-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RmmMpG8qRWW6SvL5imV3xwetTx/y/3n/iImmWV/D3HKkND6PSfvi/wQ0PcVLM2Rd O+eghlA7iRAjQeJXEJYTIQ== 0000950152-97-006714.txt : 19970927 0000950152-97-006714.hdr.sgml : 19970927 ACCESSION NUMBER: 0000950152-97-006714 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19970918 SROS: NONE 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-4 SEC ACT: SEC FILE NUMBER: 333-35931 FILM NUMBER: 97682649 BUSINESS ADDRESS: STREET 1: 55 PUBLIC SQ STREET 2: PO BOX 5000 CITY: CLEVELAND STATE: OH ZIP: 44101 BUSINESS PHONE: 2166229800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOLEDO EDISON CO CENTRAL INDEX KEY: 0000352049 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 344375005 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-35931-01 FILM NUMBER: 97682650 BUSINESS ADDRESS: STREET 1: 300 MADISON AVE CITY: TOLEDO STATE: OH ZIP: 43652 BUSINESS PHONE: 4192495000 S-4 1 THE CEI CO./TOLEDO EDISON FORM S-4 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 18, 1997 FILE NO. 333- ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY THE TOLEDO EDISON COMPANY (Exact names of registrants as specified in their charters) OHIO (State or other jurisdiction of incorporation or organization) 4911 (Primary Standard Industrial Classification Code Number) 34-0150020 34-4375005 (I.R.S. Employer Identification Numbers) C/O CENTERIOR ENERGY CORPORATION, 6200 OAK TREE BOULEVARD, INDEPENDENCE, OHIO 44131 (216) 622-9800 300 MADISON AVENUE, TOLEDO, OHIO 43652 (419) 249-5000 (addresses, including ZIP codes, and telephone numbers, including area codes, of registrants' 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: PAUL N. EDWARDS, ESQ. PRINCIPAL COUNSEL CENTERIOR ENERGY CORPORATION P.O. BOX 94661 CLEVELAND, OHIO 44101-4661 Approximate date of commencement of proposed exchange of securities is as soon as possible after the registration statement becomes effective. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: [ ] CALCULATION OF REGISTRATION FEE
==================================================================================================================== PROPOSED PROPOSED MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED BE REGISTERED PER NOTE* OFFERING PRICE* FEE - -------------------------------------------------------------------------------------------------------------------- 7.19% Series B Secured Notes due 2000 $220,000,000 100% $720,000,000 $218,181.82 7.67% Series B Secured Notes due 2004 $350,000,000 100% 7.13% Series B Secured Notes due 2007 $150,000,000 100% ====================================================================================================================
*Estimated solely for the purpose of determining the registration fee. THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND THE TOLEDO EDISON COMPANY OFFER TO EXCHANGE 7.19% SERIES B SECURED NOTES DUE 2000 FOR ALL OUTSTANDING 7.19% SERIES A SECURED NOTES DUE 2000 $220 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING, 7.67% SERIES B SECURED NOTES DUE 2004 FOR ALL OUTSTANDING 7.67% SERIES A SECURED NOTES DUE 2004 $350 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING AND 7.13% SERIES B SECURED NOTES DUE 2007 FOR ALL OUTSTANDING 7.13% SERIES A SECURED NOTES DUE 2007 $150 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED ------------------------ The Cleveland Electric Illuminating Company ("Cleveland Electric") and The Toledo Edison Company ("Toledo Edison"), joint and several obligors and Ohio corporations (together, the "Companies"), hereby offer (the "Exchange Offer"), upon the terms and subject to the conditions set forth in this Prospectus and the accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange their 7.19% Series B Secured Notes due 2000 (the "New Notes due 2000"), 7.67% Series B Secured Notes due 2004 (the "New Notes due 2004") and 7.13% Series B Secured Notes due 2007 (the "New Notes due 2007") (collectively, the "New Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement (as defined herein) of which this Prospectus constitutes a part, for equal principal amounts of their outstanding 7.19% Series A Secured Notes due 2000 (the "Old Notes due 2000" and together with the New Notes due 2000, the "Secured Notes due 2000"), 7.67% Series A Secured Notes due 2004 (the "Old Notes due 2004" and together with the New Notes due 2004, the "Secured Notes due 2004") and 7.13% Series A Secured Notes due 2007 (the "Old Notes due 2007" and together with the New Notes due 2007, the "Secured Notes due 2007") (the Old Notes due 2000, the Old Notes due 2004 and the Old Notes due 2007 are collectively referred to herein as the "Old Notes"), of which $220 million, $350 million and $150 million aggregate principal amount, respectively, are outstanding. The New Notes and the Old Notes are collectively referred to herein as the "Secured Notes." Subject to the terms and conditions set forth in this Prospectus and the Letter of Transmittal, the Companies will accept for exchange any and all Old Notes that are validly tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on , 1997, unless the Exchange Offer is extended (the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. However, the Exchange Offer is subject to certain conditions which may be waived by the Companies and to the terms and provisions of the Registration Agreement (as defined herein). Old Notes may be tendered only in denominations of $1,000 and integral multiples thereof. The Companies have agreed to pay the expenses of the Exchange Offer. See "The Exchange Offer." The New Notes will evidence the same debt as the Old Notes for which they are exchanged and will be obligations of the Companies entitled to the benefits of the Note Indenture (as defined herein) relating to the Secured Notes. The form and terms of the New Notes are identical in all material respects to the form and terms of the Old Notes except that the New Notes have been registered under the Securities Act, and, following the completion of the Exchange Offer and during the effectiveness of any required Shelf Registration Statement (as defined in the Registration Agreement), the holders of the Old Notes will not be entitled to the contingent increase in the interest rate otherwise provided for under (cover continued on following pages) ------------------------ SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES. ------------------------ 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. ------------------------ The date of this Prospectus is , 1997. 3 (Continuation of cover page) certain circumstances and will not be entitled to the benefit of certain registration and exchange rights granted to the holders of the Old Notes under the Registration Agreement. See "The Exchange Offer" and "Description of the New Notes." Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes if such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Companies have agreed that, for a period of 120 days after the Expiration Date, they will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." New Notes of each series will bear interest at the same rate and on the same terms as the Old Notes of the corresponding series. Under the Note Indenture, interest on each Old Note ceases to accrue upon the exchange of such Old Note for a New Note. Interest will accrue on each New Note from the date on which it is authenticated and will be payable to the person in whose name such New Note is registered at the close of business on the Regular Record Date (as defined in the Note Indenture) for such interest, which will be the December 15 or June 15 (whether or not a business day), as the case may be, next preceding the payment date for such interest. If, however, the New Note is authenticated and delivered in exchange for an Old Note (i) between a record date for the payment of interest on that Old Note and the related interest payment date, the interest that accrues on the New Note from the date of authentication thereof to that interest payment date shall be payable to the person in whose name such New Note was issued on its issuance date or (ii) between an interest payment date for the payment of interest on that Old Note and the record date for the next succeeding interest payment date, the interest that accrues on the Old Note from the earlier interest payment date to the date on which the Old Note is exchanged for the New Note will be paid to the person in whose name the New Note is registered on the record date for that next succeeding interest payment date. The Companies intend to cause the New Notes to be authenticated on the date on which the New Notes are exchanged for the Old Notes. Therefore, the exchange will not result in the loss of interest income to holders of Old Notes exchanged for New Notes. Interest on the Secured Notes is payable semiannually in cash in arrears on January 1 and July 1 of each year, commencing July 1, 1997, and the Secured Notes will bear interest and mature as follows: for the Secured Notes due 2000, interest at 7.19% with a maturity date of July 1, 2000; for the Secured Notes due 2004, interest at 7.67% with a maturity date of July 1, 2004; and for the Secured Notes due 2007, interest at 7.13% with a maturity date of July 1, 2007. See "The Exchange Offer -- Interest on the New Notes." The obligations of Cleveland Electric and Toledo Edison under the Secured Notes are joint and several. The Old Notes are, and the New Notes will be, secured equally and ratably as to payment of principal and interest by first mortgage bonds severally issued by Cleveland Electric and Toledo Edison and held by the trustee under the indenture for the Secured Notes. See "Descriptions of Cleveland Electric Bonds and Toledo Edison Bonds." Payment of the principal of and interest on the Old Notes due 2007 is, and payment of principal and interest on the New Notes due 2007 will be, insured by financial guaranty insurance policies issued by Ambac Assurance Corporation. See "Credit Enhancement of Secured Notes due 2007." Old Notes of each series initially purchased by qualified institutional buyers, as defined in Rule 144A under the Securities Act ("QIBs"), were initially represented by a single, global Secured Note of each series in registered form (each a "Global Note"), registered in the name of a nominee of The Depository Trust Company ("DTC"), as depository. The New Notes of each series exchanged for Old Notes represented by a Global Note will be represented by a single, global New Note of that series in registered form (each a "Global New Note"), registered in the name of Cede & Co., as nominee of DTC. Beneficial interests in the Global New Notes will be shown on, and transfers thereof will be effected only through, records maintained by DTC and its participants. See "Description of the New Notes -- Book-Entry; Delivery and Form." Based on no-action letters issued by the staff of the Securities and Exchange Commission (the "SEC") to third parties, the Companies believe that the New Notes issued pursuant to this Exchange Offer in exchange for the Old Notes may be offered for resale, resold and otherwise transferred by any holder thereof (other than (i) a broker-dealer who purchased such Old Notes directly from the Companies to resell pursuant i 4 (Continuation of cover page) to Rule 144A or any other available exemption under the Securities Act or (ii) a person that is an "affiliate" of the Companies within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the holder is acquiring the New Notes in its ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in a distribution of the New Notes. See Morgan Stanley & Co. Incorporated, SEC No-Action Letter (available June 5, 1991) and Exxon Capital Holdings Corporation, SEC No-Action Letter (available May 13, 1988). Holders of Old Notes wishing to accept the Exchange Offer must represent to the Companies, as required by the Registration Agreement, that such conditions have been met. If the Companies' belief is inaccurate, holders of New Notes who transfer New Notes in violation of the prospectus delivery provisions of the Securities Act and without an exemption from registration thereunder may incur liability under the Securities Act. The Companies do not assume, or indemnify holders against, any such liability. Proceeds from the offering of the Old Notes (the "Offering") were used by the Companies, together with cash and approximately $155 million of short-term borrowings, to refinance $873 million in high interest secured lease obligation bonds issued by a special purpose funding corporation on behalf of lessors in the Companies' sale and leaseback transaction for the Bruce Mansfield Generating Plant (the "Mansfield Plant"). The Companies will not receive any proceeds from the Exchange Offer, and no underwriter is being utilized in connection with the Exchange Offer. The exchange of Old Notes for New Notes will be a tax-free exchange. See "Certain Tax Considerations." After completion of the Exchange Offer, Old Notes which have not been exchanged for New Notes will remain outstanding. See "Risk Factors -- Consequences of Failure to Exchange." THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANIES ACCEPT SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION. Prior to the Exchange Offer, there has been no public market for the Old Notes. The Companies do not presently intend to list the New Notes on any stock exchange or trading market. There can be no assurance that an active public market for the New Notes will develop. If a market for the New Notes should develop, the New Notes could trade at a discount from their principal amount. See "Risk Factors -- Lack of Public Market for the Secured Notes." The Companies have been advised by Morgan Stanley & Co. Incorporated, Citicorp Securities, Inc., Credit Suisse First Boston and McDonald & Company Securities, Inc., the placement agents of the Old Notes (the "Placement Agents"), that, following completion of the Exchange Offer, each intends to make a market in the New Notes; however, none of the Placement Agents are under any obligation to do so and any market-making activities with respect to the New Notes may be discontinued at any time. ii 5 THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY SECURED NOTE OFFERED HEREBY BY ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF EITHER OF THE COMPANIES OR THAT THE INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. This Prospectus has been prepared by the Companies solely for use in connection with the Exchange Offer. This Prospectus is personal to the offeree to whom it has been delivered and does not constitute an offer to any other person or to the public generally to subscribe for or otherwise acquire Secured Notes. Distribution of this Prospectus to any person other than the offeree and those persons, if any, retained to advise such offeree with respect thereto is unauthorized. This Prospectus incorporates by reference documents which are not presented herein or delivered herewith. These documents are available upon request from Janis T. Percio, Secretary, Centerior Energy Corporation, P.O. Box 94661, Cleveland, Ohio 44101-4661, or telephone (216) 447-3100. In order to assure timely delivery of the documents, any request should be made by , 1997. ------------------------ None of Cleveland Electric, Toledo Edison or any of their respective representatives makes any representation to any offeree or purchaser of the New Notes offered hereby regarding the legality of an investment by such offeree or purchaser under legal investment or similar laws. Each investor should consult with its own advisors as to the legal, tax, business, financial and related aspects of any purchase of the New Notes. ------------------------ THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SECURITIES LAWS. THE COMPANIES HAVE MADE FORWARD-LOOKING STATEMENTS INCLUDING STATEMENTS ABOUT THEIR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS AND THE PENDING MERGER OF CENTERIOR ENERGY CORPORATION ("CENTERIOR ENERGY") AND OHIO EDISON COMPANY ("OHIO EDISON") DISCUSSED HEREIN. THESE STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. FORWARD-LOOKING STATEMENTS ARE STATEMENTS ABOUT FUTURE PERFORMANCE OR RESULTS, INCLUDING ANY STATEMENTS USING THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE" OR SIMILAR WORDS. FOR ALL OF THOSE STATEMENTS, THE COMPANIES CLAIM THE PROTECTION OF THE SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS CONTAINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THOSE IDENTIFIED UNDER "RISK FACTORS" HEREIN AND THE FOLLOWING POSSIBILITIES: (1) EXPECTED COST SAVINGS FROM SUCH PENDING MERGER ARE NOT FULLY REALIZED; (2) REGIONAL COMPETITIVE PRESSURE IN THE ELECTRIC UTILITY INDUSTRY INCREASES SIGNIFICANTLY; (3) COSTS OR DIFFICULTIES RELATED TO THE INTEGRATION OF THE BUSINESSES OF CENTERIOR ENERGY AND OHIO EDISON ARE GREATER THAN EXPECTED; (4) STATE AND FEDERAL REGULATORY INITIATIVES ARE IMPLEMENTED THAT FURTHER INCREASE COMPETITION, THREATEN COST AND INVESTMENT RECOVERY OR IMPACT RATE STRUCTURES; AND (5) NATIONAL AND REGIONAL ECONOMIC CONDITIONS ARE LESS FAVORABLE THAN EXPECTED. ALTHOUGH THE COMPANIES BELIEVE THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, THEY CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. THESE FACTORS SHOULD BE TAKEN INTO CONSIDERATION IN CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS. 2 6 AVAILABLE INFORMATION The Companies have filed with the SEC a Registration Statement on Form S-4 (together with all amendments, exhibits, schedules and supplements thereto, the "Registration Statement") under the Securities Act with respect to the New Notes offered hereby. This Prospectus, which forms a part of the Registration Statement, does not contain all the information set forth in the Registration Statement, certain parts of which have been omitted in accordance with the rules and regulations of the SEC. For further information with respect to the Companies and the New Notes offered hereby, reference is made to the Registration Statement. Statements contained in this Prospectus as to the contents of certain documents filed as exhibits to the Registration Statement are not necessarily complete and, in each case, are qualified by reference to the copy of the document so filed. Cleveland Electric and Toledo Edison are each subject to the informational requirements of the Securities Exchange Act of 1934 ("Exchange Act") and in accordance therewith file reports and other information with the SEC. Such reports, other information and the Registration Statement 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 Suite 1400, Northwestern Atrium, 500 West Madison Street, 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. The SEC also maintains a Web site that contains reports and other information filed by the Companies. The SEC's Internet address is http://www.sec.gov. Such material can also be inspected at the New York Stock Exchange and, for Toledo Edison, also at the American Stock Exchange. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The Companies hereby incorporate 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. Each Company's Annual Report on Form 10-K for the year ended December 31, 1996 ("Form 10-K"). 2. Each Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 ("First Quarter 1997 Form 10-Q"). 3. Each Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997 ("Second Quarter 1997 Form 10-Q"). 4. Each Company's Current Reports on Form 8-K dated June 11, 1997, July 8, 1997, and August 27, 1997. THE COMPANIES HEREBY UNDERTAKE TO PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED, ON THE WRITTEN OR ORAL REQUEST OF SUCH PERSON, A COPY OF ANY OR ALL OF THE DOCUMENTS REFERRED TO ABOVE WHICH HAVE BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS, OTHER THAN EXHIBITS TO SUCH DOCUMENTS 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, CENTERIOR ENERGY CORPORATION, P.O. BOX 94661, CLEVELAND, OH 44101-4661, OR TELEPHONE (216) 447-3100. 3 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. Holders of Old Notes are urged to read this Prospectus in its entirety before exchanging their Old Notes for New Notes. THE COMPANIES Cleveland Electric, 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. Cleveland Electric 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. Cleveland Electric serves approximately 741,000 customers and derives approximately 77% of its total electric retail revenue from customers outside the City of Cleveland. Principal industries served by Cleveland Electric 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 Cleveland Electric's operating revenues are derived from the sale of electric energy. At June 30, 1997, Cleveland Electric had 3,251 employees. The mailing address of Cleveland Electric's principal offices is P.O. Box 5000, Cleveland, OH 44101, and its telephone number is (216) 622-9800. 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 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 293,000 customers and derives approximately 56% 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 June 30, 1997, Toledo Edison had 1,581 employees. The mailing address of Toledo Edison's principal offices is 300 Madison Avenue, Toledo, OH 43652-0001, and its telephone number is (419) 249-5000. Cleveland Electric and Toledo Edison are wholly owned electric utility subsidiaries of Centerior Energy. See "Pending Merger of Cleveland Electric and Toledo Edison" for a discussion of the pending merger of Toledo Edison into Cleveland Electric. In September 1996, Centerior Energy and Ohio Edison entered into an agreement and plan of merger to form a new holding company, FirstEnergy Corp. ("FirstEnergy"). Following the consummation of the pending merger of Centerior Energy and Ohio Edison ("CEC-OE Merger"), FirstEnergy will directly hold all of the issued and outstanding common stock of the Companies, Ohio Edison and the other wholly owned subsidiaries of Centerior Energy. The Companies and Ohio Edison have adjoining service areas and share a number of major generating units. The Companies believe that the CEC-OE Merger will create a company that is better positioned to compete in the increasingly competitive electric utility industry than either Centerior Energy or Ohio Edison would be on a stand-alone basis. If the CEC-OE Merger were completed today, FirstEnergy would be the 11th largest investor-owned electric utility system in the U.S., based on combined annual sales of approximately 64 billion kilowatt-hours, and would have assets of over $18 billion, a customer base of 2.1 million and a service area of 13,200 square miles located within a 500-mile radius of one-half of the U.S. population. In addition, the CEC-OE Merger is expected to result in significant cost savings to the combined companies (approximately $1 billion over 10 years) and to enable FirstEnergy to realize opportunities to maximize efficiencies and increase management flexibility in order to enhance revenues, cash flow and earnings. See "Pending Merger of Centerior Energy and Ohio Edison" and "Risk Factors -- Consummation of the CEC-OE Merger." 4 8 SUMMARY OF THE TERMS OF THE EXCHANGE OFFER The Exchange Offer relates to the exchange of up to $220,000,000 aggregate principal amount of New Notes due 2000 for an equal aggregate principal amount of Old Notes due 2000, up to $350,000,000 aggregate principal amount of New Notes due 2004 for an equal aggregate principal amount of Old Notes due 2004, and up to $150,000,000 aggregate principal amount of New Notes due 2007 for an equal aggregate principal amount of Old Notes due 2007. The New Notes are joint and several obligations of the Companies entitled to the benefits of the Note Indenture relating to the Secured Notes. The form and terms of the New Notes are the same as the form and terms of the Old Notes except that the New Notes have been registered under the Securities Act, and following the completion of the Exchange Offer and during the effectiveness of any required Shelf Registration Statement, the Old Notes will not be entitled to the contingent increase in the interest rate otherwise provided for under certain circumstances and will not be entitled to the benefit of certain registration and exchange rights granted to the holders of the Old Notes under the Registration Agreement. See "The Exchange Offer" and "Description of the New Notes." THE EXCHANGE OFFER............ The Companies are offering to exchange $1,000 principal amount of each series of New Notes for each $1,000 principal amount of the corresponding series of Old Notes validly tendered pursuant to the Exchange Offer. As of the date hereof, there is $720 million aggregate principal amount of Old Notes outstanding. The Companies will issue the New Notes to tendering holders of Old Notes on or promptly after the Expiration Date. See "The Exchange Offer -- Background" and "-- General." RESALE OF THE NEW NOTES....... Based on interpretations by the staff of the SEC set forth in no-action letters issued to third parties, the Companies believe that New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by any holder thereof (other than (i) a broker-dealer who purchased such Old Notes directly from the Companies for resale pursuant to Rule 144A or any other available exemption under the Securities Act or (ii) a person that is an "affiliate" of the Companies within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the holder is acquiring the New Notes in its ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in a distribution of the New Notes. If the Companies' belief is inaccurate, holders of New Notes who transfer New Notes in violation of the prospectus delivery provisions of the Securities Act and without an exemption from registration thereunder may incur liability under the Securities Act. The Companies do not assume or indemnify holders against any such liability. Each broker-dealer that receives New Notes in exchange for Old Notes held for its own account, as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, such broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by any such broker-dealer in connection with resales of New Notes received in exchange for 5 9 Old Notes. The Companies have agreed that, for a period of 120 days after the Expiration Date, they will make this Prospectus and any amendment or supplement to this Prospectus available to any such broker-dealer for use in connection with any such resales. See "Plan of Distribution." The Companies believe that no registered holder of the Old Notes is an "affiliate" (as such term is defined in Rule 405 of the Securities Act) of the Companies. This Exchange Offer is not being made to, nor will the Companies accept surrenders for exchange from, holders of Old Notes in any jurisdiction in which this Exchange Offer or the acceptance thereof would not be in compliance with the securities or blue sky laws of such jurisdiction. EXPIRATION OF EXCHANGE OFFER......................... 5:00 p.m., New York City time, on , 1997, unless the Exchange Offer is extended, in which case the term "Expiration Date" means the latest date and time to which the Exchange Offer is extended. See "The Exchange Offer -- Expiration Date; Extensions; Amendments." ACCRUED INTEREST ON THE NEW NOTES AND THE OLD NOTES....... New Notes of each series will bear interest at the same rate and on the same terms as the Old Notes of the corresponding series. Under the Note Indenture, interest on each Old Note ceases to accrue upon the exchange of such Old Note for a New Note. Interest will accrue on each New Note from the date on which it is authenticated and will be payable to the person in whose name such New Note is registered at the close of business on the Regular Record Date for such interest, which will be the December 15 or June 15 (whether or not a business day), as the case may be, next preceding the payment date for such interest. If, however, the New Note is authenticated and delivered in exchange for an Old Note (i) between a record date for the payment of interest on that Old Note and the related interest payment date, the interest that accrues on the New Note from the date of authentication thereof to that interest payment date shall be payable to the person in whose name such New Note was issued on its issuance date or (ii) between an interest payment date for the payment of interest on that Old Note and the record date for the next succeeding interest payment date, the interest that accrues on the Old Note from the earlier interest payment date to the date on which the Old Note is exchanged for the New Note will be paid to the person in whose name the New Note is registered on the record date for that next succeeding interest payment date. The Companies intend to cause the New Notes to be authenticated on the date on which the New Notes are exchanged for the Old Notes. Therefore, the exchange will not result in the loss of interest income to holders of Old Notes exchanged for New Notes. Interest on the Secured Notes is payable semiannually in cash in arrears on January 1 and July 1 of each year, commencing July 1, 1997, and the Secured Notes will bear interest and mature as follows: for the Secured Notes due 2000, interest at 7.19% with a maturity date of July 1, 2000; for the Secured Notes due 2004, interest at 7.67% with a maturity date of July 1, 2004; and for the Secured Notes due 2007, 6 10 interest at 7.13% with a maturity date of July 1, 2007. See "The Exchange Offer -- Interest on the New Notes." TERMINATION OF THE EXCHANGE OFFER......................... The Exchange Offer is not subject to any condition, other than (i) that the Exchange Offer does not violate applicable law or any applicable interpretation of the staff of the SEC, (ii) that no action or proceeding shall have been instituted or threatened in any court or by or before any governmental agency or body with respect to the Exchange Offer, and (iii) that there shall not have been adopted or enacted any law, statute, rule or regulation that would render the Exchange Offer illegal. There can be no assurance that any such condition will not occur. Holders of Old Notes will have certain rights against the Companies under the Registration Agreement should the Companies fail to consummate the Exchange Offer. See "The Exchange Offer -- General" and "-- Termination." PROCEDURES FOR TENDERING OLD NOTES......................... Each holder of Old Notes wishing to accept the Exchange Offer must complete, sign and date the Letter of Transmittal, or a facsimile thereof, in accordance with the instructions contained herein and therein, and mail or otherwise deliver such Letter of Transmittal, or such facsimile, together with any other required documentation, to the Exchange Agent (as defined herein), at the address set forth herein and therein by 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer -- Procedures for Tendering." By executing the Letter of Transmittal, each holder will represent to the Companies that, among other things, (i) it is acquiring the New Notes pursuant to the Exchange Offer in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder, (ii) neither the holder nor any such other person is engaged in or intends to engage in, or has an arrangement or understanding with any person to participate in, any distribution of such New Notes and (iii) neither the holder nor any such other person is an "affiliate," as defined in Rule 405 under the Securities Act, of the Companies or, if an affiliate, such holder will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. See "The Exchange Offer -- General" and "-- Procedures for Tendering." SPECIAL PROCEDURES FOR BENEFICIAL HOLDERS............ Any beneficial holder whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender in the Exchange Offer should contact such registered holder promptly and instruct such registered holder to tender on its behalf. If such beneficial holder wishes to tender on his own behalf, such beneficial holder must, prior to completing and executing the Letter of Transmittal and delivering its Old Notes, either make appropriate arrangements to register ownership of the Old Notes in such holder's name or obtain a properly completed bond power from the registered holder. The transfer of record ownership may take considerable time. See "The Exchange Offer -- Procedures for Tendering." 7 11 GUARANTEED DELIVERY PROCEDURES.................... Holders of Old Notes who wish to tender their Old Notes and whose Old Notes are not immediately available or who cannot deliver their Old Notes (or who cannot complete the procedure for book-entry transfer on a timely basis) and a properly completed Letter of Transmittal or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date may tender their Old Notes according to the guaranteed delivery procedures set forth in "The Exchange Offer -- Guaranteed Delivery Procedures." WITHDRAWAL RIGHTS............. Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. See "The Exchange Offer -- Withdrawal of Tenders." ACCEPTANCE OF OLD NOTES AND DELIVERY OF NEW NOTES......... Subject to certain conditions (as summarized above in "Termination of the Exchange Offer" and described more fully under "The Exchange Offer -- Termination") or waiver of such conditions, the Companies will accept for exchange any and all Old Notes which are properly tendered in the Exchange Offer and not validly withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered on or promptly after the Expiration Date. See "The Exchange Offer -- General." CERTAIN TAX CONSIDERATIONS.... The exchange pursuant to the Exchange Offer will not be a taxable event for federal income tax purposes. See "Certain Tax Considerations." REGISTRATION RIGHTS........... In connection with the sale of the Old Notes, the Companies agreed to consummate the Exchange Offer pursuant to an effective registration statement or to cause resales of the Old Notes to be registered under the Securities Act, and, if neither such event occurs prior to December 15, 1997, interest payable on the Secured Notes will increase by .50% per annum until one of such events does occur. Holders who do not participate in the Exchange Offer may thereafter hold a less liquid security. See "Risk Factors -- Consequences of Failure to Exchange" and "The Exchange Offer." EXCHANGE AGENT................ The Chase Manhattan Bank, the Trustee under the Indenture, will serve as exchange agent (the "Exchange Agent") in connection with the Exchange Offer. The address of the Exchange Agent is: The Chase Manhattan Bank, 55 Water Street, Room 234, North Building, New York, NY 10041, Attention: Carlos Esteves. For information with respect to the Exchange Offer, the telephone number for the Exchange Agent is (212) 638-0828 and the facsimile number for the Exchange Agent is (212) 638-7375 or (212) 344-9367. USE OF PROCEEDS............... There will be no cash proceeds payable to the Companies from the issuance of the New Notes pursuant to the Exchange Offer. The proceeds to the Companies from the sale of the Old Notes were approximately $720 million, net of discounts and commissions. Such proceeds were used, together with cash and approximately $155 million of short-term borrowings, to refinance $873 million of 8 12 high interest secured lease obligation bonds issued by a special purpose funding corporation on behalf of lessors in the Companies' sale and leaseback transaction for the Mansfield Plant. SUMMARY DESCRIPTION OF THE NEW NOTES ISSUERS....................... Cleveland Electric and Toledo Edison. SECURITIES TO BE OFFERED...... $220 million aggregate principal amount of New Notes due 2000, $350 million aggregate principal amount of New Notes due 2004 and $150 million aggregate principal amount of New Notes due 2007. MATURITY...................... July 1, 2000 for the New Notes due 2000, July 1, 2004 for the New Notes due 2004 and July 1, 2007 for the New Notes due 2007. RECORD DATES.................. June 15 and December 15 of each year, commencing with December 15, 1997. INTEREST PAYMENT DATES........ Payable in cash in arrears on January 1 and July 1 of each year, commencing on July 1, 1997. REDEMPTION.................... The New Notes are not subject to redemption prior to maturity. There will be no sinking fund payments for the New Notes. SECURITY...................... The Old Notes are, and the New Notes (together with any Old Notes that remain outstanding after the Exchange Offer is terminated) will be, secured equally and ratably as to payment of principal and interest by $575 million aggregate principal amount of first mortgage bonds of Cleveland Electric ("Cleveland Electric Bonds") and $145 million aggregate principal amount of first mortgage bonds of Toledo Edison ("Toledo Edison Bonds") which have been issued, pledged and delivered by the Companies to the Note Trustee. The terms of the Cleveland Electric Bonds and Toledo Edison Bonds correspond to those of the Secured Notes. See "Descriptions of Cleveland Electric Bonds and Toledo Edison Bonds." CREDIT ENHANCEMENT............ Ambac Assurance Corporation (formerly known as AMBAC Indemnity Corporation) ("Ambac Assurance") has issued a financial guaranty insurance policy relating to the Old Notes due 2007 and has made a commitment to issue a financial guaranty insurance policy relating to the New Notes due 2007. The Secured Notes due 2000 and Secured Notes due 2004 are not supported by such an insurance policy. See "Credit Enhancement of Secured Notes due 2007." For a discussion of certain factors that should be considered by holders of the Old Notes in connection with an investment in the New Notes, see "Risk Factors." 9 13 SUMMARY FINANCIAL INFORMATION FOR CLEVELAND ELECTRIC
12 MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------- 1997 1992 1993 1994 1995 1996 (UNAUDITED) ------ ------ ------ ------ ------ ----------- (DOLLARS IN MILLIONS) INCOME STATEMENT DATA Operating Revenues........................ $1,743 $1,751 $1,698 $1,769 $1,790 $ 1,788 Operating Income.......................... $ 385 $ 222 $ 396 $ 398 $ 359 $ 354 Deferred Carrying Charges, Net(a)......... $ 59 $ (487) $ 25 $ 29 $ -- $ -- Write-off of Perry Nuclear Power Plant Unit 2 ("Perry Unit 2")................. $ -- $ (351) $ -- $ -- $ -- $ -- Income (Loss) Before Interest Charges..... $ 448 $ (347) $ 427 $ 429 $ 357 $ 341 Interest Charges.......................... $ 243 $ 240 $ 242 $ 245 $ 240 $ 233 Earnings (Loss) Before Interest Charges, Income Taxes, Depreciation and Amortization ("EBITDA")(b).............. $ 722 $ (414) $ 708 $ 721 $ 636 $ 628 Net Income (Loss)......................... $ 205 $ (587) $ 185 $ 184 $ 117 $ 108 Ratio of Earnings to Fixed Charges(c)..... 1.89 --(d) 1.81 1.84 1.57 1.58 Ratio of EBITDA to Interest Charges....... 2.97 -- 2.93 2.94 2.65 2.70 BALANCE SHEET DATA (END OF PERIOD) Total Assets.............................. $8,123 $7,159 $7,151 $7,152 $6,878 $ 7,337 Long-Term Debt............................ $2,515 $2,793 $2,543 $2,666 $2,441 $ 3,011(e) Preferred Stock With Mandatory Redemption Provisions.... $ 314 $ 285 $ 246 $ 215 $ 186 $ 172 Without Mandatory Redemption Provisions........................... $ 144 $ 241 $ 241 $ 241 $ 238 $ 238 Common Stock Equity....................... $1,865 $1,040 $1,058 $1,127 $1,045 $ 1,010 Total Capitalization...................... $4,838 $4,359 $4,088 $4,249 $3,910 $ 4,431(e)
- --------------- (a) In 1993, Cleveland Electric wrote off $519 million of deferred carrying charges. Deferrals under an October 1992 rate stabilization program for Cleveland Electric ended in November 1995, and amortization of the deferrals began in December 1995 (see Note 7(d) to Cleveland Electric's 1996 financial statements in the Financial Statements Section, as hereinafter defined). (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 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 Cleveland Electric'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 taxes and fixed charges was $502 million. Fixed charges during the period were $334 million. The net loss before income taxes and fixed charges included write-offs of $986 million related to Cleveland Electric's investment in Perry Unit 2 and phase-in plan deferred charges, and other charges of $79 million attributable to an early retirement program. Excluding these write-offs, the ratio of earnings to fixed charges would have been 1.68. (e) Includes Cleveland Electric's proportionate share of the Secured Notes ($575 million) which were issued on June 18, 1997. 10 14 SUMMARY FINANCIAL INFORMATION FOR TOLEDO EDISON
12 MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, -------------------------------------------------- 1997 1992 1993 1994 1995 1996 (UNAUDITED) ------ ------ ------ ------ ------ ----------- (DOLLARS IN MILLIONS) INCOME STATEMENT DATA Operating Revenues(a)..................... $ 845 $ 871 $ 865 $ 874 $ 897 $ 915 Operating Income.......................... $ 150 $ 89 $ 180 $ 188 $ 156 $ 162 Deferred Carrying Charges, Net(b)......... $ 41 $ (161) $ 15 $ 14 $ -- $ -- Write-off of Perry Unit 2................. $ -- $ (232) $ -- $ -- $ -- $ -- Income (Loss) Before Interest Charges..... $ 192 $ (174) $ 197 $ 207 $ 152 $ 162 Interest Charges.......................... $ 121 $ 115 $ 115 $ 110 $ 95 $ 94 Earnings (Loss) Before Interest Charges, Income Taxes, Depreciation and Amortization ("EBITDA")(c).............. $ 303 $ (237) $ 315 $ 335 $ 277 $ 300 Net Income (Loss)......................... $ 71 $ (289) $ 82 $ 97 $ 57 $ 68 Ratio of Earnings to Fixed Charges(d)..... 1.43 --(e) 1.51 1.63 1.43 1.55 Ratio of EBITDA to Interest Charges....... 2.49 -- 2.74 3.05 2.92 3.19 BALANCE SHEET DATA (END OF PERIOD) Total Assets.............................. $3,939 $3,510 $3,502 $3,474 $3,357 $ 3,572 Long-Term Debt............................ $1,178 $1,225 $1,154 $1,068 $1,003 $ 1,122(f) Preferred Stock With Mandatory Redemption Provisions.... $ 50 $ 28 $ 7 $ 5 $ 3 $ 2 Without Mandatory Redemption Provisions........................... $ 210 $ 210 $ 210 $ 210 $ 210 $ 210 Common Stock Equity....................... $ 935 $ 623 $ 685 $ 763 $ 803 $ 817 Total Capitalization...................... $2,373 $2,086 $2,056 $2,046 $2,019 $ 2,151(f)
- --------------- (a) Includes revenues from all bulk power sales to Cleveland Electric of $130 million, $120 million, $111 million, $102 million and $105 million in 1992, 1993, 1994, 1995 and 1996, respectively, and $111 million for the 12 months ended June 30, 1997. (b) In 1993, Toledo Edison wrote off $186 million of deferred carrying charges. Deferrals under an October 1992 rate stabilization program for Toledo Edison ended in November 1995, and amortization of the deferrals began in December 1995 (see Note 7(d) to Toledo Edison's 1996 financial statements in the Financial Statements Section). (c) 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 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 Toledo Edison's operating performance. (d) 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). (e) Not meaningful due to a net loss. For the year ended December 31, 1993, the net loss before taxes and fixed charges was $195 million. Fixed charges during the period were $233 million. The net loss before income taxes and fixed charges included write-offs of $473 million related to Toledo Edison's investment in Perry Unit 2 and phase-in plan deferred charges, and other charges of $56 million attributable to an early retirement program. Excluding these write-offs, the ratio of earnings to fixed charges would have been 1.42. (f) Includes Toledo Edison's proportionate share of the Secured Notes ($145 million) which were issued on June 18, 1997. 11 15 RISK FACTORS Holders of the Secured Notes should consider carefully the factors set forth below, as well as the other information contained in this Prospectus, in evaluating an investment in the Secured Notes. The information below is qualified in its entirety by reference to the information in the Companies' financial statements included as part of this Prospectus and in the documents incorporated in this Prospectus by reference and should be read in conjunction with such information and the other information set forth in this Prospectus. FINANCING CAPABILITY At June 30, 1997, Cleveland Electric had long-term debt outstanding of approximately $3,011 million (68% of total capitalization) and Toledo Edison had long-term debt outstanding of approximately $1,122 million (52% of total capitalization). Also at June 30, 1997, Cleveland Electric and Toledo Edison had approximately $3,230 million and $1,262 million, respectively, in aggregate principal amount of first mortgage bonds outstanding under their respective mortgages. (The outstanding first mortgage bond amounts for Cleveland Electric and Toledo Edison include $140.4 million principal amount and $210.6 million principal amount, respectively, of first mortgage bonds pledged to secure obligations to various bank creditors.) At June 30, 1997, neither Company was able to issue a material amount of additional first mortgage bonds except in connection with refinancings (see "The Companies -- Financing Capability" and "Pending Merger of Centerior Energy and Ohio Edison -- Regulatory Matters"). Also at June 30, 1997, Cleveland Electric had fixed obligations for debt other than first mortgage bonds and preferred stock with mandatory redemption provisions of $229 million, and Toledo Edison had fixed obligations for debt other than first mortgage bonds and preferred stock with mandatory redemption provisions of $141 million. The Companies also have future minimum lease payments of approximately $3,659 million for generation facility leases as of June 30, 1997. See Note 2 to the 1996 financial statements in the Financial Statements Section (as hereinafter defined). As of June 30, 1997, debt and preferred stock maturities and sinking fund requirements for the remainder of 1997 were $115.9 million (including $70.5 million of first mortgage bonds refinanced in August 1997) for Cleveland Electric and $41.5 million (including $10.1 million of first mortgage bonds refinanced in August 1997) for Toledo Edison. In August 1997, Cleveland Electric and Toledo Edison refinanced $180.6 million aggregate principal amount and $10.1 million principal amount, respectively, of first mortgage bonds issued as security for certain tax-exempt bonds issued by public authorities. Cleveland Electric plans to refinance up to $550 million of outstanding first mortgage bonds during the fourth quarter of 1997. The Companies have $273 million in financing vehicles to support their nuclear fuel leases, $83 million of which mature in 1997. Replacement financing for the maturing issues may not be needed in 1997. Under its articles of incorporation, Toledo Edison cannot issue preferred stock unless certain earnings coverage requirements are met. Based on its earnings for the 12 months ended June 30, 1997, Toledo Edison could not issue additional preferred stock. The availability and cost of capital to meet the Companies' external financing needs depend upon such factors as financial market conditions and the Companies' credit ratings. At the time of the Offering, credit ratings for the Companies were as follows:
STANDARD & POOR'S MOODY'S ----------------- ------------- First mortgage bonds.................................... BB Ba2 Unsecured notes of Cleveland Electric................... B+ Ba3 Unsecured notes of Toledo Edison........................ B+ B1 Preferred stock......................................... B b2
12 16 Current credit ratings for the Companies are as follows:
STANDARD & POOR'S MOODY'S ----------------- ------------- First mortgage bonds.................................... BB+ Ba1 Unsecured notes......................................... BB- Ba3 Preferred stock......................................... BB- b1
These ratings reflect recent upgrades by both Standard & Poor's Ratings Group, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's") and Moody's Investors Service, Inc. ("Moody's") and assume, among other things, consummation of the CEC-OE Merger. See "-- Consummation of the CEC-OE Merger," "Pending Merger of Centerior Energy and Ohio Edison" and "The Companies -- Financing Capability." LACK OF PUBLIC MARKET FOR THE SECURED NOTES The Old Notes currently have no trading market. There can be no assurance that an active trading market for the New Notes will develop or be sustained. The Companies do not presently intend to apply for listing of the New Notes on any stock exchange or trading market. If the New Notes are traded after their initial issuance, they may trade at a discount from their initial offering price, depending upon prevailing interest rates, the market for similar securities and other factors, including general economic conditions and the financial condition and performance of, and prospects for, the Companies. The Placement Agents have advised the Companies that they currently intend to make a market in the New Notes. However, the Placement Agents are not obligated to do so, and any market-making activity with respect to the New Notes may be discontinued at any time without notice. CONSEQUENCES OF FAILURE TO EXCHANGE Old Notes that are not exchanged for New Notes pursuant to the Exchange Offer will remain restricted securities and will not retain any rights under the Registration Agreement, except in certain limited circumstances. The Old Notes will continue to be subject to restrictions on transfer such that: (i) Old Notes may be resold only if registered pursuant to the Securities Act or if an exemption from registration is available thereunder, (ii) Old Notes will bear a legend restricting transfer in the absence of registration or an exemption therefrom and (iii) a holder of Old Notes who desires to sell or otherwise dispose of all or any part of its Old Notes under an exemption from registration under the Securities Act, if requested by the Companies, must deliver to the Companies an opinion of independent counsel, reasonably satisfactory in form and substance to the Companies, to the effect that such exemption is available. CONSUMMATION OF THE CEC-OE MERGER The consummation of the CEC-OE Merger remains subject to various conditions and regulatory approvals, including the approval of the Federal Energy Regulatory Commission ("FERC"). There can be no assurance that such conditions will be satisfied or such approvals can be obtained on terms which Centerior Energy and Ohio Edison will find acceptable. If the CEC-OE Merger is not consummated, the benefits which are anticipated from the merger will not be realized, and the recent upgrade in the ratings of the Companies' securities may not be maintained. See "Pending Merger of Centerior Energy and Ohio Edison." REGULATORY MATTERS The Companies comply 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 Companies 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 Companies' ability to charge prices which allow them to recover operating costs, earn a fair return on invested capital and recover the amortization of regulatory assets and (2) a significant change in the manner in which rates are set 13 17 by The Public Utilities Commission of Ohio ("PUCO") from cost-based regulation to some other form of regulation. In the event the Companies determine they no longer meet the criteria for following SFAS 71, the Companies would be required to record a before-tax charge to write off their regulatory assets which totaled $1,334 million and $915 million at June 30, 1997 for Cleveland Electric and Toledo Edison, respectively. In addition, the Companies 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 values of the Companies' property, plant and equipment. Upon consummation of the CEC-OE Merger, the FirstEnergy Regulatory Plan (as hereinafter defined) will go into effect. FirstEnergy believes that the FirstEnergy Regulatory Plan will not provide for the full recovery of costs and a fair return on the investment associated with the Companies' nuclear operations. Pursuant to the PUCO's order approving the FirstEnergy Regulatory Plan, FirstEnergy was required to submit to the PUCO staff the regulatory accounting and cost recovery details for implementing the FirstEnergy Regulatory Plan. Such details were submitted in July 1997. FirstEnergy expects that the Companies will discontinue the application of SFAS 71 for their nuclear operations if and when consummation of the CEC-OE Merger becomes probable. The remainder of their business is expected to continue to comply with the provisions of SFAS 71. At the time the CEC-OE Merger becomes probable, the Companies would be required to write off certain of their regulatory assets for financial reporting purposes. The write-off amounts would be determined at that time. FirstEnergy estimates the write-off will total approximately $750 million. This write-off is not expected to affect the Companies' first mortgage bond capacities. For financial reporting purposes, the net book value of the Companies' nuclear generating units is not expected to be impaired. If events cause one or both Companies to conclude they no longer meet the criteria for applying SFAS 71 for the remainder of their business, they would be required to write off their remaining regulatory assets and measure all other assets for impairment. See "Pending Merger of Centerior Energy and Ohio Edison" and also "Management's Financial Analysis" and Note 15 which are contained in each Company's 1996 financial statements included as a part of this Prospectus ("Financial Statements Section"). (The Financial Statements Section also contains each Company's First Quarter 1997 Form 10-Q and Second Quarter 1997 Form 10-Q). In the absence of consummation of the CEC-OE Merger, the PUCO's April 1996 rate order to the Companies remains in effect. In that order, the PUCO granted price increases totaling $119 million in annualized revenues to the Companies. The Companies intend to freeze rates at existing levels until at least 2002, although they are not precluded from requesting further price increases. In the order, the PUCO provided for recovery of all regulatory assets in the approved rates, and the Companies continue to comply with the provisions of SFAS 71. In connection with its order, the PUCO recommended that the Companies write down certain assets for regulatory purposes by an aggregate of $1.25 billion through 2001. Consideration of whether to implement a plan responsive to the PUCO's recommendation is pending the CEC-OE Merger. Notwithstanding the CEC-OE Merger and discussions with regulators concerning the effect of the FirstEnergy Regulatory Plan on the Companies' nuclear generating assets, the Companies believe it is reasonable to expect that rates will be set at levels that will recover all current and anticipated costs associated with their nuclear operations, including all associated regulatory assets, and such rates can be charged to and collected from customers. If there is a change in the Companies' evaluation of the competitive environment, regulatory framework or other factors, or if the PUCO significantly reduces the value of their assets or reduces the approved return on common stock equity of 12.59% and overall rate of return of 10.06%, or both, for future regulatory purposes, the Companies may be required to record material charges to earnings. See "Management's Financial Analysis" in the Financial Statements Section. COMPETITION The Companies face competitive challenges due to regulatory and tax constraints and their high retail cost structure. Currently, the Companies' most pressing competition comes from municipal electric systems in their service areas. Cleveland Electric's and Toledo Edison's rates are generally higher than those of municipal 14 18 systems due largely to such 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 Companies face the threat that municipalities in their service areas could establish new electric systems and continue expanding existing systems. See "The Companies -- Competition" and "Pending Merger of Centerior Energy and Ohio Edison -- Regulatory Matters." Structural changes in the electric utility industry from actions by both federal and state regulatory bodies are continuing to place downward pressure on prices and to increase competition for customers. In 1996, the FERC adopted rules relating to open-access transmission services. The open-access rules require utilities to deliver power from other utilities or generation sources to their wholesale customers at nondiscriminatory prices. A number of states have enacted transition legislation which provides for introduction of competition for retail electric business and recovery of stranded investment. Several groups in Ohio are studying the possible introduction of retail wheeling and stranded investment recovery. Retail wheeling occurs when a customer obtains power from a utility company other than its local utility. The term "stranded investment" generally refers to fixed costs approved for recovery under traditional regulatory methods that would become unrecoverable, or "stranded," as a result of legislative changes which allow for widespread competition. The PUCO is sponsoring discussions among a group of business, utility and consumer interests to explore ways of promoting competitive options without unduly harming the interests of utility company share owners or customers. The PUCO also has introduced two pilot projects, both intended as initial steps to introduce competitive elements into the Ohio electric utility business. A bill to restructure the electric utility industry in Ohio has been introduced in the Ohio House of Representatives. A bipartisan committee from both legislative houses has been formed to study the issue. The Companies cannot predict when and to what extent retail wheeling or other forms of competition will be allowed. The Companies believe that pure competition (unrestricted retail wheeling for all customer classifications) is at least several years away and that any transition to pure competition will be in phases. The FERC and the PUCO have acknowledged the need to provide at least partial recovery of stranded investment as greater competition is permitted and, therefore, the Companies believe that there will be a mechanism developed for the recovery of at least some stranded investment. However, due to the uncertainty involved, there is a risk in connection with the introduction of retail wheeling that some of the Companies' assets may not be fully recovered. See "The Companies -- Competition" and "2. Conjunctive Electric Service ("CES")" under "Part II. Other Information" of the Second Quarter 1997 Form 10-Q in the Financial Statements Section. NUCLEAR OPERATIONS The Companies have interests in three nuclear generating units -- Beaver Valley Power Station Unit 2 ("Beaver Valley Unit 2"), Davis-Besse Nuclear Power Station ("Davis-Besse") and Perry Nuclear Power Plant Unit 1 ("Perry Unit 1"). Toledo Edison operates Davis-Besse and Cleveland Electric operates Perry Unit 1. See "The Companies -- Nuclear Units." The Companies' three nuclear units may be impacted by activities or events beyond their 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 Companies' 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 Companies 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 Companies to recover their 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 each Company's financial condition, cash flows and results of operations. 15 19 SELECTED FINANCIAL INFORMATION FOR CLEVELAND ELECTRIC
12 MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------- 1997 1992 1993 1994 1995 1996 (UNAUDITED) ------ ------ ------ ------ ------ ----------- (DOLLARS IN MILLIONS) INCOME STATEMENT DATA Operating Revenues......................... $1,743 $1,751 $1,698 $1,769 $1,790 $ 1,788 Fuel and Purchased Power Expense........... $ 434 $ 423 $ 391 $ 413 $ 408 $ 418 Other Operation and Maintenance Expense.... $ 410 $ 598 $ 394 $ 418 $ 426 $ 415 Depreciation and Amortization Expense...... $ 179 $ 182 $ 195 $ 196 $ 210 $ 213 Operating Income........................... $ 385 $ 222 $ 396 $ 398 $ 359 $ 354 Deferred Carrying Charges, Net (a)......... $ 59 $ (487) $ 25 $ 29 $ -- $ -- Write-off of Perry Unit 2.................. $ -- $ (351) $ -- $ -- $ -- $ -- Income (Loss) Before Interest Charges...... $ 448 $ (347) $ 427 $ 429 $ 357 $ 341 Interest Charges........................... $ 243 $ 240 $ 242 $ 245 $ 240 $ 233 Earnings (Loss) Before Interest Charges, Income Taxes, Depreciation and Amortization ("EBITDA") (b).............. $ 722 $ (414) $ 708 $ 721 $ 636 $ 628 Net Income (Loss).......................... $ 205 $ (587) $ 185 $ 184 $ 117 $ 108 Preferred Dividend Requirements............ $ 41 $ 45 $ 45 $ 43 $ 39 $ 37 Earnings (Loss) Available for Common Stock.................................... $ 164 $ (632) $ 140 $ 141 $ 78 $ 71 Ratio of Earnings to Fixed Charges (c)..... 1.89 --(d) 1.81 1.84 1.57 1.58 Ratio of EBITDA to Interest Charges........ 2.97 -- 2.93 2.94 2.65 2.70 OTHER DATA Utility Plant Additions.................... $ 156 $ 175 $ 156 $ 155 $ 111 $ --(e) BALANCE SHEET DATA (END OF PERIOD) Total Assets............................... $8,123 $7,159 $7,151 $7,152 $6,878 $ 7,337 Current Portion of Long-Term Debt and Preferred Stock.......................... $ 310 $ 70 $ 282 $ 177 $ 145 $ 135 Long-Term Debt............................. $2,515 $2,793 $2,543 $2,666 $2,441 $ 3,011(f) Preferred Stock With Mandatory Redemption Provisions..... $ 314 $ 285 $ 246 $ 215 $ 186 $ 172 Without Mandatory Redemption Provisions............................. $ 144 $ 241 $ 241 $ 241 $ 238 $ 238 Common Stock Equity........................ $1,865 $1,040 $1,058 $1,127 $1,045 $ 1,010 Total Capitalization................ $4,838 $4,359 $4,088 $4,249 $3,910 $ 4,431(f)
- --------------- (a) In 1993, Cleveland Electric wrote off $519 million of deferred carrying charges. Deferrals under an October 1992 rate stabilization program for Cleveland Electric ended in November 1995, and amortization of the deferrals began in December 1995 (see Note 7(d) to Cleveland Electric's 1996 financial statements in the Financial Statements Section). (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 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 Cleveland Electric'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 taxes and fixed charges was $502 million. Fixed charges during the period were $334 million. The net loss before income taxes and fixed charges included write-offs of $986 million related to Cleveland Electric's investment in Perry Unit 2 and phase-in plan deferred charges, and other charges of $79 million attributable to an early retirement program. Excluding these write-offs, the ratio of earnings to fixed charges would have been 1.68. (e) Not available for periods other than calendar year. (f) Includes Cleveland Electric's proportionate share of the Secured Notes ($575 million) which were issued on June 18, 1997. 16 20 SELECTED FINANCIAL INFORMATION FOR TOLEDO EDISON
12 MONTHS ENDED YEAR ENDED DECEMBER 31, JUNE 30, ----------------------------------------------- 1997 1992 1993 1994 1995 1996 (UNAUDITED) ------ ------ ------ ------ ------ ----------- (DOLLARS IN MILLIONS) INCOME STATEMENT DATA Operating Revenues (a)..................... $ 845 $ 871 $ 865 $ 874 $ 897 $ 915 Fuel and Purchased Power Expense........... $ 169 $ 173 $ 167 $ 157 $ 169 $ 177 Other Operation and Maintenance Expense.... $ 236 $ 352 $ 229 $ 225 $ 231 $ 228 Depreciation and Amortization Expense...... $ 77 $ 76 $ 83 $ 84 $ 94 $ 95 Operating Income........................... $ 150 $ 89 $ 180 $ 188 $ 156 $ 162 Deferred Carrying Charges, Net (b)......... $ 41 $ (161) $ 15 $ 14 $ -- $ -- Write-off of Perry Unit 2.................. $ -- $ (232) $ -- $ -- $ -- $ -- Income (Loss) Before Interest Charges...... $ 192 $ (174) $ 197 $ 207 $ 152 $ 162 Interest Charges........................... $ 121 $ 115 $ 115 $ 110 $ 95 $ 94 Earnings (Loss) Before Interest Charges, Income Taxes, Depreciation and Amortization ("EBITDA") (c).............. $ 303 $ (237) $ 315 $ 335 $ 277 $ 300 Net Income (Loss).......................... $ 71 $ (289) $ 82 $ 97 $ 57 $ 68 Preferred Dividend Requirements............ $ 24 $ 23 $ 20 $ 18 $ 17 $ 17 Earnings (Loss) Available for Common Stock.................................... $ 47 $ (312) $ 62 $ 79 $ 40 $ 51 Ratio of Earnings to Fixed Charges (d)..... 1.43 --(e) 1.51 1.63 1.43 1.55 Ratio of EBITDA to Interest Charges........ 2.49 -- 2.74 3.05 2.92 3.19 OTHER DATA Utility Plant Additions.................... $ 44 $ 43 $ 41 $ 56 $ 49 $ --(f) BALANCE SHEET DATA (END OF PERIOD) Total Assets............................... $3,939 $3,510 $3,502 $3,474 $3,357 $ 3,572 Current Portion of Long-Term Debt and Preferred Stock.......................... $ 58 $ 57 $ 83 $ 58 $ 51 $ 69 Long-Term Debt............................. $1,178 $1,225 $1,154 $1,068 $1,003 $ 1,122(g) Preferred Stock With Mandatory Redemption Provisions..... $ 50 $ 28 $ 7 $ 5 $ 3 $ 2 Without Mandatory Redemption Provisions............................. $ 210 $ 210 $ 210 $ 210 $ 210 $ 210 Common Stock Equity........................ $ 935 $ 623 $ 685 $ 763 $ 803 $ 817 Total Capitalization................ $2,373 $2,086 $2,056 $2,046 $2,019 $ 2,151(g)
- --------------- (a) Includes revenues from all bulk power sales to Cleveland Electric of $130 million, $120 million, $111 million, $102 million and $105 million in 1992, 1993, 1994, 1995 and 1996, respectively, and $111 million for the 12 months ended June 30, 1997. (b) In 1993, Toledo Edison wrote off $186 million of deferred carrying charges. Deferrals under an October 1992 rate stabilization program for Toledo Edison ended in November 1995, and amortization of the deferrals began in December 1995 (see Note 7(d) to Toledo Edison's 1996 financial statements in the Financial Statements Section). (c) 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 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 Toledo Edison's operating performance. (d) 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). (e) Not meaningful due to a net loss. For the year ended December 31, 1993, the net loss before taxes and fixed charges was $195 million. Fixed charges during the period were $233 million. The net loss before income taxes and fixed charges included write-offs of $473 million related to Toledo Edison's investment in Perry Unit 2 and phase-in plan deferred charges, and other charges of $56 million attributable to an early retirement program. Excluding these write-offs, the ratio of earnings to fixed charges would have been 1.42. (f) Not available for periods other than calendar year. (g) Includes Toledo Edison's proportionate share of the Secured Notes ($145 million) which were issued on June 18, 1997. 17 21 THE COMPANIES GENERAL Cleveland Electric, 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. Cleveland Electric also provides electric energy at wholesale to other electric utility companies and to two municipal electric systems (directly and through AMP-Ohio) in its service area. Cleveland Electric serves approximately 741,000 customers and derives approximately 77% of its total electric retail revenue from customers outside the City of Cleveland. Principal industries served by Cleveland Electric 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 Cleveland Electric's operating revenues are derived from the sale of electric energy. At June 30, 1997, Cleveland Electric had 3,251 employees of which 1,780 employees (about 55% of total employees) were represented by one union. On May 28, 1997, the collective bargaining agreement between Cleveland Electric and the union expired without agreement on the terms of a new contract. Cleveland Electric and the union are continuing to negotiate under the supervision of a federal mediator. Both sides have agreed that there will be no strike or lock-out while good faith negotiations are continuing. There is a risk that such an event may occur if Cleveland Electric and the union do not reach an agreement promptly. However, Cleveland Electric believes that it would be able to continue to provide substantially normal electric service to its customers if any such event were to occur. On September 5, 1997, union members voted to give the union's negotiating committee authority to declare a strike. 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 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 293,000 customers and derives approximately 56% of its total electric retail revenues 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 June 30, 1997, Toledo Edison had 1,581 employees of which 967 employees (about 61% of total employees) were represented by three unions having collective bargaining agreements with Toledo Edison. The Companies 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, the Service Company, which furnishes certain administrative and other services to the two utility subsidiaries and to Centerior Energy. Cleveland Electric and Toledo Edison operate as separate companies, each servicing the customers in its respective service area. In March 1994, Centerior Energy announced a plan to merge Toledo Edison into Cleveland Electric. See "Pending Merger of Cleveland Electric and Toledo Edison." In September 1996, Centerior Energy and Ohio Edison entered into an agreement and plan of merger to form a new holding company, FirstEnergy. See "Pending Merger of Centerior Energy and Ohio Edison." The Companies are members of the Central Area Power Coordination Group ("CAPCO Group"), which was created in 1967 by the Companies, Ohio Edison, Duquesne Light Company ("Duquesne") and Ohio Edison's wholly owned subsidiary, Pennsylvania Power Company ("Pennsylvania Power"). The CAPCO Group companies have completed programs to construct larger, more efficient generating units and to strengthen interconnections within the CAPCO Group. The CAPCO Group companies have placed in service nine major generating units (four nuclear units and five coal-fired units), of which the Companies have ownership or leasehold interests in seven (three nuclear units and four coal-fired units). After the 18 22 consummation of the CEC-OE Merger, FirstEnergy will have ownership or leasehold interests in all nine CAPCO generating units. COMPETITION The Companies compete in their respective service areas with suppliers of natural gas to satisfy customers' energy needs with regard to heating and appliance usage. The Companies also are engaged in competition to a lesser extent with suppliers of oil and liquefied natural gas for heating purposes and with suppliers of cogeneration equipment. One competitor provides steam for heating purposes and provides chilled water for cooling purposes in certain areas of downtown Cleveland. The Companies also compete with municipally owned electric systems within their respective service areas. Several communities have evaluated municipalization of electric service and decided to continue service from the Companies. Officials in other communities have indicated an interest in evaluating the municipalization issue. The Companies face continuing competition from locations outside their service areas which are promoted by governmental and private agencies in attempts to influence potential and existing commercial and industrial customers to locate in their respective areas. The Companies also periodically compete with other producers of electricity for sales to electric utilities which are in the market for bulk power purchases. The Companies have interconnections with other electric utilities and have a transmission system capable of transmitting ("wheeling") power between the Midwest and the East. In the future, the Companies will encounter an increasingly competitive environment as a result of the structural changes taking place in the electric utility industry. For a discussion of these changes, including open-access transmission, retail wheeling and stranded investment considerations, see "Risk Factors -- Competition" and "Outlook -- Competition" in Management's Financial Analysis contained in the Financial Statements. Cleveland Electric. Located within Cleveland Electric's service area are two municipally owned electric systems. Cleveland Electric supplies a small portion of those systems' power needs at wholesale rates. One of those systems, Cleveland Public Power ("CPP"), is operated by the City of Cleveland in competition with Cleveland Electric. CPP is primarily an electric distribution system which currently supplies electric power in approximately 60% of the City's geographical area and to approximately 33% (about 72,000) of the electric consumers in the City -- equal to about 10% of all customers served by Cleveland Electric. CPP's kilowatt-hour sales and revenues are equal to about 6% of Cleveland Electric's kilowatt-hour sales and revenues. Much of the area served by CPP overlaps that of Cleveland Electric. For all classes of customers, Cleveland Electric's rates are higher than CPP's rates due largely to CPP's exemption from taxation, the lower-cost financing available to CPP, the continued availability to CPP of lower cost power through short-term power purchases and CPP's access to cheaper governmental power. Cleveland Electric makes power available to CPP on a wholesale basis, subject to FERC regulation. In 1996, Cleveland Electric directly and through AMP-Ohio provided a negligible amount of CPP's energy requirements. CPP's power is purchased from other sources and wheeled over Cleveland Electric's transmission systems. In cases currently pending, the FERC has ruled that Cleveland Electric is obligated to provide an additional interconnection with CPP but has not ruled on the terms and conditions thereof. Cleveland Electric has asked the FERC to reconsider its order that Cleveland Electric provide CPP with an additional interconnection. Also, the FERC has not ruled on Cleveland Electric's request for an increase in rates for power and services provided to CPP. Cleveland Electric believes that it is entitled to a higher level of compensation for the power and the services it provides because the rates currently paid by CPP do not adequately cover the cost of providing such power and services. CPP has constructed new transmission and distribution facilities extending into eastern portions of Cleveland and plans to enhance its existing system in western portions of Cleveland. CPP's expansion has 19 23 resulted in a reduction in Cleveland Electric's annual net income by about $7 million in 1994, by an additional $1 million (for a total reduction of about $8 million) in 1995 and by an additional $3 million (for a total reduction of about $11 million) in 1996. Cleveland Electric estimates that its net income will continue to be reduced by an additional $1-$2 million each year in the 1997 - 2001 period because of CPP's expansion, with the exception of 1997 when the reduction would be about $7 million including the loss of a commercial customer, Medical Center Co., as discussed below. Despite CPP's expansion efforts, Cleveland Electric 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. During 1996, Cleveland Electric renewed and extended for as long as ten years contracts with many of its large industrial customers, including the five largest. Prior to these renewals, 61% of Cleveland Electric's industrial base rate (nonfuel) revenues under contract was scheduled for renewal before 1999. Following the renewals, only 18% of such revenues under contract is scheduled for renewal by 1999. At year-end 1996, 51% of Cleveland Electric's industrial base rate revenues was under long-term contracts. Also, in 1996, Cleveland Electric reached agreements to serve a number of large commercial customers in Cleveland, including some previously served by CPP. An increasing number of CPP customers are converting back to Cleveland Electric service. However, competition for such customers will continue. In March 1995, one of Cleveland Electric's large commercial customers which has provided annual net income to Cleveland Electric of approximately $6 million, Medical Center Co., signed a five-year contract with CPP for electric service provided by another utility beginning in September 1996, when its contract with Cleveland Electric terminated. Cleveland Electric believes that the purchase of power by this customer is a direct purchase from another utility in violation of Ohio's certified territory statute. After being denied a rehearing on this matter by the PUCO, Cleveland Electric filed an appeal with the Ohio Supreme Court. In August 1996, the Court granted Cleveland Electric's request for rehearing and remanded the case back to the PUCO. Cleveland Electric also filed a petition with the FERC on the grounds that such a transaction is a violation of the Federal Power Act. However, in July 1996, the FERC ruled that the transaction does not violate such Act. On September 18, 1996, the FERC granted a rehearing to Cleveland Electric, which has agreed to begin providing the requested transmission service to CPP. For additional information on the effects of the CEC-OE Merger on Cleveland Electric's competition with CPP, see "Pending Merger of Centerior Energy and Ohio Edison -- Regulatory Matters." Toledo Edison. Located wholly or partly within Toledo Edison's service area are six rural electric cooperatives, five of which are supplied with power, transmitted in some cases over Toledo Edison's facilities, by Buckeye Power, Inc. (an affiliate of a number of Ohio rural electric cooperatives) and the sixth of which is supplied by Toledo Edison. Also located within Toledo Edison's service area are 16 municipally owned electric distribution systems, three of which are supplied by other electric systems. Toledo Edison provides a portion of the power purchased by the other 13 municipalities at wholesale rates through a contract with AMP-Ohio that expires in 2009. Rates under this agreement are permitted to increase annually to compensate for increased costs of operation. Less than 3% of Toledo Edison's total electric operating revenues in 1996 was derived from sales under the AMP-Ohio contract. As does Cleveland Electric, Toledo Edison offers long-term contracts to large industrial customers who might otherwise consider changing power suppliers. During 1996, Toledo Edison renewed and extended from seven to ten years contracts with many of its large industrial customers, including the six largest. Prior to these renewals, 94% of Toledo Edison's industrial base rate (nonfuel) revenues under contract was scheduled for renewal before 1999. Following the renewals, only 19% of such revenues under contract is scheduled for renewal by 1999. At year-end 1996, 61% of Toledo Edison's industrial base rate revenues was under long-term contracts. In October 1989, the City of Toledo ("Toledo") established an Electric Franchise Review Committee to (i) study Toledo Edison's franchise agreement with Toledo to determine whether alternate energy sources may be utilized and (ii) investigate the feasibility of establishing a municipal electric system within Toledo. In 20 24 November 1993, Toledo approved a non-exclusive franchise with Toledo Edison which runs through the end of 1998. In October 1995, the Toledo City Council responded to a petition drive by appropriating funds to complete the Electric Franchise Review Committee's study on whether to create a municipal electric utility in Toledo. The Committee is also expected to look into the aggregating of load to provide a conduit for retail wheeling to customers. A draft of the consultant's report in connection with this study states that, if Centerior Energy and Ohio Edison merge, a municipal system in Toledo could not compete with Toledo Edison because of the rate reductions contained in the FirstEnergy Regulatory Plan (see "Pending Merger of Centerior Energy and Ohio Edison" and "Management's Financial Analysis" and Note 15 to Toledo Edison's financial statements in the Financial Statements Section). The consultant's draft report also states that, if the merger does not occur, a municipal system could be competitive with Toledo Edison in one portion of Toledo. However, errors have been found in the draft report which may change the content of the final consultant's report. The final report will be considered by the Electric Franchise Review Committee before making its recommendation to the Toledo City Council later in 1997. In January 1995, the City of Clyde ("Clyde"), which operates its own municipal electric system, passed ordinances to force Toledo Edison to remove most of its equipment from within Clyde's borders and to prevent any residential and commercial customers within Clyde from obtaining service from Toledo Edison. Clyde subsequently asked the PUCO to authorize the removal of Toledo Edison equipment under the Miller Act. The Miller Act is an Ohio statute which provides that a utility cannot be required to withdraw or abandon its facilities and services in a city without a demonstration that such action is in the public interest and without the approval of the PUCO. Toledo Edison challenged Clyde's Miller Act proceeding before the PUCO and filed an action in the Court of Appeals in Sandusky County, Ohio to challenge Clyde's ordinance prohibiting customers from using Toledo Edison service. The Court of Appeals denied Toledo Edison's challenge, and Toledo Edison appealed to the Ohio Supreme Court. In August 1996, the Supreme Court ruled that Toledo Edison can continue to serve customers who were customers prior to the establishment of the municipal system, but Clyde has the exclusive right to serve new customers. The PUCO had previously issued a ruling in April 1996 that Clyde cannot force Toledo Edison to abandon service within Clyde. The ordinance that prevented Toledo Edison from serving customers in Clyde was repealed in an initiative ballot issue in November 1996. Toledo Edison currently serves approximately 345 customers within Clyde. In October 1995, Chase Brass & Copper Co., Inc. ("Chase Brass") terminated its service with Toledo Edison and began to receive its electric service from a consortium of four municipal electric systems and AMP-Ohio. Service is being provided over a transmission line owned by AMP-Ohio. Although the Ohio Constitution allows municipal electric systems to sell and deliver limited amounts of power outside their municipal boundaries, Toledo Edison has filed two lawsuits in Williams County (Ohio) Common Pleas Court against the four municipalities and AMP-Ohio contending, in part, that this arrangement violates the legal limits of such sales and that AMP-Ohio's system design for this transaction raises certain safety issues. North Western Electric Cooperative, whose certified territory is crossed by AMP-Ohio's transmission line, has also filed suit to challenge this transaction. The loss of Chase Brass as a customer reduced Toledo Edison's annual net income by about $1.6 million based on 1994 sales levels. As yet, no ruling has been issued by the Williams County Common Pleas Court. In addition, Chase Brass and other surrounding businesses and residences in Jefferson Township continue to seek incorporation as a municipality to be named the Village of Holiday City. The Williams County Board of Commissioners and the Williams County Court of Common Pleas issued an order permitting the area to be incorporated. Toledo Edison appealed the Court's order to the Sixth District Court of Appeals, thereby staying the incorporation proceedings. The Court of Appeals ruled against Toledo Edison, finding a lack of standing. Toledo Edison then appealed to the Ohio Supreme Court, thereby staying the incorporation proceedings again. On April 23, 1997, the Ohio Supreme Court denied Toledo Edison's appeal. Toledo Edison does not plan to apply for reconsideration at the Ohio Supreme Court. The new municipality can negotiate with other utilities for electric power. The other businesses in the proposed municipality previously terminated their service with Toledo Edison and are receiving electric service from the Village of Montpelier, one of the consortium now supplying Chase Brass. 21 25 For additional information on the effects of the CEC-OE Merger on Toledo Edison's relationship with AMP-Ohio, see "Pending Merger of Centerior Energy and Ohio Edison -- Regulatory Matters." SALES OF ELECTRICITY Kilowatt-hour sales by the Companies follow a seasonal pattern marked by increased customer usage in the summer for air conditioning and in the winter for heating. Historically, Cleveland Electric 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. Toledo Edison, although having a significant electric heating load, has experienced in recent years its heaviest demand for electric service during the summer months because of heavy air conditioning usage. Cleveland Electric's largest customer is a steel manufacturer which has two major steel producing facilities. Sales to these facilities accounted for 3.3% of Cleveland Electric's 1996 total electric operating revenues. The loss of these facilities would reduce Cleveland Electric's annual net income by about $16 million based on 1996 sales levels. The largest customer served by Toledo Edison is a major automobile manufacturer. Sales to this customer accounted for 3.9% of Toledo Edison's 1996 total electric operating revenues. The loss of this customer would reduce Toledo Edison's annual net income by about $11 million based on 1996 sales levels. FUEL SUPPLY Generation by type of fuel for 1996 was 68% coal-fired and 32% nuclear for Cleveland Electric and 48% coal-fired and 52% nuclear for Toledo Edison. Coal. In 1996, Cleveland Electric and Toledo Edison burned 5.9 million tons and 2.1 million tons of coal, respectively, for electric generation. Each utility normally maintains a reserve supply of coal sufficient for about 20 days of normal operations. On February 1, 1997, this reserve was about 20 days for plants operated by Cleveland Electric, 16 days for the plant operated by Toledo Edison and 35 days for the Mansfield Plant, which is operated by Pennsylvania Power. In 1996, about 45% of Cleveland Electric's coal requirements were purchased under long-term contracts, with the longest remaining term being almost seven 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%. Additionally, about 34% of Cleveland Electric's coal requirements were purchased under short-term contracts (nine to twelve-month terms) with price adjustments on the basis of coal quality. The sulfur content of the short-term contracts ranged from 1.5% to 1.9%. The balance of Cleveland Electric's coal was purchased on the spot market with sulfur content ranging from less than 1% to 4%. In 1996, about 54% of Toledo Edison's coal requirements were purchased under long-term contracts, with the longest remaining term being almost four 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 4%. The balance of Toledo Edison's coal was purchased on the spot market with sulfur content from less than 1% to 4%. In May 1996, Cleveland Electric and The Ohio Valley Coal Company ("Ohio Valley") terminated their existing coal supply agreement, which was scheduled to continue until September 1997, and entered into a new coal supply agreement scheduled to expire in September 1997. Under the prior agreement, Cleveland Electric had agreed to pay Ohio Valley certain amounts to cover Ohio Valley's costs, including amounts sufficient to service long-term debt and lease obligations incurred by Ohio Valley. Cleveland Electric also agreed to assume certain Ohio Valley costs and expenses, including mine closing costs, upon termination of that agreement. However, under the new agreement, the terms and conditions were revised whereby Cleveland Electric is only obligated to purchase and pay Ohio Valley for a specified tonnage of coal during the term of the agreement and has no responsibility for Ohio Valley's debt and lease obligations and other expenses, 22 26 including mine closing costs. The May 1996 agreement has been replaced by a new agreement obligating Cleveland Electric to purchase at fixed prices a specified tonnage of coal by the end of 1999. 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 Mansfield Plant. The contract is scheduled to run 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, 1996, the total dollar amount of Quarto's debt and lease obligations guaranteed by Cleveland Electric was $19.2 million and by Toledo Edison was $11.2 million. Cleveland Electric 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 Companies' least cost plan for complying with the Clean Air Act of 1970 and its 1990 Amendments, which was included in the agreement approved by the PUCO in February 1993 in connection with the Companies' 1992 long-term forecast and updated in 1995 proceedings, calls for compliance either through the use of low-sulfur coal or the use of high sulfur-coal in combination with emission allowances. Nuclear. The acquisition and utilization of nuclear fuel involves six distinct steps: (i) supply of uranium oxide raw material, (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 Companies have inventories of raw material sufficient to provide nuclear fuel through 1997 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 contract with the United States Enrichment Corporation ("USEC") which will supply the needed enrichment services for their nuclear units' fuel supply. However, the amount of enrichment services under the USEC contract varies by CAPCO Group company, with Cleveland Electric's and Toledo Edison's enrichment services reduced to 70% in 1997-1999 and reduced to 0% in 2000 and beyond. 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 material to meet the industry's nuclear fuel needs. Oil. The Companies each have adequate supplies of fuel oil for their oil-fired electric generating units which are used primarily as reserve and peaking capacity. NUCLEAR UNITS The Companies' generating facilities include, among others, three nuclear units owned or leased by the CAPCO Group -- Perry Unit 1, Beaver Valley Unit 2 and Davis-Besse. These three units are in commercial operation. Cleveland Electric 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. Cleveland Electric 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. Cleveland Electric and Toledo Edison also lease, as joint lessees, an additional 18.26% of Beaver Valley Unit 2 as a result of a September 1987 sale and leaseback transaction (see Note 2 to the 1996 financial statements in the Financial Statements Section). 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 1989, the PUCO approved nuclear plant performance standards for the Companies based on rolling three-year industry averages of availability for pressurized water reactors and for 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 availability averages of the Companies' 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 Companies to refund incremental 23 27 replacement power costs to customers through the semiannual fuel cost rate adjustment. However, if the performance of the Companies' 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 1994-1996 period are 80.7% for pressurized water reactors such as Davis-Besse and Beaver Valley Unit 2 and 78.2% for boiling water reactors such as Perry Unit 1. The 1994-1996 combined availability average for Davis-Besse and Beaver Valley Unit 2 was 87.7% and the availability average for Perry Unit 1 was 72.2%. At December 31, 1996, the total banked benefit for the Companies is estimated to be between $34 million and $37 million. 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.................. 6/4/95-9/28/96 1/8/95-9/14/96 1/22/95-1/18/97 Operations.......................... 2 2 2 Engineering......................... 2 2 1 Maintenance......................... 1 2 1 Plant Support....................... 2 2 1
In 1980, Congress passed the Low-Level Radioactive Waste Policy Act which provides that the disposal of low-level radioactive waste is the responsibility of the state where such waste is 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. In June 1995, the Ohio legislature authorized the siting, construction and operation of a disposal facility. In addition, the South Carolina legislature voted to allow out-of-region generators (such as the Companies' nuclear units) to resume shipments of low-level radioactive waste to the Barnwell disposal facility. On June 26, 1997, the Midwest Compact Commission voted to halt further siting activities in Ohio due to the availability of disposal capacity at both the Barnwell facility and the Envirocare facility in Utah. The Companies have also constructed interim storage facilities to house the waste at each nuclear site. See "5. Ohio Abandons Nuclear Waste Project" under "Part II. Other Information" of the Second Quarter 1997 Form 10-Q in the Financial Statements Section. Off-site disposal of spent nuclear fuel is unavailable, but the CAPCO Group companies have contracts with the U.S. Department of Energy ("DOE") which provide for the future acceptance of spent fuel for disposal by the federal government. On December 17, 1996, the DOE notified the Companies that it would be unable to begin acceptance of spent fuel for disposal by January 31, 1998 as mandated by Section 302(a)(5)(B) of the Nuclear Waste Policy Act ("NWPA"). As a result, the Companies along with 35 other nuclear utilities and 46 state agencies have asked for federal court approval to stop payments into the Nuclear Waste Fund and for an order requiring the DOE to take immediate action to comply with NWPA. On-site storage capacity at Davis-Besse, Perry Unit 1 and Beaver Valley Unit 2 should be sufficient through 2017, 2011 and 2013, respectively. See "Risk Factors -- Nuclear Operations" and Note 5(a) to the 1996 financial statements and "Outlook -- Nuclear Operations" in Management's Financial Analysis contained in the Financial Statements Section for a discussion of potential risks facing the Companies as owners and lessees of nuclear generating units. 24 28 FINANCING CAPABILITY At June 30, 1997, Cleveland Electric had long-term debt outstanding of approximately $3,011 million (68% of total capitalization) and Toledo Edison had long-term debt outstanding of approximately $1,122 million (52% of total capitalization). Also at June 30, 1997, Cleveland Electric and Toledo Edison had approximately $3,230 million and $1,262 million, respectively, in aggregate principal amount of first mortgage bonds outstanding under their respective mortgages. (The outstanding first mortgage bond amounts for Cleveland Electric and Toledo Edison include $140.4 million principal amount and $210.6 million principal amount, respectively, of first mortgage bonds pledged to secure obligations to various bank creditors.) At June 30, 1997, neither Company was able to issue a material amount of additional first mortgage bonds except in connection with refinancings. Also at June 30, 1997, Cleveland Electric had fixed obligations for debt other than first mortgage bonds and preferred stock with mandatory redemption provisions of $229 million, and Toledo Edison had fixed obligations for debt other than first mortgage bonds and preferred stock with mandatory redemption provisions of $141 million. The Companies also have future minimum lease payments of approximately $3,659 million for generation facility leases as of June 30, 1997. See Note 2 to the 1996 financial statements in the Financial Statements Section. From 1994-1996, aggregate fixed obligations for debt, preferred stock and the imputed principal portion of the Companies' generation facility operating leases have been reduced by $523 million. The net proceeds from the sale of the Old Notes were used by the Companies to refinance $720 million of the lessor debt related to their operating lease commitments for the Mansfield Plant, resulting in a reduction of the aggregate principal amount of the lessor debt by about $153 million after repayment of short-term financing facilities and a reduction of the average life to maturity of the lessor debt related to their Mansfield Plant operating lease commitments from approximately 11.8 years to approximately 7.0 years. As of June 30, 1997, debt and preferred stock maturities and sinking fund requirements for the remainder of 1997 were $115.9 million (including $70.5 million of first mortgage bonds refinanced in August 1997) for Cleveland Electric and $41.5 million (including $10.1 million of first mortgage bonds refinanced in August 1997) for Toledo Edison. In August 1997, Cleveland Electric and Toledo Edison refinanced $180.6 million aggregate principal amount and $10.1 million principal amount, respectively, of first mortgage bonds issued as security for certain tax-exempt bonds issued by public authorities. Cleveland Electric plans to refinance up to $550 million of outstanding first mortgage bonds during the fourth quarter of 1997. The Companies have $273 million in financing vehicles to support their nuclear fuel leases, $83 million of which mature in 1997. Replacement financing for the maturing issues may not be needed in 1997. A $125 million revolving credit facility which matured in May 1997 has been extended to May 1998. The Companies expect to meet their remaining financing requirements with internal cash generation, cash reserves and short-term borrowings. Also, in June 1997, in connection with the lease refinancing discussed above, Centerior Energy and the Companies arranged for $155 million of short-term borrowings with variable interest rates (at that time, with a weighted average interest rate of 6.8%). Of that amount, Centerior Energy borrowed $30 million under the revolving credit facility which was renewed in May 1997. The Companies also had unsecured borrowings totaling $100 million guaranteed by Centerior Energy, and Centerior Energy had $25 million of unsecured borrowings jointly and severally guaranteed by the Companies. While the $25 million amount is outstanding, Centerior Energy has agreed not to use $25 million of the revolving credit facility. The Companies expect their foreseeable future cash needs to be satisfied with internally generated cash and available credit facilities and, therefore, that they will not need to issue first mortgage bonds, except in connection with planned refinancings. There are no restrictions on Cleveland Electric's ability to issue preferred or preference stock, and there are no restrictions on Toledo Edison's ability to issue preference stock. Under its articles of incorporation, Toledo Edison cannot issue preferred stock unless certain earnings coverage requirements are met. Based on its earnings for the 12 months ended June 30, 1997, Toledo Edison could not issue additional preferred stock. 25 29 The availability and cost of capital to meet the Companies' external financing needs depend upon such factors as financial market conditions and the Companies' credit ratings. At the time of the Offering, credit ratings for the Companies were as follows:
STANDARD & POOR'S MOODY'S ----------------- ------------- First mortgage bonds.................................... BB Ba2 Unsecured notes of Cleveland Electric................... B+ Ba3 Unsecured notes of Toledo Edison........................ B+ B1 Preferred stock......................................... B b2
Current credit ratings for the Companies are as follows:
STANDARD & POOR'S MOODY'S ----------------- ------------- First mortgage bonds.................................... BB+ Ba1 Unsecured notes......................................... BB- Ba3 Preferred stock......................................... BB- b1
These ratings reflect recent upgrades by both Standard & Poor's and Moody's and assume, among other things, consummation of the CEC-OE Merger. See "Risk Factors -- Consummation of the CEC-OE Merger" and "Pending Merger of Centerior Energy and Ohio Edison." Standard & Poor's has assigned the Secured Notes a rating of "BB+" and Moody's has assigned the Secured Notes a rating of "Ba1." Any desired further explanation of the significance of these ratings should be obtained from Standard & Poor's or Moody's, respectively. The Companies furnished Standard & Poor's and Moody's with certain information and materials with respect to the Secured Notes and the Companies. Generally, rating agencies base their ratings on the information and materials so furnished to them and on their own investigations, studies and assumptions. There is no assurance that such ratings will continue for any given period of time or that they will not be lowered or withdrawn entirely if, in the judgment of the rating agencies, circumstances so warrant. Any such change in or withdrawal of such ratings could have an adverse effect on the market price of the Secured Notes. The Companies have not applied for a rating with respect to the Secured Notes from any other credit rating agency. FirstEnergy plans to account for the CEC-OE Merger as a purchase in accordance with generally accepted accounting principles. If FirstEnergy elects to apply, or "push down," the effects of purchase accounting to the financial statements of the Companies, Cleveland Electric would record adjustments to: (1) reduce the carrying value of its nuclear generating plant by $880 million to fair value; (2) recognize goodwill of $675 million; (3) reduce its common stock equity by $258 million; (4) reset its retained earnings to zero; and (5) reduce its related deferred federal income tax liability by $308 million; and Toledo Edison would record adjustments to: (1) reduce the carrying value of its nuclear generating plant by $370 million to fair value; (2) recognize goodwill of $307 million; (3) reduce its common stock equity by $124 million; (4) reset its retained earnings to zero; and (5) reduce its related deferred federal income tax liability by $130 million. These amounts reflect FirstEnergy's estimates of the pro forma adjustments for the Companies as of December 31, 1996. The actual adjustments to be recorded could be materially different from the estimates. FirstEnergy has not decided whether to push down the effects of purchase accounting to the financial statements of the Companies if the CEC-OE Merger is completed. If upon completion of the CEC-OE Merger FirstEnergy elects to apply push-down accounting to the Companies, the available bondable property of each Company would be reduced to below zero. However, each Company would still be able to issue refundable bonds subject to certain limitations. See "Description of Cleveland Electric Bonds and Toledo Edison Bonds," and "Pending Merger of Centerior Energy and Ohio Edison -- Regulatory Matters." In addition, each Company will also have the flexibility to issue cash-backed first mortgage bonds or refinance on an unsecured basis, if necessary. 26 30 CONSTRUCTION PROGRAM The Companies carry on a continuous program of constructing transmission, distribution and general facilities and modifying existing generating facilities to meet anticipated demand for electric service and to comply with governmental regulations. The Companies' 1996 long-term (20-year) forecast, as filed with the PUCO, projects long-term annual growth rates in peak demand and kilowatt-hour sales of 0.7% and 1.0%, respectively, after demand-side management considerations. The Companies' 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. Cleveland Electric's Lake Shore Plant ("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 2000. According to the current long-term integrated resource plan, the Companies do not plan to put into service any new generating capacity until 2008. The following tables show, categorized by major components, the construction expenditures by Cleveland Electric and Toledo Edison during 1994, 1995 and 1996 and the estimated cost of their construction programs for 1997 through 2001, in each case including allowance for funds used during construction and excluding nuclear fuel (however, consummation of the CEC-OE Merger is expected to reduce the Companies' cash construction expenditures from those reported in the tables):
ACTUAL ESTIMATED ------------------ --------------------------------- 1994 1995 1996 1997 1998 1999 2000 2001 ----- ----- ---- ----- ----- ----- ----- ----- (MILLIONS OF DOLLARS) CLEVELAND ELECTRIC Transmission, Distribution and General Facilities................................. $ 53 $ 68 $ 79 $ 76 $ 81 $ 94 $ 96 $ 105 Renovation and Modification of Generating Units Nuclear.................................... 18 12 17 18 15 17 11 9 Nonnuclear................................. 61 63 19 18 12 18 16 17 Clean Air Act Amendments Compliance.......... 24 12 (4) 1 10 8 3 0 ---- ---- ---- ---- ---- ---- ---- ---- Total.............................. $ 156 $ 155 $111 $ 113 $ 118 $ 137 $ 126 $ 131 ==== ==== ==== ==== ==== ==== ==== ====
ACTUAL ESTIMATED ------------------ --------------------------------- 1994 1995 1996 1997 1998 1999 2000 2001 ----- ----- ---- ----- ----- ----- ----- ----- (MILLIONS OF DOLLARS) TOLEDO EDISON Transmission, Distribution and General Facilities................................. $ 18 $ 37 $ 32 $ 38 $ 44 $ 34 $ 36 $ 25 Renovation and Modification of Generating Units Nuclear.................................... 10 6 12 14 12 14 10 6 Nonnuclear................................. 12 9 5 9 7 8 4 4 Clean Air Act Amendments Compliance.......... 1 3 0 1 6 6 2 0 ---- ---- ---- ---- ---- ---- ---- ---- Total.............................. $ 41 $ 55 $ 49 $ 62 $ 69 $ 62 $ 52 $ 35 ==== ==== ==== ==== ==== ==== ==== ====
27 31 Each company in the CAPCO Group is responsible for financing the portion of the capital costs of nuclear fuel equivalent to its ownership and leased interest in the unit in which the fuel will be utilized. See "The Companies -- Fuel Supply -- Nuclear" for information regarding nuclear fuel supplies and Note 6 in the Financial Statements regarding leasing arrangements to finance nuclear fuel capital costs. Nuclear fuel capital costs incurred by Cleveland Electric and Toledo Edison during 1994, 1995 and 1996 and their estimated nuclear fuel capital costs for 1997 through 2001 are as follows:
ACTUAL ESTIMATED ------------------ --------------------------------- 1994 1995 1996 1997 1998 1999 2000 2001 ----- ----- ---- ----- ----- ----- ----- ----- (MILLIONS OF DOLLARS) Cleveland Electric........................... $ 26 $ 19 $ 37 $ 25 $ 34 $ 40 $ 34 $ 40 Toledo Edison................................ $ 21 $ 12 $ 32 $ 22 $ 30 $ 30 $ 29 $ 32
PROPERTIES For a description of Cleveland Electric's properties, see "Descriptions of Cleveland Electric Bonds and Toledo Edison Bonds -- Cleveland Electric Bonds -- Title to Property," and for a description of Toledo Edison's properties, see "Descriptions of Cleveland Electric Bonds and Toledo Edison Bonds -- Toledo Edison Bonds -- Title to Property." PENDING MERGER OF CENTERIOR ENERGY AND OHIO EDISON On September 16, 1996, Centerior Energy and Ohio Edison jointly announced an agreement between them under which Centerior Energy would merge with Ohio Edison in a stock-for-stock transaction to form FirstEnergy. Upon consummation of the CEC-OE Merger, Centerior Energy common stock share owners will receive 0.525 share of FirstEnergy common stock for each share of Centerior Energy common stock owned, and Ohio Edison share owners will receive one share of FirstEnergy common stock for each share of Ohio Edison common stock owned. Following the CEC-OE Merger, FirstEnergy will directly hold all of the issued and outstanding common stock of Ohio Edison, Cleveland Electric, Toledo Edison, the Service Company and the three other wholly owned subsidiaries of Centerior Energy. If the CEC-OE Merger were completed today, FirstEnergy would be the 11th largest investor-owned electric utility system in the U.S., based on combined annual sales of approximately 64 billion kilowatt-hours, and would have assets of over $18 billion, a customer base of 2.1 million and a service area of 13,200 square miles located within a 500-mile radius of one-half of the U.S. population. See "Management's Financial Analysis" and Note 15 to the 1996 financial statements in the Financial Statements Section and "Risk Factors -- Consummation of the CEC-OE Merger." Various aspects of the CEC-OE Merger remain subject to approval by the FERC and the SEC and to certain other conditions. On July 16, 1997, the FERC issued an order which delayed consummation of the CEC-OE Merger. The FERC gave the Companies and Ohio Edison 15 days to elect one of two options: proceed to concurrent trial-type hearings with the FERC and the PUCO, or revise the screening analysis and propose appropriate mitigation measures. The FERC order suggested that possible mitigation measures include: (1) divestiture of generation assets, (2) creation of a regional independent system operator to manage the two companies' combined transmission grids, (3) expansion of transmission capacity and (4) commitment of internal transmission capacity to alternative suppliers. The order also directed the Companies and Ohio Edison to continue to attempt to negotiate an adequate ratepayer protection mechanism with three Pennsylvania municipalities which intervened but have not yet settled, and report to the FERC within 30 days the results of those negotiations, whereupon if no settlement is reached the FERC will decide the issue on the written record or set it for hearing. On July 30, 1997, the Companies and Ohio Edison formally notified the FERC of their election to revise the screening analysis and propose appropriate mitigation measures. On August 8, 1997, Ohio Edison and the Companies filed a revised analysis, additional testimony and proposed mitigation measures fully responsive to 28 32 the FERC's July 16, 1997 order. While the revised analysis suggests potential anticompetitive effects in certain markets under certain limited circumstances, the Companies believe that the mitigation measures more than adequately address these concerns through a variety of transmission solutions which are intended to ensure that the proposed merger's effects are procompetitive. As a result of the mitigation measures, municipal electric systems in Ohio Edison's and the Companies' service areas will be able to take full advantage of additional third party generation sources made available to them as a result of FirstEnergy's open access transmission tariff. The comment period on the August 8, 1997 submissions expires on September 22, 1997. The Companies continue to believe the FERC will approve the proposed merger prior to the end of 1997. See "1. Pending Merger with Ohio Edison" under "Part II. Other Information" of the Second Quarter 1997 Form 10-Q in the Financial Statements Section. However, there can be no assurance that such approval can be obtained on terms which Centerior Energy and Ohio Edison will find acceptable. See "Risk Factors -- Consummation of the CEC-OE Merger." REASONS FOR THE CEC-OE MERGER The Companies believe that the CEC-OE Merger will create a company that is better positioned to compete in the increasingly competitive electric utility industry than either Centerior Energy or Ohio Edison would be on a stand-alone basis. FirstEnergy expects to achieve this result through: (a) improved coordination, control and operation of major generating plants and transmission facilities; (b) accelerated debt reduction; (c) elimination of duplicative activities; (d) reduced operating expenses and cost of capital; (e) elimination or deferral of certain capital expenditures; (f) development of opportunities for sales of energy-related products and services; (g) enhanced cash flow; and (h) enhanced purchasing capabilities for goods and services. The Companies believe the combination of Centerior Energy and Ohio Edison is a natural alliance of companies with adjoining service areas who already share ownership in many of their major generating assets. As a result of the CEC-OE Merger, FirstEnergy expects to realize opportunities to eliminate duplicative costs, maximize efficiencies and increase management flexibility in order to enhance revenues, cash flow and earnings and be a more effective competitor in the increasingly competitive electric utility industry. REGULATORY MATTERS On January 30, 1997, the PUCO approved a rate reduction and economic development plan for the Companies to be effective upon the consummation of the CEC-OE Merger and extending through 2006 ("FirstEnergy Regulatory Plan"). The FirstEnergy Regulatory Plan provides for rate reductions, frozen fuel cost factors, economic development incentive prices, an energy-efficiency program and an earnings cap. The FirstEnergy Regulatory Plan requires, for regulatory purposes, a revaluation of or an accelerated reduction in the Companies' investment in nuclear plant and certain regulatory assets (excluding amounts due from customers for future federal income taxes) by at least $2 billion by the end of 2005. Only a portion of the $2 billion of accelerated costs is expected to be charged against earnings for financial reporting purposes by 2005. To the extent the revaluation or an accelerated reduction of assets required by the FirstEnergy Regulatory Plan for Cleveland Electric and Toledo Edison is reflected on the Companies' financial accounting books (which has not been determined), and is also satisfied with physical plant rather than regulatory assets (which also has not been determined), bondable property at each Company will be reduced. If, in addition, some or all of the required reduction is obtained by a change in depreciable life, Toledo Edison's (but not Cleveland Electric's) net earnings would be reduced prospectively. Toledo Edison may issue some refundable bonds without a net earnings certificate. See "Descriptions of Cleveland Electric Bonds and Toledo Edison Bonds -- Toledo Edison Bonds -- Issuance of Additional TE First Mortgage Bonds." 29 33 FirstEnergy believes that the FirstEnergy Regulatory Plan will not provide for the full recovery of costs and a fair return on the investment associated with the Companies' nuclear operations. Pursuant to the order of the PUCO approving the FirstEnergy Regulatory Plan, FirstEnergy was required to submit to the PUCO staff the regulatory accounting and cost recovery details for implementing the FirstEnergy Regulatory Plan. Such details were submitted in July 1997. FirstEnergy expects that the Companies will discontinue the application of SFAS 71 for their nuclear operations if and when consummation of the CEC-OE Merger becomes probable. The remainder of their business is expected to continue to comply with the provisions of SFAS 71. At the time the CEC-OE Merger becomes probable, the Companies would be required to write off certain of their regulatory assets for financial reporting purposes. The write-off amounts would be determined at that time. FirstEnergy estimates the write-off will total approximately $750 million. Under the FirstEnergy Regulatory Plan, some or all of this write-off cannot be applied toward the $2 billion regulatory commitment discussed above. For financial reporting purposes, the net book value of the Companies' nuclear generating units is not expected to be impaired. If events cause one or both Companies to conclude they no longer meet the criteria for applying SFAS 71 for the remainder of their business, they would be required to write off their remaining regulatory assets and measure all other assets for impairment. On June 11, 1997, an agreement was reached between FirstEnergy and the City of Cleveland that provides the framework for resolving transmission and distribution issues between Cleveland Electric and CPP. FirstEnergy believes that the agreement will enable both Cleveland Electric and CPP to better serve their customers while enhancing opportunities for economic development and growth within their respective service areas. In a related development, an agreement was also reached with AMP-Ohio that forms a framework for resolving certain transmission and operating issues. As a result of the agreements, the City of Cleveland and AMP-Ohio have withdrawn their opposition to the CEC-OE Merger at both the federal and state levels and all pending litigation involving the City of Cleveland or CPP and the Companies has been stayed to allow for settlement discussions. Reference is made to "Management's Financial Analysis" (specifically, "Strategic Plan," "Pending Merger with Ohio Edison" and "FirstEnergy Rate Plan" under "Management's Financial Analysis -- Outlook") and Note 15 to the 1996 financial statements in the Financial Statements Section for more information concerning the CEC-OE Merger and the FirstEnergy Regulatory Plan. Also, see "Risk Factors -- Consummation of the CEC-OE Merger" and "The Companies -- Financing Capability." PENDING MERGER OF CLEVELAND ELECTRIC AND TOLEDO EDISON In March 1994, Centerior Energy announced a plan to merge Toledo Edison into Cleveland Electric. In June 1995, the preferred share owners of Cleveland Electric and Toledo Edison approved actions necessary for the two companies to merge. However, the merger agreement between Centerior Energy and Ohio Edison requires the approval of Ohio Edison prior to the consummation of the Cleveland Electric and Toledo Edison merger. Ohio Edison has not yet made a decision on this matter. In the meantime, at the request of the NRC, pending Ohio Edison's decision, both Cleveland Electric and Toledo Edison have withdrawn their request for authorization to transfer certain NRC licenses to the merged entity. All other regulatory approvals have been obtained. EFFECT OF PENDING MERGER ON CEI FIRST MORTGAGE AND TE FIRST MORTGAGE Substantially all of the fixed properties and the franchises of Cleveland Electric ("CEI Mortgaged Property") are subject to the lien of the CEI First Mortgage (as hereinafter defined), and substantially all of the fixed properties and the franchises of Toledo Edison ("TE Mortgaged Property") are subject to the lien of the TE First Mortgage (as hereinafter defined). If the merger of Toledo Edison into Cleveland Electric is consummated, Cleveland Electric will acquire all of the assets of Toledo Edison, including the TE Mortgaged Property, and 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. 30 34 If the merger is consummated, the only assets of Cleveland Electric 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 Cleveland Electric 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 would, after the merger, continue to be a first lien on the CEI Mortgaged Property. After the merger, the existing junior liens of the subordinate mortgages of Cleveland Electric and Toledo Edison would be junior to the liens of the CEI First Mortgage and the TE First Mortgage. Cleveland Electric expects that, after the merger, it would enter into a new indenture ("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 Cleveland Electric under the New Indenture. The New Indenture trustee would 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 Cleveland Electric after the merger, including some or all of the CEI Mortgaged Property and TE Mortgaged Property, would 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 Cleveland Electric 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 CLEVELAND ELECTRIC AND TOLEDO EDISON The following pro forma condensed balance sheets and income statements give effect to the agreement between Cleveland Electric and Toledo Edison to merge Toledo Edison into Cleveland Electric. These statements are unaudited and based on accounting for the merger on a method similar to a pooling of interests. These statements combine the Companies' historical balance sheets at June 30, 1997, December 31, 1996 and December 31, 1995 and their historical income statements for the 12 months ended June 30, 1997 and for each of the three years ended December 31, 1996. 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. The pro forma data does not reflect any potential effects related to the consummation of the CEC-OE Merger. See "The Companies -- Financing Capability" for a discussion of the effects on the Companies' financial statements if FirstEnergy elects to apply push-down accounting to the Companies. 31 35 COMBINED PRO FORMA CONDENSED BALANCE SHEETS OF CLEVELAND ELECTRIC AND TOLEDO EDISON (UNAUDITED) (MILLIONS OF DOLLARS)
AT JUNE 30, 1997 -------------------------------------------------- HISTORICAL ------------------- CLEVELAND TOLEDO PRO FORMA ELECTRIC EDISON ADJUSTMENTS TOTALS --------- ------ ----------- --------- ASSETS Property, Plant and Equipment..................... $ 7,859 $3,527 $ -- $11,386 Less: Accumulated Depreciation and Amortization... 3,026 1,552 -- 4,578 ------ ------ ----- ------- Net Property, Plant and Equipment............ 4,833 1,975 -- 6,808 Current Assets.................................... 443 240 (92)(a) 591 Regulatory and Other Assets....................... 2,061 1,357 (18)(a,b) 3,400 ------ ------ ----- ------- Total Assets............................ $ 7,337 $3,572 $(110) $10,799 ====== ====== ===== ======= CAPITALIZATION AND LIABILITIES Capitalization: Common Stock Equity............................. $ 1,010 $ 817 $ -- $ 1,827 Preferred Stock: With Mandatory Redemption Provisions......... 172 2 -- 174 Without Mandatory Redemption Provisions...... 238 210 -- 448 Long-Term Debt.................................. 3,011 1,122 -- 4,133 ------ ------ ----- ------- Total Capitalization.................... 4,431 2,151 -- 6,582 Current Liabilities............................... 794 364 (94)(a) 1,064 Deferred Credits and Other Liabilities............ 2,112 1,057 (16)(b,r) 3,153 ------ ------ ----- ------- Total Capitalization and Liabilities.... $ 7,337 $3,572 $(110) $10,799 ====== ====== ===== =======
AT DECEMBER 31, 1996 -------------------------------------------------- HISTORICAL ------------------- CLEVELAND TOLEDO PRO FORMA ELECTRIC EDISON ADJUSTMENTS TOTALS --------- ------ ----------- --------- ASSETS Property, Plant and Equipment..................... $ 7,809 $3,504 $ -- $11,313 Less: Accumulated Depreciation and Amortization... 2,899 1,489 -- 4,388 ------ ------ ----- ------- Net Property, Plant and Equipment............ 4,910 2,015 -- 6,925 Current Assets.................................... 498 308 (102)(a,r) 704 Regulatory and Other Assets....................... 1,470 1,034 (18)(a,b,r) 2,486 ------ ------ ----- ------- Total Assets............................ $ 6,878 $3,357 $(120) $10,115 ====== ====== ===== ======= CAPITALIZATION AND LIABILITIES Capitalization: Common Stock Equity............................. $ 1,045 $ 803 $ -- $ 1,848 Preferred Stock: With Mandatory Redemption Provisions......... 186 3 -- 189 Without Mandatory Redemption Provisions...... 238 210 -- 448 Long-Term Debt.................................. 2,441 1,003 -- 3,444 ------ ------ ----- ------- Total Capitalization.................... 3,910 2,019 -- 5,929 Current Liabilities............................... 878 278 (104)(a) 1,052 Deferred Credits and Other Liabilities............ 2,090 1,060 (16)(b,r) 3,134 ------ ------ ----- ------- Total Capitalization and Liabilities.... $ 6,878 $3,357 $(120) $10,115 ====== ====== ===== =======
32 36 COMBINED PRO FORMA CONDENSED BALANCE SHEETS OF CLEVELAND ELECTRIC AND TOLEDO EDISON (UNAUDITED) (MILLIONS OF DOLLARS)
AT DECEMBER 31, 1995 -------------------------------------------------- HISTORICAL ------------------- CLEVELAND TOLEDO PRO FORMA ELECTRIC EDISON ADJUSTMENTS TOTALS --------- ------ ----------- --------- ASSETS Property, Plant and Equipment..................... $ 7,724 $3,485 $ -- $11,209 Less: Accumulated Depreciation and Amortization... 2,693 1,405 1(r) 4,099 ------ ------ ----- ------- Net Property, Plant and Equipment............ 5,031 2,080 (1) 7,110 Current Assets.................................... 598 327 (24)(a) 901 Regulatory and Other Assets....................... 1,523 1,067 (11)(b) 2,579 ------ ------ ----- ------- Total Assets............................ $ 7,152 $3,474 $ (36) $10,590 ====== ====== ===== ======= CAPITALIZATION AND LIABILITIES Capitalization: Common Stock Equity............................. $ 1,127 $ 763 $ -- $ 1,890 Preferred Stock: With Mandatory Redemption Provisions......... 215 5 -- 220 Without Mandatory Redemption Provisions...... 241 210 -- 451 Long-Term Debt.................................. 2,666 1,068 -- 3,734 ------ ------ ----- ------- Total Capitalization.................... 4,249 2,046 -- 6,295 Current Liabilities............................... 796 329 (27)(a,r) 1,098 Deferred Credits and Other Liabilities............ 2,107 1,099 (9)(a,b) 3,197 ------ ------ ----- ------- Total Capitalization and Liabilities.... $ 7,152 $3,474 $ (36) $10,590 ====== ====== ===== =======
33 37 COMBINED PRO FORMA CONDENSED INCOME STATEMENTS OF CLEVELAND ELECTRIC AND TOLEDO EDISON (UNAUDITED) (MILLIONS OF DOLLARS)
12 MONTHS ENDED JUNE 30, 1997 -------------------------------------------------------- HISTORICAL -------------------- CLEVELAND TOLEDO PRO FORMA ELECTRIC EDISON ADJUSTMENTS TOTALS --------- ------ ----------- --------- Operating Revenues.......................... $ 1,788 $915 $(140)(c) $ 2,563 Operating Expenses.......................... 1,434 753 (140)(c,d) 2,047 ------ ---- ----- ------ Operating Income.......................... 354 162 -- 516 Nonoperating (Loss)......................... (13) -- (4)(d,e,r) (17) ------ ---- ----- ------ Income Before Interest Charges............ 341 162 (4) 499 Interest Charges............................ 233 94 (5)(e,r) 322 ------ ---- ----- ------ Net Income................................ 108 68 1 177 Preferred Dividend Requirements............. 37 17 -- 54 ------ ---- ----- ------ Earnings Available for Common Stock......... $ 71 $ 51 $ 1 $ 123 ====== ==== ===== ======
YEAR ENDED DECEMBER 31, 1996 -------------------------------------------------------- HISTORICAL -------------------- CLEVELAND TOLEDO PRO FORMA ELECTRIC EDISON ADJUSTMENTS TOTALS --------- ------ ----------- --------- Operating Revenues.......................... $ 1,790 $897 $(133)(c,r) $ 2,554 Operating Expenses.......................... 1,431 741 (134)(c,d,r) 2,038 ------ ---- ----- ------ Operating Income.......................... 359 156 1 516 Nonoperating (Loss)......................... (2) (4) (2)(d,e) (8) ------ ---- ----- ------ Income Before Interest Charges............ 357 152 (1) 508 Interest Charges............................ 240 95 (1)(e) 334 ------ ---- ----- ------ Net Income................................ 117 57 -- 174 Preferred Dividend Requirements............. 39 17 -- 56 ------ ---- ----- ------ Earnings Available for Common Stock......... $ 78 $ 40 $ -- $ 118 ====== ==== ===== ======
34 38 COMBINED PRO FORMA CONDENSED INCOME STATEMENTS OF CLEVELAND ELECTRIC AND TOLEDO EDISON (UNAUDITED) (MILLIONS OF DOLLARS)
YEAR ENDED DECEMBER 31, 1995 -------------------------------------------------------- HISTORICAL -------------------- CLEVELAND TOLEDO PRO FORMA ELECTRIC EDISON ADJUSTMENTS TOTALS --------- ------ ----------- --------- Operating Revenues.......................... $ 1,769 $874 $(127)(c,r) $ 2,516 Operating Expenses.......................... 1,371 686 (129)(c,d,r) 1,928 ------ ---- ----- ------ Operating Income.......................... 398 188 2 588 Nonoperating Income......................... 31 19 (2)(d) 48 ------ ---- ----- ------ Income Before Interest Charges............ 429 207 -- 636 Interest Charges............................ 245 110 -- 355 ------ ---- ----- ------ Net Income................................ 184 97 -- 281 Preferred Dividend Requirements............. 43 18 -- 61 ------ ---- ----- ------ Earnings Available for Common Stock......... $ 141 $ 79 $ -- $ 220 ====== ==== ===== ======
YEAR ENDED DECEMBER 31, 1994 -------------------------------------------------------- HISTORICAL -------------------- CLEVELAND TOLEDO PRO FORMA ELECTRIC EDISON ADJUSTMENTS 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 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 Preferred Dividend Requirements............. 45 20 1(r) 66 ------ ---- ----- ------ Earnings Available for Common Stock......... $ 140 $ 62 $ -- $ 202 ====== ==== ===== ======
- --------------- NOTES TO COMBINED PRO FORMA CONDENSED BALANCE SHEETS AND INCOME STATEMENTS (UNAUDITED) The Pro Forma Financial Statements include the following adjustments: (a) Elimination of intercompany accounts and notes receivable and accounts and notes 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. 35 39 THE EXCHANGE OFFER BACKGROUND The Old Notes were issued and sold by the Companies to the Placement Agents on June 18, 1997 (the "Old Note Issue Date"). Thereafter, the Old Notes were resold by the Placement Agents to certain purchasers in reliance on one or more exemptions from the registration requirements of the Securities Act. Pursuant to the Registration Agreement entered into by the Companies and the Placement Agents ("Registration Agreement") as a condition to the obligations of the Placement Agents under the Placement Agreement among the Companies and the Placement Agents, the Companies agreed that, unless the Exchange Offer is prohibited by applicable law, they would (i) use their reasonable best efforts to cause the Registration Statement to become effective no later than 150 days after the Old Note Issue Date and (ii) upon effectiveness of Registration Statement, commence the Exchange Offer, maintain the effectiveness of the Registration Statement for at least 30 days (or a longer period if required by law) and deliver to the Exchange Agent New Notes in the same aggregate principal amount as the Old Notes that were tendered by the holders thereof pursuant to the Exchange Offer. A copy of the Registration Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. GENERAL Subject to the terms and conditions described herein, all Old Notes validly tendered and not withdrawn prior to the Expiration Date will be accepted for exchange for New Notes. The New Notes have terms identical to the terms of the Old Notes except that the New Notes have been registered under the Securities Act and, following the completion of the Exchange Offer and during the effectiveness of any required Shelf Registration Statement, the holders of the Old Notes will not be entitled to the contingent increase in the interest rate described below. The New Notes will evidence the same debt as the Old Notes for which they are exchanged and will be issued under, and be entitled to the benefits of, the Note Indenture, which also authorized the issuance of the Old Notes. If (a) the Companies determine that the Exchange Offer is not available or may not be consummated as soon as practicable after the last date the Exchange Offer is open because it would violate applicable law or the applicable interpretations of the staff of the SEC; (b) the Exchange Offer is not consummated by December 15, 1997; (c) the Placement Agents so request with respect to the Old Notes not eligible to be exchanged for New Notes in the Exchange Offer and held by them following consummation of the Exchange Offer; or (d) any holder (other than an exchanging dealer) is not eligible to participate in the Exchange Offer, or any holder (other than an exchanging dealer) that participates in the Exchange Offer does not receive freely tradeable New Notes on the date of the exchange for validly tendered (and not withdrawn) Old Notes, the Companies will use all reasonable efforts to file a Shelf Registration Statement, cause it to be declared effective and keep it effective for a period of 120 days or such shorter period as may be necessary to allow for the resale of all Old Notes. If the Exchange Offer is not consummated or a Shelf Registration Statement with respect to resales of the Old Notes is not declared effective by December 15, 1997, the interest rate borne by the Old Notes of each series will be increased by .50% per annum until such time as such requirements have been satisfied ("Additional Interest"). The Exchange Offer will be deemed to have been consummated upon the Companies having exchanged New Notes for all outstanding Old Notes that have been tendered and not withdrawn prior to the close of business on the Expiration Date (other than Old Notes held by persons not eligible to participate in the Exchange Offer) pursuant to the Exchange Offer. Upon consummation of the Exchange Offer, holders of Old Notes seeking liquidity in their investment (except, under certain circumstances, Participating Broker Dealers (as defined in the Registration Agreement) and the Placement Agents) would have to rely on exemptions to registration requirements under the securities laws, including the Securities Act, and such holders will retain no rights under the Registration Agreement except under certain limited circumstances. See "Risk Factors -- Consequences of Failure to Exchange." 36 40 Upon the terms and subject to the conditions described in this Prospectus and in the accompanying Letter of Transmittal, the Companies will accept all Old Notes properly tendered and not withdrawn prior to 5:00 p.m., New York City time, on the Expiration Date. The Companies will issue $1,000 principal amount of each series of New Notes in exchange for each $1,000 principal amount of each corresponding series of outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or all of their Old Notes pursuant to the Exchange Offer in denominations of $1,000 and integral multiples thereof. Based on no-action letters issued by the staff of the SEC to third parties, the Companies believe that the New Notes issued pursuant to this Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by any holder thereof (other than (i) a broker-dealer who purchased such Old Notes directly from the Companies to resell pursuant to Rule 144A or any other available exemption under the Securities Act or (ii) a person that is an "affiliate" of the Companies within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery requirements of the Securities Act, provided that the holder is acquiring the New Notes in its ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in a distribution of the New Notes. See Morgan Stanley & Co. Incorporated, SEC No-Action Letter (available June 5, 1991) and Exxon Capital Holdings Corporation, SEC No-Action Letter (available May 13, 1988). Holders of Old Notes wishing to accept the Exchange Offer must represent to the Companies, as required by the Registration Agreement, that such conditions have been met. Each broker-dealer that receives New Notes in exchange for Old Notes held for its own account, as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, such broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by such broker-dealer in connection with resales of New Notes if such New Notes were acquired by such broker-dealer as a result of market-making or other trading activities. The Companies have agreed that, for a period of 120 days after the Expiration Date, they will make this Prospectus and any amendment or supplement to this Prospectus available to any such broker-dealer for use in connection with any such resale. See "Plan of Distribution." No underwriter is being used in connection with the Exchange Offer. As of the date of this Prospectus, $720 million aggregate principal amount of Old Notes is outstanding. In connection with the issuance of the Old Notes, the Companies arranged for the Old Notes initially purchased by QIBs or in offshore transactions in reliance on Regulation S under the Securities Act to be issued and transferable in book-entry form through the facilities of DTC, acting as depositary. The New Notes are also issuable and transferable in book-entry form through DTC. See "Description of the New Notes -- Book-Entry Delivery and Form." The Companies will be deemed to have accepted validly tendered Old Notes when, as and if the Companies have given oral or written notice thereof to the Exchange Agent. See "--Exchange Agent." The Exchange Agent will act as agent for the tendering holders of Old Notes for the purpose of receiving New Notes from the Companies and delivering New Notes to such holders. If any tendered Old Notes are not accepted for exchange because of an invalid tender or the occurrence of certain other events set forth herein, certificates for any such unaccepted Old Notes will be returned, without expense, to the tendering holder thereof as promptly as practicable after the Expiration Date. Holders of the Old Notes do not have any appraisal or dissenters' rights under the Note Indenture in connection with the Exchange Offer. The Companies intend to conduct the Exchange Offer in accordance with the Registration Agreement and the applicable requirements of the Securities Act, the Exchange Act and the rules and regulations of the SEC thereunder. Holders of Old Notes who tender in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes pursuant to the Exchange Offer. The Companies will pay all reasonable charges 37 41 and expenses, other than certain applicable taxes and counsel fees, incurred in connection with the Exchange Offer. See "--Fees and Expenses." EXPIRATION DATES; DELAYS; EXTENSIONS; AMENDMENTS The term "Expiration Date" means the Expiration Date set forth on the cover of this Prospectus, unless the Companies, in their sole discretion, extend the Exchange Offer, in which case the term "Expiration Date" means the latest date to which the Exchange Offer is extended. The Companies will notify the Exchange Agent of any extension of the Expiration Date by oral or written notice and will mail to the record holders of Old Notes an announcement thereof, each prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. In the case of an extension, such announcement shall include disclosure of the approximate number of Old Notes deposited to date and shall be made prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. The Companies reserve the right, in their sole discretion, (i) to delay acceptance of any Old Notes, to extend the Exchange Offer or to terminate the Exchange Offer and to refuse to accept Old Notes not previously accepted, if any of the conditions set forth herein under "--Termination" shall have occurred and shall not have been waived by the Companies (if permitted to be waived by the Companies), by giving oral or written notice of such delay, extension or termination to the Exchange Agent, and (ii) to amend the terms of the Exchange Offer in any manner deemed by them to be advantageous to the holders of the Old Notes. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the Exchange Agent. If the Exchange Offer is amended in a manner determined by the Companies to constitute a material change, the Companies will promptly disclose such amendment in a manner reasonably calculated to inform the holders of the Old Notes of such amendment. Without limiting the manner in which the Companies may choose to make public announcements of any delay in acceptance, extension, termination or amendment of the Exchange Offer, the Companies shall have no obligation to publish, advertise or otherwise communicate any such public announcement, other than by making a timely release to the Dow Jones News Service. INTEREST ON THE SECURED NOTES The New Notes of each series will bear interest at the same rate and on the same terms as the Old Notes of the corresponding series. Under the Note Indenture, interest on each Old Note ceases to accrue upon the exchange of such Old Note for a New Note. Interest will accrue on each New Note from the date on which it is authenticated and will be payable to the person in whose name such New Note is registered at the close of business on the Regular Record Date for such interest, which will be the December 15 or June 15 (whether or not a business day), as the case may be, next preceding the payment date for such interest. If, however, the New Note is authenticated and delivered in exchange for an Old Note (i) between a record date for the payment of interest on that Old Note and the related interest payment date, the interest that accrues on the New Note from the date of authentication thereof to that interest payment date shall be payable to the person in whose name such New Note was issued on its issuance date or (ii) between an interest payment date for the payment of interest on that Old Note and the record date for the next succeeding interest payment date, the interest that accrues on the Old Note from the earlier interest payment date to the date on which the Old Note is exchanged for the New Note will be paid to the person in whose name the New Note is registered on the record date for that next succeeding interest payment date. The Companies intend to cause the New Notes to be authenticated on the date on which the New Notes are exchanged for the Old Notes. Therefore, the exchange will not result in the loss of interest income to holders of Old Notes exchanged for New Notes. Interest on the Secured Notes is payable semiannually in cash in arrears on January 1 and July 1 of each year, commencing July 1, 1997, and the Secured Notes will bear interest and mature as follows: for the Secured Notes due 2000, interest at 7.19% with a maturity date of July 1, 2000; for the Secured Notes due 2004, interest at 7.67% with a maturity date of July 1, 2004; and for the Secured Notes due 2007, interest at 7.13% with a maturity date of July 1, 2007. 38 42 PROCEDURES FOR TENDERING To tender in the Exchange Offer, a holder must properly complete, sign and date the Letter of Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if required by the Letter of Transmittal, and mail or otherwise deliver such Letter of Transmittal or such facsimile, together with the Old Notes (unless such tender is being effected pursuant to the procedure for book-entry transfer described below) and any other required documents, to the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date. Any financial institution that is a participant in DTC's Book-Entry Transfer Facility system may make book-entry delivery of the Old Notes by causing DTC to transfer such Old Notes into the Exchange Agent's account in accordance with DTC's procedures for such transfer. Although delivery of Old Notes may be effected through book-entry transfer into the Exchange Agent's account at DTC, the Letter of Transmittal (or facsimile thereof), with any required signature guarantees and any other required documents, must, in any case, be transmitted to and received or confirmed by the Exchange Agent at its addresses set forth herein under "-- Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. The tender by a holder of Old Notes will constitute an agreement between such holder and the Companies in accordance with the terms and subject to the conditions described herein and set forth in the Letter of Transmittal. THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANIES. DELIVERY OF ALL DOCUMENTS MUST BE MADE TO THE EXCHANGE AGENT AT ITS ADDRESS SET FORTH HEREIN. HOLDERS MAY ALSO REQUEST THAT THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES EFFECT SUCH TENDER FOR SUCH HOLDERS. Only a holder of Old Notes may tender such Old Notes in the Exchange Offer. The term "holder" with respect to the Exchange Offer means any person in whose name Old Notes are registered in the Security Register (as defined herein) or any other person who has obtained a properly completed bond power from the registered holder, or any person whose Old Notes are held of record by DTC who desires to deliver such Old Notes by book-entry transfer at DTC. Any beneficial holder whose Old Notes are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and who wishes to tender should contact such registered holder promptly and instruct such registered holder to tender on such beneficial owner's behalf. If such beneficial holder wishes to tender on its own behalf, such beneficial holder must, prior to completing and executing the Letter of Transmittal and delivering its Old Notes, either make appropriate arrangements to register ownership of the Old Notes in such holder's name or obtain a properly completed bond power from the registered holder which authorizes such owner to tender the Old Notes on behalf of the registered holder, in each case signed by the registered holder as the name of such registered holder appears on the Old Notes. The transfer of record ownership may take considerable time. Signatures on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed by a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office of correspondent in the United States or an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution") unless the Old Notes tendered pursuant thereto are tendered (i) by a registered holder who has 39 43 not completed the box entitled "Special Issuance Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or (ii) for the account of an Eligible Institution. If the Letter of Transmittal is signed by a person other than the registered holder of any Old Notes listed therein, such Old Notes must be endorsed or accompanied by appropriate bond powers which authorize such person to tender the Old Notes on behalf of the registered holder, in either case signed as the name of the registered holder or holders appears on the Old Notes. If the Letter of Transmittal or any Old Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Companies, evidence satisfactory to the Companies of their authority to so act must be submitted with the Letter of Transmittal. The Exchange Agent and DTC have confirmed that any financial institution that is a participant in DTC's system may utilize DTC's Automated Tender Offer Program to tender Old Notes. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of the tendered Old Notes will be determined by the Companies in their sole discretion, which determination will be final and binding. The Companies reserve the absolute right to reject any and all Old Notes not properly tendered or any Old Notes the Companies' acceptance of which would, in the opinion of counsel for the Companies, be unlawful. The Companies also reserve the absolute right to waive any irregularities or conditions of tender as to particular Old Notes. The Companies' interpretation of the terms and conditions of the Exchange Offer (including the instructions in the Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as the Companies shall determine. Neither the Companies, the Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Old Notes nor shall any of them incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned without cost by the Exchange Agent to the tendering holder of such Old Notes unless otherwise provided in the Letter of Transmittal, as soon as practicable following the Expiration Date. While the Companies have no present plan to acquire any Old Notes which have not been tendered in the Exchange Offer or to file a registration statement to permit resales of Old Notes which are not tendered pursuant to the Exchange Offer (except as may be required under the Registration Agreement), subject to the terms of the Note Indenture, the Companies reserve the right in their sole discretion to (a) purchase or make offers for any Old Notes that remain outstanding subsequent to the Expiration Date, (b) as set forth under "Termination," terminate the Exchange Offer with respect to such Old Notes or (c) to the extent permitted by applicable law, purchase Old Notes in the open market, in privately negotiated transactions or otherwise. The terms of any such purchases or offers may differ from the terms of the Exchange Offer. By tendering, each holder of Old Notes will represent to the Companies that, among other things, the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, whether or not such person is the holder, that neither the holder nor any other person has an arrangement or understanding with any person to participate in a distribution of the New Notes and that neither the holder nor any such other person is an "affiliate" of the Companies within the meaning of Rule 405 under the Securities Act or, if an affiliate, such holder or such other person will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. GUARANTEED DELIVERY PROCEDURES Holders who wish to tender their Old Notes and (i) whose Old Notes are not lost but are not immediately available or (ii) who cannot deliver their Old Notes, the Letter of Transmittal or any other 40 44 required documents to the Exchange Agent prior to the Expiration Date, or who cannot complete the procedure for book-entry transfer on a timely basis, may effect a tender if: (a) The tender is made through an Eligible Institution; (b) Prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the holder of the Old Notes, the certificate number or numbers of such Old Notes and the principal amount of Old Notes tendered, stating that the tender is being made thereby, and guaranteeing that, within three business days after the Expiration Date, the Letter of Transmittal (or facsimile thereof), together with the certificate(s) representing the Old Notes to be tendered in proper form for transfer and any other documents required by the Letter of Transmittal, will be deposited by the Eligible Institution with the Exchange Agent; and (c) Such properly completed and executed Letter of Transmittal (or facsimile thereof), together with the certificate(s) representing all tendered Old Notes in proper form for transfer (or confirmation of a book-entry transfer into the Exchange Agent's account at DTC of Old Notes delivered electronically) and all other documents required by the Letter of Transmittal are received by the Exchange Agent within three business days after the Expiration Date. WITHDRAWAL OF TENDERS Except as otherwise provided herein, tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration Date. To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex, facsimile transmission or letter notice of withdrawal must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any such notice of withdrawal must (i) specify the name of the person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) include a statement that the Depositor is withdrawing its election to have Old Notes exchanged, and identify the Old Notes to be withdrawn (including the certificate number or numbers and principal amount of such Old Notes), (iii) be signed by the Depositor in the same manner as the original signature on the Letter of Transmittal by which such Old Notes were tendered (including any required signature guarantees) or be accompanied by documents of transfer sufficient to permit the Trustee with respect to the Old Notes to register the transfer of such Old Notes into the name of the Depositor withdrawing the tender and (iv) specify the name in which any such Old Notes are to be registered, if different from that of the Depositor. All questions as to the validity, form and eligibility (including time of receipt) for such withdrawal notices will be determined by the Companies, whose determination will be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for purposes of the Exchange Offer and no New Notes will be issued with respect thereto unless the Old Notes so withdrawn are validly retendered. Any Old Notes which have been tendered but which are not accepted for exchange will be returned to the holder thereof without cost to such holder as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered by following one of the procedures described above under "-- Procedures for Tendering" at any time prior to the Expiration Date. TERMINATION The Exchange Offer is not subject to any condition, other than (i) that the Exchange Offer does not violate applicable law or any applicable interpretation of the staff of the SEC, (ii) that no action or proceeding shall have been instituted or threatened in any court or by or before any governmental agency or statute, rule or regulation that would render the Exchange Offer illegal and (iii) that there shall not have been adopted or enacted any law, statute, rule or regulation that would render the Exchange Offer illegal. There can be no assurance that any such condition will not occur. If the Companies determine that they may terminate the Exchange Offer, as set forth above, the Companies may (i) refuse to accept any Old Notes and return any Old Notes that have been tendered to the 41 45 holders thereof, (ii) extend the Exchange Offer and retain all Old Notes tendered prior to the Expiration of the Exchange Offer, subject to the rights of such holders of tendered Old Notes to withdraw their tendered Old Notes or (iii) waive such termination event with respect to the Exchange Offer and accept all properly tendered Old Notes that have not been withdrawn. If such waiver constitutes a material change in the Exchange Offer, the Companies will disclose such change by means of a supplement to this Prospectus that will be distributed to each registered holder of Old Notes, and the Companies will extend the Exchange Offer for a period of five to ten business days, depending upon the significance of the waiver and the manner of disclosure to the registered holders of the Old Notes, if the Exchange Offer would otherwise expire during such period. EXCHANGE AGENT The Chase Manhattan Bank, the Note Trustee under the Note Indenture, has been appointed as Exchange Agent for the Exchange Offer. Questions and requests for assistance and for additional copies of this Prospectus or of the Letter of Transmittal should be directed to the Exchange Agent addressed as follows: By Registered or Certified Mail or Hand or Overnight Delivery: The Chase Manhattan Bank 55 Water Street Room 234, North Building New York, NY 10041 Attention: Carlos Esteves Confirm by Telephone: (212) 638-0828 Facsimile Transmissions: (Eligible Institutions Only) (212) 638-7375 or (212) 344-9367 FEES AND EXPENSES The expenses of soliciting tenders pursuant to the Exchange Offer will be borne by the Companies. The principal solicitation for tenders pursuant to the Exchange Offer is being made by mail. Additional solicitations may be made by officers and regular employees of the Companies and their affiliates in person, by telegraph or telephone or other means. The Companies will not make any payments to brokers, dealers or other persons soliciting acceptances of the Exchange Offer. The Companies, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse the Exchange Agent for its reasonable out-of-pocket expenses in connection therewith. The Companies may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this Prospectus, Letters of Transmittal and related documents to the beneficial owners of the Old Notes and in handling or forwarding tenders for exchange. Reasonable expenses incurred in connection with the Exchange Offer, including expenses of the Exchange Agent and Note Trustee and accounting and legal fees, other than certain applicable taxes and counsel fees, will be paid by the Companies. The Companies will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates representing New Notes or Old Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the Old Notes tendered, or if tendered Old Notes are registered in the name of any person other than the person signing the Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other person) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with the Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering holder. 42 46 DESCRIPTION OF THE NEW NOTES GENERAL The Old Notes were, and the New Notes will be, issued pursuant to an Indenture dated as of June 13, 1997 and a First Supplemental Indenture thereto dated June 13, 1997 (as supplemented, "Note Indenture") between the Companies and The Chase Manhattan Bank, as trustee ("Note Trustee"). The terms of the Secured Notes include those stated in the Note Indenture and those made part of the Note Indenture by reference to the Trust Indenture Act of 1939, as amended ("Trust Indenture Act"). Holders of Secured Notes are referred to the Note Indenture and the Trust Indenture Act for a statement of all such terms. The following summary of the material provisions of the Note Indenture does not purport to be complete and is qualified in its entirety by reference to the Note Indenture, including the definitions therein of certain terms used below. Copies of the Note Indenture are available as set forth below under "Additional Information." The obligations of the Companies under the Secured Notes are joint and several. The Secured Notes are secured equally and ratably as to payment of principal and interest by $575 million aggregate principal amount of Cleveland Electric Bonds and $145 million aggregate principal amount of Toledo Edison Bonds. The Secured Notes are denominated in United States currency in minimum denominations of $1,000 and any integral multiple thereof. PRINCIPAL, MATURITY AND INTEREST The Secured Notes are limited to an aggregate amount of $720 million consisting of $220 million aggregate principal amount of Secured Notes due 2000, $350 million aggregate principal amount of Secured Notes due 2004 and $150 million aggregate principal amount of Secured Notes due 2007. New Notes of each series will bear interest at the same rate and on the same terms as the Old Notes of the corresponding series. Under the Note Indenture, interest on each Old Note ceases to accrue upon the exchange of such Old Note for a new Note. Interest will accrue on each new Note from the date on which it is authenticated and will be payable to the person in whose name such New Note is registered at the close of business on the Regular Record Date for such interest, which will be the December 15 or June 15 (whether or not a business day), as the case may be, next preceding the payment date for such interest. If, however, the New Note is authenticated and delivered in exchange for an Old Note (i) between a record date for the payment of interest on that Old Note and the related interest payment date, the interest that accrues on the New Note from the date of authentication thereof to that interest payment date shall be payable to the person in whose name such New Note was issued on its issuance date or (ii) between an interest payment date for the payment of interest on that Old Note and the record date for the next succeeding interest payment date, the interest that accrues on the Old Note from the earlier interest payment date to the date on which the Old Note is exchanged for the New Note will be paid to the person in whose name the New Note is registered on the record date for that next succeeding interest payment date. The Companies intend to cause the New Notes to be authenticated on the date on which the New Notes are exchanged for the Old Notes. Therefore, the exchange will not result in the loss of interest income to holders of Old Notes exchanged for New Notes. Interest on the Secured Notes is payable semiannually in cash in arrears on January 1 and July 1 of each year, commencing July 1, 1997, and the Secured Notes will bear interest and mature as follows: for the Secured Notes due 2000, interest at 7.19% with a maturity date of July 1, 2000; for the Secured Notes due 2004, interest at 7.67% with a maturity date of July 1, 2004; and for the Secured Notes due 2007, interest at 7.13% with a maturity date of July 1, 2007. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Principal, interest and Additional Interest, if any, on the Secured Notes is payable at the office or agency of the Companies maintained for such purpose within the City of New York, State of New York or, at the option of the Companies, payment of interest may be made by check mailed to the address of the person entitled thereto as such address shall appear in the register of holders of Secured Notes ("Security Register"); provided that all payments of principal, interest and Additional Interest, if any, with respect to Secured Notes the holders of which have given wire transfer instructions to the Companies will be required to be made by wire transfer of immediately available funds to the accounts specified by the holders thereof. Until otherwise designated by the 43 47 Companies, the Companies' office or agency in the City of New York will be the office of the Note Trustee maintained for such purpose. SECURITY FOR THE SECURED NOTES The Old Notes are, and the New Notes (together with any Old Notes that remain outstanding after the Exchange Offer is terminated) will be, secured equally and ratably as to payment of principal and interest by the Cleveland Electric Bonds and the Toledo Edison Bonds, which were issued, pledged and delivered by the Companies to the Note Trustee in connection with the Offering. The Cleveland Electric Bonds and the Toledo Edison Bonds consist of three series each of CEI First Mortgage Bonds and TE First Mortgage Bonds, respectively, all of which are secured by a lien on certain property owned by Cleveland Electric and Toledo Edison, respectively. See "Descriptions of Cleveland Electric Bonds and Toledo Edison Bonds." REDEMPTION PROVISIONS The Secured Notes are not subject to redemption prior to maturity. There are no sinking fund payments for the Secured Notes. EVENTS OF DEFAULT AND REMEDIES The Note Indenture describes "Events of Default" relating to the Secured Notes of any series, which include: (i) default for 30 days in the payment when due of interest on the Secured Notes of that series; (ii) default in payment when due of the principal of the Secured Notes of that series; (iii) default for 60 days, after notice to the Companies by the Note Trustee or to the Companies and the Note Trustee by the holders of a majority in principal amount of the outstanding Secured Notes of that series, by the Companies in the performance, or breach, of any covenant or warranty in the Note Indenture, (iv) default relating to any of the Cleveland Electric Bonds or the Toledo Edison Bonds or (v) certain events of bankruptcy or insolvency, whether voluntary or involuntary, with respect to either Company. If any Event of Default occurs and is continuing, the Note Trustee or the holders of a majority in principal amount of the then outstanding Secured Notes of any series may declare all the Secured Notes of such series to be due and payable immediately. Notwithstanding the foregoing, in the case of an Event of Default arising from certain events of bankruptcy or insolvency with respect to either Company, all outstanding Secured Notes will become due and payable without further action or notice. Holders of the Secured Notes may not enforce the Note Indenture or the Secured Notes except as provided in the Note Indenture. Subject to certain limitations, holders of a majority in principal amount of the then outstanding Secured Notes of any series may direct the Note Trustee in its exercise of any trust or power with respect to that series. The Note Trustee may withhold from holders of the Secured Notes notice of any continuing Event of Default (except an Event of Default relating to the payment of principal or interest) if it determines that withholding notice is in their interest. The holders of a majority in principal amount of the Secured Notes then outstanding of any series by notice to the Note Trustee may, on behalf of the holders of all of the Secured Notes of such series, waive any past Event of Default and its consequences under the Note Indenture except (i) a continuing Event of Default in the payment of interest on or the principal of the Secured Notes of such series or (ii) an Event of Default in respect of a covenant under the Note Indenture which cannot be amended or modified without the consent of the holders of each Secured Note of that series. In all circumstances in which the Note Indenture requires the consent of the holders in connection with a proposed action thereunder or grants to the holders the right to direct an action thereunder, Ambac Assurance shall be considered the holder of the Secured Notes due 2007. The Companies are required to deliver to the Note Trustee annually an officer's certificate stating whether or not the Companies are in default in the performance and observance of the terms of the Note Indenture, and, if the Companies shall be in default, a statement specifying the nature of such default. 