SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
OR
[ ] Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification
No.
1-9130 CENTERIOR ENERGY CORPORATION 34-1479083
(An Ohio Corporation)
6200 Oak Tree Boulevard
Independence, Ohio 44131
Telephone (216) 447-3100
1-2323 THE CLEVELAND ELECTRIC 34-0150020
ILLUMINATING COMPANY
(An Ohio Corporation)
c/o Centerior Energy Corporation
6200 Oak Tree Boulevard
Independence, Ohio 44131
Telephone (216) 622-9800
1-3583 THE TOLEDO EDISON COMPANY 34-4375005
(An Ohio Corporation)
300 Madison Avenue
Toledo, Ohio 43652
Telephone (419) 249-5000
Indicate by check mark whether each of the registrants (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrants were required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes X No
On November 6, 1997, there were 148,024,178 shares of Centerior
Energy Corporation Common Stock outstanding. Centerior Energy
Corporation is the sole holder of the 79,590,689 shares and 39,133,887
shares of common stock of The Cleveland Electric Illuminating Company
and The Toledo Edison Company, respectively, outstanding on that date.
This combined Form 10-Q is separately filed by Centerior Energy
Corporation ("Centerior Energy"), The Cleveland Electric Illuminating
Company ("Cleveland Electric") and The Toledo Edison Company ("Toledo
Edison"). Centerior Energy, Cleveland Electric and Toledo Edison are
sometimes referred to collectively as the "Companies". Cleveland
Electric and Toledo Edison are sometimes collectively referred to as
the "Operating Companies". Information contained herein relating to
any individual registrant is filed by such registrant on its behalf.
No registrant makes any representation as to information relating to
any other registrant, except that information relating to either or
both of the Operating Companies is also attributed to Centerior Energy.
-i-
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Centerior Energy Corporation and Subsidiaries
The Cleveland Electric Illuminating Company and Subsidiary
The Toledo Edison Company and Subsidiary
Notes to the Financial Statements (Unaudited) 1
Centerior Energy Corporation and Subsidiaries
Income Statement 7
Balance Sheet 8
Cash Flows 9
Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
The Cleveland Electric Illuminating Company and Subsidiary
Income Statement 14
Balance Sheet 15
Cash Flows 16
Management's Discussion and Analysis of Financial 17
Condition and Results of Operations
The Toledo Edison Company and Subsidiary
Income Statement 21
Balance Sheet 22
Cash Flows 23
Management's Discussion and Analysis of Financial 24
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
Exhibit Index 30
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CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES,
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY,
AND THE TOLEDO EDISON COMPANY AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
(1) Interim Financial Statements
Until the November 8, 1997 effective date of its merger with Ohio Edison
Company (Ohio Edison) into FirstEnergy Corp. (FirstEnergy), as discussed
in Note 9, Centerior Energy Corporation (Centerior Energy) was the
parent company of Centerior Service Company; two electric utilities, The
Cleveland Electric Illuminating Company (Cleveland Electric) and The
Toledo Edison Company (Toledo Edison); and three other wholly owned
subsidiaries. The two utilities are referred to collectively herein as
the "Operating Companies" and individually as an "Operating Company".
Centerior Energy, Cleveland Electric and Toledo Edison are referred to
collectively herein as the "Companies".
The comparative income statement and balance sheet and the related
statement of cash flows of each of the Companies have been prepared from
the records of each of the Companies without audit by independent public
accountants. In the opinion of management, all adjustments necessary
for a fair presentation of financial position at September 30, 1997 and
results of operations and cash flows for the three months and nine
months ended September 30, 1997 and 1996 have been included. All such
adjustments were normal recurring adjustments, except for the items
discussed in Notes 6, 7 and 8.
These financial statements and notes should be read in conjunction with
the financial statements and notes included in the Companies' combined
Annual Report on Form 10-K for the year ended December 31, 1996 (1996
Form 10-K) and the Quarterly Reports on Form 10-Q for the quarter ended
March 31, 1997 (First Quarter 1997 Form 10-Q) and the quarter ended June
30, 1997 (Second Quarter 1997 Form 10-Q). These interim period financial
results are not necessarily indicative of results for a 12-month period.
(2) Equity Distribution Restrictions
The Operating Companies can make cash available to fund Centerior
Energy's common stock dividends by paying dividends on their respective
common stock, which is held solely by Centerior Energy. Federal law
prohibits the Operating Companies from paying dividends out of capital
accounts. Cleveland Electric has since 1993 declared and paid preferred
and common stock dividends out of appropriated current net income
included in retained earnings. At the times of such declarations and
payments, Cleveland Electric had a deficit in its retained earnings.
From 1993 through September 1997, Toledo Edison declared and paid
preferred stock dividends out of appropriated current net income
included in retained earnings. At the times of such declarations and
payments, Toledo Edison had a deficit in its retained earnings from 1993
through November 1996. Toledo Edison also has a provision in its
mortgage applicable to approximately $63 million of outstanding first
mortgage bonds that requires common stock dividends to be paid out of
its total balance of retained earnings. At September 30, 1997, Toledo
Edison's total retained earnings were $42 million. At September 30,
1997, Cleveland Electric and Toledo Edison had $124.8 million and $259.7
million, respectively, of appropriated retained earnings for the payment
of dividends. See "Management's Financial Analysis -- Capital Resources
and Liquidity-Liquidity" contained in Item 7 of the 1996 Form 10-K for a
discussion of a Federal Energy Regulatory Commission (FERC) audit issue
regarding the declaration and payment of dividends.
(3) Common Stock Dividends
Cash dividends per common share declared by Centerior Energy during the
nine months ended September 30, 1997 and 1996 were as follows:
1997 1996
Paid February 15 $.20 $.20
Paid May 15 .20 .20
Paid August 15 .20 .20
Paid November 15 .20 .20
For information with respect to an additional cash dividend on Centerior
Energy common stock in connection with Centerior Energy's merger with
Ohio Edison, see Note 9.
Common stock cash dividends declared by Cleveland Electric during the
nine months ended September 30, 1997 and 1996 were as follows:
1997 1996
(millions)
Paid in February $29.6 $29.6
Paid in May 29.6 46.6
Paid in August 29.6 29.6
Toledo Edison did not declare any common stock dividends during the nine
months ended September 30, 1997 and 1996.
(4) Mansfield Plant Leases
As discussed in Note 4 to the financial statements in the Second Quarter
1997 Form 10-Q, the Operating Companies refinanced high-cost fixed
obligations related to their 1987 sale and leaseback transaction for the
Bruce Mansfield Generating Plant (Mansfield Plant) through a lower cost
transaction in June and July 1997.
At September 30, 1997, future minimum lease payments through the year
2016 under the original operating leases for the Mansfield Plant are
$1.454 billion, $0.926 billion and $2.38 billion for Cleveland Electric,
Toledo Edison and Centerior Energy, respectively. Amended operating
leases which are expected to result in reduced future minimum lease
payments are currently being negotiated with the owner participants.
While the lease payments are made semiannually by the Operating
Companies, rental expense is accrued on a straight-line basis over the
remaining lease term. Once amended lease terms are finalized, rental
expense accruals are expected to be at lower annual rates than the
applicable amount recorded under the original leases ($70 million, $45
million and $115 million for Cleveland Electric, Toledo Edison and
Centerior Energy, respectively).
(5) Other Financing Activity
During the three months ended September 30, 1997, the Operating
Companies also issued and redeemed preferred stock and debt securities
as follows:
Cleveland Electric
Cleveland Electric issued $54.6 million principal amount of First
Mortgage Bonds, 6.10% Series due 2020-F, as collateral security for the
sale by a public authority (water authority) of an equal principal
amount of its tax-exempt bonds. The proceeds from the sale of the water
authority's bonds were used to refund an equal principal amount of the
water authority's tax-exempt bonds that were issued in 1987 with a 9.75%
interest rate. In a corresponding transaction, Cleveland Electric's
first mortgage bonds securing the water authority's 1987 bonds were
defeased.
At the same time, Cleveland Electric also issued $15.9 million principal
amount of First Mortgage Bonds, 6.10% Series due 2020-H, as collateral
security for the sale by another public authority (air authority) of an
equal principal amount of its tax-exempt bonds. The proceeds from the
sale of the air authority's bonds were used to refund an equal principal
amount of the air authority's tax-exempt bonds that were issued in 1987
with a 9.75% interest rate. In a corresponding transaction, Cleveland
Electric's first mortgage bonds securing the air authority's 1987 bonds
were defeased.
