<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 4, 1995
FILE NO. 33-55513
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
(Exact name of registrant as specified in its charter)
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OHIO 4911 34-0150020
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
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55 PUBLIC SQUARE, CLEVELAND, OHIO 44113, (216) 622-9800
(address, including ZIP code, and telephone number, including area code,
of registrant's principal executive office)
E. LYLE PEPIN, CONTROLLER
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)
Approximate date of commencement of proposed exchange of securities is upon
consummation of the Merger described herein.
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: / /
------------------------------------------------
Amending the Joint Proxy Statement and Prospectus and filing Exhibits
12(a)(2), 12(b)(2), 12(c)(2), 23(a)(1) and 23(b)(1).
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THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATIONS S-K
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FORM S-4 -- ITEM NO. AND CAPTION PROSPECTUS/PROXY STATEMENT
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1. Forepart of Registration Statement and Outside Facing Page of Registration Statement;
Front Cover Page of Prospectus Cross Reference Sheet; Cover Page of
Prospectus
2. Inside Front and Outside Back Cover Pages of Available Information; Incorporation by
Prospectus Reference; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed Summary of Joint Proxy Statement and
Charges and Other Information Prospectus
4. Terms of the Transaction The Merger; Legal Opinions; Incorporation
by Reference; Description of Cleveland
Electric Capitalization; Amendment of
Cleveland Electric Amended Articles
5. Pro Forma Financial Information Combined Pro Forma Financial Information
6. Material Contacts with the Company Being Relationships Between Cleveland Electric
Acquired and Toledo Edison
7. Additional Information Required for Reoffering Not Applicable
by Persons and Parties Deemed to be
Underwriters
8. Interests of Named Experts and Counsel Not Applicable
9. Disclosure of Commission Position on Indemnification of Cleveland Electric's
Indemnification for Securities Act Liabilities Officers and Directors
10. Information with Respect to S-3 Registrants Not Applicable
11. Incorporation of Certain Information by Not Applicable
Reference
12. Information with Respect to S-2 or S-3 The Merger; Combined Pro Forma Financial
Registrants Information; Description of Cleveland
Electric's Business; Management's Financial
Analysis of Cleveland Electric; Financial
Statements of Cleveland Electric;
Relationships Between Cleveland Electric
and Toledo Edison
13. Incorporation of Certain Information by Incorporation by Reference
Reference
14. Information with Respect to Registrants Other Not Applicable
Than S-3 or S-2 Registrants
15. Information with Respect to S-3 Companies Not Applicable
16. Information with Respect to S-2 or S-3 The Merger; Combined Pro Forma Financial
Companies Information; Description of Toledo Edison's
Business; Management's Financial Analysis
of Toledo Edison; Financial Statements of
Toledo Edison; Relationships Between
Cleveland Electric and Toledo Edison
17. Information with Respect to Companies Other Not Applicable
Than S-3 or S-2 Companies
18. Information if Proxies, Consents or The Cleveland Electric Special Meeting; The
Authorizations are to be Solicited Toledo Edison Special Meeting; Management
of Cleveland Electric and Toledo Edison;
Incorporation by Reference
19. Information if Proxies, Consents or Not Applicable
Authorizations are not to be Solicited or in
an Exchange Offer
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[CLEVELAND ELECTRIC LETTERHEAD PASTEUP]
Robert J. Farling
Chairman and Chief
Executive Officer
April 12, 1995
Dear Preferred Stock Share Owner:
Attached is your copy of the Joint Proxy Statement and Prospectus and
Notice of Special Meeting of the preferred stock share owners of The Cleveland
Electric Illuminating Company. The meeting will be held on June 14, 1995, at
3:30 p.m., at the offices of Centerior Energy Corporation, 6200 Oak Tree
Boulevard, Independence, Ohio.
The purpose of the Special Meeting is to seek your approval of new Amended
Articles of Incorporation of the Company. The new Amended Articles would
increase the number of authorized shares of the Company's preferred stock which
is necessary to carry out the merger of The Toledo Edison Company with and into
your Company and to provide flexibility to raise funds in the future through the
sale of preferred stock. If the merger is consummated, Toledo Edison preferred
stock will be exchanged for the Company's preferred stock. The merger also
requires the approval of the preferred stock share owners of Toledo Edison.
Toledo Edison will also hold a meeting of its preferred stock share owners on
June 14, 1995 to consider the proposed merger. If the merger is consummated,
each share of Company preferred stock will continue to remain outstanding
without any change in its terms.
As subsidiaries of Centerior, the Company and Toledo Edison essentially
operate as one company since there is common management and control of
operations. Your Board of Directors believes the proposed merger is in your best
interest because it will enable the companies to achieve additional benefits
including further cost reductions.
Your Board of Directors unanimously recommends that you vote FOR the
proposal.
I urge you to read the Joint Proxy Statement and Prospectus, particularly
the summary beginning on page 6. The Joint Proxy Statement and Prospectus more
fully explains the reasons for the merger, actions necessary to consummate the
merger, certain information concerning the Company and Toledo Edison and other
pertinent details. The Joint Proxy Statement and Prospectus also constitutes the
Prospectus for the preferred stock shares of the Company to be issued to the
preferred stock share owners of Toledo Edison.
The proposed merger is extremely important to you as a share owner.
Therefore, I urge you to give your immediate attention to the proposal. Please
sign and date the enclosed proxy card and return it promptly in the postage-paid
envelope provided to help us obtain the votes needed to conduct business at the
meeting.
Your support is appreciated.
Sincerely,
/s/ Robert J. Farling
Robert J. Farling
A Centerior Energy Company
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THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
NOTICE OF SPECIAL MEETING OF PREFERRED STOCK SHARE OWNERS
April 12, 1995
To the Preferred Stock Share Owners of
The Cleveland Electric Illuminating Company:
A special meeting of the Preferred Stock Share Owners of The Cleveland
Electric Illuminating Company will be held at the offices of Centerior Energy
Corporation, 6200 Oak Tree Boulevard, Independence, Ohio, on June 14, 1995 at
3:30 p.m., Cleveland time, for the purpose of voting upon the proposal to
approve the Amended Articles of Incorporation of The Cleveland Electric
Illuminating Company. Holders of record of Preferred Stock at the close of
business on April 19, 1995 will be entitled to vote at the meeting.
EVIDENCE OF OWNERSHIP OF PREFERRED STOCK AS OF THE RECORD DATE STATED ABOVE
WILL BE REQUIRED FOR ADMITTANCE TO THE MEETING.
By Order of the Board of Directors,
Janis T. Percio, Secretary
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[TOLEDO EDISON LETTERHEAD PASTEUP]
Robert J. Farling
Chairman and Chief
Executive Officer
April 12, 1995
Dear Preferred Stock Share Owner:
Attached is your copy of the Joint Proxy Statement and Prospectus and
Notice of Special Meeting of the preferred stock share owners of The Toledo
Edison Company. The meeting will be held on June 14, 1995, at 4:30 p.m., at the
offices of Centerior Energy Corporation, 6200 Oak Tree Boulevard, Independence,
Ohio.
The purpose of the Special Meeting is to seek your approval of the
Agreement of Merger between your Company and The Cleveland Electric Illuminating
Company. The merger would result in your Company merging with and into Cleveland
Electric. Cleveland Electric also will hold a meeting of its preferred stock
share owners on June 14, 1995 to approve an increase in the number of authorized
shares of Cleveland Electric preferred stock and new Amended Articles of
Incorporation which is necessary to carry out the merger.
If the merger is consummated, Company preferred stock will be exchanged for
Cleveland Electric preferred stock. Terms of each series of new Cleveland
Electric stock into which the Company's preferred stock is to be converted will
have the same terms as the Company's preferred stock to be converted with
respect to dividend rate and payment dates; voluntary redemption provisions and
prices; liquidation, dissolution or winding up preferences; and sinking fund
provisions.
As subsidiaries of Centerior, the Company and Cleveland Electric
essentially operate as one company since there is common management and control
of operations. Your Board of Directors believes the proposed merger is in your
best interest because it will enable the companies to achieve additional
benefits including further cost reductions.
Your Board of Directors unanimously recommends that you vote FOR the
proposal.
I urge you to read the Joint Proxy Statement and Prospectus, particularly
the summary beginning on page 6. The Joint Proxy Statement and Prospectus more
fully explains the reasons for the merger, actions necessary to consummate the
merger, certain information concerning the Company and Cleveland Electric and
other pertinent details. The Joint Proxy Statement and Prospectus also
constitutes the Prospectus for the preferred stock shares of Cleveland Electric
to be issued to the preferred stock share owners of the Company.
The proposed merger is extremely important to you as a share owner.
Therefore, I urge you to give your immediate attention to the proposal. Please
sign and date the enclosed proxy card and return it promptly in the postage-paid
envelope provided to help us obtain the votes needed to conduct business at the
meeting.
Your support is appreciated.
Sincerely,
/s/ Robert J. Farling
Robert J. Farling
A Centerior Energy Company
<PAGE> 6
THE TOLEDO EDISON COMPANY
NOTICE OF SPECIAL MEETING OF PREFERRED STOCK SHARE OWNERS
April 12, 1995
To the Preferred Stock Share Owners of
The Toledo Edison Company:
A special meeting of the Preferred Stock Share Owners of The Toledo Edison
Company will be held at the offices of Centerior Energy Corporation, 6200 Oak
Tree Boulevard, Independence, Ohio, on June 14, 1995 at 4:30 p.m., Cleveland
time, for the purpose of voting upon the proposal to approve the Agreement of
Merger between the Company and The Cleveland Electric Illuminating Company.
Holders of record of Preferred Stock at the close of business on April 19, 1995
will be entitled to vote at the meeting.
EVIDENCE OF OWNERSHIP OF PREFERRED STOCK AS OF THE RECORD DATE STATED ABOVE
WILL BE REQUIRED FOR ADMITTANCE TO THE MEETING.
By Order of the Board of Directors
Janis T. Percio, Secretary
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JOINT PROXY STATEMENT
OF
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
AND
THE TOLEDO EDISON COMPANY
------------------------
PROSPECTUS
OF
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
SPECIAL MEETINGS OF RESPECTIVE SHARE OWNERS OF
PREFERRED STOCK TO BE HELD ON JUNE 14, 1995
This Joint Proxy Statement and Prospectus relates to the proposed merger
("Merger") of The Toledo Edison Company ("Toledo Edison"), an Ohio corporation,
with and into The Cleveland Electric Illuminating Company ("Cleveland
Electric"), an Ohio corporation, both of which are wholly owned subsidiaries of
Centerior Energy Corporation ("Centerior"), and is being furnished to the Share
Owners of Cumulative Preferred Stock of Toledo Edison ("Toledo Edison Preferred
Stock") and Serial Preferred Stock of Cleveland Electric ("Cleveland Electric
Preferred Stock") in connection with the solicitation of proxies by the Board of
Directors of Toledo Edison ("Toledo Edison Board") and the Board of Directors of
Cleveland Electric ("Cleveland Electric Board") for use at the special meetings
of Toledo Edison Preferred Stock Share Owners ("Toledo Edison Special Meeting")
and Cleveland Electric Preferred Stock Share Owners ("Cleveland Electric Special
Meeting") to be held on June 14, 1995, and at any adjournment or postponement
thereof.
This Joint Proxy Statement and Prospectus constitutes a prospectus of
Cleveland Electric filed as part of the Registration Statement (defined below)
with respect to the issuance of the following shares of Cleveland Electric:
up to 160,000 shares of Serial Preferred Stock, $4.25 Series U
up to 50,000 shares of Serial Preferred Stock, $4.56 Series V
up to 100,000 shares of Serial Preferred Stock, $4.25 Series W
up to 100,000 shares of Serial Preferred Stock, $8.32 Series X
up to 150,000 shares of Serial Preferred Stock, $7.76 Series Y
up to 150,000 shares of Serial Preferred Stock, $7.80 Series Z
up to 190,000 shares of Serial Preferred Stock, $10.00 Series AA
up to 83,500 shares of Serial Preferred Stock, $9.375 Series BB
up to 250,000 shares of Serial Preferred Stock, $8.84 Series CC
up to 350,000 shares of Serial Preferred Stock, $9.46 Series DD
up to 300,000 shares of Serial Preferred Stock, Adjustable Rate Series EE
up to 300,000 shares of Serial Preferred Stock, Adjustable Rate Series FF
up to 100,000 shares of Serial Preferred Stock, $11.24 Series GG
all to be issued pursuant to the Agreement of Merger, dated as of April 12, 1994
("Agreement"), between Cleveland Electric and Toledo Edison. A copy of the
Agreement is attached to this Joint Proxy Statement and Prospectus as Appendix I
and the form of the proposed Amended Articles of Incorporation of Cleveland
Electric, the surviving corporation ("Amended Articles"), is included therein as
Exhibit B thereto.
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.
No person is authorized to give any information or to make any
representation not contained in this Joint Proxy Statement and Prospectus, and
if given or made, such information or representation should not be relied upon
as having been authorized. This Joint Proxy Statement and Prospectus does not
constitute an offer to sell, or solicitation of an offer to purchase, the
securities offered by this Joint Proxy Statement and Prospectus, or the
solicitation of a proxy, in any jurisdiction, to or from any person to whom it
is unlawful to make such offer, solicitation of an offer or proxy solicitation
in such jurisdiction. Neither the delivery of this Joint Proxy Statement and
Prospectus nor any distribution of the securities pursuant to this Joint Proxy
Statement and Prospectus shall, under any circumstances, create an implication
that there has been no change in the information set forth herein since the date
of this Joint Proxy Statement and Prospectus.
THE DATE OF THIS JOINT PROXY STATEMENT AND PROSPECTUS IS APRIL 12, 1995.
<PAGE> 8
AVAILABLE INFORMATION
Cleveland Electric and Toledo Edison are subject to the informational
requirements of the Securities Exchange Act of 1934 ("Exchange Act") and
accordingly file reports and other information with the Securities and Exchange
Commission ("SEC"). Such reports and other information filed with the SEC are
available for inspection and copying 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, and at its regional offices located
at 500 West Madison Street, 14th Floor, Chicago, Illinois 60661-2511; and 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
documents also may be obtained at prescribed rates from the Public Reference
Section of the SEC at its principal office. In addition, such reports and other
information concerning Cleveland Electric and Toledo Edison can be inspected at
the New York Stock Exchange, Inc., 20 Broad Street, New York, New York 10005,
and in the case of Toledo Edison, the American Stock Exchange, 86 Trinity Place,
New York, New York 10006-1881, on which exchanges certain series of Cleveland
Electric Preferred Stock and Toledo Edison Preferred Stock are listed.
Cleveland Electric has filed with the SEC, under the Securities Act of 1933
("Securities Act"), a Registration Statement on Form S-4 with respect to the
shares of Cleveland Electric Preferred Stock issuable in connection with the
Merger ("Registration Statement"). This Joint Proxy Statement and Prospectus
does not contain all the information set forth in such Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the SEC. Such Registration Statement and any amendments thereto, including
exhibits filed as a part thereof, are available for inspection and copying as
set forth above.
INCORPORATION BY REFERENCE
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. IN THE CASE OF BOTH CLEVELAND ELECTRIC AND TOLEDO
EDISON, THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM JANIS T. PERCIO,
SECRETARY, C/O CENTERIOR ENERGY CORPORATION, P. O. BOX 94661, CLEVELAND, OHIO
44101-4661, (216) 447-3100. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS
ANY REQUEST SHOULD BE MADE BY JUNE 9, 1995.
CLEVELAND ELECTRIC AND TOLEDO EDISON HEREBY UNDERTAKE TO PROVIDE WITHOUT
CHARGE TO EACH PERSON, INCLUDING ANY BENEFICIAL OWNER, TO WHOM A COPY OF THIS
JOINT PROXY STATEMENT AND PROSPECTUS HAS BEEN DELIVERED, UPON THE WRITTEN OR
ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY AND ALL OF THE DOCUMENTS REFERRED
TO BELOW WHICH HAVE BEEN OR MAY BE INCORPORATED BY REFERENCE, OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE INCORPORATED BY REFERENCE
INTO THE INFORMATION THAT THIS JOINT PROXY STATEMENT AND PROSPECTUS
INCORPORATES. REQUESTS FOR SUCH DOCUMENTS SHOULD BE DIRECTED TO THE PERSON
INDICATED ABOVE.
The following documents, heretofore filed with the SEC pursuant to the
Exchange Act, are hereby incorporated by reference:
1. The combined Annual Report on Form 10-K for the year ended December
31, 1994 filed by Centerior, Cleveland Electric and Toledo Edison ("Form
10-K").
The reports of Arthur Andersen LLP on the financial statements and
schedules of Cleveland Electric and Toledo Edison as of December 31,
1994 and for the three years then ended, included in the Form 10-K and
incorporated by reference in this Registration Statement, include an
explanatory paragraph that describes a change made in the method of
accounting for postretirement benefits other than pensions in 1993, as
discussed in Note 9 to each of the companies' financial statements.
All documents filed by Cleveland Electric or Toledo Edison pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof and
prior to the dates of the Cleveland Electric Special Meeting and the Toledo
Edison Special Meeting shall be deemed to be incorporated by reference herein
and to be part hereof from the date of filing of such documents. All information
appearing in this Joint Proxy Statement and Prospectus is qualified in its
entirety by the detailed information and financial statements (including notes
thereto) appearing in the documents incorporated by reference. Although the Form
10-K contains information and financial statements related to Centerior, such
information shall not be deemed to be incorporated by reference herein.
2
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TABLE OF CONTENTS
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AVAILABLE INFORMATION........................................................... 2
INCORPORATION BY REFERENCE...................................................... 2
SUMMARY OF JOINT PROXY STATEMENT AND PROSPECTUS................................. 5
The Companies.............................................................. 5
The Special Meetings....................................................... 5
The Merger................................................................. 5
Recommendation............................................................. 6
Tax Consequences........................................................... 6
Share Owner Matters........................................................ 6
Exchange of Certificates................................................... 7
Regulatory Matters......................................................... 7
Accounting Treatment....................................................... 7
Market Information......................................................... 8
Summary of Financial Information........................................... 9
INTRODUCTION.................................................................... 11
THE SPECIAL MEETINGS............................................................ 11
The Cleveland Electric Special Meeting..................................... 11
The Toledo Edison Special Meeting.......................................... 12
THE MERGER...................................................................... 13
General.................................................................... 13
Reasons for the Merger..................................................... 13
Recommendations of the Boards of Directors................................. 14
Determination of Exchange Ratios........................................... 14
The Agreement.............................................................. 14
Tax Consequences........................................................... 17
Exchange of Certificates................................................... 18
Regulatory Requirements.................................................... 19
Accounting Treatment....................................................... 20
Dissenters' Rights......................................................... 20
Stock Exchange Listing..................................................... 21
Federal Securities Laws Consequences....................................... 21
COMBINED PRO FORMA FINANCIAL INFORMATION........................................ 22
BUSINESSES OF THE COMPANIES..................................................... 26
Description of Cleveland Electric's Business............................... 26
Description of Toledo Edison's Business.................................... 26
Relationships Between Cleveland Electric and Toledo Edison................. 26
Management of Cleveland Electric and Toledo Edison......................... 26
Security Ownership of Certain Beneficial Owners and Management of Cleveland
Electric and Toledo Edison................................................ 26
AMENDMENT OF CLEVELAND ELECTRIC AMENDED ARTICLES................................ 27
DESCRIPTION OF CLEVELAND ELECTRIC CAPITALIZATION................................ 27
General.................................................................... 27
Preferred Stock............................................................ 28
First Mortgage and First Mortgage Bonds.................................... 29
Subordinate Mortgage....................................................... 30
DESCRIPTION OF TOLEDO EDISON CAPITALIZATION..................................... 30
General.................................................................... 30
Preferred Stock............................................................ 30
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First Mortgage and First Mortgage Bonds.................................... 32
Subordinate Mortgage....................................................... 32
SURVIVING CORPORATION SECURED DEBT OBLIGATIONS.................................. 33
LEGAL OPINIONS.................................................................. 33
EXPERTS......................................................................... 33
PROXY SOLICITATION EXPENSES..................................................... 34
INDEMNIFICATION OF CLEVELAND ELECTRIC'S DIRECTORS AND OFFICERS.................. 34
1994 FINANCIAL STATEMENTS AND MANAGEMENT'S
DISCUSSION AND ANALYSIS OF CLEVELAND ELECTRIC AND TOLEDO EDISON............... 35
INDEX TO APPENDICES............................................................. 78
APPENDIX I Agreement of Merger.................................................. I-1
APPENDIX II Statutory Dissenters' Rights........................................ II-1
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4
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SUMMARY OF JOINT PROXY STATEMENT AND PROSPECTUS
The following is a summary of certain important terms of the Merger and
related information. This summary does not purport to be complete and is
qualified in its entirety by reference to the more detailed information
appearing in this Joint Proxy Statement and Prospectus and the Appendices.
THE COMPANIES
EXECUTIVE OFFICES AND MAILING ADDRESSES
The mailing address of the principal executive offices of Cleveland
Electric is P. O. Box 5000, Cleveland, Ohio 44101, and the telephone number is
(216) 622-9800. The mailing address of the principal executive offices of Toledo
Edison is 300 Madison Avenue, Toledo, Ohio 43652, and the telephone number is
(419) 249-5000. The mailing address of the principal executive offices of
Centerior is P.O. Box 94661, Cleveland, Ohio 44101, and the telephone number is
(216) 447-3100.
CLEVELAND ELECTRIC
Cleveland Electric was incorporated under the laws of the State of Ohio in
1892 and is a public utility engaged primarily 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 serves approximately 747,000 customers and derives
approximately 77% of its total electric retail revenue from customers outside
the City of Cleveland. In 1994, nearly all of Cleveland Electric's operating
revenues were derived from the sale of electric energy.
TOLEDO EDISON
Toledo Edison was incorporated under the laws of the State of Ohio in 1901
and is a public utility engaged primarily 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 serves approximately 287,000 customers and derives
approximately 57% of its total electric retail revenue from customers outside
the City of Toledo. In 1994, nearly all of Toledo Edison's operating revenues
were derived from the sale of electric energy.
CENTERIOR
Centerior is a public utility holding company incorporated under the laws
of the State of Ohio in 1985 which is exempt from the Public Utility Holding
Company Act of 1935 ("PUHCA"). Centerior owns 100% of the common stock of
Cleveland Electric ("Cleveland Electric Common Stock"), Toledo Edison ("Toledo
Edison Common Stock") and Centerior Service Company ("Centerior Service"), a
subsidiary of Centerior that was incorporated under the laws of the State of
Ohio in 1986 for the purpose of handling the administrative functions of
Cleveland Electric and Toledo Edison.
THE SPECIAL MEETINGS
The Cleveland Electric Special Meeting will be held at 3:30 p.m., Cleveland
time, on June 14, 1995. The Toledo Edison Special Meeting will be held at 4:30
p.m., Cleveland time, on June 14, 1995. Both meetings will take place at the
offices of Centerior, 6200 Oak Tree Boulevard, Independence, Ohio.
THE MERGER
GENERAL
The Agreement provides for the merger of Toledo Edison with and into
Cleveland Electric. All of the outstanding Toledo Edison Common Stock will be
converted into additional shares of Cleveland Electric Common Stock, the Toledo
Edison Preferred Stock Share Owners will become Cleveland Electric Preferred
5
<PAGE> 12
Stock Share Owners and all of the outstanding Cleveland Electric Common Stock
following the Merger will be held by Centerior. The name of Cleveland Electric
may be changed following consummation of the Merger.
EXCHANGE RATIO
Each share of Toledo Edison $100 Par Value Preferred Stock outstanding
immediately prior to the Merger will, upon consummation of the Merger, be
converted into one share of Cleveland Electric Preferred Stock. Each share of
Toledo Edison $25 Par Value Preferred Stock outstanding immediately prior to the
Merger will, upon consummation of the Merger, be converted into one-fourth of
one share of Cleveland Electric Preferred Stock. Holders of Toledo Edison $25
Par Value Preferred Stock will receive cash in lieu of fractional shares.
RIGHTS TO TERMINATE
The Agreement is subject to termination and abandonment under certain
conditions. See "The Merger -- The Agreement -- Termination."
REASONS FOR THE MERGER
The Boards of Directors and managements of Centerior, Cleveland Electric
and Toledo Edison believe that the Merger will enable the companies to achieve
further cost reductions and allow more effective programs. See "The Merger --
Reasons for the Merger".
RECOMMENDATION
THE BOARDS OF DIRECTORS OF CENTERIOR, CLEVELAND ELECTRIC AND TOLEDO EDISON
HAVE UNANIMOUSLY APPROVED THE MERGER AND THE AMENDED ARTICLES AND RECOMMEND THAT
THE TOLEDO EDISON PREFERRED STOCK SHARE OWNERS VOTE FOR THE PROPOSAL TO ADOPT
THE AGREEMENT AND THAT THE CLEVELAND ELECTRIC PREFERRED STOCK SHARE OWNERS VOTE
FOR THE PROPOSAL TO ADOPT THE AMENDED ARTICLES. SEE "THE MERGER --
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS".
TAX CONSEQUENCES
It is contemplated that the Merger will qualify as a tax-free
reorganization under sec.368(a)(1)(A) of the Internal Revenue Code of 1986, as
amended ("Code"). Assuming the Merger so qualifies, then for federal income tax
purposes, Toledo Edison Preferred Stock Share Owners whose shares are converted
into Cleveland Electric Preferred Stock in the Merger will recognize no gain or
loss as a result of the conversion (except in connection with any cash received
in lieu of a fractional share), and the holding period and basis applicable to
Cleveland Electric Preferred Stock received in the Merger will be the same as
the holding period (assuming Toledo Edison Preferred Stock was a capital asset
in its holder's hands) and basis (disregarding cash received in lieu of a
fractional share) attributable to the Toledo Edison Preferred Stock that was
held by such holder and converted in the Merger.
Cleveland Electric and Toledo Edison Preferred Stock have been exempt from
existing Pennsylvania personal property taxes. This exemption will continue
following the consummation of the Merger. See "The Merger -- Tax Consequences".
CLEVELAND ELECTRIC AND TOLEDO EDISON PREFERRED STOCK SHARE OWNERS ARE URGED
TO CONSULT THEIR OWN TAX ADVISORS TO DETERMINE THE PARTICULAR TAX CONSEQUENCES
TO THEM OF THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND
OTHER TAX LAWS.
SHARE OWNER MATTERS
SHARE OWNER APPROVALS
The affirmative vote of holders of 66 2/3% of the voting power of the
outstanding shares of Toledo Edison Preferred Stock is required for approval and
adoption of the Agreement. Centerior's, Cleveland Electric's and
6
<PAGE> 13
Toledo Edison's directors, officers and their affiliates own none of the
outstanding Toledo Edison Preferred Stock.
The affirmative vote of the holders of a majority of the outstanding shares
of Cleveland Electric Preferred Stock is required for approval and adoption of
the Amended Articles. Such Amended Articles increase the authorized number of
shares of Cleveland Electric Preferred Stock, which action is necessary in order
to carry out the Merger. Centerior's, Cleveland Electric's and Toledo Edison's
directors, officers and their affiliates own none of the outstanding Cleveland
Electric Preferred Stock.
Centerior, as the owner of 100% of the outstanding Common Stock of both
Cleveland Electric and Toledo Edison, has already voted those shares for the
approval and adoption of the Agreement and the Amended Articles.
DISSENTERS' RIGHTS
Any holder of record of Toledo Edison Preferred Stock as of the close of
business on April 19, 1995 ("Toledo Edison Record Date") whose shares are not
voted in favor of the Agreement is entitled, if the Merger is consummated, to be
paid the fair cash value of such shares held by him or her on the Toledo Edison
Record Date, provided he or she serves a written demand upon the issuer of such
shares not later than ten days after the date of the Toledo Edison Special
Meeting and provided he or she otherwise complies with Section 1701.85 of the
Ohio Revised Code. Under the Ohio Revised Code, Cleveland Electric Preferred
Stock Share Owners do not have such dissenters' rights. See "The Merger --
Dissenters' Rights".
EXCHANGE OF CERTIFICATES
After consummation of the Merger, Toledo Edison Preferred Stock Share
Owners will receive a letter of transmittal ("Letter of Transmittal") for use in
submitting their stock certificates in exchange for certificates representing
shares of Cleveland Electric Preferred Stock. Toledo Edison Preferred Stock
Share Owners should not submit their certificates until they receive the Letter
of Transmittal. See "The Merger -- Exchange of Certificates".
REGULATORY MATTERS
Various aspects of the Merger are subject to the approval of the Federal
Energy Regulatory Commission ("FERC"), the U.S. Nuclear Regulatory Commission
("NRC"), The Public Utilities Commission of Ohio ("PUCO") and other regulatory
authorities. Applications for approval have been filed with those authorities.
The Pennsylvania Public Utility Commission ("PaPUC") and the PUCO have each
taken the action necessary for completion of the Merger. The joint application
of Cleveland Electric and Toledo Edison to approve the Merger is pending before
the FERC. Cleveland Electric and Toledo Edison have advised the FERC that they
intend to provide additional information required by the FERC and that they
intend to file an open-access transmission tariff offering comparable service.
See "The Merger -- Regulatory Requirements".
ACCOUNTING TREATMENT
The Merger will be treated for accounting purposes in a manner similar to a
"pooling of interests." See "The Merger -- Accounting Treatment".
7
<PAGE> 14
MARKET INFORMATION
On March 24, 1994, the day prior to the announcement of the Merger, the
closing sale price for each series of Cleveland Electric Preferred Stock as
reported by the New York Stock Exchange or the estimated sale price for each
series publicly traded but not listed on an exchange was as follows:
<TABLE>
<CAPTION>
SERIES MARKET PRICE
-------------- -----------------
<S> <C> <C>
A $83 1/2
B $ 86
C Private Placement
E Private Placement
L $91 1/2
M $96 1/4(1)
N $99 1/2(1)
Q Private Placement
R $ 830(1)
S $ 840(1)
T $24 1/4(2)
</TABLE>
On March 24, 1994, the day prior to the announcement of the Merger, the
closing sale price for each series of Toledo Edison Preferred Stock as reported
on the American Stock Exchange (for the $100 Par Value Series), the New York
Stock Exchange (for the $25 Par Value Series) or the estimated sale price for
each series publicly traded but not listed on an exchange was as follows:
<TABLE>
<CAPTION>
SERIES MARKET PRICE
-------------- -----------------
<S> <C> <C>
$100 Par Value
4 1/4% $47 3/4(3)
4.25% $40 1/2(1)
4.56% $43 5/8(1)
7.76% $85 1/2
7.80% $ 76(1)
8.32% $91 1/8
9 3/8% Private Placement
10% $ 101(4)
$25 Par Value
8.84% $24 1/4
$2.365 $25 3/4
$2.81 $26 3/8
Adjustable A $23 1/2
Adjustable B $23 1/2
</TABLE>
- ---------------
(1) Estimated market price based on the sale prices of comparable securities.
(2) Closing price on the Depositary Shares, Series A.
(3) Closing price on March 22, 1994. There were no sales on March 23, 1994 or
March 24, 1994.
(4) Closing price on March 17, 1994. There were no sales between March 18, 1994
and March 24, 1994.
8
<PAGE> 15
SUMMARY OF FINANCIAL INFORMATION
The following tables present selected historical and pro forma combined
financial information for Cleveland Electric and Toledo Edison. The Cleveland
Electric and the Toledo Edison historical data for the five one-year periods
each ended December 31 is taken or derived from the audited financial statements
of Cleveland Electric and Toledo Edison, respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1990 1991 1992 1993 1994
------- ------- ------- ------- -------
(MILLIONS OF DOLLARS, EXCEPT FOR RATIOS)
<S> <C> <C> <C> <C> <C>
CLEVELAND ELECTRIC -- HISTORICAL
Income Statement Data:
Operating revenues........................ $ 1,691 $ 1,826 $ 1,743 $ 1,751 $ 1,698
Net income (loss)......................... 243 246 205 (587) 185
Preferred dividend requirements........... 37 36 41 45 45
Ratio of earnings to fixed charges and
preferred stock dividends.............. 1.70 1.80 1.61 (a) 1.51
Balance Sheet Data at End of Period:
Total assets.............................. $ 7,821 $ 7,942 $ 8,123 $ 7,159 $ 7,151
Long-term debt............................ 2,632 2,683 2,515 2,793 2,543
Preferred stock:
With mandatory redemption provisions... 171 268 314 285 246
Without mandatory redemption
provisions........................... 217 217 144 241 241
Common stock equity....................... 1,884 1,898 1,865 1,040 1,058
TOLEDO EDISON -- HISTORICAL
Income Statement Data:
Operating revenues........................ $ 863 $ 887 $ 845 $ 871 $ 865
Net income (loss)......................... 81 50 71 (289) 82
Preferred dividend requirements........... 25 25 24 23 20
Ratio of earnings to fixed charges and
preferred stock dividends.............. 1.22 1.14 1.25 (b) 1.34
Balance Sheet Data at End of Period:
Total assets.............................. $ 3,913 $ 3,926 $ 3,939 $ 3,510 $ 3,502
Long-term debt............................ 1,097 1,158 1,178 1,225 1,154
Preferred stock:
With mandatory redemption provisions... 66 64 50 28 7
Without mandatory redemption
provisions........................... 210 210 210 210 210
Common stock equity....................... 881 888 935 623 685
PRO FORMA -- CLEVELAND ELECTRIC AND TOLEDO
EDISON COMBINED
Income Statement Data:
Operating revenues........................ $ 2,430 $ 2,561 $ 2,439 $ 2,475 $ 2,422
Net income (loss)......................... 324 296 276 (876) 268
Preferred dividend requirements........... 62 61 65 68 66
Ratio of earnings to fixed charges and
preferred stock dividends.............. 1.49 1.52 1.46 (c) 1.44
Balance Sheet Data at End of Period:
Total assets.............................. $11,689 $11,816 $12,011 $10,640 $10,624
Long-term debt............................ 3,729 3,841 3,694 4,019 3,697
Preferred stock:
With mandatory redemption provisions... 237 332 364 313 253
Without mandatory redemption
provisions........................... 427 427 354 451 451
Common stock equity....................... 2,765 2,785 2,799 1,662 1,743
</TABLE>
- ---------------
(a) Not meaningful due to net loss. For the year ended December 31, 1993, fixed
charges and preferred dividends exceeded earnings by $898,617,000. Fixed
charges and preferred dividends during the period were $397,114,000. The net
loss before income taxes, fixed charges and preferred dividends included
write-offs of $986,036,000 related to Cleveland
9
<PAGE> 16
Electric's investment in Perry Unit 2 and phase-in plan deferred charges,
and other charges of $78,675,000 attributable to an early retirement
program. Excluding these write-offs and other charges, the ratio of earnings
to fixed charges and preferred dividends would have been 1.40.
(b) Not meaningful due to a net loss. For the year ended December 31, 1993,
fixed charges and preferred dividends exceeded earnings by $462,075,000.
Fixed charges and preferred dividends during the period were $266,808,000.
The net loss before income taxes, fixed charges and preferred dividends
included write-offs of $473,200,000 related to Toledo Edison's investment in
Perry Unit 2 and phase-in plan deferred charges, and other charges of
$55,695,000 attributable to an early retirement program. Excluding these
write-offs and other charges, the ratio of earnings to fixed charges and
preferred dividends would have been 1.27.
(c) Not meaningful due to a net loss. For the year ended December 31, 1993,
fixed charges and preferred dividends exceeded earnings by $1,360,683,000.
Such fixed charges and preferred dividends during the period were
$663,912,000. The net loss before income taxes, fixed charges and preferred
dividends included write-offs of $1,459,237,000 related to Cleveland
Electric's and Toledo Edison's investments in Perry Unit 2 and phase-in plan
deferred charges. Other charges of $134,370,000 attributable to an early
retirement program also contributed to the net loss. Excluding these
write-offs and other charges, the ratio of earnings to fixed charges and
preferred dividends would have been 1.35.
See "Combined Pro Forma Financial Information".
10
<PAGE> 17
INTRODUCTION
This Joint Proxy Statement and Prospectus is being furnished to the
Cleveland Electric Preferred Stock Share Owners and the Toledo Edison Preferred
Stock Share Owners in connection with the solicitation of proxies by the
Cleveland Electric Board from holders of Cleveland Electric Preferred Stock, for
use at the Cleveland Electric Special Meeting, and the solicitation of proxies
by the Toledo Edison Board from holders of Toledo Edison Preferred Stock, for
use at the Toledo Edison Special Meeting. The purpose of the Toledo Edison
Special Meeting is to act upon a proposal to approve the Merger of Cleveland
Electric and Toledo Edison. The Merger will result in Toledo Edison merging with
and into Cleveland Electric, and the Toledo Edison Preferred Stock Share Owners
becoming Cleveland Electric Preferred Stock Share Owners. The purpose of the
Cleveland Electric Special Meeting is to act upon a proposal to approve the
Amended Articles, increasing the number of authorized shares of Cleveland
Electric Preferred Stock. Such increase is necessary in order to be able to
carry out the Merger.
The Merger is to be effected pursuant to the Agreement, dated as of April
12, 1994, between Cleveland Electric and Toledo Edison. A copy of the Agreement
is attached to this Joint Proxy Statement and Prospectus as Appendix I and the
form of the proposed Amended Articles is included therein as Exhibit B thereto.
No business will be presented for consideration at the Cleveland Electric
Special Meeting or the Toledo Edison Special Meeting other than the matters
described in this Joint Proxy Statement and Prospectus.
THE SPECIAL MEETINGS
THE CLEVELAND ELECTRIC SPECIAL MEETING
PLACE, TIME AND DATE
The Cleveland Electric Special Meeting will take place at the offices of
Centerior, 6200 Oak Tree Boulevard, Independence, Ohio, at 3:30 p.m., Cleveland
time, on June 14, 1995. This Joint Proxy Statement and Prospectus is being sent
to Cleveland Electric Preferred Stock Share Owners and accompanies a form of
proxy which is being solicited by the Cleveland Electric Board for use at the
Cleveland Electric Special Meeting and at any adjournment or postponement
thereof.
MATTER TO BE CONSIDERED
At the Cleveland Electric Special Meeting, Cleveland Electric Preferred
Stock Share Owners will vote on a proposal to adopt the Amended Articles that
will increase the total number of authorized shares of Cleveland Electric
Preferred Stock by 11,000,000 shares to a total of 15,000,000 shares. For a
summary of the changes in the Amended Articles to be effected, see "Amendment of
Cleveland Electric Amended Articles".
CLEVELAND ELECTRIC RECORD DATE; VOTE REQUIRED
The Cleveland Electric Board unanimously approved the Merger and authorized
the execution of the Agreement on March 24, 1994, and has fixed the close of
business on April 19, 1995 as the Cleveland Electric record date ("Cleveland
Electric Record Date"). Only holders of record of shares of Cleveland Electric
Preferred Stock at the close of business on the Cleveland Electric Record Date
will be entitled to vote at the Cleveland Electric Special Meeting. At the close
of business on such date, there were outstanding and entitled to vote at the
Cleveland Electric Special Meeting 2,408,000 shares of Cleveland Electric
Preferred Stock.
Each holder of record of shares of Cleveland Electric Preferred Stock on
the Cleveland Electric Record Date will be entitled to cast one vote per share
on the proposal to be considered at the Cleveland Electric Special Meeting. Such
vote may be exercised in person or by properly executed proxy.
The affirmative vote of holders of a majority of the outstanding shares of
Cleveland Electric Preferred Stock is required to approve and adopt the Amended
Articles.
11
<PAGE> 18
PROXIES
Shares of Cleveland Electric Preferred Stock, holders of which are entitled
to vote at the Cleveland Electric Special Meeting and which are represented by
properly executed proxies, will, unless such proxies have been revoked, be voted
in accordance with the instructions indicated in such proxies. If no contrary
instructions are indicated, such shares will be voted for the adoption and
approval of the Amended Articles. In addition to soliciting proxies by mail,
directors, officers and employees of Centerior Service, without receiving
additional compensation therefor, may solicit proxies by telephone, by
electronic communication or in person. Arrangements will also be made with
brokerage firms and other custodians, nominees and fiduciaries to forward
solicitation material to the beneficial owners of Cleveland Electric Preferred
Stock held of record by such persons, and Cleveland Electric will reimburse such
brokerage firms, custodians, nominees and fiduciaries for reasonable
out-of-pocket expenses incurred by them in connection therewith. Cleveland
Electric has retained Morrow & Co., Inc. to aid in the solicitation of proxies.
The fee of such firm (including the fee for solicitation of proxies from Toledo
Edison Preferred Stock Share Owners) is estimated to be $25,000 plus
reimbursement for out-of-pocket costs and expenses. A Cleveland Electric
Preferred Stock Share Owner who has given a proxy may revoke it any time prior
to its exercise at such meeting by delivering to the Secretary of Cleveland
Electric a notice of revocation or a duly executed proxy bearing a later date or
by attending such meeting and voting in person.
THE TOLEDO EDISON SPECIAL MEETING
PLACE, TIME AND DATE
The Toledo Edison Special Meeting will take place at the offices of
Centerior, 6200 Oak Tree Boulevard, Independence, Ohio, at 4:30 p.m., Cleveland
time, on June 14, 1995. This Joint Proxy Statement and Prospectus is being sent
to Toledo Edison Preferred Stock Share Owners and accompanies a form of proxy
which is being solicited by the Toledo Edison Board for use at the Toledo Edison
Special Meeting and at any adjournment or postponement thereof.
MATTER TO BE CONSIDERED
At the Toledo Edison Special Meeting, Toledo Edison Preferred Stock Share
Owners will vote on a proposal to adopt the Agreement.
TOLEDO EDISON RECORD DATE; VOTE REQUIRED
The Toledo Edison Board unanimously approved the Merger and authorized the
execution of the Agreement on March 24, 1994, and has fixed the close of
business on April 19, 1995 as the Toledo Edison Record Date. Only holders of
record of shares of Toledo Edison Preferred Stock at the close of business on
the Toledo Edison Record Date will be entitled to vote at the Toledo Edison
Special Meeting. At the close of business on such date, there were outstanding
and entitled to vote at the Toledo Edison Special Meeting 6,183,500 shares of
Toledo Edison Preferred Stock.
Each holder of record of shares of Toledo Edison $100 Par Value Preferred
Stock on the Toledo Edison Record Date will be entitled to cast one vote per
share on the proposal to be considered at the Toledo Edison Special Meeting.
Each holder of record of shares of Toledo Edison $25 Par Value Preferred Stock
on the Toledo Edison Record Date will be entitled to cast one-fourth of one vote
per share on the proposal to be considered at the Toledo Edison Special Meeting.
Such votes may be exercised in person or by properly executed proxy.
The affirmative vote of holders of 66 2/3% of the voting power of the
outstanding shares of Toledo Edison Preferred Stock is required to approve and
adopt the Agreement.
PROXIES
Shares of Toledo Edison Preferred Stock, holders of which are entitled to
vote at the Toledo Edison Special Meeting and which are represented by properly
executed proxies, will, unless such proxies have been revoked, be
12
<PAGE> 19
voted in accordance with the instructions indicated in such proxies. If no
contrary instructions are indicated, such shares will be voted for the adoption
and approval of the Agreement. In addition to soliciting proxies by mail,
directors, officers and employees of Centerior Service, without receiving
additional compensation therefor, may solicit proxies by telephone, by
electronic communication or in person. Arrangements will also be made with
brokerage firms and other custodians, nominees and fiduciaries to forward
solicitation material to the beneficial owners of Toledo Edison Preferred Stock
held of record by such persons, and Toledo Edison will reimburse such brokerage
firms, custodians, nominees and fiduciaries for reasonable out-of-pocket
expenses incurred by them in connection therewith. Toledo Edison has retained
Morrow & Co., Inc. to aid in the solicitation of proxies. The fee of such firm
(including the fee for solicitation of proxies from Cleveland Electric Preferred
Stock Share Owners) is estimated to be $25,000 plus reimbursement for
out-of-pocket costs and expenses. A Toledo Edison Preferred Stock Share Owner
who has given a proxy may revoke it any time prior to its exercise at such
meeting by delivering to the Secretary of Toledo Edison a notice of revocation
or a duly executed proxy bearing a later date or by attending such meeting and
voting in person.
THE MERGER
GENERAL
The information contained in this Joint Proxy Statement and Prospectus with
respect to the Merger is qualified in its entirety by reference to the Agreement
(Appendix I) and the Amended Articles (Exhibit B to the Agreement).
The Merger will be effected by the merger of Toledo Edison with and into
Cleveland Electric. Cleveland Electric will be the surviving corporation. The
Merger will become effective upon the filing by Cleveland Electric and Toledo
Edison with the Secretary of State of Ohio of the Certificate of Merger. At such
Effective Time, pursuant to the Agreement, each share of Toledo Edison Common
Stock and Toledo Edison Preferred Stock outstanding immediately prior to the
Effective Time (other than shares of Toledo Edison Preferred Stock held by Share
Owners who properly exercise their dissenters' rights) will be converted (a) in
the case of Toledo Edison Common Stock, into one one-hundredth of a share of
newly issued Cleveland Electric Common Stock; (b) in the case of Toledo Edison
$100 Par Value Preferred Stock, into one share of newly issued Cleveland
Electric Preferred Stock; and (c) in the case of Toledo Edison $25 Par Value
Preferred Stock, into one-fourth of one share of Cleveland Electric Preferred
Stock.
No fractional shares of Cleveland Electric Common Stock or Cleveland
Electric Preferred Stock will be issued, but Toledo Edison Preferred Stock Share
Owners who would otherwise be entitled to receive fractional shares will receive
cash in lieu thereof.
All shares of Cleveland Electric Common Stock and Cleveland Electric
Preferred Stock outstanding immediately prior to the Effective Time will remain
outstanding, as such, following the Effective Time.
REASONS FOR THE MERGER
The Boards of Directors of Cleveland Electric and Toledo Edison believe
that the merger will allow additional benefits which cannot be achieved because
of the two separate corporate identities. In addition to the corporate
simplification that will be achieved upon consummation of the Merger, additional
benefits will arise through lower costs by eliminating (a) two sets of financial
records and preparation of two sets of audited financial statements, annual
reports and tax returns; (b) separate base rate cases and fuel recovery cases;
(c) separate financings; and (d) separate corporate records. In addition,
corporate simplification should lead to a better understanding among security
analysts, and, therefore, a perception of reduced business risk and a
corresponding lower cost of capital. However, no assurance can be given that the
combined company will actually have a lower cost of capital. Also, stronger and
more effective advertising and marketing programs will be possible from a
combined company.
13
<PAGE> 20
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The Board of Directors of Centerior, Cleveland Electric and Toledo Edison
determined that cost savings could be realized through corporate simplification.
Forming a single operating subsidiary, rather than two such entities, would be
the final step in the affiliation process. See the discussion under "The
Merger -- Reasons for the Merger" for additional benefits of the Merger.
Accordingly, on March 24, 1994, the Cleveland Electric Board unanimously
approved the Agreement, including the Amended Articles attached thereto as
Exhibit B, and authorized the registration and issuance of additional Cleveland
Electric Preferred Stock to be issued in the Merger and the Toledo Edison Board
unanimously approved the Agreement.
CLEVELAND ELECTRIC
THE CLEVELAND ELECTRIC BOARD HAS UNANIMOUSLY APPROVED THE AGREEMENT AND
BELIEVES THAT THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF ITS SHARE
OWNERS. THE CLEVELAND ELECTRIC BOARD RECOMMENDS A VOTE FOR THE PROPOSAL TO ADOPT
AND APPROVE THE AMENDED ARTICLES IN ORDER TO ENABLE THE ISSUANCE OF SHARES OF
CLEVELAND ELECTRIC PREFERRED STOCK IN THE MERGER.
TOLEDO EDISON
THE TOLEDO EDISON BOARD HAS UNANIMOUSLY APPROVED THE AGREEMENT AND BELIEVES
THAT THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF ITS SHARE OWNERS. THE
TOLEDO EDISON BOARD RECOMMENDS A VOTE FOR THE PROPOSAL TO APPROVE AND ADOPT THE
AGREEMENT.
DETERMINATION OF EXCHANGE RATIOS
Based on the recommendation of Centerior's staff, the Cleveland Electric
and Toledo Edison Boards determined that the Cleveland Electric Preferred Stock
to be issued in connection with the Merger should be identical, as nearly as
practicable, to the Toledo Edison Preferred Stock being exchanged. Therefore,
except for shares held by share owners who properly exercise dissenters' rights,
one share of Cleveland Electric Preferred Stock will be issued for each
outstanding share of Toledo Edison $100 Par Value Preferred Stock in the Merger
and one-fourth of one share of Cleveland Electric Preferred Stock will be issued
for each outstanding share of Toledo Edison $25 Par Value Preferred Stock in the
Merger. Specific series of Cleveland Electric Preferred Stock are established in
the proposed Amended Articles to reflect, as nearly as practicable, the terms of
the outstanding shares of Toledo Edison Preferred Stock with respect to dividend
rate and payment dates; voluntary redemption provisions and prices; liquidation,
dissolution or winding up preferences; and sinking fund provisions. In the case
of the Cleveland Electric Preferred Stock to be issued upon conversion of the
Toledo Edison $25 Par Value Preferred Stock, the applicable numbers have been
adjusted by a factor of four, to take into account the issuance of one-fourth of
one share of Cleveland Electric Preferred Stock upon conversion of each share of
Toledo Edison $25 Par Value Preferred Stock.
The Boards of Directors of Centerior, Cleveland Electric and Toledo Edison
believe that the terms of the Cleveland Electric Preferred Stock to be issued in
the Merger are fair to the Toledo Edison Preferred Stock Share Owners. No third
party appraisal or fairness opinion has been sought because the Boards believed
that would be an unnecessary expenditure of funds under the circumstances of
this Merger transaction.
THE AGREEMENT
GENERAL TERMS AND CONDITIONS
In addition to the provisions of the Agreement discussed elsewhere in this
Joint Proxy Statement and Prospectus, the Agreement provides for the matters
discussed in this section. All discussion of the Agreement is
14
<PAGE> 21
qualified in its entirety by reference to the provisions of the Agreement, which
is attached as Appendix I to this Joint Proxy Statement and Prospectus.
The Agreement contemplates the adoption by the Share Owners of Cleveland
Electric of the Amended Articles. Such adoption is necessary in order to give
Cleveland Electric sufficient authorized Preferred Stock to carry out the
Merger, and therefore the Merger is conditioned upon the adoption of the Amended
Articles.
The Agreement provides that the Regulations of Cleveland Electric prior to
the Merger shall continue in effect after the Merger until amended as provided
by law.
The Agreement provides for the closing of the Merger on the second business
day after all of the conditions to the Merger have been fulfilled or waived.
The Agreement provides for the conversion of the outstanding shares of
Toledo Edison Preferred Stock (except for shares held by share owners who
properly exercise dissenters' rights) as follows:
1. Each outstanding share of Toledo Edison $100 Par Value Preferred Stock
shall be converted into one share of Cleveland Electric Preferred Stock
as follows:
<TABLE>
<S> <C> <C>
a. Toledo Edison 4 1/4% Preferred Stock into Cleveland Electric Preferred Stock,
$4.25 Series U;
b. Toledo Edison 4.56% Preferred Stock into Cleveland Electric Preferred Stock, $4.56
Series V;
c. Toledo Edison 4.25% Preferred Stock into Cleveland Electric Preferred Stock, $4.25
Series W;
d. Toledo Edison 8.32% Preferred Stock into Cleveland Electric Preferred Stock, $8.32
Series X;
e. Toledo Edison 7.76% Preferred Stock into Cleveland Electric Preferred Stock, $7.76
Series Y;
f. Toledo Edison 7.80% Preferred Stock into Cleveland Electric Preferred Stock, $7.80
Series Z;
g. Toledo Edison 10% Preferred Stock into Cleveland Electric Preferred Stock, $10.00
Series AA; and
h. Toledo Edison 9 3/8% Preferred Stock into Cleveland Electric Preferred Stock,
$9.375 Series BB.
</TABLE>
2. Each outstanding share of Toledo Edison $25 Par Value Preferred Stock
shall be converted into one-fourth of one share of Cleveland Electric
Preferred Stock as follows:
<TABLE>
<S> <C> <C>
a. Toledo Edison 8.84% Preferred Stock into Cleveland Electric Preferred Stock, $8.84
Series CC;
b. Toledo Edison $2.365 Preferred Stock into Cleveland Electric Preferred Stock,
$9.46 Series DD;
c. Toledo Edison Adjustable Rate Preferred Stock, Series A, into Cleveland Electric
Preferred Stock, Adjustable Rate Series EE;
d. Toledo Edison Adjustable Rate Preferred Stock, Series B, into Cleveland Electric
Preferred Stock, Adjustable Rate Series FF; and
e. Toledo Edison $2.81 Preferred Stock into Cleveland Electric Preferred Stock,
$11.24 Series GG.
</TABLE>
Terms of the respective series of Cleveland Electric Preferred Stock into
which the Toledo Edison Preferred Stock is to be converted in the Merger have
been designed to reflect the respective terms of the outstanding Toledo Edison
Preferred Stock.
The following provisions applicable to the outstanding Toledo Edison
Preferred Stock will not be applicable to the Cleveland Electric Preferred Stock
to be issued in the Merger because these provisions, although they were terms of
the Toledo Edison Preferred Stock, are not terms of the Cleveland Electric
Preferred Stock:
1. The Toledo Edison Preferred Stock is par value stock ($100 as to some
series and $25 as to other series). The Cleveland Electric Preferred
Stock is without par value.
2. The Amended Articles of Incorporation of Toledo Edison limit the
issuance of additional Toledo Edison Preferred Stock, without the
approval of two-thirds of the voting power of Toledo Edison Preferred
Stock, unless certain net income and capital tests are met. At the
present time such tests are not met, and therefore Toledo Edison is not
permitted to issue additional Preferred Stock. No comparable limitation
applies to the issuance of additional Cleveland Electric Preferred
Stock.
15
<PAGE> 22
3. The Amended Articles of Incorporation of Toledo Edison limit a merger of
another corporation into Toledo Edison, unless approved by the SEC under
the PUHCA, or approved by a majority of the voting power of Toledo
Edison Preferred Stock. No comparable limitation applies to a merger
into Cleveland Electric.
4. The Amended Articles of Incorporation of Toledo Edison limit a
consolidation of Toledo Edison or its merger into another corporation,
unless approved by the SEC under the PUHCA, or approved by a majority of
the voting power of Toledo Edison Preferred Stock. Such a consolidation
or merger is permitted in the case of Cleveland Electric, without a vote
of the Cleveland Electric Preferred Stock Share Owners, if the
corporation resulting from such consolidation or merger will not have
authorized or outstanding more shares ranking prior to or on a parity
with the Cleveland Electric Preferred Stock than were authorized or
outstanding at Cleveland Electric prior to the consolidation or merger,
and if the Cleveland Electric Preferred Stock Share Owners receive in
the consolidation or merger the same number of shares of the resulting
corporation, with the same rights and preferences, as they held prior to
the consolidation or merger.
5. The Toledo Edison Preferred Stock Share Owners are entitled to elect a
majority of the Board of Directors of Toledo Edison if dividends are in
default of payment in an amount equivalent to four full quarterly
dividends on all shares of Toledo Edison Preferred Stock outstanding.
The Cleveland Electric Preferred Stock Share Owners are entitled to
elect two members of the Board of Directors of Cleveland Electric if
dividends are in default of payment for 540 days on any shares of
Cleveland Electric Preferred Stock outstanding.
In addition to the foregoing provisions, which are applicable generally to
all outstanding Toledo Edison Preferred Stock, the express terms of the Toledo
Edison 4 1/4% Preferred Stock series outstanding contain a limitation upon
payment of dividends on Toledo Edison Common Stock based upon a certain net
income test over the preceding 12 calendar months, unless a certain capital
ratio test is met. At the present time the net income test is not met, but the
capital ratio test is met, and therefore Toledo Edison Common Stock dividends
are permitted under these provisions. There is no comparable limitation under
the terms of the proposed Cleveland Electric Preferred Stock, $4.25 Series U,
into which the Toledo Edison 4 1/4% Preferred Stock is to be converted in the
Merger.
Under the Agreement, after the Effective Time no transfer or exchange of
Toledo Edison Preferred Stock will be made. If certificates are presented for
transfer or exchange, certificates will be issued for the Cleveland Electric
Preferred Stock into which such Toledo Edison Preferred Stock was converted,
together with cash in lieu of fractional shares, if applicable.
The Agreement requires both Cleveland Electric and Toledo Edison to take
the steps necessary to hold their respective Special Meetings which are the
subject matter of this Joint Proxy Statement and Prospectus. It also requires
both companies to cooperate and use reasonable efforts to obtain the necessary
consents and approvals to carry out the Merger.
Cleveland Electric is required under the Agreement to honor all pre-Merger
employee related agreements of Toledo Edison.
CONDITIONS TO CONSUMMATION OF THE MERGER
In addition to (a) approval and adoption of the Amended Articles by
Cleveland Electric Preferred Stock Share Owners, (b) approval and adoption of
the Agreement by Toledo Edison Preferred Stock Share Owners and (c) receipt of
the regulatory approvals referred to in "The Merger -- Regulatory Requirements"
on conditions that are not unreasonable or unduly burdensome from an economic
standpoint, the respective obligations of the parties to consummate the Merger
are subject to the fulfillment or waiver of certain conditions specified in the
Agreement, including among others (i) a Certificate of Amended Articles of
Incorporation of Cleveland Electric, effectuating the proposed Amended Articles
under the applicable requirements of the Ohio General Corporation Law, having
been filed with the Secretary of State of Ohio, (ii) no preliminary or permanent
injunction or other order by any federal or state court preventing consummation
of the Merger having been issued and continuing in
16
<PAGE> 23
effect, and the Merger and the other transactions contemplated thereby not being
prohibited under any applicable federal or state law or regulation, (iii) the
Registration Statement (of which this Joint Proxy Statement and Prospectus is a
part) having become effective in accordance with the provisions of the
Securities Act, and no stop order suspending such effectiveness having been
issued and remaining in effect, (iv) the shares of Cleveland Electric Preferred
Stock issuable pursuant to Article II of the Agreement having been approved for
listing on applicable stock exchanges to the extent contemplated by the terms of
the Agreement, and (v) the Cleveland Electric and Toledo Edison required
statutory approvals having been obtained at or prior to the Effective Time and
all filings, registrations, applications, designations and declarations required
prior to the Effective Time in connection with the consummation of the Merger
and such transactions having been made or effected at or prior to the Effective
Time.
TIME FOR PERFORMANCE; WAIVER; AMENDMENT
At any time prior to the Effective Time, Cleveland Electric and Toledo
Edison may (a) extend the time for performance of any of the obligations or
other acts of the other party under the Agreement and (b) waive compliance with
any of the agreements or conditions contained in the Agreement.