44 48 DEFEASANCE AND COVENANT DEFEASANCE The Companies may, at their option and at any time, elect to have all of their respective obligations discharged with respect to the outstanding Secured Notes ("Defeasance") except for (i) the rights of holders of outstanding Secured Notes to receive, solely from the trust fund described below, payments in respect of the principal of and interest on such Secured Notes when such payments are due, (ii) the Companies' obligations with respect to the Secured Notes concerning issuing temporary Secured Notes, registration of Secured Notes, mutilated, destroyed, lost or stolen Secured Notes and the maintenance of an office or agency for payment of money for security payments held in trust, (iii) the rights, powers, trusts, duties and immunities of the Note Trustee, and the Companies' obligations in connection therewith, (iv) the Defeasance provisions of the Note Indenture and (v) that portion of the principal of and interest on the Secured Notes due 2007 that is paid by Ambac Assurance pursuant to the Financial Guaranty Insurance Policy (as defined herein). In addition, the Companies may, at their option and at any time, elect to have the obligations of the Companies released with respect to certain covenants that are described in the Note Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations will not constitute an Event of Default with respect to the Secured Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, rehabilitation and insolvency events) described under "Events of Default" will no longer constitute an Event of Default with respect to the Secured Notes. In order to exercise either Defeasance or Covenant Defeasance, (i) the Companies must irrevocably deposit with the Note Trustee, in trust, for the benefit of the holders of the Secured Notes, cash in United States dollars, U.S. Government Obligations (as hereinafter defined) or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of and interest on the outstanding Secured Notes on the stated maturity; (ii) in the case of Defeasance, the Companies shall have delivered to the Note Trustee an opinion of counsel reasonably acceptable to the Note Trustee confirming that (A) the Companies have received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the Note Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the holders of the outstanding Secured Notes will not recognize gain or loss for federal income tax purposes as a result of such deposit, Defeasance and discharge and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such deposit, Defeasance and discharge had not occurred; (iii) in the case of Covenant Defeasance, the Companies shall have delivered to the Note Trustee an opinion of counsel reasonably acceptable to the Note Trustee confirming that the holders of the outstanding Secured Notes will not recognize gain or loss for federal income tax purposes as a result of the deposit and Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such deposit and Covenant Defeasance had not occurred; (iv) the Companies must deliver to the Note Trustee an officer's certificate to the effect that such Secured Notes, if then listed on any securities exchange, will not be delisted as a result of such deposit; (v) no Event of Default shall have occurred and be continuing on the date of such deposit (other than an Event of Default resulting from the borrowing of funds to be applied to such deposit which will be cured upon such Defeasance or Covenant Defeasance) or, insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 90th day after the date of such deposit; (vi) such Defeasance or Covenant Defeasance shall not cause the Note Trustee to have a conflicting interest within the meaning of the Trust Indenture Act; (vii) such Defeasance or Covenant Defeasance will not result in a breach or violation of, or constitute a default under any material agreement or instrument to which the Companies are a party or by which the Companies are bound; (viii) such Defeasance or Covenant Defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning of the Investment Company Act of 1940, as amended unless such trust is registered thereunder; and (ix) the Companies must deliver to the Note Trustee an officer's certificate and an opinion of counsel, each stating that all conditions precedent provided for relating to the Defeasance or the Covenant Defeasance have been complied with. As used herein, "U.S. Government Obligation" means (x) any security which is (i) a direct obligation of the United States of America for the payment of which the full faith and credit of the United States of 45 49 America is pledged or (ii) an obligation of a person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation of the United States of America, which, in either case (i) or (ii), is not callable or redeemable at the option of the issuer thereof, (y) any depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any U.S. Government Obligation which is specified in clause (x) above and held by such bank for the account of the holder of such depositary receipt, or with respect to any specific payment of principal of or interest on any U.S. Government Obligation which is so specified and held, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal or interest evidenced by such depositary receipt and (z) any certificates or other evidences of ownership interest in obligations of the character described in either case (i) or (ii) or in specified portions thereof, including without limitation, portions consisting solely of the interest thereon provided that such obligations are held in a bank or trust company acceptable to the Note Trustee in a special account separate from the assets of such custodian. TRANSFER AND EXCHANGE A holder may transfer or exchange Secured Notes in accordance with the Note Indenture. The Registrar (as defined in the Note Indenture) and the Note Trustee may require a holder, among other things, to furnish appropriate endorsements and transfer documents and the Companies may require a holder to pay any taxes and fees required by law or permitted by the Note Indenture. See "-- Book Entry, Delivery and Form." The registered holder of a Secured Note will be treated as the owner of it for all purposes. AMENDMENT, SUPPLEMENT AND WAIVER Except as described in the next two succeeding paragraphs, the Note Indenture or the Secured Notes may be amended or supplemented with the consent of the holders of at least a majority in principal amount of the Secured Notes then outstanding of the series affected (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Secured Notes), and any existing default or compliance with any provision of the Note Indenture or the Secured Notes may be waived with the consent of the holders of a majority in principal amount of the Secured Notes then outstanding of the series affected (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Secured Notes). Notwithstanding the foregoing, the Companies and the Note Trustee may not, without the prior consent of Ambac Assurance, amend or supplement the Note Indenture or the Secured Notes due 2007 if such amendment or supplement would adversely affect the rights of Ambac Assurance to act as the holder of such series. Without the consent of each holder affected (and Ambac Assurance with respect to the Secured Notes due 2007), an amendment or waiver may not (with respect to any Secured Notes held by a non-consenting holder): (i) reduce the principal amount of Secured Notes whose holders must consent to an amendment, supplement or waiver, (ii) reduce the principal of or change the fixed maturity of any Secured Note, (iii) reduce the rate of or change the time or place for payment of interest on any Secured Note, (iv) waive an Event of Default in the payment of principal of, interest on or Additional Interest, if any, on the Secured Notes, (v) make any change in the provisions of the Note Indenture relating to waivers of past defaults or the rights of holders of Secured Notes to receive payments of principal of or interest on the Secured Notes or (vi) make any change in the foregoing amendment and waiver provisions. Notwithstanding the foregoing, without the consent of any holder of Secured Notes, the Companies and the Note Trustee may amend or supplement the Note Indenture or the Secured Notes to cure any ambiguity, defect or inconsistency, to provide for uncertificated Secured Notes in addition to or in place of certificated Secured Notes, to provide for the assumption of the Companies' obligations to holders of Secured Notes in the case of a merger or consolidation of either or both of the Companies, to make any change that would provide any additional rights or benefits to the holders of Secured Notes or that does not adversely affect the legal 46 50 rights under the Note Indenture of any such holder, or to comply with requirements of the SEC in order to effect or maintain the qualification of the Note Indenture under the Trust Indenture Act or to provide for the acceptance of appointment under the Note Indenture of a successor Note Trustee. CONCERNING THE NOTE TRUSTEE The Chase Manhattan Bank is the Note Trustee. The Note Trustee may resign by giving written notice of its resignation as provided in the Note Indenture. The resignation will take effect only upon the appointment of a successor trustee. The holders of a majority of the then outstanding principal amount of the Secured Notes may remove the Note Trustee at any time. The Companies may appoint a successor trustee under the Note Indenture, subject to the right of the holders to replace the successor trustee appointed by the Companies. Any successor trustee must be eligible pursuant to the Trust Indenture Act and have a combined capital and surplus of at least $50,000,000. The Note Indenture contains certain limitations on the rights of the Note Trustee, should it become a creditor of the Companies, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Note Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest, it must eliminate such conflict within 90 days, and apply to the SEC for permission to continue or resign. The holders of a majority in principal amount of the then outstanding Secured Notes have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Note Trustee, subject to certain exceptions. The Note Indenture provides that in case an Event of Default shall occur (which shall not be cured), the Note Trustee is required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Note Trustee is under no obligation to exercise any of its rights or powers under the Note Indenture at the request of any holder of Secured Notes, unless such holder shall have offered to the Note Trustee security and indemnity satisfactory to it against any loss, liability or expense. NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR EMPLOYEES The Note Indenture provides that no recourse for the payment of the principal of or interest on any of the Secured Notes or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Companies in the Note Indenture, or in any of the Secured Notes or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer, director or employee of the Companies or of any successor thereof. Each holder, by accepting the Secured Notes, waives and releases all such liability and such waiver and release are part of the consideration for issuance of the Secured Notes. It is the position of the SEC that, notwithstanding such waiver, holders of the Secured Notes will continue to have all rights and remedies that are otherwise available under the anti-fraud provisions of the federal securities laws. ADDITIONAL INFORMATION Anyone who receives this Prospectus may obtain a copy of the Note Indenture without charge by writing to Janis T. Percio, Secretary, Centerior Energy Corporation, P.O. Box 94661, Cleveland, OH 44101-4661. BOOK-ENTRY, DELIVERY AND FORM The certificates representing the Old Notes were, and the certificates representing the New Notes will be, issued in fully registered form and without interest coupons. Each series of the New Notes will be represented by a Global New Note. Secured Notes sold in reliance on Rule 144A are represented by one or more Global Notes in definitive, fully registered form and without interest coupons and have been deposited with the Note Trustee, as custodian for, and registered in the name of, a nominee of DTC. The laws of some states require that certain persons take physical delivery in definitive form of securities that they own. Consequently, the ability to transfer beneficial interest in the Global Notes to such persons may 47 51 be limited to that extent. Because DTC can act only on behalf of participants, which in turn act on behalf of indirect participants and certain banks, the ability of a person having a beneficial interest in the Global Notes to pledge such interest to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interests, may be affected by the lack of physical certificate evidencing such interests. The Global Notes Ownership of beneficial interests in a Global Note is and will be limited to persons who have accounts with DTC ("participants") or persons who hold interests through participants. Ownership of beneficial interests in a Global Note is and will be shown on, and the transfer of that ownership is and will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants). Qualified institutional buyers may hold their interests in a Global Note directly through DTC if they are participants in such system, or indirectly through organizations which are participants in such system. Investors may hold their interests in Old Notes sold in reliance on Regulation S under the Securities Act (each a "Regulation S Global Note") directly through Cedel Bank ("Cedel Bank") or Morgan Guaranty Trust Company of New York, Brussels office, as operator of the Euroclear System ("Euroclear"), if they are participants in such systems, or indirectly through organizations that are participants in such systems. Beginning 40 days after the Closing Date but not earlier, investors may also hold such interests through organizations other than Cedel Bank or Euroclear that are participants in the DTC system. Cedel Bank and Euroclear will hold interests in the Regulation S Global Notes on behalf of their participants through DTC. So long as DTC, or its nominee, is the registered owner or holder of a Global Note, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the Secured Notes represented by such Global Note for all purposes under the Note Indenture and the Secured Notes. No beneficial owner of an interest in a Global Note is or will be able to transfer that interest except in accordance with applicable procedures of DTC, in addition to those provided for under the Note Indenture and, if applicable, those of Euroclear and Cedel Bank. Payments of the principal of, and interest on, the Global Notes are and will be made to DTC or its nominee, as the case may be, as the registered owner thereof. Neither the Companies nor the Note Trustee or any paying agent has any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Notes or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Companies expect that DTC or its nominee, upon receipt of any payment of principal or interest in respect of a Global Note, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Note, as shown on the records of DTC or its nominee. The Companies also expect that payments by participants to owners of beneficial interests in such Global Note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants. Transfers between participants in DTC will be effected in the ordinary way in accordance with DTC rules and will be settled in same-day funds. Transfers between participants in Euroclear and Cedel Bank will be effected in the ordinary way in accordance with their respective rules and operating procedures. If a holder requires physical delivery of a Certificated Note for any reason, such holder must transfer its interest in the Global Note in accordance with DTC's applicable procedures and, if applicable, those of Euroclear and Cedel Bank. The Companies expect that DTC will take any action permitted to be taken by a holder of Secured Notes (including the presentation of Secured Notes for exchange as described below) only at the direction of one or more participants to whose account the DTC interests in the Global Notes are credited and only in respect of such portion of the aggregate principal amount of Secured Notes as to which such participant or participants 48 52 has or have given such direction. However, if there is an Event of Default under the Secured Notes, DTC will exchange the applicable Global Note for Certificated Notes which it will distribute to its participants and which may be legended as set forth under "Transfer Restrictions." The Companies understand that DTC is a limited-purpose trust company organized under the laws of the State of New York, a "banking organization" within the meaning of New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates, and certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly ("indirect participants"). Although DTC, Euroclear and Cedel Bank are expected to follow the foregoing procedures in order to facilitate transfers of interests in the Global Notes among participants of DTC, Euroclear and Cedel Bank, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Companies nor the Note Trustee will have any responsibility for the performance by DTC, Euroclear or Cedel Bank or their respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations. Certificated Notes If DTC is at any time unwilling or unable to continue as a depository for the Global Notes and a successor depository is not appointed by the Companies within 90 days, the Companies will issue Certificated Notes in exchange for the Global Notes. Holders of an interest in a Global Note may receive a Certificated Note in accordance with DTC's rules and procedures in addition to those provided for under the Note Indenture. CREDIT ENHANCEMENT OF SECURED NOTES DUE 2007 PAYMENT PURSUANT TO FINANCIAL GUARANTY INSURANCE POLICY At the closing of the issuance of the Old Notes, Ambac Assurance issued a financial guaranty insurance policy relating to the Old Notes due 2007, and made a commitment to issue an identical financial guaranty insurance policy relating to the New Notes due 2007 ("Financial Guaranty Insurance Policy") effective as of the date of issuance of the New Notes due 2007. Under the terms of the Financial Guaranty Insurance Policy, Ambac Assurance will pay to the United States Trust Company of New York, in New York, New York, or any successor thereto ("Insurance Trustee") that portion of the principal of and interest on the New Notes due 2007 which shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer (as such terms are defined in the Financial Guaranty Insurance Policy attached hereto as Appendix I). Ambac Assurance will make such payments to the Insurance Trustee on the later of the date on which such principal and interest become Due for Payment or within one business day following the date on which Ambac Assurance shall have received notice of Nonpayment from the Note Trustee. The insurance will extend for the term of the New Notes due 2007 and, once issued, cannot be canceled by Ambac Assurance. The Financial Guaranty Insurance Policy will insure payment only on stated maturity dates. In the event of any acceleration of the principal of the New Notes due 2007, the insured payments will be made at such times and in such amounts as would have been made had there not been an acceleration. In the event the Note Trustee has notice that any payment of principal of or interest on a New Note due 2007 which has become Due for Payment and which is made to a holder by or on behalf of the Companies has been deemed a preferential transfer and theretofore recovered from its registered owner pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court of competent jurisdiction, 49 53 such registered owner will be entitled to payment from Ambac Assurance to the extent of such recovery if sufficient funds are not otherwise available. The Financial Guaranty Insurance Policy does not insure any risk other than Nonpayment. Specifically, the Financial Guaranty Insurance Policy does not cover: 1. Payment on acceleration, as a result of a call for redemption (other than mandatory sinking fund redemption) or as a result of any other advancement of maturity. 2. Payment of any redemption, prepayment or acceleration premium. 3. Nonpayment of principal or interest caused by the insolvency or negligence of any trustee or paying agent, if any. If it becomes necessary to call upon the Financial Guaranty Insurance Policy, payment of principal requires the surrender of New Notes due 2007 to the Insurance Trustee together with an appropriate instrument of assignment so as to permit ownership of such New Notes due 2007 to be registered in the name of Ambac Assurance to the extent of the payment under the Financial Guaranty Insurance Policy. Payment of interest pursuant to the Financial Guaranty Insurance Policy requires proof of holder entitlement to interest payments and an appropriate assignment of the holders' right to payment to Ambac Assurance. Upon payment of the insurance benefits, Ambac Assurance will become the owner of the New Notes due 2007, appurtenant coupons, if any, or right to payment of principal or interest on such New Notes due 2007 and will be fully subrogated to the surrendering holder's right to payment. AMBAC ASSURANCE CORPORATION The information provided in this section and the following two sections was provided to the Companies by Ambac Assurance. Ambac Assurance is a Wisconsin-domiciled stock insurance corporation regulated by the Office of the Commissioner of Insurance of the State of Wisconsin and licensed to do business in 50 states, the District of Columbia, the Territory of Guam, and the Commonwealth of Puerto Rico, with admitted assets of approximately $2,736,000,000 (unaudited) and statutory capital of approximately $1,548,000,000 (unaudited) as of June 30, 1997. Statutory capital consists of Ambac Assurance's policyholders' surplus and statutory contingency reserve. Ambac Assurance is a wholly owned subsidiary of Ambac Financial Group, Inc., a 100% publicly held company. Standard & Poor's, Moody's and Fitch Investors Service, L.P. have each assigned a triple-A claims-paying ability rating to Ambac Assurance. Ambac Assurance has obtained a ruling from the Internal Revenue Service to the effect that the insuring of an obligation by Ambac Assurance will not affect the treatment for federal income tax purposes of interest on such obligation and that insurance proceeds representing maturing interest paid by Ambac Assurance under policy provisions substantially identical to those contained in its Financial Guaranty Insurance Policy shall be treated for federal income tax purposes in the same manner as if such payments were made by the issuer of the obligation. Ambac Assurance makes no representation regarding the New Notes due 2007 or the advisability of investing in the New Notes due 2007 and makes no representation regarding, nor has it participated in the preparation of, this Prospectus other than the information supplied by Ambac Assurance and presented under the heading "Credit Enhancement of Secured Notes due 2007." AVAILABLE INFORMATION The parent company of Ambac Assurance, Ambac Financial Group, Inc. ("Ambac Financial"), is subject to the informational requirements of the Exchange Act, and in accordance therewith files reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information may be inspected and copied at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices at 7 World Trade Center, New York, New York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. 50 54 Copies of such material can be obtained from the public reference section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The SEC also maintains a Web site that contains reports and other information filed by Ambac Financial. The SEC's Internet address is http://www.sec.gov. In addition, the aforementioned material may also be inspected at the offices of the New York Stock Exchange, Inc. ("NYSE") at 20 Broad Street, New York, New York 10005. Ambac Financial's Common Stock is listed on the NYSE. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by Ambac Financial with the SEC (File No. 1-10777) are incorporated by reference in this Prospectus. 1. Ambac Financial's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, filed on March 31, 1997; 2. Ambac Financial's Current Report on Form 8-K dated March 12, 1997, filed on March 12, 1997; 3. Ambac Financial's Quarterly Report on Form 10-Q for the fiscal quarterly period ended March 31, 1997, filed on May 15, 1997; 4. Ambac Financial's Quarterly Report on Form 10-Q for the fiscal quarterly period ended June 30, 1997, filed on August 14, 1997. All documents subsequently filed by Ambac Financial pursuant to the requirements of the Exchange Act after the date of this Prospectus will be available for inspection in the same manner as described above in "Available Information." Ambac Assurance has issued a commitment for financial guaranty insurance relating to the New Notes due 2007. All tenders of the Secured Notes due 2007 may be conditioned upon the issuance effective as of the date on which the Secured Notes due 2007 are issued, of a policy of insurance by Ambac Assurance, insuring the payment when due of principal of and interest on the Secured Notes due 2007. Each Secured Note due 2007 will bear a legend referring to the insurance. The purchaser, holder or owner is not authorized to make any statements concerning the insurance beyond those set out here and in the legend on the Secured Notes due 2007 without the approval of Ambac Assurance. DESCRIPTIONS OF CLEVELAND ELECTRIC BONDS AND TOLEDO EDISON BONDS The Old Notes are, and the New Notes, together with any Old Notes that remain outstanding after the Exchange Offer is terminated, will be, secured equally and ratably as to payment of principal and interest by the Cleveland Electric Bonds and the Toledo Edison Bonds which were issued, pledged and delivered by Cleveland Electric and Toledo Edison, respectively, to the Note Trustee. The Cleveland Electric Bonds and the Toledo Edison Bonds were issued in the aggregate principal amounts of $575 million and $145 million, respectively. The Cleveland Electric Bonds and Toledo Edison Bonds held by the Note Trustee provide, in the aggregate, for interest in an amount equal to the interest payable on all Secured Notes outstanding. Satisfaction of Cleveland Electric's and Toledo Edison's obligations with respect to principal of, and interest on, the Secured Notes will satisfy the respective Company's obligations with respect to principal of, and interest on, its Bonds. CLEVELAND ELECTRIC BONDS General The Cleveland Electric Bonds were issued as three series of Cleveland Electric's First Mortgage Bonds ("CEI First Mortgage Bonds") under Cleveland Electric's Mortgage and Deed of Trust, dated July 1, 1940, from Cleveland Electric to Guaranty Trust Company of New York as trustee, under which The Chase Manhattan Bank is successor trustee ("CEI First Mortgage Trustee"), as supplemented and modified by 51 55 seventy-three supplemental indentures thereto and as further supplemented, for the issuance of the Cleveland Electric Bonds, by a Seventy-Fourth Supplemental Indenture ("Seventy-Fourth Supplemental Indenture") dated June 15, 1997 (the Mortgage and Deed of Trust as so supplemented herein called the "CEI First Mortgage"). The following summaries of certain provisions of the CEI First Mortgage do not purport to be complete and are subject to, and qualified in their entirety by, all of the provisions of the CEI First Mortgage. For a discussion of the effect on the CEI First Mortgage of the proposed merger of Toledo Edison into Cleveland Electric, see "Pending Merger of Cleveland Electric and Toledo Edison -- Effect of Pending Merger on CEI First Mortgage and TE First Mortgage." The Articles cited below refer to Articles of the CEI First Mortgage. Security The Cleveland Electric Bonds and all CEI First Mortgage Bonds of other series currently outstanding and hereafter issued under the CEI First Mortgage are, in the opinion of counsel for Cleveland Electric, secured equally and ratably (except as to any sinking or analogous fund established for the CEI 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 Cleveland Electric, except the following: (a) cash, receivables and contracts not pledged or required to be pledged under the CEI First Mortgage and leases in which Cleveland Electric is lessor; (b) securities not specifically pledged or required to be pledged under the CEI 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 Cleveland Electric 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 Cleveland Electric. (Clauses preceding Article I) All property acquired by Cleveland Electric after June 30, 1940, other than the property excepted from the lien of the CEI First Mortgage, becomes subject to the lien thereof upon acquisition. (Article I and granting and other clauses preceding Article I) Under certain conditions, the CEI First Mortgage permits Cleveland Electric to acquire property subject to a lien prior to the lien of the CEI First Mortgage. (Article IV) Property subject to the lien of the CEI First Mortgage will be released from the lien upon the sale or transfer of such property if Cleveland Electric deposits the fair value of the property with the CEI First Mortgage Trustee and meets certain other conditions specified in the CEI First Mortgage. (Article VII) Moneys received by the CEI First Mortgage Trustee for the release of property will, under certain circumstances, be applied to redeem outstanding CEI First Mortgage Bonds, be applied to satisfy other obligations of Cleveland Electric or be paid over to Cleveland Electric from time to time based upon property additions or refundable CEI First Mortgage Bonds. (Article VIII) In the Nineteenth Supplemental Indenture, the CEI First Mortgage was modified to permit Cleveland Electric without the vote or consent of the holders of any CEI First Mortgage Bonds issued after November 1976 (a) to exclude nuclear fuel from the lien of the CEI 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 of Ohio ("State") even though they are not physically connected with property of Cleveland Electric in the State and to clarify its general scope. Title to Property The generating plants and other principal facilities of Cleveland Electric are owned by Cleveland Electric, except as follows: (a) Cleveland Electric 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. Cleveland Electric owns another 24.47% interest in Beaver Valley Unit 2 as a tenant-in-common. (b) Most of the 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, 1996, the cost of Cleveland 52 56 Electric's facilities, other than water intake and discharge facilities, located on such artificially filed land aggregated $97,081,000. 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 Cleveland Electric, which erected and maintained facilities on such filled land prior to October 13, 1955. Cleveland Electric 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 Cleveland Electric's position, on advice of counsel for Cleveland Electric, 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. Cleveland Electric does hold permits, under federal statutes relating to navigation, to occupy such artificially filled land. (c) The facilities at the pumped-storage hydroelectric Seneca Power Plant in Pennsylvania ("Seneca") are located on land owned by the United States and occupied by Cleveland Electric 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 Cleveland Electric'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 Cleveland Electric. The distribution system also is located, in part, on land owned by Cleveland Electric, but, for the most part, it is located on lands owned by others and on streets and highways. In most cases, Cleveland Electric 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 Cleveland Electric. The fee title which Cleveland Electric 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 CEI First Mortgage Trustee. Issuance of Additional CEI First Mortgage Bonds In addition to the $3,230.0 million aggregate principal amount of CEI First Mortgage Bonds outstanding at June 30, 1997 (which includes $140.4 million principal amount of CEI First Mortgage Bonds pledged to secure Cleveland Electric's obligations to various bank creditors), additional CEI First Mortgage Bonds may be issued under Article III of the CEI First Mortgage, ranking equally and ratably with such outstanding CEI First Mortgage Bonds and the Cleveland Electric Bonds and without limit as to amount, on the basis of: (a) 70% of bondable property (as described under "-- Cleveland Electric Bonds -- Security") not previously used as the basis for issuance of CEI First Mortgage Bonds or applied for some other purpose under the CEI First Mortgage; (b) the deposit of cash (which may be withdrawn thereafter on the basis of bondable property or refundable CEI First Mortgage Bonds); and (c) substitution for refundable CEI First Mortgage Bonds. CEI First Mortgage Bonds become refundable CEI First Mortgage Bonds when they are paid upon maturity, redemption or purchase out of money deposited with the CEI First Mortgage Trustee for such payment or when money for such payment is irrevocably deposited with the CEI First Mortgage Trustee. (Articles I, III and VIII) In general, all property subject to the lien of the CEI First Mortgage which is used or useful in 53 57 Cleveland Electric's electric business (including property not located in the State if it is physically connected with property of Cleveland Electric in the State, either directly or through other property of Cleveland Electric), which is not subject to an unfunded prior lien and as to which Cleveland Electric 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 CEI First Mortgage Bonds. (Article I) The facilities of Cleveland Electric on the artificially filled land at Lake Shore will become bondable property only when Cleveland Electric acquires, under conditions specified in the CEI First Mortgage, either good title to such land or the right to occupy it; and the facilities of Cleveland Electric on the land at Seneca are not now bondable property. See "-- Cleveland Electric Bonds -- Title to Property." The tenant-in-common interests owned by Cleveland Electric 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 Cleveland Electric in the State. (Article I) With certain exceptions, property which Cleveland Electric leases from others is not bondable property. (Articles I and III) Also, with certain exceptions, in order to issue additional CEI First Mortgage Bonds based on bondable property, net earnings of Cleveland Electric 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 CEI First Mortgage Bonds is made must be at least twice the annual interest charges on all CEI First Mortgage Bonds outstanding and on the issue applied for. (Article III) At June 30, 1997, Cleveland Electric was not able to issue a material amount of additional CEI First Mortgage Bonds except in connection with refinancings. The amount of additional CEI First Mortgage Bonds which may be issued in the future will fluctuate depending upon the amount of available refundable CEI First Mortgage Bonds, available bondable property, earnings and interest rates. FirstEnergy has not decided whether to apply, or push down, the effects of purchase accounting to the financial statements of the Companies if the CEC-OE Merger is completed. If such push-down accounting is applied, Cleveland Electric's available bondable property would be reduced to below zero. See "The Companies -- Financing Capability." Covenant to Charge Earnings Not Applicable to the Cleveland Electric Bonds The supplemental indentures applicable to CEI First Mortgage Bonds issued prior to 1974 contain a covenant to the effect that, so long as any of those CEI First Mortgage Bonds remain outstanding (which will be until November 15, 2005, assuming no prior redemption), Cleveland Electric 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 Seventy-Fourth Supplemental Indenture does not extend such covenant to the Cleveland Electric Bonds. Remedies in the Event of Default Events of default under the CEI First Mortgage include the failure of Cleveland Electric (a) to pay the principal of or premium, if any, on any CEI First Mortgage Bond when due; (b) to pay any interest on or sinking fund obligation of any CEI 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 Cleveland Electric in excess of $100,000 within 30 days after it is rendered; or (e) to perform any other covenant in the CEI First Mortgage within 60 days after notice to Cleveland Electric from the CEI First Mortgage Trustee or the holders of not less than 15% in principal amount of the CEI First Mortgage Bonds. Events of default also include certain events of bankruptcy, insolvency or reorganization in bankruptcy or insolvency of Cleveland Electric. (Article IX) Cleveland Electric is required to furnish periodically to the CEI First Mortgage Trustee a certificate as to the absence of any default or as to compliance with the terms of the CEI First Mortgage, and such a certificate is also required in connection with the issuance of any additional CEI First Mortgage Bonds and in certain other circumstances. (Article III) The CEI First Mortgage provides that the CEI First Mortgage Trustee, within 90 days after 54 58 notice of defaults under the CEI 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 CEI 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 CEI First Mortgage Bonds or in the payment of any sinking or purchase fund installments, the CEI 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 CEI First Mortgage Bonds to do so. (Article XIII) Upon the occurrence of any event of default, the CEI First Mortgage Trustee or the holders of not less than 25% in principal amount of the CEI First Mortgage Bonds may declare the principal amount of all CEI First Mortgage Bonds due, and, if Cleveland Electric cures all defaults before a sale of the mortgaged property, the holders of a majority in principal amount of the CEI First Mortgage Bonds may waive the default. If any event of default occurs, the CEI 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 CEI 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 CEI First Mortgage Bonds may request or, in the absence of such request, as the CEI First Mortgage Trustee may determine; (c) bring suit to enforce payment of the principal of and interest on the CEI First Mortgage Bonds, to foreclose the CEI First Mortgage or for the appointment of a receiver of the mortgaged property; and (d) pursue any other remedy. (Article IX) No holder of CEI First Mortgage Bonds may institute any action, suit or proceeding for any remedy under the CEI First Mortgage unless he has previously given the CEI First Mortgage Trustee written notice of a default by Cleveland Electric, and in addition: (a) the holders of not less than 25% in principal amount of the CEI First Mortgage Bonds have requested the CEI First Mortgage Trustee and afforded it a reasonable opportunity to exercise its powers under the CEI First Mortgage or to institute such action, suit or proceeding in its own name; (b) such holder has offered to the CEI First Mortgage Trustee security and indemnity satisfactory to it against the costs, expenses and liabilities to be incurred thereby; and (c) the CEI First Mortgage Trustee has refused or neglected to comply with such request within a reasonable time. The holders of a majority in outstanding principal amount of the CEI First Mortgage Bonds, upon furnishing the CEI First Mortgage Trustee with security and indemnification satisfactory to it, may require the CEI First Mortgage Trustee to pursue any available remedy, and any holder of the CEI First Mortgage Bonds has the absolute and unconditional right to enforce the payment of the principal of and interest on his CEI First Mortgage Bonds. (Article IX) Modification of CEI First Mortgage and CEI First Mortgage Bonds Certain modifications which do not in any manner impair any of the rights of the holders of any series of CEI First Mortgage Bonds then outstanding or of the CEI First Mortgage Trustee may be made without the vote of the holders of the CEI First Mortgage Bonds by supplemental indenture entered into between Cleveland Electric and the CEI First Mortgage Trustee. (Article XIV) Modifications of the CEI First Mortgage or any indenture supplemental thereto, and of the rights and obligations of Cleveland Electric and of holders of all series of CEI First Mortgage Bonds outstanding, may be made with the consent of Cleveland Electric by the vote of the holders of at least 80% in principal amount of the outstanding CEI First Mortgage Bonds entitled to vote at a meeting of the holders of the CEI First Mortgage Bonds or, if one or more, but less than all, of the series of CEI First Mortgage Bonds outstanding under the CEI First Mortgage are affected by any such modification, by the vote of the holders of at least 80% in principal amount of the outstanding CEI 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 CEI First Mortgage Bond issued under the CEI First Mortgage or to change the voting percentage described above to less than 80% with respect to any CEI First Mortgage Bonds outstanding when such modification becomes effective. CEI First Mortgage Bonds owned or held by or for the account or benefit of Cleveland Electric or an affiliate of Cleveland Electric (as defined in the CEI First Mortgage) are not entitled to vote. (Article XV) In the Nineteenth Supplemental Indenture, the CEI First Mortgage was modified, effective when none of the CEI 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 55 59 CEI First Mortgage Bonds outstanding at June 30, 1997, the 60% voting requirement will become effective on May 1, 2009. Defeasance and Discharge The CEI First Mortgage provides that Cleveland Electric will be discharged from any and all obligations under the CEI First Mortgage if Cleveland Electric pays the principal, interest and premium, if any, due on all CEI First Mortgage Bonds outstanding in accordance with the terms stipulated in each such Bond and if Cleveland Electric has performed all other obligations under the CEI First Mortgage. In the event of such discharge, Cleveland Electric has agreed to continue to indemnify the CEI First Mortgage Trustee from any liability arising out of the CEI First Mortgage. (Article XVI) TOLEDO EDISON BONDS General The Toledo Edison Bonds were issued as three series of Toledo Edison's First Mortgage Bonds ("TE First Mortgage Bonds") under Toledo Edison's Indenture and Deed of Trust, 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), as trustee ("TE First Mortgage Trustee"), as supplemented and modified by forty-five supplemental indentures thereto and as further supplemented, for the issuance of the Toledo Edison Bonds, by a Forty-sixth Supplemental Indenture ("Forty-sixth Supplemental Indenture") dated as of June 15, 1997 (the Indenture and Deed of Trust as so supplemented herein called the "TE First Mortgage"). The following summaries of certain provisions of the TE First Mortgage do not purport to be complete and are subject to, and qualified in their entirety by, all of the provisions of the TE First Mortgage. For a discussion of the effect on the TE First Mortgage of the proposed merger of Toledo Edison into Cleveland Electric, see "Pending Merger of Cleveland Electric and Toledo Edison -- Effect of Pending Merger on CEI First Mortgage and TE First Mortgage." The Articles cited below refer to Articles of the TE First Mortgage. Security The Toledo Edison Bonds and all TE First Mortgage Bonds of other series currently outstanding and hereafter issued under the TE First Mortgage are, in the opinion of counsel for Toledo Edison, secured equally and ratably (except as to any sinking or analogous fund established for the TE First Mortgage Bonds of any particular series) by a valid and perfected first lien, subject only to certain permitted encumbrances, on substantially all the property owned and franchises held by Toledo Edison, except the following: (a) cash, receivables, contracts and leases in which Toledo Edison is lessor; (b) securities not specifically pledged or required to be pledged under the TE First Mortgage; (c) property held for sale or lease to customers or consumable in Toledo Edison's operations; (d) transportation equipment; and (e) certain parcels of real estate held for disposition. All property acquired by Toledo Edison after April 1, 1947 of the character initially subjected to the lien of the TE First Mortgage becomes subject to the lien of the TE First Mortgage upon acquisition. (Granting and other clauses preceding Article 1) Under certain conditions, the TE First Mortgage permits Toledo Edison to acquire property subject to a lien prior to the lien of the TE First Mortgage. (Article 4) The TE First Mortgage provides that property subject to the lien of the TE First Mortgage may be released from such lien under certain circumstances. The following will be automatically released upon disposition by Toledo Edison: (a) equipment which has become unnecessary for use; (b) property which has been abandoned and the operation of which has become discontinued; (c) rights under any leases, rights-of-way, contracts, franchises, licenses, authority or permit; (d) real estate used solely for right-of-way if an easement over such real estate is retained; and (e) real estate, the value of which together with the value of all other real estate released in this manner within the preceding twelve months does not exceed $25,000. Other property will be released upon disposition by Toledo Edison subject to Toledo Edison's presentation to the TE First Mortgage Trustee of documentation that the value received for the property equals or exceeds the fair value of such property and that all conditions contained in the TE First Mortgage relating to the release of property have been complied with. Proceeds of the sale of any property subject to the lien of the TE First 56 60 Mortgage must be deposited with the TE First Mortgage Trustee and may be withdrawn by Toledo Edison based upon property additions or refundable TE First Mortgage Bonds, may be applied to the redemption of outstanding TE First Mortgage Bonds or may be applied to pay federal or state taxes incurred by Toledo Edison as a result of such sale. (Article 8) Title to Property The generating plants and other principal facilities of Toledo Edison are owned by Toledo Edison, except as follows: (a) Toledo Edison and Cleveland Electric 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. Toledo Edison owns about another 1.65% interest in Beaver Valley Unit 2 as a tenant-in-common. (b) The water intake and discharge facilities at the generating plants located along Lake Erie and the Maumee and Ohio Rivers are extended into the lake and rivers under Toledo Edison's property rights as owner of the land above the water line and pursuant to permits under federal statutes relating to navigation. (c) The transmission system is located on land, easements or rights-of-way owned by Toledo Edison. The distribution system also is located, in part, on land owned by Toledo Edison, but, for the most part, it is located on lands owned by others and on streets and highways. In most cases, Toledo Edison has obtained permission from the apparent owner or, if located on streets and highways, from the apparent owner of the property. The Pennsylvania portions of the main transmission lines from the Mansfield Plant and Beaver Valley Unit 2 are not owned by Toledo Edison. The fee title which Toledo Edison 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 TE First Mortgage Trustee. Issuance of Additional TE First Mortgage Bonds In addition to the $1,262.2 million aggregate principal amount of TE First Mortgage Bonds outstanding at June 30, 1997 (which includes $210.6 million principal amount of TE First Mortgage Bonds pledged to secure Toledo Edison's obligations to various bank creditors), additional TE First Mortgage Bonds may be issued under Article 3 of the TE First Mortgage, ranking equally and ratably with such outstanding TE First Mortgage Bonds and the Toledo Edison Bonds and without limit as to amount, on the basis of: (a) 60% of property additions not previously used as the basis for issuance of TE First Mortgage Bonds or applied for some other purpose under the TE First Mortgage; (b) the deposit of cash (which may be withdrawn thereafter on the basis of property additions not previously so used or refundable TE First Mortgage Bonds); and (c) substitution for refundable TE First Mortgage Bonds. In general, all property subject to the lien of the TE First Mortgage acquired by Toledo Edison after April 1, 1947 which is used or useful in Toledo Edison's electric business and located within the State or any state adjacent thereto, which is not subject to the lien of any outstanding prior lien bonds and as to which Toledo Edison has good title and corporate power and governmental permission to own and operate constitutes property additions and as such is available as a basis for the issuance of TE First Mortgage Bonds. The tenant-in-common ownership interests of Toledo Edison in certain generating units qualify as property additions. Property which Toledo Edison leases from others does not qualify as property additions. With certain exceptions, TE First Mortgage Bonds become refundable TE First Mortgage Bonds when they are paid upon maturity, redemption or purchase out of money deposited with the TE First Mortgage Trustee for such payment or when money for such payment is irrevocably deposited with the TE First Mortgage Trustee. (Articles 1, 3 and 8) Also, with certain exceptions, in order to issue additional TE First Mortgage Bonds based on property additions, net earnings of Toledo Edison available for interest for any 12 consecutive months within the 15 calendar months immediately preceding the month in which application for authentication and delivery of 57 61 such additional TE First Mortgage Bonds is made must be at least twice the annual interest charges on all TE First Mortgage Bonds outstanding and on the issue applied for. (Article 3) At June 30, 1997, Toledo Edison was not be able to issue a material amount of additional TE First Mortgage Bonds except in connection with refinancings. The amount of additional TE First Mortgage Bonds which may be issued in the future will fluctuate depending upon the amount of available refundable TE First Mortgage Bonds, property additions, earnings and interest rates. FirstEnergy has not decided whether to apply, or push down, the effects of purchase accounting to the financial statements of the Companies if the CEC-OE Merger is completed. If such push-down accounting is applied, Toledo Edison's available bondable property would be reduced to below zero. See "The Companies -- Financing Capability." Covenants to Pay into Maintenance and Replacement Fund and Limiting Dividends Not Applicable to the Toledo Edison Bonds The supplemental indentures relating to the TE First Mortgage Bonds issued prior to October 15, 1987 contain the Maintenance and Replacement Fund and Limitation on Dividends covenants described in the next two paragraphs. Those covenants will continue in effect so long as any of those TE First Mortgage Bonds remain outstanding (which will be until November 1, 2003, assuming no prior redemption). The Forty-sixth Supplemental Indenture does not extend those covenants to the Toledo Edison Bonds. MAINTENANCE AND REPLACEMENT FUND. Under this covenant, Toledo Edison is required to pay to the TE First Mortgage Trustee by May 1, annually, as a Maintenance and Replacement Fund, an amount, called the Standard of Expenditure, not less than 15% of gross electric operating revenues derived from the mortgaged property during the prior calendar year after deducting the cost of purchased power and net operating rentals paid. Toledo Edison may reduce this payment by: (a) the amount of any expenditure during the prior year for repairs and maintenance of the mortgaged property; (b) the cost of property additions (with certain adjustments) acquired during the prior year equal to property retirements during the prior year; (c) the principal amount of any TE First Mortgage Bonds which have been retired and not used for any other purpose under the TE First Mortgage; (d) the amount of any net property additions which might otherwise be made the basis for the issuance of TE First Mortgage Bonds; and (e) the principal amount of any TE First Mortgage Bonds delivered to the TE First Mortgage Trustee for that purpose. Toledo Edison has been satisfying this requirement by taking credits as described in clauses (a), (b) and (d) above. Toledo Edison may elect to have any cash at any time remaining in the Maintenance and Replacement Fund used, among other things, to purchase TE First Mortgage Bonds at a price not in excess of the redemption price or to redeem redeemable TE First Mortgage Bonds or to be paid to Toledo Edison against funding of property additions not previously applied for any purpose under the TE First Mortgage or against delivery of TE First Mortgage Bonds. (TE First Mortgage Section 4.10 and Article IV of the First through Thirtieth Supplemental Indentures) LIMITATION ON DIVIDENDS. Under this covenant, Toledo Edison is prohibited from declaring dividends, other than stock dividends, on common stock and from making other distributions on or acquisitions of common stock, except out of retained earnings accumulated after March 31, 1947, determined on the basis of including in operating expenses for each year an aggregate amount for repairs, maintenance and depreciation equal to the Standard of Expenditure for such year. (TE First Mortgage Section 4.11 and Article IV of the First through Thirtieth Supplemental Indentures) Remedies in the Event of Default Defaults under the TE First Mortgage include the failure of Toledo Edison: (a) to pay the principal of or premium, if any, on any TE First Mortgage Bonds when due; (b) to pay any interest on or sinking fund obligation of any TE First Mortgage Bond within 60 days after it is due; (c) to pay the principal of or interest on any prior lien bonds within any allowable period; or (d) to perform any other covenant in the TE First Mortgage within 90 days after notice to Toledo Edison from the TE First Mortgage Trustee or the holders of not less than 10% in principal amount of the TE First Mortgage Bonds. Defaults also include certain events of bankruptcy, insolvency or reorganization in bankruptcy or insolvency of Toledo Edison. The TE First Mortgage provides that the TE First Mortgage Trustee, within 90 days after the occurrence of a default under 58 62 the TE First Mortgage, is required to give the holders of the TE First Mortgage Bonds notice of such default, unless cured or waived, but, except in the case of default in the payment of principal of, or premium, if any, or interest on any TE First Mortgage Bonds, the TE First Mortgage Trustee may withhold such notice if it determines that it is in the interest of such holders to do so. (Article 9) A certificate regarding compliance with certain provisions of the TE First Mortgage must be furnished to the TE First Mortgage Trustee annually. (Article 3 and Section 4.22) If and so long as any default exists, the TE First Mortgage Trustee or the holders of not less than 25% in principal amount of the TE First Mortgage Bonds outstanding may declare the principal amount of all TE First Mortgage Bonds due, and, if Toledo Edison cures all defaults before a sale of the mortgaged property, the holders of a majority in principal amount of the TE First Mortgage Bonds may waive the default. In certain circumstances, such a waiver occurs automatically upon the curing of all defaults. If any default occurs, the TE 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 TE First Mortgage Bonds; (b) sell at public auction all of the mortgaged property or such parts as the TE First Mortgage Trustee may determine; (c) bring suit to enforce its rights and the rights of the holders of the TE First Mortgage Bonds to foreclose the TE First Mortgage or to appoint a receiver of the mortgaged property; and (d) pursue any other remedy. (Article 9) No holder of TE First Mortgage Bonds may institute any action, suit or proceeding for any remedy under the TE First Mortgage unless he has previously given the TE First Mortgage Trustee written notice of a default by Toledo Edison and, in addition: (a) the holders of not less than a majority in principal amount of the TE First Mortgage Bonds have requested the TE First Mortgage Trustee in writing to act; (b) such holder has offered to the TE First Mortgage Trustee security and indemnity satisfactory to it against the costs, expenses and liabilities to be incurred thereby, without negligence or bad faith; and (c) the TE First Mortgage Trustee has refused or neglected to comply with such request within 60 days. The holders of a majority in principal amount of the TE First Mortgage Bonds may require the TE First Mortgage Trustee to pursue any available remedy, upon furnishing the TE First Mortgage Trustee with indemnification satisfactory to it, if requested by the TE First Mortgage Trustee, and any holder of the TE First Mortgage Bonds has the absolute and unconditional right to enforce the payment of the principal of and interest on his TE First Mortgage Bonds. (Article 9) Modification of TE First Mortgage and TE First Mortgage Bonds Certain modifications, which modifications do not in any manner impair any of the rights of the holders of any series of TE First Mortgage Bonds or of the TE First Mortgage Trustee, may be made without the vote of the holders of the TE First Mortgage Bonds by supplemental indenture entered into between Toledo Edison and the TE First Mortgage Trustee. (Article 14) Modifications of the TE First Mortgage or any indenture supplemental thereto, and of the rights and obligations of Toledo Edison and of holders of all series of TE First Mortgage Bonds outstanding, may be made by the vote of the holders of at least 75% in principal amount of the outstanding TE First Mortgage Bonds entitled to vote at a meeting of the holders of the TE First Mortgage Bonds or, if one or more, but less than all, of the series of outstanding TE First Mortgage Bonds are affected by any such modification, by the vote of the holders of at least 75% in principal amount of the outstanding TE First Mortgage Bonds entitled to vote of any series so affected; but no such modification may be made, without the consent of the holder of each TE First Mortgage Bond affected, which will affect the terms of payment of the principal of or premium, if any, or interest on any TE First Mortgage Bond (except changes in any sinking fund), which will create any lien prior or equal to or deprive any such holder of the benefit of the lien of the TE First Mortgage or which will change the voting percentage described above to less than 75% with respect to any TE First Mortgage Bonds outstanding when such modification becomes effective. TE First Mortgage Bonds owned by Toledo Edison, any other obligor thereon or an affiliate of Toledo Edison are not entitled to vote. (Article 15) Defeasance and Discharge The TE First Mortgage provides that Toledo Edison will be discharged from any and all obligations under the TE First Mortgage if Toledo Edison pays the principal of and interest and premium, if any, due and 59 63 payable on all TE First Mortgage Bonds outstanding under the TE First Mortgage, deposits with the TE First Mortgage Trustee cash sufficient to pay or redeem such outstanding TE First Mortgage Bonds or delivers to the TE First Mortgage Trustee for cancellation all TE First Mortgage Bonds outstanding under the TE First Mortgage and if Toledo Edison has paid all other sums payable under the TE First Mortgage. (Article 16) CERTAIN TAX CONSIDERATIONS The following is a summary of the taxation of the Secured Notes and of certain anticipated United States federal income tax consequences resulting from the ownership of the Secured Notes and the exchange of Old Notes for New Notes. This summary does not cover all of the possible tax consequences relating to the ownership of the Secured Notes and the receipt of interest thereon, and it is not intended as tax advice to any person. It addresses only beneficial owners who hold the Secured Notes as capital assets and does not address special classes of beneficial owners such as dealers in securities or currencies, banks, tax-exempt entities, life insurance companies, persons holding Secured Notes as a hedge against interest rate or currency risks or as part of a straddle or conversion transaction, or beneficial owners whose functional currency is not the U.S. dollar. This summary is based upon the United States federal income tax laws as currently in effect and as currently interpreted and does not include any description of the tax laws of any non-U.S. government that may apply. Prospective purchasers of Secured Notes should consult their own tax advisors concerning the application of the United States federal income tax laws, as well as the possible application of the tax laws of any other jurisdiction, to their particular situation. As used herein, the term "U.S. Holder" means a beneficial owner of a Secured Note that is (for purposes of United States federal income tax) (i) a citizen or resident of the United States, (ii) a corporation, partnership, or other entity treated as a partnership organized in or under the laws of the United States or of any political subdivisions thereof, or (iii) an estate or trust that is treated as a "United States person" within the meaning of Section 7701(a)(30) of the Internal Revenue Code of 1986, as amended ("Code"). A "Non- U.S. Holder" means any holder of a Secured Note other than a U.S. Holder. The exchange of the Old Notes for the New Notes will be a tax-free exchange for all holders and no gain or loss will be recognized by a holder as a result of such exchange. A holder's tax basis for a New Note will be equal to the tax basis of the Old Note exchanged therefor. A holder's holding period for a New Note will include the period during which the holder held the Old Note exchanged therefor. U.S. FEDERAL INCOME TAXATION OF U.S. HOLDERS General Under general principles of current law, the interest paid on a Secured Note will be includable in income by a U.S. Holder when the interest is received or when it accrues in accordance with the U.S. Holder's regular method of tax accounting. Disposition or Retirement of a Secured Note Upon the sale, exchange or other disposition of a Secured Note, or upon the retirement of a Secured Note at maturity, a U.S. Holder will recognize gain or loss equal to the difference, if any, between the amount realized upon the disposition or retirement and the U.S. Holder's tax basis in the Secured Note. A U.S. Holder's tax basis for determining gain or loss on the disposition or retirement of a Secured Note will be the cost of that Secured Note to such U.S. Holder, increased by the amount of original issue discount ("OID") and any market discount includable in such U.S. Holder's gross income with respect to that Secured Note, and decreased by the amount of any payments under the Secured Note that are part of its stated redemption price at maturity and by the portion of any premium applied to reduce interest payments as described above. Gain or loss upon the disposition or retirement of a Secured Note will be capital gain or loss, except to the extent the gain represents accrued OID not previously included in gross income or accrued interest, to which 60 64 extent such gain or loss would be treated as ordinary income. Any capital loss will be long-term capital loss if at the time of disposition or retirement the Secured Note has been held for more than one year. Any capital gain recognized on the disposition or retirement of Secured Notes held for more than eighteen months will be taxed at a maximum rate of 20 percent. Any capital gain recognized on the disposition or retirement of Secured Notes held for more than twelve months and less than eighteen months will be treated as mid-term gain and taxed at a maximum rate of 28 percent. Secondary Market Purchasers -- Premium and Market Discount A U.S. Holder who purchases a Secured Note subsequent to its original issuance for an amount that is greater than its "adjusted issue price" (defined as the sum of the issue price of the Secured Note and the portion of OID previously includable, disregarding any reduction on account of acquisition premium, as discussed below, in the gross income of any owners of the Secured Note and reduced by the amount of any payment previously made on the Secured Note other than a qualified periodic interest payment) and less than or equal to its stated redemption price at maturity, reduced by the amount of any payment previously made on the Secured Note other than a qualified periodic interest payment, will be considered to have purchased such Secured Note at an "acquisition premium." The amount of OID that such U.S. Holder must include in its gross income with respect to such Secured Note for any taxable year is generally reduced by the portion of such acquisition premium properly allocable to such year. If a U.S. Holder purchases a Secured Note for a cost in excess of its stated redemption price at maturity (reduced by the amount of any payment made on the debt instrument prior to the purchase date other than a qualified periodic interest payment), such Secured Note will have no OID and such U.S. Holder may elect to amortize such premium, using a constant interest method, generally over the remaining term of the Secured Note. Such premium generally shall be deemed to be an offset to interest otherwise includable with respect to the Secured Note. Premium on a Secured Note held by a U.S. Holder that does not make such an election will decrease the gain or increase the loss otherwise recognized on disposition of the Secured Note. If a U.S. Holder purchases a Secured Note subsequent to its original issuance for an amount that is less than, respectively, its stated redemption price at maturity or its revised issue price (defined as the sum of the issue price of the Secured Note and the aggregate amount of OID includable, disregarding any reduction on account of acquisition premium, as discussed above, in the gross income of all owners of the Secured Note), the amount of the difference generally will be treated as "market discount" for federal income tax purposes, unless such difference is less than a specified de minimis amount. Under the market discount rules, a U.S. Holder will be required to treat any principal payment on, or any gain on the sale, exchange, retirement or other disposition of, a Secured Note as ordinary income to the extent of the market discount that has accrued (and has not previously been included in income) during the period such U.S. Holder held the Secured Note. In addition, the U.S. Holder may be required to defer, until the maturity of the Secured Note or its earlier disposition in a taxable transaction, the deduction of all or a portion of the interest expense on any indebtedness incurred or continued to purchase or carry such Secured Note. Any market discount will be considered accrued ratably during the period from the date of acquisition to the maturity date of the Secured Note, unless the U.S. Holder elects to accrue on a constant interest basis. A U.S. Holder of a Secured Note may elect to include market discount in income currently as it accrues (on either a ratable or a constant interest basis with a corresponding increase in the U.S. Holder's tax basis in the Secured Note), in which case the rule described above regarding deferral of interest deductions will not apply. This election to include market discount in income currently, once made, applies to all market discount obligations acquired on or after the first taxable year to which the election applies and may not be revoked without the consent of the Internal Revenue Service. Backup Withholding In general, if a U.S. Holder fails to furnish a correct taxpayer identification number or certification of exempt status, fails to report dividend and interest income in full, or fails to certify that he has provided a correct taxpayer identification number and that he is not subject to withholding, the U.S. Holder may be subject to a 31 percent federal backup withholding tax on certain amounts paid or deemed paid (including 61 65 OID) to the U.S. Holder. An individual's taxpayer identification number is his social security number. The backup withholding tax is not an additional tax and may be credited against a U.S. Holder's regular federal income tax liability or refunded by the Internal Revenue Service where applicable. U.S. FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS General A Non-U.S. Holder generally will not be subject to United States federal withholding tax on interest paid on the Secured Notes as long as either (i) the beneficial owner of the Secured Note, under penalties of perjury, provides the Companies or their agent with such beneficial owner's name and address and certifies on IRS Form W-8 (or a suitable substitute form) that it is not a U.S. Holder or (ii) a securities clearing organization, bank, or other financial institution that holds customers' securities in the ordinary course of its trade or business ("financial institution") holds the Secured Note and provides a statement to the Companies or their agent under penalties of perjury in which it certifies that such an IRS Form W-8 (or a suitable substitute) has been received by it from the beneficial owner of the Secured Note or qualifying intermediary and furnishes the Companies or their agent a copy thereof. If the information provided in such statement changes, the Non-U.S. Holder must so inform the payor within 30 days of such change. The statement generally must be provided in the year a payment occurs or in either of the two preceding years. A Non-U.S. Holder is eligible to provide the statement referred to above in this paragraph if the Non-U.S. Holder: (i) is not actually or constructively a "10 percent shareholder" of either of the Companies within the meaning of the Code, (ii) is not a "controlled foreign corporation" with respect to which either of the Companies is a "related person" within the meaning of Section 881(c)(3)(C) of the Code, and (iii) is not a bank described in Section 881(c)(3)(A) of the Code. If the conditions described in the preceding paragraph are not satisfied, then interest paid on the Secured Notes will be subject to United States withholding tax at a rate of 30%, unless such rate is reduced or eliminated pursuant to an applicable tax treaty. Any capital gain realized by a Non-U.S. Holder on the sale, redemption, retirement, or other taxable disposition of a Secured Note will be exempt from United States federal income and withholding tax, provided that (i) the gain is not effectively connected with the Non-U.S. Holder's conduct of a trade or business in the United States, (ii) in the case of a Non-U.S. Holder that is an individual, the holder is not present in the United States for 183 days or more in the taxable year of the disposition, and (iii) the Non-U.S. Holder is not subject to tax pursuant to the provisions of Section 877 of the Code applicable to certain United States expatriates. Effectively-Connected Income If the interest, gain, or other income a Non-U.S. Holder recognizes on a Secured Note is effectively connected with the Non-U.S. Holder's conduct of a trade or business in the United States, the Non-U.S. Holder (although exempt from the withholding tax previously discussed if an appropriate statement is furnished) generally will be subject to United States federal income tax rates applicable to United States persons. In addition, if the Non-U.S. Holder is a foreign corporation, it may be subject to a branch profits tax equal to 30% of its "effectively connected earnings and profits," as adjusted for certain items, unless it qualifies for a lower rate under an applicable tax treaty. Backup Withholding A Non-U.S. Holder will generally be exempt from backup withholding and information reporting requirements, provided it complies with the certification and identification procedures as discussed above. The amount of any backup withholding from a payment to a holder will be allowed as a credit against the holder's federal income tax liability and may entitle such holder to a refund, provided that the required information is furnished to the Internal Revenue Service. 62 66 PLAN OF DISTRIBUTION A broker-dealer that is the holder of Old Notes that were acquired for the account of such broker-dealer as a result of market-making or other trading activities (other than Old Notes acquired directly from the Companies or any affiliate of the Companies) may exchange such Old Notes for New Notes pursuant to the Exchange Offer, provided that each broker-dealer that receives New Notes for its own account in exchange for Old Notes, if such Old Notes were acquired by such broker-dealer as a result of market-making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by any such broker-dealer in connection with resales of New Notes received in exchange for Old Notes if such Old Notes were acquired as a result of market-making activities or other trading activities. The Companies have agreed that, for a period of 120 days after the Expiration Date, they will make this Prospectus, as amended or supplemented, available to any such broker-dealer for use in connection with any such resales. In addition, until , 199 , all dealers effecting transactions in the New Notes may be required to deliver a prospectus. The Companies will not receive any proceeds from any sale of New Notes by broker-dealers. New Notes received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such New Notes. Any broker-dealer that resells New Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 120 days after the Expiration Date, the Companies will promptly send additional copies of this Prospectus, and any amendment or supplement to this Prospectus, to any broker-dealer that requests those documents in the Letter of Transmittal. The Companies have agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the holders of the Secured Notes) other than commissions or concessions of any broker or dealer and will indemnify the holders of the Secured Notes (including any broker-dealer) against certain liabilities, including liabilities under the Securities Act. LEGAL MATTERS Certain legal matters in connection with the Exchange Offer will be passed upon for Cleveland Electric and Toledo Edison by Terrence G. Linnert, Mary E. O'Reilly or Paul N. Edwards, counsel for each Company, and by Squire, Sanders & Dempsey LLP, 4900 Key Tower, Cleveland, Ohio 44114, special counsel to the Companies. Mr. Linnert is Vice President and Chief Financial Officer of each Company, Senior Vice President, Chief Financial Officer and General Counsel of Centerior Energy and Senior Vice President -- Corporate Administration Group, Chief Financial Officer and General Counsel of the Service Company. Mrs. O'Reilly is Managing Attorney of the Service Company and Mr. Edwards is Principal Counsel of the Service Company. EXPERTS The financial statements of each Company as of December 31, 1996 and 1995 and for each of the three years in the period ended December 31, 1996, 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 reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. 63 67 INDEX TO FINANCIAL STATEMENTS SECTION
PAGE ----- CLEVELAND ELECTRIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 (Reprinted from Cleveland Electric's Annual Report to Share Owners) Management's Financial Analysis............................................................. F-3 Report of Independent Public Accountants.................................................... F-10 Income Statement............................................................................ F-11 Retained Earnings........................................................................... F-11 Balance Sheet............................................................................... F-12 Cash Flows.................................................................................. F-14 Statement of Capitalization................................................................. F-15 Notes to the Financial Statements........................................................... F-17 Financial and Statistical Review............................................................ F-28 TOLEDO EDISON FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 (Reprinted from Toledo Edison's Annual Report to Share Owners) Management's Financial Analysis............................................................. F-31 Report of Independent Public Accountants.................................................... F-38 Income Statement............................................................................ F-39 Retained Earnings........................................................................... F-39 Balance Sheet............................................................................... F-40 Cash Flows.................................................................................. F-42 Statement of Capitalization................................................................. F-43 Notes to the Financial Statements........................................................... F-45 Financial and Statistical Review............................................................ F-56 FIRST QUARTER 1997 FORM 10-Q Notes to the Financial Statements (Unaudited)(a)............................................ F-61 Cleveland Electric Income Statement......................................................... F-64 Cleveland Electric Balance Sheet............................................................ F-65 Cleveland Electric Cash Flows............................................................... F-66 Cleveland Electric Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................................. F-67 Toledo Edison Income Statement.............................................................. F-69 Toledo Edison Balance Sheet................................................................. F-70 Toledo Edison Cash Flows.................................................................... F-71 Toledo Edison Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................................. F-72 Part II. Other Information(a).............................................................. F-74 SECOND QUARTER 1997 FORM 10-Q Notes to the Financial Statements (Unaudited)(a)............................................ F-82 Cleveland Electric Income Statement......................................................... F-85 Cleveland Electric Balance Sheet............................................................ F-86 Cleveland Electric Cash Flows............................................................... F-87 Cleveland Electric Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................................................. F-88 Toledo Edison Income Statement.............................................................. F-91 Toledo Edison Balance Sheet................................................................. F-92 Toledo Edison Cash Flows.................................................................... F-93 Toledo Edison Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................................. F-94 Part II. Other Information(a).............................................................. F-97
- --------------- (a) Combined in each 1997 Form 10-Q for Centerior Energy, Cleveland Electric and Toledo Edison and relates to all three companies. F-1 68 CLEVELAND ELECTRIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 F-2 69 MANAGEMENT'S FINANCIAL ANALYSIS OUTLOOK STRATEGIC PLAN In early 1994, Centerior Energy Corporation (Centerior Energy), along with The Cleveland Electric Illuminating Company (Company) and The Toledo Edison Company (Toledo Edison), created a strategic plan to achieve the twin goals of strengthening their financial conditions and improving their competitive positions. 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. To meet these goals, we seek to maximize share owner return on Centerior Energy common stock, achieve profitable revenue growth, become a leader in customer satisfaction, build a winning employee team and attain increasingly competitive supply costs. During 1996, the third year of the eight-year plan, we made strong gains toward reaching some plan objectives but need significant improvement on others. A major step taken to reach the twin goals was Centerior Energy's agreement to merge with Ohio Edison Company (Ohio Edison) to form a new holding company called FirstEnergy Corp. (FirstEnergy). The proposed merger, combined with good operating performance, a successful price increase and the accelerated paydown of debt, resulted in a significant stock price gain, such that the total return to Centerior Energy common stock share owners during 1996 was 33%. The merger is expected to better position the merged companies to meet coming competitive challenges. Revenue growth is a key objective of the plan, from pricing actions as well as market expansion. In April 1996, The Public Utilities Commission of Ohio (PUCO) approved in full the $119 million price increases requested by the Company and Toledo Edison ($84 million and $35 million, respectively). The primary purpose of the increases was to provide additional revenues to recover all the costs of providing electric service, including deferred costs, and provide a fair return to Centerior Energy common stock share owners. The additional revenues also provided cash to accelerate the redemption of debt and preferred stock. For the second year in a row, the Company's total kilowatt-hour sales increased. Although kilowatt-hour sales to our retail customers decreased by 1% compared to 1995 results, our wholesale sales increased by 27% from 1995 as a result of the good availability of our generating units and a more aggressive bulk power marketing effort. Adjusted for weather, kilowatt-hour sales to residential and commercial customers increased by 1% and 0.8%, respectively, from 1995. Another key element of our revenue strategy is to offer long-term contracts to large industrial customers who might otherwise consider changing power suppliers. During 1996, we renewed and extended for as long as ten years contracts with many of our large industrial customers, including the five largest. While this strategy has resulted in lower prices for these customers, in the long run, it is expected to maximize share owner value by retaining our customer base in a changing industry. Prior to these renewals, 61% of our industrial base rate (nonfuel) revenues under contract was scheduled for renewal before 1999. Following the renewals, the comparable percentage is 18%. At year-end 1996, 51% of our industrial base rate revenues was under long-term contracts. Our continued emphasis on economic development activities is adding to our opportunities for revenue growth. In 1996, we gained commitments on 24 economic development projects, representing almost $6 million in new and retained annual base rate revenues and nearly 4,000 new and retained jobs for Northeast Ohio. Under the strategic plan, Centerior Energy and its subsidiaries are structured in six strategic business groups to better focus on competitiveness. During 1996, the Company reduced employment from about 3,600 to 3,300. Further reduction in our work force to about 3,100 is planned by year-end 1997. We also plan to reduce expenditures for operation and maintenance activities (exclusive of fuel and purchased power expenses) and capital projects from $593 million in 1996 to approximately $560 million in 1997 by continuing to streamline operations. We will continue to reduce our unit cost of fuel used for generating electricity, while safely improving the operating performance of our generation facilities. Reducing fixed financing costs is another primary objective in strengthening our financial and competitive position. In 1996, we reduced our fixed obligations for debt, preferred stock and generation facilities leases (partially offset by the new accounts receivable securitization) by $145 million. See Notes 1(j) and 2. Interest expense and preferred dividends dropped $10 million. In the last three years, fixed obligations were reduced by $246 million. In 1996, we reported earnings available for common stock of $78 million compared to $141 million in 1995. The decline in reported earnings is primarily attributable to the delay in implementing our price increase until late April, while we began at the end of 1995 to charge earnings for operating expenses and amortization of deferrals which the price increase was designed to recover. The price increase contributed approximately $33 million (after tax) more cash to our earnings in 1996. The change in regulatory accounting measures resulted in an $85 million decrease in reported earnings for 1996 versus 1995. In addition, 1996 results included a noncash charge against earnings of $11 million after tax for the disposition of inventory. Excluding these factors, basic earnings from operations in 1996 were the same as in 1995; however, the quality of reported earnings improved. The full benefit of our $84 million price increase, substantial reductions in operation and maintenance expenses and a continuing decline in interest charges are expected to result in improvement in earnings and cash flow from operations in 1997. F-3 70 PENDING MERGER WITH OHIO EDISON On September 16, 1996, Centerior Energy announced its merger with Ohio Edison in a stock-for-stock transaction. Centerior Energy share owners will receive 0.525 of a share of FirstEnergy common stock for each share of Centerior Energy common stock owned, while Ohio Edison share owners will receive one share of FirstEnergy common stock for each share of Ohio Edison common stock owned. Following the merger, FirstEnergy will directly hold all of the issued and outstanding common stock of the Company, Toledo Edison and Ohio Edison. FirstEnergy plans to account for the merger as a purchase in accordance with generally accepted accounting principles. If FirstEnergy elects to apply, or "push down", the effects of purchase accounting to the financial statements of the Company and Toledo Edison, the Company and Toledo Edison would record adjustments to: (1) reduce the carrying value of nuclear generating plant by $1.25 billion to fair value; (2) recognize goodwill of $865 million; (3) reduce common stock equity by $401 million; (4) reset retained earnings of the Company and Toledo Edison to zero; and (5) reduce the related deferred federal income tax liability by $438 million. These amounts reflect FirstEnergy's estimates of the pro forma combined adjustments for the Company and Toledo Edison as of September 30, 1996. The actual adjustments to be recorded could be materially different from these estimates. FirstEnergy has not decided whether to push down the effects of purchase accounting to the financial statements of the Company and Toledo Edison if the merger with Ohio Edison is completed, nor has FirstEnergy estimated the allocations between the two companies if push-down accounting is elected. We believe that the merger will create a company that is better positioned to compete in the electric utility industry than either Centerior Energy or Ohio Edison could on a stand-alone basis, enhancing long-term share owner value and providing customers with reliable service at more stable and competitive prices. The combination of Centerior Energy and Ohio Edison is a natural alliance of two companies with adjoining service areas who already share many major generating units. FirstEnergy expects to reduce costs, maximize efficiencies and increase management flexibility in order to enhance revenues, cash flows and earnings and be a more effective competitor in the increasingly competitive electric utility industry. FirstEnergy anticipates the merger will result in net savings for the combined companies of approximately $1 billion over ten years, in addition to the impact of cost reduction programs underway at both companies. The additional savings, which probably could not be achieved without the merger, will result primarily from the reduction of duplicative functions and positions, joint dispatch of generating facilities and procurement efficiencies. FirstEnergy expects reductions in labor costs to comprise slightly over half the estimated savings. In addition, FirstEnergy expects to reduce system-wide debt by at least $2.5 billion through the year 2000, yielding additional long-term savings in the form of lower interest expense. The Company's share of the $1 billion of savings will permit the Company to reduce prices to its customers as discussed below under FirstEnergy Rate Plan. Absent the merger, the Company plans to achieve savings as well, but at a lower level, which is expected to allow prices to be frozen at current levels until at least 2002 despite inflationary pressures. Various aspects of the merger are subject to the approval of the Federal Energy Regulatory Commission (FERC) and other regulatory authorities. Common stock share owners of Centerior Energy and Ohio Edison are expected to vote on approval of the merger agreement on March 27, 1997. The merger must be approved by the affirmative votes of the share owners of at least two-thirds of the outstanding shares of Ohio Edison common stock and a majority of the outstanding shares of Centerior Energy common stock. The merger is expected to be effective in late 1997. FIRSTENERGY RATE PLAN On January 30, 1997, the PUCO approved a Rate Reduction and Economic Development Plan (Plan) for the Company and Toledo Edison to be effective upon the consummation of the Centerior Energy and Ohio Edison merger. The Plan would be null and void if the merger is not consummated. The rate order granting the April 1996 price increase will remain in full force and effect during the pendency of the merger or if the merger is not consummated. The Plan calls for a base rate freeze through 2005 (except to comply with any significant changes in environmental, regulatory or tax laws), followed by an immediate $310 million (which represents a decrease of approximately 15% from current levels) base rate reduction in 2006 (the Company's share is expected to be $217 million); interim reductions beginning seven months after consummation of the merger of $3 per month increasing to $5 per month per residential customer by July 1, 2001; $105 million for economic development and energy efficiency programs (the Company's share is expected to be $70 million); earnings caps for regulatory purposes for the Company and Toledo Edison; a commitment by FirstEnergy for a reduction, for regulatory accounting purposes, in nuclear and regulatory assets by the end of 2005 of at least $2 billion more than it otherwise would be, through revaluing facilities or accelerating depreciation and amortization; and a freeze in fuel cost factors until December 31, 2005, subject to PUCO review at year-end 2002 and annual inflation adjustments. The Plan permits the Company and Toledo Edison to dispose of generating assets subject to notice and possible PUCO approval, and to enter into associated power purchase arrangements. F-4 71 Total price savings for the Company's customers of about $280 million are anticipated over the term of the Plan, as summarized below, excluding potential economic development benefits and assuming that the merger takes place on December 31, 1997. The total price savings for customers of the Company and Toledo Edison are expected to be about $391 million.
Year Amount - ---------------------------------------------- ------------ (millions of dollars) 1998________________________________________ $ 15 1999________________________________________ 27 2000________________________________________ 31 2001________________________________________ 39 2002________________________________________ 42 2003________________________________________ 42 2004________________________________________ 42 2005________________________________________ 42 -------- Total___________________________________ $280 ========
Under the Plan's earnings cap, the Company and Toledo Edison will be permitted to earn up to an 11.5% return on common stock equity for regulatory purposes during calendar years prior to 2000, 12% during calendar years 2000 and 2001, and 12.59% during calendar years 2001 through 2005. The regulatory return on equity is generally expected to be lower than the return on equity calculated for financial reporting purposes due to the calculation methodology defined by the Plan and, as discussed in the next paragraph, anticipated differences in accounting for the Plan for financial reporting versus regulatory purposes. If for any calendar year the regulatory return on equity exceeds the specified level, the excess will be credited to customers, first through a reduction in Percentage of Income Payment Plan (PIPP) arrearages and then as a credit to base rates. PIPP is a deferred payment program for low-income residential customers. The Plan requires, for regulatory purposes, a revaluation of or an accelerated reduction in the investment in nuclear plant and certain regulatory assets of the Company and Toledo Edison (excluding amounts due from customers for future federal income taxes) by at least $2 billion by the end of 2005. FirstEnergy has not yet determined each company's estimated share of the $2 billion. Only a portion of the $2 billion of accelerated costs is expected to be charged against the two companies' earnings for financial reporting purposes by 2005. FirstEnergy believes that the Plan will not provide for the full recovery of costs and a fair return on investment associated with the nuclear operations of the Company and Toledo Edison. Pursuant to the PUCO's order, FirstEnergy is required to submit to the PUCO staff the regulatory accounting and cost recovery details for implementing the Plan. After approval of such details by the PUCO staff, FirstEnergy expects that the Company and Toledo Edison will discontinue the application of Statement of Financial Accounting Standards (SFAS) 71 for their nuclear operations if and when consummation of the merger becomes probable. The remainder of their business is expected to continue to comply with the provisions of SFAS 71. At the time the merger is probable, the Company and Toledo Edison would be required to write off certain of their regulatory assets for financial reporting purposes. The write-off amounts would be determined at that time. FirstEnergy estimates the write-off amounts for the Company and Toledo Edison will total approximately $750 million. The Company's share of the write-off is expected to be about two-thirds of this amount. Under the Plan, some or all of this write-off cannot be applied toward the $2 billion regulatory commitment discussed above. For financial reporting purposes, nuclear generating units are not expected to be impaired. If events cause either the Company or Toledo Edison or both companies to conclude they no longer meet the criteria for applying SFAS 71 for the remainder of their business, they would be required to write off their remaining regulatory assets and measure all other assets for impairment. For a discussion of the criteria for complying with SFAS 71, see Note 7(a). APRIL 1996 RATE ORDER In its April 1996 order, the PUCO granted price increases of $84 million and $35 million in annualized revenues to the Company and Toledo Edison, respectively. The Company and Toledo Edison intend to freeze rates at existing levels until at least 2002, although they are not precluded from requesting further price increases. In the order, the PUCO provided for recovery of all regulatory assets in the approved rates, and the Company and Toledo Edison continue to comply with the provisions of SFAS 71. In connection with its order, the PUCO recommended that the Company and Toledo Edison write down certain assets for regulatory purposes by an aggregate of $1.25 billion through 2001. If the merger is consummated, the Company and Toledo Edison believe acceleration of $2 billion of costs under the Plan would fully satisfy this recommendation. The Company and Toledo Edison agree with the concept of accelerating the recognition of costs and the recovery of assets as such concept is consistent with the strategic objective to become more competitive. However, the Company and Toledo Edison believe that such acceleration must also be consistent with the reduction of debt and the opportunity for Centerior Energy common stock share owners to receive a fair return on their investment. Consideration of whether to implement a plan responsive to the PUCO's recommendation to revalue assets by $1.25 billion is pending the merger with Ohio Edison. Notwithstanding the pending merger with Ohio Edison and discussions with regulators concerning the effect of the Plan on the Company's nuclear generating assets, we believe it is reasonable to expect that rates will be set at levels that will recover all current and anticipated costs associated with the Company's nuclear operations, including all associated regulatory assets, and such rates can be charged to and collected from customers. If there is a change in our evaluation of the competitive environment, regulatory framework or other factors, or if the PUCO significantly reduces the value of the Company's assets or reduces the approved return on common stock F-5 72 equity of 12.59% and overall rate of return of 10.06%, or both, for future regulatory purposes, the Company may be required to record material charges to earnings. MERGER OF TOLEDO EDISON INTO THE COMPANY In October 1996, the FERC authorized the merger of Toledo Edison into the Company. The merger agreement between Centerior Energy and Ohio Edison requires the approval of Ohio Edison prior to consummation of the proposed merger of Toledo Edison into the Company. Ohio Edison has not yet made a decision. See Note 16. COMPETITION Structural changes in the electric utility industry from actions by both federal and state regulatory bodies are continuing to place downward pressure on prices and increase competition for customers. The Company's nuclear plant licenses have required open-access transmission for its wholesale customers for 20 years. More recently, the Federal Energy Policy Act of 1992 initiated broader access to utility transmission systems and, in 1996, the FERC adopted rules relating to open-access transmission services. The open-access rules require utilities to deliver power from other utilities or generation sources to their wholesale customers at nondiscriminatory prices. A number of states have enacted transition legislation which provides for introduction of competition for retail electric business and recovery of stranded investment. Several groups in Ohio are studying the possible introduction of retail wheeling and stranded investment recovery. Retail wheeling occurs when a customer obtains power from a utility company other than its local utility. The term "stranded investment" generally refers to fixed costs approved for recovery under traditional regulatory methods that would become unrecoverable, or "stranded", as a result of legislative changes which allow for widespread competition. The PUCO is sponsoring discussions among a group of business, utility and consumer interests to explore ways of promoting competitive options without unduly harming the interests of utility company share owners or customers. The PUCO also has introduced two pilot projects, both intended as initial steps to introduce competitive elements into the Ohio electric utility business. A bill to restructure the electric utility industry in Ohio has been introduced in the Ohio House of Representatives. A bipartisan committee from both legislative houses has been formed to study the issue. Centerior Energy presented the Company's model for customer choice, called Energy Choice, to the PUCO discussion group in August 1996. Under this model, full retail competition should be introduced by 2002, but two essential elements, recovery of stranded investment and levelization of tax burdens among energy suppliers, must be resolved in the interim to assure share owners' recovery of and a fair return on their investments. Although competitive pressures are increasing, the traditional regulatory framework remains in place and is expected to continue for the foreseeable future. We cannot predict when and to what extent retail wheeling or other forms of competition will be allowed. We believe that pure competition (unrestricted retail wheeling for all customer classifications) is at least several years away and that any transition to pure competition will be in phases. The FERC and the PUCO have acknowledged the need to provide at least partial recovery of stranded investment as greater competition is permitted and, therefore, we believe that there will be a mechanism developed for the recovery of at least some stranded investment. However, due to the uncertainty involved, there is a risk in connection with the introduction of retail wheeling that some of the Company's assets may not be fully recovered. Competition from municipal electric suppliers for retail business in our service area is producing both favorable and unfavorable results in our business. Through aggressive door-to-door campaigns, we have been successful in limiting the number of conversions of our customers to Cleveland Public Power (CPP) under its ongoing expansion plan. CPP is the largest municipal supplier in our service area. In 1996, we reached agreements to serve a number of large Cleveland commercial customers, including some previously served by CPP. We continue to pursue legal remedies to halt illegal municipal expansion in our service area. The merger with Ohio Edison and the benefits of the Plan to our customers are expected to better position us to deal with the structural changes taking place in the industry and to improve our competitive position with respect to municipalization. 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). Toledo Edison operates Davis-Besse and the Company operates Perry Unit 1. All three units were out of service temporarily for refueling during 1996; thus, plant availability factors for Davis-Besse, Perry Unit 1 and Beaver Valley Unit 2 were 85%, 76% and 70%, respectively, for 1996. The 1994-1996 availability factors for the units were 91%, 72%, and 85%, for Davis-Besse, Perry Unit 1 and Beaver Valley Unit 2, respectively. The comparable industry averages for a three-year period (as of August 31, 1996) are 82% for pressurized water reactors such as Davis-Besse and Beaver Valley Unit 2 and 78% for boiling water reactors such as Perry Unit 1. Davis-Besse established a plant record with its 509-day continuous run at or near full capacity before shutting down for its scheduled refueling outage in April 1996. A significant part of the strategic plan involves ongoing efforts to increase the availability and lower the cost of F-6 73 production of our nuclear units. In 1996, we continued our progress toward increasing long-term unit availability while continuing to lower production costs. The goal of our nuclear improvement program is to replicate Davis-Besse's operational excellence and cost reduction gains at Perry Unit 1, while improving performance ratings. 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 (NRC) 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, cash flows and results of operations. Premature plant closings could also have a material adverse effect on our financial condition, cash flows and results of operations because the estimated cost to decommission a plant exceeds the current funding in the decommissioning trust. HAZARDOUS WASTE DISPOSAL SITES 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 amount involved, are often unsubstantiated and subject to dispute. Federal law provides that all PRPs for a particular site be held liable on a joint and several basis. If the Company were held liable for 100% of the cleanup costs of all the sites referred to above, the cost could be as high as $300 million. However, we believe that the actual cleanup costs will be substantially lower than $300 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 $7 million at December 31, 1996 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, cash flows or results of operations. A new Statement of Position issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants, Inc. effective January 1, 1997 provides guidance on the recognition and disclosure of environmental remediation liabilities. Adoption of the statement in 1997 is not expected to 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. The declaration and payment of future common stock dividends is at the discretion of the Company's Board of Directors, subject to applicable legal restrictions. 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 used the increased retained cash to redeem debt and preferred stock more quickly than would otherwise be the case. In 1996, Centerior Energy increased its common stock cash dividend demand on the Company to fund its common stock dividend and other corporate activities. See Capital Resources and Liquidity-Liquidity below. CAPITAL RESOURCES AND LIQUIDITY 1994-1996 CASH REQUIREMENTS We need cash for normal corporate operations (including the payment of dividends), retirement of maturing securities, and an ongoing program of constructing and improving facilities to meet demand for electric service and to comply with government regulations. Our cash construction expenditures totaled $164 million in 1994, $148 million in 1995 and $104 million in 1996. Our debt and preferred stock maturities and sinking fund requirements totaled $62 million in 1994, $282 million in 1995 and $176 million in 1996. In addition, we optionally redeemed $341 million of securities in the 1994-1996 period, including $143 million of tax-exempt issues refunded in 1995. In July 1996, Centerior Funding Corporation (Centerior Funding), the Company's wholly owned subsidiary, issued $150 million in AAA-rated accounts receivable- backed investor certificates due in 2001 with an interest rate of 7.2%. The Company's share of the net proceeds from the accounts receivable securitization was used to redeem higher-cost securities and for general corporate purposes. As a result of these activities, the embedded cost of the Company's debt at the end of 1996 declined to 8.83% versus 8.88% in 1995 and 8.96% in 1994. The Company also utilized short-term borrowings to help meet its cash needs. The Company had $112 million of notes payable to affiliates at December 31, 1996. The Company is a party to a $125 million revolving credit facility which was renewed in May 1996 for a one-year term. In 1996, portions of the nuclear fuel lease financing vehicles for the Company and Toledo Edison matured: $84 million of intermediate-term notes in September and a $150 million letter of credit supporting short-term borrowing in October. These facilities were replaced by $100 million of intermediate-term notes and a $100 million two-year letter of credit. The net reduction in the F-7 74 facility size results from lower nuclear fuel financing requirements. 1997 AND BEYOND CASH REQUIREMENTS Our anticipated 1997 cash requirements for construction are $110 million. Debt and preferred stock maturities and sinking fund requirements are $145 million. Of this amount, $70 million are for a tax-exempt issue secured by first mortgage bonds and subject to optional tender by the owners on November 1, 1997, which we expect to replace with a similar issue at a substantially lower interest rate. We expect to meet remaining requirements with internal cash generation and cash reserves. We also expect to be able to optionally redeem more debt and preferred stock in 1997 than we did in 1996. We expect to meet all of our 1998-2001 cash requirements with internal cash generation. Estimated cash requirements for our construction program during this period total $496 million. Debt and preferred stock maturities and sinking fund requirements total $445 million for the same period. If economical, additional securities may be redeemed with funding expected to be provided through internal cash generation. Consummation of the merger with Ohio Edison is expected to reduce the Company's cash construction requirements and improve its ability to redeem fixed obligations. LIQUIDITY Net cash flow from operating activities in 1996 was significantly increased from 1995 by implementation of the price increase effective in April 1996. Most of the net proceeds from our accounts receivable securitization of $65 million were used to redeem other higher-cost securities, producing net savings in our overall cost of borrowing. In 1996, we reduced our fixed obligations for debt, preferred stock and generation facilities leases (partially offset by the new accounts receivable securitization) by $145 million. At year-end 1996, we had $30 million in cash and temporary cash investments, down from $70 million at year-end 1995. 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, 1996, the Company would have been permitted to issue approximately $666 million of additional first mortgage bonds. If FirstEnergy elects to apply purchase accounting to the Company if the merger with Ohio Edison is completed, the Company's first mortgage bond capacity would be adversely affected. The Company also is able to raise funds through the sale of preferred and preference stock. There are no restrictions on the Company's ability to issue preferred or preference stock. The Company and Toledo Edison have $273 million in financing vehicles to support their nuclear fuel leases, $83 million of which mature in 1997. Replacement financing for the maturing issues may not be needed in 1997. The Company is a party to a $125 million revolving credit facility which is expected to be renewed when it matures in May 1997. Current credit ratings for the Company are as follows:
Standard Moody's & Poor's Investors Corporation Service, Inc. ----------- ------------- First mortgage bonds__________________ BB Ba2 Subordinate debt______________________ B+ Ba3 Preferred stock_______________________ B b2
Following the FirstEnergy merger announcement, both rating agencies placed the Company's securities on credit watch with positive implications. Federal law prohibits the Company from paying dividends out of capital accounts. The Company has since 1993 declared and paid preferred and common stock dividends out of appropriated current net income included in retained earnings. At the times of such declarations and payments, the Company had a deficit in its retained earnings. At December 31, 1996, the Company had $130 million of appropriated retained earnings for the payment of dividends. As part of a routine audit, the FERC is considering statements which it requested and received from the Company and Toledo Edison supporting the payment of dividends out of appropriated current net income included in retained earnings while total retained earnings were a deficit. At December 31, 1996, the Company's retained earnings deficit was $276 million. The final disposition of this issue is a factor expected to be considered by FirstEnergy in deciding whether to apply purchase accounting to the Company and Toledo Edison, one effect of which would be to reset deficit retained earnings to zero. If the merger is not consummated or if FirstEnergy determines not to apply purchase accounting to the two companies, the Company and Toledo Edison intend to continue to support their position and pursue all available alternatives to allow them to continue the declaration and payment of dividends. RESULTS OF OPERATIONS 1996 VS. 1995 Factors contributing to the 1.2% increase in 1996 operating revenues are as follows:
Millions Increase (Decrease) in Operating Revenues of Dollars - -------------------------------------------------- ----------- Base Rates______________________________________ $ 51 KWH Sales Volume and Mix________________________ (41) Wholesale Revenues______________________________ 14 Fuel Cost Recovery Revenues_____________________ (9) Miscellaneous Revenues__________________________ 6 ----- Total_______________________________________ $ 21 =====
The increase in 1996 base rates revenues resulted primarily from the April 1996 rate order issued by the PUCO F-8 75 for the Company as discussed under Outlook-April 1996 Rate Order and in Note 7(b). Renegotiated contracts for certain large industrial customers resulted in a decrease in base revenues which partially offset the effect of the general price increase. For the second year in a row, total kilowatt-hour sales increased. Total sales increased 1.3% because of a 27% increase in wholesale sales, the result of the good availability of our generating units and a more aggressive bulk power marketing effort. Residential and commercial kilowatt-hour sales decreased 2.1% and 0.6%, respectively, primarily because of the cooler summer weather in 1996. On a weather-normalized basis, residential and commercial sales increased 1% and 0.8%, respectively. Industrial kilowatt-hour sales decreased 0.2% primarily because of fewer sales to large automotive manufacturers. Lower 1996 fuel cost recovery revenues resulted from favorable changes in the fuel cost factors. The weighted average of these fuel cost factors decreased approximately 3%. Miscellaneous revenues increased in 1996 primarily because of new revenues relating to a generating plant lease agreement in effect for four months during the year. The parties canceled the agreement because the FERC insisted on terms which were not economic to the parties. For 1996, operating revenues were 32% residential, 32% commercial, 29% industrial and 7% other, and kilowatt-hour sales were 23% residential, 28% commercial, 37% industrial and 12% other. The average prices per kilowatt-hour for residential, commercial and industrial customers were 11.34, 9.67 and 6.57 cents, respectively. Operating expenses increased 4.4% in 1996. The cessation of the Rate Stabilization Program deferrals and the commencement of their amortization in December 1995 resulted in the increase in the net amortization of deferred operating expenses. See Note 7(d). Depreciation and amortization expenses increased primarily because of a $7 million net increase in depreciation related to changes in depreciation rates, as discussed in Note 1(e), and the cessation of the accelerated amortization of unrestricted investment tax credits under the Rate Stabilization Program, which was reported in 1995 as a $6 million reduction of depreciation. Other operation and maintenance expenses in 1996 included a $17 million one-time charge for the disposition of inventory as part of a reengineering of the supply chain process. Reengineering the supply chain process increases the use of technology, consolidates warehousing and uses just-in-time purchase and delivery. Federal income taxes decreased as a result of lower pretax operating income. A nonoperating loss resulted in 1996 primarily from costs related to the accounts receivable securitization, as discussed in Note 1(j), and the Company's share of merger-related expenses. The deferral of carrying charges related to the Rate Stabilization Program ended in November 1995. The federal income tax credit for nonoperating income increased in 1996 accordingly. Interest charges and preferred dividend requirements decreased in 1996 because of the redemption of securities and refundings at favorable terms in 1996 and 1995. 1995 VS. 1994 Factors contributing to the 4.2% increase in 1995 operating revenues are as follows:
Millions Increase (Decrease) in Operating Revenues of Dollars - --------------------------------------------------- ---------- KWH Sales Volume and Mix_________________________ $ 52 Wholesale Revenues_______________________________ 11 Fuel Cost Recovery Revenues______________________ 19 Miscellaneous Revenues___________________________ (11) ---- Total________________________________________ $ 71 ====
Industrial kilowatt-hour sales increased 0.3% in 1995, but sales grew 2.4% excluding reductions at two low-margin steel producers (representing 7.6% of industrial revenues). Residential and commercial kilowatt-hour sales increased 2.8% and 3%, respectively, primarily because of the hot summer weather, although there was about 2% nonweather-related growth in commercial kilowatt-hour sales. Other sales increased 36% because of a 58% increase in wholesale sales due principally to the hot summer and good availability of our generating units. Weather accounted for approximately $24 million of the $41 million increase in 1995 base rate revenues. Higher 1995 fuel cost recovery revenues resulted from an increase in the fuel cost factors. The weighted average of these fuel cost factors increased approximately 7%. Miscellaneous revenues decreased in 1995 primarily because the 1994 amount included the billings to other utility owners and lessees for overhead expenses related to the 1994 refueling and maintenance outage of the jointly owned Perry Unit 1. For 1995, operating revenues were 32% residential, 32% commercial, 29% industrial and 7% other, and kilowatt-hour sales were 24% residential, 28% commercial, 38% industrial and 10% other. The average prices per kilowatt-hour for residential, commercial and industrial customers were 11.04, 9.47 and 6.54 cents, respectively. The changes from 1994 were not significant. Operating expenses increased 5.3% in 1995. Fuel and purchased power expenses increased as higher fuel expense was partially offset by lower purchased power expense. The higher fuel expense was attributable to increased generation and more amortization of previously deferred fuel costs than the amount amortized in 1994. The higher other operation and maintenance expenses resulted primarily from charges for an ongoing inventory reduction program and the recognition of costs associated with preliminary engineering studies. Federal income taxes increased as a result of higher pretax operating income. Taxes, other than federal income taxes, increased primarily due to property tax increases resulting from plant additions, real estate valuation increases and a nonrecurring tax credit recorded in 1994. F-9 76 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 capitalization of The Cleveland Electric Illuminating Company (a wholly owned subsidiary of Centerior Energy Corporation) and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Arthur Andersen LLP Cleveland, Ohio February 14, 1997 F-10 77 INCOME STATEMENT The Cleveland Electric Illuminating Company and Subsidiaries
For the years ended December 31, -------------------------------- 1996 1995 1994 ------ ------ ------ (millions of dollars) OPERATING REVENUES_________________________________________________ $1,790 $1,769 $1,698 ------ ------ ------ OPERATING EXPENSES Fuel and purchased power (1)_____________________________________ 408 413 391 Other operation and maintenance__________________________________ 426 418 394 Generation facilities rental expense, net________________________ 56 56 56 ------ ------ ------ Total operation and maintenance_______________________________ 890 887 841 Depreciation and amortization____________________________________ 210 196 195 Taxes, other than federal income taxes___________________________ 230 230 218 Amortization of deferred operating expenses, net_________________ 26 (36) (34) Federal income taxes_____________________________________________ 75 94 82 ------ ------ ------ 1,431 1,371 1,302 ------ ------ ------ OPERATING INCOME___________________________________________________ 359 398 396 ------ ------ ------ NONOPERATING INCOME (LOSS) Allowance for equity funds used during construction______________ 2 2 4 Other income and deductions, net_________________________________ (10) 2 6 Deferred carrying charges________________________________________ -- 29 25 Federal income taxes--credit (expense)___________________________ 6 (2) (4) ------ ------ ------ (2) 31 31 ------ ------ ------ INCOME BEFORE INTEREST CHARGES_____________________________________ 357 429 427 ------ ------ ------ INTEREST CHARGES Debt interest____________________________________________________ 242 248 247 Allowance for borrowed funds used during construction____________ (2) (3) (5) ------ ------ ------ 240 245 242 ------ ------ ------ NET INCOME_________________________________________________________ 117 184 185 PREFERRED DIVIDEND REQUIREMENTS____________________________________ 39 43 45 ------ ------ ------ EARNINGS AVAILABLE FOR COMMON STOCK________________________________ $ 78 $ 141 $ 140 ====== ====== ======
- --------------- (1) Includes purchased power expense of $105 million, $102 million and $111 million in 1996, 1995 and 1994, respectively, for all purchases from Toledo Edison. RETAINED EARNINGS
For the years ended December 31, ------------------------- 1996 1995 1994 ----- ----- ----- (millions of dollars) RETAINED EARNINGS (DEFICIT) AT BEGINNING OF YEAR___________________ $(193) $(262) $(280) ----- ----- ----- ADDITIONS Net income_______________________________________________________ 117 184 185 DEDUCTIONS Dividends declared: Common stock__________________________________________________ (161) (74) (122) Preferred stock_______________________________________________ (39) (41) (45) ----- ----- ----- Net Increase (Decrease)_____________________________________ (83) 69 18 ----- ----- ----- RETAINED EARNINGS (DEFICIT) AT END OF YEAR_________________________ $(276) $(193) $(262) ===== ===== =====
The accompanying notes are an integral part of these statements. F-11 78 BALANCE SHEET
December 31, ---------------- 1996 1995 ------ ------ (millions of dollars) ASSETS PROPERTY, PLANT AND EQUIPMENT Utility plant in service_________________________________________________________ $6,938 $6,872 Less: accumulated depreciation and amortization_______________________________ 2,252 2,094 ------- ------- 4,686 4,778 Construction work in progress____________________________________________________ 57 73 ------- ------- 4,743 4,851 Nuclear fuel, net of amortization________________________________________________ 113 122 Other property, less accumulated depreciation____________________________________ 54 58 ------- ------- 4,910 5,031 ------- ------- CURRENT ASSETS Cash and temporary cash investments______________________________________________ 30 70 Amounts due from customers and others, net_______________________________________ 181 152 Amounts due from affiliates______________________________________________________ 6 5 Unbilled revenues________________________________________________________________ 9 79 Materials and supplies, at average cost Owned_________________________________________________________________________ 52 101 Under consignment_____________________________________________________________ 24 -- Taxes applicable to succeeding years_____________________________________________ 182 184 Other____________________________________________________________________________ 14 7 ------- ------- 498 598 ------- ------- REGULATORY AND OTHER ASSETS Regulatory assets________________________________________________________________ 1,350 1,398 Nuclear plant decommissioning trusts_____________________________________________ 76 61 Other____________________________________________________________________________ 44 64 ------- ------- 1,470 1,523 ------- ------- Total Assets________________________________________________________________ $6,878 $7,152 ======= =======
The accompanying notes are an integral part of this statement. F-12 79 The Cleveland Electric Illuminating Company and Subsidiaries
December 31, ---------------- 1996 1995 ------ ------ (millions of dollars) CAPITALIZATION AND LIABILITIES CAPITALIZATION Common stock equity______________________________________________________________ $1,045 $1,127 Preferred stock With mandatory redemption provisions__________________________________________ 186 215 Without mandatory redemption provisions_______________________________________ 238 241 Long-term debt___________________________________________________________________ 2,441 2,666 ------ ------ 3,910 4,249 ------ ------ CURRENT LIABILITIES Current portion of long-term debt and preferred stock____________________________ 145 177 Current portion of nuclear fuel lease obligations________________________________ 52 55 Accounts payable_________________________________________________________________ 83 89 Accounts and notes payable to affiliates_________________________________________ 171 64 Accrued taxes____________________________________________________________________ 316 296 Accrued interest_________________________________________________________________ 52 59 Other____________________________________________________________________________ 59 56 ------ ------ 878 796 ------ ------ DEFERRED CREDITS AND OTHER LIABILITIES Unamortized investment tax credits_______________________________________________ 176 184 Accumulated deferred federal income taxes________________________________________ 1,306 1,298 Unamortized gain from Bruce Mansfield Plant sale_________________________________ 296 311 Accumulated deferred rents for Bruce Mansfield Plant_____________________________ 99 92 Nuclear fuel lease obligations___________________________________________________ 74 86 Retirement benefits______________________________________________________________ 73 65 Other____________________________________________________________________________ 66 71 ------ ------ 2,090 2,107 ------ ------ Total Capitalization and Liabilities________________________________________ $6,878 $7,152 ====== ======
F-13 80 CASH FLOWS The Cleveland Electric Illuminating Company and Subsidiaries
For the years ended December 31, ------------------------- 1996 1995 1994 ----- ----- ----- (millions of dollars) CASH FLOWS FROM OPERATING ACTIVITIES (1) Net Income________________________________________________________________ $ 117 $ 184 $ 185 ------ ------ ------ Adjustments to Reconcile Net Income to Cash from Operating Activities: Depreciation and amortization__________________________________________ 210 196 195 Deferred federal income taxes__________________________________________ 25 56 50 Unbilled revenues______________________________________________________ 5 (7) 27 Deferred fuel__________________________________________________________ 7 9 (20) Deferred carrying charges______________________________________________ -- (29) (25) Leased nuclear fuel amortization_______________________________________ 46 71 55 Amortization of deferred operating expenses, net_______________________ 26 (36) (34) Allowance for equity funds used during construction____________________ (2) (2) (4) Changes in amounts due from customers and others, net__________________ (4) (6) 10 Net proceeds from accounts receivable securitization___________________ 65 -- -- Changes in materials and supplies______________________________________ 25 10 2 Changes in accounts payable____________________________________________ (6) 1 (34) Changes in working capital affecting operations________________________ 11 (17) 3 Other noncash items____________________________________________________ (7) -- 4 ------ ------ ------ Total Adjustments____________________________________________________ 401 246 229 ------ ------ ------ Net Cash from Operating Activities________________________________ 518 430 414 ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES (2) Notes payable to affiliates_______________________________________________ 107 (53) 58 First mortgage bond issues________________________________________________ -- 443 46 Maturities, redemptions and sinking funds_________________________________ (290) (460) (116) Nuclear fuel lease obligations____________________________________________ (52) (58) (60) Dividends paid____________________________________________________________ (200) (117) (142) Premiums, discounts and expenses__________________________________________ (1) (11) (1) ------ ------ ------ Net Cash from Financing Activities________________________________ (436) (256) (215) ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES (2) Cash applied to construction______________________________________________ (104) (148) (164) Interest capitalized as allowance for borrowed funds used during construction___________________________________________________________ (2) (3) (5) Contributions to nuclear plant decommissioning trusts_____________________ (12) (13) (14) Other cash applied________________________________________________________ (4) (6) (27) ------ ------ ------ Net Cash from Investing Activities________________________________ (122) (170) (210) ------ ------ ------ NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS___________________________ (40) 4 (11) ------ ------ ------ CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF YEAR____________________ 70 66 77 ------ ------ ------ CASH AND TEMPORARY CASH INVESTMENTS AT END OF YEAR__________________________ $ 30 $ 70 $ 66 ====== ====== ====== - --------------- (1) Interest paid (net of amounts capitalized)______________________________ $ 237 $ 214 $ 208 ====== ====== ====== Federal income taxes paid______________________________________________ $ 30 $ 66 $ 15 ====== ====== ====== (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-14 81 STATEMENT OF CAPITALIZATION The Cleveland Electric Illuminating Company and Subsidiaries
December 31, ----------------- 1996 1995 ------ ------ (millions of dollars) COMMON STOCK EQUITY: Common shares, without par value: 105 million authorized; 79.6 million outstanding in 1996 and 1995________________________________________________________________________________ $1,241 $1,241 Other paid-in capital_____________________________________________________________________ 80 79 Retained earnings (deficit)_______________________________________________________________ (276) (193) ------ ------ Total Common Stock Equity_____________________________________________________________ 1,045 1,127 ------ ------
Current 1996 Shares Call Price Outstanding Per Share ----------- ---------- PREFERRED STOCK: Without par value, 4,000,000 preferred shares authorized Subject to mandatory redemption: $ 7.35 Series C___________________________ 120,000 $ 101.00 12 13 88.00 Series E___________________________ 12,000 1,011.48 12 15 9.125 Series N___________________________ 150,000 100.00 15 30 91.50 Series Q___________________________ 53,572 1,000.00 54 64 88.00 Series R___________________________ 50,000 -- 50 50 90.00 Series S___________________________ 74,000 -- 73 73 ------ ------ 216 245 Less: Current maturities 30 30 ------ ------ Total Preferred Stock, with Mandatory Redemption Provisions_____________________________________________ 186 215 ------ ------ 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___________________________ 474,000 100.00 46 49 42.40 Series T___________________________ 200,000 -- 97 97 ------ ------ Total Preferred Stock, without Mandatory Redemption Provisions_____________________________________________ 238 241 ------ ------ LONG-TERM DEBT: First mortgage bonds: 7.625% due 2002_______________________________________________________________________ 195 245 7.375% due 2003_______________________________________________________________________ 100 100 9.500% due 2005_______________________________________________________________________ 300 300 8.750% due 2005_______________________________________________________________________ 75 75 10.880% due 2006_______________________________________________________________________ -- 50 9.250% due 2009_______________________________________________________________________ 50 50 8.375% due 2011_______________________________________________________________________ 125 125 8.375% due 2012_______________________________________________________________________ 75 75 9.375% due 2017_______________________________________________________________________ 300 300 10.000% due 2020_______________________________________________________________________ 100 100 9.000% due 2023_______________________________________________________________________ 150 150 ------ ------ 1,470 1,570 ------ ------ Tax-exempt issues secured by first mortgage bonds: 7.000% due 2006-2009__________________________________________________________________ 64 64 6.000% due 2011**_____________________________________________________________________ 6 6 6.000% due 2011**_____________________________________________________________________ 2 2 6.200% due 2013_______________________________________________________________________ 48 48 8.000% due 2013_______________________________________________________________________ 79 79 3.500% due 2015**_____________________________________________________________________ 40 40 6.000% due 2017**_____________________________________________________________________ 1 1 3.500% due 2018**_____________________________________________________________________ 73 73 6.000% due 2020**_____________________________________________________________________ 41 41 6.000% due 2020**_____________________________________________________________________ 9 9 9.750% due 2022***____________________________________________________________________ 70 70 6.850% due 2023_______________________________________________________________________ 30 30 8.000% due 2023_______________________________________________________________________ 73 73 7.625% due 2025_______________________________________________________________________ 54 54 7.750% due 2025_______________________________________________________________________ 45 45 7.700% due 2025_______________________________________________________________________ 44 44 ------ ------ 679 679 ------ ------
The accompanying notes are an integral part of this statement. F-15 82 STATEMENT OF CAPITALIZATION (CONTINUED)
December 31, --------------------- 1996 1995 ------ ------ (millions of dollars) LONG-TERM DEBT: (CONTINUED) Medium-term notes secured by first mortgage bonds: 8.700% due 1996_________________________________________________________________________ -- 20 9.100% due 1996_________________________________________________________________________ -- 32 9.110% due 1996_________________________________________________________________________ -- 13 9.000% due 1996_________________________________________________________________________ -- 13 9.140% due 1996_________________________________________________________________________ -- 12 9.050% due 1996_________________________________________________________________________ -- 10 8.950% due 1996_________________________________________________________________________ -- 40 9.450% due 1997_________________________________________________________________________ 43 43 9.000% due 1998_________________________________________________________________________ 5 5 8.870% due 1998_________________________________________________________________________ 10 10 8.260% due 1998_________________________________________________________________________ 2 2 8.330% due 1998_________________________________________________________________________ 25 25 8.170% due 1998_________________________________________________________________________ 11 11 8.150% due 1998_________________________________________________________________________ 8 8 8.160% due 1998_________________________________________________________________________ 5 5 9.250% due 1999_________________________________________________________________________ 52 52 9.300% due 1999_________________________________________________________________________ 25 25 7.670% due 1999_________________________________________________________________________ 3 3 7.250% due 1999_________________________________________________________________________ 12 12 7.850% due 1999_________________________________________________________________________ 25 25 7.770% due 1999_________________________________________________________________________ 17 17 8.290% due 1999_________________________________________________________________________ 10 10 9.200% due 2001_________________________________________________________________________ 15 15 7.420% due 2001_________________________________________________________________________ 10 20 9.050% due 2001_________________________________________________________________________ 5 5 8.680% due 2001_________________________________________________________________________ 15 15 8.540% due 2001_________________________________________________________________________ 3 3 8.560% due 2001_________________________________________________________________________ 4 4 8.550% due 2001_________________________________________________________________________ 5 5 7.850% due 2002_________________________________________________________________________ 5 5 8.130% due 2002_________________________________________________________________________ 28 28 7.750% due 2003_________________________________________________________________________ 15 15 9.520% due 2021_________________________________________________________________________ 8 8 ------ ------ 366 516 ------ ------ Tax-exempt notes: 6.500% due 1996_________________________________________________________________________ -- 3 5.500% due 1997_________________________________________________________________________ * * 6.700% due 2006_________________________________________________________________________ 20 21 5.700% due 2008_________________________________________________________________________ 7 8 6.700% due 2011_________________________________________________________________________ 6 6 5.875% due 2012_________________________________________________________________________ 14 14 ------ ------ 47 52 ------ ------ Bank loans secured by subordinate mortgage: 7.500% due 1996_________________________________________________________________________ -- 2 ------ ------ Unamortized premium (discount), net_________________________________________________________ (6) (6) ------ ------ 2,556 2,813 Less: Current maturities__________________________________________________________________ 115 147 ------ ------ Total Long-Term Debt____________________________________________________________________ 2,441 2,666 ------ ------ TOTAL CAPITALIZATION________________________________________________________________________ $3,910 $4,249 ====== ======
- --------------- * Denotes debt of less than $1 million. ** Denotes variable rate issue with December 31, 1996 interest rate shown. *** Subject to optional tender by the owners on November 1, 1997. F-16 83 NOTES TO THE FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) GENERAL The Company is an electric utility serving Northeast Ohio 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. In 1995, the Company formed a wholly owned subsidiary, Centerior Funding, to serve as the transferor in connection with an accounts receivable securitization completed in 1996 as discussed in Note 1(j). In 1994, the Company transferred its investments in three wholly owned subsidiaries to Centerior Energy at cost ($26 million) via property dividends. All significant intercompany items have been eliminated in consolidation. The Company follows the Uniform System of Accounts prescribed by the 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(a). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The estimates are based on an analysis of the best information available. Actual results could differ from those estimates. The Company is a member of the Central Area Power Coordination Group (CAPCO). Other members are Toledo Edison, Duquesne Light Company, Ohio Edison and its wholly owned subsidiary, Pennsylvania Power Company. The members have constructed and operate generation and transmission facilities for their joint 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. As discussed in Note 1(j), beginning in May 1996, Centerior Funding began serving as the transferor in connection with the accounts receivable securitization for the Company and Toledo Edison. Centerior Service Company (Service Company), a wholly owned subsidiary of Centerior Energy, provides management, financial, administrative, engineering, legal and other services at cost to the Company and other affiliated companies. The Service Company billed the Company $149 million, $141 million and $136 million in 1996, 1995 and 1994, 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. See Management's Financial Analysis -- Outlook-FirstEnergy Rate Plan. (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 as a regulatory asset since the PUCO is allowing the Company to recover the assessments through its fuel cost factors. See Note 7(a). (e) DEPRECIATION AND DECOMMISSIONING The cost of property, plant and equipment is depreciated over their estimated useful lives on a straight-line basis. In its April 1996 rate order, the PUCO approved changes F-17 84 in depreciation rates for the Company. An increase in the depreciation rate for nuclear property from 2.5% to 2.88% increased annual depreciation expense approximately $13 million. A reduction in the composite depreciation rate for nonnuclear property from 3.34% to 3.23% decreased annual depreciation expense by approximately $3 million. The changes in depreciation rates were effective in April 1996 and resulted in a $7 million net increase in 1996 depreciation expense. 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 having net earnings offset inflation. The PUCO requires that the estimated costs of decommissioning and the funding level be reviewed at least every five years. In April 1996, pursuant to the PUCO rate order, the Company decreased its annual decommissioning expense accruals to $12 million from the $13 million level in 1995. The accruals are reflected in current rates. The accruals are based on adjustments to updated, site-specific studies for each of the units completed in 1993 and 1994. These estimates reflect the DECON method of decommissioning (prompt decontamination), and the locations and cost characteristics specific to the units, and include costs associated with decontamination and dismantlement for each of the units. The estimate for Davis-Besse also includes the cost of site restoration. The adjustments to the updated studies which reduced the annual accruals beginning in April 1996 were attributable to changed assumptions on radioactive waste burial cost estimates and the exclusion of site restoration costs for Perry Unit 1 and Beaver Valley Unit 2. After the decommissioning of these units in the future, the two plant sites may be usable for new power production facilities or other industrial purposes. The revised estimates for the units in current 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 $176 $ 451 Perry Unit 1________________ 2026 132 482 Beaver Valley Unit 2________ 2027 54 203 ---- ------ Total_________________ $362 $1,136 ==== ======
The classification, Accumulated Depreciation and Amortization, in the Balance Sheet at December 31, 1996 includes $85 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 (FASB) is reviewing the accounting for removal costs, including decommissioning. If 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. The FASB issued an exposure draft on the subject on February 7, 1996 and continues to review the subject. (f) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at original cost less amounts disallowed by the PUCO. 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 10.32% in 1996, 10.33% in 1995 and 9.68% in 1994. 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. F-18 85 (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 the 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(a). 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 regulatory asset and will be recovered over the lives of the related assets. See Note 7(a). Investment tax credits are deferred and amortized over the lives of the applicable property as a reduction of depreciation expense. (j) ACCOUNTS RECEIVABLE SECURITIZATION In May 1996, the Company and Toledo Edison began to sell on a daily basis substantially all of their retail customer accounts receivable and unbilled revenue receivables to Centerior Funding pursuant to a five-year asset-backed securitization agreement. In July 1996, Centerior Funding completed a public sale of $150 million of receivables-backed investor certificates in a transaction that qualifies for sale accounting treatment for financial reporting purposes. Costs associated with the sale totaling $5 million in 1996 are included in Other Income and Deductions, Net in the Income Statement. These costs are expected to be $11 million annually over the remaining period. (k) MATERIALS AND SUPPLIES In December 1996, the Company sold substantially all of its materials and supplies and fossil fuel inventories for certain generating units and other storage locations to an independent entity at book value. The buyer now provides all of these inventories under a consignment arrangement. In accordance with SFAS 49 accounting for product financing arrangements, the inventories continue to be reported as assets in the Balance Sheet even though the buyer owns the inventories since the Company has guaranteed to be a buyer of last resort. (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. These leases extend through 2017 and 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 certain times at a premium and at the end of the leases for the fair market value at that time or to renew the leases. The leases include conditions for mandatory termination (and possible repurchase of the leasehold interests) upon certain events of default. 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. F-19 86 Future minimum lease payments under the operating leases at December 31, 1996 are summarized as follows:
For For the Toledo Year Company Edison - --------------------------------------- ------- ------- (millions of dollars) 1997_________________________________ $ 63 $ 102 1998_________________________________ 63 102 1999_________________________________ 70 108 2000_________________________________ 76 111 2001_________________________________ 75 111 Later Years__________________________ 1,170 1,696 ------ ------ Total Future Minimum Lease Payments_____________________ $1,517 $2,230 ====== ======
Rental expense is accrued on a straight-line basis over the terms of the leases. The amount recorded in 1996, 1995 and 1994 as annual rental expense for the Mansfield Plant leases was $70 million. See Note 1(g). 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 $99 million, $98 million and $108 million in 1996, 1995 and 1994, respectively. We anticipate that this purchase will continue indefinitely. The future minimum lease payments through 2017 associated with Beaver Valley Unit 2 aggregate $1.265 billion. (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, 1996 includes the following facilities owned by the Company as a tenant in common with other utilities and Lessors:
Property, Plant and Ownership Equipment Megawatts (Exclusive of Accumulated Generating Unit (% Share) Nuclear Fuel) Depreciation - ------------------------ ---------- ------------- ----------- (millions of dollars) Seneca Pumped Storage___ 351 (80.00%) $ 65 $ 24 Eastlake Unit 5_________ 411 (68.80) 161 -- Davis-Besse_____________ 454 (51.38) 711 250 Perry Unit 1____________ 371 (31.11) 1,774 392 Beaver Valley Unit 2 and Common Facilities (Note 2)_____________________ 201 (24.47) 1,279 319 ------ ------ Total_____________ $ 3,990 $ 985 ====== ======
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 1997-2001 period is $624 million, including AFUDC of $17 million and excluding nuclear fuel. The Clean Air Act Amendments of 1990 (Clean Air Act) require, 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 1994 through 1996 in connection with Clean Air Act compliance amounted to $32 million. The plan will require additional capital expenditures over the 1997-2006 period of approximately $25 million for nitrogen oxide control equipment and other plant process modifications. In addition, higher fuel and other operation and maintenance expenses will be incurred. Recently proposed particulate and ozone ambient standards have the potential to increase future compliance costs. (b) 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 sites. The Company has accrued a liability totaling $7 million at December 31, 1996 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, cash flows or results of operations. See Management's Financial Analysis -- Outlook-Hazardous Waste Disposal Sites. F-20 87 (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, cash flows and results of operations. See the discussion of these and other risks in Management's Financial Analysis -- Outlook-Nuclear Operations. (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 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 for the generating units that they have an ownership or leasehold interest in. 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 $1.3 billion for Davis-Besse and $2.75 billion for each of the Perry and Beaver Valley sites as of January 1, 1997. 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, cash flows and results of operations. In addition, the Company can be assessed a maximum of $12 million under these policies 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. The total amount of financing currently available under these lease arrangements is $273 million ($173 million from intermediate-term notes and $100 million from bank credit arrangements). The intermediate-term notes mature in the 1997 through 2000 period. The bank credit arrangements terminate in October 1998. The special-purpose corporation may not need alternate financing in 1997 to replace $83 million of maturing intermediate-term notes. At December 31, 1996, $129 million of nuclear fuel was financed for the Company. 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 $49 million, $51 million and $18 million, respectively, at December 31, 1996. The nuclear fuel amounts financed and capitalized also included interest charges incurred by the lessors amounting to $3 million in 1996, $4 million in 1995 and $7 million in 1994. The estimated future lease amortization payments for the Company based on projected consumption are $52 million in 1997, $40 million in 1998, $38 million in 1999, $35 million in 2000 and $34 million in 2001. (7) REGULATORY MATTERS (a) REGULATORY ACCOUNTING REQUIREMENTS AND REGULATORY ASSETS The Company is subject to the provisions of SFAS 71 and has complied with its provisions. SFAS 71 provides, among other things, for the deferral of certain incurred costs that are probable of future recovery in rates. We 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 charge prices which allow it to recover operating costs, earn a fair return on invested capital and recover the amortization of regulatory assets and (2) a significant change in the manner in which rates are set by the PUCO from cost-based regulation to some other form of regulation. Regulatory assets F-21 88 represent probable future revenues to the Company associated with certain incurred costs, which it will recover from customers through the rate-making process. Effective January 1, 1996, the Company adopted SFAS 121 which imposes stricter criteria for carrying regulatory assets than SFAS 71 by requiring that such assets be probable of recovery at each balance sheet date. The criteria under SFAS 121 for plant assets require such assets to be written down if the book value exceeds the projected net future undiscounted cash flows. Regulatory assets in the Balance Sheet are as follows:
December 31, --------------- 1996 1995 ------ ------ (millions of dollars) Amounts due from customers for future federal income taxes, net__________________________ $ 634 $ 651 Unamortized loss on reacquired debt__________ 58 61 Pre-phase-in deferrals*______________________ 320 331 Rate Stabilization Program deferrals_________ 300 313 Other________________________________________ 38 42 ------ ------ Total____________________________________ $1,350 $1,398 ====== ======
* 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, 1996, customer rates provide for recovery of all the above regulatory assets. The remaining recovery periods for about $1.2 billion of the regulatory assets approximate 30 years. The remaining recovery periods for the rest of the regulatory assets generally range from about two to 20 years. Regulatory liabilities in the Balance Sheet at December 31, 1996 and 1995 totaled $24 million and $17 million, respectively. (b) RATE ORDER On April 11, 1996, the PUCO issued an order for the Company and Toledo Edison granting price increases aggregating $119 million in annualized revenues ($84 million for the Company and $35 million for Toledo Edison). The PUCO rate order provided for recovery of all costs to provide regulated services, including amortization of regulatory assets, in the approved prices. The new prices were implemented in late April 1996. The average price increase for the Company's customers was 4.9% with the actual percentage increase depending upon the customer class. The Company and Toledo Edison intend to freeze prices through at least 2002, although they are not precluded from requesting further price increases. The PUCO also recommended that the Company and Toledo Edison reduce the value of their assets for regulatory purposes by an aggregate $1.25 billion through 2001. This represents an incremental reduction beyond the normal level in nuclear plant and regulatory assets. Implementation of the price increases was not contingent upon a revaluation of assets. The PUCO invited the Company and Toledo Edison to file a proposal to effectuate the PUCO's recommendation and expressed a willingness to consider alternatives to its recommendation. The PUCO stated in its order that failure by the Company and Toledo Edison to follow the recommendation could result in a PUCO-ordered write-down of assets for regulatory purposes. The PUCO approved a return on common stock equity of 12.59% and an overall rate of return of 10.06% for both companies. However, the PUCO also indicated the authorized return could be lowered by the PUCO if the Company and Toledo Edison do not implement the recommendation. In August 1996, various intervenors appealed the PUCO rate order to the Ohio Supreme Court. The Company and Toledo Edison did not appeal the order to the Ohio Supreme Court. In connection with the PUCO order discussed in Management's Financial Analysis -- Outlook-FirstEnergy Rate Plan, certain parties agreed to request a stay of their appeals until completion of the pending merger with Ohio Edison. (c) ASSESSMENT The Company and Toledo Edison agree with the concept of accelerating the recognition of costs and recovery of assets as such concept is consistent with the strategic objective to become more competitive. However, the Company and Toledo Edison believe that such acceleration must also be consistent with the reduction of debt and the opportunity for Centerior Energy common stock share owners to receive a fair return on their investment. Consideration of whether to implement a plan responsive to the PUCO's recommendation to revalue assets by $1.25 billion is pending the merger with Ohio Edison. We have evaluated the Company's markets, regulatory conditions and ability to bill and collect the approved prices, and conclude that the Company continues to comply with the provisions of SFAS 71 and its regulatory assets remain probable of recovery. If there is a change in our evaluation of the competitive environment, regulatory framework or other factors, or if the PUCO significantly reduces the value of the Company's assets or reduces the approved return on common stock equity of 12.59% and overall rate of return of 10.06%, or both, for future regulatory purposes, the Company may be required to record material charges to earnings. In particular, if we determine that the Company no longer meets the criteria for SFAS 71, the Company would be required to record a before-tax charge to write off the regulatory assets shown above. In the more likely event that only a portion of operations (such as nuclear operations) no longer meets the criteria of SFAS 71, a write-off would be limited to regulatory assets that are not reflected in the Company's cost-based prices established for the remaining regulated F-22 89 operations. 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 to some or all of the Company's operations would also result in a write-down of property, plant and equipment pursuant to SFAS 121. See Management's Financial Analysis -- Outlook-FirstEnergy Rate Plan for a discussion of a regulatory plan for the Company and Toledo Edison and its effect on their compliance with SFAS 71. (d) RATE STABILIZATION PROGRAM The Rate Stabilization Program that the PUCO approved in October 1992 allowed the Company to defer and subsequently amortize and recover certain costs not being recovered in rates at that time. Recovery of both the costs no longer being deferred and the amortization of the 1992-1995 deferrals began in late April 1996 with the implementation of the price increase granted by the PUCO as discussed above. The cost deferrals recorded in 1995 and 1994 pursuant to the Rate Stabilization Program were $76 million and $70 million, respectively. The amortization of the deferrals began in December 1995. The total amortization was $12 million and $1 million in 1996 and 1995, respectively. The regulatory accounting measures under the Rate Stabilization Program also provided for the accelerated amortization of certain benefits during the 1992-1995 period. The total annual amount of such accelerated benefits was $28 million in both 1995 and 1994. (8) FEDERAL INCOME TAX The components of federal income tax expense recorded in the Income Statement were as follows:
1996 1995 1994 ---- ---- ---- (millions of dollars) Operating Expenses: Current______________________________ $ 55 $49 $ 53 Deferred_____________________________ 20 45 29 ---- ---- ---- Total Charged to Operating Expenses_________________________ 75 94 82 ---- ---- ---- Nonoperating Income: Current______________________________ (11) (9) (17) Deferred_____________________________ 5 11 21 ---- ---- ---- Total Expense (Credit) to Nonoperating Income______________ (6) 2 4 ---- ---- ---- Total Federal Income Tax Expense_______ $ 69 $96 $ 86 ==== ==== ====
The deferred federal income tax expense results from the temporary differences that arise from the different years when certain expenses are recognized for tax purposes as opposed to financial reporting purposes. Such temporary differences relate principally to depreciation and deferred operating expenses and carrying charges. Federal income tax, computed by multiplying income before taxes by the 35% statutory rate, is reconciled to the amount of federal income tax recorded on the books as follows:
1996 1995 1994 ---- ---- ---- (millions of dollars) Book Income Before Federal Income Tax__ $186 $280 $271 ---- ---- ---- Tax on Book Income at Statutory Rate___ $ 65 $ 98 $ 95 Increase (Decrease) in Tax: Depreciation_________________________ 8 8 6 Rate Stabilization Program___________ -- (18) (18) Other items__________________________ (4) 8 3 ---- ---- ---- Total Federal Income Tax Expense_______ $ 69 $ 96 $ 86 ==== ==== ====
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 Nuclear Power Plant Unit 2 (Perry Unit 2) abandonment was recognized in 1994 and resulted in a $204 million loss with a corresponding $71 million reduction in federal income tax liability. Because of the alternative minimum tax (AMT), $40 million of the $71 million was realized in 1994. The remaining $31 million will not be realized until 1999. Additionally, a repayment of approximately $29 million of previously allowed investment tax credits was recognized in 1994. Under SFAS 109, temporary differences and carryforwards resulted in deferred tax assets of $420 million and deferred tax liabilities of $1.726 billion at December 31, 1996 and deferred tax assets of $425 million and deferred tax liabilities of $1.723 billion at December 31, 1995. These are summarized as follows:
December 31, --------------- 1996 1995 ------ ------ (millions of dollars) Property, plant and equipment________________ $1,482 $1,468 Deferred carrying charges and operating expenses___________________________________ 134 139 Net operating loss carryforwards_____________ (26) (67) Investment tax credits_______________________ (95) (99) Sale and leaseback transactions______________ (121) (123) Other________________________________________ (68) (20) ------ ------ Net deferred tax liability_______________ $1,306 $1,298 ====== ======
For tax purposes, net operating loss (NOL) carryforwards of approximately $74 million are available to reduce future taxable income and will expire in 2009. The 35% tax effect of the NOLs is $26 million. Additionally, AMT credits of $174 million that may be carried forward indefinitely are available to reduce future tax. F-23 90 (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. Pension costs (credits) for Centerior Energy and its subsidiaries for 1994 through 1996 were comprised of the following components:
1996 1995 1994 ---- ---- ---- (millions of dollars) Service cost for benefits earned during the period___________________________ $ 13 $ 10 $ 13 Interest cost on projected benefit obligation___________________________ 28 26 26 Actual return on plan assets___________ (50) (53) (2) Net amortization and deferral__________ 2 9 (34) --- --- --- Net costs (credits)__________________ $ (7) $ (8) $ 3 === === ===
Pension costs (credits) for the Company and its pro rata share of the Service Company's costs were $(5) million for both 1996 and 1995, and $2 million for 1994. 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, ------------- 1996 1995 ---- ---- (millions of dollars) Actuarial present value of benefit obligations: Vested benefits___________________________ $326 $304 Nonvested benefits________________________ 16 2 ---- ---- Accumulated benefit obligation__________ 342 306 Effect of future compensation levels______ 53 54 ---- ---- Total projected benefit obligation______ 395 360 Plan assets at fair market value____________ 421 394 ---- ---- Funded status___________________________ 26 34 Unrecognized net gain from variance between assumptions and experience________________ (56) (68) Unrecognized prior service cost_____________ 14 15 Transition asset at January 1, 1987 being amortized over 19 years___________________ (32) (36) ---- ---- Net accrued pension liability___________ $(48) $(55) ==== ====
A September 30 measurement date was used for 1996 and 1995 reporting. At December 31, 1996, the settlement (discount) rate and long-term rate of return on plan assets assumptions were 7.75% and 11%, respectively. The long-term rate of annual compensation increase assumption was 3.5% for 1997 and 4% thereafter. At December 31, 1995, the settlement rate and long-term rate of return on plan assets assumptions were 8% and 11%, respectively. The long-term rate of annual compensation increase assumption was 3.5% for 1996 and 1997 and 4% thereafter. At December 31, 1996 and 1995, the Company's net prepaid pension cost included in Regulatory and Other Assets -- Other in the Balance Sheet was $15 million and $11 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. Under SFAS 106, the accounting standard for postretirement benefits other than pensions, the expected costs of such benefits are accrued during the employees' years of service. The components of the total postretirement benefit costs for 1994 through 1996 were as follows:
1996 1995 1994 ---- ---- ---- (millions of dollars) Service cost for benefits earned during the period___________________________ $ 1 $ 1 $ 1 Interest cost on accumulated postretirement benefit obligation____ 12 11 11 Amortization of transition obligation at January 1, 1993 of $104 million over 20 years________________________ 5 5 5 Amortization of gain___________________ -- (1) -- --- --- --- Total costs $18 $16 $17 === === ===
These amounts included costs for the Company and its pro rata share of the Service Company's costs. 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, ------------- 1996 1995 ----- ----- (millions of dollars) Accumulated postretirement benefit obligation attributable to: Retired participants_______________________ $(108) $(124) Fully eligible active plan participants____ (3) (2) Other active plan participants_____________ (21) (19) ----- ----- Accumulated postretirement benefit obligation_____________________________ (132) (145) Unrecognized net gain from variance between assumptions and experience_________________ (31) (12) Unamortized transition obligation____________ 74 79 ----- ----- Accrued postretirement benefit cost______ $ (89) $ (78) ===== =====
The Balance Sheet classification of Retirement Benefits at December 31, 1996 and 1995 includes only the Company's accrued postretirement benefit cost of $73 million and $65 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 measurement date was used for 1996 and 1995 reporting. At December 31, 1996 and 1995, the settlement rate and the long-term rate of annual compen- F-24 91 sation increase assumptions were the same as those discussed for pension reporting in Note 9(a). At December 31, 1996, the assumed annual health care cost trend rates (applicable to gross eligible charges) were 7.5% for medical and 7% for dental in 1997. 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, 1996 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 a coal supplier under a long-term coal supply contract. At December 31, 1996, the principal amount of the loan and lease obligations guaranteed by the Company under the contract was $19 million. The prices under the contract which includes certain minimum payments are sufficient to satisfy the loan and lease obligations and mine closing costs over the life of the contract. If the 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. See Management's Financial Analysis -- Outlook-FirstEnergy Rate Plan. (11) CAPITALIZATION (a) CAPITAL STOCK TRANSACTIONS Preferred stock shares retired during the three years ended December 31, 1996 are listed in the following table.