At the same time, Cleveland Electric also issued $62.56 million
principal amount of First Mortgage Bonds, 6.00% Series due 2020-G, as
collateral security for the sale by the air authority of an equal
principal amount of another series of its tax-exempt bonds. The
proceeds from the sale of this series of the air authority's bonds were
used to refund equal principal amounts of two series of the air
authority's tax-exempt bonds that were issued in 1976 and 1979, each
with a 7% interest rate. In a corresponding transaction, Cleveland
Electric's first mortgage bonds securing the air authority's 1976 and
1979 bonds were defeased.
Cleveland Electric also issued $47.5 million principal amount of First
Mortgage Bonds, Variable Rate Series due 2020-I, as collateral security
for the sale by the water authority of an equal principal amount of
another series of its tax-exempt bonds. The proceeds from the sale of
this series of the water authority's bonds were used to refund an equal
principal amount of the water authority's tax-exempt bonds that were
issued in 1978 with a 6.2% interest rate. In a corresponding
transaction, Cleveland Electric's first mortgage bonds securing the
water authority's 1978 bonds were defeased. Principal and interest
payments for the new water authority bond issue are supported by an
irrevocable, direct-pay letter of credit which expires August 27, 2000.
Mandatory redemptions consisted of $1 million of Serial Preferred Stock,
$7.35 Series C, and $0.1 million of first mortgage bonds and pollution
control notes.
Toledo Edison
Toledo Edison issued $10.1 million principal amount of First Mortgage
Bonds, 6.10% Series due 2027, as collateral security for the sale by the
air authority of an equal principal amount of its tax-exempt bonds. The
proceeds from the sale of the air authority's bonds were used to refund
an equal principal amount of the air authority's tax-exempt bonds that
were issued in 1987 with a 9.875% interest rate. In a corresponding
transaction, Toledo Edison's first mortgage bonds securing the air
authority's 1987 bonds were defeased.
Mandatory redemptions were $31.4 million of first mortgage bonds.
(6) Write-down of an Investment
In the third quarter of 1997, Centerior Energy wrote down the carrying
value of an $11.7 million investment with a broker-dealer firm by $10.7
million to "Other Income and Deductions, Net". The net write-down was
$6.9 million after taxes or $.05 per common share. For background
information on the investment, see "3. Centerior Energy Investment"
under "Item 5. Other Events" in the Companies' combined Current Report
on Form 8-K/A dated August 27, 1997 (August 27, 1997 Form 8-K/A).
(7) Sale and Disposal of Materials and Supplies
In the third quarter of 1996, Cleveland Electric, Toledo Edison and
Centerior Energy recorded $16.6 million, $6.1 million and $22.7 million
charges, respectively, for the disposition of materials and supplies
inventory. The sale and disposal of inventory were part of the
reengineering of the supply chain process. The charges were recorded to
"Other Operation and Maintenance Expenses". The net charges after taxes
for Cleveland Electric, Toledo Edison and Centerior Energy were $10.8
million, $4 million and $14.8 million, respectively, or, for Centerior
Energy, $.10 per common share.
In the third quarter of 1997, Cleveland Electric, Toledo Edison and
Centerior Energy recorded $2.3 million, $1.2 million and $3.5 million
charges, respectively, for the disposition of additional materials and
supplies inventory as part of the reengineering of the supply chain
process. The net charges after taxes for Cleveland Electric, Toledo
Edison and Centerior Energy were $1.5 million, $0.8 million and $2.3
million, respectively, or, for Centerior Energy, $.02 per common share.
(8) Write-down of Inactive Production Facilities
In the first quarter of 1996, Toledo Edison wrote down the net book
value of two inactive production facilities, $11.3 million, to "Other
Income and Deductions, Net" resulting in nonoperating losses for Toledo
Edison and Centerior Energy for that period. The net write-down was
$7.2 million after taxes or, for Centerior Energy, $.05 per common share.
(9) Merger of Centerior Energy and Ohio Edison in November 1997
In September 1996, Centerior Energy and Ohio Edison entered into an
agreement and plan of merger to form a new holding company, FirstEnergy.
FirstEnergy received approvals for the merger from the FERC on October
29, 1997 and the Securities and Exchange Commission on November 5, 1997.
The FERC approved the merger with the understanding that FirstEnergy
would provide greater access to its transmission system as well as
participate in the formation of a regional independent system operator,
or ISO. In addition, on November 6, 1997, The Public Utilities
Commission of Ohio (PUCO) closed its merger-related proceeding,
approving agreed-upon conditions previously submitted by FirstEnergy.
At the same time, the PUCO opened a proceeding relating to transmission
issues, mitigation of stranded costs and FirstEnergy's participation in
a regional ISO. The merger of Centerior Energy and Ohio Edison into
FirstEnergy is effective November 8, 1997. After the merger,
FirstEnergy will directly hold all of the issued and outstanding common
stock of the six Centerior Energy wholly owned subsidiaries and Ohio
Edison.
In July 1997, FirstEnergy submitted to the PUCO staff for approval the
regulatory accounting and cost recovery details for implementing the
Rate Reduction and Economic Development Plan (Plan) for the Operating
Companies, as required by the PUCO when it approved the Plan in January
1997. The Plan is effective for the Operating Companies upon the
consummation of the merger and will extend through the year 2006. See
Note 15 to the financial statements in Item 8 of the 1996 Form 10-K for
a discussion of the significant provisions of the Plan.
The Operating Companies have discontinued the application of Statement
of Financial Accounting Standards (SFAS) 71 for their nuclear operations
effective October 29, 1997. The Operating Companies believe the Plan
will not provide for the full recovery of costs and a fair return on the
investment associated with their nuclear operations. In accordance with
SFAS 101, "Regulated Enterprises -- Accounting for the Discontinuation
of Application of SFAS 71", the Operating Companies are required to
remove from their balance sheets all regulatory assets and liabilities
related to the portions of their businesses for which SFAS 71 is
discontinued and to assess all other assets for impairment. The amounts
at October 29, 1997 for the regulatory assets written off attributable
to nuclear operations for Cleveland Electric, Toledo Edison and
Centerior Energy are $499 million ($324 million after taxes), $295
million ($192 million after taxes) and $794 million ($516 million after
taxes), respectively, or $3.49 per common share for Centerior Energy.
The write-off was recorded as an extraordinary item for the period ended
October 31, 1997. The regulatory assets attributable to nuclear
operations written off primarily represent the net amounts due from
customers for future federal income taxes when the taxes become payable,
which, under the Plan, are no longer recoverable from customers. The
remainder of the Operating Companies' businesses continue to comply with
the provisions of SFAS 71. All remaining regulatory assets of the
Operating Companies will continue to be recovered through rates set for
the nonnuclear portions of their businesses. For financial reporting
purposes, the net book value of the Operating Companies' nuclear
generating units is not impaired as a result of the Plan.
In connection with the consummation of the merger, an additional cash
dividend on Centerior Energy common stock of $.035 per share was
declared for share owners of record on November 7, 1997, payable on
December 1, 1997.
FirstEnergy is accounting for the merger with Centerior Energy as a
purchase in accordance with generally accepted accounting principles.
FirstEnergy has elected to apply, or "push down", the effects of
purchase accounting to the financial statements of the Operating
Companies. For background information, see Note 7 to the financial
statements in the First Quarter 1997 Form 10-Q.
(10) Commitments and Contingencies
Various legal actions, claims and regulatory proceedings covering
several matters are pending against the Companies. See "Item 3. Legal
Proceedings" in the 1996 Form 10-K; "Part II, Item 5. Other
Information" in this Quarterly Report on Form 10-Q and in the First and
Second Quarter 1997 Form 10-Qs; and "Item 5. Other Events" in the
August 27, 1997 Form 8-K/A.
