<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 18, 1997
FILE NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
THE TOLEDO EDISON COMPANY
(Exact names of registrants as specified in their charters)
OHIO
(State or other jurisdiction of
incorporation or organization)
4911
(Primary Standard Industrial
Classification Code Number)
34-0150020
34-4375005
(I.R.S. Employer Identification
Numbers)
C/O CENTERIOR ENERGY CORPORATION, 6200 OAK TREE BOULEVARD, INDEPENDENCE, OHIO
44131 (216) 622-9800
300 MADISON AVENUE, TOLEDO, OHIO 43652 (419) 249-5000
(addresses, including ZIP codes, and telephone numbers, including area codes,
of registrants' principal executive offices)
JANIS T. PERCIO, SECRETARY
C/O CENTERIOR ENERGY CORPORATION
P.O. BOX 94661
CLEVELAND, OHIO 44101-4661
(216) 447-3100
(name, address, including ZIP code, and telephone number, including area code,
of agent for service)
COPIES TO:
PAUL N. EDWARDS, ESQ.
PRINCIPAL COUNSEL
CENTERIOR ENERGY CORPORATION
P.O. BOX 94661
CLEVELAND, OHIO 44101-4661
Approximate date of commencement of proposed exchange of securities is as
soon as possible after the registration statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED PER NOTE* OFFERING PRICE* FEE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7.19% Series B Secured Notes due 2000 $220,000,000 100% $720,000,000 $218,181.82
7.67% Series B Secured Notes due 2004 $350,000,000 100%
7.13% Series B Secured Notes due 2007 $150,000,000 100%
====================================================================================================================
</TABLE>
*Estimated solely for the purpose of determining the registration fee.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
AND
THE TOLEDO EDISON COMPANY
OFFER TO EXCHANGE
7.19% SERIES B SECURED NOTES DUE 2000
FOR ALL OUTSTANDING 7.19% SERIES A SECURED NOTES DUE 2000
$220 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING,
7.67% SERIES B SECURED NOTES DUE 2004
FOR ALL OUTSTANDING 7.67% SERIES A SECURED NOTES DUE 2004
$350 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING AND
7.13% SERIES B SECURED NOTES DUE 2007
FOR ALL OUTSTANDING 7.13% SERIES A SECURED NOTES DUE 2007
$150 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED
------------------------
The Cleveland Electric Illuminating Company ("Cleveland Electric") and The
Toledo Edison Company ("Toledo Edison"), joint and several obligors and Ohio
corporations (together, the "Companies"), hereby offer (the "Exchange Offer"),
upon the terms and subject to the conditions set forth in this Prospectus and
the accompanying Letter of Transmittal (the "Letter of Transmittal"), to
exchange their 7.19% Series B Secured Notes due 2000 (the "New Notes due 2000"),
7.67% Series B Secured Notes due 2004 (the "New Notes due 2004") and 7.13%
Series B Secured Notes due 2007 (the "New Notes due 2007") (collectively, the
"New Notes"), which have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to a Registration Statement (as defined
herein) of which this Prospectus constitutes a part, for equal principal amounts
of their outstanding 7.19% Series A Secured Notes due 2000 (the "Old Notes due
2000" and together with the New Notes due 2000, the "Secured Notes due 2000"),
7.67% Series A Secured Notes due 2004 (the "Old Notes due 2004" and together
with the New Notes due 2004, the "Secured Notes due 2004") and 7.13% Series A
Secured Notes due 2007 (the "Old Notes due 2007" and together with the New Notes
due 2007, the "Secured Notes due 2007") (the Old Notes due 2000, the Old Notes
due 2004 and the Old Notes due 2007 are collectively referred to herein as the
"Old Notes"), of which $220 million, $350 million and $150 million aggregate
principal amount, respectively, are outstanding. The New Notes and the Old Notes
are collectively referred to herein as the "Secured Notes."
Subject to the terms and conditions set forth in this Prospectus and the
Letter of Transmittal, the Companies will accept for exchange any and all Old
Notes that are validly tendered and not withdrawn on or prior to 5:00 p.m., New
York City time, on , 1997, unless the Exchange Offer is extended
(the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is
not conditioned upon any minimum principal amount of Old Notes being tendered
for exchange. However, the Exchange Offer is subject to certain conditions which
may be waived by the Companies and to the terms and provisions of the
Registration Agreement (as defined herein). Old Notes may be tendered only in
denominations of $1,000 and integral multiples thereof. The Companies have
agreed to pay the expenses of the Exchange Offer. See "The Exchange Offer."