1996 1995 1994 ---- ---- ---- (thousands of shares) Subject to Mandatory Redemption: $ 7.35 Series C___________________ (10) (10) (10) 88.00 Series E___________________ (3) (3) (3) Adjustable Series M_______________ -- (100) (100) 9.125 Series N__________________ (150) (111) (189) 91.50 Series Q___________________ (11) (11) -- 90.00 Series S___________________ -- (1) -- Not Subject to Mandatory Redemption: Adjustable Series L_______________ (26) -- -- ---- ---- ----- Total___________________________ (200) (236) (302) ==== ==== =====
(b) EQUITY DISTRIBUTION RESTRICTIONS Federal law prohibits the Company from paying dividends out of capital accounts. The Company has since 1993 declared and paid preferred and common stock dividends out of appropriated current net income included in retained earnings. At the times of such declarations and payments, the Company had a deficit in its retained earnings. At December 31, 1996, the Company had $130 million of appropriated retained earnings for the payment of dividends. See Management's Financial Analysis -- Capital Resources and Liquidity-Liquidity. (c) PREFERRED AND PREFERENCE STOCK Amounts to be paid for preferred stock which must be redeemed during the next five years are $30 million in 1997, $15 million in 1998, $33 million in both 1999 and 2000, and $80 million in 2001. 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 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 1995, the Company purchased 1,000 shares of Serial Preferred Stock, $90.00 Series S, which reduces the 2002 redemption requirement shown in the above table. The annualized preferred dividend requirement at December 31, 1996 was $38 million. The preferred dividend rate on the Company's Series L fluctuates based on prevailing interest rates and market conditions. The dividend rate for this issue was 7% in 1996. 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 which matures or is subject to put options during the next five years is as follows: $115 million in 1997, $68 million in 1998, $149 million in 1999, $5 million in 2000 and $62 million in 2001. 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. Certain credit agreements of the Company contain covenants relating to fixed charge coverage ratios and limitations on secured financing other than through first F-25 92 mortgage bonds or certain other transactions. The Company was in compliance with all such covenants as of December 31, 1996. The Company and Toledo Edison have letters of credit in connection with the sale and leaseback of Beaver Valley Unit 2 that expire in June 1999. The letters of credit are in an aggregate amount of approximately $225 million and are secured by first mortgage bonds of the Company and Toledo Edison in the proportion of 40% and 60%, respectively. (12) SHORT-TERM BORROWING ARRANGEMENTS Centerior Energy has a $125 million revolving credit facility through May 1997. 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 credit agreement is secured with first mortgage bonds of the Company and Toledo Edison in the proportion of 40% and 60%, respectively. The credit agreement also 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, 1996. Also, the Company and Toledo Edison may borrow from each other on a short-term basis. At December 31, 1996, the Company had total short-term borrowings of $112 million from its affiliates with a weighted average interest rate of 6.18%. (13) FINANCIAL INSTRUMENTS The estimated fair values at December 31, 1996 and 1995 of financial instruments that do not approximate their carrying amounts in the Balance Sheet are as follows:
December 31, ---------------------------------- 1996 1995 ---------------- ---------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ------ -------- ------ (millions of dollars) Capitalization and Liabilities: Preferred Stock, with Mandatory Redemption Provisions_________________ $ 216 $ 220 $ 245 $ 232 Long-Term Debt_______________ 2,562 2,630 2,819 2,824
Noncash investments in the Nuclear Plant Decommissioning Trusts are summarized in the following table. In 1996, the Company and Toledo Edison transferred the bulk of their investment assets in existing trusts into Centerior Energy pooled trust funds for the two companies. The December 31, 1996 amounts in the table represent the Company's pro rata share of the fair value of such noncash investments.
December 31, -------------- 1996 1995 ---- ---- (millions of dollars) Type of Securities: Debt Securities: Federal Government_____________________ $14 $26 Municipal______________________________ -- 14 Other__________________________________ 5 -- --- --- 19 40 Equity Securities________________________ 56 -- --- --- Total________________________________ $75 $40 === === Maturities of Debt Securities: Due within one year______________________ $-- $ 1 Due in one to five years_________________ 10 12 Due in six to 10 years___________________ 4 13 Due after 10 years_______________________ 5 14 --- --- Total________________________________ $19 $40 === ===
The fair value of these trusts is estimated based on the quoted market prices for the investment securities and approximates the carrying 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, 1996 and 1995 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, 1996.
Quarters Ended ---------------------------------------- March 31, June 30, Sept. 30, Dec. 31, --------- -------- --------- -------- (millions of dollars) 1996 Operating Revenues______ $428 $434 $506 $422 Operating Income________ 76 86 121 76 Net Income______________ 17 25 59 16 Earnings Available for Common Stock__________ 7 15 49 6 1995 Operating Revenues______ $410 $424 $ 526 $408 Operating Income________ 85 91 145 77 Net Income______________ 34 38 90 23 Earnings Available for Common Stock__________ 23 27 80 12
Earnings for the quarter ended September 30, 1996 were decreased by $11 million as a result of a $17 million charge for the disposition of materials and supplies inventory. The sale and disposal of inventory was part of the reengineering of the supply chain process. (15) PENDING MERGER OF CENTERIOR ENERGY AND OHIO EDISON On September 13, 1996, Centerior Energy and Ohio Edison entered into an agreement and plan of merger to F-26 93 form a new holding company, FirstEnergy. Following the merger, FirstEnergy will directly hold all of the issued and outstanding common stock of the Company, Toledo Edison and Ohio Edison. As a result of the merger, the common stock share owners of Centerior Energy and Ohio Edison will own all of the issued and outstanding shares of FirstEnergy common stock. Centerior Energy share owners will receive 0.525 of a share of FirstEnergy common stock for each share of Centerior Energy common stock owned. Ohio Edison share owners will receive one share of FirstEnergy common stock for each share of Ohio Edison common stock owned. FirstEnergy plans to account for the merger as a purchase in accordance with generally accepted accounting principles. If FirstEnergy elects to apply, or "push down", the effects of purchase accounting to the financial statements of the Company and Toledo Edison, the Company and Toledo Edison would record adjustments to: (1) reduce the carrying value of nuclear generating plant by $1.25 billion to fair value; (2) recognize goodwill of $865 million; (3) reduce common stock equity by $401 million; (4) reset retained earnings of the Company and Toledo Edison to zero; and (5) reduce the related deferred federal income tax liability by $438 million. These amounts reflect FirstEnergy's estimates of the pro forma combined adjustments for the Company and Toledo Edison as of September 30, 1996. The actual adjustments to be recorded could be materially different from these estimates. FirstEnergy has not decided whether to push down the effects of purchase accounting to the financial statements of the Company and Toledo Edison if the merger with Ohio Edison is completed, nor has FirstEnergy estimated the allocations between the two companies if push-down accounting is elected. In addition to the approvals by the share owners of Centerior Energy and Ohio Edison common stock, various aspects of the merger are subject to the approval of the FERC and other regulatory authorities. A rate reduction and economic development plan for the Company and Toledo Edison has been approved by the PUCO. From the date of consummation of the merger through 2006, the plan provides for rate reductions, frozen fuel cost factors, economic development incentive prices, an energy-efficiency program, an earnings cap and an accelerated reduction in nuclear and regulatory assets for regulatory purposes. The plan will require the Company and Toledo Edison to write off certain regulatory assets at the time the merger becomes probable, which is expected to be after obtaining the aforementioned approvals of the merger. The write-off amounts for the Company and Toledo Edison to be charged against earnings, estimated by FirstEnergy to total approximately $750 million, will be determined based upon the plan's regulatory accounting and cost recovery details to be submitted by FirstEnergy to the PUCO staff for approval. The Company's share of the write-off is expected to be about two-thirds of this amount. If the merger is not consummated, the plan would be null and void. See Management's Financial Analysis -- Outlook-Pending Merger with Ohio Edison and - -FirstEnergy Rate Plan for a discussion of the proposed merger and the plan. (16) PENDING MERGER OF TOLEDO EDISON INTO THE COMPANY In March 1994, Centerior Energy announced a plan to merge Toledo Edison into the Company. The merger agreement between Centerior Energy and Ohio Edison requires the approval of Ohio Edison prior to consummation of the proposed merger of Toledo Edison into the Company. Ohio Edison has not yet made a decision. All necessary regulatory approvals have been obtained, except the NRC's approval. This application was withdrawn at the NRC's request pending Ohio Edison's decision whether to complete this merger. In June 1995, share owners of Toledo Edison's preferred stock approved the merger and share owners of the Company's preferred stock approved the authorization of additional shares of preferred stock. If and 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. For the merging companies, the combined pro forma operating revenues were $2.554 billion, $2.516 billion and $2.422 billion and the combined pro forma net income was $174 million, $281 million and $268 million for the years 1996, 1995 and 1994, 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 does not reflect any potential effects related to the consummation of the Centerior Energy and Ohio Edison merger. The pro forma data should be read in conjunction with the audited financial statements of both the Company and Toledo Edison. F-27 94 FINANCIAL AND STATISTICAL REVIEW OPERATING REVENUES (millions of dollars)
Total Total Steam Year Residential Commercial Industrial Other Retail Wholesale Electric Heating - ---------------------------------------------------------------------------------------------------------------------- 1996 --------- $ 562 571 524 88 1 745 45 1 790 -- 1995 --------- 559 563 523 93 1 738 31 1 769 -- 1994 --------- 531 541 508 98 1 678 20 1 698 -- 1993 --------- 539 536 510 98 1 683 68 1 751 -- 1992 --------- 517 531 530 101 1 679 64 1 743 -- 1986 --------- 410 383 461 61 1 315 8 1 323 13 - ---------------------------------------------------------------------------------------------------------------------- Total Operating Year Revenues - -------------------------------------------- 1996 --------- $ 1 790 1995 --------- 1 769 1994 --------- 1 698 1993 --------- 1 751 1992 --------- 1 743 1986 --------- 1 336 - --------------------------------------------
OPERATING EXPENSES (millions of dollars)
Other Generation Amortization of Fuel & Operation Facilities Depreciation Taxes, Deferred Federal Purchased & Rental & Other Than Operating Income Year Power Maintenance Expense, Net Amortization FIT Expenses, Net Taxes - --------------------------------------------------------------------------------------------------------------------------- 1996 --------- $ 408 426 56 210 230 26 75 1995 --------- 413 418 56 196 230 (36) 94 1994 --------- 391 394 56 195 218 (34) 82 1993 --------- 423 598(a) 56 182 221 27(b) 22 1992 --------- 434 410 55 179 226 (35) 89 1986 --------- 372 388 -- 103 144 -- 97 - --------------------------------------------------------------------------------------------------------------------------- Total Operating Year Expenses - ---------------------------------------------------------- < 1996 --------- $ 1 431 1995 --------- 1 371 1994 --------- 1 302 1993 --------- 1 529 1992 --------- 1 358 1986 --------- 1 104 - ----------------------------------------------------------
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 - --------------------------------------------------------------------------------------------------- 1996 --------- $ 359 2 (10) -- 6 $ 357 1995 --------- 398 2 2 29 (2) 429 1994 --------- 396 4 6 25 (4) 427 1993 --------- 222 4 (356)(c) (487)(b) 270 (347) 1992 --------- 385 1 8 59 (5) 448 1986 --------- 232 179 (7) -- 65 469 - ---------------------------------------------------------------------------------------------------
INCOME (LOSS) (millions of dollars)
Earnings Preferred & (Loss) Net Preference Available for Debt AFUDC-- Income Stock Common Year Interest Debt (Loss) Dividends Stock - ----------------------------------------------------------------------------------- 1996 --------- $ 242 (2) 117 39 $ 78 1995 --------- 248 (3) 184 43 141 1994 --------- 247 (5) 185 45 140 1993 --------- 244 (4) (587) 45 (632) 1992 --------- 243 -- 205 41 164 1986 --------- 232 (63) 300 40 260 - -----------------------------------------------------------------------------------
(a) Includes early retirement program expenses and other charges of $165 million. (b) Includes write-off of phase-in deferrals of $636 million, consisting of $117 million of deferred operating expenses and $519 million of deferred carrying charges. F-28 95 The Cleveland Electric Illuminating Company and Subsidiaries
ELECTRIC SALES (millions of KWH) ELECTRIC CUSTOMERS (thousands at year end) Industrial Year Residential Commercial Industrial Wholesale Other Total Residential Commercial & Other - -------------------------------------------------------------------- ------------------- ------------------------------------------ 1996 --- 4 958 5 908 7 977 2 155 522 21 520 663 71 7 1995 --- 5 063 5 946 7 994 1 694 550 21 247 670 72 7 1994 --- 4 924 5 770 7 970 1 073 575 20 312 668 72 7 1993 --- 4 934 5 634 7 911 2 290 532 21 301 669 71 8 1992 --- 4 725 5 467 7 988 1 989 533 20 702 670 71 8 1986 --- 4 586 4 744 7 927 121 460 17 838 651 63 9 - -------------------------------------------------------------------- ------------------- ------------------------------------------ ELECTRIC CUSTOMERS RESIDENTIAL USAGE (thousands at year end) Average Average Average Price Revenue KWH Per Per Per Year Total Customer KWH Customer - --------------------- ---------------------------------- 1996 --- 741 7 451 11.34cent $845.12 1995 --- 749 7 570 11.04 835.40 1994 --- 747 7 370 10.79 795.11 1993 --- 748 7 373 10.93 805.68 1992 --- 749 7 071 10.94 773.77 1986 --- 723 6 810 8.94 611.34 - --------------------- ----------------------------------
LOAD (MW & %) ENERGY (millions of KWH) FUEL Net Company Generated Seasonal Peak Capacity Load ----------------------------- Purchased Fuel Cost Year Capability Load Margin Factor Fossil(d) Nuclear Total Power Total Per KWH - -------------------------------------------------------- ----------------------------------------------------------- ---------- 1996 ------ 3 922 3 938 (0.4)% 60.6% 14 411 6 829 21 240 1 640 22 880 1.35cent 1995 ------ 4 273 4 049 5.2 58.8 12 684 8 175 20 859 1 673 22 532 1.42 1994 ------ 4 500 3 740 16.9 62.4 12 840 6 405 19 245 2 022 21 267 1.35 1993 ------ 4 500 3 862 14.2 59.9 15 557 5 644 21 201 1 454 22 655 1.37 1992 ------ 4 704 3 605 23.4 63.0 12 715 7 521 20 236 1 649 21 885 1.47 1986 ------ 3 775 3 601 4.6 62.2 16 151 12 16 163 2 984 19 147 1.78 - ---------------------------------------------------------------------------------------------------------------------------------- FUEL BTU Per Year KWH - ------------------------- 1996 ------ 10 357 1995 ------ 10 504 1994 ------ 10 538 1993 ------ 10 339 1992 ------ 10 456 1986 ------ 10 464 - -------------------------
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 - ----------------------------------------------------------------------------------------------- ----------- ------- 1996 ------ $6 938 2 252 4 686 57 167 $ 4 910 $ 111 $6 878 1995 ------ 6 872 2 094 4 778 73 180 5 031 155 7 152 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 1986 ------ 3 197 952 2 245 3 013 384 5 642 671 6 155 - -----------------------------------------------------------------------------------------------------------------------
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 - ------------------------------------------------------------------------------------------------------- 1996 ------ $1 045 27% 186 5% 238 6% 2 441 62% $3 910 1995 ------ 1 127 26 215 5 241 6 2 666 63 4 249 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 1986 ------ 1 844 40 339 7 144 3 2 311 50 4 638 - -------------------------------------------------------------------------------------------------------
(c) Includes write-off of Perry Unit 2 of $351 million. (d) Reduced by net energy used by the Seneca Pumped Storage Plant for pumping. F-29 96 TOLEDO EDISON FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996 F-30 97 MANAGEMENT'S FINANCIAL ANALYSIS OUTLOOK STRATEGIC PLAN In early 1994, Centerior Energy Corporation (Centerior Energy), along with The Toledo Edison Company (Company) and The Cleveland Electric Illuminating Company (Cleveland Electric), created a strategic plan to achieve the twin goals of strengthening their financial conditions and improving their competitive positions. The Company and Cleveland Electric are the two wholly owned electric utility subsidiaries of Centerior Energy. The plan's objectives relate to the combined operations of all three companies. To meet these goals, we seek to maximize share owner return on Centerior Energy common stock, achieve profitable revenue growth, become a leader in customer satisfaction, build a winning employee team and attain increasingly competitive supply costs. During 1996, the third year of the eight-year plan, we made strong gains toward reaching some plan objectives but need significant improvement on others. A major step taken to reach the twin goals was Centerior Energy's agreement to merge with Ohio Edison Company (Ohio Edison) to form a new holding company called FirstEnergy Corp. (FirstEnergy). The proposed merger, combined with good operating performance, a successful price increase and the accelerated paydown of debt, resulted in a significant stock price gain, such that the total return to Centerior Energy common stock share owners during 1996 was 33%. The merger is expected to better position the merged companies to meet coming competitive challenges. Revenue growth is a key objective of the plan, from pricing actions as well as market expansion. In April 1996, The Public Utilities Commission of Ohio (PUCO) approved in full the $119 million price increases requested by the Company and Cleveland Electric ($35 million and $84 million, respectively). The primary purpose of the increases was to provide additional revenues to recover all the costs of providing electric service, including deferred costs, and provide a fair return to Centerior Energy common stock share owners. The additional revenues also provided cash to accelerate the redemption of debt and preferred stock. Kilowatt-hour sales to the Company's retail customers increased by 1.6% compared to 1995 results as sales to industrial and commercial customers increased by 3% and 2.4%, respectively. Adjusted for weather, kilowatt-hour sales to commercial and residential customers increased by 4.7% and 1%, respectively. Another key element of our revenue strategy is to offer long-term contracts to large industrial customers who might otherwise consider changing power suppliers. During 1996, we renewed and extended for seven to ten years contracts with many of our large industrial customers, including the six largest. While this strategy has resulted in lower prices for these customers, in the long run, it is expected to maximize share owner value by retaining our customer base in a changing industry. Prior to these renewals, 94% of our industrial base rate (nonfuel) revenues under contract was scheduled for renewal before 1999. Following the renewals, the comparable percentage is 19%. At year-end 1996, 61% of our industrial base rate revenues was under long-term contracts. Northwest Ohio is recognized as one of the nation's leading areas in job creation and economic growth. New and expanded operations at businesses such as Delafoil/Phillips and Alcoa, as well as the development surrounding a new, major North Star BHP Steel facility, are adding to our opportunities for revenue growth. In 1996, we gained commitments on 23 economic development projects, representing almost $5 million in new and retained annual base rate revenues and over 3,000 new and retained jobs for Northwest Ohio. Under the strategic plan, Centerior Energy and its subsidiaries are structured in six strategic business groups to better focus on competitiveness. During 1996, the Company reduced employment from about 1,800 to 1,600. Further reduction in our work force to about 1,400 is planned by year-end 1997. We also plan to reduce expenditures for operation and maintenance activities (exclusive of fuel and purchased power expenses) and capital projects from $384 million in 1996 to approximately $360 million in 1997 by continuing to streamline operations. We will continue to reduce our unit cost of fuel used for generating electricity, while safely improving the operating performance of our generation facilities. Reducing fixed financing costs is another primary objective in strengthening the Company's financial and competitive position. In 1996, we reduced our fixed obligations for debt, preferred stock and generation facilities leases by $82 million. See Note 2. Interest expense and preferred dividends dropped $16 million. In the last three years, fixed obligations were reduced by $277 million. In 1996, we reported earnings available for common stock of $40 million compared to $79 million in 1995. The reported decrease masks a $5 million increase in basic earnings from operations and a significant improvement in the quality of reported earnings. The decline in reported earnings is primarily attributable to the delay in implementing our price increase until late April, while we began at the end of 1995 to charge earnings for operating expenses and amortization of deferrals which the price increase was designed to recover. The price increase contributed approximately $14 million (after tax) more cash to our earnings in 1996. The change in regulatory accounting measures resulted in a $47 million decrease in reported earnings for 1996 versus 1995. In addition, 1996 results included noncash charges against earnings of $11 million after tax for the disposition of inventory and write-down of inactive production facilities. The full benefit of our $35 million price increase, substantial reductions in operation and maintenance expenses and a continuing decline in interest charges are expected to result in improvement in earnings and cash flow from operations in 1997. F-31 98 PENDING MERGER WITH OHIO EDISON On September 16, 1996, Centerior Energy announced its merger with Ohio Edison in a stock-for-stock transaction. Centerior Energy share owners will receive 0.525 of a share of FirstEnergy common stock for each share of Centerior Energy common stock owned, while Ohio Edison share owners will receive one share of FirstEnergy common stock for each share of Ohio Edison common stock owned. Following the merger, FirstEnergy will directly hold all of the issued and outstanding common stock of the Company, Cleveland Electric and Ohio Edison. FirstEnergy plans to account for the merger as a purchase in accordance with generally accepted accounting principles. If FirstEnergy elects to apply, or "push down", the effects of purchase accounting to the financial statements of the Company and Cleveland Electric, the Company and Cleveland Electric would record adjustments to: (1) reduce the carrying value of nuclear generating plant by $1.25 billion to fair value; (2) recognize goodwill of $865 million; (3) reduce common stock equity by $401 million; (4) reset retained earnings of the Company and Cleveland Electric to zero; and (5) reduce the related deferred federal income tax liability by $438 million. These amounts reflect FirstEnergy's estimates of the pro forma combined adjustments for the Company and Cleveland Electric as of September 30, 1996. The actual adjustments to be recorded could be materially different from these estimates. FirstEnergy has not decided whether to push down the effects of purchase accounting to the financial statements of the Company and Cleveland Electric if the merger with Ohio Edison is completed, nor has FirstEnergy estimated the allocations between the two companies if push-down accounting is elected. We believe that the merger will create a company that is better positioned to compete in the electric utility industry than either Centerior Energy or Ohio Edison could on a stand-alone basis, enhancing long-term share owner value and providing customers with reliable service at more stable and competitive prices. The combination of Centerior Energy and Ohio Edison is a natural alliance of two companies with adjoining service areas who already share many major generating units. FirstEnergy expects to reduce costs, maximize efficiencies and increase management flexibility in order to enhance revenues, cash flows and earnings and be a more effective competitor in the increasingly competitive electric utility industry. FirstEnergy anticipates the merger will result in net savings for the combined companies of approximately $1 billion over ten years, in addition to the impact of cost reduction programs underway at both companies. The additional savings, which probably could not be achieved without the merger, will result primarily from the reduction of duplicative functions and positions, joint dispatch of generating facilities and procurement efficiencies. FirstEnergy expects reductions in labor costs to comprise slightly over half the estimated savings. In addition, FirstEnergy expects to reduce system-wide debt by at least $2.5 billion through the year 2000, yielding additional long-term savings in the form of lower interest expense. The Company's share of the $1 billion of savings will permit the Company to reduce prices to its customers as discussed below under FirstEnergy Rate Plan. Absent the merger, the Company plans to achieve savings as well, but at a lower level, which is expected to allow prices to be frozen at current levels until at least 2002 despite inflationary pressures. Various aspects of the merger are subject to the approval of the Federal Energy Regulatory Commission (FERC) and other regulatory authorities. Common stock share owners of Centerior Energy and Ohio Edison are expected to vote on approval of the merger agreement on March 27, 1997. The merger must be approved by the affirmative votes of the share owners of at least two-thirds of the outstanding shares of Ohio Edison common stock and a majority of the outstanding shares of Centerior Energy common stock. The merger is expected to be effective in late 1997. FIRSTENERGY RATE PLAN On January 30, 1997, the PUCO approved a Rate Reduction and Economic Development Plan (Plan) for the Company and Cleveland Electric to be effective upon the consummation of the Centerior Energy and Ohio Edison merger. The Plan would be null and void if the merger is not consummated. The rate order granting the April 1996 price increase will remain in full force and effect during the pendency of the merger or if the merger is not consummated. The Plan calls for a base rate freeze through 2005 (except to comply with any significant changes in environmental, regulatory or tax laws), followed by an immediate $310 million (which represents a decrease of approximately 15% from current levels) base rate reduction in 2006 (the Company's share is expected to be $93 million); interim reductions beginning seven months after consummation of the merger of $3 per month increasing to $5 per month per residential customer by July 1, 2001; $105 million for economic development and energy efficiency programs (the Company's share is expected to be $35 million); earnings caps for regulatory purposes for the Company and Cleveland Electric; a commitment by FirstEnergy for a reduction, for regulatory accounting purposes, in nuclear and regulatory assets by the end of 2005 of at least $2 billion more than it otherwise would be, through revaluing facilities or accelerating depreciation and amortization; and a freeze in fuel cost factors until December 31, 2005, subject to PUCO review at year-end 2002 and annual inflation adjustments. The Plan permits the Company and Cleveland Electric to dispose of generating assets subject to notice and possible PUCO approval, and to enter into associated power purchase arrangements. Total price savings for the Company's customers of about $111 million are anticipated over the term of the Plan, as summarized below, excluding potential economic devel- F-32 99 opment benefits and assuming that the merger takes place on December 31, 1997. The total price savings for customers of the Company and Cleveland Electric are expected to be about $391 million.
Year Amount - -------------------------------------------------- ------------ (millions of dollars) 1998______________________________________________ $ 6 1999______________________________________________ 10 2000______________________________________________ 12 2001______________________________________________ 15 2002______________________________________________ 17 2003______________________________________________ 17 2004______________________________________________ 17 2005______________________________________________ 17 -------- Total_________________________________________ $111 ========
Under the Plan's earnings cap, the Company and Cleveland Electric will be permitted to earn up to an 11.5% return on common stock equity for regulatory purposes during calendar years prior to 2000, 12% during calendar years 2000 and 2001, and 12.59% during calendar years 2001 through 2005. The regulatory return on equity is generally expected to be lower than the return on equity calculated for financial reporting purposes due to the calculation methodology defined by the Plan and, as discussed in the next paragraph, anticipated differences in accounting for the Plan for financial reporting versus regulatory purposes. If for any calendar year the regulatory return on equity exceeds the specified level, the excess will be credited to customers, first through a reduction in Percentage of Income Payment Plan (PIPP) arrearages and then as a credit to base rates. PIPP is a deferred payment program for low-income residential customers. The Plan requires, for regulatory purposes, a revaluation of or an accelerated reduction in the investment in nuclear plant and certain regulatory assets of the Company and Cleveland Electric (excluding amounts due from customers for future federal income taxes) by at least $2 billion by the end of 2005. FirstEnergy has not yet determined each company's estimated share of the $2 billion. Only a portion of the $2 billion of accelerated costs is expected to be charged against the two companies' earnings for financial reporting purposes by 2005. FirstEnergy believes that the Plan will not provide for the full recovery of costs and a fair return on investment associated with the nuclear operations of the Company and Cleveland Electric. Pursuant to the PUCO's order, FirstEnergy is required to submit to the PUCO staff the regulatory accounting and cost recovery details for implementing the Plan. After approval of such details by the PUCO staff, FirstEnergy expects that the Company and Cleveland Electric will discontinue the application of Statement of Financial Accounting Standards (SFAS) 71 for their nuclear operations if and when consummation of the merger becomes probable. The remainder of their business is expected to continue to comply with the provisions of SFAS 71. At the time the merger is probable, the Company and Cleveland Electric would be required to write off certain of their regulatory assets for financial reporting purposes. The write-off amounts would be determined at that time. FirstEnergy estimates the write-off amounts for the Company and Cleveland Electric will total approximately $750 million. The Company's share of the write-off is expected to be about one-third of this amount. Under the Plan, some or all of this write-off cannot be applied toward the $2 billion regulatory commitment discussed above. For financial reporting purposes, nuclear generating units are not expected to be impaired. If events cause either the Company or Cleveland Electric or both companies to conclude they no longer meet the criteria for applying SFAS 71 for the remainder of their business, they would be required to write off their remaining regulatory assets and measure all other assets for impairment. For a discussion of the criteria for complying with SFAS 71, see Note 7(a). APRIL 1996 RATE ORDER In its April 1996 order, the PUCO granted price increases of $35 million and $84 million in annualized revenues to the Company and Cleveland Electric, respectively. The Company and Cleveland Electric intend to freeze rates at existing levels until at least 2002, although they are not precluded from requesting further price increases. In the order, the PUCO provided for recovery of all regulatory assets in the approved rates, and the Company and Cleveland Electric continue to comply with the provisions of SFAS 71. In connection with its order, the PUCO recommended that the Company and Cleveland Electric write down certain assets for regulatory purposes by an aggregate of $1.25 billion through 2001. If the merger is consummated, the Company and Cleveland Electric believe acceleration of $2 billion of costs under the Plan would fully satisfy this recommendation. The Company and Cleveland Electric agree with the concept of accelerating the recognition of costs and the recovery of assets as such concept is consistent with the strategic objective to become more competitive. However, the Company and Cleveland Electric believe that such acceleration must also be consistent with the reduction of debt and the opportunity for Centerior Energy common stock share owners to receive a fair return on their investment. Consideration of whether to implement a plan responsive to the PUCO's recommendation to revalue assets by $1.25 billion is pending the merger with Ohio Edison. Notwithstanding the pending merger with Ohio Edison and discussions with regulators concerning the effect of the Plan on the Company's nuclear generating assets, we believe it is reasonable to expect that rates will be set at levels that will recover all current and anticipated costs associated with the Company's nuclear operations, including all associated regulatory assets, and such rates can be charged to and collected from customers. If there is a change in our evaluation of the competitive environment, regulatory framework or other factors, or if the PUCO significantly reduces the value of the Company's assets or reduces the approved return on common stock equity of 12.59% and overall rate of return of 10.06%, or both, for future regulatory purposes, the Company may be required to record material charges to earnings. F-33 100 MERGER OF THE COMPANY INTO CLEVELAND ELECTRIC In October 1996, the FERC authorized the merger of the Company into Cleveland Electric. The merger agreement between Centerior Energy and Ohio Edison requires the approval of Ohio Edison prior to consummation of the proposed merger of the Company into Cleveland Electric. Ohio Edison has not yet made a decision. See Note 16. COMPETITION Structural changes in the electric utility industry from actions by both federal and state regulatory bodies are continuing to place downward pressure on prices and increase competition for customers. The Company's nuclear plant licenses have required open-access transmission for its wholesale customers for 20 years. More recently, the Federal Energy Policy Act of 1992 initiated broader access to utility transmission systems and, in 1996, the FERC adopted rules relating to open-access transmission services. The open-access rules require utilities to deliver power from other utilities or generation sources to their wholesale customers at nondiscriminatory prices. A number of states have enacted transition legislation which provides for introduction of competition for retail electric business and recovery of stranded investment. Several groups in Ohio are studying the possible introduction of retail wheeling and stranded investment recovery. Retail wheeling occurs when a customer obtains power from a utility company other than its local utility. The term "stranded investment" generally refers to fixed costs approved for recovery under traditional regulatory methods that would become unrecoverable, or "stranded", as a result of legislative changes which allow for widespread competition. The PUCO is sponsoring discussions among a group of business, utility and consumer interests to explore ways of promoting competitive options without unduly harming the interests of utility company share owners or customers. The PUCO also has introduced two pilot projects, both intended as initial steps to introduce competitive elements into the Ohio electric utility business. A bill to restructure the electric utility industry in Ohio has been introduced in the Ohio House of Representatives. A bipartisan committee from both legislative houses has been formed to study the issue. Centerior Energy presented the Company's model for customer choice, called Energy Choice, to the PUCO discussion group in August 1996. Under this model, full retail competition should be introduced by 2002, but two essential elements, recovery of stranded investment and levelization of tax burdens among energy suppliers, must be resolved in the interim to assure share owners' recovery of and a fair return on their investments. Although competitive pressures are increasing, the traditional regulatory framework remains in place and is expected to continue for the foreseeable future. We cannot predict when and to what extent retail wheeling or other forms of competition will be allowed. We believe that pure competition (unrestricted retail wheeling for all customer classifications) is at least several years away and that any transition to pure competition will be in phases. The FERC and the PUCO have acknowledged the need to provide at least partial recovery of stranded investment as greater competition is permitted and, therefore, we believe that there will be a mechanism developed for the recovery of at least some stranded investment. However, due to the uncertainty involved, there is a risk in connection with the introduction of retail wheeling that some of the Company's assets may not be fully recovered. Competition from municipal electric suppliers for retail business in our service area is producing both favorable and unfavorable results in our business. All existing customers in the City of Clyde now have the right to choose between the municipal supplier and the Company, as a result of a November 1996 referendum overturning a Clyde ordinance limiting such choice. In the City of Toledo, City Council funded a consultant's study of alternatives to our service. A draft of the consultant's report states that, if Centerior Energy and Ohio Edison merge, a municipal system in Toledo could not compete with the Company because of the rate reductions contained in the Plan approved by the PUCO. The consultant's draft report also states that, if the merger does not occur, a municipal system could be competitive with the Company in one portion of the City. However, errors have been found in the draft report which may change the content of the final consultant's report. The final report will be considered by the City's Electric Franchise Review Committee before making its recommendation to City Council later in 1997. Municipal expansion activity continues in areas surrounding several towns serviced by municipal systems in our service area. We continue to pursue legal remedies to halt illegal municipal expansion in our service area. The merger with Ohio Edison and the benefits of the Plan to our customers are expected to better position us to deal with the structural changes taking place in the industry and to improve our competitive position with respect to municipalization. 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) -- and operates the first one. Cleveland Electric operates Perry Unit 1. All three units were out of service temporarily for refueling during 1996; thus, plant availability factors for Davis-Besse, Perry Unit 1 and Beaver Valley Unit 2 were 85%, 76% and 70%, respectively, for 1996. The 1994-1996 availability factors for the units were 91%, 72%, and 85%, for Davis-Besse, Perry Unit 1 and Beaver Valley Unit 2, respectively. The comparable industry averages for a three-year period (as of August 31, 1996) are 82% for pressurized water reactors such as Davis-Besse and Beaver Valley Unit 2 and 78% for boiling water reactors such as Perry Unit 1. Davis-Besse established a plant record with its 509-day continuous run at or near full capacity F-34 101 before shutting down for its scheduled refueling outage in April 1996. A significant part of the strategic plan involves ongoing efforts to increase the availability and lower the cost of production of our nuclear units. In 1996, we continued our progress toward increasing long-term unit availability while continuing to lower production costs. The goal of our nuclear improvement program is for Cleveland Electric to replicate Davis-Besse's operational excellence and cost reduction gains at Perry Unit 1, while improving performance ratings. 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 (NRC) 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, cash flows and results of operations. Premature plant closings could also have a material adverse effect on our financial condition, cash flows and results of operations because the estimated cost to decommission a plant exceeds the current funding in the decommissioning trust. HAZARDOUS WASTE DISPOSAL SITES The Company is aware of its potential involvement in the cleanup of several sites. Although these sites are not on the Superfund National Priorities List, they are generally being administered by various governmental entities in the same manner as they would be administered if they were on such list. Allegations that the Company disposed of hazardous waste at these sites, and the amount involved, are often unsubstantiated and subject to dispute. Federal law provides that all "potentially responsible parties" (PRPs) for a particular site be held liable on a joint and several basis. If the Company were held liable for 100% of the cleanup costs of all the sites referred to above, the cost could be as high as $115 million. However, we believe that the actual cleanup costs will be substantially lower than $115 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 $3 million at December 31, 1996 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, cash flows or results of operations. A new Statement of Position issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants, Inc. effective January 1, 1997 provides guidance on the recognition and disclosure of environmental remediation liabilities. Adoption of the statement in 1997 is not expected to have a material adverse effect on our financial condition or results of operations. COMMON STOCK DIVIDENDS The Company has not paid a common stock dividend to Centerior Energy since February 1991. From 1993 through November 1996, the Company was prohibited from paying a common stock dividend by a provision in its mortgage. See Capital Resources and Liquidity-Liquidity below. The declaration and payment of future common stock dividends is at the discretion of the Company's Board of Directors, subject to applicable legal restrictions. CAPITAL RESOURCES AND LIQUIDITY 1994-1996 CASH REQUIREMENTS We need cash for normal corporate operations (including the payment of dividends), retirement of maturing securities, and an ongoing program of constructing and improving facilities to meet demand for electric service and to comply with government regulations. Our cash construction expenditures totaled $41 million in 1994, $53 million in 1995 and $47 million in 1996. Our debt and preferred stock maturities and sinking fund requirements totaled $57 million in 1994, $83 million in 1995 and $58 million in 1996. In addition, we optionally redeemed $184 million of securities in the 1994-1996 period, including $94 million of tax-exempt issues refunded in 1995. As discussed in Note 1(j), in May 1996, the Company and Cleveland Electric began to sell on a daily basis substantially all of their retail customer accounts receivables and unbilled revenue receivables to Centerior Funding Corporation (Centerior Funding), a wholly owned subsidiary of Cleveland Electric. In July 1996, Centerior Funding issued $150 million in AAA-rated accounts receivable-backed investor certificates due in 2001 with an interest rate of 7.2%. The Company's share of the net proceeds from the accounts receivable securitization was used to redeem higher-cost securities and for general corporate purposes. As a result of these activities, the embedded cost of the Company's debt at the end of 1996 declined to 9.13% versus 9.23% in 1995 and 9.48% in 1994. The Company is a party to a $125 million revolving credit facility which was renewed in May 1996 for a one-year term. In 1996, portions of the nuclear fuel lease financing vehicles for the Company and Cleveland Electric matured: $84 million of intermediate-term notes in September and a $150 million letter of credit supporting short-term borrowing in October. These facilities were replaced by $100 million of intermediate-term notes and a $100 million two-year letter of credit. The net reduction in the facility size results from lower nuclear fuel financing requirements. F-35 102 1997 AND BEYOND CASH REQUIREMENTS Our anticipated 1997 cash requirements for construction are $61 million. Debt and preferred stock maturities and sinking fund requirements are $51 million. Of this amount, $10 million are for a tax-exempt issue secured by first mortgage bonds and subject to optional tender by the owners on November 1, 1997, which we expect to replace with a similar issue at a substantially lower interest rate. We expect to meet remaining requirements with internal cash generation and cash reserves. We also expect to be able to optionally redeem more debt in 1997 than we did in 1996. We expect to meet all of our 1998-2001 cash requirements with internal cash generation. Estimated cash requirements for our construction program during this period total $213 million. Debt and preferred stock maturities and sinking fund requirements total $207 million for the same period. If economical, additional securities may be redeemed with funding expected to be provided through internal cash generation. Consummation of the merger with Ohio Edison is expected to reduce the Company's cash construction requirements and improve its ability to redeem fixed obligations. LIQUIDITY Net cash flow from operating activities in 1996 was significantly increased from 1995 by implementation of the price increase effective in April 1996. A part of the net proceeds from our accounts receivable securitization of $78 million was used to redeem other higher-cost securities, producing net savings in our overall cost of borrowing. In 1996, we reduced our fixed obligations for debt, preferred stock and generation facilities leases by $82 million. At year-end 1996, we had $81 million in cash and temporary cash investments, down from $94 million at year-end 1995. 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, 1996, the Company would have been permitted to issue approximately $148 million of additional first mortgage bonds. If FirstEnergy elects to apply purchase accounting to the Company if the merger with Ohio Edison is completed, the Company's first mortgage bond capacity would be adversely affected. There are no restrictions on the Company's ability to issue preference stock. Under its articles of incorporation, the Company cannot issue preferred stock unless certain earnings coverage requirements are met. Based on its 1996 earnings, the Company could not issue additional preferred stock. The Company and Cleveland Electric have $273 million in financing vehicles to support their nuclear fuel leases, $83 million of which mature in 1997. Replacement financing for the maturing issues may not be needed in 1997. The Company is a party to a $125 million revolving credit facility which is expected to be renewed when it matures in May 1997. Current credit ratings for the Company are as follows:
Standard Moody's & Poor's Investors Corporation Service, Inc. ----------- ------------- First mortgage bonds____________________ BB Ba2 Subordinate debt________________________ B+ B1 Preferred stock_________________________ B b2
Following the FirstEnergy merger announcement, both rating agencies placed the Company's securities on credit watch with positive implications. Federal law prohibits the Company from paying dividends out of capital accounts. The Company has since 1993 declared and paid preferred stock dividends out of appropriated current net income included in retained earnings. At the times of such declarations and payments, the Company had a deficit in its retained earnings. At December 31, 1996, the Company had $223 million of appropriated retained earnings for the payment of dividends. The Company also has a provision in its mortgage applicable to approximately $94 million of outstanding first mortgage bonds ($31 million of which mature in August 1997) that requires common stock dividends to be paid out of its total balance of retained earnings, which had been a deficit from 1993 through November 1996. As part of a routine audit, the FERC is considering statements which it requested and received from the Company and Cleveland Electric supporting the payment of dividends out of appropriated current net income included in retained earnings while total retained earnings were a deficit. At December 31, 1996, the Company's total retained earnings were $5 million. The final disposition of this issue is a factor expected to be considered by FirstEnergy in deciding whether to apply purchase accounting to the Company and Cleveland Electric, one effect of which would be to reset retained earnings to zero. If the merger is not consummated or if FirstEnergy determines not to apply purchase accounting to the two companies, the Company and Cleveland Electric intend to continue to support their position and pursue all available alternatives to allow them to continue the declaration and payment of dividends. RESULTS OF OPERATIONS 1996 VS. 1995 Factors contributing to the 2.7% increase in 1996 operating revenues are as follows:
Millions Increase (Decrease) in Operating Revenues of Dollars - -------------------------------------------------- ----------- Base Rates___________________________________ $11 KWH Sales Volume and Mix_____________________ 11 Wholesale Revenues___________________________ 4 Fuel Cost Recovery Revenues__________________ 1 Miscellaneous Revenues_______________________ (4) --- Total____________________________________ $23
=== F-36 103 The increase in 1996 base rates revenues resulted primarily from the April 1996 rate order issued by the PUCO for the Company as discussed under Outlook-April 1996 Rate Order and in Note 7(b). The impact of the April 1996 price increase was offset by a change in the implementation of summer prices. As a result of this change, higher summer prices were in effect for most customers from June through September 1996. Previously, higher summer prices were in effect from May through September. Consequently, base rates revenues for the May 1996 billing period were lower relative to the May 1995 amount. Renegotiated contracts for certain large industrial customers also resulted in a decrease in base revenues which partially offset the effect of the general price increase. Although total kilowatt-hour sales decreased 0.9% in 1996 from the 1995 amount, industrial and commercial kilowatt-hour sales increased 3% and 2.4%, respectively. Residential kilowatt-hour sales decreased 0.9% primarily because of the cooler summer weather. The industrial sales growth reflected increased sales to petroleum refineries, large primary metal and glass manufacturers, and the broad-based, smaller industrial customer group. On a weather-normalized basis, commercial and residential sales increased 4.7% and 1%, respectively. The number of commercial customers increased 3.4% in 1996. Other sales (including wholesale sales) decreased 8%. Wholesale revenues increased in 1996, although wholesale sales results were adversely affected by the Beaver Valley Unit 2 refueling outage in 1996. See Note 2 for a discussion of the Beaver Valley Unit 2 capacity sale to Cleveland Electric. A slight increase in 1996 fuel cost recovery revenues resulted from an increase in the fuel cost factors. The weighted average of these fuel cost factors increased approximately 1%. For 1996, operating revenues were 27% residential, 22% commercial, 28% industrial and 23% other, and kilowatt-hour sales were 19% residential, 16% commercial, 39% industrial and 25% other. The average prices per kilowatt-hour for residential, commercial and industrial customers were 11.47, 10.82 and 5.87 cents, respectively. Operating expenses increased 8% in 1996. The cessation of the Rate Stabilization Program deferrals and the commencement of their amortization in December 1995 resulted in the increase in the net amortization of deferred operating expenses. See Note 7(d). Depreciation and amortization expenses increased primarily because of a $4 million net increase in depreciation related to changes in depreciation rates, as discussed in Note 1(e), and the cessation of the accelerated amortization of unrestricted investment tax credits under the Rate Stabilization Program, which was reported in 1995 as a $5 million reduction of depreciation. Fuel and purchased power expenses increased because of increased purchased power requirements to meet retail customer sales throughout the year but particularly during the refueling outages of Perry Unit 1 and Davis-Besse in 1996. Other operation and maintenance expenses in 1996 included a $6 million one-time charge for the disposition of inventory as part of a reengineering of the supply chain process. Reengineering the supply chain process increases the use of technology, consolidates warehousing and uses just-in-time purchase and delivery. Federal income taxes decreased as a result of lower pretax operating income. A nonoperating loss resulted in 1996 primarily from an $11 million write-down of two inactive production facilities, as discussed in Note 14, and the Company's share of merger-related expenses. The deferral of carrying charges related to the Rate Stabilization Program ended in November 1995. The federal income tax credit for nonoperating income increased in 1996 accordingly. Interest charges and preferred dividend requirements decreased in 1996 because of the redemption of securities and refundings at favorable terms in 1996 and 1995. 1995 VS. 1994 Factors contributing to the 1% increase in 1995 operating revenues are as follows:
Millions Increase (Decrease) in Operating Revenues of Dollars - --------------------------------------------------- ---------- KWH Sales Volume and Mix __________________ $ 29 Wholesale Revenues_________________________ (9) Fuel Cost Recovery Revenues________________ (10) Miscellaneous Revenues_____________________ (1) ---- Total__________________________________ $ 9 ====
Total kilowatt-hour sales increased 2.2% in 1995 primarily because of the hot summer weather. Residential and commercial kilowatt-hour sales increased 5.2% and 2.2%, respectively, which included about 1% nonweather-related growth in residential sales. Industrial kilowatt-hour sales increased 1.8% on the strength of increased sales to large glass manufacturers and the broad-based, smaller industrial customer group. Other sales increased 0.5%. Weather accounted for approximately $13 million of the $21 million increase in 1995 base rate revenues. Wholesale revenues decreased because of the lower revenues associated with the Beaver Valley Unit 2 capacity sale to Cleveland Electric. Lower 1995 fuel cost recovery revenues resulted from favorable changes in the fuel cost factors. The weighted average of these fuel cost factors decreased approximately 6%. For 1995, operating revenues were 27% residential, 21% commercial, 29% industrial and 23% other, and kilowatt-hour sales were 19% residential, 16% commercial, 37% industrial and 28% other. The average prices per kilowatt-hour for residential, commercial and industrial customers were 10.99, 10.51 and 6.09 cents, respectively. The changes from 1994 were not significant. Operating expenses increased 0.1% in 1995. Federal income taxes increased as a result of higher pretax operating income. Fuel and purchased power expenses decreased because of lower purchased power requirements resulting from the increased availability of the nuclear generating units in 1995. Interest charges and preferred dividends decreased in 1995 because of the redemption of securities and refundings at favorable terms in 1995 and 1994. F-37 104 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Share Owners and Board of Directors of The Toledo Edison Company: We have audited the accompanying balance sheet and statement of capitalization of The Toledo Edison Company (a wholly owned subsidiary of Centerior Energy Corporation) as of December 31, 1996 and 1995, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended December 31, 1996. 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 Toledo Edison Company as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Arthur Andersen LLP Cleveland, Ohio February 14, 1997 F-38 105 INCOME STATEMENT The Toledo Edison Company
For the years ended December 31, ---------------------- 1996 1995 1994 ---- ---- ---- (millions of dollars) OPERATING REVENUES (1)________________________________________ $897 $874 $865 ---- ---- ---- OPERATING EXPENSES Fuel and purchased power ___________________________________ 169 157 167 Other operation and maintenance ____________________________ 231 225 229 Generation facilities rental expense, net __________________ 104 104 104 ---- ---- ---- Total operation and maintenance _________________________ 504 486 500 Depreciation and amortization_______________________________ 94 84 83 Taxes, other than federal income taxes______________________ 90 91 90 Amortization of deferred operating expenses, net____________ 17 (17) (21) Federal income taxes________________________________________ 36 42 33 ---- ---- ---- 741 686 685 ---- ---- ---- OPERATING INCOME_____________________________________________ 156 188 180 ---- ---- ---- NONOPERATING INCOME (LOSS) Allowance for equity funds used during construction________ 1 1 1 Other income and deductions, net___________________________ (10) 6 3 Deferred carrying charges__________________________________ -- 14 15 Federal income taxes--credit (expense) ____________________ 5 (2) (2) ---- ---- ---- (4) 19 17 ---- ---- ---- INCOME BEFORE INTEREST CHARGES_______________________________ 152 207 197 ---- ---- ---- INTEREST CHARGES Debt interest 96 111 116 Allowance for borrowed funds used during construction______ (1) (1) (1) ---- ---- ---- 95 110 115 ---- ---- ---- NET INCOME 57 97 82 PREFERRED DIVIDEND REQUIREMENTS______________________________ 17 18 20 ---- ---- ---- EARNINGS AVAILABLE FOR COMMON STOCK__________________________ $ 40 $ 79 $ 62 ==== ==== ==== - ---------------
(1) Includes revenues from all bulk power sales to Cleveland Electric of $105 million, $102 million and $111 million in 1996, 1995 and 1994, respectively. RETAINED EARNINGS
For the years ended December 31, ------------------------ 1996 1995 1994 ---- ----- ----- (millions of dollars) RETAINED EARNINGS (DEFICIT) AT BEGINNING OF YEAR____________ $(35) $(113) $(175) ---- ----- ----- ADDITIONS Net income________________________________________________ 57 97 82 DEDUCTIONS Preferred stock dividends declared and other______________ (17) (19) (20) ---- ----- ----- Net Increase___________________________________________ 40 78 62 ---- ----- ----- RETAINED EARNINGS (DEFICIT) AT END OF YEAR__________________ $ 5 $ (35) $(113) ==== ===== =====
The accompanying notes are an integral part of these statements. F-39 106 BALANCE SHEET
December 31, ---------------- 1996 1995 ------ ------ (millions of dollars) ASSETS PROPERTY, PLANT AND EQUIPMENT Utility plant in service_____________________________________________________ $2,929 $2,896 Less: accumulated depreciation and amortization___________________________ 1,020 942 ------ ------ 1,909 1,954 Construction work in progress________________________________________________ 22 28 ------ ------ 1,931 1,982 Nuclear fuel, net of amortization __________________________________________ 76 78 Other property, less accumulated depreciation_______________________________ 8 20 ------ ------ 2,015 2,080 ------ ------ CURRENT ASSETS Cash and temporary cash investments ________________________________________ 81 94 Amounts due from customers and others, net _________________________________ 13 68 Amounts due from affiliates ________________________________________________ 13 19 Notes receivable from affiliates ___________________________________________ 82 -- Unbilled revenues __________________________________________________________ 4 22 Materials and supplies, at average cost_____________________________________ Owned____________________________________________________________________ 33 49 Under consignment________________________________________________________ 10 -- Taxes applicable to succeeding years________________________________________ 68 71 Other_______________________________________________________________________ 4 4 ------ ------ 308 327 ------ ------ REGULATORY AND OTHER ASSETS Regulatory assets___________________________________________________________ 928 978 Nuclear plant decommissioning trusts________________________________________ 64 52 Other_______________________________________________________________________ 42 37 ------ ------ 1,034 1,067 ------ ------ Total Assets $3,357 $3,474 ====== ======
The accompanying notes are an integral part of this statement. F-40 107 The Toledo Edison Company
December 31, ---------------- 1996 1995 ------ ------ (millions of dollars) CAPITALIZATION AND LIABILITIES CAPITALIZATION Common stock equity_________________________________________________________ $ 803 $ 763 Preferred stock With mandatory redemption provisions_____________________________________ 3 5 Without mandatory redemption provisions__________________________________ 210 210 Long-term debt______________________________________________________________ 1,003 1,068 ------ ------ 2,019 2,046 ------ ------ CURRENT LIABILITIES Current portion of long-term debt and preferred stock_______________________ 51 58 Current portion of nuclear fuel lease obligations___________________________ 36 40 Accounts payable____________________________________________________________ 46 56 Accounts and notes payable to affiliates____________________________________ 30 53 Accrued taxes_______________________________________________________________ 73 78 Accrued interest____________________________________________________________ 22 24 Other_______________________________________________________________________ 20 20 ------ ------ 278 329 ------ ------ DEFERRED CREDITS AND OTHER LIABILITIES Unamortized investment tax credits__________________________________________ 75 79 Accumulated deferred federal income taxes___________________________________ 566 573 Unamortized gain from Bruce Mansfield Plant sale____________________________ 179 188 Accumulated deferred rents for Bruce Mansfield Plant and Beaver Valley Unit 2____________________________________________________________________ 39 54 Nuclear fuel lease obligations______________________________________________ 49 52 Retirement benefits_________________________________________________________ 102 103 Other_______________________________________________________________________ 50 50 ------ ------ 1,060 1,099 ------ ------ Total Capitalization and Liabilities $3,357 $3,474 ====== ======
F-41 108 CASH FLOWS The Toledo Edison Company
For the years ended December 31, ------------------------- 1996 1995 1994 ----- ----- ----- (millions of dollars) CASH FLOWS FROM OPERATING ACTIVITIES (1) Net Income $ 57 $ 97 $ 82 ------ ------ ------ Adjustments to Reconcile Net Income to Cash from Operating Activities: Depreciation and amortization_______________________________________ 94 84 83 Deferred federal income taxes_______________________________________ 18 16 46 Unbilled revenues___________________________________________________ (7) -- 3 Deferred fuel_______________________________________________________ 9 (3) 3 Deferred carrying charges___________________________________________ -- (14) (15) Leased nuclear fuel amortization____________________________________ 33 54 44 Amortization of deferred operating expenses, net____________________ 17 (17) (21) Allowance for equity funds used during construction_________________ (1) (1) (1) Changes in amounts due from customers and others, net_______________ (2) (6) 1 Net proceeds from accounts receivable securitization________________ 78 -- -- Changes in materials and supplies___________________________________ 6 8 (2) Changes in accounts payable_________________________________________ (10) 8 (15) Changes in working capital affecting operations ____________________ (1) 4 (16) Other noncash items_________________________________________________ (10) 9 10 ----- ----- ----- Total Adjustments_________________________________________________ 224 142 120 ----- ----- ----- Net Cash from Operating Activities_____________________________ 281 239 202 ----- ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES (2) Notes payable to affiliates___________________________________________ (21) 21 -- First mortgage bond issues____________________________________________ -- 99 31 Maturities, redemptions and sinking funds ____________________________ (73) (215) (98) Nuclear fuel lease obligations________________________________________ (39) (44) (49) Dividends paid________________________________________________________ (17) (18) (20) Premiums, discounts and expenses______________________________________ -- (6) -- ----- ----- ----- Net Cash from Financing Activities____________________________ (150) (163) (136) ----- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES (2) Cash applied to construction__________________________________________ (47) (53) (41) Interest capitalized as allowance for borrowed funds used during construction_______________________________________________________ (1) (1) (1) Loans to affiliates___________________________________________________ (82) -- -- Contributions to nuclear plant decommissioning trusts_________________ (10) (11) (12) Other cash applied____________________________________________________ (4) (5) (6) ----- ----- ----- Net Cash from Investing Activities____________________________ (144) (70) (60) ----- ----- ----- NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS_______________________ (13) 6 6 ----- ----- ----- CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF YEAR________________ 94 88 82 ----- ----- ----- CASH AND TEMPORARY CASH INVESTMENTS AT END OF YEAR______________________ $ 81 $ 94 $ 88 ===== ===== ===== - --------------- (1) Interest paid (net of amounts capitalized) _________________________ $ 92 $ 93 $ 94 ===== ===== ===== Federal income taxes paid__________________________________________ $ 16 $ 23 $ 5 ===== ===== =====
(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-42 109 STATEMENT OF CAPITALIZATION The Toledo Edison Company
December 31, ----------------- 1996 1995 ------ ------ (millions of dollars) COMMON STOCK EQUITY: Common shares, $5 par value: 60 million authorized; 39.1 million outstanding in 1996 and 1995____________________________________________________________________________________ $ 196 $ 196 Premium on capital stock__________________________________________________________________ 481 481 Other paid-in capital_____________________________________________________________________ 121 121 Retained earnings (deficit)_______________________________________________________________ 5 (35) ------ ------ Total Common Stock Equity 803 763 ------ ------
Current 1996 Shares Call Price Outstanding Per Share ----------- ---------- PREFERRED STOCK: $100 par value, 3,000,000 preferred shares authorized; $25 par value, 12,000,000 preferred shares authorized Subject to mandatory redemption: $100 par $9.375_____________________________ 50,200 $100.99 5 7 Less: Current maturities 2 2 ------ ------ Total Preferred Stock, with Mandatory Redemption Provisions__________________________________ 3 5 ------ ------ Not subject to mandatory redemption: $100 par $4.25 ______________________________ 160,000 104.625 16 16 4.56 ______________________________ 50,000 101.00 5 5 4.25 ______________________________ 100,000 102.00 10 10 8.32 ______________________________ 100,000 102.46 10 10 7.76 ______________________________ 150,000 102.437 15 15 7.80 ______________________________ 150,000 101.65 15 15 10.00______________________________ 190,000 101.00 19 19 25 par 2.21 ______________________________ 1,000,000 25.25 25 25 2.365______________________________ 1,400,000 27.75 35 35 Series A Adjustable _______________ 1,200,000 25.00 30 30 Series B Adjustable _______________ 1,200,000 25.00 30 30 ------ ------ Total Preferred Stock, without Mandatory Redemption Provisions 210 210 ------ ------
LONG-TERM DEBT: First mortgage bonds: 6.125% due 1997 __________________________________________________________________________ 31 31 7.250% due 1999 __________________________________________________________________________ 85 100 7.500% due 2002 __________________________________________________________________________ 26 26 8.000% due 2003 __________________________________________________________________________ 36 36 7.875% due 2004 __________________________________________________________________________ 145 145 ------ ------ 323 338 ------ ------ Tax-exempt issues secured by first mortgage bonds: 10.000% due 1998__________________________________________________________________________ 1 1 3.700% due 2011**________________________________________________________________________ 31 31 8.000% due 2019__________________________________________________________________________ 67 67 7.625% due 2020__________________________________________________________________________ 45 45 7.750% due 2020__________________________________________________________________________ 54 54 7.400% due 2022__________________________________________________________________________ 31 31 9.875% due 2022***_______________________________________________________________________ 10 10 7.550% due 2023__________________________________________________________________________ 37 37 6.875% due 2023__________________________________________________________________________ 20 20 8.000% due 2023__________________________________________________________________________ 50 50 ------ ------ 346 346 ------ ------
The accompanying notes are an integral part of this statement. F-43 110 STATEMENT OF CAPITALIZATION (CONTINUED)
December 31, ----------------- 1996 1995 ------ ------ (millions of dollars) LONG-TERM DEBT: (CONTINUED) Medium-term notes secured by first mortgage bonds: 9.050% due 1996 ___________________________________________________________________ -- 10 9.000% due 1996 ___________________________________________________________________ -- 3 9.300% due 1998 ___________________________________________________________________ 26 26 8.000% due 1998 ___________________________________________________________________ 7 7 7.940% due 1998 ___________________________________________________________________ 5 5 8.470% due 1999 ___________________________________________________________________ 4 4 7.720% due 1999 ___________________________________________________________________ 15 15 7.500% due 2000 ___________________________________________________________________ * * 7.380% due 2000 ___________________________________________________________________ 14 14 7.460% due 2000 ___________________________________________________________________ 17 17 9.500% due 2001 ___________________________________________________________________ 21 21 8.500% due 2001 ___________________________________________________________________ 8 8 8.620% due 2002 ___________________________________________________________________ 7 7 8.650% due 2002 ___________________________________________________________________ 5 5 8.180% due 2002 ___________________________________________________________________ 17 17 7.820% due 2003 ___________________________________________________________________ 37 37 7.850% due 2003 ___________________________________________________________________ 15 15 7.760% due 2003 ___________________________________________________________________ 5 5 7.910% due 2003 ___________________________________________________________________ 3 3 7.780% due 2003 ___________________________________________________________________ 1 1 10.000% due 2021 ___________________________________________________________________ 15 15 9.220% due 2021 ___________________________________________________________________ 15 15 ------ ------ 237 250 Tax-exempt notes: ------ ------ 5.750% due 2003 ___________________________________________________________________ 4 4 10.000% due 2010 ___________________________________________________________________ 1 1 ------ ------ 5 5 ------ ------ Bank loans secured by subordinate mortgage: 9.050% due 1996 ___________________________________________________________________ -- 25 7.500% due 1996 ___________________________________________________________________ -- 2 ------ ------ -- 27 ------ ------ Notes secured by subordinate mortgage: 10.060% due 1996 ___________________________________________________________________ -- 14 8.750% due 1997 ___________________________________________________________________ 8 11 ------ ------ 8 25 ------ ------ Debentures: 8.700% due 2002 ___________________________________________________________________ 135 135 ------ ------ Unamortized premium (discount), net __________________________________________________ (2) (2) ------ ------ 1,052 1,124 Less: Current maturities ___________________________________________________________ 49 56 ------ ------ Total Long-Term Debt _____________________________________________________________ 1,003 1,068 ------ ------ TOTAL CAPITALIZATION__________________________________________________________________ $2,019 $2,046 ====== ====== - --------------- * Denotes debt of less than $1 million. ** Denotes variable rate issue with December 31, 1996 interest rate shown. *** Subject to optional tender by the owners on November 1, 1997.
F-44 111 NOTES TO THE FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) GENERAL The Company is an electric utility serving Northwest Ohio and a wholly owned subsidiary of Centerior Energy. The Company follows the Uniform System of Accounts prescribed by the 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(a). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The estimates are based on an analysis of the best information available. Actual results could differ from those estimates. The Company is a member of the Central Area Power Coordination Group (CAPCO). Other members are Cleveland Electric, Duquesne Light Company, Ohio Edison and its wholly owned subsidiary, Pennsylvania Power Company. The members have constructed and operate generation and transmission facilities for their joint 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 Cleveland Electric are primarily for firm power, interchange power, transmission line rentals and jointly owned power plant operations and construction. See Notes 2 and 3. As discussed in Note 1(j), beginning in May 1996, Cleveland Electric's wholly owned subsidiary, Centerior Funding, began serving as the transferor in connection with the accounts receivable securitization for the Company and Cleveland Electric. Centerior Service Company (Service Company), a wholly owned subsidiary of Centerior Energy, provides management, financial, administrative, engineering, legal and other services at cost to the Company and other affiliated companies. The Service Company billed the Company $60 million, $67 million and $59 million in 1996, 1995 and 1994, 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 or on ordinances of individual municipalities. 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. See Management's Financial Analysis -- Outlook-FirstEnergy Rate Plan. (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 as a regulatory asset since the PUCO is allowing the Company to recover the assessments through its fuel cost factors. See Note 7(a). (E) DEPRECIATION AND DECOMMISSIONING The cost of property, plant and equipment is depreciated over their estimated useful lives on a straight-line basis. In its April 1996 rate order, the PUCO approved changes in depreciation rates for the Company. An increase in the depreciation rate for nuclear property from 2.5% to 2.95% increased annual depreciation expense approximately $8 million. A reduction in the composite depreciation rate for nonnuclear property from 3.36% to 3.13% decreased annual depreciation expense by approximately $2 million. The changes in depreciation rates were effective in April 1996 and resulted in a $4 million net increase in 1996 depreciation expense. F-45 112 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 having net earnings offset inflation. The PUCO requires that the estimated costs of decommissioning and the funding level be reviewed at least every five years. In April 1996, pursuant to the PUCO rate order, the Company decreased its annual decommissioning expense accruals to $10 million from the $11 million level in 1995. The accruals are reflected in current rates. The accruals are based on adjustments to updated, site-specific studies for each of the units completed in 1993 and 1994. These estimates reflect the DECON method of decommissioning (prompt decontamination), and the locations and cost characteristics specific to the units, and include costs associated with decontamination and dismantlement for each of the units. The estimate for Davis-Besse also includes the cost of site restoration. The adjustments to the updated studies which reduced the annual accruals beginning in April 1996 were attributable to changed assumptions on radioactive waste burial cost estimates and the exclusion of site restoration costs for Perry Unit 1 and Beaver Valley Unit 2. After the decommissioning of these units in the future, the two plant sites may be usable for new power production facilities or other industrial purposes. The revised estimates for the units in current 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 $166 $427 Perry Unit 1_____________________ 2026 85 309 Beaver Valley Unit 2_____________ 2027 44 165 ---- ---- Total______________________ $295 $901 ==== ====
The classification, Accumulated Depreciation and Amortization, in the Balance Sheet at December 31, 1996 includes $71 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 (FASB) is reviewing the accounting for removal costs, including decommissioning. If 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. The FASB issued an exposure draft on the subject on February 7, 1996 and continues to review the subject. (F) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at original cost less amounts disallowed by the PUCO. 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 10.12% in 1996, 12.6% in 1995 and 9.87% in 1994. 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 AND LOSS FROM SALES OF UTILITY PLANT The sale and leaseback transactions discussed in Note 2 resulted in a net gain for the sale of the Bruce Mansfield Generating Plant (Mansfield Plant) and a net loss for the sale of Beaver Valley Unit 2. The net gain and net loss were deferred and are being amortized over the terms of the leases. See Note 7(a). These amortizations and the lease expense amounts are reported in the Income Statement as Generation Facilities Rental Expense, Net. F-46 113 (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(a). 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 regulatory asset and will be recovered over the lives of the related assets. See Note 7(a). Investment tax credits are deferred and amortized over the lives of the applicable property as a reduction of depreciation expense. (J) ACCOUNTS RECEIVABLE SECURITIZATION In May 1996, the Company and Cleveland Electric began to sell on a daily basis substantially all of their retail customer accounts receivable and unbilled revenue receivables to Centerior Funding pursuant to a five-year asset-backed securitization agreement. In July 1996, Centerior Funding completed a public sale of $150 million of receivables-backed investor certificates in a transaction that qualifies for sale accounting treatment for financial reporting purposes. (K) MATERIALS AND SUPPLIES In December 1996, the Company sold substantially all of its materials and supplies and fossil fuel inventories for certain generating units and other storage locations to an independent entity at book value. The buyer now provides all of these inventories under a consignment arrangement. In accordance with SFAS 49 accounting for product financing arrangements, the inventories continue to be reported as assets in the Balance Sheet even though the buyer owns the inventories since the Company has guaranteed to be a buyer of last resort. (2) UTILITY PLANT SALE AND LEASEBACK TRANSACTIONS The Company and Cleveland Electric 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. These leases extend through 2017 and are the result of sale and leaseback transactions completed in 1987. Under these leases, the Company and Cleveland Electric 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 Cleveland Electric have options to buy the interests back at certain times at a premium and at the end of the leases for the fair market value at that time or to renew the leases. The leases include conditions for mandatory termination (and possible repurchase of the leasehold interests) upon certain events of default. As co-lessee with Cleveland Electric, the Company is also obligated for Cleveland Electric's lease payments. If Cleveland Electric is unable to make its payments under the Mansfield Plant leases, the Company would be obligated to make such payments. No such payments have been made on behalf of Cleveland Electric. Future minimum lease payments under the operating leases at December 31, 1996 are summarized as follows:
For For the Cleveland Year Company Electric - -------------------------------------- ------- --------- (millions of dollars) 1997_________________________________ $ 102 $ 63 1998_________________________________ 102 63 1999_________________________________ 108 70 2000_________________________________ 111 76 2001_________________________________ 111 75 Later Years 1,696 1,170 ------ ------ Total Future Minimum Lease Payments_____________________ $2,230 $ 1,517 ====== =======
Rental expense is accrued on a straight-line basis over the terms of the leases. The amount recorded in 1996, 1995 and 1994 as annual rental expense for the Mansfield Plant leases was $45 million. The amounts recorded in 1996, F-47 114 1995 and 1994 as annual rental expense for the Beaver Valley Unit 2 lease were $63 million, $63 million and $64 million, respectively. See Note 1(g). Amounts charged to expense in excess of the lease payments are classified as Accumulated Deferred Rents in the Balance Sheet. The Company is selling 150 megawatts of its Beaver Valley Unit 2 leased capacity entitlement to Cleveland Electric. Revenues recorded for this transaction were $99 million, $98 million and $108 million in 1996, 1995 and 1994, respectively. We anticipate that this sale will continue indefinitely. The future minimum lease payments through 2017 associated with Beaver Valley Unit 2 aggregate $1.265 billion. (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, 1996 includes the following facilities owned by the Company as a tenant in common with other utilities and Lessors:
Property, Plant and Ownership Equipment Megawatts (Exclusive of Accumulated Generating Unit (% Share) Nuclear Fuel) Depreciation - ------------------------ ---------- ------------- ----------- (millions of dollars) Davis-Besse_____________ 429 (48.62%) $ 685 $ 235 Perry Unit 1____________ 238 (19.91) 1,048 244 Beaver Valley Unit 2 and Common Facilities (Note 2)________________ 13 (1.65) 209 58 ------- ----- Total_____________ $ 1,942 $ 537 ======= =====
(4) CONSTRUCTION AND CONTINGENCIES (A) CONSTRUCTION PROGRAM The estimated cost of the Company's construction program for the 1997-2001 period is $282 million, including AFUDC of $8 million and excluding nuclear fuel. The Clean Air Act Amendments of 1990 (Clean Air Act) require, 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 1994 through 1996 in connection with Clean Air Act compliance amounted to $4 million. The plan will require additional capital expenditures over the 1997-2006 period of approximately $16 million for nitrogen oxide control equipment and other plant process modifications. In addition, higher fuel and other operation and maintenance expenses will be incurred. Recently proposed particulate and ozone ambient standards have the potential to increase future compliance costs. (B) HAZARDOUS WASTE DISPOSAL SITES The Company is aware of its potential involvement in the cleanup of several sites. The Company has accrued a liability totaling $3 million at December 31, 1996 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, cash flows 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, cash flows and results of operations. See the discussion of these and other risks in Management's Financial Analysis -- Outlook-Nuclear Operations. (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 $70 million per incident. The assessment is limited to $9 million per year for each nuclear incident. These assessment limits assume the other CAPCO companies F-48 115 contribute their proportionate share of any assessment for the generating units that they have an ownership or leasehold interest in. 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 $1.3 billion for Davis-Besse and $2.75 billion for each of the Perry and Beaver Valley sites as of January 1, 1997. 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, cash flows and results of operations. In addition, the Company can be assessed a maximum of $10 million under these policies 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 Cleveland Electric through leases with a special-purpose corporation. The total amount of financing currently available under these lease arrangements is $273 million ($173 million from intermediate-term notes and $100 million from bank credit arrangements). The intermediate-term notes mature in the 1997 through 2000 period. The bank credit arrangements terminate in October 1998. The special-purpose corporation may not need alternate financing in 1997 to replace $83 million of maturing intermediate-term notes. At December 31, 1996, $87 million of nuclear fuel was financed for the Company. The Company and Cleveland Electric 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 $43 million, $26 million and $14 million, respectively, at December 31, 1996. The nuclear fuel amounts financed and capitalized also included interest charges incurred by the lessors amounting to $2 million in both 1996 and 1995, and $4 million in 1994. The estimated future lease amortization payments for the Company based on projected consumption are $36 million in 1997, $29 million in both 1998 and 1999, $27 million in 2000 and $28 million in 2001. (7) REGULATORY MATTERS (A) REGULATORY ACCOUNTING REQUIREMENTS AND REGULATORY ASSETS The Company is subject to the provisions of SFAS 71 and has complied with its provisions. SFAS 71 provides, among other things, for the deferral of certain incurred costs that are probable of future recovery in rates. We 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 charge prices which allow it to recover operating costs, earn a fair return on invested capital and recover the amortization of regulatory assets and (2) a significant change in the manner in which rates are set by the PUCO from cost-based regulation to some other form of regulation. Regulatory assets represent probable future revenues to the Company associated with certain incurred costs, which it will recover from customers through the rate-making process. Effective January 1, 1996, the Company adopted SFAS 121 which imposes stricter criteria for carrying regulatory assets than SFAS 71 by requiring that such assets be probable of recovery at each balance sheet date. The criteria under SFAS 121 for plant assets require such assets to be written down if the book value exceeds the projected net future undiscounted cash flows. F-49 116 Regulatory assets in the Balance Sheet are as follows:
December 31, -------------- 1996 1995 ---- ---- (millions of dollars) Amounts due from customers for future federal income taxes, net_________________ $391 $416 Unamortized loss from Beaver Valley Unit 2 sale_______________________________ 92 96 Unamortized loss on reacquired debt_________ 24 28 Pre-phase-in deferrals*_____________________ 215 222 Rate Stabilization Program deferrals________ 180 188 Other_______________________________________ 26 28 ---- ---- Total___________________________________ $928 $978 ==== ====
* 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, 1996, customer rates provide for recovery of all the above regulatory assets. The remaining recovery periods for about $740 million of the regulatory assets approximate 30 years. The remaining recovery periods for the rest of the regulatory assets generally range from about two to 20 years. Regulatory liabilities in the Balance Sheet at December 31, 1996 and 1995 totaled $13 million and $4 million, respectively. (B) RATE ORDER On April 11, 1996, the PUCO issued an order for the Company and Cleveland Electric granting price increases aggregating $119 million in annualized revenues ($35 million for the Company and $84 million for Cleveland Electric). The PUCO rate order provided for recovery of all costs to provide regulated services, including amortization of regulatory assets, in the approved prices. The new prices were implemented in late April 1996. The average price increase for the Company's customers was 4.7% with the actual percentage increase depending upon the customer class. The Company and Cleveland Electric intend to freeze prices through at least 2002, although they are not precluded from requesting further price increases. The PUCO also recommended that the Company and Cleveland Electric reduce the value of their assets for regulatory purposes by an aggregate $1.25 billion through 2001. This represents an incremental reduction beyond the normal level in nuclear plant and regulatory assets. Implementation of the price increases was not contingent upon a revaluation of assets. The PUCO invited the Company and Cleveland Electric to file a proposal to effectuate the PUCO's recommendation and expressed a willingness to consider alternatives to its recommendation. The PUCO stated in its order that failure by the Company and Cleveland Electric to follow the recommendation could result in a PUCO-ordered write-down of assets for regulatory purposes. The PUCO approved a return on common stock equity of 12.59% and an overall rate of return of 10.06% for both companies. However, the PUCO also indicated the authorized return could be lowered by the PUCO if the Company and Cleveland Electric do not implement the recommendation. In August 1996, various intervenors appealed the PUCO rate order to the Ohio Supreme Court. The Company and Cleveland Electric did not appeal the order to the Ohio Supreme Court. In connection with the PUCO order discussed in Management's Financial Analysis -- Outlook-FirstEnergy Rate Plan, certain parties agreed to request a stay of their appeals until completion of the pending merger with Ohio Edison. (C) ASSESSMENT The Company and Cleveland Electric agree with the concept of accelerating the recognition of costs and recovery of assets as such concept is consistent with the strategic objective to become more competitive. However, the Company and Cleveland Electric believe that such acceleration must also be consistent with the reduction of debt and the opportunity for Centerior Energy common stock share owners to receive a fair return on their investment. Consideration of whether to implement a plan responsive to the PUCO's recommendation to revalue assets by $1.25 billion is pending the merger with Ohio Edison. We have evaluated the Company's markets, regulatory conditions and ability to bill and collect the approved prices, and conclude that the Company continues to comply with the provisions of SFAS 71 and its regulatory assets remain probable of recovery. If there is a change in our evaluation of the competitive environment, regulatory framework or other factors, or if the PUCO significantly reduces the value of the Company's assets or reduces the approved return on common stock equity of 12.59% and overall rate of return of 10.06%, or both, for future regulatory purposes, the Company may be required to record material charges to earnings. In particular, if we determine that the Company no longer meets the criteria for SFAS 71, the Company would be required to record a before-tax charge to write off the regulatory assets shown above. In the more likely event that only a portion of operations (such as nuclear operations) no longer meets the criteria of SFAS 71, a write-off would be limited to regulatory assets that are not reflected in the Company's cost-based prices established for the remaining regulated operations. In addition, we would be required to evaluate whether the changes in the competitive and regulatory environment which led to discontinuing the application of F-50 117 SFAS 71 to some or all of the Company's operations would also result in a write-down of property, plant and equipment pursuant to SFAS 121. See Management's Financial Analysis -- Outlook-FirstEnergy Rate Plan for a discussion of a regulatory plan for the Company and Cleveland Electric and its effect on their compliance with SFAS 71. (D) RATE STABILIZATION PROGRAM The Rate Stabilization Program that the PUCO approved in October 1992 allowed the Company to defer and subsequently amortize and recover certain costs not being recovered in rates at that time. Recovery of both the costs no longer being deferred and the amortization of the 1992-1995 deferrals began in late April 1996 with the implementation of the price increase granted by the PUCO as discussed above. The cost deferrals recorded in 1995 and 1994 pursuant to the Rate Stabilization Program were $39 million and $43 million, respectively. The amortization of the deferrals began in December 1995. The total amortization was $8 million and $1 million in 1996 and 1995, respectively. The regulatory accounting measures under the Rate Stabilization Program also provided for the accelerated amortization of certain benefits during the 1992-1995 period. The total annual amount of such accelerated benefits was $18 million in both 1995 and 1994. (8) FEDERAL INCOME TAX The components of federal income tax expense recorded in the Income Statement were as follows:
1996 1995 1994 ---- ---- ---- (millions of dollars) Operating Expenses: Current__________________________ $ 23 $ 40 $ 18 Deferred_________________________ 13 2 15 ---- ---- ---- Total Charged to Operating Expenses_____________________ 36 42 33 ---- ---- ---- Nonoperating Income: Current__________________________ (10) (12) (29) Deferred_________________________ 5 14 31 ---- ---- ---- Total Expense (Credit) to Nonoperating Income__________ (5) 2 2 ---- ---- ---- Total Federal Income Tax Expense___ $ 31 $ 44 $ 35 ==== ==== ====
The deferred federal income tax expense results from the temporary differences that arise from the different years when certain expenses are recognized for tax purposes as opposed to financial reporting purposes. Such temporary differences relate principally to depreciation and deferred operating expenses and carrying charges. Federal income tax, computed by multiplying income before taxes by the 35% statutory rate, is reconciled to the amount of federal income tax recorded on the books as follows:
1996 1995 1994 ---- ---- ---- (millions of dollars) Book Income Before Federal Income Tax__ $88 $141 $117 --- --- ---- Tax on Book Income at Statutory Rate___ $31 $ 49 $ 41 Increase (Decrease) in Tax: Depreciation_________________________ (4) (1) (3) Rate Stabilization Program___________ -- (9) (9) Sale and leaseback transactions and amortization_______________________ 5 5 5 Other items__________________________ (1) -- 1 --- --- ---- Total Federal Income Tax Expense_______ $31 $ 44 $ 35 === ==== ====
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 Nuclear Power Plant Unit 2 (Perry Unit 2) abandonment was recognized in 1994 and resulted in a $122 million loss with a corresponding $43 million reduction in federal income tax liability. Because of the alternative minimum tax (AMT), $25 million of the $43 million was realized in 1994. The remaining $18 million will not be realized until 1999. Under SFAS 109, temporary differences and carryforwards resulted in deferred tax assets of $162 million and deferred tax liabilities of $728 million at December 31, 1996 and deferred tax assets of $179 million and deferred tax liabilities of $752 million at December 31, 1995. These are summarized as follows:
December 31, -------------- 1996 1995 ---- ---- (millions of dollars) Property, plant and equipment________________ $612 $627 Deferred carrying charges and operating expenses___________________________________ 84 85 Net operating loss carryforwards_____________ (18) (44) Investment tax credits_______________________ (44) (46) Sale and leaseback transactions______________ -- (4) Other________________________________________ (68) (45) ---- ---- Net deferred tax liability_______________ $566 $573 ==== ====
For tax purposes, net operating loss (NOL) carryforwards of approximately $51 million are available to reduce future taxable income and will expire in 2009. The 35% tax effect of the NOLs is $18 million. Additionally, AMT credits of $100 million that may be carried forward indefinitely are available to reduce future 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 retire- F-51 118 ment 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. Pension costs (credits) for Centerior Energy and its subsidiaries for 1994 through 1996 were comprised of the following components:
1996 1995 1994 ---- ---- ---- (millions of dollars) Service cost for benefits earned during the period_________________________ $ 13 $ 10 $ 13 Interest cost on projected benefit obligation_________________________ 28 26 26 Actual return on plan assets_________ (50) (53) (2) Net amortization and deferral________ 2 9 (34) ---- ---- ---- Net costs (credits)________________ $ (7) $ (8) $ 3 ==== ==== ====
Pension costs (credits) for the Company and its pro rata share of the Service Company's costs were $(2) million, $(3) million and $1 million for 1996, 1995 and 1994, 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 30%.
December 31, ------------- 1996 1995 ---- ---- (millions of dollars) Actuarial present value of benefit obligations: Vested benefits_______________________ $326 $304 Nonvested benefits____________________ 16 2 ---- ---- Accumulated benefit obligation______ 342 306 Effect of future compensation levels__ 53 54 ---- ---- Total projected benefit obligation__ 395 360 Plan assets at fair market value________ 421 394 ---- ---- Funded status_______________________ 26 34 Unrecognized net gain from variance between assumptions and experience____________ (56) (68) Unrecognized prior service cost_________ 14 15 Transition asset at January 1, 1987 being amortized over 19 years_______________ (32) (36) ---- ---- Net accrued pension liability_______ $(48) $(55) ==== ====
A September 30 measurement date was used for 1996 and 1995 reporting. At December 31, 1996, the settlement (discount) rate and long-term rate of return on plan assets assumptions were 7.75% and 11%, respectively. The long-term rate of annual compensation increase assumption was 3.5% for 1997 and 4% thereafter. At December 31, 1995, the settlement rate and long-term rate of return on plan assets assumptions were 8% and 11%, respectively. The long-term rate of annual compensation increase assumption was 3.5% for 1996 and 1997 and 4% thereafter. At December 31, 1996 and 1995, the Company's net accrued pension liability included in Retirement Benefits in the Balance Sheet was $62 million and $64 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. Under SFAS 106, the accounting standard for postretirement benefits other than pensions, the expected costs of such benefits are accrued during the employees' years of service. The components of the total postretirement benefit costs for 1994 through 1996 were as follows:
1996 1995 1994 ---- ---- ---- (millions of dollars) Service cost for benefits earned during the period____________________________ $1 $ 1 $ 1 Interest cost on accumulated postretirement benefit obligation_____ 6 7 7 Amortization of transition obligation at January 1, 1993 of $63 million over 20 years_________________________ 2 2 3 -- --- --- Total costs___________________________ $9 $10 $11 == === ===
These amounts included costs for the Company and its pro rata share of the Service Company's costs. 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, ------------ 1996 1995 ---- ---- (millions of dollars) Accumulated postretirement benefit obligation attributable to: Retired participants_________________________ $(69) $(76) Fully eligible active plan participants _____ (1) (1) Other active plan participants_______________ (10) (9) ---- ---- Accumulated postretirement benefit obligation_______________________________ (80) (86) Unrecognized net gain from variance between assumptions and experience___________________ (13) (9) Unamortized transition obligation______________ 46 49 ---- ---- Accrued postretirement benefit cost________ $(47) $(46) ==== ====
The Balance Sheet classification of Retirement Benefits at December 31, 1996 and 1995 includes only the Company's accrued postretirement benefit cost of $40 million and $39 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 measurement date was used for 1996 and 1995 reporting. At December 31, 1996 and 1995, the settlement rate and the long-term rate of annual compensation increase assumptions were the same as those dis- F-52 119 cussed for pension reporting in Note 9(a). At December 31, 1996, the assumed annual health care cost trend rates (applicable to gross eligible charges) were 7.5% for medical and 7% for dental in 1997. 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, 1996 would increase by $3 million and the aggregate of the service and interest cost components of the annual postretirement benefit cost would increase by $0.2 million. (10) GUARANTEES The Company has guaranteed certain loan and lease obligations of a coal supplier under a long-term coal supply contract. At December 31, 1996, the principal amount of the loan and lease obligations guaranteed by the Company under the contract was $11 million. The prices under the contract which includes certain minimum payments are sufficient to satisfy the loan and lease obligations and mine closing costs over the life of the contract. If the 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. See Management's Financial Analysis -- Outlook-FirstEnergy Rate Plan. (11) CAPITALIZATION (A) CAPITAL STOCK TRANSACTIONS Preferred stock shares retired during the three years ended December 31, 1996 are listed in the following table.
1996 1995 1994 ---- ---- ---- (thousands of shares) Subject to Mandatory Redemption: $100 par $9.375___________________ (17) (17) (17) 25 par 2.81____________________ -- (400) (800) --- ---- ---- Total_________________________ (17) (417) (817) === ==== ====
(B) EQUITY DISTRIBUTION RESTRICTIONS Federal law prohibits the Company from paying dividends out of capital accounts. The Company has since 1993 declared and paid preferred stock dividends out of appropriated current net income included in retained earnings. At the times of such declarations and payments, the Company had a deficit in its retained earnings. At December 31, 1996, the Company had $223 million of appropriated retained earnings for the payment of dividends. The Company also has a provision in its mortgage applicable to approximately $94 million of outstanding first mortgage bonds ($31 million of which mature in August 1997) that requires common stock dividends to be paid out of its total balance of retained earnings, which had been a deficit from 1993 through November 1996. At December 31, 1996, the Company's total retained earnings were $5 million. See Management's Financial Analysis -- Capital Resources and Liquidity-Liquidity. (C) PREFERRED AND PREFERENCE STOCK Amounts to be paid for preferred stock which must be redeemed during the next five years are $1.665 million in each year 1997 through 1999 only. The annual preferred stock mandatory redemption provisions are as follows:
Shares Price To Be Beginning Per Redeemed in Share -------- --------- ----- $100 par $9.375____________________ 16,650 1985 $100
The annualized preferred dividend requirement at December 31, 1996 was $17 million. The preferred dividend rates on the Company's Series A and B fluctuate based on prevailing interest rates and market conditions. The dividend rates for these issues averaged 7.11% and 7.75%, respectively, in 1996. Preference stock authorized for the Company is 5,000,000 shares with a $25 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 which matures or is subject to put options during the next five years is as follows: $49 million in 1997, $39 million in 1998, $104 million in 1999, $31 million in 2000 and $30 million in 2001. 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, supplies and automotive equipment. Certain credit agreements of the Company contain covenants relating to fixed charge coverage ratios and limitations on secured financing other than through first mortgage bonds or certain other transactions. The Company was in compliance with all such covenants as of December 31, 1996. The Company and Cleveland Elec- F-53 120 tric have letters of credit in connection with the sale and leaseback of Beaver Valley Unit 2 that expire in June 1999. The letters of credit are in an aggregate amount of approximately $225 million and are secured by first mortgage bonds of the Company and Cleveland Electric in the proportion of 60% and 40%, respectively. At December 31, 1996, the Company had outstanding $8 million of notes secured by subordinated mortgage collateral. (12) SHORT-TERM BORROWING ARRANGEMENTS Centerior Energy has a $125 million revolving credit facility through May 1997. Centerior Energy and the Service Company may borrow under the facility, with all borrowings jointly and severally guaranteed by the Company and Cleveland Electric. Centerior Energy plans to transfer any of its borrowed funds to the Company and Cleveland Electric. The credit agreement is secured with first mortgage bonds of the Company and Cleveland Electric in the proportion of 60% and 40%, respectively. The credit agreement also provides the participating banks with a subordinate mortgage security interest on the properties of the Company and Cleveland Electric. 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, 1996. Also, the Company and Cleveland Electric may borrow from each other on a short-term basis. At December 31, 1996, the Company had outstanding $82 million of notes receivable from Cleveland Electric with a weighted average interest rate of 6.18%. (13) FINANCIAL INSTRUMENTS The estimated fair values at December 31, 1996 and 1995 of financial instruments that do not approximate their carrying amounts in the Balance Sheet are as follows:
December 31, ---------------------------------- 1996 1995 ---------------- ---------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ------ -------- ------ (millions of dollars) Capitalization and Liabilities: Long-Term Debt_____________ $1,054 $1,086 $1,126 $1,137
Noncash investments in the Nuclear Plant Decommissioning Trusts are summarized in the following table. In 1996, the Company and Cleveland Electric transferred the bulk of their investment assets in existing trusts into Centerior Energy pooled trust funds for the two companies. The December 31, 1996 amounts in the table represent the Company's pro rata share of the fair value of such noncash investments.
December 31, ------------- 1996 1995 ---- ---- (millions of dollars) Type of Securities: Debt Securities: Federal Government_____________________ $10 $21 Municipal______________________________ -- 11 Other__________________________________ 3 -- --- --- 13 32 Equity Securities________________________ 39 -- --- --- Total________________________________ $52 $32 === === Maturities of Debt Securities: Due within one year______________________ $-- $ 1 Due in one to five years_________________ 7 9 Due in six to 10 years___________________ 3 11 Due after 10 years_______________________ 3 11 --- --- Total $13 $32 ==== ===
The fair value of these trusts is estimated based on the quoted market prices for the investment securities and approximates the carrying 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, 1996 and 1995 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, 1996.
