SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1996
OR
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification No.
1-9130 CENTERIOR ENERGY CORPORATION 34-1479083
(An Ohio Corporation)
6200 Oak Tree Boulevard
Independence, Ohio 44131
Telephone (216) 447-3100
1-2323 THE CLEVELAND ELECTRIC 34-0150020
ILLUMINATING COMPANY
(An Ohio Corporation)
c/o Centerior Energy Corporation
6200 Oak Tree Boulevard
Independence, Ohio 44131
Telephone (216) 622-9800
1-3583 THE TOLEDO EDISON COMPANY 34-4375005
(An Ohio Corporation)
300 Madison Avenue
Toledo, Ohio 43652
Telephone (419) 249-5000
Indicate by check mark whether each of the registrants (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrants were required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
On November 13, 1996, there were 148,025,928 shares of Centerior
Energy Corporation Common Stock outstanding. Centerior Energy Corporation
is the sole holder of the 79,590,689 shares and 39,133,887 shares of common
stock of The Cleveland Electric Illuminating Company and The Toledo Edison
Company, respectively, outstanding on that date.
This combined Form 10-Q is separately filed by Centerior Energy Corporation
("Centerior Energy"), The Cleveland Electric Illuminating Company
("Cleveland Electric") and The Toledo Edison Company ("Toledo Edison").
Centerior Energy, Cleveland Electric and Toledo Edison are sometimes
referred to collectively as the "Companies". Cleveland Electric and Toledo
Edison are sometimes collectively referred to as the "Operating Companies".
Information contained herein relating to any individual registrant is filed
by such registrant on its behalf. No registrant makes any representation
as to information relating to any other registrant, except that information
relating to either or both of the Operating Companies is also attributed to
Centerior Energy.
Centerior Energy has made forward-looking statements in Note 8 to the
financial statements in this Form 10-Q regarding the merger with Ohio
Edison Company ("Ohio Edison") herein referred to and the associated
Regulatory Plan (as defined herein), which statements are subject to risks
and uncertainties, including the impact on the Companies if: (1)
competitive pressure in the electric utility industry increases
significantly;(2) state and federal regulatory initiatives are implemented
that increase competition, threaten costs and investment recovery and
impact rate structures; (3) the provisions of the Regulatory Plan vary
significantly from what has been announced; (4) the effects of the
Regulatory Plan or other events on the carrying value of regulatory assets
and on the Operating Companies' ability to continue to apply SFAS 71 (as
defined herein) cause an impairment of property, plant and equipment or
variances from the amounts disclosed; (5) expected cost savings from the
merger cannot be fully realized; (6) costs or difficulties related to the
integration of the business of Ohio Edison and Centerior Energy are greater
than expected; (7) unanticipated developments occur which change the
Operating Companies' expectations regarding cost recovery over the
Regulatory Plan period; or (8) general economic conditions, either
nationally or in the area in which the combined company will be doing
business are less favorable than expected.
-i-
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Centerior Energy Corporation and Subsidiaries
The Cleveland Electric Illuminating Company and Subsidiary
The Toledo Edison Company
Notes to the Financial Statements (Unaudited) 1
Centerior Energy Corporation and Subsidiaries
Income Statement 5
Balance Sheet 6
Cash Flows 7
Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
The Cleveland Electric Illuminating Company and Subsidiary
Income Statement 12
Balance Sheet 13
Cash Flows 14
Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
The Toledo Edison Company
Income Statement 19
Balance Sheet 20
Cash Flows 21
Management's Discussion and Analysis of Financial 22
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Exhibit Index 29
-ii-
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES,
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND
SUBSIDIARY, AND THE TOLEDO EDISON COMPANY
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
(1) Interim Financial Statements
Centerior Energy Corporation (Centerior Energy) is the parent
company of Centerior Service Company (Service Company); two
electric utilities, The Cleveland Electric Illuminating Company
(Cleveland Electric) and The Toledo Edison Company (Toledo
Edison); and three other wholly owned subsidiaries. The two
utilities are referred to collectively herein as the "Operating
Companies" and individually as an "Operating Company". Centerior
Energy, Cleveland Electric and Toledo Edison are referred to
collectively herein as the "Companies".
The comparative income statement and balance sheet and the related
statement of cash flows of each of the Companies have been
prepared from the records of each of the Companies without audit
by independent public accountants. In the opinion of management,
all adjustments necessary for a fair presentation of financial
position at September 30, 1996 and results of operations and cash
flows for the three months and nine months ended September 30,
1996 and 1995 have been included. All such adjustments were
normal recurring adjustments, except for the write-down of
inactive production facilities in the first quarter of 1996
discussed in Note 7.
These financial statements and notes should be read in conjunction
with the financial statements and notes included in the Companies'
combined Annual Report on Form 10-K for the year ended December
31, 1995 (1995 Form 10-K) and the Quarterly Reports on Form 10-Q
for the quarter ended March 31, 1996 (First Quarter 1996 Form 10-
Q) and the quarter ended June 30, 1996 (Second Quarter 1996 Form
10-Q). These interim period financial results are not necessarily
indicative of results for a 12-month period.
In August 1995, Cleveland Electric formed a wholly owned
subsidiary, Centerior Funding Corporation (Centerior Funding), to
serve as the transferor in connection with asset-backed
securitization transactions completed by the Operating Companies
in May and July 1996 as discussed in Note 5 to the financial
statements in the Second Quarter 1996 Form 10-Q.
(2) Equity Distribution Restrictions
The Operating Companies can make cash available for the funding of
Centerior Energy's common stock dividends by paying dividends on
their respective common stock, which is held solely by Centerior
Energy. Federal law prohibits the Operating Companies from paying
dividends out of capital accounts. However, the Operating
Companies may pay preferred and common stock dividends out of
appropriated retained earnings and current earnings. At September
30, 1996, Cleveland Electric and Toledo Edison had $187.6 million
and $208.9 million, respectively, of appropriated retained
earnings for the payment of dividends. However, Toledo Edison is
prohibited from paying a common stock dividend by a 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.
(3) Common Stock Dividends
Cash dividends per common share declared by Centerior Energy
during the nine months ended September 30, 1996 and 1995 were as
follows:
1996 1995
Paid February 15 $.20 $.20
Paid May 15 .20 .20
Paid August 15 .20 .20
Paid November 15 .20 .20
Common stock cash dividends declared by Cleveland Electric during
the nine months ended September 30, 1996 and 1995 were as follows:
1996 1995
(millions)
Paid in February $29.6 $--
Paid in May 46.6 15.0
Paid in August 29.6 29.6
Toledo Edison did not declare any common stock dividends during
the nine months ended September 30, 1996 and 1995.
(4) Financing Activity
During the three months ended September 30, 1996, mandatory
redemptions for Cleveland Electric consisted of $80 million
principal amount of secured medium-term notes; $1 million of
Serial Preferred Stock, $7.35 Series C; and $0.9 million of first
mortgage bonds and pollution control notes. Also, Cleveland
Electric optionally purchased and retired 26,000 shares of Serial
Preferred Stock, Adjustable Rate Series L, for $1.8 million.
(5) Nuclear Fuel Financing
Nuclear fuel is financed for the Operating Companies through
leases with a special-purpose corporation. On August 2, 1996, the
special-purpose corporation completed a transaction in which it
issued $100 million aggregate amount of intermediate-term secured
notes maturing in the 1997 through 2000 period. On October 4,
1996, the special-purpose corporation completed a two-year $100
million bank credit arrangement, replacing $150 million of bank
credit arrangements which terminated in October 1996. The
special-purpose corporation used the proceeds from these
transactions to pay its outstanding borrowings, including $84
million of intermediate-term secured notes which matured on
September 30, 1996.
(6) Generating Plant Lease Agreement
Cleveland Electric had entered into an agreement with Jersey
Central Power & Light Company (Jersey Central) under which Jersey
Central leased Cleveland Electric's ownership share (351,000
kilowatts) of the Seneca Power Plant (Seneca), a pumped-storage,
hydro-electric generating station. The agreement began June 1,
1996 and was expected to provide annual revenues of approximately
$18 million. The parties agreed to cancel the agreement effective
October 2, 1996 because the Federal Energy Regulatory Commission
(FERC) insisted on terms which were not economic to the parties.