Cleveland Electric and Toledo Edison may amend the Agreement at any time
before or after approval of the Agreement by the Toledo Edison Preferred Stock
Share Owners or approval of the Amended Articles by the Cleveland Electric
Preferred Stock Share Owners, although restrictions are imposed by Section 6.3
of the Agreement on the ability to make amendments after a favorable vote by the
Preferred Stock Share Owners of either party.
TERMINATION
The Agreement may be terminated and the Merger may be abandoned at any time
prior to the consummation of the Merger in the following circumstances: (a) by
mutual written consent of the Cleveland Electric and Toledo Edison Boards; (b)
by Cleveland Electric, by written notice to Toledo Edison, if (i) there shall
have been any material breach of any covenant or agreement of Toledo Edison
under the Agreement and such breach shall not have been remedied within ten days
after receipt by Toledo Edison of notice in writing from Cleveland Electric,
specifying the nature of such breach and requesting that it be remedied or (ii)
the Toledo Edison Board shall withdraw or modify in any manner adverse to
Cleveland Electric its approval or recommendation of the Agreement or the
Merger; or (c) by Toledo Edison, by written notice to Cleveland Electric, if (i)
there shall have been any material breach of any covenant or agreement of
Cleveland Electric under the Agreement and such breach shall not have been
remedied within ten days after receipt by Cleveland Electric of notice in
writing from Toledo Edison, specifying the nature of such breach and requesting
that it be remedied or (ii) the Cleveland Electric Board shall withdraw or
modify in any manner adverse to Toledo Edison its approval or recommendation of
the Agreement or the Merger.
TAX CONSEQUENCES
The following discussion is based upon the provisions of the Code, the
applicable regulations thereunder, judicial authority, current administrative
rulings and practice as of the date hereof. The following discussion does not
address the federal income tax consequences to special classes of taxpayers
including, without limitation, foreign corporations and tax-exempt entities.
EXCHANGE OF TOLEDO EDISON PREFERRED STOCK FOR CLEVELAND ELECTRIC PREFERRED STOCK
A Toledo Edison Preferred Stock Share Owner who, pursuant to the Merger,
exchanges all of the Toledo Edison Preferred Stock held by him or her solely for
Cleveland Electric Preferred Stock will not recognize any gain or loss upon such
exchange. The aggregate tax basis of Cleveland Electric Preferred Stock received
in such exchange will be equal to the aggregate tax basis of the Toledo Edison
Preferred Stock surrendered in the exchange. If such shares of Toledo Edison
Preferred Stock are held as capital assets at the Effective Time, the holding
period of the Cleveland Electric Preferred Stock received will include the
holding period of the Toledo Edison Preferred Stock surrendered therefor. Toledo
Edison Preferred Stock Share Owners should consult their
17
<PAGE> 24
own tax advisors as to the determination of their basis and holding period in
any single share of Cleveland Electric Preferred Stock, since several methods of
determination may be available. See the discussion below for the consequences of
receiving cash in lieu of fractional shares of Cleveland Electric Preferred
Stock.
CASH RECEIVED IN LIEU OF FRACTIONAL SHARES OF CLEVELAND ELECTRIC PREFERRED STOCK
No fractional shares of Cleveland Electric Preferred Stock will be issued
pursuant to the Merger. A Toledo Edison $25 Par Value Preferred Stock Share
Owner who receives cash pursuant to the Merger in lieu of a fractional share
interest will be treated as having received such fractional share pursuant to
the Merger, and then as having exchanged such fractional share for cash in a
redemption by Cleveland Electric pursuant to Section 302(a) of the Code. The
amount of any gain or loss attributable to fractional shares will be equal to
the difference between the ratable portion of the tax basis of the Toledo Edison
Preferred Stock surrendered in the Merger which is allocated to such fractional
share and the cash received in lieu thereof. The cash value of such fractional
shares will be based on the fair market value as of the Effective Time.
RECEIPT OF CASH UPON EXERCISE OF DISSENTERS' RIGHTS
If a Toledo Edison Preferred Stock Share Owner, pursuant to the Merger,
exchanges all of his or her Toledo Edison Preferred Stock for cash by reason of
exercise of dissenters' rights and such holder does not actually or
constructively (under Code Section 318) own any Cleveland Electric Preferred
Stock immediately after the Merger, then such holder will recognize capital gain
or loss provided the shares of Toledo Edison Preferred Stock were held as
capital assets at the Effective Time.
BACKUP WITHHOLDING
Unless an exemption applies under the applicable laws and regulations, the
Exchange Agent will be required to withhold, and will withhold, 31% of any cash
payments to which a Share Owner or other payee is entitled pursuant to the
Agreement (whether received in lieu of a fractional share or upon exercise of
dissenters' rights) unless the Share Owner or other payee provides his or her
tax identification number (social security number or employer identification
number) and certifies that such number is correct. Each Share Owner and, if
applicable, each other payee should complete and sign the Substitute Form W-9
included as part of the Form of Election, so as to provide the information and
certification necessary to avoid backup withholding, unless an applicable
exemption exists and is proved in a manner satisfactory to Cleveland Electric
and the Exchange Agent.
PENNSYLVANIA PERSONAL PROPERTY TAXES
Cleveland Electric and Toledo Edison Preferred Stock have been exempt from
existing Pennsylvania personal property taxes. This exemption will continue
following the consummation of the Merger.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION
ONLY. EACH CLEVELAND ELECTRIC AND TOLEDO EDISON PREFERRED STOCK SHARE OWNER
SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF
THE MERGER TO HIM OR HER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE
AND LOCAL AND OTHER TAX LAWS.
EXCHANGE OF CERTIFICATES
Upon consummation of the Merger, Toledo Edison Preferred Stock Share Owners
will be asked to exchange their stock certificates for Cleveland Electric
Preferred Stock certificates. After the Effective Time, Cleveland Electric will
mail a Letter of Transmittal to Toledo Edison Preferred Stock Share Owners for
use in submitting their stock certificates in exchange for certificates
representing shares of Cleveland Electric Preferred Stock. Toledo Edison
Preferred Stock Share Owners should not submit their stock certificates until
they have received the Letter of Transmittal.
Each share of Cleveland Electric Preferred Stock into which shares of
Toledo Edison Preferred Stock are converted pursuant to the Merger will be
deemed to have been issued at the Effective Time. At the Effective
18
<PAGE> 25
Time, holders of certificates formerly representing Toledo Edison Preferred
Stock that are so converted into Cleveland Electric Preferred Stock will cease
to have any rights as Share Owners of Toledo Edison, except as otherwise
provided by law, and will be entitled only to exercise the rights of holders of
shares of Cleveland Electric Preferred Stock or, alternatively, to receive cash
for their shares pursuant to the exercise of dissenters' rights. Former holders
of Toledo Edison Preferred Stock will be entitled to receive all dividends and
other distributions that may be declared or payable to holders of record of
Cleveland Electric Preferred Stock following the Effective Time and to exercise
all other rights of a Cleveland Electric Preferred Stock Share Owner after the
Effective Time.
REGULATORY REQUIREMENTS
Set forth below is a summary of the regulatory approvals that Cleveland
Electric and Toledo Edison are seeking in connection with the Merger and related
transactions. While Cleveland Electric and Toledo Edison both believe that the
necessary regulatory approvals will be obtained, no assurance can be given as to
whether or when such approvals will be received. In the event any one or more of
the necessary approvals are on terms that would be unacceptable or would cause
an adverse change to the business or prospects of the combined companies,
Cleveland Electric or Toledo Edison would have the ability to terminate the
Agreement.
STATE PUBLIC UTILITY REGULATION
PUCO. Cleveland Electric and Toledo Edison are each subject, as electric
public utility companies, to the jurisdiction of the PUCO with respect to rates,
service, accounting, issuance of securities and other matters. Approval of the
PUCO is required for the issuance of the additional shares of Cleveland Electric
Preferred Stock necessary to consummate the Merger, and approval of the Merger
itself may be required as well. Cleveland Electric filed an application with the
PUCO on April 19, 1994 with respect to the issuance of additional Cleveland
Electric Common and Preferred Stock and the assumption of Toledo Edison debt by
Cleveland Electric. Cleveland Electric and Toledo Edison filed a joint
application with the PUCO on July 6, 1994 with respect to other aspects of the
Merger. On December 1, 1994, the PUCO issued orders in each of the cases
approving the Merger and the issuance of Cleveland Electric Common and Preferred
Stock and the assumption of Toledo Edison debt by Cleveland Electric.
PaPUC. Cleveland Electric and Toledo Edison are each subject, as electric
public utility companies who each own an undivided interest in generating
facilities located in the Commonwealth of Pennsylvania, to the jurisdiction of
the PaPUC in certain respects relating to their ownership interests in
generating facilities located in Pennsylvania. Approval of the PaPUC to
consummate the Merger was obtained on July 7, 1994.
FEDERAL POWER ACT
Cleveland Electric and Toledo Edison are each subject to the jurisdiction
of the FERC under the Federal Power Act. On May 2, 1994 they filed a joint
application for authorization and approval of the Merger with the FERC. The
PUCO, American Municipal Power-Ohio Inc. ("AMP-Ohio"), and the cities of
Cleveland, Clyde and Bryan, Ohio have intervened in the FERC proceedings. The
PUCO intervened as the state commission having jurisdiction, but it has not
opposed the Cleveland Electric and Toledo Edison application and, as discussed
above, has approved the Merger. AMP-Ohio, a not-for-profit corporation the
members of which are certain Ohio municipal electric systems, has opposed the
Merger citing concerns primarily relating to the Merger's impact on competition.
The cities of Cleveland, Clyde and Bryan, all AMP-Ohio members, have also
opposed the Merger on substantially similar grounds as AMP-Ohio. AMP-Ohio and
the three municipal intervenors have taken the position that the Merger should
not be approved unless Cleveland Electric and Toledo Edison file with the FERC
an open-access transmission tariff offering access to their transmission systems
on the same or comparable terms as the Companies' own use of their systems.
On December 8, 1994, the FERC advised Cleveland Electric and Toledo Edison
by letter that the application to merge would be rejected unless the companies
provide additional information and file a single system open-access transmission
tariff offering comparable service. Cleveland Electric and Toledo Edison have
advised the
19
<PAGE> 26
FERC that they intend to provide the additional information required by the
December 8, 1994 letter and that they intend to file an open-access transmission
tariff offering comparable service.
NRC LICENSE
On June 3, 1994, Cleveland Electric and Toledo Edison filed joint
applications with the NRC requesting approval of the transfer of the Toledo
Edison NRC licenses to the combined company and acknowledgment of the holding of
the Cleveland Electric NRC licenses in the name of the combined company.
Cleveland Electric and Toledo Edison do not expect the NRC to take action on
this request until the Merger has received other required approvals from the
FERC and the Cleveland Electric and Toledo Edison Preferred Stock Share Owners.
GENERAL
Under the Agreement, Cleveland Electric and Toledo Edison have agreed to
use commercially reasonable efforts to obtain all necessary permits, consents,
approvals and authorizations of all governmental bodies necessary or advisable
to consummate the transactions contemplated by the Agreement.
Cleveland Electric and Toledo Edison continue to believe that they will
obtain FERC and NRC approvals for the Merger, but there can be no assurances
that such approvals will be received or that, if received, the approvals will be
obtained on terms that satisfy the applicable conditions of the Agreement. In
this regard, either Cleveland Electric or Toledo Edison may terminate the
Agreement in the event the Board of Directors of the other party withdraws its
approval or recommendation of the Merger based on the terms of the approvals
received. In the event that the approval of the FERC or the NRC is not received
or does not become final and nonappealable, the Merger will not be consummated,
the Agreement will terminate, the Amended Articles will not be filed with the
Secretary of State of the State of Ohio and the Amended Articles of
Incorporation heretofore in effect will remain in effect and all costs incurred
in connection with the Merger will be shared equally by Cleveland Electric and
Toledo Edison.
ACCOUNTING TREATMENT
The Merger will be accounted for at historical costs in a manner similar to
that used in accounting for a pooling of interests. Under this accounting
treatment, the combination of the ownership interests of the two companies is
recognized and the recorded assets, liabilities and capital accounts are carried
forward at existing historical balances to the combined financial statements,
less any intercompany eliminations.
DISSENTERS' RIGHTS
The following summary of dissenters' rights does not purport to be complete
and is qualified in its entirety by reference to Sections 1701.84 and 1701.85 of
the Ohio Revised Code, the text of which sections is attached hereto as Appendix
II.
Any holder of Toledo Edison Preferred Stock as of the Toledo Edison Record
Date whose shares are not voted in favor of the approval of the Agreement is
entitled, if the transactions contemplated by the Agreement are consummated, to
be paid the fair cash value of such shares held by him or her on the Toledo
Edison Record Date, provided the Share Owner serves a written demand upon Toledo
Edison not later than ten days after the date on which the vote with respect to
the Agreement was taken at the Toledo Edison Special Meeting and provided the
Share Owner otherwise complies with Section 1701.85 of the Ohio Revised Code.
Failure to vote does not constitute a waiver of dissenters' rights. Any written
demand must specify the Share Owner's name and address, the number of shares and
the series designation of Toledo Edison Preferred Stock held by the Share Owner
on the Toledo Edison Record Date as to which he or she seeks relief and the
amount claimed by the Share Owner as the fair cash value of such shares.
If Toledo Edison and any of its dissenting Share Owners cannot agree on the
fair cash value of his or her shares, either the dissenting Share Owner or
Toledo Edison may, within three months after the service of the demand by the
Share Owner, file a petition for a determination of the fair cash value of the
shares in the Court of Common Pleas of Lucas County, at Toledo, Ohio. Fair cash
value is determined as of the day prior to that on
20
<PAGE> 27
which the Share Owner vote on the Agreement was taken and excludes any
appreciation or depreciation resulting from the Agreement.
Voting against, or a direction on the accompanying proxy to vote against,
the approval of the Agreement will not constitute a written demand, as required
by Section 1701.85 of the Ohio Revised Code.
The right of any dissenting Share Owner to be paid the fair cash value of
his or her shares will terminate if: (a) for any reason, the transactions
contemplated by the Agreement are not consummated; (b) the Share Owner fails to
serve an appropriate timely written demand upon the issuer; (c) the Share Owner
does not, upon request of Toledo Edison, timely surrender his or her
certificates for an endorsement thereon of a legend to the effect that demand
for the fair cash value of such shares has been made; (d) the demand is
withdrawn by the Share Owner, with the consent of the Toledo Edison Board; or
(e) Toledo Edison and the Share Owner shall not have come to an agreement as to
the fair cash value per share, and neither shall have timely filed a petition in
the appropriate court for a determination of the fair cash value of the shares.
Toledo Edison does not intend to send any further notice to its Share
Owners as to the date on which the vote on the Agreement is to be taken except
in the event of an adjournment or postponement of the Toledo Edison Special
Meeting. See the text of Sections 1701.84 and 1701.85 of the Ohio Revised Code
attached hereto as Appendix II for provisions relating to the method and
procedures of demanding and determining the fair cash value of shares, the
assessment or apportionment of costs of any appraisal proceeding and the
suspension of Share Owner rights from the time of giving the demand.
Under the Ohio Revised Code, Cleveland Electric Preferred Stock Share
Owners are not entitled to such rights.
STOCK EXCHANGE LISTING
Under the Agreement, it is a condition precedent to the Merger that the
shares of Cleveland Electric Preferred Stock issued to the holders of Toledo
Edison Preferred Stock that were listed on a stock exchange prior to the Merger
shall be approved for listing on the New York Stock Exchange ("NYSE"). Cleveland
Electric intends to file an application with the NYSE for approval of such
listings.
FEDERAL SECURITIES LAWS CONSEQUENCES
All shares of Cleveland Electric Preferred Stock received by Toledo Edison
Preferred Stock Share Owners in the Merger will be freely transferable, except
that shares of Cleveland Electric Preferred Stock received by persons who are
deemed to be "affiliates" (as such term is defined under the Securities Act) of
either Cleveland Electric or Toledo Edison prior to the Merger may be resold by
them only in transactions permitted under the resale provisions of Rule 145
promulgated under the Securities Act (or Rule 144 or Rule 144A in the case of
such persons who become affiliates of Cleveland Electric) or as otherwise
permitted under the Securities Act. Persons who may be deemed to be affiliates
of Cleveland Electric or Toledo Edison generally include individuals or entities
that control, are controlled by, or are under common control with, such party
and may include certain officers and directors of such party as well as
principal Share Owners of such party.
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<PAGE> 28
COMBINED PRO FORMA FINANCIAL INFORMATION
The following combined pro forma condensed balance sheets and income
statements give effect to the Agreement described elsewhere in this Joint Proxy
Statement and Prospectus. These statements are unaudited and are based on
accounting for the Merger on a method similar to a pooling of interests.
These condensed statements combine Cleveland Electric's and Toledo Edison's
condensed historical balance sheets at December 31, 1994 and December 31, 1993
and their condensed historical income statements for each of the three years
ended December 31, 1994.
The following combined 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 statements should be read in conjunction with the accompanying
notes and with the audited financial statements of Cleveland Electric and Toledo
Edison included elsewhere in this Joint Proxy Statement and Prospectus.
COMBINED PRO FORMA CONDENSED BALANCE SHEETS
OF CLEVELAND ELECTRIC AND TOLEDO EDISON
(UNAUDITED)
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------
HISTORICAL
------------------
CLEVELAND TOLEDO PRO FORMA
ELECTRIC EDISON ADJUSTMENTS TOTALS
--------- ------ ----------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Property, Plant and Equipment.................... $ 7,637 $3,435 $ -- $11,072
Less: Accumulated Depreciation and
Amortization................................... 2,486 1,273 -- 3,759
--------- ------ ----- ---------
Net Property, Plant and Equipment.............. 5,151 2,162 -- 7,313
Current Assets................................... 584 322 (22)(A) 884
Deferred Charges and Other Assets................ 1,416 1,018 (7)(B) 2,427
--------- ------ ----- ---------
TOTAL ASSETS.............................. $ 7,151 $3,502 $ (29) $10,624
======== ====== ========== =========
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common Stock Equity............................ $ 1,058 $ 685 $ -- $ 1,743
Preferred Stock:
With Mandatory Redemption Provisions........ 246 7 -- 253
Without Mandatory Redemption Provisions..... 241 210 -- 451
Long-Term Debt................................. 2,543 1,154 -- 3,697
--------- ------ ----- ---------
Total Capitalization........................ 4,088 2,056 -- 6,144
Current Liabilities.............................. 958 316 (24)(A) 1,250
Deferred Credits and Other Liabilities........... 2,105 1,130 (5)(A,B) 3,230
--------- ------ ----- ---------
TOTAL CAPITALIZATION AND LIABILITIES...... $ 7,151 $3,502 $ (29) $10,624
======== ====== ========== =========
</TABLE>
22
<PAGE> 29
<TABLE>
<CAPTION>
DECEMBER 31, 1993
--------------------------------------------
HISTORICAL
------------------
CLEVELAND TOLEDO PRO FORMA
ELECTRIC EDISON ADJUSTMENTS TOTALS
--------- ------ ----------- ---------
<S> <C> <C> <C> <C>
ASSETS:
Property, Plant and Equipment....................... $ 7,538 $3,402 $ -- $10,940
Less: Accumulated Depreciation and Amortization..... 2,309 1,171 -- 3,480
--------- ------ ----- ---------
Net Property, Plant and Equipment................. 5,229 2,231 -- 7,460
Current Assets...................................... 632 314 (20)(A) 926
Deferred Charges and Other Assets................... 1,298 965 (9)(B) 2,254
--------- ------ ----- ---------
TOTAL ASSETS................................. $ 7,159 $3,510 $ (29) $10,640
======== ====== ========== =========
CAPITALIZATION AND LIABILITIES:
Capitalization:
Common Stock Equity............................... $ 1,040 $ 623 $ (1)(R) $ 1,662
Preferred Stock:
With Mandatory Redemption Provisions........... 285 28 -- 313
Without Mandatory Redemption Provisions........ 241 210 -- 451
Long-Term Debt.................................... 2,793 1,225 1(R) 4,019
--------- ------ ----- ---------
Total Capitalization........................... 4,359 2,086 -- 6,445
Current Liabilities................................. 733 329 (21)(A) 1,041
Deferred Credits and Other Liabilities.............. 2,067 1,095 (8)(A,B) 3,154
--------- ------ ----- ---------
TOTAL CAPITALIZATION AND LIABILITIES......... $ 7,159 $3,510 $ (29) $10,640
======== ====== ========== =========
</TABLE>
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<PAGE> 30
COMBINED PRO FORMA CONDENSED INCOME STATEMENTS
OF CLEVELAND ELECTRIC AND TOLEDO EDISON
(UNAUDITED)
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------------------
HISTORICAL
-----------------------------
CLEVELAND TOLEDO PRO FORMA
ELECTRIC EDISON ADJUSTMENTS TOTALS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating Revenues...................... $1,698 $ 865 $ (141)(C) $2,422
Operating Expenses...................... 1,302 685 (143)(C,D) 1,844
------------ ------------ ------------ ------------
Operating Income...................... 396 180 2 578
Deferred Carrying Charges and Other
Nonop-
erating 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
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
---------------------------------------------------------------
HISTORICAL
-----------------------------
CLEVELAND TOLEDO PRO FORMA
ELECTRIC EDISON ADJUSTMENTS TOTALS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating Revenues...................... $1,751 $ 871 $ (147)(C) $2,475
Operating Expenses...................... 1,529 782 (148)(C,D) 2,163
------------ ------------ ------------ ------------
Operating Income...................... 222 89 1 312
Write-off of Perry Unit 2............... (351) (232) -- (583)
Deferred Carrying Charges, Net and Other
Nonoperating (Loss)................... (218) (31) (1)(D) (250)
------------ ------------ ------------ ------------
(Loss) Before Interest Charges........ (347) (174) -- (521)
Interest Charges........................ 240 115 -- 355
------------ ------------ ------------ ------------
Net (Loss)............................ (587) (289) -- (876)
Preferred Dividend Requirements......... 45 23 -- 68
------------ ------------ ------------ ------------
(Loss) Available for Common Stock..... $ (632) $ (312) $ -- $ (944)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
---------------------------------------------------------------
HISTORICAL
-----------------------------
CLEVELAND TOLEDO PRO FORMA
ELECTRIC EDISON ADJUSTMENTS TOTALS
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Operating Revenues...................... $1,743 $ 845 $ (149)(C) $2,439
Operating Expenses...................... 1,358 695 (150)(C,D) 1,903
------------ ------------ ------------ ------------
Operating Income...................... 385 150 1 536
Deferred Carrying Charges and Other
Nonoperating Income................... 63 42 (1)(D) 104
------------ ------------ ------------ ------------
Income Before Interest Charges........ 448 192 -- 640
Interest Charges........................ 243 121 -- 364
------------ ------------ ------------ ------------
Net Income............................ 205 71 -- 276
Preferred Dividend Requirements......... 41 24 -- 65
------------ ------------ ------------ ------------
Earnings Available for Common Stock... $ 164 $ 47 $ -- $ 211
============ ============ ============ ============
</TABLE>
24
<PAGE> 31
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.
25
<PAGE> 32
BUSINESSES OF THE COMPANIES
DESCRIPTION OF CLEVELAND ELECTRIC'S BUSINESS
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 in its
service area. Cleveland Electric serves approximately 747,000 customers and in
1994 derived 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 December 31, 1994, Cleveland Electric had 3,547
employees of which about 54% were represented by one union having a collective
bargaining agreement with Cleveland Electric.
DESCRIPTION OF TOLEDO EDISON'S BUSINESS
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 and one rural electric
cooperative distribution system in its service area. Toledo Edison serves
approximately 287,000 customers and in 1994 derived approximately 57% of its
total electric retail revenue from customers outside the City of Toledo.
Principal industries served by Toledo Edison include metal casting, forming and
fabricating; petroleum refining; automotive equipment and assembly; food
processing; and glass. Nearly all of Toledo Edison's operating revenues are
derived from the sale of electric energy. At December 31, 1994, Toledo Edison
had 1,887 employees of which about 56% were represented by three unions having
collective bargaining agreements with Toledo Edison.
RELATIONSHIPS BETWEEN CLEVELAND ELECTRIC AND TOLEDO EDISON
Cleveland Electric and Toledo Edison are wholly owned subsidiaries of
Centerior and have common management and control of all operations.
MANAGEMENT OF CLEVELAND ELECTRIC AND TOLEDO EDISON
The Cleveland Electric Board and the Toledo Edison Board both currently
consist of Robert J. Farling, Murray R. Edelman and Fred J. Lange, Jr. It is
anticipated that these individuals will serve as directors of Cleveland Electric
following consummation of the Merger until such time as successors may be
elected in accordance with the Amended Articles.
Mr. Farling is Chairman of the Board and Chief Executive Officer of both
Cleveland Electric and Toledo Edison. Mr. Edelman is President of Cleveland
Electric and Vice Chairman of Toledo Edison. Mr. Lange is President of Toledo
Edison and Vice President of Cleveland Electric.
Additional information regarding the directors and officers of Cleveland
Electric and Toledo Edison, including their compensation and certain
relationships and related transactions, is hereby incorporated by reference from
the Form 10-K.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF CLEVELAND ELECTRIC AND TOLEDO EDISON
No officers or directors of Centerior, Cleveland Electric or Toledo Edison
own any shares of Cleveland Electric Preferred Stock or Toledo Edison Preferred
Stock except for one officer who owns 400 shares of Toledo Edison Preferred
Stock. Such officer disclaims beneficial ownership of those shares.
26
<PAGE> 33
AMENDMENT OF CLEVELAND ELECTRIC AMENDED ARTICLES
The Amended Articles that are proposed for adoption at the Cleveland
Electric Special Meeting are substantially identical to the Amended Articles of
Cleveland Electric as currently in effect, except for:
1. The change of the headquarter city of Cleveland Electric from
Cleveland, Ohio to Independence, Ohio (Article Two);
2. The increase in the total number of authorized shares from
112,000,000 to 123,000,000, and the corresponding increase in the
number of authorized shares of Cleveland Electric Preferred Stock
without par value from 4,000,000 to 15,000,000 (Article Four);
3. In the general terms of the Cleveland Electric Preferred Stock, a
change in the permitted location of a depository bank for the
purpose of redemption of Preferred Stock to "Ohio or New York, New
York" (formerly reading "Cleveland, Ohio or New York, New York")
(Article Four, Division A, Section 3(b)(1));
4. In the express terms of currently outstanding series of Cleveland
Electric Preferred Stock, deletion of the phrase "Of the 4,000,000
authorized shares of Serial Preferred Stock" (Article Four,
Division A, Sections 8, 9, 10, 11, 19, 20, 21, 23, 24, 25 and 26);
5. The establishment of thirteen series of Cleveland Electric
Preferred Stock, and the terms thereof, substantially mirroring the
series of Toledo Edison Preferred Stock to be converted in the
Merger (see "The Agreement" herein), in order to carry out the
Merger (Article Four, Division A, Sections 27 through 39); and
6. Clarifying amendments to confirm existing practice that (a)
Cleveland Electric may redeem some or all of the Cleveland Electric
Preferred Stock of a series without redeeming Cleveland Electric
Preferred Stock of other series, and (b) Cleveland Electric
Preferred Stock purchased by Cleveland Electric may be applied in
satisfaction of sinking fund redemption obligations (Article Four,
Division A, Section 3).
Although only 2,283,500 additional shares of Cleveland Electric Preferred
Stock are to be issued in the Merger, Cleveland Electric is proposing that the
authorized Preferred Stock be increased by 11,000,000 shares. This will add to
the flexibility available to Cleveland Electric to accomplish future financings.
Prior to the Merger, Cleveland Electric had 4,000,000 authorized shares of
Preferred Stock, and Toledo Edison had 3,000,000 authorized shares of $100 Par
Value Preferred Stock and 12,000,000 authorized shares of $25 Par Value
Preferred Stock, for a total of 19,000,000 authorized shares of Preferred Stock
of the two companies in the aggregate. After the Merger and the adoption of the
Amended Articles, Cleveland Electric will have 15,000,000 authorized shares of
Preferred Stock.
The Amended Articles will be filed in the Office of the Secretary of State
of the State of Ohio immediately prior to the Effective Time of the Merger. If
for any reason the Merger does not go forward, the Amended Articles will not be
so filed, even if previously approved by the Cleveland Electric Preferred Stock
Share Owners, and the amended articles as heretofore in effect will remain in
effect.
The foregoing discussion of the Amended Articles is qualified in its
entirety by reference to the provisions of the Amended Articles, which are
attached as Exhibit B to Appendix I to this Joint Proxy Statement and
Prospectus.
DESCRIPTION OF CLEVELAND ELECTRIC CAPITALIZATION
GENERAL
Following adoption of the Amended Articles, the authorized capital stock of
Cleveland Electric will be 123,000,000 shares, consisting of 105,000,000 shares
of Cleveland Electric Common Stock, without par value, 3,000,000 shares of
preference stock ("Cleveland Electric Preference Stock"), without par value, and
15,000,000 shares of Cleveland Electric Preferred Stock, without par value. All
of the outstanding shares of Cleveland
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Electric Common Stock are held by Centerior, and no shares of Cleveland Electric
Preference Stock are currently outstanding.
PREFERRED STOCK
Following the Merger, the Cleveland Electric Board will be authorized to
issue 15,000,000 shares of Cleveland Electric Preferred Stock, which may be
issued from time to time in one or more series, each such series to have such
distinctive designation or title as may be fixed by the Cleveland Electric Board
prior to the issuance of any shares thereof. Each series may differ from each
other series already outstanding as may be determined from time to time by the
Cleveland Electric Board in the following respects: (a) the rate of dividend;
(b) the amount per share, if any, which the Preferred Stock shall be entitled to
receive upon redemption, liquidation, distribution or sale of assets,
dissolution or winding up of Cleveland Electric; (c) terms and conditions of
conversion, if any; or (d) terms of sinking fund, redemption or purchase, if
any. The following provisions apply to all series of Cleveland Electric
Preferred Stock.
Dividend Rights. The holders of each series of Cleveland Electric
Preferred Stock are entitled to receive, out of funds legally available
therefor, if declared, dividends in cash at the rate determined for such series
and no more, payable on the dates fixed for such series, before any dividends
(except as described in the following paragraph) may be paid or any distribution
made on the Cleveland Electric Preference Stock or Common Stock or other shares
ranking junior to the Cleveland Electric Preferred Stock. Such dividends are
cumulative from the dates fixed for the series. No dividends may be paid upon
any series of Cleveland Electric Preferred Stock for any dividend period unless
at the same time a like proportionate dividend for the dividend periods ending
on the same or any earlier date, ratably in proportion to the respective
dividend rates fixed therefor, has been paid or declared or set apart on all
series of Cleveland Electric Preferred Stock then outstanding and entitled to
receive such dividend.
Restrictions on Cleveland Electric Preference Stock and Common Stock. If
and so long as there is any arrearage in the payment of dividends on any
outstanding Cleveland Electric Preferred Stock or in meeting any sinking fund
requirement, no dividend or other distribution may be made in respect of
Cleveland Electric Preference Stock or Common Stock or any other shares ranking
junior to the Cleveland Electric Preferred Stock (except a dividend or
distribution payable in Cleveland Electric Preference Stock or Common Stock, or
other shares ranking junior to the Cleveland Electric Preferred Stock).
Liquidation. Upon voluntary or involuntary liquidation, dissolution or
winding up of Cleveland Electric, to the extent assets remain after payment of
creditors in full and before any distribution to holders of Cleveland Electric
Preference Stock or Common Stock or other shares ranking junior to the Cleveland
Electric Preferred Stock, the holders of the Cleveland Electric Preferred Stock
are entitled to receive the applicable liquidation price fixed for their
respective series, plus an amount equal to dividends accrued to, but excluding,
the date of payment thereof, ratably in proportion to their full preferential
amounts. The merger or consolidation of Cleveland Electric into or with any
other corporation, the merger of any other corporation into it, or the sale,
lease or conveyance of all or substantially all the property or business of
Cleveland Electric, is not deemed to be a dissolution, liquidation or winding up
for this purpose.
Voting Rights. The holders of Cleveland Electric Preferred Stock have no
voting rights except as required by law and as follows:
(a) if Cleveland Electric is in default in the payment of the full
dividends for a number of dividend payments (whether or not consecutive)
which aggregate at least 540 days on any series of Cleveland Electric
Preferred Stock, the holders of Cleveland Electric Preferred Stock of all
series become entitled to vote as a separate class, at a meeting at which
the holders of at least 50% thereof are represented, to elect two directors
of Cleveland Electric, in addition to those elected by holders of the
Cleveland Electric Common Stock, until all accrued dividends on the
Cleveland Electric Preferred Stock have been paid; provided that such
special class voting rights will remain vested until all accrued dividends
on the Cleveland Electric
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Preferred Stock are paid, whereupon holders of Cleveland Electric Preferred
Stock will be divested of their special class voting rights in subsequent
elections of directors;
(b) the consent of the holders of at least two-thirds of the Cleveland
Electric Preferred Stock of all series, voting as a separate class, is
necessary (i) to change the Amended Articles or the Regulations of
Cleveland Electric in a manner adversely affecting the preferences, voting
or other rights of the holders of Cleveland Electric Preferred Stock
(provided that, if any such change adversely affects less than all series
of Cleveland Electric Preferred Stock then outstanding, then only the
consent of two-thirds of the Cleveland Electric Preferred Stock so affected
is necessary), (ii) to authorize or to increase the authorized amount of
any shares or any security convertible into shares, in either case ranking
prior to the Cleveland Electric Preferred Stock, or (iii) to purchase or
redeem (for sinking fund purposes or otherwise) less than all outstanding
Cleveland Electric Preferred Stock (except pursuant to an offer made to all
record holders of Cleveland Electric Preferred Stock) when there exists a
default in the payment of dividends thereon or in meeting any sinking fund
requirement thereof; and
(c) the consent of the holders of at least a majority of the Cleveland
Electric Preferred Stock of all series, voting as a separate class, is
necessary (i) for the sale, lease or conveyance of all or substantially all
of the property or business of Cleveland Electric, (ii) for the
consolidation with or merger of Cleveland Electric into another corporation
unless, with certain exceptions, the resulting or surviving corporation has
no shares ranking prior to or on a parity with the Cleveland Electric
Preferred Stock, or (iii) for the authorization of any shares ranking on a
parity with the Cleveland Electric Preferred Stock or an increase in the
authorized shares of the Cleveland Electric Preferred Stock.
Redemption, Sinking Fund and Purchase Provisions. A series of Cleveland
Electric Preferred Stock may be redeemed at the option of the Cleveland Electric
Board or be subject to a sinking fund or mandatory redemption to the extent
provided, if any, in the express terms of such series. Any shares of Cleveland
Electric Preferred Stock may be purchased by Cleveland Electric from time to
time. See "Voting Rights", above, regarding requirements for the purchase or
redemption of Cleveland Electric Preferred Stock while there is an arrearage in
the payment of dividends or the meeting of any sinking fund requirement.
Cleveland Electric Preferred Stock which has been redeemed or purchased resumes
the status of authorized but unissued Cleveland Electric Preferred Stock without
serial designation and may be reissued by Cleveland Electric from time to time
as Cleveland Electric Preferred Stock of any series, except as may be limited by
the express terms of a series.
FIRST MORTGAGE AND FIRST MORTGAGE BONDS
Cleveland Electric has issued bonds under a certain 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 (National Association)
is the successor Trustee ("Cleveland Electric First Mortgage Trustee"), as
supplemented and modified by sixty-eight supplemental indentures thereto
(collectively, "Cleveland Electric First Mortgage").
The Cleveland Electric First Mortgage grants a valid and perfected first
lien, subject only to certain permitted liens and other encumbrances, on
substantially all of 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 Cleveland Electric First Mortgage and leases
in which Cleveland Electric is lessor; (b) securities not specifically pledged
or required to be pledged under the Cleveland Electric 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 Cleveland Electric First Mortgage,
becomes subject to the lien thereof upon acquisition (Article I and granting and
other clauses preceding Article I). Under certain conditions, the Cleveland
Electric First Mortgage permits Cleveland Electric to acquire property subject
to a lien prior to the lien of the Cleveland Electric First Mortgage (Article
IV).
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Property subject to the lien of the Cleveland Electric 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 Cleveland
Electric First Mortgage Trustee and meets certain other conditions specified in
the First Mortgage (Article VII). Moneys received by the Cleveland Electric
First Mortgage Trustee for the release of property will, under certain
circumstances, be applied to redeem outstanding Cleveland Electric 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 Cleveland Electric First Mortgage Bonds (Article VIII).
In the Nineteenth Supplemental Indenture, the Cleveland Electric First
Mortgage was modified to permit Cleveland Electric without the vote or consent
of the holders of any Cleveland Electric First Mortgage Bonds issued after
November 1976 (a) to exclude nuclear fuel from the lien of the Cleveland
Electric 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
even though they are not physically connected with property of Cleveland
Electric in the State of Ohio and to clarify its general scope.
SUBORDINATE MORTGAGE
To secure its obligations under various credit agreements, Cleveland
Electric has entered into an Open-End Subordinate Indenture of Mortgage, dated
as of June 1, 1994, ("Cleveland Electric Subordinate Mortgage") with Bank One,
Columbus, N.A., as Trustee ("Cleveland Electric Subordinate Mortgage Trustee").
The Cleveland Electric Subordinate Mortgage grants a valid and perfected
lien, subject to the lien of the Cleveland Electric First Mortgage and to
certain permitted encumbrances, on substantially all property owned and
franchises held by Cleveland Electric which are also subject to the lien of the
Cleveland Electric First Mortgage. The Cleveland Electric Subordinate Mortgage
provides that property subject to the lien of the Cleveland Electric Subordinate
Mortgage will be released from such lien if such a release is automatically
granted under the Cleveland Electric First Mortgage or upon presentation to the
Cleveland Electric Subordinate Mortgage Trustee of documentation demonstrating
that the subject property has been released from the lien of the Cleveland
Electric First Mortgage. For a discussion of the property subject to the lien of
the Cleveland Electric First Mortgage and the method for releasing property from
the Cleveland Electric First Mortgage, see "Description of Cleveland Electric
Capitalization -- First Mortgage and First Mortgage Bonds".
DESCRIPTION OF TOLEDO EDISON CAPITALIZATION
GENERAL
The authorized capital stock of Toledo Edison currently consists of
80,000,000 shares, consisting of 60,000,000 shares of Toledo Edison Common
Stock, $5 par value, 5,000,000 shares of Preference Stock ("Toledo Edison
Preference Stock"), $25 Par Value, 12,000,000 shares of Toledo Edison Preferred
Stock, $25 Par Value and 3,000,000 shares of Toledo Edison Preferred Stock, $100
Par Value. All of the outstanding shares of Toledo Edison Common Stock are held
by Centerior, and no shares of Toledo Edison Preference Stock are outstanding.
PREFERRED STOCK
Shares of Toledo Edison Preferred Stock may be issued from time to time in
one or more series, each such series to have such distinctive designation or
title as may be fixed by the Toledo Edison Board prior to the issuance of any
shares thereof. Each series may differ from each other series already
outstanding as may be declared from time to time by the Toledo Edison Board in
the following respects: (a) the rate of dividend, dividend payment dates and
dates from which dividends are cumulative; (b) the amount per share, if any,
which the Preferred Stock shall be entitled to receive upon redemption,
liquidation, distribution or sale of assets, dissolution or winding up of Toledo
Edison; (c) terms and conditions of conversion, if any; or (d) terms of sinking
fund, redemption or purchase, if any. The outstanding series of Toledo Edison
Preferred Stock are set
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forth in Article 2.2 of the Agreement, which is attached hereto as Appendix I
and incorporated by reference herein. The following provisions apply to all
series of Toledo Edison Preferred Stock.
Dividend Rights. The holders of each series of Toledo Edison Preferred
Stock are entitled to receive, out of funds legally available therefor, if
declared, dividends in cash at the rate determined for such series and no more,
payable on the dates fixed for such series, before any dividends (except as
described in the following paragraph) may be paid or any distribution made on
the Toledo Edison Preference Stock or Common Stock. Such dividends are
cumulative from the dates fixed for the series.
Restrictions on Toledo Edison Preference Stock and Common Stock. If and so
long as there is any arrearage in the payment of dividends on any outstanding
Toledo Edison Preferred Stock, no dividend or other distribution may be made in
respect of Toledo Edison Preference Stock or Common Stock.
Liquidation. Upon voluntary or involuntary liquidation, dissolution or
winding up of Toledo Edison, to the extent assets remain after payment of
creditors in full and before any distribution to holders of Toledo Edison
Preference Stock or Common Stock, the holders of the Toledo Edison Preferred
Stock are entitled to receive the applicable liquidation price fixed for their
respective series, plus an amount equal to dividends accrued to, but excluding,
the date of payment thereof, ratably in proportion to their full preferential
amounts. The merger or consolidation of Toledo Edison into or with any other
corporation, or the sale or transfer of all or substantially all the property of
Toledo Edison, is not deemed to be a dissolution, liquidation or winding up for
this purpose.
Voting Rights. The holders of Toledo Edison Preferred Stock have no voting
rights except as required by law and as follows (in the case of the $100 Par
Value stock, each share carries one vote; in the case of the $25 Par Value, each
share carries one-fourth of one vote):
(a) if Toledo Edison is in default in the payment of dividends in an
amount equivalent to four full quarterly dividends on all shares of Toledo
Edison Preferred Stock then outstanding, the holders of Toledo Edison
Preferred Stock of all series become entitled to vote as a separate class,
at a meeting at which the holders of at least 50% thereof are represented,
to elect the smallest number of directors necessary to constitute a
majority of the full Toledo Edison Board, until all accrued dividends on
the Toledo Edison Preferred Stock have been paid; provided that such
special class voting rights will remain vested until all accrued dividends
on the Toledo Edison Preferred Stock are paid, whereupon holders of Toledo
Edison Preferred Stock will be divested of their special class voting
rights in subsequent elections of directors;
(b) the consent of the holders of at least two-thirds of the Toledo
Edison Preferred Stock of all series, voting as a separate class, is
necessary (i) to authorize or issue any stock ranking prior to the Toledo
Edison Preferred Stock, (ii) to issue additional Toledo Edison Preferred
Stock in the event certain income and capitalization requirements are not
met, (iii) to authorize or issue any obligation or security convertible
into or evidencing the right to purchase shares of Toledo Edison Preferred
Stock or any stock ranking prior to or on par with Toledo Edison Preferred
Stock, or (iv) to amend the provisions of Article IV of the Toledo Edison
Articles of Incorporation so as to affect adversely any of the preferences
or other rights given to the Toledo Edison Preferred Stock; and
(c) the consent of the holders of at least a majority of the Toledo
Edison Preferred Stock of all series, voting as a separate class, is
necessary (i) for the merger, consolidation or sale of all or substantially
all of the property or business of Toledo Edison, unless such merger,
consolidation or sale has been ordered, approved or permitted by the SEC
under the PUHCA, or (ii) for the authorization of any shares ranking on a
parity with the Toledo Edison Preferred Stock or an increase in the
authorized shares of the Toledo Edison Preferred Stock.
Redemption, Sinking Fund and Purchase Provisions. A series of Toledo
Edison Preferred Stock may be redeemed at the option of the Toledo Edison Board
or be subject to a sinking fund or mandatory redemption to the extent provided,
if any, in the express terms of such series.
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FIRST MORTGAGE AND FIRST MORTGAGE BONDS
Toledo Edison has issued bonds under a certain Indenture of Mortgage 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
(National Association)), as trustee ("Toledo Edison First Mortgage Trustee"), as
supplemented and modified by forty-one supplemental indentures thereto
(collectively, "Toledo Edison First Mortgage").
The Toledo Edison First Mortgage grants 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 Toledo
Edison 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 Toledo Edison First Mortgage becomes subject to the lien of the
Toledo Edison First Mortgage upon acquisition (Granting and other clauses
preceding Article 1). Under certain conditions, the Toledo Edison First Mortgage
permits Toledo Edison to acquire property subject to a lien prior to the lien of
the Toledo Edison First Mortgage (Article 4).
The Toledo Edison First Mortgage provides that property subject to the lien
of the Toledo Edison 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 Toledo Edison 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 Toledo Edison 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 Toledo Edison First Mortgage
must be deposited with the Toledo Edison First Mortgage Trustee and may be
withdrawn by Toledo Edison based upon property additions or refundable Toledo
Edison First Mortgage Bonds, may be applied to the redemption of outstanding
Toledo Edison First Mortgage Bonds or may be applied to pay federal or state
taxes incurred by Toledo Edison as a result of such sale.
SUBORDINATE MORTGAGE
To secure its obligations under various credit agreements, Toledo Edison
has entered into an Open-End Subordinate Indenture of Mortgage, dated as of June
1, 1994, ("Toledo Edison Subordinate Mortgage") with Bank One, Columbus, N.A.,
as Trustee ("Toledo Edison Subordinate Mortgage Trustee").
The Toledo Edison Subordinate Mortgage grants a valid and perfected lien,
subject to the lien of the Toledo Edison First Mortgage and to certain permitted
encumbrances, on substantially all property owned and franchises held by Toledo
Edison which are also subject to the lien of the Toledo Edison First Mortgage.
The Toledo Edison Subordinate Mortgage provides that property subject to the
lien of the Toledo Edison Subordinate Mortgage will be released from such lien
if such a release is automatically granted under the Toledo Edison First
Mortgage or upon presentation to the Toledo Edison Subordinate Mortgage Trustee
of documentation demonstrating that the subject property has been released from
the lien of the Toledo Edison First Mortgage. For a discussion of the property
subject to the lien of the Toledo Edison First Mortgage and the method for
releasing property from the Toledo Edison First Mortgage, see "Description of
Toledo Edison Capitalization -- First Mortgage and First Mortgage Bonds".
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SURVIVING CORPORATION SECURED DEBT OBLIGATIONS
As a result of the Merger, Cleveland Electric will acquire all of the
assets of Toledo Edison, including property subject to the lien of the Toledo
Edison First Mortgage, which at the time of the Merger will be subject to the
lien of the Cleveland Electric First Mortgage and the Cleveland Electric
Subordinate Mortgage. The liens of the Cleveland Electric First Mortgage and the
Cleveland Electric Subordinate Mortgage will be junior to the lien of the Toledo
Edison First Mortgage on the property subject to the lien of the Toledo Edison
First Mortgage.
After the Merger, the only assets of Cleveland Electric which will be
subject to the liens of the Toledo Edison First Mortgage and the Toledo Edison
Subordinate Mortgage will be the property subject to the lien of the Toledo
Edison First Mortgage at the time of the Merger and properties thereafter
acquired by Cleveland Electric which are used in connection with or are
appertaining to such property. The liens of the Cleveland Electric First
Mortgage and the Cleveland Electric Subordinate Mortgage will, after the Merger,
continue to be liens on substantially all of the fixed properties and franchises
of Cleveland Electric.
Cleveland Electric expects that it will, after the Merger, enter into a new
indenture ("New Indenture") which will prohibit the issuance of any bonds under
the Toledo Edison First Mortgage or the Cleveland Electric First Mortgage,
except to the trustee under the New Indenture in the same principal amount as,
and as the basis for the issuance of, bonds issued by Cleveland Electric under
the New Indenture. The New Indenture trustee will hold such Toledo Edison First
Mortgage Bonds and Cleveland Electric 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 Toledo Edison First Mortgage Bonds and the Cleveland Electric First
Mortgage Bonds.
A substantial portion of the properties owned by Cleveland Electric after
the Merger, will be subject to the lien of the New Indenture, and such lien will
be junior to the liens of the Cleveland Electric First Mortgage and the Toledo
Edison First Mortgage, but senior to the liens of the Cleveland Electric
Subordinate Mortgage and the Toledo Edison Subordinate Mortgage.
At such time as the New Indenture trustee holds all of the outstanding
bonds issued under the Cleveland Electric First Mortgage and the Toledo Edison
First Mortgage, 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.
LEGAL OPINIONS
Legality of the Cleveland Electric Preferred Stock issued pursuant to the
Registration Statement will be passed upon for Cleveland Electric by Terrence G.
Linnert, Mary E. O'Reilly or Kevin P. Murphy, counsel for Cleveland Electric.
EXPERTS
The statements as to matters of law and legal conclusions under the
headings "General Regulation", "Environmental Regulation", "Electric Rates",
"Title to Property" and "Legal Proceedings" in the Form
10-K, and under the headings "Description of Cleveland Electric Preferred
Stock", "Indemnification of Cleveland Electric's Directors and Officers", "Tax
Consequences" and "Dissenters' Rights" in the Registration Statement are made on
the authority of Terrence G. Linnert, Mary E. O'Reilly or Kevin P. Murphy, as an
expert.
Mr. Linnert is Vice President of the Company and Centerior and Vice
President -- Legal & Governmental Affairs and General Counsel of Centerior
Service, Mrs. O'Reilly is Managing Attorney of Centerior Service and Mr. Murphy
is Senior Corporate Counsel of Centerior Service.
The financial statements and schedules of Cleveland Electric and Toledo
Edison included in the Form 10-K and incorporated by reference in this Joint
Proxy Statement and Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their respective reports thereto
and are incorporated by reference herein in reliance upon the authority of said
firm as experts in giving such reports. Reference is made to each said report
which includes an explanatory paragraph that describes a change in the
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method of accounting for postretirement benefits other than pensions in 1993, as
discussed in Note 9 to the financial statements of both Cleveland Electric and
Toledo Edison.
PROXY SOLICITATION EXPENSES
Under the Agreement, all costs and expenses incurred in connection with the
Merger, including the expenses of printing this Joint Proxy Statement and
Prospectus, the expenses of printing and filing the related Registration
Statement and the expenses of soliciting proxies from Cleveland Electric and
Toledo Edison Preferred Stock Share Owners, are to be shared equally by
Cleveland Electric and Toledo Edison.
INDEMNIFICATION OF CLEVELAND ELECTRIC'S 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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Cleveland
Electric pursuant to the foregoing provisions, Cleveland Electric has 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 paragraph (other than the payment by Cleveland Electric of
expenses incurred or paid by a director, officer or controlling person of
Cleveland Electric in the successful defense of any action, suit or proceeding)
is asserted by a director, officer or controlling person, Cleveland Electric
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether indemnification by it is against public policy as expressed
in the Securities Act and will be governed by the final adjudication of such
issue.
Cleveland Electric maintains and pays the premium on contracts insuring
Cleveland Electric (with certain exclusions) against any liability to directors
and officers it may incur under the above indemnity provisions and insuring each
director and officer of Cleveland Electric (with certain exclusions) against
liability and expense, including legal fees, which he or she may incur by reason
of his or her relationship to Cleveland Electric, even if Cleveland Electric
does not have the obligation or right to indemnify him or her against such
liability or expense.
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1994 FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS OF CLEVELAND
ELECTRIC AND TOLEDO EDISON
<TABLE>
<CAPTION>
PAGE
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<S> <C>
CLEVELAND ELECTRIC
Management's Financial Analysis............................................ 36
Income Statement........................................................... 41
Retained Earnings.......................................................... 41
Cash Flows................................................................. 42
Balance Sheet.............................................................. 43
Statement of Preferred Stock............................................... 45
Notes to the Financial Statements.......................................... 46
Report of Independent Public Accountants................................... 56
TOLEDO EDISON
Management's Financial Analysis............................................ 57
Income Statement........................................................... 62
Retained Earnings.......................................................... 62
Cash Flows................................................................. 63
Balance Sheet.............................................................. 64
Statement of Preferred Stock............................................... 66
Notes to the Financial Statements.......................................... 67
Report of Independent Public Accountants................................... 77
</TABLE>
THE FOLLOWING INFORMATION IS REPRINTED FROM THE FORM 10-K, ITEMS 7 AND 8.
35
<PAGE> 42
Management's Financial Analysis
OUTLOOK
STRATEGIC PLAN
We made significant strides in achieving the objectives of the comprehensive
strategic action plan announced in January 1994. Centerior Energy Corporation
(Centerior Energy), along with The Cleveland Electric Illuminating Company
(Company) and The Toledo Edison Company (Toledo Edison), created the strategic
plan to strengthen their financial and competitive position through the year
2001. The Company and Toledo Edison are the two wholly owned electric utility
subsidiaries of Centerior Energy. The plan's objectives relate to the combined
operations of all three companies. The objectives are to achieve profitable
revenue growth, become an industry leader in customer satisfaction, build a
winning employee team, attain increasingly competitive power supply costs and
maximize share owner return on Centerior Energy common stock. To achieve these
objectives, we will continue to control expenditures and reduce our outstanding
debt and preferred stock. In addition, we will increase revenues by finding new
uses for existing assets and resources, implementing new marketing programs and
restructuring rates when appropriate. We will also improve the operating
performance of our generating plants and take other appropriate actions.
During 1994, we made progress toward most of our long-term objectives. The
Company and Toledo Edison initiated a marketing plan designed to increase total
retail revenues (exclusive of fuel cost recovery revenues and weather
influences) by 2-3% annually through 2001. Our new customer service activities
are intended to raise our customer satisfaction rating. Our employees achieved
enough of their established objectives for the year to receive a $500 per
eligible employee incentive compensation award. The work undertaken during
refueling outages at the Davis-Besse Nuclear Power Station (Davis-Besse) and
Perry Nuclear Power Plant Unit 1 (Perry Unit 1) as well as the outage work at
our fossil-fueled plants should help us achieve our long-term objective of
reducing variable power costs to a more competitive level. Strong cash flow
continued in 1994 and the Company's fixed-income obligations were reduced by $77
million. Also, the Company's total operation and maintenance expenses declined
$71 million, exclusive of one-time charges in 1993.
We are taking aggressive steps to increase revenues through our enhanced
marketing plan and to control costs. The full impact of these efforts will take
time. In the meantime, the Company and Toledo Edison must raise revenues by
restructuring rates. Accordingly, the Company and Toledo Edison are preparing to
file a request with The Public Utilities Commission of Ohio (PUCO) to be
effective in 1996. Meaningful cost control and marketing strategies will
mitigate the need for additional rate increases and help us meet competition.
COMPETITION
We are implementing strategies designed to create and enhance our competitive
advantages and to overcome the competitive disadvantages that we face due to
regulatory and tax constraints and our high retail cost structure.
Currently our most pressing competition comes from two municipal electric
systems in our service area. Our rates are generally higher than those of the
two municipal systems due largely to their exemption from taxation, the lower
cost financing available to them, the continued availability to them of lower
cost power through short-term power purchases and their access to cheaper
governmental power. We are seeking to address the tax disparity through the
legislative process. In 1994, the Ohio Governor's Tax Commission recommended the
replacement of the gross receipts and personal property taxes currently levied
only on investor-owned utilities and collected through rates with a different
tax collected from customers of all electric utilities, including municipal
systems. Investor-owned utilities would reduce rates upon repeal of the existing
taxes. We are now working to submit this proposal to the Ohio legislature.
We face the threat that municipalities in our service area could establish new
systems and continue expanding existing systems. We are responding with
aggressive marketing programs and by emphasizing the value of our service and
the risks of a municipal system: substantial, long-term debt; no guarantee of
low-cost wholesale electricity; the difficulty of forecasting costs; and the
uncertainty of market share as a result of our aggressive competition.
Generally, these municipalities have determined that developing a system is not
feasible or have agreed with us not to pursue development of a system at this
time. Although some communities continue to be interested in municipalization,
we believe that we offer the best value and most reliable source of electric
service in our territory.
The larger municipal system in our service area, Cleveland Public Power (CPP),
is constructing new transmission and distribution facilities extending into
eastern portions of Cleveland. CPP also plans to expand to western portions of
Cleveland. CPP's expansion reduced our annual net income by about $4 million in
1993 and an additional $3 million in 1994. We estimate our net income will
continue to be reduced by an additional $4 million to $5 million each year in
the 1995-1999 period because of CPP's expansion. Despite CPP's expansion
efforts, we have been successful in retaining most of the large industrial and
commercial customers in the expansion areas by providing economic incentives in
exchange for sole-supplier contracts. We have similar contracts
36
<PAGE> 43
with customers in other parts of our service area. Approximately 90% of our
industrial revenues under contract will not be up for renewal until 1997 or
later. As these contracts expire, we expect to renegotiate them and retain the
customers. In addition, an increasing number of CPP customers are converting
back to our service.
The Energy Policy Act of 1992 will increase competition in the electric utility
industry by allowing broader access to a utility's transmission system. It
should not significantly increase the competitive threat to us since we have
been required to wheel electricity to municipal systems in our service area
since 1977 under operating licenses for our nuclear generating units. Further,
the government could eventually require utilities to deliver power from other
utilities or generation sources to their retail customers. To combat this
threat, we are offering incentives such as energy-efficiency improvements and
reductions in demand charges for increased electricity usage to our industrial
and commercial customers in return for long-term commitments.
RATE MATTERS
Under the Rate Stabilization Program discussed in Note 7, we agreed to freeze
base rates until 1996 and limit rate increases through 1998. In exchange, we are
permitted to defer through 1995 and subsequently recover certain costs not
currently recovered in rates and to accelerate the amortization of certain
benefits. Amortization and recovery of the deferrals are expected to begin in
1996 with future rate recognition and will continue over the average life of the
related assets, or between 17 and 30 years. The continued use of these
regulatory accounting measures in 1995 will be dependent upon our continuing
assessment and conclusion that there will be probable recovery of such deferrals
in future rates. Our analysis leading to certain year-end 1993 financial actions
and the strategic plan also included an evaluation of our regulatory accounting
measures. See Regulatory Accounting below and Note 7. We decided that, once the
deferral of expenses and acceleration of benefits under the Rate Stabilization
Program are completed in 1995, we should no longer plan to use these measures to
the extent we have in the past.
REGULATORY ACCOUNTING
As described in Notes 1(a) and 7, the Company complies with the provisions of
Statement of Financial Accounting Standards (SFAS) 71. We continually monitor
changes in market and regulatory conditions and consider the effects of such
changes in assessing the continuing applicability of SFAS 71. Criteria that
could give rise to discontinuation of the application of SFAS 71 include: (1)
increasing competition which significantly restricts the Company's ability to
establish rates to recover operating costs, return requirements and the
amortization of regulatory assets and (2) a significant change in the manner in
which rates are set by the PUCO from cost-based regulations to some other form
of regulations. In the event we determine that the Company no longer meets the
criteria for following SFAS 71, the Company would be required to record a
before-tax charge to write off the regulatory assets shown in Note 7. In
addition, we would be required to evaluate whether the changes in the
competitive and regulatory environment which led to discontinuing the
application of SFAS 71 would also result in an impairment of the net book value
of the Company's property, plant and equipment.
The Company's write-off in 1993 of the phase-in deferred operating expenses and
carrying charges (phase-in deferrals) discussed in Note 7 resulted from our
conclusion that projected revenues for the 1994-1998 period would not provide
for recovery of such deferrals as scheduled by the PUCO order. This short time
frame for recovery of the phase-in deferrals is a requirement under the
accounting standard for phase-in plans of regulated enterprises, SFAS 92. The
remaining recovery periods for all remaining regulatory assets are between 17
and 34 years. We believe the Company's rates will provide for recovery of these
assets over the relevant periods and SFAS 71 continues to apply.