<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,
--------------------- ---------------------------
1997 1996 1997 1996
-------- -------- ----------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 703,244 $ 727,119 $ 1,927,427 $ 1,941,340
OPERATING EXPENSES
Fuel and Purchased Power 121,508 122,920 357,059 348,152
Other Operation and Maintenance 139,383 169,711 433,787 475,379
Generation Facilities Rental Expense, Net 39,892 39,853 119,559 119,559
Depreciation and Amortization 77,072 76,835 230,923 226,789
Taxes, Other Than Federal Income Taxes 79,726 80,129 239,348 247,492
Amortization of Deferred Operating Expenses, Net 10,858 10,853 32,574 32,264
Federal Income Taxes 53,961 54,385 107,389 93,739
-------- -------- ----------- -----------
Total Operating Expenses 522,400 554,686 1,520,639 1,543,374
-------- -------- ----------- -----------
OPERATING INCOME 180,844 172,433 406,788 397,966
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During Construction 756 695 1,867 2,394
Other Income and Deductions, Net 9,267 (3,909) (3,529) (10,908)
Federal Income Taxes - Credit (Expense) (5,621) 939 (5,205) 3,734
-------- -------- ----------- -----------
Total Nonoperating Income (Loss) 4,402 (2,275) (6,867) (4,780)
-------- -------- ----------- -----------
INCOME BEFORE INTEREST CHARGES 185,246 170,158 399,921 393,186
INTEREST CHARGES
Long-term Debt 93,698 81,192 248,369 247,841
Short-term Debt 3,967 2,300 7,646 6,498
Allowance for Borrowed Funds Used During Construction (854) (640) (1,680) (2,257)
-------- -------- ----------- -----------
Net Interest Charges 96,811 82,852 254,335 252,082
-------- -------- ----------- -----------
INCOME AFTER INTEREST CHARGES 88,435 87,306 145,586 141,104
Preferred Dividend Requirements of Subsidiaries 13,061 13,815 39,876 42,092
-------- -------- ----------- -----------
NET INCOME $ 75,374 $ 73,491 $ 105,710 $ 99,012
======== ======== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 148,025 148,026 148,026 148,027
======== ======== =========== ===========
EARNINGS PER COMMON SHARE $ .51 $ .50 $ .71 $ .67
======== ======== =========== ===========
<FN>
The accompanying notes as they relate to Centerior Energy are an integral part of this statement.
</TABLE>
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<TABLE>
<CAPTION>
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
BALANCE SHEET
(Thousands)
September 30, December 31,
1997 1996
(Unaudited)
----------- -----------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
<S> <C> <C>
Utility Plant In Service $ 10,028,501 $ 9,867,193
Accumulated Depreciation and Amortization (3,535,430) (3,272,158)
----------- -----------
6,493,071 6,595,035
Construction Work In Progress 103,452 78,669
----------- -----------
6,596,523 6,673,704
Nuclear Fuel, Net of Amortization 147,896 189,148
Other Property, Less Accumulated Depreciation 47,381 89,291
----------- -----------
6,791,800 6,952,143
CURRENT ASSETS
Cash and Temporary Cash Investments 175,821 138,068
Amounts Due from Customers and Others, Net 194,821 212,680
Materials and Supplies, at Average Cost
Owned 80,005 84,846
Under Consignment 38,986 34,039
Taxes Applicable to Succeeding Years 110,584 249,961
Other 21,880 24,283
----------- -----------
622,097 743,877
REGULATORY AND OTHER ASSETS
Regulatory Assets 2,237,045 2,277,083
Mansfield Capital Trust 878,797 --
Nuclear Plant Decommissioning Trusts 163,660 139,667
Investment in Partnership 40,327 23,245
Other 85,120 74,187
----------- -----------
3,404,949 2,514,182
----------- -----------
$ 10,818,846 $ 10,210,202
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 1,973,919 $ 1,986,855
Preferred Stock
With Mandatory Redemption Provisions 173,094 189,473
Without Mandatory Redemption Provisions 448,325 448,325
Long-Term Debt 4,203,655 3,444,241
----------- -----------
6,798,993 6,068,894
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock 102,159 196,033
Current Portion of Lease Obligations 75,499 87,836
Notes Payable to Banks and Others 85,000 --
Accounts Payable 128,189 138,005
Accrued Taxes 242,761 389,014
Accrued Interest 97,396 74,826
Dividends Declared 43,202 13,977
Other 62,960 72,653
----------- -----------
837,166 972,344
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits 242,683 251,547
Accumulated Deferred Federal Income Taxes 1,904,311 1,876,924
Unamortized Gain from Bruce Mansfield Plant Sale 456,746 474,757
Accumulated Deferred Rents for Bruce Mansfield Plant
and Beaver Valley Unit 2 127,794 137,956
Nuclear Fuel Lease Obligations 99,890 122,655
Retirement Benefits 186,734 183,571
Other 164,529 121,554
----------- -----------
3,182,687 3,168,964
COMMITMENTS AND CONTINGENCIES (Note 10)
----------- -----------
$ 10,818,846 $ 10,210,202
=========== ===========
<FN>
The accompanying notes as they relate to Centerior Energy are an integral part of this
statement.
</TABLE>
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<TABLE>
<CAPTION>
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
CASH FLOWS
(Unaudited)
(Thousands)
Nine Months Ended
September 30,
-----------------------
1997 1996
-----------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income $105,710 $99,012
-------- --------
Adjustments to Reconcile Net Income
to Cash from Operating Activities:
Depreciation and Amortization 230,923 226,789
Deferred Federal Income Taxes 26,972 30,967
Deferred Fuel 28,567 10,777
Leased Nuclear Fuel Amortization 65,008 58,212
Amortization of Deferred Operating Expenses, Net 32,574 32,264
Allowance for Equity Funds Used During Construction (1,867) (2,394)
Changes in Amounts Due from Customers and Others, Net 10,983 (22,997)
Net Proceeds from Accounts Receivable Securitization -- 135,223
Changes in Materials and Supplies (106) 34,468
Changes in Accounts Payable (9,816) (38,487)
Changes in Working Capital Affecting Operations 8,404 34,841
Other Noncash Items 6,112 (15,969)
-------- --------
Total Adjustments 397,754 483,694
-------- --------
Net Cash from Operating Activities 503,464 582,706
CASH FLOWS FROM FINANCING ACTIVITIES
Bank Loans, Commercial Paper and Other Short-Term Debt 85,000 --
First Mortgage Bond Issues 190,660 --
Secured Note Issues 720,000 --
Reacquired Common Stock (20) (20)
Maturities, Redemptions and Sinking Funds (262,079) (178,153)
Nuclear Fuel Lease Obligations (63,888) (67,962)
Common Stock Dividends Paid (88,816) (88,816)
Premiums, Discounts and Expenses (15,650) (561)
-------- --------
Net Cash from Financing Activities 565,207 (335,512)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction (118,906) (107,451)
Interest Capitalized as Allowance for Borrowed Funds Used
During Construction (1,680) (2,257)
Contributions to Nuclear Plant Decommissioning Trusts (16,162) (16,994)
Investment in Mansfield Capital Trust (878,797) --
Investment in Partnership (17,082) (21,164)
Other Cash Received 1,709 6,627
-------- --------
Net Cash from Investing Activities (1,030,918) (141,239)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 37,753 105,955
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 138,068 179,038
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $175,821 $284,993
======== ========
Other Payment Information:
Interest (net of amounts capitalized) $223,000 $235,000
Federal Income Taxes 54,000 5,200
<FN>
The accompanying notes as they relate to Centerior Energy are an integral part of this statement.
</TABLE>
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CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Liquidity
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of the 1996
Form 10-K and in the First and Second Quarter 1997 Form 10-Qs. The
information under "Capital Resources and Liquidity" remains unchanged
with the following exceptions:
As discussed in Note 4, the Operating Companies completed the
refinancing of high-cost fixed obligations through a lower cost
transaction in July 1997.
During the third quarter of 1997, the Operating Companies issued and
redeemed various securities as discussed in Note 5.
In October 1997, Cleveland Electric issued $150 million principal amount
of 7.43% Series C Secured Notes due 2009 and $300 million principal
amount of 7.88% Series C Secured Notes due 2017. The Series C Secured
Notes are secured by Cleveland Electric first mortgage bonds. Using
available cash, short-term borrowings of $250 million (which have been
repaid) and the net proceeds from the sales of the Series C Secured
Notes, Cleveland Electric redeemed in October 1997 $50 million principal
amount of First Mortgage Bonds, 9-1/4% Series due 2009, at 102.19% of
face value; $300 million principal amount of First Mortgage Bonds, 9-
3/8% Series due 2017-A, at 104.38% of face value; and $100 million
principal amount of First Mortgage Bonds, 10% Series due 2020-E, at
105.74% of face value. The premiums paid for the early redemption of
the first mortgage bonds are recorded as part of the losses for the
reacquisitions of the first mortgage bonds. Such losses were deferred
and are being amortized over the lives of the new debt issues.