Quarters Ended ---------------------------------------- March 31, June 30, Sept. 30, Dec. 31, --------- -------- --------- -------- (millions of dollars) 1996 Operating Revenues_______ $ 211 $211 $ 252 $223 Operating Income_________ 33 31 52 42 Net Income_______________ 3 8 28 18 Earnings (Loss) Available for Common Stock__________________ (1) 3 24 14 1995 Operating Revenues_______ $ 206 $215 $ 246 $206 Operating Income_________ 43 45 59 41 Net Income_______________ 20 22 33 22 Earnings Available for Common Stock___________ 15 17 29 18
Earnings for the quarter ended March 31, 1996 were decreased by $7 million as a result of an $11 million write-down of the net book value of two inactive production facilities. The write-down resulted from a decision that the facilities are no longer expected to provide revenues. Earnings for the quarter ended September 30, 1996 were decreased by $4 million as a result of a $6 million charge F-54 121 for the disposition of materials and supplies inventory. The sale and disposal of inventory was part of the reengineering of the supply chain process. (15) PENDING MERGER OF CENTERIOR ENERGY AND OHIO EDISON On September 13, 1996, Centerior Energy and Ohio Edison entered into an agreement and plan of merger to form a new holding company, FirstEnergy. Following the merger, FirstEnergy will directly hold all of the issued and outstanding common stock of the Company, Cleveland Electric and Ohio Edison. As a result of the merger, the common stock share owners of Centerior Energy and Ohio Edison will own all of the issued and outstanding shares of FirstEnergy common stock. Centerior Energy share owners will receive 0.525 of a share of FirstEnergy common stock for each share of Centerior Energy common stock owned. Ohio Edison share owners will receive one share of FirstEnergy common stock for each share of Ohio Edison common stock owned. FirstEnergy plans to account for the merger as a purchase in accordance with generally accepted accounting principles. If FirstEnergy elects to apply, or "push down", the effects of purchase accounting to the financial statements of the Company and Cleveland Electric, the Company and Cleveland Electric would record adjustments to: (1) reduce the carrying value of nuclear generating plant by $1.25 billion to fair value; (2) recognize goodwill of $865 million; (3) reduce common stock equity by $401 million; (4) reset retained earnings of the Company and Cleveland Electric to zero; and (5) reduce the related deferred federal income tax liability by $438 million. These amounts reflect FirstEnergy's estimates of the pro forma combined adjustments for the Company and Cleveland Electric as of September 30, 1996. The actual adjustments to be recorded could be materially different from these estimates. FirstEnergy has not decided whether to push down the effects of purchase accounting to the financial statements of the Company and Cleveland Electric if the merger with Ohio Edison is completed, nor has FirstEnergy estimated the allocations between the two companies if push-down accounting is elected. In addition to the approvals by the share owners of Centerior Energy and Ohio Edison common stock, various aspects of the merger are subject to the approval of the FERC and other regulatory authorities. A rate reduction and economic development plan for the Company and Cleveland Electric has been approved by the PUCO. From the date of consummation of the merger through 2006, the plan provides for rate reductions, frozen fuel cost factors, economic development incentive prices, an energy-efficiency program, an earnings cap and an accelerated reduction in nuclear and regulatory assets for regulatory purposes. The plan will require the Company and Cleveland Electric to write off certain regulatory assets at the time the merger becomes probable, which is expected to be after obtaining the aforementioned approvals of the merger. The write-off amounts for the Company and Cleveland Electric to be charged against earnings, estimated by FirstEnergy to total approximately $750 million, will be determined based upon the plan's regulatory accounting and cost recovery details to be submitted by FirstEnergy to the PUCO staff for approval. The Company's share of the write-off is expected to be about one-third of this amount. If the merger is not consummated, the plan would be null and void. See Management's Financial Analysis -- Outlook-Pending Merger with Ohio Edison and - -FirstEnergy Rate Plan for a discussion of the proposed merger and the plan. (16) PENDING MERGER OF THE COMPANY INTO CLEVELAND ELECTRIC In March 1994, Centerior Energy announced a plan to merge the Company into Cleveland Electric. The merger agreement between Centerior Energy and Ohio Edison requires the approval of Ohio Edison prior to consummation of the proposed merger of the Company into Cleveland Electric. Ohio Edison has not yet made a decision. All necessary regulatory approvals have been obtained, except the NRC's approval. This application was withdrawn at the NRC's request pending Ohio Edison's decision whether to complete this merger. In June 1995, share owners of the Company's preferred stock approved the merger and share owners of Cleveland Electric's preferred stock approved the authorization of additional shares of preferred stock. If and when the merger becomes effective, share owners of the Company's preferred stock will exchange their shares for preferred stock shares of Cleveland Electric having substantially the same terms. Debt holders of the merging companies will become debt holders of Cleveland Electric. For the merging companies, the combined pro forma operating revenues were $2.554 billion, $2.516 billion and $2.422 billion and the combined pro forma net income was $174 million, $281 million and $268 million for the years 1996, 1995 and 1994, 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 does not reflect any potential effects related to the consummation of the Centerior Energy and Ohio Edison merger. The pro forma data should be read in conjunction with the audited financial statements of both the Company and Cleveland Electric. F-55 122 FINANCIAL AND STATISTICAL REVIEW OPERATING REVENUES (millions of dollars)
Total Total Operating Year Residential Commercial Industrial Other Retail Wholesale Revenues - ---------------------------------------------------------------------------------------------------------------- 1996 $ 246 194 253 67 760 137 $ 897 1995 238 184 254 65 741 133 874 1994 227 181 251 64 723 142 865 1993 229 180 244 71 724 147 871 1992 215 175 236 61 687 158 845 1986 189 134 214 24 561 13 574
- -------------------------------------------------------------------------------- OPERATING EXPENSES (millions of dollars)
Other Generation Amortization of Federal Fuel & Operation Facilities Depreciation Taxes, Deferred Income Purchased & Rental & Other Than Operating Taxes Year Power Maintenance Expense, Net Amortization FIT Expenses, Net (Credit) - ----------------------------------------------------------------------------------------------------------------------------- 1996 $ 169 231 104 94 90 17 36 1995 157 225 104 84 91 (17) 42 1994 167 229 104 83 90 (21) 33 1993 173 352(a) 104 76 91 (4)(b) (10) 1992 169 236 106 77 91 (17) 33 1986 160 168 -- 38 51 -- 41 Total Operating Year Expenses - ------------------------------------------------------------------------ < 1996 $ 741 1995 686 1994 685 1993 782 1992 695 1986 458
- -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------- 1996 $ 156 1 (10) -- 5 $ 152 1995 188 1 6 14 (2) 207 1994 180 1 3 15 (2) 197 1993 89 1 (232)(c) (161)(b) 129 (174) 1992 150 1 1 41 (1) 192 1986 116 130 (2) -- 52 296
- -------------------------------------------------------------------------------- INCOME (LOSS) (millions of dollars)
Earnings (Loss) Net Preferred Available for Debt AFUDC-- Income Stock Common Year Interest Debt (Loss) Dividends Stock - -------------------------------------------------------------------------------- 1996 $ 96 (1) 57 17 $ 40 1995 111 (1) 97 18 79 1994 116 (1) 82 20 62 1993 116 (1) (289) 23 (312) 1992 122 (1) 71 24 47 1986 174 (55) 177 45 132
- -------------------------------------------------------------------------------- (a) Includes early retirement program expenses and other charges of $107 million. (b) Includes write-off of phase-in deferrals of $241 million, consisting of $55 million of deferred operating expenses and $186 million of deferred carrying charges. F-56 123 The Toledo Edison Company ELECTRIC SALES (millions of KWH) ELECTRIC CUSTOMERS RESIDENTIAL USAGE (thousands at year end)
Industrial Year Residential Commercial Industrial Wholesale Other Total Residential Commercial & Other - -------------------------------------------------------------------- --------------------------------------- - --------------------------- 1996 2 145 1 790 4 301 2 330 488 11 054 262 27 4 1995 2 164 1 748 4 174 2 563 500 11 149 260 27 4 1994 2 056 1 711 4 099 2 548 499 10 913 257 26 4 1993 2 039 1 672 3 776 2 146 490 10 123 255 26 4 1992 1 941 1 619 3 563 2 753 478 10 354 255 26 5 1986 1 941 1 495 3 482 348 449 7 715 247 25 4 Average Average Year Total Customer KWH Customer ========= 1996 293 8 284 11.47c $950.10 1995 291 8 384 10.99 921.23 1994 287 8 044 11.04 888.30 1993 285 7 997 11.23 897.65 1992 286 7 632 11.08 845.99 1986 276 7 881 9.75 768.43
- -------------------------------------------------------------------------------- LOAD (MW & %) ENERGY (millions of KWH) FUEL
Net Company Generated Seasonal Peak Capacity Load ----------------------------- Purchased Fuel Cost Year Capability Load Margin Factor Fossil Nuclear Total Power Total Per KWH - -------------------------------------------------------- ---------------------------------------------------- - ----------------------- 1996 1 951 1 758 9.9% 62.1% 5 173 5 575 10 748 870 11 618 1.26c 1995 1 651 1 738 (5.3) 62.4 4 576 6 761 11 337 299 11 636 1.32 1994 1 726 1 620 6.1 64.7 5 160 5 419 10 579 773 11 352 1.35 1993 1 726 1 568 9.2 64.3 5 548 4 791 10 339 196 10 535 1.42 1992 1 759 1 514 13.9 63.2 4 656 6 293 10 949 (82) 10 867 1.41 1986 1 760 1 423 19.1 64.8 6 462 12 6 474 1 795 8 269 1.82 BTU Per Year KWH < ============ 1996 10 295 1995 10 341 1994 10 298 1993 10 146 1992 10 284 1986 9 860
- -------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------- - ------- ------ 1996 $2 929 1 020 1 909 22 84 $ 2 015 $ 49 $3 357 1995 2 896 942 1 954 28 98 2 080 56 3 474 1994 2 899 892 2 007 30 125 2 162 41 3 502 1993 2 837 788 2 049 40 142 2 231 43 3 510 1992 2 847 760 2 087 280 164 2 531 44 3 939 1986 1 443 416 1 027 2 130 269 3 426 463 3 774
- -------------------------------------------------------------------------------- CAPITALIZATION (millions of dollars & %)
Preferred Preferred Stock, Stock, without with Mandatory Mandatory Common Stock Redemption Redemption Year Equity Provisions Provisions Long-Term Debt Total - ------------------------------------------------------------------------------------------------------- 1996 $ 803 40% 3 --% 210 10% 1 003 50% $2 019 1995 763 38 5 -- 210 10 1 068 52 2 046 1994 685 34 7 -- 210 10 1 154 56 2 056 1993 623 30 28 1 210 10 1 225 59 2 086 1992 935 39 50 2 210 9 1 178 50 2 373 1986 1 075 36 149 5 260 9 1 481 50 2 965
- -------------------------------------------------------------------------------- (c) Includes write-off of Perry Unit 2 of $232 million. F-57 124 CENTERIOR ENERGY/CLEVELAND ELECTRIC/TOLEDO EDISON COMBINED QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1997 [THE INCOME STATEMENT, THE BALANCE SHEET, THE STATEMENT OF CASH FLOWS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAVE BEEN OMITTED FOR CENTERIOR ENERGY] F-58 125 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1997 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to
COMMISSION REGISTRANT; STATE OF INCORPORATION; I.R.S. EMPLOYER FILE NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO. - ----------- ----------------------------------------- ------------------ 1-9130 CENTERIOR ENERGY CORPORATION 34-1479083 (An Ohio Corporation) 6200 Oak Tree Boulevard Independence, Ohio 44131 Telephone (216) 447-3100 1-2323 THE CLEVELAND ELECTRIC 34-0150020 ILLUMINATING COMPANY (An Ohio Corporation) c/o Centerior Energy Corporation 6200 Oak Tree Boulevard Independence, Ohio 44131 Telephone (216) 622-9800 1-3583 THE TOLEDO EDISON COMPANY 34-4375005 (An Ohio Corporation) 300 Madison Avenue Toledo, Ohio 43652 Telephone (419) 249-5000
Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] On May 9, 1997, there were 148,025,928 shares of Centerior Energy Corporation Common Stock outstanding. Centerior Energy Corporation is the sole holder of the 79,590,689 shares and 39,133,887 shares of common stock of The Cleveland Electric Illuminating Company and The Toledo Edison Company, respectively, outstanding on that date. ================================================================================ F-59 126 This combined Form 10-Q is separately filed by Centerior Energy Corporation ("Centerior Energy"), The Cleveland Electric Illuminating Company ("Cleveland Electric") and The Toledo Edison Company ("Toledo Edison"). Centerior Energy, Cleveland Electric and Toledo Edison are sometimes referred to collectively as the "Companies". Cleveland Electric and Toledo Edison are sometimes collectively referred to as the "Operating Companies". Information contained herein relating to any individual registrant is filed by such registrant on its behalf. No registrant makes any representation as to information relating to any other registrant, except that information relating to either or both of the Operating Companies is also attributed to Centerior Energy. Centerior Energy has made forward-looking statements in this Form 10-Q which statements are subject to risks and uncertainties, including the impact on the Companies if: (1) competitive pressure in the electric utility industry increases significantly; (2) state and federal regulatory initiatives are implemented that increase competition, threaten costs and investment recovery and impact dividends or rate structures; or (3) general economic conditions, either nationally or in the area in which the combined company will be doing business are less favorable than expected. F-60 127 CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES, THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY, AND THE TOLEDO EDISON COMPANY NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) (1) INTERIM FINANCIAL STATEMENTS Centerior Energy Corporation (Centerior Energy) is the parent company of Centerior Service Company (Service Company); two electric utilities, The Cleveland Electric Illuminating Company (Cleveland Electric) and The Toledo Edison Company (Toledo Edison); and three other wholly owned subsidiaries. The two utilities are referred to collectively herein as the "Operating Companies" and individually as an "Operating Company". Centerior Energy, Cleveland Electric and Toledo Edison are referred to collectively herein as the "Companies". The comparative income statement and balance sheet and the related statement of cash flows of each of the Companies have been prepared from the records of each of the Companies without audit by independent public accountants. In the opinion of management, all adjustments necessary for a fair presentation of financial position at March 31, 1997 and results of operations and cash flows for the three months ended March 31, 1997 and 1996 have been included. All such adjustments were normal recurring adjustments, except for the write-down of inactive production facilities in the first quarter of 1996 discussed in Note 6. A new Statement of Position issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants, Inc. effective January 1, 1997 provides guidance on the recognition and disclosure of environmental remediation liabilities. The Companies' adoption of this statement in 1997 did not materially affect their results of operations or financial positions. These financial statements and notes should be read in conjunction with the financial statements and notes included in the Companies' combined Annual Report on Form 10-K for the year ended December 31, 1996 (1996 Form 10-K). These interim period financial results are not necessarily indicative of results for a 12-month period. (2) EQUITY DISTRIBUTION RESTRICTIONS The Operating Companies can make cash available to fund Centerior Energy's common stock dividends by paying dividends on their respective common stock, which is held solely by Centerior Energy. Federal law prohibits the Operating Companies from paying dividends out of capital accounts. Cleveland Electric has since 1993 declared and paid preferred and common stock dividends out of appropriated current net income included in retained earnings. At the times of such declarations and payments, Cleveland Electric had a deficit in its retained earnings. From 1993 through 1996, Toledo Edison declared and paid preferred stock dividends out of appropriated current net income included in retained earnings. At the times of such declarations and payments, Toledo Edison had a deficit in its retained earnings from 1993 through November 1996. Toledo Edison also has a provision in its mortgage applicable to approximately $94 million of outstanding first mortgage bonds ($31 million of which mature in August 1997) that requires common stock dividends to be paid out of its total balance of retained earnings. At March 31, 1997, Toledo Edison's total retained earnings were $10 million. At March 31, 1997, Cleveland Electric and Toledo Edison had $120.4 million and $227.7 million, respectively, of appropriated retained earnings for the payment of dividends. See "Management's Financial Analysis -- Capital Resources and Liquidity-Liquidity" contained in Item 7 of the 1996 Form 10-K for a discussion of a Federal Energy Regulatory Commission (FERC) audit issue regarding the declaration and payment of dividends. F-61 128 CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES, THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY, AND THE TOLEDO EDISON COMPANY NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED (3) COMMON STOCK DIVIDENDS Cash dividends per common share declared by Centerior Energy during the three months ended March 31, 1997 and 1996 were as follows:
1997 1996 ---- ---- Paid February 15..................................................... $.20 $.20 Paid May 15.......................................................... .20 .20
Common stock cash dividends declared by Cleveland Electric during the three months ended March 31, 1997 and 1996 were as follows:
1996 1997 ----- ----- (MILLIONS) Paid in February................................................... $29.6 $29.6
Toledo Edison did not declare any common stock dividends during the three months ended March 31, 1997 and 1996. (4) FINANCING ACTIVITY During the three months ended March 31, 1997, the Operating Companies redeemed preferred stock and debt securities as follows: CLEVELAND ELECTRIC Mandatory redemptions consisted of $15 million of Serial Preferred Stock, $9.125 Series N. TOLEDO EDISON Mandatory redemptions consisted of $8 million of notes secured by subordinated mortgage collateral. (5) SHORT-TERM BORROWING ARRANGEMENTS In May 1997, Centerior Energy renewed a $125 million revolving credit facility until May 7, 1998 on the same terms as the existing agreement. Centerior Energy and the Service Company may borrow under the facility, with all borrowings jointly and severally guaranteed by the Operating Companies. Centerior Energy plans to transfer any of its borrowed funds to the Operating Companies. There have not been any borrowings under the facility. (6) WRITE-DOWN OF INACTIVE PRODUCTION FACILITIES In the first quarter of 1996, Toledo Edison wrote down the net book value of two inactive production facilities, $11.3 million, to "Other Income and Deductions, Net" resulting in nonoperating losses for Toledo Edison and Centerior Energy for that period. The net write-down was $7.2 million after taxes or, for Centerior Energy, $.05 per common share. The write-down resulted from a decision that the facilities were no longer expected to provide revenues. (7) COMMITMENTS AND CONTINGENCIES Various legal actions, claims and regulatory proceedings covering several matters are pending against the Companies. See "Item 3. Legal Proceedings" in the 1996 Form 10-K and "Part II, Item 5. Other Information" in this Quarterly Report on Form 10-Q. F-62 129 CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES, THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY, AND THE TOLEDO EDISON COMPANY NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED In September 1996, Centerior Energy and Ohio Edison Company (Ohio Edison) entered into an agreement and plan of merger to form a new holding company, FirstEnergy Corp. (FirstEnergy). On March 27, 1997, Centerior Energy and Ohio Edison common stock share owners approved the merger. Various aspects of the merger are subject to the approval of the FERC and other regulatory authorities. FirstEnergy plans to account for the merger as a purchase in accordance with generally accepted accounting principles. If FirstEnergy elects to apply, or "push down", the effects of purchase accounting to the financial statements of the Operating Companies, Cleveland Electric would record adjustments to: (1) reduce the carrying value of its nuclear generating plant by $880 million to fair value; (2) recognize goodwill of $675 million; (3) reduce its common stock equity by $258 million; (4) reset its retained earnings to zero; and (5) reduce its related deferred federal income tax liability by $308 million; and Toledo Edison would record adjustments to: (1) reduce the carrying value of its nuclear generating plant by $370 million to fair value; (2) recognize goodwill of $307 million; (3) reduce its common stock equity by $124 million; (4) reset its retained earnings to zero; and (5) reduce its related deferred federal income tax liability by $130 million. These amounts reflect FirstEnergy's estimates of the pro forma adjustments for the Operating Companies as of December 31, 1996. The actual adjustments to be recorded could be materially different from the estimates. FirstEnergy has not decided whether to push down the effects of purchase accounting to the financial statements of the Operating Companies if the Ohio Edison-Centerior Energy merger is completed. F-63 130 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY INCOME STATEMENT (UNAUDITED) (THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------- 1997 1996 -------- -------- OPERATING REVENUES....................................................... $431,627 $427,526 OPERATING EXPENSES Fuel and Purchased Power (1)........................................... 110,530 103,726 Other Operation and Maintenance........................................ 91,447 105,132 Generation Facilities Rental Expense, Net.............................. 13,892 13,892 Depreciation and Amortization.......................................... 53,297 50,816 Taxes, Other Than Federal Income Taxes................................. 56,686 60,010 Amortization of Deferred Operating Expenses, Net....................... 6,567 6,368 Federal Income Taxes................................................... 19,203 11,805 -------- -------- Total Operating Expenses............................................ 351,622 351,749 -------- -------- OPERATING INCOME......................................................... 80,005 75,777 NONOPERATING INCOME (LOSS) Allowance for Equity Funds Used During Construction.................... 327 498 Other Income and Deductions, Net....................................... (4,649) 1,649 Federal Income Taxes -- Credit (Expense)............................... 658 (752) -------- -------- Total Nonoperating Income (Loss).................................... (3,664) 1,395 -------- -------- INCOME BEFORE INTEREST CHARGES........................................... 76,341 77,172 INTEREST CHARGES Long-Term Debt......................................................... 54,393 60,160 Short-Term Debt........................................................ 2,177 692 Allowance for Borrowed Funds Used During Construction.................. (459) (519) -------- -------- Net Interest Charges................................................ 56,111 60,333 -------- -------- NET INCOME............................................................... 20,230 16,839 Preferred Dividend Requirements........................................ 9,315 10,032 -------- -------- EARNINGS AVAILABLE FOR COMMON STOCK...................................... $ 10,915 $ 6,807 ======== ======== (1) Includes purchased power expense for purchases from Toledo Edison.... $ 28,920 $ 26,672
The accompanying notes as they relate to Cleveland Electric are an integral part of this statement. F-64 131 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY BALANCE SHEET (THOUSANDS)
MARCH 31, DECEMBER 31, 1997 1996 ----------- ------------ (UNAUDITED) ASSETS PROPERTY, PLANT AND EQUIPMENT Utility Plant In Service....................................................... $ 6,960,941 $ 6,938,535 Accumulated Depreciation and Amortization...................................... (2,306,322) (2,252,321) ----------- ----------- 4,654,619 4,686,214 Construction Work In Progress.................................................. 62,173 56,853 ----------- ----------- 4,716,792 4,743,067 Nuclear Fuel, Net of Amortization.............................................. 100,764 113,030 Other Property, Less Accumulated Depreciation.................................. 51,553 53,547 ----------- ----------- 4,869,109 4,909,644 CURRENT ASSETS Cash and Temporary Cash Investments............................................ 26,698 30,273 Amounts Due from Customers and Others, Net..................................... 146,187 189,547 Amounts Due from Affiliates.................................................... 347 5,634 Materials and Supplies, at Average Cost Owned........................................................................ 50,777 51,686 Under Consignment............................................................ 23,497 23,655 Taxes Applicable to Succeeding Years........................................... 156,147 181,609 Other.......................................................................... 11,416 15,237 ----------- ----------- 415,069 497,641 REGULATORY AND OTHER ASSETS Regulatory Assets.............................................................. 1,341,785 1,349,693 Nuclear Plant Decommissioning Trusts........................................... 83,067 75,573 Other.......................................................................... 60,725 44,980 ----------- ----------- 1,485,577 1,470,246 ----------- ----------- $ 6,769,755 $ 6,877,531 =========== =========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common Stock Equity............................................................ $ 1,034,701 $ 1,044,283 Preferred Stock With Mandatory Redemption Provisions......................................... 186,118 186,118 Without Mandatory Redemption Provisions...................................... 238,325 238,325 Long-Term Debt................................................................. 2,441,297 2,441,215 ----------- ----------- 3,900,441 3,909,941 CURRENT LIABILITIES Current Portion of Long-Term Debt and Preferred Stock.......................... 129,874 144,668 Current Portion of Lease Obligations........................................... 49,266 51,592 Accounts Payable............................................................... 57,092 82,694 Accounts and Notes Payable to Affiliates....................................... 170,966 171,433 Accrued Taxes.................................................................. 253,143 315,998 Accrued Interest............................................................... 60,247 52,487 Dividends Declared............................................................. 5,692 15,228 Other.......................................................................... 40,156 43,672 ----------- ----------- 766,436 877,772 DEFERRED CREDITS AND OTHER LIABILITIES Unamortized Investment Tax Credits............................................. 174,158 176,130 Accumulated Deferred Federal Income Taxes...................................... 1,316,529 1,305,601 Unamortized Gain from Bruce Mansfield Plant Sale............................... 291,993 295,730 Accumulated Deferred Rents for Bruce Mansfield Plant........................... 99,351 98,767 Nuclear Fuel Lease Obligations................................................. 64,968 73,947 Retirement Benefits............................................................ 74,512 72,843 Other.......................................................................... 81,367 66,800 ----------- ----------- 2,102,878 2,089,818 COMMITMENTS AND CONTINGENCIES (Note 7) ----------- ----------- $ 6,769,755 $ 6,877,531 =========== ===========
The accompanying notes as they relate to Cleveland Electric are an integral part of this statement. F-65 132 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY CASH FLOWS (UNAUDITED) (THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------- 1997 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income............................................................. $ 20,230 $ 16,839 -------- -------- Adjustments to Reconcile Net Income to Cash from Operating Activities: Depreciation and Amortization....................................... 53,297 50,816 Deferred Federal Income Taxes....................................... 10,736 14,388 Deferred Fuel....................................................... 7,696 (2,639) Leased Nuclear Fuel Amortization.................................... 13,411 11,339 Amortization of Deferred Operating Expenses, Net.................... 6,567 6,368 Allowance for Equity Funds Used During Construction................. (327) (498) Changes in Amounts Due from Customers and Others, Net............... 43,360 1,678 Changes in Materials and Supplies................................... 1,067 6,643 Changes in Accounts Payable......................................... (25,602) 27,758 Changes in Working Capital Affecting Operations..................... (27,289) (31,665) Other Noncash Items................................................. 2,336 (9,791) -------- -------- Total Adjustments.............................................. 85,252 74,397 -------- -------- Net Cash from Operating Activities............................. 105,482 91,236 CASH FLOWS FROM FINANCING ACTIVITIES Notes Payable to Affiliates............................................ 2,781 (5,000) Maturities, Redemptions and Sinking Funds.............................. (15,000) (15,800) Nuclear Fuel Lease Obligations......................................... (12,450) (18,194) Dividends Paid......................................................... (39,141) (39,865) -------- -------- Net Cash from Financing Activities............................. (63,810) (78,859) CASH FLOWS FROM INVESTING ACTIVITIES Cash Applied to Construction........................................... (32,812) (25,105) Interest Capitalized as Allowance for Borrowed Funds Used During Construction........................................................ (459) (519) Contributions to Nuclear Plant Decommissioning Trusts.................. (2,928) -- Other Cash Received (Applied).......................................... (9,048) 3,486 -------- -------- Net Cash from Investing Activities............................. (45,247) (22,138) -------- -------- NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS........................ (3,575) (9,761) CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD............... 30,273 69,770 -------- -------- CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD..................... $ 26,698 $ 60,009 ======== ======== Other Payment Information: Interest (net of amounts capitalized).................................. $ 47,000 $ 47,000 Federal Income Taxes................................................... 8,300 --
The accompanying notes as they relate to Cleveland Electric are an integral part of this statement. F-66 133 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7 of the 1996 Form 10-K. The information under "Capital Resources and Liquidity" remains unchanged with the following exceptions: During the first quarter of 1997, Cleveland Electric redeemed preferred stock as discussed in Note 4. Cleveland Electric is a party to a $125 million revolving credit facility which Centerior Energy renewed in May 1997 until May 7, 1998 as discussed in Note 5. Centerior Energy plans to transfer any of its borrowed funds under the facility to the Operating Companies. RESULTS OF OPERATIONS Factors contributing to the 1% increase in 1997 first quarter operating revenues are shown as follows:
CHANGES FROM FIRST QUARTER 1996 FACTORS OPERATING REVENUES ------------------------------------------------------------------- ------------------ (MILLIONS) Base Rates......................................................... $ 18.7 Kilowatt-hour Sales Volume and Mix................................. (15.0) Wholesale Revenues................................................. 7.5 Fuel Cost Recovery Revenues........................................ 2.3 Miscellaneous Revenues............................................. (9.4) ------ Total.............................................................. $ 4.1 ======
The increase in first quarter 1997 base rates revenues resulted primarily from the April 1996 rate order issued by the PUCO. Renegotiated contracts for certain large industrial customers resulted in a decrease in base rates which partially offset the effect of the general price increase. Percentage changes between 1997 and 1996 first quarter billed electric kilowatt-hour sales are summarized as follows:
CUSTOMER CATEGORIES % CHANGE - ---------------------------------------- -------- Residential............................. 0.5% Commercial.............................. 1.2 Industrial.............................. (1.7) Other................................... 78.5 Total................................... 8.0
Despite milder weather, first quarter 1997 total kilowatt-hour sales rose as increases in residential and commercial sales along with a 99% increase in wholesale sales (included in the "Other" category) were partially offset by a decline in industrial sales. Weather-normalized residential and commercial sales increased 5.4% and 2.2%, respectively, for the 1997 period. The number of commercial customers at March 31, 1997 was 1.3% above the March 31, 1996 number. Industrial sales decreased primarily because of fewer sales to large automotive manufacturers and steel industry customers. F-67 134 The increase in fuel cost recovery revenues included in customer bills resulted from a 3% increase in the weighted average of the fuel cost recovery factors used in the first quarter of 1997 to calculate these revenues compared to the 1996 first quarter average. First quarter miscellaneous revenues in 1997 decreased from the 1996 amount primarily because of the reclassification of certain revenues as credits to operating expenses commencing in the second quarter of 1996 and a first quarter 1997 refund payment related to a canceled generating plant lease agreement. First quarter operating expenses in 1997 were virtually the same as in 1996. Higher fuel and purchased power expenses resulted from increased purchased power requirements in the 1997 period. Depreciation and amortization expenses increased primarily because of changes in depreciation rates approved in the April 1996 PUCO rate order. Federal income taxes increased as a result of higher pretax operating income. Other operation and maintenance expenses decreased as a result of ongoing cost cutting and work force reductions; a shift of certain payroll expenses to the nonoperating classification for work related to the Ohio Edison-Centerior Energy merger; and the aforementioned reclassification of certain expense reimbursements as credits to operating expenses. Taxes, other than federal income taxes, decreased primarily because of lower property and payroll tax accruals. A first quarter 1997 nonoperating loss resulted primarily from both Cleveland Electric's share of merger-related expenses and certain costs associated with an accounts receivable securitization. First quarter 1997 interest charges and preferred dividend requirements decreased because of the redemption of securities in 1996. NEW ACCOUNTING STANDARD In February 1997, the FASB issued a new statement of financial accounting standards for the disclosure of information about capital structure effective for year-end December 31, 1997 reporting. Cleveland Electric's adoption of the statement in 1997 will not affect its financial condition. F-68 135 THE TOLEDO EDISON COMPANY INCOME STATEMENT (UNAUDITED) (THOUSANDS)
THREE MONTHS ENDED MARCH 31, ------------------- 1997 1996 -------- -------- OPERATING REVENUES (1)................................................... $217,060 $210,793 OPERATING EXPENSES Fuel and Purchased Power............................................... 43,314 38,768 Other Operation and Maintenance........................................ 56,317 56,519 Generation Facilities Rental Expense, Net.............................. 25,961 25,961 Depreciation and Amortization.......................................... 23,814 22,416 Taxes, Other Than Federal Income Taxes................................. 22,794 23,853 Amortization of Deferred Operating Expenses, Net....................... 4,291 4,175 Federal Income Taxes................................................... 8,212 6,227 -------- -------- Total Operating Expenses............................................ 184,703 177,919 -------- -------- OPERATING INCOME......................................................... 32,357 32,874 NONOPERATING INCOME (LOSS) Allowance for Equity Funds Used During Construction.................... 332 413 Other Income and Deductions, Net....................................... (427) (9,153) Federal Income Taxes -- Credit (Expense)............................... (225) 3,195 -------- -------- Total Nonoperating Income (Loss).................................... (320) (5,545) -------- -------- INCOME BEFORE INTEREST CHARGES........................................... 32,037 27,329 INTEREST CHARGES Long-Term Debt......................................................... 22,111 23,159 Short-Term Debt........................................................ 1,190 1,218 Allowance for Borrowed Funds Used During Construction.................. (104) (325) -------- -------- Net Interest Charges................................................ 23,197 24,052 -------- -------- NET INCOME............................................................... 8,840 3,277 Preferred Dividend Requirements........................................ 4,194 4,204 -------- -------- EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK............................... $ 4,646 $ (927) ======== ======== (1) Includes revenues from bulk power sales to Cleveland Electric........ $ 28,920 $ 26,672
The accompanying notes as they relate to Toledo Edison are an integral part of this statement. F-69 136 THE TOLEDO EDISON COMPANY BALANCE SHEET (THOUSANDS)
MARCH 31, DECEMBER 31, 1997 1996 ----------- ------------ (UNAUDITED) ASSETS PROPERTY, PLANT AND EQUIPMENT Utility Plant In Service....................................................... $ 2,932,203 $ 2,928,657 Accumulated Depreciation and Amortization...................................... (1,045,988) (1,019,836) ----------- ----------- 1,886,215 1,908,821 Construction Work In Progress.................................................. 26,443 21,479 ----------- ----------- 1,912,658 1,930,300 Nuclear Fuel, Net of Amortization.............................................. 67,361 76,118 Other Property, Less Accumulated Depreciation.................................. 8,456 8,460 ----------- ----------- 1,988,475 2,014,878 CURRENT ASSETS Cash and Temporary Cash Investments............................................ 63,416 81,454 Amounts Due from Customers and Others, Net..................................... 15,948 16,308 Amounts Due from Affiliates.................................................... 130,574 95,336 Materials and Supplies, at Average Cost Owned........................................................................ 32,127 33,160 Under Consignment............................................................ 10,994 10,383 Taxes Applicable to Succeeding Years........................................... 59,766 68,352 Other.......................................................................... 3,628 3,479 ----------- ----------- 316,453 308,472 REGULATORY AND OTHER ASSETS Regulatory Assets.............................................................. 921,175 927,629 Nuclear Plant Decommissioning Trusts........................................... 69,818 64,093 Other.......................................................................... 39,483 42,408 ----------- ----------- 1,030,476 1,034,130 ----------- ----------- $ 3,335,404 $ 3,357,480 =========== =========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common Stock Equity............................................................ $ 807,883 $ 803,237 Preferred Stock With Mandatory Redemption Provisions......................................... 3,355 3,355 Without Mandatory Redemption Provisions...................................... 210,000 210,000 Long-Term Debt................................................................. 1,003,055 1,003,026 ----------- ----------- 2,024,293 2,019,618 CURRENT LIABILITIES Current Portion of Long-Term Debt and Preferred Stock.......................... 43,365 51,365 Current Portion of Lease Obligations........................................... 35,105 36,244 Accounts Payable............................................................... 52,987 46,496 Accounts Payable to Affiliates................................................. 25,454 30,016 Accrued Taxes.................................................................. 56,203 72,829 Accrued Interest............................................................... 24,998 22,348 Other.......................................................................... 16,437 18,722 ----------- ----------- 254,549 278,020 DEFERRED CREDITS AND OTHER LIABILITIES Unamortized Investment Tax Credits............................................. 74,434 75,417 Accumulated Deferred Federal Income Taxes...................................... 565,331 565,600 Unamortized Gain from Bruce Mansfield Plant Sale............................... 176,760 179,027 Accumulated Deferred Rents for Bruce Mansfield Plant and Beaver Valley Unit 2............................................................................ 38,675 39,188 Nuclear Fuel Lease Obligations................................................. 41,699 48,491 Retirement Benefits............................................................ 104,210 102,214 Other.......................................................................... 55,453 49,905 ----------- ----------- 1,056,562 1,059,842 COMMITMENTS AND CONTINGENCIES (Note 7) ----------- ----------- $ 3,335,404 $ 3,357,480 =========== ===========
The accompanying notes as they relate to Toledo Edison are an integral part of this statement. F-70 137 THE TOLEDO EDISON COMPANY CASH FLOWS (UNAUDITED) (THOUSANDS)
THREE MONTHS ENDED MARCH 31, --------------------- 1997 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income........................................................... $ 8,840 $ 3,277 -------- -------- Adjustments to Reconcile Net Income to Cash from Operating Activities: Depreciation and Amortization..................................... 23,814 22,416 Deferred Federal Income Taxes..................................... (269) 4,403 Deferred Fuel..................................................... 2,567 623 Leased Nuclear Fuel Amortization.................................. 9,442 9,349 Amortization of Deferred Operating Expenses, Net.................. 4,291 4,175 Allowance for Equity Funds Used During Construction............... (332) (413) Changes in Amounts Due from Customers and Others, Net............. 360 3,784 Changes in Materials and Supplies................................. 422 881 Changes in Accounts Payable....................................... 6,491 32,445 Changes in Working Capital Affecting Operations................... (15,042) (12,698) Other Noncash Items............................................... 4,540 (2,672) -------- -------- Total Adjustments............................................ 36,284 62,293 -------- -------- Net Cash from Operating Activities........................... 45,124 65,570 CASH FLOWS FROM FINANCING ACTIVITIES Notes Payable to Affiliates.......................................... -- (20,950) Maturities, Redemptions and Sinking Funds............................ (8,000) (28,750) Nuclear Fuel Lease Obligations....................................... (8,617) (13,969) Dividends Paid....................................................... (4,193) (4,226) Premiums, Discounts and Expenses..................................... -- (50) -------- -------- Net Cash from Financing Activities........................... (20,810) (67,945) CASH FLOWS FROM INVESTING ACTIVITIES Cash Applied to Construction......................................... (10,149) (14,595) Interest Capitalized as Allowance for Borrowed Funds Used During Construction...................................................... (104) (325) Loans to Affiliates.................................................. (32,582) -- Contributions to Nuclear Plant Decommissioning Trusts................ (2,459) -- Other Cash Received.................................................. 2,942 3,451 -------- -------- Net Cash from Investing Activities........................... (42,352) (11,469) -------- -------- NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS...................... (18,038) (13,844) CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD............. 81,454 93,669 -------- -------- CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD................... $ 63,416 $ 79,825 ======== ======== Other Payment Information: Interest (net of amounts capitalized)................................ $ 19,000 $ 21,000 Federal Income Taxes................................................. 4,300 --
The accompanying notes as they relate to Toledo Edison are an integral part of this statement. F-71 138 THE TOLEDO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7 of the 1996 Form 10-K. The information under "Capital Resources and Liquidity" remains unchanged with the following exceptions: During the first quarter of 1997, Toledo Edison redeemed notes as discussed in Note 4. Toledo Edison is a party to a $125 million revolving credit facility which Centerior Energy renewed in May 1997 until May 7, 1998 as discussed in Note 5. Centerior Energy plans to transfer any of its borrowed funds under the facility to the Operating Companies. RESULTS OF OPERATIONS Factors contributing to the 3% increase in 1997 first quarter operating revenues are shown as follows:
CHANGES FROM FIRST QUARTER 1996 FACTORS OPERATING REVENUES ------------------------------------------------------------------- ------------------ (MILLIONS) Base Rates......................................................... $ 3.4 Kilowatt-hour Sales Volume and Mix................................. 2.4 Wholesale Revenues................................................. 2.9 Fuel Cost Recovery Revenues........................................ (1.5) Miscellaneous Revenues............................................. (0.9) ----- Total.............................................................. $ 6.3 =====
The increase in first quarter 1997 base rates revenues resulted primarily from the April 1996 rate order issued by the PUCO. Renegotiated contracts for certain large industrial customers also resulted in a decrease in base rates which partially offset the effect of the general price increase. Percentage changes between 1997 and 1996 first quarter billed electric kilowatt-hour sales are summarized as follows:
CUSTOMER CATEGORIES % CHANGE - ---------------------------------------- -------- Residential............................. (3.1)% Commercial.............................. 2.9 Industrial.............................. 8.2 Other................................... 21.0 Total................................... 8.1
First quarter 1997 total kilowatt-hour sales increased because of increases in industrial and commercial sales along with a 26% increase in wholesale sales (included in the "Other" category). Industrial sales growth reflected increased sales to large primary metals, automotive and glass manufacturers and the broad-based, smaller industrial customer group. Industrial sales for the 1997 period included sales to the new North Star BHP Steel facility. Commercial sales increased despite milder weather because of a 3.3% increase in the number of commercial customers and greater economic activity. Residential sales declined because of the milder weather. However, weather-normalized commercial and residential sales increased 3.6% and 0.3%, respectively, for the 1997 period. F-72 139 The decrease in fuel cost recovery revenues included in customer bills resulted from a 5% decrease in the weighted average of the fuel cost recovery factors used in the first quarter of 1997 to calculate these revenues compared to the 1996 first quarter average. First quarter operating expenses in 1997 increased 3.8% from the 1996 amount. Higher fuel and purchased power expenses resulted from increased purchased power requirements in the 1997 period. Depreciation and amortization expenses increased primarily because of changes in depreciation rates approved in the April 1996 PUCO rate order. Federal income taxes increased as a result of higher pretax operating income. Taxes, other than federal income taxes, decreased primarily because of lower property and payroll tax accruals. The first quarter 1997 total nonoperating loss was smaller than the first quarter 1996 total nonoperating loss. The first quarter 1997 nonoperating loss resulted primarily from both Toledo Edison's share of expenses related to the Ohio Edison-Centerior Energy merger and certain costs associated with an accounts receivable securitization. The first quarter 1996 nonoperating loss resulted primarily from the write-down of two inactive production facilities as discussed in Note 6. First quarter 1997 interest charges and preferred dividend requirements decreased slightly because of the redemption of securities in 1996. NEW ACCOUNTING STANDARD In February 1997, the FASB issued a new statement of financial accounting standards for the disclosure of information about capital structure effective for year-end December 31, 1997 reporting. Toledo Edison's adoption of the statement in 1997 will not affect its financial condition. F-73 140 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS 1. CENTERIOR ENERGY a. A Special Meeting of Centerior Energy's common stock share owners was held on March 27, 1997. b. The only matter submitted to share owners at the Special Meeting was for the approval and adoption of an Agreement and Plan of Merger between Ohio Edison and Centerior Energy. The vote on this issue was as follows:
BROKER FOR AGAINST ABSTAIN NON-VOTE - ------------ ---------- ------- --------------- 112,633,407 2,219,786 935,047 Not Applicable
2. CENTERIOR ENERGY a. Centerior Energy's Annual Meeting of share owners was held on May 8, 1997. b. Proxies for the Annual Meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934. There was no solicitation in opposition to management's nominees for directors as listed in the proxy statement dated April 3, 1997, and all such nominees were elected. c. Three matters were submitted to share owners for a vote at the Annual Meeting. Issue 1 was the election of 11 directors of Centerior Energy. The vote on this issue was as follows:
BROKER NOMINEE FOR WITHHELD NON-VOTE - ------------------- ------------ ---------- ---------- R. P. Anderson 116,211,692 4,643,968 7,108,921 A. C. Bersticker 116,326,706 4,528,954 7,108,921 T. A. Commes 116,397,916 4,457,744 7,108,921 W. F. Conway 116,246,440 4,609,220 7,108,921 W. R. Embry 116,141,102 4,714,558 7,108,921 R. J. Farling 116,097,124 4,758,536 7,108,921 R. A. Miller 113,866,343 6,989,317 7,108,921 F. E. Mosier 116,226,823 4,628,837 7,108,921 Sr. M. M. Reinhard 116,098,360 4,757,301 7,108,921 R. C. Savage 116,274,966 4,580,694 7,108,921 W. J. Williams 116,236,011 4,619,649 7,108,921
Issue 2 was the ratification of the appointment by the Board of Directors of Arthur Andersen LLP as the independent accountants of Centerior Energy, Cleveland Electric and Toledo Edison for 1997. The vote on this issue was as follows:
BROKER FOR AGAINST ABSTAIN NON-VOTE - ------------ ---------- ------- ---------- 118,514,019 1,254,749 1,086,892 7,108,921
Issue 3 was a share owner proposal to eliminate all discretionary voting when the individual share owner has not actually voted by marking the proxy card. The vote on this issue was as follows:
BROKER FOR AGAINST ABSTAIN NON-VOTE - ------------ ---------- ------- ---------- 15,700,936 79,222,813 4,893,382 28,147,450
F-74 141 3. CLEVELAND ELECTRIC a. In lieu of an Annual Meeting, Cleveland Electric's sole share owner, Centerior Energy (the sole share owner of all 79,590,689 outstanding shares of Cleveland Electric common stock), elected directors of Cleveland Electric through a Written Action of Sole Share Owner on May 8, 1997. b. The directors elected pursuant to the Written Action were: Robert J. Farling Murray R. Edelman Fred J. Lange, Jr. c. No other matters were addressed in the Written Action in lieu of an Annual Meeting. 4. TOLEDO EDISON a. In lieu of an Annual Meeting, Toledo Edison's sole share owner, Centerior Energy (the sole share owner of all 39,133,887 outstanding shares of Toledo Edison common stock), elected directors of Toledo Edison through a Written Action of Sole Share Owner on May 8, 1997. b. The directors elected pursuant to the Written Action were: Robert J. Farling Murray R. Edelman Fred J. Lange, Jr. c. No other matters were addressed in the Written Action in lieu of an Annual Meeting. ITEM 5. OTHER INFORMATION 1. 1996 RATE ORDER For background relating to this topic see "Item 1. Business-Electric Rates-1996 Rate Order" in the Companies Annual Report on Form 10-K for the year ended December 31, 1996 ("1996 Form 10-K"). The City of Cleveland, the Office of the Ohio Consumer's Counsel ("OCC"), the Ohio Council of Retail Merchants, the Empowerment Center of Greater Cleveland, the City of Toledo, the Lucas County Board of Commissioners and Congresswoman Marcy Kaptur filed appeals with the Ohio Supreme Court from the PUCO's April 11, 1996 rate order for the Operating Companies. The Ohio Supreme Court granted the Operating Companies' motions to dismiss the appeals of the Lucas County Board of Commissioners and Congresswoman Marcy Kaptur on November 20, 1996. On April 4, 1997, the OCC filed a motion to stay the appeal because of the Rate Stipulation agreed to by the OCC regarding the FirstEnergy merger, and the Operating Companies filed a memorandum in support of the stay on April 14, 1997. The Ohio Supreme Court granted OCC's motion to stay on April 21, 1997. 2. JOINT SELECT COMMITTEE HEARINGS Ohio's General Assembly has commissioned a Joint Committee to study electric utility deregulation. The Joint Committee is conducting hearings concerning various issues regarding electric utility deregulation and plans to have a report completed by October 1997 to present to the full General Assembly for its consideration. The Operating Companies and other interested parties will be providing testimony on the issues as the hearings continue throughout the summer. 3. RACHEL TRANSMISSION LINE On March 24, 1997, the Ohio Power Siting Board ("OPSB") granted Cleveland Electric a Certificate of Environmental Compatibility and Public Need ("Certificate") to construct its nine-mile "Rachel" 138,000-volt transmission line in Geauga County, Ohio. The transmission line is necessary to provide high-quality and reliable electric service to the general area, which has experienced above average load growth over the last several decades. On April 24, 1997, Citizens for a Better Way filed an Application for Rehearing of the F-75 142 OPSB's decision; however, because the Application for Rehearing was filed late, it is anticipated that the OPSB will not entertain substantive modifications to the Certificate. 4. CHASE BRASS For background relating to this topic, see "Item 1. Business-Operations-Competitive Conditions-Toledo Edison" in the 1996 Form 10-K. Chase Brass & Copper Co., Inc. ("Chase Brass"), a former Toledo Edison customer, and other surrounding businesses and residences in Jefferson Township, Ohio, have sought incorporation as a municipality to be named the Village of Holiday City. The Williams County (Ohio) Board of Commissioners and the Williams County Court of Common Pleas issued an order permitting the area to be incorporated. Toledo Edison previously appealed the Court's order to the Sixth District Court of Appeals, but the Court of Appeals ruled against Toledo Edison, finding a lack of standing. Toledo Edison then appealed to the Ohio Supreme Court. On April 23, 1997, the Ohio Supreme Court denied Toledo Edison's appeal. Toledo Edison does not plan to apply for reconsideration at the Court. The new municipality can negotiate with other utilities for electric power. The other businesses in the proposed municipality previously terminated their service with Toledo Edison and are receiving electric service from the Village of Montpelier, one of the consortium now supplying Chase Brass. 5. DAVIS-BESSE PLANT OUTAGE The Davis-Besse Nuclear Power Station automatically shut down on Sunday, May 4, 1997, when a fire suppression system on the station's main transformer malfunctioned. Although there was no fire, protective circuitry disconnected the transformer from the electrical system. Safety systems automatically take the plant offline under these conditions. Plant personnel are investigating the cause of the malfunction. It is anticipated that the plant will be back on line by the end of May, 1997. This is the first unplanned shut down at the plant in three years. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS See Exhibit Index following. B. REPORTS ON FORM 8-K During the quarter ended March 31, 1997, Centerior Energy, Cleveland Electric and Toledo Edison each filed two Current Reports on Form 8-K with the Securities and Exchange Commission. A Form 8-K dated January 28, 1997 and filed that date included one item under "Item 5. Other Events". That item, "Recent Financial Results (Unaudited)", reported Centerior Energy's operating revenues, net income and earnings per share for 1996. A Form 8-K dated January 30, 1997 and filed on February 6, 1997 included one item under "Item 5. Other Events". That item, "Rate Reduction and Economic Development Plan", discussed a rate reduction plan approved by the PUCO for the Operating Companies which would take effect upon the consummation of the merger of Centerior Energy with Ohio Edison. F-76 143 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The person signing this report on behalf of each such registrant is also signing in his capacity as each registrant's Chief Accounting Officer. CENTERIOR ENERGY CORPORATION -------------------------------------- (Registrant) THE CLEVELAND ELECTRIC ILLUMINATING COMPANY -------------------------------------- (Registrant) THE TOLEDO EDISON COMPANY -------------------------------------- (Registrant) By: E. LYLE PEPIN -------------------------------------- E. Lyle Pepin, Controller and Chief Accounting Officer of each Registrant Date: May 15, 1997 F-77 144 [THIS PAGE INTENTIONALLY LEFT BLANK] F-78 145 CENTERIOR ENERGY/CLEVELAND ELECTRIC/TOLEDO EDISON COMBINED QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 [THE INCOME STATEMENT, THE BALANCE SHEET, THE STATEMENT OF CASH FLOWS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS HAVE BEEN OMITTED FOR CENTERIOR ENERGY] F-79 146 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 1997 OR [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to
COMMISSION REGISTRANT; STATE OF INCORPORATION; I.R.S. EMPLOYER FILE NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO. - ----------- ----------------------------------------- ------------------ 1-9130 CENTERIOR ENERGY CORPORATION 34-1479083 (An Ohio Corporation) 6200 Oak Tree Boulevard Independence, Ohio 44131 Telephone (216) 447-3100 1-2323 THE CLEVELAND ELECTRIC 34-0150020 ILLUMINATING COMPANY (An Ohio Corporation) c/o Centerior Energy Corporation 6200 Oak Tree Boulevard Independence, Ohio 44131 Telephone (216) 622-9800 1-3583 THE TOLEDO EDISON COMPANY 34-4375005 (An Ohio Corporation) 300 Madison Avenue Toledo, Ohio 43652 Telephone (419) 249-5000
Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] On August 8, 1997, there were 148,024,178 shares of Centerior Energy Corporation Common Stock outstanding. Centerior Energy Corporation is the sole holder of the 79,590,689 shares and 39,133,887 shares of common stock of The Cleveland Electric Illuminating Company and The Toledo Edison Company, respectively, outstanding on that date. ================================================================================ F-80 147 This combined Form 10-Q is separately filed by Centerior Energy Corporation ("Centerior Energy"), The Cleveland Electric Illuminating Company ("Cleveland Electric") and The Toledo Edison Company ("Toledo Edison"). Centerior Energy, Cleveland Electric and Toledo Edison are sometimes referred to collectively as the "Companies". Cleveland Electric and Toledo Edison are sometimes collectively referred to as the "Operating Companies". Information contained herein relating to any individual registrant is filed by such registrant on its behalf. No registrant makes any representation as to information relating to any other registrant, except that information relating to either or both of the Operating Companies is also attributed to Centerior Energy. F-81 148 CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES, THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY, AND THE TOLEDO EDISON COMPANY AND SUBSIDIARY NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) (1) INTERIM FINANCIAL STATEMENTS Centerior Energy Corporation (Centerior Energy) is the parent company of Centerior Service Company (Service Company); two electric utilities, The Cleveland Electric Illuminating Company (Cleveland Electric) and The Toledo Edison Company (Toledo Edison); and three other wholly owned subsidiaries. The two utilities are referred to collectively herein as the "Operating Companies" and individually as an "Operating Company". Centerior Energy, Cleveland Electric and Toledo Edison are referred to collectively herein as the "Companies". The comparative income statement and balance sheet and the related statement of cash flows of each of the Companies have been prepared from the records of each of the Companies without audit by independent public accountants. In the opinion of management, all adjustments necessary for a fair presentation of financial position at June 30, 1997 and results of operations and cash flows for the three months and six months ended June 30, 1997 and 1996 have been included. All such adjustments were normal recurring adjustments, except for the write-down of inactive production facilities in the first quarter of 1996 discussed in Note 6. In June 1997, Toledo Edison formed a subsidiary, Toledo Edison Capital Corporation (TECC), to serve as an equity partner in a trust in connection with the financing transaction discussed in Note 4. The subsidiary was capitalized with Toledo Edison having a 90% interest and Cleveland Electric having a 10% interest. These financial statements and notes should be read in conjunction with the financial statements and notes included in the Companies' combined Annual Report on Form 10-K for the year ended December 31, 1996 (1996 Form 10-K) and the Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (First Quarter 1997 Form 10-Q). These interim period financial results are not necessarily indicative of results for a 12-month period. (2) EQUITY DISTRIBUTION RESTRICTIONS The Operating Companies can make cash available to fund Centerior Energy's common stock dividends by paying dividends on their respective common stock, which is held solely by Centerior Energy. Federal law prohibits the Operating Companies from paying dividends out of capital accounts. Cleveland Electric has since 1993 declared and paid preferred and common stock dividends out of appropriated current net income included in retained earnings. At the times of such declarations and payments, Cleveland Electric had a deficit in its retained earnings. From 1993 through June 1997, Toledo Edison declared and paid preferred stock dividends out of appropriated current net income included in retained earnings. At the times of such declarations and payments, Toledo Edison had a deficit in its retained earnings from 1993 through November 1996. Toledo Edison also has a provision in its mortgage applicable to approximately $94 million of outstanding first mortgage bonds ($31 million of which matured August 1, 1997) that requires common stock dividends to be paid out of its total balance of retained earnings. At June 30, 1997, Toledo Edison's total retained earnings were $19 million. At June 30, 1997, Cleveland Electric and Toledo Edison had $95.6 million and $236.6 million, respectively, of appropriated retained earnings for the payment of dividends. See "Management's Financial Analysis -- Capital Resources and Liquidity-Liquidity" contained in Item 7 of the 1996 Form 10-K for a discussion of a Federal Energy Regulatory Commission (FERC) audit issue regarding the declaration and payment of dividends. F-82 149 CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES, THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY, AND THE TOLEDO EDISON COMPANY AND SUBSIDIARY NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED (3) COMMON STOCK DIVIDENDS Cash dividends per common share declared by Centerior Energy during the six months ended June 30, 1997 and 1996 were as follows:
1997 1996 ---- ---- Paid February 15..................................................... $.20 $.20 Paid May 15.......................................................... .20 .20 Paid August 15....................................................... .20 .20
Common stock cash dividends declared by Cleveland Electric during the six months ended June 30, 1997 and 1996 were as follows:
1996 1997 ----- ----- (MILLIONS) Paid in February................................................... $29.6 $29.6 Paid in May........................................................ 29.6 46.6
Toledo Edison did not declare any common stock dividends during the six months ended June 30, 1997 and 1996. (4) NEW FINANCINGS In a June 1997 offering (Offering), the Operating Companies pledged $720 million aggregate principal amount of first mortgage bonds due in 2000, 2004 and 2007 to a trust as security for the issuance of a like principal amount of secured notes due in 2000, 2004 and 2007 (Secured Notes). Cleveland Electric pledged $175 million principal amount of 7.19% First Mortgage Bonds due 2000, $280 million principal amount of 7.67% First Mortgage Bonds due 2004 and $120 million principal amount of 7.13% First Mortgage Bonds due 2007, and Toledo Edison pledged $45 million principal amount of 7.19% First Mortgage Bonds due 2000, $70 million principal amount of 7.67% First Mortgage Bonds due 2004 and $30 million principal amount of 7.13% First Mortgage Bonds due 2007. The obligations of the Operating Companies under the Secured Notes are joint and several. Also in June 1997 in connection with the Offering, the Companies arranged for $155 million of short-term borrowings with variable interest rates (at that time, with a weighted average interest rate of 6.8%). Centerior Energy borrowed $30 million under a $125 million revolving credit facility which was renewed in May 1997. See Note 5 to the financial statements in the First Quarter 1997 Form 10-Q. The Operating Companies also had unsecured borrowings totaling $100 million guaranteed by Centerior Energy, and Centerior Energy had $25 million of unsecured borrowings jointly and severally guaranteed by the Operating Companies. While the $25 million amount is outstanding, Centerior Energy has agreed not to use $25 million of the revolving credit facility. Using available cash, the short-term borrowings and the net proceeds from the Offering, the Operating Companies invested $906.5 million in the Mansfield Capital Trust (MCT), an unaffiliated business trust, in June 1997. The MCT used these funds to purchase lease notes and redeem all $873.2 million aggregate principal amount of 10 1/4% and 11 1/8% secured lease obligation bonds (SLOBs) due 2003 and 2016 in July 1997. The SLOBs were issued by a special purpose funding corporation in 1988 on behalf of lessors in the Operating Companies' 1987 sale and leaseback transaction for the Bruce Mansfield Generating Plant. F-83 150 CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES, THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY, AND THE TOLEDO EDISON COMPANY AND SUBSIDIARY NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED The transaction allows the Operating Companies to capture the benefit of lower interest rates through the spread between (1) the interest rates on the Operating Companies' investments in the MCT and the return on TECC's investment and (2) the cost of funds for the Operating Companies and TECC, resulting in lower annual lease expense for the Operating Companies. For supplemental information on this transaction, see "1. Refinancing of Mansfield SLOBs" under "Item 5. Other Events" in the Companies' combined Current Report on Form 8-K dated July 8, 1997 (July 8, 1997 Form 8-K). (5) OTHER FINANCING ACTIVITY During the three months ended June 30, 1997, the Operating Companies also redeemed preferred stock and debt securities as follows: CLEVELAND ELECTRIC Mandatory redemptions consisted of $3 million of Serial Preferred Stock, $88.00 Series E; $10.7 million of Serial Preferred Stock, $91.50 Series Q; and $0.3 million of tax-exempt notes. TOLEDO EDISON Mandatory redemptions consisted of $1.7 million of 9 3/8% Cumulative Preferred Stock, $100 par value, and $0.2 million of tax-exempt notes. (6) WRITE-DOWN OF INACTIVE PRODUCTION FACILITIES In the first quarter of 1996, Toledo Edison wrote down the net book value of two inactive production facilities, $11.3 million, to "Other Income and Deductions, Net" resulting in nonoperating losses for Toledo Edison and Centerior Energy for that period. The net write-down was $7.2 million after taxes or, for Centerior Energy, $.05 per common share. (7) COMMITMENTS AND CONTINGENCIES Various legal actions, claims and regulatory proceedings covering several matters are pending against the Companies. See "Item 3. Legal Proceedings" in the 1996 Form 10-K; "Part II, Item 5. Other Information" in this Quarterly Report on Form 10-Q and in the First Quarter 1997 Form 10-Q; and "Item 5. Other Events" in the Companies' combined Current Report on Form 8-K dated June 11, 1997. In September 1996, Centerior Energy and Ohio Edison Company (Ohio Edison) entered into an agreement and plan of merger to form a new holding company, FirstEnergy Corp. (FirstEnergy). The merger remains subject to the approval of the FERC and the Securities and Exchange Commission. For a discussion of the status of the FERC approval process, see "2. Pending Merger with Ohio Edison" under "Item 5. Other Events" in the July 8, 1997 Form 8-K and "1. Pending Merger with Ohio Edison" under "Part II, Item 5. Other Information" in this Quarterly Report on Form 10-Q. F-84 151 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY INCOME STATEMENT (UNAUDITED) (THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ------------------- 1997 1996 1997 1996 -------- -------- -------- -------- OPERATING REVENUES.................................... $428,246 $434,025 $859,873 $861,551 OPERATING EXPENSES Fuel and Purchased Power (1)........................ 102,090 98,216 212,620 201,942 Other Operation and Maintenance..................... 101,409 99,083 192,856 204,215 Generation Facilities Rental Expense, Net........... 13,891 13,891 27,783 27,783 Depreciation and Amortization....................... 53,224 53,033 106,521 103,849 Taxes, Other Than Federal Income Taxes.............. 57,274 59,750 113,960 119,760 Amortization of Deferred Operating Expenses, Net.... 6,567 6,575 13,134 12,943 Federal Income Taxes................................ 16,353 17,565 35,556 29,370 -------- -------- -------- -------- Total Operating Expenses......................... 350,808 348,113 702,430 699,862 -------- -------- -------- -------- OPERATING INCOME...................................... 77,438 85,912 157,443 161,689 NONOPERATING INCOME (LOSS) Allowance for Equity Funds Used During Construction..................................... 398 601 725 1,099 Other Income and Deductions, Net.................... (7,031) (1,016) (11,680) 633 Federal Income Taxes -- Credit...................... 1,412 1,034 2,070 282 -------- -------- -------- -------- Total Nonoperating Income (Loss)................. (5,221) 619 (8,885) 2,014 -------- -------- -------- -------- INCOME BEFORE INTEREST CHARGES........................ 72,217 86,531 148,558 163,703 INTEREST CHARGES Long-Term Debt...................................... 56,211 60,626 110,604 120,786 Short-Term Debt..................................... 2,288 1,372 4,465 2,064 Allowance for Borrowed Funds Used During Construction..................................... (252) (627) (711) (1,146) -------- -------- -------- -------- Net Interest Charges............................. 58,247 61,371 114,358 121,704 -------- -------- -------- -------- NET INCOME............................................ 13,970 25,160 34,200 41,999 Preferred Dividend Requirements..................... 9,096 9,813 18,411 19,845 -------- -------- -------- -------- EARNINGS AVAILABLE FOR COMMON STOCK................... $ 4,874 $ 15,347 $ 15,789 $ 22,154 ======== ======== ======== ======== (1) Includes purchased power expense for purchases from Toledo Edison................................ $ 29,454 $ 25,908 $ 58,374 $ 52,580
The accompanying notes as they relate to Cleveland Electric are an integral part of this statement. F-85 152 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY BALANCE SHEET (THOUSANDS)
JUNE 30, DECEMBER 31, 1997 1996 ----------- ------------ (UNAUDITED) ASSETS PROPERTY, PLANT AND EQUIPMENT Utility Plant In Service....................................................... $ 7,053,571 $ 6,938,535 Accumulated Depreciation and Amortization...................................... (2,400,777) (2,252,321) ----------- ----------- 4,652,794 4,686,214 Construction Work In Progress.................................................. 67,121 56,853 ----------- ----------- 4,719,915 4,743,067 Nuclear Fuel, Net of Amortization.............................................. 97,922 113,030 Other Property, Less Accumulated Depreciation.................................. 14,999 53,547 ----------- ----------- 4,832,836 4,909,644 CURRENT ASSETS Cash and Temporary Cash Investments............................................ 22,126 30,273 Amounts Due from Customers and Others, Net..................................... 160,110 189,547 Amounts Due from Affiliates.................................................... 3,160 5,634 Materials and Supplies, at Average Cost Owned........................................................................ 52,453 51,686 Under Consignment............................................................ 27,028 23,655 Taxes Applicable to Succeeding Years........................................... 130,591 181,609 Other.......................................................................... 47,530 15,237 ----------- ----------- 442,998 497,641 REGULATORY AND OTHER ASSETS Regulatory Assets.............................................................. 1,333,979 1,349,693 Mansfield Capital Trust........................................................ 569,389 -- Nuclear Plant Decommissioning Trusts........................................... 85,995 75,573 Other.......................................................................... 72,259 44,980 ----------- ----------- 2,061,622 1,470,246 ----------- ----------- $ 7,337,456 $ 6,877,531 =========== =========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common Stock Equity............................................................ $ 1,009,866 $ 1,044,283 Preferred Stock With Mandatory Redemption Provisions......................................... 172,404 186,118 Without Mandatory Redemption Provisions...................................... 238,325 238,325 Long-Term Debt................................................................. 3,011,080 2,441,215 ----------- ----------- 4,431,675 3,909,941 CURRENT LIABILITIES Current Portion of Long-Term Debt and Preferred Stock.......................... 134,874 144,668 Current Portion of Lease Obligations........................................... 46,329 51,592 Notes Payable to Banks and Others.............................................. 70,000 -- Accounts Payable............................................................... 71,373 82,694 Accounts and Notes Payable to Affiliates....................................... 129,282 171,433 Accrued Taxes.................................................................. 242,541 315,998 Accrued Interest............................................................... 53,932 52,487 Dividends Declared............................................................. 5,686 15,228 Other.......................................................................... 39,689 43,672 ----------- ----------- 793,706 877,772 DEFERRED CREDITS AND OTHER LIABILITIES Unamortized Investment Tax Credits............................................. 172,186 176,130 Accumulated Deferred Federal Income Taxes...................................... 1,328,181 1,305,601 Unamortized Gain from Bruce Mansfield Plant Sale............................... 288,256 295,730 Accumulated Deferred Rents for Bruce Mansfield Plant........................... 101,750 98,767 Nuclear Fuel Lease Obligations................................................. 63,429 73,947 Retirement Benefits............................................................ 75,750 72,843 Other.......................................................................... 82,523 66,800 ----------- ----------- 2,112,075 2,089,818 COMMITMENTS AND CONTINGENCIES (Note 7) ----------- ----------- $ 7,337,456 $ 6,877,531 =========== ===========
The accompanying notes as they relate to Cleveland Electric are an integral part of this statement. F-86 153 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY CASH FLOWS (UNAUDITED) (THOUSANDS)
SIX MONTHS ENDED JUNE 30, --------------------------- 1997 1996 ---------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net Income........................................................ $ 34,200 $ 41,999 -------- -------- Adjustments to Reconcile Net Income to Cash from Operating Activities: Depreciation and Amortization.................................. 106,521 103,849 Deferred Federal Income Taxes.................................. 22,197 22,905 Deferred Fuel.................................................. 12,775 (52) Leased Nuclear Fuel Amortization............................... 25,186 20,338 Amortization of Deferred Operating Expenses, Net............... 13,134 12,943 Allowance for Equity Funds Used During Construction............ (725) (1,099) Changes in Amounts Due from Customers and Others, Net.......... 14,965 (35,708) Changes in Materials and Supplies.............................. (4,140) 7,415 Changes in Accounts Payable.................................... (11,321) 4,886 Changes in Working Capital Affecting Operations................ (55,980) (31,895) Other Noncash Items............................................ 5,636 (12,856) -------- -------- Total Adjustments............................................ 128,248 90,726 -------- -------- Net Cash from Operating Activities........................... 162,448 132,725 CASH FLOWS FROM FINANCING ACTIVITIES Bank Loans, Commercial Paper and Other Short-Term Debt............ 70,000 100,000 Notes Payable to Affiliates....................................... (40,967) 41,411 Secured Note Issues............................................... 575,000 -- Maturities, Redemptions and Sinking Funds......................... (29,014) (50,614) Nuclear Fuel Lease Obligations.................................... (25,861) (29,533) Dividends Paid.................................................... (77,952) (96,388) Premiums, Discounts and Expenses.................................. (53) (249) -------- -------- Net Cash from Financing Activities........................... 471,153 (35,373) CASH FLOWS FROM INVESTING ACTIVITIES Cash Applied to Construction...................................... (54,261) (51,455) Interest Capitalized as Allowance for Borrowed Funds Used During Construction................................................... (711) (1,146) Contributions to Nuclear Plant Decommissioning Trusts............. (5,856) (3,204) Investment in Mansfield Capital Trust............................. (569,389) -- Purchases of Accounts Receivable from Affiliate................... -- (76,326) Other Cash Received (Applied)..................................... (11,531) 6,174 -------- -------- Net Cash from Investing Activities........................... (641,748) (125,957) -------- -------- NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS................... (8,147) (28,605) CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD.......... 30,273 69,770 -------- -------- CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD................ $ 22,126 $ 41,165 ======== ======== Other Payment Information: Interest (net of amounts capitalized)............................. $110,000 $119,000 Federal Income Taxes (Refund)..................................... 8,300 (6,200)
The accompanying notes as they relate to Cleveland Electric are an integral part of this statement. F-87 154 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7 of the 1996 Form 10-K and in the First Quarter 1997 Form 10-Q. The information under "Capital Resources and Liquidity" remains unchanged with the following exceptions: As discussed in Note 4, the Operating Companies refinanced high-cost fixed obligations through a lower cost transaction. During the second quarter of 1997, Cleveland Electric redeemed various securities as discussed in Note 5. S&P and Moody's raised the credit ratings for Cleveland Electric's securities in July and August 1997, respectively, in anticipation of Centerior Energy's pending merger with Ohio Edison. S&P indicated that, should the merger not be consummated, its prior ratings would be restored. Current credit ratings for Cleveland Electric are as follows:
SECURITIES S&P MOODY'S ------------------------------------------------------------------ ---- ------- First Mortgage Bonds.............................................. BB+ Ba1 Subordinate Debt.................................................. BB- Ba3 Preferred Stock................................................... BB- b1
In the third quarter of 1997, Cleveland Electric plans to refinance with lower-cost securities $180.6 million principal amount of first mortgage bonds issued as security for certain tax-exempt bonds issued by public authorities. Additional first mortgage bonds may be issued by Cleveland Electric under its mortgage on the basis of property additions, cash or refundable first mortgage bonds. If the applicable interest coverage test is met, Cleveland Electric may issue first mortgage bonds on the basis of property additions and, under certain circumstances, refundable bonds. At June 30, 1997, Cleveland Electric would not have been permitted to issue a material amount of additional first mortgage bonds, except in connection with refinancings. If FirstEnergy elects to apply purchase accounting to Cleveland Electric upon completion of Centerior Energy's pending merger with Ohio Edison, Cleveland Electric's available bondable property would be reduced to below zero. Cleveland Electric expects its foreseeable future cash needs to be satisfied with internally generated cash and available credit facilities and, therefore, that it will not need to issue first mortgage bonds, except in connection with planned refinancings. F-88 155 RESULTS OF OPERATIONS Factors contributing to the 1.3% and 0.2% decreases in 1997 operating revenues from 1996 for the second quarter and six months, respectively, are shown as follows:
CHANGES FOR PERIOD ENDED JUNE 30, 1997 ------------------- THREE SIX FACTORS MONTHS MONTHS --------------------------------------------------------------- ------ ------ (MILLIONS) Kilowatt-hour Sales Volume and Mix............................. $(9.5) $(8.8) Unbilled Revenues.............................................. 6.0 (6.0) Wholesale Revenues............................................. 1.9 9.4 Base Rates..................................................... (6.7) 8.3 Fuel Cost Recovery Revenues.................................... 0.2 2.5 Miscellaneous Revenues......................................... 2.3 (7.1) ----- ----- Total.......................................................... $(5.8) $(1.7) ===== =====
Percentage changes between 1997 and 1996 billed electric kilowatt-hour sales are summarized as follows:
CHANGES FOR PERIOD ENDED JUNE 30, 1997 ------------------- THREE SIX CUSTOMER CATEGORIES MONTHS MONTHS - ---------------------------------------- ------ ------ Residential............................. (5.3)% (2.0)% Commercial.............................. (4.1) (1.4) Industrial.............................. 2.0 0.1 Other................................... 20.3 52.7 Total................................... 0.4 4.4
Second quarter 1997 total kilowatt-hour sales increased slightly as increases in industrial and other sales were partially offset by fewer residential and commercial sales. Industrial sales increased on the strength of increased sales to the broad-based, smaller industrial customer group and large primary metals industry customers, which were partially offset by fewer sales to large automotive manufacturers. Other sales increased as a 39% increase in wholesale sales was partially offset by fewer sales to public authorities. Residential and commercial sales declined because of a change in the meter reading schedule in June 1997, which reduced the number of days in the billing cycles, and the milder weather in the 1997 period. Weather-normalized residential and commercial sales decreased 3.1% and 3%, respectively, for the 1997 period. Kilowatt-hour sales data does not reflect a significant portion of the effect of hot weather in the second half of June 1997 because those sales were not billed by the end of the month. However, the estimated revenues from those sales have been recorded. Total kilowatt-hour sales increased for the six-month period in 1997 as increased wholesale sales were partially offset by fewer residential and commercial sales. Industrial sales increased slightly primarily because of increased sales to the broad-based, smaller industrial customer group. Wholesale sales increased 73%. Residential and commercial sales declined because of the milder weather in the 1997 period. On a weather-normalized basis, residential sales increased 1.7% for the 1997 period, while commercial sales decreased 0.4%. Wholesale sales in 1996 were suppressed by soft market conditions and limited power availability for bulk power transactions because of nuclear generating plant refueling and maintenance outages. The net changes in 1997 base rates revenues resulted from the April 1996 rate order issued by the PUCO and renegotiated contracts for certain large industrial customers which resulted in a decrease in base rates for those customers. F-89 156 The increases in 1997 fuel cost recovery revenues included in customer bills resulted from increases in the fuel cost recovery factors used in 1997 to calculate these revenues compared to those used in 1996. The increases in the weighted averages of the fuel cost recovery factors for 1997 were about 0.3% and 2% for the second quarter and six months, respectively. Second quarter miscellaneous revenues in 1997 increased from the 1996 amount primarily because of the retroactive effect of a reclassification of certain revenues as credits to operating expenses. The reclassification was recorded in the 1996 second quarter. A significant portion of the six-month decrease in miscellaneous revenues in 1997 related to a canceled generating plant lease agreement for which a refund payment was made in the 1997 first quarter. Second quarter operating expenses in 1997 increased 0.8% from the 1996 amount. Fuel and purchased power expenses increased as higher purchased power expense was partially offset by lower fuel expense. A change in the system generating mix (more nuclear generation and less coal-fired generation in the 1997 period than in the 1996 period) accounted for a large part of the lower fuel expense for the 1997 period. Taxes, other than federal income taxes, decreased primarily because of lower property and payroll tax accruals. Federal income taxes decreased as a result of lower pretax operating income. The second quarter 1997 nonoperating loss resulted primarily from both Cleveland Electric's share of expenses related to Centerior Energy's pending merger with Ohio Edison and certain costs associated with an accounts receivable securitization. Second quarter 1997 interest charges and preferred dividend requirements decreased primarily because of the redemption of securities in 1996 and 1997. Six-month operating expenses in 1997 increased 0.4% from the 1996 amount. Fuel and purchased power expenses increased for the same reasons cited for the second quarter 1997 increase in these expenses. Federal income taxes increased as a result of higher pretax operating income. Depreciation and amortization expenses increased primarily because of changes in depreciation rates approved in the April 1996 PUCO rate order. Other operation and maintenance expenses decreased as a result of ongoing cost cutting and work force reductions. Taxes, other than federal income taxes, decreased for the same reason cited for the second quarter 1997 decrease in these expenses. The six-month 1997 nonoperating loss resulted primarily from both Cleveland Electric's share of merger-related expenses and certain costs associated with an accounts receivable securitization. Six-month 1997 interest charges and preferred dividend requirements decreased primarily because of the same reason cited for the second quarter 1997 decrease in these charges. NEW ACCOUNTING STANDARDS In June 1997, the FASB issued two new statements of financial accounting standards, one for the reporting of comprehensive income and one for the disclosures about segments of an enterprise and related information. Both statements are effective for 1998 reporting. Cleveland Electric has not completed analyses to determine the effects of adopting the new standards. F-90 157 THE TOLEDO EDISON COMPANY AND SUBSIDIARY INCOME STATEMENT (UNAUDITED) (THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- --------------------- 1997 1996 1997 1996 -------- -------- -------- -------- OPERATING REVENUES (1).......................... $222,144 $210,940 $439,204 $421,733 OPERATING EXPENSES Fuel and Purchased Power...................... 44,501 40,652 87,815 79,420 Other Operation and Maintenance............... 55,455 58,244 111,772 114,763 Generation Facilities Rental Expense, Net..... 25,923 25,962 51,884 51,923 Depreciation and Amortization................. 23,516 23,689 47,330 46,105 Taxes, Other Than Federal Income Taxes........ 22,601 23,572 45,395 47,425 Amortization of Deferred Operating Expenses, Net........................................ 4,291 4,293 8,582 8,468 Federal Income Taxes.......................... 9,780 3,872 17,992 10,099 -------- -------- -------- -------- Total Operating Expenses.............. 186,067 180,284 370,770 358,203 -------- -------- -------- -------- OPERATING INCOME................................ 36,077 30,656 68,434 63,530 NONOPERATING INCOME (LOSS) Allowance for Equity Funds Used During Construction............................... 54 186 386 599 Other Income and Deductions, Net.............. 900 374 473 (8,779) Federal Income Taxes -- Credit (Expense)...... (601) 115 (826) 3,310 -------- -------- -------- -------- Total Nonoperating Income (Loss)...... 353 675 33 (4,870) -------- -------- -------- -------- INCOME BEFORE INTEREST CHARGES.................. 36,430 31,331 68,467 58,660 INTEREST CHARGES Long-Term Debt................................ 21,956 22,704 44,067 45,863 Short-Term Debt............................... 1,369 1,145 2,559 2,363 Allowance for Borrowed Funds Used During Construction............................... (11) (146) (115) (471) -------- -------- -------- -------- Net Interest Charges.................. 23,314 23,703 46,511 47,755 -------- -------- -------- -------- NET INCOME...................................... 13,116 7,628 21,956 10,905 Preferred Dividend Requirements............... 4,211 4,229 8,405 8,433 -------- -------- -------- -------- EARNINGS AVAILABLE FOR COMMON STOCK............. $ 8,905 $ 3,399 $ 13,551 $ 2,472 -------- -------- -------- -------- (1) Includes revenues from bulk power sales to Cleveland Electric.......................... $ 29,454 $ 25,908 $ 58,374 $ 52,580
The accompanying notes as they relate to Toledo Edison are an integral part of this statement. F-91 158 THE TOLEDO EDISON COMPANY AND SUBSIDIARY BALANCE SHEET (THOUSANDS)
DECEMBER 31, 1996 JUNE 30, ------------ 1997 ----------- (UNAUDITED) ASSETS PROPERTY, PLANT AND EQUIPMENT Utility Plant In Service....................................................... $ 2,945,663 $ 2,928,657 Accumulated Depreciation and Amortization...................................... (1,066,369) (1,019,836) ---------- ---------- 1,879,294 1,908,821 Construction Work In Progress.................................................. 23,883 21,479 ---------- ---------- 1,903,177 1,930,300 Nuclear Fuel, Net of Amortization.............................................. 64,848 76,118 Other Property, Less Accumulated Depreciation.................................. 7,003 8,460 ---------- ---------- 1,975,028 2,014,878 CURRENT ASSETS Cash and Temporary Cash Investments............................................ 22,502 81,454 Amounts Due from Customers and Others, Net..................................... 29,007 16,308 Amounts Due from Affiliates.................................................... 92,949 95,336 Materials and Supplies, at Average Cost Owned........................................................................ 31,601 33,160 Under Consignment............................................................ 10,170 10,383 Taxes Applicable to Succeeding Years........................................... 51,898 68,352 Other.......................................................................... 2,498 3,479 ---------- ---------- 240,625 308,472 REGULATORY AND OTHER ASSETS Regulatory Assets.............................................................. 914,600 927,629 Mansfield Capital Trust........................................................ 337,099 -- Nuclear Plant Decommissioning Trusts........................................... 72,277 64,093 Other.......................................................................... 32,669 42,408 ---------- ---------- 1,356,645 1,034,130 ---------- ---------- $ 3,572,298 $ 3,357,480 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION Common Stock Equity............................................................ $ 816,795 $ 803,237 Preferred Stock With Mandatory Redemption Provisions......................................... 1,690 3,355 Without Mandatory Redemption Provisions...................................... 210,000 210,000 Long-Term Debt................................................................. 1,121,783 1,003,026 ---------- ---------- 2,150,268 2,019,618 CURRENT LIABILITIES Current Portion of Long-Term Debt and Preferred Stock.......................... 69,465 51,365 Current Portion of Lease Obligations........................................... 33,367 36,244 Notes Payable to Banks and Others.............................................. 30,000 -- Accounts Payable............................................................... 44,574 46,496 Accounts and Notes Payable to Affiliates....................................... 81,964 30,016 Accrued Taxes.................................................................. 64,849 72,829 Accrued Interest............................................................... 22,337 22,348 Other.......................................................................... 17,162 18,722 ---------- ---------- 363,718 278,020 DEFERRED CREDITS AND OTHER LIABILITIES Unamortized Investment Tax Credits............................................. 73,451 75,417 Accumulated Deferred Federal Income Taxes...................................... 562,474 565,600 Unamortized Gain from Bruce Mansfield Plant Sale............................... 174,454 179,027 Accumulated Deferred Rents for Bruce Mansfield Plant and Beaver Valley Unit 2............................................................................ 39,960 39,188 Nuclear Fuel Lease Obligations................................................. 41,303 48,491 Retirement Benefits............................................................ 104,332 102,214 Other.......................................................................... 62,338 49,905 ---------- ---------- 1,058,312 1,059,842 COMMITMENTS AND CONTINGENCIES (NOTE 7) ---------- ---------- $ 3,572,298 $ 3,357,480 ========== ==========
The accompanying notes as they relate to Toledo Edison are an integral part of this statement. F-92 159 THE TOLEDO EDISON COMPANY AND SUBSIDIARY CASH FLOWS (UNAUDITED) (THOUSANDS)
SIX MONTHS ENDED JUNE 30, --------------------- 1997 1996 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net Income........................................................... $ 21,956 $ 10,905 -------- -------- Adjustments to Reconcile Net Income to Cash from Operating Activities: Depreciation and Amortization..................................... 47,330 46,105 Deferred Federal Income Taxes..................................... (3,126) 13,368 Deferred Fuel..................................................... 6,116 1,643 Leased Nuclear Fuel Amortization.................................. 17,634 15,461 Amortization of Deferred Operating Expenses, Net.................. 8,582 8,468 Allowance for Equity Funds Used During Construction............... (386) (599) Changes in Amounts Due from Customers and Others, Net............. (5,103) (4,461) Sales of Accounts Receivable to Affiliate......................... -- 76,326 Changes in Materials and Supplies................................. 1,772 1,689 Changes in Accounts Payable....................................... (1,922) 2,553 Changes in Working Capital Affecting Operations................... (3,947) (30,245) Other Noncash Items............................................... 9,886 (12,787) -------- -------- Total Adjustments............................................ 76,836 117,521 -------- -------- Net Cash from Operating Activities........................... 98,792 128,426 CASH FLOWS FROM FINANCING ACTIVITIES Bank Loans, Commercial Paper and Other Short-Term Debt............... 30,000 -- Notes Payable to Affiliates.......................................... 55,000 (20,950) Secured Note Issues.................................................. 145,000 -- Maturities, Redemptions and Sinking Funds............................ (9,865) (43,865) Nuclear Fuel Lease Obligations....................................... (18,060) (23,318) Dividends Paid....................................................... (8,397) (8,437) Premiums, Discounts and Expenses..................................... (28) (225) -------- -------- Net Cash from Financing Activities........................... 193,650 (96,795) CASH FLOWS FROM INVESTING ACTIVITIES Cash Applied to Construction......................................... (25,004) (23,850) Interest Capitalized as Allowance for Borrowed Funds Used During Construction...................................................... (115) (471) Loans to Affiliates.................................................. 11,166 (46,411) Contributions to Nuclear Plant Decommissioning Trusts................ (4,919) (2,693) Investment in Mansfield Capital Trust................................ (337,099) -- Other Cash Received.................................................. 4,577 397 -------- -------- Net Cash from Investing Activities........................... (351,394) (73,028) -------- -------- NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS...................... (58,952) (41,397) CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD............. 81,454 93,669 -------- -------- CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD................... $ 22,502 $ 52,272 ======== ======== Other Payment Information: Interest (net of amounts capitalized)................................ $ 44,000 $ 46,000 Federal Income Taxes................................................. 4,300 10,400
The accompanying notes as they relate to Toledo Edison are an integral part of this statement. F-93 160 THE TOLEDO EDISON COMPANY AND SUBSIDIARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAPITAL RESOURCES AND LIQUIDITY Reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 7 of the 1996 Form 10-K and in the First Quarter 1997 Form 10-Q. The information under "Capital Resources and Liquidity" remains unchanged with the following exceptions: As discussed in Note 4, the Operating Companies refinanced high-cost fixed obligations through a lower cost transaction. During the second quarter of 1997, Toledo Edison redeemed various securities as discussed in Note 5. S&P and Moody's raised the credit ratings for Toledo Edison's securities in July and August 1997, respectively, in anticipation of Centerior Energy's pending merger with Ohio Edison. S&P indicated that, should the merger not be consummated, its prior ratings would be restored. Current credit ratings for Toledo Edison are as follows:
SECURITIES S&P MOODY'S -------------------------------------------------------- ---- ------- First Mortgage Bonds.................................... BB+ Ba1 Subordinate Debt........................................ BB- Ba3 Preferred Stock......................................... BB- b1
In the third quarter of 1997, Toledo Edison plans to refinance with lower-cost securities $10.1 million principal amount of first mortgage bonds issued as security for certain tax-exempt bonds issued by public authorities. Additional first mortgage bonds may be issued by Toledo Edison under its mortgage on the basis of property additions, cash or refundable first mortgage bonds. If the applicable interest coverage test is met, Toledo Edison may issue first mortgage bonds on the basis of property additions and, under certain circumstances, refundable bonds. At June 30, 1997, Toledo Edison would not have been permitted to issue a material amount of additional first mortgage bonds, except in connection with refinancings. If FirstEnergy elects to apply purchase accounting to Toledo Edison upon completion of Centerior Energy's pending merger with Ohio Edison, Toledo Edison's available bondable property would be reduced to below zero. Toledo Edison expects its foreseeable future cash needs to be satisfied with internally generated cash and available credit facilities and, therefore, that it will not need to issue first mortgage bonds, except in connection with planned refinancings. F-94 161 RESULTS OF OPERATIONS Factors contributing to the 5.3% and 4.1% increases in 1997 operating revenues from 1996 for the second quarter and six months, respectively, are shown as follows:
CHANGES FOR PERIOD ENDED JUNE 30, 1997 ------------------ THREE SIX FACTORS MONTHS MONTHS ---------------------------------------------------------------- ------ ------- (MILLIONS) Kilowatt-hour Sales Volume and Mix.............................. $ 10.2 $ 16.4 Unbilled Revenues............................................... 7.0 4.0 Wholesale Revenues.............................................. 4.2 7.1 Base Rates...................................................... (6.0) (3.4) Fuel Cost Recovery Revenues..................................... (3.0) (4.5) Miscellaneous Revenues.......................................... (1.2) (2.1) ----- ----- Total........................................................... $ 11.2 $ 17.5 ===== =====
Percentage changes between 1997 and 1996 billed electric kilowatt-hour sales are summarized as follows:
CHANGES FOR PERIOD ENDED JUNE 30, 1997 ------------------ THREE SIX CUSTOMER CATEGORIES MONTHS MONTHS --------------------------------------------------------- ------ ------- Residential.............................................. (2.4)% (2.8)% Commercial............................................... (1.5) 0.7 Industrial............................................... 11.9 10.0 Other.................................................... 21.1 21.0 Total.................................................... 9.4 8.7
Second quarter 1997 total kilowatt-hour sales increased primarily because of increased industrial and wholesale sales. Industrial sales increased on the strength of increased sales to large primary metals industry customers (including the new North Star BHP Steel facility) and the broad-based, smaller industrial customer group. Wholesale sales (included in the "Other" category) increased 22%. Residential and commercial sales declined because of the milder weather in the 1997 period. On a weather-normalized basis, residential sales increased 0.9% for the 1997 period. Kilowatt-hour sales data does not reflect a significant portion of the effect of hot weather in the second half of June 1997 because those sales were not billed by the end of the month. However, the estimated revenues from those sales have been recorded. Total kilowatt-hour sales increased for the six-month period in 1997 primarily because of increased industrial and wholesale sales. Industrial sales growth reflected increased sales to large primary metals, automotive and glass manufacturers and the broad-based, smaller industrial customer group. Wholesale sales increased 24%. While residential sales declined because of the milder weather in the 1997 period, commercial sales increased slightly. Weather-normalized residential and commercial sales increased 0.5% and 1.9%, respectively, for the 1997 period. Wholesale sales in 1996 were suppressed by soft market conditions and limited power availability for bulk power transactions because of nuclear generating plant refueling and maintenance outages. Renegotiated contracts for certain large industrial customers resulted in a decrease in base rates which entirely offset the effect of the general price increase under the April 1996 rate order issued by the PUCO, resulting in decreases in 1997 base rates revenues. The decreases in 1997 fuel cost recovery revenues included in customer bills resulted from decreases in the fuel cost recovery factors used in 1997 to calculate these revenues compared to those used in 1996. The decreases in the weighted averages of the fuel cost recovery factors for 1997 were about 10% and 7% for the second quarter and six months, respectively. F-95 162 Second quarter operating expenses in 1997 increased 3.2% from the 1996 amount. Fuel and purchased power expenses increased as higher purchased power expense was partially offset by lower fuel expense. A change in the system generating mix (more nuclear generation and less coal-fired generation in the 1997 period than in the 1996 period) accounted for a large part of the lower fuel expense for the 1997 period. Federal income taxes increased as a result of higher pretax operating income. Other operation and maintenance expenses decreased as a result of ongoing cost cutting and work force reductions. Taxes, other than federal income taxes, decreased primarily because of lower property and payroll tax accruals. Second quarter 1997 interest charges and preferred dividend requirements decreased slightly primarily because of the redemption of securities in 1996 and 1997. Six-month operating expenses in 1997 increased 3.5% from the 1996 amount. Fuel and purchased power expenses increased for the same reasons cited for the second quarter 1997 increase in these expenses. Federal income taxes increased as a result of higher pretax operating income. Depreciation and amortization expenses increased primarily because of changes in depreciation rates approved in the April 1996 PUCO rate order. Other operation and maintenance expenses and taxes, other than federal income taxes, decreased for the same reasons cited for the second quarter 1997 decreases in these expenses. The six-month 1996 nonoperating loss resulted primarily from the write-down of two inactive production facilities as discussed in Note 6. Six-month 1997 interest charges and preferred dividend requirements decreased primarily because of the same reason cited for the second quarter 1997 decrease in these charges. NEW ACCOUNTING STANDARDS In June 1997, the FASB issued two new statements of financial accounting standards, one for the reporting of comprehensive income and one for the disclosures about segments of an enterprise and related information. Both statements are effective for 1998 reporting. Toledo Edison has not completed analyses to determine the effects of adopting the new standards. F-96 163 PART II. OTHER INFORMATION ITEM 5. OTHER INFORMATION 1. PENDING MERGER WITH OHIO EDISON For additional information relating to this topic, see "Outlook-Pending Merger with Ohio Edison" under "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Companies' Annual Report on Form 10-K for the year ended December 31, 1996 ("1996 Form 10-K") and "Pending Merger with Ohio Edison" under "Item 5. Other Events" in the Companies' Form 8-K Current Reports dated June 11, 1997 and July 8, 1997. On August 8, 1997, Ohio Edison Company and the Companies filed a revised analysis, additional testimony and proposed mitigation measures fully responsive to the FERC's July 16, 1997 Order. While the revised analysis suggests potential anticompetitive effects in certain markets under certain limited circumstances, the Companies believe that the mitigation measures more than adequately address these concerns through a variety of transmission solutions which are intended to ensure that the proposed merger's effects are procompetitive. As a result of the mitigation measures, municipal electric systems in Ohio Edison's and the Companies' service areas will be able to take full advantage of additional third party generation sources made available to them as a result of FirstEnergy's open access transmission tariff. Accordingly, whether or not the FERC grants their separate request to shorten the comment period from 60 to 30 days, the Companies continue to believe the FERC will approve the proposed merger prior to year end. 2. CONJUNCTIVE ELECTRIC SERVICE ("CES") In December 1996, The Public Utilities Commission of Ohio ("PUCO") ruled that all Ohio electric utilities were required to file tariffs which would provide for a new type of electric service in which various customers could aggregate together and negotiate their electric rates with the utilities. The Operating Companies filed their version of a CES tariff on March 31, 1997. On April 28, 1997, Cleveland Electric and Toledo Edison, as well as three other Ohio utilities, appealed the PUCO's order to the Ohio Supreme Court. The City of Toledo and Enron Capital and Trade Resources have moved to intervene. The Operating Companies have filed merit briefs asserting that the PUCO is without statutory authority to require utilities to file tariffs which will permit customers to aggregate and negotiate their electric rates with the utilities. 3. FIRSTENERGY RATE PLAN For additional information relating to this topic, see "Management's Financial Analysis -- Outlook-FirstEnergy Rate Plan" in the Companies' 1996 Form 10-K. Various intervenors have filed a motion at the PUCO seeking clarification of the status of the FirstEnergy Rate Plan in light of their assertions that PUCO approval of such plan was conditioned upon an acceptable CES tariff, and that the Operating Companies' CES tariff, discussed in Item 2 above, is unacceptable. FirstEnergy and the Operating Companies have responded that the PUCO lacks authority to impose CES tariffs and that the PUCO has not yet determined whether the Operating Companies' filed version of a CES tariff is acceptable. 4. PLANTS TO BE DECOMMISSIONED On June 24, 1997, Cleveland Electric's Board of Directors authorized the decommissioning later this year of several older coal-fired units with aggregate generating capacity of 266 MW. This capacity can be economically replaced by purchasing power, and the planned decommissioning will not materially adversely affect Cleveland Electric's results of operations. 5. OHIO ABANDONS NUCLEAR WASTE PROJECT The six-state Midwest Compact Commission has abandoned planning a facility to store low-level radioactive waste from nuclear power plants and other producers. Officials from the compact, which included Ohio, said a facility is no longer needed and would cost too much to build. Disposal sites in South Carolina F-97 164 and Utah are now open to waste generators. The decision has no immediate impact on the Companies' operations or costs, while long-term implications are under study. 6. NEW FEDERAL RULES For additional information relating to this topic, see "Environmental Regulation -- Air Quality Control" under "Item 1. Business" in the Companies' 1996 Form 10-K. The U.S. Environmental Protection Agency has issued new clean air standards for ozone and fine particulates that could require the Operating Companies to install additional air pollution control equipment and/or switch fuel sources at the Operating Companies' fossil-fueled plants after 2002. Compliance would be required by 2004. The new rules have been challenged in court by trade associations. The PUCO estimates the new rules will cost Ohio utilities approximately $760 million per year, and increase the average cost of electricity by 7%. The Companies are evaluating their options. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K A. EXHIBITS See Exhibit Index following. B. REPORTS ON FORM 8-K During the quarter ended June 30, 1997, Centerior Energy, Cleveland Electric and Toledo Edison each filed one Current Report on Form 8-K with the Securities and Exchange Commission. A Form 8-K dated June 11, 1997 and filed June 18, 1997 included one item under "Item 5. Other Events". That item, "Pending Merger with Ohio Edison", reported on agreements reached with the City of Cleveland and American Municipal Power-Ohio and the withdrawal of their opposition to the pending merger of Centerior Energy and Ohio Edison Company. F-98 165 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The person signing this report on behalf of each such registrant is also signing in his capacity as each registrant's Chief Accounting Officer. CENTERIOR ENERGY CORPORATION -------------------------------------- (Registrant) THE CLEVELAND ELECTRIC ILLUMINATING COMPANY -------------------------------------- (Registrant) THE TOLEDO EDISON COMPANY -------------------------------------- (Registrant) By: E. LYLE PEPIN -------------------------------------- E. Lyle Pepin, Controller and Chief Accounting Officer of each Registrant Date: August 14, 1997 F-99 166 APPENDIX I [SPECIMEN] AMBAC Ambac Assurance Corporation c/o CT Corporation Systems 44 East Mifflin Street, Madison, Wisconsin 53703 Financial Guaranty Insurance Policy Administrative Office: One State Street Plaza, New York, New York 10004 Telephone: (212) 668-0340
Obligor: Policy Number: Obligations: Premium: AMBAC ASSURANCE CORPORATION (AMBAC) A Wisconsin Stock Insurance Company in consideration of the payment of the premium and subject to the terms of this Policy, hereby agrees to pay to United States Trust Company of New York, as trustee, or its successor (the "Insurance Trustee"), for the benefit of the Obligees, that portion of the principal of and interest on the above-described obligations (the "Obligations") which shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Obligor. Ambac will make such payments to the Insurance Trustee within one (1) business day following notification to Ambac of Nonpayment. Upon an Obligee's presentation and surrender to the Insurance Trustee of such unpaid Obligations or appurtenant coupons, uncanceled and in bearer form free of any adverse claim, the Insurance Trustee will disburse to the Obligee the face amount of principal and interest which is then Due for Payment but is unpaid. Upon such disbursement, Ambac shall become the owner of the surrendered Obligations and coupons and shall be fully subrogated to all of the Obligee's rights to payment. In cases where the Obligations are issuable only in a form whereby principal is payable to registered Obligees or their assigns, the Insurance Trustee shall disburse principal to an Obligee as aforesaid only upon presentation and surrender to the Insurance Trustee of the unpaid Obligation, uncanceled and free of any adverse claim, together with an instrument of assignment, in form satisfactory to the Insurance Trustee duly executed by the Obligee or such Obligee's duly authorized representative, so as to permit ownership of such Obligation to be registered in the name of Ambac or its nominee. In cases where the Obligations are issuable only in a form whereby interest is payable to registered Obligees or their assigns the Insurance Trustee shall disburse interest to an Obligee as aforesaid only upon presentation to the Insurance Trustee of proof that the claimant is the person entitled to the payment of interest on the Obligation and delivery to the Insurance Trustee of an instrument of assignment, in form satisfactory to the Insurance Trustee, duly executed by the claimant Obligee or such Obligee's duly authorized representative, transferring to Ambac all rights under such Obligation to receive the interest in respect of which the insurance disbursement was made. Ambac shall be subrogated to all of the Obligees' rights to payment on registered Obligations to the extent of the insurance disbursements so made. In the event that a trustee or paying agent for the Obligations has notice that any payment of principal of or interest on an Obligation which has become Due for Payment and which is made to an Obligee by or on behalf of the Obligor has been deemed a preferential transfer and theretofore recovered from the Obligee pursuant to the United States Bankruptcy Code in accordance with a final, nonappealable order of a court of competent jurisdiction, such Obligee will be entitled to payment from Ambac to the extent of such recovery if sufficient funds are not otherwise available. As used herein, the term "Obligee" means any person other than the Obligor who, at the time of Nonpayment, is the owner of an Obligation or of a coupon appertaining to an Obligation. As used herein, "Due for Payment", when referring to the principal of Obligations, is when the stated maturity date or mandatory redemption date for the application of a required sinking fund installment has been reached and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by application of required sinking fund installments), acceleration or other advancement of maturity; and, when referring to interest on the Obligations, is when the stated date for payment of interest has been reached. As used herein, "Nonpayment" means the failure of the Obligor to have provided sufficient funds to the paying agent for payment in full of all principal of and interest on the Obligations which are Due for Payment. This Policy is noncancelable. The premium on this Policy is not refundable for any reason, including payment of the Obligations prior to maturity. This Policy does not insure against loss of any prepayment or other acceleration payment which at any time may become due in respect of any Obligation, other than at the sole option of Ambac, nor against any risk other than Nonpayment. In witness whereof, Ambac has caused this Policy to be affixed with a facsimile of its corporate seal and to be signed by its duly authorized officers in facsimile to become effective as its original seal and signatures and binding upon Ambac by virtue of the countersignature of its duly authorized representative. /s/ P. Lassiter AMBAC ASSURANCE CORPORATION /s/ _______ A. Cooke President SEAL Secretary WISCONSIN Effective Date: Authorized Representative UNITED STATES TRUST COMPANY OF NEW YORK /s/ H. William Weber acknowledges that it has agreed to perform the duties of Insurance Trustee under this Authorized Officer Policy. Form No.: 2B-0012(7/97) 167 ====================================================== No dealer, salesperson or other individual has been authorized to give any information or to make any representations in connection with the Exchange Offer other than those contained or incorporated by reference in this Prospectus and the accompanying Letter of Transmittal. If given or made, such information or representations must not be relied upon as having been authorized by the Companies or the Exchange Agent. Neither this Prospectus nor the accompanying Letter of Transmittal, or both together, constitute an offer to sell, or a solicitation of an offer to buy, Secured Notes in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation. Neither the delivery of this Prospectus nor the accompanying Letter of Transmittal, or both together, nor any sale made hereunder shall, under any circumstances, create an implication that there has not been a change in the facts set forth in this Prospectus or in the affairs of the Companies since the date hereof. UNTIL ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ------------------------ TABLE OF CONTENTS
PAGE ----------- Available Information.................. 3 Incorporation of Certain Documents by Reference............................ 3 Summary Information.................... 4 Risk Factors........................... 12 Selected Financial Information for Cleveland Electric................... 16 Selected Financial Information for Toledo Edison........................ 17 The Companies.......................... 18 Pending Merger of Centerior Energy and Ohio Edison.......................... 28 Pending Merger of Cleveland Electric and Toledo Edison.................... 30 Combined Pro Forma Condensed Balance Sheets of Cleveland Electric and Toledo Edison........................ 32 Combined Pro Forma Condensed Income Statements of Cleveland Electric and Toledo Edison........................ 34 The Exchange Offer..................... 36 Description of the New Notes........... 43 Credit Enhancement of Secured Notes due 2007................................. 49 Descriptions of Cleveland Electric Bonds and Toledo Edison Bonds........ 51 Certain Tax Considerations............. 60 Plan of Distribution................... 63 Legal Matters.......................... 63 Experts................................ 63 Index to Financial Statements Section.............................. F-1 Financial Guaranty Insurance Policy.... Appendix 1
====================================================== ====================================================== $720,000,000 EXCHANGE OFFER THE CLEVELAND ELECTRIC ILLUMINATING COMPANY THE TOLEDO EDISON COMPANY OFFER TO EXCHANGE 7.19% SERIES B SECURED NOTES DUE 2000, 7.67% SERIES B SECURED NOTES DUE 2004 OR 7.13% SERIES B SECURED NOTES DUE 2007 FOR ANY AND ALL OUTSTANDING 7.19% SERIES A SECURED NOTES DUE 2000, 7.67% SERIES A SECURED NOTES DUE 2004 OR 7.13% SERIES A SECURED NOTES DUE 2007, RESPECTIVELY PROSPECTUS , 1997 ====================================================== 168 PART II ITEM 20 INDEMNIFICATION OF DIRECTORS AND OFFICERS Cleveland Electric Regulations provide that each person who is or has been a director or officer of Cleveland Electric shall be indemnified by Cleveland Electric against judgments, penalties, reasonable settlements, legal fees and expenses arising out of any threatened, pending or completed proceedings of a criminal, administrative or investigative nature in which he or she may become involved by reason of his or her relationship to Cleveland Electric (other than a proceeding by or on behalf of Cleveland Electric), but only if he or she is found, by the disinterested members of the Cleveland Electric Board, by independent counsel or by the Share Owners, (a) to have acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of Cleveland Electric and (b) in the case of a criminal matter, to have had no reasonable cause to believe his or her conduct was unlawful. In the case of actions brought by or on behalf of Cleveland Electric against a director or officer, indemnification is provided only for reasonable legal fees and expenses and only if it is determined that he or she acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of Cleveland Electric; but if he or she is adjudged to be liable due to negligence or misconduct, indemnification is provided only if an appropriate court determines that indemnification is fair and reasonable under the circumstances. Similar indemnification also may be made available by Cleveland Electric to its directors and officers, and to a limited extent may be available as a matter of right to such persons, under Section 1701.13 of the Revised Code of Ohio. The Code of Regulations of Toledo Edison provides that Toledo Edison will indemnify each director and officer against judgments, fines and amounts paid in settlement and attorneys' fees and other expenses incurred in connection with suits and proceedings involving his or her actions as a director or officer to the full extent Toledo Edison is authorized to do so under the Ohio General Corporation Law as now in effect or as amended from time to time. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling the Companies pursuant to the foregoing provisions, the Companies have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against liabilities described in the preceding paragraphs (other than the payment by the Companies of expenses incurred or paid by a director, officer or controlling person of the Companies in the successful defense of any action, suit or proceeding) is asserted by a director, officer or controlling person, the Companies will, unless in the opinion of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether indemnification by them is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Companies maintain and pay the premium on contracts insuring the Companies (with certain exclusions) against any liability to directors and officers they may incur under the above indemnity provisions and insuring each director and officer of the Companies (with certain exclusions) against liability and expense, including legal fees, which he or she may incur by reason of his or her relationship to the Companies, even if the Companies do no have the obligation or right to indemnify him or her against such liability or expense. ITEM 21 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS. See Exhibit Index and exhibits following. (B) FINANCIAL STATEMENT SCHEDULES. No schedules are required. II-1 169 ITEM 22 UNDERTAKINGS The undersigned registrants hereby undertake as follows: (1) To file, during any period when offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; (2) That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering; (4) To respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request; and (5) To supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. See also the fifth paragraph of Item 20 above. II-2 170 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF INDEPENDENCE, STATE OF OHIO, ON THE 18TH DAY OF SEPTEMBER, 1997. THE CLEVELAND ELECTRIC ILLUMINATING COMPANY Registrant By JANIS T. PERCIO -------------------------------------- Janis T. Percio, Secretary PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT 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: *TERRENCE G. LINNERT Vice President & Chief Financial Officer (iii) Principal accounting officer: *E. LYLE PEPIN Controller September 18, 1997 (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-3 171 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF INDEPENDENCE, STATE OF OHIO, ON THE 18TH DAY OF SEPTEMBER, 1997. THE TOLEDO EDISON COMPANY Registrant By JANIS T. PERCIO -------------------------------------- Janis T. Percio, Secretary PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT 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: *TERRENCE G. LINNERT Vice President & Chief Financial Officer (iii) Principal accounting officer: *E. LYLE PEPIN Controller September 18, 1997 (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-4 172 EXHIBIT INDEX Exhibits Filed Herewith The following Exhibits are filed herewith and made a part hereof:
EXHIBIT NUMBER DESCRIPTION - -------------- --------------------------------------------------------------------------------- 1(a) Placement Agreement. 1(b) Registration Agreement. 1(c) Letter of Transmittal. 1(d) Notice of Guaranteed Delivery. 1(e) Nominee Letter. 1(f) Client's Letter. 4(a) Seventy-Fourth Supplemental Indenture of The Cleveland Electric Illuminating Company dated June 15, 1997. 4(b) Forty-sixth Supplemental Indenture of The Toledo Edison Company dated as of June 15, 1997. 4(c) Note Indenture dated as of June 13, 1997. 4(d) First Supplemental Note Indenture dated as of June 13, 1997. 5 Opinion of counsel for the Companies. 12 Statements regarding computation of ratios. 23(a) Consent of Arthur Andersen LLP. 23(b) Consent of counsel for the Companies (included in Exhibit 5). 24 Powers of Attorney. 25 Form T-1 Statement of Eligibility and Qualification under Trust Indenture of 1939 of The Chase Manhattan Bank, as Note Trustee.
EXHIBITS INCORPORATED BY REFERENCE The exhibits listed below have been filed heretofore with the SEC pursuant to requirements of the Acts administered by the SEC and are incorporated herein by reference and made a part hereof. The exhibit number and file number of such documents are stated in parenthesis. CLEVELAND ELECTRIC EXHIBITS
EXHIBIT NUMBER DESCRIPTION - -------------- ------------------------------------------------------------------------------- 3a Amended Articles of Incorporation of Cleveland Electric, as amended, effective May 28, 1993 (Exhibit 3a, 1993 Form 10-K, File No. 1-2323). 3b Regulations of Cleveland Electric, dated April 29, 1981, as amended effective October 1, 1988 and April 24, 1990 (Exhibit 3b, 1990 Form 10-K, File No. 1-2323). 4b(1) Mortgage and Deed of Trust, dated July 1, 1940, between Cleveland Electric and Guaranty Trust Company of New York, as trustee, (under which The Chase Manhattan Bank is successor trustee) (Exhibit 7(a), File No. 2-4450). Supplemental Indentures between Cleveland Electric and the Trustee, supplemental to Exhibit 4b(1), dated as follows: 4b(2) July 1, 1940 (Exhibit 7(b), File No. 2-4450). 4b(3) August 18, 1944 (Exhibit 4(c), File No. 2-9887).
173
EXHIBIT NUMBER DESCRIPTION - -------------- ------------------------------------------------------------------------------- 4b(4) December 1, 1947 (Exhibit 7(d), File No. 2-7306). 4b(5) September 1, 1950 (Exhibit 7(c), File No. 2-8587). 4b(6) June 1, 1951 (Exhibit 7(f), File No. 2-8994). 4b(7) May 1, 1954 (Exhibit 4(d), File No. 2-10830). 4b(8) March 1, 1958 (Exhibit 2(a)(4), File No. 2-13839). 4b(9) April 1, 1959 (Exhibit 2(a)(4), File No. 2-14753). 4b(10) December 20, 1967 (Exhibit 2(a)(4), File No. 2-30759). 4b(11) January 15, 1969 (Exhibit 2(a)(5), File No. 2-30759). 4b(12) November 1, 1969 (Exhibit 2(a)(4), File No. 2-35008). 4b(13) June 1, 1970 (Exhibit 2(a)(4), File No. 2-37235). 4b(14) November 15, 1970 (Exhibit 2(a)(4), File No. 2-38460). 4b(15) May 1, 1974 (Exhibit 2(a)(4), File No. 2-50537). 4b(16) April 15, 1975 (Exhibit 2(a)(4), File No. 2-52995). 4b(17) April 16, 1975 (Exhibit 2(a)(4), File No. 2-53309). 4b(18) May 28, 1975 (Exhibit 2(c), June 5, 1975 Form 8-A, File No. 1-2323). 4b(19) February 1, 1976 (Exhibit 3(d)(6), 1975 Form 10-K, File No. 1-2323). 4b(20) November 23, 1976 (Exhibit 2(a)(4), File No. 2-57375). 4b(21) July 26, 1977 (Exhibit 2(a)(4), File No. 2-59401). 4b(22) September 27, 1977 (Exhibit 2(a)(5), File No. 2-67221). 4b(23) May 1, 1978 (Exhibit 2(b), June 30, 1978 Form 10-Q, File No. 1-2323). 4b(24) September 1, 1979 (Exhibit 2(a), September 30, 1979 Form 10-Q, File No. 1-2323). 4b(25) April 1, 1980 (Exhibit 4(a)(2), September 30, 1980 Form 10-Q, File No. 1-2323). 4b(26) April 15, 1980 (Exhibit 4(b), September 30, 1980 Form 10-Q, File No. 1-2323). 4b(27) May 28, 1980 (Exhibit 2(a)(4), Amendment No. 1, File No. 2-67221). 4b(28) June 9, 1980 (Exhibit 4(d), September 30, 1980 Form 10-Q, File No. 1-2323). 4b(29) December 1, 1980 (Exhibit 4(b)(29), 1980 Form 10-K, File No. 1-2323). 4b(30) July 28, 1981 (Exhibit 4(a), September 30, 1981, Form 10-Q, File No. 1-2323). 4b(31) August 1, 1981 (Exhibit 4(b), September 30, 1981, Form 10-Q, File No. 1-2323). 4b(32) March 1, 1982 (Exhibit 4(b)(3), Amendment No. 1, File No. 2-76029). 4b(33) July 15, 1982 (Exhibit 4(a), September 30, 1982 Form 10-Q, File No. 1-2323). 4b(34) September 1, 1982 (Exhibit 4(a)(1), September 30, 1982 Form 10-Q, File No. 1-2323). 4b(35) November 1, 1982 (Exhibit 4(a)(2), September 30, 1982 Form 10-Q, File No. 1-2323). 4b(36) November 15, 1982 (Exhibit 4(b)(36), 1982 Form 10-K, File No. 1-2323). 4b(37) May 24, 1983 (Exhibit 4(a), June 30, 1983 Form 10-Q, File No. 1-2323). 4b(38) May 1, 1984 (Exhibit 4, June 30, 1984 Form 10-Q, File No. 1-2323). 4b(39) May 23, 1984 (Exhibit 4, May 22, 1984 Form 8-K, File No. 1-2323). 4b(40) June 27, 1984 (Exhibit 4, June 11, 1984 Form 8-K, File No. 1-2323). 4b(41) September 4, 1984 (Exhibit 4b(41), 1984 Form 10-K, File No. 1-2323). 4b(42) November 14, 1984 (Exhibit 4b(42), 1984 Form 10-K, File No. 1-2323). 4b(43) November 15, 1984 (Exhibit 4b(43), 1984 Form 10-K, File No. 1-2323). 4b(44) April 15, 1985 (Exhibit 4(a), May 8, 1985 Form 8-K, File No. 1-2323).
174
EXHIBIT NUMBER DESCRIPTION - -------------- ------------------------------------------------------------------------------- 4b(45) May 28, 1985 (Exhibit 4(b), May 8, 1985 Form 8-K, File No. 1-2323). 4b(46) August 1, 1985 (Exhibit 4, September 30, 1985 Form 10-Q, File No. 1-2323). 4b(47) September 1, 1985 (Exhibit 4, September 30, 1985 Form 8-K, File No. 1-2323). 4b(48) November 1, 1985 (Exhibit 4, January 31, 1986 Form S-K, File No. 1-2323). 4b(49) April 15, 1986 (Exhibit 4, March 31, 1986 Form 10-Q, File No. 1-2323). 4b(50) May 14, 1986 (Exhibit 4(a), June 30, 1986 Form 10-Q, File No. 1-2323). 4b(51) May 15, 1986 (Exhibit 4(b), June 30, 1986 Form 10-Q, File No. 1-2323). 4b(52) February 25, 1987 (Exhibit 4b(52), 1986 Form 10-K, File No. 1-2323). 4b(53) October 15, 1987 (Exhibit 4, September 30, 1987 Form 10-Q, File No. 1-2323). 4b(54) February 24, 1988 (Exhibit 4b(54), 1987 Form 10-K, File No. 1-2323). 4b(55) September 15, 1988 (Exhibit 4b(55), 1988 Form 10-K, File No. 1-2323). 4b(56) May 15, 1989 (Exhibit 4(a)(2)(i), File No. 33-32724). 4b(57) June 13, 1989 (Exhibit 4(a)(2)(ii), File No. 33-32724). 4b(58) October 15, 1989 (Exhibit 4(a)(2)(iii), File No. 33-32724). 4b(59) January 1, 1990 (Exhibit 4b(59), 1989 Form 10-K, File No. 1-2323). 4b(60) June 1, 1990 (Exhibit 4(a), September 30, 1990 Form 10-Q, File No. 1-2323). 4b(61) August 1, 1990 (Exhibit 4(b), September 30, 1990 Form 10-Q, File No. 1-2323). 4b(62) May 1, 1991 (Exhibit 4(a), June 30, 1991 Form 10-Q, File No. 1-2323). 4b(63) May 1, 1992 (Exhibit 4(a)(3), File No. 33-48845). 4b(64) July 31, 1992 (Exhibit 4(a)(3), File No. 33-57292). 4b(65) January 1, 1993 (Exhibit 4b(65), 1992 Form 10-K, File No. 1-2323). 4b(66) February 1, 1993 (Exhibit 4b(66), 1992 Form 10-K, File No. 1-2323). 4b(67) May 20, 1993 (Exhibit 4(a), July 14, 1993 Form 8-K, File No. 1-2323). 4b(68) June 1, 1993 (Exhibit 4(b), July 14, 1993 Form 8-K, File No. 1-2323). 4b(69) September 15, 1994 (Exhibit 4(a), September 30, 1994 Form 10-Q, File No. 1-2323). 4b(70) May 1, 1995 (Exhibit 4(a), September 30, 1995 Form 10-Q, File No. 1-2323). 4b(71) May 2, 1995 (Exhibit 4(b), September 30, 1995 Form 10-Q, File No. 1-2323). 4b(72) June 1, 1995 (Exhibit 4(c), September 30, 1995 Form 10-Q, File No. 1-2323). 4b(73) July 15, 1995 (Exhibit 4b(73), 1995 Form 10-K, File No. 1-2323). 4b(74) August 1, 1995 (Exhibit 4b(74), 1995 Form 10-K, File No. 1-2323). 4c Open-End Subordinate Indenture of Mortgage between The Cleveland Electric Illuminating Company and Bank One, Columbus, N.A., as Trustee, Dated as of June 1, 1994 (Exhibit 4(a), August 26, 1994 Form 8-K, File No. 1-2323).
175 TOLEDO EDISON EXHIBITS
EXHIBIT NUMBER DOCUMENT - -------------- ------------------------------------------------------------------------------- 3a Amended Articles of Incorporation of Toledo Edison, as amended effective October 2, 1992 (Exhibit 3a, 1992 Form 10-K, File No. 1-3583). 3b Code of Regulations of Toledo Edison dated January 28, 1987, as amended effective July 1 and October 1, 1988 and April 24, 1990 (Exhibit 3b, 1990 Form 10-K, File No. 1-3583). 4b(l) Indenture, dated as of April 1, 1947, between the Company and The Chase National Bank of the City of New York (now The Chase Manhattan Bank) (Exhibit 2(b), File No. 2-26908). Supplemental Indentures between Toledo Edison and the Trustee, Supplemental to Exhibit 4b(l), dated as follows: 4b(2) September 1, 1948 (Exhibit 2(d), File No. 2-26908). 4b(3) April 1, 1949 (Exhibit 2(e), File No. 2-26908). 4b(4) December 1, 1950 (Exhibit 2(f), File No. 2-26908). 4b(5) March 1, 1954 (Exhibit 2(g), File No. 2-26908). 4b(6) February 1, 1956 (Exhibit 2(h), File No. 2-26908). 4b(7) May 1, 1958 (Exhibit 5(g), File No. 2-59794). 4b(8) August 1, 1967 (Exhibit 2(c), File No. 2-26908). 4b(9) November 1, 1970 (Exhibit 2(c), File No. 2-38569). 4b(10) August 1, 1972 (Exhibit 2(c), File No. 2-44873). 4b(11) November 1, 1973 (Exhibit 2(c), File No. 2-49428). 4b(12) July 1, 1974 (Exhibit 2(c), File No. 2-51429). 4b(13) October 1, 1975 (Exhibit 2(c), File No. 2-54627). 4b(14) June 1, 1976 (Exhibit 2(c), File No. 2-56396). 4b(15) October 1, 1978 (Exhibit 2(c), File No. 2-62568). 4b(16) September 1, 1979 (Exhibit 2(c), File No. 2-65350). 4b(17) September 1, 1980 (Exhibit 4(s), File No. 2-69190). 4b(18) October 1, 1980 (Exhibit 4(c), File No. 2-69190). 4b(19) April 1, 1981 (Exhibit 4(c), File No. 2-71580). 4b(20) November 1, 1981 (Exhibit 4(c), File No. 2-74485). 4b(21) June 1, 1982 (Exhibit 4(c), File No. 2-77763). 4b(22) September 1, 1982 (Exhibit 4(x), File No. 2-87323). 4b(23) April 1, 1983 (Exhibit 4(c), March 31, 1983 Form 10-Q, File No. 1-3583). 4b(24) December 1, 1983 (Exhibit 4(x), 1983 Form 10-K, File No. 1-3583). 4b(25) April 1, 1984 (Exhibit 4(c), File No. 2-90059). 4b(26) October 15, 1984 (Exhibit 4(z), 1984 Form 10-K, File No. 1-3583). 4b(27) October 15, 1984 (Exhibit 4(aa), 1984 Form 10-K, File No. 1-3583). 4b(28) August 1, 1985 (Exhibit 4(dd), File No. 33-1689). 4b(29) August 1, 1985 (Exhibit 4(ee), File No. 33-1689). 4b(30) December 1, 1985 (Exhibit 4(c)f File No. 33-1689). 4b(31) March 1, 1986 (Exhibit 4b(31), 1986 Form 10-K, File No.1-3583). 4b(32) October 15, 1987 (Exhibit 4, September 30, 1987 Form 10-Q, File No. l-3583).
176
EXHIBIT NUMBER DOCUMENT - -------------- ------------------------------------------------------------------------------- 4b(33) September 15, 1988 (Exhibit 4b(33), 1988 Form 10-K, File No. 1-3583). 4b(34) June 15, 1989 (Exhibit 4b(34), 1989 Form 10-K, File No. 1-3583). 4b(35) October 15, 1989 (Exhibit 4b(35), 1989 Form 10-K, File No. 1-3583). 4b(36) May 15, 1990 (Exhibit 4, June 30, 1990 Form 10-Q, File No. 1-3583). 4b(37) March 1, 1991 (Exhibit 4(b), June 30, 1991 Form 10-Q, File No. 1-3583). 4b(38) May 1, 1992 (Exhibit 4(a)(3), File No. 33-48844). 4b(39) August 1, 1992 (Exhibit 4b(39), 1992 Form 10-K, File No. 1-3583). 4b(40) October 1, 1992 (Exhibit 4b(40), 1992 Form 10-K, File No. 1-3583). 4b(41) January 1, 1993 (Exhibit 4b(41), 1992 Form 10-K, File No. 1-3583). 4b(42) September 15, 1994 (Exhibit 4(b), September 30, 1994 Form 10-Q, File No. 1-3583). 4b(43) May 1, 1995 (Exhibit 4(d), September 30, 1995 Form 10-Q, File No. 1-3583). 4b(44) June 1, 1995 (Exhibit 4(e), September 30, 1995 Form 10-Q, File No. 1-3583). 4b(45) July 14, 1995 (Exhibit 4(f), September 30, 1995 Form 10-Q, File No. 1-3583). 4b(46) July 15, 1995 (Exhibit 4(g), September 30, 1995 Form 10-Q, File No. 1-3583). 4c Open-End Subordinate Indenture of Mortgage between The Toledo Edison Company and Bank One, Columbus, N.A., as Trustee, Dated as of June 1, 1994 (Exhibit 4(b), August 26, 1994 Form 8-K, File No. 1-3583).