(7) Write-down of Inactive Production Facilities
In the first quarter of 1996, Toledo Edison wrote down the net
book value of two inactive production facilities, $11.3 million,
to "Other Income and Deductions, Net" resulting in nonoperating
losses for Toledo Edison and Centerior Energy for that period.
The net write-down was $7.2 million after taxes or, for Centerior
Energy, $.05 per common share. The write-down resulted from a
decision that the facilities are no longer expected to provide
revenues.
(8) Commitments and Contingencies
Various legal actions, claims and regulatory proceedings covering
several matters are pending against the Companies. See "Item 3.
Legal Proceedings" in the 1995 Form 10-K; "Part II, Item 5. Other
Information" in this Quarterly Report on Form 10-Q and in the
First and Second Quarter 1996 Form 10-Qs; and "Item 5. Other
Events" in the Companies' combined Current Report on Form 8-K
dated August 21, 1996.
On September 13, 1996, Centerior Energy and Ohio Edison Company (Ohio
Edison) entered into an Agreement and Plan of Merger to form a new
holding company, FirstEnergy Corp. (FirstEnergy). See "Item 5. Other
Events" in the Companies' combined Current Report on Form 8-K dated
September 13, 1996. The merger agreement is conditioned upon, among
other matters, approval by The Public Utilities Commission of Ohio
(PUCO) of a FirstEnergy regulatory plan (Regulatory Plan) for the
Operating Companies which is mutually acceptable to Ohio Edison and
Centerior Energy. Implementation of the Regulatory Plan is conditioned
upon consummation of the merger. As announced, the Regulatory Plan is
expected to include (i) a price freeze through 2005 followed by a $300
million price reduction in 2006; and (ii) a $2 billion aggregate
reduction in assets through 2005, resulting from amounts that have been
sold, revalued, recovered and amortized, and/or depreciated on an
accelerated basis. These provisions may be changed, and other
provisions may be added, to the Regulatory Plan prior to its filing.
Until the Regulatory Plan is filed, Centerior Energy cannot predict what
the Plan's effect on the Operating Companies' regulatory assets will be,
or whether the Plan will demonstrate that the Operating Companies will
continue to comply with Statement of Financial Accounting Standards
(SFAS) 71. If it is determined that the Regulatory Plan ultimately
approved by the PUCO does not provide for full recovery of costs and
regulatory assets, or other events cause one or both of the Operating
Companies to conclude that the SFAS 71 criteria are no longer met, one
or both of the Operating Companies would be required to record a
material charge against earnings to write off regulatory assets ($1.328
billion for Cleveland Electric and $0.932 billion for Toledo Edison,
aggregating $2.260 billion for Centerior Energy at September 30, 1996),
and to evaluate whether the effects of the Regulatory Plan would cause
an impairment of property, plant and equipment. It is possible that
only a portion of operations (such as nuclear operations) would no
longer meet the criteria of SFAS 71, and, therefore, the write-off
would be limited to regulatory assets and/or property, plant and
equipment that are not reflected in cost-based prices established for
the remaining regulated operations. Any such effects from the
Regulatory Plan would be recorded at the time consummation of the merger
becomes probable. If the merger is not consummated, the Operating
Companies are not obligated to adopt either of the two provisions
described above. Any asset revaluation must be consistent with the
Operating Companies' objectives to become more competitive, reduce debt
and provide the opportunity for share owners to receive a fair return
on their investment. The Operating Companies continue to examine a
number of accelerated cost recognition and asset recovery plans.
On October 17, 1996, the FERC issued an order authorizing the
merger of Toledo Edison into Cleveland Electric without a hearing
and without significant conditions. The order included the FERC's
conclusion that it was not necessary to require the Operating Companies
to turn over control of their facilities to an independent system operator.
The FERC also approved the Operating Companies' recently filed single-system,
open-access transmission tariff. A request for authorization to transfer
certain Nuclear Regulatory Commission licenses to the merged entity was
recently withdrawn. The merger agreement between Ohio Edison and Centerior
Energy requires the approval of Ohio Edison prior to consummation
of the proposed merger of the Operating Companies. No decision on
the proposed merger of the Operating Companies is expected prior
to February 1997 when Ohio Edison and Centerior Energy common
stock shareholders are expected to vote on approval of the Ohio
Edison-Centerior Energy merger agreement.
<TABLE>
<CAPTION>
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
INCOME STATEMENT
(Unaudited)
(Thousands, Except Per Share Amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------------
1996 1995 1996 1995
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 727,119 $ 739,579 $ 1,941,340 $ 1,934,105
OPERATING EXPENSES
Fuel and Purchased Power 122,920 127,914 348,152 361,008
Other Operation and Maintenance 169,711 167,818 475,379 458,973
Generation Facilities Rental Expense, Net 39,853 39,873 119,559 119,576
Depreciation and Amortization 76,835 70,420 226,789 209,891
Taxes, Other Than Federal Income Taxes 80,129 81,961 247,492 246,341
Deferred Operating Expenses, Net 10,853 (16,772) 32,264 (47,542)
Federal Income Taxes 54,385 63,827 93,739 114,769
-------- -------- ----------- -----------
Total Operating Expenses 554,686 535,041 1,543,374 1,463,016
-------- -------- ----------- -----------
OPERATING INCOME 172,433 204,538 397,966 471,089
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During Construction 695 120 2,394 1,766
Other Income and Deductions, Net (3,909) (2,094) (10,908) 1,176
Deferred Carrying Charges -- 11,804 -- 34,999
Federal Income Taxes - Credit (Expense) 939 254 3,734 (2,543)
-------- -------- ----------- -----------
Total Nonoperating Income (Loss) (2,275) 10,084 (4,780) 35,398
-------- -------- ----------- -----------
INCOME BEFORE INTEREST CHARGES 170,158 214,622 393,186 506,487
INTEREST CHARGES
Long-term Debt 81,192 89,204 247,841 263,939
Short-term Debt 2,300 1,744 6,498 7,315
Allowance for Borrowed Funds Used During Construction (640) (197) (2,257) (1,960)
-------- -------- ----------- -----------
Net Interest Charges 82,852 90,751 252,082 269,294
-------- -------- ----------- -----------
INCOME AFTER INTEREST CHARGES 87,306 123,871 141,104 237,193
Preferred Dividend Requirements of Subsidiaries 13,815 14,959 42,092 46,113
-------- -------- ----------- -----------
NET INCOME $ 73,491 $ 108,912 $ 99,012 $ 191,080
======== ======== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 148,026 148,032 148,027 148,032
======== ======== =========== ===========
EARNINGS PER COMMON SHARE $ .50 $ .74 $ .67 $ 1.29
======== ======== =========== ===========
<FN>
The accompanying notes as they relate to Centerior Energy are an integral part of this statement.