NUCLEAR OPERATIONS
The Company has interests in three nuclear generating units -- Davis-Besse,
Perry Unit 1 and Beaver Valley Power Station Unit 2 (Beaver Valley Unit 2).
Toledo Edison operates Davis-Besse and the Company operates Perry Unit 1.
Davis-Besse and Beaver Valley Unit 2 have been operating extremely well, with
each unit having a three-year availability average at year-end 1994 that
exceeded the three-year industry average of 80% for similar reactors. However,
the three-year availability average of Perry Unit 1 was below the three-year
industry availability average for that reactor type.
In 1994, Davis-Besse had an availability factor of 88%. Further, Davis-Besse
completed the shortest refueling and maintenance outage in its history in 1994,
returning to service just 46 days after shutting down. The Company is in the
process of upgrading Perry Unit 1 to the same level. For seven months in 1994,
Perry Unit 1 was out of service for its fourth refueling and maintenance outage.
Work was also performed in connection with the comprehensive course of action
developed in 1993 to improve the operating performance of Perry Unit 1. Work in
connection with that course of action is ongoing.
We externally fund the estimated costs for the future decommissioning of our
nuclear units. In 1993 and 1994, we increased our decommissioning expense
accruals because of revisions in our cost estimates. See Note 1(e).
37
<PAGE> 44
Our nuclear units may be impacted by activities or events beyond our control.
Operating nuclear units have experienced unplanned outages or extensions of
scheduled outages because of equipment problems or new regulatory requirements.
A major accident at a nuclear facility anywhere in the world could cause the
Nuclear Regulatory Commission to limit or prohibit the operation or licensing of
any domestic nuclear unit. If one of our nuclear units is taken out of service
for an extended period for any reason, including an accident at such unit or any
other nuclear facility, we cannot predict whether regulatory authorities would
impose unfavorable rate treatment. Such treatment could include taking our
affected unit out of rate base, thereby not permitting us to recover our
investment in and earn a return on it, or disallowing certain construction or
maintenance costs. An extended outage coupled with unfavorable rate treatment
could have a material adverse effect on our financial condition and results of
operations.
HAZARDOUS WASTE DISPOSAL SITES
The Comprehensive Environmental Response, Compensation and Liability Act of 1980
as amended (Superfund) established programs addressing the cleanup of hazardous
waste disposal sites, emergency preparedness and other issues. The Company has
been named as a "potentially responsible party" (PRP) for three sites listed on
the Superfund National Priorities List (Superfund List) and is aware of its
potential involvement in the cleanup of several other sites. Allegations that
the Company disposed of hazardous waste at these sites, and the amounts
involved, are often unsubstantiated and subject to dispute. Superfund provides
that all PRPs for a particular site can be held liable on a joint and several
basis. If the Company were held liable for 100% of the cleanup costs of all of
the sites referred to above, the cost could be as high as $350 million. However,
we believe that the actual cleanup costs will be substantially lower than $350
million, that the Company's share of any cleanup costs will be substantially
less than 100% and that most of the other PRPs are financially able to
contribute their share. The Company has accrued a liability totaling $8 million
at December 31, 1994 based on estimates of the costs of cleanup and its
proportionate responsibility for such costs. We believe that the ultimate
outcome of these matters will not have a material adverse effect on our
financial condition or results of operations.
COMMON STOCK DIVIDENDS
Centerior Energy's common stock dividend has been funded in recent years
primarily by common stock dividends paid by the Company. We expect this practice
to continue for the foreseeable future. In 1994, Centerior Energy lowered its
common stock dividend which reduced its cash outflow by over $110 million
annually. This action, in turn, reduced the common stock cash dividend demand on
the Company. The Company is using the increased retained cash to redeem debt and
preferred stock more quickly than would otherwise be the case. This has helped
improve the Company's capitalization structure and fixed charge coverage ratios.
MERGER OF TOLEDO EDISON INTO THE COMPANY
We continue to seek the necessary regulatory approvals to complete the merger of
Toledo Edison into the Company which was announced in 1994. The Company and
Toledo Edison plan to seek preferred stock share owner approval in mid-1995. The
merger is expected to be effective in 1995. See Note 15.
INFLATION
Although the rate of inflation has eased in recent years, we are still affected
by even modest inflation which causes increases in the unit cost of labor,
materials and services.
CAPITAL RESOURCES AND LIQUIDITY
1992-1994 CASH REQUIREMENTS
We need cash for normal corporate operations, the mandatory retirement of
securities and constructing and modifying facilities. Construction is needed to
meet anticipated demand for electric service, comply with government regulations
and protect the environment. Over the three-year period 1992-1994, construction
and mandatory retirement needs totaled approximately $940 million. In addition,
we exercised options to redeem and purchase approximately $470 million of our
securities.
We raised $989 million through security issues and term bank loans during the
1992-1994 period. The Company also utilized short-term borrowings to help meet
its cash needs. The Company had $58 million of notes payable to affiliates at
December 31, 1994. See Note 12. Although write-offs of the Company's Perry
Nuclear Power Plant Unit 2 (Perry Unit 2) investment and phase-in deferrals in
1993 negatively affected earnings, they did not adversely affect cash flow. See
Notes 4(b) and 7.
1995 AND BEYOND CASH REQUIREMENTS
Estimated cash requirements for 1995-1999 for the Company are $802 million for
construction and $832 million for the mandatory redemption of debt and preferred
stock. The Company expects to finance externally about two-thirds of its 1995
cash requirements of approximately $451 million and about one-third of its 1996
cash requirements of approximately $320 million. The Company expects to meet
nearly all of its 1997-1999 requirements through internal cash generation and
current cash resources. If economical, additional securities may be redeemed
under optional redemption provisions. We expect that the Company's continued
strong cash flow
38
<PAGE> 45
will reduce borrowing requirements and outstanding debt and preferred stock
during this period.
Cash expenditures to comply with the Clean Air Act Amendments of 1990 (Clean Air
Act) are estimated to be approximately $65 million over the 1995-1999 period.
See Note 4(a).
LIQUIDITY
Additional first mortgage bonds may be issued by the Company under its mortgage
on the basis of property additions, cash or refundable first mortgage bonds. If
the applicable interest coverage test is met, the Company may issue first
mortgage bonds on the basis of property additions and, under certain
circumstances, refundable bonds. At December 31, 1994, the Company would have
been permitted to issue approximately $487 million of additional first mortgage
bonds.
The Company also is able to raise funds through the sale of subordinated debt
and preferred and preference stock. There are no restrictions on the Company's
ability to issue preferred or preference stock.
In 1995, the Company plans to raise funds through the sale of first mortgage
bonds and the collateralization of accounts receivable. In addition, the Company
expects to issue first mortgage bonds as collateral security for the sale by a
public authority of tax-exempt bonds.
The Company is a party to a $205 million revolving credit facility which runs
through mid-1996. See Note 12. The Company had $66 million of cash and temporary
cash investments at the end of 1994. The Company is unable to issue commercial
paper because of its below investment grade commercial paper ratings.
The foregoing financing resources are expected to be sufficient for the
Company's needs over the next several years. However, the availability and cost
of capital to meet the Company's external financing needs also depend upon such
factors as financial market conditions and its credit ratings. Current credit
ratings for the Company are as follows:
<TABLE>
<CAPTION>
Standard Moody's
& Poor's Investors
Corporation Service, Inc.
----------- -------------
<S> <C> <C>
First mortgage bonds BB Ba2
Unsecured notes B+ Ba3
Preferred stock B b2
</TABLE>
RESULTS OF OPERATIONS
1994 VS. 1993
Factors contributing to the 3% decrease in 1994 operating revenues are as
follows:
<TABLE>
<CAPTION>
Millions
Increase (Decrease) in Operating Revenues of Dollars
- ------------------------------------------------ -----------
<S> <C>
KWH Sales Volume and Mix $ 2
Wholesale Revenues (48)
Fuel Cost Recovery Revenues (13)
Miscellaneous Revenues 6
-----
Total $ (53)
-----
</TABLE>
The Company experienced good retail kilowatt-hour sales growth in the commercial
and industrial categories in 1994; the residential category was negatively
impacted by weather conditions, particularly during the summer. The revenue
decrease resulted primarily from milder weather conditions in 1994 and 53% lower
wholesale sales. Weather reduced base rate revenues approximately $8 million
from the 1993 amount. Although total sales decreased by 4.6%, commercial sales
increased 2.4%. Industrial sales increased 0.7% on the strength of increased
sales to large automotive manufacturers and the broad-based, smaller industrial
customer group. This growth substantiated an economic resurgence in Northeastern
Ohio. Residential sales declined 0.2% because of the weather factor. Other sales
decreased by 42% because of the lower sales to wholesale customers attributable
to expiration of a wholesale power agreement, softer wholesale market conditions
and limited power availability for bulk power transactions at certain times
because of generating plant outages. Lower 1994 fuel cost recovery revenues
resulted from favorable changes in the fuel cost factors. The weighted average
of these factors dropped by approximately 5%.
For 1994, operating revenues were 31% residential, 32% commercial, 30%
industrial and 7% other and kilowatt-hour sales were 24% residential, 29%
commercial, 39% industrial and 8% other. The average prices per kilowatt-hour
for residential, commercial and industrial customers were $.11, $.09 and $.06,
respectively.
Operating expenses were 15% lower in 1994. Operation and maintenance expenses
for 1993 included $130 million of net benefit expenses related to an early
retirement program, called the Voluntary Transition Program (VTP), and other
charges totaling $35 million. The VTP benefit expenses in 1993 consisted of $102
million of costs for the Company plus $28 million for the Company's pro rata
share of the costs for its affiliate, Centerior Service Company (Service
Company). Two other significant reasons for lower operation and maintenance
expenses in 1994 were a smaller work force and ongoing cost reduction measures.
More nuclear generation and less coal-fired generation accounted for a large
part of the lower fuel and purchased power expenses in 1994. Depreciation and
amortization expenses increased primarily because of higher nuclear plant
decommissioning expenses as discussed in Note 1(e). Deferred operating expenses
were greater primarily because of the write-off of $117 million of phase-in
deferred operating expenses in 1993 as discussed in Note 7. The 1993 deferrals
also
39
<PAGE> 46
included $52 million of postretirement benefit curtailment cost deferrals
related to the VTP. See Note 9(b). Federal income taxes increased as a result of
higher pretax operating income.
As discussed in Note 4(b), $351 million of our Perry Unit 2 investment was
written off in 1993. Also, as discussed in Note 7, phase-in deferred carrying
charges of $519 million were written off in 1993. The change in the federal
income tax credit amounts for nonoperating income was attributable to these
write-offs.
1993 VS. 1992
Factors contributing to the 0.5% increase in 1993 operating revenues are as
follows:
<TABLE>
<CAPTION>
Millions
Increase (Decrease) in Operating Revenues of Dollars
- ------------------------------------------------ -----------
<S> <C>
KWH Sales Volume and Mix $ 27
Fuel Cost Recovery Revenues (13)
Base Rates and Miscellaneous (10)
Wholesale Sales 4
-----
Total $ 8
-----
</TABLE>
The revenue increase resulted primarily from the different weather conditions
and the changes in the composition of the sales mix among customer categories.
Weather accounted for approximately $32 million of higher 1993 base rate
revenues. Hot summer weather in 1993 boosted residential, commercial and
wholesale kilowatt-hour sales. In contrast, the 1992 summer was the coolest in
56 years for Northeastern Ohio. Residential and commercial sales also increased
as a result of colder late-winter temperatures in 1993 which increased electric
heating-related demand. As a result, total sales increased 2.9% in 1993.
Residential and commercial sales increased 4.4% and 3.1%, respectively.
Industrial sales decreased 1%. Lower sales to large steel industry customers
were partially offset by increased sales to large automotive manufacturers and
the broad-based, smaller industrial customer group. Other sales increased 12%
because of increased sales to wholesale customers. The decrease in 1993 fuel
cost recovery revenues resulted from changes in the fuel cost factors. The
weighted average of these factors decreased approximately 5%. Base rates and
miscellaneous revenues decreased in 1993 primarily from lower revenues under
contracts having reduced rates with certain large customers and a declining rate
structure tied to usage. The contracts have been negotiated to meet competition
and encourage economic growth.
For 1993, operating revenues were 31% residential, 31% commercial, 29%
industrial and 9% other and kilowatt-hour sales were 23% residential, 27%
commercial, 37% industrial and 13% other. The average prices per kilowatt-hour
for residential, commercial and industrial customers were $.11, $.10 and $.06,
respectively. The changes from 1992 were not significant.
Operating expenses increased 12% in 1993. The increase in total operation and
maintenance expenses resulted from the $130 million of net benefit expenses
related to the VTP, other charges totaling $35 million and an increase in other
operation and maintenance expenses. The increase in other operation and
maintenance expenses resulted from higher environmental expenses, power
restoration and repair expenses following a July 1993 storm, and an increase in
other postretirement benefit expenses. See Note 9 for information on retirement
benefits. Deferred operating expenses decreased because of the write-off of the
phase-in deferred operating expenses in 1993. Federal income taxes decreased as
a result of lower pretax operating income.
As mentioned above, $351 million of our Perry Unit 2 investment was written off
in 1993. Credits for carrying charges recorded in nonoperating income decreased
because of the write-off of the phase-in deferred carrying charges in 1993. The
federal income tax credit for nonoperating income in 1993 resulted from the
write-offs.
40
<PAGE> 47
Income Statement The Cleveland Electric Illuminating Company and Subsidiaries
<TABLE>
<CAPTION>
For the years ended December
31,
----------------------------
1994 1993 1992
------ ------ ------
(millions of dollars)
<S> <C> <C> <C>
OPERATING REVENUES $1,698 $1,751 $1,743
------ ------ ------
OPERATING EXPENSES
Fuel and purchased power (1) 391 423 434
Other operation and maintenance 394 433 410
Generation facilities rental expense, net 56 56 55
Early retirement program expenses and other -- 165 --
------ ------ ------
Total operation and maintenance 841 1,077 899
Depreciation and amortization 195 182 179
Taxes, other than federal income taxes 218 221 226
Deferred operating expenses, net (34) 27 (35)
Federal income taxes 82 22 89
------ ------ ------
1,302 1,529 1,358
------ ------ ------
OPERATING INCOME 396 222 385
------ ------ ------
NONOPERATING INCOME (LOSS)
Allowance for equity funds used during construction 4 4 1
Other income and deductions, net 6 (5) 8
Write-off of Perry Unit 2 -- (351) --
Deferred carrying charges, net 25 (487) 59
Federal income taxes -- credit (expense) (4) 270 (5)
------ ------ ------
31 (569) 63
------ ------ ------
INCOME (LOSS) BEFORE INTEREST CHARGES 427 (347) 448
------ ------ ------
INTEREST CHARGES
Debt interest 247 244 243
Allowance for borrowed funds used during construction (5) (4) --
------ ------ ------
242 240 243
------ ------ ------
NET INCOME (LOSS) 185 (587) 205
PREFERRED DIVIDEND REQUIREMENTS 45 45 41
------ ------ ------
EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK $ 140 $ (632) $ 164
------ ------ ------
</TABLE>
- ---------------
(1) Includes purchased power expense of $111 million, $120 million and $130
million in 1994, 1993 and 1992, respectively, for all purchases from Toledo
Edison.
Retained Earnings
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------
1994 1993 1992
----- ----- -----
(millions of dollars)
<S> <C> <C> <C>
RETAINED EARNINGS (DEFICIT) AT BEGINNING OF YEAR $(280) $ 545 $ 578
----- ----- -----
ADDITIONS
Net income (loss) 185 (587) 205
DEDUCTIONS
Dividends declared:
Common stock (122) (189) (195)
Preferred stock (45) (48) (41)
Other, primarily preferred stock redemption expenses -- (1) (2)
----- ----- -----
Net Increase (Decrease) 18 (825) (33)
----- ----- -----
RETAINED EARNINGS (DEFICIT) AT END OF YEAR $(262) $(280) $ 545
----- ----- -----
</TABLE>
The accompanying notes are an integral part of these statements.
41
<PAGE> 48
Cash Flows The Cleveland Electric Illuminating Company and Subsidiaries
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------
1994 1993 1992
----- ----- -----
(millions of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES (1)
Net Income (Loss) $ 185 $(587) $ 205
----- ----- -----
Adjustments to Reconcile Net Income (Loss) to Cash from Operating
Activities:
Depreciation and amortization 195 182 179
Deferred federal income taxes 50 (292) 66
Investment tax credits, net -- -- (8)
Unbilled revenues 27 (6) (7)
Deferred fuel (20) 4 6
Deferred carrying charges, net (25) 487 (59)
Leased nuclear fuel amortization 55 47 70
Deferred operating expenses, net (34) 27 (35)
Allowance for equity funds used during construction (4) (4) (1)
Noncash early retirement program expenses, net -- 125 --
Write-off of Perry Unit 2 -- 351 --
Changes in amounts due from customers and others, net 10 5 6
Changes in inventories 2 17 (2)
Changes in accounts payable (34) 18 7
Changes in working capital affecting operations 3 29 (4)
Other noncash items 4 5 (11)
----- ----- -----
Total Adjustments 229 995 207
----- ----- -----
Net Cash from Operating Activities 414 408 412
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES (2)
Bank loans, commercial paper and other short-term debt -- (10) 10
Notes payable to affiliates 58 (11) (13)
First mortgage bond issues 46 280 324
Secured medium-term note issues -- 35 90
Term bank loan -- 40 --
Preferred stock issues -- 100 74
Maturities, redemptions and sinking funds (116) (345) (481)
Nuclear fuel lease obligations (60) (59) (65)
Dividends paid (142) (232) (235)
Premiums, discounts and expenses (1) (11) (7)
----- ----- -----
Net Cash from Financing Activities (215) (213) (303)
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES (2)
Cash applied to construction (164) (167) (152)
Interest capitalized as allowance for borrowed funds used during
construction (5) (4) --
Contributions to nuclear plant decommissioning trusts (14) (5) (5)
Other cash received (applied) (27) 24 (15)
----- ----- -----
Net Cash from Investing Activities (210) (152) (172)
----- ----- -----
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (11) 43 (63)
----- ----- -----
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF YEAR 77 34 97
----- ----- -----
CASH AND TEMPORARY CASH INVESTMENTS AT END OF YEAR $ 66 $ 77 $ 34
----- ----- -----
</TABLE>
- ---------------
(1) Interest paid (net of amounts capitalized) was $208 million, $204 million
and $205 million in 1994, 1993 and 1992, respectively. Income taxes paid
were $15 million in 1994 and $28 million in both 1993 and 1992.
(2) Increases in Nuclear Fuel and Nuclear Fuel Lease Obligations in the Balance
Sheet resulting from the noncash capitalizations under nuclear fuel
agreements are excluded from this statement.
The accompanying notes are an integral part of this statement.
42
<PAGE> 49
Balance Sheet
<TABLE>
<CAPTION>
December 31,
----------------
1994 1993
------ ------
(millions of
dollars)
<S> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility plant in service $6,871 $6,734
Less: accumulated depreciation and amortization 2,014 1,889
------ ------
4,857 4,845
Construction work in progress 99 141
------ ------
4,956 4,986
Nuclear fuel, net of amortization 174 202
Other property, less accumulated depreciation 21 41
------ ------
5,151 5,229
------ ------
CURRENT ASSETS
Cash and temporary cash investments 66 77
Amounts due from customers and others, net 146 156
Amounts due from affiliates 5 5
Unbilled revenues 72 99
Materials and supplies, at average cost 95 93
Fossil fuel inventory, at average cost 16 20
Taxes applicable to succeeding years 180 179
Other 4 3
------ ------
584 632
------ ------
DEFERRED CHARGES AND OTHER ASSETS
Amounts due from customers for future federal income taxes 641 586
Unamortized loss on reacquired debt 58 60
Carrying charges and operating expenses 578 519
Nuclear plant decommissioning trusts 44 30
Other 95 103
------ ------
1,416 1,298
------ ------
Total Assets $7,151 $7,159
------ ------
</TABLE>
The accompanying notes are an integral part of this statement.
43
<PAGE> 50
The Cleveland Electric Illuminating Company and Subsidiaries
<TABLE>
<CAPTION>
December 31,
-----------------
1994 1993
------ ------
(millions of
dollars)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shares, without par value: 105 million authorized;
79.6 million outstanding in 1994 and 1993 $1,241 $1,241
Other paid-in-capital 79 79
Retained earnings (deficit) (262) (280)
------ ------
Common stock equity 1,058 1,040
Preferred stock
With mandatory redemption provisions 246 285
Without mandatory redemption provisions 241 241
Long-term debt 2,543 2,793
------ ------
4,088 4,359
------ ------
CURRENT LIABILITIES
Current portion of long-term debt and preferred stock 282 70
Current portion of nuclear fuel lease obligations 47 63
Accounts payable 88 122
Accounts and notes payable to affiliates 118 61
Accrued taxes 310 305
Accrued interest 62 60
Other 51 52
------ ------
958 733
------ ------
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized investment tax credits 192 235
Accumulated deferred federal income taxes 1,234 1,105
Unamortized gain from Bruce Mansfield Plant sale 327 343
Accumulated deferred rents for Bruce Mansfield Plant 84 77
Nuclear fuel lease obligations 132 151
Retirement benefits 59 52
Other 77 104
------ ------
2,105 2,067
------ ------
Total Capitalization and Liabilities $7,151 $7,159
------ ------
</TABLE>
44
<PAGE> 51
Statement of Preferred Stock
The Cleveland Electric Illuminating Company and Subsidiaries
<TABLE>
<CAPTION>
Current December 31,
1994 Shares Call Price -------------
Outstanding Per Share 1994 1993
----------- ---------- ---- ----
(millions of
dollars)
<S> <C> <C> <C> <C> <C>
Without par value, 4,000,000 preferred shares authorized
Subject to mandatory redemption:
$ 7.35 Series C 140,000 $ 101.00 $ 14 $ 15
88.00 Series E 18,000 1,019.13 18 21
Adjustable Series M 100,000 100.00 10 20
9.125 Series N 410,766 102.03 41 59
91.50 Series Q 75,000 -- 75 75
88.00 Series R 50,000 -- 50 50
90.00 Series S 75,000 -- 74 74
---- ----
282 314
Less: Current maturities 36 29
---- ----
TOTAL PREFERRED STOCK, WITH MANDATORY REDEMPTION PROVISIONS $246 $285
---- ----
Not subject to mandatory redemption:
$ 7.40 Series A 500,000 101.00 $ 50 $ 50
7.56 Series B 450,000 102.26 45 45
Adjustable Series L 500,000 100.00 49 49
42.40 Series T 200,000 -- 97 97
---- ----
TOTAL PREFERRED STOCK, WITHOUT MANDATORY REDEMPTION PROVISIONS $241 $241
---- ----
</TABLE>
The accompanying notes are an integral part of this statement.
45
<PAGE> 52
Notes to the Financial Statements
(1) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(A) GENERAL
The Company is an electric utility and a wholly owned subsidiary of Centerior
Energy. The Company's financial statements have historically included the
accounts of the Company's wholly owned subsidiaries, which in the aggregate were
not material. During 1994, the Company transferred its investments in its three
wholly owned subsidiaries to Centerior Energy at cost ($26 million) via property
dividends.
The Company follows the Uniform System of Accounts prescribed by the Federal
Energy Regulatory Commission (FERC) and adopted by the PUCO. Rate-regulated
utilities are subject to SFAS 71 which governs accounting for the effects of
certain types of rate regulation. Pursuant to SFAS 71, certain incurred costs
are deferred for recovery in future rates. See Note 7.
The Company is a member of the Central Area Power Coordination Group (CAPCO).
Other members are Toledo Edison, Duquesne Light Company, Ohio Edison Company and
its wholly owned subsidiary, Pennsylvania Power Company. The members have
constructed and operate generation and transmission facilities for their use.
(B) RELATED PARTY TRANSACTIONS
Operating revenues, operating expenses and interest charges include those
amounts for transactions with affiliated companies in the ordinary course of
business operations.
The Company's transactions with Toledo Edison are primarily for firm power,
interchange power, transmission line rentals and jointly owned power plant
operations and construction. See Notes 2 and 3.
The Service Company provides management, financial, administrative, engineering,
legal and other services at cost to the Company and other affiliated companies.
The Service Company billed the Company $136 million, $167 million and $150
million in 1994, 1993 and 1992, respectively, for such services.
(C) REVENUES
Customers are billed on a monthly cycle basis for their energy consumption based
on rate schedules or contracts authorized by the PUCO. An accrual is made at the
end of each month to record the estimated amount of unbilled revenues for
kilowatt-hours sold in the current month but not billed by the end of that
month.
A fuel factor is added to the base rates for electric service. This factor is
designed to recover from customers the costs of fuel and most purchased power.
It is reviewed and adjusted semiannually in a PUCO proceeding.
(D) FUEL EXPENSE
The cost of fossil fuel is charged to fuel expense based on inventory usage. The
cost of nuclear fuel, including an interest component, is charged to fuel
expense based on the rate of consumption. Estimated future nuclear fuel disposal
costs are being recovered through base rates.
The Company defers the differences between actual fuel costs and estimated fuel
costs currently being recovered from customers through the fuel factor. This
matches fuel expenses with fuel-related revenues.
Owners of nuclear generating plants are assessed by the federal government for
the cost of decontamination and decommissioning of nuclear enrichment facilities
operated by the United States Department of Energy. The assessments are based
upon the amount of enrichment services used in prior years and cannot be imposed
for more than 15 years (to 2007). The Company has accrued a liability for its
share of the total assessments. These costs have been recorded in a deferred
charge account since the PUCO is allowing the Company to recover the assessments
through its fuel cost factors.
(E) DEPRECIATION AND AMORTIZATION
The cost of property, plant and equipment is depreciated over their estimated
useful lives on a straight-line basis. The annual straight-line depreciation
provision for nonnuclear property expressed as a percent of average depreciable
utility plant in service was 3.4% in 1994, 1993 and 1992. The annual
straight-line depreciation rate for nuclear property is 2.5%.
The Company accrues the estimated costs of decommissioning its three nuclear
generating units. The accruals are required to be funded in an external trust.
The PUCO requires that the expense and payments to the external trusts be
determined on a levelized basis by dividing the unrecovered decommissioning
costs in current dollars by the remaining years in the licensing period of each
unit. This methodology requires that the net earnings on the trusts be
reinvested therein with the intent of allowing net earnings to offset inflation.
The PUCO requires that the estimated costs of decommissioning and the funding
level be reviewed at least every five years.
In 1994, the Company increased its annual decommissioning expense accruals to
$13 million from the $4 million level in 1992. The accruals are reflected in
current rates. The increased accruals were derived from recently updated,
site-specific studies for each of the units. The revised estimates reflect the
DECON method of decommissioning (prompt decontamination), and the locations
46
<PAGE> 53
and cost characteristics specific to the units, and include costs associated
with decontamination, dismantlement and site restoration.
The revised estimates for the units in 1993 and 1992 dollars and in dollars at
the time of license expiration, assuming a 4% annual inflation rate, are as
follows:
<TABLE>
<CAPTION>
License
Expiration Future
Generating Unit Year Amount Amount
- ------------------------------- ---------- ------ ------
(millions of
dollars)
<S> <C> <C> <C>
Davis-Besse 2017 $178(1) $ 443
Perry Unit 1 2026 156(1) 554
Beaver Valley Unit 2 2027 63(2) 233
------ ------
Total $397 $1,230
------ ------
</TABLE>
- ---------------
(1) Dollar amounts in 1993 dollars.
(2) Dollar amounts in 1992 dollars.
The updated estimates reflect substantial increases from the prior
PUCO-recognized aggregate estimates of $142 million in 1987 and 1986 dollars.
The classification, Accumulated Depreciation and Amortization, in the Balance
Sheet at December 31, 1994 includes $53 million of decommissioning costs
previously expensed and the earnings on the external trust funding. This amount
exceeds the Balance Sheet amount of the external Nuclear Plant Decommissioning
Trusts because the reserve began prior to the external trust funding. The trust
earnings are recorded as an increase to the trust assets and the related
component of the decommissioning reserve (included in Accumulated Depreciation
and Amortization).
The staff of the Securities and Exchange Commission has questioned certain of
the current accounting practices of the electric utility industry, including
those of the Company, regarding the recognition, measurement and classification
of decommissioning costs for nuclear generating stations in the financial
statements. In response to these questions, the Financial Accounting Standards
Board is reviewing the accounting for removal costs, including decommissioning.
If such current accounting practices are changed, the annual provision for
decommissioning could increase; the estimated cost for decommissioning could be
recorded as a liability rather than as accumulated depreciation; and trust fund
income from the external decommissioning trusts could be reported as investment
income rather than as a reduction to decommissioning expense.
(F) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at original cost less amounts ordered
by the PUCO to be written off. Construction costs include related payroll taxes,
retirement benefits, fringe benefits, management and general overheads and
allowance for funds used during construction (AFUDC). AFUDC represents the
estimated composite debt and equity cost of funds used to finance construction.
This noncash allowance is credited to income. The AFUDC rate was 9.68% in 1994,
9.63% in 1993 and 10.56% in 1992.
Maintenance and repairs for plant and equipment are charged to expense as
incurred. The cost of replacing plant and equipment is charged to the utility
plant accounts. The cost of property retired plus removal costs, after deducting
any salvage value, is charged to the accumulated provision for depreciation.
(G) DEFERRED GAIN FROM
SALE OF UTILITY PLANT
The sale and leaseback transaction discussed in Note 2 resulted in a net gain
for the sale of the Bruce Mansfield Generating Plant (Mansfield Plant). The net
gain was deferred and is being amortized over the term of leases. The
amortization and the lease expense amounts are reported in the Income Statement
as Generation Facilities Rental Expense, Net.
(H) INTEREST CHARGES
Debt Interest reported in the Income Statement does not include interest on
obligations for nuclear fuel under construction. That interest is capitalized.
See Note 6.
Losses and gains realized upon the reacquisition or redemption of long-term debt
are deferred, consistent with the regulatory rate treatment. See Note 7. Such
losses and gains are either amortized over the remainder of the original life of
the debt issue retired or amortized over the life of the new debt issue when the
proceeds of a new issue are used for the debt redemption. The amortizations are
included in debt interest expense.
(I) FEDERAL INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with SFAS 109. See Note 8. This method requires that deferred taxes
be recorded for all temporary differences between the book and tax bases of
assets and liabilities. The majority of these temporary differences are
attributable to property-related basis differences. Included in these basis
differences is the equity component of AFUDC, which will increase future tax
expense when it is recovered through rates. Since this component is not
recognized for tax purposes, the Company must record a liability for its tax
obligation. The PUCO permits recovery of such taxes from customers when they
become payable. Therefore, the net amount due from customers through rates has
been recorded as a deferred charge and will be recovered over the lives of the
related assets. See Note 7.
Investment tax credits are deferred and amortized over the lives of the
applicable property as a reduction of depreciation expense. See Note 7 for a
discussion of the
47
<PAGE> 54
amortization of certain unrestricted excess deferred taxes and unrestricted
investment tax credits under the Rate Stabilization Program.
(2) UTILITY PLANT SALE AND
LEASEBACK TRANSACTIONS
The Company and Toledo Edison are co-lessees of 18.26% (150 megawatts) of Beaver
Valley Unit 2 and 6.5% (51 megawatts), 45.9% (358 megawatts) and 44.38% (355
megawatts) of Units 1, 2 and 3 of the Mansfield Plant, respectively, all for
terms of about 29 1/2 years. These leases are the result of sale and leaseback
transactions completed in 1987.
Under these leases, the Company and Toledo Edison are responsible for paying all
taxes, insurance premiums, operation and maintenance expenses and all other
similar costs for their interests in the units sold and leased back. They may
incur additional costs in connection with capital improvements to the units. The
Company and Toledo Edison have options to buy the interests back at the end of
the leases for the fair market value at that time or renew the leases.
Additional lease provisions provide other purchase options along with conditions
for mandatory termination of the leases (and possible repurchase of the
leasehold interests) for events of default. These events include noncompliance
with any of several financial covenants discussed in Note 11(d).
As co-lessee with Toledo Edison, the Company is also obligated for Toledo
Edison's lease payments. If Toledo Edison is unable to make its payments under
the Beaver Valley Unit 2 and Mansfield Plant leases, the Company would be
obligated to make such payments. No such payments have been made on behalf of
Toledo Edison.
Future minimum lease payments under the operating leases at December 31, 1994
are summarized as follows:
<TABLE>
<CAPTION>
For For
the Toledo
Year Company Edison
- ------------------------------------ --------- ---------
(millions of dollars)
<S> <C> <C>
1995 $ 63 $ 103
1996 63 125
1997 63 102
1998 63 102
1999 70 108
Later Years 1,321 1,918
--------- ---------
Total Future Minimum Lease
Payments $ 1,643 $ 2,458
--------- ---------
</TABLE>
Rental expense is accrued on a straight-line basis over the terms of the leases.
The amount recorded in 1994, 1993 and 1992 as annual rental expense for the
Mansfield Plant leases was $70 million. Amounts charged to expense in excess of
the lease payments are classified as Accumulated Deferred Rents in the Balance
Sheet.
The Company is buying 150 megawatts of Toledo Edison's Beaver Valley Unit 2
leased capacity entitlement. Purchased power expense for this transaction was
$108 million, $103 million and $108 million in 1994, 1993 and 1992,
respectively. We anticipate that this purchase will continue indefinitely. The
future minimum lease payments through the year 2017 associated with Beaver
Valley Unit 2 aggregate $1.413 billion.
48
<PAGE> 55
(3) PROPERTY OWNED WITH OTHER UTILITIES AND INVESTORS
The Company owns, as a tenant in common with other utilities and those investors
who are owner-participants in various sale and leaseback transactions (Lessors),
certain generating units as listed below. Each owner owns an undivided share in
the entire unit. Each owner has the right to a percentage of the generating
capability of each unit equal to its ownership share. Each utility owner is
obligated to pay for only its respective share of the construction costs and
operating expenses. Each Lessor has leased its capacity rights to a utility
which is obligated to pay for such Lessor's share of the construction costs and
operating expenses. The Company's share of the operating expenses of these
generating units is included in the Income Statement. The Balance Sheet
classification of Property, Plant and Equipment at December 31, 1994 includes
the following facilities owned by the Company as a tenant in common with other
utilities and Lessors:
<TABLE>
<CAPTION>
In- Plant Construction
Service Ownership Ownership Power in Work in Accumulated
Generating Unit Date Share Megawatts Source Service Progress Depreciation
- ------------------------------- ------- --------- --------- -------- ------- ------------ -----------
(millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Seneca Pumped Storage 1970 80.00% 351 Hydro $ 66 $ -- $ 22
Eastlake Unit 5 1972 68.80 411 Coal 156 1 --
Davis-Besse 1977 51.38 454 Nuclear 664 2 190
Perry Unit 1 1987 31.11 371 Nuclear 1,774 5 314
Beaver Valley Unit 2 and
Common Facilities (Note 2) 1987 24.47 201 Nuclear 1,276 2 250
------- --- -----
Total $3,936 $ 10 $ 776
------- --- -----
</TABLE>
Depreciation for Eastlake Unit 5 has been accumulated with all other nonnuclear
depreciable property rather than by specific units of depreciable property.
(4) CONSTRUCTION AND CONTINGENCIES
(A) CONSTRUCTION PROGRAM
The estimated cost of the Company's construction program for the 1995-1999
period is $851 million, including AFUDC of $49 million and excluding nuclear
fuel.
The Clean Air Act requires, among other things, significant reductions in the
emission of sulfur dioxide and nitrogen oxides by fossil-fueled generating
units. Our strategy provides for compliance primarily through greater use of
low-sulfur coal at some of our units and the use of emission allowances. Total
capital expenditures from 1991 through 1994 in connection with Clean Air Act
compliance amounted to $34 million. The plan will require additional capital
expenditures over the 1995-2004 period of approximately $125 million for
nitrogen oxide control equipment and plant modifications. In addition, higher
fuel and other operation and maintenance expenses will be incurred. The
anticipated rate increase associated with the capital expenditures and higher
expenses would be about 1-2% in the late 1990s. The Company may need to install
sulfur emission control technology at one of its generating plants after 2005
which could require additional expenditures at that time.
(B) PERRY UNIT 2
Perry Unit 2, including its share of the facilities common with Perry Unit 1,
was approximately 50% complete when construction was suspended in 1985 pending
consideration of various options. We wrote off our investment in Perry Unit 2 at
December 31, 1993 after we determined that it would not be completed or sold.
The write-off totaled $351 million ($258 million after taxes) for the Company's
44.85% ownership share of the unit. See Note 14.
(C) HAZARDOUS WASTE DISPOSAL SITES
The Company is aware of its potential involvement in the cleanup of three sites
listed on the Superfund List and several other waste sites not on such list. The
Company has accrued a liability totaling $8 million at December 31, 1994 based
on estimates of the costs of cleanup and its proportionate responsibility for
such costs. We believe that the ultimate outcome of these matters will not have
a material adverse effect on our financial condition or results of operations.
See Management's Financial Analysis -- Outlook-Hazardous Waste Disposal Sites.
(5) NUCLEAR OPERATIONS AND CONTINGENCIES
(A) OPERATING NUCLEAR UNITS
The Company's three nuclear units may be impacted by activities or events beyond
our control. An extended outage of one of our nuclear units for any reason,
coupled with any unfavorable rate treatment, could
have a material adverse effect on our financial condition
and results of operations. See the discussion of these risks in Management's
Financial Analysis -- Outlook-Nuclear Operations.
49
<PAGE> 56
(B) NUCLEAR INSURANCE
The Price-Anderson Act limits the public liability of the owners of a nuclear
power plant to the amount provided by private insurance and an industry
assessment plan. In the event of a nuclear incident at any unit in the United
States resulting in losses in excess of the level of private insurance
(currently $200 million), the Company's maximum potential assessment under that
plan would be $85 million (plus any inflation adjustment) per incident. The
assessment is limited to $11 million per year for each nuclear incident. These
assessment limits assume the other CAPCO companies contribute their
proportionate share of any assessment.
The utility owners and lessees of Davis-Besse, Perry and Beaver Valley also have
insurance coverage for damage to property at these sites (including leased fuel
and cleanup costs). Coverage amounted to $2.75 billion for each site as of
January 1, 1995. Damage to property could exceed the insurance coverage by a
substantial amount. If it does, the Company's share of such excess amount could
have a material adverse effect on its financial condition and results of
operations. Under these policies, the Company can be assessed a maximum of $12
million during a policy year if the reserves available to the insurer are
inadequate to pay claims arising out of an accident at any nuclear facility
covered by the insurer.
The Company also has extra expense insurance coverage. It includes the
incremental cost of any replacement power purchased (over the costs which would
have been incurred had the units been operating) and other incidental expenses
after the occurrence of certain types of accidents at our nuclear units. The
amounts of the coverage are 100% of the estimated extra expense per week during
the 52-week period starting 21 weeks after an accident and 80% of such estimate
per week for the next 104 weeks. The amount and duration of extra expense could
substantially exceed the insurance coverage.
(6) NUCLEAR FUEL
Nuclear fuel is financed for the Company and Toledo Edison through leases with a
special-purpose corporation. At December 31, 1994, $307 million ($182 million
for the Company and $125 million for Toledo Edison) of nuclear fuel was financed
($157 million from intermediate-term notes and $150 million from bank credit
arrangements). The intermediate-term notes mature in 1996 and 1997. The Company
and Toledo Edison severally lease their respective portions of the nuclear fuel
and are obligated to pay for the fuel as it is consumed in a reactor. The lease
rates are based on various intermediate-term note rates, bank rates and
commercial paper rates.
The amounts financed include nuclear fuel in the Davis-Besse, Perry Unit 1 and
Beaver Valley Unit 2 reactors with remaining lease payments for the Company of
$67 million, $57 million and $14 million, respectively, at December 31, 1994.
The nuclear fuel amounts financed and capitalized also included interest charges
incurred by the lessors amounting to $7 million in 1994 and $9 million in both
1993 and 1992. The estimated future lease amortization payments based on
projected consumption are $57 million in 1995, $52 million in 1996, $46 million
in 1997, $43 million in 1998 and $36 million in 1999.
(7) REGULATORY MATTERS
The Company is subject to the provisions of SFAS 71. Regulatory assets represent
probable future revenues to the Company associated with certain incurred costs,
which it will recover from customers through the ratemaking process. Regulatory
assets in the Balance Sheet are as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1994 1993
------ ------
(millions of
dollars)
<S> <C> <C>
Amounts due from customers for future federal
income taxes $ 641 $ 586
Unamortized loss on reacquired debt 58 60
Pre-phase-in deferrals* 341 351
Rate Stabilization Program deferrals 237 168
------ ------
Total $1,277 $1,165
------ ------
</TABLE>
* Represent deferrals of operating expenses and carrying charges for Perry Unit
1 and Beaver Valley Unit 2 in 1987 and 1988 which are being amortized over the
lives of the related property.
As of December 31, 1994, customer rates provide for recovery of all the above
regulatory assets, except those related to the Rate Stabilization Program
discussed below. The remaining recovery periods for all of the regulatory assets
listed above range from 17 to 34 years. We continually assess the effects of
competition and the changing industry and regulatory environment on operations
and the Company's ability to recover the regulatory assets. In the event that we
determine that future revenues would not be provided for recovery of any
regulatory asset, such asset would be required to be written off. See
Management's Financial Analysis -- Outlook-Regulatory Accounting.
The Company will file a request with the PUCO to restructure rates to increase
revenues to be effective in 1996 which will include provision for recovery of
the Rate Stabilization Program deferrals. We believe that rates will be set at a
level consistent with cost-based regulations and will provide revenues to
recover the then-current operating costs, return requirements and amortization
of all regulatory assets listed above.
The Rate Stabilization Program that the PUCO approved in October 1992 was
designed to encourage economic growth in the Company's service area by freezing
the Company's base rates until 1996 and limiting subsequent
50
<PAGE> 57
rate increases to specified annual amounts not to exceed $216 million over the
1996-1998 period.
As part of the Rate Stabilization Program, during the 1992-1995 period the
Company is allowed to defer and subsequently recover certain costs not currently
recovered in rates and to accelerate amortization of certain benefits. The
continued use of these regulatory accounting measures will be dependent upon our
continuing assessment and conclusion that there will be probable recovery of
such deferrals in future rates.
The regulatory accounting measures we are eligible to record through December
31, 1995 include the deferral of post-in-service interest carrying charges,
depreciation expense and property taxes on assets placed in service after
February 29, 1988. The cost deferrals recorded in 1994, 1993 and 1992 pursuant
to these provisions were $66 million, $56 million and $52 million, respectively.
The regulatory accounting measures also provide for the accelerated amortization
of certain unrestricted excess deferred tax and unrestricted investment tax
credit balances and interim spent fuel storage accrual balances for Davis-Besse.
The total amount of such regulatory benefits recognized pursuant to these
provisions was $28 million in both 1994 and 1993 and $7 million in 1992.
The Rate Stabilization Program also authorized the Company to defer and
subsequently recover the incremental expenses associated with the adoption of
the accounting standard for postretirement benefits other than pensions (SFAS
106). In 1994 and 1993, we deferred $4 million and $60 million, respectively,
pursuant to this provision. Amortization and recovery of these deferrals are
expected to commence in 1996 and to be completed by no later than 2012. See Note
9(b).
In 1993, upon completing a comprehensive study which led to our current
strategic plan, we concluded that projected revenues would not provide for
recovery of deferrals recorded pursuant to a phase-in plan approved by the PUCO
in 1989. Such deferrals were scheduled to be recovered over the 1994 through
1998 period. The total phase-in deferred operating expenses and carrying charges
written off at December 31, 1993 by the Company were $117 million and $519
million, respectively (totaling $433 million after taxes). See Note 14.
Additionally, based on our assessment of business conditions, we concluded that,
once the deferral of expenses and acceleration of benefits under our Rate
Stabilization Program are completed in 1995, we should no longer plan to use
regulatory accounting measures to the extent we have in the past.
(8) FEDERAL INCOME TAX
The components of federal income tax expense (credit) recorded in the Income
Statement were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ----- ----
(millions of
dollars)
<S> <C> <C> <C>
Operating Expenses:
Current $ 53 $ 64 $ 47
Deferred 29 (42) 42
---- ----- ----
Total Charged to Operating Expenses 82 22 89
---- ----- ----
Nonoperating Income:
Current (17) (20) (19)
Deferred 21 (250) 24
---- ----- ----
Total Expense (Credit) to
Nonoperating Income 4 (270) 5
---- ----- ----
Total Federal Income Tax Expense (Credit) $ 86 $(248) $ 94
---- ----- ----
</TABLE>
The deferred federal income tax expense results from the temporary differences
that arise from the different years certain expenses are recognized for tax
purposes as opposed to financial reporting purposes. Such temporary differences
affecting operating expenses relate principally to depreciation and deferred
operating expenses whereas those affecting nonoperating income principally
relate to deferred carrying charges and the 1993 write-offs.
Federal income tax, computed by multiplying income before taxes by the statutory
rate (35% in 1994 and 1993 and 34% in 1992), is reconciled to the amount of
federal income tax recorded on the books as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ----- ----
(millions of
dollars)
<S> <C> <C> <C>
Book Income (Loss) Before Federal Income
Tax $271 $(835) $299
---- ----- ----
Tax (Credit) on Book Income (Loss) at
Statutory Rate $ 95 $(292) $102
Increase (Decrease) in Tax:
Write-off of Perry Unit 2 -- 30 --
Write-off of phase-in deferrals -- 20 --
Depreciation 6 6 (3)
Rate Stabilization Program (18) (20) (5)
Other items 3 8 --
---- ----- ----
Total Federal Income Tax Expense (Credit) $ 86 $(248) $ 94
---- ----- ----
</TABLE>
The Company joins in the filing of a consolidated federal income tax return with
its affiliated companies. The method of tax allocation reflects the benefits and
burdens realized by each company's participation in the consolidated tax return,
approximating a separate return result for each company.
For tax reporting purposes, the Perry Unit 2 abandonment was recognized in 1994
and resulted in a $187 million loss with a corresponding $65 million reduction
in federal income tax liability. Because of the alternative minimum tax (AMT),
$38 million of the $65 million was realized in 1994. The remaining $27 million
will not be realized until 1999. Additionally, a repayment of approximately $32
million of previously allowed investment tax credits was recognized in 1994.
51
<PAGE> 58
In August 1993, the Revenue Reconciliation Act of 1993 was enacted. Retroactive
to January 1, 1993, the top marginal corporate income tax rate increased to 35%.
The change in tax rate did not materially impact the results of operations for
1993, but increased Accumulated Deferred Federal Income Taxes for the future tax
obligation by approximately $61 million. Since the PUCO has historically
permitted recovery of such taxes from customers when they become payable, the
deferred charge, Amounts Due from Customers for Future Federal Income Taxes,
also was increased by $61 million.
Under SFAS 109, temporary differences and carryforwards resulted in deferred tax
assets of $418 million and deferred tax liabilities of $1.652 billion at
December 31, 1994 and deferred tax assets of $426 million and deferred tax
liabilities of $1.531 billion at December 31, 1993. These are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
---------------
1994 1993
------ ------
(millions of
dollars)
<S> <C> <C>
Property, plant and equipment $1,429 $1,311
Deferred carrying charges and operating 132 127
expenses
Net operating loss carryforwards (88) (69)
Investment tax credits (105) (128)
Sale and leaseback transactions (125) (126)
Other (9) (10)
------ ------
Net deferred tax liability $1,234 $1,105
------ ------
</TABLE>
For tax purposes, net operating loss (NOL) carryforwards of approximately $252
million are available to reduce future taxable income and will expire in 2003
through 2009. The 35% tax effect of the NOLs is $88 million. Additionally, AMT
credits of $99 million that may be carried forward indefinitely are available to
reduce future regular tax.
(9) RETIREMENT BENEFITS
(A) RETIREMENT INCOME PLAN
Centerior Energy sponsors jointly with its subsidiaries a noncontributing
pension plan (Centerior Pension Plan) which covers all employee groups. The
amount of retirement benefits generally depends upon the length of service.
Under certain circumstances, benefits can begin as early as age 55. The funding
policy is to comply with the Employee Retirement Income Security Act of 1974
guidelines.
In 1993, eligible employees were offered the VTP, an early retirement program.
Operating expenses for Centerior Energy and its subsidiaries in 1993 included
$205 million of pension plan accruals to cover enhanced VTP benefits and an
additional $10 million of pension costs for VTP benefits paid to retirees from
corporate funds. The $10 million is not included in the pension data reported in
the following table. A credit of $81 million resulting from a settlement of
pension obligations through lump sum payments to almost all the VTP retirees
partially offset the VTP expenses.
Pension and VTP costs (credits) for Centerior Energy and its subsidiaries for
1992 through 1994 were comprised of the following components:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(millions of
dollars)
<S> <C> <C> <C>
Pension Costs (Credits):
Service cost for benefits earned
during the
period $ 13 $ 15 $ 15
Interest cost on projected benefit
obligation 26 37 38
Actual return on plan assets (2) (65) (24)
Net amortization and deferral (34) 4 (45)
---- ---- ----
Net pension costs (credits) 3 (9) (16)
VTP cost -- 205 --
Settlement gain -- (81) --
---- ---- ----
Net costs (credits) $ 3 $115 $(16)
---- ---- ----
</TABLE>
Pension and VTP costs (credits) for the Company and its pro rata share of the
Service Company's costs were $2 million, $62 million and $(16) million for 1994,
1993 and 1992, respectively.
The following table presents a reconciliation of the funded status of the
Centerior Pension Plan. The Company's share of the Centerior Pension Plan's
total projected benefit obligation approximates 50%.
<TABLE>
<CAPTION>
December 31,
-------------
1994 1993
---- ----
(millions of
dollars)
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefits $278 $333
Nonvested benefits 2 37
---- ----
Accumulated benefit obligation 280 370
Effect of future compensation levels 37 53
---- ----
Total projected benefit obligation 317 423
Plan assets at fair market value 362 386
---- ----
Funded status 45 (37)
Unrecognized net loss (gain) from variance
between assumptions and experience (79) 11
Unrecognized prior service cost 10 10
Transition asset at January 1, 1987 being
amortized over 19 years (39) (43)
---- ----
Net accrued pension liability $(63) $(59)
---- ----
</TABLE>
A September 30, 1994 measurement date was used for 1994 reporting. At December
31, 1994, the settlement (discount) rate and long-term rate of return on plan
assets assumptions were 8.5% and 10%, respectively. The long-term rate of annual
compensation increase assumption was 3.5% for 1995 and 1996 and 4% thereafter.
At December 31, 1993, the settlement rate and long-term rate of return on plan
assets assumptions were 7.25% and 8.75%, respectively. The long-term rate of
annual compensation increase assumption was 4.25%. At December 31, 1994 and
1993, the Company's net prepaid pension cost included in Deferred Charges and
Other
52
<PAGE> 59
Assets -- Other in the Balance Sheet was $7 million and $9 million,
respectively.
Plan assets consist primarily of investments in common stock, bonds, guaranteed
investment contracts, cash equivalent securities and real estate.
(B) OTHER POSTRETIREMENT BENEFITS
Centerior Energy sponsors jointly with its subsidiaries a postretirement benefit
plan which provides all employee groups certain health care, death and other
postretirement benefits other than pensions. The plan is contributory, with
retiree contributions adjusted annually. The plan is not funded. The Company
adopted SFAS 106, the accounting standard for postretirement benefits other than
pensions, effective January 1, 1993. The standard requires the accrual of the
expected costs of such benefits during the employees' years of service. Prior to
1993, the costs of these benefits were expensed as paid, which was consistent
with ratemaking practices.
The components of the total postretirement benefit costs for 1994 and 1993 were
as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
(millions
of dollars)
<S> <C> <C>
Service cost for benefits earned during the
period $ 1 $ 2
Interest cost on accumulated postretirement
benefit obligation 11 10
Amortization of transition obligation at January
1, 1993 of $104 million over 20 years 5 5
VTP curtailment cost (includes $10 million
transition obligation adjustment) -- 52
---- ----
Total costs $17 $69
---- ----
</TABLE>
These amounts included costs for the Company and its pro rata share of the
Service Company's costs.
In 1994 and 1993, the Company deferred incremental SFAS 106 expenses (in excess
of the amounts paid) of $4 million and $60 million, respectively, pursuant to a
provision of the Rate Stabilization Program. See Note 7.
The accumulated postretirement benefit obligation and accrued postretirement
benefit cost for the Company and its share of the Service Company's obligation
are as follows:
<TABLE>
<CAPTION>
December 31,
-------------
1994 1993
----- -----
(millions of
dollars)
<S> <C> <C>
Accumulated postretirement benefit obligation
attributable to:
Retired participants $(124) $(141)
Fully eligible active plan participants (1) (1)
Other active plan participants (14) (19)
----- -----
Accumulated postretirement benefit
obligation (139) (161)
Unrecognized net loss (gain) from variance
between assumptions and experience (16) 9
Unamortized transition obligation 84 89
----- -----
Accrued postretirement benefit cost $ (71) $ (63)
----- -----
</TABLE>
The Balance Sheet classification of Retirement Benefits at December 31, 1994 and
1993 includes only the Company's accrued postretirement benefit cost of $59
million and $52 million, respectively, and excludes the Service Company's
portion since the Service Company's total accrued cost is carried on its books.
A September 30, 1994 measurement date was used for 1994 reporting. At December
31, 1994 and 1993, the settlement rate and the long-term rate of annual
compensation increase assumptions were the same as those discussed for pension
reporting in Note 9(a). At December 31, 1994, the assumed annual health care
cost trend rates (applicable to gross eligible charges) are 8.5% for medical and
8% for dental in 1995. Both rates reduce gradually to a fixed rate of 4.75% by
2003. Elements of the obligation affected by contribution caps are significantly
less sensitive to the health care cost trend rate than other elements. If the
assumed health care cost trend rates were increased by one percentage point in
each future year, the accumulated postretirement benefit obligation as of
December 31, 1994 would increase by $3 million and the aggregate of the service
and interest cost components of the annual postretirement benefit cost would
increase by $0.3 million.
(10) GUARANTEES
The Company has guaranteed certain loan and lease obligations of two coal
suppliers under two long-term coal supply contracts. At December 31, 1994, the
principal amount of the loan and lease obligations guaranteed by the Company
under both contracts was $50 million. In addition, the Company may be
responsible for mine closing costs when one of the contracts is terminated. At
December 31, 1994, the unfunded costs of closing this mine as estimated by the
supplier were $54 million.
The prices under both contracts which include certain minimum payments are
sufficient to satisfy the loan and lease obligations and mine closing costs over
the lives of the contracts. If either contract is terminated early for any
reason, the Company would attempt to reduce the termination charges and would
ask the PUCO to allow recovery of such charges from customers through the fuel
factor.
53
<PAGE> 60
(11) CAPITALIZATION
(A) CAPITAL STOCK TRANSACTIONS
Preferred stock shares sold and retired during the three years ended December
31, 1994 are listed in the following table.
<TABLE>
<CAPTION>
1994 1993 1992
---- ----- -----
(thousands of shares)
<S> <C> <C> <C>
Subject to Mandatory Redemption:
Sales
$90.00 Series S -- -- 75
Retirements
$ 7.35 Series C (10) (10) (10)
88.00 Series E (3) (3) (3)
Adjustable Series M (100) (100) (100)
9.125 Series N (189) (150) --
Not Subject to Mandatory Redemption:
Sales
$42.40 Series T -- 200 --
Retirements
Remarketed Series P -- -- (1)
---- ----- -----
Net (Decrease) (302) (63) (39)
---- ----- -----
</TABLE>
(B) EQUITY DISTRIBUTION RESTRICTIONS
Federal law prohibits the Company from paying dividends out of capital accounts.
However, the Company may pay preferred and common stock dividends out of
appropriated retained earnings and current earnings. At December 31, 1994, the
Company had $144 million of appropriated retained earnings for the payment of
preferred and common stock dividends.
(C) PREFERRED AND PREFERENCE STOCK
Amounts to be paid for preferred stock which must be redeemed during the next
five years are $36 million in 1995, $30 million in both 1996 and 1997, $15
million in 1998 and $33 million in 1999.
The annual preferred stock mandatory redemption provisions are as follows:
<TABLE>
<CAPTION>
Shares Price
To Be Beginning Per
Redeemed in Share
-------- --------- ------
<S> <C> <C> <C>
$ 7.35 Series C 10,000 1984 $ 100
88.00 Series E 3,000 1981 1,000
Adjustable Series M 100,000 1991 100
9.125 Series N 150,000 1993 100
91.50 Series Q 10,714 1995 1,000
88.00 Series R 50,000 2001* 1,000
90.00 Series S 18,750 1999 1,000
</TABLE>
* All outstanding shares to be redeemed on December 1, 2001.
In 1993, the Company issued $100 million principal amount of Serial Preferred
Stock, $42.40 Series T. The Series T stock was deposited with an agent which
issued Depositary Receipts, each representing 1/20 of a share of the Series T
stock.
The annualized preferred dividend requirement at December 31, 1994 was $44
million.
The preferred dividend rates on the Company's Series L and M fluctuate based on
prevailing interest rates and market conditions. The dividend rates for these
issues averaged 7.17% and 7.01%, respectively, in 1994.
Preference stock authorized for the Company is 3,000,000 shares without par
value. No preference shares are currently outstanding.
With respect to dividend and liquidation rights, the Company's preferred stock
is prior to its preference stock and common stock, and its preference stock is
prior to its common stock.
(D) LONG-TERM DEBT AND OTHER
BORROWING ARRANGEMENTS
Long-term debt, less current maturities, was as follows:
<TABLE>
<CAPTION>
Actual
or Average
Interest
Rate at December 31,
December 31, ---------------
Year of Maturity 1994 1994 1993
- -------------------------------- ------------ ------ ------
(millions of
dollars)
<S> <C> <C> <C>
First mortgage bonds:
1996-1999 13.75% $ 17 $ 21
1996-1999 7.00 3 4
1997-1999 10.88 18 18
1999 6.20 2 2
2000-2004 7.92 396 400
2005-2009 8.33 202 202
2010-2014 8.50 365 365
2015-2019 8.00 459 459
2020-2023 8.75 518 518
------ ------
1,980 1,989
Secured medium term notes due
1996-2021 8.68 516 713
Term bank loans due 1996 8.50 2 45
Pollution control notes due
1996-2012 6.82 52 53
Other -- net -- (7) (7)
------ ------
Total Long-Term Debt $2,543 $2,793
------ ------
</TABLE>
Long-term debt matures during the next five years as follows: $246 million in
1995, $151 million in 1996, $55 million in 1997, $78 million in 1998 and $159
million in 1999.
The Company issued $125 million aggregate principal amount of secured
medium-term notes in 1992 and 1993. The notes are secured by first mortgage
bonds.
The Company's mortgage constitutes a direct first lien on substantially all
property owned and franchises held by the Company. Excluded from the lien, among
other things, are cash, securities, accounts receivable, fuel and supplies.