The New Notes will evidence the same debt as the Old Notes for which they
are exchanged and will be obligations of the Companies entitled to the benefits
of the Note Indenture (as defined herein) relating to the Secured Notes. The
form and terms of the New Notes are identical in all material respects to the
form and terms of the Old Notes except that the New Notes have been registered
under the Securities Act, and, following the completion of the Exchange Offer
and during the effectiveness of any required Shelf Registration Statement (as
defined in the Registration Agreement), the holders of the Old Notes will not be
entitled to the contingent increase in the interest rate otherwise provided for
under
(cover continued on following pages)
------------------------
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is , 1997.
<PAGE> 3
(Continuation of cover page)
certain circumstances and will not be entitled to the benefit of certain
registration and exchange rights granted to the holders of the Old Notes under
the Registration Agreement. See "The Exchange Offer" and "Description of the New
Notes."
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes if such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Companies have agreed that, for a period of 120 days after the
Expiration Date, they will make this Prospectus available to any broker-dealer
for use in connection with any such resale. See "Plan of Distribution."
New Notes of each series will bear interest at the same rate and on the
same terms as the Old Notes of the corresponding series. Under the Note
Indenture, interest on each Old Note ceases to accrue upon the exchange of such
Old Note for a New Note. Interest will accrue on each New Note from the date on
which it is authenticated and will be payable to the person in whose name such
New Note is registered at the close of business on the Regular Record Date (as
defined in the Note Indenture) for such interest, which will be the December 15
or June 15 (whether or not a business day), as the case may be, next preceding
the payment date for such interest. If, however, the New Note is authenticated
and delivered in exchange for an Old Note (i) between a record date for the
payment of interest on that Old Note and the related interest payment date, the
interest that accrues on the New Note from the date of authentication thereof to
that interest payment date shall be payable to the person in whose name such New
Note was issued on its issuance date or (ii) between an interest payment date
for the payment of interest on that Old Note and the record date for the next
succeeding interest payment date, the interest that accrues on the Old Note from
the earlier interest payment date to the date on which the Old Note is exchanged
for the New Note will be paid to the person in whose name the New Note is
registered on the record date for that next succeeding interest payment date.
The Companies intend to cause the New Notes to be authenticated on the date on
which the New Notes are exchanged for the Old Notes. Therefore, the exchange
will not result in the loss of interest income to holders of Old Notes exchanged
for New Notes. Interest on the Secured Notes is payable semiannually in cash in
arrears on January 1 and July 1 of each year, commencing July 1, 1997, and the
Secured Notes will bear interest and mature as follows: for the Secured Notes
due 2000, interest at 7.19% with a maturity date of July 1, 2000; for the
Secured Notes due 2004, interest at 7.67% with a maturity date of July 1, 2004;
and for the Secured Notes due 2007, interest at 7.13% with a maturity date of
July 1, 2007. See "The Exchange Offer -- Interest on the New Notes."
The obligations of Cleveland Electric and Toledo Edison under the Secured
Notes are joint and several. The Old Notes are, and the New Notes will be,
secured equally and ratably as to payment of principal and interest by first
mortgage bonds severally issued by Cleveland Electric and Toledo Edison and held
by the trustee under the indenture for the Secured Notes. See "Descriptions of
Cleveland Electric Bonds and Toledo Edison Bonds." Payment of the principal of
and interest on the Old Notes due 2007 is, and payment of principal and interest
on the New Notes due 2007 will be, insured by financial guaranty insurance
policies issued by Ambac Assurance Corporation. See "Credit Enhancement of
Secured Notes due 2007."