Pursuant to Paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, the Registrants have not filed as an exhibit to this Form S-4 any instrument with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of the applicable Registrant and its subsidiaries on a consolidated basis, but each hereby agrees to furnish to the Securities and Exchange Commission on request any such instruments. EX-1.A 2 EXHIBIT 1(A) 1 EXHIBIT 1(A) PLACEMENT AGREEMENT June 11, 1997 Morgan Stanley & Co. Incorporated Citicorp Securities, Inc. Credit Suisse First Boston McDonald & Company Securities, Inc. c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Dear Sirs: The Cleveland Electric Illuminating Company, an Ohio corporation ("Cleveland Electric"), and The Toledo Edison Company, an Ohio corporation ("Toledo Edison," and each of Cleveland Electric and Toledo Edison, a "Company" and collectively, the "Companies), propose jointly and severally to issue and sell to the purchasers named in Schedule I hereto (the "Purchasers") $220,000,000 principal amount of 7.19% Series A Secured Notes Due 2000, $350,000,000 principal amount of 7.67% Series A Secured Notes Due 2004, and $150,000,000 principal amount of 7.13% Series A Secured Notes Due 2007 (those three tranches of Notes collectively, the "Notes"), to be issued pursuant to an Indenture to be dated as of June 13, 1997 and a First Supplemental Indenture to be dated June 13, 1997 (that Indenture, as supplemented by that First Supplemental Indenture, the "Indenture") between the Company and The Chase Manhattan Bank, a New York banking corporation, as trustee (the "Trustee"). The Notes will be offered without being registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance on exemptions therefrom. You have advised the Companies and agree that you will make an offering of the Notes purchased by you hereunder in accordance with Section 6 hereof on the terms set forth in the Preliminary Memorandum and the Final Memorandum (each as defined below), as soon as practicable after the date hereof as in your judgment is advisable. The Companies hereby confirm that they have authorized the use of the Preliminary Memorandum and the Offering Memorandum in connection with that offering of the Notes by you. Purchasers of the Notes (including subsequent transferees) will have the registration rights set forth in the Registration Agreement of even date 2 herewith (the "Registration Agreement"), among the Companies and the Purchasers. Pursuant to the Registration Agreement, the Companies have agreed to file with the Securities and Exchange Commission (the "Commission") a registration statement (the "Exchange Offer Registration Statement") under the Securities Act pursuant to which the Companies will offer to exchange the Notes of each tranche for an issue under the Indenture of secured notes of the Companies (the "Exchange Notes") with terms identical to the Notes of that tranche (except that the Exchange Notes will not contain terms with respect to transfer restrictions). In connection with the sale of the Notes, the Companies have prepared a preliminary offering memorandum (the "Preliminary Memorandum") and will prepare a final offering memorandum (the "Final Memorandum" and, with the Preliminary Memorandum, each a "Memorandum") setting forth or including a description of the terms of the Notes, the terms of the offering, a description of the Companies and any material developments relating to either Company occurring after the date of the most recent financial statements included therein. 1. REPRESENTATIONS AND WARRANTIES. The Companies jointly and severally represent and warrant to, and agree with, you that as of the date hereof: (a) The Preliminary Memorandum does not contain and the Final Memorandum, in the form used by the Purchasers to confirm sales and on the Closing Date, 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 Section l(a) do not apply to statements or omissions in either Memorandum based upon information relating to any Purchaser furnished to the Companies in writing by that Purchaser through you expressly for use therein. (b) Each Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Ohio, has the corporate power and authority to own its property and to conduct its business as described in each Memorandum 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 that Company and its Subsidiaries (as defined below), taken as a whole. (c) Each Subsidiary of each Company (i) other than those subsidiaries specified in clause (ii) of this paragraph (1)(c) has been duly incorporated, is validly existing as a -2- 3 corporation in good standing under the laws of the jurisdiction of its incorporation, and has corporate power and authority to own its property and to conduct its business as described in the Final Memorandum or (ii) that is not a corporation is a limited partnership, has been duly formed and is validly existing as a limited partnership in good standing under the laws of the jurisdiction of its formation, and has full power and authority to own its property and to conduct its business as described in the Final Memorandum; and, in either case, 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 required 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; and neither Company is a general partner in any partnership. As used herein, the term "Subsidiary" has the meaning ascribed to it in the Indenture. (d) The financial statements included or incorporated by reference in each Memorandum present fairly the financial position of each Company and its consolidated Subsidiaries and the results of their operations for the periods specified; and except as otherwise stated in each Memorandum, those financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis. (e) The pro forma adjustments described in each Memorandum have been properly applied on the bases described therein and each Company believes that such adjustments with respect to it and the assumptions that underlie those adjustments are reasonable. (f) [Intentionally omitted.] (g) This Agreement has been duly authorized, executed and delivered by each Company. (h) The Indenture has been duly authorized, and when executed and delivered by the Companies (assuming due authorization, execution and delivery by the Trustee) will constitute a valid and binding agreement of each Company, enforceable in accordance with its 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. (i) The Notes have been duly authorized by each Company and, when the Notes are executed by the Companies and authenticated by the Trustee in accordance with the Indenture and delivered to and paid for by the Purchasers in accordance with this Agreement, the Notes will be entitled to the benefits of the Indenture, and will be valid and binding joint and several -3- 4 obligations of the Companies, 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. (j) The Registration Agreement has been duly authorized, executed and delivered by the Companies and (assuming due authorization, execution and delivery by the Purchasers) constitutes a valid and binding agreement of each Company, enforceable in accordance with its terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability. (k) The execution and delivery by the Companies of, and the performance by the Companies of their obligations under, this Agreement, the Indenture, the Notes and the Registration Agreement will not contravene any provision of applicable law or the articles of incorporation, regulations, partnership agreement or other organizational documents of either Company or any Subsidiary of either Company or any agreement or other instrument binding upon either Company or any Subsidiary of either Company, or any judgment, order or decree of any governmental body, agency or court having jurisdiction over either Company or any Subsidiary of either Company, and no consent, approval, authorization or order of, or qualification with, any governmental body or agency is required for the performance by either Company of its obligations under this Agreement, the Indenture, the Notes or the Registration Agreement, except such as may be required (i) by the securities or Blue Sky laws of the various states in connection with the offer and sale of the Notes and (ii) by the securities or Blue Sky laws of the various states and the Securities Act in connection with the offer of the Exchange Notes and (iii) from The Public Utilities Commission of Ohio (whose approval for the performance by the Companies of their obligations under the Agreement, the Indenture, the Notes and the Registration Agreement has been obtained). (l) 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 either Company and its Subsidiaries, taken as a whole, from that set forth in the Final Memorandum. (m) Neither Company nor any Subsidiary of either Company is in violation of its respective articles of incorporation or regulations, partnership agreement or other organizational documents and neither Company nor any Subsidiary of either Company is in default in the performance of any bond, -4- 5 debenture, note or any other evidence of indebtedness or any indenture, mortgage, deed of trust or other contract, lease or other instrument to which it is a party or by which any of them is bound, or to which any of its property or assets is subject, except such violations or defaults as have been waived or which would not have, singly or in the aggregate, a material adverse effect on either Company and its Subsidiaries, taken as a whole. (n) Each Company and each of its Subsidiaries has obtained all necessary consents, authorizations, approvals, orders, licenses, certificates and permits of and from, and has made all declarations and filings with, all foreign, federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals, required to own, lease, license, construct, operate and use its properties and assets and to conduct its business in the manner described in the Final Memorandum, except to the extent that the failure to obtain, declare or file would not have a material adverse effect on that Company, and its Subsidiaries, taken as a whole. (o) There are no legal or governmental proceedings pending or, to the knowledge of either Company, threatened to which either Company or any Subsidiary of either Company is a party or to which any of the properties of either Company or any Subsidiary of either Company is subject other than proceedings accurately described in all material respects in the Final Memorandum and proceedings that would not have a material adverse effect on either Company and its Subsidiaries, taken as a whole, or on the power or ability of either Company to perform its obligations under this Agreement, the Indenture, the Notes or the Registration Agreement or to consummate the transactions contemplated by the Final Memorandum. (p) Neither Company nor any affiliate (as defined in Rule 501(b) of Regulation D under the Securities Act, an "Affiliate") of either Company has directly, or through any agent, (i) sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the sale of the Notes in a manner that would require the registration under the Securities Act of the Notes or (ii) engaged in any form of general solicitation or general advertising in connection with the offering of the Notes (as those terms are used in Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of section 4(2) of the Securities Act. (q) Neither Company is 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. -5- 6 (r) It is not necessary in connection with the offer, sale and delivery of the Notes to the Purchasers in the manner contemplated by this Agreement to register the Notes under the Securities Act or to qualify the Indenture under the Trust Indenture Act of 1939, as amended. (s) Each Company and each of its Subsidiaries (i) is in compliance with any and all applicable foreign, federal, state and local laws and regulations relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its business and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except in cases in which that noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on that Company and its Subsidiaries, taken as a whole. (t) In the ordinary course of its business, each Company conducts a periodic review of the effect of Environmental Laws on the business, operations and properties of that Company and its Subsidiaries, in the course of which it identifies and evaluates associated costs and liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). On the basis of that review, each Company has reasonably concluded that such associated costs and liabilities would not, singly or in the aggregate, have a material adverse effect on that Company and its Subsidiaries, taken as a whole. (u) Neither Company nor any of either Company's Affiliates or any person acting on its or their behalf (other than the Purchasers) has engaged in any directed selling efforts (as that term is defined in Regulation S under the Securities Act ("Regulation S")) with respect to the Notes and each Company and its Affiliates and any person acting on its or their behalf (other than the Purchasers) has complied with the offering restrictions requirement of Regulation S. (v) Each 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 Securities and Exchange Commission (the "Commission") and, therefore, each Company is also exempt from such regulation. -6- 7 (w) The Companies have obtained a commitment from AMBAC Indemnity Corporation, a Wisconsin-domiciled stock insurance company ("AMBAC Indemnity"), to issue a financial guaranty insurance policy (the "Financial Guaranty Insurance Policy") relating to the Secured Notes Due 2007 effective as of the date of issuance of the Notes. The Secured Notes due 2007 will be entitled to the benefit of the Financial Guaranty Insurance Policy as described in the Final Memorandum. (x) Cleveland Electric's Mortgage and Deed of Trust dated July 1, 1940, to Guaranty Trust Company of New York as Trustee, under which The Chase Manhattan Bank (National Association) is successor trustee (the "Cleveland Mortgage Trustee"), as supplemented and modified in certain respects by indentures supplemental thereto (the "CEI Mortgage"), including the Seventy-Fourth Supplemental Indenture dated June 15, 1997 (the "CEI Supplemental Indenture"), and the First Mortgage Bonds, Series due 2000, the First Mortgage Bonds, Series due 2004, and the First Mortgage Bonds, Series due 2007, of Cleveland Electric (collectively, the "CEI First Mortgage Bonds") issued under the CEI Mortgage and the CEI Supplemental Indenture, on or before the Closing Date will have been duly authorized, executed and delivered by Cleveland Electric and, as to the CEI First Mortgage Bonds, assuming that they have been duly authenticated by the Cleveland Mortgage Trustee, constitute valid and binding obligations enforceable against each Company in accordance with their terms, except to the extent that the binding effect and enforceability thereof are subject to applicable bankruptcy, insolvency, reorganization, moratorium and other laws in effect from time to time affecting the rights of creditors generally or the enforcement of the security provided by the Cleveland Mortgage, and except to the extent that the enforceability thereof may be limited by the application of general principles of equity and may be subject to limitations upon the right to obtain judicial orders requiring specific performance; (y) The execution and delivery of the CEI Supplemental Indenture and the CEI First Mortgage Bonds and the performance by Cleveland Electric of its obligations thereunder and under the CEI Mortgage (to the extent pertinent to the issuance of the CEI First Mortgage Bonds), will not constitute a default under, or conflict with or violate any of the provisions of, the Articles of Incorporation, the Regulations, any law, rule, regulation, judgment, order or decree to which Cleveland Electric is subject or any agreement, indenture, mortgage, lease, note or other obligation or instrument to which Cleveland Electric is a party or by which it is bound; (z) All consents or approvals of the PUCO and of any other federal or state regulatory agency required in connection with Cleveland Electric's execution and delivery of, and the performance of its obligations under the CEI Supplemental Indenture and the CEI First Mortgage Bonds have been obtained; -7- 8 (aa) Except as specifically described in the Offering Memorandum, there are no actions, suits, proceedings, inquiries or investigations at law or in equity before or by any judicial or administrative court or agency, pending or threatened against Cleveland Electric and there is no basis for any such action, suit, proceeding, inquiry or investigation wherein the decision, ruling or finding would materially or adversely affect the validity or enforceability of the CEI Mortgage (to the extent pertinent to the issuance of the CEI First Mortgage Bonds) or the CEI First Mortgage Bonds; (ab) Cleveland Electric has good title to substantially all the properties referred to or described in the granting clauses of the CEI Mortgage as being subject to the lien thereof and now owned by it, subject only to the conditions and exceptions set forth in the Offering Memorandum "Descriptions of Cleveland Electric Bonds and Toledo Edison Bonds--Cleveland Electric Bonds--Title to Property," none of which materially impairs the use of the property affected thereby in the operation of the business of Cleveland Electric; (ac) Toledo Edison's Indenture of Mortgage and Deed of Trust dated April 1, 1947 from Toledo Edison to The Chase Manhattan Bank (National Association), as trustee (the "Toledo Mortgage Trustee"), as supplemented and modified in certain respects by indentures supplemental thereto (the "Toledo Mortgage"), including the Forty-sixth Supplemental Indenture dated as of June 15, 1997 (the "Toledo Supplemental Indenture"), and the First Mortgage Bonds, Series due 2000, the First Mortgage Bonds, Series due 2004, and the First Mortgage Bonds, Series due 2007, of Toledo Edison (collectively, the "Toledo Edison First Mortgage Bonds") issued under the Toledo Mortgage and the Toledo Supplemental Indenture, on or before the Closing Date will have been duly authorized, executed and delivered by Toledo Edison and, as to the Toledo Edison First Mortgage Bonds, assuming that they have been duly authenticated by the Toledo Mortgage Trustee, constitute valid and binding obligations enforceable against Toledo Edison in accordance with their terms, except to the extent that the binding effect and enforceability thereof are subject to applicable bankruptcy, insolvency, reorganization, moratorium and other laws in effect from time to time affecting the rights of creditors generally or the enforcement of the security provided by the Toledo Mortgage, and except to the extent that the enforceability thereof may be limited by the application of general principles of equity and may be subject to limitations upon the right to obtain judicial orders requiring specific performance; (ad) The execution and delivery of the Toledo Supplemental Indenture and the Toledo Edison First Mortgage Bonds and the performance by Toledo Edison of its obligations thereunder and under the Toledo Mortgage (to the extent pertinent to the issuance of the Toledo Edison First Mortgage Bonds), will -8- 9 not constitute a default under, or conflict with or violate any of the provisions of, the Articles of Incorporation, the Regulations, the Bylaws, any law, rule, regulation, judgment, order or decree to which Toledo Edison is subject or any agreement, indenture, mortgage, lease, note or other obligation or instrument to which Toledo Edison is a party or by which it is bound; (ae) All consents or approvals of the PUCO and of any other federal or state regulatory agency required in connection with Toledo Edison's execution and delivery of, and the performance of its obligations under the Toledo Supplemental Indenture and the Toledo Edison First Mortgage Bonds have been obtained; (af) Except as specifically described in the Offering Memorandum, there are no actions, suits, proceedings, inquiries or investigations at law or in equity before or by any judicial or administrative court or agency, pending or threatened against Toledo Edison and there is no basis for any such action, suit, proceeding, inquiry or investigation wherein the decision, ruling or finding would materially or adversely affect the validity or enforceability of the Toledo Mortgage (to the extent pertinent to the issuance of the Toledo Edison First Mortgage Bonds) or the Toledo Edison First Mortgage Bonds; (ag) Toledo Edison has good title to substantially all the properties referred to or described in the granting clauses of the Toledo Mortgage as being subject to the lien thereof and now owned by it, subject only to the conditions and exceptions set forth in the Offering Memorandum under "Descriptions of Cleveland Electric Bonds and Toledo Edison Bonds--Toledo Edison Bonds--Title Property," none of which materially impairs the use of the property affected thereby in the operation of the business of Toledo Edison; 2. OFFERING. You have advised the Companies that the Purchasers will make an offering of the Notes purchased by the Purchasers hereunder on the terms to be set forth in the Final Memorandum, as soon as practicable after this Agreement is entered into as in your judgment is advisable. 3. PURCHASE AND DELIVERY. The Companies hereby agree jointly and severally to sell to the several Purchasers, and the Purchasers, 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 Companies the respective principal amounts of Notes set forth in Schedule I hereto opposite their names at a purchase price equal to the sum of 98.875% of the principal amount of the 7.19% Series A Secured Notes Due 2000, 98.625% of the principal amount of the 7.67% Series A Secured Notes Due 2004, and 99.35% of the principal amount of the 7.13% Series A Secured Notes Due 2007, in -9- 10 each case plus accrued interest, if any, from June 18, 1997, to the date of payment and delivery. Payment for the Notes will be made against delivery of the Notes at a closing to be held at the office of Winthrop, Stimson, Putnam & Roberts, One Battery Park Plaza, New York, NY, at 10:00 A.M., local time, on June 18, 1997, or at such other place or time on the same or such other date, not later than June 25, 1997, as shall be designated in writing by you. The time and date of that payment are herein referred to as the Closing Date. Payment for the Notes will be made by wire transfer to the Companies of immediately available funds. The Companies will deliver against payment of the purchase price the Notes of each tranche to be offered and sold by the Purchasers in reliance on Regulation S (the "Regulation S Notes") in the form of one permanent global security in definitive form for that tranche (each, a "Regulation S Global Note") that will be deposited with the Trustee as custodian for The Depository Trust Company ("DTC") and registered in the name of Cede & Co., as nominee for DTC, for the accounts of Euroclear System ("Euroclear") or Cedel Societe Anonyme ("Cedel"). The Companies will deliver against payment of the purchase price the Notes of each tranche to be purchased by each Purchaser hereunder and to be offered and sold by each Purchaser in reliance on Rule 144A under the Securities Act (the "144A Notes") in the form of one permanent global security in definitive form for that tranche (each, a "Restricted Global Note") deposited with the Trustee as custodian for DTC and registered in the name of Cede & Co., as nominee for DTC. The Regulation S Global Notes and the Restricted Global Notes will be assigned separate CUSIP numbers. The Restricted Global Notes will include the legend regarding restrictions on transfer set forth under "Transfer Restrictions" in the Final Memorandum. Until the termination of the restricted period (as defined in Regulation S) with respect to the offering of the Regulation S Notes, interests in the Regulation S Global Notes may only be held by the DTC participants for Euroclear & Cedel. Interests in any permanent global security will be held only in book-entry form through DTC except in the limited circumstances described in the Final Memorandum. Both the Restricted Global Notes and the Regulation S Global Notes will be made available for inspection by the Purchasers and by DTC by 4:00 p.m., New York time, on the business day prior to the Closing Date at such place in New York City as the Purchasers and the Companies shall agree. The certificates evidencing the Notes will be delivered to you on the Closing Date for the respective accounts of the several Purchasers, with any transfer taxes payable in connection with the transfer of the Notes to the Purchasers duly paid, against payment of the purchase price therefor. -10- 11 Notwithstanding the foregoing, any Notes sold to Institutional Accredited Investors (as hereinafter defined) pursuant to Section 6(a) shall be issued in definitive, fully registered form and shall bear the legend relating thereto set forth under "Transfer Restrictions" in the Final Memorandum, but shall be paid for in the same manner as any Notes to be purchased by the Purchasers hereunder and to be offered and sold by them in reliance on Rule 144A under the Securities Act. 4. CONDITIONS TO CLOSING. The several obligations of the Purchasers under this Agreement to purchase the Notes will be subject to the following conditions: (a) Subsequent to the execution and delivery of this 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 notice of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any of either Company's securities by any "nationally recognized statistical rating organization," as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; and (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 either Company and its Subsidiaries, taken as a whole, from that set forth in the Final Memorandum that, in your judgment, is material and adverse and that makes it, in your judgment, impracticable to market the Notes on the terms and in the manner contemplated in the Final Memorandum. (b) You shall have received on the Closing Date a certificate or certificates, dated the Closing Date and signed by an executive officer of each Company, to the effect set forth in clause (a)(i) above and to the effect that the representations and warranties of that Company contained in this Agreement are true and correct as of the Closing Date and that that 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 or certificates may rely upon the best of knowledge as to proceedings threatened. (c) You shall have received on the Closing Date an opinion of Squire, Sanders & Dempsey, L.L.P., counsel for the Companies, dated the Closing Date, to the effect that: -11- 12 (i) the Indenture is a valid and binding agreement of each 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; and the Indenture is in such form that it may be qualified under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"), in compliance with the terms of the provisions of the Registration Agreement without material modification; (ii) when the Notes are executed by the Companies and authenticated by the Trustee in accordance with the provisions of the Indenture and delivered to and paid for by the Purchasers in accordance with this Agreement, the Notes will be entitled to the benefits of the Indenture and will be valid and binding joint and several obligations of the Companies, 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; (iii) the Registration Agreement (assuming due authorization, execution and delivery by the Purchasers) constitutes a valid and binding agreement of each Company, enforceable in accordance with its terms except as (i) the enforceability thereof may be limited by bankruptcy, insolvency or similar laws affecting creditors' rights generally and (ii) the availability of equitable remedies may be limited by equitable principles of general applicability; (iv) the execution and delivery by each Company of, and the performance by that Company of its obligations under, this Agreement, the Notes, the Indenture and the Registration Agreement will not, to such counsel's knowledge, contravene any judgment, order or decree of any governmental body, agency or court having jurisdiction over that Company or any Subsidiary of that Company, and no consent, approval, authorization or order of or qualification with any governmental body or agency is required for the performance by that Company of its obligations under this Agreement, the Notes, the Indenture and the Registration Agreement, except such as may be required (i) by the securities or Blue Sky laws of the various -12- 13 states in connection with the offer and sale of the Notes, (ii) by the securities or Blue Sky laws of the various states and the Securities Act in connection with the offer of the Exchange Notes and (iii) from The Public Utilities Commission of Ohio; (v) the statements in the Final Memorandum under the captions "Description of Secured Notes," "Descriptions of Cleveland Electric Bonds and Toledo Edison Bonds," "Certain Tax Considerations," "Private Placement," "Transfer Restrictions," and "Considerations for Employee Benefit Plans," insofar as those statements constitute summaries of the legal matters, documents and proceedings referred to therein, fairly present the information called for with respect to those legal matters, documents and proceedings and fairly summarize the matters referred to therein; (vi) after due inquiry, such counsel does not know of any legal or governmental proceedings pending or threatened to which either Company or any of its Subsidiaries is a party or to which any of the properties of either Company or any of its Subsidiaries is subject other than proceedings fairly summarized in all material respects in the Final Memorandum and proceedings that such counsel believes are not likely to have a material adverse effect on either Company and its Subsidiaries taken as a whole, or on the power or ability of either Company to perform its obligations under this Agreement, the Indenture, the Notes or the Registration Agreement or to consummate the transactions contemplated by the Final Memorandum; (vii) based upon the representations, war- ranties and agreements of the Companies in Sections 1(p), 1(v), 5(f), 5(g), 5(h) and 5(k) of this Agreement and of the Purchasers in section 6 of this Agreement and on the representations and agreements contained in Exhibit A to this Agreement, it is not necessary in connection with the offer, sale and delivery of the Notes to the Purchasers under this Agreement or in connection with the initial resale of the Notes by the Purchasers in accordance with Section 6 of this Agreement to register the Notes under the Securities Act or to qualify the Indenture under the Trust Indenture Act, it being understood that no opinion is expressed as to any subsequent resale of any Secured Note; and (viii) 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. -13- 14 Such counsel shall also include a statement to the effect that no facts have come to such counsel's attention that would lead such counsel to believe that (except for financial statements, schedules and other financial and statistical information as to which such counsel need not express any belief) the Final Memorandum when issued did not, and as of the date such opinion is delivered 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 the light of the circumstances under which they were made, not misleading. (d) You shall have received on the Closing Date an opinion of Terrence G. Linnert or Paul N. Edwards, as counsel of Centerior Energy Corporation, to the effect that: (i) each Company has been duly incorporated, is validly existing as a corporation in good standing under the laws of the State of Ohio, has the corporate power and authority to own its property and to conduct its business as described in the Final Memorandum (references herein to the Final Memorandum being taken to mean the Final Memorandum, as amended or supplemented), 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 that Company and its Subsidiaries, taken as a whole; (ii) this Agreement has been duly authorized, executed and delivered by each Company; (iii) the Indenture has been duly authorized, executed and delivered by each Company; (iv) the Notes have been duly authorized by each Company; (v) the Registration Agreement has been duly authorized, executed and delivered by each Company; (vi) the execution and delivery by each Company of, and the performance by that Company of its obligations under, this Agreement, the Notes, the Indenture and the Registration Agreement will not contravene any provision of applicable law or the articles of incorporation, regulations, partnership agreement or other organizational documents of that Company or of any Subsidiary of that Company or, to such counsel's knowledge, any agreement or other -14- 15 instrument binding on that Company or on any Subsidiary of that Company that is material to that Company and its Subsidiaries taken as a whole, or, to such counsel's knowledge, any judgment, order or decree of any governmental body, agency or court having jurisdiction over that Company or any Subsidiary of that Company, and no consent, approval, authorization or order of or qualification with any governmental body or agency is required for the performance by that Company of its obligations under this Agreement, the Notes, the Indenture and the Registration Agreement, except such as may be required by (i) the securities or Blue Sky laws 'of the various states in connection with the offer and sale of the Notes and (ii) the securities or Blue Sky laws of the various states and the Securities Act in connection with the offer of the Exchange Notes; (vii) the statements in the Final Memorandum under the captions "Description of Secured Notes," "Descriptions of Cleveland Electric Bonds and Toledo Edison Bonds," "Private Placement" and "Transfer Restrictions," insofar as those statements constitute summaries of the legal matters, documents and proceedings referred to therein, fairly present the information called for with respect to those 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 either Company or any of its Subsidiaries is a party or to which any of the properties of either Company or any of its Subsidiaries is subject other than proceedings fairly summarized in all material respects in the Final Memorandum and proceedings that such counsel believes are not likely to have a material adverse effect on either Company and its Subsidiaries taken as a whole, or on the power or ability of either Company to perform its obligations under this Agreement, the Indenture, the Notes or the Registration Agreement or to consummate the transactions contemplated by the Final Memorandum; (ix) each Subsidiary of each Company (i) has been duly incorporated, is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, and has corporate power and authority to own its property and to conduct its business as described in the Final Memorandum or 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 -15- 16 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 of which it is a Subsidiary and its Subsidiaries, taken as a whole; and neither Company is a general partner in any partnership; (x) each Company and each of its Subsidiaries has obtained all necessary consents, authorizations, approvals, orders, licenses, certificates and permits of and from, and has made all declarations and filings with, all foreign, federal, state, local and other governmental authorities, all self-regulatory organizations and all courts and other tribunals, required to own, lease, license, operate and use its properties and assets and to conduct its business in the manner described in the Final Memorandum, except to the extent that the failure to obtain, declare or file would not have a material adverse effect on that Company and its Subsidiaries, taken as a whole; (xi) such counsel is of the opinion that each Company and each Subsidiary of each Company (i) is in compliance with any and all applicable Environmental Laws, (ii) has received all permits, licenses or other approvals required of it under applicable Environmental Laws to conduct its business and (iii) is in compliance with all terms and conditions of any such permit, license or approval, except in cases in which that noncompliance with Environmental Laws, failure to receive required permits, licenses or other approvals or failure to comply with the terms and conditions of such permits, licenses or approvals would not, singly or in the aggregate, have a material adverse effect on that Company; (xii) each 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, each Company is also exempt from such regulation. (xiii) The CEI Mortgage and the CEI First Mortgage Bonds have been duly authorized, executed and delivered by Cleveland Electric and, as to the CEI First Mortgage Bonds, assuming that they have been duly authenticated by the Cleveland Mortgage Trustee, constitute valid and binding obligations enforceable -16- 17 against each Company in accordance with their terms, except to the extent that the binding effect and enforceability thereof are subject to applicable bankruptcy, insolvency, reorganization, moratorium and other laws in effect from time to time affecting the rights of creditors generally or the enforcement of the security provided by the Cleveland Mortgage, and except to the extent that the enforceability thereof may be limited by the application of general principles of equity and may be subject to limitations upon the right to obtain judicial orders requiring specific performance; (xiv) The execution and delivery of the CEI Supplemental Indenture and the CEI First Mortgage Bonds and the performance by Cleveland Electric of its obligations thereunder and under the CEI Mortgage (to the extent pertinent to the issuance of the CEI First Mortgage Bonds), does not constitute a default under, or conflict with or violate any of the provisions of, the Articles of Incorporation, the Regulations, any law, rule, regulation, judgment, order or decree to which Cleveland Electric is subject or any agreement, indenture, mortgage, lease, note or other obligation or instrument to which Cleveland Electric is a party or by which it is bound; (xv) All consents or approvals of the PUCO and of any other federal or state regulatory agency required in connection with Cleveland Electric's execution and delivery of, and the performance of its obligations under the CEI Supplemental Indenture and the CEI First Mortgage Bonds have been obtained; (xvi) Except as specifically described in the Offering Memorandum, there are no actions, suits, proceedings, inquiries or investigations at law or in equity before or by any judicial or administrative court or agency, pending or threatened against Cleveland Electric and there is no basis for any such action, suit, proceeding, inquiry or investigation wherein the decision, ruling or finding would materially or adversely affect the validity or enforceability of the CEI Mortgage (to the extent pertinent to the issuance of the CEI First Mortgage Bonds) or the CEI First Mortgage Bonds; (xvii) Cleveland Electric has good title to substantially all the properties referred to or described in the granting clauses of the CEI Mortgage as being subject to the lien thereof and now owned by it, subject only to the conditions and exceptions set forth in the Offering Memorandum under "Descriptions of -17- 18 Cleveland Electric Bonds and Toledo Edison Bonds -- Cleveland Electric Bonds -- Title to Property," none of which materially impairs the use of the property affected thereby in the operation of the business of Cleveland Electric; (xviii) The CEI 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 CEI Mortgage and the CEI Mortgage constitutes a valid and direct first lien upon all of the property referred to in subparagraph (xvii) above, subject only to the conditions and exceptions referred to therein and, under current law, all property acquired by Cleveland Electric hereafter, other than property excepted from the lien of the CEI Mortgage, will become subject to the lien thereof upon acquisition; (xix) The CEI First Mortgage Bonds are entitled to the benefits and security of the CEI Mortgage, equally and ratably with all other bonds outstanding under the CEI Mortgage, except as the enforceability thereof may be subject to the limitations set forth in subparagraph (xiii), above; (xx) The CEI First Mortgage Bonds are not required to be registered under the Securities Act of 1933, as amended, and the CEI Supplemental Indenture is exempt from qualification under the Trust Indenture Act of 1933, as amended; (xxi) Assuming that the Trustee holds the CEI First Mortgage Bonds as provided in the Indenture, the Indenture creates a valid and perfected first priority security interest in the CEI First Mortgage Bonds. (xxii) The Toledo Mortgage and the Toledo Edison First Mortgage Bonds have been duly authorized, executed and delivered by Toledo Edison and, as to the Toledo Edison First Mortgage Bonds, assuming that they have been duly authenticated by the Toledo Mortgage Trustee, constitute valid and binding obligations enforceable against Toledo Edison in accordance with their terms, except to the extent that the binding effect and enforceability thereof are subject to applicable bankruptcy, insolvency, reorganization, moratorium and other laws in effect from time to time affecting the rights of creditors generally or the enforcement of the security provided by the Toledo Mortgage, and except to the extent that the enforceability thereof may be limited by the application of general principles of equity and may be -18- 19 subject to limitations upon the right to obtain judicial orders requiring specific performance; (xxiii) The execution and delivery of the Toledo Supplemental Indenture and the Toledo Edison First Mortgage Bonds and the performance by Toledo Edison of its obligations thereunder and under the Toledo Mortgage (to the extent pertinent to the issuance of the Toledo Edison First Mortgage Bonds), does not constitute a default under, or conflict with or violate any of the provisions of, the Articles of Incorporation, the Regulations, the Bylaws, any law, rule, regulation, judgment, order or decree to which Toledo Edison is subject or any agreement, indenture, mortgage, lease, note or other obligation or instrument to which Toledo Edison is a party or by which it is bound; (xxiv) All consents or approvals of the PUCO and of any other federal or state regulatory agency required in connection with Toledo Edison's execution and delivery of, and the performance of its obligations under the Toledo Supplemental Indenture and the Toledo Edison First Mortgage Bonds have been obtained; (xxv) Except as specifically described in the Offering Memorandum, there are no actions, suits, proceedings, inquiries or investigations at law or in equity before or by any judicial or administrative court or agency, pending or threatened against Toledo Edison and there is no basis for any such action, suit, proceeding, inquiry or investigation wherein the decision, ruling or finding would materially or adversely affect the validity or enforceability of the Toledo Mortgage (to the extent pertinent to the issuance of the Toledo Edison First Mortgage Bonds) or the Toledo Edison First Mortgage Bonds; (xxvi) Toledo Edison has good title to substantially all the properties referred to or described in the granting clauses of the Toledo Mortgage as being subject to the lien thereof and now owned by it, subject only to the conditions and exceptions set forth in the Offering Memorandum under "Descriptions of Cleveland Electric Bonds and Toledo Edison Bonds -- Toledo Edison Bonds -- Title to Property," none of which materially impairs the use of the property affected thereby in the operation of the business of Toledo Edison; (xxvii) The Toledo Mortgage and all financing statements have been duly filed and recorded in all places where such filing or recording is necessary for -19- 20 the perfection or preservation of the lien of the Toledo Mortgage and the Toledo Mortgage constitutes a valid and direct first lien upon all of the property referred to in subparagraph (xxvi) above, subject only to the conditions and exceptions referred to therein and, under current law, all property acquired by Toledo Edison hereafter, other than property excepted from the lien of the Toledo Mortgage, will become subject to the lien thereof upon acquisition; (xxviii) The Toledo Edison First Mortgage Bonds are entitled to the benefits and security of the Toledo Mortgage, equally and ratably with all other bonds outstanding under the Toledo Mortgage, except as the enforceability thereof may be subject to the limitations set forth in subparagraph (xxii), above; (xxix) The Toledo Edison First Mortgage Bonds are not required to be registered under the Securities Act of 1933, as amended, and the Toledo Supplemental Indenture is exempt from qualification under the Trust Indenture Act of 1933, as amended; (xxx) Assuming that the Trustee holds the Toledo Edison First Mortgage Bonds as provided in the Indenture, the Indenture creates a valid and perfected first priority security interest in the Toledo Edison First Mortgage Bonds. (e) You shall have received on the Closing Date an opinion of Baker & Hostetler LLP, counsel for the Purchasers, dated the Closing Date, covering the matters referred to in subparagraphs (i), (ii), (iii), (v) (but only as to the statements under the captions "Description of the Secured Notes," "Private Placement" and "Transfer Restrictions") and (vii), and the final subparagraph of paragraph (c) above, and the matters referred to in subparagraphs (ii), (iii), (iv) and (v) of paragraph (d) above. With respect to the final subparagraph of paragraph (c) above, Squire, Sanders & Dempsey, L.L.P. and Baker & Hostetler LLP may state that their belief is based upon their participation in the preparation of each Memorandum and any amendments or supplements thereto and review and discussion of the contents thereof, but is without independent check or verification except as specified. With respect to matters of fact, such counsel may rely on certificates of officers of the relevant Company and of governmental officials, in which case their opinion is to state that they are so doing and that the Purchasers are justified in relying on such opinions or certificates and copies of said opinions or certificates are to be attached to the opinion. -20- 21 The opinion of Squire, Sanders & Dempsey, L.L.P. described in paragraph (c) above shall be rendered to you at the request of the Companies and shall so state therein. (f) You shall have received on the Closing Date (i) a letter, substantially in the form attached hereto as Exhibit B (with the exhibits to that letter omitted for purposes of this Agreement only), dated the Closing Date from Winthrop, Stimson, Putnam & Roberts, and (ii) a letter dated the Closing Date from Squire, Sanders & Dempsey, L.L.P., as counsel to the Companies, stating that you are entitled to rely on the opinions rendered by such counsel on the Closing Date to IBJ Schroder Bank & Trust Company in connection with the secured lease obligation bond refinancing referred to under the caption "Use of Proceeds" in the Final Memorandum. (g) You shall have received on the Closing Date an opinion of an Assistant General Counsel of AMBAC Indemnity, dated the Closing Date, substantially in the form attached hereto as Exhibit C. (h) You shall have received on each of the date hereof and the Closing Date a letter, dated the date hereof or the Closing Date, as the case may be, in form and substance satisfactory to you, from Arthur Andersen LLP, independent public accountants for the Companies, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters (of the type ordinarily applicable for registration statements filed under the Securities Act) with respect to the financial statements and certain financial information contained in each Memorandum. 5. COVENANTS OF THE COMPANIES. In further consideration of the agreements of the Purchasers herein contained, the Companies jointly and severally covenant as follows: (a) To furnish to you, without charge, during the period mentioned in paragraph (c) below, as many copies of the Final Memorandum, any documents incorporated by reference therein and any supplements and amendments thereto as you may reasonably request; with respect to the Final Memorandum, to furnish copies of the Final Memorandum in New York City, prior to 3:00 p.m. on the business day following the date of this Agreement, in such quantities as you reasonably request; but the Companies are not responsible for the costs of distributing either Memorandum other than to the Purchasers. (b) Before amending or supplementing either Memorandum, to furnish to you a copy of each such proposed amendment or supplement and not to use any such proposed amendment or supplement to which you reasonably object. -21- 22 (c) If, during such period after the date hereof and prior to the date on which all of the Notes shall have been sold by the Purchasers, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Final Memorandum in order to make the statements therein, in the light of the circumstances when such Memorandum is delivered to a purchaser, not misleading, or if, in the opinion of your counsel, it is necessary to amend or supplement that Memorandum to comply with applicable law, forthwith to prepare and furnish, at its own expense, to the Purchasers, either amendments or supplements to that Memorandum so that the statements in that Memorandum as so amended or supplemented will not, in the light of the circumstances when that Memorandum is delivered to a purchaser, be misleading or so that that Memorandum, as so amended or supplemented, will comply with applicable law. (d) To endeavor to qualify the Notes for offer and sale under the securities or Blue Sky laws of such jurisdictions as you shall reasonably request. (e) Whether or not any sale of Notes is consummated, to pay all expenses incident to the performance of their obligations under this Agreement, including: (i) the preparation of each Memorandum and all amendments and supplements thereto, (ii) the preparation, issuance and delivery of the Notes, (iii) the fees and disbursements of the Companies' counsel and accountants and the Trustee and its counsel, if any, (iv) the qualification of the Notes under securities or Blue Sky laws in accordance with Section 5(d), including filing fees and the fees and disbursements of counsel for the Purchasers in connection therewith and in connection with the preparation of any Blue Sky or legal investment memoranda, (v) the printing and delivery to the Purchasers in quantities as hereinabove stated of copies of the Memorandum and any amendment or supplement thereto, (vi) any fees charged by rating agencies for the rating of Notes, (vii) all document production charges and expenses of counsel to the Purchasers (but not including their fees for professional services) in connection with the preparation of this Agreement and (viii) the fees and expenses, if any, incurred in connection with the admission of Notes for trading in any appropriate market system. (f) Neither Company nor any Affiliate of either Company will sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Securities Act) that could be integrated with the sale of the Notes in a manner that would require the registration under the Securities Act of those Notes. (g) Not to solicit any offer to buy or offer or sell the Notes by means of any form of general solicitation or general advertising (as those terms are used in Regulation D under the -22- 23 Securities Act) or in any manner involving a public offering within the meaning of section 4(2) of the Securities Act. (h) While any of the Notes remain outstanding, to make available, upon request, to any seller of Notes the information specified in Rule 144A(d)(4) under the Securities Act, unless the Company is then subject to section 13 or 15(d) of the Exchange Act. (i) To include information substantially in the form set forth in Exhibit A in each Memorandum. (j) If requested by you, to use its best efforts to permit the Notes to be designated PORTAL securities in accordance with the rules and regulations adopted by the National Association of Securities Dealers, Inc. relating to trading in the PORTAL Market. (k) None of either Company, its Affiliates or any person acting on its or their behalf (other than the Purchasers) will engage in any directed selling efforts (as that term is defined in Regulation S) with respect to the Notes, and each Company and its Affiliates and each person acting on its or their behalf (other than the Purchasers) will comply with the offering restrictions of Regulation S. (l) 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 either Company or warrants to purchase debt securities of either Company substantially similar to the Notes (other than the Notes), without your prior written consent. (m) To use the proceeds from the sale of the Notes in the manner discussed in the Final Memorandum under the caption "Use of Proceeds". 6. OFFERING OF NOTES; RESTRICTIONS ON TRANSFER. (a) Each Purchaser, severally and not jointly, represents and warrants that Purchaser is a qualified institutional buyer as defined in Rule 144A under the Securities Act (a "QIB"). Each Purchaser, severally and not jointly, agrees with the Company that (a) it has not solicited and will not solicit offers for, and it has not offered and sold and it will not offer or sell, Notes by any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act) or in any manner involving a public offering within the meaning of section 4(2) of the Securities Act and (b) it has solicited and will solicit offers for Notes only from, and has offered and will offer Notes only to, persons that it reasonably believes to be (A) in the case of offers or sales inside the United States, (i) QIBs or (ii) other institutional -23- 24 accredited investors (as defined in Rule 501 (a) (1), (2), (3) or (7) under the Securities Act (each, an "Institutional Accredited Investor") that, prior to their purchase of Notes, deliver to that Purchaser a letter containing the representations and agreements set forth in Annex A to the Memorandum and (B) in the case of offers or sales outside the United States, to persons other than U.S. persons ("foreign purchasers," which term shall include dealers or other professional fiduciaries in the United States acting on a discretionary basis for foreign beneficial owners (other than an estate or trust)) that, in each case, in purchasing Notes are deemed to have represented and agreed as provided in Exhibit A hereto. (b) Each Purchaser, severally and not jointly, represents, warrants, and agrees with respect to offers and sales outside the United States that: (i) it understands that no action has been or will be taken in any jurisdiction by any Purchaser or either Company that would permit a public offering of the Notes, or possession or distribution of either Memorandum or any other offering or publicity material relating to the Notes, in any country or jurisdiction where action for that purpose is required; (ii) that Purchaser will comply with all applicable laws and regulations in each jurisdiction in which it acquires, offers, sells or delivers Notes or has in its possession or distributes either Memorandum or any such other material, in all cases at its own expense; (iii) the Notes have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S under the Securities Act or pursuant to another exemption from the registration requirements of the Securities Act; (iv) that Purchaser has offered the Notes and will offer and sell the Notes (A) as part of their distribution, at any time and (B) otherwise until 40 days after the later of the commencement of the Offering and the closing Date, only in accordance with Rule 903 of Regulation S. Accordingly, neither that Purchaser, its Affiliates nor any persons acting on its or their behalf have engaged or will engage in any directed selling efforts (within the meaning of Regulation S) with respect to the Notes, and any such Purchaser, its Affiliates and any such persons have complied and will comply with the offering restrictions requirement of Regulation S; -24- 25 (v) that Purchaser has (1) not offered or sold, and prior to the date 180 days after the Closing Date will not offer or sell any Notes in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995, (2) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom, and (3) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the offering of the Notes to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to whom that document may otherwise lawfully be issued or passed on; (vi) that Purchaser understands that the Notes have not been and will not be registered under the Securities and Exchange Law of Japan, and represents that it has not offered or sold, and agrees that it will not offer or sell, any Notes acquired by it in connection with the distribution contemplated hereby, directly or indirectly, in Japan or to or for the account of any resident thereof, except for offers or sales to Japanese dealers and except pursuant to any exemption from the registration requirements of the Securities and Exchange Law of Japan and otherwise in compliance with applicable provisions of Japanese law, and further agrees that it will send to any dealer who purchases from it any of the Notes a notice stating in substance that, by purchasing those Notes, that dealer represents and agrees that it has not offered or sold, and will not offer or sell, any Notes, directly or indirectly, in Japan or to or for the account of any resident thereof, except for offers or sales to Japanese dealers and except pursuant to any exemption from the registration requirements of the Securities and Exchange Law of Japan and otherwise in compliance with applicable provisions of Japanese law, and that that dealer will send to any other dealer to whom it sells any of the Notes a notice containing substantially the same statement as is contained in this sentence. (vii) that Purchaser agrees that, at or prior to confirmation of sales of the Notes made in reliance -25- 26 on Regulation S, it will have sent to each distributor, dealer or person receiving a selling concession, fee or other remuneration that purchases Notes from it during the restricted period a confirmation or notice substantially to the following effect: "The Notes covered hereby have not been registered under the U.S. Securities Act of 1933, as amended (the "Securities Act") and may not be offered and sold within the United States or to, or for the account or benefit of, U.S. persons (i) as part of their distribution, at any time or, (ii) otherwise until 40 days after the later of the commencement of the offering and the closing date, except in either case in accordance with Regulation S (or Rule 144A if available) under the Securities Act. Terms used above have the meaning given to them by Regulation S." Terms used in this Section 6 have the meanings given to them by Regulation S. (c) Each Purchaser understands and agrees that, upon original issuance of the Notes, and until such time as the applicable provisions of the Securities Act and the rules promulgated thereunder and under the Indenture no longer so require, the Notes will bear the legends set forth in "Transfer Restrictions" in the Final Memorandum. 7. INDEMNIFICATION AND CONTRIBUTION. (a) The Companies agree jointly and severally to indemnify and hold harmless each Purchaser, and each person, if any, who controls that Purchaser within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, or is under common control with, or is controlled by, that Purchaser, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred by any Purchaser or any such controlling of affiliated 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 either Memorandum (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 necessary to make the statements therein in light of the circumstances under which they were made 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 Purchaser furnished to the Companies in writing by such Purchaser through you expressly for use therein. The indemnity agreement contained in this Section 7(a) with respect to any Preliminary Memorandum does not inure to the benefit of -26- 27 any Purchaser (or the benefit of any person controlling any Purchaser) if the person asserting any such losses, liabilities, claims, damages, or expenses purchased the Notes which are the subject thereof if at or prior to the written confirmation of the sale of the Notes a copy of the Final Memorandum (or the Final Memorandum as amended or supplemented) was not sent or delivered to that person and the Final Memorandum (or the Final Memorandum as amended or supplemented) would have cured the defect giving rise to those losses, claims, damages or liabilities so long as the Companies have complied with their obligations set forth in Sections 5(a) and 5(c) hereof to permit that sending or delivery. (b) Each Purchaser agrees, severally and not jointly, to indemnify and hold harmless each Company, its directors, its officers and each person, if any, who controls that 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 Companies to that Purchaser, but only with reference to information relating to that Purchaser furnished to the Companies by that Purchaser in writing through you expressly for use in either Memorandum or any amendment or supplement thereto. (c) If any proceeding (including any governmental investigation) is instituted involving any person in respect of which indemnity may be sought pursuant to either paragraph (a) or (b) above, that person (the "indemnified party") shall promptly notify the person against whom that 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 that proceeding and shall pay the fees and disbursements of that counsel related to that proceeding. In any such proceeding, any indemnified party has the right to retain its own counsel, but the fees and expenses of that counsel will be at the expense of that indemnified party unless (i) the indemnifying party and the indemnified party have mutually agreed to the retention of that counsel or (ii) 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 because of actual or potential differing interests between them. It is understood that the indemnifying party will 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. That firm shall be designated in writing by Morgan Stanley & Co. Incorporated in the case of parties indemnified pursuant to paragraph (a) above and by the Companies in the case of parties indemnified pursuant to -27- 28 paragraph (b) above. The indemnifying party will not be liable for any settlement of any proceeding effected without its written consent, but if settled with that consent or if there be 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 that settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party has 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 will be liable for any settlement of any proceeding affected without its written consent if (i) that settlement is entered into more than 60 days after receipt by that indemnifying party of the aforesaid request and (ii) that indemnifying party has not reimbursed the indemnified party in accordance with that request prior to the date of that 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 that indemnified party, unless that settlement includes an unconditional release of that indemnified party from all liability on claims that are the subject matter of that proceeding. (d) To the extent the indemnification provided for in paragraph (a) or (b) of this Section 7 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 that paragraph, in lieu of indemnifying that indemnified party thereunder, shall contribute to the amount paid or payable by that indemnified party as a result of those losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Companies on the one hand and the Purchasers on the other hand from the offering of those Notes or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Purchasers on the other hand in connection with the statements or omissions that resulted in those 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 Purchasers on the other hand in connection with the offering of Notes will be deemed to be in the same respective proportions as the aggregate net proceeds from the offering of those Notes (before deducting expenses) received by the Companies and the total discounts and commissions received by the Purchasers in respect thereof, in each case as set forth in the Final Memorandum, bear to the aggregate offering price of those Notes. The relative fault of the Companies on the one hand and of the Purchasers on the other hand will be determined by reference to, -28- 29 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 relates to information supplied by the Companies or by the Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent that statement or omission. The Purchasers' respective obligations to contribute pursuant to this Section 7 are several in proportion to the respective principal amount of Notes they have purchased hereunder, and not joint. (e) The Companies and the Purchasers agree that it would not be just or equitable if contribution pursuant to this Section 7 were determined by PRO RATA allocation (even if the Purchasers were treated as one entity for that purpose) or by any other method of allocation that does not take account of the equitable considerations referred to in paragraph (d) above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in paragraph (d) above will be deemed to include, subject to the limitations set forth above, any legal or other expenses reasonably incurred by that indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 7, no Purchaser will be required to contribute any amount in excess of the amount by which the total price at which the Notes resold by it in the initial placement of those Notes were offered to investors exceeds the amount of any damages that that Purchaser has otherwise been required to pay by reason of that 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) is entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The indemnity and contribution provisions contained in this Section 7 and the representations and warranties of the Companies contained in this Agreement will remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of the Purchasers or any person controlling the Purchasers or by or on behalf of either Company, its officers or directors or any person controlling either Company and (iii) acceptance of and payment for any of the Notes. The remedies provided for in this Section 7 are not exclusive and do not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. 8. TERMINATION. This Agreement is subject to termination by notice given by Morgan Stanley & Co. Incorporated (the "Purchaser Representative") to the Companies, if (a) after the execution and delivery of this 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, the National Association of Securities Dealers, Inc., the Chicago Board of -29- 30 Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any securities of either Company shall have been suspended on any exchange or in any over-the-counter market, (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 judgment, is material and adverse and (b) in the case of any of the events specified in clauses (a) (i) through (iv), that event singly or together with any other such event makes it, in the Purchaser Representative's judgment, impracticable to market the Notes on the terms and in the manner contemplated in the Final Memorandum. 9. MISCELLANEOUS. If, on the Closing Date, any one or more of the Purchasers fails or refuses to purchase Notes that it or they have agreed to purchase hereunder on that date, and the aggregate principal amount of Notes that that defaulting Purchaser or Purchasers agreed but failed or refused to purchase is not more than one-tenth of the aggregate principal amount of Notes to be purchased on that date, the other Purchasers will be obligated severally in the proportions that the principal amount of Notes set forth opposite their respective names in Schedule I bear to the aggregate principal amount of Notes set forth opposite the names of all such non-defaulting Purchasers, or in such other proportions as you may specify, to purchase the Notes that the defaulting Purchaser or Purchasers agreed but failed or refused to purchase on that date, but in no event will the principal amount of Notes that any Purchaser has agreed to purchase pursuant to Section 3 be increased pursuant to this Section 9 by an amount in excess of one-ninth of that principal amount of Notes without the written consent of that Purchaser. If, on the Closing Date any Purchaser or Purchasers fails or refuses to purchase Notes that it or they have agreed to purchase hereunder on that date and the aggregate principal amount of Notes with respect to which that default occurs is more than one-tenth of the aggregate principal amount of Notes to be purchased on that date, and arrangements satisfactory to you and the Company for the purchase of those Notes are not made within 36 hours after that default, this Agreement will terminate without liability on the part of any non-defaulting Purchaser or of either Company. In any such case either you or the Companies may postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Final Memorandum or in any other document or arrangement may be effected. Any action taken under this paragraph will not relieve any defaulting Purchaser from liability in respect of any default of that Purchaser under this Agreement. This Agreement may be signed in any number of counterparts, each of which is an original, with the same effect -30- 31 as if the signatures thereto and hereto were on the same instrument. If this Agreement is terminated by the Purchasers, or any of them, because of any failure or refusal on the part of either Company to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason either Company is unable to perform its obligations under this Agreement, the Companies will reimburse the Purchasers or such Purchasers as have so terminated this Agreement with respect to themselves, severally, for all out-of-pocket expenses (including the fees and disbursements of their counsel) reasonably incurred by those Purchasers in connection with this Agreement or the offering contemplated hereunder. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -31- 32 This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York. The headings of the sections of this Agreement have been inserted for convenience of reference only and will not be deemed a part of this Agreement. Please confirm your agreement to the foregoing by signing in the space provided below for that purpose and returning to us a copy hereof, whereupon this Agreement will constitute a binding agreement between us. THE CLEVELAND ELECTRIC ILLUMINATING COMPANY and THE TOLEDO EDISON COMPANY By /s/ Terrence G. Linnert ----------------------------------------- Name: Terrence G. Linnert Title: Vice President, of each --------------- Accepted as of the date first written above MORGAN STANLEY & CO. INCORPORATED CITICORP SECURITIES, INC. CREDIT SUISSE FIRST BOSTON McDONALD & COMPANY SECURITIES, INC. By Morgan Stanley & Co. Incorporated By /s/ W.L. Blais ---------------------------------------- Name: W.L. Blais Title: Principal -32- 33 SCHEDULE I Principal Amount Purchaser of Notes to be Purchased - --------- ------------------------ Morgan Stanley & Co. $220,000,000 principal amount of Incorporated 7.19% Series A Secured Notes Due 2000; $350,000,000 principal amount of 7.67% Series A Secured Notes Due 2004; and $150,000,000 principal amount of 7.13% Series A Secured Notes Due 2007. -33- 34 EXHIBIT A Each Memorandum will contain language to the following effect: "Each purchaser of the Notes will be deemed to: (1) represent that it is purchasing the Notes for its own account with respect to which it exercises sole investment discretion and that it and any such account is (i) a QIB and is aware that the sale to it is being made in reliance on Rule 144A, (ii) an Institutional Accredited Investor or (iii) a foreign purchaser that is outside the United States (or a foreign purchaser that is a dealer or other fiduciary as referred to above); (2) acknowledge that the Notes have not been registered under the Securities Act and may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons except as set forth below; (3) if it is a person other than a foreign purchaser outside of the United States, agree that if it should resell or otherwise transfer any of the Notes within three years after the later of the original issuance of those Notes or the last date on which those Notes were held by an affiliate of either The Cleveland Electric Illuminating Company or The Toledo Edison Company (each, a "Company," and collectively, the "Companies"), it will do so only (i) to either Company or any Subsidiary thereof, (ii) inside the United States to a QIB in compliance with Rule 144A, (iii) inside the United States to an Institutional Accredited Investor that, prior to that transfer, furnishes to the Trustee a signed letter containing certain representations and agreements relating to the restrictions on transfer of the Notes (the form of which letter can be obtained from the Trustee) and, if that transfer is in respect of an aggregate principal amount of Notes at the time of transfer of less than $100,000, an opinion of counsel acceptable to the Companies that that transfer is in compliance with the Securities Act, (iv) outside the United States in compliance with Rule 904 under the Securities Act, (v) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available) or (vi) pursuant to an effective registration statement under the Securities Act. Each Institutional Accredited Investor that is not a QIB and that is an original purchaser of the Notes will be required to sign an agreement to the foregoing effect in the form attached hereto as Appendix A. Subject to the procedures set forth under "Description of Secured Notes--Book Entry; Delivery and Form," prior to any proposed transfer of any of the A-1 35 Notes (otherwise than pursuant to an effective registration statement) within three years after the later of the original issuance of those Notes or the last date on which those Notes were held by an affiliate of either Company, the holder thereof must check the appropriate box set forth on the reverse of its Notes relating to the manner of that transfer and submit the Notes to the Trustee; (4) agree that it will deliver to each person to whom it transfers any of the Notes notice of any restrictions on transfer of those Notes; (5) if it is a foreign purchaser outside the United States, understand that the Notes will initially be represented by a Regulations S Global Note and that transfers thereof are restricted as described under "Description of Secured Notes--Book Entry; Delivery and Form" for a period ending 40 days after the later of the commencement of the offering and the closing date; (6) if it is a QIB, understand that the Notes offered in reliance on Rule 144A will be represented by a Restricted Global Note. Before any interest in a Restricted Global Note may be offered, sold, pledged or otherwise transferred to a person who is not a QIB, the transferee will be required to provide the Trustee with a written certification (the form of which certification can be obtained from the Trustee) as to compliance with the transfer restriction referred to above; (7) understand that, unless or until registered under the Securities Act, the Notes (other than those issued to foreign purchasers) will bear a legend to the following effect unless otherwise agreed by the Companies and the holder thereof: THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501 (A)(1), (2), (3) or (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT, WITHIN THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE OF THIS NOTE OR THE LAST DATE ON WHICH THIS NOTE WAS HELD A-2 36 BY AN AFFILIATE OF EITHER COMPANY, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO EITHER COMPANY OR ANY SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT PRIOR TO SUCH TRANSFER, FURNISHED TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE) AND, IF THAT TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES AT THE TIME OF TRANSFER OF LESS THAN $100,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANIES THAT THAT TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT,(E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUANCE OF THIS NOTE OR THE LAST DATE ON WHICH THIS NOTE WAS HELD BY AN AFFILIATE OF EITHER COMPANY, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF THAT TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO THAT TRANSFER, FURNISH TO THE TRUSTEE AND THE COMPANIES SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT THAT TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSONS" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS; (8) acknowledge that the Companies, the Placement Agents and others will rely upon the truth and accuracy of the foregoing acknowledgements, representations and agreements, and agree that if any of the acknowledgements, representations or warranties deemed to have been made by it by its purchase of Notes are no longer accurate, it shall promptly notify the Companies and the Placement Agents. If it is acquiring Notes as a fiduciary or agent for one or more investor accounts, it represents that is has sole A-3 37 investment discretion with respect to each such account and it has full power to make the foregoing acknowledgements, representations and agreements, on behalf of each such account; and (9) represent that (i) it is not purchasing Notes with the assets of any pension, profit-sharing, retirement, or other employee benefit plan subject to Title 7 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA Plan"), with respect to which either Company or any lender to be repaid with proceeds of the offering is a "party in interest" within the meaning of Section 3(14) of ERISA or a "Disqualified Person" within the meaning of Section 4975(e)(2) of the Code or (ii) if it is purchasing the Notes with the assets of any such ERISA Plan, those assets are (a) assets of a bank collective investment fund, with respect to which Prohibited Transaction Class Exemption 91-38 issued by the Department of Labor provides an exemption for that purchase, (b) assets of a pooled separate account, with respect to which Prohibited Transaction Class Exemption 90-1 issued by the Department of Labor provides and exemption for that purchase, (c) assets of an investment fund managed by a "qualified professional asset manager," with respect to which Prohibited Transaction Class Exemption 84-14 issued by the Department of Labor provides an exemption for that purchase or (d) assets of an insurance company general account with respect to which Prohibited Transaction Class Exemption 95-60 issued by the Department of Labor provides an exemption for that purchase. Each subsequent transferee of the Notes is deemed to have made the representation in this paragraph 9 upon its acquisition of Notes, but upon that subsequent transfer the representation in clause (i) of this paragraph 9 may be made without regard to whether any lender to be repaid with proceeds of the offering is a party in interest or Disqualified Person with respect to an ERISA Plan whose assets are a source of funds for the transfer. Each Memorandum must also contain language to the following effect: "Each person receiving this Memorandum acknowledges that (i) that person has been afforded an opportunity to request from the Company, and to review, all additional information considered by it to be necessary to verify the accuracy of, or to supplement, the information contained herein; (ii) that person has not relied on the Placement Agents or any person affiliated with the Placement Agents in connection with its investigation of the accuracy of that information or its investment decision; and (iii) no person has been authorized to give any information or to make any representation concerning either Company or the Notes (other than as contained herein and information given by duly A-4 38 authorized officers and employees of either Company in connection with the investor's examination of the Companies and the terms of the sale of the Notes), and, if given or made, any such other information or representation should not be relied upon as having been authorized by either Company or the Placement Agents. A-5 39 EXHIBIT B June ____, 1997 Morgan Stanley & Co. Incorporated Citicorp Securities, Inc. Credit Suisse First Boston McDonald & Company Securities, Inc. c/o Morgan Stanley Dean Witter 1585 Broadway New York, New York 10036 Dear Sirs: Listed on Schedule I hereto are certain opinions dated the same date as this letter rendered by us concurrently with this letter (the "WINTHROP STIMSON OPINIONS"). Copies of the Winthrop Stimson Opinions are attached as Exhibits A through Y hereto. You are entitled to rely on each Winthrop Stimson Opinion to the same extent as if it had been specifically addressed to you, in each case with respect to your purchase of an aggregate of $720,000,000 of 7.19 Series A Secured Notes due 2000, 7.67% Series A Senior Secured Notes due 2004 and 7.13% Series A Secured Notes due 2007 of The Cleveland Electric Illuminating Company and The Toledo Edison Company. Very truly yours, B-1 40 Schedule I to Reliance Letter --------------- Exhibit ------- 1. Opinion addressed to Mansfield Capital Trust A ("MANSFIELD") and others with respect to Sections 1.2(m) of the Tax Indemnity Agreement. 2. Opinion addressed to IBJ Schroder Bank & B Trust Company ("IBJ"), as trustee, with respect to the registration of transfer of all Secured Notes, Bruce Mansfield 1987 Trust A. 3. Opinion addressed to IBJ, as trustee, with C respect to the registration of transfer of all Secured Notes, Bruce Mansfield 1987 Trust B. 4. Opinion addressed to IBJ, as trustee, with D respect to the registration of transfer of all Secured Notes, Bruce Mansfield 1987 Trust C. 5. Opinion addressed to IBJ, as trustee, with E respect to the registration of transfer of all Secured Notes, Bruce Mansfield 1987 Trust D. 6. Opinion addressed to IBJ, as trustee, with F respect to the registration of transfer of all Secured Notes, Bruce Mansfield 1987 Trust E. 7. Opinion addressed to IBJ, as trustee, with G respect to the registration of transfer of all Secured Notes, Bruce Mansfield 1987 Trust F. 8. Opinion addressed to IBJ, as trustee, with H respect to the registration of transfer of all Secured Notes, Bruce Mansfield 1987 Trust G. 9. Opinion addressed to IBJ, as trustee, with I respect to the registration of transfer of all Secured Notes, Bruce Mansfield 1987 Trust J. 10. Opinion addressed to IBJ, as trustee, with J respect to the registration of transfer of all Secured Notes, Bruce Mansfield 1987 Trust K. 11. Opinion addressed to IBJ, as trustee, with K respect to the registration of transfer of all Secured Notes, Bruce Mansfield 1987 Trust L. B-2 41 12. Opinion addressed to IBJ, as trustee, with L respect to Irrevocable Payment Instruction, General Power of Attorney and Compliance with Operative Documents, Bruce Mansfield Trust A. 13. Opinion addressed to IBJ, as trustee, with M respect to Irrevocable Payment Instruction, General Power of Attorney and Compliance with Operative Documents, Bruce Mansfield Trust B. 14. Opinion addressed to IBJ, as trustee, with N respect to Irrevocable Payment Instruction, General Power of Attorney and Compliance with Operative Documents, Bruce Mansfield Trust C. 15. Opinion addressed to IBJ, as trustee, with O respect to Irrevocable Payment Instruction, General Power of Attorney and Compliance with Operative Documents, Bruce Mansfield Trust D. 16. Opinion addressed to IBJ, as trustee, with P respect to Irrevocable Payment Instruction, General Power of Attorney and Compliance with Operative Documents, Bruce Mansfield Trust E. 17. Opinion addressed to IBJ, as trustee, with Q respect to Irrevocable Payment Instruction, General Power of Attorney and Compliance with Operative Documents, Bruce Mansfield Trust F. 18. Opinion addressed to IBJ, as trustee, with R respect to Irrevocable Payment Instruction, General Power of Attorney and Compliance with Operative Documents, Bruce Mansfield Trust G. 19. Opinion addressed to IBJ, as trustee, with S respect to Irrevocable Payment Instruction, General Power of Attorney and Compliance with Operative Documents, Bruce Mansfield Trust J. 20. Opinion addressed to IBJ, as trustee, with T respect to Irrevocable Payment Instruction, General Power of Attorney and Compliance with Operative Documents, Bruce Mansfield Trust K. 21. Opinion addressed to IBJ, as trustee, with U respect to Irrevocable Payment Instruction, General Power of Attorney and Compliance with Operative Documents, Bruce Mansfield Trust L. 22. Opinion addressed to IBJ, as trustee, with V respect to the defeasance and redemption of all outstanding Secured Lease Obligation B-3 42 Bonds. 23. Opinion addressed to The Cleveland Electric W Illuminating Company, The Toledo Edison Company and The Toledo Edison Capital Corporation (collectively, the "CENTERIOR COMPANIES") [, among other addressees,] with respect to certain matters of New York law concerning the Group 1 Lessor Notes. 24. Opinion addressed to IBJ with respect to the X issuance of Refunding Notes by Bruce Mansfield 1987 Trusts H and I. 25. Opinion addressed to the Centerior Companies, Y among others, with respect to certain New York law matters relating to Mansfield. B-4 43 EXHIBIT C FORM OF AMBAC LEGAL OPINION Morgan Stanley & Co. Incorporated Citicorp Securities, Inc. Credit Suisse First Boston McDonald & Company Securities, Inc. c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, New York 10036 Ladies and Gentlemen: This opinion has been requested of the undersigned, a Vice President and an Assistant General Counsel of AMBAC Indemnity Corporation, a Wisconsin stock insurance company ("AMBAC Indemnity"), in connection with the issuance by AMBAC Indemnity of a certain Financial Guaranty Insurance Policy and endorsement thereto, effective as of the date hereof (the "Policy"), insuring > in aggregate principal amount of the > (the "Issuer"), > (the "Obligations"). In connection with my opinion herein, I have examined the Policy, such statutes, documents and proceedings as I have considered necessary or appropriate under the circumstances to render the following opinion, including, without limiting the generality of the foregoing, certain statements contained in the Offering Memorandum of the Issuer dated >, relating to the Obligations (the "Offering Memorandum") under the heading "Credit Enhancement". Based upon the foregoing and having regard to legal considerations I deem relevant, I am of the opinion that: 1. AMBAC Indemnity is a stock insurance company duly organized and validly existing under the laws of the State of Wisconsin and duly qualified to conduct an insurance business in the State of Ohio. 2. AMBAC Indemnity has full corporate power and authority to execute and deliver the Policy and the Policy has been duly authorized, executed and delivered by AMBAC Indemnity and constitutes a legal, valid and binding obligation of AMBAC Indemnity enforceable in accordance with its terms except to the extent that the enforceability (but C-1 44 not the validity) of such obligation may be limited by any applicable bankruptcy, insolvency, liquidation, rehabilitation or other similar law or enactment now or hereafter enacted affecting the enforcement of creditors' rights. 3. The execution and delivery by AMBAC Indemnity of the Policy will not, and the consummation of the transactions contemplated thereby and the satisfaction of the terms thereof will not, conflict with or result in a breach of any of the terms, conditions or provisions of the Certificate of Incorporation of By-Laws of AMBAC Indemnity, or any restriction contained in any contract, agreement or instrument to which AMBAC Indemnity is a party or by which it is bound or constitute a default under any of the foregoing. 4. Proceedings legally required for the issuance of the Policy have been taken by AMBAC Indemnity and licenses, orders, consents or other authorizations or approvals of any governmental boards or bodies legal required for the enforceability of the Policy have been obtained; any proceedings not taken and any licenses, authorizations or approvals not obtained are not material to the enforceability of the Policy. 5. The statements contained in the Official Statement under the heading "Credit Enhancement," insofar as such statements constitute summaries of the matters referred to therein, accurately reflect and fairly present the information purported to be shown and, insofar as such statements describe AMBAC Indemnity, fairly and accurately describe AMBAC Indemnity. 6. The form of Policy attached hereto as Appendix I is a true and complete copy of the form of Policy. Very truly yours, > Vice President Assistant General Counsel C-2 EX-1.B 3 EXHIBIT 1(B) 1 Exhibit 1(b) THE CLEVELAND ELECTRIC ILLUMINATING COMPANY THE TOLEDO EDISON COMPANY REGISTRATION AGREEMENT Morgan Stanley & Co. Incorporated Citicorp Securities, Inc. Credit Suisse First Boston McDonald & Company Securities, Inc. June 11, 1997 c/o Morgan Stanley & Co. Incorporated 1585 Broadway New York, NY 10036 Dear Sirs and Mesdames: The Cleveland Electric Illuminating Company, an Ohio corporation, and The Toledo Edison Company, an Ohio corporation (collectively, the "Companies"), propose to issue and sell jointly and severally to Morgan Stanley & Co. Incorporated, CitiCorp Securities, Inc., Credit Suisse First Boston, McDonald & Company Securities, Inc. and the other purchasers identified in Schedule I of the Placement Agreement (defined below) (collectively, the "Purchasers"), on the terms set forth in a placement agreement of even date herewith (the "Placement Agreement"), $220,000,000 principal amount of 7.19% Series A Secured Notes Due 2000, $350,000,000 principal amount of 7.67% Series A Secured Notes Due 2004, and $150,000,000 principal amount of 7.13% Series A Secured Notes Due 2007 (those three tranches of notes, collectively, the "Notes"). The Notes will be issued pursuant to an Indenture to be dated as of June 13, 1997 and a First Supplemental Indenture to be dated June 13, 1997 (that Indenture, as supplemented by that First Supplemental Indenture, the "Indenture") between the Company and The Chase Manhattan Bank, a New York banking corporation, as trustee (the "Trustee"). As an inducement to the Purchasers to enter into the Placement Agreement and in satisfaction of a condition to your obligations thereunder, the Companies agree with the Purchasers for the benefit of the registered holders of the Notes (including, without limitation, the Purchasers) and the Exchange Notes (as defined below) (collectively, the "Holders"), as follows: SECTION 1. REGISTERED EXCHANGE OFFER. The Companies shall use their best efforts to prepare and file with the Securities and Exchange Commission (the "Commission") a registration statement (the "Exchange Offer Registration Statement") on an appropriate form under the Securities Act of 1933, as amended (the "Securities Act"), with respect to an offer (the "Registered Exchange Offer") to the Holders of Transfer 2 Restricted Notes (as defined in Section 6 hereof) , who are not prohibited by any law or policy of the Commission from participating in the Registered Exchange offer, to issue and deliver to such Holders, in exchange for the Notes of each tranche, a like aggregate principal amount of debt securities (the "Exchange Notes") of the Companies issued under the indenture and identical in all material respects to the Notes of that tranche (including having, with respect to the Secured Notes Due 2007 (as defined in the Placement Agreement), the benefit of the Financial Guaranty Insurance Policy (as defined in the Placement Agreement), but excluding the transfer restrictions relating to the Notes) that would be registered under the Securities Act. The Companies shall use their best efforts to cause that Exchange Offer Registration Statement to become effective under the Securities Act within 150 days after the date of original issue of the Notes and shall keep the Exchange Offer Registration Statement effective for not less than 30 days (or longer, if required by applicable law) after the date on which notice of the Registered Exchange Offer is mailed to the Holders (that period being called the "Exchange Offer Registration Period"). If the Companies effect the Registered Exchange offer, the Companies will be entitled to close the Registered Exchange Offer 30 days after the commencement thereof if the Companies have accepted all the Notes validly tendered by the 30th day after that commencement in accordance with the terms of the Registered Exchange Offer. Following the declaration of the effectiveness of the Exchange Offer Registration Statement, the Companies shall promptly commence the Registered Exchange Offer, it being the objective of the Registered Exchange Offer to enable each Holder of Transfer Restricted Notes electing to exchange those Transfer Restricted Notes for Exchange Notes (assuming that Holder is not an affiliate of either Company within the meaning of the Securities Act, acquires the Exchange Notes in the ordinary course of that Holder's business and has no arrangement with any person to participate in the distribution of the Exchange Notes, and is not prohibited by any law or policy of the Commission from participating in the Registered Exchange Offer) to trade those Exchange Notes from and after their receipt without any limitations or restrictions under the Securities Act and without material restrictions under the securities laws of the several states of the United States. In connection with the Registered Exchange Offer, the Companies shall use their best efforts to consummate the Registered Exchange Offer and shall comply with the applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and other applicable laws and regulations in connection with the Registered Exchange Offer. The Companies acknowledge that, pursuant to current interpretations by the Commission's staff of section 5 of the -2- 3 Securities Act, in the absence of an applicable exemption therefrom, (a) each Holder that is a broker-dealer electing to exchange Notes, acquired for its own account as a result of market-making activities or other trading activities, for Exchange Notes (an "Exchanging Dealer"), is required to deliver a prospectus containing the information set forth in Annex A hereto on the cover, in Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section, and in Annex C hereto and the "Plan of Distribution" section, in connection with a sale of any such Exchange Notes received by that Exchanging Dealer pursuant to the Registered Exchange Offer; and (b) if the Purchasers are permitted to and elect to sell Exchange Notes accrued in exchange for Notes constituting any portion of an unsold allotment, they are required to deliver a prospectus containing the information required by item 507 or 508 of Regulation S-K under the Securities Act, as applicable, in connection with that sale. The Companies shall include in the prospectus contained in the Exchange Offer Registration Statement a section entitled "Plan of Distribution," reasonably acceptable to the Purchasers, that contains a summary statement of the positions taken or policies made by the staff of the Commission with respect to the potential "underwriter" status of any broker-dealer that is the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange Notes received by that broker-dealer in the Registered Exchange Offer (a "Participating Broker-Dealer"), whether those positions or policies have been publicly disseminated by the staff of the Commission or those positions or policies, in the reasonable judgment of the Purchasers based on advice of counsel (which may be in-house counsel), represent the prevailing views of the staff of the Commission. The Companies shall use their best efforts to keep the Exchange Offer Registration Statement effective and to amend and supplement the prospectus contained therein, in order to permit that prospectus to be lawfully delivered by the Purchasers and all Exchanging Dealers subject to the prospectus delivery requirements of the Securities Act and shall make that prospectus available to the Purchasers and those Exchanging Dealers for such period of time after the consummation of the Registered Exchange offer as those persons must comply with those requirements in order to resell the Exchange Notes, but that period shall not exceed 120 days (unless extended pursuant to Section 3(j) below), and those persons are not authorized by the Companies to deliver and shall not deliver any such prospectus after the expiration of that period in connection with the resales contemplated by this paragraph. The Companies shall make available for a period of 120 days after the consummation of the Registered Exchange Offer a copy of the prospectus, and any amendment or supplement thereto, forming part of the Exchange Offer Registration Statement, to any -3- 4 broker-dealer for use in connection with any resale of any Exchange Notes. The Notes and the Exchange Notes are herein collectively called the "Securities." In connection with the Registered Exchange Offer, the Companies shall: (a) mail to each Holder a copy of the prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal and related documents; (b) keep the Registered Exchange Offer open for not less than 30 days (or longer, if required by applicable law) after the date notice thereof is mailed to the Holders; (c) utilize the services of a depositary for the Registered Exchange Offer with an address in the Borough of Manhattan, The City of New York, which may be the Trustee or an affiliate of the Trustee; (d) permit Holders to withdraw tendered Notes at any time prior to the close of business, New York time, on the last business day on which the Registered Exchange Offer remains open; and (e) otherwise comply in all material respects with all applicable laws. As soon as practicable after the close of the Registered Exchange Offer, the Companies shall: (i) accept for exchange all the Notes validly tendered and not withdrawn pursuant to the Registered Exchange Offer; (ii) deliver, or cause to be delivered, to the Trustee for cancellation all the Notes so accepted for exchange; and (iii) issue, and cause the Trustee to authenticate and deliver promptly to each Holder of the Notes of any tranche, Exchange Notes of the same tranche, equal in principal amount to the Notes of that tranche of that Holder so accepted for exchange. The Indenture will provide that the Exchange Notes will not be subject to the transfer restrictions set forth in the Indenture and that all the Securities will vote and consent together on all matters as one class and that none of the Securities will have the right to vote or consent as a class separate from one another on any matter. -4- 5 Interest on each Exchange Note Issued pursuant to the Registered Exchange Offer will accrue from the last interest payment date on which interest was paid on the Notes surrendered in exchange therefor or, if no interest has been paid on those Notes, from the date of original issue of those Notes. Each Holder participating in the Registered Exchange offer will be required to represent to the Companies at the time of the consummation of the Registered Exchange Offer (a) that any Exchange Note received by that Holder will be acquired in the ordinary course of business; (b) that the Holder will have no arrangement or understanding with any person to participate in the distribution of the Notes or the Exchange Notes within the meaning of the Securities Act; (c) that the Holder is not an "affiliate," as defined in Rule 405 of the Securities Act, of either Company or if it is an affiliate, that Holder will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable; (d) if that Holder is not a broker-dealer, that it is not engaged in, and does not intend to engage in, any distribution of the Exchange Notes; and (v) if that Holder is a broker-dealer, that it will receive Exchange Notes for its own account in exchange for Notes that were acquired as a result of market-making activities or other trading activities and that it will deliver a prospectus in connection with any resale of those Exchange Notes. Notwithstanding any other provision hereof, the Companies will ensure that (a) any Exchange Offer Registration Statement and any amendment thereto and any prospectus forming part thereof and any supplement thereto complies in all material respects with the Securities Act and the rules and regulations thereunder; (b) any Exchange Offer Registration Statement and any amendment thereto does not, when it becomes effective, contain an 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, in light of the circumstances under which they were made, not misleading; and (c) any prospectus forming part of any Exchange Offer Registration Statement, and any supplement to that prospectus, at the time of issuance does not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. SECTION 2. SHELF REGISTRATION. If (a) the Companies determine that a Registered Exchange Offer, as contemplated by Section 1 hereof, is not available or may not be consummated as soon as practicable after the last date the Registered Exchange Offer is open because it would violate applicable law or the applicable interpretations of the staff of the Commission; (b) the Registered Exchange Offer is not consummated within 180 days after the date of original issue of the Notes; (c) the Purchasers so request with respect to the Notes not eligible to be exchanged -5- 6 for Exchange Notes in the Registered Exchange Offer and held BY them following consummation of the Registered Exchange Offer; or (d) any Holder (other than an Exchanging Dealer) is not eligible to participate in the Registered Exchange Offer, or any Holder (other than an Exchanging Dealer) that participates in the Registered Exchange Offer does not receive freely tradeable Exchange Notes on the date of the exchange for validity tendered (and not withdrawn) Notes: (i) The Companies shall use all reasonable efforts to prepare and file, as promptly as practicable, with the Commission and thereafter to cause to be declared effective a registration statement (the "Shelf Registration Statement" and, together with the Exchange Offer Registration Statement, a "Registration Statement") on an appropriate form under the Securities Act relating to the offer and sale of the Transfer Restricted Notes (as defined below), by the Holders thereof from time to time in accordance with the methods of distribution set forth in the Shelf Registration Statement and Rule 415 under the Securities Act (hereinafter, the "Shelf Registration") , but no Holder (other than the Purchasers) is entitled to have any Securities held by it covered by that Shelf Registration Statement unless that Holder agrees in writing to be bound by all the provisions of this Agreement applicable to that Holder. (ii) The Companies shall use all reasonable efforts to keep the Shelf Registration Statement continuously effective in order to permit the prospectus included therein to be lawfully delivered by the Holders of the relevant Securities, until the earlier of (A) the end of the period referred to in Rule 144(k) under the Securities Act after the original issue date of the Notes expires (or the end of such longer period as may result from an extension pursuant to Section 3(j) below), and (E) the date on which all the Securities covered by the Shelf Registration Statement have been sold pursuant thereto. (iii) Notwithstanding any other provision of this Agreement to the contrary, the Companies shall cause the Shelf Registration Statement and the related prospectus and any amendment or supplement thereto, as of the effective date of the Shelf Registration Statement, amendment or supplement, (A) to comply in all material respects with the applicable requirements of the Securities Act and the rules and regulations of the Commission and (B) not to contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. -6- 7 SECTION 3. REGISTRATION PROCEDURES. in connection with any Shelf Registration contemplated by Section 2 hereof and, to the extent applicable, any Registered Exchange Offer contemplated by Section 1 hereof, the following provisions shall apply: (a) The Companies shall (i) furnish to the Purchasers, prior to the filing thereof with the Commission, a copy of the Registration Statement and each amendment thereof and each supplement, if any, to the prospectus included therein and shall not file any such Registration Statement or amendment thereto or any prospectus or any supplement thereto (including any document that, upon filing, would be incorporated or deemed to be incorporated by reference therein and any amendment to any such document other than documents required to be filed pursuant to the Exchange Act) to which the Purchasers shall reasonably object, except for any Registration Statement or amendment thereto or prospectus or supplement thereto (a copy of which has been previously furnished to the Purchasers and their counsel (and, in the case of a Shelf Registration Statement, the Holders and their counsel)) which counsel to the Companies has advised the Companies in writing is required to be filed, notwithstanding any such objection, in order to comply with applicable law; (ii) include information substantially to the effect set forth (A) in Annex A hereto on the cover, (B) in Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of the Exchange Offer" section, (C) in Annex C hereto in the "Plan of Distribution" section, of the prospectus forming a part of the Exchange Offer Registration Statement, and (D) include the information set forth in Annex D hereto in the Letter of Transmittal delivered in connection with the Registered Exchange Offer; (iii) to the extent required by law or interpretation of the staff of the Commission, if requested by the Purchasers, include the information required by Item 507 or 508 of Regulation S-K under the Securities Act, as applicable, in the prospectus forming a part of the Exchange Offer Registration Statement; and (iv) to the extent required by law or interpretation of the staff of the Commission, in the case of a Shelf Registration Statement, include the names of the Holders who propose to sell Securities pursuant to the Shelf Registration Statement as selling securityholders. (b) The Companies shall notify promptly the Purchasers, the Holders and any Participating Broker-Dealer from whom the Companies have received prior written notice stating that it will be a Participating Broker-Dealer in the Registered Exchange Offer (which notice pursuant to clauses (ii) through (v) hereof shall be accompanied by an instruction to suspend the use of the prospectus until the requisite changes have been made) and, if requested by the -7- 8 Purchasers, the Holders or any such Participating Broker-Dealer, confirm such notice in writing: (i) when the Registration Statement or any amendment thereto has been filed with the Commission and when the Registration Statement or any post effective amendment thereto has become effective; (ii) of any request BY the Commission for an amendment or supplement to the Registration Statement or the prospectus included therein or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceeding for that purpose; (iv) of the receipt by either Company or its legal counsel of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for that purpose; (iv) of the happening of any event that requires the Companies to make changes in the Registration Statement or the prospectus in order that the Registration Statement or the prospectus does not contain an 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, in light of the circumstances under which they were made, not misleading; and (vi) of any determination by the Companies that a post-effective amendment to a Registration Statement would be appropriate. (c) The Companies shall make every reasonable effort to prevent the issuance, and if issued to obtain the withdrawal at the earliest possible time, of any order suspending the effectiveness of the Registration Statement and shall provide prompt written notice to the Purchasers and each Holder of the withdrawal of any such order. (d) The Companies shall furnish to each Holder of Securities included in the Shelf Registration, without charge, at least one conformed copy of the Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules (without documents incorporated therein by reference or exhibits thereto, unless a Holder so requests in writing). -8- 9 (e) The Companies shall deliver to the Purchasers, and to any other Holder that so requests, without charge, at least one conformed copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules (without documents incorporated therein by reference or exhibits thereto, unless the Purchasers or any such Holder so request in writing). (f) The Companies shall deliver to each Holder of Securities included in the Shelf Registration, without charge, as many copies of the prospectus (including each preliminary prospectus) included in the Shelf Registration Statement and any amendment or supplement thereto as that Holder may reasonably request. The Companies consent, subject to the provisions of this Agreement, to the use of the prospectus or any amendment or supplement thereto by each of the selling Holders of the Securities in connection with the offering and sale of the Securities covered by, and as contemplated by, the prospectus, or any amendment or supplement thereto, Concluded in the Shelf Registration Statement. (g) The Companies shall deliver to each Purchaser, any Participating Broker-Dealer and any Exchanging Dealer, without charge, as many copies of the final prospectus included in the Exchange Offer Registration Statement and any amendment or supplement thereto as that person or entity may reasonably request, during a period not exceeding 120 days following the consummation of the Registered Exchange Offer. The Companies consent, subject to the provisions of this Agreement, to the use of the prospectus or any amendment or supplement thereto by the Purchasers, if necessary, any Participating Broker-Dealer and any Exchanging Dealer and such other persons as may be required to deliver a prospectus following the Registered Exchange Offer in connection with the offering and sale of the Exchange Notes covered by the prospectus, or any amendment or supplement thereto, included in the Exchange Offer Registration Statement, but no such person or entity is authorized by the Companies to deliver and no such person or entity shall deliver any such prospectus after the expiration of the period referred to in the immediately preceding sentence, in connection with any resale contemplated by this paragraph. (h) Prior to any public offering of Securities pursuant to any Registration Statement, the Companies shall use their best efforts to register or qualify or cooperate with the Holders of the Securities included therein and their respective counsel in connection with the registration or qualification of the Securities for offer and sale under the securities or Blue Sky laws of such state of the United -9- 10 States as any Holder of the Securities reasonably requests in writing and shall do any and all other acts or things necessary or advisable to enable that Holder to offer and sell in such jurisdictions the Securities covered by that Registration Statement owned by that Holder, but the Companies are not required to (i) qualify generally or as foreign corporations to do business in any jurisdiction where they are not then so qualified or (ii) take any action which would subject them to general service of process or to taxation in any jurisdiction where they are not then so subject. (i) The Companies shall cooperate with the Holders of the Securities to facilitate the timely preparation and delivery of certificates representing the Securities to be sold pursuant to any Shelf Registration Statement free of any restrictive legend and in such denominations (consistent with the provisions of the Indenture) and registered in such names as the Holders may request at least two business days prior to closing of any sale of the Securities pursuant to such Shelf Registration Statement. (j) If any event contemplated by paragraphs (ii) through (vi) of Section 3(b) above occurs during the period in which the Companies are required to maintain an effective Registration Statement, the Companies shall promptly prepare and file a post-effective amendment to the Registration Statement or a supplement to the related prospectus and any other required document so that, as thereafter delivered to Holders of the Notes or purchasers of Securities, the prospectus will not contain an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. If the Companies notify the Purchasers, the Holders of the Securities and any known Participating Broker-Dealer in accordance with paragraphs (ii) through (vi) of Section 3(b) above to suspend the use of the prospectus until the requisite changes to the prospectus have been made, then the Purchasers, the Holders of the Securities and any such Participating Broker-Dealer shall suspend use of that prospectus until the Companies have amended or supplemented the prospectus to correct that misstatement or omission, and the period of effectiveness of the Shelf Registration Statement provided for in Section 2(b) above and the Exchange Offer Registration Statement provided for in Section 1 above shall each be extended by the number of days from and including the date of the giving of that notice to and including the date when the Purchasers, the Holders of the Securities and any known Participating Broker-Dealer shall have received that amended or supplemented prospectus pursuant to this Section 3(j), but the minimum time period before the Companies are -10- 11 entitled to close the Registered Exchange Offer will be extended only to the extent required by the Commission Each Purchaser, Holder and Participating Broker-Dealer agrees that on receipt of any such notice from the Companies it will not distribute copies of the prospectus that are the subject of that notice and will retain those copies in its files. (k) Not later than the effective date of the applicable Registration Statement, the Companies will obtain a CUSIP number for each tranche of the Transfer Restricted Notes or the Exchange Notes, as the case may be, and provide the Trustee with printed certificates for the Notes or the Exchange Notes, as the case may be, in a form eligible for deposit with The Depository Trust Company. (1) The Companies will comply with all rules and regulations of the Commission to the extent and so long as they are applicable to the Registered Exchange offer or the Shelf Registration and will make generally available to their security holders (or otherwise provide in accordance with section 11(a) of the Securities Act) an earnings statement satisfying the provisions of section 11(a) of the Securities Act, no later than 45 days after the end of the 12-month period (or 90 days, if that period is a fiscal year) that begins with the first month of the Companies' first fiscal quarter commencing after the effective date of the Registration Statement, which statement will cover that 12-month period. (m) The Companies shall cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended, in a timely manner and to contain any changes that are necessary for that qualification. If that qualification would require the appointment of a new trustee under the Indenture, the Companies shall appoint a new trustee thereunder pursuant to the applicable provisions of the Indenture. (n) The Companies may require each Holder of Securities to be sold pursuant to any Shelf Registration Statement to furnish to the Companies such information regarding that Holder and the distribution of the Securities as the Companies may from time to time reasonably request for inclusion in the Shelf Registration Statement, and the Companies may exclude from that registration the Securities of any Holder that unreasonably fails to furnish that information within a reasonable time after receiving that request. (o) In the case of any Shelf Registration, the Companies shall enter into such customary agreements (including, if requested, an underwriting agreement in -11- 12 customary form) and take all such other action, if any, as the Holders of a majority of the Securities being sold shall reasonably request in order to facilitate the disposition of the Securities pursuant to that Shelf Registration. (p) in the case of any Shelf Registration, the Companies shall make available for Inspection by a representative of the Holders of Securities being sold, their counsel and an accountant retained by those Holders, in a manner designed to permit underwriters to satisfy their due diligence investigation under the Securities Act, all financial and other records, pertinent corporate documents and properties of the Companies customarily inspected by underwriters in primary underwritten offerings and shall cause the officers, directors and employees of the Companies and their subsidiaries to supply all information reasonably requested by, and customarily supplied in connection with primary underwritten offerings to, any such representative, attorney or accountant in connection with that but any records, information or documents that designated by the Companies as confidential at delivery thereof shall be kept confidential by persons, unless (i) those records, information are in the public domain or otherwise publicly (ii) disclosure of those records, information or documents is required by a court or administrative order; or (iii) disclosure of those records, information or documents, in the written opinion of counsel to those persons, is otherwise required by law (including, without limitation, pursuant to the Securities Act). (q) In the case of any Shelf Registration, the Companies, if requested by any Holder of Securities covered thereby, shall (i) cause their counsel to deliver an opinion and updates thereof relating to the Securities in customary form addressed to the selling Holder and the managing underwriters, if any, covering matters customarily covered in opinions requested in underwritten offerings; (ii) cause their officers to execute and deliver such documents and certificates and updates thereof as may be reasonably requested by any underwriter of the applicable Securities, and which are customarily delivered in underwritten offerings, to evidence the continued validity of the representations and warranties of the Companies made pursuant to, and to evidence compliance with any customary conditions contained in, an underwriting agreement; and (ii) cause their independent public accountants to provide to the selling Holders of the applicable Securities (and any underwriter therefor) a comfort letter in customary form and covering matters of the type customarily covered in comfort letters in connection with primary underwritten offerings, subject to receipt of appropriate documentation as -12- 13 contemplated, and only if permitted, by Statement of Auditing Standards No. 72. (r) If a Registered Exchange offer is to be consummated, upon delivery of the Notes by Holders to the Companies (or to any other Person designated by the Companies) in exchange for the Exchange Notes, the Companies shall mark, or caused to be marked, on the Notes so exchanged that those Notes are being canceled in exchange for the Exchange Notes, and in no event shall the Notes be marked as paid or otherwise satisfied. (s) The Companies shall use their best efforts to cause the Securities covered by a Registration Statement to be rated by two nationally recognized statistical rating organizations (as that term is defined in Rule 436(g)(2) under the Securities Act) if so requested by Holders of a majority in aggregate principal amount of the Securities covered by that Registration Statement, or by the managing underwriters, if any. (t) If any broker-dealer registered under the Exchange Act underwrites any Securities or participates as a member of an underwriting syndicate or selling group or "assists in the distribution" (within the meaning of the Conduct Rules of the National Association of Securities Dealers, Inc. ("NASD")) thereof, whether as a Holder of those Securities or as an underwriter, a placement or sales agent or a broker or dealer in respect thereof, or otherwise, the Companies shall assist such broker-dealer in complying with the requirements of those Rules and By-Laws, including by (i) if those Rules, including Rule 2720, shall so require, engaging a "qualified independent underwriter" (as defined in Rule 2720) to participate in the preparation of the Registration Statement relating to those Securities, to exercise usual standards of due diligence in respect thereto and, if any portion of the offering contemplated by that Registration Statement is an underwritten offering or is made through a placement or sales agent, to recommend the yield of such Securities, (ii) indemnifying any such qualified independent underwriter to the extent of the of underwriters provided in Section 5 hereof; and (iii) providing such information to that broker-dealer as may be required in order for that broker-dealer to comply with the requirements of the Conduct Rules of the NASD. SECTION 4. REGISTRATION EXPENSES. The Companies shall pay all fees and expenses incident to the performance of or compliance with this Agreement by the Companies including, without limitation, (a) all Commission, stock exchange or NASD registration and filing fees; (b) all fees and expenses incurred in connection with compliance with. state securities or Blue Sky laws (including reasonable fees and disbursements of counsel for -13- 14 any underwriters or holders in connection with Blue Sky qualification of any of the Securities); (c) all out of pocket expenses of any persons in preparing or assisting in preparing, word processing, printing and distributing any Registration Statement, any prospectus, any amendment or supplement to either thereof, any underwriting agreement, securities sales agreement or other document relating to the performance of and compliance with this Agreement; (d) all rating agency fees; and (e) the fees and disbursements of counsel for the Companies and, in the event of a Shelf Registration, the reasonable fees and disbursements of one firm of counsel designated by the Holders of a majority in principal amount of the Securities covered thereby and of the independent public accountants of the Companies, including the expense of any special audit or "cold comfort" letter required by or incident to that performance and compliance, but excluding fees and expenses of counsel to the underwriters and underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of Securities by a Holder. SECTION 5. INDEMNIFICATION. (a) The Companies agree to indemnify and hold harmless each Holder of Securities, any Participating Broker-Dealer, and each person, if any, who controls that Holder or Participating Broker-Dealer within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act, or is under common control with, or is controlled by, that Holder or Participating Broker-Dealer, from and against any and all losses, claims, damages and liabilities (including, without limitation, any legal or other expenses reasonably incurred 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 a Registration Statement or prospectus (as amended or supplemented if the Companies shall have furnished any amendment or supplement thereto), or caused by any omission or alleged emission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, 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 on information relating to that Holder or Participating Broker-Dealer furnished to the Companies in writing by that Holder or Participating Broker-Dealer expressly for use therein, but the foregoing indemnity with respect to any preliminary prospectus will not inure to the benefit of any Holder or Participating Broker-Dealer from whom the person asserting any such losses, claims, damages or liabilities purchased Securities, or any person controlling or affiliated with that Holder or Participating Broker-Dealer, is a copy of the final prospectus (as then amended or supplemented if the Companies shall have furnished any amendment or supplement thereto) was not sent or given by or on behalf of that Holder or Participating Broker-Dealer to that person, if required by law so to have been delivered, at or prior to the written confirmation -14- 15 of the sale of the Securities to that person, and if the final prospectus (as so amended or supplemented) would have cured the defect giving rise to that loss, claim, damage or liability. (b) Each Participating Broker-Dealer and Holder of Securities, severally and not jointly, agrees to indemnify and hold harmless the Companies, other selling Holders and Participating Broker-Dealers, directors of the Companies, the officers of the Companies who sign a Registration Statement and each person, if any, who controls either Company or any selling Holder or Participating Broker-Dealer, 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 Companies to that Holder or Participating Broker-Dealer, but only with reference to information relating to that Holder furnished to the Companies in writing by that Holder or Participating Broker-Dealer expressly for use in a Registration Statement, any preliminary prospectus, prospectus or any amendment or supplement to any thereof. (c) If any proceeding (including any governmental investigation) is instituted involving any person in respect of which indemnity may be sought pursuant to either paragraph (a) or (b) above, that person (the "indemnified party") shall promptly notify the person against whom that 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 that proceeding and shall pay the fees and expenses of that counsel related to that proceeding. In any such proceeding, any indemnified party may retain its own counsel, but the fees and expenses of that counsel will be at the expense of that indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of that counsel, or (ii) 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 because of 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. If an indemnified party includes (x) the Purchasers or such controlling persons of the Purchasers, that firm will be designated in writing by Morgan Stanley & Co. Incorporated; or (y) Holders of Securities (other than the Purchasers) or controlling persons of those Holders, that firm will be designated in writing by the Holders of a majority in aggregate principal amount of those Securities. In all other -15- 16 cases, that firm will be designated by the Companies. The indemnifying party will not be liable for any settlement of any proceeding effected without its written consent, but if settled with that consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnity the indemnified party from and against any loss or Liability by reason of that settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party has 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 will be liable for any settlement of any proceeding effected without its written consent if (i) that settlement is entered into more than 90 days after receipt by the indemnifying party of the aforesaid request and (ii) the indemnifying party shall not have reimbursed the indemnified party in accordance with that request prior to the date of that settlement. No indemnifying party may, 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 that indemnified party, unless that settlement includes an unconditional release of that indemnified party from all liability on claims that are the subject matter of that proceeding. (d) To the extent the indemnification provided for in paragraph (a) or (b) of this Section 5 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 that paragraph, in lieu of indemnifying that indemnified party thereunder, shall contribute to the amount paid or payable by that indemnified party as a result of those losses, claims, damages or liabilities in such proportion as is appropriate to reflect the relative fault of the indemnifying party or parties, on the one hand, and the indemnified party or parties, on the other hand, in connection with the statements or omissions that resulted in those losses, claims, damages or liabilities, as well as any other relevant equitable considerations. The relative fault of the parties 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 relates to information supplied by the Companies or by that Holder, Participating Broker-Dealer or other party and the parties, relative intent, knowledge, access to information and opportunity to correct or prevent that statement or omission. The Holders, and Participating Broker-Dealers' respective obligations to contribute pursuant to this Section 5 are several in proportion to the respective amount of Notes they have purchased, not joint. (e) The Companies, each Participating Broker-Dealer and each Holder agree that it would not be just or equitable if -16- 17 contribution pursuant to this Section 5 were determined by PRO RATA allocation or by any other method of allocation that does not take account of the equitable considerations referred to in subsection (d) of this Section 5. The amount paid or payable by an indemnified party as a result of the losses, claims, damages and liabilities referred to in subsection (d) above is deemed to include, subject to the limitations set forth, above, any legal or other expenses reasonably incurred by that indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the Provisions of this Section 5, no Holder of Securities is required to contribute any amount in excess of the amount by which the total price at which the Securities were sold by that Holder pursuant to a Registration Statement exceeds the amount of any damages that Holder has otherwise been required to pay by reason of that 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) is entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. (f) The indemnity and contribution provisions contained in this Section 5 will remain operative and in full force and effect regardless of (i) any termination of this Agreement; (ii) any investigation made by or on behalf of any Holder or Participating Broker-Dealer or any person controlling that Holder or Participating Broker-Dealer or by or on behalf of either Company, its officers or directors or any person controlling either Company; and (iii) the sale of the Securities. The remedies provided for in this Section 5 are not exclusive and do not limit any rights or remedies which may otherwise be available to any indemnified party at law or in equity. SECTION 6. ADDITIONAL INTEREST UNDER CERTAIN CIRCUMSTANCES. (a) Additional interest (the "Additional Interest") with respect to the Securities will be assessed as follows if any of the following events occurs (each event identified in clause (i), (ii) or (iii) below, a "Failure to Register): (i) If by the 150th day after the date of the original issue of the Notes (that date of issue, the "Closing Date"), neither the Exchange Offer Registration Statement nor a Shelf Registration Statement has been filed with the Commission, (ii) If by the 180th day after the Closing Date, the Registered Exchange Offer is not consummated and, if required in lieu thereof, the Shelf Registration Statement is not declared effective by the Commission; or (iii) If, after the 180th day after the Closing Date, and after either the Exchange Offer Registration -17- 18 Statement or the Shelf Registration Statement is declared effective, (A) that Registration Statement thereafter ceases to be effective prior to completion of the Exchange Offer or the sale of all the Transfer Restricted Notes registered pursuant to the Shelf Registration Statement, as the case may be; or (B) that Registration Statement or the related prospectus ceases to be usable in connection with resales of transfer Restricted Notes during the periods specified in this Agreement (except as permitted in paragraph (b) of this Section 6) because either (1) any event occurs as a result of which the related prospectus forming part of that Registration Statement would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or (2) it shall be necessary to amend that Registration Statement, or supplement the related prospectus, to comply with the Securities Act or the Exchange Act or the respective rules thereunder. Additional Interest shall accrue on the Notes of each tranche over and above the interest set forth in the title of the Notes of that tranche from and including the date on which any such Failure to Register shall occur to but excluding the date on which all such Failures to Register have been cured, at a rate of 0.50% per annum. (b) A Failure to Register referred to in Section 6(a)(iii) is deemed not to be continuing in relation to a Registration Statement or the related prospectus if (i) that Failure to Register has occurred solely as a result of (x) the filing of a post-effective amendment to that Registration Statement to incorporate annual audited financial information with respect to the Companies, when such post-effective amendment is not yet effective and needs to be declared effective to permit Holders to use the related prospectus or (y) the occurrence of other material events or developments with respect to the Companies or their Affiliates that would need to be described in that Registration Statement or the related prospectus, and (ii) in the case of clause (y), the Companies are proceeding promptly and in good faith to amend or supplement that Registration Statement and related prospectus to describe those events or, in the case of material developments that the Companies determine in good faith must remain confidential for business reasons, the Companies are proceeding promptly and in good faith to take such steps as are necessary so that those developments need no longer remain confidential, but in any case, if any Failure to Register (including any referred to in clause (x) or (y), above) continues for a Period in excess of 45 days, Additional Interest will be payable in accordance with the above paragraph from the day following the last day of that 45-day period until the date on which that Failure to Register is cured. -18- 19 (c) Any Additional Interest payable will be payable on the regular interest payment dates with respect to the Notes, in the same manner as the manner in which regular interest is payable. The amount of Additional Interest for any period will be determined by multiplying the applicable Additional Interest rate by the principal amount of the applicable Notes, multiplied by a fraction, the numerator of which is the number of days that Additional Interest rate was applicable during that period (determined on the basis of a 360-day year comprised of twelve 30-day months), and the denominator of which is 360. (d) "Transfer Restricted Note" means each Security until (i) the date on which that Security has been exchanged by a person other than a broker-dealer for a freely transferrable Exchange Note in the Registered Exchange Offer; (ii) following the exchange by a broker-dealer in the Registered Exchange Offer of a Transfer Restricted Note for an Exchange Note, the date on which that Exchange Note is sold to a purchaser who receives from that broker-dealer on or prior to the date of that sale a copy of the prospectus contained in the Exchange Offer Registration Statement; (iii) the date on which that Security has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement; or (iv) the date on which that Security is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. SECTION 7. RULES 144 AND 144A. The Companies shall use their best efforts to file the reports required to be filed by them under the Securities Act and the Exchange Act in a timely manner and, if at any time the Companies are not required to file those reports, they will, upon the request of any Holder of Transfer Restricted Notes, make publicly available other information so long as is necessary to permit sales of Securities pursuant to Rules 144 and 144A. The Companies covenant that they wall take such further action as any Holder of Transfer Restricted Notes may reasonably request, all to the extent required from time to time to enable that Holder to sell Transfer Restricted Notes without registration under the Securities Act within the limitation of the exemptions provided by Rules 144 and 144A (including the requirements of Rule 144A(d)(4)). Upon request by a Purchaser, the Companies will provide a copy of this Agreement to prospective purchasers of Notes identified to the Companies by that Purchaser. Upon the request of any Holder of Transfer Restricted Notes, the Companies shall deliver to that Holder a written statement as to whether it has complied with those requirements. Notwithstanding the foregoing, nothing in this Section 7 requires either Company to register any of its securities under the Exchange Act. SECTION 8. Underwritten Registrations. If any of the Transfer Restricted Notes covered by any Shelf Registration are to be sold in an underwritten offering, the investment banker or -19- 20 investment bankers and manager or managers that will administer the offering ("Managing Underwriters") will be selected by the Holders of a majority in aggregate principal amount of the Transfer Restricted Notes included in that offering, but the Managing Underwriters must be reasonably satisfactory to the Companies. No person may participate in any underwritten registration hereunder unless that person (a) agrees to sell that person's Transfer Restricted Notes on the basis reasonably provided in any underwriting arrangements approved by the persons entitled hereunder to approve those arrangements; and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents reasonably required under the terms of those underwriting arrangements. SECTION 9. MISCELLANEOUS. (a) AMENDMENTS AND WAIVERS. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, except by the Companies and the written consent of the Holders of a majority in principal amount of the Securities affected thereby. (b) NOTICES. ALL notices and other communications provided for or permitted hereunder must be given in writing by hand-delivery, first-class mail, facsimile transmission, or air courier that guarantees overnight delivery: (i) if to a Holder of Securities, at the most current address given by that Holder to the Companies in accordance with this Section 9(b) , which address initially is, with respect to each Holder, the address of that Holder to which confirmation of the sale of the Notes to that Holder was first sent by the Purchasers, with a copy in like manner to you as follows: Morgan Stanley & Co. Incorporated 1585 Broadway New York, NY 10036 Facsimile: (212) 761-0359 Attention: Managing Director, Syndicate -20- 21 with a copy to: Baker & Hostetler LLP 3200 National City Center 1900 East 9th Street Cleveland, Ohio 44114-3485 Facsimile: (216) 696-0740 Attention: Robert A. Weible (2) if to the Companies, at the following address: Centerior Energy 6200 Oak Tree Boulevard Independence, Ohio 44131 Facsimile: (216) 447-3100 Attention: Terrence G. Linnert with a copy to: Squire, Sanders & Dempsey, L.L.P. 4900 Key Tower 127 Public Square Cleveland, Ohio 44114-1304 Facsimile: (216) 479-8793 Attention: Gordon S. Kaiser All such notices and communications will be deemed to have been duly given: at the time delivered by hand, if personally delivered; three business days after being deposited in the mail, postage prepaid, if mailed; when receipt is acknowledged by the recipient's facsimile machine operator, if sent by facsimile transmission; and on the day delivered, if sent by overnight air courier guaranteeing next day delivery. (c) NO INCONSISTENT AGREEMENTS. Neither Company has, as of the date hereof, entered into, nor may either Company, on or after the date hereof, enter into, any agreement with respect to the Securities that is inconsistent with the rights granted to the Holders herein or that otherwise conflicts with this Agreement. (d) SUCCESSORS AND ASSIGNS. This Agreement is binding on the Companies and their successors and assigns. (e) COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed will constitute an original and all of which taken together constitute one and the same agreement. -21- 22 (f) GOVERNING LAW. THIS AGREEMENT IS GOVERNED BY, AND IS TO BE CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. (h) SEVERABILITY. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein is not affected or impaired thereby. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] -22- 23 (i) SECURITIES HELD BY THE COMPANIES. Whenever the consent or approval of Holders of a specified percentage of principal amount of Securities is required hereunder, Securities held by the Companies or their affiliates will not be counted in determining whether that consent or approval was given by the Holders of that required percentage. If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Companies a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Purchasers and the Companies in accordance with its terms. Very truly yours, THE CLEVELAND ELECTRIC ILLUMINATING COMPANY and THE TOLEDO EDISON COMPANY By: ------------------------------------ Name: Title: of each ------------------ Accepted as of the date hereof Morgan Stanley & Co. Incorporated Citicorp Securities, Inc. Credit Suisse First Boston McDonald & Company Securities, Inc. Acting severally on behalf of themselves and the several Purchasers BY MORGAN STANLEY & CO. INCORPORATED By: ------------------------------------ Name: Title: -23- 24 (i) SECURITIES HELD BY THE COMPANIES. Whenever the consent or approval of Holders of a specified percentage of principal amount of Securities is required hereunder, Securities held by the Companies or their affiliates will not be counted in determining whether that consent or approval was given by the Holders of that required percentage. If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Companies a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the Purchasers and the Companies in accordance with its terms. Very truly yours, THE CLEVELAND ELECTRIC ILLUMINATING COMPANY and THE TOLEDO EDISON COMPANY BY: ------------------------------- Name: Title: of each ---------------- Accepted as of the date hereof Morgan Stanley & Co. Incorporated Citicorp Securities, Inc. Credit Suisse First Boston McDonald & Company Securities, Inc. Acting severally on behalf of themselves and the several Purchasers By MORGAIN STANLEY, INCORPORATED By: -------------------------------- Name: Title: -23- 25 ANNEX A Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such Exchange Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer wi11 not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Existing Notes where such Existing Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 120 days after the consummation of the Exchange Offer, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution". 26 ANNEX B Each broker-dealer that receives Exchange Notes for its own account in exchange for Notes, that were acquired by that broker-dealer as a result of market-making activities or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of those Exchange Notes. See "Plan of Distribution." 27 ANNEX C PLAN OF DISTRIBUTION Each broker-dealer that receives Exchange Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of those Exchange Notes. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of Exchange Notes received in exchange for Existing Notes when those Existing Notes were acquired as a result of market making activities or other trading activities. The Companies have agreed that, for a period of 120 days after the consummation of the Exchange Offer, they will make this prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until __________________, 199_, all dealers effecting transactions in the Exchange Notes may be required to deliver a prospectus. The Companies will not receive any proceeds from any sale of Exchange Notes by broker-dealers. Exchange Notes received by any broker-dealer for its own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the Exchange Notes or a combination of those methods of resale, at market prices prevailing at the time of resale or at prices related to those prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer or the purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of those Exchange Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of Exchange Notes and any commission or concessions received by any such person may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 120 days after the Expiration Date the Companies will promptly send additional copies of this Prospectus, and any amendment or supplement to this Prospectus, to any broker-dealer that requests those documents in the Letter of Transmittal. The Companies have agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the Holders of the Notes) other than commissions or concessions of any broker or dealer and will indemnify the Holders of the Securities (including any broker-dealer) against 28 certain liabilities, including liabilities under the Securities Act. - --------------------------- */ In addition, the legend required by Item 502(e) of Regulation S-K will appear on the back cover page of the Exchange Offer prospectus. -2- 29 ANNEX D [] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENT OR SUPPLEMENT THERETO. Name: Address: If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of Exchange Notes. If the undersigned is a broker-dealer that will receive Exchange Notes for its own account in exchange for Notes that were acquired as a result of market-making activities or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such Exchange Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. EX-1.C 4 EXHIBIT 1(C) 1 Exhibit 1(c) LETTER OF TRANSMITTAL FOR 7.19% SERIES A SECURED NOTES DUE 2000, 7.67% SERIES A SECURED NOTES DUE 2004 AND 7.13% SERIES A SECURED NOTES DUE 2007 OF THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND THE TOLEDO EDISON COMPANY PURSUANT TO THE EXCHANGE OFFER IN RESPECT OF ALL OF THEIR OUTSTANDING 7.19% SERIES A SECURED NOTES DUE 2000, 7.67% SERIES A SECURED NOTES DUE 2004 AND 7.13% SERIES A SECURED NOTES DUE 2007 FOR 7.19% SERIES B SECURED NOTES DUE 2000, 7.67% SERIES B SECURED NOTES DUE 2004 AND 7.13% SERIES B SECURED NOTES DUE 2007, RESPECTIVELY ------------------------------------------------------------ PURSUANT TO THE PROSPECTUS DATED , 1997 THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1997 UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF OLD NOTES (AS DEFINED HEREIN) MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE EXPIRATION DATE. The Exchange Agent for the Exchange Offer is: THE CHASE MANHATTAN BANK By Registered or Certified Mail: The Chase Manhattan Bank 55 Water Street Room 234, North Building New York, New York 10041 Attention: Carlos Esteves Facsimile Transmissions: (Eligible Institutions Only) (212) 638-7375 or (212) 344-9367 Confirm by Telephone: (212) 638-0828 By Hand or Overnight Delivery: The Chase Manhattan Bank 55 Water Street Room 234, North Building New York, New York 10041 Attention: Carlos Esteves DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION VIA TELEGRAM, TELEX OR FACSIMILE, OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR OLD NOTES PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR OLD NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE. By execution hereof, the undersigned acknowledges receipt of the Prospectus dated , 1997 (the "Prospectus") of The Cleveland Electric Illuminating Company and The Toledo Edison Company (the "Companies"), which, together with this Letter of Transmittal and the instructions hereto (the "Letter of Transmittal"), constitute the Companies' offer (the "Exchange Offer") to exchange $1,000 principal amount of their 7.19% Series B Secured Notes due 2000 (the "New Notes due 2000"), 7.67% Series B Secured Notes due 2004 (the "New Notes due 2004") and 7.13% Series B Secured Notes due 2007 (the "New Notes due 2007") (collectively, the "New Notes"), which have been registered under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a registration statement of which the Prospectus constitutes a part, for each $1,000 principal amount of their outstanding 7.19% Series A Secured Notes due 2000 (the "Old Notes due 2000"), 7.67% Series A Secured Notes due 2004 (the "Old Notes due 2004") and 7.13% Series A Secured Notes due 2007 (the "Old Notes due 2007") (collectively, the "Old Notes"), upon the terms and subject to the conditions set forth in the Prospectus. This Letter of Transmittal is to be used by Holders (as defined below) if: (i) certificates representing Old Notes are to be physically delivered to the Exchange Agent herewith by Holders; (ii) tender of Old Notes is to be made by book- 2 entry transfer to the Exchange Agent's account at The Depository Trust Company ("DTC") pursuant to the procedures set forth in the Prospectus under "The Exchange Offer -- Procedures for Tendering" by any financial institution that is a participant in DTC and whose name appears on a security position listing as the owner of Old Notes (such participants acting on behalf of Holders are referred to herein, together with such Holders, as "Acting Holders"); or (iii) tender of Old Notes is to be made according to the guaranteed delivery procedures set forth in the Prospectus under "The Exchange Offer -- Guaranteed Delivery Procedures," and, in each case, instructions are being transmitted through the DTC Automated Tender Offer Program ("ATOP"). See Instruction 1. Delivery of documents to DTC does not constitute delivery to the Exchange Agent. The term "Holder" with respect to the Exchange Offer means any person: (i) in whose name Old Notes are registered on the books of the Companies or any other person who has obtained a properly completed bond power from the registered Holder; or (ii) whose Old Notes are held of record by DTC and who desires to deliver such Old Notes by book-entry transfer at DTC. The undersigned has completed, executed and delivered this Letter of Transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. THE EXCHANGE OFFER IS NOT BEING MADE TO (NOR WILL THE SURRENDER OF OLD NOTES FOR EXCHANGE BE ACCEPTED FROM OR ON BEHALF OF) HOLDERS IN ANY JURISDICTION IN WHICH THE MAKING OR ACCEPTANCE OF THE EXCHANGE OFFER WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION. All capitalized terms used herein and not defined shall have the meaning ascribed to them in the Prospectus. The instructions included with this Letter of Transmittal must be followed. Questions and requests for assistance or for additional copies of the Prospectus, this Letter of Transmittal and the Notice of Guaranteed Delivery may be directed to the Exchange Agent. See Instruction 8 herein. HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR OLD NOTES MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY. THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF NOTES" AND SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE TENDERED THE OLD NOTES AND MADE CERTAIN REPRESENTATIONS DESCRIBED IN THE PROSPECTUS AND HEREIN. List below the Old Notes to which this Letter of Transmittal relates. If the space provided below is inadequate, list the certificate numbers and principal amounts on a separately executed schedule and affix the schedule to this Letter of Transmittal. Tenders of Old Notes will be accepted only in principal amounts equal to $1,000 or integral multiples thereof.
- -------------------------------------------------------------------------------------------------------- DESCRIPTION OF NOTES - -------------------------------------------------------------------------------------------------------- NAME(S) AND ADDRESS(ES) OF HOLDER(S) CERTIFICATE NUMBERS* AGGREGATE PRINCIPAL (PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) (ATTACH SIGNED LIST AMOUNT TENDERED APPEAR(S) ON OLD NOTES BEING TENDERED) IF NECESSARY) (IF LESS THAN ALL)** - -------------------------------------------------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- -------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------- TOTAL PRINCIPAL AMOUNT OF OLD NOTES TENDERED - -------------------------------------------------------------------------------------------------------- * Need not be completed by Holders tendering by book-entry transfer ** Need not be completed by Holders who wish to tender with respect to all Old Notes listed. See Instruction 2. - -------------------------------------------------------------------------------------------------------- [ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY DTC TO THE EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING: Name of Tendering Institution: ________________________________________________________________ DTC Book-Entry Account No.: ___________________________________________________________________ Transaction Code No.: _________________________________________________________________________
3 If Holders desire to tender Old Notes pursuant to the Exchange Offer and (i) certificates representing such Old Notes are not lost but are not immediately available, (ii) time will not permit the Letter of Transmittal, certificates representing such Old Notes or other required documents to reach the Exchange Agent prior to the Expiration Date, or (iii) the procedure for book-entry transfer cannot be completed prior to the Expiration Date, such Holders may effect a tender of such Old Notes in accordance with the guaranteed delivery procedures set forth in the Prospectus under "The Exchange Offer -- Guaranteed Delivery Procedures." DTC participants may also accept the Exchange Offer by submitting the notice of guaranteed delivery through ATOP. [ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING (See Instructions 1 and 4): Name(s) of Holder(s) of Old Notes:___________________________________________________________________________________________ Window Ticket No. (if any):______________________________________________________________________ Date of Execution of Notice of Guaranteed Delivery:___________________________________________________________________ Name of Eligible Institution that Guaranteed Delivery: _________________________________________________________________________________________________ [ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER FACILITY, AND PROVIDE THE FOLLOWING INFORMATION: Name of Tendering Institution:___________________________________________________________________ DTC Book-Entry Account No.:______________________________________________________________________ Transaction Code No.:_____________________________________________________________________________ [ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name:_____________________________________________________________________________________________ Address:__________________________________________________________________________________________ __________________________________________________________________________________________________ [ ] CHECK HERE IF CERTIFICATES FOR TENDERED OLD NOTES ARE ENCLOSED HEREWITH.
4 NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY. LADIES AND GENTLEMEN: Subject to the terms of the Exchange Offer, the undersigned hereby tenders to the Companies the principal amount of Old Notes indicated in the box entitled "Description of Notes." Subject to and effective upon the acceptance for exchange of the principal amount of Old Notes tendered in accordance with this Letter of Transmittal, the undersigned sells, assigns and transfers to, or upon the order of, the Companies all right, title and interest in and to the Old Notes tendered hereby. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent its agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as the agent of the Companies and as Trustee under the Indenture for the Old Notes and the New Notes) with respect to the tendered Old Notes with full power of substitution to (i) deliver certificates for such Old Notes to the Companies, or transfer ownership of such Old Notes on the account books maintained by DTC together, in either such case, with all accompanying evidences of transfer and authenticity to, or upon the order of, the Companies and (ii) present such Old Notes for transfer on the books of the Companies and receive all benefits and otherwise execute all rights of beneficial ownership of such Old Notes, all in accordance with the terms of the Exchange Offer. The power of attorney granted in this paragraph shall be deemed irrevocable and coupled with an interest. The undersigned hereby represents and warrants that (a) the undersigned accepts the terms and conditions of the Exchange Offer, (b) the undersigned has full power and authority to tender, exchange, assign and transfer the Old Notes tendered hereby, and (c) when the same are accepted for exchange by the Companies, the Companies will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim or right. The undersigned will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or the Companies to be necessary or desirable to complete the sale, assignment and transfer of the Old Notes tendered hereby. The undersigned hereby represents and warrants that he or she has full power and authority to tender, sell, assign and transfer the Old Notes tendered hereby and that the Companies will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim, when the same are acquired by the Companies. The undersigned also acknowledges that this Exchange Offer is being made in reliance upon interpretations by the staff of the Securities and Exchange Commission that the New Notes issued in exchange for the Old Notes pursuant to the Exchange Offer may be offered for sale, resold and otherwise transferred by any holder thereof (other than (i) a broker-dealer who purchased such Old Notes directly from the Companies to resell pursuant to Rule 144A or any other available exemption under the Securities Act, or (ii) a person that is an "affiliate" of the Companies within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the holder is acquiring the New Notes in its ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the New Notes. THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL TENDERS BE ACCEPTED FROM OR ON BEHALF OF, HOLDERS OF THE OLD NOTES IN ANY JURISDICTION IN WHICH THE MAKING OF THE OFFER OR ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION OR WOULD OTHERWISE NOT BE IN COMPLIANCE WITH ANY PROVISION OF ANY APPLICABLE SECURITY LAW. The undersigned represents that (i) the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of such holder's business, (ii) such holder has no arrangement or understanding with any person to participate in the distribution of the New Notes and (iii) such holder is not an "affiliate," as defined under Rule 405 of the Securities Act, of the Companies or, if such holder is an affiliate, such holder will comply with the registration and prospectus delivery requirements of the Securities Act to the extent applicable. If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of New Notes. If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of market-making or other trading activities, it acknowledges that it will deliver a prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. The undersigned will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or the Companies to be necessary or desirable to complete the assignment and transfer of the Old Notes tendered hereby. The undersigned understands and acknowledges that the Companies reserve the right, in their sole discretion, to purchase or make offers for any Old Notes that remain outstanding subsequent to the Expiration Date or to terminate the Exchange Offer and, to the extent permitted by applicable law, purchase Old Notes in the open market, in privately 5 negotiated transactions or otherwise. The terms of any such purchases or offers will differ from the terms of the Exchange Offer. The undersigned understands that by tendering Old Notes pursuant to one of the procedures described in the Prospectus and the instructions thereto, the exchange of the Old Notes for the New Notes will not result in the loss of interest income for the tendering holder. For purposes of the Exchange Offer, the Companies shall be deemed to have accepted validly tendered Old Notes when the Companies have given oral or written notice thereof to the Exchange Agent. If any tendered Old Notes are not accepted for exchange pursuant to the Exchange Offer for any reason, certificates for any such unaccepted Old Notes will be returned (except as noted below with respect to tenders through DTC), without expense, to the undersigned at the address shown below or at a different address as may be indicated under "Special Issuance Instructions" as promptly as practicable after the Expiration Date. All authority conferred or agreed to be conferred by this Letter of Transmittal shall survive the death, incapacity or dissolution of the undersigned and every obligation under this Letter of Transmittal shall be binding upon the undersigned's heirs, personal representatives, successors and assigns. The undersigned understands that tenders of Old Notes pursuant to the procedures described under the caption "The Exchange Offer -- Procedures for Tendering" in the Prospectus and in the instructions hereto will constitute a binding agreement between undersigned and the Companies upon the terms and subject to the conditions of the Exchange Offer. All questions as to form, validity, eligibility (including time of receipt), acceptance and withdrawal of tendered Old Notes will be determined by the Companies in their sole discretion, which determination will be final and binding. Unless otherwise indicated under "Special Issuance Instructions," please issue the certificates representing the New Notes issued in exchange for the Old Notes accepted for exchange and return any Old Notes not tendered or not exchanged in the name(s) of the undersigned (or in either such event in the case of Old Notes tendered by DTC, by credit to the account at DTC). Similarly, unless otherwise indicated under "Special Delivery Instructions," please send the certificates representing the New Notes issued in exchange for the Old Notes accepted for exchange and any certificates for Old Notes not tendered or not exchanged (and accompanying documents, as appropriate) to the undersigned at the address shown below the undersigned's signature(s), unless, in either event, tender is being made through DTC. In the event that both "Special Issuance Instructions" and "Special Delivery Instructions" are completed, please issue the certificates representing the New Notes issued in exchange for the Old Notes accepted for exchange and return any Old Notes not tendered or not exchanged in the name(s) of, and send said certificates to, the person(s) so indicated. The undersigned recognizes that the Companies have no obligation pursuant to the "Special Issuance Instructions" and "Special Delivery Instructions" to transfer any Old Notes from the name of the registered holder(s) thereof if the Companies do not accept for exchange any of the Old Notes so tendered. 6 PLEASE SIGN HERE (TO BE COMPLETED BY ALL TENDERING HOLDERS OF OLD NOTES REGARDLESS OF WHETHER OLD NOTES ARE BEING PHYSICALLY DELIVERED HEREWITH) This Letter of Transmittal must be signed by the Holder(s) of Old Notes exactly as their name(s) appear(s) on certificate(s) for Old Notes or, if tendered by a participant in DTC, exactly as such participant's name appears on a security position listing as the owner of Old Notes, or by person(s) authorized to become registered Holder(s) by endorsements and documents transmitted with this Letter of Transmittal. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must set forth his or her full title below under "Capacity" and submit evidence satisfactory to the Companies of such person's authority to so act. See Instruction 3 herein. X _______________________________________________ Date: ___________________________________________ X _______________________________________________ Date: ___________________________________________ SIGNATURE(S) OF HOLDER(S) OR AUTHORIZED SIGNATORY Name(s): ______________________________________ Address ________________________________________ _________________________________________________ _________________________________________________ (PLEASE PRINT) (INCLUDING ZIP CODE) Area Code and Capacity: _______________________________________ Telephone No.: __________________________________ Social Security No.: ___________________________
PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN MEDALLION SIGNATURE GUARANTEE (IF REQUIRED -- SEE INSTRUCTION 3 HEREIN) ________________________________________________________________________________ (NAME OF ELIGIBLE INSTITUTION GUARANTEEING SIGNATURE(S)) ________________________________________________________________________________ (ADDRESS (INCLUDING ZIP CODE) AND TELEPHONE NUMBER (INCLUDING AREA CODE) OF FIRM) ________________________________________________________________________________ (AUTHORIZED SIGNATURE) ________________________________________________________________________________ (PRINTED NAME) ________________________________________________________________________________ (TITLE) Date: _________________________________________________________________________ 7 ______________________________________________________________________________ SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTION 2, 3, 4 AND 5 HEREIN) To be completed ONLY if certificates for Old Notes in a principal amount not tendered are to be issued in the name of, or the New Notes issued pursuant to the Exchange Offer are to be issued to the order of, someone other than the person(s) whose signature(s) appear(s) within this Letter of Transmittal, or issued to an address different from that shown in the box entitled "Description of Notes" within this Letter of Transmittal, or if Old Notes tendered by book-entry transfer are not accepted for purchase are to be credited to an account maintained at DTC other than the account indicated above. Name: ____________________________________________________ (PLEASE PRINT) Address: __________________________________________________ __________________________________________________ (ZIP CODE) __________________________________________________ TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER (YOU MUST ALSO COMPLETE SUBSTITUTE FORM W-9 HEREIN) Credit unaccepted Old Notes tendered by book-entry transfer to: [ ] The Depository Trust Company account set forth below: ____________________________________________________________ (DTC ACCOUNT NUMBER) ____________________________________________________________ ______________________________________________________________________________ SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTION 2, 3, 4 AND 5 HEREIN) To be completed ONLY if certificates for Old Notes in a principal amount not tendered or not accepted for purchase or the New Notes issued pursuant to the Exchange Offer are to be sent to someone other than the person(s) whose signature(s) appear(s) within this Letter of Transmittal, or issued to an address different from that shown in the box entitled "Description of Notes" within this Letter of Transmittal. Name: _______________________________________________________________ (PLEASE PRINT) Address: ____________________________________________________________ ____________________________________________________________ (ZIP CODE) ____________________________________________________________ TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER (YOU MUST ALSO COMPLETE SUBSTITUTE FORM W-9 HEREIN) ______________________________________________________________________________ 8 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER AND THE SOLICITATION 1. Delivery of this Letter of Transmittal and Old Notes; Guaranteed Delivery Procedures. The certificates for the tendered Old Notes (or a confirmation of a book-entry transfer into the Exchange Agent's account at DTC of all Old Notes delivered electronically), as well as a properly completed and duly executed copy of this Letter of Transmittal or facsimile hereof and any other documents required by this Letter of Transmittal must be received by the Exchange Agent at one of its addresses set forth on the first page of this Letter of Transmittal, prior to 5:00 P.M., New York City time, on the Expiration Date. The method of delivery of the tendered Old Notes, this Letter of Transmittal and all other required documents to the Exchange Agent is at the election and risk of the Holder and, except as otherwise provided below, the delivery will be deemed made only when actually received by the Exchange Agent. Instead of delivery by mail, it is recommended that the Holder use an overnight or hand delivery service. In all cases, sufficient time should be allowed to assure timely delivery. No Letter of Transmittal or Old Notes should be sent to the Companies. THE METHOD OF DELIVERY OF OLD NOTES AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER. SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY TO THE EXCHANGE AGENT BY 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. Holders who wish to tender their Old Notes and (i) whose Old Notes are not lost but are not immediately available or (ii) who cannot deliver their Old Notes, this Letter of Transmittal or any other documents required hereby to the Exchange Agent prior to the Expiration Date must tender their Old Notes and follow the guaranteed delivery procedures set forth in the Prospectus. Pursuant to such procedures: (i) such tender must be made by or through an Eligible Institution; (ii) prior to the Expiration Date, the Exchange Agent must have received from the Eligible Institution a properly completed and duly executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery) setting forth the name and address of the Holder of the Old Notes, the certificate number or numbers of such Old Notes and the principal amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three business days after the Expiration Date, this Letter of Transmittal (or a facsimile hereof) together with the certificate(s) representing the Old Notes (or a confirmation of electronic delivery of book-entry delivery into the Exchange Agent's account at DTC) and any of the required documents will be deposited by the Eligible Institution with the Exchange Agent; and (iii) such properly completed and executed Letter of Transmittal (or a facsimile hereof), as well as other documents required by this Letter of Transmittal and the certificate(s) representing all tendered Old Notes in proper form for transfer (or a confirmation of electronic mail delivery of book-entry delivery into the Exchange Agent's account at DTC), must be received by the Exchange Agent within three business days after the Expiration Date, all as provided in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures." Any Holder of Old Notes who wishes to tender his Old Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the Notice of Guaranteed Delivery prior to 5:00 P.M., New York City time, on the Expiration Date. All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Old Notes will be determined by the Companies in their sole discretion, which determination will be final and binding. The Companies reserve the absolute right to reject any and all Old Notes not properly tendered or any Old Notes the Companies' acceptance of which would, in the opinion of counsel for the Companies, be unlawful. The Companies also reserve the right to waive any irregularities or conditions of tender as to particular Old Notes. The Companies' interpretation of the terms and conditions of the Exchange Offer (including the instructions in this Letter of Transmittal) will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Old Notes must be cured within such time as the Companies shall determine. Neither the Companies, the Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Old Notes, nor shall any of them incur any liability for failure to give such notification. Tenders of Old Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Old Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned without cost to the holders by the Exchange Agent to the tendering Holders of Old Notes, unless otherwise provided in this Letter of Transmittal, as soon as practicable following the Expiration Date. 2. Partial Tenders. Tenders of Old Notes will be accepted in all denominations of $1,000 and integral multiples in excess thereof. If less than the entire principal amount of any Old Notes is tendered, the tendering Holder should fill in the principal amount tendered in the third column of the chart entitled "Description of Notes." The entire principal amount of Old Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. If the entire principal amount of Old Notes is not tendered, Old Notes for the principal amount of Old Notes not tendered and a certificate or certificates representing New Notes issued in exchange for any Old Notes accepted will be sent to the Holder at his or her registered address, unless a different address is provided in the appropriate box on this Letter of Transmittal or unless tender is made through DTC, promptly after the Old Notes are accepted for exchange. 9 3. Signatures on the Letter of Transmittal; Bond Powers and Endorsements; Guarantee of Signatures. If this Letter of Transmittal (or a facsimile hereof) is signed by the registered Holder(s) of the Old Notes tendered hereby, the signature must correspond with the name(s) as written on the face of the Old Notes without alteration, enlargement or any change whatsoever. If this Letter of Transmittal (or a facsimile hereof) is signed by the registered Holder(s) of Old Notes tendered and the certificate(s) for New Notes issued in exchange therefor is to be issued (or any untendered principal amount of Old Notes is to be reissued) to the registered Holder, such Holder need not and should not endorse the Old Notes tendered or transmit a properly completed separate bond power with this Letter of Transmittal, with the signatures on the endorsement or bond power guaranteed by a recognized member of the Medallion Signature Guarantee Program. If this Letter of Transmittal (or a facsimile hereof) is signed by a person other than the registered Holder(s) of any Certificates listed, such Certificates must be endorsed or accompanied by appropriate bond powers signed as the name of the registered Holder(s) appears on the Certificates. If this Letter of Transmittal (or a facsimile hereof) or any Old Notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, or officers of corporations or others acting in a fiduciary or representative capacity, such persons should so indicate when signing, and unless waived by the Companies, evidence satisfactory to the Companies of their authority so to act must be submitted with this Letter of Transmittal. If any Old Notes tendered hereby are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If any Old Notes tendered hereby are registered in different names on several certificates, it will be necessary to complete, sign and submit as many separate copies of this Letter of Transmittal as there are different registrations of certificates. Endorsements on Old Notes or signatures on bond powers required by this Instruction 3 must be guaranteed by a recognized member of the Medallion Signature Guarantee Program. Signatures on this Letter of Transmittal (or a facsimile hereof) must be guaranteed by a recognized member of the Medallion Signature Guarantee Program unless the Old Notes tendered pursuant thereto are tendered (i) by a registered Holder (including any participant in DTC whose name appears on a security position listing as the owner of Old Notes) who has not completed the box set forth herein entitled "Special Issuance Instructions" or the box entitled "Special Delivery Instructions" or (ii) for the account of a member of a registered national securities exchange, a member of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States (each of the foregoing being referred to as an "Eligible Institution"). 4. Special Issuance and Delivery Instructions. Tendering Holders should indicate, in the applicable spaces, the name and address to which New Notes or substitute Old Notes for principal amounts not tendered or not accepted for exchange are to be issued or sent, if different from the name or address of the person signing this Letter of Transmittal (or in the case of tender of the Old Notes through DTC, if such Old Notes are to be credited to an account maintained at DTC other than the account indicated above). In the case of issuance in a different name, the taxpayer identification or social security number of the person named must also be indicated. If no such instructions are given, any Old Notes not exchanged will be returned to the name and address of the person signing this Letter of Transmittal. 5. Transfer Taxes. The Companies will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates representing New Notes or Old Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered Holder of the Old Notes tendered hereby, or if tendered Old Notes are registered in the name of any person other than the person signing this Letter of Transmittal, or if a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered Holder or any other person) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with this Letter of Transmittal, the amount of such transfer taxes will be billed directly to such tendering Holder. Except as provided in this Instruction 5, it will not be necessary for transfer tax stamps to be affixed to the Old Notes listed in this Letter of Transmittal. 6. Waiver of Conditions. The Companies reserve the absolute right to amend, waive or modify specified conditions in the Exchange Offer in the case of any Old Notes tendered. 7. Mutilated, Lost, Stolen or Destroyed Old Notes. Any tendering Holder whose Old Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated herein for further instruction. 8. Requests for Assistance or Additional Copies. Questions and requests for assistance and requests for additional copies of the Prospectus or this Letter of Transmittal may be directed to the Exchange Agent at the address specified in 10 the Prospectus. Holders may also contact their broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Exchange Offer. 9. Withdrawal. Tenders may be withdrawn only pursuant to the withdrawal rights set forth in the Prospectus under the caption "The Exchange Offer -- Withdrawal of Tenders". To be effective, a written or facsimile transmission notice of withdrawal must (a) be received by the Exchange Agent at one of its addresses set forth on the first page of this Letter of Transmittal prior to 5:00 p.m., New York City time, on the Expiration Date, (b) specify the name of the person who tendered the Old Notes, (c) include a statement that the person who tendered Old Notes is withdrawing its election to have such Old Notes exchanged and contain the description of the Old Notes to be withdrawn, the certificate numbers shown on the particular certificates evidencing such Old Notes and the aggregate principal amount represented by such Old Notes and (d) be signed by the holder of such Old Notes in the same manner as the original signature appears on this Letter of Transmittal (including any required signature guarantees) or be accompanied by evidence sufficient to have the Note Trustee with respect to the Old Notes register the transfer of such Old Notes into the name of the holder withdrawing the tender. The signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution unless such Old Notes have been tendered (a) by a registered holder of Old Notes who has not completed either the box entitled "Special Issuance Instructions" or the box entitled "Special Delivery Instructions" on this Letter of Transmittal or (b) for the account of an Eligible Institution. All questions as to the validity, form and eligibility (including time of receipt) of such withdrawal notices shall be determined by the Companies, whose determination shall be final and binding on all parties. If the Old Notes to be withdrawn have been delivered or otherwise identified to the Exchange Agent, a signed notice of withdrawal is effective immediately upon receipt by the Exchange Agent of a written or facsimile transmission notice of withdrawal even if physical release is not yet effected. In addition, such notice must specify, in the case of Old Notes tendered by delivery of certificates for such Old Notes, the name of the registered holder (if different from that of the tendering holder) to be credited with the withdrawn Old Notes. Withdrawals may not be rescinded, and any Old Notes withdrawn will thereafter be deemed not validly tendered for purposes of the Exchange Offer. However, properly withdrawn Old Notes may be retendered by following one of the procedures described under "The Exchange Offer -- Procedures for Tendering" in the Prospectus at any time on or prior to the Expiration Date. 11