</TABLE>
<TABLE>
<CAPTION>
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
BALANCE SHEET
(Thousands)
September 30, December 31,
1996 1995
(Unaudited)
----------- -----------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
<S> <C> <C>
Utility Plant In Service $ 9,835,687 $ 9,767,788
Accumulated Depreciation and Amortization (3,218,650) (3,036,181)
----------- -----------
6,617,037 6,731,607
Construction Work In Progress 92,875 101,031
----------- -----------
6,709,912 6,832,638
Nuclear Fuel, Net of Amortization 203,992 199,707
Other Property, Less Accumulated Depreciation 92,434 101,745
----------- -----------
7,006,338 7,134,090
CURRENT ASSETS
Cash and Temporary Cash Investments 284,993 179,038
Amounts Due from Customers and Others, Net 210,755 223,228
Unbilled Revenues 7,100 100,344
Materials and Supplies, at Average Cost 93,562 119,507
Fossil Fuel Inventory, at Average Cost 22,140 30,663
Taxes Applicable to Succeeding Years 109,810 255,142
Other 19,937 18,562
----------- -----------
748,297 926,484
REGULATORY AND OTHER ASSETS
Amounts Due from Customers for Future Federal Income
Taxes, Net 1,058,817 1,067,374
Unamortized Loss from Beaver Valley Unit 2 Sale 92,837 96,206
Unamortized Loss on Reacquired Debt 83,728 88,893
Carrying Charges and Operating Expenses 1,024,207 1,053,220
Nuclear Plant Decommissioning Trusts 133,034 113,681
Other 157,610 163,156
----------- -----------
2,550,233 2,582,530
----------- -----------
$ 10,304,868 $ 10,643,104
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 1,964,802 $ 1,983,560
Preferred Stock
With Mandatory Redemption Provisions 189,267 220,440
Without Mandatory Redemption Provisions 448,325 450,871
Long-Term Debt 3,612,166 3,733,892
----------- -----------
6,214,560 6,388,763
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock 211,423 234,771
Current Portion of Lease Obligations 84,239 94,653
Accounts Payable 114,422 152,909
Accrued Taxes 263,725 373,757
Accrued Interest 91,063 83,050
Dividends Declared 43,771 14,666
Other 66,231 73,328
----------- -----------
874,874 1,027,134
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits 254,294 263,352
Accumulated Deferred Federal Income Taxes 1,899,793 1,875,080
Unamortized Gain from Bruce Mansfield Plant Sale 480,760 498,771
Accumulated Deferred Rents for Bruce Mansfield Plant
and Beaver Valley Unit 2 137,898 145,393
Nuclear Fuel Lease Obligations 142,464 137,260
Retirement Benefits 182,745 178,579
Other 117,480 128,772
----------- -----------
3,215,434 3,227,207
COMMITMENTS AND CONTINGENCIES (Note 8)
----------- -----------
$ 10,304,868 $ 10,643,104
=========== ===========
<FN>
The accompanying notes as they relate to Centerior Energy are an integral part of this
statement.
</TABLE>
<TABLE>
<CAPTION>
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
CASH FLOWS
(Unaudited)
(Thousands)
Nine Months Ended
September 30,
------------------------
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income $99,012 $191,080
-------- --------
Adjustments to Reconcile Net Income
to Cash from Operating Activities:
Depreciation and Amortization 226,789 209,891
Deferred Federal Income Tax 30,967 52,248
Unbilled Revenues 6,344 11,000
Deferred Fuel 10,777 11,438
Deferred Carrying Charges -- (34,999)
Leased Nuclear Fuel Amortization 58,212 92,682
Deferred Operating Expenses, Net 32,264 (47,542)
Allowance for Equity Funds Used During Construction (2,394) (1,766)
Changes in Amounts Due from Customers and Others, Net (29,341) (46,428)
Proceeds from Accounts Receivable Securitization 135,223 --
Changes in Inventories 34,468 15,355
Changes in Accounts Payable (38,487) 19,373
Changes in Working Capital Affecting Operations 34,841 (9,829)
Other Noncash Items (15,969) 8,362
-------- --------
Total Adjustments 483,694 279,785
-------- --------
Net Cash from Operating Activities 582,706 470,865
CASH FLOWS FROM FINANCING ACTIVITIES
First Mortgage Bond Issues -- 541,850
Reacquired Common Stock (20) --
Maturities, Redemptions and Sinking Funds (178,153) (636,413)
Nuclear Fuel Lease Obligations (67,962) (69,298)
Common Stock Dividends Paid (88,816) (88,819)
Premiums, Discounts and Expenses (561) (13,955)
-------- --------
Net Cash from Financing Activities (335,512) (266,635)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction (107,451) (114,686)
Interest Capitalized as Allowance for Borrowed Funds Used
During Construction (2,257) (1,960)
Contributions to Nuclear Plant Decommissioning Trusts (16,994) (11,794)
Investment in Partnership (21,164) --
Other Cash Received (Applied) 6,627 (26,776)
-------- --------
Net Cash from Investing Activities (141,239) (155,216)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 105,955 49,014
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 179,038 186,399
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $284,993 $235,413
======== ========
Other Payment Information:
Interest (net of amounts capitalized) $235,000 $217,000
Federal Income Taxes 5,200 77,900
<FN>
The accompanying notes as they relate to Centerior Energy are an integral part of this statement.
</TABLE>
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Liquidity
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of the 1995
Form 10-K and in the First and Second Quarter 1996 Form 10-Qs. The
information under "Capital Resources and Liquidity" remains unchanged
with the following exceptions:
During the third quarter of 1996, Cleveland Electric redeemed or retired
various securities as discussed in Note 4.
In July 1996, Centerior Funding, a wholly owned subsidiary of Cleveland
Electric, completed a public sale of $150 million of receivables-backed
investor certificates in a transaction that qualifies for sale
accounting treatment for financial reporting purposes. Centerior
Funding used the net proceeds of $148.9 million to retire $100 million
of its receivables-backed investor certificates which were issued in May
1996, repay its notes payable ($10 million to Cleveland Electric and $16
million to Toledo Edison) and pay a $22.9 million dividend to Cleveland
Electric.
As discussed in Note 5, a special-purpose corporation completed
financing transactions in the 1996 third quarter and October 1996 to
replace expiring nuclear fuel financing arrangements.
In October 1996, Cleveland Electric completed the purchase and
retirement of $50 million principal amount of its 7.625% interest rate
first mortgage bonds due in 2002 and $10 million principal amount of its
7.42% interest rate secured medium-term notes due in 2001 for a total of
$59.1 million. Also in October 1996, Toledo Edison completed the
purchase and retirement of $15 million principal amount of its 7.25%
interest rate first mortgage bonds due in 1999 for $14.9 million. The
securities are included in current liabilities in the September 30, 1996
balance sheet.
Additional first mortgage bonds may be issued by the Operating Companies
under their respective mortgages on the basis of property additions,
cash or refundable first mortgage bonds. If the applicable interest
coverage test is met, each Operating Company may issue first mortgage
bonds on the basis of property additions and, under certain
circumstances, refundable bonds. At September 30, 1996, Cleveland
Electric and Toledo Edison would have been permitted to issue
approximately $571 million and $143 million of additional first mortgage
bonds, respectively, after giving effect to the corresponding security
retirements in October 1996 discussed above.
Under its articles of incorporation, Toledo Edison cannot issue
preferred stock unless certain earnings coverage requirements are met.
Based on earnings for the 12 months ended September 30, 1996, Toledo
Edison could not issue additional preferred stock.
Results of Operations
Factors contributing to the 1.7% third quarter decrease and 0.4% nine-
month increase in 1996 operating revenues from 1995 are shown as
follows:
Changes for Period Ended
September 30, 1996
Three Nine
Factors Months Months
(millions)
Base Rates $ 27.7 $ 40.2
Kilowatt-hour Sales Volume and Mix (36.3) (22.1)
Wholesale Revenues (3.4) (3.1)
Fuel Cost Recovery Revenues (1.3) (10.0)
Miscellaneous Revenues 0.8 2.2
Total $ (12.5) $ 7.2
The increases in 1996 base rates revenues resulted primarily from the
April 1996 rate order issued by the PUCO for the Operating Companies.
Renegotiated contracts for certain large industrial customers of the Operating
Companies resulted in a decrease in base rates which partially offset
the effect of the general price increase.
Percentage changes between 1996 and 1995 billed electric kilowatt-hour
sales are summarized as follows:
Changes for Period Ended
September 30, 1996
Three Nine
Customer Categories Months Months
Residential (14.9)% (2.5)%
Commercial (3.5) 0.9
Industrial 1.4 0.7
Other (7.6) (12.1)
Total (5.1) (1.6)
Third quarter 1996 residential, commercial and total kilowatt-hour sales
decreased because of cooler summer weather in the 1996 period which
reduced cooling-related demand. Weather-normalized residential and
commercial sales increased 0.6% and 3.8%, respectively, for the 1996
period. Weather-normalized commercial sales growth in the 1996 period
is attributable to an increase in average customer usage of about 4%.
Industrial sales increased primarily because of increased sales to large
automotive manufacturers and the broad-based, smaller industrial
customer group. Other sales decreased because of less sales to
wholesale and public authority customers.