An unsecured loan agreement of the Company contains covenants relating to
capitalization ratios, fixed charge coverage ratios and limitations on secured
financing other than through first mortgage bonds or certain other transactions.
Two reimbursement agreements relating to separate letters of credit issued in
connection with the sale
54
<PAGE> 61
and leaseback of Beaver Valley Unit 2 contain several financial covenants
affecting the Company, Toledo Edison and Centerior Energy. Among these are
covenants relating to fixed charge coverage ratios and capitalization ratios.
The write-offs recorded at December 31, 1993 caused the Company, Toledo Edison
and Centerior Energy to violate certain covenants contained in the loan
agreement and the two reimbursement agreements. The affected creditors waived
those violations in exchange for a subordinate mortgage security interest on the
properties of the Company and Toledo Edison. The Company provided the same
security interest to certain other creditors because their agreements require
equal treatment. At December 31, 1994, the Company provided subordinate mortgage
collateral for $45 million of unsecured debt, $228 million of bank letters of
credit and a $205 million revolving credit facility. The bank letters of credit
are joint and several obligations of the Company and Toledo Edison and the
revolving credit facility is an obligation of Centerior Energy that is jointly
and severally guaranteed by the Company and Toledo Edison.
(12) SHORT-TERM BORROWING ARRANGEMENTS
Centerior Energy has a $205 million revolving credit facility through May 1996.
Centerior Energy and the Service Company may borrow under the facility, with all
borrowings jointly and severally guaranteed by the Company and Toledo Edison.
Centerior Energy plans to transfer any of its borrowed funds to the Company and
Toledo Edison. The facility agreement as amended provides the participating
banks with a subordinate mortgage security interest on the properties of the
Company and Toledo Edison. The banks' fee is 0.625% per annum payable quarterly
in addition to interest on any borrowings. There were no borrowings under the
facility at December 31, 1994. The facility agreement contains covenants
relating to capitalization and fixed charge coverage ratios for the Company,
Toledo Edison and Centerior Energy.
Short-term borrowing capacity authorized by the PUCO annually is $300 million
for the Company. The Company and Toledo Edison are authorized by the PUCO to
borrow from each other on a short-term basis. At December 31, 1994, the Company
had total short-term borrowings of $58 million from its affiliates with a
weighted average interest rate of 6.14%.
(13) FINANCIAL INSTRUMENTS
Except for the Nuclear Plant Decommissioning Trusts at December 31 1994, as
discussed below, the estimated fair values at December 31, 1994 and 1993 of
financial instruments that do not approximate their carrying amounts in the
Balance Sheet are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1994 1993
---------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
(millions of dollars)
<S> <C> <C> <C> <C>
Assets:
Nuclear Plant Decommissioning
Trusts $ 44 $ 44 $ 30 $ 32
Capitalization and Liabilities:
Preferred Stock, with
Mandatory Redemption
Provisions (including
current portion) 282 245 314 307
Long-Term Debt (including
current portion) 2,795 2,503 2,841 2,946
</TABLE>
The Nuclear Plant Decommissioning Trusts at December 31, 1994 included $25
million of federal governmental securities and $17 million of municipal
securities. The securities had the following maturities: $11 million due within
one year; $8 million due in one to five years; $10 million due in six to 10
years; and $13 million due after 10 years. The fair value of these trusts is
estimated based on the quoted market prices for the investment securities. As a
result of adopting the new accounting standard for certain investments in debt
and equity securities, SFAS 115, in 1994, the carrying amount of these trusts is
equal to the fair value. The fair value of the Company's preferred stock, with
mandatory redemption provisions, and long-term debt is estimated based on the
quoted market prices for the respective or similar issues or on the basis of the
discounted value of future cash flows. The discounted value used current
dividend or interest rates (or other appropriate rates) for similar issues and
loans with the same remaining maturities.
The estimated fair values of all other financial instruments approximate their
carrying amounts in the Balance Sheet at December 31, 1994 and 1993 because of
their short-term nature.
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of operations
for the two years ended December 31, 1994.
<TABLE>
<CAPTION>
Quarters Ended
----------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
--------- -------- --------- --------
(millions of dollars)
<S> <C> <C> <C> <C>
1994
Operating Revenues $ 408 $415 $ 474 $ 401
Operating Income 86 91 132 88
Net Income 33 38 79 35
Earnings Available for
Common Stock 21 27 68 24
1993
Operating Revenues $ 421 $417 $ 507 $ 406
Operating Income (Loss) 82 85 89 (32)
Net Income (Loss) 33 30 39 (689)
Earnings (Loss)
Available for Common
Stock 23 19 27 (701)
</TABLE>
55
<PAGE> 62
Earnings for the quarter ended September 30, 1993 were decreased by $46 million
as a result of the recording of $71 million of VTP pension-related benefits.
Earnings for the quarter ended December 31, 1993 were decreased as a result of
year-end adjustments for the $351 million write-off of Perry Unit 2 (see Note
4(b)), the $636 million write-off of the phase-in deferrals (see Note 7) and $38
million of other charges. These adjustments decreased quarterly earnings by $716
million.
(15) PENDING MERGER OF TOLEDO EDISON INTO THE COMPANY
In March 1994, Centerior Energy announced a plan to merge Toledo Edison into the
Company. Since the Company and Toledo Edison affiliated in 1986, efforts have
been made to consolidate operations and administration as much as possible to
achieve maximum cost savings. Various aspects of the merger are subject to the
approval of the FERC and other regulatory authorities. The PUCO and the
Pennsylvania Public Utility Commission have approved the merger. In addition,
the merger must be approved by share owners of Toledo Edison's preferred stock.
Share owners of the Company's preferred stock must approve the authorization of
additional shares of preferred stock. When the merger becomes effective, share
owners of Toledo Edison's preferred stock will exchange their shares for
preferred stock shares of the Company having substantially the same terms. Debt
holders of the merging companies will become debt holders of the Company. The
merging companies plan to seek preferred stock share owner approval in mid-1995.
The merger is expected to be effective in 1995.
For the merging companies, the combined pro forma operating revenues were $2.422
billion, $2.475 billion and $2.439 billion and the combined pro forma net income
(loss) was $268 million, $(876) million and $276 million for the years 1994,
1993 and 1992, respectively. The pro forma data is based on accounting for the
merger on a method similar to a pooling of interests. The pro forma data is not
necessarily indicative of the results of operations which would have been
reported had the merger been in effect during those years or which may be
reported in the future. The pro forma data should be read in conjunction with
the audited financial statements of both the Company and Toledo Edison.
Report of Independent
Public Accountants
To the Share Owners and
Board of Directors of
The Cleveland Electric Illuminating Company:
We have audited the accompanying consolidated balance sheet and consolidated
statement of preferred stock of The Cleveland Electric Illuminating Company (a
wholly owned subsidiary of Centerior Energy Corporation) and subsidiaries as of
December 31, 1994 and 1993, and the related consolidated statements of income,
retained earnings and cash flows for each of the three years in the period ended
December 31, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Cleveland Electric
Illuminating Company and subsidiaries as of December 31, 1994 and 1993, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed further in Note 9, a change was made in the method of accounting
for postretirement benefits other than pensions in 1993.
Arthur Andersen LLP
Cleveland, Ohio
February 17, 1995
56
<PAGE> 63
Management's Financial Analysis
OUTLOOK
STRATEGIC PLAN
We made significant strides in achieving the objectives of the comprehensive
strategic action plan announced in January 1994. Centerior Energy Corporation
(Centerior Energy), along with The Toledo Edison Company (Company) and The
Cleveland Electric Illuminating Company (Cleveland Electric), created the
strategic plan to strengthen their financial and competitive position through
the year 2001. 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. The objectives are to achieve
profitable revenue growth, become an industry leader in customer satisfaction,
build a winning employee team, attain increasingly competitive power supply
costs and maximize share owner return on Centerior Energy common stock. To
achieve these objectives, we will continue to control expenditures and reduce
our outstanding debt and preferred stock. In addition, we will increase revenues
by finding new uses for existing assets and resources, implementing new
marketing programs and restructuring rates when appropriate. We will also
improve the operating performance of our generating plants and take other
appropriate actions.
During 1994, we made progress toward most of our long-term objectives. The
Company and Cleveland Electric initiated a marketing plan designed to increase
total retail revenues (exclusive of fuel cost recovery revenues and weather
influences) by 2-3% annually through 2001. Our new customer service activities
are intended to raise our customer satisfaction rating. Our employees achieved
enough of their established objectives for the year to receive a $500 per
eligible employee incentive compensation award. The work undertaken during
refueling outages at the Davis-Besse Nuclear Power Station (Davis-Besse) and
Perry Nuclear Power Plant Unit 1 (Perry Unit 1) as well as the outage work at
our fossil-fueled plants should help us achieve our long-term objective of
reducing variable power costs to a more competitive level. Strong cash flow
continued in 1994 and the Company's fixed-income obligations were reduced by $66
million. Also, the Company's total operation and maintenance expenses declined
$22 million, exclusive of one-time charges in 1993.
We are taking aggressive steps to increase revenues through our enhanced
marketing plan and to control costs. The full impact of these efforts will take
time. In the meantime, the Company and Cleveland Electric must raise revenues by
restructuring rates. Accordingly, the Company and Cleveland Electric are
preparing to file a request with The Public Utilities Commission of Ohio (PUCO)
to be effective in 1996. Meaningful cost control and marketing strategies will
mitigate the need for additional rate increases and help us meet competition.
COMPETITION
We are implementing strategies designed to create and enhance our competitive
advantages and to overcome the competitive disadvantages that we face due to
regulatory and tax constraints and our high retail cost structure.
Currently our most pressing competition comes from municipal electric systems in
our service area. Our rates are generally higher than those of municipal systems
due largely to their exemption from taxation, the lower cost financing available
to them, the continued availability to them of lower cost power through
short-term power purchases and their access to cheaper governmental power. We
are seeking to address the tax disparity through the legislative process. In
1994, the Ohio Governor's Tax Commission recommended the replacement of the
gross receipts and personal property taxes currently levied only on
investor-owned utilities and collected through rates with a different tax
collected from customers of all electric utilities, including municipal systems.
Investor-owned utilities would reduce rates upon repeal of the existing taxes.
We are now working to submit this proposal to the Ohio legislature.
We face the threat that municipalities in our service area could establish new
systems and continue expanding existing systems. We are responding with
aggressive marketing programs and by emphasizing the value of our service and
the risks of a municipal system: substantial, long-term debt; no guarantee of
low-cost wholesale electricity; the difficulty of forecasting costs; and the
uncertainty of market share as a result of our aggressive competition.
Generally, these municipalities have determined that developing a system is not
feasible or have agreed with us not to pursue development of a system at this
time. Although some communities continue to be interested in municipalization,
we believe that we offer the best value and most reliable source of electric
service in our territory.
The Energy Policy Act of 1992 will increase competition in the electric utility
industry by allowing broader access to a utility's transmission system. It
should not significantly increase the competitive threat to us since we have
been required to wheel electricity to municipal systems in our service area
since 1977 under operating licenses for our nuclear generating units. Further,
the government could eventually require utilities to deliver power from other
utilities or generation sources to their retail customers. To combat this
threat, we are offering incentives such as energy-efficiency improvements and
reductions in demand charges for increased electricity usage to our industrial
and commercial customers in return for long-term commitments. Most of our large
industrial and
57
<PAGE> 64
commercial customers have entered into sole-supplier contracts with us. More
than 80% of our industrial revenues under contract will not be up for renewal
until 1997 or later. As these contracts expire, we expect to renegotiate them
and retain the customers.
RATE MATTERS
Under the Rate Stabilization Program discussed in Note 7, we agreed to freeze
base rates until 1996 and limit rate increases through 1998. In exchange, we are
permitted to defer through 1995 and subsequently recover certain costs not
currently recovered in rates and to accelerate the amortization of certain
benefits. Amortization and recovery of the deferrals are expected to begin in
1996 with future rate recognition and will continue over the average life of the
related assets, or between 17 and 30 years. The continued use of these
regulatory accounting measures in 1995 will be dependent upon our continuing
assessment and conclusion that there will be probable recovery of such deferrals
in future rates. Our analysis leading to certain year-end 1993 financial actions
and the strategic plan also included an evaluation of our regulatory accounting
measures. See Regulatory Accounting below and Note 7. We decided that, once the
deferral of expenses and acceleration of benefits under the Rate Stabilization
Program are completed in 1995, we should no longer plan to use these measures to
the extent we have in the past.
REGULATORY ACCOUNTING
As described in Notes 1(a) and 7, the Company complies with the provisions of
Statement of Financial Accounting Standards (SFAS) 71. We continually monitor
changes in market and regulatory conditions and consider the effects of such
changes in assessing the continuing applicability of SFAS 71. Criteria that
could give rise to discontinuation of the application of SFAS 71 include: (1)
increasing competition which significantly restricts the Company's ability to
establish rates to recover operating costs, return requirements and the
amortization of regulatory assets and (2) a significant change in the manner in
which rates are set by the PUCO from cost-based regulations to some other form
of regulations. In the event we determine that the Company no longer meets the
criteria for following SFAS 71, the Company would be required to record a
before-tax charge to write off the regulatory assets shown in Note 7. In
addition, we would be required to evaluate whether the changes in the
competitive and regulatory environment which led to discontinuing the
application of SFAS 71 would also result in an impairment of the net book value
of the Company's property, plant and equipment.
The Company's write-off in 1993 of the phase-in deferred operating expenses and
carrying charges (phase-in deferrals) discussed in Note 7 resulted from our
conclusion that projected revenues for the 1994-1998 period would not provide
for recovery of such deferrals as scheduled by the PUCO order. This short time
frame for recovery of the phase-in deferrals is a requirement under the
accounting standard for phase-in plans of regulated enterprises, SFAS 92. The
remaining recovery periods for all remaining regulatory assets are between 17
and 34 years. We believe the Company's rates will provide for recovery of these
assets over the relevant periods and SFAS 71 continues to apply.
NUCLEAR OPERATIONS
The Company has interests in three nuclear generating units -- Davis-Besse,
Perry Unit 1 and Beaver Valley Power Station Unit 2 (Beaver Valley Unit
2) -- and operates the first one. Cleveland Electric operates Perry Unit 1.
Davis-Besse and Beaver Valley Unit 2 have been operating extremely well, with
each unit having a three-year availability average at year-end 1994 that
exceeded the three-year industry average of 80% for similar reactors. However,
the three-year availability average of Perry Unit 1 was below the three-year
industry availability average for that reactor type.
In 1994, Davis-Besse had an availability factor of 88%. Further, Davis-Besse
completed the shortest refueling and maintenance outage in its history in 1994,
returning to service just 46 days after shutting down. Cleveland Electric is in
the process of upgrading Perry Unit 1 to the same level. For seven months in
1994, Perry Unit 1 was out of service for its fourth refueling and maintenance
outage. Work was also performed in connection with the comprehensive course of
action developed in 1993 to improve the operating performance of Perry Unit 1.
Work in connection with that course of action is ongoing.
We externally fund the estimated costs for the future decommissioning of our
nuclear units. In 1993 and 1994, we increased our decommissioning expense
accruals because of revisions in our cost estimates. See Note 1(e).
Our nuclear units may be impacted by activities or events beyond our control.
Operating nuclear units have experienced unplanned outages or extensions of
scheduled outages because of equipment problems or new regulatory requirements.
A major accident at a nuclear facility anywhere in the world could cause the
Nuclear Regulatory Commission to limit or prohibit the operation or licensing of
any domestic nuclear unit. If one of our nuclear units is taken out of service
for an extended period for any reason, including an accident at such unit or any
other nuclear facility, we cannot predict whether regulatory authorities would
impose unfavorable rate treatment. Such treatment could include taking our
affected unit out of rate base, thereby not permitting us to recover our
investment in and earn a return on it, or disallowing certain construction or
maintenance costs. An extended
58
<PAGE> 65
outage coupled with unfavorable rate treatment could have a material adverse
effect on our financial condition and results of operations.
HAZARDOUS WASTE DISPOSAL SITES
The Comprehensive Environmental Response, Compensation and Liability Act of 1980
as amended (Superfund) established programs addressing the cleanup of hazardous
waste disposal sites, emergency preparedness and other issues. The Company 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 amounts involved,
are often unsubstantiated and subject to dispute. Superfund provides that all
"potentially responsible parties" (PRPs) for a particular site can be held
liable on a joint and several basis. If the Company were held liable for 100% of
the cleanup costs of all of the sites referred to above, the cost could be as
high as $150 million. However, we believe that the actual cleanup costs will be
substantially lower than $150 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 $5 million at December 31, 1994 based on estimates of the costs of
cleanup and its proportionate responsibility for such costs. We believe that the
ultimate outcome of these matters will not have a material adverse effect on our
financial condition or results of operations.
COMMON STOCK DIVIDENDS
In recent years, the Company has retained all of its earnings available for
common stock. The Company has not paid a common stock dividend to Centerior
Energy since February 1991. The Company is currently prohibited from paying a
common stock dividend by a provision in its mortgage (see Note 11(b)). The
Company does not expect to pay any common stock dividends prior to its merger
into Cleveland Electric, as discussed below.
MERGER OF THE COMPANY INTO CLEVELAND ELECTRIC
We continue to seek the necessary regulatory approvals to complete the merger of
the Company into Cleveland Electric which was announced in 1994. The Company and
Cleveland Electric plan to seek preferred stock share owner approval in
mid-1995. The merger is expected to be effective in 1995. See Note 15.
INFLATION
Although the rate of inflation has eased in recent years, we are still affected
by even modest inflation which causes increases in the unit cost of labor,
materials and services.
CAPITAL RESOURCES AND LIQUIDITY
1992-1994 CASH REQUIREMENTS
We need cash for normal corporate operations, the mandatory retirement of
securities and constructing and modifying facilities. Construction is needed to
meet anticipated demand for electric service, comply with government regulations
and protect the environment. Over the three-year period 1992-1994, construction
and mandatory retirement needs totaled approximately $370 million. In addition,
we exercised options to redeem approximately $460 million of our securities.
We raised $603 million through security issues and term bank loans during the
1992-1994 period. The Company also utilized short-term borrowings to help meet
its cash needs. Although write-offs of the Company's Perry Nuclear Power Plant
Unit 2 (Perry Unit 2) investment and phase-in deferrals in 1993 negatively
affected earnings, they did not adversely affect cash flow. See Notes 4(b) and
7.
1995 AND BEYOND CASH REQUIREMENTS
Estimated cash requirements for 1995-1999 for the Company are $288 million for
construction and $378 million for the mandatory redemption of debt and preferred
stock. The Company expects to meet nearly all of its 1995 and 1996 cash
requirements of approximately $145 million and $154 million, respectively,
through internal cash generation and current cash resources. The Company expects
to meet nearly all of its 1997-1999 requirements through internal cash
generation and current cash resources. If economical, additional securities may
be redeemed under optional redemption provisions. We expect that the Company's
continued strong cash flow will reduce borrowing requirements and outstanding
debt and preferred stock during this period.
Cash expenditures to comply with the Clean Air Act Amendments of 1990 (Clean Air
Act) are estimated to be approximately $22 million over the 1995-1999 period.
See Note 4(a).
LIQUIDITY
Additional first mortgage bonds may be issued by the Company under its mortgage
on the basis of property additions, cash or refundable first mortgage bonds. If
the applicable interest coverage test is met, the Company may issue first
mortgage bonds on the basis of property additions and, under certain
circumstances, refundable
59
<PAGE> 66
bonds. At December 31, 1994, the Company would have been permitted to issue
approximately $525 million of additional first mortgage bonds.
The Company also is able to raise funds through the sale of subordinated debt
and preferred and preference stock. Under its articles of incorporation, the
Company cannot issue preferred stock unless certain earnings coverage
requirements are met. At December 31, 1994, the Company would have been
permitted to issue approximately $28 million of additional preferred stock at an
assumed dividend rate of 12%. There are no restrictions on the Company's ability
to issue preference stock.
In 1995, the Company plans to raise funds through the collateralization of
accounts receivable. In addition, the Company expects to issue first mortgage
bonds as collateral security for the sale by a public authority of tax-exempt
bonds.
The Company is a party to a $205 million revolving credit facility which runs
through mid-1996. See Note 12. The Company had $88 million of cash and temporary
cash investments at the end of 1994. The Company is unable to issue commercial
paper because of its below investment grade commercial paper ratings.
The foregoing financing resources are expected to be sufficient for the
Company's needs over the next several years. However, the availability and cost
of capital to meet the Company's external financing needs also depend upon such
factors as financial market conditions and its credit ratings. Current credit
ratings for the Company are as follows:
<TABLE>
<CAPTION>
Standard Moody's
& Poor's Investors
Corporation Service, Inc.
----------- -------------
<S> <C> <C>
First mortgage bonds BB Ba2
Unsecured notes B+ B1
Preferred stock B b2
</TABLE>
RESULTS OF OPERATIONS
1994 VS. 1993
Factors contributing to the 0.7% decrease in 1994 operating revenues are as
follows:
<TABLE>
<CAPTION>
Millions
Increase (Decrease) in Operating Revenues of Dollars
- ------------------------------------------------ -----------
<S> <C>
KWH Sales Volume and Mix $ 8
Wholesale Revenues (5)
Fuel Cost Recovery Revenues (9)
---
Total $(6)
---
</TABLE>
The Company experienced good retail kilowatt-hour sales growth in the industrial
and commercial categories in 1994; the sales growth for the residential category
was lessened by weather conditions, particularly during the summer. The revenue
decrease resulted from milder weather conditions in 1994 and both lower
wholesale and fuel cost recovery revenues. Weather reduced base rate revenues
approximately $7 million from the 1993 amount. Total sales increased 7.8%.
Industrial sales increased 8.6% on the strength of increased sales to large
automotive manufacturers and the broad-based, smaller industrial customer group.
This growth substantiated an economic resurgence in Northwestern Ohio.
Residential and commercial sales increased 0.8% and 2.3%, respectively. Other
sales increased 16% because of increased sales to wholesale customers, although
the softer wholesale market conditions in 1994 resulted in lower wholesale
revenues. Lower 1994 fuel cost recovery revenues resulted from favorable changes
in the fuel cost factors. The weighted average of these factors dropped by 6%.
For 1994, operating revenues were 26% residential, 21% commercial, 29%
industrial and 24% 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 $.11, $.11 and $.06,
respectively.
Operating expenses were 12% lower in 1994. Operation and maintenance expenses
for 1993 included $88 million of net benefit expenses related to an early
retirement program, called the Voluntary Transition Program (VTP), and other
charges totaling $19 million. The VTP benefit expenses in 1993 consisted of $75
million of costs for the Company plus $13 million for the Company's pro rata
share of the costs for its affiliate, Centerior Service Company (Service
Company). Two other significant reasons for lower operation and maintenance
expenses in 1994 were a smaller work force and ongoing cost reduction measures.
Lower purchased power costs helped reduce fuel and purchased power expenses in
1994 despite an increase in the amount of power purchased. More nuclear
generation and less coal-fired generation also accounted for a part of the lower
fuel and purchased power expenses. Depreciation and amortization expenses
increased primarily because of higher nuclear plant decommissioning expenses as
discussed in Note 1(e). Deferred operating expenses were greater primarily
because of the write-off of $55 million of phase-in deferred operating expenses
in 1993 as discussed in Note 7. The 1993 deferrals also included $32 million of
postretirement benefit curtailment cost deferrals related to the VTP. See Note
9(b). Federal income taxes increased as a result of higher pretax operating
income.
As discussed in Note 4(b), $232 million of our Perry Unit 2 investment was
written off in 1993. Also, as discussed in Note 7, phase-in deferred carrying
charges of $186 million were written off in 1993. The change in the federal
income tax credit amounts for nonoperating income was attributable to these
write-offs.
60
<PAGE> 67
1993 VS. 1992
Factors contributing to the 3.1% increase in 1993 operating revenues are as
follows:
<TABLE>
<CAPTION>
Millions
Increase (Decrease) in Operating Revenues of Dollars
- ------------------------------------------------ -----------
<S> <C>
KWH Sales Volume and Mix $ 38
Wholesale Sales (11)
Base Rates and Miscellaneous (3)
Fuel Cost Recovery Revenues 2
-----
Total $ 26
-----
</TABLE>
The revenue increase resulted primarily from the different weather conditions
and the changes in the composition of the sales mix among customer categories.
Weather accounted for approximately $15 million of higher 1993 base rate
revenues. Hot summer weather in 1993 boosted residential and commercial
kilowatt-hour sales. In contrast, the 1992 summer was the coolest in 56 years
for Northwestern Ohio. Residential and commercial sales also increased as a
result of colder late-winter temperatures in 1993 which increased electric
heating-related demand. Residential and commercial sales increased 5.1% and
3.2%, respectively, in 1993. Industrial sales increased 6% as a result of
increased sales to large automotive manufacturers, petroleum refiners and the
broad-based, smaller industrial customer group. Other sales decreased 18%
because of fewer sales to wholesale customers. Generating plant outages and
retail customer demand limited power availability for bulk power transactions.
As a result, total sales decreased 2.2% in 1993. Base rates and miscellaneous
revenues decreased in 1993 primarily from lower revenues under contracts having
reduced rates with certain large customers and a declining rate structure tied
to usage. The contracts have been negotiated to meet competition and encourage
economic growth. The increase in 1993 fuel cost recovery revenues resulted from
changes in the fuel cost factors. The weighted average of these factors
increased about 2%.
For 1993, operating revenues were 26% residential, 21% commercial, 28%
industrial and 25% other and kilowatt-hour sales were 20% residential, 17%
commercial, 37% industrial and 26% other. The average prices per kilowatt-hour
for residential, commercial and industrial customers were $.11, $.11 and $.06,
respectively. The changes from 1992 were not significant.
Operating expenses increased 13% in 1993. The increase in total operation and
maintenance expenses resulted from the $88 million of net benefit expenses
related to the VTP, other charges totaling $19 million and a slight increase in
other operation and maintenance expenses. Deferred operating expenses decreased
because of the write-off of the phase-in deferred operating expenses in 1993.
Federal income taxes decreased as a result of lower pretax operating income.
As mentioned above, $232 million of our Perry Unit 2 investment was written off
in 1993. Credits for carrying charges recorded in nonoperating income decreased
because of the write-off of the phase-in deferred carrying charges in 1993. The
federal income tax credit for nonoperating income in 1993 resulted from the
write-offs.
61
<PAGE> 68
Income Statement The Toledo Edison Company
<TABLE>
<CAPTION>
For the years ended
December 31,
-----------------------
1994 1993 1992
---- ----- ----
(millions of dollars)
<S> <C> <C> <C>
OPERATING REVENUES (1) $865 $ 871 $845
---- ----- ----
OPERATING EXPENSES
Fuel and purchased power 167 173 169
Other operation and maintenance 229 245 236
Generation facilities rental expense, net 104 104 106
Early retirement program expenses and other -- 107 --
---- ----- ----
Total operation and maintenance 500 629 511
Depreciation and amortization 83 76 77
Taxes, other than federal income taxes 90 91 91
Deferred operating expenses, net (21) (4) (17)
Federal income taxes (credit) 33 (10) 33
---- ----- ----
685 782 695
---- ----- ----
OPERATING INCOME 180 89 150
---- ----- ----
NONOPERATING INCOME (LOSS)
Allowance for equity funds used during construction 1 1 1
Other income and deductions, net 3 -- 1
Write-off of Perry Unit 2 -- (232) --
Deferred carrying charges, net 15 (161) 41
Federal income taxes -- credit (expense) (2) 129 (1)
---- ----- ----
17 (263) 42
---- ----- ----
INCOME (LOSS) BEFORE INTEREST CHARGES 197 (174) 192
---- ----- ----
INTEREST CHARGES
Debt interest 116 116 122
Allowance for borrowed funds used during construction (1) (1) (1)
---- ----- ----
115 115 121
---- ----- ----
NET INCOME (LOSS) 82 (289) 71
PREFERRED DIVIDEND REQUIREMENTS 20 23 24
---- ----- ----
EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK $ 62 $(312) $ 47
---- ----- ----
</TABLE>
- ---------------
(1) Includes revenues from all bulk power sales to Cleveland Electric of $111
million, $120 million and $130 million in 1994, 1993 and 1992, respectively.
Retained Earnings
<TABLE>
<CAPTION>
For the years ended
December 31,
------------------------
1994 1993 1992
----- ----- ----
(millions of dollars)
<S> <C> <C> <C>
RETAINED EARNINGS (DEFICIT) AT BEGINNING OF YEAR $(175) $ 137 $ 90
----- ----- ----
ADDITIONS
Net income (loss) 82 (289) 71
DEDUCTIONS
Preferred stock dividends declared (20) (23) (24)
----- ----- ----
Net Increase (Decrease) 62 (312) 47
----- ----- ----
RETAINED EARNINGS (DEFICIT) AT END OF YEAR $(113) $(175) $137
----- ----- ----
</TABLE>
The accompanying notes are an integral part of these statements.
62
<PAGE> 69
Cash Flows The Toledo Edison Company
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------
1994 1993 1992
----- ----- -----
(millions of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES (1)
Net Income (Loss) $ 82 $(289) $ 71
----- ----- -----
Adjustments to Reconcile Net Income (Loss) to Cash from Operating
Activities:
Depreciation and amortization 83 76 77
Deferred federal income taxes 46 (160) 28
Investment tax credits, net -- -- (5)
Unbilled revenues 3 (4) 1
Deferred fuel 3 -- (4)
Deferred carrying charges, net (15) 161 (41)
Leased nuclear fuel amortization 44 38 56
Deferred operating expenses, net (21) (4) (17)
Allowance for equity funds used during construction (1) (1) (1)
Noncash early retirement program expenses, net -- 83 --
Write-off of Perry Unit 2 -- 232 --
Changes in amounts due from customers and others, net 1 (3) --
Changes in inventories (2) 10 (9)
Changes in accounts payable (15) 16 (8)
Changes in working capital affecting operations (16) 21 7
Other noncash items 10 14 13
----- ----- -----
Total Adjustments 120 479 97
----- ----- -----
Net Cash from Operating Activities 202 190 168
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES (2)
Bank loans, commercial paper and other short-term debt -- (40) 40
Notes payable to affiliates -- -- (30)
First mortgage bond issues 31 20 276
Secured medium-term note issues -- 93 48
Debenture issue -- -- 135
Maturities, redemptions and sinking funds (98) (89) (531)
Nuclear fuel lease obligations (49) (47) (52)
Dividends paid (20) (23) (24)
Premiums, discounts and expenses -- (1) (8)
----- ----- -----
Net Cash from Financing Activities (136) (87) (146)
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES (2)
Cash applied to construction (41) (42) (48)
Interest capitalized as allowance for borrowed funds used during
construction (1) (1) (1)
Loans to affiliates -- -- 12
Sale and leaseback restructuring fees -- -- (43)
Contributions to nuclear plant decommissioning trusts (12) (4) (4)
Other cash received (applied) (6) 10 (1)
----- ----- -----
Net Cash from Investing Activities (60) (37) (85)
----- ----- -----
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 6 66 (63)
----- ----- -----
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF YEAR 82 16 79
----- ----- -----
CASH AND TEMPORARY CASH INVESTMENTS AT END OF YEAR $ 88 $ 82 $ 16
----- ----- -----
</TABLE>
- ---------------
(1) Interest paid (net of amounts capitalized) was $94 million, $92 million and
$95 million in 1994, 1993 and 1992, respectively. Income taxes paid were $5
million, $7 million and $3 million in 1994, 1993 and 1992, respectively.
(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.
63
<PAGE> 70
Balance Sheet
<TABLE>
<CAPTION>
December 31,
----------------
1994 1993
------ ------
(millions of
dollars)
<S> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility plant in service $2,899 $2,837
Less: accumulated depreciation and amortization 892 788
------ ------
2,007 2,049
Construction work in progress 30 40
------ ------
2,037 2,089
Nuclear fuel, net of amortization 119 142
Other property, less accumulated depreciation 6 --
------ ------
2,162 2,231
------ ------
CURRENT ASSETS
Cash and temporary cash investments 88 82
Amounts due from customers and others, net 62 63
Amounts due from affiliates 19 16
Unbilled revenues 22 25
Materials and supplies, at average cost 45 43
Fossil fuel inventory, at average cost 12 12
Taxes applicable to succeeding years 72 71
Other 2 2
------ ------
322 314
------ ------
DEFERRED CHARGES AND OTHER ASSETS
Amounts due from customers for future federal income taxes 405 382
Unamortized loss from Beaver Valley Unit 2 sale 101 105
Unamortized loss on reacquired debt 28 32
Carrying charges and operating expenses 379 343
Nuclear plant decommissioning trusts 38 26
Other 67 77
------ ------
1,018 965
------ ------
Total Assets $3,502 $3,510
------ ------
</TABLE>
The accompanying notes are an integral part of this statement.
64
<PAGE> 71
The Toledo Edison Company
<TABLE>
<CAPTION>
December 31,
-----------------
1994 1993
------ ------
(millions of
dollars)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common shares, $5 par value: 60 million authorized;
39.1 million outstanding in 1994 and 1993 $ 196 $ 196
Premium on capital stock 481 481
Other paid-in capital 121 121
Retained earnings (deficit) (113) (175)
------ ------
Common stock equity 685 623
Preferred stock
With mandatory redemption provisions 7 28
Without mandatory redemption provisions 210 210
Long-term debt 1,154 1,225
------ ------
2,056 2,086
------ ------
CURRENT LIABILITIES
Current portion of long-term debt and preferred stock 83 57
Current portion of nuclear fuel lease obligations 36 49
Accounts payable 48 63
Accounts payable to affiliates 31 27
Accrued taxes 75 90
Accrued interest 27 27
Other 16 16
------ ------
316 329
------ ------
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized investment tax credits 87 94
Accumulated deferred federal income taxes 541 471
Unamortized gain from Bruce Mansfield Plant sale 198 208
Accumulated deferred rents for Bruce Mansfield Plant and Beaver Valley Unit 2 54 50
Nuclear fuel lease obligations 87 103
Retirement benefits 103 98
Other 60 71
------ ------
1,130 1,095
------ ------
Total Capitalization and Liabilities $3,502 $3,510
------ ------
</TABLE>
65
<PAGE> 72
Statement of Preferred Stock The Toledo Edison Company
<TABLE>
<CAPTION>
Current
Call
Price December 31,
1994 Shares Per -------------
Outstanding Share 1994 1993
----------- -------- ---- ----
(millions of
dollars)
<S> <C> <C> <C> <C> <C>
$100 par value, 3,000,000 preferred shares authorized and
$25 par value, 12,000,000 preferred shares authorized
Subject to mandatory redemption:
$100
par $9.375 83,500 $101.98 $ 8 $ 10
25
par 2.81 400,000 25.62 10 30
---- ----
18 40
Less: Current maturities 11 12
---- ----
TOTAL PREFERRED STOCK, WITH MANDATORY REDEMPTION PROVISIONS $ 7 $ 28
---- ----
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 25.75 30 30
Series B Adjustable 1,200,000 25.75 30 30
---- ----
TOTAL PREFERRED STOCK, WITHOUT MANDATORY REDEMPTION PROVISIONS $210 $210
---- ----
</TABLE>
The accompanying notes are an integral part of this statement.
66
<PAGE> 73
Notes to the Financial Statements
(1) SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(A) GENERAL
The Company is an electric utility and a wholly owned subsidiary of Centerior
Energy. The Company follows the Uniform System of Accounts prescribed by the
Federal Energy Regulatory Commission (FERC) and adopted by the PUCO.
Rate-regulated utilities are subject to SFAS 71 which governs accounting for the
effects of certain types of rate regulation. Pursuant to SFAS 71, certain
incurred costs are deferred for recovery in future rates. See Note 7.
The Company is a member of the Central Area Power Coordination Group (CAPCO).
Other members are Cleveland Electric, Duquesne Light Company, Ohio Edison
Company and its wholly owned subsidiary, Pennsylvania Power Company. The members
have constructed and operate generation and transmission facilities for their
use.
(B) RELATED PARTY TRANSACTIONS
Operating revenues, operating expenses and interest charges include those
amounts for transactions with affiliated companies in the ordinary course of
business operations.
The Company's transactions with 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.
The Service Company provides management, financial, administrative, engineering,
legal and other services at cost to the Company and other affiliated companies.
The Service Company billed the Company $59 million, $71 million and $60 million
in 1994, 1993 and 1992, respectively, for such services.
(C) REVENUES
Customers are billed on a monthly cycle basis for their energy consumption based
on rate schedules or contracts authorized by the PUCO 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.
(D) FUEL EXPENSE
The cost of fossil fuel is charged to fuel expense based on inventory usage. The
cost of nuclear fuel, including an interest component, is charged to fuel
expense based on the rate of consumption. Estimated future nuclear fuel disposal
costs are being recovered through base rates.
The Company defers the differences between actual fuel costs and estimated fuel
costs currently being recovered from customers through the fuel factor. This
matches fuel expenses with fuel-related revenues.
Owners of nuclear generating plants are assessed by the federal government for
the cost of decontamination and decommissioning of nuclear enrichment facilities
operated by the United States Department of Energy. The assessments are based
upon the amount of enrichment services used in prior years and cannot be imposed
for more than 15 years (to 2007). The Company has accrued a liability for its
share of the total assessments. These costs have been recorded in a deferred
charge account since the PUCO is allowing the Company to recover the assessments
through its fuel cost factors.
(E) DEPRECIATION AND AMORTIZATION
The cost of property, plant and equipment is depreciated over their estimated
useful lives on a straight-line basis. The annual straight-line depreciation
provision for nonnuclear property expressed as a percent of average depreciable
utility plant in service was 3.5% in 1994 and 3.6% in both 1993 and 1992. The
annual straight-line depreciation rate for nuclear property is 2.5%.
The Company accrues the estimated costs of decommissioning its three nuclear
generating units. The accruals are required to be funded in an external trust.
The PUCO requires that the expense and payments to the external trusts be
determined on a levelized basis by dividing the unrecovered decommissioning
costs in current dollars by the remaining years in the licensing period of each
unit. This methodology requires that the net earnings on the trusts be
reinvested therein with the intent of allowing net earnings to offset inflation.
The PUCO requires that the estimated costs of decommissioning and the funding
level be reviewed at least every five years.
In 1994, the Company increased its annual decommissioning expense accruals to
$11 million from the $4 million level in 1992. The accruals are reflected in
current rates. The increased accruals were derived from recently updated,
site-specific studies for each of the units. The revised estimates reflect the
DECON method of decommissioning (prompt decontamination), and the locations and
cost characteristics specific to the units, and include costs associated with
decontamination, dismantlement and site restoration.
67
<PAGE> 74
The revised estimates for the units in 1993 and 1992 dollars and in dollars at
the time of license expiration, assuming a 4% annual inflation rate, are as
follows:
<TABLE>
<CAPTION>
License
Expiration Future
Generating Unit Year Amount Amount
- ------------------------------- ---------- ------ ------
(millions of
dollars)
<S> <C> <C> <C>
Davis-Besse 2017 $168(1) $419
Perry Unit 1 2026 100(1) 354
Beaver Valley Unit 2 2027 51(2) 190
------ ------
Total $319 $963
------ ------
</TABLE>
- ---------------
(1) Dollar amounts in 1993 dollars.
(2) Dollar amounts in 1992 dollars.
The updated estimates reflect substantial increases from the prior
PUCO-recognized aggregate estimates of $115 million in 1987 and 1986 dollars.
The classification, Accumulated Depreciation and Amortization, in the Balance
Sheet at December 31, 1994 includes $44 million of decommissioning costs
previously expensed and the earnings on the external trust funding. This amount
exceeds the Balance Sheet amount of the external Nuclear Plant Decommissioning
Trusts because the reserve began prior to the external trust funding. The trust
earnings are recorded as an increase to the trust assets and the related
component of the decommissioning reserve (included in Accumulated Depreciation
and Amortization).
The staff of the Securities and Exchange Commission has questioned certain of
the current accounting practices of the electric utility industry, including
those of the Company, regarding the recognition, measurement and classification
of decommissioning costs for nuclear generating stations in the financial
statements. In response to these questions, the Financial Accounting Standards
Board is reviewing the accounting for removal costs, including decommissioning.
If such current accounting practices are changed, the annual provision for
decommissioning could increase; the estimated cost for decommissioning could be
recorded as a liability rather than as accumulated depreciation; and trust fund
income from the external decommissioning trusts could be reported as investment
income rather than as a reduction to decommissioning expense.
(F) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at original cost less amounts ordered
by the PUCO to be written off. Construction costs include related payroll taxes,
retirement benefits, fringe benefits, management and general overheads and
allowance for funds used during construction (AFUDC). AFUDC represents the
estimated composite debt and equity cost of funds used to finance construction.
This noncash allowance is credited to income. The AFUDC rate was 9.87% in 1994,
10.22% in 1993 and 10.96% in 1992.
Maintenance and repairs for plant and equipment are charged to expense as
incurred. The cost of replacing plant and equipment is charged to the utility
plant accounts. The cost of property retired plus removal costs, after deducting
any salvage value, is charged to the accumulated provision for depreciation.
(G) DEFERRED GAIN 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 leases. See Note 7. These
amortizations and the lease expense amounts are reported in the Income Statement
as Generation Facilities Rental Expense, Net.
(H) INTEREST CHARGES
Debt Interest reported in the Income Statement does not include interest on
obligations for nuclear fuel under construction. That interest is capitalized.
See Note 6.
Losses and gains realized upon the reacquisition or redemption of long-term debt
are deferred, consistent with the regulatory rate treatment. See Note 7. Such
losses and gains are either amortized over the remainder of the original life of
the debt issue retired or amortized over the life of the new debt issue when the
proceeds of a new issue are used for the debt redemption. The amortizations are
included in debt interest expense.
(I) FEDERAL INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with SFAS 109. See Note 8. This method requires that deferred taxes
be recorded for all temporary differences between the book and tax bases of
assets and liabilities. The majority of these temporary differences are
attributable to property-related basis differences. Included in these basis
differences is the equity component of AFUDC, which will increase future tax
expense when it is recovered through rates. Since this component is not
recognized for tax purposes, the Company must record a liability for its tax
obligation. The PUCO permits recovery of such taxes from customers when they
become payable. Therefore, the net amount due from customers through rates has
been recorded as a deferred charge and will be recovered over the lives of the
related assets. See Note 7.
Investment tax credits are deferred and amortized over the lives of the
applicable property as a reduction of
68
<PAGE> 75
depreciation expense. See Note 7 for a discussion of the amortization of certain
unrestricted excess deferred taxes and unrestricted investment tax credits under
the Rate Stabilization Program.
(2) UTILITY PLANT SALE AND
LEASEBACK TRANSACTIONS
The Company and 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, all
for terms of about 29 1/2 years. These leases are the result of sale and
leaseback transactions completed in 1987.
Under these leases, the Company and 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 the
end of the leases for the fair market value at that time or renew the leases.
Additional lease provisions provide other purchase options along with conditions
for mandatory termination of the leases (and possible repurchase of the
leasehold interests) for events of default. These events include noncompliance
with any of several financial covenants discussed in Note 11(d).
As co-lessee with 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.
In April 1992, nearly all of the outstanding Secured Lease Obligation Bonds
(SLOBs) issued by a special purpose corporation in connection with financing the
sale and leaseback of Beaver Valley Unit 2 were refinanced through a tender
offer and the sale of new bonds having a lower interest rate. As part of the
refinancing transaction, the Company paid $43 million as supplemental rent to
fund transaction expenses and part of the tender premium. This amount has been
deferred and is being amortized over the remaining lease term. The refinancing
transaction reduced the annual rental expense for the Beaver Valley Unit 2 lease
by $9 million.
Future minimum lease payments under the operating leases at December 31, 1994
are summarized as follows:
<TABLE>
<CAPTION>
For For
the Cleveland
Year Company Electric
- ---------------------------------------- ------- ---------
(millions of
dollars)
<S> <C> <C>
1995 $ 103 $ 63
1996 125 63
1997 102 63
1998 102 63
1999 108 70
Later Years 1,918 1,321
------- ---------
Total Future Minimum Lease
Payments $2,458 $ 1,643
------- ---------
</TABLE>
Rental expense is accrued on a straight-line basis over the terms of the leases.
The amount recorded in 1994, 1993 and 1992 as annual rental expense for the
Mansfield Plant leases was $45 million. The amounts recorded in 1994, 1993 and
1992 as annual rental expense for the Beaver Valley Unit 2 lease were $64
million, $63 million and $66 million, respectively. 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
$108 million, $103 million and $108 million in 1994, 1993 and 1992,
respectively. We anticipate that this sale will continue indefinitely. The
future minimum lease payments through the year 2017 associated with Beaver
Valley Unit 2 aggregate $1.413 billion.
69
<PAGE> 76
(3) PROPERTY OWNED WITH OTHER UTILITIES AND INVESTORS
The Company owns, as a tenant in common with other utilities and those investors
who are owner-participants in various sale and leaseback transactions (Lessors),
certain generating units as listed below. Each owner owns an undivided share in
the entire unit. Each owner has the right to a percentage of the generating
capability of each unit equal to its ownership share. Each utility owner is
obligated to pay for only its respective share of the construction costs and
operating expenses. Each Lessor has leased its capacity rights to a utility
which is obligated to pay for such Lessor's share of the construction costs and
operating expenses. The Company's share of the operating expenses of these
generating units is included in the Income Statement. The Balance Sheet
classification of Property, Plant and Equipment at December 31, 1994 includes
the following facilities owned by the Company as a tenant in common with other
utilities and Lessors:
<TABLE>
<CAPTION>
In- Plant Construction
Service Ownership Ownership Power in Work in Accumulated
Generating Unit Date Share Megawatts Source Service Progress Depreciation
- ------------------------------- ------- --------- --------- -------- ------- ------------ -----------
(millions of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Davis-Besse 1977 48.62% 429 Nuclear $ 642 $ 4 $ 179
Perry Unit 1 1987 19.91 238 Nuclear 1,043 4 197
Beaver Valley Unit 2 and
Common Facilities (Note 2) 1987 1.65 13 Nuclear 204 3 42
------- --- -----
Total $1,889 $ 11 $ 418
------- --- -----
</TABLE>
(4) CONSTRUCTION AND CONTINGENCIES
(A) CONSTRUCTION PROGRAM
The estimated cost of the Company's construction program for the 1995-1999
period is $303 million, including AFUDC of $15 million and excluding nuclear
fuel.
The Clean Air Act requires, among other things, significant reductions in the
emission of sulfur dioxide and nitrogen oxides by fossil-fueled generating
units. Our strategy provides for compliance primarily through greater use of
low-sulfur coal at some of our units and the use of emission allowances. Total
capital expenditures from 1991 through 1994 in connection with Clean Air Act
compliance amounted to $1 million. The plan will require additional capital
expenditures over the 1995-2004 period of approximately $32 million for nitrogen
oxide control equipment and plant modifications. In addition, higher fuel and
other operation and maintenance expenses may be incurred. The anticipated rate
increase associated with the capital expenditures and higher expenses would be
less than 2% over the ten-year period.
(B) PERRY UNIT 2
Perry Unit 2, including its share of the facilities common with Perry Unit 1,
was approximately 50% complete when construction was suspended in 1985 pending
consideration of various options. We wrote off our investment in Perry Unit 2 at
December 31, 1993 after we determined that it would not be completed or sold.
The write-off totaled $232 million ($167 million after taxes) for the Company's
19.91% ownership share of the unit. See Note 14.
(C) HAZARDOUS WASTE DISPOSAL SITES
The Company is aware of its potential involvement in the cleanup of several
hazardous waste disposal sites. The Company has accrued a liability totaling $5
million at December 31, 1994 based on estimates of the costs of cleanup and its
proportionate responsibility for such costs. We believe that the ultimate
outcome of these matters will not have a material adverse effect on our
financial condition or results of operations. See Management's Financial
Analysis -- Outlook-Hazardous Waste Disposal Sites.
(5) NUCLEAR OPERATIONS AND CONTINGENCIES
(A) OPERATING NUCLEAR UNITS
The Company's three nuclear units may be impacted by activities or events beyond
our control. An extended outage of one of our nuclear units for any reason,
coupled with any unfavorable rate treatment, could
have a material adverse effect on our financial condition and results of
operations. See the discussion of these risks in Management's Financial
Analysis -- Outlook-Nuclear Operations.
(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 (plus any inflation adjustment) per incident. The
assessment is limited to $9 million per year for each nuclear incident. These
assessment limits assume the other CAPCO companies contribute their
proportionate share of any assessment.
70
<PAGE> 77
The utility owners and lessees of Davis-Besse, Perry and Beaver Valley also have
insurance coverage for damage to property at these sites (including leased fuel
and cleanup costs). Coverage amounted to $2.75 billion for each site as of
January 1, 1995. Damage to property could exceed the insurance coverage by a
substantial amount. If it does, the Company's share of such excess amount could
have a material adverse effect on its financial condition and results of
operations. Under these policies, the Company can be assessed a maximum of $10
million during a policy year if the reserves available to the insurer are
inadequate to pay claims arising out of an accident at any nuclear facility
covered by the insurer.
The Company also has extra expense insurance coverage. It includes the
incremental cost of any replacement power purchased (over the costs which would
have been incurred had the units been operating) and other incidental expenses
after the occurrence of certain types of accidents at our nuclear units. The
amounts of the coverage are 100% of the estimated extra expense per week during
the 52-week period starting 21 weeks after an accident and 80% of such estimate
per week for the next 104 weeks. The amount and duration of extra expense could
substantially exceed the insurance coverage.
(6) NUCLEAR FUEL
Nuclear fuel is financed for the Company and Cleveland Electric through leases
with a special-purpose corporation. At December 31, 1994, $307 million ($125
million for the Company and $182 million for Cleveland Electric) of nuclear fuel
was financed ($157 million from intermediate-term notes and $150 million from
bank credit arrangements). The intermediate-term notes mature in 1996 and 1997.
The Company and 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
$61 million, $34 million and $10 million, respectively, at December 31, 1994.
The nuclear fuel amounts financed and capitalized also included interest charges
incurred by the lessors amounting to $4 million in 1994 and $6 million in both
1993 and 1992. The estimated future lease amortization payments based on
projected consumption are $43 million in 1995, $38 million in 1996, $34 million
in 1997, $31 million in 1998 and $27 million in 1999.
(7) REGULATORY MATTERS
The Company is subject to the provisions of SFAS 71. Regulatory assets represent
probable future revenues to the Company associated with certain incurred costs,
which it will recover from customers through the ratemaking process. Regulatory
assets in the Balance Sheet are as follows:
<TABLE>
<CAPTION>
December 31,
-------------
1994 1993
---- ----
(millions of
dollars)
<S> <C> <C>
Amounts due from customers for future federal
income taxes $405 $382
Unamortized loss from Beaver Valley Unit 2
sale 101 105
Unamortized loss on reacquired debt 28 32
Pre-phase-in deferrals* 229 236
Rate Stabilization Program deferrals 150 107
---- ----
Total $913 $862
---- ----
</TABLE>
* Represent deferrals of operating expenses and carrying charges for Perry Unit
1 and Beaver Valley Unit 2 in 1987 and 1988 which are being amortized over the
lives of the related property.
As of December 31, 1994, customer rates provide for recovery of all the above
regulatory assets, except those related to the Rate Stabilization Program
discussed below. The remaining recovery periods for all of the regulatory assets
listed above range from 17 to 34 years. We continually assess the effects of
competition and the changing industry and regulatory environment on operations
and the Company's ability to recover the regulatory assets. In the event that we
determine that future revenues would not be provided for recovery of any
regulatory asset, such asset would be required to be written off. See
Management's Financial Analysis -- Outlook-Regulatory Accounting.
The Company will file a request with the PUCO to restructure rates to increase
revenues to be effective in 1996 which will include provision for recovery of
the Rate Stabilization Program deferrals. We believe that rates will be set at a
level consistent with cost-based regulations and will provide revenues to
recover the then-current operating costs, return requirements and amortization
of all regulatory assets listed above.
The Rate Stabilization Program that the PUCO approved in October 1992 was
designed to encourage economic growth in the Company's service area by freezing
the Company's base rates until 1996 and limiting subsequent rate increases to
specified annual amounts not to exceed $89 million over the 1996-1998 period.
As part of the Rate Stabilization Program, during the 1992-1995 period the
Company is allowed to defer and subsequently recover certain costs not currently
recovered in rates and to accelerate amortization of certain benefits. The
continued use of these regulatory accounting measures will be dependent upon our
continuing assess-
71
<PAGE> 78
ment and conclusion that there will be probable recovery of such deferrals in
future rates.
The regulatory accounting measures we are eligible to record through December
31, 1995 include the deferral of post-in-service interest carrying charges,
depreciation expense and property taxes on assets placed in service after
February 29, 1988 and the deferral of operating expenses equivalent to an
accumulated excess rent reserve for Beaver Valley Unit 2 (which resulted from
the April 1992 refinancing of SLOBs as discussed in Note 2). The cost deferrals
recorded in 1994, 1993 and 1992 pursuant to these provisions were $40 million,
$39 million and $32 million, respectively. The regulatory accounting measures
also provide for the accelerated amortization of certain unrestricted excess
deferred tax and unrestricted investment tax credit balances and interim spent
fuel storage accrual balances for Davis-Besse. The total amount of such
regulatory benefits recognized pursuant to these provisions was $18 million in
both 1994 and 1993 and $5 million in 1992.
The Rate Stabilization Program also authorized the Company to defer and
subsequently recover the incremental expenses associated with the adoption of
the accounting standard for postretirement benefits other than pensions (SFAS
106). In 1994 and 1993, we deferred $2 million and $37 million, respectively,
pursuant to this provision. Amortization and recovery of these deferrals are
expected to commence in 1996 and to be completed by no later than 2012. See Note
9(b).
In 1993, upon completing a comprehensive study which led to our current
strategic plan, we concluded that projected revenues would not provide for
recovery of deferrals recorded pursuant to a phase-in plan approved by the PUCO
in 1989. Such deferrals were scheduled to be recovered over the 1994 through
1998 period. The total phase-in deferred operating expenses and carrying charges
written off at December 31, 1993 by the Company were $55 million and $186
million, respectively (totaling $165 million after taxes). See Note 14.
Additionally, based on our assessment of business conditions, we concluded that,
once the deferral of expenses and acceleration of benefits under our Rate
Stabilization Program are completed in 1995, we should no longer plan to use
regulatory accounting measures to the extent we have in the past.
(8) FEDERAL INCOME TAX
The components of federal income tax expense (credit) recorded in the Income
Statement were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ----- ----
(millions of dollars)
<S> <C> <C> <C>
Operating Expenses:
Current $18 $ 36 $26
Deferred 15 (46) 7
---- ----- ----
Total Expense (Credit) to Operating
Expenses 33 (10) 33
---- ----- ----
Nonoperating Income:
Current (29 ) (15) (20 )
Deferred 31 (114) 21
---- ----- ----
Total Expense (Credit) to
Nonoperating Income 2 (129) 1
---- ----- ----
Total Federal Income Tax Expense
(Credit) $35 $(139) $34
---- ----- ----
</TABLE>
The deferred federal income tax expense results from the temporary differences
that arise from the different years certain expenses are recognized for tax
purposes as opposed to financial reporting purposes. Such temporary differences
affecting operating expenses relate principally to depreciation and deferred
operating expenses whereas those affecting nonoperating income principally
relate to deferred carrying charges and the 1993 write-offs.
Federal income tax, computed by multiplying income before taxes by the statutory
rate (35% in 1994 and 1993 and 34% in 1992), is reconciled to the amount of
federal income tax recorded on the books as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ----- ----
(millions of dollars)
<S> <C> <C> <C>
Book Income (Loss) Before Federal
Income Tax $117 $(428) $105
---- ----- ----
Tax (Credit) on Book Income (Loss) at
Statutory Rate $ 41 $(150) $ 36
Increase (Decrease) in Tax:
Write-off of Perry Unit 2 -- 16 --
Write-off of phase-in deferrals -- 8 --
Depreciation (3) (12) (6)
Rate Stabilization Program (9) (10) (2)
Sale and leaseback transactions and
amortization 5 5 5
Other items 1 4 1
---- ----- ----
Total Federal Income Tax Expense
(Credit) $ 35 $(139) $ 34
---- ----- ----
</TABLE>
The Company joins in the filing of a consolidated federal income tax return with
its affiliated companies. The method of tax allocation reflects the benefits and
burdens realized by each company's participation in the consolidated tax return,
approximating a separate return result for each company.
For tax reporting purposes, the Perry Unit 2 abandonment was recognized in 1994
and resulted in a $120 million loss with a corresponding $42 million reduction
in federal income tax liability. Because of the alternative minimum tax (AMT),
$24 million of the $42 million was realized in 1994. The remaining $18 million
will not be realized until 1999.
72
<PAGE> 79
In August 1993, the Revenue Reconciliation Act of 1993 was enacted. Retroactive
to January 1, 1993, the top marginal corporate income tax rate increased to 35%.
The change in tax rate did not materially impact the results of operations for
1993, but increased Accumulated Deferred Federal Income Taxes for the future tax
obligation by approximately $29 million. Since the PUCO has historically
permitted recovery of such taxes from customers when they become payable, the
deferred charge, Amounts Due from Customers for Future Federal Income Taxes,
also was increased by $29 million.
Under SFAS 109, temporary differences and carryforwards resulted in deferred tax
assets of $178 million and deferred tax liabilities of $719 million at December
31, 1994 and deferred tax assets of $178 million and deferred tax liabilities of
$649 million at December 31, 1993. These are summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------
1994 1993
---- ----
(millions of
dollars)
<S> <C> <C>
Property, plant and equipment $606 $534
Deferred carrying charges and operating 83 79
expenses
Net operating loss carryforwards (54) (39)
Investment tax credits (51) (55)
Sale and leaseback transactions (3) --
Other (40) (48)
---- ----
Net deferred tax liability $541 $471
---- ----
</TABLE>
For tax purposes, net operating loss (NOL) carryforwards of approximately $154
million are available to reduce future taxable income and will expire in 2003
through 2009. The 35% tax effect of the NOLs is $54 million. Additionally, AMT
credits of $69 million that may be carried forward indefinitely are available to
reduce future regular tax.
(9) RETIREMENT BENEFITS
(A) RETIREMENT INCOME PLAN
Centerior Energy sponsors jointly with its subsidiaries a noncontributing
pension plan (Centerior Pension Plan) which covers all employee groups. The
amount of retirement benefits generally depends upon the length of service.
Under certain circumstances, benefits can begin as early as age 55. The funding
policy is to comply with the Employee Retirement Income Security Act of 1974
guidelines.
In 1993, eligible employees were offered the VTP, an early retirement program.
Operating expenses for Centerior Energy and its subsidiaries in 1993 included
$205 million of pension plan accruals to cover enhanced VTP benefits and an
additional $10 million of pension costs for VTP benefits paid to retirees from
corporate funds. The $10 million is not included in the pension data reported in
the following table. A credit of $81 million resulting from a settlement of
pension obligations through lump sum payments to almost all the VTP retirees
partially offset the VTP expenses.