At September 30, 1997, neither Operating Company would have been
permitted to issue a material amount of additional first mortgage bonds,
except in connection with refinancings. Since FirstEnergy has elected
to apply purchase accounting to the Operating Companies, upon completion
of Centerior Energy's merger with Ohio Edison, each Operating Company's
available bondable property will be reduced to less than zero.
The Operating Companies expect their foreseeable future cash needs to be
satisfied with internally generated cash and available credit facilities
and, therefore, that they will not need to issue first mortgage bonds,
except in connection with any refinancings.
Results of Operations
Factors contributing to the 3.3% and 0.7% decreases in 1997 operating
revenues from 1996 for the third quarter and nine months, respectively,
are shown as follows:
Changes for Period
Ended September 30, 1997
Three Nine
Factors Months Months
(millions)
Kilowatt-hour Sales Volume and Mix $ 7.1 $ 14.6
Unbilled Revenues (2.7) (4.7)
Wholesale Revenues 5.9 13.7
Base Rates (22.0) (17.1)
Fuel Cost Recovery Revenues (7.2) (9.2)
Miscellaneous Revenues (5.0) (11.2)
Total $(23.9) $(13.9)
Percentage changes between 1997 and 1996 billed electric kilowatt-hour
sales are summarized as follows:
Changes for Period
Ended September 30, 1997
Three Nine
Customer Categories Months Months
Residential (2.3)% (2.3)%
Commercial (3.5) (1.9)
Industrial 4.4 3.9
Other 0.8 17.8
Total 0.4 2.5
Third quarter 1997 total kilowatt-hour sales increased slightly as
greater industrial and other sales were partially offset by fewer
residential and commercial sales. Industrial sales increased primarily
because of sales to the new North Star BHP Steel facility and continuing
growth in sales to the broad-based, smaller industrial customer group.
However, these industrial sales increases were partially offset by fewer
sales to large automotive manufacturers. Other sales increased slightly
as increased sales to public authorities were partially offset by lower
wholesale sales. Residential and commercial sales declined because of
the cooler summer weather in the 1997 period. On a weather-normalized
basis, residential sales increased 1.9% for the 1997 period, while
commercial sales decreased 1.3%. Kilowatt-hour sales data reflects a
significant portion of the effect of hot weather in the second half of
June 1997 because unbilled sales at the end of June 1997 were included
in third quarter 1997 sales data. However, the estimated revenues from
those unbilled sales were recorded in June 1997.
Total kilowatt-hour sales increased for the nine-month period in 1997 as
greater industrial and other sales were partially offset by fewer
residential and commercial sales. Industrial sales increased primarily
for the same reasons cited for the third quarter 1997 increase. Other
sales increased as a result of a 22% increase in wholesale sales and an
increase in sales to public authorities. Residential and commercial
sales declined because of the milder weather in the 1997 period. On a
weather-normalized basis, residential sales increased 1.5% for the 1997
period, while commercial sales decreased 0.4%.
Wholesale sales in 1996 were suppressed by soft market conditions and,
during the first six months of 1996, by limited power availability for
bulk power transactions because of nuclear generating plant refueling
and maintenance outages.
Renegotiated contracts for certain large industrial customers of the
Operating Companies resulted in a decrease in their base rates,
contributing to the declines in 1997 base rates revenues.
The decreases in 1997 fuel cost recovery revenues included in customer
bills resulted from changes in the fuel cost recovery factors used by
the Operating Companies to calculate these revenues. The weighted
average of the respective fuel cost recovery factors used for the third
quarter of 1997 decreased about 6% and 10% for Cleveland Electric and
Toledo Edison, respectively, compared to the weighted average of the
respective fuel cost recovery factors used for the third quarter of
1996. The weighted average of the respective fuel cost recovery factors
used for the 1997 nine-month period decreased about 1% and 8% for
Cleveland Electric and Toledo Edison, respectively, compared to the
weighted average of the respective fuel cost recovery factors used for
the 1996 nine-month period.
Significant portions of the 1997 third quarter and nine-month decreases
in miscellaneous revenues relate to a canceled generating plant lease
agreement for which revenues were recorded in 1996 and a refund payment
was made in the 1997 first quarter.
Third quarter operating expenses in 1997 decreased 5.8% from the 1996
amount. Other operation and maintenance expenses decreased as a result
of ongoing cost cutting and work force reductions. Also, other
operation and maintenance expenses for the 1996 third quarter included a
$22.7 million charge for the disposition of materials and supplies
inventory as discussed in Note 7. A similar $3.5 million charge was
recorded for the 1997 third quarter.
Third quarter nonoperating income in 1997 increased from the 1996 amount
primarily because interest income from investments in the Mansfield
Capital Trust in connection with the Mansfield Plant lease refinancing
transaction discussed in Note 4 completely offset the write-down of the
investment discussed in Note 6 and expenses related to the pending
merger with Ohio Edison.
Third quarter interest charges in 1997 increased from the 1996 amount
primarily because of the issuance of $720 million aggregate principal
amount of secured notes in June 1997 along with certain short-term
borrowing arrangements in connection with the Mansfield Plant lease
refinancing. However, the increased interest expense was completely
offset by increased interest income included in nonoperating income.
Nine-month operating expenses in 1997 decreased 1.5% from the 1996
amount. Other operation and maintenance expenses decreased for the same
reasons cited for the third quarter 1997 decrease in these expenses.
Taxes, other than federal income taxes, decreased primarily because of
lower property and payroll tax accruals. Federal income taxes increased
as a result of higher pretax operating income. Fuel and purchased power
expenses increased as higher purchased power expense was partially
offset by lower fuel expense. A change in the system generating mix
(more nuclear generation and less coal-fired generation in the 1997
period than in the 1996 period) accounted for a large part of the lower
fuel expense for the 1997 period. Depreciation and amortization
expenses increased primarily because of changes in depreciation rates
approved in the April 1996 PUCO rate order.
The nine-month 1997 nonoperating loss resulted primarily from the
aforementioned write-down of an investment, merger-related expenses and
certain costs associated with an accounts receivable securitization.
The nine-month 1996 nonoperating loss resulted primarily from Toledo
Edison's write-down of two inactive production facilities as discussed
in Note 8.
Nine-month interest charges in 1997 increased from the 1996 amount
primarily because the interest charges for the new secured notes and
short-term borrowings for the Mansfield Plant lease refinancing exceeded
the expense reduction from the redemption and refinancing of debt
securities in 1996 and 1997.
Nine-month preferred dividend requirements in 1997 decreased from the
1996 amount because of the redemption of preferred stock in 1996 and
1997.
<TABLE>
<CAPTION>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
INCOME STATEMENT
(Unaudited)
(Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -------------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 499,468 $ 506,491 $ 1,359,341 $ 1,368,042
OPERATING EXPENSES
Fuel and Purchased Power (1) 108,397 102,941 321,017 304,883
Other Operation and Maintenance 89,830 115,118 282,686 319,333
Generation Facilities Rental Expense, Net 13,892 13,892 41,675 41,675
Depreciation and Amortization 53,610 53,279 160,131 157,128
Taxes, Other Than Federal Income Taxes 56,864 56,537 170,824 176,297
Amortization of Deferred Operating Expenses, Net 6,567 6,567 19,701 19,510
Federal Income Taxes 38,837 37,434 74,393 66,804
-------- -------- ---------- ----------
Total Operating Expenses 367,997 385,768 1,070,427 1,085,630
-------- -------- ---------- ----------
OPERATING INCOME 131,471 120,723 288,914 282,412
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During Construction 465 366 1,190 1,465
Other Income and Deductions, Net 12,107 (4,506) 427 (3,873)
Federal Income Taxes - Credit (Expense) (5,028) 1,449 (2,958) 1,731
-------- -------- ---------- ----------
Total Nonoperating Income (Loss) 7,544 (2,691) (1,341) (677)
-------- -------- ---------- ----------
INCOME BEFORE INTEREST CHARGES 139,015 118,032 287,573 281,735
INTEREST CHARGES
Long-Term Debt 69,041 58,628 179,645 179,414
Short-Term Debt 2,961 1,063 7,426 3,127
Allowance for Borrowed Funds Used During Construction (729) (380) (1,440) (1,526)
-------- -------- ---------- ----------
Net Interest Charges 71,273 59,311 185,631 181,015
-------- -------- ---------- ----------
NET INCOME 67,742 58,721 101,942 100,720
Preferred Dividend Requirements 8,876 9,563 27,287 29,408
-------- -------- ---------- ----------
EARNINGS AVAILABLE FOR COMMON STOCK $ 58,866 $ 49,158 $ 74,655 $ 71,312
======== ======== ========== ==========
(1) Includes purchased power expense for
purchases from Toledo Edison. $ 28,118 $ 24,933 $ 86,492 $ 77,513
<FN>
The accompanying notes as they relate to Cleveland Electric are an integral part of this statement.