_______________________________________________________________________________________________________ (DO NOT WRITE IN SPACE BELOW) - ------------------------------------------------------------------------------------------------------- CERTIFICATE SURRENDERED OLD NOTES TENDERED OLD NOTES ACCEPTED - ------------------------------------------------------------------------------------------------------- ________________________________________________________________________________________________________ ________________________________________________________________________________________________________ ____________________________________________________ Delivery Prepared by ____________ Checked by ____________ Date ____________ _________________________________________________________________________________________________________
IMPORTANT TAX INFORMATION Under federal income tax laws, a Holder whose tendered Old Notes are accepted for payment is required to provide the Exchange Agent (as payer) with such Holder's correct TIN on Substitute Form W-9 below or otherwise establish a basis for exemption from backup withholding. If such Holder is an individual, the TIN is his social security number. If the Exchange Agent is not provided with the correct TIN, a $50 penalty may be imposed by the Internal Revenue Service, and payments made with respect to New Notes purchased pursuant to the Exchange Offer may be subject to backup withholding. Certain Holders (including, among others, all corporations and certain foreign persons) are not subject to these backup withholding and reporting requirements. Exempt Holders should indicate their exempt status on Substitute Form W-9. A foreign person may qualify as an exempt recipient by submitting to the Exchange Agent a properly completed Internal Revenue Service Form W-8, signed under penalties of perjury, attesting to that Holder's exempt status. A Form W-8 can be obtained from the Exchange Agent. See the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for additional instructions. If backup withholding applies, the Exchange Agent is required to withhold 31% of any payments made to the Holder or other payee. Backup withholding is not an additional federal income tax. Rather, the federal income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup withholding on payments made with respect to the Exchange Offer, the Holder is required to provide the Exchange Agent with either: (i) the Holder's correct TIN by completing the form below, certifying that the TIN provided on Substitute Form W-9 is correct (or that the Holder is awaiting a TIN) and that (A) the Holder has not been notified by the Internal Revenue Service that the Holder is subject to backup withholding as a result of failure to report all interest or dividends or (B) the Internal Revenue Service has notified the Holder that the Holder is no longer subject to backup withholding; or (ii) an adequate basis for exemption. WHAT NUMBER TO GIVE THE EXCHANGE AGENT The Holder is required to give the Exchange Agent the TIN (e.g., social security number or employer identification number) of the registered Holder of the Old Notes. If the Old Notes are held in more than one name or are held not in the name of the actual owner, consult the enclosed "Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9" for additional guidance on which number to report. 12 - -------------------------------------------------------------------------------------------------------------- PAYER'S NAME - -------------------------------------------------------------------------------------------------------------- SUBSTITUTE PART 1 -- PROVIDE YOUR TIN IN THE BOX AT PART 3 -- FORM W-9 RIGHT AND CERTIFY BY SIGNING AND DATING BELOW Awaiting TIN [ ] -------------------------------------------------------------------------------------- DEPARTMENT OF THE PART 2 -- Certification -- Under Penalties ------------------------------------ TREASURY INTERNAL of Perjury, SOCIAL SECURITY NUMBER REVENUE SERVICE I certify that: OR PAYER'S REQUEST (1) The number shown on this form is my - ------------------------------------ FOR TAXPAYER correct Taxpayer Identification Number (or I EMPLOYER IDENTIFICATION NUMBER(S) IDENTIFICATION am waiting for a number to be issued to NUMBER (TIN) me) and (2) I am not subject to backup withholding either because I have not been notified by the Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of failure to report all interest or dividends, or the IRS has notified me that I am no longer subject to backup withholding. --------------------------------------------------------------------------------------- CERTIFICATION INSTRUCTIONS -- You must cross out item (2) in Part 2 above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax returns. However, if after being notified by the IRS that you were subject to backup withholding you received another notification from the IRS stating that you are no longer subject to backup withholding, do not cross out such item (2). SIGNATURE __________________________________ DATE _________________ - --------------------------------------------------------------------------------------------------------------
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN) Please fill out your name and address below: ------------------------------------------------------------------------------ Name ------------------------------------------------------------------------------ Address (Number and street) ------------------------------------------------------------------------------ City, State and Zip Code NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO HOLDERS OF NEW NOTES PURSUANT TO THE EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9. CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number within 60 days, 31 percent of all reportable payments made to me thereafter will be withheld until I provide a number and that, if I do not provide my taxpayer identification number within 60 days, such retained amounts shall be remitted to the IRS as backup withholding. ----------------------------------------------- ----------------------------------------------- SIGNATURE DATE
13 THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS: The Chase Manhattan Bank By Registered or Certified By Facsimile: By Hand or Overnight Courier: Mail: The Chase Manhattan Bank (Eligible Institutions Only) The Chase Manhattan Bank 55 Water Street (212) 638-7375 or (212) 344-9367 55 Water Street Room 234, North Building Room 234, North Building New York, New York 10041 Confirm by Telephone: New York, New York 10041 Attention: Carlos Esteves (212) 638-0828 Attention: Carlos Esteves
EX-1.D 5 EXHIBIT 1(D) 1 Exhibit 1 (d) NOTICE OF GUARANTEED DELIVERY TO TENDER FOR EXCHANGE 7.19% SERIES A SECURED NOTES DUE 2000, 7.67% SERIES A SECURED NOTES DUE 2004 AND 7.13% SERIES A SECURED NOTES DUE 2007 OF THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND THE TOLEDO EDISON COMPANY As set forth in the Prospectus dated , 1997 (the "Prospectus"), of The Cleveland Electric Illuminating Company and The Toledo Edison Company (the "Companies") and in the accompanying Letter of Transmittal and instructions thereto (the "Letter of Transmittal"), this form or one substantially equivalent hereto must be used to accept the Companies' exchange offer (the "Exchange Offer") to exchange any or all of their outstanding 7.19% Series A Secured Notes due 2000 (the "Old Notes due 2000"), 7.67% Series A Secured Notes due 2004 (the "Old Notes due 2004") and 7.13% Series A Secured Notes due 2007 (the "Old Notes due 2007") (collectively, the "Old Notes") if (i) certificates representing the Old Notes to be tendered for purchase and payment are not lost but are not immediately available, (ii) time will not permit the Letter of Transmittal, certificates representing such Old Notes or other required documents to reach the Exchange Agent prior to the Expiration Date, or (iii) the procedure for book-entry transfer cannot be completed prior to the Expiration Date. This form may be delivered by an Eligible Institution (as defined herein) by mail or hand delivery or transmitted, via telegram, telex or facsimile, to the Exchange Agent as set forth below. All capitalized terms used herein but not defined herein shall have the meanings ascribed to them in the Prospectus. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1997 UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE"). TENDERS OF OLD NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE EXPIRATION DATE. To: The Chase Manhattan Bank, Exchange Agent By Registered or Certified By Facsimile: By Hand or Overnight Courier: Mail: The Chase Manhattan Bank (Eligible Institutions Only) The Chase Manhattan Bank 55 Water Street (212) 638-7375 or (212) 344-9367 55 Water Street Room 234, North Building Room 234, North Building New York, New York 10041 Confirm by Telephone: New York, New York 10041 Attention: Carlos Esteves (212) 638-0828 Attention: Carlos Esteves
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION VIA TELEGRAM, TELEX OR FACSIMILE, OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY. This form is not to be used to guarantee signatures. If a signature on the Letter of Transmittal is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. LADIES AND GENTLEMEN: The undersigned hereby tender(s) to the Companies, upon the terms and subject to the conditions set forth in the Prospectus and the Letter of Transmittal, receipt of which is hereby acknowledged, the aggregate principal amount of Old Notes set forth below, pursuant to the guaranteed delivery procedures set forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures." Subject to and effective upon acceptance for exchange of the Old Notes tendered herewith, the undersigned hereby sells, assigns and transfers to or upon the order of the Companies all right, title and interest in and to, and any and all claims in respect of or arising or having arisen as a result of the undersigned's status as a holder of, all Old Notes tendered hereby. In the event of a termination of the Exchange Offer, the Old Notes tendered pursuant hereto will be returned to the tendering Old Note holder promptly. The undersigned hereby represents and warrants that the undersigned accepts the terms and conditions of the Prospectus and the Letter of Transmittal, has full power and authority to tender, sell, assign and transfer the Old Notes tendered hereby and that the Companies will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim. The undersigned will, upon request, execute 2 and deliver any additional documents deemed by the Exchange Agent or the Companies to be necessary or desirable to complete the sale, assignment and transfer of the Old Notes tendered. The undersigned understands that tenders of Old Notes will be accepted only in principal amounts equal to $1,000 or integral multiples thereof. The undersigned understands that tenders of Old Notes pursuant to the Exchange Offer may not be withdrawn after 5:00 p.m., New York City time, on the Expiration Date. Tenders of Old Notes may also be withdrawn if the Exchange Offer is terminated without any such Old Notes being purchased thereunder or as otherwise provided in the Prospectus under the caption "The Exchange Offer -- Withdrawal of Tenders." All authority herein conferred or agreed to be conferred by this Notice of Guaranteed Delivery shall survive the death or incapacity of the undersigned, and every obligation of the undersigned under this Notice of Guaranteed Delivery shall be binding upon the heirs, personal representatives, executors, administrators, successors, assigns, trustees in bankruptcy and other legal representatives of the undersigned. PLEASE COMPLETE AND SIGN Signature(s) of Registered Owner(s) or Authorized Signatory: - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ Principal Amount and Series of Old Notes Tendered: - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ Certificate No(s). of Old Notes (if available): - ------------------------------------------------------------ - ------------------------------------------------------------ Date: - ------------------------------------------------------------ Name(s) of Registered Holder(s): - ------------------------------------------------------------ - ------------------------------------------------------------ - ------------------------------------------------------------ Address: - ------------------------------------------------------------ - ------------------------------------------------------------ Area Code and Telephone No.: - ------------------------------------------------------------ If Old Notes will be delivered by book-entry transfer at The Depository Trust Company, insert The Depository Account No.: - ------------------------------------------------------------ Transaction Code No.: - ------------------------------------------------------------ This Notice of Guaranteed Delivery must be signed by the registered holder(s) of Old Notes exactly as its (their) name(s) appear on certificates for Old Notes or on a security position listing as the owner of Old Notes, or by person(s) authorized to become registered holder(s) by endorsements and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must provide the following information: Please print name(s) and address(es) Name(s):___________________________ Capacity:__________________________ Address(es):_______________________ DO NOT SEND OLD NOTES WITH THIS FORM. OLD NOTES SHOULD BE SENT TO THE EXCHANGE AGENT TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL. 3 Guarantee (not to be used for signature guarantee) The undersigned, a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or a correspondent in the United States, hereby guarantees that, within three New York Stock Exchange trading days from the date of this Notice of Guaranteed Delivery, a properly completed and duly executed Letter of Transmittal (or a facsimile thereof), together with certificates representing the Old Notes tendered hereby in proper form for transfer (or confirmation of the book-entry transfer of such Old Notes into the Exchange Agent's account at The Depository Trust Company, pursuant to the procedure for book-entry transfer set forth in the Prospectus) and required documents will be deposited by the undersigned with the Exchange Agent at one of its addresses set forth above. The undersigned acknowledges that it must deliver the Letter of Transmittal and Old Notes tendered hereby to the Exchange Agent within the time period set forth above and that failure to do so could result in financial loss to the undersigned. Name of Firm:________________________ ___________________________ AUTHORIZED SIGNATURE Address:_____________________________ Name:______________________ Title:_____________________ Area Code and Telephone No.__________ Date:______________________
EX-1.E 6 EXHIBIT 1(E) 1 Exhibit 1(e) [CEI LOGO] [TE LOGO] OFFER TO EXCHANGE 7.19% SERIES B SECURED NOTES DUE 2000 FOR ALL OUTSTANDING 7.19% SERIES A SECURED NOTES DUE 2000 $220 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING, 7.67% SERIES B SECURED NOTES DUE 2004 FOR ALL OUTSTANDING 7.67% SERIES A SECURED NOTES DUE 2004 $350 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING, AND 7.13% SERIES B SECURED NOTES DUE 2007 FOR ALL OUTSTANDING 7.13% SERIES A SECURED NOTES DUE 2007 $150 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING OF THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND THE TOLEDO EDISON COMPANY THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON , , 1997, UNLESS EXTENDED. TENDERS OF OLD NOTES MAY ONLY BE WITHDRAWN UNDER THE CIRCUMSTANCES DESCRIBED IN THE PROSPECTUS AND THE LETTER OF TRANSMITTAL. To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: We are enclosing herewith an offer by The Cleveland Electric Illuminating Company and The Toledo Edison Company (the "Companies") to exchange (the "Exchange Offer") their 7.19% Series B Secured Notes due 2000 (the "New Notes due 2000"), 7.67% Series B Secured Notes due 2004 (the "New Notes due 2004") and 7.13% Series B Secured Notes due 2007 (the "New Notes due 2007") (collectively, the "New Notes") for all outstanding 7.19% Series A Secured Notes due 2000 (the "Old Notes due 2000"), 7.67% Series A Secured Notes due 2004 (the "Old Notes due 2004") and 7.13% Series A Secured Notes due 2007 (the "Old Notes due 2007") (collectively, the "Old Notes"), upon the terms and conditions set forth in the accompanying Prospectus dated , 1997 (the "Prospectus") and related Letter of Transmittal and instructions thereto (the "Letter of Transmittal"). The Letter of Transmittal is being circulated to holders of Old Notes with the Prospectus. The Exchange Offer also provides a procedure for holders to tender the Old Notes by means of guaranteed delivery. Based on an interpretation of the Securities and Exchange Commission (the "Commission"), New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by holders thereof (other than (i) a broker-dealer who purchased such Old Notes directly from the Companies for resale pursuant to Rule 144A or any other available exemption under the Securities Act of 1933, as amended (the "Securities Act") or (ii) a person that is an "affiliate" of the Companies within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the holder is acquiring the New Notes in its ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the New Notes. Holders of Old Notes wishing to accept the Exchange Offer must represent to the Companies that such conditions have been met. Each broker-dealer that receives New Notes in exchange for Old Notes held for its own account, as a result of market making or other trading activities, must acknowledge that it will deliver a prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, such broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by such broker-dealer in connection with resales of New Notes received in exchange for Old Notes. The Companies have agreed that, for a period of 90 days after the Expiration Date, as defined herein, they will make this Prospectus and any amendment or supplement thereto available to any broker-dealer for use in connection with any such resale. Notwithstanding any other term of the Exchange Offer, the Companies may terminate or amend the Exchange Offer as provided in the Prospectus and will not be required to accept for exchange, or exchange New Notes for, any Old Notes not accepted for exchange prior to such termination. 2 THE COMPANIES RESERVE THE RIGHT NOT TO ACCEPT TENDERED OLD NOTES FROM ANY TENDERING HOLDER IF THE COMPANIES DETERMINE, IN THEIR SOLE AND ABSOLUTE DISCRETION, THAT SUCH ACCEPTANCE COULD RESULT IN A VIOLATION OF APPLICABLE SECURITIES LAWS. We are asking you to contact your clients for whom you hold Old Notes registered in your name or in the name of your nominee. In addition, we ask you to contact your clients who, to your knowledge, hold Old Notes registered in their own names. The Companies will not pay any fees or commissions to any broker, dealer or other person (other than the Exchange Agent as described in the Prospectus) in connection with the solicitation of tenders of Old Notes pursuant to the Exchange Offer. You will, however, be reimbursed by the Companies for customary mailing and handling expenses incurred by you in forwarding any of the enclosed materials to your clients. The Companies will pay any transfer taxes applicable to the tender of Old Notes to them or their order, except as otherwise provided in the Prospectus and the Letter of Transmittal. Enclosed is a copy of each of the following documents: 1. The Prospectus. 2. A Letter of Transmittal for your use in connection with the Exchange Offer and for the information of your clients. 3. A form of letter that may be sent to your clients for whose accounts you hold Old Notes registered in your name or the name of your nominee, with space provided for obtaining the clients' instructions with regard to the Exchange Offer. 4. A form of Notice of Guaranteed Delivery. 5. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. 6. A return envelope addressed to The Chase Manhattan Bank, the Exchange Agent. YOUR PROMPT ATTENTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). OLD NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN, SUBJECT TO THE PROCEDURES DESCRIBED IN THE PROSPECTUS AND THE LETTER OF TRANSMITTAL, AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. THE EXCHANGE OFFER IS NOT CONDITIONED ON ANY MINIMUM PRINCIPAL AMOUNT OF OLD NOTES BEING TENDERED. To tender Old Notes in the Exchange Offer, certificates for Old Notes (or confirmation of a book-entry transfer into the Exchange Agent's account at The Depository Trust Company of Old Notes tendered electronically) and a duly executed and properly completed Letter of Transmittal or a facsimile thereof, together with any other required documents, must be received by the Exchange Agent as indicated in the Prospectus. If holders desire to tender Old Notes pursuant to the Exchange Offer and (i) certificates representing such Old Notes are not lost but are not immediately available, (ii) time will not permit the Letter of Transmittal, certificates evidencing such Old Notes or other required documents to reach the Exchange Agent prior to the Expiration Date or (iii) the procedures for book-entry transfer cannot be completed prior to the Expiration Date, such holders may effect a tender of such Old Notes in accordance with the guaranteed delivery procedures set forth in the Prospectus under the caption "The Exchange Offer -- Guaranteed Delivery Procedures." Holders following the guaranteed delivery procedure must still fully complete, execute and deliver the Letter of Transmittal or facsimile thereof. THE EXCHANGE OFFER IS NOT BE MADE TO, NOR WILL TENDERS BE ACCEPTED FROM OR ON BEHALF OF, HOLDERS OF THE OLD NOTES IN ANY JURISDICTION IN WHICH THE MAKING OF THE EXCHANGE OFFER OR ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION OR WOULD OTHERWISE NOT BE IN COMPLIANCE WITH ANY PROVISION OF ANY APPLICABLE SECURITIES LAW. Additional copies of the enclosed material may be obtained from the Exchange Agent. NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY PERSON AS AN AGENT OF THE COMPANIES, THE TRUSTEE OR THE EXCHANGE AGENT, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENTS ON BEHALF OF ANY OF THEM WITH RESPECT TO THE EXCHANGE OFFER OR THE SOLICITATION, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE PROSPECTUS OR THE LETTER OF TRANSMITTAL. Very truly yours, Janis T. Percio, Secretary THE CLEVELAND ELECTRIC ILLUMINATING COMPANY and THE TOLEDO EDISON COMPANY EX-1.F 7 EXHIBIT 1(F) 1 Exhibit 1 (f) OFFER TO EXCHANGE 7.19% SERIES B SECURED NOTES DUE 2000 FOR ALL OUTSTANDING 7.19% SERIES A SECURED NOTES DUE 2000 $220 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING, 7.67% SERIES B SECURED NOTES DUE 2004 FOR ALL OUTSTANDING 7.67% SERIES A SECURED NOTES DUE 2004 $350 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING AND 7.13% SERIES B SECURED NOTES DUE 2007 FOR ALL OUTSTANDING 7.13% SERIES A SECURED NOTES DUE 2007 $150 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING OF THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND THE TOLEDO EDISON COMPANY To Our Clients: Enclosed for your consideration are the Prospectus dated , 1997 (the "Prospectus") and the related Letter of Transmittal and instructions thereto (the "Letter of Transmittal") in connection with the offer by The Cleveland Electric Illuminating Company and The Toledo Edison Company (the "Companies") to exchange (the "Exchange Offer") their 7.19% Series B Secured Notes due 2000 (the "New Notes due 2000"), 7.67% Series B Secured Notes due 2004 (the "New Notes due 2004") and 7.13% Series B Secured Notes due 2007 (the "New Notes due 2007") (collectively, the "New Notes") for all outstanding 7.19% Series A Secured Notes due 2000 (the "Old Notes due 2000"), 7.67% Series A Secured Notes due 2004 (the "Old Notes due 2004") and 7.13% Series A Secured Notes due 2007 (the "Old Notes due 2007") (collectively, the "Old Notes" and, together with the New Notes, the "Secured Notes"), upon the terms and conditions set forth in the Prospectus and Letter of Transmittal. WE ARE THE REGISTERED HOLDER (THE "REGISTERED HOLDER") OF OLD NOTES HELD FOR YOUR ACCOUNT. AN EXCHANGE OF THE OLD NOTES CAN BE MADE ONLY BY US AS THE REGISTERED HOLDER AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO EXCHANGE THE OLD NOTES HELD BY US FOR YOUR ACCOUNT. THE PROSPECTUS AND RELATED LETTER OF TRANSMITTAL ALSO PROVIDE A PROCEDURE FOR HOLDERS TO TENDER THEIR OLD NOTES BY MEANS OF GUARANTEED DELIVERY. We request information as to whether you wish us to exchange any or all of the Old Notes held by us for your account upon the terms and subject to the conditions of the Exchange Offer. We urge you to read carefully the Prospectus and the Letter of Transmittal before instructing us to tender your Old Notes. Your instructions to us should be forwarded as promptly as possible in order to permit us to tender Old Notes on your behalf in accordance with the provisions of the Exchange Offer. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON , , 1997 (THE "EXPIRATION DATE"), UNLESS EXTENDED. Old Notes tendered pursuant to the Exchange Offer may only be withdrawn under the circumstances described in the Prospectus and the Letter of Transmittal. Your attention is directed to the following: 1. The New Notes will be exchanged for the Old Notes at the rate of $1,000 principal amount of New Notes for each $1,000 principal amount of Old Notes. There will be no loss of interest income to holders of Old Notes whose Old Notes are accepted for exchange, as more fully explained in the Prospectus. The form and terms of the New Notes are identical in all material respects to the form and terms of the Old Notes, except that the New Notes have been registered under the Securities Act of 1933, as amended (the "Securities Act"). Following completion of the Exchange Offer and during the effectiveness of any required Shelf Registration Statement, none of the Secured Notes will be entitled to the benefits of the Registration Agreement (as defined in the Prospectus) relating to a contingent increase in the interest rate borne by the Secured Notes under certain circumstances. 2. Based on an interpretation of the Securities and Exchange Commission (the "Commission"), New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold and otherwise transferred by holders thereof (other than (i) a broker-dealer who purchased Old Notes directly from the Companies for resale pursuant to Rule 144A or any other available exemption under the Securities Act or (ii) a person that is an "affiliate" of the Companies within the meaning of Rule 405 under the Securities Act) without compliance with the 2 registration and prospectus delivery provisions of the Securities Act, provided that the holder is acquiring the New Notes in its ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the New Notes. Holders of Old Notes wishing to accept the Exchange Offer must represent to the Companies that such conditions have been met. 3. THE EXCHANGE OFFER IS NOT CONDITIONED ON ANY MINIMUM PRINCIPAL AMOUNT OF OLD NOTES BEING TENDERED. 4. Notwithstanding any other term of the Exchange Offer, the Companies may terminate or amend the Exchange Offer as provided in the Prospectus and will not be required to accept for exchange, or exchange New Notes for, any Old Notes not accepted for exchange prior to such termination. 5. The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1997, unless extended (the "Expiration Date"). Tendered Old Notes may be withdrawn, subject to the procedures described in the Prospectus, at any time prior to 5:00 p.m., New York City time, on the Expiration Date if such Old Notes have not previously been accepted for exchange pursuant to the Exchange Offer. 6. Any transfer taxes applicable to the exchange of the Old Notes pursuant to the Exchange Offer will be paid by the Companies, except as otherwise provided in Instruction 5 of the Letter of Transmittal. 7. Tendering holders may withdraw their tender at any time until the Expiration Date. 8. The acceptance for exchange of Old Notes validly tendered and not validly withdrawn and the issuance of New Notes will be made as promptly as practicable after the Expiration Date. Subject to rules promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Companies, however, expressly reserve the right to delay acceptance of any of the Old Notes or to terminate the Exchange Offer and not accept for purchase any Old Notes not theretofore accepted if any of the conditions set forth in the Prospectus under the caption "The Exchange Offer -- Termination" shall not have been satisfied or waived by the Companies. 9. The Companies expressly reserve the right, in their sole discretion, (i) to amend the terms of the Exchange Offer or (ii) to terminate the Exchange Offer. Any delay, extension, amendment or termination will be followed as promptly as practicable by oral or written notice to the Exchange Agent and a public announcement thereof. In the case of an extension, such public announcement shall include disclosure of the approximate number of Old Notes deposited to date and shall be made prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. 10. Consummation of the Exchange Offer may have adverse consequences to non-tendering Old Note holders, including that the reduced amount of outstanding Old Notes as a result of the Exchange Offer may adversely affect the trading market, liquidity and market price of the Old Notes. If you wish to have us tender any or all of your Old Notes, please so instruct us by completing, detaching and returning to us the instruction form attached hereto. An envelope to return your instructions is enclosed. If you authorize a tender of your Old Notes, the entire principal amount of Old Notes held for your account will be tendered unless otherwise specified on the instruction form. Your instructions should be forwarded to us in ample time to permit us to submit a tender on your behalf by the Expiration Date. THE EXCHANGE OFFER IS NOT BE MADE TO, NOR WILL TENDERS BE ACCEPTED FROM OR ON BEHALF OF, HOLDERS OF THE OLD NOTES IN ANY JURISDICTION IN WHICH THE MAKING OF THE EXCHANGE OFFER OR ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION OR WOULD OTHERWISE NOT BE IN COMPLIANCE WITH ANY PROVISION OF ANY APPLICABLE SECURITIES LAW. 3 OFFER TO EXCHANGE 7.19% SERIES B SECURED NOTES DUE 2000 FOR ALL OUTSTANDING 7.19% SERIES A SECURED NOTES DUE 2000 $220 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING, 7.67% SERIES B SECURED NOTES DUE 2004 FOR ALL OUTSTANDING 7.67% SERIES A SECURED NOTES DUE 2004 $350 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING AND 7.13% SERIES B SECURED NOTES DUE 2007 FOR ALL OUTSTANDING 7.13% SERIES A SECURED NOTES DUE 2007 $150 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING OF THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND THE TOLEDO EDISON COMPANY The undersigned acknowledge(s) receipt of your letter and the enclosed Prospectus and the related Letter of Transmittal, in connection with the offer by the Companies to exchange the Old Notes for the New Notes. This will instruct you to tender the principal amount of Old Notes indicated below held by you for the account of the undersigned, upon the terms and subject to the conditions set forth in the Prospectus and the related Letter of Transmittal, and the undersigned hereby makes the applicable representations set forth in such Letter of Transmittal. SIGN HERE -------------------------------------- Signature -------------------------------------- Signature [ ] Please tender the Old Notes held by you for my account, as indicated below.: [ ] Please do not tender any Old Notes held by you for my account. Principal Amount* of Old Notes to be Tendered: $ (must be in the principal amount of $1,000 or an integral multiple thereof) [ ] Name(s) (Please Print) - -------------------------------------- Address - -------------------------------------- Zip Code - -------------------------------------- Area Code and Telephone Number Dated: , 1997 - -------------------------------------------------------------------------------- *Unless otherwise indicated, it will be assumed that all of the securities listed are to be tendered. EX-4.A 8 EXHIBIT 4(A) 1 Exhibit 4(a) ================================================================================ THE CLEVELAND ELECTRIC ILLUMINATING COMPANY TO THE CHASE MANHATTAN BANK, as Trustee. (successor to Morgan Guaranty Trust Company of New York, formerly Guaranty Trust Company of New York) As Trustee under The Cleveland Electric Illuminating Company's Mortgage and Deed of Trust, Dated July 1, 1940 ------------------------ SEVENTY-FOURTH SUPPLEMENTAL INDENTURE DATED JUNE 15, 1997 FIRST MORTGAGE BONDS, SERIES DUE 2000 FIRST MORTGAGE BONDS, SERIES DUE 2004 FIRST MORTGAGE BONDS, SERIES DUE 2007 ================================================================================ 2 i THE CLEVELAND ELECTRIC ILLUMINATING COMPANY SEVENTY-FOURTH SUPPLEMENTAL INDENTURE DATED JUNE 15, 1997 TABLE OF CONTENTS*
PAGE -------- PARTIES..................................................... 1 RECITALS: Indenture and Supplemental Indentures..................... 1 First Mortgage Bonds outstanding.......................... 1 Authorization by Indenture of issue of additional Bonds... 2 Pledge Bonds.............................................. 2 Purpose of Seventy-Fourth Supplemental Indenture.......... 2 Authorization of Seventy-Fourth Supplemental Indenture.... 2 Compliance with conditions to making of Seventy-Fourth Supplemental Indenture................................. 2 ARTICLE I -- CONFIRMATION OF 1940 MORTGAGE AND SUPPLEMENTAL INDENTURES..................................... 3 ARTICLE II -- CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT AND FORM OF BONDS OF 2000 SERIES....... 4 Section 1 -- Creation and designation of Bonds and compliance with Indenture................. 4 Section 2 -- Registered Bonds and denominations........ 4 Section 3 -- Date of Bonds, maturity date, interest rate, accrual date, payment dates, Record Date and place of payments................ 4 Section 4 -- Transfer and exchange of Bonds............ 6 Section 5 -- Redemption of Bonds....................... 6 Section 6 -- Notice of redemption...................... 6 Section 7 -- Purchase, prepayment or payment of principal of Notes deemed to be corresponding payment of Bonds............ 7 Section 8 -- Redemption of Bonds in an "Event of Default" under the Note Indenture......... 7
- --------------- *The Table of Contents, the page headings and the recording data are not part of the Seventy-Fourth Supplemental Indenture as executed. 3 ii
PAGE -------- Section 9 -- Payment of interest or premium on Notes deemed to be corresponding payment on Bonds..................................... 7 Section 10 -- Surrender of Bonds purchased or otherwise acquired................................. 8 Section 11 -- Bonds deemed to be paid in full upon surrendering Secured Notes for cancellation under the Note Indenture.... 8 Section 12 -- Notation of payments on Bonds before transfer................................. 8 Section 13 -- Principal amount of Bonds which may be authenticated and delivered.............. 8 Section 14 -- Form of Fully Registered Pledge Bonds.... 8 Form of Trustee's Certificate of Authentication....................... 9 ARTICLE III -- CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT AND FORM OF BONDS OF 2004 SERIES...... 15 Section 1 -- Creation and designation of Bonds and compliance with Indenture................. 15 Section 2 -- Registered Bonds and denominations........ 15 Section 3 -- Date of Bonds, maturity date, interest rate, accrual date, payment dates, Record Date and place of payments................ 15 Section 4 -- Transfer and exchange of Bonds............ 17 Section 5 -- Redemption of Bonds....................... 17 Section 6 -- Notice of redemption...................... 18 Section 7 -- Purchase, prepayment or payment of principal of Notes deemed to be corresponding payment of Bonds............ 18 Section 8 -- Redemption of Bonds in an "Event of Default" under the Note Indenture......... 18 Section 9 -- Payment of interest or premium on Notes deemed to be corresponding payment on Bonds..................................... 19 Section 10 -- Surrender of Bonds purchased or otherwise acquired................................. 19
4 iii
PAGE -------- Section 11 -- Surrender of Bonds in the event of payment in full or partial payment thereof and issuance of new Bonds for the unpaid balance........................... 19 Section 12 -- Notation of payments on Bonds before transfer................................. 19 Section 13 -- Principal amount of Bonds which may be authenticated and delivered.............. 20 Section 14 -- Form of Fully Registered Pledge Bonds.... 20 Form of Trustee's Certificate of Authentication....................... 20 ARTICLE IV -- CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT AND FORM OF BONDS OF 2007 SERIES....... 25 Section 1 -- Creation and designation of Bonds and compliance with Indenture................. 25 Section 2 -- Registered Bonds and denominations........ 26 Section 3 -- Date of Bonds, maturity date, interest rate, accrual date, payment dates, Record Date and place of payments................ 26 Section 4 -- Transfer and exchange of Bonds............ 27 Section 5 -- Redemption of Bonds....................... 28 Section 6 -- Notice of redemption...................... 28 Section 7 -- Purchase, prepayment or payment of principal of Notes deemed to be corresponding payment of Bonds............ 28 Section 8 -- Redemption of Bonds in an "Event of Default" under the Note Indenture......... 29 Section 9 -- Payment of interest or premium on Notes deemed to be corresponding payment on Bonds..................................... 29 Section 10 -- Surrender of Bonds purchased or otherwise acquired................................. 29 Section 11 -- Surrender of Bonds in the event of payment in full or partial payment thereof and issuance of new Bonds for the unpaid balance........................... 30
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PAGE -------- Section 12 -- Notation of payments on Bonds before transfer................................. 30 Section 13 -- Principal amount of Bonds which may be authenticated and delivered.............. 30 Section 14 -- Form of Fully Registered Pledge Bonds.... 30 Form of Trustee's Certificate of Authentication........................ 30 ARTICLE V -- THE TRUSTEE.................................... 37 Section 1 -- Acceptance by Trustee..................... 37 Section 2 -- Responsibility of Trustee................. 37 Section 3 -- Reliance by Trustee upon certain demands, certificates and opinions................. 37 Section 4 -- Records kept and indemnity given by agency of the Company............................ 37 Section 5 -- Certain advices to the Company............ 38 Section 6 -- Certificates regarding interest rates..... 38 ARTICLE VI -- MISCELLANEOUS PROVISIONS...................... 39 EXECUTION................................................... 39 COMPANY'S ACKNOWLEDGMENT.................................... S-1 TRUSTEE'S ACKNOWLEDGMENT.................................... S-2 RECORDING AND FILING DATA................................... R-1
6 SEVENTY-FOURTH SUPPLEMENTAL INDENTURE, dated June 15, 1997, made by and between THE CLEVELAND ELECTRIC ILLUMINATING COMPANY, a corporation organized and existing under the laws of the State of Ohio (the "Company"), and THE CHASE MANHATTAN BANK, successor by merger to The Chase Manhattan Bank (National Association), which in turn was successor to Morgan Guaranty Trust Company of New York, formerly Guaranty Trust Company of New York), a corporation organized and existing under the laws of the State of New York (the "Trustee"), as Trustee under the Mortgage and Deed of Trust dated July 1, 1940, hereinafter mentioned: RECITALS In order to secure First Mortgage Bonds of the Company ("Bonds"), the Company has heretofore executed and delivered to the Trustee the Mortgage and Deed of Trust dated July 1, 1940 (the "1940 Mortgage") and seventy-three Supplemental Indentures thereto dated, respectively, July 1, 1940, August 18, 1944, December 1, 1947, September 1, 1950, June 1, 1951, May 1, 1954, March 1, 1958, April 1, 1959, December 20, 1967, January 15, 1969, November 1, 1969, June 1, 1970, November 15, 1970, May 1, 1974, April 15, 1975, April 16, 1975, May 28, 1975, February 1, 1976, November 23, 1976, July 26, 1977, September 27, 1977, May 1, 1978, September 1, 1979, April 1, 1980, April 15, 1980, May 28, 1980, June 9, 1980, December 1, 1980, July 28, 1981, August 1, 1981, March 1, 1982, July 15, 1982, September 1, 1982, November 1, 1982, November 15, 1982, May 24, 1983, May 1, 1984, May 23, 1984, June 27, 1984, September 4, 1984, November 14, 1984, November 15, 1984, April 15, 1985, May 28, 1985, August 1, 1985, September 1, 1985, November 1, 1985, April 15, 1986, May 14, 1986, May 15, 1986, February 25, 1987, October 15, 1987, February 24, 1988, September 15, 1988, May 15, 1989, June 13, 1989, October 15, 1989, January 1, 1990, June 1, 1990, August 1, 1990, May 1, 1991, May 1, 1992, July 31, 1992, January 1, 1993, February 1, 1993, May 20, 1993, June 1, 1993, September 15, 1994, May 1, 1995, May 2, 1995, June 1, 1995, July 15, 1995 and August 1, 1995; and The 1940 Mortgage, as supplemented and modified by said Supplemental Indentures and by this Seventy-Fourth Supplemental Indenture, will be hereinafter collectively referred to as the "Indenture" and this Seventy-Fourth Supplemental Indenture will be hereinafter referred to as "this Supplemental Indenture"; and Pursuant to the provisions of the Indenture, the Company has issued 117 series of Bonds in the aggregate principal amount of $5,541,402,000, of which 79 series in the aggregate principal amount of $2,886,387,000 are no longer outstanding; and 7 2 The Indenture provides among other things that the Company, from time to time, in addition to the Bonds authorized to be executed, authenticated and delivered pursuant to other provisions therein, may execute and deliver additional Bonds to the Trustee and the Trustee shall thereupon authenticate and deliver such Bonds to or upon the order of the Company; and The Company has determined to create pursuant to the provisions of the Indenture three new series of first mortgage bonds (collectively, the "Cleveland Electric Pledge Bonds"), to be pledged as security for the payment of principal of and interest on certain notes (as hereinafter defined), with such Cleveland Electric Pledge Bonds to have the denominations, rate of interest, date of maturity, redemption provisions and other provisions and agreements in respect thereof as in this Supplemental Indenture set forth; and The Cleveland Electric Pledge Bonds are to be limited in aggregate principal amount to $575 million and are to be delivered to The Chase Manhattan Bank, as Note Trustee (hereinafter called the "Note Trustee") pursuant to an Indenture dated as of June 13, 1997, among the Company, The Toledo Edison Company and the Note Trustee, as amended and supplemented from time to time (hereinafter called the "Note Indenture") under which the Note Trustee will hold the Cleveland Electric Pledge Bonds, together with bonds issued by The Toledo Edison Company under the Forty-sixth Supplemental Indenture to an Indenture of Mortgage and Deed of Trust dated as of April 1, 1947 by and between The Toledo Edison Company and The Chase Manhattan Bank as Trustee ("Toledo Supplement," and those bonds, the "Toledo Edison Pledge Bonds"), as security for the payment of principal of and interest on three new series of notes to be issued in a private placement and three new series of notes that may be exchanged therefor pursuant to a registered exchange offer (hereinafter collectively called the "Notes"); and The Company, in the exercise of the powers and authority conferred upon and reserved to it under the provisions of the Indenture, and pursuant to appropriate resolutions of its Board of Directors, has duly resolved and determined to make, execute and deliver to the Trustee this Supplemental Indenture in the form hereof for the purposes herein provided; and All conditions and requirements necessary to make this Supplemental Indenture a valid, binding and legal instrument have been done, performed and fulfilled and the execution and delivery hereof have been in all respects duly authorized. 8 3 NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: That The Cleveland Electric Illuminating Company, in consideration of the premises and of the mutual covenants herein contained and of the sum of One Dollar ($1.00) to it duly paid by the Trustee at or before the ensealing and delivery of these presents and for other valuable considerations, the receipt whereof is hereby acknowledged, hereby covenants and agrees to and with the Trustee and its successors in the Trust under the Indenture, for the benefit of those who shall hold the Bonds and coupons, if any, issued and to be issued thereunder and under this Supplemental Indenture as hereinafter provided, as follows: ARTICLE I CONFIRMATION OF 1940 MORTGAGE AND SUPPLEMENTAL INDENTURES The 1940 Mortgage (as modified in Article V of the Supplemental Indenture dated December 1, 1947, Article V of the Supplemental Indenture dated May 1, 1954, Article V of the Supplemental Indenture dated March 1, 1958, Article V of the Supplemental Indenture dated January 15, 1969, Article III of the Supplemental Indenture dated November 23, 1976 and Article III of the Supplemental Indenture dated April 15, 1985) and the Supplemental Indentures dated July 1, 1940, August 18, 1944, December 1, 1947, September 1, 1950, June 1, 1951, May 1, 1954, March 1, 1958, April 1, 1959, December 20, 1967, January 15, 1969, November 1, 1969, June 1, 1970, November 15, 1970, May 1, 1974, April 15, 1975, April 16, 1975, May 28, 1975, February 1, 1976, November 23, 1976, July 26, 1977, September 27, 1977, May 1, 1978, September 1, 1979, April 1, 1980, April 15, 1980, May 28, 1980, June 9, 1980, December 1, 1980, July 28, 1981, August 1, 1981, March 1, 1982, July 15, 1982, September 1, 1982, November 1, 1982, November 15, 1982, May 24, 1983, May 1, 1984, May 23, 1984, June 27, 1984, September 4, 1984, November 14, 1984, November 15, 1984, April 15, 1985, May 28, 1985, August 1, 1985, September 1, 1985, November 1, 1985, April 15, 1986, May 14, 1986, May 15, 1986, February 25, 1987, October 15, 1987, February 24, 1988, September 15, 1988, May 15, 1989, June 13, 1989, October 15, 1989, January 1, 1990, June 1, 1990, August 1, 1990, May 1, 1991, May 1, 1992, July 31, 1992, January 1, 1993, February 1, 1993, May 20, 1993, June 1, 1993, September 15, 1994, May 1, 1995, May 2, 1995, June 1, 1995, July 15, 1995 and August 1, 1995, respectively, are hereby in all respects confirmed. 9 4 ARTICLE II CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT AND FORM OF BONDS OF 2000 SERIES SECTION 1. The Company hereby creates a new series of Bonds to be issued under and secured by the Indenture and to be designated as "First Mortgage Bonds, Series due 2000" of the Company and hereinabove and hereinafter called the "Cleveland Electric Pledge Bonds due 2000". The Cleveland Electric Pledge Bonds due 2000 shall be executed, authenticated and delivered in accordance with the provisions of, and shall in all respects be subject to, all of the terms, conditions and covenants of the Indenture. SECTION 2. The Cleveland Electric Pledge Bonds due 2000 shall be issued as fully registered Bonds only, without coupons, in the denominations of $1,000 or any multiple thereof. SECTION 3. The Cleveland Electric Pledge Bonds due 2000 shall be dated the date of authentication, shall mature July 1, 2000, and shall bear interest from the time hereinafter provided at such rate per annum as shall cause the amount of interest payable on such Cleveland Electric Pledge Bonds due 2000 then outstanding to equal the amount of interest payable on the same proportion of the Notes due 2000 (as defined below) then outstanding as those Cleveland Electric Pledge Bonds due 2000 are to the aggregate principal amount of (i) the Cleveland Electric Pledge Bonds due 2000 then outstanding and (ii) the Toledo Edison Pledge Bonds due 2000 issued pursuant to (and as defined in) the Toledo Supplement ("Toledo Edison Pledge Bonds due 2000") then outstanding. The ratio of the Cleveland Electric Pledge Bonds due 2000 outstanding at any time to the aggregate principal amount of the Cleveland Electric Pledge Bonds due 2000 then outstanding and Toledo Edison Pledge Bonds due 2000 then outstanding is hereinafter referred to as the "Cleveland Electric 2000 Ratio." The interest on the Cleveland Electric Pledge Bonds due 2000 is payable on January 1 and July 1 in each year starting on July 1, 1997 (each such date hereinafter called an "interest payment date") on and until maturity, or, in the case of any such Cleveland Electric Pledge Bonds due 2000 duly called for redemption, on and until the redemption date, or in the case of any default by the Company in the payment of the principal due on any such Cleveland Electric Pledge Bonds due 2000, until the Company's obligation with respect to the payment of the principal shall be discharged as provided in the Indenture. The amount of interest payable on the Cleveland Electric Pledge Bonds due 2000 on any interest payment date, on the date of maturity and on any redemption date shall be computed on the same basis as the basis on which such interest is computed on the Secured Notes due 2000 provided for in the Note Indenture, which shall include the notes 10 5 initially issued and any notes exchanged therefor pursuant to the terms of the Note Indenture (either or both of such series of notes, the "Notes due 2000"). The Cleveland Electric Pledge Bonds due 2000 shall be payable as to principal and interest at the agency of the Company in the Borough of Manhattan, The City of New York, or, at the option of the registered owner, at the agency of the Company in the City of Cleveland, State of Ohio, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts. Except as hereinafter provided, each Cleveland Electric Pledge Bond due 2000 shall bear interest from the later of the date of initial authentication of the Cleveland Electric Pledge Bonds due 2000 or the most recent date to which interest has been paid or duly provided for until the principal of such Cleveland Electric Pledge Bond due 2000 is paid or duly provided for. The interest payable on any interest payment date shall be paid to the respective persons in whose names the Cleveland Electric Pledge Bonds due 2000 shall be registered at the close of business on the Record Date next preceding such interest payment date, notwithstanding the cancellation of any such Bond upon any transfer or exchange thereof subsequent to such Record Date and prior to such interest payment date; provided, however, that, if and to the extent the Company shall default in the payment of the interest due on such interest payment date (other than an interest payment date that is a redemption date or maturity date), such defaulted interest shall be paid to the respective persons in whose names such outstanding Cleveland Electric Pledge Bonds due 2000 are registered at the close of business on a date (the "Subsequent Record Date") not less than ten days nor more than 15 days next preceding the date of payment of such defaulted interest, such Subsequent Record Date to be established by the Company by notice given by mail by or on behalf of the Company to the registered owners of Cleveland Electric Pledge Bonds due 2000 not less than 10 days next preceding such Subsequent Record Date. If any interest payment date should fall on a day which is not a business day, then such interest payment date shall be the next preceding business day. The initial interest rate on the Secured Notes due 2000, and therefore on the Cleveland Electric Pledge Bonds due 2000, is 7.19%. Under certain circumstances specified in a Registration Agreement dated as of June 11, 1997 among the Company, Toledo Edison and the Purchasers (as defined therein) of the Secured Notes, the interest rate on the Secured Notes due 2000, and therefore on the Cleveland Electric Pledge Bonds due 2000, will increase temporarily to 7.69%. 11 6 The term "Record Date", with respect to any interest payment date, redemption date or date of maturity of any Cleveland Electric Pledge Bond due 2000, shall have the same meaning as the term "Record Date" has with respect to those events for the Notes due 2000. SECTION 4. In the manner and subject to the limitations provided in the Indenture, Cleveland Electric Pledge Bonds due 2000 may be transferred or may be exchanged for a like aggregate principal amount of Bonds of such series of other authorized denominations, in either case without charge, except for any tax or taxes or other governmental charges incident to such transfer or exchange, at the agency of the Company in the Borough of Manhattan, The City of New York. In the event less than all of the Cleveland Electric Pledge Bonds due 2000 at the time outstanding are called for redemption, the Company shall not be required (a) to register any transfer or make any exchange of any such bond for a period of 15 days before the mailing of the notice of redemption of any such bonds, (b) to register any transfer or make any exchange of any such bond so called for redemption in its entirety or (c) to register any transfer or make any exchange of any portion of any such bond so called for redemption. Except as otherwise provided in Section 3 of this Article II with respect to the payment of interest, the Company, the agencies of the Company and the Trustee may deem and treat the person in whose name a Cleveland Electric Pledge Bond due 2000 is registered as the absolute owner thereof for the purpose of receiving any payment and for all other purposes. SECTION 5. The Cleveland Electric Pledge Bonds due 2000 shall be redeemable only to the extent provided in this Article II, subject to the provisions contained in Article V of the Indenture and the form of Cleveland Electric Pledge Bond due 2000. SECTION 6. Subject to the applicable provisions of the Indenture, written notice of redemption of Cleveland Electric Pledge Bonds due 2000 pursuant to this Supplemental Indenture shall be given by the Trustee by mailing to each registered owner of such Cleveland Electric Pledge Bonds due 2000 to be redeemed a notice of such redemption, first class postage prepaid, at its last address as it shall appear upon the books of the Company for the registration and transfer of such Cleveland Electric Pledge Bonds due 2000. Any notice of redemption shall be mailed at least 30 days, but no more than 60 days, prior to the redemption date. In the event of partial redemption of Cleveland Electric Pledge Bonds due 2000, the Trustee shall select the Cleveland Electric Pledge Bonds due 2000 or portions thereof to be redeemed, 12 7 subject to the provisions of this Supplemental Indenture, in such manner as the Trustee shall deem appropriate and fair. SECTION 7. If and when any Notes due 2000 shall be purchased and surrendered to the Note Trustee for cancellation pursuant to the Note Indenture, or if and when the principal of any Notes due 2000 shall be paid pursuant to the Note Indenture, then there shall be deemed to have been paid a principal amount of the Cleveland Electric Pledge Bonds due 2000 then outstanding which bears the same ratio to the aggregate principal amount of Cleveland Electric Pledge Bonds due 2000 then outstanding as the principal amount of the Notes due 2000 so purchased or paid bears to the aggregate principal amount of the Notes due 2000 outstanding immediately before such purchase or payment; provided however, that such purchase or payment of Cleveland Electric Pledge Bonds due 2000 shall be deemed to have been made only when and to the extent that notice of such purchase or payment of the principal amount of such Notes due 2000 shall have been given by the Company to the Trustee. The Trustee may rely upon any such notification by the Company that such purchase or payment of Notes due 2000 has been so made. SECTION 8. The Cleveland Electric Pledge Bonds due 2000 shall be redeemed by the Company in whole at any time prior to maturity at a redemption price of 100% of the principal amount to be redeemed, plus accrued and unpaid interest to the redemption date, but only if the Trustee shall receive a written demand from the Note Trustee for redemption of all Cleveland Electric Pledge Bonds due 2000 held by the Note Trustee stating that an "Event of Default" under the Note Indenture has occurred and is continuing, that payment of the principal of the Notes due 2000 has been accelerated and that the Note Trustee is waiving notice of redemption; provided, however, that the Cleveland Electric Pledge Bonds due 2000 shall not be redeemed in the event that prior to such redemption (a) the Trustee shall have received a certificate of the Note Trustee (i) stating that there has been a waiver of such Event of Default and a rescission and annulment of such acceleration or (ii) withdrawing said written demand or (b) an event of default under Section 6.01 of Article VI of the Indenture shall have occurred and be continuing, and there has been a declaration of acceleration of the principal of the Cleveland Electric Pledge Bonds due 2000. The redemption of the Cleveland Electric Pledge Bonds due 2000 pursuant to this Section shall be made not more than 60 days after receipt of the written demand. SECTION 9. Any payment of interest on the Notes due 2000 shall be deemed to constitute payment of interest on the Cleveland Electric Pledge Bonds due 2000 in an amount equal to the amount of interest paid on the Notes due 2000 multiplied by the Cleveland Electric 2000 13 8 Ratio; provided, however, that such payment of interest shall be deemed to have been made only when and to the extent that notice of such payment of interest on such Notes due 2000 shall have been given by the Company to the Trustee. The Trustee may rely upon any such notification by the Company that such payment of interest has been so made. SECTION 10. Any Cleveland Electric Pledge Bonds due 2000 at any time purchased or otherwise acquired by the Company shall be surrendered to the Trustee for cancellation and the Trustee shall forthwith cancel the same. SECTION 11. All Cleveland Electric Pledge Bonds due 2000 deemed to have been redeemed or paid in full as provided in Section 7 of this Article II shall be surrendered to the Trustee for cancellation and the Trustee shall forthwith cancel the same. In the event that part of a Cleveland Electric Pledge Bond due 2000 shall be deemed to have been redeemed or paid as provided in said Section 7, the registered owner may, at its option, surrender such bond to the Trustee for cancellation, in which event the Trustee shall cancel such bond and the Company shall execute and the Trustee shall authenticate and deliver to the registered owner one or more new fully registered Cleveland Electric Pledge Bonds due 2000 in such authorized denominations as shall be specified by the registered owner in an aggregate principal amount equal to the unpaid balance of the principal amount of such surrendered Bond. SECTION 12. Cleveland Electric Pledge Bonds due 2000 shall not be transferable unless the registered owner shall have first surrendered the same to the Trustee for notation thereon of all payments of principal deemed to have been made thereon under Section 7 of this Article II or for cancellation and execution, authentication and delivery of Cleveland Electric Pledge Bonds due 2000 in an aggregate principal amount equal to the unpaid balance of the principal amount of such surrendered Cleveland Electric Pledge Bonds due 2000 under Section 11 of this Article II. SECTION 13. The aggregate principal amount of Cleveland Electric Pledge Bonds due 2000 which may be authenticated and delivered hereunder shall not exceed $175 million, except as otherwise provided in the Indenture. SECTION 14. The form of the fully registered Cleveland Electric Pledge Bonds due 2000, and of the Trustee's certificate of authentication thereon, shall be substantially as follows: 14 9 [FORM OF FULLY REGISTERED BOND OF 2000 SERIES] THE CLEVELAND ELECTRIC ILLUMINATING COMPANY Incorporated under the laws of the State of Ohio FIRST MORTGAGE BOND, SERIES DUE 2000 Due July 1, 2000 No. $ THE CLEVELAND ELECTRIC ILLUMINATING COMPANY, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the "Company", which term shall include any successor corporation as defined in the Indenture hereinafter referred to), for value received, hereby promises to pay to , or registered assigns, the sum of Dollars ($ ) or the aggregate unpaid principal amount hereof (as shown on the Schedule of Payments hereon), whichever is less, on July 1, 2000, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, and to pay interest on the unpaid principal amount hereof in like coin or currency from the time hereinafter provided, at such rate per annum as shall cause the amount of interest payable hereon to equal the amount of interest payable on the same proportion of the Notes due 2000 (hereinafter defined) then outstanding as this Cleveland Electric Pledge Bond due 2000 is to the aggregate principal amount of (i) the Cleveland Electric Pledge Bonds due 2000 then outstanding and (ii) the Toledo Edison Pledge Bonds due 2000 issued pursuant to the Forty-sixth Supplemental Indenture to an Indenture of Mortgage and Deed of Trust dated as of April 1, 1947 by and between The Toledo Edison Company and The Chase Manhattan Bank as Trustee ("Toledo Edison Pledge Bonds due 2000") then outstanding. The ratio of the Cleveland Electric Pledge Bonds due 2000 outstanding at any time to the aggregate principal amount of the Cleveland Electric Pledge Bonds due 2000 then outstanding and Toledo Edison Pledge Bonds due 2000 then outstanding is hereinafter referred to as the "Cleveland Electric 2000 Ratio." The interest on the Cleveland Electric Pledge Bonds due 2000 is payable on January 1 and July 1 in each year starting on July 1, 1997 (each such date herein called an "interest payment date"), and on and until the date of maturity of this Bond, or, if this Bond shall be duly called for redemption, on and until the redemption date, or, if the Company shall default in the payment of the principal amount of this Bond, until the Company's obligation with respect to the payment of such principal shall be discharged as provided in said Indenture. Except as hereinafter provided, this Bond shall bear interest from the date of initial authentication of this Bond or the most recent date to which interest has been paid or duly provided for until the principal of 15 10 this Bond has been paid or duly provided for. Subject to certain exceptions provided in said Indenture, the interest payable on any interest payment date shall be paid to the person in whose name this Bond shall be registered at the close of business on the Record Date or, in the case of defaulted interest, on a day preceding the date of payment thereof established by notice to the registered owner of this Bond in the manner provided in the Supplemental Indenture (hereinafter defined). Principal of and interest on this Bond are payable at the agency of the Company in the Borough of Manhattan, The City of New York, or, at the option of the registered owner, at the agency of the Company in the City of Cleveland, State of Ohio. This Bond is one of the duly authorized Bonds of the Company (herein called the "Bonds"), all issued and to be issued under and equally secured by a Mortgage and Deed of Trust dated July 1, 1940, executed by the Company to Guaranty Trust Company of New York (subsequently Morgan Guaranty Trust Company of New York and then The Chase Manhattan Bank (National Association)), now succeeded by The Chase Manhattan Bank as Trustee (herein called the "Trustee"), and all indentures supplemental thereto (said Mortgage as so supplemented herein called the "Indenture") to which reference is hereby made for a description of the properties mortgaged and pledged, the nature and extent of the security, the rights of the registered owner or owners of the Bonds and of the Trustee in respect thereof, and the terms and conditions upon which the Bonds are, and are to be, secured. The Bonds may be issued in series, for various principal sums, may mature at different times, may bear interest at different rates and may otherwise vary as in the Indenture provided. This Bond is one of a series designated as the First Mortgage Bonds, Series due 2000 (herein called the "Cleveland Electric Pledge Bonds due 2000") limited, except as otherwise provided in the Indenture, in aggregate principal amount to $175 million, issued under and secured by the Indenture and described in the Seventy-Fourth Supplemental Indenture dated June 15, 1997, between the Company and the Trustee (herein called the "Supplemental Indenture"). The Cleveland Electric Pledge Bonds due 2000 have been delivered by the Company to The Chase Manhattan Bank, as trustee (hereinafter called the "Note Trustee"), pursuant to a Note Indenture, dated as of June 13, 1997, among the Company, The Toledo Edison Company and the Note Trustee, under which the Note Trustee holds the Cleveland Electric Pledge Bonds due 2000, together with the Toledo Edison Pledge Bonds due 2000, as a portion of the security for the payment of principal of and interest on the Secured Notes issued under the Note Indenture. 16 11 If and when any Secured Notes due 2000 issued under the Note Indenture (herein called the "Notes due 2000") are purchased and surrendered to the Note Trustee for cancellation pursuant to the Note Indenture, or the principal of any Notes due 2000 is paid pursuant to the Note Indenture, then there shall be deemed to be paid a principal amount of the Cleveland Electric Pledge Bonds due 2000 then outstanding which bears the same ratio to the aggregate principal amount of Cleveland Electric Pledge Bonds due 2000 outstanding immediately before such purchase or payment as the principal amount of the Notes due 2000 so purchased or paid bears to the aggregate principal amount of the Notes due 2000 outstanding immediately before such purchase or payment; provided, however, that such purchase or payment of Cleveland Electric Pledge Bonds due 2000 is deemed to be made only when and to the extent that notice of such purchase or payment of such Notes due 2000 is given by the Company to the Trustee. Any payment of interest on the Notes due 2000 shall be deemed to constitute payment of interest on the Cleveland Electric Pledge Bonds due 2000 in an amount equal to the amount of interest paid on the Notes due 2000 multiplied by the Cleveland Electric 2000 Ratio; provided, however, that such payment of interest is deemed to be made only when and to the extent that notice of such payment of interest on such Notes due 2000 is given by the Company to the Trustee. In the event that this Bond is deemed to be paid or redeemed in full, this Bond shall be surrendered to the Trustee for cancellation. In the event that this Bond is deemed to be paid or redeemed in part, this Bond may, at the option of the registered owner, be surrendered to the Trustee for cancellation, in which event the Trustee will cancel this Bond and the Company will execute and the Trustee will authenticate and deliver to the registered owner Cleveland Electric Pledge Bonds due 2000 in authorized denominations in aggregate principal amount equal to the unpaid balance of the principal amount of this Bond. The Cleveland Electric Pledge Bonds due 2000 shall be redeemed by the Company prior to maturity in whole at any time as provided in Section 8 of Article II of the Supplemental Indenture at a redemption price of 100% of the principal amount to be redeemed, plus accrued and unpaid interest to the redemption date. In the Forty-Third Supplemental Indenture dated April 15, 1985 between the Company and the Trustee, the Company has modified, in certain respects, the redemption provisions in the Indenture effective only with respect to the Bonds of all series established or created in said Forty-Third Supplemental Indenture and all supplemental indentures dated after May 28, 1985. 17 12 To the extent permitted by and as provided in the Indenture, modifications or alterations of the Indenture, or of any indenture supplemental thereto, and of the rights and obligations of the Company and of the holders of the Bonds and coupons may be made with the consent of the Company by an affirmative vote of not less than 80% in principal amount of the Bonds entitled to vote then outstanding, at a meeting of Bondholders called and held as provided in the Indenture, and, in case one or more but less than all of the series of Bonds then outstanding under the Indenture are so affected, by an affirmative vote of not less than 80% in principal amount of the Bonds of any series entitled to vote then outstanding and affected by such modification or alteration; provided, however, that no such modification or alteration shall be made which will affect the terms of payment of the principal of or interest on this Bond. In the Nineteenth Supplemental Indenture dated November 23, 1976 between the Company and the Trustee, the Company has modified the Indenture effective from and after the time when none of the Bonds of any series established prior to the execution of the Nineteenth Supplemental Indenture shall remain outstanding so as to change "80%" in the foregoing sentence to "60%" and to make certain other modifications of the Indenture and has reserved the right to make certain other modifications of the Indenture without any vote, consent or other action by the holders of Bonds of any series established in the Nineteenth Supplemental Indenture or in any subsequent supplemental indenture. If an event of default, as defined in the Indenture, shall occur, the principal of all the Bonds at any such time outstanding under the Indenture may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the Bonds outstanding. Subject to the limitations provided in the Indenture and the Note Indenture, this Bond is transferable by the registered owner hereof, in person or by duly authorized attorney, on the books of the Company to be kept for that purpose at the agency of the Company in the Borough of Manhattan, The City of New York, upon surrender and cancellation of this Bond, and upon presentation of a duly executed written instrument of transfer, and thereupon a new fully registered bond or bonds of the same series, of the same aggregate principal amount and in authorized denominations will be issued to the transferee or transferees in exchange herefor; and this Bond, with or without others of the same series, may in like manner be exchanged for one or more new fully registered Cleveland Electric Pledge Bonds due 2000 of other authorized denominations but of the same aggregate principal amount; all without charge except for any tax or taxes or other governmental 18 13 charges incidental to such transfer or exchange and all subject to the terms and conditions set forth in the Indenture. In the event less than all of the Cleveland Electric Pledge Bonds due 2000 at the time outstanding are called for redemption, the Company shall not be required (a) to register any transfer or make any exchange of any such Bond for a period of 15 days before the mailing of the notice of redemption of any such Bonds, (b) to register any transfer or make any exchange of any such Bond called for redemption in its entirety, or (c) to register any transfer or make any exchange of any portion of any such Bond which has been called for redemption. Except as otherwise provided herein with respect to the payment of interest, the Company, the agencies of the Company and the Trustee may deem and treat the person in whose name this Bond is registered as the absolute owner hereof for the purpose of receiving any payment and for all other purposes. No recourse shall be had for the payment of the principal of or the interest on this Bond, or for any claim based hereon or on the Indenture or any indenture supplemental thereto, against any incorporator, or against any stockholder, director or officer, past, present or future, of the Company, or of any predecessor or successor corporation, as such, either directly or through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability, whether at common law, in equity, by any constitution or statute or otherwise, of incorporators, stockholders, directors or officers being released by every owner hereof by the acceptance of this Bond and as part of the consideration for the issue hereof, and being likewise released by the terms of the Indenture. This Bond shall not be entitled to any benefit under the Indenture or any indenture supplemental thereto, or become valid or obligatory for any purpose, until the Trustee under the Indenture, or a successor trustee thereto under the Indenture, shall have signed the form of certificate of authentication endorsed hereon. 19 14 IN WITNESS WHEREOF, The Cleveland Electric Illuminating Company has caused this Bond to be signed in its name by its President or a Vice President (whose signature may be manual or a facsimile thereof) and its corporate seal (or a facsimile thereof) to be hereto affixed and attested by its Secretary or an Assistant Secretary (whose signature may be manual or a facsimile thereof). Dated: THE CLEVELAND ELECTRIC ILLUMINATING COMPANY By .................................................... Attest: ............................. Secretary [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This Bond is one of the Bonds of the series designated and described in the within-mentioned Indenture and Supplemental Indenture. THE CHASE MANHATTAN BANK, TRUSTEE By ........................................... AUTHORIZED OFFICER 20 15 [FORM OF SCHEDULE OF PAYMENTS] SCHEDULE OF PAYMENTS
AGENCY OF THE UNPAID COMPANY PRINCIPAL PRINCIPAL PREMIUM INTEREST MAKING AUTHORIZED DATE PAYMENT AMOUNT PAYMENT PAYMENT NOTATION OFFICER TITLE - --------- ------- ------- ------- ------- ------- ------- -------
[END OF FORM OF FULLY REGISTERED BOND] ARTICLE III CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT AND FORM OF BONDS OF 2004 SERIES SECTION 1. The Company hereby creates a new series of Bonds to be issued under and secured by the Indenture and to be designated as "First Mortgage Bonds, Series due 2004" of the Company and hereinabove and hereinafter called the "Cleveland Electric Pledge Bonds due 2004". The Cleveland Electric Pledge Bonds due 2004 shall be executed, authenticated and delivered in accordance with the provisions of, and shall in all respects be subject to, all of the terms, conditions and covenants of the Indenture. SECTION 2. The Cleveland Electric Pledge Bonds due 2004 shall be issued as fully registered Bonds only, without coupons, in the denomi nations of $1,000 or any multiple thereof. SECTION 3. The Cleveland Electric Pledge Bonds due 2004 shall be dated the date of authentication, shall mature July 1, 2004, and shall bear interest from the time hereinafter provided at such rate per annum as shall cause the amount of interest payable on such Cleveland Electric Pledge Bonds due 2004 then outstanding to equal the amount of interest payable on the same proportion of the Notes due 2004 (as defined below) then outstanding as those Cleveland Electric Pledge Bonds due 2004 are to the aggregate principal amount of (i) the Cleveland Electric Pledge Bonds due 2004 then outstanding and (ii) the Toledo Edison Pledge Bonds due 2004 issued pursuant to the Toledo Supplement then outstanding. The ratio of the Cleveland Electric Pledge Bonds due 2004 outstanding at any time to the aggregate principal amount of the Cleveland Electric Pledge Bonds due 2004 then outstanding and Toledo Edison Pledge Bonds due 2004 then outstanding is hereinafter referred to as the "Cleveland Electric 2004 Ratio." The interest on the Cleveland Electric Pledge Bonds due 2004 is payable on January 1 and July 1 in each year starting on July 1, 1997 21 16 (each such date hereinafter called an "interest payment date") on and until maturity, or, in the case of any such Cleveland Electric Pledge Bonds due 2004 duly called for redemption, on and until the redemption date, or in the case of any default by the Company in the payment of the principal due on any such Cleveland Electric Pledge Bonds due 2004, until the Company's obligation with respect to the payment of the principal shall be discharged as provided in the Indenture. The amount of interest payable on the Cleveland Electric Pledge Bonds due 2004 on any interest payment date, on the date of maturity and on any redemption date shall be computed on the same basis as the basis on which such interest is computed on the Secured Notes due 2004 provided for in the Note Indenture, which shall include the notes initially issued and any notes exchanged therefor pursuant to the terms of the Note Indenture (either or both of such series of notes, the "Notes due 2004"). The Cleveland Electric Pledge Bonds due 2004 shall be payable as to principal and interest at the agency of the Company in the Borough of Manhattan, The City of New York, or, at the option of the registered owner, at the agency of the Company in the City of Cleveland, State of Ohio, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts. Except as hereinafter provided, each Cleveland Electric Pledge Bond due 2004 shall bear interest from the later of the date of initial authentication of the Cleveland Electric Pledge Bonds due 2004 or the most recent date to which interest has been paid or duly provided for until the principal of such Cleveland Electric Pledge Bond due 2004 is paid or duly provided for. The interest payable on any interest payment date shall be paid to the respective persons in whose names the Cleveland Electric Pledge Bonds due 2004 shall be registered at the close of business on the Record Date next preceding such interest payment date, notwithstanding the cancellation of any such Bond upon any transfer or exchange thereof subsequent to such Record Date and prior to such interest payment date; provided, however, that, if and to the extent the Company shall default in the payment of the interest due on such interest payment date (other than an interest payment date that is a redemption date or maturity date), such defaulted interest shall be paid to the respective persons in whose names such outstanding Cleveland Electric Pledge Bonds due 2004 are registered at the close of business on a date (the "Subsequent Record Date") not less than ten days nor more than 15 days next preceding the date of payment of such defaulted interest, such Subsequent Record Date to be established by the Company by notice given by mail by or on behalf of the 22 17 Company to the registered owners of Cleveland Electric Pledge Bonds due 2004 not less than 10 days next preceding such Subsequent Record Date. If any interest payment date should fall on a day which is not a business day, then such interest payment date shall be the next preceding business day. The initial interest rate on the Secured Notes due 2004, and therefore on the Cleveland Electric Pledge Bonds due 2004, is 7.67%. Under certain circumstances specified in a Registration Agreement dated as of June 11, 1997 among the Company, Toledo Edison and the Purchasers (as defined therein) of the Secured Notes, the interest rate on the Secured Notes due 2004, and therefore on the Cleveland Electric Pledge Bonds due 2004, will increase temporarily to 8.17%. The term "Record Date", with respect to any interest payment date, redemption date or date of maturity of any Cleveland Electric Pledge Bond due 2004 shall have the same meaning as the term "Record Date" has with respect to those events for the Notes due 2004. SECTION 4. In the manner and subject to the limitations provided in the Indenture, Cleveland Electric Pledge Bonds due 2004 may be transferred or may be exchanged for a like aggregate principal amount of Bonds of such series of other authorized denominations, in either case without charge, except for any tax or taxes or other governmental charges incident to such transfer or exchange, at the agency of the Company in the Borough of Manhattan, The City of New York. In the event less than all of the Cleveland Electric Pledge Bonds due 2004 at the time outstanding are called for redemption, the Company shall not be required (a) to register any transfer or make any exchange of any such bond for a period of 15 days before the mailing of the notice of redemption of any such bonds, (b) to register any transfer or make any exchange of any such bond so called for redemption in its entirety or (c) to register any transfer or make any exchange of any portion of any such bond so called for redemption. Except as otherwise provided in Section 3 of this Article III with respect to the payment of interest, the Company, the agencies of the Company and the Trustee may deem and treat the person in whose name a Cleveland Electric Pledge Bond due 2004 is registered as the absolute owner thereof for the purpose of receiving any payment and for all other purposes. SECTION 5. The Cleveland Electric Pledge Bonds due 2004 shall be redeemable only to the extent provided in this Article III, subject to the provisions contained in Article V of the Indenture and the form of Cleveland Electric Pledge Bond due 2004. 23 18 SECTION 6. Subject to the applicable provisions of the Indenture, written notice of redemption of Cleveland Electric Pledge Bonds due 2004 pursuant to this Supplemental Indenture shall be given by the Trustee by mailing to each registered owner of such Cleveland Electric Pledge Bonds due 2004 to be redeemed a notice of such redemption, first class postage prepaid, at its last address as it shall appear upon the books of the Company for the registration and transfer of such Cleveland Electric Pledge Bonds due 2004. Any notice of redemption shall be mailed at least 30 days, but no more than 60 days, prior to the redemption date. In the event of partial redemption of Cleveland Electric Pledge Bonds due 2004, the Trustee shall select the Cleveland Electric Pledge Bonds due 2004 or portions thereof to be redeemed, subject to the provisions of this Supplemental Indenture, in such manner as the Trustee shall deem appropriate and fair. SECTION 7. If and when any Notes due 2004 shall be purchased and surrendered to the Note Trustee for cancellation pursuant to the Note Indenture, or if and when the principal of any Notes due 2004 shall be paid pursuant to the Note Indenture, then there shall be deemed to have been paid a principal amount of the Cleveland Electric Pledge Bonds due 2004 then outstanding which bears the same ratio to the aggregate principal amount of Cleveland Electric Pledge Bonds due 2004 then outstanding as the principal amount of the Notes due 2004 so purchased or paid bears to the aggregate principal amount of the Notes due 2004 outstanding immediately before such purchase or payment; provided however, that such purchase or payment of Cleveland Electric Pledge Bonds due 2004 shall be deemed to have been made only when and to the extent that notice of such purchase or payment of the principal amount of such Notes due 2004 shall have been given by the Company to the Trustee. The Trustee may rely upon any such notification by the Company that such purchase or payment of Notes due 2004 has been so made. SECTION 8. The Cleveland Electric Pledge Bonds due 2004 shall be redeemed by the Company in whole at any time prior to maturity at a redemption price of 100% of the principal amount to be redeemed, plus accrued and unpaid interest to the redemption date, but only if the Trustee shall receive a written demand from the Note Trustee for redemption of all Cleveland Electric Pledge Bonds due 2004 held by the Note Trustee stating that an "Event of Default" under the Note Indenture has occurred and is continuing, that payment of the principal of the Notes due 2004 has been accelerated and that the Note Trustee is waiving notice of redemption; provided, however, that the Cleveland Electric Pledge Bonds due 2004 shall not be redeemed in the event that prior to such redemption (a) the Trustee shall have received a certificate of the Note Trustee (i) stating that there has been a waiver of such Event of Default and a rescission and annulment of 24 19 such acceleration or (ii) withdrawing said written demand or (b) an event of default under Section 6.01 of Article VI of the Indenture shall have occurred and be continuing, and there has been a declaration of acceleration of the principal of the Cleveland Electric Pledge Bonds due 2004. The redemption of the Cleveland Electric Pledge Bonds due 2004 pursuant to this Section shall be made not more than 60 days after receipt of the written demand. SECTION 9. Any payment of interest on the Notes due 2004 shall be deemed to constitute payment of interest on the Cleveland Electric Pledge Bonds due 2004 in an amount equal to the amount of interest paid on the Notes due 2004 multiplied by the Cleveland Electric 2004 Ratio; provided, however, that such payment of interest shall be deemed to have been made only when and to the extent that notice of such payment of interest on such Notes due 2004 shall have been given by the Company to the Trustee. The Trustee may rely upon any such notification by the Company that such payment of interest has been so made. SECTION 10. Any Cleveland Electric Pledge Bonds due 2004 at any time purchased or otherwise acquired by the Company shall be surrendered to the Trustee for cancellation and the Trustee shall forthwith cancel the same. SECTION 11. All Cleveland Electric Pledge Bonds due 2004 deemed to have been redeemed or paid in full as provided in Section 7 of this Article III shall be surrendered to the Trustee for cancellation and the Trustee shall forthwith cancel the same. In the event that part of a Cleveland Electric Pledge Bond due 2004 shall be deemed to have been redeemed or paid as provided in said Section 7, the registered owner may, at its option, surrender such bond to the Trustee for cancellation, in which event the Trustee shall cancel such bond and the Company shall execute and the Trustee shall authenticate and deliver to the registered owner one or more new fully registered Cleveland Electric Pledge Bonds due 2004 in such authorized denominations as shall be specified by the registered owner in an aggregate principal amount equal to the unpaid balance of the principal amount of such surrendered Bond. SECTION 12. Cleveland Electric Pledge Bonds due 2004 shall not be transferable unless the registered owner shall have first surrendered the same to the Trustee for notation thereon of all payments of principal deemed to have been made thereon under Section 7 of this Article III or for cancellation and execution, authentication and delivery of Cleveland Electric Pledge Bonds due 2004 in an aggregate principal amount equal to the unpaid balance of the principal amount of such surrendered Cleveland Electric Pledge Bonds due 2004 under Section 11 of this Article III. 25 20 SECTION 13. The aggregate principal amount of Cleveland Electric Pledge Bonds due 2004 which may be authenticated and delivered hereunder shall not exceed $280 million, except as otherwise provided in the Indenture. SECTION 14. The form of the fully registered Cleveland Electric Pledge Bonds due 2004, and of the Trustee's certificate of authentication thereon, shall be substantially as follows: [FORM OF FULLY REGISTERED BOND OF 2004 SERIES] THE CLEVELAND ELECTRIC ILLUMINATING COMPANY Incorporated under the laws of the State of Ohio FIRST MORTGAGE BOND, SERIES DUE 2004 Due July 1, 2004 No. $ THE CLEVELAND ELECTRIC ILLUMINATING COMPANY, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the "Company", which term shall include any successor corporation as defined in the Indenture hereinafter referred to), for value received, hereby promises to pay to , or registered assigns, the sum of Dollars ($ ) or the aggregate unpaid principal amount hereof (as shown on the Schedule of Payments hereon), whichever is less, on July 1, 2004, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, and to pay interest on the unpaid principal amount hereof in like coin or currency from the time hereinafter provided, at such rate per annum as shall cause the amount of interest payable hereon to equal the amount of interest payable on the same proportion of the Notes due 2004 (hereinafter defined) then outstanding as this Cleveland Electric Pledge Bond due 2004 is to the aggregate principal amount of (i) the Cleveland Electric Pledge Bonds due 2004 then outstanding and (ii) the Toledo Edison Pledge Bonds due 2004 issued pursuant to the Forty-sixth Supplemental Indenture to an Indenture of Mortgage and Deed of Trust dated as of April 1, 1947 by and between The Toledo Edison Company and The Chase Manhattan Bank as Trustee ("Toledo Edison Pledge Bonds due 2004") then outstanding. The ratio of the Cleveland Electric Pledge Bonds due 2004 outstanding at any time to the aggregate principal amount of the Cleveland Electric Pledge Bonds due 2004 then outstanding and Toledo Edison Pledge Bonds due 2004 then outstanding is hereinafter referred to as the "Cleveland Electric 2004 Ratio." The interest on the Cleveland Electric Pledge Bonds due 2004 is payable on January 1 and July 1 in each year starting on July 1, 1997 (each such date herein called an "interest payment date"), and on and until the date of maturity of this Bond, or, if this Bond shall be duly 26 21 called for redemption, on and until the redemption date, or, if the Company shall default in the payment of the principal amount of this Bond, until the Company's obligation with respect to the payment of such principal shall be discharged as provided in said Indenture. Except as hereinafter provided, this Bond shall bear interest from the date of initial authentication of this Bond or the most recent date to which interest has been paid or duly provided for until the principal of this Bond has been paid or duly provided for. Subject to certain exceptions provided in said Indenture, the interest payable on any interest payment date shall be paid to the person in whose name this Bond shall be registered at the close of business on the Record Date or, in the case of defaulted interest, on a day preceding the date of payment thereof established by notice to the registered owner of this Bond in the manner provided in the Supplemental Indenture (hereinafter defined). Principal of and interest on this Bond are payable at the agency of the Company in the Borough of Manhattan, The City of New York, or, at the option of the registered owner, at the agency of the Company in the City of Cleveland, State of Ohio. This Bond is one of the duly authorized Bonds of the Company (herein called the "Bonds"), all issued and to be issued under and equally secured by a Mortgage and Deed of Trust dated July 1, 1940, executed by the Company to Guaranty Trust Company of New York (subsequently Morgan Guaranty Trust Company of New York and then The Chase Manhattan Bank (National Association)), now succeeded by The Chase Manhattan Bank as Trustee (herein called the "Trustee"), and all indentures supplemental thereto (said Mortgage as so supplemented herein called the "Indenture") to which reference is hereby made for a description of the properties mortgaged and pledged, the nature and extent of the security, the rights of the registered owner or owners of the Bonds and of the Trustee in respect thereof, and the terms and conditions upon which the Bonds are, and are to be, secured. The Bonds may be issued in series, for various principal sums, may mature at different times, may bear interest at different rates and may otherwise vary as in the Indenture provided. This Bond is one of a series designated as the First Mortgage Bonds, Series due 2004 (herein called the "Cleveland Electric Pledge Bonds due 2004") limited, except as otherwise provided in the Indenture, in aggregate principal amount to $280 million, issued under and secured by the Indenture and described in the Seventy-Fourth Supplemental Indenture dated June 15, 1997, between the Company and the Trustee (herein called the "Supplemental Indenture"). The Cleveland Electric Pledge Bonds due 2004 have been delivered by the Company to The Chase Manhattan Bank, as trustee (hereinafter called the "Note Trustee"), pursuant to a Note Indenture, dated as of June 13, 1997, among the Company, The Toledo Edison Company and 27 22 the Note Trustee, under which the Note Trustee holds the Cleveland Electric Pledge Bonds due 2004, together with the Toledo Edison Pledge Bonds due 2004, as a portion of the security for the payment of principal and interest on the Secured Notes issued under the Note Indenture. If and when any Secured Notes due 2004 issued under the Note Indenture (herein called the "Notes due 2004") are purchased and surrendered to the Note Trustee for cancellation pursuant to the Note Indenture, or the principal of any Notes due 2004 is paid pursuant to the Note Indenture, then there shall be deemed to be paid a principal amount of the Cleveland Electric Pledge Bonds due 2004 then outstanding which bears the same ratio to the aggregate principal amount of Cleveland Electric Pledge Bonds due 2004 outstanding immediately before such purchase or payment as the principal amount of the Notes due 2004 so purchased or paid bears to the aggregate principal amount of the Notes due 2004 outstanding immediately before such purchase or payment; provided, however, that such purchase or payment of Cleveland Electric Pledge Bonds due 2004 is deemed to be made only when and to the extent that notice of such purchase or payment of such Notes due 2004 is given by the Company to the Trustee. Any payment of interest on the Notes due 2004 shall be deemed to constitute payment of interest on the Cleveland Electric Pledge Bonds due 2004 in an amount equal to the amount of interest paid on the Notes due 2004 multiplied by the Cleveland Electric 2004 Ratio; provided, however, that such payment of interest is deemed to be made only when and to the extent that notice of such payment of interest on such Notes due 2004 is given by the Company to the Trustee. In the event that this Bond is deemed to be paid or redeemed in full, this Bond shall be surrendered to the Trustee for cancellation. In the event that this Bond is deemed to be paid or redeemed in part, this Bond may, at the option of the registered owner, be surrendered to the Trustee for cancellation, in which event the Trustee will cancel this Bond and the Company will execute and the Trustee will authenticate and deliver to the registered owner Cleveland Electric Pledge Bonds due 2004 in authorized denominations in aggregate principal amount equal to the unpaid balance of the principal amount of this Bond. The Cleveland Electric Pledge Bonds due 2004 shall be redeemed by the Company prior to maturity in whole at any time as provided in Section 8 of Article III of the Supplemental Indenture at a redemption price of 100% of the principal amount to be redeemed, plus accrued and unpaid interest to the redemption date. 28 23 In the Forty-Third Supplemental Indenture dated April 15, 1985 between the Company and the Trustee, the Company has modified, in certain respects, the redemption provisions in the Indenture effective only with respect to the Bonds of all series established or created in said Forty-Third Supplemental Indenture and all supplemental indentures dated after May 28, 1985. To the extent permitted by and as provided in the Indenture, modifications or alterations of the Indenture, or of any indenture supplemental thereto, and of the rights and obligations of the Company and of the holders of the Bonds and coupons may be made with the consent of the Company by an affirmative vote of not less than 80% in principal amount of the Bonds entitled to vote then outstanding, at a meeting of Bondholders called and held as provided in the Indenture, and, in case one or more but less than all of the series of Bonds then outstanding under the Indenture are so affected, by an affirmative vote of not less than 80% in principal amount of the Bonds of any series entitled to vote then outstanding and affected by such modification or alteration; provided, however, that no such modification or alteration shall be made which will affect the terms of payment of the principal of or interest on this Bond. In the Nineteenth Supplemental Indenture dated November 23, 1976 between the Company and the Trustee, the Company has modified the Indenture effective from and after the time when none of the Bonds of any series established prior to the execution of the Nineteenth Supplemental Indenture shall remain outstanding so as to change "80%" in the foregoing sentence to "60%" and to make certain other modifications of the Indenture and has reserved the right to make certain other modifications of the Indenture without any vote, consent or other action by the holders of Bonds of any series established in the Nineteenth Supplemental Indenture or in any subsequent supplemental indenture. If an event of default, as defined in the Indenture, shall occur, the principal of all the Bonds at any such time outstanding under the Indenture may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the Bonds outstanding. Subject to the limitations provided in the Indenture and the Note Indenture, this Bond is transferable by the registered owner hereof, in person or by duly authorized attorney, on the books of the Company to be kept for that purpose at the agency of the Company in the Borough of Manhattan, The City of New York, upon surrender and cancellation of this Bond, and upon presentation of a duly executed written instrument of transfer, and thereupon a new fully registered bond or 29 24 bonds of the same series, of the same aggregate principal amount and in authorized denominations will be issued to the transferee or transferees in exchange herefor; and this Bond, with or without others of the same series, may in like manner be exchanged for one or more new fully registered Cleveland Electric Pledge Bonds due 2004 of other authorized denominations but of the same aggregate principal amount; all without charge except for any tax or taxes or other governmental charges incidental to such transfer or exchange and all subject to the terms and conditions set forth in the Indenture. In the event less than all of the Cleveland Electric Pledge Bonds due 2004 at the time outstanding are called for redemption, the Company shall not be required (a) to register any transfer or make any exchange of any such Bond for a period of 15 days before the mailing of the notice of redemption of any such Bonds, (b) to register any transfer or make any exchange of any such Bond called for redemption in its entirety, or (c) to register any transfer or make any exchange of any portion of any such Bond which has been called for redemption. Except as otherwise provided herein with respect to the payment of interest, the Company, the agencies of the Company and the Trustee may deem and treat the person in whose name this Bond is registered as the absolute owner hereof for the purpose of receiving any payment and for all other purposes. No recourse shall be had for the payment of the principal of or the interest on this Bond, or for any claim based hereon or on the Indenture or any indenture supplemental thereto, against any incorporator, or against any stockholder, director or officer, past, present or future, of the Company, or of any predecessor or successor corporation, as such, either directly or through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability, whether at common law, in equity, by any constitution or statute or otherwise, of incorporators, stockholders, directors or officers being released by every owner hereof by the acceptance of this Bond and as part of the consideration for the issue hereof, and being likewise released by the terms of the Indenture. This Bond shall not be entitled to any benefit under the Indenture or any indenture supplemental thereto, or become valid or obligatory for any purpose, until the Trustee under the Indenture, or a successor trustee thereto under the Indenture, shall have signed the form of certificate of authentication endorsed hereon. IN WITNESS WHEREOF, The Cleveland Electric Illuminating Company has caused this Bond to be signed in its name by its President or a Vice President (whose signature may be manual or a facsimile thereof) and its corporate seal (or a facsimile thereof) to be hereto 30 25 affixed and attested by its Secretary or an Assistant Secretary (whose signature may be manual or a facsimile thereof). Dated: THE CLEVELAND ELECTRIC ILLUMINATING COMPANY By........................................ Attest: ............................... Secretary [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This Bond is one of the Bonds of the series designated and described in the within-mentioned Indenture and Supplemental Indenture. THE CHASE MANHATTAN BANK, TRUSTEE By ........................................... AUTHORIZED OFFICER [FORM OF SCHEDULE OF PAYMENTS] SCHEDULE OF PAYMENTS
AGENCY OF THE UNPAID COMPANY PRINCIPAL PRINCIPAL PREMIUM INTEREST MAKING AUTHORIZED DATE PAYMENT AMOUNT PAYMENT PAYMENT NOTATION OFFICER TITLE - --------- ------- ------- ------- ------- ------- ------- -------
[END OF FORM OF FULLY REGISTERED BOND] ARTICLE IV CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT AND FORM OF BONDS OF 2007 SERIES SECTION 1. The Company hereby creates a new series of Bonds to be issued under and secured by the Indenture and to be designated as "First Mortgage Bonds, Series due 2007" of the Company and hereinabove and hereinafter called the "Cleveland Electric Pledge Bonds due 2007". The Cleveland Electric Pledge Bonds due 2007 shall be executed, authenticated and delivered in accordance with the provisions 31 26 of, and shall in all respects be subject to, all of the terms, conditions and covenants of the Indenture. SECTION 2. The Cleveland Electric Pledge Bonds due 2007 shall be issued as fully registered Bonds only, without coupons, in the denominations of $1,000 or any multiple thereof. SECTION 3. The Cleveland Electric Pledge Bonds due 2007 shall be dated the date of authentication, shall mature July 1, 2007, and shall bear interest from the time hereinafter provided at such rate per annum as shall cause the amount of interest payable on such Cleveland Electric Pledge Bonds due 2007 then outstanding to equal the amount of interest payable on the same proportion of the Notes due 2007 (as defined below) then outstanding as those Cleveland Electric Pledge Bonds due 2007 are to the aggregate principal amount of (i) the Cleveland Electric Pledge Bonds due 2007 then outstanding and (ii) the Toledo Edison Pledge Bonds due 2007 issued pursuant to the Toledo Supplement then outstanding. The ratio of the Cleveland Electric Pledge Bonds due 2007 outstanding at any time to the aggregate principal amount of the Cleveland Electric Pledge Bonds due 2007 then outstanding and Toledo Edison Pledge Bonds due 2007 then outstanding is hereinafter referred to as the "Cleveland Electric 2007 Ratio." The interest on the Cleveland Electric Pledge Bonds due 2007 is payable on January 1 and July 1 in each year starting on July 1, 1997 (each such date hereinafter called an "interest payment date") on and until maturity, or, in the case of any such Cleveland Electric Pledge Bonds due 2007 duly called for redemption, on and until the redemption date, or in the case of any default by the Company in the payment of the principal due on any such Cleveland Electric Pledge Bonds due 2007, until the Company's obligation with respect to the payment of the principal shall be discharged as provided in the Indenture. The amount of interest payable on the Cleveland Electric Pledge Bonds due 2007 on any interest payment date, on the date of maturity and on any redemption date shall be computed on the same basis as the basis on which such interest is computed on the Secured Notes due 2007 provided for in the Note Indenture, which shall include the notes initially issued and any notes exchanged therefor pursuant to the terms of the Note Indenture (either or both of such series of notes, the "Notes due 2007"). The Cleveland Electric Pledge Bonds due 2007 shall be payable as to principal and interest at the agency of the Company in the Borough of Manhattan, The City of New York, or, at the option of the registered owner, at the agency of the Company in the City of Cleveland, State of Ohio, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts. 32 27 Except as hereinafter provided, each Cleveland Electric Pledge Bond due 2007 shall bear interest from the later of the date of initial authentication of the Cleveland Electric Pledge Bonds due 2007 or the most recent date to which interest has been paid or duly provided for until the principal of such Cleveland Electric Pledge Bond due 2007 is paid or duly provided for. The interest payable on any interest payment date shall be paid to the respective persons in whose names the Cleveland Electric Pledge Bonds due 2007 shall be registered at the close of business on the Record Date next preceding such interest payment date, notwithstanding the cancellation of any such Bond upon any transfer or exchange thereof subsequent to such Record Date and prior to such interest payment date; provided, however, that, if and to the extent the Company shall default in the payment of the interest due on such interest payment date (other than an interest payment date that is a redemption date or maturity date), such defaulted interest shall be paid to the respective persons in whose names such outstanding Cleveland Electric Pledge Bonds due 2007 are registered at the close of business on a date (the "Subsequent Record Date") not less than ten days nor more than 15 days next preceding the date of payment of such defaulted interest, such Subsequent Record Date to be established by the Company by notice given by mail by or on behalf of the Company to the registered owners of Cleveland Electric Pledge Bonds due 2007 not less than 10 days next preceding such Subsequent Record Date. If any interest payment date should fall on a day which is not a business day, then such interest payment date shall be the next preceding business day. The initial interest rate on the Secured Notes due 2007, and therefore on the Cleveland Electric Pledge Bonds due 2007, is 7.13%. Under certain circumstances specified in a Registration Agreement dated as of June 11, 1997 among the Company, Toledo Edison and the Purchasers (as defined therein) of the Secured Notes, the interest rate on the Secured Notes due 2007, and therefore on the Cleveland Electric Pledge Bonds due 2007, will increase temporarily to 7.63%. The term "Record Date", with respect to any interest payment date, redemption date or date of maturity of any Cleveland Electric Pledge Bond due 2007, shall have the same meaning as the term "Record Date" has with respect to those events for the Notes due 2007. SECTION 4. In the manner and subject to the limitations provided in the Indenture, Cleveland Electric Pledge Bonds due 2007 may be transferred or may be exchanged for a like aggregate principal amount of Bonds of such series of other authorized denominations, in either case without charge, except for any tax or taxes or other governmental 33 28 charges incident to such transfer or exchange, at the agency of the Company in the Borough of Manhattan, The City of New York. In the event less than all of the Cleveland Electric Pledge Bonds due 2007 at the time outstanding are called for redemption, the Company shall not be required (a) to register any transfer or make any exchange of any such bond for a period of 15 days before the mailing of the notice of redemption of any such bonds, (b) to register any transfer or make any exchange of any such bond so called for redemption in its entirety or (c) to register any transfer or make any exchange of any portion of any such bond so called for redemption. Except as otherwise provided in Section 3 of this Article III with respect to the payment of interest, the Company, the agencies of the Company and the Trustee may deem and treat the person in whose name a Cleveland Electric Pledge Bond due 2007 is registered as the absolute owner thereof for the purpose of receiving any payment and for all other purposes. SECTION 5. The Cleveland Electric Pledge Bonds due 2007 shall be redeemable only to the extent provided in this Article III, subject to the provisions contained in Article V of the Indenture and the form of Cleveland Electric Pledge Bond due 2007. SECTION 6. Subject to the applicable provisions of the Indenture, written notice of redemption of Cleveland Electric Pledge Bonds due 2007 pursuant to this Supplemental Indenture shall be given by the Trustee by mailing to each registered owner of such Cleveland Electric Pledge Bonds due 2007 to be redeemed a notice of such redemption, first class postage prepaid, at its last address as it shall appear upon the books of the Company for the registration and transfer of such Cleveland Electric Pledge Bonds due 2007. Any notice of redemption shall be mailed at least 30 days, but no more than 60 days, prior to the redemption date. In the event of partial redemption of Cleveland Electric Pledge Bonds due 2007, the Trustee shall select the Cleveland Electric Pledge Bonds due 2007 or portions thereof to be redeemed, subject to the provisions of this Supplemental Indenture, in such manner as the Trustee shall deem appropriate and fair. SECTION 7. If and when any Notes due 2007 shall be purchased and surrendered to the Note Trustee for cancellation pursuant to the Note Indenture, or if and when the principal of any Notes due 2007 shall be paid pursuant to the Note Indenture, then there shall be deemed to have been paid a principal amount of the Cleveland Electric Pledge Bonds due 2007 then outstanding which bears the same ratio to the aggregate principal amount of Cleveland Electric Pledge Bonds due 2007 then outstanding as the principal amount of the Notes due 2007 so purchased or paid bears to the aggregate principal amount of the 34 29 Notes due 2007 outstanding immediately before such purchase or payment; provided however, that such purchase or payment of Cleveland Electric Pledge Bonds due 2007 shall be deemed to have been made only when and to the extent that notice of such purchase or payment of the principal amount of such Notes due 2007 shall have been given by the Company to the Trustee. The Trustee may rely upon any such notification by the Company that such purchase or payment of Notes due 2007 has been so made. SECTION 8. The Cleveland Electric Pledge Bonds due 2007 shall be redeemed by the Company in whole at any time prior to maturity at a redemption price of 100% of the principal amount to be redeemed, plus accrued and unpaid interest to the redemption date, but only if the Trustee shall receive a written demand from the Note Trustee for redemption of all Cleveland Electric Pledge Bonds due 2007 held by the Note Trustee stating that an "Event of Default" under the Note Indenture has occurred and is continuing, that payment of the principal of the Notes due 2007 has been accelerated and that the Note Trustee is waiving notice of redemption; provided, however, that the Cleveland Electric Pledge Bonds due 2007 shall not be redeemed in the event that prior to such redemption (a) the Trustee shall have received a certificate of the Note Trustee (i) stating that there has been a waiver of such Event of Default and a rescission and annulment of such acceleration or (ii) withdrawing said written demand or (b) an event of default under Section 6.01 of Article VI of the Indenture shall have occurred and be continuing, and there has been a declaration of acceleration of the principal of the Cleveland Electric Pledge Bonds due 2007. The redemption of the Cleveland Electric Pledge Bonds due 2007 pursuant to this Section shall be made not more than 60 days after receipt of the written demand. SECTION 9. Any payment of interest on the Notes due 2007 shall be deemed to constitute payment of interest on the Cleveland Electric Pledge Bonds due 2007 in an amount equal to the amount of interest paid on the Notes due 2007 multiplied by the Cleveland Electric 2007 Ratio; provided, however, that such payment of interest shall be deemed to have been made only when and to the extent that notice of such payment of interest on such Notes due 2007 shall have been given by the Company to the Trustee. The Trustee may rely upon any such notification by the Company that such payment of interest has been so made. SECTION 10. Any Cleveland Electric Pledge Bonds due 2007 at any time purchased or otherwise acquired by the Company shall be surrendered to the Trustee for cancellation and the Trustee shall forthwith cancel the same. 35 30 SECTION 11. All Cleveland Electric Pledge Bonds due 2007 deemed to have been redeemed or paid in full as provided in Section 7 of this Article IV shall be surrendered to the Trustee for cancellation and the Trustee shall forthwith cancel the same. In the event that part of a Cleveland Electric Pledge Bond due 2007 shall be deemed to have been redeemed or paid as provided in said Section 7, the registered owner may, at its option, surrender such bond to the Trustee for cancellation, in which event the Trustee shall cancel such bond and the Company shall execute and the Trustee shall authenticate and deliver to the registered owner one or more new fully registered Cleveland Electric Pledge Bonds due 2007 in such authorized denominations as shall be specified by the registered owner in an aggregate principal amount equal to the unpaid balance of the principal amount of such surrendered Bond. SECTION 12. Cleveland Electric Pledge Bonds due 2007 shall not be transferable unless the registered owner shall have first surrendered the same to the Trustee for notation thereon of all payments of principal deemed to have been made thereon under Section 7 of this Article IV or for cancellation and execution, authentication and delivery of Cleveland Electric Pledge Bonds due 2007 in an aggregate principal amount equal to the unpaid balance of the principal amount of such surrendered Cleveland Electric Pledge Bonds due 2007 under Section 11 of this Article IV. SECTION 13. The aggregate principal amount of Cleveland Electric Pledge Bonds due 2007 which may be authenticated and delivered hereunder shall not exceed $120 million, except as otherwise provided in the Indenture. SECTION 14. The form of the fully registered Cleveland Electric Pledge Bonds due 2007, and of the Trustee's certificate of authentication thereon, shall be substantially as follows: [FORM OF FULLY REGISTERED BOND OF 2007 SERIES] THE CLEVELAND ELECTRIC ILLUMINATING COMPANY Incorporated under the laws of the State of Ohio FIRST MORTGAGE BOND, SERIES DUE 2007 Due July 1, 2007 No. $ THE CLEVELAND ELECTRIC ILLUMINATING COMPANY, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the "Company", which term shall include any successor corporation as defined in the Indenture hereinafter referred to), for value received, hereby promises to pay to 36 31 , or registered assigns, the sum of Dollars ($ ) or the aggregate unpaid principal amount hereof (as shown on the Schedule of Payments hereon), whichever is less, on July 1, 2007, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, and to pay interest on the unpaid principal amount hereof in like coin or currency from the time hereinafter provided, at such rate per annum as shall cause the amount of interest payable hereon to equal the amount of interest payable on the same proportion of the Notes due 2007 (hereinafter defined) then outstanding as this Cleveland Electric Pledge Bond due 2007 is to the aggregate principal amount of (i) the Cleveland Electric Pledge Bonds due 2007 then outstanding and (ii) the Toledo Edison Pledge Bonds due 2007 issued pursuant to the Forty-sixth Supplemental Indenture to an Indenture of Mortgage and Deed of Trust dated as of April 1, 1947 by and between The Toledo Edison Company and The Chase Manhattan Bank as Trustee ("Toledo Edison Pledge Bonds due 2007") then outstanding. The ratio of the Cleveland Electric Pledge Bonds due 2007 outstanding at any time to the aggregate principal amount of the Cleveland Electric Pledge Bonds due 2007 then outstanding and Toledo Edison Pledge Bonds due 2007 then outstanding is hereinafter referred to as the "Cleveland Electric 2007 Ratio." The interest on the Cleveland Electric Pledge Bonds due 2007 is payable on January 1 and July 1 in each year starting on July 1, 1997 (each such date herein called an "interest payment date"), and on and until the date of maturity of this Bond, or, if this Bond shall be duly called for redemption, on and until the redemption date, or, if the Company shall default in the payment of the principal amount of this Bond, until the Company's obligation with respect to the payment of such principal shall be discharged as provided in said Indenture. Except as hereinafter provided, this Bond shall bear interest from the date of initial authentication of this Bond or the most recent date to which interest has been paid or duly provided for until the principal of this Bond has been paid or duly provided for. Subject to certain exceptions provided in said Indenture, the interest payable on any interest payment date shall be paid to the person in whose name this Bond shall be registered at the close of business on the Record Date or, in the case of defaulted interest, on a day preceding the date of payment thereof established by notice to the registered owner of this Bond in the manner provided in the Supplemental Indenture (hereinafter defined). Principal of and interest on this Bond are payable at the agency of the Company in the Borough of Manhattan, The City of New York, or, at the option of the registered owner, at the agency of the Company in the City of Cleveland, State of Ohio. 37 32 This Bond is one of the duly authorized Bonds of the Company (herein called the "Bonds"), all issued and to be issued under and equally secured by a Mortgage and Deed of Trust dated July 1, 1940, executed by the Company to Guaranty Trust Company of New York (subsequently Morgan Guaranty Trust Company of New York and then The Chase Manhattan Bank (National Association)), now succeeded by The Chase Manhattan Bank as Trustee (herein called the "Trustee"), and all indentures supplemental thereto (said Mortgage as so supplemented herein called the "Indenture") to which reference is hereby made for a description of the properties mortgaged and pledged, the nature and extent of the security, the rights of the registered owner or owners of the Bonds and of the Trustee in respect thereof, and the terms and conditions upon which the Bonds are, and are to be, secured. The Bonds may be issued in series, for various principal sums, may mature at different times, may bear interest at different rates and may otherwise vary as in the Indenture provided. This Bond is one of a series designated as the First Mortgage Bonds, Series due 2007 (herein called the "Cleveland Electric Pledge Bonds due 2007") limited, except as otherwise provided in the Indenture, in aggregate principal amount to $120 million, issued under and secured by the Indenture and described in the Seventy-Fourth Supplemental Indenture dated June 15, 1997, between the Company and the Trustee (herein called the "Supplemental Indenture"). The Cleveland Electric Pledge Bonds due 2007 have been delivered by the Company to The Chase Manhattan Bank, as trustee (hereinafter called the "Note Trustee"), pursuant to a Note Indenture, dated as of June 13, 1997, among the Company, The Toledo Edison Company and the Note Trustee, under which the Note Trustee holds the Cleveland Electric Pledge Bonds due 2007, together with the Toledo Edison Pledge Bonds due 2007, as a portion of the security for the payment of principal of and interest on the Secured Notes issued under the Note Indenture. If and when any Secured Notes due 2007 issued under the Note Indenture (herein called the "Notes due 2007") are purchased and surrendered to the Note Trustee for cancellation pursuant to the Note Indenture or the principal of any Notes due 2007 is paid pursuant to the Note Indenture, then there shall be deemed to be paid a principal amount of the Cleveland Electric Pledge Bonds due 2007 then outstanding which bears the same ratio to the aggregate principal amount of Cleveland Electric Pledge Bonds due 2007 outstanding immediately before such purchase or payment as the principal amount of the Notes due 2007 so purchased or paid bears to the aggregate principal amount of the Notes due 2007 outstanding immediately before such purchase or payment; provided, however, that such purchase or payment of Cleveland Electric Pledge Bonds due 2007 is deemed to be made only 38 33 when and to the extent that notice of such purchase or payment of such Notes due 2007 is given by the Company to the Trustee. Any payment of interest on the Notes due 2007 shall be deemed to constitute payment of interest on the Cleveland Electric Pledge Bonds due 2007 in an amount equal to the amount of interest paid on the Notes due 2007 multiplied by the Cleveland Electric 2007 Ratio; provided, however, that such payment of interest is deemed to be made only when and to the extent that notice of such payment of interest on such Notes due 2007 is given by the Company to the Trustee. In the event that this Bond is deemed to be paid or redeemed in full, this Bond shall be surrendered to the Trustee for cancellation. In the event that this Bond is deemed to be paid or redeemed in part, this Bond may, at the option of the registered owner, be surrendered to the Trustee for cancellation, in which event the Trustee will cancel this Bond and the Company will execute and the Trustee will authenticate and deliver to the registered owner Cleveland Electric Pledge Bonds due 2007 in authorized denominations in aggregate principal amount equal to the unpaid balance of the principal amount of this Bond. The Cleveland Electric Pledge Bonds due 2007 shall be redeemed by the Company prior to maturity in whole at any time as provided in Section 8 of Article IV of the Supplemental Indenture at a redemption price of 100% of the principal amount to be redeemed, plus accrued and unpaid interest to the redemption date. In the Forty-Third Supplemental Indenture dated April 15, 1985 between the Company and the Trustee, the Company has modified, in certain respects, the redemption provisions in the Indenture effective only with respect to the Bonds of all series established or created in said Forty-Third Supplemental Indenture and all supplemental indentures dated after May 28, 1985. To the extent permitted by and as provided in the Indenture, modifications or alterations of the Indenture, or of any indenture supplemental thereto, and of the rights and obligations of the Company and of the holders of the Bonds and coupons may be made with the consent of the Company by an affirmative vote of not less than 80% in principal amount of the Bonds entitled to vote then outstanding, at a meeting of Bondholders called and held as provided in the Indenture, and, in case one or more but less than all of the series of Bonds then outstanding under the Indenture are so affected, by an affirmative vote of not less than 80% in principal amount of the Bonds of any series entitled to vote then outstanding and affected by such modification or alteration; provided, however, that no such modification or alteration shall be made which will affect the terms of payment of the principal 39 34 of or interest on this Bond. In the Nineteenth Supplemental Indenture dated November 23, 1976 between the Company and the Trustee, the Company has modified the Indenture effective from and after the time when none of the Bonds of any series established prior to the execution of the Nineteenth Supplemental Indenture shall remain outstanding so as to change "80%" in the foregoing sentence to "60%" and to make certain other modifications of the Indenture and has reserved the right to make certain other modifications of the Indenture without any vote, consent or other action by the holders of Bonds of any series established in the Nineteenth Supplemental Indenture or in any subsequent supplemental indenture. If an event of default, as defined in the Indenture, shall occur, the principal of all the Bonds at any such time outstanding under the Indenture may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the Bonds outstanding. Subject to the limitations provided in the Indenture and the Note Indenture, this Bond is transferable by the registered owner hereof, in person or by duly authorized attorney, on the books of the Company to be kept for that purpose at the agency of the Company in the Borough of Manhattan, The City of New York, upon surrender and cancellation of this Bond, and upon presentation of a duly executed written instrument of transfer, and thereupon a new fully registered bond or bonds of the same series, of the same aggregate principal amount and in authorized denominations will be issued to the transferee or transferees in exchange herefor; and this Bond, with or without others of the same series, may in like manner be exchanged for one or more new fully registered Cleveland Electric Pledge Bonds due 2007 of other authorized denominations but of the same aggregate principal amount; all without charge except for any tax or taxes or other governmental charges incidental to such transfer or exchange and all subject to the terms and conditions set forth in the Indenture. In the event less than all of the Cleveland Electric Pledge Bonds due 2007 at the time outstanding are called for redemption, the Company shall not be required (a) to register any transfer or make any exchange of any such Bond for a period of 15 days before the mailing of the notice of redemption of any such Bonds, (b) to register any transfer or make any exchange of any such Bond called for redemption in its entirety, or (c) to register any transfer or make any exchange of any portion of any such Bond which has been called for redemption. Except as otherwise provided herein with respect to the payment of interest, the Company, the agencies of the Company and the Trustee may deem and treat the person in whose name this Bond is registered as the absolute 40 35 owner hereof for the purpose of receiving any payment and for all other purposes. No recourse shall be had for the payment of the principal of or the interest on this Bond, or for any claim based hereon or on the Indenture or any indenture supplemental thereto, against any incorporator, or against any stockholder, director or officer, past, present or future, of the Company, or of any predecessor or successor corporation, as such, either directly or through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability, whether at common law, in equity, by any constitution or statute or otherwise, of incorporators, stockholders, directors or officers being released by every owner hereof by the acceptance of this Bond and as part of the consideration for the issue hereof, and being likewise released by the terms of the Indenture. This Bond shall not be entitled to any benefit under the Indenture or any indenture supplemental thereto, or become valid or obligatory for any purpose, until the Trustee under the Indenture, or a successor trustee thereto under the Indenture, shall have signed the form of certificate of authentication endorsed hereon. 41 36 IN WITNESS WHEREOF, The Cleveland Electric Illuminating Company has caused this Bond to be signed in its name by its President or a Vice President (whose signature may be manual or a facsimile thereof) and its corporate seal (or a facsimile thereof) to be hereto affixed and attested by its Secretary or an Assistant Secretary (whose signature may be manual or a facsimile thereof). Dated: THE CLEVELAND ELECTRIC ILLUMINATING COMPANY By .................................................... Attest: ............................. Secretary [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This Bond is one of the Bonds of the series designated and described in the within-mentioned Indenture and Supplemental Indenture. THE CHASE MANHATTAN BANK, TRUSTEE By ........................................... AUTHORIZED OFFICER 42 37 [FORM OF SCHEDULE OF PAYMENTS] SCHEDULE OF PAYMENTS
AGENCY OF THE UNPAID COMPANY PRINCIPAL PRINCIPAL PREMIUM INTEREST MAKING AUTHORIZED DATE PAYMENT AMOUNT PAYMENT PAYMENT NOTATION OFFICER TITLE - --------- ------- ------- ------- ------- ------- ------- -------
[END OF FORM OF FULLY REGISTERED BOND] ARTICLE V THE TRUSTEE SECTION 1. The Trustee hereby accepts the trusts hereby declared and provided upon the terms and conditions in the Indenture set forth and upon the terms and conditions set forth in this Article V. SECTION 2. The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or the due execution hereof by the Company or for or in respect of the recitals contained herein, all of which recitals are made by the Company solely. In general, each and every term and condition contained in Article XIII of the Indenture shall apply to this Supplemental Indenture with the same force and effect as if the same were herein set forth in full, with such omissions, variations and modifications thereof as may be appropriate. SECTION 3. For purposes of this Supplemental Indenture (a) the Trustee may conclusively rely and shall be protected in acting upon the written demand from, or certificate of, any agency duly appointed by resolution of the Board of Directors of the Company or any officers' certificate or opinion of counsel, as to the truth of the statements and the correctness of the opinions expressed therein, without independent investigation or verification thereof, subject to Article XIII of the Indenture and (b) a written demand from, or certificate of, an agency of the Company shall mean a written demand or certificate executed by the president, any vice president or any trust officer of, or any other person authorized to act for, such agency, as such. SECTION 4. The Company shall cause any agency of the Company, other than the Trustee, which it may appoint from time to time to act as such agency in respect of the Cleveland Electric Pledge Bonds, to execute and deliver to the Trustee an instrument in which such agency shall: 43 38 (a) Agree to keep and maintain, and furnish to the Trustee from time to time as reasonably requested by the Trustee, appropriate records of all transactions carried out by it as such agency and to furnish the Trustee such other information and reports as the Trustee may reasonably require; (b) Certify that it is eligible for appointment as such agency and agree to notify the Trustee promptly if it shall cease to be so eligible; and (c) Agree to indemnify the Trustee, in a manner satisfactory to the Trustee, against any loss, liability or expense incurred by, and defend any claim asserted against, the Trustee by reason of any acts or failures to act as such agency, except for any liability resulting from any action taken by it at the specific direction of the Trustee; provided, however, that the Company, in lieu of causing any such agency to furnish such an instrument, may make such other arrangements with the Trustee in respect of any such agency as shall be satisfactory to the Trustee. SECTION 5. The Trustee shall advise the Company in writing of the receipt of any notification provided for in or any cancellation made pursuant to Sections 7, 8, 9, 10 and 11 of Articles II, III and IV of this Supplemental Indenture. SECTION 6. For purposes of the Original Indenture, the Supplemental Indenture and the Cleveland Electric Pledge Bonds, the Trustee is permitted to assume for all purposes that the rates of interest on the Cleveland Electric Pledge Bonds are the applicable initial interest rates expressed in this Supplemental Indenture until such time as the Company shall deliver an Officers' Certificate stating a change in the interest rates and the dates from which such rates shall be effective. Upon receipt of such an Officers' Certificate, the Trustee is permitted to assume for all purposes that the rates of interest on the Cleveland Electric Pledge Bonds are as set forth in such Officers' Certificate until such time as such Officers' Certificate shall be superseded by a subsequent Officers' Certificate delivered pursuant to this Section 6, in which case, the Trustee is permitted to assume for all purposes that the rates of interest on the Cleveland Electric Pledge Bonds are those set forth in the most current Officers' Certificate delivered pursuant to this Section 6. Absent the receipt by it of an Officers' Certificate specifying a change in interest rates pursuant to this Supplemental Indenture and the Cleveland Electric Pledge Bonds, the Trustee shall not be charged with having had knowledge of such change in rates of interest regardless of any notice it may receive or knowledge it may have in its capacity as Note Trustee. 44 39 ARTICLE VI MISCELLANEOUS PROVISIONS This Supplemental Indenture may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original; but such counterparts shall together constitute but one and the same instrument. EXECUTION IN WITNESS WHEREOF, said The Cleveland Electric Illuminating Company has caused this Supplemental Indenture to be executed on its behalf by its President or one of its Vice Presidents and its corporate seal to be hereto affixed and said seal and this Supplemental Indenture to be attested by its Secretary or an Assistant Secretary, and said The Chase Manhattan Bank, in evidence of its acceptance of the trust hereby created, has caused this Supplemental Indenture to be executed on its behalf by one of its Vice Presidents or one of its Corporate Trust Officers, and its corporate seal to be hereto affixed and said seal and this Supplemental Indenture to be attested by one of its Assistant Secretaries, all as of the day and year first above written. 45 R-1 This page contains information as to recording and filing which was not set forth in this Supplemental Indenture at the time of execution. This page is not a part of this Supplemental Indenture. RECORDING AND FILING DATA This Supplemental Indenture was filed for record and recorded in the record of mortgages in the offices of the Recorders of the following Counties:
COUNTY VOLUME PAGE FILED FOR RECORD - ------------------------------- --------------- ------------------------- Ohio Ashtabula Cuyahoga Geauga Lake Lorain Ottawa Portage June 17, 1997 Stark Summit Trumbull Pennsylvania Warren Beaver
This Supplemental Indenture was filed for record and recorded in the Registered Land Department of the offices of the Recorders of the following Counties in the State of Ohio
FILED FOR COUNTY DOCUMENT NUMBER RECORD - ------------------------------- --------------- Cuyahoga Lake June 17, 1997
An amendment to a previously filed financing statement and a counterpart of this Supplemental Indenture were filed in the office of the Secretary of the Commonwealth of Pennsylvania on June 17, 1997 under original file number 13451763, microfilm number 18111533, to comply with the filing requirements of the Pennsylvania enactment of the Uniform Commercial Code. EX-4.B 9 EXHIBIT 4(B) 1 Exhibit 4(b) ================================================================================ THE TOLEDO EDISON COMPANY TO THE CHASE MANHATTAN BANK as Trustee. ------------------------ FORTY-SIXTH SUPPLEMENTAL INDENTURE DATED AS OF JUNE 15, 1997 (Supplemental to Indenture dated as of April 1, 1947) FIRST MORTGAGE BONDS, SERIES DUE 2000 FIRST MORTGAGE BONDS, SERIES DUE 2004 FIRST MORTGAGE BONDS, SERIES DUE 2007 ================================================================================ 2 i THE TOLEDO EDISON COMPANY FORTY-SIXTH SUPPLEMENTAL INDENTURE DATED AS OF JUNE 15, 1997 TABLE OF CONTENTS*
PAGE -------- PARTIES..................................................... 1 RECITALS.................................................... 1 GRANTING CLAUSES............................................ 3 ARTICLE I -- CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT AND FORM OF BONDS OF 2000 SERIES........ 4 Section 1 -- Creation and designation of Bonds and compliance with Indenture................. 4 Section 2 -- Registered Bonds and denominations........ 4 Section 3 -- Date of Bonds, maturity date, interest rate, accrual date, payment dates, Record Date and place of payments................ 4 Section 4 -- Transfer and exchange of Bonds............ 6 Section 5 -- Redemption of Bonds....................... 6 Section 6 -- Notice of redemption...................... 6 Section 7 -- Purchase, prepayment or payment of principal of Notes deemed to be corresponding payment of Bonds............ 7 Section 8 -- Redemption of Bonds in an "Event of Default" under the Note Indenture......... 7 Section 9 -- Payment of interest or premium on Notes deemed to be corresponding payment on Bonds..................................... 8 Section 10 -- Surrender of Bonds purchased or otherwise acquired................................. 8 Section 11 -- Surrender of Bonds in the event of payment in full or partial payment thereof and issuance of new Bonds for the unpaid balance........................... 8
- --------------- *The Table of Contents, the page headings and the recording data are not part of the Forty-sixth Supplemental Indenture as executed. 3 ii
PAGE -------- Section 12 -- Notation of payments on Bonds before transfer................................. 8 Section 13 -- Principal amount of Bonds which may be authenticated and delivered.............. 8 Section 14 -- Form of Fully Registered Pledge Bonds.... 9 Form of Trustee's Certificate of Authentication....................... 14 ARTICLE II -- CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT AND FORM OF BONDS OF 2004 SERIES....... 14 Section 1 -- Creation and designation of Bonds and compliance with Indenture................. 14 Section 2 -- Registered Bonds and denominations........ 14 Section 3 -- Date of Bonds, maturity date, interest rate, accrual date, payment dates, Record Date and place of payments................ 14 Section 4 -- Transfer and exchange of Bonds............ 16 Section 5 -- Redemption of Bonds....................... 17 Section 6 -- Notice of redemption...................... 17 Section 7 -- Purchase, prepayment or payment of principal of Notes deemed to be corresponding payment of Bonds............ 17 Section 8 -- Redemption of Bonds in an "Event of Default" under the Note Indenture......... 17 Section 9 -- Payment of interest or premium on Notes deemed to be corresponding payment on Bonds..................................... 18 Section 10 -- Surrender of Bonds purchased or otherwise acquired................................. 18 Section 11 -- Surrender of Bonds in the event of payment in full or partial payment thereof and issuance of new Bonds for the unpaid balance........................... 18 Section 12 -- Notation of payments on Bonds before transfer................................. 19 Section 13 -- Principal amount of Bonds which may be authenticated and delivered.............. 19
4 iii
PAGE -------- Section 14 -- Form of Fully Registered Pledge Bonds.... 19 Form of Trustee's Certificate of Authentication....................... 24 ARTICLE III -- CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT AND FORM OF BONDS OF 2007 SERIES...... 25 Section 1 -- Creation and designation of Bonds and compliance with Indenture................. 25 Section 2 -- Registered Bonds and denominations........ 25 Section 3 -- Date of Bonds, maturity date, interest rate, accrual date, payment dates, Record Date and place of payments................ 25 Section 4 -- Transfer and exchange of Bonds............ 27 Section 5 -- Redemption of Bonds....................... 27 Section 6 -- Notice of redemption...................... 27 Section 7 -- Purchase, prepayment or payment of principal of Notes deemed to be corresponding payment of Bonds............ 28 Section 8 -- Redemption of Bonds in an "Event of Default" under the Note Indenture......... 28 Section 9 -- Payment of interest or premium on Notes deemed to be corresponding payment on Bonds..................................... 29 Section 10 -- Surrender of Bonds purchased or otherwise acquired................................. 29 Section 11 -- Surrender of Bonds in the event of payment in full or partial payment thereof and issuance of new Bonds for the unpaid balance........................... 29 Section 12 -- Notation of payments on Bonds before transfer................................. 29 Section 13 -- Principal amount of Bonds which may be authenticated and delivered.............. 30 Section 14 -- Form of Fully Registered Pledge Bonds.... 30 Form of Trustee's Certificate of Authentication........................... 35
5 iv
PAGE -------- ARTICLE IV -- THE TRUSTEE................................... 36 Section 1 -- Acceptance by Trustee..................... 36 Section 2 -- Agency of the Company other than the Trustee................................... 36 Section 3 -- Certain advices to the Company............ 37 Section 4 -- Certificates regarding interest rates..... 37 ARTICLE V -- MISCELLANEOUS PROVISIONS....................... 37 TESTIMONIUM CLAUSE.......................................... 37 EXECUTION................................................... 38 COMPANY'S ACKNOWLEDGMENT.................................... S-1 TRUSTEE'S ACKNOWLEDGMENT.................................... S-2 RECORDING AND FILING DATA................................... R-1
6 FORTY-SIXTH SUPPLEMENTAL INDENTURE, dated as of June 15, 1997, made by and between THE TOLEDO EDISON COMPANY, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the "Company"), and THE CHASE MANHATTAN BANK, a corporation organized and existing under the laws of the State of New York (the "Trustee"), as Trustee. RECITALS The Company has heretofore executed and delivered an Indenture of Mortgage and Deed of Trust dated as of April 1, 1947 (the "Original Indenture") to The Chase National Bank of the City of New York, predecessor Trustee, to secure an issue of First Mortgage Bonds of the Company, issuable in series, and created thereunder an initial series of bonds designated as First Mortgage Bonds, 2 7/8% Series due 1977, being the initial series of bonds issued under the Original Indenture; and The Company has heretofore executed and delivered to The Chase National Bank of the City of New York, predecessor Trustee, four Supplemental Indentures supplementing the Original Indenture dated, respectively, September 1, 1948, April 1, 1949, December 1, 1950 and March 1, 1954 and has heretofore executed and delivered to The Chase Manhattan Bank, which on March 31, 1955, became the Trustee under the Original Indenture by virtue of the merger of The Chase National Bank of the City of New York into President and Directors of The Manhattan Company under the name of The Chase Manhattan Bank, the Fifth and the Sixth Supplemental Indentures dated, respectively, February 1, 1956, and May 1, 1958, supplementing the Original Indenture; and The Chase Manhattan Bank was converted into a national banking association under the name The Chase Manhattan Bank (National Association), effective September 23, 1965; and by virtue of said conversion the continuity of the business of Chase Manhattan Bank, including its business of acting as corporate trustee, and its corporate existence, were not affected, so that Chase Manhattan Bank is vested with all the trusts, powers, discretion, immunities, privileges and all other matters as were vested in said Chase Manhattan Bank under the Indenture, with like effect as if originally named as Trustee therein; and The Company has heretofore executed and delivered to The Chase Manhattan Bank (National Association), predecessor Trustee, 38 Supplemental Indentures dated, respectively, as follows: Seventh, August 1, 1967, Eighth, November 1, 1970, Ninth, August 1, 1972, Tenth, November 1, 1973, Eleventh, July 1, 1974, Twelfth, October 1, 1975, Thirteenth, June 1, 1976, Fourteenth, October 1, 1978, Fifteenth, 7 2 September 1, 1979, Sixteenth, September 1, 1980, Seventeenth, October 1, 1980, Eighteenth, April 1, 1981, Nineteenth, November 1, 1981, Twentieth, June 1, 1982, Twenty-first, September 1, 1982, Twenty-second, April 1, 1983, Twenty-third, December 1, 1983, Twenty-fourth, April 1, 1984, Twenty-fifth, October 15, 1984, Twenty-sixth, October 15, 1984, Twenty-seventh, August 1, 1985, Twenty-eighth, August 1, 1985, Twenty-ninth, December 1, 1985, Thirtieth, March 1, 1986, Thirty-first, October 15, 1987, Thirty-second, September 15, 1988, Thirty-third, June 15, 1989, Thirty-fourth, October 15, 1989, Thirty-fifth, May 15, 1990, Thirty-sixth, March 1, 1991, Thirty-seventh, May 1, 1992, Thirty-eighth, August 1, 1992, Thirty-ninth, October 1, 1992, Fortieth, January 1, 1993, Forty-first, September 15, 1994, Forty-second, May 1, 1995, Forty-third, June 1, 1995, Forty-fourth, July 14, 1995 and Forty-fifth, July 15, 1995 supplementing the Original Indenture; and The Chase Manhattan Bank (National Association), Successor Trustee, was merged on July 1, 1996, with and into Chemical Bank, a New York banking corporation, which changed its name to The Chase Manhattan Bank, and which became the Trustee under the Original Indenture by virtue of such merger; and The Company is executing and delivering to The Chase Manhattan Bank, Trustee, this Forty-sixth Supplemental Indenture, dated June , 1997, supplementing the Original Indenture (The Original Indenture, all the aforementioned Supplemental Indentures, this Forty-sixth Supplemental Indenture and any other indentures supplemental to the Original Indenture are herein collectively called the "Indenture" and this Forty-sixth Supplemental Indenture is hereinafter called "this Supplemental Indenture"); and Pursuant to the provisions of the Indenture, the Company has issued 52 series of bonds in the aggregate principal amount of $2,327,400,000, of which 29 series (including the Bonds of the 1977 Series issued pursuant to the Original Indenture) in the aggregate principal amount of $1,145,800,000 are no longer outstanding and of which additional portions, aggregating $64,375,000 in principal amount, of 5 other series have been retired; and The Company covenanted in and by the Original Indenture to execute and deliver such further instruments and do such further acts as may be necessary or proper to carry out more effectually the purposes of the Original Indenture and to make subject to the lien thereof property acquired after the execution and delivery of the Original Indenture; and 8 3 Under Article 3 of the Original Indenture, the Company is authorized to issue additional bonds upon the terms and conditions expressed in the Original Indenture; and The Company has determined to create pursuant to the provisions of the Indenture three new series of first mortgage bonds (collectively, the "Toledo Edison Pledge Bonds"), to be pledged as security for the payment of principal of and interest on certain notes (as hereinafter defined), with such Toledo Edison Pledge Bonds to have the denominations, rate of interest, date of maturity, redemption provisions and other provisions and agreements in respect thereof as in this Supplemental Indenture set forth; and The Toledo Edison Pledge Bonds are to be limited in aggregate principal amount to $145 million are to be delivered to The Chase Manhattan Bank, as Note Trustee (hereinafter called the "Note Trustee"), pursuant to an Indenture dated as of June 13, 1997, among the Company, The Cleveland Electric Illuminating Company and the Note Trustee, as amended and supplemented from time to time (hereinafter called the "Note Indenture") under which the Note Trustee will hold the Toledo Edison Pledge Bonds, together with bonds issued by The Cleveland Electric Illuminating Company under the Seventy-Fourth Supplemental Indenture to a Mortgage and Deed of Trust dated July 1, 1940 by and between The Cleveland Electric Illuminating Company and The Chase Manhattan Bank as Trustee (the "Cleveland Electric Supplement," and those bonds, the "Cleveland Electric Pledge Bonds"), as security for the payment of principal and interest on three new series of notes to be issued in a private placement and three new series of notes that may be exchanged therefor pursuant to a registered exchange offer (hereinafter collectively called the "Notes"); and The Company, by appropriate corporate action, has duly resolved and determined to execute this Supplemental Indenture for the purpose of providing for the creation of the Toledo Edison Pledge Bonds and of specifying the form, provisions and particulars thereof as in said Original Indenture, as amended, provided or permitted, including the issuance only of fully registered Toledo Edison Pledge Bonds, and of giving to the Toledo Edison Pledge Bonds the protection and security of the Indenture; and All conditions and requirements necessary to make this Supplemental Indenture a valid, legal and binding instrument in accordance with its terms and to make the Toledo Edison Pledge Bonds, when duly executed by the Company and authenticated and delivered by the Trustee, and duly issued, the valid, binding and legal obligations of the Company, have been done and performed, and the execution and delivery of this Supplemental Indenture have been in all respects duly authorized; 9 4 NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: That The Toledo Edison Company, the Company herein named, in consideration of the premises and of One Dollar ($1.00) to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, does hereby covenant and agree to and with the Trustee and its successors in the trust under the Indenture, for the benefit of those who shall hold the bonds to be issued hereunder and thereunder, as hereinafter provided, as follows: ARTICLE I CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT AND FORM OF BONDS OF 2000 SERIES SECTION 1. The Company hereby creates a new series of Bonds to be issued under and secured by the Indenture and to be designated as "First Mortgage Bonds, Series due 2000" of the Company and hereinabove and hereinafter called the "Toledo Edison Pledge Bonds due 2000". The Toledo Edison Pledge Bonds due 2000 shall be executed, authenticated and delivered in accordance with the provisions of, and shall in all respects be subject to, all of the terms, conditions and covenants of the Indenture. SECTION 2. The Toledo Edison Pledge Bonds due 2000 shall be issued as fully registered Bonds only, without coupons, in the denominations of $1,000 or any multiple thereof. SECTION 3. The Toledo Edison Pledge Bonds due 2000 shall be dated the date of authentication, shall mature July 1, 2000, and shall bear interest from the time hereinafter provided at such rate per annum as shall cause the amount of interest payable on such Toledo Edison Pledge Bonds due 2000 then outstanding to equal the amount of interest payable on the same proportion of the Notes due 2000 (as defined below) then outstanding as those Toledo Edison Pledge Bonds due 2000 are to the aggregate principal amount of (i) the Toledo Edison Pledge Bonds due 2000 then outstanding and (ii) the Cleveland Electric Pledge Bonds due 2000 issued pursuant to (and as defined in) the Cleveland Electric Supplement (the "Cleveland Electric Pledge Bonds due 2000") then outstanding. The ratio of the Toledo Edison Pledge Bonds due 2000 outstanding at any time to the aggregate principal amount of the Cleveland Electric Pledge Bonds due 2000 then outstanding and the Toledo Edison Pledge Bonds due 2000 then outstanding is hereinafter referred to as the "Toledo Edison 2000 Ratio." The interest on the Toledo Edison Pledge Bonds due 2000 is payable on January 1 and July 1 in each year starting on July 1, 1997 (each such date hereinafter called an "interest payment date") on and until maturity, or, in the case of any such Toledo Edison Pledge Bonds due 10 5 2000 duly called for redemption, on and until the redemption date, or in the case of any default by the Company in the payment of the principal due on any such Toledo Edison Pledge Bonds due 2000, until the Company's obligation with respect to the payment of the principal shall be discharged as provided in the Indenture. The amount of interest payable on the Toledo Edison Pledge Bonds due 2000 on any interest payment date, on the date of maturity and on any redemption date shall be computed on the same basis as the basis on which such interest is computed on the Secured Notes due 2000 provided for in the Note Indenture, which shall include the notes initially issued and any notes exchanged therefor pursuant to the terms of the Note Indenture (either or both of such series of notes, the "Notes due 2000"). The Toledo Edison Pledge Bonds due 2000 shall be payable as to principal and interest at the agency of the Company in the Borough of Manhattan, The City of New York, or, at the option of the registered owner, at the agency of the Company in the City of Toledo, State of Ohio, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts. Except as hereinafter provided, each Toledo Edison Pledge Bond due 2000 shall bear interest from the later of the date of initial authentication of the Toledo Edison Pledge Bonds due 2000 or the most recent date to which interest has been paid or duly provided for until the principal of such Toledo Edison Pledge Bond due 2000 is paid or duly provided for. The interest payable on any interest payment date shall be paid to the respective persons in whose names the Toledo Edison Pledge Bonds due 2000 shall be registered at the close of business on the Record Date next preceding such interest payment date, notwithstanding the cancellation of any such Toledo Edison Pledge Bond upon any transfer or exchange thereof subsequent to such Record Date and prior to such interest payment date; provided, however, that, if and to the extent the Company shall default in the payment of the interest due on such interest payment date (other than an interest payment date that is a redemption date or maturity date), such defaulted interest shall be paid to the respective persons in whose names such outstanding Toledo Edison Pledge Bonds due 2000 are registered at the close of business on a date (the "Subsequent Record Date") not less than ten days nor more than 15 days next preceding the date of payment of such defaulted interest, such Subsequent Record Date to be established by the Company by notice given by mail by or on behalf of the Company to the registered owners of Toledo Edison Pledge Bonds due 2000 not less than 10 days next preceding such Subsequent Record Date. If any interest payment date should fall on a day which is not a business day, 11 6 then such interest payment date shall be the next preceding business day. The initial interest rate on the Secured Notes due 2000, and therefore on the Toledo Edison Pledge Bonds due 2000, is 7.19%. Under certain circumstances specified in a Registration Agreement dated as of June 11, 1997 among Cleveland Electric, the Company and the Purchasers (as defined therein) of the Secured Notes, the interest rate on the Secured Notes due 2000, and therefore on the Toledo Edison Pledge Bonds due 2000, will increase temporarily to 7.69%. The term "Record Date", with respect to any interest payment date, redemption date or date of maturity of any Toledo Edison Pledge Bond due 2000, shall have the same meaning as the term "Record Date" has with respect to those events for the Notes due 2000. SECTION 4. In the manner and subject to the limitations provided in the Indenture, Toledo Edison Pledge Bonds due 2000 may be transferred or may be exchanged for a like aggregate principal amount of Toledo Edison Pledge Bonds of such series of other authorized denominations, in either case without charge, except for any tax or taxes or other governmental charges incident to such transfer or exchange, at the agency of the Company in the Borough of Manhattan, The City of New York. In the event less than all of the Toledo Edison Pledge Bonds due 2000 at the time outstanding are called for redemption, the Company shall not be required (a) to register any transfer or make any exchange of any such bond for a period of 15 days before the mailing of the notice of redemption of any such bonds, (b) to register any transfer or make any exchange of any such bond so called for redemption in its entirety or (c) to register any transfer or make any exchange of any portion of any such bond so called for redemption. Except as otherwise provided in Section 3 of this Article I with respect to the payment of interest, the Company, the agencies of the Company and the Trustee may deem and treat the person in whose name a Toledo Edison Pledge Bond due 2000 is registered as the absolute owner thereof for the purpose of receiving any payment and for all other purposes. SECTION 5. The Toledo Edison Pledge Bonds due 2000 shall be redeemable only to the extent provided in this Article I, subject to the provisions contained in Article V of the Indenture and the form of Toledo Edison Pledge Bond due 2000. SECTION 6. Subject to the applicable provisions of the Indenture, written notice of redemption of Toledo Edison Pledge Bonds due 2000 pursuant to this Supplemental Indenture shall be given by the Trustee 12 7 by mailing to each registered owner of such Toledo Edison Pledge Bonds due 2000 to be redeemed a notice of such redemption, first class postage prepaid, at its last address as it shall appear upon the books of the Company for the registration and transfer of such Toledo Edison Pledge Bonds due 2000. Any notice of redemption shall be mailed at least 30 days, but no more than 60 days, prior to the redemption date. In the event of partial redemption of Toledo Edison Pledge Bonds due 2000, the Trustee shall select the Toledo Edison Pledge Bonds due 2000 or portions thereof to be redeemed, subject to the provisions of this Supplemental Indenture, in such manner as the Trustee shall deem appropriate and fair. SECTION 7. If and when any Notes due 2000 shall be purchased and surrendered to the Note Trustee for cancellation pursuant to the Note Indenture, or if and when the principal of any Notes due 2000 shall be paid pursuant to the Note Indenture, then there shall be deemed to have been paid a principal amount of the Toledo Edison Pledge Bonds due 2000 then outstanding which bears the same ratio to the aggregate principal amount of Toledo Edison Pledge Bonds due 2000 then outstanding as the principal amount of the Notes due 2000 so purchased or paid bears to the aggregate principal amount of the Notes due 2000 outstanding immediately before such purchase or payment; provided however, that such purchase or payment of Toledo Edison Pledge Bonds due 2000 shall be deemed to have been made only when and to the extent that notice of such purchase or payment of the principal amount of such Notes due 2000 shall have been given by the Company to the Trustee. The Trustee may rely upon any such notification by the Company that such purchase or payment of Notes due 2000 has been so made. SECTION 8. The Toledo Edison Pledge Bonds due 2000 shall be redeemed by the Company in whole at any time prior to maturity at a redemption price of 100% of the principal amount to be redeemed, plus accrued and unpaid interest to the redemption date, but only if the Trustee shall receive a written demand from the Note Trustee for redemption of all Toledo Edison Pledge Bonds due 2000 held by the Note Trustee stating that an "Event of Default" under the Note Indenture has occurred and is continuing, that payment of the principal of the Notes due 2000 has been accelerated and that the Note Trustee is waiving notice of redemption; provided, however, that the Toledo Edison Pledge Bonds due 2000 shall not be redeemed in the event that prior to such redemption (a) the Trustee shall have received a certificate of the Note Trustee (i) stating that there has been a waiver of such Event of Default and a rescission and annulment of such acceleration or (ii) withdrawing said written demand or (b) an event of default under Section 6.01 of Article VI of the Indenture shall have occurred and be continuing, there has been a declaration of 13 8 acceleration of the principal of the Toledo Edison Pledge Bonds due 2000. The redemption of the Toledo Edison Pledge Bonds due 2000 pursuant to this Section shall be made not more than 60 days after receipt of the written demand. SECTION 9. Any payment of interest on the Notes due 2000 shall be deemed to constitute payment of interest on the Toledo Edison Pledge Bonds due 2000 in an amount equal to the amount of interest paid on the Notes due 2000 multiplied by the Toledo Edison 2000 Ratio; provided, however, that such payment of interest shall be deemed to have been made only when and to the extent that notice of such payment of interest on such Notes due 2000 shall have been given by the Company to the Trustee. The Trustee may rely upon any such notification by the Company that such payment of interest has been so made. SECTION 10. Any Toledo Edison Pledge Bonds due 2000 at any time purchased or otherwise acquired by the Company shall be surrendered to the Trustee for cancellation and the Trustee shall forthwith cancel the same. SECTION 11. All Toledo Edison Pledge Bonds due 2000 deemed to have been redeemed or paid in full as provided in Section 7 of this Article I shall be surrendered to the Trustee for cancellation and the Trustee shall forthwith cancel the same. In the event that part of a Toledo Edison Pledge Bond due 2000 shall be deemed to have been redeemed or paid as provided in said Section 7, the registered owner may, at its option, surrender such bond to the Trustee for cancellation, in which event the Trustee shall cancel such bond and the Company shall execute and the Trustee shall authenticate and deliver to the registered owner one or more new fully registered Toledo Edison Pledge Bonds due 2000 in such authorized denominations as shall be specified by the registered owner in an aggregate principal amount equal to the unpaid balance of the principal amount of such surrendered Bond. SECTION 12. Toledo Edison Pledge Bonds due 2000 shall not be transferable unless the registered owner shall have first surrendered the same to the Trustee for notation thereon of all payments of principal deemed to have been made thereon under Section 7 of this Article I or for cancellation and execution, authentication and delivery of Toledo Edison Pledge Bonds due 2000 in an aggregate principal amount equal to the unpaid balance of the principal amount of such surrendered Toledo Edison Pledge Bonds due 2000 under Section 11 of this Article I. SECTION 13. The aggregate principal amount of Toledo Edison Pledge Bonds due 2000 which may be authenticated and delivered 14 9 hereunder shall not exceed $45 million, except as otherwise provided in the Indenture. SECTION 14. The form of the fully registered Toledo Edison Pledge Bonds due 2000, and of the Trustee's certificate of authentication thereon, shall be substantially as follows: [FORM OF FULLY REGISTERED BOND OF 2000 SERIES] THE TOLEDO EDISON COMPANY Incorporated under the laws of the State of Ohio FIRST MORTGAGE BOND, SERIES DUE 2000 Due July 1, 2000 No. $ THE TOLEDO EDISON COMPANY, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the "Company", which term shall include any successor corporation as defined in the Indenture hereinafter referred to), for value received, hereby promises to pay to , or registered assigns, the sum of Dollars ($ ) or the aggregate unpaid principal amount hereof (as shown on the Schedule of Payments hereon), whichever is less, on July 1, 2000, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, and to pay interest on the unpaid principal amount hereof in like coin or currency from the time hereinafter provided, at such rate per annum as shall cause the amount of interest payable hereon to equal the amount of interest payable on the same proportion of the Notes due 2000 (hereinafter defined) then outstanding as this Toledo Edison Pledge Bond due 2000 is to the aggregate principal amount of (i) the Toledo Edison Pledge Bonds due 2000 then outstanding and (ii) the Cleveland Electric Pledge Bonds due 2000 issued pursuant to (and defined in) the Seventy-Fourth Supplemental Indenture to a Mortgage and Deed of Trust dated July 1, 1940 by and between The Cleveland Electric Illuminating Company and The Chase Manhattan Bank as Trustee (the "Cleveland Electric Pledge Bonds due 2000") then outstanding. The ratio of the Toledo Edison Pledge Bonds due 2000 outstanding at any time to the aggregate principal amount of the Cleveland Electric Pledge Bonds due 2000 then outstanding and the Toledo Edison Pledge Bonds due 2000 then outstanding is hereinafter referred to as the "Toledo Edison 2000 Ratio." The interest on the Toledo Edison Pledge Bonds due 2000 is payable on January 1 and July 1 in each year starting on July 1, 1997 (each such date herein called an "interest payment date"), and on and until the date of maturity of this Bond, or, if this Bond shall be duly called for redemption, on and until the redemption date, or, if the Company shall default in the payment of the principal 15 10 amount of this Bond, until the Company's obligation with respect to the payment of such principal shall be discharged as provided in said Indenture. Except as hereinafter provided, this Bond shall bear interest from the date of initial authentication of this Bond or the most recent date to which interest has been paid or duly provided for until the principal of this Bond has been paid or duly provided for. Subject to certain exceptions provided in said Indenture, the interest payable on any interest payment date shall be paid to the person in whose name this Bond shall be registered at the close of business on the Record Date or, in the case of defaulted interest, on a day preceding the date of payment thereof established by notice to the registered owner of this Bond in the manner provided in the Supplemental Indenture (hereinafter defined). Principal of and interest on this Bond are payable at the agency of the Company in the Borough of Manhattan, The City of New York, or, at the option of the registered owner, at the agency of the Company in the City of Toledo, State of Ohio. This Bond is one of the duly authorized Bonds of the Company (herein called the "Bonds"), all issued and to be issued under and equally secured by a Mortgage and Deed of Trust, dated as of April 1, 1947 (herein called the "Original Indenture"), executed by the Company to The Chase National Bank of the City of New York, now succeeded by The Chase Manhattan Bank as Trustee (herein called the "Trustee"), and all indentures supplemental thereto (said Mortgage as so supplemented herein called the "Indenture") to which reference is hereby made for a description of the properties mortgaged and pledged, the nature and extent of the security, the rights of the registered owner or owners of the Bonds and of the Trustee in respect thereof, and the terms and conditions upon which the Bonds are, and are to be, secured. The Bonds may be issued in series, for various principal sums, may mature at different times, may bear interest at different rates and may otherwise vary as in the Indenture provided. This Bond is one of a series designated as the First Mortgage Bonds, Series due 2000 (herein called the "Toledo Edison Pledge Bonds due 2000") limited, except as otherwise provided in the Indenture, in aggregate principal amount to $45 million, issued under and secured by the Indenture and described in the Forty-sixth Supplemental Indenture dated as of June 15, 1997, between the Company and the Trustee (herein called the "Supplemental Indenture"). The Toledo Edison Pledge Bonds due 2000 have been delivered by the Company to The Chase Manhattan Bank, as trustee (hereinafter called the "Note Trustee"), pursuant to a Note Indenture, dated as of June 13, 1997, among the Company, The Cleveland Electric Illuminating Company and the Note Trustee, under which the Note Trustee holds the Toledo Edison Pledge Bonds due 2000, together with the Cleveland Electric Pledge Bonds due 2000, as a portion of the security 16 11 for the payment of principal of and interest on the Secured Notes issued under the Note Indenture. If and when any Secured Notes due 2000 issued under the Note Indenture (herein called the "Notes due 2000") are purchased and surrendered to the Note Trustee for cancellation pursuant to the Note Indenture, or the principal of any Notes due 2000 is paid pursuant to the Note Indenture, then there shall be deemed to be paid a principal amount of the Toledo Edison Pledge Bonds due 2000 then outstanding which bears the same ratio to the aggregate principal amount of Toledo Edison Pledge Bonds due 2000 outstanding immediately before such purchase or payment as the principal amount of the Notes due 2000 so purchased or paid bears to the aggregate principal amount of the Notes due 2000 outstanding immediately before such purchase or payment; provided, however, that such purchase or payment of Pledge Bonds due 2000 is deemed to be made only when and to the extent that notice of such purchase or payment of such Notes due 2000 is given by the Company to the Trustee. Any payment of interest on the Notes due 2000 shall be deemed to constitute payment of interest on the Toledo Edison Pledge Bonds due 2000 in an amount equal to the amount of interest paid on the Notes due 2000 multipled by the Toledo Edison 2000 Ratio; provided, however, that such payment of interest is deemed to be made only when and to the extent that notice of such payment of interest on such Notes due 2000 is given by the Company to the Trustee. In the event that this Bond is deemed to be paid or redeemed in full, this Bond shall be surrendered to the Trustee for cancellation. In the event that this Bond is deemed to be paid or redeemed in part, this Bond may, at the option of the registered owner, be surrendered to the Trustee for cancellation, in which event the Trustee will cancel this Bond and the Company will execute and the Trustee will authenticate and deliver to the registered owner Toledo Edison Pledge Bonds due 2000 in authorized denominations in aggregate principal amount equal to the unpaid balance of the principal amount of this Bond. The Toledo Edison Pledge Bonds due 2000 shall be redeemed by the Company prior to maturity in whole at any time as provided in Section 8 of Article I of the Supplemental Indenture at a redemption price of 100% of the principal amount to be redeemed, plus accrued and unpaid interest to the redemption date. Any redemption of the Pledge Bonds due 2000 shall be made in accordance with the applicable provisions of Sections 5.02, 5.03, 5.04 and 5.05 of the Original Indenture, unless and to the extent waived in writing by the registered owner or owners of all Pledge Bonds due 2000 and such waiver is filed with the Trustee. 17 12 To the extent permitted by and as provided in the Indenture, the rights and obligations of the Company and of the holders of said Bonds and coupons (including those pertaining to any sinking or other fund) may be changed and modified, with the consent of the Company by the holders of at least 75% in aggregate principal amount of the Bonds then outstanding, such percentage being determined as provided in the Indenture; provided, however, that in case such changes and modifications affect one or more but less than all series of Bonds then outstanding, they shall be required to be adopted only by the affirmative vote of the holders of at least 75% in aggregate principal amount of outstanding Bonds of such one or more series so affected; and further provided, that without the consent of the holder hereof no such change or modification shall be made which will extend the time of payment of the principal of or interest on this Bond or reduce the principal amount hereof or the rate of interest hereon, or affect any other modification of the terms of payment of such principal or interest or will permit the creation of any lien ranking prior to or on a party with the lien of the Indenture on any of the mortgaged property, or will deprive the holder hereof of the benefit of a lien upon the mortgaged property for the security of this Bond, or will reduce the percentage of Bonds required for the adoption of changes or modifications as aforesaid. If an event of default, as defined in the Indenture, shall occur, the principal of all the Bonds at any such time outstanding under the Indenture may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the Bonds outstanding. Subject to the limitations provided in the Indenture and the Note Indenture, this Bond is transferable by the registered owner hereof, in person or by duly authorized attorney, on the books of the Company to be kept for that purpose at the agency of the Company in the Borough of Manhattan, The City of New York, upon surrender and cancellation of this Bond, and upon presentation of a duly executed written instrument of transfer, and thereupon a new fully registered bond or bonds of the same series, of the same aggregate principal amount and in authorized denominations will be issued to the transferee or transferees in exchange herefor; and this Bond, with or without others of the same series, may in like manner be exchanged for one or more new fully registered Toledo Edison Pledge Bonds due 2000 of other authorized denominations but of the same aggregate principal amount; all without charge except for any tax or taxes or other governmental charges incidental to such transfer or exchange and all subject to the terms and conditions set forth in the Indenture. In the event less than all of the Toledo Edison Pledge Bonds due 2000 at the time outstanding 18 13 are called for redemption, the Company shall not be required (a) to register any transfer or make any exchange of any such Bond for a period of 15 days before the mailing of the notice of redemption of any such Bonds, (b) to register any transfer or make any exchange of any such Bond called for redemption in its entirety, or (c) to register any transfer or make any exchange of any portion of any such Bond which has been called for redemption. Except as otherwise provided herein with respect to the payment of interest, the Company, the agencies of the Company and the Trustee may deem and treat the person in whose name this Bond is registered as the absolute owner hereof for the purpose of receiving any payment and for all other purposes. No recourse shall be had for the payment of the principal of or the interest on this Bond, or for any claim based hereon or on the Indenture or any indenture supplemental thereto, against any incorporator, or against any stockholder, director or officer, past, present or future, of the Company, or of any predecessor or successor corporation, as such, either directly or through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability, whether at common law, in equity, by any constitution or statute or otherwise, of incorporators, stockholders, directors or officers being released by every owner hereof by the acceptance of this Bond and as part of the consideration for the issue hereof, and being likewise released by the terms of the Indenture. This Bond shall not be entitled to any benefit under the Indenture or any indenture supplemental thereto, or become valid or obligatory for any purpose, until the Trustee under the Indenture, or a successor trustee thereto under the Indenture, shall have signed the form of certificate of authentication endorsed hereon. IN WITNESS WHEREOF, The Toledo Edison Company has caused this Bond to be signed in its name by its President or a Vice President (whose signature may be manual or a facsimile thereof) and its corporate seal (or a facsimile thereof) to be hereto affixed and attested by its Secretary or an Assistant Secretary (whose signature may be manual or a facsimile thereof). Dated: THE TOLEDO EDISON COMPANY By .................................................... Attest: ............................. Secretary 19 14 [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This Bond is one of the Bonds of the series designated and described in the within-mentioned Indenture and Supplemental Indenture. THE CHASE MANHATTAN BANK, TRUSTEE By ........................................... AUTHORIZED OFFICER [FORM OF SCHEDULE OF PAYMENTS] SCHEDULE OF PAYMENTS