Total kilowatt-hour sales decreased for the nine-month period in 1996
because of decreases from weather-related demand and a 14% decline in
wholesale sales. Residential sales decreased because of the cooler
summer weather in the 1996 period. However, commercial and industrial
sales increased for the 1996 nine-month period. Colder winter and
spring weather in the first six months of 1996 had boosted residential
and commercial sales for the first half of 1996. Weather-normalized
residential and commercial sales increased 1.1% and 3%, respectively,
for the 1996 nine-month period. Weather-normalized commercial sales
growth in the 1996 period is attributable to a 1% increase in the
average number of customers and an increase in average customer usage of
about 2%. Increased sales to petroleum refineries and the broad-based,
smaller industrial customer group were partially offset by less sales to
large steel industry customers.
Wholesale sales in 1996 were suppressed by soft market conditions and,
during the first six months of 1996, limited power availability for bulk
power transactions because of nuclear generating plant refueling and
maintenance outages.
The decreases in 1996 fuel cost recovery revenues included in customer
bills resulted from changes in the fuel cost recovery factors used by
the Operating Companies to calculate these revenues. The weighted
average of the respective fuel cost recovery factors used for the third
quarter of 1996 decreased about 2% for Cleveland Electric and increased
about 1.5% for Toledo Edison compared to the weighted average of the
respective fuel cost recovery factors used for the third quarter of
1995. The weighted average of the respective fuel cost recovery factors
used for the 1996 nine-month period decreased about 5% for Cleveland
Electric and increased about 2% for Toledo Edison compared to the
weighted average of the respective fuel cost recovery factors used for
the 1995 nine-month period.
Third quarter operating expenses in 1996 increased 3.7% from the 1995
amount. The cessation of the Rate Stabilization Program deferrals and
the commencement of their amortization in December 1995 resulted in the
decrease in deferred operating expenses. Depreciation and amortization
expenses increased because of a net increase in depreciation related to
changes in depreciation rates approved in the April 1996 PUCO rate order
and the cessation of the accelerated amortization of unrestricted
investment tax credits under the Rate Stabilization Program, which was
reported in 1995 as a reduction of depreciation expense. Federal income
taxes decreased as a result of lower pretax operating income. Fuel and
purchased power expenses decreased as lower fuel expense was partially
offset by slightly higher purchased power expense.
Other operation and maintenance expenses for the 1996 third quarter
included a $22.7 million charge for an ongoing inventory reduction
program. The ongoing streamlining of the supply chain process includes
a shift in management philosophy toward increased use of technology,
consolidated warehousing and just-in-time purchase and delivery. Other
operation and maintenance expenses for the 1995 third quarter had
included charges totaling $14.6 million for an inventory reduction and
the recognition of costs associated with preliminary engineering
studies. Other cost-control measures helped to reduce third quarter
1996 other operation and maintenance expenses below the third quarter
1995 level, exclusive of the charges discussed above.
Third quarter 1996 nonoperating income decreased primarily because the
deferral of carrying charges related to the Rate Stabilization Program
ended in November 1995.
Third quarter 1996 interest charges and preferred dividend requirements
decreased because of the redemption of securities and refinancing at
favorable terms.
Nine-month operating expenses in 1996 increased 5.5% from the 1995
amount. The cessation of the Rate Stabilization Program deferrals and
the commencement of their amortization in December 1995 resulted in the
decrease in deferred operating expenses. Other operation and
maintenance expenses increased because of increases in nuclear power
production expenses (attributable to refueling and maintenance outages,
and the end of accelerated amortization of certain excess interim spent
nuclear fuel storage costs under the Rate Stabilization Program), the
third quarter 1996 inventory reduction charge, and expenses related to
distribution operations and improvements in customer service and sales
and marketing efforts. Depreciation and amortization expenses increased
for the same reasons cited for the third quarter 1996 increase in these
expenses. Federal income taxes decreased as a result of lower pretax
operating income. Fuel and purchased power expenses decreased as lower
fuel expense related to less generation was partially offset by higher
purchased power expense.
A nine-month 1996 nonoperating loss resulted primarily from Toledo
Edison's write-down of two inactive production facilities as discussed
in Note 7. The deferral of carrying charges related to the Rate
Stabilization Program ended in November 1995. The nine-month 1996
federal income tax credit for nonoperating income increased accordingly.
Nine-month 1996 interest charges and preferred dividend requirements
decreased because of the same reasons cited for the third quarter 1996
decrease in these charges.
<TABLE>
<CAPTION>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
INCOME STATEMENT
(Unaudited)
(Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------------
1996 1995 1996 1995
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 506,491 $ 525,833 $ 1,368,042 $ 1,360,578
OPERATING EXPENSES
Fuel and Purchased Power (1) 102,941 110,104 304,883 317,997
Other Operation and Maintenance 115,118 113,421 319,333 308,390
Generation Facilities Rental Expense, Net 13,892 13,892 41,675 41,675
Depreciation and Amortization 53,279 49,290 157,128 146,777
Taxes, Other Than Federal Income Taxes 56,537 58,288 176,297 174,535
Deferred Operating Expenses, Net 6,567 (11,229) 19,510 (31,686)
Federal Income Taxes 37,434 47,140 66,804 81,592
-------- -------- ---------- ----------
Total Operating Expenses 385,768 380,906 1,085,630 1,039,280
-------- -------- ---------- ----------
OPERATING INCOME 120,723 144,927 282,412 321,298
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During Construction 366 290 1,465 1,256
Other Income and Deductions, Net (4,506) 804 (3,873) 1,941
Deferred Carrying Charges -- 7,991 -- 23,354
Federal Income Taxes - Credit (Expense) 1,449 (538) 1,731 (1,441)
-------- -------- ---------- ----------
Total Nonoperating Income (Loss) (2,691) 8,547 (677) 25,110
-------- -------- ---------- ----------
INCOME BEFORE INTEREST CHARGES 118,032 153,474 281,735 346,408
INTEREST CHARGES
Long-Term Debt 58,628 62,889 179,414 184,194
Short-Term Debt 1,063 844 3,127 2,638
Allowance for Borrowed Funds Used During Construction (380) (236) (1,526) (1,614)
-------- -------- ---------- ----------
Net Interest Charges 59,311 63,497 181,015 185,218
-------- -------- ---------- ----------
NET INCOME 58,721 89,977 100,720 161,190
Preferred Dividend Requirements 9,563 10,452 29,408 32,127
-------- -------- ---------- ----------
EARNINGS AVAILABLE FOR COMMON STOCK $ 49,158 $ 79,525 $ 71,312 $ 129,063
======== ======== ========== ==========
(1) Includes purchased power expense for
purchases from Toledo Edison. $ 24,933 $ 25,939 $ 77,513 $ 75,496
<FN>
The accompanying notes as they relate to Cleveland Electric are an integral part of this statement.