</TABLE>
- 14 -
<TABLE>
<CAPTION>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
BALANCE SHEET
(Thousands)
September 30, December 31,
1997 1996
(Unaudited)
----------- -----------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
<S> <C> <C>
Utility Plant In Service $ 7,079,565 $ 6,938,535
Accumulated Depreciation and Amortization (2,448,138) (2,252,321)
----------- -----------
4,631,427 4,686,214
Construction Work In Progress 69,262 56,853
----------- -----------
4,700,689 4,743,067
Nuclear Fuel, Net of Amortization 89,488 113,030
Other Property, Less Accumulated Depreciation 16,038 53,547
----------- -----------
4,806,215 4,909,644
CURRENT ASSETS
Cash and Temporary Cash Investments 87,023 30,273
Amounts Due from Customers and Others, Net 168,206 189,547
Amounts Due from Affiliates 5,477 5,634
Materials and Supplies, at Average Cost
Owned 48,518 51,686
Under Consignment 28,498 23,655
Taxes Applicable to Succeeding Years 78,735 181,609
Other 13,622 15,237
----------- -----------
430,079 497,641
REGULATORY AND OTHER ASSETS
Regulatory Assets 1,328,356 1,349,693
Mansfield Capital Trust 558,813 --
Nuclear Plant Decommissioning Trusts 88,923 75,573
Other 69,367 44,980
----------- -----------
2,045,459 1,470,246
----------- -----------
$ 7,281,753 $ 6,877,531
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 1,043,614 $ 1,044,283
Preferred Stock
With Mandatory Redemption Provisions 171,404 186,118
Without Mandatory Redemption Provisions 238,325 238,325
Long-Term Debt 3,072,394 2,441,215
----------- -----------
4,525,737 3,909,941
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock 73,544 144,668
Current Portion of Lease Obligations 42,006 51,592
Notes Payable to Banks and Others 60,000 --
Accounts Payable 56,159 82,694
Accounts and Notes Payable to Affiliates 99,685 171,433
Accrued Taxes 199,064 315,998
Accrued Interest 70,246 52,487
Dividends Declared 5,685 15,228
Other 39,096 43,672
----------- -----------
645,485 877,772
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits 170,215 176,130
Accumulated Deferred Federal Income Taxes 1,340,431 1,305,601
Unamortized Gain from Bruce Mansfield Plant Sale 284,519 295,730
Accumulated Deferred Rents for Bruce Mansfield Plant 92,642 98,767
Nuclear Fuel Lease Obligations 60,791 73,947
Retirement Benefits 77,039 72,843
Other 84,894 66,800
----------- -----------
2,110,531 2,089,818
COMMITMENTS AND CONTINGENCIES (Note 10)
----------- -----------
$ 7,281,753 $ 6,877,531
=========== ===========
<FN>
The accompanying notes as they relate to Cleveland Electric are an integral part of this
statement.
</TABLE>
- 15 -
<TABLE>
<CAPTION>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
CASH FLOWS
(Unaudited)
(Thousands)
Nine Months Ended
September 30,
---------------------
1997 1996
---------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income $101,942 $100,720
-------- --------
Adjustments to Reconcile Net Income
to Cash from Operating Activities:
Depreciation and Amortization 160,131 157,128
Deferred Federal Income Taxes 34,254 21,514
Deferred Fuel 17,197 3,245
Leased Nuclear Fuel Amortization 38,110 33,537
Amortization of Deferred Operating Expenses, Net 19,701 19,510
Allowance for Equity Funds Used During Construction (1,190) (1,465)
Changes in Amounts Due from Customers and Others, Net 6,869 (10,719)
Net Proceeds from Accounts Receivable Securitization -- 57,988
Changes in Materials and Supplies (1,675) 29,551
Changes in Accounts Payable (26,535) (36,552)
Changes in Working Capital Affecting Operations (2,235) 38,596
Other Noncash Items (1,737) (7,157)
-------- --------
Total Adjustments 242,890 305,176
-------- --------
Net Cash from Operating Activities 344,832 405,896
CASH FLOWS FROM FINANCING ACTIVITIES
Bank Loans, Commercial Paper and Other Short-Term Debt 60,000 --
Notes Payable to Affiliates (68,618) 1,281
First Mortgage Bond Issues 180,560 --
Secured Note Issues 575,000 --
Equity Contributions from Parent 4,500 --
Maturities, Redemptions and Sinking Funds (210,714) (134,288)
Nuclear Fuel Lease Obligations (37,636) (38,532)
Dividends Paid (116,447) (135,598)
Premiums, Discounts and Expenses (12,495) (307)
-------- --------
Net Cash from Financing Activities 374,150 (307,444)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction (85,265) (74,747)
Interest Capitalized as Allowance for Borrowed Funds Used
During Construction (1,440) (1,526)
Contributions to Nuclear Plant Decommissioning Trusts (8,784) (9,194)
Investment in Mansfield Capital Trust (558,813) --
Other Cash Received (Applied) (7,930) 2,479
-------- --------
Net Cash from Investing Activities (662,232) (82,988)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS 56,750 15,464
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 30,273 69,770
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $87,023 $85,234
======== ========
Other Payment Information:
Interest (net of amounts capitalized) $162,000 $169,000
Federal Income Taxes (Refund) 26,300 (6,200)
<FN>
The accompanying notes as they relate to Cleveland Electric are an integral part of this statement.
</TABLE>
- 16 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Liquidity
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of the 1996
Form 10-K and in the First and Second Quarter 1997 Form 10-Qs. The
information under "Capital Resources and Liquidity" remains unchanged
with the following exceptions:
As discussed in Note 4, the Operating Companies completed the
refinancing of high-cost fixed obligations through a lower cost
transaction in July 1997.
During the third quarter of 1997, Cleveland Electric issued and redeemed
various securities as discussed in Note 5.
In October 1997, Cleveland Electric issued $150 million principal amount
of 7.43% Series C Secured Notes due 2009 and $300 million principal
amount of 7.88% Series C Secured Notes due 2017. The Series C Secured
Notes are secured by Cleveland Electric first mortgage bonds. Using
available cash, short-term borrowings of $250 million (which have been
repaid) and the net proceeds from the sales of the Series C Secured
Notes, Cleveland Electric redeemed in October 1997 $50 million principal
amount of First Mortgage Bonds, 9-1/4% Series due 2009, at 102.19% of
face value; $300 million principal amount of First Mortgage Bonds, 9-
3/8% Series due 2017-A, at 104.38% of face value; and $100 million
principal amount of First Mortgage Bonds, 10% Series due 2020-E, at
105.74% of face value. The premiums paid for the early redemption of
the first mortgage bonds are recorded as part of the losses for the
reacquisitions of the first mortgage bonds. Such losses were deferred
and are being amortized over the lives of the new debt issues.
At September 30, 1997, Cleveland Electric would not have been permitted
to issue a material amount of additional first mortgage bonds, except in
connection with refinancings. Since FirstEnergy has elected to apply
purchase accounting to Cleveland Electric, upon completion of Centerior
Energy's merger with Ohio Edison, Cleveland Electric's available
bondable property will be reduced to less than zero.
Cleveland Electric expects its foreseeable future cash needs to be
satisfied with internally generated cash and available credit facilities
and, therefore, that it will not need to issue first mortgage bonds,
except in connection with any refinancings.