Old Notes of each series initially purchased by qualified institutional
buyers, as defined in Rule 144A under the Securities Act ("QIBs"), were
initially represented by a single, global Secured Note of each series in
registered form (each a "Global Note"), registered in the name of a nominee of
The Depository Trust Company ("DTC"), as depository. The New Notes of each
series exchanged for Old Notes represented by a Global Note will be represented
by a single, global New Note of that series in registered form (each a "Global
New Note"), registered in the name of Cede & Co., as nominee of DTC. Beneficial
interests in the Global New Notes will be shown on, and transfers thereof will
be effected only through, records maintained by DTC and its participants. See
"Description of the New Notes -- Book-Entry; Delivery and Form."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "SEC") to third parties, the Companies believe that the
New Notes issued pursuant to this Exchange Offer in exchange for the Old Notes
may be offered for resale, resold and otherwise transferred by any holder
thereof (other than (i) a broker-dealer who purchased such Old Notes directly
from the Companies to resell pursuant
i
<PAGE> 4
(Continuation of cover page)
to Rule 144A or any other available exemption under the Securities Act or (ii) a
person that is an "affiliate" of the Companies within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the holder
is acquiring the New Notes in its ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution of the New Notes. See Morgan Stanley & Co.
Incorporated, SEC No-Action Letter (available June 5, 1991) and Exxon Capital
Holdings Corporation, SEC No-Action Letter (available May 13, 1988). Holders of
Old Notes wishing to accept the Exchange Offer must represent to the Companies,
as required by the Registration Agreement, that such conditions have been met.
If the Companies' belief is inaccurate, holders of New Notes who transfer New
Notes in violation of the prospectus delivery provisions of the Securities Act
and without an exemption from registration thereunder may incur liability under
the Securities Act. The Companies do not assume, or indemnify holders against,
any such liability.
Proceeds from the offering of the Old Notes (the "Offering") were used by
the Companies, together with cash and approximately $155 million of short-term
borrowings, to refinance $873 million in high interest secured lease obligation
bonds issued by a special purpose funding corporation on behalf of lessors in
the Companies' sale and leaseback transaction for the Bruce Mansfield Generating
Plant (the "Mansfield Plant"). The Companies will not receive any proceeds from
the Exchange Offer, and no underwriter is being utilized in connection with the
Exchange Offer.
The exchange of Old Notes for New Notes will be a tax-free exchange. See
"Certain Tax Considerations."
After completion of the Exchange Offer, Old Notes which have not been
exchanged for New Notes will remain outstanding. See "Risk
Factors -- Consequences of Failure to Exchange."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANIES ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
Prior to the Exchange Offer, there has been no public market for the Old
Notes. The Companies do not presently intend to list the New Notes on any stock
exchange or trading market. There can be no assurance that an active public
market for the New Notes will develop. If a market for the New Notes should
develop, the New Notes could trade at a discount from their principal amount.
See "Risk Factors -- Lack of Public Market for the Secured Notes."
The Companies have been advised by Morgan Stanley & Co. Incorporated,
Citicorp Securities, Inc., Credit Suisse First Boston and McDonald & Company
Securities, Inc., the placement agents of the Old Notes (the "Placement
Agents"), that, following completion of the Exchange Offer, each intends to make
a market in the New Notes; however, none of the Placement Agents are under any
obligation to do so and any market-making activities with respect to the New
Notes may be discontinued at any time.
ii
<PAGE> 5
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, ANY SECURED NOTE OFFERED HEREBY BY ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF EITHER OF THE COMPANIES OR THAT THE INFORMATION SET FORTH HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
This Prospectus has been prepared by the Companies solely for use in
connection with the Exchange Offer. This Prospectus is personal to the offeree
to whom it has been delivered and does not constitute an offer to any other
person or to the public generally to subscribe for or otherwise acquire Secured
Notes. Distribution of this Prospectus to any person other than the offeree and
those persons, if any, retained to advise such offeree with respect thereto is
unauthorized.
This Prospectus incorporates by reference documents which are not presented
herein or delivered herewith. These documents are available upon request from
Janis T. Percio, Secretary, Centerior Energy Corporation, P.O. Box 94661,
Cleveland, Ohio 44101-4661, or telephone (216) 447-3100. In order to assure
timely delivery of the documents, any request should be made by ,
1997.
------------------------
None of Cleveland Electric, Toledo Edison or any of their respective
representatives makes any representation to any offeree or purchaser of the New
Notes offered hereby regarding the legality of an investment by such offeree or
purchaser under legal investment or similar laws. Each investor should consult
with its own advisors as to the legal, tax, business, financial and related
aspects of any purchase of the New Notes.