Pension and VTP costs (credits) for Centerior Energy and its subsidiaries for
1992 through 1994 were comprised of the following components:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(millions of
dollars)
<S> <C> <C> <C>
Pension Costs (Credits):
Service cost for benefits earned
during the
period $ 13 $ 15 $ 15
Interest cost on projected benefit
obligation 26 37 38
Actual return on plan assets (2) (65) (24)
Net amortization and deferral (34) 4 (45)
---- ---- ----
Net pension costs (credits) 3 (9) (16)
VTP cost -- 205 --
Settlement gain -- (81) --
---- ---- ----
Net costs (credits) $ 3 $115 $(16)
---- ---- ----
</TABLE>
Pension and VTP costs (credits) for the Company and its pro rata share of the
Service Company's costs were $1 million and $53 million for 1994 and 1993,
respectively. The costs for 1992 were negligible.
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%.
<TABLE>
<CAPTION>
December 31,
-------------
1994 1993
---- ----
(millions of
dollars)
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefits $278 $333
Nonvested benefits 2 37
---- ----
Accumulated benefit obligation 280 370
Effect of future compensation levels 37 53
---- ----
Total projected benefit obligation 317 423
Plan assets at fair market value 362 386
---- ----
Funded status 45 (37)
Unrecognized net loss (gain) from variance
between assumptions and experience (79) 11
Unrecognized prior service cost 10 10
Transition asset at January 1, 1987 being
amortized over 19 years (39) (43)
---- ----
Net accrued pension liability $(63) $(59)
---- ----
</TABLE>
A September 30, 1994 measurement date was used for 1994 reporting. At December
31, 1994, the settlement (discount) rate and long-term rate of return on plan
assets assumptions were 8.5% and 10%, respectively. The long-term rate of annual
compensation increase assumption was 3.5% for 1995 and 1996 and 4% thereafter.
At December 31, 1993, the settlement rate and long-term rate of return on plan
assets assumptions were 7.25% and 8.75%, respectively. The long-term rate of
annual compensation increase assumption was 4.25%. At December 31, 1994 and
1993, the Company's net accrued pension liability included in Retirement
Benefits in the
73
<PAGE> 80
Balance Sheet was $66 million and $65 million, respectively.
Plan assets consist primarily of investments in common stock, bonds, guaranteed
investment contracts, cash equivalent securities and real estate.
(B) OTHER POSTRETIREMENT BENEFITS
Centerior Energy sponsors jointly with its subsidiaries a postretirement benefit
plan which provides all employee groups certain health care, death and other
postretirement benefits other than pensions. The plan is contributory, with
retiree contributions adjusted annually. The plan is not funded. The Company
adopted SFAS 106, the accounting standard for postretirement benefits other than
pensions, effective January 1, 1993. The standard requires the accrual of the
expected costs of such benefits during the employees' years of service. Prior to
1993, the costs of these benefits were expensed as paid, which was consistent
with ratemaking practices.
The components of the total postretirement benefit costs for 1994 and 1993 were
as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
(millions
of dollars)
<S> <C> <C>
Service cost for benefits earned during the
period $ 1 $ 1
Interest cost on accumulated postretirement
benefit obligation 7 6
Amortization of transition obligation at January
1, 1993 of $63 million over 20 years 3 3
VTP curtailment cost (includes $6 million
transition obligation adjustment) -- 32
---- ----
Total costs $11 $42
---- ----
</TABLE>
These amounts included costs for the Company and its pro rata share of the
Service Company's costs.
In 1994 and 1993, the Company deferred incremental SFAS 106 expenses (in excess
of the amounts paid) of $2 million and $37 million, respectively, pursuant to a
provision of the Rate Stabilization Program. See Note 7.
The accumulated postretirement benefit obligation and accrued postretirement
benefit cost for the Company and its share of the Service Company's obligation
are as follows:
<TABLE>
<CAPTION>
December 31,
-------------
1994 1993
---- ----
(millions of
dollars)
<S> <C> <C>
Accumulated postretirement benefit obligation
attributable to:
Retired participants $(79) $(88)
Other active plan participants (7) (9)
---- ----
Accumulated postretirement benefit
obligation (86) (97)
Unrecognized net loss (gain) from variance
between assumptions and experience (7) 5
Unamortized transition obligation 51 54
---- ----
Accrued postretirement benefit cost $(42) $(38)
---- ----
</TABLE>
The Balance Sheet classification of Retirement Benefits at December 31, 1994 and
1993 includes only the Company's accrued postretirement benefit cost of $37
million and $33 million, respectively, and excludes the Service Company's
portion since the Service Company's total accrued cost is carried on its books.
A September 30, 1994 measurement date was used for 1994 reporting. At December
31, 1994 and 1993, the settlement rate and the long-term rate of annual
compensation increase assumptions were the same as those discussed for pension
reporting in Note 9(a). At December 31, 1994, the assumed annual health care
cost trend rates (applicable to gross eligible charges) are 8.5% for medical and
8% for dental in 1995. Both rates reduce gradually to a fixed rate of 4.75% by
2003. Elements of the obligation affected by contribution caps are significantly
less sensitive to the health care cost trend rate than other elements. If the
assumed health care cost trend rates were increased by one percentage point in
each future year, the accumulated postretirement benefit obligation as of
December 31, 1994 would increase by $3 million and the aggregate of the service
and interest cost components of the annual postretirement benefit cost would
increase by $0.3 million.
(10) GUARANTEES
The Company has guaranteed certain loan and lease obligations of a coal supplier
under a long-term coal supply contract. At December 31, 1994, the principal
amount of the loan and lease obligations guaranteed by the Company was $17
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.
(11) CAPITALIZATION
(A) CAPITAL STOCK TRANSACTIONS
Preferred stock shares retired during the three years ended December 31, 1994
are listed in the following table.
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
(thousands of shares)
<S> <C> <C> <C>
Subject to Mandatory Redemption:
$100 par $11.00 -- -- (25)
9.375 (17) (17) (17)
25 par 2.81 (800) (800) --
---- ---- ----
Total (817) (817) (42)
---- ---- ----
</TABLE>
(B) EQUITY DISTRIBUTION RESTRICTIONS
Federal law prohibits the Company from paying dividends out of capital accounts.
However, the Company may pay dividends out of appropriated retained earnings and
current earnings. At December 31, 1994, the Company had $104 million of
appropriated retained earnings for the payment of preferred stock dividends. The
Company is prohibited from paying a common stock dividend by a
74
<PAGE> 81
provision in its mortgage that essentially requires such dividends to be paid
out of the total balance of retained earnings, which currently is a deficit.
(C) PREFERRED AND PREFERENCE STOCK
Amounts to be paid for preferred stock which must be redeemed during the next
five years are $11 million in 1995 and $2 million in each year 1996 through
1999.
The annual preferred stock mandatory redemption provisions are as follows:
<TABLE>
<CAPTION>
Shares Price
To Be Beginning Per
Redeemed in Share
-------- --------- -----
<S> <C> <C> <C>
$100 par $9.375 16,650 1985 $100
25 par 2.81 400,000 1993 25
</TABLE>
The annualized preferred dividend requirement at December 31, 1994 was $19
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 7.66% and 8.44%, respectively, in 1994.
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, less current maturities, was as follows:
<TABLE>
<CAPTION>
Actual
or Average
Interest
Rate at December 31,
December 31, ---------------
Year of Maturity 1994 1994 1993
- -------------------------------- ------------ ------ ------
(millions of
dollars)
<S> <C> <C> <C>
First mortgage bonds:
1997 6.125% $ 31 $ 31
1998 10.00 1 1
1999 7.25 100 100
2000-2004 7.85 207 207
2010-2014 3.85 31 31
2015-2019 8.00 67 67
2020-2023 7.74 148 148
------ ------
585 585
Secured medium term notes due
1996-2021 8.44 250 250
Term bank loans due 1996 9.08 62 109
Notes due 1996-1997 9.49 25 43
Debentures due 2002 8.70 135 135
Pollution control notes due
1996-2015 12.11 99 105
Other -- net -- (2) (2)
------ ------
Total Long-Term Debt $1,154 $1,225
------ ------
</TABLE>
Long-term debt matures during the next five years as follows: $71 million in
1995, $91 million in 1996, $40 million in 1997, $39 million in 1998 and $119
million in 1999.
The Company issued $141 million aggregate principal amount of secured
medium-term notes in 1992 and 1993. The notes are secured by first mortgage
bonds.
The Company's mortgage constitutes a direct first lien on substantially all
property owned and franchises held by the Company. Excluded from the lien, among
other things, are cash, securities, accounts receivable, fuel, supplies and
automotive equipment.
Certain unsecured loan agreements of the Company contain covenants relating to
capitalization ratios, fixed charge coverage ratios and limitations on secured
financing other than through first mortgage bonds or certain other transactions.
Two reimbursement agreements relating to separate letters of credit issued in
connection with the sale and leaseback of Beaver Valley Unit 2 contain several
financial covenants affecting the Company, Cleveland Electric and Centerior
Energy. Among these are covenants relating to fixed charge coverage ratios and
capitalization ratios. The write-offs recorded at December 31, 1993 caused the
Company, Cleveland Electric and Centerior Energy to violate certain covenants
contained in the two reimbursement agreements. The affected creditors waived
those violations in exchange for a subordinate mortgage security interest on the
properties of the Company and Cleveland Electric. The Company provided the same
security interest to certain other creditors because their agreements require
equal treatment. At December 31, 1994, the Company provided subordinate mortgage
collateral for $152 million of unsecured debt, $228 million of bank letters of
credit and a $205 million revolving credit facility. The bank letters of credit
are joint and several obligations of the Company and Cleveland Electric and the
revolving credit facility is an obligation of Centerior Energy that is jointly
and severally guaranteed by the Company and Cleveland Electric.
(12) SHORT-TERM BORROWING ARRANGEMENTS
Centerior Energy has a $205 million revolving credit facility through May 1996.
Centerior Energy and the Service Company may borrow under the facility, with all
borrowings jointly and severally guaranteed by the Company and Cleveland
Electric. Centerior Energy plans to transfer any of its borrowed funds to the
Company and Cleveland Electric. The facility agreement as amended provides the
participating banks with a subordinate mortgage security interest on the
properties of the Company
75
<PAGE> 82
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, 1994. The facility agreement contains covenants
relating to capitalization and fixed charge coverage ratios for the Company,
Cleveland Electric and Centerior Energy.
Short-term borrowing capacity authorized by the PUCO annually is $150 million
for the Company. The Company and Cleveland Electric are authorized by the PUCO
to borrow from each other on a short-term basis.
(13) FINANCIAL INSTRUMENTS
Except for the Nuclear Plant Decommissioning Trusts at December 31 1994, as
discussed below, the estimated fair values at December 31, 1994 and 1993 of
financial instruments that do not approximate their carrying amounts in the
Balance Sheet are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1994 1993
---------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
(millions of dollars)
<S> <C> <C> <C> <C>
Assets:
Nuclear Plant Decommissioning
Trusts $ 38 $ 38 $ 26 $ 27
Capitalization and Liabilities:
Preferred Stock, with
Mandatory Redemption
Provisions (including
current portion) 18 19 40 42
Long-Term Debt (including
current portion) 1,227 1,116 1,271 1,314
</TABLE>
The Nuclear Plant Decommissioning Trusts at December 31, 1994 included $21
million of federal governmental securities and $14 million of municipal
securities. The securities had the following maturities: $9 million due within
one year; $7 million due in one to five years; $7 million due in six to 10
years; and $12 million due after 10 years. The fair value of these trusts is
estimated based on the quoted market prices for the investment securities. As a
result of adopting the new accounting standard for certain investments in debt
and equity securities, SFAS 115, in 1994, the carrying amount of these trusts is
equal to the fair value. The fair value of the Company's preferred stock, with
mandatory redemption provisions, and long-term debt is estimated based on the
quoted market prices for the respective or similar issues or on the basis of the
discounted value of future cash flows. The discounted value used current
dividend or interest rates (or other appropriate rates) for similar issues and
loans with the same remaining maturities.
The estimated fair values of all other financial instruments approximate their
carrying amounts in the Balance Sheet at December 31, 1994 and 1993 because of
their short-term nature.
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of operations
for the two years ended December 31, 1994.
<TABLE>
<CAPTION>
Quarters Ended
----------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
--------- -------- --------- --------
(millions of dollars)
<S> <C> <C> <C> <C>
1994
Operating Revenues $ 217 $216 $ 227 $204
Operating Income 43 43 53 40
Net Income 19 20 29 15
Earnings Available for
Common Stock 13 14 24 11
1993
Operating Revenues $ 215 $210 $ 239 $207
Operating Income (Loss) 39 42 17 (10)
Net Income (Loss) 18 20 (5) (323)
Earnings (Loss)
Available for Common
Stock 12 14 (10) (328)
</TABLE>
Earnings for the quarter ended September 30, 1993 were decreased by $35 million
as a result of the recording of $54 million of VTP pension-related benefits.
Earnings for the quarter ended December 31, 1993 were decreased as a result of
year-end adjustments for the $232 million write-off of Perry Unit 2 (see Note
4(b)), the $241 million write-off of the phase-in deferrals (see Note 7) and $19
million of other charges. These adjustments decreased quarterly earnings by $345
million.
(15) PENDING MERGER OF THE COMPANY INTO CLEVELAND ELECTRIC
In March 1994, Centerior Energy announced a plan to merge the Company into
Cleveland Electric. Since the Company and Cleveland Electric affiliated in 1986,
efforts have been made to consolidate operations and administration as much as
possible to achieve maximum cost savings. Various aspects of the merger are
subject to the approval of the FERC and other regulatory authorities. The PUCO
and the Pennsylvania Public Utility Commission have approved the merger. In
addition, the merger must be approved by share owners of the Company's preferred
stock. Share owners of Cleveland Electric's preferred stock must approve the
authorization of additional shares of preferred stock. 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. The merging companies plan to seek preferred stock share
owner approval in mid-1995. The merger is expected to be effective in 1995.
76
<PAGE> 83
For the merging companies, the combined pro forma operating revenues were $2.422
billion, $2.475 billion and $2.439 billion and the combined pro forma net income
(loss) was $268 million, $(876) million and $276 million for the years 1994,
1993 and 1992, respectively. The pro forma data is based on accounting for the
merger on a method similar to a pooling of interests. The pro forma data is not
necessarily indicative of the results of operations which would have been
reported had the merger been in effect during those years or which may be
reported in the future. The pro forma data should be read in conjunction with
the audited financial statements of both the Company and Cleveland Electric.
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 preferred stock
of The Toledo Edison Company (a wholly owned subsidiary of Centerior Energy
Corporation) as of December 31, 1994 and 1993, and the related statements of
income, retained earnings and cash flows for each of the three years in the
period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Toledo Edison Company as of
December 31, 1994 and 1993, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1994, in conformity
with generally accepted accounting principles.
As discussed further in Note 9, a change was made in the method of accounting
for postretirement benefits other than pensions in 1993.
Arthur Andersen LLP
Cleveland, Ohio
February 17, 1995
77
<PAGE> 84
INDEX TO APPENDICES
APPENDIX I -- AGREEMENT OF MERGER
EXHIBIT A -- CERTIFICATE OF MERGER
EXHIBIT B -- PROPOSED AMENDED ARTICLES OF CLEVELAND ELECTRIC
APPENDIX II -- STATUTORY DISSENTERS' RIGHTS
78
<PAGE> 85
APPENDIX I
AGREEMENT OF MERGER
BY AND BETWEEN
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
AND
THE TOLEDO EDISON COMPANY
DATED AS OF APRIL 12, 1994
I-1
<PAGE> 86
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I THE MERGER........................................................... I-3
Section 1.1 The Merger........................................................... I-3
Section 1.2 Effective Time of the Merger......................................... I-3
Section 1.3 Amended Articles of Incorporation.................................... I-3
Section 1.4 Regulations.......................................................... I-3
ARTICLE II CONVERSION OF SHARES................................................. I-3
Section 2.1 Effect of Merger on CEI Shares....................................... I-3
Section 2.2 Conversion of TE Shares in the Merger................................ I-4
Section 2.3 Surviving Corporation to Make Certificates Available................. I-5
Section 2.4 Dividends............................................................ I-5
Section 2.5 Closing of TE Transfer Books......................................... I-5
Section 2.6 Dissenting Shares.................................................... I-5
ARTICLE III THE CLOSING.......................................................... I-6
Section 3.1 Closing.............................................................. I-6
ARTICLE IV ADDITIONAL AGREEMENTS................................................ I-6
Section 4.1 Joint Proxy Statement and Registration Statement..................... I-6
Section 4.2 Approvals and Consents............................................... I-7
Section 4.3 Approval of TE Preferred Stockholders; Approval of CEI Preferred
Stockholders......................................................... I-7
Section 4.4 Public Announcements................................................. I-8
Section 4.5 Employee Benefits and Related Matters; Certain Employee Agreements... I-8
Section 4.6 Expenses............................................................. I-8
ARTICLE V CONDITIONS........................................................... I-8
Section 5.1 Conditions to Each Party's Obligation to Effect the Merger........... I-8
Section 5.2 Conditions to Obligation of TE to Effect the Merger.................. I-8
Section 5.3 Conditions to Obligations of CEI to Effect the Merger................ I-9
ARTICLE VI TERMINATION, AMENDMENT AND WAIVER.................................... I-9
Section 6.1 Termination.......................................................... I-9
Section 6.2 Effect of Termination................................................ I-10
Section 6.3 Amendment............................................................ I-10
Section 6.4 Waiver............................................................... I-10
ARTICLE VII GENERAL PROVISIONS................................................... I-10
Section 7.1 Non-Survival of Agreements........................................... I-10
Section 7.2 Brokers.............................................................. I-10
Section 7.3 Notices.............................................................. I-10
Section 7.4 Miscellaneous........................................................ I-11
Section 7.5 Interpretation....................................................... I-11
Section 7.6 Counterparts; Effect................................................. I-11
Section 7.7 Parties in Interest.................................................. I-11
Appendix I -- Glossary of Defined Terms................................................ I-12
Exhibit A -- Certificate of Merger..................................................... A-1
Exhibit B -- Proposed Amended Articles of Incorporation of Surviving Corporation....... B-1
</TABLE>
I-2
<PAGE> 87
AGREEMENT OF MERGER
AGREEMENT OF MERGER, dated as of April 12, 1994, (this "Agreement"), by and
between The Cleveland Electric Illuminating Company, an Ohio corporation
("CEI"), and The Toledo Edison Company, an Ohio corporation ("TE"). CEI and TE
are each wholly owned subsidiaries of Centerior Energy Corporation, an Ohio
corporation ("CEC").
RECITALS
The parties desire that TE be merged with and into CEI upon the terms and
conditions contained herein. The boards of directors of each of CEI, TE and CEC
deem the merger advisable and in the best interests of each of CEI, TE and CEC,
the boards of directors of each of CEI, TE and CEC have adopted resolutions
approving this Agreement and the transactions contemplated hereby, the board of
directors of TE has directed that this Agreement be submitted for consideration
at a meeting of the preferred shareholders of TE, and the board of directors of
CEI has directed that the Amended Articles of Incorporation of Surviving
Corporation, as set forth in Exhibit B hereto, be submitted for consideration at
a meeting of the preferred shareholders of CEI.
Unless the context shall otherwise require, capitalized terms used herein
shall have the meanings assigned thereto in Appendix I hereto.
In consideration of the mutual premises and the covenants and agreements
contained herein, the parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time, TE shall be merged with and into CEI (the
"Merger"). The separate existence and corporate organization of TE shall
thereupon cease and CEI and TE shall thereupon be a single corporation. CEI
shall be the surviving corporation in the Merger (the "Surviving Corporation")
and shall continue its existence under the provisions of the Ohio General
Corporation Law (the "OGCL").
Section 1.2 Effective Time of the Merger. On the Closing Date (as defined
in Section 3.1 hereof), a certificate of merger substantially in the form of
Exhibit A (the "Certificate of Merger") shall be executed by CEI and TE and
shall be filed with the Secretary of State of the State of Ohio. The Merger
shall become effective at such time as the Certificate of Merger is filed with
the Secretary of State of the State of Ohio, such time being herein called the
"Effective Time."
Section 1.3 Amended Articles of Incorporation. The Amended Articles of
Incorporation of CEI as in effect immediately prior to the Effective Time shall
be replaced by the proposed Amended Articles of Incorporation of the Surviving
Corporation, as set forth in Exhibit B hereto, from and after the Effective Time
until amended as provided by law.
Section 1.4 Regulations. Regulations of CEI as in effect immediately prior
to the Effective Time shall be and remain the Regulations of the Surviving
Corporation from and after the Effective Time until amended as provided by law.
ARTICLE II
CONVERSION OF SHARES
Section 2.1 Effect of Merger on CEI Shares. At the Effective Time, each
share of CEI Common Stock without par value (the "CEI Common Stock"), issued and
outstanding immediately prior to the Effective Time shall remain issued and
outstanding as one share of common stock, without par value (the "Surviving
Corporation Common Stock"), of the Surviving Corporation.
I-3
<PAGE> 88
At the Effective Time, each share of CEI Serial Preferred Stock without par
value (the "CEI Preferred Stock") issued and outstanding immediately prior to
the Effective Time shall remain issued and outstanding as one share of preferred
stock without par value (the "Surviving Corporation Preferred Stock") of the
Surviving Corporation, with the same express terms as were applicable to each
such share prior to the Effective Time.
Section 2.2 Conversion of TE Shares in the Merger. At the Effective Time,
by virtue of the Merger and without any action on the part of any holder of any
share of capital stock of TE:
(a) each share of Common Stock, $5.00 par value (the "TE Common
Stock") of TE, issued and outstanding shall be converted into one
one-hundredth of one share (.01) of Surviving Corporation Common Stock;
(b) each share of Cumulative Preferred Stock with par value of one
hundred dollars ($100) per share (the "TE $100 Preferred Stock") of TE, of
each of the respective series indicated below, issued and outstanding shall
be converted into one share of Surviving Corporation Preferred Stock of the
respective series indicated below (series references to the series of
Surviving Corporation Preferred Stock refer to the series set forth in
Exhibit B hereto):
(i) 4 1/4% Cumulative Preferred Stock ($100 par value) series into
Serial Preferred Stock, $4.25 Series U;
(ii) 4.56% Cumulative Preferred Stock ($100 par value) series into
Serial Preferred Stock, $4.56 Series V;
(iii) 4.25% Cumulative Preferred Stock ($100 par value) series into
Serial Preferred Stock, $4.25 Series W;
(iv) 8.32% Cumulative Preferred Stock ($100 par value) series into
Serial Preferred Stock, $8.32 Series X;
(v) 7.76% Cumulative Preferred Stock ($100 par value) series into
Serial Preferred Stock, $7.76 Series Y;
(vi) 7.80% Cumulative Preferred Stock ($100 par value) series into
Serial Preferred Stock, $7.80 Series Z;
(vii) 10% Cumulative Preferred Stock ($100 par value) series into
Serial Preferred Stock, $10.00 Series AA;
(viii) 9 3/8% Cumulative Preferred Stock ($100 par value) series
into Serial Preferred Stock, $9.375 Series BB;
(c) each share of Cumulative Preferred Stock of the par value of
twenty-five dollars ($25) per share (the "TE $25 Preferred Stock") of TE,
of each of the respective series indicated below, issued and outstanding
shall be converted into one-fourth of a share of Surviving Corporation
Preferred Stock of the respective series indicated below (series references
to the series of Surviving Corporation Preferred Stock refer to the series
set forth in Exhibit B hereto):
(i) 8.84% Cumulative Preferred Stock ($25 par value) series into
Serial Preferred Stock, $8.84 Series CC;
(ii) $2.365 Cumulative Preferred Stock ($25 par value) series into
Serial Preferred Stock, $9.46 Series DD;
(iii) Adjustable Rate Preferred Stock, Series A ($25 par value)
into Serial Preferred Stock, Adjustable Rate Series EE;
(iv) Adjustable Rate Preferred Stock, Series B ($25 par value) into
Serial Preferred Stock, Adjustable Rate Series FF; and
I-4
<PAGE> 89
(v) $2.81 Cumulative Preferred Stock ($25 par value) series into
Serial Preferred Stock, $11.24 Series GG.
(d) The TE $100 Preferred Stock and the TE $25 Preferred Stock are
sometimes collectively referred to herein as the "TE Preferred Stock."
Section 2.3 Surviving Corporation to Make Certificates Available. (a) As
soon as practicable after the Effective Time, each holder of shares of TE
Preferred Stock converted into shares of Surviving Corporation Preferred Stock
pursuant to Section 2.2(b) or 2.2(c), upon surrender to the Exchange Agent of
one or more certificates for such shares of TE Preferred Stock will be entitled
to receive a certificate representing that number of shares of Surviving
Corporation Preferred Stock of the series as set forth in Section 2.2(b) or
2.2(c) to be issued in respect of the aggregate number of such shares of TE
Preferred Stock previously represented by the stock certificates surrendered.
Notwithstanding any other provision hereof, no fractional shares of Surviving
Corporation Preferred Stock and no certificates or scrip therefor, or other
evidence of ownership thereof, will be issued, and no right to receive cash in
lieu thereof shall entitle the holder thereof to any voting or other rights of a
holder of fractional share interests. If a stockholder would otherwise be
entitled to a fractional share, such stockholder shall be entitled, after the
later of the Effective Time and the surrender of such stockholder's Certificate
or Certificates which represent such shares of TE Preferred Stock, to receive
from the Surviving Corporation an amount in cash in lieu of such fractional
share, based on the fair market value thereof as of the Effective Time. The
Surviving Corporation will make available to the Exchange Agent, as required,
cash necessary for this purpose. Notwithstanding the foregoing, neither the
Exchange Agent nor any party hereto shall be liable to a holder of shares of TE
Preferred Stock for any Surviving Corporation Preferred Stock or dividends
thereon delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
(b) As soon as practicable after the Effective Time, the Exchange Agent
shall mail to each holder of record of a Certificate or Certificates that
immediately prior to the Effective Time represented outstanding shares of TE
Preferred Stock (the "Certificates") (i) a form letter of transmittal (which
shall specify that delivery shall be effective, and risk of loss and title to
the Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent) and (ii) instructions for use in effecting the surrender of the
Certificates.
(c) The cash paid and shares of Surviving Corporation Preferred Stock
issued upon the surrender of Certificates in accordance with the terms hereof
shall be deemed to have been paid and issued in full satisfaction of all rights
pertaining to such shares of TE Preferred Stock.
(d) Any Surviving Corporation Preferred Stock certificates delivered or
made available to the Exchange Agent pursuant to this Section 2.3 and not
exchanged for Certificates within one year after the Effective Time pursuant to
this Section 2.3 shall be returned by the Exchange Agent to the Surviving
Corporation which shall thereafter act as Exchange Agent subject to the rights
of holders of unsurrendered Certificates under this Article II. Notwithstanding
the foregoing, neither CEI, TE, the Surviving Corporation, the Exchange Agent
nor any other party hereto shall be liable to a holder of TE Preferred Stock for
any Surviving Corporation Preferred Stock, or dividends or distributions
thereon, delivered to a public official pursuant to any applicable abandoned
property, escheat, or similar law.
Section 2.4 Dividends. After the Effective Time and pending the surrender
and exchange of shares of TE Preferred Stock for shares of Surviving Corporation
Preferred Stock pursuant to Section 2.3, each Certificate or Certificates shall
be deemed for all corporate purposes, including the payment of dividends, to
evidence the number of whole shares of Surviving Corporation Preferred Stock
into which such shares of TE Preferred Stock shall have been converted by the
Merger.
Section 2.5. Closing of TE Transfer Books. At the Effective Time the
Preferred Stock transfer books of TE shall be closed and no transfer of TE
Preferred Stock shall thereafter be made. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, they shall be cancelled
and exchanged for certificates representing whole shares of Surviving
Corporation Preferred Stock and cash as provided in this Article II.
Section 2.6 Dissenting Shares. Notwithstanding anything to the contrary
contained in this Agreement, in the event appraisal rights are available to
holders of TE Preferred Stock or to holders of CEI Preferred Stock pursuant to
the OGCL, any Shares held by a person who objects to the proposal to adopt this
Agreement (in the
I-5
<PAGE> 90
case of TE) or who objects to the proposal to adopt the Amended Articles of
Incorporation of the Surviving Corporation (in the case of CEI), whose Shares
either were not entitled to vote or were not voted in favor of the proposal to
adopt this Agreement (in the case of TE) or the proposal to adopt the Amended
Articles of Incorporation of the Surviving Corporation (in the case of CEI) and
who complies with all of the provisions of the OGCL concerning the rights of
such person to dissent from such proposals and to require appraisal of such
person's Shares ("Dissenting Shares") shall not be converted pursuant to Section
2.2, or remain outstanding pursuant to Section 2.1, but shall become the right
to receive such consideration as may be determined to be due to the holder of
such Dissenting Shares pursuant to the OGCL, including, if applicable, any costs
determined to be payable by the Surviving Corporation to the holders of
Dissenting Shares in accordance with the OGCL; provided, however, that each
Dissenting Share held by a person at the Effective Time who shall, after the
Effective Time, withdraw the demand for appraisal or lose the right of
appraisal, in either case pursuant to the OGCL, shall be deemed to be converted
(or to remain outstanding, as the case may be) as of the Effective Time, as set
forth in Section 2.2 or Section 2.1, for whole shares of the same class and
series and cash for any fractional share, without any interest thereon.
ARTICLE III
THE CLOSING
Section 3.1 Closing. The closing (the "Closing") of the Merger shall take
place at the offices of CEC, 6200 Oak Tree Boulevard, Independence, Ohio 44131
at 10:00 A.M., local time, on the second business day immediately following the
date on which the last of the conditions set forth in Article V hereof is
fulfilled or waived, or at such other time and date and place as TE, CEC and CEI
shall mutually agree (the "Closing Date").
ARTICLE IV
ADDITIONAL AGREEMENTS
Section 4.1 Joint Proxy Statement and Registration Statement. (a) CEI and
TE will prepare and file with the SEC as soon as reasonably practicable after
the date hereof (i) a Registration Statement on Form S-4 to be filed under the
Securities Act by CEI in connection with the Merger for purposes of registering
the shares of Surviving Corporation Preferred Stock to be issued in the Merger
pursuant to Article II hereof (the "Registration Statement") and (ii) a joint
proxy statement to be filed under the Exchange Act by CEI and TE and to be
distributed by CEI and TE, respectively, in connection with the CEI
Stockholders' Approval and the TE Stockholders' Approval (the "Joint Proxy
Statement" and, together with the Registration Statement, the "Joint Proxy
Statement and Registration Statement"). CEI and TE shall use reasonable efforts
to cause the Registration Statement to be declared effective under the
Securities Act as promptly as practicable after such filing. CEI and TE shall
also take such action as may be reasonably required to cause the shares of
Surviving Corporation Preferred Stock issuable pursuant to the Merger to be
registered or to obtain an exemption from registration under applicable state
"blue sky" or securities laws; provided, however, that neither CEI nor TE shall
be required to register or qualify as a foreign corporation or to take other
action which would subject it to service of process in any jurisdiction where it
is not presently so subject. CEI will furnish to TE and TE shall furnish to CEI
all information concerning itself as each such other party or its counsel may
reasonably request and which is required or customary for inclusion in the Joint
Proxy Statement and Registration Statement. CEI shall use reasonable efforts to
cause the shares of Surviving Corporation Preferred Stock issuable in the Merger
upon conversion of TE Preferred Stock to be listed on the New York Stock
Exchange, with respect to those series of Surviving Corporation Preferred Stock
issued upon conversion of a series of TE Preferred Stock that was listed on a
stock exchange.
(b) CEI covenants to TE that the Joint Proxy Statement and Registration
Statement (i) will comply in all material respects with the applicable
provisions of the Exchange Act and the Securities Act and the rules and
regulations of the SEC thereunder and (ii) will not at the respective times such
documents are filed with the SEC, and, in the case of the Joint Proxy Statement
or any amendments thereof or supplements thereto, at the time of the mailing of
the Joint Proxy Statement and any amendments thereof or supplements thereto, and
at the time of
I-6
<PAGE> 91
the meetings of stockholders of CEI and TE to be held in connection with the
transactions contemplated by this Agreement, and, in the case of the
Registration Statement and any amendment thereof or any supplement thereto, at
all times after it becomes effective under the Securities Act and until the
Effective Time, contain any untrue statement of a material fact or omit to state
any 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, or necessary to correct any statement in any earlier
filing with the SEC of such Joint Proxy Statement and Registration Statement or
any amendment thereof or any supplement thereto or any earlier communication
(including the Joint Proxy Statement and Registration Statement) to stockholders
of CEI or TE with respect to the transactions contemplated by this Agreement;
provided, that no covenant or agreement is made by CEI with respect to
information supplied by TE for inclusion in the Joint Proxy Statement and
Registration Statement.
(c) TE covenants to CEI that the Joint Proxy Statement and Registration
Statement (i) will comply in all material respects with the applicable
provisions of the Exchange Act and the Securities Act and the rules and
regulations of the SEC thereunder and (ii) will not at the respective times such
documents are filed with the SEC, and, in the case of the Joint Proxy Statement
or any amendments thereof or supplements thereto, at the time of the mailing of
the Joint Proxy Statement and any amendments thereof or supplements thereto, and
at the time of the meetings of stockholders of CEI and TE to be held in
connection with the transactions contemplated by this Agreement, and, in the
case of the Registration Statement and any amendment thereof or any supplement
thereto, at all times after it becomes effective under the Securities Act and
until the Effective Time, contain any untrue statement of a material fact or
omit to state any 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, or necessary to correct any statement in any
earlier filing with the SEC of such Joint Proxy Statement and Registration
Statement or any amendment thereof or any supplement thereto or any earlier
communication (including the Joint Proxy Statement and Registration Statement)
to stockholders of CEI or TE with respect to the transactions contemplated by
this Agreement; provided, that no covenant or agreement is made by TE with
respect to information supplied by CEI for inclusion in the Joint Proxy
Statement and Registration Statement.
Section 4.2 Approvals and Consents. CEI and TE each shall cooperate with
each other and use their reasonable efforts to promptly prepare and file all
necessary documentation, to effect all necessary applications, notices,
petitions, filings and other documents, and to use commercially reasonable
efforts to obtain all necessary permits, consents, approvals and authorizations
of all third parties and governmental bodies necessary or advisable to
consummate the transactions contemplated by this Agreement, including, without
limitation, the CEI Required Statutory Approvals and the TE Required Statutory
Approvals.
Section 4.3 Approval of TE Preferred Stockholders; Approval of CEI
Preferred Stockholders. (a) TE shall as soon as reasonably practicable (i) take
all steps necessary duly to call, give notice of, convene and hold a special
meeting of holders of TE Preferred Stock (the "TE Special Meeting") (A) for the
purpose of adopting this Agreement (the "TE Stockholders' Approval") and (B) for
such other purposes as may be necessary or desirable, (ii) distribute to holders
of TE Preferred Stock the Joint Proxy Statement in accordance with applicable
Federal and state law and with its Amended Articles of Incorporation and Code of
Regulations, (iii) recommend to holders of TE Preferred Stock the adoption of
this Agreement and such other matters as may be submitted to such stockholders
in connection with this Agreement and (iv) cooperate and consult with CEI with
respect to each of the foregoing matters.
(b) CEI shall as soon as reasonably practicable (i) take all steps
necessary to call, give notice of, convene and hold a special meeting of holders
of CEI Preferred Stock (the "CEI Special Meeting") (A) for the purpose of
adopting the Amended Articles of Incorporation of the Surviving Corporation in
the form set forth in Exhibit B hereto (the "CEI Stockholders' Approval"), and
(B) for such other purposes as may be necessary or desirable, (ii) distribute to
holders of CEI Preferred Stock the Joint Proxy Statement in accordance with
applicable Federal and state law and its Amended Articles of Incorporation and
Regulations, (iii) recommend to holders of CEI Preferred Stock the adoption of
the Amended Articles of Incorporation of the Surviving Corporation and such
other matters as may be submitted to such stockholders in connection with this
Agreement, (iv) cooperate and consult with TE with respect to each of the
foregoing matters and (v) in the event such Amended Articles of Incorporation
are adopted by the requisite vote of holders of CEI Preferred Stock, file such
Amended Articles of Incorporation in order to permit it to consummate the
transactions contemplated hereby.
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Section 4.4 Public Announcements. Subject to each party's disclosure
obligations imposed by law, CEI and TE will cooperate with each other and with
CEC in the development and distribution of all news releases and other public
information disclosures with respect to this Agreement or any of the
transactions contemplated hereby and shall not issue any public announcement or
statement prior to consultation with the other party and with CEC.
Section 4.5 Employee Benefits and Related Matters; Certain Employee
Agreements. CEI hereby unconditionally agrees to honor, without modification,
offset or counterclaim, all contracts, agreements, collective bargaining
agreements and commitments of TE authorized by TE prior to the Effective Time
which apply to any current or former employee or current or former director of
TE; provided, however, that this undertaking is not intended to prevent the
Surviving Corporation from enforcing such contracts, agreements, collective
bargaining agreements and commitments in accordance with their terms.
Section 4.6 Expenses. All costs and expenses incurred in connection with
this Agreement and the transactions contemplated hereby shall be shared equally
by CEI and TE.
ARTICLE V
CONDITIONS
Section 5.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the following conditions, except, to the extent permitted by
applicable law, as such conditions may be waived in writing pursuant to Section
6.4 by the joint action of the parties hereto:
(a) this Agreement having been adopted by the requisite vote of the
holders of the TE Preferred Stock required under the OGCL and TE's Amended
Articles of Incorporation;
(b) the Amended Articles of Incorporation of the Surviving Corporation
in the form set forth in Exhibit B hereto (the "Articles Amendment") having
been adopted by the requisite vote of the holders of shares of CEI
Preferred Stock under the OGCL and CEI's Amended Articles of Incorporation;
(c) a Certificate of Amended Articles of Incorporation of the
Surviving Corporation, effectuating the Articles Amendment under the
applicable requirements of the OGCL, having been filed with the Secretary
of State of the State of Ohio;
(d) no preliminary or permanent injunction or other order by any
Federal or state court preventing consummation of the Merger having been
issued and continuing in effect, and the Merger and the other transactions
contemplated hereby not being prohibited under any applicable Federal or
state law or regulation;
(e) the Registration Statement having become effective in accordance
with the provisions of the Securities Act, and no stop order suspending
such effectiveness having been issued and remaining in effect; and
(f) the shares of Surviving Corporation Preferred Stock issuable
pursuant to Article II hereof in the Merger having been approved for
listing on the New York Stock Exchange to the extent contemplated by the
terms of this Agreement.
The parties mutually recognize and acknowledge that at the time of
execution of this Agreement, this Agreement and all transactions contemplated
hereby, including approval of the Articles Amendment, have been adopted by CEC
as the sole holder of CEI Common Stock and TE Common Stock.
Section 5.2 Conditions to Obligation of TE to Effect the Merger. The
obligation of TE to effect the Merger shall be further subject to the
fulfillment at or prior to the Effective Time of the following conditions,
except, to the extent permitted by applicable law, as may be waived by TE in
writing pursuant to Section 6.4:
(a) CEI having performed in all material respects its agreements and
covenants contained in or contemplated by this Agreement required to be
performed at or prior to the Effective Time;
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(b) all actions required to be taken by, or on the part of, CEI to
authorize the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby having been duly and
validly taken by the board of directors and stockholders of CEI, and TE
having received certified copies of the resolutions evidencing such
authorizations;
(c) the CEI Required Statutory Approvals having been obtained at or
prior to the Effective Time and all filings, registrations, applications,
designations and declarations required prior to the Effective Time in
connection with the consummation of the Merger and such transactions having
been made or effected at or prior to the Effective Time;
(d) the CEI Required Statutory Approvals and the TE Required Statutory
Approvals having become Final Orders (as defined below) unless such Final
Order shall impose any term or condition on the Surviving Corporation which
shall cause a material adverse change to the business, operations or
prospects of the Surviving Corporation. A "Final Order" means action by the
relevant regulatory authority which has not been reversed, stayed,
enjoined, set aside, annulled or suspended, with respect to which any
waiting period prescribed by law before the transactions contemplated
hereby may be consummated has expired, and as to which all conditions to
the consummation of such transactions prescribed by law, regulation or
order have been satisfied.
Section 5.3 Conditions to Obligations of CEI to Effect the Merger. The
obligation of CEI to effect the Merger shall be further subject to the
fulfillment at or prior to the Effective Time of the following conditions,
except, to the extent permitted by applicable law, as may be waived by CEI in
writing pursuant to Section 6.4:
(a) TE having performed in all material respects its agreements and
covenants contained in or contemplated by this Agreement required to be
performed at or prior to the Effective Time;
(b) all action required to be taken by, or on the part of, TE to
authorize the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby having been duly and
validly taken by the board of directors and stockholders of TE, and CEI
having received certified copies of the resolutions evidencing such
authorizations;
(c) the TE Required Statutory Approvals having been obtained at or
prior to the Effective Time, and all filings, registrations, applications,
designations and declarations required prior to the Effective Time in
connection with the consummation of the Merger and such transactions having
been made or effected at or prior to the Effective Time;
(d) the CEI Required Statutory Approvals and the TE Required Statutory
Approvals having become Final Orders unless such Final Order shall impose
any term or condition on the Surviving Corporation which shall cause a
material adverse change to the business, operations or prospects of the
Surviving Corporation.
ARTICLE VI
TERMINATION, AMENDMENT AND WAIVER
Section 6.1 Termination. This Agreement may be terminated at any time
prior to the Closing Date, whether before or after adoption of this Agreement by
the holders of TE Preferred Stock and adoption of the Articles Amendment by the
holders of CEI Preferred Stock contemplated by this Agreement:
(a) by mutual written consent of the boards of directors of CEI and
TE; or
(b) by CEI, by written notice to TE, if:
(i) there shall have been any material breach of any covenant or
agreement of TE hereunder and such breach shall not have been remedied
within ten days after receipt by TE of notice in writing from CEI,
specifying the nature of such breach and requesting that it be remedied;
or
(ii) the board of directors of TE shall withdraw or modify in any
manner adverse to CEI its approval or recommendation of this Agreement
or the Merger; or
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(c) by TE, by written notice to CEI, if:
(i) there shall have been any material breach of any covenant or
agreement of CEI hereunder and such breach shall not have been remedied
within ten days after receipt by CEI of notice in writing from TE,
specifying the nature of such breach and requesting that it be remedied;
or
(ii) the board of directors of CEI shall withdraw or modify in any
manner adverse to TE its approval or recommendation of this Agreement or
the Merger.
Section 6.2 Effect of Termination. In the event of termination of this
Agreement by either CEI or TE, as provided in Section 6.1, there shall be no
liability on the part of either CEI or TE or their respective officers or
directors hereunder, except that Section 4.6 shall survive the termination.
Section 6.3 Amendment. This Agreement may be amended by the parties
hereto, at any time before or after adoption hereof by the holders of TE
Preferred Stock and adoption of the Articles Amendment by the holders of CEI
Preferred Stock, but after such approvals, no such amendment shall (i) alter or
change the amount or kind of shares, cash or rights or any of the proceedings of
the exchange and/or conversion, (ii) alter or change any of the terms and
conditions of this Agreement if any of the alterations or changes, alone or in
the aggregate, would materially adversely affect the holders of any class or
series of Shares, or (iii) alter or change any term of the Amended Articles of
Incorporation of the Surviving Corporation, except for alterations or changes
that could otherwise be adopted by the directors of the Surviving Corporation,
without the further approval of such stockholders. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
parties hereto.
Section 6.4 Waiver. At any time prior to the Effective Time, one party
hereto may (a) extend the time for the performance of any of the obligations or
other acts of the other party hereto and (b) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid if set forth in an
instrument in writing signed on behalf of such party.
ARTICLE VII
GENERAL PROVISIONS
Section 7.1 Non-Survival of Agreements. All agreements in this Agreement
shall not survive the Merger, except as otherwise provided in this Agreement and
except for the agreements contained in Article II and Section 4.5 hereof.
Section 7.2 Brokers. CEI represents and warrants that no broker, finder or
investment banker is entitled to any brokerage, finder's or other fee or
commission in connection with the Merger or the transactions contemplated by
this Agreement based upon arrangements made by or on behalf of CEI. TE
represents and warrants that no broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
Merger or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of TE.
Section 7.3 Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given if (i) delivered personally, or (ii)
sent by reputable overnight courier service, or (iii) telecopied (which is
confirmed), or (iv) five days after being mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) If to CEI, to:
6200 Oak Tree Boulevard
Independence, Ohio 44131
Attention: E. Lyle Pepin
Telephone: (216) 447-2300
Telecopy: (216) 447-3240
With a copy to:
Kevin P. Murphy, Senior Counsel
6200 Oak Tree Boulevard
Independence, Ohio 44131
Telephone: (216) 447-3251
Telecopy: (216) 447-2592
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(b) If to TE, to:
6200 Oak Tree Boulevard
Independence, Ohio 44131
Attention: E. Lyle Pepin
Telephone: (216) 447-2300
Telecopy: (216) 447-3240
With a copy to:
Bruce T. Rosenbaum, Counsel
6200 Oak Tree Boulevard
Independence, Ohio 44131
Telephone: (216) 447-3207
Telecopy: (216) 447-2592
Section 7.4 Miscellaneous. This Agreement (including the documents and
instruments referred to herein) (a) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and oral,
among the parties, or any of them with respect to the subject matter hereof; (b)
shall not be assigned by operation of law or otherwise; and (c) shall be
governed by and construed in accordance with the laws of the State of Ohio
(without giving effect to its rules or principles of conflicts of law).
Section 7.5 Interpretation. When a reference is made in this Agreement to
Sections, such reference shall be to a Section of this Agreement unless
otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement, they shall be deemed to be
followed by the words "without limitation."
Section 7.6 Counterparts; Effect. This Agreement may be executed in one or
more counterparts, each of which shall be deemed to be an original, but all of
which shall constitute one and the same agreement.
Section 7.7 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and, nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
IN WITNESS WHEREOF, CEI and TE have caused this Agreement to be signed by
their respective officers thereunto duly authorized as of the date first written
above.
THE CLEVELAND ELECTRIC ILLUMINATING
COMPANY
By: /s/ E. LYLE PEPIN
Name: E. Lyle Pepin
Title: Secretary
THE TOLEDO EDISON COMPANY
By: /s/ E. LYLE PEPIN
Name: E. Lyle Pepin
Title: Secretary
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APPENDIX I
GLOSSARY OF DEFINED TERMS
"Agreement" means the Agreement of Merger between CEI and TE.
"Articles Amendment" has the meaning set forth in Section 5.1(b) of the
Agreement.
"CEC" means Centerior Energy Corporation, an Ohio corporation.
"CEI" means The Cleveland Electric Illuminating Company, an Ohio corporation.
"CEI Common Stock" means the common stock without par value of CEI.
"CEI Preferred Stock" means the Serial Preferred Stock without par value of CEI.
"CEI Required Statutory Approvals" means any required approvals of the Merger
and other transactions contemplated by the Agreement by the Federal Energy
Regulatory Commission, the U. S. Nuclear Regulatory Commission, The Public
Utilities Commission of Ohio and the Pennsylvania Public Utilities Commission.
"CEI Special Meeting" has the meaning set forth in Section 4.3(b) of the
Agreement.
"CEI Stockholders' Approval" has the meaning set forth in Section 4.3(b) of the
Agreement.
"Certificate" has the meaning set forth in Section 2.3(b) of the Agreement.
"Certificate of Merger" shall mean a certificate of merger substantially in the
form of Exhibit A to the Agreement.
"Closing" has the meaning set forth in Section 3.1 of the Agreement.
"Closing Date" has the meaning set forth in Section 3.1 of the Agreement.
"Dissenting Shares" has the meaning set forth in Section 2.6 of the Agreement.
"Effective Time" has the meaning set forth in Section 1.2 of the Agreement.
"Exchange Agent" shall mean the person or persons authorized and designated by
the Surviving Corporation to perform the function of exchange agent as
contemplated by the Agreement.
"Final Order" has the meaning set forth in Section 5.2(d) of the Agreement.
"Joint Proxy Statement" has the meaning set forth in Section 4.1(a) of the
Agreement.
"Joint Proxy Statement and Registration Statement" has the meaning set forth in
Section 4.1(a) of the Agreement.
"Merger" means the merger of TE into CEI.
"OGCL" means the Ohio General Corporation Law.
"Registration Statement" has the meaning set forth in Section 4.1(a) of the
Agreement.
"SEC" means the Securities Exchange Commission of the United States of America.
"Shares" means collectively the TE Preferred Stock and the CEI Preferred Stock.
"Surviving Corporation" has the meaning set forth in Section 1.1 of the
Agreement.
"Surviving Corporation Common Stock" means the common stock without par value of
the Surviving Corporation.
"Surviving Corporation Preferred Stock" means the Serial Preferred Stock without
par value of the Surviving Corporation.
"TE" means The Toledo Edison Company, an Ohio corporation.
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"TE $100 Preferred Stock" means the cumulative preferred stock ($100 par value)
of TE.
"TE $25 Preferred Stock" means the cumulative preferred stock ($25 par value) of
TE.
"TE Preferred Stock" means the cumulative preferred stock ($100 par value) and
the cumulative preferred stock ($25 par value) of TE.
"TE Required Statutory Approvals" means any required approvals of the Merger and
the other transactions contemplated by the Agreement by the Federal Energy
Regulatory Commission, the U.S. Nuclear Regulatory Commission, the Public
Utilities Commission of Ohio and the Pennsylvania Public Utilities Commission.
"TE Special Meeting" has the meaning set forth in Section 4.3(a) of the
Agreement.
"TE Stockholders' Approval" has the meaning set forth in Section 4.3(a) of the
Agreement.
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EXHIBIT A
CERTIFICATE OF MERGER
OF
THE TOLEDO EDISON COMPANY
(a corporation organized and existing under the
laws of the State of Ohio)
INTO
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
(a corporation organized and existing under the
laws of the State of Ohio)
We, the undersigned, being respectively the President and Secretary of The
Toledo Edison Company ("TE"), an Ohio corporation, and the President and
Secretary of The Cleveland Electric Illuminating Company ("CEI"), an Ohio
corporation, hereby certify pursuant to Section 1701.81 of the Ohio Revised Code
that:
The Agreement of Merger annexed hereto as Exhibit A was approved by the
Board of Directors of TE at a meeting duly called and held on
at which a quorum was present, was adopted by an Action
in Writing by the holder of 100% of the common shares of TE on ,
1994, and was adopted by the affirmative vote of the holders of at least
two-thirds of the shares of Cumulative Preferred Stock of TE at a meeting duly
called and held on , 1994, such common shares and Cumulative
Preferred Stock of TE being the only classes of shares entitled to vote on the
Agreement of Merger.
Such Agreement of Merger was approved by the Board of Directors of CEI at a
meeting duly called and held on at which a quorum was
present, and was adopted by an Action in Writing by the holder of 100% of the
shares of Common Stock of CEI on , 1994, such shares of Common
Stock of CEI being the only class of shares entitled to vote on the Agreement of
Merger.
The Effective Time of the Merger shall be the date of filing of this
Certificate in the Office of the Secretary of State of the State of Ohio.
THE TOLEDO EDISON COMPANY
By:
Dated:
- ------------------------------
And:
THE CLEVELAND ELECTRIC
ILLUMINATING COMPANY
By:
Dated:
- ------------------------------
<PAGE> 99
Marked to Show Changes
from CEI Amended Articles as
Currently in Effect
Key--
Underlined means new.
Cross-out means to be deleted.
[] material is explanatory comment, and would not be included in the
Amendment itself.
EXHIBIT B
PROPOSED AMENDED ARTICLES OF INCORPORATION OF
*[SURVIVING CORPORATION]*{THE CLEVELAND ELECTRIC ILLUMINATING COMPANY}
*ARTICLE ONE. The name of the Corporation shall be
. Prior to the adoption of these Amended Articles of
Incorporation, the name of the Corporation was The Cleveland Electric
Illuminating Company.*
ARTICLE TWO. The place in the State of Ohio where the principal office of
the Corporation shall be located is Independence in the County of Cuyahoga.
ARTICLE THREE. The purposes for which the Corporation is formed are as
follows:
A. To manufacture, generate, develop, create and produce from any
source and by any means, and to purchase, otherwise acquire, use, transmit,
transport, distribute, sell, exchange, lease as lessor or as lessee,
otherwise dispose of, grant licenses with respect to, furnish any kind of
service by means of and engage in research with respect to, any kind or
form of electricity, energy, radiation, light, refrigeration, heat, water,
steam, gas and fuel;
B. To purchase, otherwise acquire, hold, use, improve, develop, build,
manufacture, repair, sell, exchange, encumber, lease as lessor or as
lessee, otherwise dispose of, grant licenses with respect to, furnish any
kind of service by means of and engage in research with respect to, any
kind or form of tangible and intangible personal property and any kind or
form of real estate, interests therein, buildings and structures;
C. To purchase, otherwise acquire, hold, sell, assign, exchange,
encumber and otherwise dispose of shares of stock and other securities of
whatever nature issued by other corporations, governments, firms, trusts
and individuals, both domestic and foreign; and
D. To do any and all things and transact any and all business
incidental to the foregoing.
ARTICLE FOUR. The authorized number of shares of the Corporation is
{112,000,000}*123,000,000* consisting of {4,000,000}*15,000,000* shares of
Serial Preferred Stock without par value (hereinafter called "Serial Preferred
Stock"), 3,000,000 shares of Preference Stock without par value (hereinafter
called "Preference Stock") and 105,000,000 shares of Common Stock without par
value (hereinafter called "Common Stock").
DIVISION A
The Serial Preferred Stock shall have the following express terms:
Section 1. Series. The Serial Preferred Stock may be issued from time to time
in one or more series. All shares of Serial Preferred Stock shall be of equal
rank and shall be identical, except in respect of the matters that may be fixed
by the Board of Directors as hereinafter provided, and each share of a series
shall be identical with all other shares of such series, except as to the date
from which dividends are cumulative. Subject to the provisions of Sections 2 to
7, both inclusive, of this Division, which provisions shall apply to all Serial
Preferred Stock, the Board of Directors hereby is authorized to cause such
shares to be issued in one or more series and with respect
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Language indicated as being shown by strike out in the typeset document is
enclosed in braces "{" and "}" in the electronic format.
Language indicated as being shown with an underline in the typeset document is
enclosed in asterisks "*" and "*" in the electronic format.
<PAGE> 100
to each such series to determine and fix prior to the issuance thereof (and
thereafter, to the extent provided in clause (b) of this Section) the following:
(a) The designation of the series, which may be by distinguishing
number, letter or title;
(b) The number of shares of the series, which number the Board of
Directors may (except where otherwise provided in the creation of the
series) increase or decrease from time to time before or after the issuance
thereof (but not below the number of shares thereof then outstanding);
(c) The annual dividend rate or rates of the series;
(d) The dates on which and the period or periods for which dividends,
if declared, shall be payable and the date or dates from which dividends
shall accrue and be cumulative;
(e) The redemption rights and price or prices, if any, for shares of
the series;
(f) The terms and amount of the sinking fund, if any, for the purchase
or redemption of shares of the series;
(g) The amounts payable on shares of the series in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation;
(h) Whether the shares of the series shall be convertible into Common
Stock or shares of any other class and, if so, the conversion rate or rates
or price or prices, any adjustments thereof and all other terms and
conditions upon which such conversion may be made; and
(i) Restrictions (in addition to those set forth in Sections 5(c) and
5(d) of this Division) on the issuance of shares of the same series or of
any other class or series.
The Board of Directors is authorized to adopt from time to time amendments
to the Amended Articles of Incorporation fixing, with respect to each such
series, the matters described in clauses (a) to (i), both inclusive, of this
Section.
Section 2. Dividends.
(a) The holders of Serial Preferred Stock of each series, in
preference to the holders of Common Stock and of any other class of shares
ranking junior to the Serial Preferred Stock, shall be entitled to receive
out of any funds legally available and when and as declared by the Board of
Directors, dividends in cash at the rate or rates for such series fixed in
accordance with the provisions of Section 1 of this Division and no more,
payable on the dates fixed for such series. Such dividends shall be
cumulative, in the case of shares of each particular series, from and after
the date or dates fixed with respect to such series. No dividends shall be
paid upon or declared or set apart for any series of the Serial Preferred
Stock for any dividend period unless at the same time a like proportionate
dividend for the dividend periods terminating on the same or any earlier
date, ratably in proportion to the respective annual dividend rates fixed
therefor, shall have been paid upon or declared or set apart for all Serial
Preferred Stock of all series then issued and outstanding and entitled to
receive such dividend.
(b) So long as any Serial Preferred Stock shall be outstanding no
dividend, except a dividend payable in Common Stock or other shares ranking
junior to the Serial Preferred Stock, shall be paid or declared or any
distribution be made, except as aforesaid, in respect of the Common Stock
or any other shares ranking junior to the Serial Preferred Stock, nor shall
any Common Stock or any other shares ranking junior to the Serial Preferred
Stock be purchased, retired or otherwise acquired by the Corporation,
except out of the proceeds of the sale of Common Stock or other shares of
the Corporation ranking junior to the Serial Preferred Stock received by
the Corporation subsequent to the date of first issuance of Serial
Preferred Stock of any series, unless:
(1) All accrued and unpaid dividends on Serial Preferred Stock,
including the full dividends for all current dividend periods, shall
have been declared and paid or a sum sufficient for payment thereof set
apart; and
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(2) There shall be no arrearages with respect to the redemption of
Serial Preferred Stock of any series from any sinking fund provided for
shares of such series in accordance with the provisions of Section 1 of
this Division.
Section 3. Redemption.
(a) Subject to the express terms of each series and to the provisions
of Section 5(c)(3) of this Division, the Corporation:
(1) May, from time to time at the option of the Board of Directors,
redeem all or any part of any redeemable series of Serial Preferred
Stock at the time outstanding at the applicable redemption price for
such series fixed in accordance with the provisions of Section 1 of this
Division; and
(2) Shall, from time to time, make such redemptions of each series
of Serial Preferred Stock as may be required to fulfill the requirements
of any sinking fund provided for shares of such series at the applicable
sinking fund redemption price fixed in accordance with the provisions of
Section 1 of this Division *(shares of Serial Preferred Stock acquired
by the Corporation may be applied to the satisfaction of any sinking
fund requirements);*
and shall in each case pay all accrued and unpaid dividends to the
redemption date.