</TABLE>
<TABLE>
<CAPTION>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
BALANCE SHEET
(Thousands)
September 30, December 31,
1996 1995
(Unaudited)
----------- -----------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
<S> <C> <C>
Utility Plant In Service $ 6,911,857 $ 6,871,468
Accumulated Depreciation and Amortization (2,212,724) (2,094,092)
----------- -----------
4,699,133 4,777,376
Construction Work In Progress 69,801 73,250
----------- -----------
4,768,934 4,850,626
Nuclear Fuel, Net of Amortization 121,678 121,966
Other Property, Less Accumulated Depreciation 56,707 58,299
----------- -----------
4,947,319 5,030,891
CURRENT ASSETS
Cash and Temporary Cash Investments 85,234 69,770
Amounts Due from Customers and Others, Net 191,445 152,339
Amounts Due from Affiliates 1,502 4,729
Unbilled Revenues 5,000 78,500
Materials and Supplies, at Average Cost 60,276 79,540
Fossil Fuel Inventory, at Average Cost 11,104 21,391
Taxes Applicable to Succeeding Years 77,935 184,099
Other 10,029 7,197
----------- -----------
442,525 597,565
REGULATORY AND OTHER ASSETS
Amounts Due from Customers for Future Federal Income
Taxes, Net 643,024 651,264
Unamortized Loss on Reacquired Debt 58,681 61,252
Carrying Charges and Operating Expenses 626,007 643,561
Nuclear Plant Decommissioning Trusts 71,986 61,497
Other 85,788 105,696
----------- -----------
1,485,486 1,523,270
----------- -----------
$ 6,875,330 $ 7,151,726
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 1,102,128 $ 1,126,762
Preferred Stock
With Mandatory Redemption Provisions 185,912 215,420
Without Mandatory Redemption Provisions 238,325 240,871
Long-Term Debt 2,599,076 2,665,981
----------- -----------
4,125,441 4,249,034
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock 140,874 176,474
Current Portion of Lease Obligations 49,468 54,634
Accounts Payable 52,486 89,038
Accounts and Notes Payable to Affiliates 59,437 63,961
Accrued Taxes 227,225 296,141
Accrued Interest 65,185 58,608
Dividends Declared 6,092 15,818
Other 40,947 40,766
----------- -----------
641,714 795,440
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits 178,088 184,002
Accumulated Deferred Federal Income Taxes 1,311,649 1,298,260
Unamortized Gain from Bruce Mansfield Plant Sale 299,467 310,678
Accumulated Deferred Rents for Bruce Mansfield Plant 98,183 91,604
Nuclear Fuel Lease Obligations 85,465 85,569
Retirement Benefits 71,352 65,424
Other 63,971 71,715
----------- -----------
2,108,175 2,107,252
COMMITMENTS AND CONTINGENCIES (Note 8)
----------- -----------
$ 6,875,330 $ 7,151,726
=========== ===========
<FN>
The accompanying notes as they relate to Cleveland Electric are an integral part of this
statement.
</TABLE>
<TABLE>
<CAPTION>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
CASH FLOWS
(Unaudited)
(Thousands)
Nine Months Ended
September 30,
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income $100,720 $161,190
----------- ---------
Adjustments to Reconcile Net Income
to Cash from Operating Activities:
Depreciation and Amortization 157,128 146,777
Deferred Federal Income Tax 21,514 36,106
Unbilled Revenues 5,500 9,000
Deferred Fuel 3,245 13,900
Deferred Carrying Charges -- (23,354)
Leased Nuclear Fuel Amortization 33,537 52,552
Deferred Operating Expenses, Net 19,510 (31,686)
Allowance for Equity Funds Used During Construction (1,465) (1,256)
Changes in Amounts Due from Customers and Others, Net (16,219) (35,066)
Proceeds from Accounts Receivable Securitization 57,988 --
Changes in Inventories 29,551 6,824
Changes in Accounts Payable (36,552) (3,565)
Changes in Working Capital Affecting Operations 38,596 (16,558)
Other Noncash Items (7,157) (2,438)
-------- --------
Total Adjustments 305,176 151,236
-------- --------
Net Cash from Operating Activities 405,896 312,426
CASH FLOWS FROM FINANCING ACTIVITIES
Notes Payable to Affiliates 1,281 (58,100)
First Mortgage Bond Issues -- 442,850
Maturities, Redemptions and Sinking Funds (134,288) (428,455)
Nuclear Fuel Lease Obligations (38,532) (39,776)
Dividends Paid (135,598) (77,078)
Premiums, Discounts and Expenses (307) (8,644)
-------- --------
Net Cash from Financing Activities (307,444) (169,203)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction (74,747) (89,534)
Interest Capitalized as Allowance for Borrowed Funds Used
During Construction (1,526) (1,614)
Contributions to Nuclear Plant Decommissioning Trusts (9,194) (6,408)
Other Cash Received (Applied) 2,479 (18,389)
-------- --------
Net Cash from Investing Activities (82,988) (115,945)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 15,464 27,278
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 69,770 65,643
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $85,234 $92,921
======== ========
Other Payment Information:
Interest (net of amounts capitalized) $169,000 $149,000
Federal Income Taxes (Refund) (6,200) 60,300
<FN>
The accompanying notes as they relate to Cleveland Electric are an integral part of this statement.
</TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Liquidity
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of the 1995
Form 10-K and in the First and Second Quarter 1996 Form 10-Qs. The
information under "Capital Resources and Liquidity" remains unchanged
with the following exceptions:
During the third quarter of 1996, Cleveland Electric redeemed or retired
various securities as discussed in Note 4.
In July 1996, Centerior Funding, a wholly owned subsidiary of Cleveland
Electric, completed a public sale of $150 million of receivables-backed
investor certificates in a transaction that qualifies for sale
accounting treatment for financial reporting purposes. Centerior
Funding used the net proceeds of $148.9 million to retire $100 million
of its receivables-backed investor certificates which were issued in May
1996, repay its notes payable ($10 million to Cleveland Electric and $16
million to Toledo Edison) and pay a $22.9 million dividend to Cleveland
Electric.
As discussed in Note 5, a special-purpose corporation completed
financing transactions in the 1996 third quarter and October 1996 to
replace expiring nuclear fuel financing arrangements.
In October 1996, Cleveland Electric completed the purchase and
retirement of $50 million principal amount of its 7.625% interest rate
first mortgage bonds due in 2002 and $10 million principal amount of its
7.42% interest rate secured medium-term notes due in 2001 for a total of
$59.1 million. The securities are included in current liabilities in
the September 30, 1996 balance sheet.
Additional first mortgage bonds may be issued by Cleveland Electric
under its mortgage on the basis of property additions, cash or
refundable first mortgage bonds. If the applicable interest coverage
test is met, Cleveland Electric may issue first mortgage bonds on the
basis of property additions and, under certain circumstances, refundable
bonds. At September 30, 1996, Cleveland Electric would have been
permitted to issue approximately $571 million of additional first
mortgage bonds after giving effect to the October 1996 security
retirements discussed above.
Results of Operations
Factors contributing to the 3.7% third quarter decrease and 0.5% nine-
month increase in 1996 operating revenues from 1995 are shown as
follows:
Changes for Period Ended
September 30, 1996
Three Nine
Factors Months Months
(millions)
Base Rates $ 20.2 33.4
Kilowatt-hour Sales Volume and Mix (38.2) (22.4)
Wholesale Revenues (0.9) 3.9
Fuel Cost Recovery Revenues (1.8) (11.5)
Miscellaneous Revenues 1.44 .1
Total $(19.3) $ 7.5
The increases in 1996 base rates revenues resulted primarily from the
April 1996 rate order issued by the PUCO. Renegotiated contracts for
certain large industrial customers resulted in a decrease in base rates
which partially offset the effect of the general price increase.
Percentage changes between 1996 and 1995 billed electric kilowatt-hour
sales are summarized as follows:
Changes for Period Ended
September 30, 1996
Three Nine
Customer Categories Months Months
Residential (15.4)% (2.8)%
Commercial (3.7) 0.5
Industrial (0.6) (0.8)
Other 5.8 5.2
Total (4.4) (0.3)
Third quarter 1996 residential, commercial and total kilowatt-hour sales
decreased because of cooler summer weather in the 1996 period which
reduced cooling-related demand. Weather-normalized residential and
commercial sales increased 0.8% and 2.8%, respectively, for the 1996
period. Weather-normalized commercial sales growth in the 1996 period
is attributable to an increase in average customer usage of about 3%.
Industrial sales decreased as less sales to large automotive
manufacturers and the broad-based, smaller industrial customer group
were partially offset by increased sales to large steel industry
customers. Other sales increased as increased wholesale sales were
partially offset by less sales to public authorities.
Total kilowatt-hour sales decreased for the nine-month period in 1996 as
decreases from weather-related demand were partially offset by a 10%
increase in wholesale sales. Residential sales decreased because of the
cooler summer weather in the 1996 period. Colder winter and spring
weather in the first six months of 1996 had boosted residential and
commercial sales for the first half of 1996. Weather-normalized
residential and commercial sales increased 1.2% and 2.4%, respectively,
for the 1996 nine-month period. Weather-normalized commercial sales
growth in the 1996 period is attributable to a 1% increase in the
average number of customers and an increase in average customer usage of
about 1.5%. Industrial sales decreased primarily because of less sales
to large automotive manufacturers and the broad-based, smaller
industrial customer group.