------------------------
THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE SECURITIES LAWS. THE COMPANIES HAVE MADE FORWARD-LOOKING STATEMENTS
INCLUDING STATEMENTS ABOUT THEIR FINANCIAL CONDITION, RESULTS OF OPERATIONS AND
BUSINESS AND THE PENDING MERGER OF CENTERIOR ENERGY CORPORATION ("CENTERIOR
ENERGY") AND OHIO EDISON COMPANY ("OHIO EDISON") DISCUSSED HEREIN. THESE
STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. FORWARD-LOOKING STATEMENTS
ARE STATEMENTS ABOUT FUTURE PERFORMANCE OR RESULTS, INCLUDING ANY STATEMENTS
USING THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE" OR SIMILAR WORDS. FOR ALL OF
THOSE STATEMENTS, THE COMPANIES CLAIM THE PROTECTION OF THE SAFE HARBOR FOR
FORWARD-LOOKING STATEMENTS CONTAINED IN THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995. FACTORS THAT MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS,
THOSE IDENTIFIED UNDER "RISK FACTORS" HEREIN AND THE FOLLOWING POSSIBILITIES:
(1) EXPECTED COST SAVINGS FROM SUCH PENDING MERGER ARE NOT FULLY REALIZED; (2)
REGIONAL COMPETITIVE PRESSURE IN THE ELECTRIC UTILITY INDUSTRY INCREASES
SIGNIFICANTLY; (3) COSTS OR DIFFICULTIES RELATED TO THE INTEGRATION OF THE
BUSINESSES OF CENTERIOR ENERGY AND OHIO EDISON ARE GREATER THAN EXPECTED; (4)
STATE AND FEDERAL REGULATORY INITIATIVES ARE IMPLEMENTED THAT FURTHER INCREASE
COMPETITION, THREATEN COST AND INVESTMENT RECOVERY OR IMPACT RATE STRUCTURES;
AND (5) NATIONAL AND REGIONAL ECONOMIC CONDITIONS ARE LESS FAVORABLE THAN
EXPECTED. ALTHOUGH THE COMPANIES BELIEVE THAT THE EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE REASONABLE, THEY CAN GIVE NO ASSURANCE THAT SUCH
EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. THESE FACTORS SHOULD BE TAKEN INTO
CONSIDERATION IN CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED IN
THIS PROSPECTUS.
2
<PAGE> 6
AVAILABLE INFORMATION
The Companies have filed with the SEC a Registration Statement on Form S-4
(together with all amendments, exhibits, schedules and supplements thereto, the
"Registration Statement") under the Securities Act with respect to the New Notes
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement, certain parts of which have been omitted in accordance with the rules
and regulations of the SEC. For further information with respect to the
Companies and the New Notes offered hereby, reference is made to the
Registration Statement. Statements contained in this Prospectus as to the
contents of certain documents filed as exhibits to the Registration Statement
are not necessarily complete and, in each case, are qualified by reference to
the copy of the document so filed.
Cleveland Electric and Toledo Edison are each subject to the informational
requirements of the Securities Exchange Act of 1934 ("Exchange Act") and in
accordance therewith file reports and other information with the SEC. Such
reports, other information and the Registration Statement can be inspected and
copied at the public reference facilities maintained by the SEC at its principal
office located at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549-1004 and at its regional offices located at Suite 1400, Northwestern
Atrium, 500 West Madison Street, Chicago, IL 60661-2511 and 7 World Trade
Center, 13th Floor, New York, NY 10048. Copies of such material also can be
obtained at prescribed rates from the Public Reference Section of the SEC at its
principal office. The SEC also maintains a Web site that contains reports and
other information filed by the Companies. The SEC's Internet address is
http://www.sec.gov. Such material can also be inspected at the New York Stock
Exchange and, for Toledo Edison, also at the American Stock Exchange.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Companies hereby incorporate in this Prospectus by reference the
following documents heretofore filed with the SEC, pursuant to the Exchange Act,
to which reference hereby is made:
1. Each Company's Annual Report on Form 10-K for the year ended
December 31, 1996 ("Form 10-K").