Results of Operations
Factors contributing to the 1.4% and 0.6% decreases in 1997 operating
revenues from 1996 for the third quarter and nine months, respectively,
are shown as follows:
Changes for Period
Ended September 30, 1997
Three Nine
Factors Months Months
(millions)
Kilowatt-hour Sales Volume and Mix $ 1.0 $ (7.8)
Unbilled Revenues 4.5 (1.5)
Wholesale Revenues 9.4 18.8
Base Rates (12.9) (4.6)
Fuel Cost Recovery Revenues (3.9) (1.4)
Miscellaneous Revenues (5.1) (12.2)
Total $ (7.0) $ (8.7)
Percentage changes between 1997 and 1996 billed electric kilowatt-hour
sales are summarized as follows:
Changes for Period
Ended September 30, 1997
Three Nine
Customer Categories Months Months
Residential (1.0)% (1.7)%
Commercial (3.4) (2.1)
Industrial 0.6 0.3
Other 29.0 42.6
Total 2.9 3.9
Third quarter 1997 total kilowatt-hour sales increased as greater
industrial and other sales were partially offset by fewer residential
and commercial sales. Industrial sales increased slightly as more sales
to the broad-based, smaller industrial customer group were partially
offset by fewer sales to large automotive and primary metal
manufacturers. Other sales increased as a result of a 24% increase in
wholesale sales and an increase in sales to public authorities.
Residential and commercial sales declined because of the cooler
summer weather in the 1997 period. On a weather-normalized basis,
residential sales increased 2.3% for the 1997 period, while commercial
sales decreased 1.5%. Kilowatt-hour sales data reflects a significant
portion of the effect of hot weather in the second half of June 1997
because unbilled sales at the end of June 1997 were included in third
quarter 1997 sales data. However, the estimated revenues from those
unbilled sales were recorded in June 1997.
Total kilowatt-hour sales increased for the nine-month period in 1997 as
greater industrial and other sales were partially offset by fewer
residential and commercial sales. Industrial sales increased slightly
as more sales to large chemical industry customers and the broad-based,
smaller industrial customer group were partially offset by fewer sales
to large automotive manufacturers. Other sales increased as a result of
a 50% increase in wholesale sales and an increase in sales to public
authorities. Residential and commercial sales declined because of the
milder weather in the 1997 period. On a weather-normalized basis,
residential sales increased 2% for the 1997 period, while commercial
sales decreased 0.8%.
Wholesale sales in 1996 were suppressed by soft market conditions and,
during the first six months of 1996, by limited power availability for
bulk power transactions because of nuclear generating plant refueling
and maintenance outages.
Renegotiated contracts for certain large industrial customers resulted
in a decrease in their base rates, contributing to the declines in 1997
base rates revenues.
The decreases in 1997 fuel cost recovery revenues included in customer
bills resulted from decreases in the fuel cost recovery factors used in
1997 to calculate these revenues compared to those used in 1996. The
decreases in the weighted averages of the fuel cost recovery factors for
1997 were about 6% and 1% for the third quarter and nine months,
respectively.
Significant portions of the 1997 third quarter and nine-month decreases
in miscellaneous revenues relate to a canceled generating plant lease
agreement for which revenues were recorded in 1996 and a refund payment
was made in the 1997 first quarter.
Third quarter operating expenses in 1997 decreased 4.6% from the 1996
amount. Other operation and maintenance expenses decreased as a result
of ongoing cost cutting and work force reductions. Also, other
operation and maintenance expenses for the 1996 third quarter included a
$16.6 million charge for the disposition of materials and supplies
inventory as discussed in Note 7. A similar $2.3 million charge was
recorded for the 1997 third quarter. Fuel and purchased power expenses
increased as higher purchased power expense was partially offset by
lower fuel expense related to less generation. Federal income taxes
increased as a result of higher pretax operating income.
Third quarter nonoperating income in 1997 increased from the 1996 amount
primarily because interest income from the investment in the Mansfield
Capital Trust in connection with the Mansfield Plant lease refinancing
transaction discussed in Note 4 completely offset Cleveland Electric's
share of expenses related to Centerior Energy's pending merger with Ohio
Edison.
Third quarter interest charges in 1997 increased from the 1996 amount
primarily because of the issuance of $575 million aggregate principal
amount of secured notes in June 1997 along with certain short-term
borrowing arrangements in connection with the Mansfield Plant lease
refinancing. However, the increased interest expense was completely
offset by increased interest income included in nonoperating income.
Nine-month operating expenses in 1997 decreased 1.4% from the 1996
amount. Other operation and maintenance expenses decreased for the same
reasons cited for the third quarter 1997 decrease in these expenses.
Taxes, other than federal income taxes, decreased primarily because of
lower property and payroll tax accruals. Fuel and purchased power
expenses increased as higher purchased power expense was partially
offset by lower fuel expense. A change in the system generating mix
(more nuclear generation and less coal-fired generation in the 1997
period than in the 1996 period) accounted for a large part of the lower
fuel expense for the 1997 period. Federal income taxes increased as a
result of higher pretax operating income. Depreciation and amortization
expenses increased primarily because of changes in depreciation rates
approved in the April 1996 PUCO rate order.
The nine-month 1997 nonoperating loss resulted primarily from Cleveland
Electric's share of merger-related expenses and certain costs associated
with an accounts receivable securitization.
Nine-month interest charges in 1997 increased from the 1996 amount
primarily because the interest charges for the new secured notes and
short-term borrowings for the Mansfield Plant lease refinancing exceeded
the expense reduction from the redemption and refinancing of debt
securities in 1996 and 1997.
Nine-month preferred dividend requirements in 1997 decreased from the
1996 amount because of the redemption of preferred stock in 1996 and
1997.
<TABLE>
<CAPTION>
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
INCOME STATEMENT
(Unaudited)
(Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES (1) $ 241,282 $ 252,198 $ 680,486 $ 673,931
OPERATING EXPENSES
Fuel and Purchased Power 45,477 46,928 133,292 126,348
Other Operation and Maintenance 54,740 59,287 166,512 174,050
Generation Facilities Rental Expense, Net 26,000 25,961 77,884 77,884
Depreciation and Amortization 23,462 23,556 70,792 69,661
Taxes, Other Than Federal Income Taxes 22,729 23,503 68,124 70,928
Amortization of Deferred Operating Expenses, Net 4,291 4,287 12,873 12,755
Federal Income Taxes 15,212 17,011 33,204 27,110
-------- -------- -------- --------
Total Operating Expenses 191,911 200,533 562,681 558,736
-------- -------- -------- --------
OPERATING INCOME 49,371 51,665 117,805 115,195
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During Construction 291 330 677 929
Other Income and Deductions, Net 7,870 96 8,343 (8,683)
Federal Income Taxes - Credit (Expense) (3,103) (92) (3,929) 3,218
-------- -------- -------- --------
Total Nonoperating Income (Loss) 5,058 334 5,091 (4,536)
-------- -------- -------- --------
INCOME BEFORE INTEREST CHARGES 54,429 51,999 122,896 110,659
INTEREST CHARGES
Long-Term Debt 24,656 22,564 68,723 68,427
Short-Term Debt 2,678 1,712 5,237 4,075
Allowance for Borrowed Funds Used During Construction (124) (260) (239) (731)
-------- -------- -------- --------
Net Interest Charges 27,210 24,016 73,721 71,771
-------- -------- -------- --------
NET INCOME 27,219 27,983 49,175 38,888
Preferred Dividend Requirements 4,185 4,250 12,590 12,683
-------- -------- -------- --------
EARNINGS AVAILABLE FOR COMMON STOCK $ 23,034 $ 23,733 $ 36,585 $ 26,205
======== ======== ======== ========
(1) Includes revenues from bulk power sales
to Cleveland Electric. $ 28,118 $ 24,933 $ 86,492 $ 77,513
<FN>
The accompanying notes as they relate to Toledo Edison are an integral part of this statement.