(b) (1) Notice of every such redemption shall be mailed, postage
prepaid, to the holders of record of the Serial Preferred Stock to
be redeemed at their respective addresses then appearing on the
books of the Corporation, not less than 30 days nor more than 60
days prior to the date fixed for such redemption, or such other time
prior thereto as the Board of Directors shall fix for any series
pursuant to Section 1(e) of this Division prior to the issuance
thereof. At any time after notice as provided above has been
deposited in the mail, the Corporation may deposit the aggregate
redemption price of the shares of Serial Preferred Stock to be
redeemed, together with accrued and unpaid dividends thereon to the
redemption date, with any bank or trust company in {Cleveland, }Ohio
or New York, New York, having capital and surplus of not less than
$25,000,000, named in such notice, directed to be paid to the
respective holders of the shares of Serial Preferred Stock so to be
redeemed, in amounts equal to the redemption price of all shares of
Serial Preferred Stock so to be redeemed, on surrender of the stock
certificate or certificates held by such holders; and upon the
deposit of such notice in the mail and the making of such deposit of
money with such bank or trust company, such holders shall cease to
be shareholders with respect to such shares; and from and after the
time such notice shall have been so deposited and such deposit of
money shall have been so made, such holders shall have no interest
or claim against the Corporation with respect to such shares, except
only the right to receive such money from such bank or trust company
without interest or to exercise, before the redemption date, any
unexpired privileges of conversion. In the event less than all of
the outstanding shares of *a series of* Serial Preferred Stock are
to be redeemed, the Corporation shall select by lot the shares so
to be redeemed in such manner as shall be prescribed by the Board of
Directors.
(2) If the holders of shares of Serial Preferred Stock which
have been called for redemption shall not, within 6 years after such
deposit, claim the amount deposited for the redemption thereof, any
such bank or trust company shall, upon demand, pay over to the
Corporation such unclaimed amounts and thereupon such bank or trust
company and the Corporation shall be relieved of all responsibility
in respect thereof and to such holders.
(c) Any shares of Serial Preferred Stock which are (1) redeemed by the
Corporation pursuant to the provisions of this Section, (2) purchased and
delivered in satisfaction of any sinking fund requirements provided for
shares of such series, (3) converted in accordance with the express terms
thereof, or (4) otherwise acquired by the Corporation, shall resume the
status of authorized but unissued shares of Serial Preferred Stock without
serial designation.
Section 4. Liquidation.
(a) (1) The holders of Serial Preferred Stock of any series shall,
in the event of voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the Corporation, be entitled to
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receive in full out of the assets of the Corporation, including its
capital, before any amount shall be paid or distributed among the
holders of the Common Stock or any other shares ranking junior to the
Serial Preferred Stock, the amounts fixed with respect to shares of such
series in accordance with Section 1 of this Division, plus an amount
equal to all dividends accrued and unpaid thereon to the date of payment
of the amount due pursuant to such liquidation, dissolution or winding
up of the affairs of the Corporation. In the event the net assets of the
Corporation legally available therefor are insufficient to permit the
payment upon all outstanding shares of Serial Preferred Stock of the
full preferential amount to which they are respectively entitled, then
such net assets shall be distributed ratably upon outstanding shares of
Serial Preferred Stock in proportion to the full preferential amount to
which each such share is entitled.
(2) After payment to the holders of Serial Preferred Stock of the
full preferential amounts as aforesaid, the holders of Serial
Preferred Stock, as such, shall have no right or claim to any of the
remaining assets of the Corporation.
(b) The merger or consolidation of the Corporation into or with any
other corporation, the merger of any other corporation into it, or the
sale, lease or conveyance of all or substantially all the property or
business of the Corporation, shall not be deemed to be a dissolution,
liquidation or winding up for the purposes of this Section.
Section 5. Voting.
(a) The holders of Serial Preferred Stock shall have no voting rights,
except as provided in this Section or required by law.
(b) (1) If, and so often as, the Corporation shall be in default in
the payment of the equivalent of the full dividends for a number of
dividend payment periods (whether or not consecutive) which in the
aggregate contain at least 540 days on any series of Serial
Preferred Stock at the time outstanding, whether or not earned or
declared, the holders of Serial Preferred Stock of all series,
voting separately as a class, shall be entitled to elect, as herein
provided, two members of the Board of Directors of the Corporation;
provided, however, that the holders of shares of Serial Preferred
Stock shall not have or exercise such special class voting rights
except at meetings of such shareholders for the election of
Directors at which the holders of not less than 50% of the
outstanding shares of Serial Preferred Stock of all series then
outstanding are present in person or by proxy; and provided further
that the special class voting rights provided for in this paragraph
when the same shall have become vested shall remain so vested until
all accrued and unpaid dividends on the Serial Preferred Stock of
all series then outstanding shall have been paid, whereupon the
holders of Serial Preferred Stock shall be divested of their special
class voting rights in respect of subsequent elections of Directors,
subject to the revesting of such special class voting rights in the
event hereinabove specified in this paragraph.
(2) In the event of default entitling the holders of Serial
Preferred Stock to elect two Directors as specified in paragraph (1)
of this Subsection, a special meeting of such holders for the
purpose of electing such Directors shall be called by the Secretary
of the Corporation upon written request of, or may be called by, the
holders of record of at least 10% of the shares of Serial Preferred
Stock of all series at the time outstanding, and notice thereof
shall be given in the same manner as that required for the annual
meeting of shareholders; provided, however, that the Corporation
shall not be required to call such special meeting if the annual
meeting of shareholders shall be held within 120 days after the date
of receipt of the foregoing written request from the holders of
Serial Preferred Stock. At any meeting at which the holders of
Serial Preferred Stock shall be entitled to elect Directors, the
holders of 50% of the then outstanding shares of Serial Preferred
Stock of all series, present in person or by proxy, shall be
sufficient to constitute a quorum, and the vote of the holders of a
majority of such shares so present at any such meeting at which
there shall be such a quorum shall be sufficient to elect the
members of the Board of Directors which the holders of Serial
Preferred Stock are entitled to elect as hereinabove provided.
Notwithstanding any provision of these Amended Articles of
Incorporation or the Regulations of the Corporation or any action
taken by the holders of any class of shares fixing the number of
Directors of the Corporation, the two Directors who may be elected
by the holders of Serial
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Preferred Stock pursuant to this Subsection shall serve in addition to
any other Directors then in office or proposed to be elected otherwise
than pursuant to this Subsection. Nothing in this Subsection shall
prevent any change otherwise permitted in the total number of Directors
of the Corporation or require the resignation of any Director elected
otherwise than pursuant to this Subsection. Notwithstanding any
classification of the other Directors of the Corporation, the two
Directors elected by the holders of Serial Preferred Stock shall be
elected annually for the terms expiring at the next succeeding annual
meeting of shareholders.
(c) The affirmative vote or consent of the holders of at least
two-thirds of the shares of Serial Preferred Stock at the time outstanding,
voting or consenting separately as a class, given in person or by proxy
either in writing or at a meeting called for the purpose, shall be
necessary to effect any one or more of the following (but so far as the
holders of Serial Preferred Stock are concerned, such action may be
effected with such vote or consent):
(1) Any amendment, alteration or repeal of any of the provisions of
the Amended Articles of Incorporation or of the Regulations of the
Corporation which affects adversely the preferences or voting or other
rights of the holders of Serial Preferred Stock; provided, however, that
for the purpose of this paragraph only, neither the amendment of the
Amended Articles of Incorporation so as to authorize, create or change
the authorized or outstanding amount of Serial Preferred Stock or of any
shares of any class ranking on a parity with or junior to the Serial
Preferred Stock nor the amendment of the provisions of the Regulations
so as to change the number of directors of the Corporation shall be
deemed to affect adversely the preferences or voting or other rights of
the holders of Serial Preferred Stock; and provided further, that if
such amendment, alteration or repeal affects adversely the preferences
or voting or other rights of one or more but not all series of Serial
Preferred Stock at the time outstanding, only the affirmative vote or
consent of the holders of at least two-thirds of the number of the
shares at the time outstanding of the series so affected shall be
required;
(2) The authorization, creation or the increase in the authorized
amount of any shares of any class or any security convertible into
shares of any class, in either case ranking prior to the Serial
Preferred Stock; or
(3) The purchase or redemption (for sinking fund purposes or
otherwise) of less than all of the Serial Preferred Stock then
outstanding except in accordance with a stock purchase offer made to all
holders of record of Serial Preferred Stock, unless all dividends on all
Serial Preferred Stock then outstanding for all previous dividend
periods shall have been declared and paid or funds therefor set apart
and all accrued sinking fund obligations applicable thereto shall have
been complied with.
(d) The affirmative vote or consent of the holders of at least a
majority of the shares of Serial Preferred Stock at the time outstanding,
voting or consenting separately as a class, given in person or by proxy
either in writing or at a meeting called for the purpose, shall be
necessary to effect any one or more of the following (but so far as the
holders of Serial Preferred Stock are concerned, such action may be
effected with such vote or consent):
(1) The sale, lease or conveyance by the Corporation of all or
substantially all of its property or business;
(2) The consolidation of the Corporation with or its merger into
any other corporation, unless the corporation resulting from such
consolidation or surviving such merger will not have after such
consolidation or merger any class of shares either authorized or
outstanding ranking prior to or on a parity with the Serial Preferred
Stock except the same number of shares ranking prior to or on a parity
with the Serial Preferred Stock and having the same rights and
preferences as the shares of the Corporation authorized and outstanding
immediately preceding such consolidation or merger (and each holder of
Serial Preferred Stock immediately preceding such consolidation or
merger shall receive the same number of shares with the same rights and
preferences of the resulting or surviving corporation); or
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<PAGE> 104
(3) The authorization of any shares ranking on a parity with the
Serial Preferred Stock or an increase in the authorized number of shares
of Serial Preferred Stock.
(e) Neither the vote, consent nor any adjustment of the voting rights
of holders of shares of Serial Preferred Stock shall be required for an
increase in the number of shares of Common Stock authorized or issued or
for stock splits of the Common Stock or for stock dividends on any class of
stock payable solely in Common Stock; and none of the foregoing actions
shall be deemed to affect adversely the preferences or voting or other
rights of Serial Preferred Stock within the meaning and for the purpose of
this Division.
Section 6. Pre-emptive Rights. No holder of Serial Preferred Stock, as
such, shall have any preemptive right to purchase, have offered to him for
purchase or subscribe for any of the Corporation's shares or other securities of
any class, whether now or hereafter authorized.
Section 7. Definitions. For the purposes of this Division:
(a) Whenever reference is made to shares "ranking prior to the Serial
Preferred Stock", such reference shall mean and include all shares of the
Corporation in respect of which the rights of the holders thereof as to the
payment of dividends or as to distributions in the event of a voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation are given preference over the rights of the holders of Serial
Preferred Stock;
(b) Whenever reference is made to shares "on a parity with the Serial
Preferred Stock", such reference shall mean and include all shares of the
Corporation in respect of which the rights of the holders thereof as to the
payment of dividends and as to distributions in the event of a voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation rank on an equality (except as to the amounts fixed therefor)
with the rights of the holders of Serial Preferred Stock; and
(c) Whenever reference is made to shares "ranking junior to the Serial
Preferred Stock", such reference shall mean and include all shares of the
Corporation other than those defined under Subsections (a) and (b) of this
Section as shares "ranking prior to" or "on a parity with" the Serial
Preferred Stock.
Section 8. Serial Preferred Stock, $7.40 Series A. {Of the 4,000,000
authorized shares of Serial Preferred Stock, }500,000 shares* of Serial
Preferred Stock* are designated as a series entitled "Serial Preferred Stock,
$7.40 Series A" (hereinafter called "Series A Stock"). The Series A Stock shall
have the express terms set forth in this Division as being applicable to all
shares of Serial Preferred Stock as a class, and, in addition, the following
express terms applicable to all shares of Series A Stock as a series of the
Serial Preferred Stock:
(a) The annual dividend rate of the Series A Stock shall be $7.40 per
share.
(b) Dividends on Series A Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on March 1,
1972.
(c) Dividends on Series A Stock shall be cumulative as follows:
(1) With respect to shares included in the initial issue of Series
A Stock and shares issued any time thereafter up to and including the
record date for the payment of the first dividend on the initial issue
of Series A Stock, dividends shall be cumulative from the date of the
initial issue of Series A Stock; and
(2) With respect to shares issued any time after the aforesaid
record date, dividends shall be cumulative from the dividend payment
date next preceding the date of issue of such shares, except that if
such shares are issued during the period commencing the day after the
record date for the payment of a dividend on Series A Stock and ending
on the payment date of that dividend, dividends with respect to such
shares shall be cumulative from that dividend payment date.
(d) Subject to the provisions of Section 5(c)(3) of this Division,
Series A Stock shall be redeemable in the manner provided in Sections
3(b)(1) and (2) of this Division, at any time or from time to time, at the
option of the Board of Directors, upon payment of $107.50 per share if
redeemed on any date prior to
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December 1, 1976, $105.00 per share if redeemed on or after the date last
stated and prior to December 1, 1981, $102.50 per share if redeemed on or
after the date last stated and prior to December 1, 1986, and $101.00 per
share if redeemed on or after the date last stated, plus in each case an
amount equal to all dividends accrued and unpaid thereon to the date of
redemption; provided, however, that Series A Stock may not be redeemed
prior to December 1, 1976, directly or indirectly as a part of or in
anticipation of any refunding of Series A Stock involving the incurring of
indebtedness or the issuance of shares of Serial Preferred Stock or any
other shares ranking prior to or on a parity with the Serial Preferred
Stock if the interest on such indebtedness or the dividends on such shares
result in an effective cost to the Corporation of less than 7.49% per year.
(e) The amount payable per share on Series A Stock in the event of any
voluntary liquidation, dissolution or winding up of the affairs of the
Corporation shall be the redemption price then in effect as set forth in
Subsection (d) of this Section and in the event of any involuntary
liquidation, dissolution or winding up of the affairs of the Corporation
shall be $100, plus in each case an amount equal to all dividends accrued
and unpaid thereon to the date of payment of the amount due pursuant to
this Subsection.
Section 9. Serial Preferred Stock, $7.56 Series B. {Of the 4,000,000
authorized shares of Serial Preferred Stock, }450,000 shares* of Serial
Preferred Stock* are designated as a series entitled "Serial Preferred Stock,
$7.56 Series B" (hereinafter called "Series B Stock"). The Series B Stock shall
have the express terms set forth in this Division as being applicable to all
shares of Serial Preferred Stock as a class, and, in addition, the following
express terms applicable to all shares of Series B Stock as a series of the
Serial Preferred Stock:
(a) The annual dividend rate of the Series B Stock shall $7.56 per
share.
(b) Dividends on Series B Stock shall be payable, if declared,
quarterly on the first day of January, April, July and October of each
year, the first quarterly dividend being payable, if declared, on October
1, 1972.
(c) Dividends on Series B Stock shall be cumulative as follows:
(1) With respect to shares included in the initial issue of Series
B Stock and shares issued any time thereafter up to and including the
record date for the payment of the first dividend on the initial issue
of Series B Stock, dividends shall be cumulative from the date of the
initial issue of Series B Stock; and
(2) With respect to shares issued any time after the aforesaid
record date, dividends shall be cumulative from the dividend payment
date next preceding the date of issue of such shares, except that if
such shares are issued during the period commencing the day after the
record date for the payment of a dividend on Series B Stock and ending
on the payment date of that dividend, dividends with respect to such
shares shall be cumulative from that dividend payment date.
(d) Subject to the provisions of Section 5(c)(3) of this Division,
Series B Stock shall be redeemable in the manner provided in Sections
3(b)(1) and (2) of this Division, at any time or from time to time, at the
option of the Board of Directors, upon payment of $108.76 per share if
redeemed on any date prior to August 1, 1977, $106.35 per share if redeemed
on or after the date last stated and prior to August 1, 1982, $103.78 per
share if redeemed on or after the date last stated and prior to August 1,
1987, and $102.26 per share if redeemed on or after the date last stated,
plus in each case an amount per share equal to all dividends accrued and
unpaid thereon to the date of redemption; provided, however, that Series B
Stock may not be redeemed prior to August 1, 1977, directly or indirectly
as a part of or in anticipation of any refunding of Series B Stock
involving the incurring of indebtedness or the issuance of shares of Serial
Preferred Stock or any other shares ranking prior to or on a parity with
the Serial Preferred Stock if the interest on such indebtedness or the
dividends on such shares result in an effective cost to the Corporation of
less than 7.55% per year.
(e) The amount payable per share on Series B Stock in the event of any
voluntary liquidation, dissolution or winding up of the affairs of the
Corporation shall be the redemption price then in effect as set forth in
Subsection (d) of this Section and in the event of any involuntary
liquidation, dissolution or winding
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<PAGE> 106
up of the affairs of the Corporation shall be $100, plus in each case an
amount equal to all dividends accrued and unpaid thereon to the date of
payment of the amount due pursuant to this Subsection.
Section 10. Serial Preferred Stock, $7.35 Series C. {Of the 4,000,000
authorized shares of Serial Preferred Stock, }250,000 shares* of Serial
Preferred Stock* are designated as a series entitled "Serial Preferred Stock,
$7.35 Series C" (hereinafter called "Series C Stock"). The Series C Stock
shall have the express terms set forth in this Division as being applicable to
all shares of Serial Preferred Stock as a class, and, in addition, the
following express terms applicable to all shares of Series C Stock as a series
of the Serial Preferred Stock:
(a) The annual dividend rate of the Series C Stock shall be $7.35 per
share.
(b) Dividends on Series C Stock shall be payable, if declared,
quarterly on the first day of February, May, August and November of each
year, the first quarterly dividend being payable, if declared, on November
1, 1973, to the extent then accrued.
(c) Dividends on Series C Stock shall be cumulative from the date of
initial issue.
(d) Subject in each case to the provisions of Section 5(c)(3) of this
Division, Series C Stock shall be redeemable in the manner provided in
Sections 3(b)(1) and (2) of this Division, and as follows:
(1) The Series C Stock shall be redeemed in part from time to time
for the Sinking Fund as hereinafter set forth at a redemption price of
$100 per share, plus in each case an amount per share equal to all
dividends accrued and unpaid thereon to the date of redemption (such
price plus such amount being hereinafter called the "Sinking Fund
Redemption Price"). As and for a Sinking Fund for the Series C Stock, so
long as and to the extent that any shares thereof are outstanding, the
Corporation will redeem on each August 1 (hereinafter called "Sinking
Fund Date") commencing with August 1, 1984, 10,000 shares of Series C
Stock at the Sinking Fund Redemption Price (the Corporation's obligation
to redeem such number of such shares on any Sinking Fund Date being
hereinafter referred to as the "Sinking Fund Obligation"). Such
redemption shall be mandatory, subject to any applicable restrictions of
law, and not optional to the Corporation. If the Corporation shall for
any reason fail to discharge its Sinking Fund Obligation on any Sinking
Fund Date, such Sinking Fund Obligation to the extent not discharged
shall, without prejudice to any other right or remedy, become an
additional Sinking Fund Obligation for each succeeding Sinking Fund Date
until fully discharged.
(2) On each Sinking Fund Date so long as and to the extent that
Series C Stock shall be outstanding, and provided that the Corporation
has fulfilled its Sinking Fund Obligation on such date, the Corporation
may at the option of the Board of Directors redeem up to but not in
excess of 10,000 additional shares of Series C Stock at the redemption
price of $100 per share plus in each case an amount per share equal to
all dividends accrued and unpaid thereon to the date of redemption,
provided however that no more than 83,000 shares of Series C Stock in
the aggregate may be redeemed pursuant to this Subsection (d)(2).
(3) The Corporation at the option of the Board of Directors may at
any time and from time to time redeem all or any part of the outstanding
Series C Stock upon payment of $110 per share if redeemed on any date
prior to August 1, 1983, $103 per share if redeemed on or after the date
last stated and prior to August 1, 1988, and $101 per share if redeemed
on or after August 1, 1988, plus in each case an amount per share equal
to all dividends accrued and unpaid thereon to the date of redemption;
provided, however, that Series C Stock may not be redeemed prior to
August 1, 1978, directly or indirectly (i) as a part of or in
anticipation of any refunding of Series C Stock involving the borrowing
of funds or the issuance of shares of Serial Preferred Stock or any
other shares ranking prior to or on a parity with the Serial Preferred
Stock if the interest on such borrowed funds or the dividends on such
shares result in an effective cost to the Corporation of less than 7.35%
per year, or (ii) from proceeds derived from the sale of equity
securities junior to Series C Stock.
(4) On August 1, 2008, the Corporation shall redeem all remaining
shares of Series C Stock, if any, then outstanding at the redemption
price of $100 per share plus in each case an amount per share equal to
all dividends accrued and unpaid thereon to the date of redemption.
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(e) The amount payable per share on Series C Stock in the event of any
voluntary liquidation, dissolution or winding up of the affairs of the
Corporation shall be the redemption price then in effect as set forth in
Subsection (d)(3) of this Section and in the event of any involuntary
liquidation, dissolution or winding up of the affairs of the Corporation
shall be $100, plus in each case an amount equal to all dividends accrued
and unpaid thereon to the date of payment of the amount due pursuant to
this Subsection.
(f) The number of shares of Series C Stock shall not be increased
above, and shall not exceed 250,000. Series C Stock once redeemed shall not
be reissued as shares of Series C Stock, but, having been restored to the
status of authorized but unissued shares of Serial Preferred Stock without
serial designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
Section 11. Serial Preferred Stock, $12.00 Series D. Redeemed June 16,
1978.
Section 12. Serial Preferred Stock, $88.00 Series E. {Of the 4,000,000
authorized shares of Serial Preferred Stock, }60,000 shares* of Serial Preferred
Stock* are designated as a series entitled "Serial Preferred Stock, $88.00
Series E" (hereinafter called "Series E Stock"). The Series E Stock shall have
the express terms set forth in this Division as being applicable to all shares
of Serial Preferred Stock as a class, and, in addition, the following express
terms applicable to all shares of Series E Stock as a series of the Serial
Preferred Stock:
(a) The annual dividend rate of the Series E Stock shall be $88.00 per
share.
(b) Dividends on Series E Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on September
1, 1976, to the extent then accrued.
(c) Dividends on Series E Stock shall be cumulative from the date of
initial issue.
(d) Subject in each case to the provisions of Section 5(c)(3) of this
Division, Series E Stock shall be redeemable in the manner provided in
Sections 3(b)(1) and (2) of this Division, and as follows:
(1) The Series E Stock shall be redeemed in part from time to time
for the Sinking Fund as hereinafter set forth at a redemption price of
$1,000 per share, plus in each case an amount per share equal to all
dividends accrued and unpaid thereon to the date of redemption (such
price plus such amount being hereinafter called the "Sinking Fund
Redemption Price"). As and for a Sinking Fund for the Series E Stock, so
long as and to the extent that any shares thereof are outstanding, the
Corporation will redeem on each June 1 (hereinafter called "Sinking Fund
Date") commencing with June 1, 1981, 3,000 shares of Series E Stock at
the Sinking Fund Redemption Price (the Corporation's obligation to
redeem such number of such shares on any Sinking Fund Date being
hereinafter referred to as the "Sinking Fund Obligation"). Such
redemption shall be mandatory, subject to any applicable restrictions of
law, and not optional to the Corporation. If the Corporation shall for
any reason fail to discharge its Sinking Fund Obligation on any Sinking
Fund Date, such Sinking Fund Obligation to the extent not discharged
shall, without prejudice to any other right or remedy, become an
additional Sinking Fund Obligation for each succeeding Sinking Fund Date
until fully discharged.
(2) On each Sinking Fund Date so long as and to the extent that
Series E Stock shall be outstanding, and provided that the Corporation
has fulfilled its Sinking Fund Obligation on such date, the Corporation
may at the option of the Board of Directors redeem up to but not in
excess of 3,000 additional shares of Series E Stock at the redemption
price of $1,000 per share plus in each case an amount per share equal to
all dividends accrued and unpaid thereon to the date of redemption;
provided, however, that no more than 20,000 shares of Series E Stock in
the aggregate may be redeemed pursuant to this Subsection (d)(2).
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<PAGE> 108
(3) The Corporation at the option of the Board of Directors may at
any time and from time to time redeem all or any part of the outstanding
Series E Stock upon payment of $1,088 per share if redeemed on any date
prior to June 1, 1986, and as follows:
<TABLE>
<CAPTION>
IF REDEEMED IN UPON
THE 12 MONTHS PAYMENT
ENDING MAY 31 PER SHARE OF
--------------- ------------
<S> <C>
1987.......................................... $ 1,049.74
1988.......................................... 1,045.91
1989.......................................... 1,042.09
1990.......................................... 1,038.26
1991.......................................... 1,034.43
1992.......................................... 1,030.61
1993.......................................... 1,026.78
1994.......................................... 1,022.96
1995.......................................... 1,019.13
1996.......................................... 1,015.30
1997.......................................... 1,011.48
1998.......................................... 1,007.65
1999.......................................... 1,003.83
2000 or in any year thereafter................ 1,000.00
</TABLE>
plus in each case an amount per share equal to all dividends accrued and
unpaid thereon to the date of redemption; provided, however, that Series
E Stock may not be redeemed prior to June 1, 1986, directly or
indirectly (i) as a part of or in anticipation of any refunding of
Series E Stock involving the borrowing of funds or the issuance of
shares of Serial Preferred Stock or any other shares ranking prior to or
on a parity with the Serial Preferred Stock if the interest on such
borrowed funds or the dividends on such shares result in an effective
cost to the Corporation of less than 8.80% per year, or (ii) from
proceeds derived from the sale of equity securities junior to Series E
Stock.
(4) On June 1, 2001, the Corporation shall redeem all remaining
shares of Series E Stock, if any, then outstanding at the redemption
price of $1,000 per share plus in each case an amount per share equal to
all dividends accrued and unpaid thereon to the date of redemption.
(e) The amount payable per share on Series E Stock in the event of any
voluntary liquidation, dissolution or winding up of the affairs of the
Corporation shall be the redemption price then in effect as set forth in
Subsection (d)(3) of this Section and in the event of any involuntary
liquidation, dissolution or winding up of the affairs of the Corporation
shall be $1,000, plus in each case an amount equal to all dividends accrued
and unpaid thereon to the date of payment of the amount due pursuant to
this Subsection.
(f) The number of shares of Series E Stock shall not be increased
above, and shall not exceed, 60,000. Series E Stock once redeemed shall not
be reissued as shares of Series E Stock, but having been restored to the
status of authorized but unissued shares of Serial Preferred Stock without
serial designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
Section 13. Serial Preferred Stock, $75.00 Series F. Redeemed November 1,
1991.
Section 14. Serial Preferred Stock, $80.00 Series G. Redeemed December 1,
1990.
Section 15. Serial Preferred Stock, $145.00 Series H. Redeemed June 1,
1990.
Section 16. Serial Preferred Stock, $145.00 Series I. Redeemed June 1,
1991.
Section 17. Serial Preferred Stock, $113.50 Series J. Redeemed June 1,
1987.
Section 18. Serial Preferred Stock, $113.50 Series K. Redeemed June 1,
1991.
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Section 19. Serial Preferred Stock, Adjustable Rate Series L. {Of the
4,000,000 authorized shares of Serial Preferred Stock, }500,000 shares* of
Serial Preferred Stock* are designated as a series entitled "Serial Preferred
Stock, Adjustable Rate Series L" (hereinafter called "Series L Stock"). The
Series L Stock shall have the express terms set forth in this Division as being
applicable to all shares of Serial Preferred Stock as a class, and, in
addition, the following express terms applicable to all shares of Series L
Stock as a series of the Serial Preferred Stock:
(a) The dividend rate of the Series L Stock shall be as follows:
(1) An annual rate of $11.36 per share for the dividend period from
the date of initial issue of the Series L Stock to and including March
31, 1984 and an annual rate of .50 of 1% below the Applicable Rate (as
defined in Subsection (a)(2)) from time to time in effect for each
subsequent three-month dividend period; provided, however, that the
annual dividend rate shall in no event be less than 7.00% or more than
13.00% for any dividend period.
(2) The applicable rate (hereinafter called the "Applicable Rate")
for any dividend period shall be the highest of the Treasury Bill Rate,
the Ten Year Constant Maturity Rate and the Twenty Year Constant
Maturity Rate (each as hereinafter defined) for such dividend period,
except that in the event the Corporation determines in good faith that
for any reason one or more of such rates cannot be determined for any
dividend period, then the Applicable Rate for such dividend shall be the
higher of whichever of such rates can be so determined or in the event
the Corporation determines in good faith that none of such rates can be
determined for any dividend period, then the Applicable Rate in effect
for the preceding dividend period shall be continued for such dividend
period.
(3) Except as provided below in this Subsection (a)(3), the
"Treasury Bill Rate" for each dividend period shall be the arithmetic
average of the two most recent weekly per annum market discount rates
(or the one weekly per annum market discount rate, if only one such rate
is published during the relevant Calendar Period (as hereinafter
defined)) for three-month U.S. Treasury bills, as published weekly by
the Federal Reserve Board during the Calendar Period immediately prior
to the last ten calendar days of March, June, September or December, as
the case may be, prior to the dividend period for which the dividend
rate on the Series L Stock is being determined. In the event that the
Federal Reserve Board does not publish such a weekly per annum market
discount rate during any such Calendar Period, then the Treasury Bill
Rate for the related dividend period shall be the arithmetic average of
the two most recent weekly per annum market discount rates (or the one
weekly per annum market discount rate, if only one such rate is
published during the relevant Calendar Period) for three-month U.S.
Treasury bills, as published weekly during such Calendar Period by any
Federal Reserve Bank or by any U.S. Government department or agency
selected by the Corporation. In the event that a per annum market
discount rate for three-month U.S. Treasury bills is not published by
the Federal Reserve Board or by any Federal Reserve Bank or by any U.S.
Government department or agency during such Calendar Period, then the
Treasury Bill Rate for such dividend period shall be the arithmetic
average of the two most recent weekly per annum market discount rates
(or the one weekly per annum market discount rate, if only one such rate
is published during the relevant Calendar Period) for all of the U.S.
Treasury bills then having maturities of not less than 80 nor more than
100 days, as published during such Calendar Period by the Federal
Reserve Board or, if the Federal Reserve Board does not publish such
rates, by any Federal Reserve Bank or by any U.S. Government Department
or agency selected by the Corporation. In the event the Corporation
determines in good faith that for any reason no such U.S. Treasury bill
rates are published as provided above during such Calendar Period, then
the Treasury Bill Rate for such dividend period shall be the arithmetic
average of the per annum market discount rates based upon the closing
bids during such Calendar Period for each of the issues of marketable
non-interest bearing U.S. Treasury securities with a maturity of not
less than 80 nor more than 100 days from the date of each such
quotation, as quoted daily for each business day in New York City (or
less frequently if daily quotations are not generally available) to the
Corporation by at least three recognized U.S. Government securities
dealers selected by the Corporation. In the event the Corporation
determines in good faith that for any reason the Corporation cannot
determine the Treasury Bill Rate for any dividend period as provided
above in this Subsection (a)(3), the Treasury Bill Rate for
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<PAGE> 110
such dividend period shall be the arithmetic average of the per annum
market discount rates based upon the closing bids during the related
Calendar Period for each of the issues of marketable interest bearing
U.S. Treasury securities with a maturity of not less than 80 nor more
than 100 days from the date of each such quotation, as quoted daily for
each business day in New York City (or less frequently if daily
quotations are not generally available) to the Corporation by at least
three recognized U.S. Government securities dealers selected by the
Corporation.
(4) Except as provided below in this Subsection (a)(4), the "Ten
Year Constant Maturity Rate" for each dividend period shall be the
arithmetic average of the two most recent weekly per annum Ten Year
Average Yields (or the one weekly per annum Ten Year Average Yield, if
only one such Yield is published during the relevant Calendar Period),
as published weekly by the Federal Reserve Board during the Calendar
Period immediately prior to the last ten calendar days of March, June,
September or December, as the case may be, prior to the dividend period
for which the dividend rate on the Series L Stock is being determined.
In the event that the Federal Reserve Board does not publish such a
weekly per annum Ten Year Average Yield during such Calendar Period,
then the Ten Year Constant Maturity Rate for such dividend period shall
be the arithmetic average of the two most recent weekly per annum Ten
Year Average Yields (or the one weekly per annum Ten Year Average Yield,
if only one such Yield is published during the relevant Calendar
Period), as published weekly during such Calendar Period by any Federal
Reserve Bank or by any U.S. Government department or agency selected by
the Corporation. In the event that a per annum Ten Year Average Yield is
not published by the Federal Reserve Board or by any Federal Reserve
Bank or by any U.S. Government department or agency during such Calendar
Period, then the Ten Year Constant Maturity Rate for such dividend
period shall be the arithmetic average of the two most recent weekly per
annum average yields to maturity (or the one weekly average yield to
maturity, if only one such yield is published during the relevant
Calendar Period) for all of the actively traded marketable U.S. Treasury
fixed interest rate securities (other than Special Securities (as
hereinafter defined)) then having maturities of not less than eight nor
more than twelve years, as published during such Calendar Period by the
Federal Reserve Board or, if the Federal Reserve Board does not publish
such yields, by any Federal Reserve Bank or by any U.S. Government
department or agency selected by the Corporation. In the event the
Corporation determines in good faith that for any reason the Corporation
cannot determine the Ten Year Constant Maturity Rate for any dividend
period as provided above in this Subsection (a)(4), then the Ten Year
Constant Maturity Rate for such dividend period shall be the arithmetic
average of the per annum average yields to maturity based upon the
closing bids during such Calendar Period for each of the issues of
actively traded marketable U.S. Treasury fixed interest rate securities
(other than Special Securities) with a final date not less than eight
nor more than twelve years from the date of each such quotation, as
quoted daily for each business day in New York City (or less frequently
if daily quotations are not generally available) to the Corporation by
at least three recognized U.S. Government securities dealers selected by
the Corporation.
(5) Except as provided below in this Subsection (a)(5), the "Twenty
Year Constant Maturity Rate" for each dividend period shall be the
arithmetic average of the two most recent weekly per annum Twenty Year
Average Yields (or the one weekly per annum Twenty Year Average Yield,
if only one such Yield is published during the relevant Calendar
Period), as published weekly by the Federal Reserve Board during the
Calendar Period immediately prior to the last ten calendar days of
March, June, September or December, as the case may be, prior to the
dividend period for which the dividend rate on the Series L Stock is
being determined. In the event the Federal Reserve Board does not
publish such a weekly per annum Twenty Year Average Yield during such
Calendar Period, then the Twenty Year Constant Maturity Rate for such
dividend period shall be the arithmetic average of the two most recent
weekly per annum Twenty Year Average Yields (or the one weekly per annum
Twenty Year Average Yield, if only One such Yield is published during
the relevant Calendar Period), as published weekly during such Calendar
Period by any Federal Reserve Bank or by any U.S. Government department
or agency selected by the Corporation. In the event that a per annum
Twenty Year Average Yield is not published by the Federal Reserve Board
or by any Federal Reserve Bank or by any U.S. Government department or
agency during such Calendar Period, then the Twenty Year
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<PAGE> 111
Constant Maturity Rate for such dividend period shall be the arithmetic
average of the two most recent weekly per annum average yields to
maturity (or the one weekly average yield to maturity, if only one such
yield is published during the relevant Calendar Period) for all of the
actively traded marketable U.S. Treasury fixed interest rate securities
(other than Special Securities) then having maturities of not less than
eighteen nor more than twenty-two years, as published during such
Calendar Period by the Federal Reserve Board or, if the Federal Reserve
Board does not publish such yields, by any Federal Reserve Bank or by
any U.S. Government department or agency selected by the Corporation. In
the event that the Corporation determines in good faith that for any
reason the Corporation cannot determine the Twenty Year Constant
Maturity Rate for any dividend period as provided above in this
Subsection (a)(5), then the Twenty Year Constant Maturity Rate for such
dividend period shall be the arithmetic average of the per annum average
yields to maturity based upon the closing bids during such Calendar
Period for each of the issues of actively traded marketable U.S.
Treasury fixed interest rate securities (other than Special Securities)
with a final maturity date not less than eighteen nor more than
twenty-two years from the date of each quotation, as quoted daily for
each business day in New York City (or less frequently if daily
quotations are not generally available) to the Corporation by at least
three recognized U.S. Government securities dealers selected by the
Corporation.
(6) The Treasury Bill Rate, the Ten Year Constant Maturity Rate and
the Twenty Year Constant Maturity Rate each shall be rounded to the
nearest one hundredth of a percentage point.
(7) The fixed dividend rate per share for each dividend period
shall be computed in dollars by dividing the dividend rate for such
dividend period by four and, in the case of an Applicable Rate,
converting such rate to a fraction and multiplying it by $100; provided
that the dividend payable for the initial dividend period or any period
longer or shorter than a full quarterly dividend period shall be
computed on the basis of a 360-day year consisting of 30-day months.
(8) The dividend rate with respect to each dividend period shall be
calculated as promptly as practicable by the Corporation. The
mathematical accuracy of each such calculation shall be confirmed in
writing by the Corporation's independent auditors. The Corporation shall
cause each individual rate to be published in a newspaper of general
circulation in New York City prior to the commencement of the dividend
period to which it applies.
(9) As used in this Subsection (a), the term "Calendar Period"
means a period of fourteen calendar days; the term "Special Securities"
means securities which can, at the option of the holder, be surrendered
at face value in payment of any Federal estate tax or which provide tax
benefits to the holder and are priced to reflect such tax benefits or
which were originally issued at a deep or substantial discount; the term
"Ten Year Average Yield" means the average yield to maturity for
actively traded marketable U.S. Treasury fixed interest rate securities
(adjusted to constant maturities of ten years); and the term "Twenty
Year Average Yield" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities (adjusted
to constant maturities of twenty years).
(b) Dividends on Series L Stock shall be payable, if declared,
quarterly on the first day of January, April, July and October of each
year, the first quarterly dividend being payable, if declared, on April 1,
1984, to the extent accrued.
(c) Dividends on Series L Stock shall be cumulative as follows:
(1) With respect to shares included in the initial issue of Series
L Stock and shares issued any time thereafter up to and including the
record date for the payment of the first dividend on the initial issue
of Series L Stock, dividends shall be cumulative from the date of the
initial issue of Series L Stock; and
(2) With respect to shares issued any time after the aforesaid
record date, dividends shall be cumulative from the dividend payment
date next preceding the date of issue of such shares, except that if
such shares are issued during the period commencing the day after the
record date for the payment of a dividend on Series L Stock and ending
on the payment date of that dividend, dividends with respect to such
shares shall be cumulative from that dividend payment date.
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(d) Subject to the provisions of Section 5(c)(3) of this Division,
Series L Stock shall be redeemable in the manner provided in Sections
3(b)(1) and (2) of this Division, at any time or from time to time, at the
option of the Board of Directors, upon payment of $111.36 per share if
redeemed on any date prior to January 1, 1985, $109.69 per share if
redeemed on or after the date last stated and prior to January 1, 1986,
$108.02 per share if redeemed on or after the date last stated and prior to
January 1, 1987, $106.34 per share if redeemed on or after the date last
stated and prior to January 1, 1988, $104.67 per share if redeemed on or
after the date last stated and prior to January 1, 1989, $103.00 if
redeemed on or after the date last stated and prior to January 1, 1994, and
$100.00 per share if redeemed on or after the date last stated, plus in
each case an amount equal to all dividends accrued and unpaid thereon to
the date of redemption; provided, however, that Series L Stock may not be
redeemed prior to January 1, 1989, directly or indirectly as a part of or
in anticipation of any refunding of Series L Stock involving the incurring
of indebtedness or the issuance of shares of Serial Preferred Stock or any
other shares ranking prior to or on a parity with the Serial Preferred
Stock if the interest on such indebtedness or the dividends on such shares
results in an effective annual cost to the Corporation of less than the
annual dividend rate of the Series L Stock. In the case of a refunding
redemption of Series L Stock with borrowed funds or shares having a fixed
interest or dividend rate, the annual rate of the Series L Stock is the
dividend payable on the Series L Stock on or, if it is not payable on, then
payable most recently before, the date the redemption notice is deposited
in the mail. In the case of a refunding redemption of Series L Stock with
borrowed funds or shares having an adjustable interest or dividend rate,
the effective annual interest or dividend cost of such borrowed funds or
shares shall be deemed to be lower than the annual dividend rate of the
Series L Stock if either (i) the initial annual interest or dividend rate
of such borrowed funds or shares is lower than the annual dividend rate of
the Series L Stock payable on, or if it is not payable on, then payable
most recently before, the date the redemption notice is deposited in the
mail or (ii) the adjusted annual interest or dividend rate of such borrowed
funds or shares definitely would, under the applicable adjustment formula,
be lower at any time while such borrowing or shares would be outstanding
than the adjusted annual dividend rate of the Series L Stock would be at
the corresponding time if it also were to remain outstanding.
(e) The amount payable per share on Series L Stock in the event of any
voluntary liquidation, dissolution or winding up of the affairs of the
Corporation shall be the redemption price then in effect as set forth in
Subsection (d) of this Section and in the event of any involuntary
liquidation, dissolution or winding up of the affairs of the Corporation
shall be $100, plus in each case an amount equal to all dividends accrued
and unpaid thereon to the date of payment of the amount due pursuant to
this Subsection.
(f) The number of shares of Series L Stock shall not be increased
above, and shall not exceed 500,000. Series L Stock once purchased,
acquired or otherwise redeemed by the Corporation shall not be reissued as
shares of Series L Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
Section 20. Serial Preferred Stock, Adjustable Rate Series M. {Of the
4,000,000 authorized shares of Serial Preferred Stock, }500,000 shares* of
Serial Preferred Stock* are designated as a series entitled "Serial Preferred
Stock, Adjustable Rate Series M" (hereinafter called "Series M Stock"). The
Series M Stock shall have the express terms set forth in this Division as being
applicable to all shares of Serial Preferred Stock as a class and, in addition,
the following express terms applicable to all shares of Series M Stock as a
series of the Serial Preferred Stock:
(a) The dividend rate of the Series M Stock shall be as follows:
(1) An annual rate of $9.27 per share for the dividend period from
the date of initial issue of the Series M Stock to and including January
31, 1986 and an annual rate 1.15 percentage points below the Applicable
Rate (as defined in Subsection (a)(2)) from time to time in effect for
each subsequent three-month dividend period; provided, however, that the
annual dividend rate shall in no event be less than 7.00% or more than
13.50% for any dividend period.
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<PAGE> 113
(2) The applicable rate (hereinafter called the "Applicable Rate")
for any dividend period shall be the highest of the Treasury Bill Rate,
the Ten Year Constant Maturity Rate and the Twenty Year Constant
Maturity Rate (each as hereinafter defined) for such dividend period,
except that in the event the Corporation determines in good faith that
for any reason one or more of such rates cannot be determined for any
dividend period, then the Applicable Rate for such dividend shall be the
higher of whichever of such rates can be so determined or in the event
the Corporation determines in good faith that none of such rates can be
determined for any dividend period, then the Applicable Rate in effect
for the preceding dividend period shall be continued for such dividend
period.
(3) Except as provided below in this Subsection (a)(3), the
"Treasury Bill Rate" for each dividend period shall be the arithmetic
average of the two most recent weekly per annum market discount rates
(or the one weekly per annum market discount rate, if only one such rate
is published during the relevant Calendar Period (as hereinafter
defined)) for three-month U.S. Treasury bills, as published weekly by
the Federal Reserve Board during the Calendar Period immediately prior
to the last ten calendar days of January, April, July or October, as the
case may be, prior to the dividend period for which the dividend rate on
the Series M Stock is being determined. In the event that the Federal
Reserve Board does not publish such a weekly per annum market discount
rate during such Calendar Period, then the Treasury Bill Rate for such
dividend period shall be the arithmetic average of the two most recent
weekly per annum market discount rates (or the one weekly per annum
market discount rate, if only one such rate is published during such
Calendar Period) for three-month U.S. Treasury bills, as published
weekly during such Calendar Period by any Federal Reserve Bank or by any
U.S. Government department or agency selected by the Corporation. In the
event that a per annum market discount rate for three-month U.S.
Treasury bills is not published by the Federal Reserve Board or by any
Federal Reserve Bank or by any U.S. Government department or agency
during such Calendar Period, then the Treasury Bill Rate for such
dividend period shall be the arithmetic average of the two most recent
weekly per annum market discount rates (or the one weekly per annum
market discount rate, if only one such rate is published during such
Calendar Period) for all of the U.S. Treasury bills then having
maturities of not less than 80 nor more than 100 days, as published
during such Calendar Period by the Federal Reserve Board or, if the
Federal Reserve Board does not publish such rates, by any Federal
Reserve Bank or by any U.S. Government department or agency selected by
the Corporation. In the event the Corporation determines in good faith
that for any reason no such U.S. Treasury bill rates are published as
provided above during such Calendar Period, then the Treasury Bill Rate
for such dividend period shall be the arithmetic average of the per
annum market discount rates based upon the closing bids during such
Calendar Period for each of the issues of marketable noninterest bearing
U.S. Treasury securities with a maturity of not less than 80 nor more
than 100 days from the date of each such quotation, as quoted daily for
each business day in New York City (or less frequently if daily
quotations are not generally available) to the Corporation by at least
three recognized U.S. Government securities dealers selected by the
Corporation. In the event the Corporation determines in good faith that
for any reason the Corporation cannot determine the Treasury Bill Rate
for such dividend period as provided above in this Subsection (a)(3),
the Treasury Bill Rate for such dividend period shall be the arithmetic
average of the per annum market discount rates based upon the closing
bids during such Calendar Period for each of the issues of marketable
interest bearing U.S. Treasury securities with a maturity of not less
than 80 nor more than 100 days from the date of each such quotation, as
quoted daily for each business day in New York City (or less frequently
if daily quotations are not generally available) to the Corporation by
at least three recognized U.S. Government securities dealers selected by
the Corporation.
(4) Except as provided below in this Subsection (a)(4), the "Ten
Year Constant Maturity Rate" for each dividend period shall be the
arithmetic average of the two most recent weekly per annum Ten Year
Average Yields (or the one weekly per annum Ten Year Average Yield, if
only one such Yield is published during the relevant Calendar Period),
as published weekly by the Federal Reserve Board during the Calendar
Period immediately prior to the last ten calendar days of January,
April, July or October, as the case may be, prior to the dividend period
for which the dividend rate on the Series M Stock is being determined.
In the event that the Federal Reserve Board does not publish such a
weekly
B-15
<PAGE> 114
per annum Ten Year Average Yield during such Calendar Period, then the
Ten Year Constant Maturity Rate for such dividend period shall be the
arithmetic average of the two most recent weekly per annum Ten Year
Average Yields (or the one weekly per annum Ten Year Average Yield, if
only one such Yield is published during such Calendar Period), as
published weekly during such Calendar Period by any Federal Reserve Bank
or by any U.S. Government department or agency selected by the
Corporation. In the event that a per annum Ten Year Average Yield is not
published by the Federal Reserve Board or by any Federal Reserve Bank or
by any U.S. Government department or agency during such Calendar Period,
then the Ten Year Constant Maturity Rate for such dividend period shall
be the arithmetic average of the two most recent weekly per annum
average yields to maturity (or the one weekly average yield to maturity,
if only one such yield is published during such Calendar Period) for all
of the actively traded marketable U.S. Treasury fixed interest rate
securities (other than Special Securities (as hereinafter defined)) then
having maturities of not less than eight nor more than twelve years, as
published during such Calendar Period by the Federal Reserve Board or,
if the Federal Reserve Board does not publish such yields, by any
Federal Reserve Bank or by any U.S. Government department or agency
selected by the Corporation. In the event the Corporation determines in
good faith that for any reason the Corporation cannot determine the Ten
Year Constant Maturity Rate for such dividend period as provided above
in this Subsection (a)(4), then the Ten Year Constant Maturity Rate for
such dividend period shall be the arithmetic average of the per annum
average yields to maturity based upon the closing bids during such
Calendar Period for each of the issues of actively traded marketable
U.S. Treasury fixed interest rate securities (other than Special
Securities) with a final maturity date not less than eight nor more than
twelve years from the date of each such quotation, as quoted daily for
each business day in New York City (or less frequently if daily
quotations are not generally available) to the Corporation by at least
three recognized U.S. Government securities dealers selected by the
Corporation.
(5) Except as provided below in this Subsection (a)(5), the "Twenty
Year Constant Maturity Rate" for each dividend period shall be the
arithmetic average of the two most recent weekly per annum Twenty Year
Average Yields (or the one weekly per annum Twenty Year Average Yield,
if only one such Yield is published during the relevant Calendar
Period), as published weekly by the Federal Reserve Board during the
Calendar Period immediately prior to the last ten calendar days of
January, April, July or October, as the case may be, prior to the
dividend period for which the dividend rate on the Series M Stock is
being determined. In the event the Federal Reserve Board does not
publish such a weekly per annum Twenty Year Average Yield during such
Calendar Period, then the Twenty Year Constant Maturity Rate for such
dividend period shall be the arithmetic average of the two most recent
weekly per annum Twenty Year Average Yields (or the one weekly per annum
Twenty Year Average Yield, if only one such Yield is published during
such Calendar Period), as published weekly during such Calendar Period
by any Federal Reserve Bank or by any U.S. Government department or
agency selected by the Corporation. In the event that a per annum Twenty
Year Average Yield is not published by the Federal Reserve Board or by
any Federal Reserve Bank or by any U.S. Government department or agency
during such Calendar Period, then the Twenty Year Constant Maturity Rate
for such dividend period shall be the arithmetic average of the two most
recent weekly per annum average yields to maturity (or the one weekly
average yield to maturity, if only one such yield is published during
such Calendar Period) for all of the actively traded marketable U.S.
Treasury fixed interest rate securities (other than Special Securities)
then having maturities of not less than eighteen nor more than
twenty-two years, as published during such Calendar Period by the
Federal Reserve Board or, if the Federal Reserve Board does not publish
such yields, by any Federal Reserve Bank or by any U.S. Government
department or agency selected by the Corporation. In the event that the
Corporation determines in good faith that for any reason the Corporation
cannot determine the Twenty Year Constant Maturity Rate for such
dividend period as provided above in this Subsection (a)(5), then the
Twenty Year Constant Maturity Rate for such dividend period shall be the
arithmetic average of the per annum average yields to maturity based
upon the closing bids during such Calendar Period for each of the issues
of actively traded marketable U.S. Treasury fixed interest rate
securities (other than Special Securities) with a final maturity date
not less than eighteen nor more than twenty-
B-16
<PAGE> 115
two years from the date of each quotation, as quoted daily for each
business day in New York City (or less frequently if daily quotations
are not generally available) to the Corporation by at least three
recognized U.S. Government securities dealers selected by the
Corporation.
(6) The Treasury Bill Rate, the Ten Year Constant Maturity Rate and
the Twenty Year Constant Maturity Rate each shall be rounded to the
nearest one hundredth of a percentage point.
(7) The fixed dividend rate per share for each dividend period
shall be computed in dollars by dividing the dividend rate for such
dividend period by four and, in the case of an Applicable Rate,
converting such rate to a fraction and multiplying it by $100; provided
that the dividend payable for the initial dividend period or any period
longer or shorter than a full quarterly dividend period shall be
computed on the basis of a 360-day year consisting of 30-day months.
(8) The dividend rate with respect to each dividend period shall be
calculated as promptly as practicable by the Corporation. The
mathematical accuracy of each such calculation shall be confirmed in
writing by the Corporation's independent auditors. The Corporation shall
cause each individual rate to be published in a newspaper of general
circulation in New York City prior to the commencement of the dividend
period to which it applies.
(9) As used in this Subsection (a), the term "Calendar Period"
means a period of fourteen calendar days; the term "Special Securities"
means securities which can, at the option of the holder, be surrendered
at face value in payment of any Federal estate tax or which provide tax
benefits to the holder and are priced to reflect such tax benefits or
which were originally issued at a deep or substantial discount; the term
"Ten Year Average Yield" means the average yield to maturity for
actively traded marketable U.S. Treasury fixed interest rate securities
(adjusted to constant maturities of ten years); and the term "Twenty
Year Average Yield" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities (adjusted
to constant maturities of twenty years).
(b) Dividends on Series M Stock shall be payable, if declared,
quarterly on the first day of February, May, August and November of each
year, the first quarterly dividend being payable, if declared, on February
1, 1986, to the extent accrued.
(c) Dividends on Series M Stock shall be cumulative as follows:
(1) With respect to shares included in the initial issue of Series
M Stock and shares issued any time thereafter up to and including the
record date for the payment of the first dividend on the initial issue
of Series M Stock, dividends shall be cumulative from the date of the
initial issue of Series M Stock; and
(2) With respect to shares issued any time after the aforesaid
record date, dividends shall be cumulative from the dividend payment
date next preceding the date of issue of such shares, except that if
such shares are issued during the period commencing the day after the
record date for the payment of a dividend on Series M Stock and ending
on the payment date of that dividend, dividends with respect to such
shares shall be cumulative from that dividend payment date.
(d) Subject to the provisions of Section 5(c)(3) of this Division, the
Series M Stock shall be redeemed in the manner provided in Sections 3(b)(1)
and (2) of this Division as follows:
(1) The Corporation shall, on November 1, 1991 and on each November
1 thereafter, redeem 100,000 shares of Series M Stock, or the number of
shares then outstanding, if less, at the redemption price of $100 per
share, plus an amount per share equal to all dividends accrued and
unpaid thereon to the date of redemption. The Corporation's obligation
to redeem such number of shares on any such date is hereinafter referred
to as a "Mandatory Redemption Obligation". If the Corporation shall not
have on such date sufficient funds legally available to effect such
mandatory redemption, it shall set aside for such redemption on such
date such funds, if any, as are then legally available, and shall do so
as promptly as practicable thereafter as the Corporation determines that
it has funds then legally available, and shall apply such funds to the
redemption of shares of Series M Stock as provided in the last sentence
of this Subsection (d)(1) until it has redeemed all of the Series M
Stock then required to be
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<PAGE> 116
redeemed pursuant to the first sentence of this Subsection (d)(1).
Notwithstanding the foregoing, if at any time the Corporation (i) shall
be obligated to redeem Series M Stock or to set aside legally available
funds for that purpose and to redeem other Serial Preferred Stock for
its sinking fund or other mandatory redemption and (ii) shall not have
sufficient funds legally available to do so in full, then such portion
of such then legally available funds shall be set aside to redeem the
Series M Stock as shall bear the same ratio to the total funds then
legally available to effect such redemption and to meet the then unmet
obligations of the sinking fund and other mandatory redemption terms of
all outstanding Serial Preferred Stock as the then unmet obligation to
redeem Series M Stock bears to the aggregate of such unmet obligations
to redeem and the then unmet obligations of the sinking fund and other
mandatory redemption terms of all outstanding Serial Preferred Stock. At
any time following the setting aside of funds to redeem Series M Stock
pursuant to this Subsection (d)(1) when the amount so set aside is
sufficient to redeem at least 1000 shares of the Series M Stock, the
Corporation shall promptly call for redemption such number of whole
shares of Series M Stock as may be redeemed with such amount at the
redemption price of $100 per share, plus accrued but unpaid dividends on
the Series M Stock then being redeemed to the date of redemption.
(2) On each mandatory redemption date specified in Subsection
(d)(1), so long as and to the extent that Series M Stock shall be
outstanding, and provided that the Corporation has fulfilled all its
Mandatory Redemption obligations under Subsection (d)(1) on such date,
the Corporation, at the option of the Board of Directors, may redeem not
more than 100,000 additional shares of Series M Stock, or the number of
shares then outstanding in excess of those then being redeemed pursuant
to Subsection (d)(1), if less, at the mandatory redemption price
specified in Subsection (d)(1). The option to redeem additional Series M
Stock pursuant to this Subsection (d)(2) shall not be cumulative.
(3) The Corporation, at the option of the Board of Directors, may
redeem at any time and from time to time, all or any part of the
outstanding Series M Stock as follows:
<TABLE>
<CAPTION>
IF REDEEMED IN UPON PAYMENT
THE 12 MONTHS OF THE REDEMPTION
ENDING ON OCTOBER 31, PRICE PER SHARE OF
------------------------- ------------------
<S> <C>
1986................................ $ 109.27
1987................................ 108.02
1988................................ 106.76
1989................................ 105.51
1990................................ 104.25
1991................................ 103.00
1992................................ 102.00
1993................................ 101.00
1994................................ 100.00
1995................................ 100.00
</TABLE>
plus in each case an amount equal to all dividends accrued and unpaid
thereon to the date of redemption; provided, however, that Series M
Stock may not be redeemed prior to November 1, 1990, directly or
indirectly as a part of or in anticipation of any refunding of Series M
Stock involving the incurring of indebtedness or the issuance of shares
of Serial Preferred Stock or any other shares ranking prior to or on a
parity with the Serial Preferred Stock if the interest on such
indebtedness or the dividends on such shares results in an effective
annual cost to the Corporation of less than the annual dividend rate of
the Series M Stock. In the case of a refunding redemption of Series M
Stock with borrowed funds or shares having a fixed interest or dividend
rate, the annual rate of the Series M Stock is the dividend payable on
the Series M Stock on or, if it is not payable on, then payable most
recently before, the date the redemption notice is deposited in the
mail. In the case of a refunding redemption of Series M Stock with
borrowed funds or shares having an adjustable interest or dividend rate,
the effective annual interest or dividend cost of such borrowed funds or
shares shall be deemed to be lower
B-18
<PAGE> 117
than the annual dividend rate of the Series M Stock if either (i) the
initial annual interest or dividend rate of such borrowed funds or
shares is lower than the annual dividend rate of the Series M Stock
payable on, or if it is not payable on, then payable most recently
before, the date the redemption notice is deposited in the mail or (ii)
the adjusted annual interest or dividend rate of such borrowed funds or
shares definitely would, under the applicable adjustment formula, be
lower at any time while such borrowing or shares would be outstanding
than the adjusted annual dividend rate of the Series M Stock would be at
the corresponding time if it also were to remain outstanding.
(4) Any shares of Series M Stock acquired by the Corporation
pursuant to Subsection (d)(2) or (3) or by purchase or otherwise may, at
the option of the Board of Directors, be credited on any mandatory
redemption date specified in Subsection (d)(1), in whole or in part, to
reduce all or part of any unsatisfied Mandatory Redemption Obligation of
the Corporation under Subsection (d)(1) on such date, such reduction to
be credited first to the oldest unsatisfied Mandatory Redemption
Obligation and then sequentially to each subsequent unsatisfied
Mandatory Redemption Obligation, if any, to the extent of the number of
shares so acquired and determined by the Board of Directors to be so
credited. Any shares so credited may not thereafter be again so
credited.
(e) The amount payable per share on Series M Stock in the event of any
voluntary liquidation, dissolution or winding up of the affairs of the
Corporation shall be the redemption price then in effect as
set forth in Subsection (d)(3) of this Section and in the event of any
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation shall be $100, plus in each case an amount equal to all
dividends accrued and unpaid thereon to the date of payment of the amount
due pursuant to this Subsection (e).
(f) The number of shares of Series M Stock shall not be increased
above, and shall not exceed 500,000. Series M Stock once redeemed,
purchased, or otherwise acquired by the Corporation shall not be reissued
as shares of Series M Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
Section 21. Serial Preferred Stock, $9.125 Series N. {Of the 4,000,000
authorized shares of Serial Preferred Stock, }750,000 shares* of Serial
Preferred Stock* are designated as a series entitled "Serial Preferred Stock,
$9.125 Series N" (hereinafter called "Series N Stock"). The Series N Stock
shall have the express terms set forth in this Division as being applicable to
all shares of Serial Preferred Stock as a class and, in addition, the following
express terms applicable to all shares of Series N Stock as a series of the
Serial Preferred Stock:
(a) The annual dividend rate of the Series N Stock shall be $9.125 per
share.