2. Each Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997 ("First Quarter 1997 Form 10-Q").
3. Each Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 ("Second Quarter 1997 Form 10-Q").
4. Each Company's Current Reports on Form 8-K dated June 11, 1997,
July 8, 1997, and August 27, 1997.
THE COMPANIES HEREBY UNDERTAKE TO PROVIDE WITHOUT CHARGE TO EACH PERSON TO
WHOM A COPY OF THIS PROSPECTUS HAS BEEN DELIVERED, ON THE WRITTEN OR ORAL
REQUEST OF SUCH PERSON, A COPY OF ANY OR ALL OF THE DOCUMENTS REFERRED TO ABOVE
WHICH HAVE BEEN INCORPORATED BY REFERENCE IN THIS PROSPECTUS, OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE INTO THE INFORMATION THAT THIS PROSPECTUS INCORPORATES. REQUESTS FOR
SUCH COPIES SHOULD BE DIRECTED TO JANIS T. PERCIO, SECRETARY, CENTERIOR ENERGY
CORPORATION, P.O. BOX 94661, CLEVELAND, OH 44101-4661, OR TELEPHONE (216)
447-3100.
3
<PAGE> 7
SUMMARY INFORMATION
The following material is qualified in its entirety by the information appearing
elsewhere in this Prospectus and in the documents incorporated herein by
reference. Holders of Old Notes are urged to read this Prospectus in its
entirety before exchanging their Old Notes for New Notes.
THE COMPANIES
Cleveland Electric, which was incorporated under the laws of the State of
Ohio in 1892, is a public utility engaged in the generation, purchase,
transmission, distribution and sale of electric energy in an area of
approximately 1,700 square miles in northeastern Ohio, including the City of
Cleveland. Cleveland Electric also provides electric energy at wholesale to
other electric utility companies and to two municipal electric systems (directly
and through American Municipal Power-Ohio ("AMP-Ohio")) in its service area.
Cleveland Electric serves approximately 741,000 customers and derives
approximately 77% of its total electric retail revenue from customers outside
the City of Cleveland. Principal industries served by Cleveland Electric include
those producing steel and other primary metals; automotive and other
transportation equipment; chemicals; electrical and nonelectrical machinery;
fabricated metal products; and rubber and plastic products. Nearly all of
Cleveland Electric's operating revenues are derived from the sale of electric
energy. At June 30, 1997, Cleveland Electric had 3,251 employees.
The mailing address of Cleveland Electric's principal offices is P.O. Box
5000, Cleveland, OH 44101, and its telephone number is (216) 622-9800.
Toledo Edison, which was incorporated under the laws of the State of Ohio
in 1901, is a public utility engaged in the generation, purchase, transmission,
distribution and sale of electric energy in an area of approximately 2,500
square miles in northwestern Ohio, including the City of Toledo. Toledo Edison
also provides electric energy at wholesale to other electric utility companies
and to 13 municipally owned distribution systems (through AMP-Ohio) and one
rural electric cooperative distribution system in its service area. Toledo
Edison serves approximately 293,000 customers and derives approximately 56% of
its total electric retail revenue from customers outside the City of Toledo.
Principal industries served by Toledo Edison include metal casting, forming and
fabricating; petroleum refining; automotive equipment and assembly; food
processing; and glass. Nearly all of Toledo Edison's operating revenues are
derived from the sale of electric energy. At June 30, 1997, Toledo Edison had
1,581 employees.
The mailing address of Toledo Edison's principal offices is 300 Madison
Avenue, Toledo, OH 43652-0001, and its telephone number is (419) 249-5000.
Cleveland Electric and Toledo Edison are wholly owned electric utility
subsidiaries of Centerior Energy. See "Pending Merger of Cleveland Electric and
Toledo Edison" for a discussion of the pending merger of Toledo Edison into
Cleveland Electric.
In September 1996, Centerior Energy and Ohio Edison entered into an
agreement and plan of merger to form a new holding company, FirstEnergy Corp.