The decreases in 1996 fuel cost recovery revenues included in customer
bills resulted from decreases in the fuel cost recovery factors used in
1996 to calculate these revenues compared to those used in 1995. The
decreases in the weighted averages of the fuel cost recovery factors for
1996 were about 2% and 5% for the third quarter and nine months,
respectively.
Miscellaneous revenues in 1996 increased from the 1995 amounts primarily
because of the new revenues related to the Seneca lease agreement
discussed in Note 6.
Third quarter operating expenses in 1996 increased 1.3% from the 1995
amount. The cessation of the Rate Stabilization Program deferrals and
the commencement of their amortization in December 1995 resulted in the
decrease in deferred operating expenses. Depreciation and amortization
expenses increased because of a net increase in depreciation related to
changes in depreciation rates approved in the April 1996 PUCO rate order
and the cessation of the accelerated amortization of unrestricted
investment tax credits under the Rate Stabilization Program, which was
reported in 1995 as a reduction of depreciation expense. Federal income
taxes decreased as a result of lower pretax operating income. Lower
fuel and purchased power expenses resulted from both lower fuel expense
and lower purchased power expense.
Other operation and maintenance expenses for the 1996 third quarter
included a $16.6 million charge for an ongoing inventory reduction
program. The ongoing streamlining of the supply chain process includes
a shift in management philosophy toward increased use of technology,
consolidated warehousing and just-in-time purchase and delivery. Other
operation and maintenance expenses for the 1995 third quarter had
included charges totaling $11.4 million for an inventory reduction and
the recognition of costs associated with preliminary engineering
studies. Other cost-control measures helped to reduce third quarter
1996 other operation and maintenance expenses below the third quarter
1995 level, exclusive of the charges discussed above.
Third quarter 1996 nonoperating income decreased primarily because the
deferral of carrying charges related to the Rate Stabilization Program
ended in November 1995. The third quarter 1996 federal income tax credit
for nonoperating income increased accordingly.
Nine-month operating expenses in 1996 increased 4.5% from the 1995
amount. The cessation of the Rate Stabilization Program deferrals and
the commencement of their amortization in December 1995 resulted in the
decrease in deferred operating expenses. Other operation and
maintenance expenses increased because of increases in nuclear power
production expenses (attributable to refueling and maintenance outages,
and the end of accelerated amortization of certain excess interim spent
nuclear fuel storage costs under the Rate Stabilization Program), the
third quarter 1996 inventory reduction charge, and expenses related to
distribution operations and improvements in customer service and sales
and marketing efforts. Depreciation and amortization expenses increased
for the same reasons cited for the third quarter 1996 increase in these
expenses. Federal income taxes decreased as a result of lower pretax
operating income. Lower fuel and purchased power expenses resulted
primarily from less amortization of previously deferred fuel costs than
the amount amortized in 1995.
Nine-month 1996 nonoperating income decreased because the deferral of
carrying charges related to the Rate Stabilization Program ended in
November 1995. The nine-month 1996 federal income tax credit for
nonoperating income increased accordingly.
<TABLE>
<CAPTION>
THE TOLEDO EDISON COMPANY
INCOME STATEMENT
(Unaudited)
(Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES (1) $ 252,198 $ 245,830 $ 673,931 $ 667,257
OPERATING EXPENSES
Fuel and Purchased Power 46,928 44,239 126,348 120,196
Other Operation and Maintenance 59,287 60,881 174,050 169,553
Generation Facilities Rental Expense, Net 25,961 25,981 77,884 77,901
Depreciation and Amortization 23,556 21,130 69,661 63,114
Taxes, Other Than Federal Income Taxes 23,503 23,555 70,928 71,452
Deferred Operating Expenses, Net 4,287 (5,543) 12,755 (15,856)
Federal Income Taxes 17,011 16,730 27,110 33,404
-------- -------- -------- --------
Total Operating Expenses 200,533 186,973 558,736 519,764
-------- -------- -------- --------
OPERATING INCOME 51,665 58,857 115,195 147,493
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During Construction 330 (169) 929 510
Other Income and Deductions, Net 96 (2,905) (8,683) 223
Deferred Carrying Charges -- 3,813 -- 11,645
Federal Income Taxes - Credit (Expense) (92) 1,100 3,218 (182)
-------- -------- -------- --------
Total Nonoperating Income (Loss) 334 1,839 (4,536) 12,196
-------- -------- -------- --------
INCOME BEFORE INTEREST CHARGES 51,999 60,696 110,659 159,689
INTEREST CHARGES
Long-Term Debt 22,564 26,315 68,427 79,746
Short-Term Debt 1,712 905 4,075 5,370
Allowance for Borrowed Funds Used During Construction (260) 39 (731) (346)
-------- -------- -------- --------
Net Interest Charges 24,016 27,259 71,771 84,770
-------- -------- -------- --------
NET INCOME 27,983 33,437 38,888 74,919
Preferred Dividend Requirements 4,250 4,507 12,683 13,986
-------- -------- -------- --------
EARNINGS AVAILABLE FOR COMMON STOCK $ 23,733 $ 28,930 $ 26,205 $ 60,933
======== ======== ======== ========
(1) Includes revenues from bulk power sales
to Cleveland Electric. $ 24,933 $ 25,939 $ 77,513 $ 75,496
<FN>
The accompanying notes as they relate to Toledo Edison are an integral part of this statement.
</TABLE>
<TABLE>
<CAPTION>
THE TOLEDO EDISON COMPANY
BALANCE SHEET
(Thousands)
September 30, December 31,
1996 1995
(Unaudited)
----------- -----------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
<S> <C> <C>
Utility Plant In Service $ 2,923,830 $ 2,896,320
Accumulated Depreciation and Amortization (1,005,926) (942,088)
----------- -----------
1,917,904 1,954,232
Construction Work In Progress 23,073 27,781
----------- -----------
1,940,977 1,982,013
Nuclear Fuel, Net of Amortization 82,314 77,741
Other Property, Less Accumulated Depreciation 8,283 19,555
----------- -----------
2,031,574 2,079,309
CURRENT ASSETS
Cash and Temporary Cash Investments 164,664 93,669
Amounts Due from Customers and Others, Net 15,973 68,077
Amounts Due from Affiliates 22,054 18,905
Unbilled Revenues 2,100 21,844
Materials and Supplies, at Average Cost 33,286 39,967
Fossil Fuel Inventory, at Average Cost 11,036 9,273
Taxes Applicable to Succeeding Years 31,875 71,044
Other 3,346 4,315
----------- -----------
284,334 327,094
REGULATORY AND OTHER ASSETS
Amounts Due from Customers for Future Federal Income
Taxes, Net 416,034 416,351
Unamortized Loss from Beaver Valley Unit 2 Sale 92,837 96,206
Unamortized Loss on Reacquired Debt 25,047 27,640
Carrying Charges and Operating Expenses 398,200 409,659
Nuclear Plant Decommissioning Trusts 61,048 52,185
Other 65,010 65,345
----------- -----------
1,058,176 1,067,386
----------- -----------
$ 3,374,084 $ 3,473,789
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 789,059 $ 762,877
Preferred Stock
With Mandatory Redemption Provisions 3,355 5,020
Without Mandatory Redemption Provisions 210,000 210,000
Long-Term Debt 1,013,090 1,067,603
----------- -----------
2,015,504 2,045,500
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock 70,549 58,297
Current Portion of Lease Obligations 34,771 40,019
Accounts Payable 58,971 56,233
Accounts and Notes Payable to Affiliates 26,160 53,245
Accrued Taxes 38,717 78,178
Accrued Interest 25,884 24,250
Other 16,039 18,607
----------- -----------
271,091 328,829
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits 76,206 79,350
Accumulated Deferred Federal Income Taxes 582,247 573,035
Unamortized Gain from Bruce Mansfield Plant Sale 181,293 188,093
Accumulated Deferred Rents for Bruce Mansfield Plant
and Beaver Valley Unit 2 39,715 53,789
Nuclear Fuel Lease Obligations 56,758 51,691
Retirement Benefits 102,508 103,060
Other 48,762 50,442
----------- -----------
1,087,489 1,099,460
COMMITMENTS AND CONTINGENCIES (Note 8)
----------- -----------
$ 3,374,084 $ 3,473,789
=========== ===========
<FN>
The accompanying notes as they relate to Toledo Edison are an integral part of this
statement.