(b) Dividends on Series N Stock shall be payable, if declared,
quarterly on the first day of February, May, August and November of each
year, the first quarterly dividend being payable, if declared, on February
1, 1987, to the extent accrued.
(c) Dividends on Series N Stock shall be cumulative as follows:
(1) With respect to shares included in the initial issue of Series
N Stock and shares issued any time thereafter up to and including the
record date for the payment of the first dividend on the initial issue
of Series N Stock, dividends shall be cumulative from the date of the
initial issue of Series N Stock; and
(2) With respect to shares issued any time after the aforesaid
record date, dividends shall be cumulative from the dividend payment
date next preceding the date of issue of such shares, except that if
such shares are issued during the period commencing the day after the
record date for the payment of a dividend on Series N Stock and ending
on the payment date of that dividend, dividends with respect to such
shares shall be cumulative from that dividend payment date.
(d) Subject to the provisions of Section 5(c)(3) of this Division, the
Series N Stock shall be redeemable in the manner provided in Sections
3(b)(1) and (2) of this Division as follows:
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(1) The Corporation shall, on February 1, 1993 and on each February
1 thereafter, redeem 150,000 shares of Series N Stock, or the number of
shares then outstanding, if less, at the redemption price of $100 per
share, plus an amount per share equal to all dividends accrued and
unpaid thereon to the date of redemption. If the Corporation shall not
have on any such date sufficient funds legally available to effect such
mandatory redemption, it shall set aside for such redemption on such
date such funds, if any, as are then legally available, and shall do so
as promptly as practicable thereafter as the Corporation determines that
it has funds then legally available, and shall apply such funds to the
redemption of shares of Series N Stock as provided in the last sentence
of this Subsection (d)(1) until it has redeemed all of the Series N
Stock then required to be redeemed pursuant to the first sentence of
this Subsection (d)(1). Notwithstanding the foregoing, if at any time
the Corporation (i) shall be obligated to redeem Series N Stock or to
set aside legally available funds for that purpose and to redeem other
Serial Preferred Stock for its sinking fund or other mandatory
redemption terms and (ii) shall not have sufficient funds legally
available to do so in full, then such portion of such then legally
available funds shall be set aside to redeem the Series N Stock as shall
bear the same ratio to the total funds then legally available to effect
such redemption and to meet the then unmet obligations of the sinking
fund and other mandatory redemption terms of all outstanding Serial
Preferred Stock as the then unmet obligation to redeem Series N Stock
bears to the aggregate of such unmet obligations to redeem and the then
unmet obligations of the sinking fund and other mandatory redemption
terms of all outstanding Serial Preferred Stock. At any time following
the setting aside of funds to redeem Series N Stock pursuant to this
Subsection (d)(1) when the amount so set aside is sufficient to redeem
at least 1,000 shares of the Series N Stock, the Corporation shall
promptly call for redemption such number of whole shares of Series N
Stock as may be redeemed with such amount at the redemption price of
$100 per share, plus accrued but unpaid dividends on the Series N Stock
then being redeemed to the date of redemption.
(2) The Corporation, at the option of the Board of Directors, may
redeem at any time and from time to time, all or any part of the
outstanding Series N Stock as follows:
<TABLE>
<CAPTION>
IF REDEEMED IN UPON PAYMENT
THE 12 MONTHS OF THE REDEMPTION
ENDING ON JANUARY 31, PRICE PER SHARE OF
----------------------- ------------------
<S> <C>
1987................................ $ 109.13
1988................................ 109.13
1989................................ 108.11
1990................................ 107.10
1991................................ 106.08
1992................................ 105.07
1993................................ 104.06
1994................................ 103.04
1995................................ 102.03
1996................................ 101.01
1997................................ 100.00
</TABLE>
plus in each case an amount equal to all dividends accrued and unpaid
thereon to the date of redemption; provided, however, that Series N
Stock may not be so redeemed prior to February 1, 1992, directly or
indirectly as a part of or in anticipation of any refunding of Series N
Stock involving the incurring of indebtedness or the issuance of shares
of Serial Preferred Stock or any other shares ranking prior to or on a
parity with the Serial Preferred Stock if the interest on such
indebtedness or the dividends on such shares results in an effective
annual cost to the Corporation of less than the annual dividend rate of
the Series N Stock. In the case of a refunding optional redemption of
Series N Stock with borrowed funds or shares or proceeds of shares
having an adjustable interest or dividend rate, the effective annual
interest or dividend cost of such borrowed funds or shares shall be
deemed to be less
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<PAGE> 119
than the annual dividend rate of the Series N Stock if the initial
annual interest or dividend rate of such borrowed funds or shares is
less than the annual dividend rate of the Series N Stock.
(3) On February 1, 1997, the Corporation shall redeem all remaining
shares of Series N Stock, if any, then outstanding at the redemption
price of $100 per share, plus an amount per share equal to all dividends
accrued and unpaid thereon to the date of redemption.
(e) The amount payable per share on Series N Stock in the event of any
voluntary liquidation, dissolution or winding up of the affairs of the
Corporation shall be the redemption price then in effect as set forth in
Subsection (d)(2) of this Section and in the event of any involuntary
liquidation, dissolution or winding up of the affairs of the Corporation
shall be $100, plus in each case an amount equal to all dividends accrued
and unpaid thereon to the date of payment of the amount due pursuant to
this Subsection (e).
(f) The number of shares of Series N Stock shall not be increased
above, and shall not exceed, 750,000. Series N Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series N Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
Section 22. Serial Preferred Stock, Remarketed Series P. Redeemed August
31, 1993.
Section 23. Serial Preferred Stock, $91.50 Series Q. {Of the 4,000,000
authorized shares of Serial Preferred Stock, }75,000 shares* of Serial Preferred
Stock* are designated as a series entitled "Serial Preferred Stock, $91.50
Series Q" (hereinafter called "Series Q Stock"). The shares of Series Q Stock
shall have the express terms set forth in this Division as being applicable to
all shares of Serial Preferred Stock as a class and, in addition, the following
express terms applicable to all shares of Series Q Stock as a series of the
Serial Preferred Stock:
(a) The annual dividend rate of the Series Q Stock shall be $91.50 per
share.
(b) Dividends on Series Q Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on September
1, 1991, to the extent accrued.
(c) Dividends on Series Q Stock shall be cumulative as follows:
(1) With respect to shares included in the initial issue of Series
Q Stock and shares issued any time thereafter up to and including the
record date for the payment of the first dividend on the initial issue
of Series Q Stock, dividends shall be cumulative from the date of the
initial issue of Series Q Stock; and
(2) With respect to shares issued any time after the aforesaid
record date, dividends shall be cumulative from the dividend payment
date next preceding the date of issue of such shares, except that if
such shares are issued during the period commencing the day after the
record date for the payment of a dividend on Series Q Stock and ending
on the payment date of that dividend, dividends with respect to such
shares shall be cumulative from that dividend payment date.
(d) Subject in each case to the provisions of Section 5(c)(3) of this
Division, Series Q Stock shall be redeemable in the manner provided in
Sections 3(b)(1) and (2) of this Division, and as follows:
(1) Series Q Stock shall be redeemed in part from time to time for
the Sinking Fund as hereinafter set forth at a redemption price of
$1,000 per share, plus in each case an amount per share equal to all
dividends accrued and unpaid thereon to the date of redemption (such
price plus such amount being hereinafter called the "Sinking Fund
Redemption Price"). As and for a Sinking Fund for Series Q Stock, so
long as and to the extent that any shares thereof are outstanding, the
Corporation will redeem on each June 1 (hereinafter called "Sinking Fund
Date") commencing with June 1, 1995 and ending on June 1, 2000, 10,714
shares of Series Q Stock, and on June 1, 2001, the remaining 10,716
shares of
B-21
<PAGE> 120
Series Q Stock, or the number of shares then outstanding, if less, at
the Sinking Fund Redemption Price (the Corporation's obligation to
redeem such number of such shares on any Sinking Fund Date being
hereinafter referred to as the "Sinking Fund Obligation"). If the
Corporation shall not have on any Sinking Fund Date sufficient funds
legally available to effect such mandatory redemption, it shall set
aside for such redemption on such date such funds, if any, as are then
legally available, and shall do so as promptly as practicable thereafter
as the Corporation determines that it has funds then legally available,
on such date such funds, if any, as are then legally available, and
shall apply such funds to the redemption of shares of Series Q Stock as
provided in the last sentence of this Subsection (d)(1) until it has
redeemed all of the Series Q Stock then required to be redeemed pursuant
to this Subsection (d)(1). Notwithstanding the foregoing, if at any time
the Corporation (i) shall be obligated to redeem Series Q Stock or to
set aside legally available funds for that purpose and to redeem other
Serial Preferred Stock for its sinking fund or other mandatory
redemption terms and (ii) shall not have sufficient funds legally
available to do so in full, then such portion of such then legally
available funds shall be set aside to redeem the Series Q Stock as shall
bear the same ratio to the total funds then legally available to effect
such redemption and to meet the then unmet obligations of the sinking
fund and other mandatory redemption terms of all outstanding Serial
Preferred Stock as the then unmet obligation to redeem Series Q Stock
bears to the aggregate of such unmet obligations to redeem and the then
unmet obligations of the sinking fund and other mandatory redemption
terms of all outstanding Serial Preferred Stock. At any time following
the setting aside of funds to redeem Series Q Stock pursuant to this
Subsection (d)(1) when the amount so set aside is sufficient to redeem
at least 100 shares of Series Q Stock, the Corporation shall promptly
call for redemption such number of whole shares of Series Q Stock as may
be redeemed with such amount at the redemption price of $1,000 per
share, plus accrued but unpaid dividends on Series Q Stock then being
redeemed to the date of redemption.
(2) On each Sinking Fund Date so long as and to the extent that
Series Q Stock shall be outstanding, and provided that the Corporation
has fulfilled its Sinking Fund Obligation on such date, the Corporation
may at the option of the Board of Directors redeem additional shares of
Series Q Stock (any redemption of less than all of the then outstanding
Series Q Stock being applied in satisfaction of required Sinking Fund
Obligations in inverse order of their scheduled Sinking Fund Dates) at
the redemption price of $1,000 per share (the "Redemption Amount"), plus
in each case an amount per share equal to all dividends accrued and
unpaid thereon to the date of redemption, plus in each case the Optional
Redemption Amount, if any.
For purposes of this Section 23(d)(2) (and Section 23(e) as
provided therein), the following definitions shall apply:
"OPTIONAL REDEMPTION AMOUNT" shall mean, with respect to each
share of Series Q Stock, an amount equal to (A) the excess, if any,
of the Discounted Value of the Called Amount over the sum of (i) such
Called Amount plus (ii) accrued and unpaid dividends on the shares of
Series Q Stock to be redeemed as of (including dividends payable on)
the Settlement Date, divided by (B) the number of shares of Series Q
Stock to be redeemed on such Settlement Date. The Optional Redemption
Amount shall in no event be less than zero.
"BUSINESS DAY" shall mean any day other than a Saturday, a
Sunday or a day on which commercial banks in New York City or Ohio
are required or authorized to be closed.
"CALLED AMOUNT" shall mean, with the respect to the Series Q
Stock the aggregate Redemption Amount of the shares of Series Q Stock
that are to be redeemed pursuant to this Section 23(d)(2) or pursuant
to the provisions of Section 23(e) regarding voluntary liquidation,
dissolution, or winding up of the affairs of the Corporation.
"DISCOUNTED VALUE" shall mean, with respect to the Called
Amount, the amount obtained by discounting all Remaining Scheduled
Payments with respect to such Called Amount from their respective
scheduled due dates to the Settlement Date, in accordance with
accepted financial
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<PAGE> 121
practice and at a discount factor (applied on a quarterly basis)
equal to the Reinvestment Yield with respect to such Called Amount.
"REINVESTMENT YIELD" shall mean, with respect to the Called
Amount, the yield to maturity implied by (i) the yields reported, as
of 10:00 A.M. (New York City time) on the Business Day next preceding
the Settlement Date, on the display designated as "Page 678" on the
Telerate Service (or such other display as may replace Page 678 on
the Telerate Service) for actively traded U.S. Treasury securities
having a maturity equal to the Remaining Average Life of such Called
Amount as of such Settlement Date, or, if such yields shall not be
reported as of such time or if the yields reported as of such time
shall not be ascertainable, (ii) the Treasury Constant Maturity
Series yields reported, for the latest day for which such yields
shall have been so reported as of the Business Day next preceding the
Settlement Date, in Federal Reserve Statistical Release H.15 (519)
(or any comparable successor publication) for actively traded U.S.
Treasury securities having a constant maturity equal to the Remaining
Average Life of such Called Amount as of such Settlement Date. Such
implied yield shall be determined, if necessary, by (a) converting
U.S. Treasury bill quotations to bond-equivalent yields in accordance
with accepted financial practice and (b) interpolating linearly
between reported yields.
"REMAINING AVERAGE LIFE" shall mean, with respect to the Called
Amount, the number of years (calculated to the nearest one-twelfth
year) obtained by dividing (i) such Called Amount into (ii) the sum
of the products obtained by multiplying (a) each Remaining Scheduled
Payment of such Called Amount (but not of dividends that would have
been payable with respect to the shares of Series Q Stock to be
redeemed between the Settlement Date and the respective Sinking Fund
Dates) by (b) the number of years (calculated to the nearest
one-twelfth year which will elapse between the Settlement Date and
the scheduled Sinking Fund Date of such Remaining Scheduled Payment.
"REMAINING SCHEDULED PAYMENTS" shall mean, with respect to the
Called Amount, all payments required by Section 23(d)(1) with respect
to such Called Amount plus all dividends at the rate of $103.60 per
annum on the shares of Series Q Stock to be redeemed that would have
been payable between the Settlement Date and the respective Sinking
Fund Dates.
"SETTLEMENT DATE" shall mean, with respect to the Called Amount,
the date on which such Called Amount is to be redeemed pursuant to
this Section 23(d)(2) or becomes payable pursuant to the provisions
of Section 23(e) regarding voluntary liquidation, dissolution or
winding up of the affairs of the Corporation.
(3) On June 1, 2001, the Corporation shall redeem all remaining
shares of Series Q Stock, if any, then outstanding at the redemption
price of $1,000 per share plus in each case an amount per share equal to
all dividends accrued and unpaid thereon to the date of redemption.
(e) The amount payable per share on Series Q Stock in the event of any
voluntary liquidation, dissolution or winding up of the affairs of the
Corporation shall be the redemption price then in effect as set forth in
Subsection (d)(2) of this Section and in the event of any involuntary
liquidation, dissolution or winding up of the affairs of the Corporation
shall be $1,000, plus in each case an amount equal to all dividends accrued
and unpaid thereon to the date of payment of the amount due pursuant to
this Subsection (e).
(f) The number of shares of Series Q Stock shall not be increased
above,and shall not exceed, 75,000. Series Q Stock once redeemed, purchased
or otherwise acquired by the Corporation shall not be reissued as shares of
Series Q Stock, but, having been restored to the status of authorized but
unissued shares of Serial Preferred Stock without serial designation, may,
in whole or in part, be, or be included in, any subsequent series of Serial
Preferred Stock of a new designation with such express terms as may be
fixed by the Board of Directors of the Corporation.
(g) In the event that there is for any reason a change in the Federal
Tax Rate (other than a change increasing such rate to more than 34%), then,
in that event, the dividend rate on the Series Q Stock shall be
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<PAGE> 122
automatically adjusted (but not higher than a rate of $105.00 per annum),
effective as of the effective date of change for each such change, to the
rate per annum determined by multiplying the original dividend rate on such
Series Q Stock by the Adjustment Fraction.
For purposes of this Section 23(g), the following definitions shall
apply:
"ADJUSTMENT FRACTION" shall mean the following fraction resulting from
the following formula:
(1 - Xo X Fo)) X (1 - Fn)
-------------------------
(1 - Xo X Fn)) X (1 - Fo)
where
Xo = 30% (the Inclusion Rate, which is that portion of dividends
received that are includable in taxable income for corporations as set
forth in the Internal Revenue Code of 1986 as amended).
Fo = 34% (the Federal Tax Rate in effect on the date the original
dividend rate was determined)
Fn = the new Federal Tax Rate
The Adjustment Fraction will be rounded to three decimal places with
rounding up if the Fourth decimal place is .0005 or higher, and rounding
down otherwise.
"FEDERAL TAX RATE" shall mean the highest marginal income tax rate in
effect for corporations as set forth in the Internal Revenue Code of 1986
as amended.
Section 24. Serial Preferred Stock, $88.00 Series R. {Of the 4,000,000
authorized shares of Serial Preferred Stock, }50,000 shares* of Serial
Preferred Stock* are designated as a series entitled "Serial Preferred Stock,
$88.00 Series R" (hereinafter called "Series R Stock"). The shares of Series R
Stock shall have the express terms set forth in this Division as being
applicable to all shares of Serial Preferred Stock as a class and, in addition,
the following express terms applicable to all shares of Series R Stock as a
series of the Serial Preferred Stock:
(a) The annual dividend rate of the Series R Stock shall be $88.00 per
share.
(b) Dividends on Series R Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on March 1,
1992, to the extent accrued. The amount of dividends payable on any share
of Series R Stock for any period shorter than a full quarterly dividend
period shall be calculated on the basis of a 360-day year and 30-day months
and, with respect to any month in which such share of the Series R Stock is
not outstanding for the entire month, the actual number of days that such
share of Series R stock is outstanding in such month.
(c) Dividends on Series R Stock shall be cumulative as follows:
(1) With respect to shares included in the initial issue of Series R
Stock and shares issued any time thereafter up to and including the
record date for the payment of the first dividend on the initial
issue of Series R Stock, dividends shall be cumulative from the date
of the initial issue of Series R Stock; and
(2) With respect to shares issued any time after the aforesaid record
date, dividends shall be cumulative from the dividend payment date
next preceding the date of issue of such shares, except that if such
shares are issued during the period commencing the day after the
record date for the payment of a dividend on Series R Stock and
ending on the payment date of that dividend, dividends with respect
to such shares shall be cumulative from that dividend payment date.
(d) Subject to the provisions of Section 5(c)(3) of this Division and
in the manner provided in Sections 3(b)(1) and (2) of this Division, the
Corporation shall, on December 1, 2001, redeem all shares of Series R Stock
then outstanding at the redemption price of $1,000 per share, plus an
amount per share equal to all dividends accrued and unpaid thereon to the
date of redemption. If the Corporation shall not have on such date
sufficient funds legally available to effect such mandatory redemption, it
shall set aside for such
B-24
<PAGE> 123
redemption on such date such funds, if any, as are then legally available,
and shall do so as promptly as practicable thereafter as the Corporation
determines that it has funds then legally available, and shall apply such
funds to the redemption of shares of Series R Stock as provided in this
paragraph until it has redeemed all of the Series R Stock. Notwithstanding
the foregoing, if at any time the Corporation (i) shall be obligated to
redeem Series R Stock or to set aside legally available funds for that
purpose and to redeem other Serial Preferred Stock and (ii) shall not have
sufficient funds legally available to do so in full, then such portion of
such then legally available funds shall be set aside to redeem the Series R
Stock as shall bear the same ratio to the total funds then legally
available to effect such redemption and to meet the then unmet obligations
to redeem all outstanding Serial Preferred Stock as the then unmet
obligation to redeem Series R Stock bears to the aggregate of such unmet
obligations to redeem and the then unmet obligations to redeem all
outstanding Serial Preferred Stock. At any time following the setting aside
of funds to redeem Series R Stock pursuant to this paragraph when the
amount so set aside is sufficient to redeem at least 100 shares of Series R
Stock, the Corporation shall promptly call for redemption such number of
whole shares of Series R Stock as may be redeemed with such amount at the
redemption price of $1,000 per share, plus accrued but unpaid dividends on
Series R Stock then being redeemed to the date of redemption. The shares of
Series R Stock shall not be subject to redemption except pursuant to this
paragraph.
(e) The amount payable per share on Series R Stock in the event of any
liquidation, dissolution or winding up of the affairs of the Corporation
shall be $1,000, plus an amount equal to all dividends accrued and unpaid
thereon to the date of payment of the amount due pursuant to this
paragraph.
(f) The number of shares of Series R Stock shall not be increased
above, and shall not exceed, 50,000. Series R Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series R Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
Section 25. Serial Preferred Stock, $90.00 Series S. {Of the 4,000,000
authorized shares of Serial Preferred Stock, }75,000 shares* of Serial
Preferred Stock* are designated as a series entitled "Serial Preferred Stock,
$90.00 Series S" (hereinafter called "Series S Stock"). The shares of Series S
Stock shall have the express terms set forth in this Division as being
applicable to all shares of Serial Preferred Stock as a class and, in addition,
the following express terms applicable to all shares of Series S Stock as a
series of the Serial Preferred Stock:
(a) The annual dividend rate of the Series S Stock shall be $90.00 per
share.
(b) Dividends on Series S Stock shall be payable, if declared,
quarterly on the first day of February, May, August and November of each
year, the first quarterly dividend being payable, if declared, on February
1, 1993, to the extent accrued. The amount of dividends payable for the
initial dividend period or any period shorter than a full quarterly
dividend period shall be calculated on the basis of a 360-day year and
30-day months or, with respect to any month in which any share of the
Series S Stock is not outstanding for the entire month, the actual number
of days that such share of Series S Stock is outstanding in such month.
(c) Dividends on Series S Stock shall be cumulative as follows:
(1) With respect to shares included in the initial issue of Series
S Stock and shares issued any time thereafter up to and including the
record date for the payment of the first dividend on the initial issue
of Series S Stock, dividends shall be cumulative from the date of the
initial issue of Series S Stock; and
(2) With respect to shares issued any time after the aforesaid
record date, dividends shall be cumulative from the dividend payment
date next preceding the date of issue of such shares, except that if
such shares are issued during the period commencing the day after the
record date for the payment of a dividend on Series S Stock and ending
on the payment date of that dividend, dividends with respect to such
shares shall be cumulative from that dividend payment date.
(d) Subject to the provisions of Section 5(c)(3) of this Division and
in the manner provided in Sections 3(b)(1) and (2) of this Division, the
Corporation shall, on November 1, 1999 and on each November 1
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<PAGE> 124
thereafter, redeem 18,750 shares of Series S Stock, or the number of shares
then outstanding, if less, at the redemption price of $1,000 per share,
plus an amount per share equal to all dividends accrued and unpaid thereon
to the date of redemption. If the Corporation shall not have on any such
date sufficient funds legally available to effect such mandatory
redemption, it shall set aside for such redemption on such date such funds,
if any, as are then legally available, and shall do so as promptly as
practicable thereafter as the Corporation determines that it has funds then
legally available, and shall apply such funds to the redemption of shares
of Series S Stock as provided in the last sentence of this paragraph until
it has redeemed all of the Series S Stock then required to be redeemed
pursuant to the first sentence of this paragraph. Notwithstanding the
foregoing, if at any time the Corporation (i) shall be obligated to redeem
Series S Stock or to set aside legally available funds for that purpose and
to redeem other Serial Preferred Stock for its sinking fund or other
mandatory redemption terms and (ii) shall not have sufficient funds legally
available to do so in full, then such portion of such then legally
available funds shall be set aside to redeem the Series S Stock as shall
bear the same ratio to the total funds then legally available to effect
such redemption and to meet the then unmet obligations of the sinking fund
and other mandatory redemption terms of all outstanding Serial Preferred
Stock as the then unmet obligation to redeem Series S Stock bears to the
aggregate of such unmet obligations to redeem and the then unmet
obligations of the sinking fund and other mandatory redemption terms of all
outstanding Serial Preferred Stock. At any time following the setting aside
of funds to redeem Series S Stock pursuant to this paragraph when the
amount so set aside is sufficient to redeem at least 100 shares of Series S
Stock, the Corporation shall promptly call for redemption such number of
whole shares of Series S Stock as may be redeemed with such amount at the
redemption price of $1,000 per share, plus accrued but unpaid dividends on
Series S Stock then being redeemed to the date of redemption. The shares of
Series S Stock shall not be subject to redemption except pursuant to this
paragraph.
(e) The amount payable per share on Series S Stock in the event of any
liquidation, dissolution or winding up of the affairs of the Corporation
shall be $1,000, plus an amount equal to all dividends accrued and unpaid
thereon to the date of payment of the amount due pursuant to this
paragraph.
(f) The number of shares of Series S Stock shall not be increased
above, and shall not exceed, 75,000. Series S Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series S Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
Section 26. Serial Preferred Stock, $42.40 Series T. {Of the 4,000,000
authorized shares of Serial Preferred Stock, }200,000 shares* of Serial
Preferred Stock* are designated as a series entitled "Serial Preferred Stock,
$42.40 Series T" (hereinafter called "Series T Stock"). The shares of Series T
Stock shall have the express terms set forth in this Division as being
applicable to all shares of Serial Preferred Stock as a class and, in addition,
the following express terms applicable to all shares of Series T Stock as a
series of the Serial Preferred Stock:
(a) The annual dividend rate of the Series T Stock shall be $42.40 per
share.
(b) Dividends on Series T Stock shall be payable, if declared,
quarterly on the first day of February, May, August and November of each
year, the first quarterly dividend being payable, if declared, on August 1,
1993, to the extent accrued. The amount of dividends payable for the
initial dividend period or any period shorter than a full quarterly
dividend period shall be calculated on the basis of a 360-day year and
30-day months or, with respect to any month in which any share of the
Series T Stock is not outstanding for the entire month, the actual number
of days that such share of Series T Stock is outstanding in such month.
(c) Dividends on Series T Stock shall be cumulative as follows:
(1) With respect to shares included in the initial issue of Series
T Stock and shares issued any time thereafter up to and including the
record date for the payment of the first dividend on the initial issue
of Series T Stock, dividends shall be cumulative from the date of the
initial issue of Series T Stock; and
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(2) With respect to shares issued any time after the aforesaid
record date, dividends shall be cumulative from the dividend payment
date next preceding the date of issue of such shares, except that if
such shares are issued during the period commencing the day after the
record date for the payment of a dividend on Series T Stock and ending
on the payment date of that dividend, dividends with respect to such
shares shall be cumulative from that dividend payment date.
(d) Series T Stock shall not be redeemable prior to June 1, 1998.
Thereafter, subject to the provisions of Section 5(c)(3) of this Division
and in the manner provided in Sections 3(b)(1) and (2) of this Division,
Series T Stock shall be redeemable at any time or from time to time, at the
option of the Board of Directors, upon payment of $500 per share, plus an
amount per share equal to all dividends accrued and unpaid thereon to the
date of redemption.
(e) The amount payable per share on Series T Stock in the event of any
liquidation, dissolution or winding up of the affairs of the Corporation
shall be $500, plus an amount per share equal to all dividends accrued and
unpaid thereon to the date of payment of the amount due pursuant to this
paragraph.
(f) The number of shares of Series T Stock shall not be increased
above, and shall not exceed, 200,000. Series T Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series T Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
*Section 27. Serial Preferred Stock, $4.25 Series U. 160,000 shares of
Serial Preferred Stock are designated as a series entitled "Serial Preferred
Stock, $4.25 Series U" (hereinafter called "Series U Stock"). The Series U Stock
shall have the express terms set forth in this Division as being applicable to
all shares of Serial Preferred Stock as a class, and, in addition, the following
express terms applicable to all shares of Series U Stock as a series of the
Serial Preferred Stock:
(a) The annual dividend rate of the Series U Stock shall be $4.25 per
share.
(b) Dividends on Series U Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on the first
such payment date following the merger of The Toledo Edison Company
("Toledo Edison") into The Cleveland Electric Illuminating Company (the
"Merger"); provided, however, that if a record date shall have been
established and a dividend declared, payable on such date, by Toledo Edison
with respect to its 4 1/4% Cumulative Preferred Stock, then the first
payment date for a quarterly dividend on the Series U Stock shall be the
next ensuing first day of March, June, September or December.
(c) Dividends on Series U Stock shall be cumulative from the last
dividend payment date established by Toledo Edison with respect to its
4 1/4% Cumulative Preferred Stock prior to the conversion of such 4 1/4%
Cumulative Preferred Stock into the Series U Stock in the Merger.
(d) Subject to the provisions of Section 5(c)(3) of this Division and
in the manner provided in Sections 3(b)(1) and (2) of this Division, Series
U Stock shall be redeemable at any time or from time to time, at the option
of the Board of Directors, upon payment of $104.625 per share, plus an
amount per share equal to all dividends accrued and unpaid thereon to the
date of payment of the amount due pursuant to this paragraph.
(e) The amount payable per share on Series U Stock in the event of any
liquidation, dissolution or winding up of the affairs of the Corporation
shall be $100, plus an amount per share equal to all dividends accrued and
unpaid thereon to the date of payment of the amount due pursuant to this
paragraph; provided, however, that if such liquidation, dissolution or
winding up is voluntary, an additional sum of $4.625 shall be so paid.
(f) The number of shares of Series U Stock shall not be increased
above, and shall not exceed, 160,000. Series U Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series U Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in,*
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*any subsequent series of Serial Preferred Stock of a new designation with
such express terms as may be fixed by the Board of Directors of the
Corporation.
Section 28. Serial Preferred Stock, $4.56 Series V. 50,000 shares of
Serial Preferred Stock are designated as a series entitled "Serial Preferred
Stock, $4.56 Series V" (hereinafter called "Series V Stock"). The Series V Stock
shall have the express terms set forth in this Division as being applicable to
all shares of Serial Preferred Stock as a class, and, in addition, the following
express terms applicable to all shares of Series V Stock as a series of the
Serial Preferred Stock:
(a) The annual dividend rate of the Series V Stock shall be $4.56 per
share.
(b) Dividends on Series V Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on the first
such payment date following the merger of The Toledo Edison Company
("Toledo Edison") into The Cleveland Electric Illuminating Company (the
"Merger"); provided, however, that if a record date shall have been
established and a dividend declared, payable on such date, by Toledo Edison
with respect to its 4.56% Cumulative Preferred Stock, then the first
payment date for a quarterly dividend on the Series V Stock shall be the
next ensuing first day of March, June, September or December.
(c) Dividends on Series V Stock shall be cumulative from the last
dividend payment date established by Toledo Edison with respect to its
4.56% Cumulative Preferred Stock prior to the conversion of such 4.56%
Cumulative Preferred Stock into the Series V Stock in the Merger.
(d) Subject to the provisions of Section 5(c)(3) of this Division and
in the manner provided in Sections 3(b)(1) and (2) of this Division, Series
V Stock shall be redeemable at any time or from time to time, at the option
of the Board of Directors, upon payment of $101.00 per share, plus an
amount per share equal to all dividends accrued and unpaid thereon to the
date of payment of the amount due pursuant to this paragraph.
(e) The amount payable per share on Series V Stock in the event of any
liquidation, dissolution or winding up of the affairs of the Corporation
shall be $100, plus an amount per share equal to all dividends accrued and
unpaid thereon to the date of payment of the amount due pursuant to this
paragraph; provided, however, that if such liquidation, dissolution or
winding up is voluntary, an additional sum of $1.00 shall be so paid.
(f) The number of shares of Series V Stock shall not be increased
above, and shall not exceed, 150,000. Series V Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series V Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
Section 29. Serial Preferred Stock, $4.25 Series W. 100,000 shares of
Serial Preferred Stock are designated as a series entitled "Serial Preferred
Stock, $4.25 Series W" (hereinafter called "Series W Stock"). The Series W Stock
shall have the express terms set forth in this Division as being applicable to
all shares of Serial Preferred Stock as a class, and, in addition, the following
express terms applicable to all shares of Series W Stock as a series of the
Serial Preferred Stock:
(a) The annual dividend rate of the Series W Stock shall be $4.25 per
share.
(b) Dividends on Series W Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on the first
such payment date following the merger of The Toledo Edison Company
("Toledo Edison") into The Cleveland Electric Illuminating Company (the
"Merger"); provided, however, that if a record date shall have been
established and a dividend declared, payable on such date, by Toledo Edison
with respect to its 4.25% Cumulative Preferred Stock, then the first
payment date for a quarterly dividend on the Series W Stock shall be the
next ensuing first day of March, June, September or December.*
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*(c) Dividends on Series W Stock shall be cumulative from the last
dividend payment date established by Toledo Edison with respect to its
4.25% Cumulative Preferred Stock prior to the conversion of such 4.25%
Cumulative Preferred Stock into the Series W Stock in the Merger.
(d) Subject to the provisions of Section 5(c)(3) of this Division and
in the manner provided in Sections 3(b)(1) and (2) of this Division, Series
W Stock shall be redeemable at any time or from time to time, at the option
of the Board of Directors, upon payment of $102.00 per share, plus an
amount per share equal to all dividends accrued and unpaid thereon to the
date of payment of the amount due pursuant to this paragraph.
(e) The amount payable per share on Series W Stock in the event of any
liquidation, dissolution or winding up of the affairs of the Corporation
shall be $100, plus an amount per share equal to all dividends accrued and
unpaid thereon to the date of payment of the amount due pursuant to this
paragraph; provided, however, that if such liquidation, dissolution or
winding up is voluntary, an additional sum of $2.00 shall be so paid.
(f) The number of shares of Series W Stock shall not be increased
above, and shall not exceed, 100,000. Series W Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series W Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
Section 30. Serial Preferred Stock, $8.32 Series X. 100,000 shares of
Serial Preferred Stock are designated as a series entitled "Serial Preferred
Stock, $8.32 Series X" (hereinafter called "Series X Stock"). The Series X Stock
shall have the express terms set forth in this Division as being applicable to
all shares of Serial Preferred Stock as a class, and, in addition, the following
express terms applicable to all shares of Series X Stock as a series of the
Serial Preferred Stock:
(a) The annual dividend rate of the Series X Stock shall be $8.32 per
share.
(b) Dividends on Series X Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on the first
such payment date following the merger of The Toledo Edison Company
("Toledo Edison") into The Cleveland Electric Illuminating Company (the
"Merger"); provided, however, that if a record date shall have been
established and a dividend declared, payable on such date, by Toledo Edison
with respect to its 8.32% Cumulative Preferred Stock, then the first
payment date for a quarterly dividend on the Series X Stock shall be the
next ensuing first day of March, June, September or December.
(c) Dividends on Series X Stock shall be cumulative from the last
dividend payment date established by Toledo Edison with respect to its
8.32% Cumulative Preferred Stock prior to the conversion of such 8.32%
Cumulative Preferred Stock into the Series X Stock in the Merger.
(d) Subject to the provisions of Section 5(c)(3) of this Division and
in the manner provided in Sections 3(b)(1) and (2) of this Division, Series
X Stock shall be redeemable at any time or from time to time, at the option
of the Board of Directors, upon payment of $102.46 per share, plus an
amount per share equal to all dividends accrued and unpaid thereon to the
date of payment of the amount due pursuant to this paragraph.
(e) The amount payable per share on Series X Stock in the event of any
liquidation, dissolution or winding up of the affairs of the Corporation
shall be $100, plus an amount per share equal to all dividends accrued and
unpaid thereon to the date of payment of the amount due pursuant to this
paragraph; provided, however, that if such liquidation, dissolution or
winding up is voluntary, an additional sum of $2.46 shall be so paid.
(f) The number of shares of Series X Stock shall not be increased
above, and shall not exceed, 100,000. Series X Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series X Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in,*
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*any subsequent series of Serial Preferred Stock of a new designation with
such express terms as may be fixed by the Board of Directors of the
Corporation.
Section 31. Serial Preferred Stock, $7.76 Series Y. 150,000 shares of
Serial Preferred Stock are designated as a series entitled "Serial Preferred
Stock, $7.76 Series Y" (hereinafter called "Series Y Stock"). The Series Y Stock
shall have the express terms set forth in this Division as being applicable to
all shares of Serial Preferred Stock as a class, and, in addition, the following
express terms applicable to all shares of Series Y Stock as a series of the
Serial Preferred Stock:
(a) The annual dividend rate of the Series Y Stock shall be $7.76 per
share.
(b) Dividends on Series Y Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on the first
such payment date following the merger of The Toledo Edison Company
("Toledo Edison") into The Cleveland Electric Illuminating Company (the
"Merger"); provided, however, that if a record date shall have been
established and a dividend declared, payable on such date, by Toledo Edison
with respect to its 7.76% Cumulative Preferred Stock, then the first
payment date for a quarterly dividend on the Series Y Stock shall be the
next ensuing first day of March, June, September or December.
(c) Dividends on Series Y Stock shall be cumulative from the last
dividend payment date established by Toledo Edison with respect to its
7.76% Cumulative Preferred Stock prior to the conversion of such 7.76%
Cumulative Preferred Stock into the Series Y Stock in the Merger.
(d) Subject to the provisions of Section 5(c)(3) of this Division and
in the manner provided in Sections 3(b)(1) and (2) of this Division, Series
Y Stock shall be redeemable at any time or from time to time, at the option
of the Board of Directors, upon payment of $102.437 per share, plus an
amount per share equal to all dividends accrued and unpaid thereon to the
date of payment of the amount due pursuant to this paragraph.
(e) The amount payable per share on Series Y Stock in the event of any
liquidation, dissolution or winding up of the affairs of the Corporation
shall be $100, plus an amount per share equal to all dividends accrued and
unpaid thereon to the date of payment of the amount due pursuant to this
paragraph; provided, however, that if such liquidation, dissolution or
winding up is voluntary, an additional sum of $2.437 shall be so paid.
(f) The number of shares of Series Y Stock shall not be increased
above, and shall not exceed, 150,000. Series Y Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series Y Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
Section 32. Serial Preferred Stock, $7.80 Series Z. 150,000 shares of
Serial Preferred Stock are designated as a series entitled "Serial Preferred
Stock, $7.80 Series Z" (hereinafter called "Series Z Stock"). The Series Z Stock
shall have the express terms set forth in this Division as being applicable to
all shares of Serial Preferred Stock as a class, and, in addition, the following
express terms applicable to all shares of Series Z Stock as a series of the
Serial Preferred Stock:
(a) The annual dividend rate of the Series Z Stock shall be $7.80 per
share.
(b) Dividends on Series Z Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on the first
such payment date following the merger of The Toledo Edison Company
("Toledo Edison") into The Cleveland Electric Illuminating Company (the
"Merger"); provided, however, that if a record date shall have been
established and a dividend declared, payable on such date, by Toledo Edison
with respect to its 7.80% Cumulative Preferred Stock, then the first
payment date for a quarterly dividend on the Series Z Stock shall be the
next ensuing first day of March, June, September or December.*
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*(c) Dividends on Series Z Stock shall be cumulative from the last
dividend payment date established by Toledo Edison with respect to its
7.80% Cumulative Preferred Stock prior to the conversion of such 7.80%
Cumulative Preferred Stock into the Series Z Stock in the Merger.
(d) Subject to the provisions of Section 5(c)(3) of this Division and
in the manner provided in Sections 3(b)(1) and (2) of this Division, Series
Z Stock shall be redeemable at any time or from time to time, at the option
of the Board of Directors, upon payment of $101.65 per share, plus an
amount per share equal to all dividends accrued and unpaid thereon to the
date of payment of the amount due pursuant to this paragraph.
(e) The amount payable per share on Series Z Stock in the event of any
liquidation, dissolution or winding up of the affairs of the Corporation
shall be $100, plus an amount per share equal to all dividends accrued and
unpaid thereon to the date of payment of the amount due pursuant to this
paragraph; provided, however, that if such liquidation, dissolution or
winding up is voluntary, an additional sum of $1.65 shall be so paid.
(f) The number of shares of Series Z Stock shall not be increased
above, and shall not exceed, 150,000. Series Z Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series Z Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
Section 33. Serial Preferred Stock, $10.00 Series AA. 190,000 shares of
Serial Preferred Stock are designated as a series entitled "Serial Preferred
Stock, $10.00 Series AA" (hereinafter called "Series AA Stock"). The Series AA
Stock shall have the express terms set forth in this Division as being
applicable to all shares of Serial Preferred Stock as a class, and, in addition,
the following express terms applicable to all shares of Series AA Stock as a
series of the Serial Preferred Stock:
(a) The annual dividend rate of the Series AA Stock shall be $10.00
per share.
(b) Dividends on Series AA Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on the first
such payment date following the merger of The Toledo Edison Company
("Toledo Edison") into The Cleveland Electric Illuminating Company (the
"Merger"); provided, however, that if a record date shall have been
established and a dividend declared, payable on such date, by Toledo Edison
with respect to its 10% Cumulative Preferred Stock, then the first payment
date for a quarterly dividend on the Series AA Stock shall be the next
ensuing first day of March, June, September or December.
(c) Dividends on Series AA Stock shall be cumulative from the last
dividend payment date established by Toledo Edison with respect to its 10%
Cumulative Preferred Stock prior to the conversion of such 10% Cumulative
Preferred Stock into the Series AA Stock in the Merger.
(d) Subject to the provisions of Section 5(c)(3) of this Division and
in the manner provided in Sections 3(b)(1) and (2) of this Division, Series
AA Stock shall be redeemable at any time or from time to time, at the
option of the Board of Directors, upon payment of $101.00 per share, plus
an amount per share equal to all dividends accrued and unpaid thereon to
the date of payment of the amount due pursuant to this paragraph.
(e) The amount payable per share on Series AA Stock in the event of
any liquidation, dissolution or winding up of the affairs of the
Corporation shall be $100, plus an amount per share equal to all dividends
accrued and unpaid thereon to the date of payment of the amount due
pursuant to this paragraph; provided, however, that if such liquidation,
dissolution or winding up is voluntary, an additional sum of $1.00 shall be
so paid.
(f) The number of shares of Series AA Stock shall not be increased
above, and shall not exceed, 190,000. Series AA Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series AA Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in,*
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*any subsequent series of Serial Preferred Stock of a new designation with
such express terms as may be fixed by the Board of Directors of the
Corporation.
Section 34. Serial Preferred Stock, $9.375 Series BB. 83,500 shares of
Serial Preferred Stock are designated as a series entitled "Serial Preferred
Stock, $9.375 Series BB" (hereinafter called "Series BB Stock"). The Series BB
Stock shall have the express terms set forth in this Division as being
applicable to all shares of Serial Preferred Stock as a class, and, in addition,
the following express terms applicable to all shares of Series BB Stock as a
series of the Serial Preferred Stock:
(a) The annual dividend rate of the Series BB Stock shall be $9.375
per share.
(b) Dividends on Series BB Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on the first
such payment date following the merger of The Toledo Edison Company
("Toledo Edison") into The Cleveland Electric Illuminating Company (the
"Merger"); provided, however, that if a record date shall have been
established and a dividend declared, payable on such date, by Toledo Edison
with respect to its 9.375% Cumulative Preferred Stock, then the first
payment date for a quarterly dividend on the Series BB Stock shall be the
next ensuing first day of March, June, September or December.
(c) Dividends on Series BB Stock shall be cumulative from the last
dividend payment date established by Toledo Edison with respect to its
9.375% Cumulative Preferred Stock prior to the conversion of such 9.375%
Cumulative Preferred Stock into the Series BB Stock in the Merger.
(d) Subject in each case to the provisions of Section 5(c)(3) of this
Division, Series BB Stock shall be redeemable in the manner provided in
Sections 3(b)(1) and (2) of this Division, and as follows:
(1) Series BB Stock shall be redeemed in part from time to time for
the Sinking Fund as hereinafter set forth at a redemption price of $100
per share, plus in each case an amount per share equal to all dividends
accrued and unpaid thereon to the date of redemption (such price plus
such amount being hereinafter called the "Sinking Fund Redemption
Price"). As and for a Sinking Fund for Series BB Stock, so long as and
to the extent that any shares thereof are outstanding, the Corporation
will redeem on each June 1 (hereinafter called "Sinking Fund Date")
commencing with June 1, 1995 and ending on June 1, 1998, 16,650 shares
of Series BB Stock, and on June 1, 1999, the remaining 16,900 shares of
Series BB Stock, or the number of shares then outstanding, if less, at
the Sinking Fund Redemption Price (the Corporation's obligation to
redeem such number of shares on any Sinking Fund Date being hereinafter
referred to as the "Sinking Fund Obligation"). If the Corporation shall
not have on any Sinking Fund Date sufficient funds legally available to
effect such mandatory redemption, it shall set aside for such redemption
on such date such funds, if any, as are then legally available, and
shall do so as promptly as practicable thereafter as the Corporation
determines that it has funds then legally available, and shall apply
such funds to the redemption of shares of Series BB Stock as provided in
the last sentence of this Subsection (d)(1) until it has redeemed all of
the Series BB Stock then required to be redeemed pursuant to this
Subsection (d)(1). Notwithstanding the foregoing, if at any time the
Corporation (i) shall be obligated to redeem Series BB Stock or to set
aside legally available funds for that purpose and to redeem other
Serial Preferred Stock for its sinking fund or other mandatory
redemption terms and (ii) shall not have sufficient funds legally
available to do so in full, then such portion of such then legally
available funds shall be set aside to redeem the Series BB Stock as
shall bear the same ratio to the total funds then legally available to
effect such redemption and to meet the then unmet obligations of the
sinking fund and other mandatory redemption terms of all outstanding
Serial Preferred Stock as the then unmet obligation to redeem Series BB
Stock bears to the aggregate of such unmet obligations to redeem and the
then unmet obligations of the sinking fund and other mandatory
redemption terms of all outstanding Serial Preferred Stock. At any time
following the setting aside of funds to redeem Series BB Stock pursuant
to this Subsection (d)(1) when the amount so set aside is sufficient to
redeem at least 100 shares of Series BB Stock, the Corporation shall
promptly call for redemption such number of whole shares of Series BB
Stock as may be redeemed with such amount at the redemption price of
$100 per share, plus accrued but unpaid dividends on Series BB Stock
then being redeemed to the date of redemption.*
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*(2) On each Sinking Fund Date so long as and to the extent that
Series BB Stock shall be outstanding, and provided that the Corporation
has fulfilled its Sinking Fund Obligation on such date, the Corporation
may at the option of the Board of Directors on each said June 1 redeem
up to 16,650 additional shares of Series BB Stock (any redemption of
less than all of the then outstanding Series BB Stock being applied in
satisfaction of required Sinking Fund Obligations in inverse order of
their scheduled Sinking Fund Dates) at the redemption price of $100 per
share (the "Redemption Amount"), plus in each case an amount per share
equal to all dividends accrued and unpaid thereon to the date of
redemption; provided, however, that not more than 37,500 shares of
Series BB Stock shall be redeemed pursuant to this Subsection (d)(2).
(3) Series BB Stock shall be redeemable at any time or from time to
time, at the option of the Board of Directors, upon payment of $101.98
per share if redeemed prior to June 1, 1995, or $101.48 per share if
redeemed on or subsequent to June 1, 1995 and prior to June 1, 1996, or
$100.99 per share if redeemed on or subsequent to June 1, 1996 and prior
to June 1, 1997, or $100.49 per share if redeemed on or subsequent to
June 1, 1997 and prior to June 1, 1998, or $100.00 per share if redeemed
on or subsequent to June 1, 1998 plus in each case an amount per share
equal to all dividends accrued and unpaid thereon to the date of
redemption.
(e) The amount payable per share on Series BB Stock in the event of
any liquidation, dissolution or winding up of the affairs of the
Corporation shall be $100, plus an amount per share equal to all dividends
accrued and unpaid thereon to the date of payment of the amount due
pursuant to this paragraph; provided, however, that if such liquidation,
dissolution or winding up is voluntary, an additional sum equal to the
excess of the redemption price per share provided in Subsection (d)(3)
hereof over $100 shall be so paid.
(f) The number of shares of Series BB Stock shall not be increased
above, and shall not exceed, 83,500. Series BB Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series BB Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
Section 35. Serial Preferred Stock, $8.84 Series CC. 250,000 shares of
Serial Preferred Stock are designated as a series entitled "Serial Preferred
Stock, $8.84 Series CC" (hereinafter called "Series CC Stock"). The Series CC
Stock shall have the express terms set forth in this Division as being
applicable to all shares of Serial Preferred Stock as a class, and, in addition,
the following express terms applicable to all shares of Series CC Stock as a
series of the Serial Preferred Stock:
(a) The annual dividend rate of the Series CC Stock shall be $8.84 per
share.
(b) Dividends on Series CC Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on the first
such payment date following the merger of The Toledo Edison Company
("Toledo Edison") into The Cleveland Electric Illuminating Company (the
"Merger"); provided, however, that if a record date shall have been
established and a dividend declared, payable on such date, by Toledo Edison
with respect to its 8.84% Cumulative Preferred Stock, then the first
payment date for a quarterly dividend on the Series CC Stock shall be the
next ensuing first day of March, June, September or December.
(c) Dividends on Series CC Stock shall be cumulative from the last
dividend payment date established by Toledo Edison with respect to its
8.84% Cumulative Preferred Stock prior to the conversion of such 8.84%
Cumulative Preferred Stock into the Series CC Stock in the Merger.
(d) Subject to the provisions of Section 5(c)(3) of this Division and
in the manner provided in Sections 3(b)(1) and (2) of this Division, Series
CC Stock shall be redeemable at any time or from time to time, at the
option of the Board of Directors, upon payment of $101.00 per share, plus
an amount per share equal to all dividends accrued and unpaid thereon to
the date of payment of the amount due pursuant to this paragraph.*
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(e) The amount payable per share on Series CC Stock in the event of
any liquidation, dissolution or winding up of the affairs of the
Corporation shall be $100.00, plus an amount per share equal to all
dividends accrued and unpaid thereon to the date of payment of the amount
due pursuant to this paragraph; provided, however, that if such
liquidation, dissolution or winding up is voluntary, an additional sum of
$1.00 shall be so paid.
(f) The number of shares of Series CC Stock shall not be increased
above, and shall not exceed, 250,000. Series CC Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series CC Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
Section 36. Serial Preferred Stock, $9.46 Series DD. 350,000 shares of
Serial Preferred Stock are designated as a series entitled "Serial Preferred
Stock, $9.46 Series DD" (hereinafter called "Series DD Stock"). The Series DD
Stock shall have the express terms set forth in this Division as being
applicable to all shares of Serial Preferred Stock as a class, and, in addition,
the following express terms applicable to all shares of Series DD Stock as a
series of the Serial Preferred Stock:
(a) The annual dividend rate of the Series DD Stock shall be $9.46 per
share.
(b) Dividends on Series DD Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on the first
such payment date following the merger of The Toledo Edison Company
("Toledo Edison") into The Cleveland Electric Illuminating Company (the
"Merger"); provided, however, that if a record date shall have been
established and a dividend declared, payable on such date, by Toledo Edison
with respect to its $2.365 Cumulative Preferred Stock, then the first
payment date for a quarterly dividend on the Series DD Stock shall be the
next ensuing first day of March, June, September or December.
(c) Dividends on Series DD Stock shall be cumulative from the last
dividend payment date established by Toledo Edison with respect to its
$2.365 Cumulative Preferred Stock prior to the conversion of such $2.365
Cumulative Preferred Stock into the Series DD Stock in the Merger.
(d) Subject to the provisions of Section 5(c)(3) of this Division and
in the manner provided in Sections 3(b)(1) and (2) of this Division, Series
DD Stock shall be redeemable at any time or from time to time, at the
option of the Board of Directors, upon payment of $111.00 per share, plus
an amount per share equal to all dividends accrued and unpaid thereon to
the date of payment of the amount due pursuant to this paragraph.
(e) The amount payable per share on Series DD Stock in the event of
any liquidation, dissolution or winding up of the affairs of the
Corporation shall be $100.00, plus an amount per share equal to all
dividends accrued and unpaid thereon to the date of payment of the amount
due pursuant to this paragraph; provided, however, that if such
liquidation, dissolution or winding up is voluntary, an additional sum of
$11.00 shall be so paid.
(f) The number of shares of Series DD Stock shall not be increased
above, and shall not exceed, 350,000. Series DD Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series DD Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
Section 37. Serial Preferred Stock, Adjustable Rate Series EE. 300,000
shares of Serial Preferred Stock are designated as a series entitled "Serial
Preferred Stock, Adjustable Rate Series EE" (hereinafter called "Series EE
Stock"). The Series EE Stock shall have the express terms set forth in this
Division as being*
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*applicable to all shares of Serial Preferred Stock as a class, and, in
addition, the following express terms applicable to all shares of Series EE
Stock as a series of the Serial Preferred Stock:
(a) The dividend rate of the Series EE Stock shall be as follows:
(1) An annual rate that is .15% above the Applicable Rate (as
defined in Subsection (a)(2) from time to time in effect for each
three-month dividend period; provided, however, that the annual dividend
rate shall in no event be less than 7.00% or more than 14.00% for any
dividend period.
(2) The applicable rate (hereinafter called the "Applicable Rate")
for any dividend period shall be the highest of the Treasury Bill Rate,
the Ten Year Constant Maturity Rate and the Twenty Year Constant
Maturity Rate (each as hereinafter defined) for such dividend period,
except that in the event the Corporation determines in good faith that
for any reason one or more of such rates cannot be determined for any
dividend period, then the Applicable Rate for such dividend shall be the
higher of whichever of such rates can be so determined or in the event
the Corporation determines in good faith that none of such rates can be
determined for any dividend period, then the Applicable Rate in effect
for the preceding dividend period shall be continued for such dividend
period.
(3) Except as provided below in this Subsection (a)(3), the
"Treasury Bill Rate" for each dividend period shall be the arithmetic
average of the two most recent weekly per annum market discount rates
(or the one weekly per annum market discount rate, if only one such rate
is published during the relevant Calendar Period (as hereinafter
defined)) for the three-month U.S. Treasury bills, as published weekly
by the Federal Reserve Board during the Calendar Period immediately
prior to the last ten calendar days of February, May, August or
November, as the case may be, prior to the dividend period for which the
dividend rate on the Series EE Stock is being determined. In the event
that the Federal Reserve Board does not publish such a weekly per annum
market discount rate during such Calendar Period, then the Treasury Bill
Rate for such dividend period shall be the arithmetic average of the two
most recent weekly per annum market discount rates (or the one weekly
per annum market discount rate, if only one such rate is published
during such Calendar Period) for three-month U.S. Treasury bills, as
published weekly during such Calendar Period by any Federal Reserve Bank
or by any U.S. Government department or agency selected by the
Corporation. In the event that a per annum market discount rate for
three-month U.S. Treasury bills is not published by the Federal Reserve
Board or by any Federal Reserve Bank or by any U.S. Government
department or agency during such Calendar Period, then the Treasury Bill
Rate for such dividend period shall be the arithmetic average of the two
most recent weekly per annum market discount rates (or the one weekly
per annum market discount rate, if only one such rate is published
during such Calendar Period) for all of the U.S. Treasury bills then
having maturities of not less than 80 nor more than 100 days, as
published during such Calendar Period by the Federal Reserve Board or,
if the Federal Reserve Board does not publish such rates, by any Federal
Reserve Bank or by any U.S. Government department or agency selected by
the Corporation. In the event the Corporation determines in good faith
that for any reason no such U.S. Treasury bill rates are published as
provided above during such Calendar Period, then the Treasury Bill Rate
for such dividend period shall be the arithmetic average of the per
annum market discount rates based upon the closing bids during such
Calendar Period for each of the issues of marketable non-interest
bearing U.S. Treasury securities with a maturity of not less than 80 nor
more than 100 days from the date of each such quotation, as quoted daily
for each business day in New York City (or less frequently if daily
quotations are not generally available) to the Corporation by at least
three recognized U.S. Government securities dealers selected by the
Corporation. In the event the Corporation determines in good faith that
for any reason the Corporation cannot determine the Treasury Bill Rate
for such dividend period as provided above in this Subsection (a)(3),
the Treasury Bill Rate for such dividend period shall be the arithmetic
average of the per annum market discount rates based upon the closing
bids during such Calendar Period for each of the issues of marketable
interest bearing U.S. Treasury securities with a maturity of not less
than 80 nor more than 100 days from the date of each such quotation, as
quoted daily for each business day in New York City (or less frequently
if daily quotations are not generally available) to the Corporation by
at least three recognized U.S. Government securities dealers selected by
the Corporation.*
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*(4) Except as provided below in this Subsection (a)(4), the "Ten
Year Constant Maturity Rate" for each dividend period shall be the
arithmetic average of the two most recent weekly per annum Ten Year
Average Yields (or the one weekly per annum Ten Year Average Yield, if
only one such Yield is published during the relevant Calendar Period),
as published weekly by the Federal Reserve Board during the Calendar
Period immediately prior to the last ten calendar days of February, May,
August or November, as the case may be, prior to the dividend period for
which the dividend rate on the Series EE Stock is being determined. In
the event that the Federal Reserve Board does not publish such a weekly
per annum Ten Year Average Yield during such Calendar Period, then the
Ten Year Constant Maturity Rate for such dividend period shall be the
arithmetic average of the two most recent weekly per annum Ten Year
Average Yields (or the one weekly per annum Ten Year Average Yield, if
only one such Yield is published during such Calendar Period), as
published weekly during such Calendar Period by any Federal Reserve Bank
or by any U.S. Government department or agency selected by the
Corporation. In the event that a per annum Ten Year Average Yield is not
published by the Federal Reserve Board or by any Federal Reserve Bank or
by any U.S. Government department or agency during such Calendar Period,
then the Ten Year Constant Maturity Rate for such dividend period shall
be the arithmetic average of the two most recent weekly per annum
average yields to maturity (or the one weekly average yield to maturity,
if only one such yield is published during such Calendar Period) for all
of the actively traded marketable U.S. Treasury fixed interest rate
securities (other than Special Securities (as hereinafter defined)) then
having maturities of not less than eight nor more than twelve years, as
published during such Calendar Period by the Federal Reserve Board or,
if the Federal Reserve Board does not publish such yields, by any
Federal Reserve Bank or by any U.S. Government department or agency
selected by the Corporation. In the event the Corporation determines in
good faith that for any reason the Corporation cannot determine the Ten
Year Constant Maturity Rate for such dividend period as provided above
in this Subsection (a)(4), then the Ten Year Constant Maturity Rate for
such dividend period shall be the arithmetic average of the per annum
average yields to maturity based upon the Closing bids during such
Calendar Period for each of the issues of actively traded marketable
U.S. Treasury fixed interest rate securities (other than Special
Securities) with a final maturity date not less than eight nor more than
twelve years from the date of each such quotation, as quoted daily for
each business day in New York City (or less frequently if daily
quotations are not generally available) to the Corporation by at least
three recognized U.S. Government securities dealers selected by the
Corporation.