("FirstEnergy"). Following the consummation of the pending merger of Centerior
Energy and Ohio Edison ("CEC-OE Merger"), FirstEnergy will directly hold all of
the issued and outstanding common stock of the Companies, Ohio Edison and the
other wholly owned subsidiaries of Centerior Energy. The Companies and Ohio
Edison have adjoining service areas and share a number of major generating
units. The Companies believe that the CEC-OE Merger will create a company that
is better positioned to compete in the increasingly competitive electric utility
industry than either Centerior Energy or Ohio Edison would be on a stand-alone
basis. If the CEC-OE Merger were completed today, FirstEnergy would be the 11th
largest investor-owned electric utility system in the U.S., based on combined
annual sales of approximately 64 billion kilowatt-hours, and would have assets
of over $18 billion, a customer base of 2.1 million and a service area of 13,200
square miles located within a 500-mile radius of one-half of the U.S.
population. In addition, the CEC-OE Merger is expected to result in significant
cost savings to the combined companies (approximately $1 billion over 10 years)
and to enable FirstEnergy to realize opportunities to maximize efficiencies and
increase management flexibility in order to enhance revenues, cash flow and
earnings. See "Pending Merger of Centerior Energy and Ohio Edison" and "Risk
Factors -- Consummation of the CEC-OE Merger."
4
<PAGE> 8
SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $220,000,000 aggregate
principal amount of New Notes due 2000 for an equal aggregate principal amount
of Old Notes due 2000, up to $350,000,000 aggregate principal amount of New
Notes due 2004 for an equal aggregate principal amount of Old Notes due 2004,
and up to $150,000,000 aggregate principal amount of New Notes due 2007 for an
equal aggregate principal amount of Old Notes due 2007. The New Notes are joint
and several obligations of the Companies entitled to the benefits of the Note
Indenture relating to the Secured Notes. The form and terms of the New Notes are
the same as the form and terms of the Old Notes except that the New Notes have
been registered under the Securities Act, and following the completion of the
Exchange Offer and during the effectiveness of any required Shelf Registration
Statement, the Old Notes will not be entitled to the contingent increase in the
interest rate otherwise provided for under certain circumstances and will not be
entitled to the benefit of certain registration and exchange rights granted to
the holders of the Old Notes under the Registration Agreement. See "The Exchange
Offer" and "Description of the New Notes."
THE EXCHANGE OFFER............ The Companies are offering to exchange $1,000
principal amount of each series of New Notes
for each $1,000 principal amount of the
corresponding series of Old Notes validly
tendered pursuant to the Exchange Offer. As of
the date hereof, there is $720 million
aggregate principal amount of Old Notes
outstanding. The Companies will issue the New
Notes to tendering holders of Old Notes on or
promptly after the Expiration Date. See "The
Exchange Offer -- Background" and "-- General."
RESALE OF THE NEW NOTES....... Based on interpretations by the staff of the
SEC set forth in no-action letters issued to
third parties, the Companies believe that New
Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for
resale, resold and otherwise transferred by any
holder thereof (other than (i) a broker-dealer
who purchased such Old Notes directly from the
Companies for resale pursuant to Rule 144A or
any other available exemption under the
Securities Act or (ii) a person that is an
"affiliate" of the Companies within the meaning
of Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery provisions of the Securities Act,
provided that the holder is acquiring the New
Notes in its ordinary course of business and is
not participating, and has no arrangement or
understanding with any person to participate,
in a distribution of the New Notes. If the
Companies' belief is inaccurate, holders of New
Notes who transfer New Notes in violation of
the prospectus delivery provisions of the
Securities Act and without an exemption from
registration thereunder may incur liability
under the Securities Act. The Companies do not
assume or indemnify holders against any such
liability.
Each broker-dealer that receives New Notes in
exchange for Old Notes held for its own
account, as a result of market-making or other
trading activities, must acknowledge that it
will deliver a prospectus in connection with
any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and
by delivering a prospectus, such broker-dealer
will not be deemed to admit that it is an
"underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may
be used by any such broker-dealer in connection
with resales of New Notes received in exchange
for
5
<PAGE> 9
Old Notes. The Companies have agreed that, for
a period of 120 days after the Expiration Date,
they will make this Prospectus and any
amendment or supplement to this Prospectus
available to any such broker-dealer for use in
connection with any such resales. See "Plan of
Distribution." The Companies believe that no
registered holder of the Old Notes is an
"affiliate" (as such term is defined in Rule
405 of the Securities Act) of the Companies.
This Exchange Offer is not being made to, nor
will the Companies accept surrenders for
exchange from, holders of Old Notes in any
jurisdiction in which this Exchange Offer or
the acceptance thereof would not be in
compliance with the securities or blue sky laws
of such jurisdiction.