</TABLE>
<TABLE>
<CAPTION>
THE TOLEDO EDISON COMPANY
CASH FLOWS
(Unaudited)
(Thousands)
Nine Months Ended
September 30,
------------------------
1996 1995
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income $38,888 $74,919
-------- --------
Adjustments to Reconcile Net Income
to Cash from Operating Activities:
Depreciation and Amortization 69,661 63,114
Deferred Federal Income Tax 9,863 16,244
Unbilled Revenues 844 2,000
Deferred Fuel 7,532 (2,463)
Deferred Carrying Charges -- (11,645)
Leased Nuclear Fuel Amortization 24,677 40,131
Deferred Operating Expenses, Net 12,755 (15,856)
Allowance for Equity Funds Used During Construction (929) (510)
Changes in Amounts Due from Customers and Others, Net (12,597) (11,398)
Proceeds from Accounts Receivable Securitization 77,235 --
Changes in Inventories 4,918 8,531
Changes in Accounts Payable 2,738 27,645
Changes in Working Capital Affecting Operations (3,260) (2,014)
Other Noncash Items (8,812) 10,800
-------- --------
Total Adjustments 184,625 124,579
-------- --------
Net Cash from Operating Activities 223,513 199,498
CASH FLOWS FROM FINANCING ACTIVITIES
Notes Payable to Affiliates (20,950) --
First Mortgage Bond Issues -- 99,000
Maturities, Redemptions and Sinking Funds (43,865) (199,183)
Nuclear Fuel Lease Obligations (29,430) (29,522)
Dividends Paid (12,702) (14,155)
Premiums, Discounts and Expenses (254) (5,311)
-------- --------
Net Cash from Financing Activities (107,201) (149,171)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction (32,704) (25,152)
Interest Capitalized as Allowance for Borrowed Funds Used
During Construction (731) (346)
Loans to Affiliates (6,281) --
Contributions to Nuclear Plant Decommissioning Trusts (7,800) (5,386)
Other Cash Received (Applied) 2,199 (5,421)
-------- --------
Net Cash from Investing Activities (45,317) (36,305)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 70,995 14,022
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 93,669 87,800
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $164,664 $101,822
======== ========
Other Payment Information:
Interest (net of amounts capitalized) $66,000 $69,000
Federal Income Taxes 10,400 17,500
<FN>
The accompanying notes as they relate to Toledo Edison are an integral part of this statement.
</TABLE>
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Liquidity
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of the 1995
Form 10-K and in the First and Second Quarter 1996 Form 10-Qs. The
information under "Capital Resources and Liquidity" remains unchanged
with the following exceptions:
As discussed in Note 5, a special-purpose corporation completed
financing transactions in the 1996 third quarter and October 1996 to
replace expiring nuclear fuel financing arrangements.
In October 1996, Toledo Edison completed the purchase and retirement of
$15 million principal amount of its 7.25% interest rate first mortgage
bonds due in 1999 for $14.9 million. The securities are included in
current liabilities in the September 30, 1996 balance sheet.
Additional first mortgage bonds may be issued by Toledo Edison under its
mortgage on the basis of property additions, cash or refundable first
mortgage bonds. If the applicable interest coverage test is met, Toledo
Edison may issue first mortgage bonds on the basis of property additions
and, under certain circumstances, refundable bonds. At September 30,
1996, Toledo Edison would have been permitted to issue approximately
$143 million of additional first mortgage bonds after giving effect to
the October 1996 first mortgage bond retirement discussed above.
Under its articles of incorporation, Toledo Edison cannot issue
preferred stock unless certain earnings coverage requirements are met.
Based on earnings for the 12 months ended September 30, 1996, Toledo
Edison could not issue additional preferred stock.
Results of Operations
Factors contributing to the 2.6% and 1% increases in 1996 operating
revenues from 1995 for the third quarter and nine months, respectively,
are shown as follows:
Changes for Period Ended
September 30, 1996
Three Nine
Factors Months Months
(millions)
Base Rates $ 7.5 $ 6.8
Kilowatt-hour Sales Volume and Mix 1.9 0.4
Wholesale Revenues (1.9) (1.1)
Fuel Cost Recovery Revenues 0.5 1.5
Miscellaneous Revenues (1.6) (0.9)
Total $ 6.4 $ 6.7
The increase in third quarter base rates revenues in 1996 resulted
primarily from the April 1996 rate order issued by the PUCO.
Renegotiated contracts for certain large industrial customers also
resulted in a decrease in base rates which partially offset the effect
of the general price increase.
For the nine-month period in 1996, the impact of the April 1996 price
increase was offset by a change in the implementation of summer prices.
As a result of this change, higher summer prices were in effect for
most customers from June through September 1996. Previously, higher
summer prices were in effect from May through September. Consequently,
base rates revenues for the May 1996 billing period were lower relative
to the May 1995 amount. Renegotiated contracts for certain large
industrial customers also resulted in a decrease in base rates which
partially offset the effect of the general price increase.
Percentage changes between 1996 and 1995 billed electric kilowatt-hour
sales are summarized as follows:
Changes for Period Ended
September 30, 1996
Three Nine
Customer Categories Months Months
Residential (13.7)% (1.8)%
Commercial (3.0) 2.1
Industrial 5.0 3.5
Other (12.0) (9.5)
Total (4.9) (1.3)
Third quarter 1996 total kilowatt-hour sales decreased as less
residential and commercial sales, along with less wholesale sales
(included in the "Other" category), completely offset increased industrial
sales. Residential and commercial sales decreased because of the cooler
summer weather in the third quarter of 1996 versus the third quarter of 1995,
which reduced cooling-related demand. Weather-normalized commercial
sales increased 7.6% for the 1996 period. Weather-normalized commercial
sales growth in the 1996 period is attributable to a 1% increase in the
average number of customers and an increase in average customer usage of
about 6%. Industrial sales increased on the strength of increased sales
to large automotive and glass manufacturers.
Total kilowatt-hour sales for the nine-month period in 1996 decreased as
less residential and wholesale sales completely offset increased
commercial and industrial sales. Residential sales decreased because of
the cooler summer weather in the 1996 period. Colder winter and spring
weather in the first six months of 1996 had boosted residential and
commercial sales for the first half of 1996. Weather-normalized
residential and commercial sales increased 0.9% and 5.1%, respectively,
for the 1996 nine-month period. Weather-normalized commercial sales
growth in the 1996 period is attributable to a 1.6% increase in the
average number of customers and an increase in average customer usage of
about 3.5%. Industrial sales increased on the strength of increased
sales to petroleum refineries, large automotive manufacturers and the
broad-based, smaller industrial customer group.
Wholesale sales in 1996 were suppressed by soft market conditions and,
during the first six months of 1996, limited power availability for bulk
power transactions because of nuclear generating plant refueling and
maintenance outages.
The increases in 1996 fuel cost recovery revenues included in customer
bills resulted from increases in the fuel cost recovery factors used in
1996 to calculate these revenues compared to those used in 1995. The
increases in the weighted averages of the fuel cost recovery factors for
1996 were about 1.5% and 2% for the third quarter and nine months,
respectively.
Third quarter operating expenses in 1996 increased 7.3% from the 1995
amount. The cessation of the Rate Stabilization Program deferrals and
the commencement of their amortization in December 1995 resulted in the
decrease in deferred operating expenses. Fuel and purchased power
expenses increased because of higher purchased power expense. Depreciation
and amortization expenses increased because of a net increase in
depreciation related to changes in depreciation rates approved in the April
1996 PUCO rate order and the cessation of the accelerated amortization of
unrestricted investment tax credits under the Rate Stabilization Program,
which was reported in 1995 as a reduction of depreciation expense.