(5) Except as provided below in this Subsection (a)(5), the "Twenty
Year Constant Maturity Rate" for each dividend period shall be the
arithmetic average of the two most recent weekly per annum Twenty Year
Average Yields (or the one weekly per annum Twenty Year Average Yield,
if only one such Yield is published during the relevant Calendar
Period), as published weekly by the Federal Reserve Board during the
Calendar Period immediately prior to the last ten calendar days of
February, May, August or November, as the case may be, prior to the
dividend period for which the dividend rate on the Series EE Stock is
being determined. In the event the Federal Reserve Board does not
publish such a weekly per annum Twenty Year Average Yield during such
Calendar Period, then the Twenty Year Constant Maturity Rate for such
dividend period shall be the arithmetic average of the two most recent
weekly per annum Twenty Year Average Yields (or the one weekly per annum
Twenty Year Average Yield, if only one such Yield is published during
such Calendar Period), as published weekly during such Calendar Period
by any Federal Reserve Bank or by any U.S. Government department or
agency selected by the Corporation. In the event that a per annum Twenty
Year Average Yield is not published by the Federal Reserve Board or by
any Federal Reserve Bank or by any U.S. Government department or agency
during such Calendar Period, then the Twenty Year Constant Maturity Rate
for such dividend period shall be the arithmetic average of the two most
recent weekly per annum average yields to maturity (or the one weekly
average yield to maturity, if only one such yield is published during
such Calendar Period) for all of the actively traded marketable U.S.
Treasury fixed interest rate securities (other than Special Securities)
then having maturities of not less than eighteen nor more than
twenty-two years, as published during such Calendar Period by the
Federal Reserve Board or, if the Federal Reserve Board does not publish
such yields, by any Federal Reserve*
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<PAGE> 135
*Bank or by any U.S. government department or agency selected by the
Corporation. In the event that the Corporation determines in good faith
that for any reason the Corporation cannot determine the Twenty Year
Constant Maturity Rate for such dividend period as provided above in
this Subsection (a)(5), then the Twenty Year Constant Maturity Rate for
such dividend period shall be the arithmetic average of the per annum
average yields to maturity based upon the closing bids during such
Calendar Period for each of the issues of actively traded marketable
U.S. Treasury fixed interest rate securities (other than Special
Securities) with a final maturity date not less than eighteen nor more
than twenty-two years from the date of each quotation, as quoted daily
for each business day in New York City (or less frequently if daily
quotations are not generally available) to the Corporation by at least
three recognized U.S. Government securities dealers selected by the
Corporation.
(6) The Treasury Bill Rate, the Ten Year Constant Maturity Rate and
the Twenty Year Constant Maturity Rate each shall be rounded to the
nearest one hundredth of a percentage point.
(7) The fixed dividend rate per share for each dividend period
shall be computed in dollars by dividing the dividend rate for such
dividend period by four and, in the case of an Applicable Rate,
converting such rate to a fraction and multiplying it by $100.00;
provided that the dividend payable for any period longer or shorter than
a full quarterly dividend period shall be computed on the basis of a
360-day year consisting of 30-day months.
(8) The dividend rate with respect to each dividend period shall be
calculated as promptly as practicable by the Corporation. The
mathematical accuracy of each such calculation shall be confirmed in
writing by the Corporation's independent auditors. The Corporation shall
cause each individual rate to be published in a newspaper of general
circulation in New York City prior to the commencement of the dividend
period to which it applies.
(9) As used in this Subsection (a), the term "Calendar Period"
means a period of fourteen calendar days; the term "Special Securities"
means securities which can, at the option of the holder, be surrendered
at face value in payment of any Federal estate tax or which provide tax
benefits to the holder and are priced to reflect such tax benefits or
which were originally issued at a deep or substantial discount; the term
"Ten Year Average Yield" means the average yield to maturity for
actively traded marketable U.S. Treasury fixed interest rate securities
(adjusted to constant maturities of ten years); and the term "Twenty
Year Average Yield" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities (adjusted
to constant maturities of twenty years).
(b) Dividends on Series EE Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on the first
such payment date following the merger of The Toledo Edison Company
("Toledo Edison") into The Cleveland Electric Illuminating Company (the
"Merger"); provided, however, that if a record date shall have been
established and a dividend declared, payable on such date, by Toledo Edison
with respect to its Adjustable Rate Preferred Stock, Series A, then the
first payment date for a quarterly dividend on the Series EE Stock shall be
the next ensuing first day of March, June, September or December.
(c) Dividends on Series EE Stock shall be cumulative from the last
dividend payment date established by Toledo Edison with respect to its
Adjustable Rate Preferred Stock, Series A, prior to the conversion of such
Adjustable Rate Preferred Stock, Series A, into the Series EE Stock in the
Merger.
(d) Subject to the provisions of Section 5(c)(3) of this Division and
in the manner provided in Sections 3(b)(1) and (2) of this Division, Series
EE Stock shall be redeemable at any time or from time to time, at the
option of the Board of Directors, upon payment of $103.00 per share if
redeemed prior to December 1, 1995 and $100.00 per share if redeemed on or
after December 1, 1995, plus in each case an amount per share equal to all
dividends accrued and unpaid thereon to the date of payment of the amount
due pursuant to this paragraph.
(e) The amount payable per share on Series EE Stock in the event of
any liquidation, dissolution or winding up of the affairs of the
Corporation shall be $100.00, plus an amount per share equal to all
dividends accrued and unpaid thereon to the date of payment of the amount
due pursuant to this paragraph;*
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<PAGE> 136
*provided, however, that if such liquidation, dissolution or winding up is
voluntary and occurs prior to December 1, 1995, an additional sum of $3.00
shall be so paid.
(f) The number of shares of Series EE Stock shall not be increased
above, and shall not exceed, 300,000. Series EE Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series EE Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
Section 38. Serial Preferred Stock, Adjustable Rate Series FF. 300,000
shares of Serial Preferred Stock are designated as a series entitled "Serial
Preferred Stock, Adjustable Rate Series FF" (hereinafter called "Series FF
Stock"). The Series FF Stock shall have the express terms set forth in this
Division as being applicable to all shares of Serial Preferred Stock as a class,
and, in addition, the following express terms applicable to all shares of Series
FF Stock as a series of the Serial Preferred Stock:
(a) The dividend rate of the Series FF Stock shall be as follows:
(1) An annual rate that is 1.00% above the Applicable Rate (as
defined in Subsection (a)(2) from time to time in effect for each
three-month dividend period; provided, however, that the annual dividend
rate shall in no event be less than 7.00% or more than 13.00% for any
dividend period.
(2) The applicable rate (hereinafter called the "Applicable Rate")
for any dividend period shall be the highest of the Treasury Bill Rate,
the Ten Year Constant Maturity Rate and the Twenty Year Constant
Maturity Rate (each as hereinafter defined) for such dividend period,
except that in the event the Corporation determines in good faith that
for any reason one or more of such rates cannot be determined for any
dividend period, then the Applicable Rate for such dividend shall be the
higher of whichever of such rates can be so determined or in the event
the Corporation determines in good faith that none of such rates can be
determined for any dividend period, then the Applicable Rate in effect
for the preceding dividend period shall be continued for such dividend
period.
(3) Except as provided below in this Subsection (a)(3), the
"Treasury Bill Rate" for each dividend period shall be the arithmetic
average of the two most recent weekly per annum market discount rates
(or the one weekly per annum market discount rate, if only one such rate
is published during the relevant Calendar Period (as hereinafter
defined)) for the three-month U.S. Treasury bills, as published weekly
by the Federal Reserve Board during the Calendar Period immediately
prior to the last ten calendar days of February, May, August or
November, as the case may be, prior to the dividend period for which the
dividend rate on the Series FF Stock is being determined. In the event
that the Federal Reserve Board does not publish such a weekly per annum
market discount rate during such Calendar Period, then the Treasury Bill
Rate for such dividend period shall be the arithmetic average of the two
most recent weekly per annum market discount rates (or the one weekly
per annum market discount rate, if only one such rate is published
during such Calendar Period) for three-month U.S. Treasury bills, as
published weekly during such Calendar Period by any Federal Reserve Bank
or by any U.S. Government department or agency selected by the
Corporation. In the event that a per annum market discount rate for
three-month U.S. Treasury bills is not published by the Federal Reserve
Board or by any Federal Reserve Bank or by any U.S. Government
department or agency during such Calendar Period, then the Treasury Bill
Rate for such dividend period shall be the arithmetic average of the two
most recently weekly per annum market discount rates (or the one weekly
per annum market discount rate, if only one such rate is published
during such Calendar Period) for all of the U.S. Treasury bills then
having maturities of not less than 80 nor more than 100 days, as
published during such Calendar Period by the Federal Reserve Board or,
if the Federal Reserve Board does not publish such rates, by any Federal
Reserve Bank or by any U.S. Government department or agency selected by
the Corporation. In the event the Corporation determines in good faith
that for any reason no such U.S. Treasury bill rates are published as
provided above during such Calendar Period, then the Treasury Bill Rate
for such dividend period shall be the arithmetic average of the per
annum market discount rates based upon the closing bids during such
Calendar Period for each of the issues of marketable non-*
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<PAGE> 137
*interest bearing U.S. Treasury securities with a maturity of not less
than 80 nor more than 100 days from the date of each such quotation, as
quoted daily for each business day in New York City (or less frequently
if daily quotations are not generally available) to the Corporation by
at least three recognized U.S. Government securities dealers selected by
the Corporation. In the event the Corporation determines in good faith
that for any reason the Corporation cannot determine the Treasury Bill
Rate for such dividend period as provided above in this Subsection
(a)(3), the Treasury Bill Rate for such dividend period shall be the
arithmetic average of the per annum market discount rates based upon the
closing bids during such Calendar Period for each of the issues of
marketable interest bearing U.S. Treasury securities with a maturity of
not less than 80 nor more than 100 days from the date of each such
quotation, as quoted daily for each business day in New York City (or
less frequently if daily quotations are not generally available) to the
Corporation by at least three recognized U.S. Government securities
dealers selected by the Corporation.
(4) Except as provided below in this Subsection (a)(4), the "Ten
Year Constant Maturity Rate" for each dividend period shall be the
arithmetic average of the two most recent weekly per annum Ten Year
Average Yields (or the one weekly per annum Ten Year Average Yield, if
only one such Yield is published during the relevant Calendar Period),
as published weekly by the Federal Reserve Board during the Calendar
Period immediately prior to the last ten calendar days of February, May,
August or November, as the case may be, prior to the dividend period for
which the dividend rate on the Series FF Stock is being determined. In
the event that the Federal Reserve Board does not publish such a weekly
per annum Ten Year Average Yield during such Calendar Period, then the
Ten Year Constant Maturity Rate for such dividend period shall be the
arithmetic average of the two most recent weekly per annum Ten Year
Average Yields (or the one weekly per annum Ten Year Average Yield, if
only one such Yield is published during such Calendar Period), as
published weekly during such Calendar Period by any Federal Reserve Bank
or by any U.S. Government department or agency selected by the
Corporation. In the event that a per annum Ten year Average Yield is not
published by the Federal Reserve Board or by any Federal Reserve Bank or
by any U.S. Government department or agency during such Calendar Period,
then the Ten Year Constant Maturity Rate for such dividend period shall
be the arithmetic average of the two most recent weekly per annum
average yields to maturity (or the one weekly average yield to maturity,
if only one such yield is published during such Calendar Period) for all
of the actively traded marketable U.S. Treasury fixed interest rate
securities (other than Special Securities (as hereinafter defined)) then
having maturities of not less than eight nor more than twelve years, as
published during such Calendar Period by the Federal Reserve Board or,
if the Federal Reserve Board does not publish such yields, by any
Federal Reserve Bank or by any U.S. Government department or agency
selected by the Corporation. In the event the Corporation determines in
good faith that for any reason the Corporation cannot determine the Ten
Year Constant Maturity Rate for such dividend period as provided above
in this Subsection (a)(4), then the Ten Year Constant Maturity Rate for
such dividend period shall be the arithmetic average of the per annum
average yields to maturity based upon the closing bids during such
Calendar Period for each of the issues of actively traded marketable
U.S. Treasury fixed interest rate securities (other than Special
Securities) with a final maturity date not less than eight nor more than
twelve years from the date of each such quotation, as quoted daily for
each business day in New York City (or less frequently if daily
quotations are not generally available) to the Corporation by at least
three recognized U.S. Government securities dealers selected by the
Corporation.
(5) Except as provided below in this Subsection (a)(5), the "Twenty
Year Constant Maturity Rate" for each dividend period shall be the
arithmetic average of the two most recent weekly per annum Twenty Year
Average Yields (or the one weekly per annum Twenty Year Average Yield,
if only one such Yield is published during the relevant Calendar
Period), as published weekly by the Federal Reserve Board during the
Calendar Period immediately prior to the last ten calendar days of
February, May, August or November, as the case may be, prior to the
dividend period for which the dividend rate on the Series FF Stock is
being determined. In the event the Federal Reserve Board does not
publish such a weekly per annum Twenty Year Average Yield during such
Calendar Period, then the Twenty Year Constant Maturity Rate for such
dividend period shall be the arithmetic average of the*
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<PAGE> 138
*two most recent weekly per annum Twenty Year Average Yields (or the one
weekly per annum Twenty Year Average Yield, if only one such Yield is
published during such Calendar Period), as published weekly during such
Calendar Period by any Federal Reserve Bank or by any U.S. Government
department or agency selected by the Corporation. In the event that a
per annum Twenty Year Average Yield is not published by the Federal
Reserve Board or by any Federal Reserve Bank or by any U.S. Government
department or agency during such Calendar Period, then the Twenty Year
Constant Maturity Rate for such dividend period shall be the arithmetic
average of the two most recent weekly per annum average yields to
maturity (or the one weekly average yield to maturity, if only one such
yield is published during such Calendar Period) for all of the actively
traded marketable U.S. Treasury fixed interest rate securities (other
than Special Securities) then having maturities of not less than
eighteen nor more than twenty-two years, as published during such
Calendar Period by the Federal Reserve Board or, if the Federal Reserve
Board does not publish such yields, by any Federal Reserve Bank or by
any U.S. government department or agency selected by the Corporation. In
the event that the Corporation determines in good faith that for any
reason the Corporation cannot determine the Twenty Year Constant
Maturity Rate for such dividend period as provided above in this
Subsection (a)(5), then the Twenty Year Constant Maturity Rate for such
dividend period shall be the arithmetic average of the per annum average
yields to maturity based upon the closing bids during such Calendar
Period for each of the issues of actively traded marketable U.S.
Treasury fixed interest rate securities (other than Special Securities)
with a final maturity date not less than eighteen nor more than twenty-
two years from the date of each quotation, as quoted daily for each
business day in New York City (or less frequently if daily quotations
are not generally available) to the Corporation by at least three
recognized U.S. Government securities dealers selected by the
Corporation.
(6) The Treasury Bill Rate, the Ten Year Constant Maturity Rate and
the Twenty Year Constant Maturity Rate each shall be rounded to the
nearest one hundredth of a percentage point.
(7) The fixed dividend rate per share for each dividend period
shall be computed in dollars by dividing the dividend rate for such
dividend period by four and, in the case of an Applicable Rate,
converting such rate to a fraction and multiplying it by $100.00;
provided that the dividend payable for any period longer or shorter than
a full quarterly dividend period shall be computed on the basis of a
360-day year consisting of 30-day months.
(8) The dividend rate with respect to each dividend period shall be
calculated as promptly as practicable by the Corporation. The
mathematical accuracy of each such calculation shall be confirmed in
writing by the Corporation's independent auditors. The Corporation shall
cause each individual rate to be published in a newspaper of general
circulation in New York City prior to the commencement of the dividend
period to which it applies.
(9) As used in this Subsection (a), the term "Calendar Period"
means a period of fourteen calendar days; the term "Special Securities"
means securities which can, at the option of the holder, be surrendered
at face value in payment of any Federal estate tax or which provide tax
benefits to the holder and are priced to reflect such tax benefits or
which were originally issued at a deep or substantial discount; the term
"Ten Year Average Yield" means the average yield to maturity for
actively traded marketable U.S. Treasury fixed interest rate securities
(adjusted to constant maturities of ten years); and the term "Twenty
Year Average Yield" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities (adjusted
to constant maturities of twenty years).
(b) Dividends on Series FF Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on the first
such payment date following the merger of The Toledo Edison Company
("Toledo Edison") into The Cleveland Electric Illuminating Company (the
"Merger"); provided, however, that if a record date shall have been
established and a dividend declared, payable on such date, by Toledo Edison
with respect to its Adjustable Rate Preferred Stock, Series B, then the
first payment date for a quarterly dividend on the Series FF Stock shall be
the next ensuing first day of March, June, September or December.*
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*(c) Dividends on Series FF Stock shall be cumulative from the last
dividend payment date established by Toledo Edison with respect to its
Adjustable Rate Preferred Stock, Series B, prior to the conversion of such
Adjustable Rate Preferred Stock, Series B, into the Series FF Stock in the
Merger.
(d) Subject to the provisions of Section 5(c)(3) of this Division and
in the manner provided in Sections 3(b)(1) and (2) of this Division, Series
FF Stock shall be redeemable at any time or from time to time, at the
option of the Board of Directors, upon payment of $103.00 per share if
redeemed prior to March 1, 1996 and $100.00 per share if redeemed on or
after March 1, 1996, plus in each case an amount per share equal to all
dividends accrued and unpaid thereon to the date of payment of the amount
due pursuant to this paragraph.
(e) The amount payable per share on Series FF Stock in the event of
any liquidation, dissolution or winding up of the affairs of the
Corporation shall be $100.00, plus an amount per share equal to all
dividends accrued and unpaid thereon to the date of payment of the amount
due pursuant to this paragraph; provided, however, that if such
liquidation, dissolution or winding up is voluntary and occurs prior to
March 1, 1996, an additional sum of $3.00 shall be so paid.
(f) The number of shares of Series FF Stock shall not be increased
above, and shall not exceed, 300,000. Series FF Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series FF Stock, but, having been restored to the status of
authorized but unissued shares of Serial Preferred Stock without serial
designation, may, in whole or in part, be, or be included in, any
subsequent series of Serial Preferred Stock of a new designation with such
express terms as may be fixed by the Board of Directors of the Corporation.
Section 39. Serial Preferred Stock, $11.24 Series GG. 100,000 shares of
Serial Preferred Stock are designated as a series entitled "Serial Preferred
Stock, $11.24 Series GG" (hereinafter called "Series GG Stock"). The Series GG
Stock shall have the express terms set forth in this Division as being
applicable to all shares of Serial Preferred Stock as a class, and, in addition,
the following express terms applicable to all shares of Series GG Stock as a
series of the Serial Preferred Stock:
(a) The annual dividend rate of the Series GG Stock shall be $11.24
per share.
(b) Dividends on Series GG Stock shall be payable, if declared,
quarterly on the first day of March, June, September and December of each
year, the first quarterly dividend being payable, if declared, on the first
such payment date following the merger of The Toledo Edison Company
("Toledo Edison") into The Cleveland Electric Illuminating Company (the
"Merger"); provided, however, that if a record date shall have been
established and a dividend declared, payable on such date, by Toledo Edison
with respect to its $2.81 Cumulative Preferred Stock, then the first
payment date for a quarterly dividend on the Series GG Stock shall be the
next ensuing first day of March, June, September or December.
(c) Dividends on Series GG Stock shall be cumulative from the last
dividend payment date established by Toledo Edison with respect to its
$2.81 Cumulative Preferred Stock prior to the conversion of such $2.81
Cumulative Preferred Stock into the Series GG Stock in the Merger.
(d) Subject to the provisions of Section 5(c)(3) of this Division and
in the manner provided in Sections 3(b)(1) and (2) of this Division, Series
GG Stock shall be redeemable as follows:
(1) So long as there shall be outstanding any shares of Series GG
Stock, after full dividends on the outstanding Serial Preferred Stock of
all series shall have been paid or declared and set apart for payment
with respect to all past dividend periods and the current dividend
period, the Corporation shall redeem for a sinking fund, at a redemption
price of $100.00 per share ("Sinking Fund Redemption Price"), plus an
amount, per share, equal to all dividends accrued and unpaid thereon to
the date of redemption, payable out of funds legally available therefor,
100,000 shares of Series GG Stock, on September 1, in each year
beginning in 1995, unless a fewer number of shares shall be outstanding
in which case the fewer number shall be so redeemed; provided, however,
that the Corporation may apply, as a credit against the number of shares
of Series GG Stock to be redeemed for the sinking fund as aforesaid, any
shares of Series GG Stock previously purchased or redeemed by the
Corporation, other than shares previously redeemed for the sinking fund
or shares redeemed pursuant to subpara-*
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*graph (d)(2) of this Paragraph or shares previously so applied as a
credit. If the Corporation shall fail for any reason on any such
September 1 so to redeem and credit 100,000 shares for the sinking fund,
the number of shares to be redeemed and credited on the next such
September 1 shall be increased by the amount of the deficiency. Unless
all shares of Series GG Stock theretofore required to be redeemed for
the sinking fund for Series GG Stock shall have been redeemed, no
dividends shall be declared or paid upon or set apart for the Common
Stock or any other stock ranking junior to the Cumulative Preferred
Stock in respect of dividends or assets, and no shares of Common Stock
or any other stock ranking junior to the Cumulative Preferred Stock in
respect of dividends or assets shall be purchased or otherwise acquired
for a consideration by the Corporation.
(2) On September 1 in each year beginning in 1995, the Corporation,
at the option of the Board of Directors, may redeem an additional
100,000 shares of Series GG Stock, at the Sinking Fund Redemption Price,
plus an amount, per share, equal to all dividends accrued and unpaid
thereon to the date of redemption; provided, however, that the
redemption of such additional shares shall not reduce the amount so
required to be redeemed in any subsequent year; and provided, further,
that the right of the Corporation to redeem such additional shares shall
not be cumulative.
(3) The Corporation, at the option of the Board of Directors, may
redeem at any time all, or from time to time any part, of the
outstanding Series GG Stock as follows:
<TABLE>
<CAPTION>
IF REDEEMED IN UPON PAYMENT
THE 12 MONTHS OF THE REDEMPTION
ENDING ON AUGUST 31, PRICE PER SHARE OF
--------------------- ------------------
<S> <C>
1995................................... $ 102.48
1996................................... 101.24
1997................................... 100.00
</TABLE>
plus, in each case, an amount, per share, equal to all dividends accrued
and unpaid thereon to the date of redemption.
(4) On September 1, 1997, the Corporation shall redeem, out of
funds legally available therefor, all remaining shares of Series GG
Stock, if any, then outstanding at the redemption price of $100.00 per
share, plus an amount, per share, equal to all dividends accrued and
unpaid thereon to the date of redemption.
(e) The amount payable per share on Series GG Stock in the event of
any voluntary liquidation, dissolution or winding up of the affairs of the
Corporation shall be the redemption price then in effect as set forth in
subparagraph (d)(3) of this Paragraph or in the event of any involuntary
liquidation, dissolution or winding up of the affairs of the Corporation
shall be $100.00, plus, in either case, an amount, per share, equal to all
dividends accrued and unpaid thereon to the date of payment of the amount
due pursuant to this subparagraph.
(f) The number of shares of Series GG Stock shall not be increased
above and shall not exceed 250,000. Series GG Stock once redeemed,
purchased or otherwise acquired by the Corporation shall not be reissued as
shares of Series GG Stock, but, having been restored to the status of
authorized but unissued shares of Cumulative Preferred Stock without serial
designation, may, in whole or in part, be, or be included in, any
subsequent series of Cumulative Preferred Stock of a new designation with
such express terms as may be fixed by the Board of Directors of the
Corporation.*
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DIVISION B
The Preference Stock shall have the following express terms:
Section 1. Preferences; Series. The Preference Stock shall rank junior to
the Serial Preferred Stock as to the payment of dividends and as to
distributions in the event of a voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Corporation. The Preference
Stock may be issued from time to time in one or more series. All shares of
Preference Stock shall be of equal rank and shall be identical, except in
respect of the matters that may be fixed by the Board of Directors as
hereinafter provided, and each share of a series shall be identical with all
other shares of such series, except as to the date from which dividends are
cumulative. Subject to the provisions of Sections 2 to 7, inclusive, of this
Division, which provisions shall apply to all Preference Stock, the Board of
Directors hereby is authorized to cause such shares to be issued in one or more
series and with respect to each such series to determine and fix prior to the
issuance thereof (and thereafter, to the extent provided in clause (b) of this
Section) the following:
(a) The designation of the series, which may be by distinguishing
number, letter or title;
(b) The number of shares of the series, which number the Board of
Directors may (except where otherwise provided in the creation of the
series) increase or decrease from time to time before or after the issuance
thereof (but not below the number of shares thereof then outstanding);
(c) The annual dividend rate or rates of the series;
(d) The dates on which and the period or periods for which dividends,
if declared, shall be payable and the date or dates from which dividends
shall accrue and be cumulative;
(e) The redemption rights and price or prices, if any, for shares of
the series;
(f) The terms and amount of the sinking fund, if any, for the purchase
or redemption of shares of the series;
(g) The amounts payable on shares of the series in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Corporation, which may be different for voluntary and
involuntary liquidation, dissolution or winding up;
(h) Whether the shares of the series shall be convertible into Common
Stock or shares of any other class ranking junior to the Preference Stock
or any series of the same class of stock of the Corporation and, if so, the
conversion rate or rates or price or prices, any adjustments thereof and
all other terms and conditions upon which such conversion may be made; and
(i) Restrictions (in addition to those set forth in Sections 5(c) and
5(d) of this Division) on the issuance of shares of the same series or of
any other class or series.
The Board of Directors is authorized to adopt from time to time amendments
to the Amended Articles of Incorporation fixing, with respect to each such
series, the matters described in clauses (a) to (i), inclusive, of this Section.
Section 2. Dividends.
(a) The holders of Preference Stock of each series, subject to the
prior preference with respect to dividends upon Serial Preferred Stock set
forth in Section 2 of Division A and in preference to the holders of Common
Stock and of any other class of shares ranking junior to the Preference
Stock, shall be entitled to receive out of any funds legally available and
when and as declared by the Board of Directors, dividends in cash at the
rate or rates for such series fixed in accordance with the provisions of
Section 1 of this Division and no more, payable on the dates fixed for such
series. Such dividends shall be cumulative, in the case of shares of each
particular series, from and after the date or dates fixed with respect to
such series. No dividends shall be paid upon or declared or set apart for
any series of the Preference Stock for any dividend period unless at the
same time a like proportionate dividend for the dividend periods
terminating on the same or any earlier date, ratably in proportion to the
respective annual dividend rates fixed therefor, shall
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<PAGE> 142
have been paid upon or declared or set apart for all Preference Stock of
all series then issued and outstanding and entitled to receive such
dividend.
(b) So long as any Preference Stock shall be outstanding no dividend,
except a dividend payable in Common Stock or other shares ranking junior to
the Preference Stock, shall be paid or declared or any distribution be
made, except as aforesaid, in respect of the Common Stock or any other
shares ranking junior to the Preference Stock, nor shall any Common Stock
or any other shares ranking junior to the Preference Stock be purchased,
retired or otherwise acquired by the Corporation, except out of the
proceeds of the sale of Common Stock or other shares of the Corporation
ranking junior to the Preference Stock received by the Corporation
subsequent to the date of first issuance of Preference Stock of any series,
unless:
(1) All accrued and unpaid dividends on Preference Stock, including
the full dividends for all current dividend periods, shall have been
declared and paid or a sum sufficient for payment thereof set apart; and
(2) There shall be no arrearages with respect to the redemption of
Preference Stock of any series from any sinking fund provided for shares
of such series in accordance with the provisions of Section 1 of this
Division.
Section 3. Redemption.
(a) Subject to the express terms of each series and to the provisions
of Section 5(c)(2) of this Division, the Corporation:
(1) May, from time to time at the option of the Board of Directors,
redeem all or any part of any redeemable series of Preference Stock at
the time outstanding at the applicable redemption price for such series
fixed in accordance with the provisions of Section 1 of this Division;
and
(2) Shall, from time to time, make such redemptions of each series
of Preference Stock as may be required to fulfill the requirements of
any sinking fund provided for shares of such series at the applicable
sinking fund redemption price fixed in accordance with the provisions of
Section 1 of this Division;
and shall in each case pay all accrued and unpaid dividends to the
redemption date.
(b) (1) Notice of every such redemption shall be mailed, postage
prepaid, to the holders of record of the Preference Stock to be redeemed
at their respective addresses then appearing on the books of the
Corporation, not less than 30 days nor more than 90 days prior to the
date fixed for such redemption, or such other time prior thereto as the
Board of Directors shall fix for any series pursuant to Section 1(e) of
this Division prior to the issuance thereof. At any time after notice as
provided above has been deposited in the mail, the Corporation may
deposit the aggregate redemption price of the shares of Preference Stock
to be redeemed, together with accrued and unpaid dividends thereon to
the redemption date, with any bank or trust company in Ohio or New York,
New York, having capital and surplus of not less than $25,000,000, named
in such notice, directed to be paid to the respective holders of the
shares of Preference Stock so to be redeemed, in amounts equal to the
redemption price of all shares of Preference Stock so to be redeemed, on
surrender of the stock certificate or certificates held by such holders;
and upon the deposit of such notice in the mail and the making of such
deposit of money with such bank or trust company, such holders shall
cease to be shareholders with respect to such shares; and from and after
the time such notice shall have been so deposited and such deposit of
money shall have been so made, such holders shall have no interest in or
claim against the Corporation with respect to such shares, except only
the right to receive such money from such bank or trust company without
interest or to exercise, before the redemption date, any unexpired
privileges of conversion. In the event less than all of the outstanding
shares of Preference Stock are to be redeemed, the Corporation shall
select by lot or pro rata the shares so to be redeemed in such manner as
shall be prescribed by the Board of Directors.
(2) If the holders of shares of Preference Stock which have been
called for redemption shall not, within 6 years after such deposit,
claim the amount deposited for the redemption thereof, any such bank or
trust company shall, upon demand, pay over to the Corporation such
unclaimed amounts and
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<PAGE> 143
thereupon such bank or trust company shall be relieved of all
responsibility in respect thereof and to such holders.
(c) Except as otherwise provided in Section 5(d)(2) of this Division,
the Corporation may also from time to time purchase or otherwise acquire,
for a consideration, shares of its outstanding Preference Stock of any
series.
(d) Any shares of Preference Stock which are (1) redeemed by the
Corporation pursuant to the provisions of this Section, (2) purchased and
delivered in satisfaction of any sinking fund requirements provided for
shares of such series, (3) converted in accordance with the express terms
thereof, or (4) otherwise acquired by the Corporation, shall resume the
status of authorized but unissued shares of Preference Stock without serial
designation.
Section 4. Liquidation.
(a) Subject to the prior preference with respect to distributions to
holders of Preferred Stock in the event of a voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Corporation:
(1) The holders of Preference Stock of any series shall, in the
event of a voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Corporation, be entitled to receive in full out
of the assets of the Corporation, including its capital, before any
amount shall be paid or distributed among the holders of the Common
Stock or any other shares ranking junior to the Preference Stock, the
amounts fixed with respect to shares of such series in accordance with
Section 1 of this Division, plus an amount equal to all dividends
accrued and unpaid thereon to the date of payment of the amount due
pursuant to such liquidation, dissolution or winding up of the affairs
of the Corporation; and in the event the net assets of the Corporation
legally available therefor are insufficient to permit the payment upon
all outstanding shares of Preference Stock of the full preferential
amount to which they are respectively entitled, then such net assets
shall be distributed ratably upon outstanding shares of Preference Stock
in proportion to the full preferential amount to which each such share
is entitled; and
(2) After payment to the holders of Preference Stock of the full
preferential amounts as aforesaid, the holders of Preference Stock, as
such, shall have no right or claim to any of the remaining assets of the
Corporation.
(b) The merger or consolidation of the Corporation into or with any
other corporation, the merger of any other corporation into it, or the
sale, lease or conveyance of all or substantially all the property or
business of the Corporation, shall not be deemed to be a dissolution,
liquidation or winding up for the purposes of this Section.
(c) Nothing in this Section 4 of this Division shall be deemed to
prevent the purchase, acquisition or other retirement by the Corporation of
any shares of its outstanding stock as now or in the future authorized or
permitted by the laws of the State of Ohio.
Section 5. Voting.
(a) The holders of Preference Stock shall have no voting rights,
except as provided in this Section or required by law.
(b) (1) If, and so often as, the Corporation shall be in default in the
payment of the equivalent of the full dividends for a number of dividend
payment periods (whether or not consecutive) which in the aggregate
contain at least 540 days on any series of Preference Stock at the time
outstanding, whether or not earned or declared, the holders of
Preference Stock of all series, voting separately as a class, shall be
entitled to elect, as herein provided, two members of the Board of
Directors of the Corporation, subject to the prior rights of the holders
of the Serial Preferred Stock as hereinbefore provided in Division A;
provided, however, that the holders of shares of Preference Stock shall
not have or exercise such special class voting rights except at meetings
of such shareholders for the election of Directors at which the holders
of not less than 50% of the outstanding shares of Preference Stock of
all series then outstanding are present in person or by proxy; and
provided further that the special class voting rights
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provided for in this paragraph when the same shall have become vested
shall remain so vested until all accrued and unpaid dividends on the
Preference Stock of all series then outstanding shall have been paid,
whereupon the holders of Preference Stock shall be divested of their
special class voting rights in respect of subsequent elections of
Directors, subject to the revesting of such special class voting rights
in the event hereinabove specified in this paragraph.
(2) In the event of default entitling the holders of Preference Stock
to elect two Directors as specified in paragraph (1) of this Subsection,
a special meeting of such holders for the purpose of electing such
Directors shall be called by the Secretary of the Corporation upon
written request of, or may be called by, the holders of record of at
least 10% of the shares of Preference Stock of all series at the time
outstanding, and notice thereof shall be given in the same manner as
that required for the annual meeting of shareholders; provided, however,
that the Corporation shall not be required to call such special meeting
if the annual meeting of shareholders shall be held within 120 days
after the date of receipt of the foregoing written request from the
holders of Preference Stock. At any meeting at which the holders of
Preference Stock shall be entitled to elect Directors, the holders of
50% of the then outstanding shares of Preference Stock of all series,
present in person or by proxy, shall be sufficient to constitute a
quorum, and the vote of the holders of a majority of such shares so
present at any such meeting at which there shall be such a quorum shall
be sufficient to elect the members of the Board of Directors which the
holders of Preference Stock are entitled to elect as hereinabove
provided. Notwithstanding any provision of these Amended Articles of
Incorporation or the Regulations of the Corporation or any action taken
by the holders of any class of shares fixing the number of Directors of
the Corporation, the two Directors who may be elected by the holders of
Preference Stock pursuant to this Subsection shall serve in addition to
any other Directors then in office or proposed to be elected otherwise
than pursuant to this Subsection. Nothing in this Subsection shall
prevent any change otherwise permitted in the total number of Directors
of the Corporation or require the resignation of any Director elected
otherwise than pursuant to this Subsection. Notwithstanding any
classification of the other Directors of the Corporation, the two
Directors elected by the holders of Preference Stock shall be elected
annually for terms expiring at the next succeeding annual meeting of
shareholders.
(3) In case of any vacancy in the office of a director occurring
among the directors elected by the holders of the Preference Stock,
voting separately as a class, or of a vacancy in the office of his or
her successor appointed as below provided, the remaining director so
elected may elect a successor to hold office for the unexpired term of
the director whose place shall be vacant. Likewise, in case of any
vacancy in the office of a director occurring among the directors not
elected by the holders of the Serial Preferred Stock or the Preference
Stock, or of a vacancy in the office of his or her successor appointed
as below provided, the remaining directors not elected by the holders of
the Serial Preferred Stock or the Preference Stock, by affirmative vote
of a majority thereof, or the remaining such director if there be but
one, may elect a successor or successors to hold office for the
unexpired term of the director or directors whose place or places shall
be vacant.
(c) The holders of the outstanding shares of any series of Preference
Stock shall not have any right under the provisions set forth in this
Section 5 to vote in respect of the authorization of issuance of any shares
of any class of stock of the Corporation if, through the application of
proceeds thereof or otherwise in connection therewith, provision is to be
made for redemption or retirement of all of the shares of such series of
Preference Stock at the time outstanding.
(d) The affirmative vote or consent of the holders of at least
two-thirds of the shares of Preference Stock at the time outstanding,
voting or consenting separately as a class, given in person or by proxy
either in writing or at a meeting called for the purpose, shall be
necessary to effect any one or more of the following (but so far as the
holders of Preference Stock are concerned, such action may be effected with
such vote or consent):
(1) Any amendment, alteration or repeal of any of the provisions of
the Amended Articles of Incorporation or of the Regulations of the
Corporation which affects adversely the preferences or voting or other
rights of the holders of Preference Stock; provided, however, that for
the purpose of this
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<PAGE> 145
paragraph only, neither the amendment of the Amended Articles of
Incorporation so as to authorize, create or change the authorized or
outstanding amount of Preference Stock or of any shares of any class
ranking on a parity with or junior to the Preference Stock nor the
amendment of the provisions of the Regulations so as to change the
number of directors of the Corporation shall be deemed to affect
adversely the preferences or voting or other rights of the holders of
Preference Stock; and provided further, that if such amendment,
alteration or repeal affects adversely the preferences or voting or
other rights of one or more but not all series of Preference Stock at
the time outstanding, only the affirmative vote or consent of the
holders of at least two-thirds of the number of the shares at the time
outstanding of the series so affected shall be required; or
(2) The purchase or redemption (for sinking fund purposes or
otherwise) of less than of the Preference Stock then outstanding except
in accordance with a stock purchase offer made to all holders of record
of Preference Stock, unless all dividends on all Preference Stock then
outstanding for all previous dividend periods shall have been declared
and paid or funds therefor set apart and all accrued sinking fund
obligations applicable thereto shall have been complied with.
(e) The affirmative vote or consent of the holders of at least a
majority of the shares of Preference Stock at the time outstanding, voting
or consenting separately as a class, given in person or by proxy either in
writing or at a meeting called for the purpose, shall be necessary to
effect any one or more of the following (but so far as the holders of
Preference Stock are concerned, such action may be effected with such vote
or consent):
(1) The sale, lease or conveyance by the Corporation of all or
substantially all of its property or business;
(2) The consolidation of the Corporation with or its merger into
any other corporation, unless the corporation resulting from such
consolidation or surviving such merger will not have after such
consolidation or merger any class of shares either authorized or
outstanding ranking prior to or on a parity with the Preference Stock
except the same number of shares ranking prior to or on a parity with
the Preference Stock and having the same rights and preferences as the
shares of the Corporation authorized and outstanding immediately
preceding such consolidation or merger (and each holder of Preference
Stock immediately preceding such consolidation or merger shall receive
the same number of shares with the same rights and preferences of the
resulting or surviving corporation) provided, however, that no vote or
consent of the holders of Preference Stock shall be necessary to effect
the consolidation of the Corporation with or its merger into a company
owning all or a majority of the Corporation's common stock, or any
affiliate;
(3) The authorization, creation or the increase in the authorized
amount of any shares of any class or any security convertible into
shares of any class, in either case ranking prior to the Preference
Stock; or
(4) The authorization of any shares ranking on a parity with or
convertible into the Preference Stock, or convertible into a class of
stock on parity with the Preference Stock, or an increase in the
authorized number of shares of Preference Stock.
(f) Neither the vote, consent nor any adjustment of the voting rights
of holders of shares of Preference Stock shall be required for an increase
in the number of shares of Common Stock authorized or issued or for stock
splits of the Common Stock or for stock dividends on any class of stock
payable solely in Common Stock; and none of the foregoing actions shall be
deemed to affect adversely the preferences or voting or other rights of
Preference Stock within the meaning and for the purpose of this Division.
Section 6. Preemptive Rights. No holder of Preference Stock as such, shall
have any pre-emptive right to purchase, have offered to him for purchase or
subscribe for any of the Corporation's shares or other securities of any class,
whether now or hereafter authorized.
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Section 7. Definitions. For the purposes of this Division:
(a) Whenever reference is made to shares "ranking prior to the
Preference Stock", such reference shall mean and include all shares of the
Corporation in respect of which the rights of the holders thereof as to the
payment of dividends or as to distributions in the event of a voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation are given preference over the rights of the holders of
Preference Stock;
(b) Whenever reference is made to shares "on a parity with the
Preference Stock", such reference shall mean and include all shares of the
Corporation in respect of which the rights of the holders thereof as to the
payment of dividends and as to distributions in the event of a voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Corporation rank on an equality (except as to the amounts fixed therefor)
with the rights of the holders of Preference Stock; and
(c) Whenever reference is made to shares "ranking junior to the
Preference Stock", such reference shall mean and include all shares of the
Corporation other than those defined under Subsections (a) and (b) of this
Section as shares "ranking prior to" or "on a parity with" the Preference
Stock.
Section 8. Serial Preference Stock, $77.50 Series 1. Redeemed August 1,
1989.
DIVISION C
The Common Stock shall have the following express terms:
Section 1. General. The Common Stock shall be subject to the express terms
of the Serial Preferred Stock and any series thereof and to the express terms of
the Preference Stock and any series thereof. Each share of Common Stock shall be
equal to every other share of Common Stock and the holders thereof shall be
entitled to one vote for each share of Common Stock on all questions presented
to the shareholders.
Section 2. Changes in Number of Authorized Shares. The affirmative vote or
consent of the holders of at least a majority of the shares of Common Stock at
the time outstanding, voting or consenting separately as a class, given in
person or by proxy either in writing or at a meeting called for the purpose,
shall be necessary to effect a change in the authorized number of shares of the
Corporation or of any class of such shares.
Section 3. Pre-emptive Rights. No holder of Common Stock shall have any
pre-emptive right to purchase, have offered to him for purchase or subscribe for
any of the Corporation's shares or other securities of any class, whether now or
hereafter authorized.
ARTICLE FIVE. The Corporation, by action of the Board of Directors, may
purchase shares of any class issued by the Corporation.
ARTICLE SIX. These Amended Articles of Incorporation shall supersede and
take the place of the heretofore existing Amended Articles of Incorporation of
the Corporation and all amendments thereof prior to the date hereof.
B-48
<PAGE> 147
APPENDIX II
STATUTORY DISSENTERS' RIGHTS
1701.84 DISSENTING SHAREHOLDERS ENTITLED TO RELIEF
The following are entitled to relief as dissenting shareholders under
section 1701.85 of the Revised Code:
(A) Shareholders of a domestic corporation which is being merged or
consolidated into a surviving or new corporation, domestic or foreign,
pursuant to section 1701.78 or 1701.79 of the Revised Code;
(B) In the case of a merger into a domestic corporation, shareholders
of the surviving corporation who under section 1701.78 of the Revised Code
are entitled to vote on the adoption of an agreement of merger, but only as
to the shares so entitling them to vote;
(C) Shareholders, other than the parent corporation, of a domestic
subsidiary corporation which is being merged into the domestic or foreign
parent corporation pursuant to section 1701.80 of the Revised Code;
(D) In the case of a combination or a majority share acquisition,
shareholders of the acquiring corporation who under section 1701.83 of the
Revised Code are entitled to vote on such transaction, but only as to the
shares so entitling them to vote.
1701.85 RELIEF FOR DISSENTING SHAREHOLDERS; QUALIFICATIONS; PROCEDURES
(A) (1) A shareholder of a domestic corporation is entitled to relief as a
dissenting shareholder in respect of the proposals in sections 1701.74, 1701.76,
and 1701.84 of the Revised Code, only in compliance with this section.
(2) In the case where the proposal must be submitted to the
shareholders of the corporation involved, the dissenting shareholder must
be a record holder of the shares of the corporation as to which he seeks
relief as of the date fixed for the determination of shareholders entitled
to notice of a meeting of the shareholders at which the proposal is to be
submitted, and such shares must not have been voted in favor of the
proposal. Not later than ten days after the date on which the vote on such
proposal was taken at the meeting of the shareholders, the shareholder must
deliver to the corporation a written demand for payment to him of the fair
cash value of the shares as to which he seeks relief, stating his address,
the number and class of such shares, and the amount claimed by him as the
fair cash value of the shares.
(3) In the case of a merger pursuant to section 1701.80 of the Revised
Code, the dissenting shareholder must be a record holder of the shares of
the corporation as to which he seeks relief as of the date on which the
agreement of merger was adopted by the directors of that corporation.
Within twenty days after there has been sent to him the notice provided in
that section, the shareholder must deliver to the corporation a written
demand for payment with the same information as that provided for in
division (A)(2) of this section.
(4) In the case of a merger or consolidation, a demand served on the
constituent corporation involved constitutes service on the surviving or
the new corporation, whether served before, on, or after the effective date
of the merger or consolidation.
(5) If the corporation sends to the dissenting shareholder, at the
address specified in his demand, a request for the certificates
representing the shares as to which he seeks relief, he shall, within
fifteen days from the date of the sending of such request, deliver to the
corporation the certificates requested, in order that the corporation may
forthwith endorse on them a legend to the effect that demand for the fair
cash value of such shares has been made. The corporation shall promptly
return such endorsed certificates to the shareholder. Failure on the part
of the shareholder to deliver such certificates terminates his rights as a
dissenting shareholder, at the option of the corporation, exercised by
written notice sent to him within twenty days after the lapse of the
fifteen day period above mentioned, unless a court for good cause shown
otherwise directs. If shares represented by a certificate on which such a
legend has been endorsed are transferred, each new certificate issued for
them shall bear a similar legend, together with the name of the
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<PAGE> 148
original dissenting holder of such shares. Upon receiving a demand for
payment from a dissenting shareholder who is the record holder of
uncertificated securities, the corporation shall make an appropriate
notation thereof in its shareholder records. If uncertificated shares for
which payment has been demanded are to be transferred, any new certificate
issued therefor shall bear the legend required for certificated securities
as provided in this paragraph. A transferee of the shares so endorsed, or
of uncertificated securities where such notation has been made, acquires
only such rights in the corporation as the original dissenting holder of
such shares had immediately after the service of a demand for payment of
the fair cash value of the shares. Such request by the corporation is not
an admission by the corporation that the shareholder is entitled to relief
under this section.
(B) Unless the corporation and the dissenting shareholder shall have come
to an agreement on the fair cash value per share of the shares as to which he
seeks relief, the shareholder or the corporation, which in case of a merger or
consolidation may be the surviving or the new corporation, may, within three
months after the service of the demand by the shareholder, file a petition in
the court of common pleas of the county in which the principal office of the
corporation which issues such shares is located, or was located at the time when
the proposal was adopted by the shareholders of the corporation, or, if the same
was not required to be submitted to the shareholders, was approved by the
directors. Other dissenting shareholders, within the period of three months, may
join as plaintiffs, or may be joined as defendants in any such proceeding, and
any two or more such proceedings may be consolidated. The petition shall contain
a brief statement of the facts, including the vote and the facts entitling the
dissenting shareholder to the relief demanded. No answer to such petition is
required. Upon the filing of the petition, the court, on motion of the
petitioner, shall enter an order fixing a date for hearing the petition, and
requiring that a copy of the petition and a notice of the filing and of the date
for hearing be given to the respondent or defendant in the manner in which
summons is required to be served or substituted service is required to be made
in other cases. On the day fixed for hearing on the petition or any adjournment
thereof, the court shall determine from the petition and from such evidence as
is submitted by either party whether the shareholder is entitled to be paid the
fair cash value of any shares and, if so, the number and class of such shares.
If the court finds that the shareholder is so entitled, the court may appoint
one or more persons as appraisers to receive evidence and to recommend a
decision on the amount of the fair cash value. The appraisers have such power
and authority as is specified in the order of their appointment. The court shall
thereupon make a finding as to the fair cash value of a share, and shall render
judgment against the corporation for the payment of it, with interest at such
rate and from such date as the court considers equitable. The costs of the
proceeding, including reasonable compensation to the appraisers to be fixed by
the court, shall be assessed or apportioned as the court considers equitable.
Such a proceeding shall be a special proceeding within the meaning of section
2505.02 of the Revised Code, and final orders in it may be vacated, modified, or
reversed as provided in sections 2505.01 to 2505.45 of the Revised Code. If
during the pendency of any proceeding instituted under this section a suit or
proceeding is or has been instituted to enjoin or otherwise to prevent the
carrying out of the action as to which the shareholder has dissented, the
proceeding instituted under this section shall be stayed until the final
determination of the other suit or proceeding. Unless any provision in division
(D) of this section is applicable, the fair cash value of the shares as agreed
upon by the parties or as fixed under this section shall be paid within thirty
days after the date of final determination of such value under this division or
the effective date of the amendment to the articles or the consummation of the
other action involved, whichever occurs last. Upon the occurrence of the last
such event, payment shall be made immediately to a holder of uncertificated
securities entitled to such payment. In the case of holders of shares
represented by certificates, payment shall be made only upon and simultaneously
with the surrender to the corporation of the certificates representing the
shares for which such payment is made.
(C) In the case where the proposal was required to be submitted to the
shareholders of the corporation, fair cash value shall be determined as of the
day prior to that on which the vote by the shareholders was taken, or, in the
case of a merger pursuant to section 1701.80 of the Revised Code, the day before
the adoption of the agreement of merger by the directors of the particular
subsidiary corporation. The fair cash value of a share, for the purposes of this
section, is the amount which a willing seller, under no compulsion to sell,
would be willing to accept, and which a willing buyer, under no compulsion to
purchase, would be willing to pay, but in no event shall the amount thereof
exceed the amount specified in the demand of the particular shareholder. In
computing
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<PAGE> 149
such fair cash value, any appreciation or depreciation in market value resulting
from the proposal submitted to the directors or to the shareholders shall be
excluded.
(D) The right and obligation of a dissenting shareholder to receive such
fair cash value and to sell such shares as to which he seeks relief, and the
right and obligation of the corporation to purchase such shares and to pay the
fair cash value of them terminates if:
(1) Such shareholder has not complied with this section, unless the
corporation by its directors waives such failure;
(2) The corporation abandons, or is finally enjoined or prevented from
carrying out, or the shareholders rescind their adoption of the action
involved;
(3) The shareholder withdraws his demand, with the consent of the
corporation by its directors;
(4) The corporation and the dissenting shareholder shall not have come
to an agreement as to the fair cash value per share, and neither the
shareholder nor the corporation shall have filed or joined in a petition
under division (B) of this section within the period provided.
(E) From the time of giving the demand, until either the termination of the
rights and obligations arising therefrom or the purchase of the shares by the
corporation, all other rights accruing from such shares, including voting and
dividend or distribution rights, are suspended. If during suspension, any
dividend or distribution is paid in money upon shares of such class, or any
dividend, distribution, or interest is paid in money upon any securities issued
in extinguishment of or in substitution for such shares, an amount equal to the
dividend, distribution, or interest which, except for said suspension, would
have been payable upon such shares or securities, shall be paid to the holder of
record as a credit upon the fair cash value of the shares. If the right to
receive fair cash value is terminated otherwise than by the purchase of the
shares by the corporation, all rights of the holder shall be restored and all
distributions which, except for suspension, would have been made shall be made
to the holder of record of the shares at the time of termination.
II-3
<PAGE> 150
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
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
<PAGE> 151
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT NO. 2 TO REGISTRATION STATEMENT FILE NO. 33-55513 TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY
OF INDEPENDENCE, STATE OF OHIO, ON APRIL 3, 1995.
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 AMENDMENT
NO. 2 TO REGISTRATION STATEMENT FILE NO. 33-55513 HAS BEEN SIGNED BY THE
FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- --------------------------------- ----------------
<S> <C> <C>
(i) Principal executive officer:
*ROBERT J. FARLING Chairman and Chief Executive
Robert J. Farling Officer
(ii) Principal financial officer:
*GARY R. LEIDICH Vice President and Chief
Gary R. Leidich Financial Officer
(iii) Principal accounting officer:
*E. LYLE PEPIN Controller
</TABLE>
April 3, 1995
<TABLE>
<S> <C> <C>
E. Lyle Pepin
(iv) Directors
*ROBERT J. FARLING Director
Robert J. Farling
*MURRAY R. EDELMAN Director
Murray R. Edelman
*FRED J. LANGE, JR. Director
Fred J. Lange, Jr.
</TABLE>
*By JANIS T. PERCIO
Janis T. Percio,
Attorney-in-Fact
II-2
<PAGE> 152
EXHIBIT INDEX
EXHIBITS FILED HEREWITH
The following exhibits are filed herewith and made a part hereof:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------------------
<C> <S>
12(a)(2) Statement regarding computation of ratio of earnings to fixed charges and
preferred stock dividends of Cleveland Electric.
12(b)(2) Statement regarding computation of ratio of earnings to fixed charges and
preferred stock dividends of Toledo Edison.
12(c)(2) Statement regarding computation of the pro forma ratio of earnings to fixed
charges and preferred stock dividends for the combined Cleveland Electric and
Toledo Edison Companies.
23(a)(1) Consent of Arthur Andersen LLP.
23(b)(1) Consent of Arthur Andersen LLP.
</TABLE>
II-3
<PAGE> 153
EXHIBIT 12(A)(2)
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(Thousands of Dollars)
Statement Setting Forth Computations Showing Satisfaction of the
Requirements Specified in Regulation S-K, Item 503(d):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1990 1991 1992 1993 1994
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Consolidated Net Income (Loss)................. $242,328 $246,158 $204,939 $(587,147) $185,431
Add
Federal Income Taxes Expense................. 95,500 130,135 94,627 (247,966) 85,455
Interest (a)................................. 275,169 264,072 253,042 252,479 254,248
Provision for Interest Element of Rentals
(b)....................................... 83,215 83,370 81,948 81,131 79,462
-------- -------- -------- --------- --------
Total Earnings....................... $696,212 $723,735 $634,556 $(501,503) $604,596
======== ======== ======== ======== ========
Fixed Charges
Interest (a)................................. $275,169 $264,072 $253,042 $ 252,479 $254,248
Provision for Interest Element of Rentals
(b)....................................... 83,215 83,370 81,948 81,131 79,462
-------- -------- -------- --------- --------
Total Fixed Charges............................ $358,384 $347,442 $334,990 $ 333,610 $333,710
-------- -------- -------- --------- --------
Dividend Requirements.......................... $ 36,682 $ 35,857 $ 40,538 $ 44,650 $ 45,437
100% -- Effective Tax Rate..................... 71.73% 65.42% 68.41% 70.31% 68.45%
-------- -------- -------- --------- --------
Dividend Factor................................ $ 51,139 $ 54,810 $ 59,257 $ 63,504 $ 66,380
-------- -------- -------- --------- --------
Total Fixed Charges and Preferred Stock
Dividends.................................... $409,523 $402,252 $394,247 $ 397,114 $400,090
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends.................... 1.70 1.80 1.61 (1.26) 1.51
======== ======== ======== ======== ========
<FN>
- ---------------
(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.
</TABLE>
<PAGE> 154
EXHIBIT 12(B)(2)
THE TOLEDO EDISON COMPANY
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(Thousands of Dollars)
Statement Setting Forth Computations Showing Satisfaction of the
Requirements Specified in Regulation S-K, Item 503(d):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1990 1991 1992 1993 1994
-------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Net Income (Loss)................................ $ 81,424 $ 49,613 $ 70,677 $(289,275) $ 82,531
Add
Federal Income Taxes Expense (Credit)....... 12,377 37,995 33,905 (139,479) 34,342
Interest (a)................................ 149,301 141,285 128,779 121,221 119,421
Provision for Interest Element of Rentals
(b)....................................... 121,488 122,469 115,638 112,266 111,163
-------- -------- -------- --------- --------
Total Earnings......................... $364,590 $351,362 $348,999 $(195,267) $347,457
======== ======== ======== ======== ========
Fixed Charges
Interest (a)................................ $149,301 $141,285 $128,779 $ 121,221 $119,421
Provision for Interest Element of Rentals
(b)....................................... 121,488 122,469 115,638 112,266 111,163
-------- -------- -------- --------- --------
Total Fixed Charges............................ $270,789 $263,754 $244,417 $ 233,487 $229,656
-------- -------- -------- --------- --------
Dividend Requirements............................ $ 25,159 $ 24,792 $ 23,969 $ 22,482 $ 20,220
100% - Effective Tax Rate........................ 86.81% 56.63% 67.58% 67.47% 70.62%
-------- -------- -------- --------- --------
Dividend Factor.................................. $ 28,982 $ 43,779 $ 35,468 $ 33,321 $ 28,632
-------- -------- -------- --------- --------
Total Fixed Charges and Preferred Stock
Dividends...................................... $299,771 $307,533 $279,885 $ 266,808 $259,216
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends................................ 1.22 1.14 1.25 (0.73) 1.34
======== ======== ======== ======== ========
<FN>
- ---------------
(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.
</TABLE>
<PAGE> 155
EXHIBIT 12(C)(2)
THE COMBINED CLEVELAND ELECTRIC ILLUMINATING AND TOLEDO EDISON COMPANIES
COMPUTATION OF PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK
DIVIDENDS
(Thousands of Dollars)
Statement Setting Forth Computations Showing Satisfaction of the
Requirements Specified in Regulation S-K, Item 503(d):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1990 1991 1992 1993 1994
---------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Net Income (Loss)............................... $ 323,752 $ 295,771 $275,616 $(876,422) $267,962
Add
Federal Income Taxes Expense (Credit)...... 107,877 168,130 128,532 (387,445) 119,797
Interest (a)............................... 421,487 404,858 381,601 373,700 372,536
Provision for Interest Element of Rentals
(b)...................................... 204,703 205,839 197,586 193,396 190,626
---------- ---------- -------- --------- --------
Total Earnings........................ $1,057,819 $1,074,598 $983,335 $(696,771) $950,921
========= ========= ======== ======== ========
Fixed Charges
Interest (a).................................. $ 421,487 $ 404,858 $381,601 $ 373,700 $372,536
Provision for Interest Element of Rentals
(b)........................................ 204,703 205,839 197,586 193,396 190,626
---------- ---------- -------- --------- --------
Total Fixed Charges........................... $ 626,190 $ 610,697 $579,187 $ 567,096 $562,234
---------- ---------- -------- --------- --------
Dividend Requirements........................... $ 61,841 $ 60,649 $ 64,507 $ 67,132 $ 65,657
100% -- Effective Tax Rate...................... 75.01% 63.76% 68.20% 69.34% 69.11%
---------- ---------- -------- --------- --------
Dividend Factor................................. $ 82,444 $ 95,121 $ 94,585 $ 96,816 $ 95,004
---------- ---------- -------- --------- --------
Total Fixed Charges and Preferred Stock
Dividends..................................... $ 708,346 $ 705,756 $673,881 $ 663,646 $657,314
========= ========= ======== ======== ========
Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends............................... 1.49 1.52 1.46 (1.05) 1.44
========= ========= ======== ======== ========
<FN>
- ---------------
(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.
</TABLE>
<PAGE> 156
EXHIBIT 23(A)(1)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 17, 1995, included in this Registration Statement, and to
the incorporation by reference of our report contained in The Cleveland Electric
Illuminating Company's Form 10-K for the year ended December 31, 1994, and to
all references to our Firm included in this Registration Statement.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Cleveland, Ohio
March 31, 1995
<PAGE> 157
EXHIBIT 23(B)(1)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 17, 1995, included in this Registration Statement, and to
the incorporation by reference of our report contained in The Toledo Edison
Company's Form 10-K for the year ended December 31, 1994, and to all references
to our Firm included in this Registration Statement.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Cleveland, Ohio
March 31, 1995