EXPIRATION OF EXCHANGE
OFFER......................... 5:00 p.m., New York City time, on ,
1997, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange
Offer is extended. See "The Exchange
Offer -- Expiration Date; Extensions;
Amendments."
ACCRUED INTEREST ON THE NEW
NOTES AND THE OLD NOTES....... New Notes of each series will bear interest at
the same rate and on the same terms as the Old
Notes of the corresponding series. Under the
Note Indenture, interest on each Old Note
ceases to accrue upon the exchange of such Old
Note for a New Note. Interest will accrue on
each New Note from the date on which it is
authenticated and will be payable to the person
in whose name such New Note is registered at
the close of business on the Regular Record
Date for such interest, which will be the
December 15 or June 15 (whether or not a
business day), as the case may be, next
preceding the payment date for such interest.
If, however, the New Note is authenticated and
delivered in exchange for an Old Note (i)
between a record date for the payment of
interest on that Old Note and the related
interest payment date, the interest that
accrues on the New Note from the date of
authentication thereof to that interest payment
date shall be payable to the person in whose
name such New Note was issued on its issuance
date or (ii) between an interest payment date
for the payment of interest on that Old Note
and the record date for the next succeeding
interest payment date, the interest that
accrues on the Old Note from the earlier
interest payment date to the date on which the
Old Note is exchanged for the New Note will be
paid to the person in whose name the New Note
is registered on the record date for that next
succeeding interest payment date. The Companies
intend to cause the New Notes to be
authenticated on the date on which the New
Notes are exchanged for the Old Notes.
Therefore, the exchange will not result in the
loss of interest income to holders of Old Notes
exchanged for New Notes. Interest on the
Secured Notes is payable semiannually in cash
in arrears on January 1 and July 1 of each
year, commencing July 1, 1997, and the Secured
Notes will bear interest and mature as follows:
for the Secured Notes due 2000, interest at
7.19% with a maturity date of July 1, 2000; for
the Secured Notes due 2004, interest at 7.67%
with a maturity date of July 1, 2004; and for
the Secured Notes due 2007,
6
<PAGE> 10
interest at 7.13% with a maturity date of July
1, 2007. See "The Exchange Offer -- Interest on
the New Notes."
TERMINATION OF THE EXCHANGE
OFFER......................... The Exchange Offer is not subject to any
condition, other than (i) that the Exchange
Offer does not violate applicable law or any
applicable interpretation of the staff of the
SEC, (ii) that no action or proceeding shall
have been instituted or threatened in any court
or by or before any governmental agency or body
with respect to the Exchange Offer, and (iii)
that there shall not have been adopted or
enacted any law, statute, rule or regulation
that would render the Exchange Offer illegal.
There can be no assurance that any such
condition will not occur. Holders of Old Notes
will have certain rights against the Companies
under the Registration Agreement should the
Companies fail to consummate the Exchange
Offer. See "The Exchange Offer -- General" and
"-- Termination."
PROCEDURES FOR TENDERING OLD
NOTES......................... Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof,
in accordance with the instructions contained
herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with any other required
documentation, to the Exchange Agent (as
defined herein), at the address set forth
herein and therein by 5:00 p.m., New York City
time, on the Expiration Date. See "The Exchange
Offer -- Procedures for Tendering."
By executing the Letter of Transmittal, each
holder will represent to the Companies that,
among other things, (i) it is acquiring the New
Notes pursuant to the Exchange Offer in the
ordinary course of business of the person
receiving such New Notes, whether or not such
person is the holder, (ii) neither the holder
nor any such other person is engaged in or
intends to engage in, or has an arrangement or
understanding with any person to participate
in, any distribution of such New Notes and
(iii) neither the holder nor any such other
person is an "affiliate," as defined in Rule
405 under the Securities Act, of the Companies
or, if an affiliate, such holder will comply
with the registration and prospectus delivery
requirements of the Securities Act to the
extent applicable. See "The Exchange
Offer -- General" and "-- Procedures for
Tendering."