</TABLE>
- 21 -
<TABLE>
<CAPTION>
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
BALANCE SHEET
(Thousands)
September 30, December 31,
1997 1996
(Unaudited)
----------- -----------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
<S> <C> <C>
Utility Plant In Service $ 2,948,913 $ 2,928,657
Accumulated Depreciation and Amortization (1,087,291) (1,019,836)
----------- -----------
1,861,622 1,908,821
Construction Work In Progress 27,622 21,479
----------- -----------
1,889,244 1,930,300
Nuclear Fuel, Net of Amortization 58,408 76,118
Other Property, Less Accumulated Depreciation 6,936 8,460
----------- -----------
1,954,588 2,014,878
CURRENT ASSETS
Cash and Temporary Cash Investments 48,144 81,454
Amounts Due from Customers and Others, Net 9,110 16,308
Amounts Due from Affiliates 60,259 95,336
Materials and Supplies, at Average Cost
Owned 31,487 33,160
Under Consignment 10,487 10,383
Taxes Applicable to Succeeding Years 31,849 68,352
Other 2,102 3,479
----------- -----------
193,438 308,472
REGULATORY AND OTHER ASSETS
Regulatory Assets 908,929 927,629
Mansfield Capital Trust 319,984 --
Nuclear Plant Decommissioning Trusts 74,737 64,093
Other 35,208 42,408
----------- -----------
1,338,858 1,034,130
----------- -----------
$ 3,486,884 $ 3,357,480
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 839,822 $ 803,237
Preferred Stock
With Mandatory Redemption Provisions 1,690 3,355
Without Mandatory Redemption Provisions 210,000 210,000
Long-Term Debt 1,131,262 1,003,026
----------- -----------
2,182,774 2,019,618
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock 28,615 51,365
Current Portion of Lease Obligations 30,345 36,244
Accounts Payable 47,348 46,496
Accounts and Notes Payable to Affiliates 57,042 30,016
Accrued Taxes 47,303 72,829
Accrued Interest 27,052 22,348
Other 15,588 18,722
----------- -----------
253,293 278,020
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits 72,468 75,417
Accumulated Deferred Federal Income Taxes 559,139 565,600
Unamortized Gain from Bruce Mansfield Plant Sale 172,227 179,027
Accumulated Deferred Rents for Bruce Mansfield Plant
and Beaver Valley Unit 2 35,153 39,188
Nuclear Fuel Lease Obligations 39,099 48,491
Retirement Benefits 104,529 102,214
Other 68,202 49,905
----------- -----------
1,050,817 1,059,842
COMMITMENTS AND CONTINGENCIES (Note 10)
----------- -----------
$ 3,486,884 $ 3,357,480
=========== ===========
<FN>
The accompanying notes as they relate to Toledo Edison are an integral part of this statement.
</TABLE>
- 22 -
<TABLE>
<CAPTION>
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
CASH FLOWS
(Unaudited)
(Thousands)
Nine Months Ended
September 30,
-----------------------
1997 1996
--------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income $49,175 $38,888
-------- --------
Adjustments to Reconcile Net Income
to Cash from Operating Activities:
Depreciation and Amortization 70,792 69,661
Deferred Federal Income Taxes (6,462) 9,863
Deferred Fuel 11,369 7,532
Leased Nuclear Fuel Amortization 26,898 24,677
Amortization of Deferred Operating Expenses, Net 12,873 12,755
Allowance for Equity Funds Used During Construction (677) (929)
Changes in Amounts Due from Customers and Others, Net 14,794 (11,753)
Net Proceeds from Accounts Receivable Securitization -- 77,235
Changes in Materials and Supplies 1,569 4,918
Changes in Accounts Payable 852 2,738
Changes in Working Capital Affecting Operations 12,710 (3,260)
Other Noncash Items 7,849 (8,812)
-------- --------
Total Adjustments 152,567 184,625
-------- --------
Net Cash from Operating Activities 201,742 223,513
CASH FLOWS FROM FINANCING ACTIVITIES
Notes Payable to Affiliates 24,500 (20,950)
First Mortgage Bond Issue 10,100 --
Secured Note Issues 145,000 --
Maturities, Redemptions and Sinking Funds (51,365) (43,865)
Nuclear Fuel Lease Obligations (26,252) (29,430)
Dividends Paid (12,589) (12,702)
Premiums, Discounts and Expenses (3,155) (254)
-------- --------
Net Cash from Financing Activities 86,239 (107,201)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction (33,641) (32,704)
Interest Capitalized as Allowance for Borrowed Funds Used
During Construction (239) (731)
Loans to Affiliates 38,817 (6,281)
Contributions to Nuclear Plant Decommissioning Trusts (7,378) (7,800)
Investment in Mansfield Capital Trust (319,984) --
Other Cash Received 1,134 2,199
-------- --------
Net Cash from Investing Activities (321,291) (45,317)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (33,310) 70,995
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 81,454 93,669
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $48,144 $164,664
======== ========
Other Payment Information:
Interest (net of amounts capitalized) $65,000 $66,000
Federal Income Taxes 25,300 10,400
<FN>
The accompanying notes as they relate to Toledo Edison are an integral part of this statement.
</TABLE>
- 23 -
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Liquidity
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of the 1996
Form 10-K and in the First and Second Quarter 1997 Form 10-Qs. The
information under "Capital Resources and Liquidity" remains unchanged
with the following exceptions:
As discussed in Note 4, the Operating Companies completed the
refinancing of high-cost fixed obligations through a lower cost
transaction in July 1997.
During the third quarter of 1997, Toledo Edison issued and redeemed
various securities as discussed in Note 5.
At September 30, 1997, Toledo Edison would not have been permitted to
issue a material amount of additional first mortgage bonds, except in
connection with refinancings. Since FirstEnergy has elected to apply
purchase accounting to Toledo Edison, upon completion of Centerior
Energy's merger with Ohio Edison, Toledo Edison's available bondable
property will be reduced to less than zero.
Toledo Edison expects its foreseeable future cash needs to be satisfied
with internally generated cash and available credit facilities and,
therefore, that it will not need to issue first mortgage bonds, except
in connection with any refinancings.
Results of Operations
Factors contributing to the 4.3% decrease and 1% increase in 1997
operating revenues from 1996 for the third quarter and nine months,
respectively, are shown as follows:
Changes for Period
Ended September 30, 1997
Three Nine
Factors Months Months
(millions)
Kilowatt-hour Sales Volume and Mix $ 6.1 $ 22.5
Unbilled Revenues (7.2) (3.2)
Wholesale Revenues 1.9 9.0
Base Rates (9.1) (12.5)
Fuel Cost Recovery Revenues (3.3) (7.8)
Miscellaneous Revenues 0.7 (1.4)
Total $(10.9) $ 6.6
Percentage changes between 1997 and 1996 billed electric kilowatt-hour
sales are summarized as follows:
Changes for Period
Ended September 30, 1997
Three Nine
Customer Categories Months Months
Residential (5.4)% (3.7)%
Commercial (4.0) (1.0)
Industrial 11.3 10.5
Other -- 13.6
Total 2.7 6.6
Third quarter 1997 total kilowatt-hour sales increased as greater
industrial sales were partially offset by fewer residential and
commercial sales. Industrial sales increased as more sales to large
primary metals industry customers (including the new North Star BHP
Steel facility) and the broad-based, smaller industrial customer group
were partially offset by fewer sales to large automotive manufacturers.
Residential and commercial sales declined because of a change in the
meter reading schedule in August 1997, which reduced the number of days
in the billing cycles, and the cooler summer weather in the 1997 period.
On a weather-normalized basis, residential sales increased 0.7% for the
1997 period, while commercial sales decreased 0.3%. Kilowatt-hour sales
data reflects a significant portion of the effect of hot weather in the
second half of June 1997 because unbilled sales at the end of June 1997
were included in third quarter 1997 sales data. However, the estimated
revenues from those unbilled sales were recorded in June 1997.
Total kilowatt-hour sales increased for the nine-month period in 1997 as
greater industrial and other sales were partially offset by fewer
residential and commercial sales. Industrial sales increased primarily
for the same reasons cited for the third quarter 1997 increase. Other
sales increased primarily because of a 16% increase in wholesale sales.
Residential and commercial sales declined because of the milder weather
in the 1997 period. Weather-normalized residential and commercial sales
increased 0.6% and 1.1% respectively, for the 1997 period.
Wholesale sales in 1996 were suppressed by soft market conditions and,
during the first six months of 1996, by limited power availability for
bulk power transactions because of nuclear generating plant refueling
and maintenance outages.
Renegotiated contracts for certain large industrial customers resulted
in a decrease in their base rates, contributing to the declines in 1997
base rates revenues.
The decreases in 1997 fuel cost recovery revenues included in customer
bills resulted from decreases in the fuel cost recovery factors used in
1997 to calculate these revenues compared to those used in 1996. The
decreases in the weighted averages of the fuel cost recovery factors for
1997 were about 10% and 8% for the third quarter and nine months,
respectively.
Third quarter operating expenses in 1997 decreased 4.3% from the 1996
amount. Other operation and maintenance expenses, exclusive of the
inventory reduction charges recorded in the third quarter of both years,
increased slightly. Other operation and maintenance expenses for the
1996 third quarter included a $6.1 million charge for the disposition of
materials and supplies inventory as discussed in Note 7. A similar $1.2
million charge was recorded for the 1997 third quarter. Fuel and
purchased power expenses decreased as lower fuel expense related to less
generation was partially offset by higher purchased power expense.