Other operation and maintenance expenses for the 1996 third quarter
included a $6.1 million charge for an ongoing inventory reduction
program. The ongoing streamlining of the supply chain process includes
a shift in management philosophy toward increased use of technology,
consolidated warehousing and just-in-time purchase and delivery. Other
operation and maintenance expenses for the 1995 third quarter had
included charges totaling $3.2 million for an inventory reduction and
the recognition of costs associated with preliminary engineering
studies. Other cost-control measures helped to reduce third quarter
1996 other operation and maintenance expenses below the third quarter
1995 level, exclusive of the charges discussed above.
Third quarter 1996 nonoperating income decreased primarily because the
deferral of carrying charges related to the Rate Stabilization Program
ended in November 1995.
Third quarter 1996 interest charges and preferred dividend requirements
decreased because of the redemption of securities and refinancing at
favorable terms.
Nine-month operating expenses in 1996 increased 7.5% from the 1995
amount. The cessation of the Rate Stabilization Program deferrals and
the commencement of their amortization in December 1995 resulted in the
decrease in deferred operating expenses. Depreciation and amortization
expenses increased for the same reasons cited for the third quarter 1996
increase in these expenses. Fuel and purchased power expenses increased
as higher purchased power expense was partially offset by lower fuel
expense. Other operation and maintenance expenses increased because of
increases in nuclear power production expenses (attributable to
refueling and maintenance outages, and the end of accelerated
amortization of certain excess interim spent nuclear fuel storage costs
under the Rate Stabilization Program), the third quarter 1996 inventory
reduction charge, and expenses related to improvements in customer
service and sales and marketing efforts. Federal income taxes decreased
as a result of lower pretax operating income.
A nine-month 1996 nonoperating loss resulted primarily from the write-
down of two inactive production facilities as discussed in Note 7. The
deferral of carrying charges related to the Rate Stabilization Program
ended in November 1995. The nine-month 1996 federal income tax credit
for nonoperating income increased accordingly.
Nine-month 1996 interest charges and preferred dividend requirements
decreased because of the same reasons cited for the third quarter 1996
decrease in these charges.
PART II. OTHER INFORMATION
Item 5. Other Information
1. PUCO Rate Order
For background relating to this topic, see "Note 6 to the
Financial Statements (Unaudited) -- (6) Regulatory Matters" in the
First Quarter 1996 Form 10-Q and "Item 5. Other Information. 5.
PUCO Rate Order" in the Second Quarter 1996 Form 10-Q.
The City of Cleveland, the Office of the Ohio Consumers' Counsel,
the Ohio Council of Retail Merchants, the Empowerment Center of
Greater Cleveland, the City of Toledo, the Lucas County Board of
Commissioners and Congresswoman Marcy Kaptur have filed appeals
with the Ohio Supreme Court of the PUCO's April 11, 1996 rate
order for the Operating Companies. The Operating Companies have
filed motions to dismiss the appeals filed by Congresswoman Kaptur
and the Lucas County Board of Commissioners because neither was a
party to the PUCO proceeding. The appellants filed their merit
briefs with the Ohio Supreme Court on November 4, 1996, and the
Operating Companies expect to file their reply briefs with the
Supreme Court by December 4, 1996.
2. PUCO Order on Request by City of Clyde
For background relating to this topic, see "Item 5. Other Events.
2. PUCO Order on Request by City of Clyde" in the Companies'
combined Current Report on Form 8-K dated April 11, 1996; "Item 5.
Other Information. 6. PUCO Order on Request by City of Clyde"
in the Second Quarter 1996 Form 10-Q; and "Item 5. Other Events.
2. City of Clyde" in the Companies' combined Current Report on
Form 8-K dated August 21, 1996 ("8/21/96 Form 8-K").
On August 28, 1996, the Ohio Supreme Court granted a Writ of
Mandamus against the City of Clyde, Ohio, requiring the City to
allow buildings which existed in the City prior to its February
1995 Ordinance to receive electric service from Toledo Edison or
from the City's electric company, at the option of the customer.
On November 5, 1996, voters in the City of Clyde passed a
referendum rescinding the Ordinance.
3. Medical Center Co. -- FERC Petition
For background relating to this topic, see "Item 1. Business--
Operations--Competitive Conditions--Cleveland Electric" in the
1995 Form 10-K; "Item 5. Other Information. 8. Medical Center
Co.--FERC Petition" in the Second Quarter 1996 Form 10-Q; and
"Item 5. Other Events. 3. Medical Center" in the 8/21/96 Form
8-K.
On July 31, 1996, the FERC ruled that Cleveland Electric is
obligated to provide transmission service to Cleveland Public
Power ("CPP"). This ruling enabled CPP to provide electric
service to Medical Center Co. beginning in August 1996. The FERC
concluded that such transmission service by Cleveland Electric to
CPP does not violate the Federal Power Act. The FERC also
dismissed Cleveland Electric's request for stranded cost recovery,
without prejudice to its refiling and demonstrating that such
request meets the criteria for seeking stranded cost recovery
under FERC Order 888. Cleveland Electric has sought rehearing of
the FERC ruling and has agreed to provide the requested
transmission service to CPP. On September 18, 1996, the FERC
granted rehearing for further consideration of the issues.
- 26 -
4. City of Cleveland Lawsuit
For background relating to this topic, see "Item 5. Other
Information. 9. City of Cleveland Lawsuit" in the Second Quarter
1996 Form 10-Q.
On August 5, 1996, the City of Cleveland filed with the Court of
Common Pleas of Cuyahoga County a complaint against Cleveland
Electric seeking an order requiring Cleveland Electric to remove
certain lamp posts, street lights and/or utility poles and
assessing penalties for failure to take such action. Cleveland
Electric has filed a motion to dismiss the complaint for lack of
jurisdiction, which motion is decisional.
5. Cost Reduction Efforts
For background relating to this topic, see "Item 5. Other
Information. Cost Reduction Efforts" in the First Quarter 1996
Form 10-Q.
On May 13, 1996, the Companies announced their intention to reduce
the number of employees from 6,800 at January 1, 1996 to 6,300 by
December 31, 1996. At September 30, 1996, the Operating Companies
and Centerior Service Company had 6,279 employees, with further
reductions expected prior to year end. The Companies also are
decommissioning two older fossil-fueled generating units at the
Acme Station in Toledo and the C-Plant in Ashtabula and reducing
generating activities at three other plants. These steps are part
of an ongoing effort to reduce annual operating costs and are
expected to result in annualized savings of at least $30 million.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
See Exhibit Index following.
b. Reports on Form 8-K
During the quarter ended September 30, 1996, Centerior Energy,
Cleveland Electric and Toledo Edison each filed two Current
Reports on Form 8-K with the Securities and Exchange Commission.
A Form 8-K dated August 21, 1996 and filed on September 13, 1996
included three items under "Item 5. Other Events". The first,
"Management Changes", reported on the election of Lew W. Myers as
Vice President - Nuclear--Perry. The second, "2. City of Clyde",
reported on the status of Toledo Edison's litigation with the City
of Clyde. The third, "3. Medical Center", reported on the status
of proceedings against Ohio Power Company.
A Form 8-K dated September 13, 1996 and filed on September 17,
1996 included one item under "Item 5. Other Events". That item,
"Merger with Ohio Edison", reported on the merger agreement
between Centerior Energy and Ohio Edison.
- 27 -
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The person signing this report on
behalf of each such registrant is also signing in his capacity as each
registrant's Chief Accounting Officer.
CENTERIOR ENERGY CORPORATION
(Registrant)
THE CLEVELAND ELECTRIC
ILLUMINATING COMPANY
(Registrant)
THE TOLEDO EDISON COMPANY
(Registrant)
By: E. LYLE PEPIN
E. Lyle Pepin, Controller and Chief
Accounting Officer of each Registrant
Date: November 14, 1996
- 28 -
EXHIBIT INDEX
The following exhibits are submitted herewith:
CENTERIOR ENERGY EXHIBIT
Exhibit Number Description
27(a) Financial Data Schedule for the period ended
September 30, 1996.
CLEVELAND ELECTRIC EXHIBITS
Exhibit Number Description
27(b) Financial Data Schedule for the period ended
September 30, 1996.
TOLEDO EDISON EXHIBITS
Exhibit Number Description
27(c) Financial Data Schedule for the period ended
September 30, 1996.
- 29 -
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