AGENCY OF THE UNPAID COMPANY PRINCIPAL PRINCIPAL PREMIUM INTEREST MAKING AUTHORIZED DATE PAYMENT AMOUNT PAYMENT PAYMENT NOTATION OFFICER TITLE - --------- ------- ------- ------- ------- ------- ------- -------
[END OF FORM OF FULLY REGISTERED BOND] ARTICLE II CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT AND FORM OF BONDS OF 2004 SERIES SECTION 1. The Company hereby creates a new series of Bonds to be issued under and secured by the Indenture and to be designated as "First Mortgage Bonds, Series due 2004" of the Company and hereinabove and hereinafter called the "Toledo Edison Pledge Bonds due 2004". The Toledo Edison Pledge Bonds due 2004 shall be executed, authenticated and delivered in accordance with the provisions of, and shall in all respects be subject to, all of the terms, conditions and covenants of the Indenture. SECTION 2. The Toledo Edison Pledge Bonds due 2004 shall be issued as fully registered Bonds only, without coupons, in the denominations of $1,000 or any multiple thereof. SECTION 3. The Toledo Edison Pledge Bonds due 2004 shall be dated the date of authentication, shall mature July 1, 2004, and shall bear interest from the time hereinafter provided at such rate per annum as shall cause the amount of interest payable on such Toledo Edison Pledge Bonds due 2004 then outstanding to equal the amount of 20 15 interest payable on the same proportion of the Notes due 2004 (as defined below) then outstanding as those Toledo Edison Pledge Bonds due 2004 are to the aggregate principal amount of (i) the Toledo Edison Pledge Bonds due 2004 then outstanding and (ii) the Cleveland Electric Pledge Bonds due 2004 issued pursuant to (and as defined in) the Cleveland Electric Supplement (the "Cleveland Electric Pledge Bonds due 2004") then outstanding. The ratio of the Toledo Edison Pledge Bonds due 2004 outstanding at any time to the aggregate principal amount of the Cleveland Electric Pledge Bonds due 2004 then outstanding and the Toledo Edison Pledge Bonds due 2004 then outstanding is hereinafter referred to as the "Toledo Edison 2004 Ratio." The interest on the Toledo Edison Pledge Bonds due 2004 is payable on January 1 and July 1 in each year starting on July 1, 1997 (each such date hereinafter called an "interest payment date") on and until maturity, or, in the case of any such Toledo Edison Pledge Bonds due 2004 duly called for redemption, on and until the redemption date, or in the case of any default by the Company in the payment of the principal due on any such Toledo Edison Pledge Bonds due 2004, until the Company's obligation with respect to the payment of the principal shall be discharged as provided in the Indenture. The amount of interest payable the Toledo Edison Pledge Bonds due 2004 on any interest payment date, on the date of maturity and on any redemption date shall be computed on the same basis as the basis on which such interest is computed on the Secured Notes due 2004 provided for in the Note Indenture, which shall include the notes initially issued and any notes exchanged therefor pursuant to the terms of the Note Indenture (either or both of such series of notes, the "Notes due 2004"). The Toledo Edison Pledge Bonds due 2004 shall be payable as to principal and interest at the agency of the Company in the Borough of Manhattan, The City of New York, or, at the option of the registered owner, at the agency of the Company in the City of Toledo, State of Ohio, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts. Except as hereinafter provided, each Toledo Edison Pledge Bond due 2004 shall bear interest from the later of the date of initial authentication of the Toledo Edison Pledge Bonds due 2004 or the most recent date to which interest has been paid or duly provided for until the principal of such Toledo Edison Pledge Bond due 2004 is paid or duly provided for. The interest payable on any interest payment date shall be paid to the respective persons in whose names the Toledo Edison Pledge Bonds due 2004 shall be registered at the close of business on the Record Date next preceding such interest payment date, notwithstanding the can- 21 16 cellation of any such Bond upon any transfer or exchange thereof subsequent to such Record Date and prior to such interest payment date; provided, however, that, if and to the extent the Company shall default in the payment of the interest due on such interest payment date (other than an interest payment date that is a redemption date or maturity date), such defaulted interest shall be paid to the respective persons in whose names such outstanding Toledo Edison Pledge Bonds due 2004 are registered at the close of business on a date (the "Subsequent Record Date") not less than ten days nor more than 15 days next preceding the date of payment of such defaulted interest, such Subsequent Record Date to be established by the Company by notice given by mail by or on behalf of the Company to the registered owners of Toledo Edison Pledge Bonds due 2004 not less than 10 days next preceding such Subsequent Record Date. If any interest payment date should fall on a day which is not a business day, then such interest payment date shall be the next preceding business day. The initial interest rate on the Secured Notes due 2004, and therefore on the Toledo Edison Pledge Bonds due 2004, is 7.67%. Under certain circumstances specified in a Registration Agreement dated as of June 11, 1997 among Cleveland Electric, the Company and the Purchasers (as defined therein) of the Secured Notes, the interest rate on the Secured Notes due 2004, and therefore on the Toledo Edison Pledge Bonds due 2004, will increase temporarily to 8.17%. The term "Record Date", with respect to any interest payment date, redemption date or date of maturity of any Toledo Edison Pledge Bond due 2004, shall have the same meaning as the term "Record Date" has with respect to those events for the Notes due 2004. SECTION 4. In the manner and subject to the limitations provided in the Indenture, Toledo Edison Pledge Bonds due 2004 may be transferred or may be exchanged for a like aggregate principal amount of Bonds of such series of other authorized denominations, in either case without charge, except for any tax or taxes or other governmental charges incident to such transfer or exchange, at the agency of the Company in the Borough of Manhattan, The City of New York. In the event less than all of the Toledo Edison Pledge Bonds due 2004 at the time outstanding are called for redemption, the Company shall not be required (a) to register any transfer or make any exchange of any such bond for a period of 15 days before the mailing of the notice of redemption of any such bonds, (b) to register any transfer or make any exchange of any such bond so called for redemption in its entirety or (c) to register any transfer or make any exchange of any portion of any such bond so called for redemption. 22 17 Except as otherwise provided in Section 3 of this Article I with respect to the payment of interest, the Company, the agencies of the Company and the Trustee may deem and treat the person in whose name a Toledo Edison Pledge Bond due 2004 is registered as the absolute owner thereof for the purpose of receiving any payment and for all other purposes. SECTION 5. The Toledo Edison Pledge Bonds due 2004 shall be redeemable only to the extent provided in this Article I, subject to the provisions contained in Article V of the Indenture and the form of Toledo Edison Pledge Bond due 2004. SECTION 6. Subject to the applicable provisions of the Indenture, written notice of redemption of Toledo Edison Pledge Bonds due 2004 pursuant to this Supplemental Indenture shall be given by the Trustee by mailing to each registered owner of such Toledo Edison Pledge Bonds due 2004 to be redeemed a notice of such redemption, first class postage prepaid, at its last address as it shall appear upon the books of the Company for the registration and transfer of such Toledo Edison Pledge Bonds due 2004. Any notice of redemption shall be mailed at least 30 days, but no more than 60 days, prior to the redemption date. In the event of partial redemption of Toledo Edison Pledge Bonds due 2004, the Trustee shall select the Toledo Edison Pledge Bonds due 2004 or portions thereof to be redeemed, subject to the provisions of this Supplemental Indenture, in such manner as the Trustee shall deem appropriate and fair. SECTION 7. If and when any Notes due 2004 shall be purchased and surrendered to the Note Trustee for cancellation pursuant to the Note Indenture, or if and when the principal of any Notes due 2004 shall be paid pursuant to the Note Indenture, then there shall be deemed to have been paid a principal amount of the Toledo Edison Pledge Bonds due 2004 then outstanding which bears the same ratio to the aggregate principal amount of Toledo Edison Pledge Bonds due 2004 then outstanding as the principal amount of the Notes due 2004 so purchased or paid bears to the aggregate principal amount of the Notes due 2004 outstanding immediately before such purchase or payment; provided however, that such purchase or payment of Toledo Edison Pledge Bonds due 2004 shall be deemed to have been made only when and to the extent that notice of such purchase or payment of the principal amount of such Notes due 2004 shall have been given by the Company to the Trustee. The Trustee may rely upon any such notification by the Company that such purchase or payment of Notes due 2004 has been so made. SECTION 8. The Toledo Edison Pledge Bonds due 2004 shall be redeemed by the Company in whole at any time prior to maturity at a redemption price of 100% of the principal amount to be redeemed, plus 23 18 accrued and unpaid interest to the redemption date, but only if the Trustee shall receive a written demand from the Note Trustee for redemption of all Toledo Edison Pledge Bonds due 2004 held by the Note Trustee stating that an "Event of Default" under the Note Indenture has occurred and is continuing, that payment of the principal of the Notes due 2004 has been accelerated and that the Note Trustee is waiving notice of redemption; provided, however, that the Toledo Edison Pledge Bonds due 2004 shall not be redeemed in the event that prior to such redemption (a) the Trustee shall have received a certificate of the Note Trustee (i) stating that there has been a waiver of such Event of Default and a rescission and annulment of such acceleration or (ii) withdrawing said written demand or (b) an event of default under Section 6.01 of Article VI of the Indenture shall have occurred and be continuing, there has been a declaration of acceleration of the principal of the Toledo Edison Pledge Bonds due 2004. The redemption of the Toledo Edison Pledge Bonds due 2004 pursuant to this Section shall be made not more than 60 days after receipt of the written demand. SECTION 9. Any payment of interest on the Notes due 2004 shall be deemed to constitute payment of interest on the Toledo Edison Pledge Bonds due 2004 in an amount equal to the amount of interest paid on the Notes due 2004 multiplied by the Toledo Edison 2004 Ratio; provided, however, that such payment of interest shall be deemed to have been made only when and to the extent that notice of such payment of interest on such Notes due 2004 shall have been given by the Company to the Trustee. The Trustee may rely upon any such notification by the Company that such payment of interest has been so made. SECTION 10. Any Toledo Edison Pledge Bonds due 2004 at any time purchased or otherwise acquired by the Company shall be surrendered to the Trustee for cancellation and the Trustee shall forthwith cancel the same. SECTION 11. All Toledo Edison Pledge Bonds due 2004 deemed to have been redeemed or paid in full as provided in Section 7 of this Article I shall be surrendered to the Trustee for cancellation and the Trustee shall forthwith cancel the same. In the event that part of a Toledo Edison Pledge Bond due 2004 shall be deemed to have been redeemed or paid as provided in said Section 7, the registered owner may, at its option, surrender such bond to the Trustee for cancellation, in which event the Trustee shall cancel such bond and the Company shall execute and the Trustee shall authenticate and deliver to the registered owner one or more new fully registered Toledo Edison Pledge Bonds due 2004 in such authorized denominations as shall be specified by the registered owner in an aggregate principal amount 24 19 equal to the unpaid balance of the principal amount of such surrendered Bond. SECTION 12. Toledo Edison Pledge Bonds due 2004 shall not be transferable unless the registered owner shall have first surrendered the same to the Trustee for notation thereon of all payments of principal deemed to have been made thereon under Section 7 of this Article I or for cancellation and execution, authentication and delivery of Toledo Edison Pledge Bonds due 2004 in an aggregate principal amount equal to the unpaid balance of the principal amount of such surrendered Toledo Edison Pledge Bonds due 2004 under Section 11 of this Article I. SECTION 13. The aggregate principal amount of Toledo Edison Pledge Bonds due 2004 which may be authenticated and delivered hereunder shall not exceed $70 million, except as otherwise provided in the Indenture. SECTION 14. The form of the fully registered Toledo Edison Pledge Bonds due 2004, and of the Trustee's certificate of authentication thereon, shall be substantially as follows: [FORM OF FULLY REGISTERED BOND OF 2004 SERIES] THE TOLEDO EDISON COMPANY Incorporated under the laws of the State of Ohio FIRST MORTGAGE BOND, SERIES DUE 2004 Due July 1, 2004 No. $ THE TOLEDO EDISON COMPANY, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the "Company", which term shall include any successor corporation as defined in the Indenture hereinafter referred to), for value received, hereby promises to pay to , or registered assigns, the sum of Dollars ($ ) or the aggregate unpaid principal amount hereof (as shown on the Schedule of Payments hereon), whichever is less, on July 1, 2004, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, and to pay interest on the unpaid principal amount hereof in like coin or currency from the time hereinafter provided, at such rate per annum as shall cause the amount of interest payable hereon to equal the amount of interest payable on the same proportion of the Notes due 2004 (hereinafter defined) then outstanding as this Toledo Edison Pledge Bond due 2004 is to the aggregate principal amount of (i) the Toledo Edison Pledge Bonds due 2004 then outstanding and (ii) the Cleveland Electric Pledge Bonds due 2004 issued pursuant to (and as defined in) the Seventy-Fourth Supplemental 25 20 Indenture to a Mortgage and Deed of Trust dated July 1, 1940 by and between The Cleveland Electric Illuminating Company and The Chase Manhattan Bank as Trustee (the "Cleveland Electric Pledge Bonds due 2004") then outstanding. The ratio of the Toledo Edison Pledge Bonds due 2004 outstanding at any time to the aggregate principal amount of the Cleveland Electric Pledge Bonds due 2004 then outstanding and the Toledo Edison Pledge Bonds due 2004 then outstanding is hereinafter referred to as the "Toledo Edison 2004 Ratio." The interest on the Toledo Edison Pledge Bonds due 2004 is payable on January 1 and July 1 in each year starting on July 1, 1997 (each such date herein called an "interest payment date"), and on and until the date of maturity of this Bond, or, if this Bond shall be duly called for redemption, on and until the redemption date, or, if the Company shall default in the payment of the principal amount of this Bond, until the Company's obligation with respect to the payment of such principal shall be discharged as provided in said Indenture. Except as hereinafter provided, this Bond shall bear interest from the date of initial authentication of this Bond or the most recent date to which interest has been paid or duly provided for until the principal of this Bond has been paid or duly provided for. Subject to certain exceptions provided in said Indenture, the interest payable on any interest payment date shall be paid to the person in whose name this Bond shall be registered at the close of business on the Record Date or, in the case of defaulted interest, on a day preceding the date of payment thereof established by notice to the registered owner of this Bond in the manner provided in the Supplemental Indenture (hereinafter defined). Principal of and interest on this Bond are payable at the agency of the Company in the Borough of Manhattan, The City of New York, or, at the option of the registered owner, at the agency of the Company in the City of Toledo, State of Ohio. This Bond is one of the duly authorized Bonds of the Company (herein called the "Bonds"), all issued and to be issued under and equally secured by a Mortgage and Deed of Trust, dated as of April 1, 1947 (herein called the "Original Indenture"), executed by the Company to The Chase National Bank of the City of New York, now succeeded by The Chase Manhattan Bank as Trustee (herein called the "Trustee"), and all indentures supplemental thereto (said Mortgage as so supplemented herein called the "Indenture") to which reference is hereby made for a description of the properties mortgaged and pledged, the nature and extent of the security, the rights of the registered owner or owners of the Bonds and of the Trustee in respect thereof, and the terms and conditions upon which the Bonds are, and are to be, secured. The Bonds may be issued in series, for various principal sums, may mature at different times, may bear interest at different rates and may otherwise vary as in the Indenture provided. 26 21 This Bond is one of a series designated as the First Mortgage Bonds, Series due 2004 (herein called the "Toledo Edison Pledge Bonds due 2004") limited, except as otherwise provided in the Indenture, in aggregate principal amount to $70 million, issued under and secured by the Indenture and described in the Forty-sixth Supplemental Indenture dated as of June 15, 1997, between the Company and the Trustee (herein called the "Supplemental Indenture"). The Toledo Edison Pledge Bonds due 2004 have been delivered by the Company to The Chase Manhattan Bank, as trustee (hereinafter called the "Note Trustee"), pursuant to a Note Indenture, dated as of June 13, 1997, among the Company, The Cleveland Electric Illuminating Company and the Note Trustee, under which the Note Trustee holds the Toledo Edison Pledge Bonds due 2004, together with the Cleveland Electric Pledge Bonds due 2004, as a portion of the security for the payment of principal of and interest on the Secured Notes issued under the Note Indenture. If and when any Secured Notes due 2004 issued under the Note Indenture (herein called the "Notes due 2004") are purchased and surrendered to the Note Trustee for cancellation pursuant to the Note Indenture, or the principal of any Notes due 2004 is paid pursuant to the Note Indenture, then there shall be deemed to be paid a principal amount of the Toledo Edison Pledge Bonds due 2004 then outstanding which bears the same ratio to the aggregate principal amount of Toledo Edison Pledge Bonds due 2004 outstanding immediately before such purchase or payment as the principal amount of the Notes due 2004 so purchased or paid bears to the aggregate principal amount of the Notes due 2004 outstanding immediately before such purchase or payment; provided, however, that such purchase or payment of Toledo Edison Pledge Bonds due 2004 is deemed to be made only when and to the extent that notice of such purchase or payment of such Notes due 2004 is given by the Company to the Trustee. Any payment of interest on the Notes due 2004 shall be deemed to constitute payment of interest on the Toledo Edison Pledge Bonds due 2004 in an amount equal to the amount of interest paid on the Notes due 2004 multiplied by the Toledo Edison 2004 Ratio; provided, however, that such payment of interest is deemed to be made only when and to the extent that notice of such payment of interest on such Notes due 2004 is given by the Company to the Trustee. In the event that this Bond is deemed to be paid or redeemed in full, this Bond shall be surrendered to the Trustee for cancellation. In the event that this Bond is deemed to be paid or redeemed in part, this Bond may, at the option of the registered owner, be surrendered to the Trustee for cancellation, in which event the Trustee will cancel this Bond and the Company will execute and the Trustee will authenticate 27 22 and deliver to the registered owner Toledo Edison Pledge Bonds due 2004 in authorized denominations in aggregate principal amount equal to the unpaid balance of the principal amount of this Bond. The Toledo Edison Pledge Bonds due 2004 shall be redeemed by the Company prior to maturity in whole at any time as provided in Section 8 of Article I of the Supplemental Indenture at a redemption price of 100% of the principal amount to be redeemed, plus accrued and unpaid interest to the redemption date. Any redemption of the Pledge Bonds due 2004 shall be made in accordance with the applicable provisions of Sections 5.02, 5.03, 5.04 and 5.05 of the Original Indenture, unless and to the extent waived in writing by the registered owner or owners of all Pledge Bonds due 2004 and such waiver is filed with the Trustee. To the extent permitted by and as provided in the Indenture, the rights and obligations of the Company and of the holders of said Bonds and coupons (including those pertaining to any sinking or other fund) may be changed and modified, with the consent of the Company by the holders of at least 75% in aggregate principal amount of the Bonds then outstanding, such percentage being determined as provided in the Indenture; provided, however, that in case such changes and modifications affect one or more but less than all series of Bonds then outstanding, they shall be required to be adopted only by the affirmative vote of the holders of at least 75% in aggregate principal amount of outstanding Bonds of such one or more series so affected; and further provided, that without the consent of the holder hereof no such change or modification shall be made which will extend the time of payment of the principal of, or of the interest or premium, if any, on this Bond or reduce the principal amount hereof or the rate of interest or the premium, if any, hereon, or affect any other modification of the terms of payment of such principal or interest, or premium, if any, or will permit the creation of any lien ranking prior to or on a party with the lien of the Indenture on any of the mortgaged property, or will deprive the holder hereof of the benefit of a lien upon the mortgaged property for the security of this Bond, or will reduce the percentage of Bonds required for the adoption of changes or modifications as aforesaid. If an event of default, as defined in the Indenture, shall occur, the principal of all the Bonds at any such time outstanding under the Indenture may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the Bonds outstanding. 28 23 Subject to the limitations provided in the Indenture and the Note Indenture, this Bond is transferable by the registered owner hereof, in person or by duly authorized attorney, on the books of the Company to be kept for that purpose at the agency of the Company in the Borough of Manhattan, The City of New York, upon surrender and cancellation of this Bond, and upon presentation of a duly executed written instrument of transfer, and thereupon a new fully registered bond or bonds of the same series, of the same aggregate principal amount and in authorized denominations will be issued to the transferee or transferees in exchange herefor; and this Bond, with or without others of the same series, may in like manner be exchanged for one or more new fully registered Toledo Edison Pledge Bonds due 2004 of other authorized denominations but of the same aggregate principal amount; all without charge except for any tax or taxes or other governmental charges incidental to such transfer or exchange and all subject to the terms and conditions set forth in the Indenture. In the event less than all of the Toledo Edison Pledge Bonds due 2004 at the time outstanding are called for redemption, the Company shall not be required (a) to register any transfer or make any exchange of any such Bond for a period of 15 days before the mailing of the notice of redemption of any such Bonds, (b) to register any transfer or make any exchange of any such Bond called for redemption in its entirety, or (c) to register any transfer or make any exchange of any portion of any such Bond which has been called for redemption. Except as otherwise provided herein with respect to the payment of interest, the Company, the agencies of the Company and the Trustee may deem and treat the person in whose name this Bond is registered as the absolute owner hereof for the purpose of receiving any payment and for all other purposes. No recourse shall be had for the payment of the principal of or the interest on this Bond, or for any claim based hereon or on the Indenture or any indenture supplemental thereto, against any incorporator, or against any stockholder, director or officer, past, present or future, of the Company, or of any predecessor or successor corporation, as such, either directly or through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability, whether at common law, in equity, by any constitution or statute or otherwise, of incorporators, stockholders, directors or officers being released by every owner hereof by the acceptance of this Bond and as part of the consideration for the issue hereof, and being likewise released by the terms of the Indenture. This Bond shall not be entitled to any benefit under the Indenture or any indenture supplemental thereto, or become valid or obligatory for any purpose, until the Trustee under the Indenture, or a successor 29 24 trustee thereto under the Indenture, shall have signed the form of certificate of authentication endorsed hereon. IN WITNESS WHEREOF, The Toledo Edison Company has caused this Bond to be signed in its name by its President or a Vice President (whose signature may be manual or a facsimile thereof) and its corporate seal (or a facsimile thereof) to be hereto affixed and attested by its Secretary or an Assistant Secretary (whose signature may be manual or a facsimile thereof). Dated: THE TOLEDO EDISON COMPANY By .............................................. Attest: ............................. Secretary [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This Bond is one of the Bonds of the series designated and described in the within-mentioned Indenture and Supplemental Indenture. THE CHASE MANHATTAN BANK, TRUSTEE By ........................................... Authorized Officer 30 25 [FORM OF SCHEDULE OF PAYMENTS] SCHEDULE OF PAYMENTS
AGENCY OF THE UNPAID COMPANY PRINCIPAL PRINCIPAL PREMIUM INTEREST MAKING AUTHORIZED DATE PAYMENT AMOUNT PAYMENT PAYMENT NOTATION OFFICER TITLE - --------- ------- ------- ------- ------- ------- ------- -------
[END OF FORM OF FULLY REGISTERED BOND] ARTICLE III CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT AND FORM OF BONDS OF 2007 SERIES SECTION 1. The Company hereby creates a new series of Bonds to be issued under and secured by the Indenture and to be designated as "First Mortgage Bonds, Series due 2007" of the Company and hereinabove and hereinafter called the "Toledo Edison Pledge Bonds due 2007". The Toledo Edison Pledge Bonds due 2007 shall be executed, authenticated and delivered in accordance with the provisions of, and shall in all respects be subject to, all of the terms, conditions and covenants of the Indenture. SECTION 2. The Toledo Edison Pledge Bonds due 2007 shall be issued as fully registered Bonds only, without coupons, in the denominations of $1,000 or any multiple thereof. SECTION 3. The Toledo Edison Pledge Bonds due 2007 shall be dated the date of authentication, shall mature July 1, 2007, and shall bear interest from the time hereinafter provided at such rate per annum as shall cause the amount of interest payable on such Toledo Edison Pledge Bonds due 2007 then outstanding to equal the amount of interest payable on the same proportion of the Notes due 2007 (as defined below) then outstanding as those Toledo Edison Pledge Bonds due 2007 are to the aggregate principal amount of (i) the Toledo Edison Pledge Bonds due 2007 then outstanding and (ii) the Cleveland Electric Pledge Bonds due 2007 issued pursuant to (and as defined in) the Cleveland Electric Supplement (the "Cleveland Electric Pledge Bonds due 2007") then outstanding. The ratio of the Toledo Edison Pledge Bonds due 2007 outstanding at any time to the aggregate principal amount of the Cleveland Electric Pledge Bonds due 2007 then outstanding and the Toledo Edison Pledge Bonds due 2007 then outstanding is hereinafter referred to as the "Toledo Edison 2007 Ratio." The interest on the Toledo Edison Pledge Bonds due 2007 is payable on 31 26 January 1 and July 1 in each year starting on July 1, 1997 (each such date hereinafter called an "interest payment date") on and until maturity, or, in the case of any such Toledo Edison Pledge Bonds due 2007 duly called for redemption, on and until the redemption date, or in the case of any default by the Company in the payment of the principal due on any such Toledo Edison Pledge Bonds due 2007, until the Company's obligation with respect to the payment of the principal shall be discharged as provided in the Indenture. The amount of interest payable on the Toledo Edison Pledge Bonds due 2007 on any interest payment date, on the date of maturity and on any redemption date shall be computed on the same basis as the basis on which such interest is computed on the Secured Notes due 2007 provided for in the Note Indenture, which shall include the notes initially issued and any notes exchanged therefor pursuant to the terms of the Note Indenture (either or both of such series of notes, the "Notes due 2007"). The Toledo Edison Pledge Bonds due 2007 shall be payable as to principal and interest at the agency of the Company in the Borough of Manhattan, The City of New York, or, at the option of the registered owner, at the agency of the Company in the City of Toledo, State of Ohio, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts. Except as hereinafter provided, each Toledo Edison Pledge Bond due 2007 shall bear interest from the later of the date of initial authentication of the Toledo Edison Pledge Bonds due 2007 or the most recent date to which interest has been paid or duly provided for until the principal of such Toledo Edison Pledge Bond due 2007 is paid or duly provided for. The interest payable on any interest payment date shall be paid to the respective persons in whose names the Toledo Edison Pledge Bonds due 2007 shall be registered at the close of business on the Record Date next preceding such interest payment date, notwithstanding the cancellation of any such Bond upon any transfer or exchange thereof subsequent to such Record Date and prior to such interest payment date; provided, however, that, if and to the extent the Company shall default in the payment of the interest due on such interest payment date (other than an interest payment date that is a redemption date or maturity date), such defaulted interest shall be paid to the respective persons in whose names such outstanding Toledo Edison Pledge Bonds due 2007 are registered at the close of business on a date (the "Subsequent Record Date") not less than ten days nor more than 15 days next preceding the date of payment of such defaulted interest, such Subsequent Record Date to be established by the Company by notice given by mail by or on behalf of the Company to the registered 32 27 owners of Toledo Edison Pledge Bonds due 2007 not less than 10 days next preceding such Subsequent Record Date. If any interest payment date should fall on a day which is not a business day, then such interest payment date shall be the next preceding business day. The initial interest rate on the Secured Notes due 2007, and therefore on the Toledo Edison Pledge Bonds due 2007, is 7.13%. Under certain circumstances specified in a Registration Agreement dated as of June 11, 1997 among Cleveland Electric, the Company and the Purchasers (as defined therein) of the Secured Notes, the interest rate on the Secured Notes due 2007, and therefore on the Toledo Edison Pledge Bonds due 2007, will increase temporarily to 7.63%. The term "Record Date", with respect to any interest payment date, redemption date or date of maturity of any Toledo Edison Pledge Bond due 2007, shall have the same meaning as the term "Record Date" has with respect to those events for the Notes due 2007. SECTION 4. In the manner and subject to the limitations provided in the Indenture, Toledo Edison Pledge Bonds due 2007 may be transferred or may be exchanged for a like aggregate principal amount of Bonds of such series of other authorized denominations, in either case without charge, except for any tax or taxes or other governmental charges incident to such transfer or exchange, at the agency of the Company in the Borough of Manhattan, The City of New York. In the event less than all of the Toledo Edison Pledge Bonds due 2007 at the time outstanding are called for redemption, the Company shall not be required (a) to register any transfer or make any exchange of any such bond for a period of 15 days before the mailing of the notice of redemption of any such bonds, (b) to register any transfer or make any exchange of any such bond so called for redemption in its entirety or (c) to register any transfer or make any exchange of any portion of any such bond so called for redemption. Except as otherwise provided in Section 3 of this Article I with respect to the payment of interest, the Company, the agencies of the Company and the Trustee may deem and treat the person in whose name a Toledo Edison Pledge Bond due 2007 is registered as the absolute owner thereof for the purpose of receiving any payment and for all other purposes. SECTION 5. The Toledo Edison Pledge Bonds due 2007 shall be redeemable only to the extent provided in this Article I, subject to the provisions contained in Article V of the Indenture and the form of Toledo Edison Pledge Bond due 2007. SECTION 6. Subject to the applicable provisions of the Indenture, written notice of redemption of Toledo Edison Pledge Bonds due 2007 33 28 pursuant to this Supplemental Indenture shall be given by the Trustee by mailing to each registered owner of such Toledo Edison Pledge Bonds due 2007 to be redeemed a notice of such redemption, first class postage prepaid, at its last address as it shall appear upon the books of the Company for the registration and transfer of such Toledo Edison Pledge Bonds due 2007. Any notice of redemption shall be mailed at least 30 days, but no more than 60 days, prior to the redemption date. In the event of partial redemption of Toledo Edison Pledge Bonds due 2007, the Trustee shall select the Toledo Edison Pledge Bonds due 2007 or portions thereof to be redeemed, subject to the provisions of this Supplemental Indenture, in such manner as the Trustee shall deem appropriate and fair. SECTION 7. If and when any Notes due 2007 shall be purchased and surrendered to the Note Trustee for cancellation pursuant to the Note Indenture, or if and when the principal of any Notes due 2007 shall be paid pursuant to the Note Indenture, then there shall be deemed to have been paid a principal amount of the Toledo Edison Pledge Bonds due 2007 then outstanding which bears the same ratio to the aggregate principal amount of Toledo Edison Pledge Bonds due 2007 then outstanding as the principal amount of the Notes due 2007 so purchased or paid bears to the aggregate principal amount of the Notes due 2007 outstanding immediately before such purchase or payment; provided however, that such purchase or payment of Toledo Edison Pledge Bonds due 2007 shall be deemed to have been made only when and to the extent that notice of such purchase or payment of the principal amount of such Notes due 2007 shall have been given by the Company to the Trustee. The Trustee may rely upon any such notification by the Company that such purchase or payment of Notes due 2007 has been so made. SECTION 8. The Toledo Edison Pledge Bonds due 2007 shall be redeemed by the Company in whole at any time prior to maturity at a redemption price of 100% of the principal amount to be redeemed, plus accrued and unpaid interest to the redemption date, but only if the Trustee shall receive a written demand from the Note Trustee for redemption of all Toledo Edison Pledge Bonds due 2007 held by the Note Trustee stating that an "Event of Default" under the Note Indenture has occurred and is continuing, that payment of the principal of the Notes due 2007 has been accelerated and that the Note Trustee is waiving notice of redemption; provided, however, that the Toledo Edison Pledge Bonds due 2007 shall not be redeemed in the event that prior to such redemption (a) the Trustee shall have received a certificate of the Note Trustee (i) stating that there has been a waiver of such Event of Default and a rescission and annulment of such acceleration or (ii) withdrawing said written demand or (b) an event of default under Section 6.01 of Article VI of the Indenture shall 34 29 have occurred and be continuing, there has been a declaration of acceleration of the principal of the Toledo Edison Pledge Bonds due 2007. The redemption of the Toledo Edison Pledge Bonds due 2007 pursuant to this Section shall be made not more than 60 days after receipt of the written demand. SECTION 9. Any payment of interest on the Notes due 2007 shall be deemed to constitute payment of interest on the Toledo Edison Pledge Bonds due 2007 in an amount equal to the amount of interest paid on the Notes due 2007 multiplied by the Toledo Edison 2007 Ratio; provided, however, that such payment of interest shall be deemed to have been made only when and to the extent that notice of such payment of interest on such Notes due 2007 shall have been given by the Company to the Trustee. The Trustee may rely upon any such notification by the Company that such payment of interest has been so made. SECTION 10. Any Toledo Edison Pledge Bonds due 2007 at any time purchased or otherwise acquired by the Company shall be surrendered to the Trustee for cancellation and the Trustee shall forthwith cancel the same. SECTION 11. All Toledo Edison Pledge Bonds due 2007 deemed to have been redeemed or paid in full as provided in Section 7 of this Article I shall be surrendered to the Trustee for cancellation and the Trustee shall forthwith cancel the same. In the event that part of a Toledo Edison Pledge Bond due 2007 shall be deemed to have been redeemed or paid as provided in said Section 7, the registered owner may, at its option, surrender such Toledo Edison Pledge Bond due 2007 to the Trustee for cancellation, in which event the Trustee shall cancel such Toledo Edison Pledge Bond due 2007 and the Company shall execute and the Trustee shall authenticate and deliver to the registered owner one or more new fully registered Toledo Edison Pledge Bonds due 2007 in such authorized denominations as shall be specified by the registered owner in an aggregate principal amount equal to the unpaid balance of the principal amount of such surrendered Bond. SECTION 12. Toledo Edison Pledge Bonds due 2007 shall not be transferable unless the registered owner shall have first surrendered the same to the Trustee for notation thereon of all payments of principal deemed to have been made thereon under Section 7 of this Article I or for cancellation and execution, authentication and delivery of Toledo Edison Pledge Bonds due 2007 in an aggregate principal amount equal to the unpaid balance of the principal amount of such surrendered Toledo Edison Pledge Bonds due 2007 under Section 11 of this Article I. 35 30 SECTION 13. The aggregate principal amount of Toledo Edison Pledge Bonds due 2007 which may be authenticated and delivered hereunder shall not exceed $30 million, except as otherwise provided in the Indenture. SECTION 14. The form of the fully registered Toledo Edison Pledge Bonds due 2007, and of the Trustee's certificate of authentication thereon, shall be substantially as follows: [FORM OF FULLY REGISTERED BOND OF 2007 SERIES] THE TOLEDO EDISON COMPANY Incorporated under the laws of the State of Ohio FIRST MORTGAGE BOND, SERIES DUE 2007 Due July 1, 2007 No. $ THE TOLEDO EDISON COMPANY, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the "Company", which term shall include any successor corporation as defined in the Indenture hereinafter referred to), for value received, hereby promises to pay to , or registered assigns, the sum of Dollars ($ ) or the aggregate unpaid principal amount hereof (as shown on the Schedule of Payments hereon), whichever is less, on July 1, 2007, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, and to pay interest on the unpaid principal amount hereof in like coin or currency from the time hereinafter provided, at such rate per annum as shall cause the amount of interest payable hereon to equal the amount of interest payable on the same proportion of the Notes due 2007 (hereinafter defined) then outstanding as this Toledo Edison Pledge Bond due 2007 is to the aggregate principal amount of (i) the Toledo Edison Pledge Bonds due 2007 then outstanding and (ii) the Cleveland Electric Pledge Bonds due 2007 issued pursuant to (and as defined in) the Seventy-Fourth Supplemental Indenture to a Mortgage and Deed of Trust dated July 1, 1940 by and between The Cleveland Electric Illuminating Company and The Chase Manhattan Bank as Trustee (the "Cleveland Electric Pledge Bonds due 2007") then outstanding. The ratio of Toledo Edison Pledge Bonds due 2007 outstanding at any time to the aggregate principal amount of the Cleveland Electric Pledge Bonds due 2007 then outstanding and the Toledo Edison Pledge Bonds due 2007 then outstanding is hereinafter referred to as the "Toledo Edison 2007 Ratio." The interest on the Toledo Edison Pledge Bonds due 2007 is payable on January 1 and July 1 in each year starting on July 1, 1997 (each such date herein called an 36 31 "interest payment date"), and on and until the date of maturity of this Bond, or, if this Bond shall be duly called for redemption, on and until the redemption date, or, if the Company shall default in the payment of the principal amount of this Bond, until the Company's obligation with respect to the payment of such principal shall be discharged as provided in said Indenture. Except as hereinafter provided, this Bond shall bear interest from the date of initial authentication of this Bond or the most recent date to which interest has been paid or duly provided for until the principal of this Bond has been paid or duly provided for. Subject to certain exceptions provided in said Indenture, the interest payable on any interest payment date shall be paid to the person in whose name this Bond shall be registered at the close of business on the Record Date or, in the case of defaulted interest, on a day preceding the date of payment thereof established by notice to the registered owner of this Bond in the manner provided in the Supplemental Indenture (hereinafter defined). Principal of and interest on this Bond are payable at the agency of the Company in the Borough of Manhattan, The City of New York, or, at the option of the registered owner, at the agency of the Company in the City of Toledo, State of Ohio. This Bond is one of the duly authorized Bonds of the Company (herein called the "Bonds"), all issued and to be issued under and equally secured by a Mortgage and Deed of Trust, dated as of April 1, 1947 (herein called the "Original Indenture"), executed by the Company to The Chase National Bank of the City of New York, now succeeded by The Chase Manhattan Bank as Trustee (herein called the "Trustee"), and all indentures supplemental thereto (said Mortgage as so supplemented herein called the "Indenture") to which reference is hereby made for a description of the properties mortgaged and pledged, the nature and extent of the security, the rights of the registered owner or owners of the Bonds and of the Trustee in respect thereof, and the terms and conditions upon which the Bonds are, and are to be, secured. The Bonds may be issued in series, for various principal sums, may mature at different times, may bear interest at different rates and may otherwise vary as in the Indenture provided. This Bond is one of a series designated as the First Mortgage Bonds, Series due 2007 (herein called the "Toledo Edison Pledge Bonds due 2007") limited, except as otherwise provided in the Indenture, in aggregate principal amount to $30 million, issued under and secured by the Indenture and described in the Forty-sixth Supplemental Indenture dated as of June 15, 1997, between the Company and the Trustee (herein called the "Supplemental Indenture"). The Toledo Edison Pledge Bonds due 2007 have been delivered by the Company to The Chase Manhattan Bank, as trustee (hereinafter called the "Note Trustee"), pursuant to a Note Indenture, dated as of 37 32 June 13, 1997, among the Company, The Cleveland Electric Illuminating Company and the Note Trustee, under which the Note Trustee holds the Toledo Edison Pledge Bonds due 2007, together with the Cleveland Electric Pledge Bonds due 2007, as a portion of the security for the payment of principal of and interest on the Secured Notes issued under the Note Indenture. If and when any Secured Notes due 2007 issued under the Note Indenture (herein called the "Notes due 2007") are purchased and surrendered to the Note Trustee for cancellation pursuant to the Note Indenture, or the principal of any Notes due 2007 is paid pursuant to the Note Indenture, then there shall be deemed to be paid a principal amount of the Toledo Edison Pledge Bonds due 2007 then outstanding which bears the same ratio to the aggregate principal amount of Toledo Edison Pledge Bonds due 2007 outstanding immediately before such purchase or payment as the principal amount of the Notes due 2007 so purchased or paid bears to the aggregate principal amount of the Notes due 2007 outstanding immediately before such purchase or payment; provided, however, that such purchase or payment of Toledo Edison Pledge Bonds due 2007 is deemed to be made only when and to the extent that notice of such purchase or payment of such Notes due 2007 is given by the Company to the Trustee. Any payment of interest on the Notes due 2007 shall be deemed to constitute payment of interest on the Toledo Edison Pledge Bonds due 2007 in an amount equal to the amount of interest paid on the Notes due 2007 multipled by the Toledo Edison 2007 Ratio; provided, however, that such payment of interest is deemed to be made only when and to the extent that notice of such payment of interest on such Notes due 2007 is given by the Company to the Trustee. In the event that this Bond is deemed to be paid or redeemed in full, this Bond shall be surrendered to the Trustee for cancellation. In the event that this Bond is deemed to be paid or redeemed in part, this Bond may, at the option of the registered owner, be surrendered to the Trustee for cancellation, in which event the Trustee will cancel this Bond and the Company will execute and the Trustee will authenticate and deliver to the registered owner Toledo Edison Pledge Bonds due 2007 in authorized denominations in aggregate principal amount equal to the unpaid balance of the principal amount of this Bond. The Toledo Edison Pledge Bonds due 2007 shall be redeemed by the Company prior to maturity in whole at any time as provided in Section 8 of Article I of the Supplemental Indenture at a redemption price of 100% of the principal amount to be redeemed, plus accrued and unpaid interest to the redemption date. 38 33 Any redemption of the Toledo Edison Pledge Bonds due 2007 shall be made in accordance with the applicable provisions of Sections 5.02, 5.03, 5.04 and 5.05 of the Original Indenture, unless and to the extent waived in writing by the registered owner or owners of all Toledo Edison Pledge Bonds due 2007 and such waiver is filed with the Trustee. To the extent permitted by and as provided in the Indenture, the rights and obligations of the Company and of the holders of said Bonds and coupons (including those pertaining to any sinking or other fund) may be changed and modified, with the consent of the Company by the holders of at least 75% in aggregate principal amount of the Bonds then outstanding, such percentage being determined as provided in the Indenture; provided, however, that in case such changes and modifications affect one or more but less than all series of Bonds then outstanding, they shall be required to be adopted only by the affirmative vote of the holders of at least 75% in aggregate principal amount of outstanding Bonds of such one or more series so affected; and further provided, that without the consent of the holder hereof no such change or modification shall be made which will extend the time of payment of the principal of, or of the interest or premium, if any, on this Bond or reduce the principal amount hereof or the rate of interest or the premium, if any, hereon, or affect any other modification of the terms of payment of such principal or interest, or premium, if any, or will permit the creation of any lien ranking prior to or on a party with the lien of the Indenture on any of the mortgaged property, or will deprive the holder hereof of the benefit of a lien upon the mortgaged property for the security of this Bond, or will reduce the percentage of Bonds required for the adoption of changes or modifications as aforesaid. If an event of default, as defined in the Indenture, shall occur, the principal of all the Bonds at any such time outstanding under the Indenture may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the Bonds outstanding. Subject to the limitations provided in the Indenture and the Note Indenture, this Bond is transferable by the registered owner hereof, in person or by duly authorized attorney, on the books of the Company to be kept for that purpose at the agency of the Company in the Borough of Manhattan, The City of New York, upon surrender and cancellation of this Bond, and upon presentation of a duly executed written instrument of transfer, and thereupon a new fully registered bond or bonds of the same series, of the same aggregate principal amount and in authorized denominations will be issued to the transferee or trans- 39 34 ferees in exchange herefor; and this Bond, with or without others of the same series, may in like manner be exchanged for one or more new fully registered Toledo Edison Pledge Bonds due 2007 of other authorized denominations but of the same aggregate principal amount; all without charge except for any tax or taxes or other governmental charges incidental to such transfer or exchange and all subject to the terms and conditions set forth in the Indenture. In the event less than all of the Toledo Edison Pledge Bonds due 2007 at the time outstanding are called for redemption, the Company shall not be required (a) to register any transfer or make any exchange of any such Bond for a period of 15 days before the mailing of the notice of redemption of any such Bonds, (b) to register any transfer or make any exchange of any such Bond called for redemption in its entirety, or (c) to register any transfer or make any exchange of any portion of any such Bond which has been called for redemption. Except as otherwise provided herein with respect to the payment of interest, the Company, the agencies of the Company and the Trustee may deem and treat the person in whose name this Bond is registered as the absolute owner hereof for the purpose of receiving any payment and for all other purposes. No recourse shall be had for the payment of the principal of or the interest on this Bond, or for any claim based hereon or on the Indenture or any indenture supplemental thereto, against any incorporator, or against any stockholder, director or officer, past, present or future, of the Company, or of any predecessor or successor corporation, as such, either directly or through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability, whether at common law, in equity, by any constitution or statute or otherwise, of incorporators, stockholders, directors or officers being released by every owner hereof by the acceptance of this Bond and as part of the consideration for the issue hereof, and being likewise released by the terms of the Indenture. This Bond shall not be entitled to any benefit under the Indenture or any indenture supplemental thereto, or become valid or obligatory for any purpose, until the Trustee under the Indenture, or a successor trustee thereto under the Indenture, shall have signed the form of certificate of authentication endorsed hereon. 40 35 IN WITNESS WHEREOF, The Toledo Edison Company has caused this Bond to be signed in its name by its President or a Vice President (whose signature may be manual or a facsimile thereof) and its corporate seal (or a facsimile thereof) to be hereto affixed and attested by its Secretary or an Assistant Secretary (whose signature may be manual or a facsimile thereof). Dated: THE TOLEDO EDISON COMPANY By .................................................... Attest: ............................. Secretary [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This Bond is one of the Bonds of the series designated and described in the within-mentioned Indenture and Supplemental Indenture. THE CHASE MANHATTAN BANK, TRUSTEE By ........................................... AUTHORIZED OFFICER 41 36 [FORM OF SCHEDULE OF PAYMENTS] SCHEDULE OF PAYMENTS
AGENCY OF THE UNPAID COMPANY PRINCIPAL PRINCIPAL PREMIUM INTEREST MAKING AUTHORIZED DATE PAYMENT AMOUNT PAYMENT PAYMENT NOTATION OFFICER TITLE - --------- ------- ------- ------- ------- ------- ------- -------
[END OF FORM OF FULLY REGISTERED BOND] ARTICLE IV THE TRUSTEE SECTION 1. The Trustee accepts the trusts created by this Supplemental Indenture upon the terms and conditions in the Original Indenture and in this Supplemental Indenture set forth. The recitals in this Supplemental Indenture are made by the Company only and not by the Trustee. Each and every term and condition contained in Article 13 of the Original Indenture shall apply to this Supplemental Indenture with the same force and effect as if the same were herein set forth in fully, with such omissions, variations and modifications thereof as may be appropriate to make the same conform to this Supplemental Indenture. SECTION 2. The Company shall cause any agency of the Company, other than the Trustee, which it may appoint from time to time to act as such agency in respect of the Toledo Edison Pledge Bonds, to execute and deliver to the Trustee an instrument in which such agency shall: (a) Agree to keep and maintain, and furnish to the Trustee from time to time as reasonably requested by the Trustee, appropriate records of all transactions carried out by it as such agency and to furnish the Trustee such other information and reports as the Trustee may reasonably require; (b) Certify that it is eligible for appointment as such agency and agree to notify the Trustee promptly if it shall cease to be so eligible; and (c) Agree to indemnify the Trustee, in a manner satisfactory to the Trustee, against any loss, liability or expense incurred by, and defend any claim asserted against, the Trustee by reason of any acts or failures to act as such agency, except for any liability resulting from any action taken by it at the specific direction of the Trustee; 42 37 provided, however, that the Company, in lieu of causing any such agency to furnish such an instrument, may make such other arrangements with the Trustee in respect of any such agency as shall be satisfactory to the Trustee. SECTION 3. The Trustee shall advise the Company in writing of the notation or receipt of written notice of notation on or cancellation of any Toledo Edison Pledge Bond provided for in Sections 7, 8, 9, 10 and 11, Articles I, II and III of this Supplemental Indenture. SECTION 4. For purposes of the Original Indenture, the Supplemental Indenture and the Toledo Edison Pledge Bonds, the Trustee is permitted to assume for all purposes that the rates of interest on the Toledo Edison Pledge Bonds are the applicable initial interest rates expressed in this Supplemental Indenture until such time as the Company shall deliver an Officers' Certificate stating a change in the interest rates and the dates from which such rates shall be effective. Upon receipt of such an Officers' Certificate, the Trustee is permitted to assume for all purposes that the rates of interest on the Toledo Edison Pledge Bonds are as set forth in such Officers' Certificate until such time as such Officers' Certificate shall be superseded by a subsequent Officers' Certificate delivered pursuant to this Section 4, in which case, the Trustee is permitted to assume for all purposes that the rates of interest on the Toledo Edison Pledge Bonds are those set forth in the most current Officers' Certificate delivered pursuant to this Section 4. Absent the receipt by it of an Officers' Certificate specifying a change in interest rates pursuant to this Supplemental Indenture and the Toledo Edison Pledge Bonds, the Trustee shall not be charged with having had knowledge of such change in rates of interest regardless of any notice it may receive or knowledge it may have in its capacity as Note Trustee. ARTICLE V MISCELLANEOUS PROVISIONS SECTION 1. The Original Indenture, as heretofore supplemented, is in all respects ratified and confirmed, and the Original Indenture, this Supplemental Indenture and all other indentures supplemental to the Original Indenture shall be read, taken and construed as one and the same instrument. Neither the execution of this Supplemental Indenture nor anything herein contained shall be construed to impair the lien of the Indenture on any of the property subject thereto, and such lien shall remain in full force and effect as security for all bonds now outstanding or hereafter issued under the Indenture. All covenants and provisions of the Original Indenture, except as modified by this Supplemental Indenture and all other indentures supplemental to the Original 43 38 Indenture, shall continue in full force and effect for the respective periods of time therein specified, and this Supplemental Indenture shall form part of the Indenture. All terms defined in Article 1 of the Original Indenture shall, for all purposes of this Supplemental Indenture, have the meanings in said Article 1 specified, except as modified by this Supplemental Indenture and all other indentures supplemental to the Original Indenture and unless the context otherwise requires. SECTION 2. This Supplemental Indenture may be simultaneously executed in any number of counterparts, and all said counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. EXECUTION IN WITNESS WHEREOF, The Toledo Edison Company has caused its corporate name to be hereunto affixed, this instrument to be signed by its President or a Vice President and its corporate seal to be hereunto affixed and attested by its Secretary or an Assistant Secretary for and in its behalf and The Chase Manhattan Bank, as Trustee, in evidence of its acceptance of the trust hereby created, has caused its corporate name to be hereunto affixed, this instrument to be signed by its President or a Vice President and its corporate seal to be hereunto affixed and attested by its Secretary, an Assistant Secretary or a Corporate Trust Officer, for and in its behalf, all as of the day and year first above written. 44 R-1 This page contains information as to recording and filing which was not set forth in this Supplemental Indenture at the time of execution. This page is not a part of this Supplemental Indenture. RECORDING AND FILING DATA This Supplemental Indenture was filed for record and recorded in the record of mortgages in the offices of the Recorders of the following Counties:
COUNTY VOLUME PAGE FILED FOR RECORD - ---------------- --------------- ------------------------------------- Ohio Belmont Defiance Erie Fulton Henry Lake Monroe Ottawa Paulding June 17, 1997 Putnam Sandusky Seneca Williams Wood Pennsylvania Beaver MICROFICHE ---------- Lucas, Ohio June 17, 1997
An amendment to a previously filed financing statement and a counterpart of this Supplemental Indenture were filed in the office of the Secretary of the Commonwealth of Pennsylvania on June 17, 1997 under original or amendment file number 07851362, microfilm number 24581784, to comply with the filing requirements of the Pennsylvania enactment of the Uniform Commercial Code. EX-4.C 10 EXHIBIT 4(C) 1 Exhibit 4(c) ================================================================================ THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND THE TOLEDO EDISON COMPANY ----------------------------------- INDENTURE DATED AS OF JUNE 13, 1997 ----------------------------------- THE CHASE MANHATTAN BANK Trustee ================================================================================ 2 Certain Sections of this Indenture relating to Sections 310 through 318, inclusive, of the Trust Indenture Act of 1939: Trust Indenture Indenture Act Section Section Section 310(a) (1)........................................... 7.09 (a) (2).............................................. 7.09 (a) (3).............................................. Not Applicable (a) (4).............................................. Not Applicable (b).................................................. 7.08 ...................................... 7.10 311 (a).................................................. 7.13 (b).................................................. 7.13 312 (a).................................................. 8.01 ...................................... 8.02 (b).................................................. 8.02 (c).................................................. 8.02 313 (a).................................................. 8.03 (b).................................................. 8.03 (c).................................................. 8.03 (d).................................................. 8.03 314 (a).................................................. 8.04 (a) (4).............................................. 1.01 ...................................... 11.04 (b).................................................. 11.05 (c) (1).............................................. 1.02 (c) (2).............................................. 1.02 (c) (3).............................................. Not Applicable (d).................................................. 1.02 (e).................................................. 1.02 315 (a).................................................. 7.01 (b).................................................. 7.02 (c).................................................. 7.01 (d).................................................. 7.01 (e).................................................. 6.14 316 (a).................................................. 1.01 (a) (1) (A).......................................... 6.02 ...................................... 6.12 (a) (1) (B).......................................... 6.13 (a) (2).............................................. Not Applicable (b).................................................. 6.08 (c).................................................. 1.04 317 (a) (1).............................................. 6.03 (a) (2).............................................. 6.04 (b).................................................. 11.03 318 (a).................................................. 1.07 - ---------------- Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. 3 TABLE OF CONTENTS Page ----
ARTICLE I. DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.01. Definitions.............................................................................. 1 Act............................................................................................ 2 Affiliate...................................................................................... 2 AMBAC Indemnity................................................................................ 2 Authenticating Agent........................................................................... 2 Board of Directors............................................................................. 2 Board Resolutions.............................................................................. 2 Business Day................................................................................... 2 Cleveland Electric............................................................................. 2 Cleveland Electric First Mortgage.............................................................. 2 Cleveland Electric First Mortgage Bonds........................................................ 2 Commission..................................................................................... 2 Company........................................................................................ 2 Company Request or Company Order............................................................... 3 Corporate Trust Office......................................................................... 3 Corporation.................................................................................... 3 Covenant Defeasance............................................................................ 3 Defaulted Interest............................................................................. 3 Defeasance..................................................................................... 3 Depository..................................................................................... 3 Event of Default............................................................................... 3 Exchange Act................................................................................... 3 Expiration Date................................................................................ 3 Financial Guaranty Insurance Policy............................................................ 3 First Mortgage................................................................................. 3 First Mortgage Bonds........................................................................... 3 Global Security................................................................................ 3 Holder......................................................................................... 3 Indenture...................................................................................... 3 independent.................................................................................... 4 Insured Security............................................................................... 4 Interest....................................................................................... 4 Interest Payment Date.......................................................................... 4 Investment Company Act......................................................................... 4 Maturity....................................................................................... 4 Mortgage Trustees.............................................................................. 4 Notice of Default.............................................................................. 4 Officer's Certificate.......................................................................... 4 Opinion of Counsel............................................................................. 4 Original Issue Discount Security............................................................... 4
-1- 4 Outstanding.................................................................................... 4 Paying Agent................................................................................... 5 Person......................................................................................... 5 Place of Payment............................................................................... 5 Predecessor Security........................................................................... 5 Redemption Date................................................................................ 6 Redemption Price............................................................................... 6 Regular Record Date............................................................................ 6 Responsible Officer............................................................................ 6 Securities..................................................................................... 6 Securities Act................................................................................. 6 Security Register and Security Registrar....................................................... 6 Special Record Date............................................................................ 6 Stated Maturity................................................................................ 6 Subsidiary..................................................................................... 6 Toledo Edison.................................................................................. 6 Toledo Edison First Mortgage................................................................... 6 Toledo Edison First Mortgage Bonds............................................................. 7 Trust Indenture Act............................................................................ 7 Trustee........................................................................................ 7 U.S. Government Obligation..................................................................... 7 Vice President................................................................................. 7 SECTION 1.02. Compliance Certificates and Opinions..................................................... 7 SECTION 1.03. Form of Documents Delivered to Trustee................................................... 7 SECTION 1.04. Acts of Holders; Record Dates........................................................... 8 SECTION 1.05. Notices, Etc., to the Trustee and the Companies..........................................10 SECTION 1.06. Notice to Holders; Waiver............................................................... 10 SECTION 1.07. Conflict with Trust Indenture Act....................................................... 11 SECTION 1.08. Effect of Headings and Table of Contents ............................................... 11 SECTION 1.09. Successors and Assigns.................................................................. 11 SECTION 1.10. Separability Clause..................................................................... 11 SECTION 1.11. Benefits of Indenture................................................................... 11 SECTION 1.12. Governing Law........................................................................... 11 SECTION 1.13. Legal Holidays.......................................................................... 11 SECTION 1.14. Joint and Several Liability of the Companies............................................ 12 SECTION 1.15. Immunity of Incorporators, Stockholders, Officers and Directors..........................12 ARTICLE II. SECURITY FORMS SECTION 2.01. Forms Generally......................................................................... 12 SECTION 2.02. Reserved................................................................................ 12 SECTION 2.03. Reserved................................................................................ 12 SECTION 2.04. Form of Legend for Global Securities.................................................... 12 SECTION 2.05. Form of Trustee's Certificate of Authentication......................................... 13
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ARTICLE III. THE SECURITIES SECTION 3.01. Amount Unlimited; Issuable in Series.................................................... 13 SECTION 3.02. Denominations........................................................................... 15 SECTION 3.03. Execution, Authentication, Delivery and Dating.......................................... 15 SECTION 3.04. Temporary Securities.................................................................... 17 SECTION 3.05. Registration, Registration of Transfer and Exchange..................................... 18 SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities........................................ 19 SECTION 3.07. Payment of Interest; Interest Rights Preserved.......................................... 20 SECTION 3.08. Persons Deemed Owners................................................................... 20 SECTION 3.09. Cancellation............................................................................ 21 SECTION 3.10. Computation of Interest................................................................. 21 SECTION 3.11. CUSIP Numbers........................................................................... 21 SECTION 3.12. Payments on First Mortgage Bonds........................................................ 21 ARTICLE IV. FIRST MORTGAGE BONDS SECTION 4.01. Acceptance of First Mortgage Bonds...................................................... 21 SECTION 4.02. Terms of First Mortgage Bonds........................................................... 21 SECTION 4.03. First Mortgage Bonds as Security for Securities......................................... 22 SECTION 4.04. Reserved................................................................................ 22 SECTION 4.05. First Mortgage Bonds Held by the Trustee................................................ 22 SECTION 4.06. No Transfer of First Mortgage Bonds; Exception.......................................... 22 SECTION 4.07. Delivery to the Companies of all First Mortgage Bonds................................... 22 SECTION 4.08. Further Assurances...................................................................... 23 SECTION 4.09. Exchange and Surrender of First Mortgage Bonds.......................................... 23 ARTICLE V. SATISFACTION AND DISCHARGE SECTION 5.01. Satisfaction and Discharge of Indenture................................................. 24 SECTION 5.02. Application of Trust Money.............................................................. 25 SECTION 5.03 Paying Agent to Repay Moneys Held........................................................25 SECTION 5.04 Return of Unclaimed Moneys...............................................................25 ARTICLE VI. REMEDIES SECTION 6.01. Events of Default....................................................................... 25 SECTION 6.02. Acceleration of Maturity; Rescission and Annulment...................................... 27 SECTION 6.03. Collection of Indebtedness and Suits for Enforcement by Trustee......................... 28 SECTION 6.04. Trustee May File Proofs of Claim........................................................ 28 SECTION 6.05. Trustee May Enforce Claims Without Possession of Securities............................. 29 SECTION 6.06. Application of Money Collected...........................................................29
-3- 6 SECTION 6.07. Limitation on Suits..................................................................... 29 SECTION 6.08. Unconditional Right of Holders to Receive Principal, Premium and Interest.............................................................. 30 SECTION 6.09. Restoration of Rights and Remedies...................................................... 30 SECTION 6.10. Rights and Remedies Cumulative.......................................................... 30 SECTION 6.11. Delay or Omission Not Waiver............................................................ 30 SECTION 6.12. Control by Holders...................................................................... 30 SECTION 6.13. Waiver of Past Defaults................................................................. 31 SECTION 6.14. Undertaking for Costs................................................................... 31 SECTION 6.15. Waiver of Usury, Stay or Extension Laws................................................. 31 ARTICLE VII. THE TRUSTEE SECTION 7.01. Certain Duties and Responsibilities..................................................... 32 SECTION 7.02. Notice of Defaults...................................................................... 32 SECTION 7.03. Certain Rights of Trustee............................................................... 32 SECTION 7.04. Not Responsible for Recitals or Issuance of Securities ................................. 33 SECTION 7.05. May Hold Securities..................................................................... 34 SECTION 7.06. Money Held in Trust..................................................................... 34 SECTION 7.07. Compensation and Reimbursement ......................................................... 34 SECTION 7.08. Conflicting Interests................................................................... 34 SECTION 7.09. Corporate Trustee Required; Eligibility................................................. 35 SECTION 7.10. Resignation and Removal; Appointment of Successor....................................... 35 SECTION 7.11. Acceptance of Appointment by Successor.................................................. 36 SECTION 7.12. Merger, Conversion, Consolidation or Succession to Business............................. 37 SECTION 7.13. Preferential Collection of Claims Against Companies..................................... 37 SECTION 7.14. Appointment of Authenticating Agent..................................................... 37 ARTICLE VIII. HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANIES SECTION 8.01. Companies to Furnish Trustee Names and Addresses of Holders............................. 39 SECTION 8.02. Preservation of Information; Communications to Holders.................................. 39 SECTION 8.03. Reports by Trustee...................................................................... 39 SECTION 8.04. Reports by Companies.................................................................... 40 ARTICLE IX. CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 9.01. Companies May Consolidate, Etc., Only on Certain Terms.................................. 40 SECTION 9.02. Successor Substituted................................................................... 41
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ARTICLE X. AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 10.01. Without Consent of Holders............................................................. 41 SECTION 10.02. With Consent of Holders................................................................ 42 SECTION 10.03. Execution of Amendments or Supplements................................................. 43 SECTION 10.04. Effect of Amendments or Supplements.................................................... 43 SECTION 10.05. Conformity with Trust Indenture Act.................................................... 43 SECTION 10.06. Reference in Securities to Amendments or Supplements................................... 43 ARTICLE XI. COVENANTS SECTION 11.01. Payment of Principal, Premium and Interest............................................. 44 SECTION 11.02. Maintenance of Office or Agency........................................................ 44 SECTION 11.03. Money for Securities Payments to Be Held in Trust...................................... 44 SECTION 11.04. Statement by Officers as to Default.................................................... 45 SECTION 11.05. Recording, Filing, Etc.; Opinions of Counsel........................................... 45 SECTION 11.06. Waiver of Certain Covenants............................................................ 46 SECTION 11.07. Calculation of Original Issue Discount................................................. 46 ARTICLE XII. REDEMPTION OF SECURITIES SECTION 12.01. Applicability of Article............................................................... 46 SECTION 12.02. Election to Redeem; Notice to Trustee.................................................. 46 SECTION 12.03. Selection by Trustee of Securities to Be Redeemed...................................... 47 SECTION 12.04. Notice of Redemption................................................................... 47 SECTION 12.05. Securities Payable on Redemption Date; Deposit of Redemption Price............................................................ 48 SECTION 12.06. Reserved .............................................................................. 48 SECTION 12.07. Securities Redeemed in Part............................................................ 48 ARTICLE XIII. SINKING FUNDS SECTION 13.01. Applicability of Article............................................................... 49 SECTION 13.02. Satisfaction of Sinking Fund Payments with Securities.................................. 49 SECTION 13.03. Redemption of Securities for Sinking Fund.............................................. 49
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ARTICLE XIV. DEFEASANCE AND COVENANT DEFEASANCE SECTION 14.01. Option of the Companies to Effect Defeasance or Covenant Defeasance.............................................................. 50 SECTION 14.02. Defeasance and Discharge............................................................... 50 SECTION 14.03. Covenant Defeasance.................................................................... 50 SECTION 14.04. Conditions to Defeasance or Covenant Defeasance........................................ 51 SECTION 14.05. Deposited Money and U.S. Government Obligations to Be Held in Trust; Miscellaneous Provisions.................................................. 52 SECTION 14.06. Reinstatement.......................................................................... 53 SIGNATURES.............................................................................................S-1
-6- 9 INDENTURE, dated as of June 13, 1997, among THE CLEVELAND ELECTRIC ILLUMINATING COMPANY, a corporation duly organized and existing under the laws of the State of Ohio (herein called "CLEVELAND ELECTRIC"), having its principal office at 6200 Oak Tree Boulevard, Independence, Ohio 44131, THE TOLEDO EDISON COMPANY, a corporation duly organized and existing under the laws of the State of Ohio (herein called "TOLEDO EDISON"), having its principal office at 300 Madison Avenue, Toledo, Ohio 43652, and THE CHASE MANHATTAN BANK, a New York banking corporation, as Trustee (herein called the "TRUSTEE"). RECITALS OF THE COMPANY The Companies (as hereinafter defined) have duly authorized the execution and delivery of this Indenture to provide for the issuance from time to time of bonds, debentures, notes or other evidences of indebtedness (herein called the "SECURITIES"), to be issued in one or more series as in this Indenture provided. Subject to the provisions of SECTION 4.03, each or either Company may issue one or more series of First Mortgage Bonds (as hereinafter defined) and deliver such First Mortgage Bonds to the Trustee to hold in trust for the benefit of the respective Holders from time to time of the related series of Securities, or require the Trustee to deliver to the applicable Company for cancellation any and all First Mortgage Bonds held by the Trustee. All things necessary to make this Indenture a valid agreement of the Companies in accordance with its terms, have been done. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually agreed, for the benefit of all Holders of the Securities or of series thereof, as follows: ARTICLE I. DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.01. DEFINITIONS. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (1) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (2) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (3) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted in the United States of America; 10 (4) unless the context otherwise requires, any reference to an "ARTICLE" or a "SECTION" refers to an Article or a Section, as the case may be, of this Indenture; and (5) the words "HEREIN", "HEREOF" and "HEREUNDER" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. "ACT", when used with respect to any Holder, has the meaning specified in SECTION 1.04. "AFFILIATE" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "CONTROL" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "CONTROLLING" and "CONTROLLED" have meanings correlative to the foregoing. "AMBAC INDEMNITY" means AMBAC Indemnity Corporation, a Wisconsin-domiciled stock insurance company. "AUTHENTICATING AGENT" means any Person authorized by the Trustee pursuant to SECTION 7.14 to act on behalf of the Trustee to authenticate Securities of one or more series. "BOARD OF DIRECTORS" means the board of directors of either Company or any duly authorized committee of either such board. "BOARD RESOLUTIONS" mean copies of resolutions certified by the Secretary or an Assistant Secretary or Associate Secretary of either Company to have been duly adopted by the Board of Directors of that Company and to be in full force and effect on the date of such certification, and delivered to the Trustee. "BUSINESS DAY", when used with respect to any Place of Payment, means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which banking institutions in that Place of Payment are authorized or obligated by law or executive order to close. "CLEVELAND ELECTRIC" means the Person named as "CLEVELAND ELECTRIC" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "CLEVELAND ELECTRIC" shall mean such successor Person. "CLEVELAND ELECTRIC FIRST MORTGAGE" means the Mortgage and Deed of Trust between Cleveland Electric and Guaranty Trust Company of New York (now The Chase Manhattan Bank as successor trustee), as trustee, dated as of July 1, 1940, as supplemented and amended from time to time, and including without limitation, the Seventy-Fourth Supplemental Indenture thereto to be dated June 15, 1997. "CLEVELAND ELECTRIC FIRST MORTGAGE BONDS" mean any series of first mortgage bonds issued by Cleveland Electric under the Cleveland Electric First Mortgage and delivered to the Trustee pursuant to Section 4.01 hereof. "COMMISSION" means the Securities and Exchange Commission, from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this instrument such -2- 11 Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "COMPANY" means each of Cleveland Electric and Toledo Edison and "COMPANIES" means, collectively, Cleveland Electric and Toledo Edison. "COMPANY REQUEST" or "COMPANY ORDER" means a written request or order signed in the name of either Company by one of its Chairman of the Board, its President, its Vice President, its Chief Financial Officer, its Treasurer, its Controller, its Secretary, or an Assistant Secretary, and delivered to the Trustee. "CORPORATE TRUST OFFICE" means the office of the Trustee in New York at which at any particular time its corporate trust business shall be principally administered, which office at the date hereof is located at 450 W. 33rd Street, New York, New York 10001. "CORPORATION" means a corporation, association, company, joint-stock company or business trust. "COVENANT DEFEASANCE" has the meaning specified in SECTION 14.03. "DEFAULTED INTEREST" has the meaning specified in SECTION 3.07. "DEFEASANCE" has the meaning specified in SECTION 14.02. "DEPOSITORY" means, with respect to Securities of any series issuable in whole or in part in the form of one or more Global Securities, a clearing agency registered under the Exchange Act that is designated to act as Depository for such Securities as contemplated by SECTION 3.01. "EVENT OF DEFAULT" has the meaning specified in SECTION 6.01. "EXCHANGE ACT" means the Securities Exchange Act of 1934 and any statute successor thereto, in each case as amended from time to time. "EXPIRATION DATE" has the meaning specified in SECTION 1.04. "FINANCIAL GUARANTY INSURANCE POLICY" shall mean the financial guaranty insurance policy issued by AMBAC Indemnity insuring the payment when due of the principal of and interest on any series of Securities issued hereunder as provided therein. "FIRST MORTGAGE" means each of the Cleveland Electric First Mortgage and the Toledo Edison First Mortgage and "FIRST MORTGAGES" mean, collectively, the Cleveland Electric First Mortgage and the Toledo Edison First Mortgage. "FIRST MORTGAGE BONDS" mean Cleveland Electric First Mortgage Bonds or Toledo Edison First Mortgage Bonds delivered to the Trustee pursuant to SECTION 4.01. "GLOBAL SECURITY" means a Security that evidences all or part of the Securities of any series and bears the legend described in SECTION 2.04 (or such legend as may be specified as contemplated by SECTION 3.01 for such Securities), that is delivered to a Depository and that shall be registered in the name of a Depository or nominee. -3- 12 "HOLDER" means a Person in whose name a Security is registered in the Security Register. "INDENTURE" means this instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof, including, for all purposes of this instrument and any such supplemental indenture, the provisions of the Trust Indenture Act that are deemed to be a part of and govern this instrument and any such supplemental indenture, respectively. The term "Indenture" shall also include the terms of particular series of Securities established as contemplated by SECTION 3.01. "INDEPENDENT", when applied to any accountant, appraiser, or other expert, shall mean such a Person who is in fact independent, selected by either Company and approved by the Trustee in the exercise of reasonable care. "INSURED SECURITY" means a Security that is insured by a Financial Guaranty Insurance Policy issued by AMBAC Indemnity. "INTEREST", when used with respect to an Original Issue Discount Security that by its terms bears interest only after Maturity, means interest payable after Maturity. "INTEREST PAYMENT DATE", when used with respect to any Security, means the Stated Maturity of an installment of interest on such Security. "INVESTMENT COMPANY ACT" means the Investment Company Act of 1940 and any statute successor thereto, in each case as amended from time to time. "MATURITY", when used with respect to any Security, means the date on which the principal of such Security or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "MORTGAGE TRUSTEES" mean the Persons serving as trustee at the time under the First Mortgages. "MORTGAGE TRUSTEE" means either of the Mortgage Trustees. "NOTICE OF DEFAULT" means a written notice of the kind specified in SECTION 6.01(4). "OFFICER'S CERTIFICATE" means a certificate signed by one of the Chairman of the Board, the President, the Vice President, the Chief Financial Officer, the Treasurer, the Controller, the Secretary or an Assistant Secretary, of either Company, and delivered to the Trustee. The officer of either Company signing an Officer's Certificate given pursuant to SECTION 11.04 shall be the principal executive, financial or accounting officer of that Company. "OPINION OF COUNSEL" means a written opinion of counsel, who may be counsel for the Companies or other counsel, who shall be reasonably acceptable to the Trustee. "ORIGINAL ISSUE DISCOUNT SECURITY" means any Security that provides for an amount less than the principal amount thereof to be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to SECTION 6.02. "OUTSTANDING", when used with respect to Securities, means, as of the date of -4- 13 determination, all Securities theretofore authenticated and delivered under this Indenture, except: (1) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (2) Securities for whose payment or redemption funds in the necessary amount have been theretofore deposited with the Trustee or any Paying Agent (other than either Company) in trust or set aside and segregated in trust by the Companies (if either Company shall act as Paying Agent for the Companies) for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; (3) Securities as to which Defeasance has been effected pursuant to SECTION 14.02; and (4) Securities that have been replaced pursuant to SECTION 3.06 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Companies; provided, however, that in determining whether the Holders of the requisite principal amount of the Outstanding Securities have given, made or taken any request, demand, authorization, direction, notice, consent, waiver or other action hereunder as of any date, (A) the principal amount of an Original Issue Discount Security that shall be deemed to be Outstanding shall be the amount of the principal thereof that would be due and payable as of such date upon acceleration of the Maturity thereof to such date pursuant to SECTION 6.02, (B) if, as of such date, the principal amount payable at the Stated Maturity of a Security is not determinable, the principal amount of such Security that shall be deemed to be Outstanding shall be the amount as specified or determined as contemplated by SECTION 3.01, (C) the principal amount of a Security denominated in one or more foreign currencies or currency units that shall be deemed to be Outstanding shall be the U.S. dollar equivalent, determined as of such date in the manner provided as contemplated by SECTION 3.01, of the principal amount of such Security (or, in the case of a Security described in Clause (A) or (B) above, of the amount determined as provided in such Clause), and (D) Securities owned by either Company or any other obligor upon the Securities or any Affiliate of either Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent, waiver or other action, only Securities that the Trustee actually knows to be so owned shall be so disregarded. Securities so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not either Company or any other obligor upon the Securities or any Affiliate of either Company or of such other obligor. In the event that the principal and/or interest due on any Security shall be paid by AMBAC Indemnity pursuant to a Financial Guaranty Insurance Policy, such Security shall remain Outstanding for all purposes until the Companies have reimbursed AMBAC Indemnity for such principal and/or interest payments; and the Trustee shall be entitled to assume that any such Security is Outstanding until it has received an Officer's Certificate from the Companies stating that the Companies have reimbursed AMBAC Indemnity for the principal and/or interest payments made by AMBAC Indemnity for such Security. "PAYING AGENT" means any Person authorized by the Companies to pay the principal of or any premium or interest on any Securities on behalf of the Companies. -5- 14 "PERSON" means any individual, corporation, partnership, limited liability company, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof. "PLACE OF PAYMENT", when used with respect to the Securities of any series, means the place or places where the principal of and any premium and interest on the Securities of that series are payable as specified as contemplated by SECTION 3.01. "PREDECESSOR SECURITY" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under SECTION 3.06 in exchange for or in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security. "REDEMPTION DATE", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "REDEMPTION PRICE", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "REGULAR RECORD DATE" means, unless otherwise specified pursuant to SECTION 3.01, the fifteenth day of the calendar month immediately preceding an Interest Payment Date. "RESPONSIBLE OFFICER", when used with respect to the Trustee, means the chairman or any vice-chairman of the board of directors, the chairman or any vice-chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any vice president, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any senior trust officer, any trust officer or assistant trust officer, the controller or any assistant controller or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "SECURITIES" has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture. "SECURITIES ACT" means the Securities Act of 1933 and any statute successor thereto, in each case as amended from time to time. "SECURITY REGISTER" and "SECURITY REGISTRAR" have the respective meanings specified in SECTION 3.05. "SPECIAL RECORD DATE" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to SECTION 3.07. "STATED MATURITY", when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable. "SUBSIDIARY" means a corporation more than 50% of the outstanding voting stock of -6- 15 which is owned, directly or indirectly, by either Company or by one or more other Subsidiaries, or by either Company and one or more other Subsidiaries. For the purposes of this definition, "VOTING STOCK" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "TOLEDO EDISON" means the Person named as "TOLEDO EDISON" in the first paragraph of this instrument until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "TOLEDO EDISON" shall mean such successor Person. "TOLEDO EDISON FIRST MORTGAGE" means the Indenture of Mortgage and Deed of Trust between Toledo Edison and The Chase National Bank of the City of New York (now The Chase Manhattan Bank as successor trustee), as trustee, dated as of April 1, 1947, as supplemented and amended from time to time, and including without limitation, the Forty-Sixth Supplemental Indenture thereto to be dated as of June 15, 1997. "TOLEDO EDISON FIRST MORTGAGE BONDS" mean any series of first mortgage bonds issued by Toledo Edison under the Toledo Edison First Mortgage and delivered to the Trustee pursuant to Section 4.01 hereof. "TRUST INDENTURE ACT" means the Trust Indenture Act of 1939 as in force at the date as of which this instrument was executed; provided, however, that in the event the Trust Indenture Act of 1939 is amended after such date, "TRUST INDENTURE ACT" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "TRUSTEE" means the Person named as the "TRUSTEE" in the first paragraph of this instrument until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "TRUSTEE" shall mean or include each Person who is then a Trustee hereunder, and if at any time there is more than one such Person, "TRUSTEE" as used with respect to the Securities of any series shall mean the Trustee with respect to Securities of that series. "U.S. GOVERNMENT OBLIGATION" has the meaning specified in SECTION 14.04. "VICE PRESIDENT", when used with respect to the Companies or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". SECTION 1.02. COMPLIANCE CERTIFICATES AND OPINIONS. Upon any application or request by the Companies to the Trustee to take any action under any provision of this Indenture, the Companies shall furnish to the Trustee such certificates and opinions as may be required under the Trust Indenture Act. Each such certificate or opinion shall be given in the form of an Officer's Certificate, if to be given by officers of the Companies, or an Opinion of Counsel, if to be given by counsel, and shall comply with the requirements of the Trust Indenture Act and any other requirements set forth in this Indenture. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include, (1) a statement that each individual signing such certificate or opinion has read such -7- 16 covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 1.03. FORM OF DOCUMENTS DELIVERED TO TRUSTEE. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of each Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of each Company stating that the information with respect to such factual matters is in the possession of either Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Any Opinion of Counsel delivered hereunder may contain standard exceptions and qualifications reasonably satisfactory to the Trustee. Any certificate or opinion of an officer of either Company, or of counsel, may be based, insofar as it relates to accounting matters, upon a certificate or opinion of, or representations by, an independent public accountant or firm of accountants, unless such officer or counsel, as the case may be, knows that the certificate or opinions or representations with respect to the accounting matters upon which the certificate or opinion of such officer or counsel may be based are erroneous, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. -8- 17 SECTION 1.04. ACTS OF HOLDERS; RECORD DATES. Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agent duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Companies. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "ACT" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Companies, if made in the manner provided in this Section. The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which the Trustee deems sufficient. All of the Holders of Outstanding Securities of each series will give, make or take any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture together as one class and none of the Holders of Outstanding Securities of any such series will have the right to act as a class separate from any other Holder within the same series on any matter. The ownership of Securities shall be proved by the Security Register. Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Companies in reliance thereon, whether or not notation of such action is made upon such Security. Notwithstanding anything to the contrary herein, AMBAC Indemnity shall be considered the Holder of any Insured Security for the purposes of any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by the Holder of such Insured Security. The Companies may set any day that is after the day on which the record date is set as a record date for the purpose of determining the Holders of Outstanding Securities of any series entitled to give, make or take any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders of Securities of such series, provided that the Companies may not set a record date for, and the provisions of this paragraph shall not apply with respect to, the giving or making of any notice, declaration, request or direction referred to in the next paragraph. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities of the relevant series on such record date, and no other Holders, shall be entitled to -9- 18 take or revoke the relevant action, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities of such series on such record date. Nothing in this paragraph shall be construed to prevent the Companies from setting a new record date that is after the day on which the new record date is set for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be canceled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities of the relevant series on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Companies, at their own expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Trustee in writing and to each Holder of Securities of the relevant series in the manner set forth in SECTION 1.06. The Trustee may set any day that is after the day on which the record date is set as the record date for the purpose of determining the Holders of Outstanding Securities of any series entitled to join in the giving or making of (i) any Notice of Default, (ii) any declaration of acceleration referred to in SECTION 6.02, (iii) any request to institute proceedings referred to in SECTION 6.07(2) or (iv) any direction referred to in SECTION 6.12 or SECTION 6.13, in each case with respect to Securities of such series. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities of such series on such record date, and no other Holders, shall be entitled to join in such notice, declaration, request or direction or to revoke the same, whether or not such Holders remain Holders after such record date; provided that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities of such series on such record date. Nothing in this paragraph shall be construed to prevent the Trustee from setting a new record date that is after the day on which the new record date is set for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be canceled and of no effect), and nothing in this paragraph shall be construed to render ineffective any action taken by Holders of the requisite principal amount of Outstanding Securities of the relevant series on the date such action is taken. Promptly after any record date is set pursuant to this paragraph, the Trustee, at the expense of the Companies, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Companies in writing and to each Holder of Securities of the relevant series in the manner set forth in SECTION 1.06. With respect to any record date set pursuant to this Section, the party hereto that sets such record date may designate any day after that record date as the "EXPIRATION DATE" and from time to time may change the Expiration Date to any earlier or later day that is after that record date; provided that no such change shall be effective unless notice of the proposed new Expiration Date is given to the other parties hereto in writing, and to each Holder of Securities of the relevant series in the manner set forth in SECTION 1.06, on or prior to the existing Expiration Date. If an Expiration Date is not designated with respect to any record date set pursuant to this Section, the party hereto which set such record date shall be deemed to have initially designated the 180th day after such record date as the Expiration Date with respect thereto, subject to its right to change the Expiration Date as provided in this paragraph. Notwithstanding the foregoing, no Expiration Date shall be later than the 180th day after the applicable record date. Without limiting the foregoing, a Holder entitled hereunder to take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such principal amount. -10- 19 SECTION 1.05. NOTICES, ETC., TO THE TRUSTEE AND THE COMPANIES. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Companies shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at 450 W. 33rd Street, New York, New York 10001, Attention: Corporate Trust Administration, or (2) the Companies by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Company addressed to it at the address of its principal office specified in the first paragraph of this instrument or at any other address previously furnished in writing to the Trustee by the Companies, or (3) AMBAC Indemnity by the Trustee or by the Companies shall be sufficient for every purpose hereunder if in writing and mailed, first-class postage prepaid, to AMBAC Indemnity at One State Street Plaza, New York, New York 10004. SECTION 1.06. NOTICE TO HOLDERS; WAIVER. Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice. Where this Indenture provides for notice to Holders of any event, such notice shall also be given to AMBAC Indemnity for so long as any Financial Guaranty Insurance is in effect with respect to any Securities issued hereunder. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice by mail, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. -11- 20 SECTION 1.07. CONFLICT WITH TRUST INDENTURE ACT. If any provision hereof limits, qualifies or conflicts with a provision of the Trust Indenture Act which is required under such Act to be a part of and govern this Indenture, the latter provision shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act which may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or to be excluded, as the case may be. SECTION 1.08. EFFECT OF HEADINGS AND TABLE OF CONTENTS. The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 1.09. SUCCESSORS AND ASSIGNS. All covenants and agreements in this Indenture by the Companies shall bind their successors and assigns, whether so expressed or not. SECTION 1.10. SEPARABILITY CLAUSE. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 1.11. BENEFITS OF INDENTURE. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 1.12. GOVERNING LAW. This Indenture and the Securities shall be governed by and construed in accordance with the law of the State of New York, without regard to conflicts of laws or principles thereof. SECTION 1.13. LEGAL HOLIDAYS. In any case when any Interest Payment Date, Redemption Date or Stated Maturity of any Security shall not be a Business Day at any Place of Payment, then (notwithstanding any other provision of this Indenture or of the Securities (other than a provision of any Security that specifically states that such provision shall apply in lieu of this Section)) payment of interest or principal (and premium, if any) need not be made at such Place of Payment on such date, but may be made on the next preceding Business Day at such Place of Payment with the same force and effect as if made on the Interest Payment Date or Redemption Date or at the Stated Maturity. -12- 21 SECTION 1.14. JOINT AND SEVERAL LIABILITY OF THE COMPANIES. Each Company hereby acknowledges and agrees that the Securities of each series are joint and several obligations of the Companies in accordance with the terms thereof and this Indenture and that it and the other Company shall be jointly and severally liable for all of the obligations of either Company arising under this Indenture. SECTION 1.15. IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS. No recourse for the payment of the principal of or any premium or interest on any Security, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Companies, contained in this Indenture or in any supplemental indenture, or in any Security, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, officer or director, as such, past, present or future, of the Companies or any successor corporation, either directly or through the Companies or any successor corporation(s), whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Securities. ARTICLE II. SECURITY FORMS SECTION 2.01. FORMS GENERALLY. The Securities of each series shall be in substantially such form as shall be established by or pursuant to Board Resolutions or in one or more indentures supplemental hereto, in each case with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or Depository therefor or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution thereof. If the form of Securities of any series is established by action taken pursuant to Board Resolutions, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of each Company and delivered to the Trustee at or prior to the delivery of the Company Order contemplated by SECTION 3.03 for the authentication and delivery of such Securities. The definitive Securities shall be printed, lithographed or engraved on steel engraved borders or may be produced in any other manner, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities. SECTION 2.02. RESERVED. SECTION 2.03. RESERVED. -13- 22 SECTION 2.04. FORM OF LEGEND FOR GLOBAL SECURITIES. Unless otherwise specified as contemplated by SECTION 3.01 for the Securities evidenced thereby, every Global Security authenticated and delivered hereunder shall bear a legend as shall be established in one or more indentures supplemental hereto. SECTION 2.05. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION. The Trustee's certificate of authentication shall be in substantially the following form: TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. Dated: THE CHASE MANHATTAN BANK, As Trustee By -------------------------------- Authorized Signatory ARTICLE III. THE SECURITIES SECTION 3.01. AMOUNT UNLIMITED; ISSUABLE IN SERIES. The aggregate principal amount of Securities that may be authenticated and delivered under this Indenture is unlimited. Notwithstanding the foregoing, no Company shall issue any Securities, if, after giving effect to such issuance the aggregate principal amount of outstanding Securities would exceed the aggregate principal amount of the outstanding Cleveland Electric First Mortgage Bonds and Toledo Edison First Mortgage Bonds. The Securities may be issued in one or more series. There shall be established by or pursuant to Board Resolutions and, subject to SECTION 3.03, set forth or determined in the manner provided, or established in one or more indentures supplemental hereto, prior to the issuance of Securities of any series, (1) the title of the Securities of the series (which shall distinguish the Securities of the series from Securities of any other series); (2) any limit upon the aggregate principal amount of the Securities of the series that may be authenticated and delivered under this Indenture (except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities of the series pursuant to SECTION 3.04, 3.05, 3.06, 10.06 or 12.07 and except for any Securities that, -14- 23 pursuant to SECTION 3.03, are deemed never to have been authenticated and delivered hereunder); (3) the Person to whom interest on a Security of the series shall be payable, if other than the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest; (4) the date or dates on which the principal of any Securities of the series is payable; (5) the rate or rates at which any Securities of the series shall bear interest, the date or dates from which such interest shall accrue, the Interest Payment Dates on which interest shall be payable, the manner (if any) of determination of such Interest Payment Dates and the Regular Record Date for such interest payable on any Interest Payment Date; (6) the right, if any, to extend the interest payment periods and the duration of such extension; (7) the place or places where the principal of and any premium and interest on any Securities of the series shall be payable; (8) the period or periods within which, the price or prices at which and the terms and conditions upon which any Securities of the series may be redeemed, in whole or in part, at the option of the Companies and, if other than by Board Resolutions, the manner in which any election by the Companies to redeem the Securities shall be evidenced; (9) the obligation, if any, of the Companies to redeem or purchase any Securities of the series pursuant to any sinking fund or analogous provisions or at the option of the Holder thereof and the period or periods within which, the price or prices at which and the terms and conditions upon which any Securities of the series shall be redeemed or purchased, in whole or in part, pursuant to such obligation; (10) if other than denominations of $1,000 and any integral multiple thereof, the denominations in which any Securities of the series shall be issuable; (11) if the amount of principal of or any premium or interest on any Securities of the series may be determined with reference to an index or pursuant to a formula, the manner in which such amounts shall be determined; (12) if other than the currency of the United States of America, the currency, currencies or currency units in which the principal of or any premium or interest on any Securities of the series shall be payable and the manner of determining the equivalent thereof in the currency of the United States of America for any purpose, including for purposes of the definition of "Outstanding" in SECTION 1.01; (13) if the principal of or any premium or interest on any Securities of the series is to be payable, at the election of the Companies or the Holder thereof, in one or more currencies or currency units other than that or those in which such Securities are stated to be payable, the currency, currencies or currency units in which the principal of or any premium or interest on such Securities as to which such election is made shall be payable, the periods within which and the terms and conditions upon which such election is to be made and the amount so payable (or the manner in which such amount shall be determined); -15- 24 (14) if other than the entire principal amount thereof, the portion of the principal amount of any Securities of the series which shall be payable upon declaration of acceleration of the Maturity thereof pursuant to SECTION 6.02; (15) if the principal amount payable at the Stated Maturity of any Securities of the series will not be determinable as of any one or more dates prior to the Stated Maturity, the amount which shall be deemed to be the principal amount of such Securities as of any such date for any purpose thereunder or hereunder, including the principal amount thereof which shall be due and payable upon any Maturity other than the Stated Maturity or which shall be deemed to be Outstanding as of any date prior to the Stated Maturity (or, in any such case, the manner in which such amount deemed to be the principal amount shall be determined); (16) if applicable, that the Securities of the series, in whole or any specified part, shall be defeasible pursuant to SECTION 14.02 or SECTION 14.03 or both such Sections and, if other than by Board Resolutions, the manner in which any election by the Companies to defease such Securities shall be evidenced; (17) if applicable, that any Securities of the series shall be issuable in whole or in part in the form of one or more Global Securities and, in such case, the respective Depositories for such Global Securities, the form of any legend or legends which shall be borne by any such Global Security in addition to or in lieu of that set forth in SECTION 2.04 and any circumstances in addition to or in lieu of those set forth in Clause (2) of the last paragraph of SECTION 3.05 in which any such Global Security may be exchanged in whole or in part for Securities registered, and any transfer of such Global Security in whole or in part may be registered, in the name or names of Persons other than the Depository for such Global Security or a nominee thereof; (18) the designation of the series of First Mortgage Bonds to be delivered to the Trustee in connection with the issuance of such series of Securities pursuant to SECTION 4.01; (19) any addition to or change in the Events of Default that applies to any Securities of the series and any change in the right of the Trustee or the requisite Holders of such Securities to declare the principal amount thereof due and payable pursuant to SECTION 6.02; (20) any addition to or change in the covenants set forth in ARTICLE XI that applies to Securities of the series; and (21) any other terms of the series (which terms shall not be inconsistent with the provisions of this Indenture, except as permitted by SECTION 10.01(5)). All Securities of any one series shall be substantially identical except as to denomination and except as may otherwise be provided in or pursuant to the Board Resolutions referred to above and (subject to SECTION 3.03) set forth, or determined in the manner provided in any such indenture supplemental hereto. If any of the terms of the series are established by action taken pursuant to Board Resolutions, a copy of an appropriate record of such action shall be certified by the Secretary or an Assistant Secretary of each Company and delivered to the Trustee at or prior to the delivery of the Company Order for the authentication and delivery of the series of Securities. -16- 25 SECTION 3.02. DENOMINATIONS. The Securities of each series shall be issuable only in fully registered form without coupons and only in such denominations as shall be specified as contemplated by SECTION 3.01. In the absence of any such specified denomination with respect to the Securities of any series, the Securities of such series shall be issuable in denominations of $1,000 and any integral multiple thereof. SECTION 3.03. EXECUTION, AUTHENTICATION, DELIVERY AND DATING. Unless otherwise provided as contemplated by SECTION 3.01 with respect to any series of Securities, the Securities shall be executed on behalf of each Company by its Chairman of the Board, its President or one of its Vice Presidents. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of each Company shall bind each Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Companies may deliver Securities of any series executed by the Companies to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and First Mortgage Bonds conforming to the requirements of SECTIONS 4.01 and 4.02, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. In authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and (subject to SECTION 7.01) shall be fully protected in relying upon, (1) First Mortgage Bonds meeting the requirements of SECTION 4.02, and (2) an Opinion of Counsel stating, (A) if the form of such Securities has been established by or pursuant to Board Resolutions or in a supplemental indenture as permitted by SECTION 2.01, that such form has been duly authorized by each Company and established in conformity with the provisions of this Indenture; (B) if the terms of such Securities have been duly authorized by the Companies and established by or pursuant to Board Resolutions or in a supplemental indenture as permitted by SECTION 3.01, that such terms have been established in conformity with the provisions of this Indenture; (C) that such Securities, when authenticated and delivered by the Trustee and issued by the Companies in the manner and subject to any conditions specified in such Opinion of Counsel, will have been duly issued under the Indenture and will constitute valid and legally binding obligations of each Company, entitled to the benefits provided by the Indenture, and enforceable in accordance with their terms, subject to (a) bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles, (b) the necessity for compliance with the statutory procedural rights governing the exercise of remedies by a secured creditor, and (c) the qualification that certain waivers, procedures, remedies, and other specified provisions of such Securities and this Indenture may be unenforceable under or limited by the laws of the State of -17- 26 Ohio; (D) that the First Mortgage Bonds being delivered to the Trustee in connection with the issuance of such series of Securities have been duly authorized, executed, authenticated, issued, and delivered by the applicable Company, constitute valid and legally binding obligations of such Company entitled to the benefits and security provided by the applicable First Mortgage, and enforceable in accordance with their terms, subject to (a) bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles, (b) the necessity for compliance with the statutory procedural requirements governing the exercise of remedies by a secured creditor, and (c) the qualification that certain waivers, procedures, remedies, and other specified provisions of the First Mortgage Bonds and the applicable First Mortgage may be unenforceable under or limited by the law of the State of Ohio or Commonwealth of Pennsylvania or the laws of the United States of America; and that the First Mortgage Bonds are entitled to the benefits provided by the applicable First Mortgage, equally and ratably, with all first mortgage bonds outstanding thereunder, except as to sinking fund provisions; and (E) that the execution and delivery of this Indenture and the Securities by the Companies and the execution and delivery of the Cleveland Electric First Mortgage and any Cleveland Electric First Mortgage Bonds by Cleveland Electric or the Toledo Edison First Mortgage and any Toledo Edison First Mortgage Bonds by Toledo Edison, as applicable, have been duly authorized by the Public Utilities Commission of the State of Ohio (the "PUCO"), the PUCO had jurisdiction in the premises, and no further approval, authorization, or consent of any other public board or body is necessary to the validity of such execution and delivery of this Indenture, the Securities, the First Mortgages, and the First Mortgage Bonds, except as may be required under state securities or blue sky laws, as to which laws such counsel shall not be required to express an opinion. If such form or terms have been so established, the Trustee shall not be required to authenticate such Securities if the issue of such Securities pursuant to this Indenture will affect the Trustee's own rights, duties or immunities under the Securities and this Indenture or otherwise in a manner which is not reasonably acceptable to the Trustee. In the event that all of the Securities of a series are not issued at one time, for each issuance of Securities after the original issuance of Securities, the Companies shall be required only to deliver to the Trustee (i) the Securities, (ii) a written request to the Trustee to authenticate such Securities and to deliver such Securities in accordance with the instructions specified by such request and (iii) an Opinion of Counsel. Any such request shall constitute a representation and warranty by the Companies that the Securities are being issued pursuant to the same Board Resolutions or supplemental indenture as the original issuance of Securities of such series. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature of an authorized signatory, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. Notwithstanding the foregoing, if any Security shall have been authenticated and -18- 27 delivered hereunder but never issued and sold by the Companies, and the Companies shall deliver such Security to the Trustee for cancellation as provided in SECTION 3.09, then such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture. SECTION 3.04. TEMPORARY SECURITIES. Pending the preparation of definitive Securities of any series, the Companies may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities that are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities. If temporary Securities of any series are issued, the Companies will cause definitive Securities of that series to be prepared without unreasonable delay. After the preparation of definitive Securities of such series, the temporary Securities of such series shall be exchangeable for definitive Securities of such series upon surrender of the temporary Securities of such series at the office or agency of the Companies in a Place of Payment for that series, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities of any series, the Companies shall execute and the Trustee shall authenticate and deliver in exchange therefor one or more definitive Securities of the same series, of any authorized denominations and of like tenor and aggregate principal amount. Until so exchanged, the temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as definitive Securities of such series and tenor. SECTION 3.05. REGISTRATION, REGISTRATION OF TRANSFER AND EXCHANGE. The Companies shall cause to be maintained in the Borough of Manhattan, the City and State of New York a register (the register maintained in such office or in any other office or agency of the Companies in a Place of Payment being herein sometimes referred to as the "SECURITY REGISTER") in which, subject to such reasonable regulations as the Trustee may prescribe, the Companies shall provide for the registration of Securities and of transfers of Securities. The Trustee is hereby appointed "SECURITY REGISTRAR" for the purpose of registering Securities and transfers of Securities as herein provided. The Security Registrar shall be in written form or in any other form capable of being converted into written form within a reasonable time. At all reasonable times such register shall be open for inspection by each Company. Upon surrender for registration of transfer of any Security of a series at the office or agency of the Companies in a Place of Payment for that series, the Companies shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of the same series, of any authorized denominations and of like tenor and aggregate principal amount. At the option of the Holder, Securities of any series may be exchanged for other Securities of the same series, of any authorized denominations and of like tenor and aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Companies shall execute, and the Trustee shall authenticate and deliver, the Securities that the Holder making the exchange is entitled to receive. -19- 28 All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Companies, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Companies or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Companies and the Security Registrar duly executed, by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Securities, but the Companies may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities. If the Securities of any series (or of any series and specified tenor) are to be redeemed, the Companies shall not be required (A) to issue, register the transfer of or exchange any Securities of that series (or of that series and specified tenor, as the case may be) during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of any such Securities selected for redemption and ending at the close of business on the day of such mailing, or (B) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. The provisions of Clauses (1), (2), (3) and (4) below shall apply only to Global Securities: (1) Each Global Security authenticated under this Indenture shall be registered in the name of the Depository designated for such Global Security or a nominee thereof and delivered to such Depository or a nominee thereof or custodian therefor. (2) Notwithstanding any other provision in this Indenture, no Global Security may be exchanged in whole or in part for Securities registered, and no transfer of a Global Security in whole or in part may be registered, in the name of any Person other than the Depository for such Global Security or a nominee thereof unless (A) such Depository (i) has notified the Companies that it is unwilling or unable to continue as Depository for such Global Security or (ii) has ceased to be a clearing agency registered under the Exchange Act, (B) there shall have occurred and be continuing an Event of Default with respect to such Global Security or (C) there shall exist such circumstances, if any, in addition to or in lieu of the foregoing as have been specified for this purpose as contemplated by SECTION 3.01. (3) Subject to Clause (2) above, any exchange of a Global Security for other Securities may be made in whole or in part, and all Securities issued in exchange for a Global Security or any portion thereof shall be registered in such names as the Depository for such Global Security shall direct. (4) Every Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Security or any portion thereof, whether pursuant to this Section, SECTION 3.04, 3.06, 10.06 or 12.07 or otherwise, shall be authenticated and delivered in the form of, and shall be, a Global Security, unless such Security is registered in the name of a Person other than the Depository for such Global Security or a nominee thereof. -20- 29 SECTION 3.06. MUTILATED, DESTROYED, LOST AND STOLEN SECURITIES. If any mutilated Security is surrendered to the Trustee, the Companies shall execute and the Trustee shall authenticate and deliver in exchange therefor a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding. If there shall be delivered to the Companies and the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them and any agent of either of them harmless, then, in the absence of notice to the Companies or the Trustee that such Security has been acquired by a bona fide purchaser, the Companies shall execute and the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of the same series and of like tenor and principal amount and bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Companies in their discretion may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section, the Companies may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security of any series issued pursuant to this Section in lieu of any destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Companies, whether or not the destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities of that series duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 3.07. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED. Except as otherwise provided as contemplated by SECTION 3.01 with respect to any series of Securities, interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest. Any interest on any Security of any series which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date (herein called "DEFAULTED INTEREST") shall forthwith cease to be payable to the Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Companies, at their election in each case, as provided in Clause (1) or (2) below: (1) The Companies may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are -21- 30 registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Companies shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security of such series and the date of the proposed payment, and at the same time the Companies shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this Clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest that shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Companies of such Special Record Date and, in the name and at the expense of the Companies, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be given to each Holder of Securities of such series in the manner set forth in SECTION 1.06, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities of such series (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following Clause (2). (2) The Companies may make payment of any Defaulted Interest on the Securities of any series in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Companies to the Trustee of the proposed payment pursuant to this Clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Security. SECTION 3.08. PERSONS DEEMED OWNERS. Prior to due presentment of a Security for registration of transfer, the Companies, the Trustee and any agent of the Companies or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of and any premium and (subject to SECTION 3.07) any interest on such Security and for all other purposes whatsoever, whether or not such Security shall be overdue, and neither the Companies, the Trustee nor any agent of the Companies or the Trustee shall be affected by notice to the contrary. -22- 31 SECTION 3.09. CANCELLATION. All Securities surrendered for payment, redemption, registration of transfer or exchange or for credit against any sinking fund payment shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly canceled by it. The Companies may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder that the Companies may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder that the Companies have not issued and sold, and all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Securities held by the Trustee shall be disposed of as directed by a Company Order; provided, however, that the Trustee shall not be required to destroy such canceled Securities. SECTION 3.10. COMPUTATION OF INTEREST. Except as otherwise specified as contemplated by SECTION 3.01 for Securities of any series, interest on the Securities of each series shall be computed on the basis of a 360-day year of twelve 30-day months. SECTION 3.11. CUSIP NUMBERS. The Companies in issuing the Securities may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers. SECTION 3.12. PAYMENTS ON FIRST MORTGAGE BONDS. Subject to ARTICLE V and ARTICLE XIV hereof, all payments made by the applicable Company to the Trustee on First Mortgage Bonds shall be applied by the Trustee to pay, when due, principal of, premium, if any, and interest on the related series of Securities and, to the extent so applied, shall satisfy the obligations of the Companies on such Securities. ARTICLE IV. FIRST MORTGAGE BONDS SECTION 4.01. ACCEPTANCE OF FIRST MORTGAGE BONDS. At or prior to the time of issuance of a series of Securities hereunder, there shall have been delivered to the Trustee, and the Trustee shall have accepted, for the benefit of the Holders of the Securities as described in SECTION 4.03, Cleveland Electric First Mortgage Bonds, Toledo Edison First Mortgage Bonds, or any combination thereof, each of a series not theretofore delivered to the Trustee, registered in the name of the Trustee and conforming to the requirements of SECTION 4.02. -23- 32 SECTION 4.02. TERMS OF FIRST MORTGAGE BONDS. First Mortgage Bonds delivered to the Trustee pursuant to SECTION 4.01 shall have the same rate or rates of interest (or interest calculated in the same manner), interest payment dates, maturity and redemption provisions, and shall be in the same aggregate principal amount, as the series of Securities being issued. SECTION 4.03. FIRST MORTGAGE BONDS AS SECURITY FOR SECURITIES. Subject to ARTICLE V and ARTICLE XIV hereof, First Mortgage Bonds delivered to the Trustee pursuant to SECTION 4.01 for the benefit of the Holders of Securities shall serve equally and ratably as security for any and all obligations of the Companies under such Securities, including, but not limited to (1) the full and prompt payment of the principal and premium, if any, on such Securities when and as the same shall become due and payable in accordance with the terms and provisions of this Indenture or the Securities either at the Stated Maturity thereof, upon acceleration of the maturity thereof or upon redemption, and (2) the full and prompt payment of any interest on such Securities when and as the same shall become due and payable in accordance with the terms and provisions of this Indenture or the Securities. SECTION 4.04. RESERVED. SECTION 4.05. FIRST MORTGAGE BONDS HELD BY THE TRUSTEE. The Trustee, as a Holder of First Mortgage Bonds, shall attend any meeting of holders of First Mortgage Bonds under the applicable First Mortgage as to which it receives due notice, or, at its option, shall deliver its proxy in connection therewith. Either at such meeting, or otherwise where consent of holders of First Mortgage Bonds issued under the applicable First Mortgage is sought without a meeting, the Trustee shall vote all of such First Mortgage Bonds held by it, or shall consent or withhold its consent with respect thereto, as directed by the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities; provided, however, that the Trustee shall not vote as such holder of a particular series of First Mortgage Bonds in favor of, or give its consent to, any action that, in the Trustee's opinion, would materially adversely affect such series of First Mortgage Bonds in a manner not shared generally by all other First Mortgage Bonds, except upon notification by the Trustee to the Holders of the related series of Outstanding Securities of such proposal and consent thereto of the holders of not less than a majority in aggregate principal amount of the Outstanding Securities of such series. SECTION 4.06. NO TRANSFER OF FIRST MORTGAGE BONDS; EXCEPTION. Except as required to effect an assignment to a successor trustee under this Indenture or pursuant to SECTION 4.07 or SECTION 4.09, the Trustee shall not sell, assign or transfer the First Mortgage Bonds and the applicable Company shall issue stop transfer instructions to the applicable Mortgage Trustee and any transfer agent under the applicable First Mortgage to effect compliance with this SECTION 4.06. -24- 33 SECTION 4.07. DELIVERY TO THE COMPANIES OF ALL FIRST MORTGAGE BONDS. When the obligation of either Company to make payment with respect to the principal of and premium, if any, and interest on the First Mortgage Bonds shall be satisfied or deemed satisfied pursuant to SECTION 5.01 or ARTICLE XIV, the Trustee shall, upon written request of such Company, deliver to such Company without charge therefor all of the First Mortgage Bonds, together with such appropriate instruments of transfer or release as may be reasonably requested by such Company. All such First Mortgage Bonds delivered to such Company in accordance with this SECTION 4.07 shall be delivered by such Company to the applicable Mortgage Trustee for cancellation. SECTION 4.08. FURTHER ASSURANCES. Each Company, at its own expense, shall do such further lawful acts and things, and execute and deliver such additional conveyances, assignments, assurances, agreements, financing statements and instruments, as may be necessary in order to further assign, assure, perfect and confirm to the Trustee its security interest in the First Mortgage Bonds and for maintaining, protecting and preserving such security interest. SECTION 4.09. EXCHANGE AND SURRENDER OF FIRST MORTGAGE BONDS. At any time upon receipt of a Company Order at the written direction of either Company, the Trustee shall surrender to such Company all or part of the First Mortgage Bonds in exchange for First Mortgage Bonds equal in aggregate principal amount to, in different denominations than but of the same series and with all other terms identical to, the First Mortgage Bonds so surrendered to such Company. If at any time a Security shall cease to be entitled to any lien, benefit or security under this Indenture pursuant to SECTION 5.01 or ARTICLE XIV, the Trustee shall surrender an equal principal amount of First Mortgage Bonds of the related series to the applicable Company for cancellation, such First Mortgage Bonds to be either or both of Cleveland Electric First Mortgage Bonds and Toledo Edison First Mortgage Bonds in the same proportion as the proportion in which such First Mortgage Bonds were initially delivered to and accepted by the Trustee pursuant to SECTION 4.01 for the benefit of the series of Securities of which such Security is a part. The Trustee shall, together with any such First Mortgage Bonds, deliver to the applicable Company such appropriate instruments of transfer or release as such Company may reasonably request. Prior to the surrender required by this paragraph, the Trustee shall receive from such Company, and (subject to SECTION 7.01) shall be fully protected in relying upon, an Officer's Certificate stating (i) the aggregate Outstanding principal amount of the First Mortgage Bonds of the series surrendered by the Trustee and the portion (if any) of such First Mortgage Bonds that are Cleveland Electric First Mortgage Bonds or Toledo Edison First Mortgage Bonds, after giving effect to such surrender, (ii) the aggregate Outstanding principal amount of the related series of Securities, (iii) that the surrender of the First Mortgage Bonds will not change the proportion of Cleveland Electric First Mortgage Bonds and Toledo Edison First Mortgage Bonds outstanding with respect to the series of Securities in question or otherwise result in any default under this Indenture, and (iv) that any First Mortgage Bonds to be delivered in exchange for the First Mortgage Bonds being surrendered comply with the provisions of this Section. Neither Company shall be permitted to cause the surrender or exchange of all or any part of the First Mortgage Bonds contemplated in this Section, if, after such surrender or exchange, (i) the aggregate Outstanding principal amount of the related series of Securities would exceed the aggregate Outstanding principal amount of the First Mortgage Bonds held by the Trustee relating to such series of -25- 34 Securities or (ii) the First Mortgage Bonds held by the Trustee relating to such series of Securities would be comprised of a proportion of Cleveland Electric First Mortgage Bonds and Toledo Edison First Mortgage Bonds that is different from the proportion in which such First Mortgage Bonds were initially delivered to and accepted by the Trustee pursuant to SECTION 4.01. Any First Mortgage Bonds received by such Company pursuant to this SECTION 4.09 shall be delivered to the applicable Mortgage Trustee for cancellation. ARTICLE V. SATISFACTION AND DISCHARGE SECTION 5.01. SATISFACTION AND DISCHARGE OF INDENTURE. This Indenture shall upon Company Request cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for), and the Trustee, at the expense of the Companies, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in SECTION 3.06 and (ii) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Companies and thereafter repaid to the Companies or discharged from such trust, as provided in SECTION 11.03) have been delivered to the Trustee for cancellation; or (B) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Companies, and the Companies, in the case of (i), (ii) or (iii) above, have deposited or caused to be deposited with the Trustee as trust funds in trust for this purpose funds in an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal and any premium and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Companies have paid or caused to be paid all other sums payable hereunder by the Companies; and (3) the Companies have delivered to the Trustee an Officer's Certificate and an -26- 35 Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Companies to the Trustee under SECTION 7.07, the obligations of the Companies to any Authenticating Agent under SECTION 7.14 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of Clause (1) of this Section, the obligations of the Trustee under SECTION 5.02 and the last paragraph of SECTION 11.03 shall survive. If the Securities are deemed paid and discharged pursuant to this SECTION 5.01 or defeased pursuant to ARTICLE XIV, the obligation of the applicable Company to make payment with respect to the principal of and premium, if any, and interest on the First Mortgage Bonds shall be satisfied and discharged, as provided in the supplemental trust indenture or indentures to the applicable First Mortgage creating such First Mortgage Bonds, and the First Mortgage Bonds shall cease to secure the Securities in any manner. If the Companies shall have paid or caused to be paid the principal of and premium, if any, and interest on any Security, as and when the same shall have become due and payable or the Companies shall have delivered to the Trustee for cancellation any outstanding Security, such Security shall cease to be entitled to any lien, benefit or security under this Indenture. Upon a Security of any series ceasing to be entitled to any lien, benefit or security under this Indenture, the obligation of the applicable Company to make payment with respect to principal of and premium, if any, and interest on a principal amount of the related First Mortgage Bonds (pro rata as between Cleveland Electric First Mortgage Bonds and Toledo Edison First Mortgage Bonds) equal to the principal amount of such Security shall be satisfied and discharged and such portion of the principal amount of such First Mortgage Bonds (pro rata as aforesaid) shall cease to secure the Securities in any manner. SECTION 5.02. APPLICATION OF TRUST MONEY. Subject to the provisions of the last paragraph of SECTION 11.03, all money deposited with the Trustee pursuant to SECTION 5.01 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including either Company acting as the Paying Agent for the Companies) as the Trustee may determine, to the Persons entitled thereto, of the principal and any premium and interest for whose payment such money has been deposited with the Trustee. SECTION 5.03. PAYING AGENT TO REPAY MONEYS HELD. Upon the satisfaction and discharge of this Indenture all moneys then held by any Paying Agent for the Securities (other than the Trustee) shall, upon written demand by the Companies, be repaid to the Companies or paid to the Trustee, and thereupon such Paying Agent shall be released from all further liability with respect to such moneys. SECTION 5.04. RETURN OF UNCLAIMED MONEYS. Any moneys deposited with or paid to the Trustee for payment of the principal of or any premium or interest on any Securities and not applied but remaining unclaimed by the holders of such Securities for two years after the date upon which the principal of or any premium or interest on such Securities, as the case may be, shall have become due and payable, shall be repaid to the Companies by the Trustee on written demand by the Companies, and all liability of the Trustee shall thereupon cease; -27- 36 and any holder of any such Securities shall thereafter look only to the Companies for any payment which such holder may be entitled to collect. ARTICLE VI. REMEDIES SECTION 6.01. EVENTS OF DEFAULT. "EVENT OF DEFAULT", wherever used herein with respect to Securities of any series, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest upon any Security of that series when it becomes due and payable, and continuance of such default for a period of 30 days; or (2) default in the payment of the principal of or any premium on any Security of that series at its Maturity; or (3) default in the deposit of any sinking fund payment, when and as due by the terms of a Security of that series; or (4) default in the performance, or breach, of any covenant or warranty of either Company in this Indenture (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with or which has expressly been included in this Indenture solely for the benefit of series of Securities other than that series), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Companies by the Trustee or to the Companies and the Trustee by the Holders of a majority in principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "NOTICE OF DEFAULT" hereunder; or (5) if any First Mortgage Bonds held by the Trustee relating to such series pursuant to ARTICLE IV are Cleveland Electric First Mortgage Bonds, a Default (as defined in the Cleveland Electric First Mortgage) has occurred and is continuing, and the Mortgage Trustee under the Cleveland Electric First Mortgage, Cleveland Electric or Holders of at least 25% in principal amount of the outstanding Securities shall have given written notice thereof to the Trustee; or (6) if any First Mortgage Bonds held by the Trustee relating to such series pursuant to ARTICLE IV are Toledo Edison First Mortgage Bonds, a Default (as defined in the Toledo Edison First Mortgage) has occurred and is continuing, and the Mortgage Trustee under the Toledo Edison First Mortgage, Toledo Edison or Holders of at least 25% in principal amount of the outstanding Securities shall have given written notice thereof to the Trustee; or (7) the entry by a court having jurisdiction in the premises of (A) a decree or order for relief in respect of either Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or (B) a decree or order adjudging either Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of either -28- 37 Company under any applicable Federal or State law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of either Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of 90 consecutive days; or (8) the commencement by either Company of a voluntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree or order for relief in respect of either Company in an involuntary case or proceeding under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of either Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due, or the taking of corporate action by either Company in furtherance of any such action; or (9) any other Event of Default provided with respect to Securities of that series. SECTION 6.02. ACCELERATION OF MATURITY; RESCISSION AND ANNULMENT. If an Event of Default (other than an Event of Default specified in SECTION 6.01(7) or 6.01(8)) with respect to Securities of any series at the time Outstanding occurs and is continuing, then in every such case the Trustee or the Holders of a majority in principal amount of the Outstanding Securities of that series may declare the principal amount of all the Securities of that series (or, if any Securities of that series are Original Issue Discount Securities, such portion of the principal amount of such Securities as may be specified by the terms thereof) to be due and payable immediately, by a notice in writing to the Companies (and to the Trustee if given by Holders), and upon any such declaration such principal amount (or specified amount) shall become immediately due and payable. If an Event of Default specified in SECTION 6.01(7) or 6.01(8) with respect to Securities of any series at the time Outstanding occurs, the principal amount of all the Securities of that series (or, if any Securities of that series are Original Issue Discount Securities, such portion of the principal amount of such Securities as may be specified by the terms thereof) shall automatically, and without any declaration or other action on the part of the Trustee or any Holder, become immediately due and payable. Upon such Securities becoming immediately due and payable, by declaration or otherwise, pursuant to any of the foregoing provisions of this SECTION 6.02, the Trustee shall immediately file with the applicable Mortgage Trustee or Mortgage Trustees a written demand for the acceleration of the payment of principal of all First Mortgage Bonds relating to such series of outstanding Securities pursuant to the applicable provisions of the supplemental indenture to the applicable First Mortgage or First Mortgages relating to such First Mortgage Bonds. At any time after such a declaration of acceleration with respect to Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, and prior to the receipt by the Trustee from the applicable Mortgage Trustee of an irrevocable, valid and unconditional notice to the Trustee of the acceleration of the payment of principal, by declaration or otherwise, of all of the First Mortgage Bonds relating to such series of Securities, the related Event of Default and its consequences (including, if given, the written -29- 38 demand for the acceleration of the payment of principal of all such First Mortgage Bonds) will be automatically waived, resulting in an automatic rescission and annulment of the acceleration of the Securities if (1) there shall have been paid to or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Securities of that series, (B) the principal of (and premium, if any, on) any Securities of that series that have become due otherwise than by such declaration of acceleration and any interest thereon at the rate or rates prescribed therefor in such Securities, (C) to the extent that payment of such interest is lawful, interest upon overdue interest at the rate or rates prescribed therefor in such Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default with respect to Securities of that series, other than the nonpayment of the principal of Securities of that series that have become due solely by such declaration of acceleration, have been cured (including any Defaults (as defined in the Cleveland Electric First Mortgage) under the Cleveland Electric First Mortgage, as evidenced by notice thereof received by the Trustee from the Mortgage Trustee under the Cleveland Electric First Mortgage and any Defaults (as defined in the Toledo Edison First Mortgage) under the Toledo Edison First Mortgage, as evidenced by notice thereof received by the Trustee from the Mortgage Trustee under the Toledo Edison First Mortgage, as the case may be) or waived as provided in SECTION 6.13 or under the applicable First Mortgage. No such rescission and annulment shall affect any subsequent default or impair any right consequent thereon. SECTION 6.03. COLLECTION OF INDEBTEDNESS AND SUITS FOR ENFORCEMENT BY TRUSTEE. The Companies covenant that if (1) default is made in the payment of any interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (2) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof, the Companies will, upon demand of the Trustee, pay to it, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and any premium and interest and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal and premium and on any overdue interest, at the rate or rates prescribed therefor in such Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel other than through its negligence or bad faith, and any other amounts due the Trustee under SECTION 7.07 hereof. -30- 39 If an Event of Default with respect to Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights (including any rights that the Trustee may have as a holder of First Mortgage Bonds relating to the series of such Securities) and the rights of the Holders of Securities of such series by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 6.04. TRUSTEE MAY FILE PROOFS OF CLAIM. In case of any judicial proceeding relative to either Company (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee (including any claims of the Trustee as a holder of First Mortgage Bonds) allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under SECTION 7.07. No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding; provided, however, that the Trustee may, on behalf of the Holders, vote for the election of a trustee in bankruptcy or similar official and be a member of a creditors' or other similar committee. SECTION 6.05. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF SECURITIES. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. SECTION 6.06. APPLICATION OF MONEY COLLECTED. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or any premium or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: -31- 40 FIRST: To the payment of all amounts due the Trustee under SECTION 7.07; SECOND: To the payment of the amounts then due and unpaid for principal of and any premium and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and any premium and interest, respectively; and THIRD: To the payment of the balance, if any, to the Companies in the manner set forth in a Company Request or any other Person or Persons legally entitled thereto. SECTION 6.07. LIMITATION ON SUITS. No Holder of any Security of any series shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of that series; (2) the Holders of not less than a majority in principal amount of the Outstanding Securities of that series shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority in principal amount of the Outstanding Securities of that series; it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of such Holders. SECTION 6.08. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE PRINCIPAL, PREMIUM AND INTEREST. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and any premium and (subject to SECTION 3.07) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. -32- 41 SECTION 6.09. RESTORATION OF RIGHTS AND REMEDIES. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Companies, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 6.10. RIGHTS AND REMEDIES CUMULATIVE. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of SECTION 3.06, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 6.11. DELAY OR OMISSION NOT WAIVER. No delay or omission of the Trustee or of any Holder of any Securities to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 6.12. CONTROL BY HOLDERS. The Holders of a majority in principal amount of the Outstanding Securities of any series shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, with respect to the Securities of such series, provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture, (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, (3) subject to the provisions of SECTION 7.01, the Trustee shall have the right to decline to follow any such direction if the Trustee in good faith shall, by a Responsible Officer or Officers of the Trustee, determine that the proceeding so directed would involve the Trustee in personal liability, and (4) the Trustee shall have the right to decline to follow any such direction if the Trustee in good faith shall so determine that the actions or forebearances specified in or pursuant to such direction would be unduly prejudicial to the interests of Holders of the Securities of all -33- 42 series so affected not joining in the giving of said direction, it being understood that the Trustee shall have no duty to ascertain whether or not such actions or forebearances are unduly prejudicial to such Holders. SECTION 6.13. WAIVER OF PAST DEFAULTS. The Holders of not less than a majority in principal amount of the Outstanding Securities of any series by notice to the Trustee may, on behalf of the Holders of all the Securities of such series, waive any existing or past default hereunder with respect to such series and its consequences (including by way of consents obtained in connection with a tender offer or exchange for Securities of such series), except a default (1) in the payment of the principal of or any premium or interest on any Security of such series, or (2) in respect of a covenant or provision hereof which under ARTICLE X cannot be modified or amended without the consent of the Holder of each Outstanding Security of such series affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or impair any right consequent thereon. SECTION 6.14. UNDERTAKING FOR COSTS. In any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, a court may require any party litigant in such suit to file an undertaking to pay the costs of such suit, and may assess costs against any such party litigant, in the manner and to the extent provided in the Trust Indenture Act; provided that neither this Section nor the Trust Indenture Act shall be deemed to authorize any court to require such an undertaking or to make such an assessment in any suit instituted by the Companies or the Trustee. SECTION 6.15. WAIVER OF USURY, STAY OR EXTENSION LAWS. Each Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force, that may affect the covenants or the performance of this Indenture; and each Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. -34- 43 ARTICLE VII. THE TRUSTEE SECTION 7.01. CERTAIN DUTIES AND RESPONSIBILITIES. Except during the continuance of a default, the duties and responsibilities of the Trustee shall be as provided by the Trust Indenture Act, and no implied covenants or obligations shall be read into the Indenture against the Trustee. The phrase "default (as such term is defined in such indenture)" as it appears in SECTION 3.15 of the Trust Indenture Act shall mean an Event of Default with respect to a series of Securities which shall have occurred and is continuing. Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not herein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section. If default of which the Trustee has knowledge has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in its exercise, as a prudent man would exercise or use under the circumstance in the conduct of his own affairs. SECTION 7.02. NOTICE OF DEFAULTS. If a default occurs hereunder with respect to Securities of any series, the Trustee shall give the Holders of Securities of such series notice of such default known to the Trustee within 90 days after it occurs; provided, however, that in the case of any default of the character specified in SECTION 6.01(4) with respect to Securities of such series, no such notice to Holders shall be given until at least 30 days after the occurrence thereof. Except in the case of an Event of Default in payment on any Security pursuant to SECTION 6.01(1) or (2) hereof, the Trustee may withhold the notice if the Trustee in good faith determines that withholding the notice is in the interest of the Holders. For the purpose of this Section, the term "DEFAULT" means any event which is, or after notice or lapse of time or both would become, an Event of Default with respect to Securities of such series. SECTION 7.03. CERTAIN RIGHTS OF TRUSTEE. Subject to the provisions of SECTION 7.01: (1) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (2) any request or direction of the Companies mentioned herein shall be sufficiently evidenced by a Company Request or Company Order, and any resolutions of the Board of Directors shall be sufficiently evidenced by Board Resolutions; (3) whenever in the administration of this Indenture the Trustee shall deem it -35- 44 desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of negligence or bad faith on its part, rely upon an Officer's Certificate and/or an Opinion of Counsel; (4) the Trustee may consult with counsel of its selection and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (5) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (6) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Companies, personally or by agent or attorney; (7) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; and (8) except as otherwise provided in SECTION 6.01(4), the Trustee shall not be charged with knowledge of any default or Event of Default unless either (i) a Responsible Officer of the Trustee assigned to the Corporate Trustee Administration of the Trustee (or any successor division or department of the Trustee) shall have actual knowledge of the default or Event of Default, or (ii) written notice of such default or Event of Default shall have been given to the Trustee by the Companies, any other obligor on the Securities or by any Holder of such Securities or, in the case of an Event of Default described in SECTION 6.01(5), by the Mortgage Trustee under the Cleveland Electric First Mortgage, or in the case of an Event of Default described in SECTION 6.01(6), by the Mortgage Trustee under the Toledo Edison First Mortgage, or Holders of at least 25% in principal amount of the Outstanding Securities. -36- 45 SECTION 7.04. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF SECURITIES. The recitals contained herein and in the Securities, except the Trustee's certificates of authentication, shall be taken as the statements of the Companies, and neither the Trustee nor any Authenticating Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities or as to the value, title or validity of any First Mortgage Bonds or other securities at any time pledged or deposited with the Trustee hereunder or as to the security offered thereby or hereby. Neither the Trustee nor any Authenticating Agent shall be accountable for the use or application by the Companies of Securities or the proceeds thereof or of any moneys paid to the Companies under any provision hereof. The Trustee shall not be responsible for recording or filing this Indenture, any indenture supplemented hereto or any financing or continuation statement in any public office or elsewhere at any time or times. SECTION 7.05. MAY HOLD SECURITIES. The Trustee, any Authenticating Agent, any Paying Agent, any Security Registrar or any other agent of the Companies, in their individual or any other capacity, may become the owner or pledgee of Securities and, subject to SECTIONS 6.08 and 6.13, may otherwise deal with the Companies with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Security Registrar or such other agent. SECTION 7.06. MONEY HELD IN TRUST. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed in writing with the Companies. SECTION 7.07. COMPENSATION AND REIMBURSEMENT.SECTION 7.07. COMPENSATION AND REIMBURSEMENT. The Companies agree (1) to pay to the Trustee from time to time such compensation as shall be agreed to in writing between the Companies and the Trustee for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. -37- 46 The Trustee shall have a lien prior to the Securities upon all property and funds held by it hereunder for any amount owing it or any predecessor Trustee pursuant to this SECTION 7.07, except with respect to funds held in trust for the benefit of the Holders of particular Securities. Without limiting any rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with an Event of Default specified in SECTION 6.01(7) or SECTION 6.01(8), the expenses (including the reasonable charges and expenses of its agents and counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable Federal or State bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the termination of this Indenture. SECTION 7.08. CONFLICTING INTERESTS. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall eliminate such conflict within 90 days, apply to the Commission for permission to continue as Trustee or resign. To the extent permitted by such Act, the Trustee shall not be deemed to have a conflicting interest by virtue of being a trustee under this Indenture with respect to Securities of more than one series. SECTION 7.09. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY. There shall at all times be one (and only one) Trustee hereunder with respect to the Securities of each series, which may be Trustee hereunder for Securities of one or more other series. Each Trustee shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000. If any such Person publishes reports of condition at least annually, pursuant to law or to the requirements of its supervising or examining authority, then for the purposes of this Section and to the extent permitted by the Trust Indenture Act, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee with respect to the Securities of any series shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 7.10. RESIGNATION AND REMOVAL; APPOINTMENT OF SUCCESSOR. No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of SECTION 7.11. The Trustee may resign at any time with respect to the Securities of one or more series by giving written notice thereof to the Companies. If the instrument of acceptance by a successor Trustee required by SECTION 7.11 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. The Trustee may be removed at any time with respect to the Securities of any series by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series, delivered to the Trustee and to the Companies. -38- 47 If at any time: (1) the Trustee shall fail to comply with SECTION 7.08 after written request therefor by the Companies or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under SECTION 7.09 and shall fail to resign after written request therefor by the Companies or by any such Holder, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (A) the Companies by Board Resolutions may remove the Trustee with respect to all Securities, or (B) subject to SECTION 6.14, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees. If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, with respect to the Securities of one or more series, the Companies, by Board Resolutions, shall promptly appoint a successor Trustee or Trustees with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or more or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series) and shall comply with the applicable requirements of SECTION 7.11. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Companies and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of SECTION 7.11, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Companies. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Companies or the Holders and accepted appointment in the manner required by SECTION 7.11, any Holder who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. The Companies shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series to all Holders of Securities of such series in the manner provided in SECTION 1.06. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office. -39- 48 SECTION 7.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR. In case of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee so appointed shall execute, acknowledge and deliver to the Companies and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee, including right, title and interest in the First Mortgage Bonds; but, on the request of the Companies or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. The successor Trustee shall mail a notice of its succession to the Holders of the Securities. In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Companies, the retiring Trustee and each successor Trustee with respect to the Securities of one or more series shall execute and deliver an indenture supplemental hereto wherein each successor Trustee shall accept such appointment and which (1) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, each successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (2) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (3) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees as co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee; and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Companies or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates. Upon request of any such successor Trustee, the Companies shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in the first or second preceding paragraph, as the case may be. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. -40- 49 SECTION 7.12. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION TO BUSINESS. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. SECTION 7.13. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANIES. If and when the Trustee shall be or become a creditor of the Companies (or any other obligor upon the Securities), the Trustee shall be subject to the provisions of the Trust Indenture Act regarding the collection of claims against the Companies (or any such other obligor). SECTION 7.14. APPOINTMENT OF AUTHENTICATING AGENT. The Trustee may appoint an Authenticating Agent or Agents with respect to one or more series of Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities of such series issued upon exchange, registration of transfer or partial redemption thereof or pursuant to SECTION 3.06, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Companies and shall at all times be a corporation organized and doing business under the laws of the United States of America, any State thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal or State authority. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent. -41- 50 An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Companies. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Companies. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee may appoint a successor Authenticating Agent that shall be acceptable to the Companies and shall give notice of such appointment in the manner provided in SECTION 1.06 to all Holders of Securities of the series with respect to which such Authenticating Agent will serve. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Companies agree to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section. If an appointment with respect to one or more series is made pursuant to this Section, the Securities of such series may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternative certificate of authentication in the following form: This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. Dated: THE CHASE MANHATTAN BANK, As Trustee By ---------------------------- Authenticating Agent By ---------------------------- Authorized Officer ARTICLE VIII. HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANIES SECTION 8.01. COMPANIES TO FURNISH TRUSTEE NAMES AND ADDRESSES OF HOLDERS. The Companies will furnish or cause to be furnished to the Trustee (1) within fifteen days after each Regular Record Date, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of Securities of each series as of such Regular Record Date, and (2) at such other times as the Trustee may request in writing, within 30 days after the receipt by any Company of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; -42- 51 provided, however, the Companies may exclude from any such list names and addresses received by the Trustee in its capacity as Security Registrar. SECTION 8.02. PRESERVATION OF INFORMATION; COMMUNICATIONS TO HOLDERS. COMMUNICATIONS TO HOLDERS. The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in SECTION 8.01 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in SECTION 8.01 upon receipt of a new list so furnished. The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and privileges of the Trustee, shall be as provided by the Trust Indenture Act. Every Holder of Securities, by receiving and holding the same, agrees with the Companies and the Trustee that neither the Companies nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act. SECTION 8.03. REPORTS BY TRUSTEE. The Trustee shall transmit to Holders (and to AMBAC Indemnity, for so long as any Financial Guaranty Insurance Policy is in effect) such reports concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. If required by Section 3.13(a) of the Trust Indenture Act, the Trustee shall, within sixty days after each May 15 following the date of this Indenture deliver to Holders a brief report, dated as of such May 15, which complies with the provisions of such Section 3.13(a). A copy of each such report shall, at the time of such transmission to Holders (and to AMBAC Indemnity, for so long as any Financial Guaranty Insurance Policy is in effect), be filed by the Trustee with each stock exchange upon which any Securities are listed, with the Commission and with the Companies. The Companies will promptly notify the Trustee when any Securities are listed on any stock exchange. SECTION 8.04. REPORTS BY COMPANIES. The Companies shall file with the Trustee and the Commission, and transmit to Holders (and to AMBAC Indemnity, for so long as any Financial Guaranty Insurance Policy is in effect), such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; provided that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. -43- 52 ARTICLE IX. CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 9.01. COMPANIES MAY CONSOLIDATE, ETC., ONLY ON CERTAIN TERMS. (1) Except for a consolidation or merger of Cleveland Electric and Toledo Edison pursuant to Clause (2) hereof, a Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and a Company shall not permit any Person to consolidate with or merge into such Company or convey, transfer or lease its properties and assets substantially as an entirety to such Company, unless: (a) in case a Company shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the Person formed by such consolidation or into which such Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of such Company substantially as an entirety shall be a corporation, partnership, unincorporated organization or trust, shall be organized and validly existing under the laws of the United States of America, any State thereof or the District of Columbia and (a) shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the due and punctual payment of the principal of and any premium and interest on all the Securities and the performance or observance of every covenant of this Indenture on the part of such Company to be performed or observed and (b) shall expressly assume, by an indenture supplemental to the applicable First Mortgage, executed and delivered to the Trustee and the applicable Mortgage Trustee, in form satisfactory to the Trustee and the applicable Mortgage Trustee, the due and punctual payment of the principal of and any premium and interest on the Cleveland Electric First Mortgage Bonds or the Toledo Edison First Mortgage Bonds then held by the Trustee pursuant to ARTICLE IV, as the case may be, and the performance of every covenant of the applicable First Mortgage on the part of such Company to be performed or observed; (b) immediately after giving effect to such transaction and treating any indebtedness which becomes an obligation of either Company or any Subsidiary as a result of such transaction as having been incurred by such Company or such Subsidiary at the time of such transaction, no Event of Default, and no event which, after notice or lapse of time or both, would become an Event of Default, shall have happened and be continuing; and (c) the applicable Company has delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. (2) Cleveland Electric and Toledo Edison may consolidate with or merge into each other, or convey, transfer or lease its properties and assets substantially as an entirety one to the other, upon the satisfaction or waiver of any conditions set forth in each First Mortgage with respect to such consolidation, merger, conveyance, transfer or lease. -44- 53 SECTION 9.02. SUCCESSOR SUBSTITUTED. Upon any consolidation of either Company with, or merger of such Company into, any other Person or any conveyance, transfer or lease of the properties and assets of such Company substantially as an entirety in accordance with SECTION 9.01, the successor Person formed by such consolidation or into which such Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, such Company under this Indenture with the same effect as if such successor Person had been named as such Company herein, and thereafter, except in the case of any conveyance, transfer or lease of less than all of the properties or assets of the Company, the predecessor Person shall be relieved of all obligations and covenants under this Indenture and the Securities. ARTICLE X. AMENDMENTS, SUPPLEMENTS AND WAIVERS SECTION 10.01. WITHOUT CONSENT OF HOLDERS. Without the consent of any Holders, the Companies, when authorized by Board Resolutions, and the Trustee, at any time and from time to time, may amend or supplement this Indenture or the Securities for any of the following purposes: (1) to cure any ambiguity, defect or inconsistency; or (2) to provide for uncertificated Securities in addition to or in place of certificated Securities; or (3) to evidence the succession of another Person to either Company in accordance with this Indenture and the assumption by any such successor of the covenants of such Company herein and in the Securities; or (4) to add to or change any of the provisions of this Indenture to such extent as shall be necessary to permit or facilitate the issuance of Securities in bearer form, registrable or not registrable as to principal, and with or without interest coupons, or to permit or facilitate the issuance of Securities in uncertificated form; or (5) to add to, change or eliminate any of the provisions of this Indenture in respect of one or more series of Securities, provided that any such addition, change or elimination (A) shall neither (i) apply to any Security of any series created prior to the execution of such supplemental indenture and entitled to the benefit of such provision nor (ii) modify the rights of the Holder of any such Security with respect to such provision or (B) shall become effective only when there is no such Security Outstanding; or (6) to make any change that would provide any additional rights or benefits to the Holders of the Securities or that does not adversely affect the legal rights of any Holder; or (7) to comply with the requirements of the Commission in order to effect or maintain the qualification of this Indenture under the Trust Indenture Act or to evidence or provide for the -45- 54 acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of SECTION 7.11; or (8) to secure the Securities; or (9) to establish the form or terms of Securities of any series as permitted by SECTIONS 2.01 and 3.01. SECTION 10.02. WITH CONSENT OF HOLDERS. With the consent of the Holders of a majority in principal amount of the Outstanding Securities of each series affected by such supplemental indenture (including, without limitation, consents obtained in connection with a purchase of, or tender offer or exchange offer for, Securities of each such series), by Act of said Holders delivered to the Companies and the Trustee, the Companies, when authorized by Board Resolutions, and the Trustee may (a) amend or supplement the Indenture or the Securities or (b) subject to SECTION 6.13 hereof, waive compliance with any provision of this Indenture or the Securities; provided, however, that, without the consent of the Holder of each Outstanding Security affected thereby, no such amendment, supplement or waiver shall (with respect to any Securities held by a non-consenting Holder), (1) change the Stated Maturity of the principal of, or any installment of principal of or interest on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof, or reduce the amount of the principal of an Original Issue Discount Security or any other Security which would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to SECTION 6.02, or change any Place of Payment where, or the coin or currency in which, any Security or any premium or interest thereon is payable, or impair the interest hereunder of the Trustee in the First Mortgage Bonds, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date), impair the interest hereunder of the Trustee in the First Mortgage Bonds, reduce the principal amount of First Mortgage Bonds to an amount less than the principal amount of the related series of Securities or alter the payment provisions of such First Mortgage Bonds in a manner adverse to the Holders of the Securities, or (2) reduce the percentage in principal amount of the Outstanding Securities of any series, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture, or (3) modify any of the provisions of this Section, SECTION 6.13 or SECTION 11.06, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived (with respect to any Securities held by a non-consenting Holder) without the consent of the Holder of each Outstanding Security affected thereby; provided, however, that this clause shall not be deemed to require the consent of any Holder with respect to changes in the references to "the Trustee" and concomitant changes in this Section and SECTION 11.06, or the deletion of this proviso, in accordance with the requirements of SECTIONS 7.11 and 10.01(7). -46- 55 In addition, for so long as any Financial Guaranty Insurance Policy is in effect with respect to any Securities, no amendment, supplement or waiver shall adversely affect the right of AMBAC Indemnity to act as the Holder of any Insured Security in accordance with SECTION 1.04 hereof without the consent of AMBAC Indemnity. An amendment or supplement which changes or eliminates any covenant or other provision of this Indenture which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed amendment or supplement, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 10.03. EXECUTION OF AMENDMENTS OR SUPPLEMENTS. In executing, or accepting the additional trusts created by, any amendment or supplement permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and (subject to SECTION 7.01) shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such amendment or supplement is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such amendment or supplement which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 10.04. EFFECT OF AMENDMENTS OR SUPPLEMENTS. Upon the execution of any amendment or supplement under this Article, this Indenture shall be modified in accordance therewith, and such amendment or supplement shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 10.05. CONFORMITY WITH TRUST INDENTURE ACT. Every amendment or supplement executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act. SECTION 10.06. REFERENCE IN SECURITIES TO AMENDMENTS OR SUPPLEMENTS. Securities of any series authenticated and delivered after the execution of any amendment or supplement pursuant to this Article may, and shall if required by the Trustee, bear a notation in form approved by the Trustee as to any matter provided for in such amendment or supplement. If the Companies shall so determine, new Securities of any series so modified as to conform, in the opinion of the Trustee and the Companies, to any such amendment or supplement may be prepared and executed by the Companies and authenticated and delivered by the Trustee in exchange for Outstanding Securities of such series. -47- 56 ARTICLE XI. COVENANTS SECTION 11.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. Each Company covenants and agrees for the benefit of each series of Securities that it will duly and punctually pay the principal of and any premium and interest on the Securities of that series in accordance with the terms of the Securities and this Indenture. SECTION 11.02. MAINTENANCE OF OFFICE OR AGENCY. The Companies will maintain in each Place of Payment for any series of Securities an office or agency where Securities of that series may be presented or surrendered for payment, where Securities of that series may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Companies in respect of the Securities of that series and this Indenture may be served. The Companies will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency. If at any time the Companies shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Companies hereby appoint the Trustee as their agent to receive all such presentations, surrenders, notices and demands. The Companies may also from time to time designate one or more other offices or agencies where the Securities of one or more series may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; provided, however, that no such designation or rescission shall in any manner relieve the Companies of their obligation to maintain an office or agency in each Place of Payment for Securities of any series for such purposes. The Companies will give prompt written notice to the Trustee of any such designation or rescission and of any change in the location of any such other office or agency. SECTION 11.03. MONEY FOR SECURITIES PAYMENTS TO BE HELD IN TRUST. If either Company shall at any time act as Paying Agent for the Companies with respect to any series of Securities, it will, on or before each due date of the principal of or any premium or interest on any of the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal and any premium and interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Companies shall have one or more Paying Agents for any series of Securities, they will, prior to each due date of the principal of or any premium or interest on any Securities of that series, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held as provided by the Trust Indenture Act, and (unless such Paying Agent is the Trustee) the Companies will promptly notify the Trustee of their action or failure so to act. -48- 57 The Companies will cause each Paying Agent for any series of Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will (1) comply with the provisions of the Trust Indenture Act applicable to it as a Paying Agent and (2) during the continuance of any default by the Companies (or any other obligor upon the Securities of that series) in the making of any payment in respect of the Securities of that series, upon the written request of the Trustee to the Paying Agent, forthwith pay to the Trustee all sums held in trust by such Paying Agent for payment in respect of the Securities of that series. The Companies may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Companies or such Paying Agent, such sums to be held by the Trustee upon the same terms as those upon which such sums were held by the Companies or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Companies, in trust for the payment of the principal of or any premium or interest on any Security of any series and remaining unclaimed for two years after such principal, premium or interest has become due and payable shall be paid to the Companies on Company Request and in the manner set forth in such Company Request, or (if then held by either Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Companies for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Companies as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Companies cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Companies. SECTION 11.04. STATEMENT BY OFFICERS AS TO DEFAULT. The Companies will deliver to the Trustee, within 120 days after the end of each fiscal year of the Companies ending after the date hereof, an Officer's Certificate, stating whether or not to the best knowledge of the signers thereof the Companies are in default in the performance and observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder) and, if the Companies shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge. SECTION 11.05. RECORDING, FILING, ETC.; OPINIONS OF COUNSEL. The Companies will cause this Indenture, any Indentures supplemental to this Indenture, and any financing or continuation statements to be promptly recorded and filed and rerecorded and refiled in such a manner and in such places as may be required by law in order fully to preserve, protect and perfect the security of the Holders and all rights of the Trustee, and shall deliver to the Trustee: (a) upon the execution and delivery of this Indenture and of any indenture -49- 58 supplemental to this Indenture, an Opinion of Counsel either stating that, in the opinion of such counsel, this Indenture or such supplemental indenture and any financing or continuation statements have been properly recorded and filed so as to make effective and to perfect the security interest of the Trustee intended to be created by this Indenture for the benefit of the Holders from time to time in the First Mortgage Bonds, and reciting the details of such action, or stating that, in the opinion of such counsel, no such action is necessary to perfect or make such security interest effective and stating what, if any, action of the foregoing character may reasonably be expected to become necessary prior to August 1, 1998 to maintain, perfect and make such security interest effective; and (b) on or before August 1 of each year, beginning in 1998, an Opinion of Counsel either stating that in the opinion of such counsel such action has been taken, since the date of the most recent Opinion of Counsel furnished pursuant to this SECTION 11.05(b) or the first Opinion of Counsel furnished pursuant to SECTION 11.05(a), with respect to the recording, filing, rerecording, or refiling of this Indenture, each supplemental indenture and any financing or continuation statements, as is necessary to maintain and perfect the security interest of the Trustee intended to be created by this Indenture for the benefit of the Holders from time to time of the Securities in the First Mortgage Bonds, and reciting the details of such action, or stating that in the opinion of such counsel no such action is necessary to maintain and perfect such security interest and stating what, if any, action of the foregoing character may reasonably be expected to become necessary prior to the next succeeding August 1 to maintain, perfect and make such security interest effective. SECTION 11.06. WAIVER OF CERTAIN COVENANTS. Except as otherwise specified as contemplated by SECTION 3.01 for Securities of such series, the Companies may, with respect to the Securities of any series, omit in any particular instance to comply with any term, provision or condition set forth in any covenant provided pursuant to this ARTICLE 11 (except for the covenants set forth in SECTIONS 11.01 through 11.03 hereof) for the benefit of the Holders of such series if before the time for such compliance the Holders of a majority in principal amount of the Outstanding Securities of such series shall, by Act of such Holders, either waive such compliance in such instance or generally waive compliance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Companies and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. SECTION 11.07. CALCULATION OF ORIGINAL ISSUE DISCOUNT. If applicable, the Companies shall file with the Trustee promptly at the end of each calendar year a written notice specifying the amount of original issue discount (including daily rates and accrual periods) accrued on Outstanding Securities as of the end of such year. -50- 59 ARTICLE XII. REDEMPTION OF SECURITIES SECTION 12.01. APPLICABILITY OF ARTICLE. Securities of any series which are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and (except as otherwise specified as contemplated by SECTION 3.01 for such Securities) in accordance with this Article. SECTION 12.02. ELECTION TO REDEEM; NOTICE TO TRUSTEE. The election of the Companies to redeem any Securities shall be evidenced by Board Resolutions or in another manner specified as contemplated by SECTION 3.01 for such Securities. In case of any redemption at the election of the Companies, the Companies shall, at least 30 days prior to the Redemption Date fixed by the Companies (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date, of the principal amount of Securities of such series to be redeemed and, if applicable, of the tenor of the Securities to be redeemed. In the case of any redemption of Securities (a) prior to the expiration of any restriction on such redemption provided in the terms of such Securities or elsewhere in this Indenture, or (b) pursuant to an election of the Companies that is subject to a condition specified in the terms of such Securities or elsewhere in this Indenture, the Companies shall furnish the Trustee with an Officer's Certificate evidencing compliance with such restriction or condition. SECTION 12.03. SELECTION BY TRUSTEE OF SECURITIES TO BE REDEEMED. If less than all the Securities of any series are to be redeemed (unless all the Securities of such series and of a specified tenor are to be redeemed or unless such redemption affects only a single Security), the particular Securities to be redeemed shall be selected not more than 30 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and that may provide for the selection for redemption of a portion of the principal amount of any Security of such series, provided that the unredeemed portion of the principal amount of any Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security. If less than all the Securities of such series and of a specified tenor are to be redeemed (unless such redemption affects only a single Security), the particular Securities to be redeemed shall be selected not more than 30 days prior to the Redemption Date by the Trustee, from the Outstanding Securities of such series and specified tenor not previously called for redemption in accordance with the preceding sentence. The Trustee shall promptly notify the Companies in writing of the Securities selected for redemption as aforesaid and, in case of any Securities selected for partial redemption as aforesaid, the principal amount thereof to be redeemed. The provisions of the two preceding paragraphs shall not apply with respect to any redemption affecting only a single Security, whether such Security is to be redeemed in whole or in part. In the case of any such redemption in part, the unredeemed portion of the principal amount of the Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security. -51- 60 For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed. SECTION 12.04. NOTICE OF REDEMPTION. Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 15 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed, at his address appearing in the Security Register. All notices of redemption shall identity the Securities to be redeemed (including CUSIP number) and shall state: (1) the Redemption Date, (2) the Redemption Price, (3) if less than all the Outstanding Securities of any series and of a specified tenor consisting of more than a single Security are to be redeemed, the identification (and, in the case of partial redemption of any such Securities, the principal amounts) of the particular Securities to be redeemed and, if less than all the Outstanding Securities of any series and of a specified tenor consisting of a single Security are to be redeemed, the principal amount of the particular Security to be redeemed, (4) that on the Redemption Date the Redemption Price will become due and payable upon each such Security to be redeemed and, if applicable, that interest thereon will cease to accrue on and after said date, (5) the place or places where each such Security is to be surrendered for payment of the Redemption Price, and (6) that the redemption is for a sinking fund, if such is the case. Any notice which is given in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the Holder receives the notice. In any case, failure duly to give such notice, or any defect in notice, to the Holder of any Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security. -52- 61 SECTION 12.05. SECURITIES PAYABLE ON REDEMPTION DATE; DEPOSIT OF REDEMPTION PRICE. Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified; provided that the Companies shall have deposited with the Trustee or with a Paying Agent on or prior to such Redemption Date an amount sufficient to pay the Redemption Price, together with accrued interest to the Redemption Date. Interest on the Securities or portions thereof so called for redemption shall cease to bear interest from and after the Redemption Date. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Companies at the Redemption Price, together with accrued interest to the Redemption Date; provided, however, that, unless otherwise specified as contemplated by SECTION 3.01, installments of interest whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of SECTION 3.07. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, or if the Companies shall not have deposited with the Trustee or a Paying Agent on or prior to the Redemption Date an amount sufficient to pay the Redemption Price of all Securities called for redemption, together with the interest accrued to the Redemption Date, the notice of redemption shall be ineffective and the principal and any premium shall continue to bear interest from the Redemption Date at the rate prescribed therefor in the Security as if the notice of redemption had not been given. SECTION 12.06. RESERVED. SECTION 12.07. SECURITIES REDEEMED IN PART. Any Security that is to be redeemed only in part shall be surrendered at a Place of Payment therefor (with, if the Companies or the Trustee so require, due endorsement by, or a written instrument of transfer in form satisfactory to the Companies and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), and the Companies shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities of the same series and of like tenor, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. ARTICLE XIII. SINKING FUNDS SECTION 13.01. APPLICABILITY OF ARTICLE. The provisions of this Article shall be applicable to any sinking fund for the retirement of Securities of any series except as otherwise specified as contemplated by SECTION 3.01 for such Securities. The minimum amount of any sinking fund payment provided for by the terms of any Securities is herein referred to as a "MANDATORY SINKING FUND PAYMENT", and any payment in excess of -53- 62 such minimum amount provided for by the terms of such Securities is herein referred to as an "OPTIONAL SINKING FUND PAYMENT". If provided for by the terms of any Securities, the cash amount of any sinking fund payment may be subject to reduction as provided in SECTION 13.02. Each sinking fund payment shall be applied to the redemption of Securities as provided for by the terms of such Securities. SECTION 13.02. SATISFACTION OF SINKING FUND PAYMENTS WITH SECURITIES. The Companies (1) may deliver Outstanding Securities of a series (other than any previously called for redemption) and (2) may apply as a credit Securities of a series which have been redeemed either at the election of the Companies pursuant to the terms of such Securities or through the application of permitted optional sinking fund payments pursuant to the terms of such Securities, in each case in satisfaction of all or any part of any sinking fund payment with respect to any Securities of such series required to be made pursuant to the terms of such Securities as and to the extent provided for by the terms of such Securities; provided that the Securities to be so credited have not been previously so credited. The Securities to be so credited shall be received and credited for such purpose by the Trustee at the Redemption Price, as specified in the Securities so to be redeemed, for redemption through operation of the sinking fund and the amount of such sinking fund payment shall be reduced accordingly. SECTION 13.03. REDEMPTION OF SECURITIES FOR SINKING FUND. Not less than 30 days prior to each sinking fund payment date for any Securities, the Companies will deliver to the Trustee an Officer's Certificate specifying the amount of the next ensuing sinking fund payment for such Securities pursuant to the terms of such Securities, the portion thereof, if any, that is to be satisfied by payment of cash and the portion thereof, if any, that is to be satisfied by delivering and crediting Securities pursuant to SECTION 13.02 and stating the basis for such credit and that such Securities have not been previously so credited and will also deliver to the Trustee any Securities to be so delivered. Not less than 15 days prior to each such sinking fund payment date, the Trustee shall select the Securities to be redeemed upon such sinking fund payment date in the manner specified in SECTION 12.03 and cause notice of the redemption thereof to be given in the name of and at the expense of the Companies in the manner provided in SECTION 12.04. Such notice having been duly given, the redemption of such Securities shall be made upon the terms and in the manner stated in SECTIONS 12.05 and 12.07. -54- 63 ARTICLE XIV. DEFEASANCE AND COVENANT DEFEASANCE SECTION 14.01. OPTION OF THE COMPANIES TO EFFECT DEFEASANCE OR COVENANT DEFEASANCE. The Companies may elect, at their option at any time, to have SECTION 14.02 or SECTION 14.03 applied to any Securities or any series of Securities, as the case may be, designated pursuant to SECTION 3.01 as being defeasible pursuant to such SECTION 14.02 or 14.03, in accordance with any applicable requirements provided pursuant to SECTION 3.01 and upon compliance with the conditions set forth below in this Article. Any such election shall be evidenced by Board Resolutions or in another manner specified as contemplated by SECTION 3.01 for such Securities. SECTION 14.02. DEFEASANCE AND DISCHARGE. Upon the exercise of the option (if any) of the Companies to have this Section applied to any Securities or any series of Securities, as the case may be, the Companies shall be deemed to have been discharged from their obligations with respect to such Securities as provided in this Section on and after the date the conditions set forth in SECTION 14.04 are satisfied (hereinafter called "Defeasance") and the obligation of the applicable Company to make payment with respect to the principal of and premium, if any, and interest on the First Mortgage Bonds shall be satisfied and discharged, as provided in the supplemental trust indenture or indentures to the applicable First Mortgage creating such First Mortgage Bonds and the First Mortgage Bonds shall cease to secure the Securities in any manner. For this purpose, such Defeasance means that the Companies shall be deemed to have paid and discharged the entire indebtedness represented by such Securities and to have satisfied all their other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Companies, shall execute proper instruments acknowledging the same), subject to the following which shall survive until otherwise terminated or discharged hereunder: (1) the rights of Holders of such Securities to receive, solely from the trust fund described in SECTION 14.04 and as more fully set forth in such Section, payments in respect of the principal of and any premium and interest on such Securities when payments are due, (2) the obligations of the Companies with respect to such Securities under SECTIONS 3.04, 3.05, 3.06, 11.02 and 11.03 and with respect to the Trustee under SECTION 7.07, (3) the rights, powers, trusts, duties and immunities of the Trustee hereunder, (4) this Article, and (5) the obligation to repay that portion of the principal of and interest on the Insured Security that is paid by AMBAC Indemnity pursuant to the Financial Guaranty Insurance Policy. Subject to compliance with this Article, the Companies may exercise their option (if any) to have this Section applied to any Securities notwithstanding the prior exercise of their option (if any) to have SECTION 14.03 applied to such Securities. -55- 64 SECTION 14.03. COVENANT DEFEASANCE. Upon the exercise of the option (if any) of the Companies to have this Section applied to any Securities or any series of Securities, as the case may be, (1) the Companies shall be released from any covenants provided pursuant to SECTIONS 11.04 through 11.07 for the benefit of the Holders of such Securities and (2) the occurrence of any event specified in SECTION 6.01(4) (with respect to any such covenants provided pursuant to SECTIONS 11.04 through 11.07 shall be deemed not to be or result in an Event of Default with respect to such Securities as provided in this Section on and after the date the conditions set forth in SECTION 14.04 are satisfied (hereinafter called "COVENANT DEFEASANCE"). For this purpose, such Covenant Defeasance means that, with respect to such Securities, the Companies may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such specified Section (to the extent so specified in the case of SECTION 6.01(4)), whether directly or indirectly by reason of any reference elsewhere herein to any such Section or by reason of any reference in any such Section to any other provision herein or in any other document, but the remainder of this Indenture and such Securities shall be unaffected thereby. In addition, upon the Companies' exercise under SECTION 14.01 hereof of the option applicable to this SECTION 14.03, subject to the satisfaction of the conditions set forth in SECTION 14.04 hereof, SECTIONS 6.01(1) through 6.01(6) and SECTION 6.01(9) hereof shall not constitute Events of Default. SECTION 14.04. CONDITIONS TO DEFEASANCE OR COVENANT DEFEASANCE. The following shall be the conditions to the application of SECTION 14.02 or SECTION 14.03 to any Securities or any series of Securities, as the case may be: (1) The Companies shall irrevocably have deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities, (A) money in an amount, or (B) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, in each case sufficient, in a report from a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and that shall be applied by the Trustee to pay and discharge, the principal of and any premium and interest on such Securities on the respective Stated Maturities or on any Redemption Date established pursuant to Clause (9) below, in accordance with the terms of this Indenture and such Securities. As used herein, "U.S. GOVERNMENT OBLIGATION" means (x) any security which is (i) a direct obligation of the United States of America for the payment of which the full faith and credit of the United States of America is pledged or (ii) an obligation of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case (i) or (ii), is not callable or redeemable at the option of the issuer thereof, and (y) any depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any U.S. Government Obligation which is specified in Clause (x) above and held by such bank for the account of the holder of such depositary receipt, or with respect to any specific payment of principal of or interest on any U.S. Government Obligation which is so specified and held, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal or interest evidenced by such depositary receipt, and (z) any certificates or other evidences of ownership interest in obligations of the character described in either case (i) or (ii) or in specified portions thereof, including without -56- 65 limitation, portions consisting solely of the interest thereon provided that such obligations are held in a bank or trust company acceptable to the Trustee in a special account separate from the assets of such custodian. (2) In the event of an election to have SECTION 14.02 apply to any Securities or any series of Securities, as the case may be, the Companies shall have delivered to the Trustee an Opinion of Counsel stating that (A) the Companies have received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of this instrument, there has been a change in the applicable Federal income tax law, in either case (A) or (B) to the effect that, and based thereon such opinion shall confirm that, the Holders of such Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit, Defeasance and discharge to be effected with respect to such Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit, Defeasance and discharge were not to occur. (3) In the event of an election to have SECTION 14.03 apply to any Securities or any series of Securities, as the case may be, the Companies shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of such Securities will not recognize gain or loss for Federal income tax purposes as a result of the deposit and Covenant Defeasance to be effected with respect to such Securities and will be subject to Federal income tax on the same amount, in the same manner and at the same times as would be the case if such deposit and Covenant Defeasance were not to occur. (4) The Companies shall have delivered to the Trustee an Officer's Certificate to the effect that neither such Securities nor any other Securities of the same series, if then listed on any securities exchange, will be delisted as a result of such deposit. (5) No event that is, or after notice or lapse of time or both would become, an Event of Default with respect to such Securities or any other Securities shall have occurred and be continuing at the time of such deposit (other than an Event of Default resulting from the borrowing of funds to be applied to such deposit which will be cured upon such Defeasance or Covenant Defeasance) or, with regard to any such event specified in SECTIONS 6.01(7) and (8), at any time on or prior to the 90th day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until after such 90th day). (6) Such Defeasance or Covenant Defeasance shall not cause the Trustee to have a conflicting interest within the meaning of the Trust Indenture Act (assuming all Securities are in default within the meaning of such Act). (7) Such Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under, any material agreement or instrument to which the Companies are a party or by which they are bound. (8) Such Defeasance or Covenant Defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning of the Investment Company Act unless such trust shall be registered under such Act or exempt from registration thereunder. (9) The Companies shall have delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that all conditions precedent with respect to such Defeasance or Covenant Defeasance have been complied with. -57- 66 SECTION 14.05. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS TO BE HELD IN TRUST; MISCELLANEOUS PROVISIONS. Subject to the provisions of the last paragraph of SECTION 11.03, all money and U.S. Government Obligations (including the proceeds thereof) deposited with the Trustee pursuant to SECTION 14.04 in respect of any Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any such Paying Agent (including either Company acting as Paying Agent for the Companies) as the Trustee may determine, to the Holders of such Securities, of all sums due and to become due thereon in respect of principal and any premium and interest, but money so held in trust need not be segregated from other funds except to the extent required by law. Any moneys held by the Trustee in accordance with the provision of this Article shall be invested by the Trustee only in U.S. Government Obligations having maturity dates, which, at the option of the holder of those obligations, shall be not later than the date or dates at which moneys will be required for the purposes described above. Unless otherwise directed by the Companies, the Trustee shall not be obligated to invest U.S. Government Obligations deposited with the Trustee in accordance with the provisions of this Article. The Companies shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to SECTION 14.04 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of Outstanding Securities. Anything in this Article to the contrary notwithstanding, the Trustee shall deliver or pay to the Companies from time to time upon Company Request and in the manner set forth in such Company Request any money or U.S. Government Obligations (including any income or interest earned by, or increment to, the investments held under this Section) held by it as provided in SECTION 14.04 with respect to any Securities that, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof that would then be required to be deposited to effect the Defeasance or Covenant Defeasance, as the case may be, with respect to such Securities. SECTION 14.06. REINSTATEMENT. If the Trustee or the Paying Agent is unable to apply any money in accordance with this Article with respect to any Securities by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the obligations under this Indenture and such Securities from which the Companies have been discharged or released pursuant to SECTION 14.02 or 14.03 shall be revived and reinstated as though no deposit had occurred pursuant to this Article with respect to such Securities, until such time as the Trustee or Paying Agent is permitted to apply all money held in trust pursuant to SECTION 14.05 with respect to such Securities in accordance with this Article; provided, however, that if the Companies make any payment of principal of or any premium or interest on any such Security following such reinstatement of its obligations, the Companies shall be subrogated to the rights (if any) of the Holders of such Securities to receive such payment from the money so held in trust. This instrument may be executed in any number of counterparts, each of which so -58- 67 executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. [SIGNATURES APPEAR ON FOLLOWING PAGE.] -59- 68 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written. THE CLEVELAND ELECTRIC ILLUMINATING COMPANY and THE TOLEDO EDISON COMPANY By: ---------------------------------- Name: ------------------------------- Title:______________for each Company THE CHASE MANHATTAN BANK, as Trustee By: ---------------------------------- Name: ------------------------------- Title: ------------------------------ S-1 EX-4.D 11 EXHIBIT 4(D) 1 Exhibit 4 (d) ================================================================================ THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND THE TOLEDO EDISON COMPANY ----------------------------------- $720,000,000 7.19% SERIES A SECURED NOTES DUE 2000 7.67% SERIES A SECURED NOTES DUE 2004 7.13% SERIES A SECURED NOTES DUE 2007 7.19% SERIES B SECURED NOTES DUE 2000 7.67% SERIES B SECURED NOTES DUE 2004 7.13% SERIES B SECURED NOTES DUE 2007 ----------------------------------- FIRST SUPPLEMENTAL INDENTURE DATED JUNE 13, 1997 ----------------------------------- THE CHASE MANHATTAN BANK Trustee ================================================================================ 2 FIRST SUPPLEMENTAL INDENTURE, dated June 13, 1997, among THE CLEVELAND ELECTRIC ILLUMINATING COMPANY, a corporation duly organized and existing under the laws of the State of Ohio (herein called "Cleveland Electric"), having its principal office at 6200 Oak Tree Boulevard, Independence, Ohio 44131, THE TOLEDO EDISON COMPANY, a corporation duly organized and existing under the laws of the State of Ohio (herein called "Toledo Edison"), having its principal office at 300 Madison Avenue, Toledo, Ohio 43652, and THE CHASE MANHATTAN BANK, a New York banking corporation, as Trustee (herein called the "Trustee") under the Indenture dated as of June 13, 1997 between the Companies and the Trustee (the "Indenture"). RECITALS OF THE COMPANIES The Companies have executed and delivered the Indenture to the Trustee to provide for the issuance from time to time of their securities (the "Securities"), said Securities to be issued in one or more series as in the Indenture provided. Unless otherwise defined in Article III hereof, capitalized terms used herein shall have the meaning ascribed to such terms in the Indenture. Pursuant to the terms of the Indenture, the Companies desire to provide for the establishment of six new series of their Securities to be known as their 7.19% Series A Secured Notes due 2000 (herein called the "Initial 2000 Notes"), 7.67% Series A Secured Notes due 2004 (herein called the "Initial 2004 Notes") and 7.13% Series A Secured Notes due 2007 (herein called the "Initial 2007 Notes" and, together with the Initial 2000 Notes and the Initial 2004 Notes, the "Initial Notes") and, if and when issued pursuant to a Registered Exchange Offer, 7.19% Series B Secured Notes due 2000 (herein called the "Exchange 2000 Notes"), 7.67% Series B Secured Notes due 2004 (herein called the "Exchange 2004 Notes") and 7.13% Series B Secured Notes due 2007 (herein called the "Exchange 2007 Notes" and, together with the Exchange 2000 Notes and the Exchange 2004 Notes, the "Exchange Notes" and, together with the Initial Notes, the "Notes"), the form and substance of such Notes and the terms, provisions, and conditions thereof to be set forth as provided in the Indenture and this First Supplemental Indenture. All things necessary to make this First Supplemental Indenture a valid agreement of each Company, and to make the Notes, when executed by each Company and authenticated and delivered by the Trustee, the valid joint and several obligations of each Company, have been done. NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Notes by the Holders thereof, and for the purpose of setting forth, as provided in the Indenture, the form and substance of the Notes and the terms, provisions, and conditions thereof, it is mutually agreed, for the equal and proportionate benefit of all Holders of the Notes, as follows: ARTICLE I. GENERAL TERMS AND CONDITIONS OF THE NOTES SECTION I.01 ESTABLISHMENT OF NOTES. (a) INITIAL NOTES. There shall be and are hereby authorized three series of Securities as follows: 3
================================================================================================== DESIGNATION PRINCIPAL AMOUNT ----------- ---------------- - -------------------------------------------------------------------------------------------------- 7.19% Series A Secured Notes due 2000 $220,000,000 - -------------------------------------------------------------------------------------------------- 7.67% Series A Secured Notes due 2004 $350,000,000 - -------------------------------------------------------------------------------------------------- 7.13% Series A Secured Notes due 2007 $150,000,000 ==================================================================================================
The Initial Notes shall mature and the principal thereof shall be due and payable together with all accrued and unpaid interest thereon on the following dates:
===================================================================================================================== SERIES MATURITY DATE ------ ------------- - --------------------------------------------------------------------------------------------------------------------- Initial 2000 Notes July 1, 2000 - --------------------------------------------------------------------------------------------------------------------- Initial 2004 Notes July 1, 2004 - --------------------------------------------------------------------------------------------------------------------- Initial 2007 Notes July 1, 2007 =====================================================================================================================
The Initial Notes are being offered and sold by the Companies pursuant to the Placement Agreement and shall be issued in the form of registered Initial Notes without interest coupons. Principal of and interest on the Initial Notes will be payable, the transfer of Initial Notes will be registrable and Initial Notes will be exchangeable for Exchange Notes bearing identical terms and provisions (except with respect to transfer restrictions), at the office or agency of the Companies in the Borough of Manhattan, The City and State of New York; provided, however, that payment of interest may be made at the option of the Companies by check mailed to the registered holder at such address as shall appear in the Security Register. (b) EXCHANGE NOTES. There shall be and are hereby authorized three series of Securities as follows:
================================================================================================== DESIGNATION PRINCIPAL AMOUNT ----------- ---------------- - -------------------------------------------------------------------------------------------------- 7.19% Series B Secured Notes due 2000 $220,000,000 - -------------------------------------------------------------------------------------------------- 7.67% Series B Secured Notes due 2004 $350,000,000 - -------------------------------------------------------------------------------------------------- 7.13% Series B Secured Notes due 2007 $150,000,000 ==================================================================================================
The Exchange Notes are issuable only in exchange for the Initial Notes in the Registered Exchange Offer, - 3 - 4 as described in the Registration Agreement. The Exchange Notes shall mature and the principal shall be due and payable together with all accrued and unpaid interest thereon on the following dates:
===================================================================================================================== SERIES MATURITY DATE ------ ------------- - --------------------------------------------------------------------------------------------------------------------- Exchange 2000 Notes July 1, 2000 - --------------------------------------------------------------------------------------------------------------------- Exchange 2004 Notes July 1, 2004 - --------------------------------------------------------------------------------------------------------------------- Exchange 2007 Notes July 1, 2007 =====================================================================================================================
SECTION I.02 FORM OF INITIAL NOTES, GLOBAL NOTES AND DEFINITIVE NOTES. (a) FORM OF INITIAL NOTES. The Initial Notes shall be substantially in the form of Exhibit A hereto, which is hereby incorporated in and expressly made a part of this First Supplemental Indenture. (b) GLOBAL NOTES. (i) Initial Notes offered and sold to a QIB in reliance on Rule 144A under the Securities Act ("Rule 144A"), as provided in the Placement Agreement, shall be issued initially in the form of one or more permanent global securities in definitive, fully registered form without interest coupons with the global notes legend and the restricted notes legend set forth in Exhibit A hereto (each, a "Restricted Global Note"), which shall be deposited on behalf of the Purchasers with the Trustee, at its New York office, as Securities Custodian, and registered in the name of the Depository or a nominee of the Depository, duly executed by the Companies and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of each Restricted Global Note may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depository or its nominee, as the case may be, as hereinafter provided. (ii) Initial Notes offered and sold in reliance on Regulation S under the Securities Act ("Regulation S"), as provided in the Placement Agreement, shall be issued initially in the form of one or more permanent global securities in definitive, fully registered form without interest coupons with the global notes legend and the restricted notes legend set forth in Exhibit A hereto (each, a "Regulation S Global Note" and, together with the Restricted Global Notes, the "Global Notes"), which shall be deposited on behalf of the Purchasers with the Trustee, at its New York office, as Securities Custodian, and registered in the name of the Depository or a nominee of the Depository, duly executed by the Companies and authenticated by the Trustee as hereinafter provided. Prior to the 40th day after the Closing Date, beneficial interests in the Regulation S Global Note may only be held for the accounts of designated agents holding on behalf of the Euroclear System ("Euroclear") or Cedel Bank ("Cedel"). Following the 40th day after the Closing Date, beneficial interests in the Regulation S Global Note may be held through Euroclear, Cedel or other participants having accounts at the Depository. The aggregate principal amount of each Regulation S Global Note may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depository or its nominee, as the case may be, as - 4 - 5 hereinafter provided. (iii) Members of, or participants in, the Depository ("Agent Members") shall have no rights under this First Supplemental Indenture or the Indenture with respect to any Global Note held on their behalf by the Depository or by the Trustee as the Securities Custodian or under such Global Note, and the Depository may be treated by the Companies, the Trustee and any agent of the Companies or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Companies, the Trustee or any agent of the Companies or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and its Agent Members, the operation of customary practices of such Depository governing the exercise of the rights of a holder of a beneficial interest in any Global Note. (iv) The provisions of the "Operating Procedures of the Euroclear System" and "Terms and Conditions Governing Use of Euroclear" and the "Management Regulations" and "Instructions to Participants" of Cedel shall be applicable to interests in the Regulations S Global Notes that are held by Agent Members through Euroclear or Cedel. The Trustee shall have no obligation to notify Holders of any such procedures or to monitor or enforce compliance with the same. (c) DEFINITIVE NOTES. Except as provided in this Section 1.02 or Article II, owners of beneficial interests in Global Notes will not be entitled to receive physical delivery of Initial Notes. Purchasers of Initial Notes who are Institutional Accredited Investors and are not QIBs and did not purchase Initial Notes sold in reliance on Regulation S will receive Definitive Notes; PROVIDED, HOWEVER, that upon transfer of such Definitive Notes to a QIB or in accordance with Regulation S, such Definitive Notes will, unless the relevant Global Note has previously been exchanged, be exchanged for an interest in a Global Note pursuant to the provisions of Article II. SECTION I.03 INTEREST ON THE INITIAL NOTES. (a) THE INITIAL 2000 NOTES. Each Initial 2000 Note will bear interest at the rate of 7.19% per annum from June 18, 1997 until the principal thereof is paid or duly provided for, and on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum, payable on January 1 and July 1 of each year, commencing on July 1, 1997 to the Person in whose name such Initial 2000 Note or any predecessor Initial Note is registered, at the close of business on the December 15 or June 15 next preceding such interest payment date; provided, however, that the record date for the interest payment due on July 1, 1997 shall be June 25, 1997 and provided further that the interest payable at maturity will be payable to the Person to whom principal shall be payable. Interest on each Initial 2000 Note will cease to accrue upon the exchange of such Note for an Exchange 2000 Note, and if the record date for the interest payment date next following that exchange occurs after that exchange, the accrued and unpaid interest on that Initial 2000 Note will be payable to the Person in whose name such Exchange 2000 Note is registered on that record date. Each Initial 2000 Note will bear Additional Interest as and to the extent required under and in accordance with Section 1.03(f) hereof. - 5 - 6 (b) THE INITIAL 2004 NOTES. Each Initial 2004 Note will bear interest at the rate of 7.67% per annum from June 18, 1997 until the principal thereof is paid or duly provided for, and on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum, payable on January 1 and July 1 of each year, commencing on July 1, 1997 to the Person in whose name such Initial 2004 Note or any predecessor Initial Note is registered, at the close of business on the December 15 or June 15 next preceding such interest payment date; provided, however, that the record date for the interest payment due on July 1, 1997 shall be June 25, 1997 and provided further that the interest payable at maturity will be payable to the Person to whom principal shall be payable. Interest on each Initial 2004 Note will cease to accrue upon the exchange of such Note for an Exchange 2004 Note, and if the record date for the interest payment date next following that exchange occurs after that exchange, the accrued and unpaid interest on that Initial 2004 Note will be payable to the Person in whose name such Exchange 2004 Note is registered on that record date. Each Initial 2004 Note will bear Additional Interest as and to the extent required under and in accordance with Section 1.03(f) hereof. (c) THE INITIAL 2007 NOTES. Each Initial 2007 Note will bear interest at the rate of 7.13% per annum from June 18, 1997 until the principal thereof is paid or duly provided for, and on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum, payable on January 1 and July 1 of each year, commencing on July 1, 1997 to the Person in whose name such Initial 2007 Note or any predecessor Initial Note is registered, at the close of business on the December 15 or June 15 next preceding such interest payment date; provided, however, that the record date for the interest payment due on July 1, 1997 shall be June 25, 1997 and provided further that the interest payable at maturity will be payable to the Person to whom principal shall be payable. Interest on each Initial 2007 Note will cease to accrue upon the exchange of such Note for an Exchange 2007 Note, and if the record date for the interest payment date next following that exchange occurs after that exchange, the accrued and unpaid interest on that Initial 2007 Note will be payable to the Person in whose name such Exchange 2007 Note is registered on that record date. Each Initial 2007 Note will bear Additional Interest as and to the extent required under and in accordance with Section 1.03(f) hereof. (d) DEFAULTED INTEREST ON THE INITIAL NOTES. Any interest installment on the Initial Notes not punctually paid or duly provided for shall forthwith cease to be payable to the registered holders on the Regular Record Date, and may be paid to the Person in whose name the Initial Note (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date to be fixed by the Trustee for the payment of such defaulted interest, notice of which shall be given to the registered holders of the Initial Notes not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Initial Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. (e) CALCULATION OF INTEREST ON THE INITIAL NOTES. The amount of interest or Additional Interest payable for any period on the Initial Notes will be computed on the basis of a 360 day year of - 6 - 7 twelve 30-day months. In the event that any date on which interest or Additional Interest is payable on the Initial Notes is not a Business Day, then payment of interest or Additional Interest payable on such date will be made on the next preceding day that is a Business Day. (f) ADDITIONAL INTEREST UNDER CERTAIN CIRCUMSTANCES. (i) Additional interest (the "Additional Interest") with respect to the Initial Notes will accrue as follows if any of the following events occurs (each event identified in clause (A), (B) or (C) below, a "Failure to Register"): (A) If by the 150th day after the date of the original issue of the Initial Notes (that date of issue, the "Closing Date"), neither the Exchange Offer Registration Statement nor a Shelf Registration Statement has been filed with the Commission; (B) If by the 180th day after the Closing Date, the Registered Exchange Offer is not consummated and, if required in lieu thereof, the Shelf Registration Statement is not declared effective by the Commission; or (C) If, after the 180th day after the Closing Date, and after either the Exchange Offer Registration Statement or the Shelf Registration Statement is declared effective, (1) that Registration Statement thereafter ceases to be effective prior to completion of the Exchange Offer or the sale of all the Transfer Restricted Notes registered pursuant to the Shelf Registration Statement, as the case may be; or (2) that Registration Statement or the related prospectus ceases to be usable in connection with resales of Transfer Restricted Notes during the periods specified in the Registration Agreement (except as permitted in paragraph (ii) of this paragraph (f)) because either (x) any event occurs as a result of which the related prospectus forming part of that Registration Statement would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or (y) it shall be necessary to amend that Registration Statement, or supplement the related prospectus, to comply with the Securities Act or the Exchange Act or the respective rules thereunder. Additional Interest shall accrue on the Initial Notes of each series over and above the interest set forth in the title of the Initial Notes of that series from and including the date on which any such Failure to Register shall occur to but excluding the date on which all such Failures to Register have been cured, at a rate of 0.50% per annum. (ii) A Failure to Register referred to in Section 1.03(f)(i)(C) is deemed not to be continuing in relation to a Registration Statement or the related prospectus if (A) that Failure to Register has occurred solely as a result of (x) the filing of a post-effective amendment to that Registration Statement to incorporate annual audited financial information with respect to the Companies, when such post-effective amendment is not yet effective and needs to be declared effective to permit Holders to use the related prospectus or (y) the occurrence of other material events or developments with respect to the Companies or their Affiliates that would need to be described in that Registration Statement or the related prospectus, and (B) in the case of clause (y), the Companies are proceeding promptly and in good faith to - 7 - 8 amend or supplement that Registration Statement and related prospectus to describe those events or, in the case of material developments that the Companies determine in good faith must remain confidential for business reasons, the Companies are proceeding promptly and in good faith to take such steps as are necessary so that those developments need no longer remain confidential, but in any case, if any Failure to Register (including any referred to in clause (x) or (y), above) continues for a period in excess of 45 days, Additional Interest will be payable in accordance with the above paragraph from the day following the last day of that 45-day period until the date on which that Failure to Register is cured. (iii) Any Additional Interest payable will be payable on the regular interest payment dates with respect to the Initial Notes, in the same manner as the manner in which regular interest is payable. The amount of Additional Interest for any period will be determined by multiplying the applicable Additional Interest rate by the principal amount of the applicable Initial Notes, multiplied by a fraction, the numerator of which is the number of days that Additional Interest rate was applicable during that period (determined on the basis of a 360-day year comprised of twelve 30-day months), and the denominator of which is 360. (iv) For all purposes of the Indenture, this First Supplemental Indenture and the Initial Notes, the Trustee is permitted to assume for all purposes that Additional Interest is not due in respect of an Initial Note until such time as the Company shall deliver an Officer's Certificate to the Trustee stating that Additional Interest is due in respect of one or more series of Initial Notes (such Officer's Certificate to also state the date on which Additional Interest began to accrue). Upon receipt of such an Officer's Certificate, the Trustee is permitted to assume for all purposes that Additional Interest shall be due as set forth in such Officer's Certificate until such time as such Officer's Certificate shall be superseded by a subsequent Officer's Certificate pursuant to this Section 1.03 stating that Additional Interest is no longer due in respect of the Initial Notes (such Officer's Certificate to also state the date on which Additional Interest ceased to accrue). Absent receipt by it of an Officer's Certificate specifying that Additional Interest has begun accruing or an Officer's Certificate that Additional Interest is no longer accruing, the Trustee shall not be charged with knowledge of such matters unless a Responsible Officer of the Trustee assigned to the Corporate Trustee Administration of the Trustee (or any successor division or department of the Trustee) shall have actual knowledge that a Failure to Register has occurred and is continuing, or has been cured, as applicable. SECTION I.04 THE EXCHANGE NOTES. The Exchange Notes shall be substantially in the form of, and contain the terms and provisions set forth in, Exhibit B hereto, which is hereby incorporated in and expressly made a part of this First Supplemental Indenture. The Trustee shall authenticate and deliver Exchange Notes of any series for issue only in a Registered Exchange Offer pursuant to the Registration Agreement, for a like principal amount of Initial Notes of the series bearing interest at the same rate, in each case pursuant to a Company Order. Such Company Order shall specify the series and the amount of the Exchange Notes to be authenticated and the date on which the original issue of such Exchange Notes is to be authenticated. Prior to authenticating and delivering Exchange Notes pursuant to this Section 1.04, the Trustee may request that the Companies deliver an Officer's Certificate and/or an Opinion of Counsel stating that the Exchange Notes are being issued pursuant to an effective registration statement in accordance with the Registration Agreement. Except as provided in the Indenture, the - 8 - 9 aggregate principal amount of Notes outstanding at any time may not exceed (x) $220,000,000 with respect to the Initial 2000 Notes and the Exchange 2000 Notes, (y) $350,000,000 with respect to the Initial 2004 Notes and the Exchange 2004 Notes and (z) $150,000,000 with respect to the Initial 2007 Notes and the Exchange 2007 Notes. If an Exchange Note is authenticated and delivered in exchange for an Initial Note between a record date for the payment of interest on that Initial Note and the related interest payment date, the interest that accrues on such Exchange Note from the date of authentication thereof to that interest payment date shall be payable to the Person in whose name such Exchange Note was issued on its issuance date. SECTION I.05 INTEREST ON THE EXCHANGE NOTES. (a) THE EXCHANGE 2000 NOTES. Each Exchange 2000 Note will bear interest at the rate of 7.19% per annum from its date of authentication until the principal thereof is paid or duly provided for, and on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum, payable on January 1 and July 1 of each year, commencing on July 1, 1997 to the Person in whose name such Exchange 2000 Note or any predecessor Exchange Note is registered, at the close of business on the December 15 or June 15 next preceding such interest payment date; provided, however, that the interest payable at maturity will be payable to the Person to whom principal shall be payable. (b) THE EXCHANGE 2004 NOTES. Each Exchange 2004 Note will bear interest at the rate of 7.67% per annum from its date of authentication until the principal thereof is paid or duly provided for, and on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum, payable on January 1 and July 1 of each year, commencing on July 1, 1997 to the Person in whose name such Exchange 2004 Note or any predecessor Exchange Note is registered, at the close of business on the December 15 or June 15 next preceding such interest payment date; provided, however, that the interest payable at maturity will be payable to the Person to whom principal shall be payable. (c) THE EXCHANGE 2007 NOTES. Each Exchange 2007 Note will bear interest at the rate of 7.13% per annum from its date of authentication until the principal thereof is paid or duly provided for, and on any overdue principal and (to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the same rate per annum, payable on January 1 and July 1 of each year, commencing on July 1, 1997 to the Person in whose name such Exchange 2007 Note or any predecessor Exchange Note is registered, at the close of business on the December 15 or June 15 next preceding such interest payment date; provided, however, that the interest payable at maturity will be payable to the Person to whom principal shall be payable. (d) DEFAULTED INTEREST ON THE EXCHANGE NOTES. Any interest installment on the Exchange Notes not punctually paid or duly provided for shall forthwith cease to be payable to the registered holders on the Regular Record Date, and may be paid to the Person in whose name the Exchange Note (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date to be fixed by the Trustee for the payment of such defaulted interest, notice of which shall be given to the registered - 9 - 10 holders of the Exchange Notes not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Exchange Notes may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. (e) CALCULATION OF INTEREST ON THE EXCHANGE NOTES. The amount of interest payable for any period on the Exchange Notes will be computed on the basis of a 360 day year of twelve 30-day months. In the event that any date on which interest is payable on the Exchange Notes is not a Business Day, then payment of interest payable on such date will be made on the next preceding day that is a Business Day. SECTION I.06 FIRST MORTGAGE BONDS. (a) The Companies hereby deliver to the Trustee, for the benefit of the holders of the Notes, First Mortgage Bonds, which shall serve equally and ratably as security for any and all obligations of the Companies under the Notes, including, but not limited to, the payment of principal and interest on such Notes when and as the same shall become due and payable. The First Mortgage Bonds so delivered consist of (1) $175,000,000 principal amount of Cleveland Electric's First Mortgage Bonds, Series due 2000, and $45,000,000 principal amount of Toledo Edison's First Mortgage Bonds, Series due 2000, (2) $280,000,000 principal amount of Cleveland Electric's First Mortgage Bonds, Series due 2004, and $70,000,000 principal amount of Toledo Edison's First Mortgage Bonds, Series due 2004-A, and (3) $120,000,000 principal amount of Cleveland Electric's First Mortgage Bonds, Series due 2007, and $30,000,000 principal amount of Toledo Edison's First Mortgage Bonds, Series due 2007. The aggregate principal amount of the First Mortgage Bonds being delivered hereunder is subject to reduction in accordance with the terms of the Cleveland Electric First Mortgage and the Toledo Edison First Mortgage. (b) The Trustee acknowledges receipt of and accepts the First Mortgage Bonds in the aggregate principal amount of $720,000,000, for the benefit of the holders of the Notes, as security for any and all obligations of the Companies under the Notes, including, but not limited to, the payment of principal and interest on the Notes when and as the same shall become due and payable. SECTION I.07 DEFEASANCE. The Notes shall be defeasible pursuant to Section 14.02 and Section 14.03 of the Indenture. SECTION I.08 PAYING AGENT. The Chase Manhattan Bank will be the Paying Agent for the Notes. The Depository Trust Company will be the Depository for the Notes. SECTION I.09 AMBAC INDEMNITY INSURED NOTES. Payment of the principal of and interest on the Initial 2007 Notes and the Exchange 2007 Notes (collectively, the "2007 Notes" and each, a "2007 Note") is insured by a financial guaranty insurance policy ("Policy") issued by AMBAC Indemnity. Each 2007 Note shall bear the AMBAC Indemnity insurance legend set forth in Exhibit A hereto. For as long as the Policy is in full force and effect, the Companies and the Trustee agree as - 10 - 11 follows: (a) the Trustee or the Paying Agent, if any, shall notify AMBAC Indemnity at least one (1) day after any Interest Payment Date of the nonpayment of the principal of or interest on the 2007 Notes on such Interest Payment Date. Such notice shall specify the amount of the deficiency, the 2007 Notes to which such deficiency is applicable and whether such 2007 Notes is deficient as to principal or interest, or both. If the Trustee or Paying Agent, if any, has not so notified AMBAC Indemnity at least one (1) day after an Interest Payment Date, AMBAC Indemnity will make payments of principal or interest due on the 2007 Notes on or before the first (1st) day next following the date on which AMBAC Indemnity shall have received notice of nonpayment from the Trustee or Paying Agent, if any. (b) the Trustee or Paying Agent, if any, shall, after giving notice to AMBAC Indemnity as provided in (a) above, make available to AMBAC Indemnity and, at AMBAC Indemnity's direction, to the United States Trust Company of New York, as insurance trustee for AMBAC Indemnity or any successor insurance trustee (the "Insurance Trustee"), the registration books of the Companies relating to the 2007 Notes maintained by the Trustee or Paying Agent, if any. (c) the Trustee or Paying Agent, if any, shall provide AMBAC Indemnity and the Insurance Trustee with a list of registered owners of 2007 Notes entitled to receive principal or interest payments from AMBAC Indemnity under the terms of the Policy, and shall make arrangements with the Insurance Trustee (i) to mail checks or drafts to the registered owners of 2007 Notes entitled to receive full or partial interest payments from AMBAC Indemnity and (ii) to pay principal upon 2007 Notes surrendered to the Insurance Trustee by the registered owners of 2007 Notes entitled to receive full or partial principal payments from AMBAC Indemnity. (d) the Trustee or Paying Agent, if any, shall, at the time it provides notice to AMBAC Indemnity pursuant to (a) above, notify registered owners of 2007 Notes entitled to receive the payment of principal or interest thereon from AMBAC Indemnity (i) as to the fact of such entitlement, (ii) that AMBAC Indemnity will remit to them all or a part of the interest payments next coming due upon proof of the holder's entitlement to interest payments and delivery to the Insurance Trustee, in form satisfactory to the Insurance Trustee, of an appropriate assignment of the registered owner's right to payment, (iii) that should they be entitled to receive full payment of principal from AMBAC Indemnity, they must surrender their 2007 Notes (along with an appropriate instrument of assignment in form satisfactory to the Insurance Trustee to permit ownership of such 2007 Notes to be registered in the name of AMBAC Indemnity) for payment to the Insurance Trustee, and not the Trustee or Paying Agent, if any, and (iv) that should they be entitled to receive partial payment of principal from AMBAC Indemnity, they must surrender their 2007 Notes for payment thereon first to the Trustee or Paying Agent, if any, who shall note on such 2007 Notes the portion of the principal paid by the Trustee or Paying Agent, if any, and then, along with an appropriate instrument of assignment in form satisfactory to the Insurance Trustee, to the Insurance Trustee, which will then pay the unpaid portion of principal. (e) in the event that the Trustee or Paying Agent, if any, has notice that any payment of principal of or interest on a 2007 Note which has become due for payment and which is made to a holder - 11 - 12 by or on behalf of the Companies has been deemed a preferential transfer and theretofore recovered from its registered owner pursuant to the United States Bankruptcy Code by a trustee in bankruptcy in accordance with the final, nonappealable order of a court having competent jurisdiction, the Trustee or Paying Agent, if any, shall, at the time AMBAC Indemnity is notified pursuant to (a) above, notify all registered owners that in the event that any registered owner's payment is so recovered, such registered owner will be entitled to payment from AMBAC Indemnity to the extent of such recovery if sufficient funds are not otherwise available, and the Trustee or Paying Agent, if any, shall furnish to AMBAC Indemnity its records evidencing the payments of principal of and interest on the 2007 Notes which have been made by the Trustee or Paying Agent, if any, and subsequently recovered from registered owners and the dates on which such payments were made. In addition to those rights granted AMBAC Indemnity hereunder, AMBAC Indemnity shall, to the extent it makes payment of principal of or interest on the 2007 Notes, become subrogated to the rights of the recipients of such payments in accordance with the terms of the Policy, and to evidence such subrogation (i) in the case of subrogation as to claims for past due interest, the Trustee or Paying Agent, if any, shall note AMBAC Indemnity's rights as subrogee on the registration books of the Companies maintained by the Trustee or Paying Agent, if any, upon receipt from AMBAC Indemnity of proof of the payment of interest thereon to the registered owners of the 2007 Notes, and (ii) in the case of subrogation as to claims for past due principal, the Trustee or Paying Agent, if any shall note AMBAC Indemnity's rights as subrogee on the registration books of the Companies maintained by the Trustee or Paying Agent, if any, upon surrender of the 2007 Notes by the registered owners thereof together with proof of the payment of principal thereof. ARTICLE II. TRANSFER AND EXCHANGE OF NOTES SECTION II.01 TRANSFER AND EXCHANGE OF DEFINITIVE NOTES. When Definitive Notes are presented to the Security Registrar with a request to register the transfer of such Definitive Notes or to exchange such Definitive Notes for an equal principal amount of Definitive Notes of other authorized denominations, the Security Registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; PROVIDED, HOWEVER, that the Definitive Notes surrendered for transfer or exchange: (a) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Companies and the Security Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing; and (b) are being transferred or exchanged pursuant to an effective registration statement under the Securities Act pursuant to Section 2.02, or pursuant to clause (i), (ii) or (iii) below, and are accompanied by the following additional information and documents, as applicable: - 12 - 13 (i) if such Definitive Notes are being delivered to the Security Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect (in the form set forth on the reverse of the Note); or (ii) if such Definitive Notes are being transferred to the Companies, a certification to that effect (in the form set forth on the reverse of the Note); or (iii) if such Definitive Notes are being transferred (x) pursuant to an exemption from registration in accordance with Rule 144, (y) in reliance on another exemption from the registration requirements of the Securities Act or (z) to an Institutional Accredited Investor that is acquiring the Note for its own account, or for the account of such an Institutional Accredited Investor, in each case for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act: (A) a certification to that effect (in the form set forth on the reverse of the Note) and (B) in the case of clause (y), an Opinion of Counsel from such Holder or the transferee reasonably acceptable to the Companies to the effect that such transfer is in compliance with the Securities Act and (C) in the case of clause (z), if the aggregate principal amount of such Definitive Notes being transferred is less than $100,000, an opinion of counsel addressed to the Companies as to the compliance with the restrictions set forth in the legend set forth in Exhibit A hereto. SECTION II.02 RESTRICTIONS ON TRANSFER OF A DEFINITIVE NOTE FOR A BENEFICIAL INTEREST IN A GLOBAL NOTE. A Definitive Note may not be exchanged for a beneficial interest in a Global Note except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a Definitive Note, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Trustee, together with: (a) certification, in the form set forth on the reverse of the Note, that such Definitive Note is being transferred (A) to a QIB in accordance with Rule 144A, or (B) outside the United States in an offshore transaction within the meaning of Regulation S and in compliance with Rule 904 under the Securities Act; and (b) written instructions directing the Trustee to make, or to direct the Securities Custodian to make, an adjustment on its books and records with respect to the Restricted Global Note or the Regulation S Global Note, as the case may be, to reflect an increase in the aggregate principal amount of the Notes represented by such Global Note, such instructions to contain information regarding the Depository account (or in the case of the Regulation S Global Note only, the Euroclear or Cedel account) to be credited with such increase, then the Trustee shall cancel such Definitive Note and cause, or direct the Securities Custodian to cause, in accordance with the standing instructions and procedures existing between the Depository and the Securities Custodian (including the rules of Euroclear and Cedel, if applicable), the aggregate principal amount of Notes represented by the Restricted Global Note or the Regulation S Global Note, as the case - 13 - 14 may be, to be increased by the principal amount of the Definitive Note to be exchanged and shall credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in such Global Note equal to the principal amount of the Definitive Note so canceled. If no Global Notes are then outstanding, the Companies shall issue and the Trustee shall authenticate, pursuant to a Company Order, a new Restricted Global Note or Regulation S Global Note, as the case may be, in the appropriate principal amount. SECTION II.03 TRANSFER AND EXCHANGE OF GLOBAL NOTES AND BENEFICIAL INTERESTS THEREIN. (a) The transfer and exchange of Global Notes or beneficial interests therein shall be effected through the Depository in accordance with this First Supplemental Indenture (including applicable restrictions on transfer set forth herein, if any) and the procedures of the Depository therefor, including the rules and procedures of Euroclear and Cedel, if applicable. A transferor of a beneficial interest in a Global Note shall deliver to the Security Registrar a written order given in accordance with the Depository's procedures containing information regarding the Euroclear, Cedel or other participant account of the Depository to be credited with a beneficial interest in the Global Note. The Security Registrar shall, in accordance with such instructions instruct the Depository to credit to the account of the Person specified in such instructions a beneficial interest in the Global Note and to debit the account of the Person making the transfer the beneficial interest in the Global Note being transferred. Transfers of beneficial interests in the Global Notes to Persons required to take delivery in the form of an interest in another Global Note shall be permitted as follows: (i) Restricted Global Note to Regulation S Global Note. If, at any time, an owner of a beneficial interest in a Restricted Global Note deposited with the Depository (or the Trustee as custodian for the Depository) wishes to transfer its beneficial interest in such Restricted Global Note to a Person who is required or permitted to take delivery thereof in the form of an interest in a Regulation S Global Note, such owner shall, subject to the Depository's procedures, exchange or cause the exchange of such interest for an equivalent beneficial interest in a Regulation S Global Note as provided in this Section 2.03(a)(i). Upon receipt by the Trustee of (1) instructions given in accordance with the Depository's procedures from an Agent Member directing the Trustee to credit or cause to be credited a beneficial interest in the Regulation S Global Note in an amount equal to the beneficial interest in the Restricted Global Note to be exchanged, (2) a written order given in accordance with the Depository's procedures containing information regarding the Agent Member account of the Depository and the Euroclear or Cedel account to be credited with such increase, and (3) a certificate given by the owner of such beneficial interest stating that the transfer of such interest has been made in compliance with the transfer restriction applicable to the Global Notes and pursuant to and in accordance with Rule 903 or Rule 904 of Regulation S, then the Security Registrar shall instruct the Depository to reduce or cause to be reduced the aggregate principal amount at maturity of the - 14 - 15 applicable Restricted Global Note and to increase or cause to be increased the aggregate principal amount at maturity of the applicable Regulation S Global Note by the principal amount at maturity of the beneficial interest in the Restricted Global Note to be exchanged or transferred, to credit or cause to be credited to the account of the Person specified in such instructions, a beneficial interest in the Regulation S Global Note equal to the reduction in the aggregate principal amount at maturity of the Restricted Global Note, and to debit, or cause to be debited, from the account of the Person making such exchange or transfer the beneficial interest in the Restricted Note that is being exchanged or transferred. (ii) Regulation S Global Note to Restricted Global Note. If, at any time, after the expiration of the 40-day restricted period (as defined in Regulation S), an owner of a beneficial interest in a Regulation S Global Note deposited with the Depository or with the Trustee as custodian for the Depository wishes to transfer its beneficial interest in such Regulation S Global Note to a Person who is required or permitted to take delivery thereof in the form of an interest in a Restricted Global Note, such owner shall, subject to the Depository's procedures, exchange or cause the exchange of such interest for an equivalent beneficial interest of a Restricted Global Note as provided in this Section 2.03(a)(ii). Upon receipt by the Trustee of (1) instructions from Euroclear or Cedel, if applicable, and the Depository, directing the Security Registrar to credit or cause to be credited a beneficial interest in the Restricted Global Note equal to the beneficial interest in the Regulation S Global Note to be exchanged, such instructions to contain information regarding the Agent Member account with the Depository to be credited with such increase, (2) a written order given in accordance with the Depository's procedures containing information regarding the participant account of the Depository and (3) a certificate given by the owner of such beneficial interest stating (A) if the transfer is pursuant to Rule 144A, that the Person transferring such interest in a Regulation S Global Note reasonably believes that the Person acquiring such interest in the Regulation S Global Note is a QIB and is obtaining such beneficial interest in a transaction meeting the requirement of Rule 144A and any applicable blue sky or securities laws of any state of the United States, (B) that the transfer complies with the requirements of Rule 144 under the Securities Act, or (C) if the transfer is pursuant to any other exemption from the registration requirements of the Securities Act, that the transfer of such interest has been made in compliance with the transfer restrictions applicable to the Global Notes and pursuant to and in accordance with the requirements of the exemption claimed, such statement to be supported by an Opinion of Counsel from the transferee or the transferor in form reasonably acceptable to the Companies and to the Security Registrar and in each case, in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction, then the Security Registrar shall instruct the Depository to reduce or cause to be reduced the aggregate principal amount at maturity of such Regulation - 15 - 16 S Global Note and to increase or cause to be increased the aggregate principal amount at maturity of the applicable Restricted Global Note by the principal amount at maturity of the beneficial interest in the Regulation S Global Note to be exchanged or transferred, and the Security Registrar shall instruct the Depository, concurrently with such reduction, to credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the applicable Restricted Global Note equal to the reduction in the aggregate principal amount at maturity of such Regulation S Global Note and to debit or cause to be debited from the account of the Person making such transfer the beneficial interest in the Regulation S Global Note that is being exchanged or transferred. (b) Notwithstanding any other provisions of this First Supplemental Indenture (other than the provisions set forth in Section 2.09), a Global Note may not be transferred as a whole except by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository or by the Depository or any such nominee to a successor Depository or a nominee of such successor Depository. (c) The Companies shall advise the Trustee as to the commencement of the Registered Exchange Offer or the effectiveness of the Shelf Registration Statement and the Trustee may rely conclusively thereon. (d) In the event that a Global Note is exchanged for Notes in definitive registered form pursuant to this First Supplemental Indenture or Section 3.04 of the Indenture, prior to the consummation of a Registered Exchange Offer or the effectiveness of a Shelf Registration Statement with respect to such Notes, such Notes may be exchanged only in accordance with such procedures as are substantially consistent with the provisions of this Section 2.03 (including the certification requirements set forth on the reverse of the Initial Notes intended to ensure that such transfers comply with Rule 144A or Regulation S, as the case may be) and such other procedures as may from time to time be adopted by the Companies. - 16 - 17 SECTION II.04 TRANSFER OF A BENEFICIAL INTEREST IN A GLOBAL NOTE FOR A DEFINITIVE NOTE. (a) Subject to Section 2.03(b), any Person having a beneficial interest in a Transfer Restricted Note that is a Global Note may transfer such beneficial interest to an Institutional Accredited Investor that is acquiring the Note for its own account, or for the account of such an Institutional Accredited Investor, in each case for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act; provided, however, that any written order or such other form of instructions as is customary for the Depository, from the Depository or its nominee on behalf of any Person having a beneficial interest in such Global Note shall be accompanied by (i) a certification from the transferee or transferor with respect to the transfer (in the form set forth on the reverse of the Note) and such other certifications as the Trustee may reasonably request and (ii) if the aggregate principal amount of the applicable Global Note being transferred is less than $100,000, an opinion of counsel addressed to the Companies as to the compliance with the restrictions set forth in the legend described in Section 2.05(a). Upon receipt by the Trustee of such information and documents, the Trustee or the Securities Custodian, at the direction of the Trustee, will cause, in accordance with the standing instructions and procedures existing between the Depository and the Securities Custodian, including the rules and procedures of Euroclear or Cedel, if applicable, the aggregate principal amount of the applicable Global Note to be reduced on its books and records and, following such reduction, the Companies will execute and the Trustee will authenticate and deliver to the transferee a Definitive Note. (b) Definitive Notes issued in exchange for a beneficial interest in a Global Note pursuant to this Section 2.04 shall be registered in such names and in such authorized denominations as Euroclear or Cedel, if applicable, and the Depository, pursuant to instructions from its direct or indirect participants or otherwise, shall instruct the Trustee. The Trustee shall deliver such Definitive Notes to the Persons in whose names such Notes are so registered in accordance with the instructions of the Depository. SECTION II.05 LEGENDS. (a) Except as permitted by the following paragraphs (b), (c) and (d), each Note certificate evidencing the Global Notes and the Definitive Notes (and all Notes issued in exchange or in substitution therefor) shall bear the restricted notes legend set forth in Exhibit A hereto ("Restricted Notes Legend"). (b) Upon any sale or transfer of a Transfer Restricted Note (including any Transfer Restricted Note represented by a Global Note) pursuant to Rule 144 under the Securities Act: (i) in the case of any Transfer Restricted Note that is a Definitive Note, the Security Registrar shall permit the Holder thereof to exchange such Transfer Restricted Note for a certificated Note that does not bear the Restricted Notes Legend and rescind any restriction on the transfer of such Transfer Restricted Note; and (ii) in the case of any Transfer Restricted Note that is represented by a Global Note, the Security Registrar shall permit the Holder thereof to exchange such Transfer Restricted Note for a certificated Note that does not bear the Restricted Notes Legend and - 17 - 18 rescind any restriction on the transfer of such Transfer Restricted Note, if the Holder certifies in writing to the Security Registrar that its request for such exchange was made in reliance on Rule 144 (such certification to be in the form set forth on the reverse of the Note). (c) After a transfer of any Initial Notes under and in the manner described in a Shelf Registration Statement with respect to such Initial Notes, all requirements pertaining to legends on such Initial Note will cease to apply, the requirements requiring any such Initial Note issued to certain Holders to be issued in global form will cease to apply, and a certificated Initial Note without legends will be available to the transferee of the Holder of such Initial Notes upon exchange of such transferring Holder's certificated Initial Note or directions to transfer such Holder's interest in the Global Note, as applicable. (d) Upon the consummation of a Registered Exchange Offer with respect to the Initial Notes pursuant to which Holders of such Initial Notes are offered Exchange Notes in exchange for their Initial Notes, all requirements pertaining to such Initial Notes that Initial Notes issued to certain Holders be issued in global form will cease to apply and certificated Initial Notes with the Restricted Notes Legend set forth in Exhibit A hereto will be available to Holders of such Initial Notes that do not exchange their Initial Notes, and Exchange Notes in certificated or global form will be available to Holders that exchange such Initial Notes in such Registered Exchange Offer. SECTION II.06 CANCELLATION OR ADJUSTMENT OF GLOBAL NOTE. At such time as all beneficial interests in a Global Note have either been exchanged for certificated Notes, redeemed, repurchased or canceled, such Global Note shall be returned to the Depository for cancellation or retained and canceled by the Trustee. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for certificated Notes, redeemed, repurchased or canceled, the principal amount of Notes represented by such Global Note shall be reduced and an adjustment shall be made on the books and records of the Trustee (if it is then the Securities Custodian for such Global Note) with respect to such Global Note, by the Trustee or the Securities Custodian, to reflect such reduction. SECTION II.07 OBLIGATIONS WITH RESPECT TO TRANSFERS AND EXCHANGES OF NOTES. (a) To permit registrations of transfers and exchanges, the Companies shall execute and the Trustee shall authenticate Definitive Notes and Global Notes at the Security Registrar's request. (b) No service charge shall be made for any registration of transfer or exchange, but the Companies may require payment of a sum sufficient to cover any transfer tax, assessments, or similar governmental charge payable in connection therewith. (c) Prior to the due presentation for registration of transfer of any Note, the Companies, the Trustee, the Paying Agent or the Security Registrar may deem and treat the Person in whose name a Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and interest on such Note and for all other purposes whatsoever, whether or not such Note is overdue, and none of the Companies, the Trustee, the Paying Agent or the Security Registrar shall be affected by notice - 18 - 19 to the contrary. (d) All Notes issued upon any transfer or exchange pursuant to the terms of this First Supplemental Indenture and the Indenture shall evidence the same debt and shall be entitled to the same benefits under this First Supplemental Indenture and the Indenture as the Notes surrendered upon such transfer or exchange. SECTION II.08 NO OBLIGATION OF THE TRUSTEE. (a) The Trustee shall have no responsibility or obligation to any beneficial owner of a Global Note, a member of, or a participant in the Depository or other Person with respect to the accuracy of the records of the Depository or its nominee or of any participant or member thereof, with respect to any ownership interest in the Notes or with respect to the delivery to any participant, member, beneficial owner or other Person (other than the Depository) of any notice (including any notice of redemption) or the payment of any amount, under or with respect to such Notes. All notices and communications to be given to the Holders and all payments to be made to Holders under the Notes shall be given or made only to or upon the order of the registered Holders (which shall be the Depository or its nominee in the case of a Global Note). The rights of beneficial owners in any Global Note shall be exercised only through the Depository subject to the applicable rules and procedures of the Depository. The Trustee may rely and shall be fully protected in relying upon information furnished by the Depository with respect to its members, participants and any beneficial owners. (b) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this First Supplemental Indenture or the Indenture or under applicable law with respect to any transfer of any interest in any Note (including any transfers between or among Depository participants, members or beneficial owners in any Global Note) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this First Supplemental Indenture or the Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. SECTION II.09 ISSUANCE OF DEFINITIVE NOTES. (a) A Global Note deposited with the Depository or with the Securities Custodian pursuant to Section 1.02 shall be transferred to the beneficial owners thereof in the form of Definitive Notes in an aggregate principal amount equal to the principal amount of such Global Note, in exchange for such Global Note, only if such transfer complies with Section 2.03 and (i) the Depository notifies the Companies that it is unwilling or unable to continue as Depository for such Global Note or if at any time such Depository ceases to be a "clearing agency" registered under the Exchange Act and a successor depositary is not appointed by the Companies within 90 days of such notice, (ii) an Event of Default has occurred and is continuing or (iii) the Companies, in their sole discretion, notify the Trustee in writing that they elect to cause the issuance of Definitive Notes under this First Supplemental Indenture. - 19 - 20 (b) Any Global Note that is transferable to the beneficial owners thereof pursuant to this Section 2.09 shall be surrendered by the Depository to the Trustee located in New York, New York, to be so transferred, in whole or from time to time in part, without charge, and the Trustee shall authenticate and deliver, upon such transfer of each portion of such Global Note, an equal aggregate principal amount of Definitive Notes of authorized denominations. Any portion of a Global Note transferred pursuant to this Section 2.09 shall be executed, authenticated and delivered only in denominations of $1,000 and any integral multiple thereof and registered in such names as the Depository shall direct. Any Definitive Note delivered in exchange for an interest in the Global Note shall, except as otherwise provided by Section 2.05, bear the restricted notes legend set forth in Exhibit A hereto. (c) Subject to the provisions of this Section 2.09, the registered Holder of a Global Note may grant proxies and otherwise authorize any Person, including Agent Members and Persons that may hold interests through Agent Members, to take any action that a Holder is entitled to take under this First Supplemental Indenture or the Indenture or the Notes. (d) In the event of the occurrence of any of the events specified in Section 2.09(a), the Companies will promptly make available to the Trustee a reasonable supply of Definitive Notes in definitive, fully registered form without interest coupons. ARTICLE III. DEFINITIONS SECTION III.01 DEFINITIONS. For the purposes of this First Supplemental Indenture the following terms shall have the meanings indicated below: "AMBAC Indemnity" means AMBAC Indemnity Corporation, a Wisconsin-domiciled stock insurance company. "Definitive Note" means a certificated Initial Note bearing the restricted notes legend described in Section 2.05(a) and which may be held by an Institutional Accredited Investor in accordance with Section 1.02(c). "Depository" means The Depository Trust Company, New York, New York, its nominees and their respective successors. "Exchange Notes" has the meaning set forth in the second paragraph under "RECITALS OF THE COMPANIES." "Exchange Offer Registration Statement" has the meaning set forth in Section 1 of the Registration Agreement. - 20 - 21 "Institutional Accredited Investor" means an institutional "accredited investor" as described in Rule 501(a) (1), (2), (3) or (7) under the Securities Act. "Paying Agent" means The Chase Manhattan Bank. "Placement Agreement" means the Placement Agreement dated June 11, 1997 between the Companies and the Purchasers. "Purchasers" means Morgan Stanley & Co. Incorporated, Citicorp Securities, Inc., Credit Suisse First Boston and McDonald & Company Securities, Inc. "QIB" means a "qualified institutional buyer" as defined in Rule 144A. "Registered Exchange Offer" means the offer by the Companies, pursuant to the Registration Agreement, to certain Holders of Initial Notes, to issue and deliver to such Holders, in exchange for the Initial Notes, a like aggregate principal amount of Exchange Notes registered under the Securities Act. "Registration Agreement" means the Registration Agreement dated June 11, 1997 between the Companies and the Purchasers. "Registration Statement" means each of the Exchange Offer Registration Statement and the Shelf Registration Statement. "Securities Act" means the Securities Act of 1933, as amended. "Securities Custodian" means the custodian with respect to a Global Note (as appointed by the Depository), or any successor Person thereto and shall initially be the Trustee. "Shelf Registration Statement" means any registration statement filed by the Companies in connection with the offer and sale of Initial Notes pursuant to the Registration Agreement. "Transfer Restricted Notes" means each Definitive Note and each Note that bears or is required to bear the legend described in Section 2.05 until (i) the date on which that Note has been exchanged by a person other than a broker-dealer for a freely transferrable Exchange Note in the Registered Exchange Offer; (ii) following the exchange by a broker-dealer in the Registered Exchange Offer of a Transfer Restricted Note for an Exchange Note, the date on which that Exchange Note is sold to a purchaser who receives from that broker-dealer on or prior to the date of that sale a copy of the prospectus contained in the Exchange Offer Registration Statement; (iii) the date on which that Note has been effectively registered under the Securities Act and disposed of in accordance with the Shelf Registration Statement; or (iv) the date on which that Note is distributed to the public pursuant to Rule 144 under the Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act. - 21 - 22 ARTICLE IV. SUNDRY PROVISIONS SECTION IV.01 TERMS. Except as otherwise expressly provided in this First Supplemental Indenture or in the forms of Notes or otherwise clearly required by the context hereof or thereof, all terms used herein or in said forms of Notes that are defined in the Indenture shall have the several meanings respectively assigned to them thereby. SECTION IV.02 INDENTURE. This First Supplemental Indenture shall be deemed part of the Indenture in the manner and to the extent herein and therein provided. SECTION IV.03 TRUSTEE. The Trustee hereby accepts the trusts herein declared, provided, created, supplemented, or amended and agrees to perform the same upon the terms and conditions herein and in the Indenture, as heretofore supplemented and amended, set forth and upon the following terms and conditions: the Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this First Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made by the Companies solely. In general, each and every term and condition contained in Article VII of the Indenture shall apply to and form part of this First Supplemental Indenture with the same force and effect as if the same were herein set forth in full. If there is a conflict in the terms of the Indenture and this First Supplemental Indenture that affects the Trustee's rights and obligations, then the terms of the Indenture shall govern. SECTION IV.04 COUNTERPARTS. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. [SIGNATURES APPEAR ON FOLLOWING PAGE] - 22 - 23 IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed as of the day and year first above written. THE CLEVELAND ELECTRIC ILLUMINATING COMPANY and THE TOLEDO EDISON COMPANY By:_______________________________________ Name:_____________________________________ Title:_____________________of each Company THE CHASE MANHATTAN BANK, as Trustee By:_______________________________________ Name:_____________________________________ Title:____________________________________ S-1 24 EXHIBIT A [FORM OF FACE OF INITIAL NOTE] [___% Series A Secured Note due ____] THE CLEVELAND ELECTRIC ILLUMINATING COMPANY THE TOLEDO EDISON COMPANY No. .............. $ ............. CUSIP No. ____________ The Cleveland Electric Illuminating Company and The Toledo Edison Company hereby promise, jointly and severally, to pay to ________, or registered assigns, the principal sum of .......................................... Dollars on ....................... Interest Payment Dates: January 1 and July 1, commencing July 1, 1997. Record Dates: December 15 and June 15, provided, however, the record date for the interest payment due on July 1, 1997 shall be June 25, 1997. Reference is hereby made to the further provisions of this Note attached hereto which further provisions shall for all purposes have the same effect as if set forth in this place. IN WITNESS WHEREOF, each Company has caused this instrument to be executed by its duly authorized officer. Dated: ___________________ THE CLEVELAND ELECTRIC ILLUMINATING COMPANY By:_____________________________________ Name: Title: THE TOLEDO EDISON COMPANY By:_____________________________________ Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities of the series designated therein referred to in he within-mentioned Indenture. THE CHASE MANHATTAN BANK, as Trustee A-1 25 EXHIBIT A By:___________________________ Name: Title: Date of Authentication:__________________ A-2 26 EXHIBIT A [FORM OF REVERSE SIDE OF INITIAL NOTE] [___% Series A Secured Note due ____] [Global Notes Legend] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANIES OR THEIR AGENTS FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF. [Restricted Notes Legend] THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT), OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT, IF IT IS A PURCHASER OTHER THAN A FOREIGN PURCHASER OUTSIDE THE UNITED STATES, IT WILL NOT, WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) UNDER THE SECURITIES ACT AS IN EFFECT WITH RESPECT TO SUCH TRANSFER, RESELL OR OTHERWISE TRANSFER THIS NOTE EXCEPT (A) TO THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND THE TOLEDO EDISON COMPANY ("COMPANIES"), (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FURNISHES A-3 27 EXHIBIT A TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE OBTAINED FROM THE TRUSTEE) AND IF SUCH TRANSFER IS IN RESPECT OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES AT THE TIME OF TRANSFER OF LESS THAN $100,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANIES THAT SUCH TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E) PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN THE TIME PERIOD REFERRED TO ABOVE, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE REVERSE SIDE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE TRUSTEE AND THE COMPANIES SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF THIS SECURITY IN VIOLATION OF THE FOREGOING RESTRICTIONS. [AMBAC Indemnity Insurance Legend To be Inserted in Initial 2007 Notes Only] FINANCIAL GUARANTY INSURANCE POLICY NO. FG0264BE (THE "POLICY") WITH RESPECT TO PAYMENTS DUE FOR PRINCIPAL OF AND INTEREST ON THIS NOTE HAS BEEN ISSUED BY AMBAC INDEMNITY CORPORATION ("AMBAC INDEMNITY"). THE POLICY HAS BEEN DELIVERED TO THE UNITED STATES TRUST COMPANY OF NEW YORK, NEW YORK, NEW YORK, AS THE INSURANCE TRUSTEE UNDER SAID POLICY AND WILL BE HELD BY SUCH INSURANCE TRUSTEE OR ANY SUCCESSOR INSURANCE TRUSTEE. THE POLICY IS ON FILE AND AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE INSURANCE TRUSTEE AND A COPY THEREOF MAY BE SECURED FROM AMBAC INDEMNITY OR THE INSURANCE TRUSTEE. ALL PAYMENTS REQUIRED TO BE MADE UNDER THE POLICY SHALL BE MADE IN ACCORDANCE WITH THE PROVISIONS THEREOF. THE OWNER OF THIS NOTE ACKNOWLEDGES AND CONSENTS TO THE SUBROGATION RIGHTS OF AMBAC INDEMNITY AS MORE FULLY SET FORTH IN THE POLICY. A-4 28 EXHIBIT A Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. INTEREST. The Cleveland Electric Illuminating Company, a corporation duly organized and existing under the laws of the State of Ohio ("CLEVELAND ELECTRIC", which term includes any successor Person under the Indenture hereinafter referred to), and The Toledo Edison Company, a corporation duly organized and existing under the laws of the State of Ohio ("TOLEDO EDISON", which term includes any successor Person under the Indenture hereinafter referred to, and, together with Cleveland Electric, the "COMPANIES"), hereby promise, jointly and severally, to pay interest on the principal amount of this Note and Additional Interest, if any. The Companies will pay interest from the later of June 18, 1997 or the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on January 1 and July 1 in each year, commencing July 1, 1997, at the rate of ....% per annum, until the principal hereof is paid or made available for payment and will pay Additional Interest, if any. The interest and any Additional Interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Note (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the December 15 or June 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date; provided, however, the Regular Record Date for the interest payment due on July 1, 1997 shall be June 25, 1997. Any such interest or Additional Interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Note (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice of which shall be given to Holders of Notes of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Interest on this Note shall cease to accrue upon the exchange of this Note for an Exchange Note in like principal amount and having substantially identical terms to this Note pursuant to a Registered Exchange Offer. If the record date for the interest payment date next following the exchange of this Note occurs after the exchange of this Note, the accrued and unpaid interest on this Note will be payable to the Person in whose name the Exchange Note is registered on that record date. The amount of interest or Additional Interest payable for any period will be computed on the basis of a 360 day year of twelve 30-day months. In the event that any date on which interest or Additional Interest is payable on this Note is not a Business Day, then payment of interest or Additional Interest payable on such date will be made on the next preceding day that is a Business Day. 2. METHOD OF PAYMENT. Payment of the principal of, interest and Additional Interest, if any, on this Note will be made at the office or agency of the Companies maintained for that purpose in the Borough of Manhattan, New York, New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts or, at the option of the A-5 29 EXHIBIT A Companies payment of interest or Additional Interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register; provided that payment by wire transfer of immediately available funds shall be required with respect to principal of, and interest and Additional Interest, if any, on all Global Notes and all other Notes the Holders of which shall have provided written wire transfer instructions to the Companies or the Paying Agent. 3. PAYING AGENT AND SECURITY REGISTRAR. Initially, the Trustee shall act as the Paying Agent and Security Registrar. The Companies may change any Paying Agent or Security Registrar without notice to any Holder. The Companies or any of their Affiliates may act in any such capacity. 4. INDENTURE. This Note is one of a duly authorized issue of Securities of the Companies (herein called the "NOTES"), issued and to be issued in one or more series under an Indenture, dated as of June 13, 1997 (herein called the "INDENTURE", which term shall have the meaning assigned to it in such instrument), between the Companies and The Chase Manhattan Bank, as Trustee (herein called the "TRUSTEE", which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Companies, the Trustee and the Holders of the Notes and of the terms upon which the Notes are, and are to be, authenticated and delivered. This Note is one of the series designated on the face hereof, limited in aggregate principal amount to $............ 5. SECURITY. This Note will be secured equally and ratably by First Mortgage Bonds delivered by one or both of the Companies to the Trustee for the benefit of the Holders of the Notes. Such First Mortgage Bonds shall be issued under one or both of the Mortgage and Deed of Trust between Cleveland Electric and Guaranty Trust Company of New York (now The Chase Manhattan Bank as successor trustee), as trustee (the "CLEVELAND Trustee"), dated as of July 1, 1940, as supplemented and amended from time to time (the "CLEVELAND ELECTRIC FIRST MORTGAGE"), and the Indenture of Mortgage and Deed of Trust between Toledo Edison and The Chase National Bank of the City of New York (now The Chase Manhattan Bank as successor trustee), as trustee (the "TOLEDO TRUSTEE"; with the Cleveland Trustee, collectively, the "MORTGAGE TRUSTEES" and, individually, a "MORTGAGE TRUSTEE"), dated as of April 1, 1947, as supplemented and amended from time to time (the "TOLEDO EDISON FIRST MORTGAGE"; with the Cleveland Electric First Mortgage, collectively, the "FIRST MORTGAGES" and, individually, a "FIRST MORTGAGE") (the "FIRST MORTGAGE BONDS"). Reference is made to the First Mortgages for a description of property mortgaged and pledged thereunder, the nature and extent of the security, the rights of the holders of first mortgage bonds under each First Mortgage and of the Mortgage Trustee in respect thereof, the duties and immunities of the Mortgage Trustees and the terms and conditions upon which the First Mortgage Bonds are secured and the circumstances under which additional first mortgage bonds may be issued under each First Mortgage. 6. REGISTRATION. Pursuant to the Registration Agreement by and between the Companies and the Purchasers, the Companies will be obligated to consummate an exchange offer pursuant to which the Holders of the Notes shall have the right to exchange the Notes for [___]% Series B Secured Notes due [_____], of the Companies, which are to be registered under the Securities Act, in like principal amount and having identical terms as the Notes except with respect to transfer restrictions. If the Exchange Offer A-6 30 EXHIBIT A is not accomplished, the Companies will be obligated to file a shelf registration statement to cover resales of the Notes under certain circumstances. The Holders of the Notes shall be entitled to receive certain additional interest payments in the event such exchange offer is not consummated, the shelf registration statement is not filed and upon certain other conditions, all pursuant to and in accordance with the terms of the Registration Agreement. 7. MANDATORY REDEMPTION. The Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. 8. DEFAULT AND REMEDIES. If an Event of Default with respect to Notes of this series shall occur and be continuing, the principal of the Notes may be declared due and payable in the manner and with the effect provided in the Indenture and, upon such declaration, the Trustee can demand the acceleration of the payment of principal of the First Mortgage Bonds as provided in the Indenture. As provided in and subject to the provisions of the Indenture, the Holder of this Note shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Notes of this series, the Holders of not less than a majority in principal amount of the Notes of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Notes of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Note for the enforcement of any payment of principal hereof or any premium or interest hereon on or after the respective due dates expressed herein. 9. AMENDMENT, SUPPLEMENT AND WAIVER. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Companies and the rights of the Holders of the Notes of each series to be affected under the Indenture at any time by the Companies and the Trustee with the consent of the Holders of a majority in principal amount of the Notes at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Notes of each series at the time Outstanding, on behalf of the Holders of all Notes of such series, to waive compliance by the Companies with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 10. DENOMINATIONS, TRANSFER AND EXCHANGE. The Notes of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Notes of this series are A-7 31 EXHIBIT A exchangeable for a like aggregate principal amount of Notes of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Companies may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. 11. PERSONS DEEMED OWNERS. Prior to due presentment of this Note for registration of transfer, the Companies, the Trustee and any agent of the Companies or the Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Companies, the Trustee nor any such agent shall be affected by notice to the contrary. 12. UNCLAIMED MONEY. If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Companies at its request unless an abandoned property law designates another person. After any such payment, Holders entitled to any portion of such money must look only to the Companies, and not to the Trustee or Paying Agent, for payment as general creditors, or, as applicable law designates, another person. 13. TRUSTEE DEALINGS WITH THE COMPANIES. Subject to certain limitations imposed by the Trust Indenture Act, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of the Notes, and may otherwise deal with and collect obligations owed to it by the Companies or its Affiliates and may otherwise deal with the Companies or its Affiliates with the same rights it would have if it were not Trustee. 14. DISCHARGE PRIOR TO MATURITY. The Companies' obligations pursuant to the Indenture will be discharged, except for obligations pursuant to certain sections thereof, subject to the terms of the Indenture, upon the payment of all the Securities or upon the irrevocable deposit with the Trustee of money or U.S. Government Obligations sufficient to pay when due the principal of and interest on the Notes to maturity. The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Note or certain restrictive covenants and Events of Default with respect to this Note, in each case upon compliance with certain conditions set forth in the Indenture. 15. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Companies have caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to the Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 16. NO RECOURSE AGAINST OTHERS. No director, officer, employee, or stockholder of the A-8 32 EXHIBIT A Companies shall have any liability for any obligation of the Companies under the Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Holder hereof waives and releases all such liability. The waiver and release are part of the consideration for the issue of this Note. 17. AUTHENTICATION. Unless the certificate of authentication hereon has been executed by the Trustee, this Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. The Companies shall furnish to any Holder upon written request and without charge a copy of the Indenture or the Registration Agreement. Requests may be made to: Janis T. Percio, Secretary Centerior Energy Corporation P.O. Box 94661 Cleveland, Ohio 44101-4661 A-9 33 EXHIBIT A - -------------------------------------------------------------------------------- ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) - -------------------------------------------------------------------------------- (Insert assignee's Soc. Sec. or Tax I.D. No.) And irrevocably appoint_________________________________________________________ agent to transfer this Note on the books of the Companies. The agent may substitute another to act for him. - -------------------------------------------------------------------------------- Date: __________ Your Signature: Sign exactly as your name appears on the other side of this Note. In connection with any transfer of any of the Notes evidenced by this certificate occurring prior to the expiration of the period referred to in Rule 144(k) under the Securities Act of 1933 after the later of the date of original issuance of such Notes and the last date, if any, on which such Notes were owned by the Companies or any Affiliate of the Companies, the undersigned confirms that such Notes are being transferred in accordance with its terms: CHECK ONE BOX BELOW (1) [ ] to the Companies; or (2) [ ] pursuant to an effective registration statement under the Securities Act of 1933; or (3) [ ] inside the United States to a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act of 1933) that purchases for its own account or for the account of a qualified institutional buyer to whom notice is given that such transfer is being made in reliance on Rule 144A, in each case pursuant to and in compliance with Rule 144A under the Securities Act of 1933; or A-10 34 EXHIBIT A (4) [ ] outside the United States in an offshore transaction within the meaning of Regulation S under the Securities Act in compliance with Rule 904 under the Securities Act of 1933; or (5) [ ] inside the United States to an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act of 1933) that, prior to such transfer, furnishes to the Trustee a signed letter containing certain representations and agreements (the form of which letter can be obtained from the Trustee) and, if such transfer is in respect of an aggregate principal amount of Notes at the time of transfer of less than $100,000, an opinion of counsel acceptable to the Companies that such transfer is in compliance with the restrictions set forth in the legend on the Notes; or (6) [ ] pursuant to another available exemption from registration provided by Rule 144 under the Securities Act of 1933. Unless one of the boxes is checked, the Trustee will refuse to register any of the Notes evidenced by this certificate in the name of any person other than the registered holder thereof; PROVIDED, HOWEVER, that if box (4), (5) or (6) is checked, the Trustee may require, prior to registering any such transfer of the Notes, such legal opinions, certifications and other information as the Company has reasonably requested to confirm that such transfer is being made pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act of 1933, such as the exemption provided by Rule 144 under such Act. --------------------------------------------- Signature - -------------------------- Signature Guarantee: --------------------------------------------- (Signature must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Security Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Security Registrar in addition to, or in substitution for, STAMP, all in accordance with the Securities Exchange Act of 1934, as amended.) A-11 35 EXHIBIT A TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED. The undersigned represents and warrants that it is purchasing this Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Companies as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. Dated: ____________________ __________ NOTICE: To be executed by an executive officer A-12 36 [TO BE ATTACHED TO GLOBAL NOTES] SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE The following increases or decreases in this Global Note have been made:
Principal amount of Amount of decrease in Amount of increase in this Global Note Signature of authorized Date of Principal Amount of Principal Amount of following such officer of Trustee or Exchange this Global Note this Global Note decrease or increase Securities Custodian - -------- ---------------- ---------------- -------------------- --------------------
A-13 37 EXHIBIT B [FORM OF FACE OF EXCHANGE NOTE] [___% Series B Secured Note due ____] THE CLEVELAND ELECTRIC ILLUMINATING COMPANY THE TOLEDO EDISON COMPANY No. .............. $ ............. CUSIP No. ____________ The Cleveland Electric Illuminating Company and The Toledo Edison Company hereby promise, jointly and severally, to pay to _______, or registered assigns, the principal sum of ........................................... Dollars on ................... Interest Payment Dates: January 1 and July 1, commencing July 1, 1997. Record Dates: December 15 and June 15. Reference is hereby made to the further provisions of this Note attached hereto which further provisions shall for all purposes have the same effect as if set forth in this place. IN WITNESS WHEREOF, each Company has caused this instrument to be executed by its duly authorized officer. Dated: ___________________ THE CLEVELAND ELECTRIC ILLUMINATING COMPANY By:_____________________________________ Name: Title: THE TOLEDO EDISON COMPANY By:_____________________________________ Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION B-1 38 EXHIBIT B This is one of the Securities of the series designated therein referred to in the within-mentioned Indenture. THE CHASE MANHATTAN BANK, as Trustee By:___________________________ Name: Title: Date of Authentication:__________________ B-2 39 EXHIBIT B [FORM OF REVERSE SIDE OF EXCHANGE NOTE] [___% Series B Secured Note due ____] [1/] [AMBAC Indemnity Insurance Legend To be Inserted in Exchange 2007 Notes Only] FINANCIAL GUARANTY INSURANCE POLICY NO. FG0264BE (THE "POLICY") WITH RESPECT TO PAYMENTS DUE FOR PRINCIPAL OF AND INTEREST ON THIS NOTE HAS BEEN ISSUED BY AMBAC INDEMNITY CORPORATION ("AMBAC INDEMNITY"). THE POLICY HAS BEEN DELIVERED TO THE UNITED STATES TRUST COMPANY OF NEW YORK, NEW YORK, NEW YORK, AS THE INSURANCE TRUSTEE UNDER SAID POLICY AND WILL BE HELD BY SUCH INSURANCE TRUSTEE OR ANY SUCCESSOR INSURANCE TRUSTEE. THE POLICY IS ON FILE AND AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE INSURANCE TRUSTEE AND A COPY THEREOF MAY BE SECURED FROM AMBAC INDEMNITY OR THE INSURANCE TRUSTEE. ALL PAYMENTS REQUIRED TO BE MADE UNDER THE POLICY SHALL BE MADE IN ACCORDANCE WITH THE PROVISIONS THEREOF. THE OWNER OF THIS NOTE ACKNOWLEDGES AND CONSENTS TO THE SUBROGATION RIGHTS OF AMBAC INDEMNITY AS MORE FULLY SET FORTH IN THE POLICY. Capitalized terms used herein shall have the meanings assigned to them in the Indenture referred to below unless otherwise indicated. 1. INTEREST. The Cleveland Electric Illuminating Company, a corporation duly organized and existing under the laws of the State of Ohio ("CLEVELAND ELECTRIC", which term includes any successor Person under the Indenture hereinafter referred to), and The Toledo Edison Company, a corporation duly organized and existing under the laws of the State of Ohio ("TOLEDO EDISON", which term includes any successor Person under the Indenture hereinafter referred to, and, together with Cleveland Electric, the "COMPANIES"), hereby promise, jointly and severally, to pay interest on the principal amount of this Note from the date of authentication of this Note. Interest shall be payable semi-annually on January 1 and July 1 in each year, commencing July 1, 1997, at the rate of ....% per annum, until the principal hereof is paid or made available for payment. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Note (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the December 15 or June 15 (whether or not a Business Day), as the case - ----------------------- 1. If the Note is to be issued in global form add the global notes legend from Exhibit A and the attachment from such Exhibit A captioned "TO BE ATTACHED TO GLOBAL NOTES - SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE." B-3 40 may be, next preceding such Interest Payment Date. If this Note is authenticated and delivered in exchange for an Initial Note between a record date for the payment of interest on that Initial Note and the related interest payment date, the interest that accrues on this Note from the date of authentication hereof to that interest payment date shall be payable to the Person in whose name this Note was issued on its issuance date. Any interest on this Note not punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Note (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Notes of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Notes of this series may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. The amount of interest payable for any period will be computed on the basis of a 360 day year of twelve 30-day months. In the event that any date on which interest is payable on this Note is not a Business Day, then payment of interest payable on such date will be made on the next preceding day that is a Business Day. 2. METHOD OF PAYMENT. Payment of the principal of and interest on this Note will be made at the office or agency of the Companies maintained for that purpose in the Borough of Manhattan, New York, New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts or, at the option of the Companies payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register; provided that payment by wire transfer of immediately available funds shall be required with respect to principal of and interest on all Global Notes and all other Notes the Holders of which shall have provided written wire transfer instructions to the Companies or the Paying Agent. 3. PAYING AGENT AND SECURITY REGISTRAR. Initially, the Trustee shall act as the Paying Agent and Security Registrar. The Companies may change any Paying Agent or Security Registrar without notice to any Holder. The Companies or any of their Affiliates may act in any such capacity. 4. INDENTURE. This Note is one of a duly authorized issue of Securities of the Companies (herein called the "NOTES"), issued and to be issued in one or more series under an Indenture, dated as of June 13, 1997 (herein called the "INDENTURE", which term shall have the meaning assigned to it in such instrument), between the Companies and The Chase Manhattan Bank, as Trustee (herein called the "TRUSTEE", which term includes any successor trustee under the Indenture), and reference is hereby made to the Indenture for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Companies, the Trustee and the Holders of the Notes and of the terms upon which the Notes are, and are to be, authenticated and delivered. This Note is one of the series designated on the face hereof, limited in aggregate principal amount to $............ B-4 41 EXHIBIT B 5. SECURITY. This Note will be secured by First Mortgage Bonds delivered by one or both of the Companies to the Trustee for the benefit of the Holders of the Notes. Such First Mortgage Bonds shall be issued under one or both of the Mortgage and Deed of Trust between Cleveland Electric and Guaranty Trust Company of New York (now The Chase Manhattan Bank as successor trustee), as trustee (the "CLEVELAND TRUSTEE"), dated as of July 1, 1940, as supplemented and amended from time to time (the "CLEVELAND ELECTRIC FIRST MORTGAGE"), and the Indenture of Mortgage and Deed of Trust between Toledo Edison and The Chase National Bank of the City of New York (now The Chase Manhattan Bank as successor trustee), as trustee (the "TOLEDO TRUSTEE"; with the Cleveland Trustee, collectively, the "MORTGAGE TRUSTEES" and, individually, a "MORTGAGE TRUSTEE"), dated as of April 1, 1947, as supplemented and amended from time to time (the "TOLEDO EDISON FIRST MORTGAGE"; with the Cleveland Electric First Mortgage, collectively, the "FIRST MORTGAGES" and, individually, a "FIRST MORTGAGE") (the "FIRST MORTGAGE BONDS"). Reference is made to the First Mortgages for a description of property mortgaged and pledged thereunder, the nature and extent of the security, the rights of the holders of first mortgage bonds under each First Mortgage and of the Mortgage Trustee in respect thereof, the duties and immunities of the Mortgage Trustees and the terms and conditions upon which the First Mortgage Bonds are secured and the circumstances under which additional first mortgage bonds may be issued under each First Mortgage. 6. EXCHANGE OFFER. This Note is issued pursuant to a Registered Exchange Offer under which the Initial Note of the Companies, in like principal amount and having substantially identical terms to this Note, was exchanged for this Note. 7. MANDATORY REDEMPTION. The Company shall not be required to make mandatory redemption or sinking fund payments with respect to the Notes. 8. DEFAULT AND REMEDIES. If an Event of Default with respect to Notes of this series shall occur and be continuing, the principal of the Notes may be declared due and payable in the manner and with the effect provided in the Indenture and, upon such declaration, the Trustee can demand the acceleration of the payment of principal of the First Mortgage Bonds as provided in the Indenture. As provided in and subject to the provisions of the Indenture, the Holder of this Note shall not have the right to institute any proceeding with respect to the Indenture or for the appointment of a receiver or trustee or for any other remedy thereunder, unless such Holder shall have previously given the Trustee written notice of a continuing Event of Default with respect to the Notes of this series, the Holders of not less than a majority in principal amount of the Notes of this series at the time Outstanding shall have made written request to the Trustee to institute proceedings in respect of such Event of Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee shall not have received from the Holders of a majority in principal amount of Notes of this series at the time Outstanding a direction inconsistent with such request, and shall have failed to institute any such proceeding, for 60 days after receipt of such notice, request and offer of indemnity. The foregoing shall not apply to any suit instituted by the Holder of this Note for the enforcement of any payment of principal hereof or any premium or B-5 42 EXHIBIT B interest hereon on or after the respective due dates expressed herein. 9. AMENDMENT, SUPPLEMENT AND WAIVER. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Companies and the rights of the Holders of the Notes of each series to be affected under the Indenture at any time by the Companies and the Trustee with the consent of the Holders of a majority in principal amount of the Notes at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Notes of each series at the time Outstanding, on behalf of the Holders of all Notes of such series, to waive compliance by the Companies with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any Note issued upon the registration of transfer hereof or in exchange therefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Note. 10. DENOMINATIONS, TRANSFER AND EXCHANGE. The Notes of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Notes of this series are exchangeable for a like aggregate principal amount of Notes of this series and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Companies may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. 11. PERSONS DEEMED OWNERS. Prior to due presentment of this Note for registration of transfer, the Companies, the Trustee and any agent of the Companies or the Trustee may treat the Person in whose name this Note is registered as the owner hereof for all purposes, whether or not this Note be overdue, and neither the Companies, the Trustee nor any such agent shall be affected by notice to the contrary. 12. UNCLAIMED MONEY. If money for the payment of principal or interest remains unclaimed for two years, the Trustee or Paying Agent shall pay the money back to the Companies at its request unless an abandoned property law designates another person. After any such payment, Holders entitled to any portion of such money must look only to the Companies, and not to the Trustee or Paying Agent, for payment as general creditors, or, as applicable law designates, another person. 13. TRUSTEE DEALINGS WITH THE COMPANIES. Subject to certain limitations imposed by the Trust Indenture Act, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of the Notes, and may otherwise deal with and collect obligations owed to it by the Companies or its Affiliates and may otherwise deal with the Companies or its Affiliates with the same B-6 43 EXHIBIT B rights it would have if it were not Trustee. 14. DISCHARGE PRIOR TO MATURITY. The Companies' obligations pursuant to the Indenture will be discharged, except for obligations pursuant to certain sections thereof, subject to the terms of the Indenture, upon the payment of all the Securities or upon the irrevocable deposit with the Trustee of money or U.S. Government Obligations sufficient to pay when due the principal of and interest on the Notes to maturity. The Indenture contains provisions for defeasance at any time of the entire indebtedness of this Note or certain restrictive covenants and Events of Default with respect to this Note, in each case upon compliance with certain conditions set forth in the Indenture. 15. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the Committee on Uniform Security Identification Procedures, the Companies have caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP numbers in notices of redemption as a convenience to the Holders. No representation is made as to the accuracy of such numbers either as printed on the Notes or as contained in any notice of redemption and reliance may be placed only on the other identification numbers placed thereon. 16. NO RECOURSE AGAINST OTHERS. No director, officer, employee, or stockholder of the Companies shall have any liability for any obligation of the Companies under the Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Holder hereof waives and releases all such liability. The waiver and release are part of the consideration for the issue of this Note. 17. AUTHENTICATION. Unless the certificate of authentication hereon has been executed by the Trustee, this Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. The Companies shall furnish to any Holder upon written request and without charge a copy of the Indenture. Requests may be made to: Janis T. Percio, Secretary Centerior Energy Corporation P.O. Box 94661 Cleveland, Ohio 44101-4661 B-7 44 EXHIBIT B - -------------------------------------------------------------------------------- ASSIGNMENT FORM To assign this Note, fill in the form below: I or we assign and transfer this Note to - -------------------------------------------------------------------------------- (Print or type assignee's name, address and zip code) - -------------------------------------------------------------------------------- (Insert assignee's Soc. Sec. or Tax I.D. No.) And irrevocably appoint_________________________________________________________ agent to transfer this Note on the books of the Companies. The agent may substitute another to act for him. Date:_________ Your Signature: - -------------------------------------------------------------------------------- Sign exactly as your name appears on the other side of this Note. - ------------------------------ Signature Guarantee: --------------------------------------------- (Signature must be guaranteed by an "eligible guarantor institution" meeting the requirements of the Security Registrar, which requirements include membership or participation in the Security Transfer Agent Medallion Program ("STAMP") or such other "signature guarantee program" as may be determined by the Security Registrar in addition to, or in substitution for, STAMP, B-8 45 EXHIBIT B all in accordance with the Securities Exchange Act of 1934, as amended.) B-9 EX-5 12 EXHIBIT 5 1 Exhibit 5 September 18, 1997 The Cleveland Electric Illuminating Company The Toledo Edison Company c/o Centerior Energy Corporation P.O. Box 94661 Cleveland, Ohio 44101 Gentlemen: With reference to the proposed issue and sale of the principal amounts of Series B Secured Notes (the "Notes") of The Cleveland Electric Illuminating Company and The Toledo Edison Company (each a "Company" and together, the "Companies") set forth in the Registration Statement described below and to be issued and sold under an Indenture dated as of June 13, 1997 and a First Supplemental Indenture thereto dated June 13, 1997 (as supplemented, the "Note Indenture") between the Companies and The Chase Manhattan Bank, as trustee, I am counsel for the Companies, and attorneys acting under my supervision have examined the following: (a) A copy of each Company's Amended Articles of Incorporation, as filed with the Secretary of the State of Ohio; (b) A copy of each Company's Regulations, certified by the Secretary of the Company; (c) The Application (as amended and supplemented) filed by the Companies with The Public Utilities Commission of Ohio for authority to issue and sell the Notes; (d) The Note Indenture; (e) The proposed form of the Notes; (f) The Registration Statement on Form S-4 (including the Prospectus and exhibits) relating to the Notes and the documents incorporated by reference therein, in the form in which it is being filed with the Securities and Exchange Commission (such Registration Statement being herein called the "Registration Statement" and the Prospectus contained therein being herein called the "Prospectus"); and 2 The Cleveland Electric Illuminating Company The Toledo Edison Company c/o Centerior Energy Corporation September 18, 1997 Page 2 (g) Such other documents and matters as I deem necessary to express this opinion. Based on the foregoing and such legal considerations as I deem relevant, I am of the opinion that: 1. Each Company is a corporation duly organized and validly existing and in good standing under the laws of the State of Ohio, with power to authorize the issue and sale of the Notes; 2. The Note Indenture and the Notes are in due and legal form; and 3. Upon (a) due execution by the Companies and authentication by the trustee of the Notes as provided in the Note Indenture and (b) issuance and sale of the Notes in accordance with the Registration Statement when the same shall have become effective, the Notes will be legally issued, valid and binding joint and several obligations of the Companies, enforceable against the Companies 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. I hereby consent (a) to the use of my name in connection with the statements made under the heading "Legal Opinions" in the Prospectus, and (b) to the filing of this opinion and consent with the Securities and Exchange Commission as an exhibit to the Registration Statement. Respectfully submitted, /s/ Paul N. Edwards ---------------------------------------------- Paul N. Edwards Principal Counsel for The Cleveland Electric Illuminating Company and The Toledo Edison Company EX-12 13 EXHIBIT 12 1 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY Exhibit 12 ---------- Computation of Ratio of Earnings to Fixed Charges Page 1 of 1 ---------------------- (Thousands of Dollars)
Statement Setting Forth Computations Showing Satisfaction of the Requirements Specified in Regulation S-K, Item 503(d): Year Ended December 31 12 Months ------------------------------------------------------ Ended 1992 1993 1994 1995 1996 6/30/97 -------- --------- -------- -------- -------- -------- Consolidated Net Income (Loss) $204,939 ($587,147) $185,431 $183,719 $116,553 $108,754 Add Federal Income Taxes Expense (Credit) 94,627 (247,966) 85,455 95,561 69,120 73,518 Interest (a) 253,042 252,479 254,248 251,793 244,789 235,751 Provision for Interest Element of Rentals (b) 81,948 81,131 79,462 79,642 79,503 79,217 -------- --------- -------- -------- -------- -------- Total Earnings $634,556 ($501,503) $604,596 $610,715 $509,965 $497,240 -------- --------- -------- -------- -------- -------- Fixed Charges Interest (a) $253,042 $ 252,479 $254,248 $251,793 $244,789 $235,751 Provision for Interest Element of Rentals (b) 81,948 81,131 79,462 79,642 79,503 79,217 -------- --------- -------- -------- -------- -------- Total Fixed Charges $334,990 $ 333,610 $333,710 $331,435 $324,292 $314,968 -------- --------- -------- -------- -------- -------- Ratio of Earnings to Fixed Charges 1.89 (1.50) 1.81 1.84 1.57 1.58 ======== ========= ======== ======== ======== ======== - --------------------------- (a) Includes 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. (b) Includes the interest component of Bruce Mansfield sale and leaseback rentals, leased nuclear fuel in the reactor, and other miscellaneous rentals.
2 THE TOLEDO EDISON COMPANY Exhibit 12 ----------- Computation of Ratio of Earnings to Fixed Charges Page 1 of 1 ---------------------- (Thousands of Dollars) Statement Setting Forth Computations Showing Satisfaction of the Requirements Specified in Regulation S-K, Item 503(d):
Year Ended December 31 12 Months ------------------------------------------------------ Ended 1992 1993 1994 1995 1996 6/30/97 -------- --------- -------- -------- -------- -------- Consolidated Net Income (Loss) $ 70,677 ($289,275) $ 82,531 $ 96,762 $ 57,289 $ 68,340 Add Federal Income Taxes Expense (Credit) 33,905 (139,479) 34,342 43,828 31,501 43,530 Interest (a) 128,779 121,221 119,421 112,344 97,329 94,955 Provision for Interest Element of Rentals (b) 115,638 112,266 111,163 110,977 109,935 109,743 -------- --------- -------- -------- -------- -------- Total Earnings $348,999 ($195,267) $347,457 $363,911 $296,054 $316,568 -------- --------- -------- -------- -------- -------- Fixed Charges Interest (a) $128,779 $ 121,221 $119,421 $112,344 $ 97,329 $ 94,955 Provision for Interest Element of Rentals (b) 115,638 112,266 111,163 110,977 109,935 109,743 -------- --------- -------- -------- -------- -------- Total Fixed Charges $244,417 $ 233,487 $230,584 $223,321 $207,264 $204,698 -------- --------- -------- -------- -------- -------- Ratio of Earnings to Fixed Charges 1.43 (0.84) 1.51 1.63 1.43 1.55 ======== ========= ======== ======== ======== ======== - ----------------------------- (a) Includes 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. (b) Includes the interest component of Beaver Valley and Bruce Mansfield sale and leaseback rentals, leased nuclear fuel in the reactor, and other miscellaneous rentals.
EX-23.A 14 EXHIBIT 23(A) 1 Ehibit 23(a) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- As independent public accountants, we hereby consent to the incorporation by reference in this registration statement of our report dated February 14, 1997 included in The Cleveland Electric Illuminating Company Form 10-K for the year ended December 31, 1996, and our report dated February 14, 1997 included in The Toledo Edison Company Form 10-K for the year ended December 31, 1996. We also consent to the use of our reports included in this registration statement, and to all references to our Firm included in this registration statement. ARTHUR ANDERSEN LLP Cleveland, Ohio September 16, 1997 EX-24 15 EXHIBIT 24 1 Exhibit 24 POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF ----------------------------------------------- THE CLEVELAND ELECTRIC ILLUMINATING COMPANY ------------------------------------------- The undersigned, being a director or officer or both (as stated under his or her signature below) of The Cleveland Electric Illuminating Company, an Ohio corporation (hereinafter called the "Company"), does hereby constitute and appoint each of Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary R. Leidich, Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio, Ronald J. Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards as an attorney of the undersigned with power to act alone for and in the name, place and stead of the undersigned, with power of substitution and resubstitution, to sign and file, including electronic filing, on behalf of the undersigned acting in his or her capacity as such director or officer the Company's Registration Statement on Form S-4 relating to the registration of up to $720 million of the Company's Series B Secured Notes in the third quarter of 1997, and any and all amendments, exhibits and supplementary information thereto, with the Securities and Exchange Commission pursuant to the Securities Act of 1933, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises and the undersigned hereby ratifies and approves the acts of each such attorney and any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this 15th day of September, 1997. ROBERT J. FARLING -------------------------------- Robert J. Farling Chairman, Chief Executive Officer and Director Signed and acknowledged in the presence of: J. T. PERCIO ------------------ 2 POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF ----------------------------------------------- THE CLEVELAND ELECTRIC ILLUMINATING COMPANY ------------------------------------------- The undersigned, being a director or officer or both (as stated under his or her signature below) of The Cleveland Electric Illuminating Company, an Ohio corporation (hereinafter called the "Company"), does hereby constitute and appoint each of Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary R. Leidich, Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio, Ronald J. Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards as an attorney of the undersigned with power to act alone for and in the name, place and stead of the undersigned, with power of substitution and resubstitution, to sign and file, including electronic filing, on behalf of the undersigned acting in his or her capacity as such director or officer the Company's Registration Statement on Form S-4 relating to the registration of up to $720 million of the Company's Series B Secured Notes in the third quarter of 1997, and any and all amendments, exhibits and supplementary information thereto, with the Securities and Exchange Commission pursuant to the Securities Act of 1933, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises and the undersigned hereby ratifies and approves the acts of each such attorney and any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this 16th day of September, 1997. MURRAY R. EDELMAN ----------------------------------- Murray R. Edelman President and Director Signed and acknowledged in the presence of: J. T. PERCIO ------------------- 3 POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF ----------------------------------------------- THE CLEVELAND ELECTRIC ILLUMINATING COMPANY ------------------------------------------- The undersigned, being a director or officer or both (as stated under his or her signature below) of The Cleveland Electric Illuminating Company, an Ohio corporation (hereinafter called the "Company"), does hereby constitute and appoint each of Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary R. Leidich, Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio, Ronald J. Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards as an attorney of the undersigned with power to act alone for and in the name, place and stead of the undersigned, with power of substitution and resubstitution, to sign and file, including electronic filing, on behalf of the undersigned acting in his or her capacity as such director or officer the Company's Registration Statement on Form S-4 relating to the registration of up to $720 million of the Company's Series B Secured Notes in the third quarter of 1997, and any and all amendments, exhibits and supplementary information thereto, with the Securities and Exchange Commission pursuant to the Securities Act of 1933, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises and the undersigned hereby ratifies and approves the acts of each such attorney and any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this 15th day of September, 1997. FRED J. LANGE, JR. ----------------------------------- Fred J. Lange, Jr. Vice President and Director Signed and acknowledged in the presence of: MARY V. FRAIN ----------------------- 4 POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF ----------------------------------------------- THE CLEVELAND ELECTRIC ILLUMINATING COMPANY ------------------------------------------- The undersigned, being a director or officer or both (as stated under his or her signature below) of The Cleveland Electric Illuminating Company, an Ohio corporation (hereinafter called the "Company"), does hereby constitute and appoint each of Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary R. Leidich, Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio, Ronald J. Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards as an attorney of the undersigned with power to act alone for and in the name, place and stead of the undersigned, with power of substitution and resubstitution, to sign and file, including electronic filing, on behalf of the undersigned acting in his or her capacity as such director or officer the Company's Registration Statement on Form S-4 relating to the registration of up to $720 million of the Company's Series B Secured Notes in the third quarter of 1997, and any and all amendments, exhibits and supplementary information thereto, with the Securities and Exchange Commission pursuant to the Securities Act of 1933, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises and the undersigned hereby ratifies and approves the acts of each such attorney and any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this 16th day of September, 1997. TERRENCE G. LINNERT ---------------------------------- Terrence G. Linnert Vice President and Chief Financial Officer Signed and acknowledged in the presence of: PATRICIA M. MITCHELL --------------------------- 5 POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF ----------------------------------------------- THE CLEVELAND ELECTRIC ILLUMINATING COMPANY ------------------------------------------- The undersigned, being a director or officer or both (as stated under his or her signature below) of The Cleveland Electric Illuminating Company, an Ohio corporation (hereinafter called the "Company"), does hereby constitute and appoint each of Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary R. Leidich, Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio, Ronald J. Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards as an attorney of the undersigned with power to act alone for and in the name, place and stead of the undersigned, with power of substitution and resubstitution, to sign and file, including electronic filing, on behalf of the undersigned acting in his or her capacity as such director or officer the Company's Registration Statement on Form S-4 relating to the registration of up to $720 million of the Company's Series B Secured Notes in the third quarter of 1997, and any and all amendments, exhibits and supplementary information thereto, with the Securities and Exchange Commission pursuant to the Securities Act of 1933, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises and the undersigned hereby ratifies and approves the acts of each such attorney and any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this 15 day of September, 1997. E. LYLE PEPIN -------------------------------- E. Lyle Pepin Controller Signed and acknowledged in the presence of: RUTH A. HARNER ------------------- 6 POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF ----------------------------------------------- THE TOLEDO EDISON COMPANY ------------------------- The undersigned, being a director or officer or both (as stated under his or her signature below) of The Toledo Edison Company, an Ohio corporation (hereinafter called the "Company"), does hereby constitute and appoint each of Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary R. Leidich, Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio, Ronald J. Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards as an attorney of the undersigned with power to act alone for and in the name, place and stead of the undersigned, with power of substitution and resubstitution, to sign and file, including electronic filing, on behalf of the undersigned acting in his or her capacity as such director or officer the Company's Registration Statement on Form S-4 relating to the registration of up to $720 million of the Company's Series B Secured Notes in the third quarter of 1997, and any and all amendments, exhibits and supplementary information thereto, with the Securities and Exchange Commission pursuant to the Securities Act of 1933, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises and the undersigned hereby ratifies and approves the acts of each such attorney and any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this 15th day of September, 1997. ROBERT J. FARLING -------------------------------- Robert J. Farling Chairman, Chief Executive Officer and Director Signed and acknowledged in the presence of: J. T. PERCIO ---------------- 7 POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF ----------------------------------------------- THE TOLEDO EDISON COMPANY ------------------------- The undersigned, being a director or officer or both (as stated under his or her signature below) of The Toledo Edison Company, an Ohio corporation (hereinafter called the "Company"), does hereby constitute and appoint each of Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary R. Leidich, Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio, Ronald J. Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards as an attorney of the undersigned with power to act alone for and in the name, place and stead of the undersigned, with power of substitution and resubstitution, to sign and file, including electronic filing, on behalf of the undersigned acting in his or her capacity as such director or officer the Company's Registration Statement on Form S-4 relating to the registration of up to $720 million of the Company's Series B Secured Notes in the third quarter of 1997, and any and all amendments, exhibits and supplementary information thereto, with the Securities and Exchange Commission pursuant to the Securities Act of 1933, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises and the undersigned hereby ratifies and approves the acts of each such attorney and any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this 16th day of September, 1997. MURRAY R. EDELMAN -------------------------------- Murray R. Edelman Vice Chairman and Director Signed and acknowledged in the presence of: J. T. PERCIO ----------------- 8 POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF ----------------------------------------------- THE TOLEDO EDISON COMPANY ------------------------- The undersigned, being a director or officer or both (as stated under his or her signature below) of The Toledo Edison Company, an Ohio corporation (hereinafter called the "Company"), does hereby constitute and appoint each of Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary R. Leidich, Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio, Ronald J. Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards as an attorney of the undersigned with power to act alone for and in the name, place and stead of the undersigned, with power of substitution and resubstitution, to sign and file, including electronic filing, on behalf of the undersigned acting in his or her capacity as such director or officer the Company's Registration Statement on Form S-4 relating to the registration of up to $720 million of the Company's Series B Secured Notes in the third quarter of 1997, and any and all amendments, exhibits and supplementary information thereto, with the Securities and Exchange Commission pursuant to the Securities Act of 1933, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises and the undersigned hereby ratifies and approves the acts of each such attorney and any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this 15th day of September, 1997. FRED J. LANGE, JR. ------------------------------ Fred J. Lange, Jr. President and Director Signed and acknowledged in the presence of: MARY V. FRAIN ----------------- 9 POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF ----------------------------------------------- THE TOLEDO EDISON COMPANY ------------------------- The undersigned, being a director or officer or both (as stated under his or her signature below) of The Toledo Edison Company, an Ohio corporation (hereinafter called the "Company"), does hereby constitute and appoint each of Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary R. Leidich, Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio, Ronald J. Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards as an attorney of the undersigned with power to act alone for and in the name, place and stead of the undersigned, with power of substitution and resubstitution, to sign and file, including electronic filing, on behalf of the undersigned acting in his or her capacity as such director or officer the Company's Registration Statement on Form S-4 relating to the registration of up to $720 million of the Company's Series B Secured Notes in the third quarter of 1997, and any and all amendments, exhibits and supplementary information thereto, with the Securities and Exchange Commission pursuant to the Securities Act of 1933, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises and the undersigned hereby ratifies and approves the acts of each such attorney and any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this 16th day of September, 1997. TERRENCE G. LINNERT ------------------------------------ Terrence G. Linnert Vice President and Chief Financial Officer Signed and acknowledged in the presence of: PATRICIA M. MITCHELL ------------------------- 10 POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF THE TOLEDO EDISON COMPANY The undersigned, being a director or officer or both (as stated under his or her signature below) of The Toledo Edison Company, an Ohio corporation (hereinafter called the "Company"), does hereby constitute and appoint each of Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary R. Leidich, Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio, Ronald J. Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards as an attorney of the undersigned with power to act alone for and in the name, place and stead of the undersigned, with power of substitution and resubstitution, to sign and file, including electronic filing, on behalf of the undersigned acting in his or her capacity as such director or officer the Company's Registration Statement on Form S-4 relating to the registration of up to $720 million of the Company's Series B Secured Notes in the third quarter of 1997, and any and all amendments, exhibits and supplementary information thereto, with the Securities and Exchange Commission pursuant to the Securities Act of 1933, with full power and authority to do and perform any and all acts and things whatsoever requisite and necessary to be done in the premises and the undersigned hereby ratifies and approves the acts of each such attorney and any such substitute or substitutes. IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this 15 day of September, 1997. E. LYLE PEPIN ---------------------------- E. Lyle Pepin Controller Signed and acknowledged in the presence of: RUTH A. HARNER ------------------ EX-25 16 EXHIBIT 25 1 Exhibit 25 ------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 ------------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ------------------------------------------- CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________ ---------------------------------------- THE CHASE MANHATTAN BANK (Exact name of trustee as specified in its charter) NEW YORK 13-4994650 (State of incorporation (I.R.S. employer if not a national bank) identification No.) 270 PARK AVENUE NEW YORK, NEW YORK 10017 (Address of principal executive offices) (Zip Code) William H. McDavid General Counsel 270 Park Avenue New York, New York 10017 Tel: (212) 270-2611 (Name, address and telephone number of agent for service) THE CLEVELAND ELECTRIC ILLUMINATING COMPANY THE TOLEDO EDISON COMPANY ---------------------- (Exact name of obligors as specified in its charter) OHIO 34-0150020 OHIO 34-4375005 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) C/O CENTERIOR ENERGY CORPORATION, 6200 OAK TREE BOULEVARD, INDEPENDENCE, OHIO 44131 300 MADISON AVENUE, TOLEDO, OHIO 43652 (Address of principal executive offices) (Zip Code) ------------------------------------- 7.19% SERIES B SECURED NOTES DUE 2000 7.67% SERIES B SECURED NOTES DUE 2004 7.13% SERIES B SECURED NOTES DUE 2007 (Title of the indenture securities) ------------------------------------- 2 GENERAL Item 1. General Information. Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. New York State Banking Department, State House, Albany, New York 12110. Board of Governors of the Federal Reserve System, Washington, D.C., 20551 Federal Reserve Bank of New York, District No. 2, 33 Liberty Street, New York, N.Y. Federal Deposit Insurance Corporation, Washington, D.C., 20429. (b) Whether it is authorized to exercise corporate trust powers. Yes. Item 2. Affiliations with the Obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. None. 3 - 2 - Item 16. List of Exhibits List below all exhibits filed as a part of this Statement of Eligibility. 1. A copy of the Articles of Association of the Trustee as now in effect, including the Organization Certificate and the Certificates of Amendment dated February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982, February 28, 1985, December 2, 1991 and July 10, 1996 (see Exhibit 1 to Form T-1 filed in connection with Registration Statement No. 333-06249, which is incorporated by reference). 2. A copy of the Certificate of Authority of the Trustee to Commence Business (see Exhibit 2 to Form T-1 filed in connection with Registration Statement No. 33-50010, which is incorporated by reference. On July 14, 1996, in connection with the merger of Chemical Bank and The Chase Manhattan Bank (National Association), Chemical Bank, the surviving corporation, was renamed The Chase Manhattan Bank). 3. None, authorization to exercise corporate trust powers being contained in the documents identified above as Exhibits 1 and 2. 4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form T-1 filed in connection with Registration Statement No. 333-06249, which is incorporated by reference). 5. Not applicable. 6. The consent of the Trustee required by Section 321(b) of the Act (see Exhibit 6 to Form T-1 filed in connection with Registration Statement No. 33-50010, which is incorporated by reference. On July 14, 1996, in connection with the merger of Chemical Bank and The Chase Manhattan Bank (National Association), Chemical Bank, the surviving corporation, was renamed The Chase Manhattan Bank). 7. A copy of the latest report of condition of the Trustee, published pursuant to law or the requirements of its supervising or examining authority. 8. Not applicable. 9. Not applicable. SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee, The Chase Manhattan Bank, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York and State of New York, on the 16th day of September, 1997. THE CHASE MANHATTAN BANK By /s/ James P. Freeman ----------------------------------- James P. Freeman Assistant Vice President - 2 - 4 Exhibit 7 to Form T-1 Bank Call Notice RESERVE DISTRICT NO. 2 CONSOLIDATED REPORT OF CONDITION OF The Chase Manhattan Bank of 270 Park Avenue, New York, New York 10017 and Foreign and Domestic Subsidiaries, a member of the Federal Reserve System, at the close of business June 30, 1997, in accordance with a call made by the Federal Reserve Bank of this District pursuant to the provisions of the Federal Reserve Act.
DOLLAR AMOUNTS ASSETS IN MILLIONS Cash and balances due from depository institutions: Noninterest-bearing balances and currency and coin ................................................... $ 13,892 Interest-bearing balances ........................................... 4,282 Securities: ............................................................. Held to maturity securities............................................... 2,857 Available for sale securities.............................................. 34,091 Federal Funds sold and securities purchased under agreements to resell ................................................. 29,970 Loans and lease financing receivables: Loans and leases, net of unearned income $124,827 Less: Allowance for loan and lease losses 2,753 Less: Allocated transfer risk reserve ......... 13 ---------- Loans and leases, net of unearned income, allowance, and reserve ............................................... 122,061 Trading Assets ............................................................ 56,042 Premises and fixed assets (including capitalized leases)............................................................... 2,904 Other real estate owned ................................................... 306 Investments in unconsolidated subsidiaries and associated companies.................................................. 232 Customers' liability to this bank on acceptances outstanding .......................................................... 2,092 Intangible assets ......................................................... 1,532 Other assets .............................................................. 10,448 -------- TOTAL ASSETS .............................................................. $280,709 ========
5
LIABILITIES Deposits In domestic offices ....................................................................... $ 91,249 Noninterest-bearing ............................................................. $38,157 Interest-bearing ................................................................ 53,092 In foreign offices, Edge and Agreement subsidiaries, ------- and IBF's ................................................................................. 70,192 Noninterest-bearing ............................................................. $ 3,712 Interest-bearing ................................................................ 66,480 Federal funds purchased and securities sold under agree- ments to repurchase ............................................................................ 35,185 Demand notes issued to the U.S. Treasury ....................................................... 1,000 Trading liabilities ............................................................................ 42,307 OtherBorrowed money (includes mortgage indebtedness and obligations under calitalized leases): With a remaining maturity of one year or less ............................................. 4,593 With a remaining maturity of more than one year ........................................... through three years..................................................................... 260 With a remaining maturity of more than three years........................................ 146 Bank's liability on acceptances executed and outstanding ....................................... 2,092 Subordinated notes and debentures .............................................................. 5,715 Other liabilities . .............................................................................................. 11,373 TOTAL LIABILITIES .............................................................................. 264,112 ------- EQUITY CAPITAL Perpetual Preferred stock and related surplus .................................................. 0 Common stock ................................................................................... 1,211 Surplus (exclude all surplus related to preferred stock) ...................................... 10,283 Undivided profits and capital reserves ......................................................... 5,280 Net unrealized holding gains (Losses) on available-for-sale securities ............................................................... (193) Cumulative foreign currency translation adjustments ............................................ 16 TOTAL EQUITY CAPITAL ........................................................................... 16,597 --------- TOTAL LIABILITIES AND EQUITY CAPITAL ........................................................... $ 280,709 =========
I, Joseph L. Sclafani, E.V.P. & Controller of the above-named bank, do hereby declare that this Report of Condition has been prepared in conformance with the instructions issued by the appropriate Federal regulatory authority and is true to the best of my knowledge and belief. JOSEPH L. SCLAFANI We, the undersigned directors, attest to the correctness of this Report of Condition and declare that it has been examined by us, and to the best of our knowledge and belief has been prepared in conformance with the instructions issued by the appropriate Federal regulatory authority and is true and correct. WALTER V. SHIPLEY ) THOMAS G. LABRECQUE ) DIRECTORS WILLIAM B. HARRISON, JR. ) -----END PRIVACY-ENHANCED MESSAGE-----