Federal income taxes decreased as a result of lower pretax
operating income.
Third quarter nonoperating income in 1997 increased from the 1996 amount
primarily because of interest income from the investment in the
Mansfield Capital Trust in connection with the Mansfield Plant lease
refinancing transaction discussed in Note 4.
Third quarter interest charges in 1997 increased from the 1996 amount
primarily because of the issuance of $145 million aggregate principal
amount of secured notes in June 1997 along with certain short-term
borrowing arrangements in connection with the Mansfield Plant lease
refinancing. However, the increased interest expense was completely
offset by increased interest income included in nonoperating income.
Nine-month operating expenses in 1997 increased 0.7% from the 1996
amount. Fuel and purchased power expenses increased as higher purchased
power expense was partially offset by lower fuel expense. A change in
the system generating mix (more nuclear generation and less coal-fired
generation in the 1997 period than in the 1996 period) accounted for a
large part of the lower fuel expense for the 1997 period. Federal
income taxes increased as a result of higher pretax operating income.
Depreciation and amortization expenses increased primarily because of
changes in depreciation rates approved in the April 1996 PUCO rate
order. Other operation and maintenance expenses, exclusive of the
inventory reduction charges recorded in the third quarter of both years,
decreased as a result of ongoing cost cutting and work force reductions.
Taxes, other than federal income taxes, decreased primarily because of
lower property and payroll tax accruals.
Nine-month nonoperating income in 1997 increased from the 1996 amount as
interest income from the investment in the Mansfield Capital Trust in
connection with the Mansfield Plant lease refinancing completely offset
Toledo Edison's share of expenses related to Centerior Energy's pending
merger with Ohio Edison. Also, the nine-month 1996 nonoperating loss
resulted primarily from the write-down of two inactive production
facilities as discussed in Note 8.
Nine-month interest charges in 1997 increased from the 1996 amount
primarily because the interest charges for the new secured notes and
short-term borrowings for the Mansfield Plant lease refinancing exceeded
the expense reduction from the redemption and refinancing of debt
securities in 1996 and 1997.
PART II. OTHER INFORMATION
Item 5. Other Information
1. Cleveland Electric Collective Bargaining Agreement
For additional information relating to this topic, see "2.
Cleveland Electric Collective Bargaining Agreement" under "Item 5.
Other Events" in the August 27, 1997 Form 8-K/A.
Cleveland Electric withdrew its settlement offer to the union
effective October 29, 1997. By its terms, the current contract
between Cleveland Electric and Local 270 continues in full force
and effect except that certain provisions, including one
prohibiting a strike or lockout, are not in effect. There is a
risk that a strike may occur at any time. However, Cleveland
Electric believes that it would be able to continue to provide
substantially normal electric service to its customers if any such
event were to occur.
2. Proposed Air Quality Control Changes
For additional information relating to this topic, see
"Environmental Regulation - Air Quality Control" under "Item 1.
Business" in the Companies' 1996 Form 10-K and "6. New Federal
Rules" under "Part II., Item 5. Other Information" in the Second
Quarter 1997 Form 10-Q.
The U.S. Environmental Protection Agency has proposed regulations
which would require 22 states, including Ohio, to revise their
state implementation plans to reduce emissions of nitrogen oxide
by the end of 2002. It is anticipated that required reductions
could be achieved through additional emission controls on Ohio's
53 coal-fired electric power plants. The proposed controls could
require the Operating Companies to incur capital costs of between
approximately $250-345 million.
3. Conjunctive Electric Service (CES)
For more information on the Operating Companies' conjunctive
electric service (CES) tariff and pending PUCO and Ohio Supreme
Court proceedings, see "Part II., Item 5. Other Information, 2.
Conjunctive Electric Service" and "3. FirstEnergy Rate Plan" in
the Second Quarter 1997 Form 10-Q.
In the pending Ohio Supreme Court appeal challenging the PUCO's
authority to require such tariffs, the PUCO and intervenors have
filed briefs asserting that the matter is not yet ripe for
adjudication because the PUCO has not yet determined the adequacy
of the CES tariffs which have been filed.
In connection with its November 6, 1997 merger-related order, see
Note 9 to the financial statements included elsewhere in this
report, the PUCO also reiterated the importance of developing CES
tariffs in compliance with its guidelines.
- 27 -
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
See Exhibit Index following.
b. Reports on Form 8-K
During the quarter ended September 30, 1997, Centerior Energy,
Cleveland Electric and Toledo Edison each filed two Current
Reports on Form 8-K with the Securities and Exchange Commission.
A Form 8-K dated July 8, 1997 and filed July 30, 1997 included two
items under "Item 5. Other Events." The first item, "1.
Refinancing of Mansfield SLOBs", reported on the refinancing of
$873.2 million of secured lease obligation bonds issued in 1987 in
connection with the Operating Companies' sale/leaseback of the
Bruce Mansfield Generating Plant. The second item, "2. Pending
Merger with Ohio Edison", reported on a July 16, 1997 order by the
FERC relating to the merger of Centerior Energy and Ohio Edison.
A Form 8-K/A dated August 27, 1997 and filed September 19, 1997
included three items under "Item 5. Other Events." The first
item, "Refinancings", reported the refinancing of $190.7 million
of the Operating Companies' first mortgage bonds securing certain
tax-exempt bonds issued by public authorities. The second item,
"Cleveland Electric Collective Bargaining Agreement", reported the
status of negotiations for a new collective bargaining agreement.
The third item, "Centerior Energy Investment", reported the loss
of an investment and ensuing legal proceedings.
- 28 -
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
each registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized. The person signing this
report on behalf of each such registrant is also signing in his capacity
as each registrant's Chief Accounting Officer.
CENTERIOR ENERGY CORPORATION
(Registrant)
THE CLEVELAND ELECTRIC
ILLUMINATING COMPANY
(Registrant)
THE TOLEDO EDISON COMPANY
(Registrant)
By: E. LYLE PEPIN
E. Lyle Pepin, Controller and Chief
Accounting Officer of each
Registrant
Date: November 7, 1997
- 29 -
EXHIBIT INDEX
The following exhibits are submitted herewith:
CENTERIOR ENERGY EXHIBIT
Exhibit Number Description
27(a) Financial Data Schedule for the period
ended September 30, 1997.
CLEVELAND ELECTRIC EXHIBITS
Exhibit Number Description
27(b) Financial Data Schedule for the period
ended September 30, 1997.
TOLEDO EDISON EXHIBITS
Exhibit Number Description
27(c) Financial Data Schedule for the period
ended September 30, 1997.
- 30 -
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
RELATED FORM 10-Q FINANCIAL STATEMENTS FOR CENTERIOR ENERGY CORPORATION
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000774197
<NAME> CENTERIOR ENERGY CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 6,596,523
<OTHER-PROPERTY-AND-INVEST> 1,278,962
<TOTAL-CURRENT-ASSETS> 622,097
<TOTAL-DEFERRED-CHARGES> 2,321,264
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 10,818,846
<COMMON> 2,320,631
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> (346,712)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,973,919
173,094
448,325
<LONG-TERM-DEBT-NET> 4,203,655
<SHORT-TERM-NOTES> 85,000
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16,379
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<OTHER-OPERATING-EXPENSES> 1,413,250
<TOTAL-OPERATING-EXPENSES> 1,520,639
<OPERATING-INCOME-LOSS> 406,788
<OTHER-INCOME-NET> (6,867)
<INCOME-BEFORE-INTEREST-EXPEN> 399,921
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0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 118,420
<TOTAL-INTEREST-ON-BONDS> 326,200
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<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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SUCH FINANCIAL STATEMENTS.
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<CIK> 0000020947
<NAME> THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
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<TOTAL-ASSETS> 7,281,753
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171,404
238,325
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14,714
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<LEASES-CURRENT> 42,006
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<TOT-CAPITALIZATION-AND-LIAB> 7,281,753
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<OTHER-OPERATING-EXPENSES> 996,034
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<INCOME-BEFORE-INTEREST-EXPEN> 287,573
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27,287
<EARNINGS-AVAILABLE-FOR-COMM> 74,655
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<TOTAL-INTEREST-ON-BONDS> 247,669
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<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
RELATED FORM 10-Q FINANCIAL STATEMENTS FOR THE TOLEDO EDISON COMPANY AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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