SPECIAL PROCEDURES FOR
BENEFICIAL HOLDERS............ Any beneficial holder whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender in the Exchange Offer
should contact such registered holder promptly
and instruct such registered holder to tender
on its behalf. If such beneficial holder wishes
to tender on his own behalf, such beneficial
holder must, prior to completing and executing
the Letter of Transmittal and delivering its
Old Notes, either make appropriate arrangements
to register ownership of the Old Notes in such
holder's name or obtain a properly completed
bond power from the registered holder. The
transfer of record ownership may take
considerable time. See "The Exchange
Offer -- Procedures for Tendering."
7
<PAGE> 11
GUARANTEED DELIVERY
PROCEDURES.................... Holders of Old Notes who wish to tender their
Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes (or who cannot complete the
procedure for book-entry transfer on a timely
basis) and a properly completed Letter of
Transmittal or any other documents required by
the Letter of Transmittal to the Exchange Agent
prior to the Expiration Date may tender their
Old Notes according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS............. Tenders of Old Notes may be withdrawn at any
time prior to 5:00 p.m., New York City time, on
the Expiration Date. See "The Exchange
Offer -- Withdrawal of Tenders."
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF NEW NOTES......... Subject to certain conditions (as summarized
above in "Termination of the Exchange Offer"
and described more fully under "The Exchange
Offer -- Termination") or waiver of such
conditions, the Companies will accept for
exchange any and all Old Notes which are
properly tendered in the Exchange Offer and not
validly withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date. The New
Notes issued pursuant to the Exchange Offer
will be delivered on or promptly after the
Expiration Date. See "The Exchange
Offer -- General."
CERTAIN TAX CONSIDERATIONS.... The exchange pursuant to the Exchange Offer
will not be a taxable event for federal income
tax purposes. See "Certain Tax Considerations."
REGISTRATION RIGHTS........... In connection with the sale of the Old Notes,
the Companies agreed to consummate the Exchange
Offer pursuant to an effective registration
statement or to cause resales of the Old Notes
to be registered under the Securities Act, and,
if neither such event occurs prior to December
15, 1997, interest payable on the Secured Notes
will increase by .50% per annum until one of
such events does occur. Holders who do not
participate in the Exchange Offer may
thereafter hold a less liquid security. See
"Risk Factors -- Consequences of Failure to
Exchange" and "The Exchange Offer."
EXCHANGE AGENT................ The Chase Manhattan Bank, the Trustee under the
Indenture, will serve as exchange agent (the
"Exchange Agent") in connection with the
Exchange Offer. The address of the Exchange
Agent is:
The Chase Manhattan Bank, 55 Water Street, Room
234, North Building, New York, NY 10041,
Attention: Carlos Esteves. For information with
respect to the Exchange Offer, the telephone
number for the Exchange Agent is (212) 638-0828
and the facsimile number for the Exchange Agent
is (212) 638-7375 or (212) 344-9367.
USE OF PROCEEDS............... There will be no cash proceeds payable to the
Companies from the issuance of the New Notes
pursuant to the Exchange Offer. The proceeds to
the Companies from the sale of the Old Notes
were approximately $720 million, net of
discounts and commissions. Such proceeds were
used, together with cash and approximately $155
million of short-term borrowings, to refinance
$873 million of
8
<PAGE> 12
high interest secured lease obligation bonds
issued by a special purpose funding corporation
on behalf of lessors in the Companies' sale and
leaseback transaction for the Mansfield Plant.
SUMMARY DESCRIPTION OF THE NEW NOTES
ISSUERS....................... Cleveland Electric and Toledo Edison.
SECURITIES TO BE OFFERED...... $220 million aggregate principal amount of New
Notes due 2000, $350 million aggregate
principal amount of New Notes due 2004 and $150
million aggregate principal amount of New Notes
due 2007.
MATURITY...................... July 1, 2000 for the New Notes due 2000, July
1, 2004 for the New Notes due 2004 and July 1,
2007 for the New Notes due 2007.
RECORD DATES.................. June 15 and December 15 of each year,
commencing with December 15, 1997.
INTEREST PAYMENT DATES........ Payable in cash in arrears on January 1 and
July 1 of each year, commencing on July 1,
1997.
REDEMPTION.................... The New Notes are not subject to redemption
prior to maturity. There will be no sinking
fund payments for the New Notes.
SECURITY...................... The Old Notes are, and the New Notes (together
with any Old Notes that remain outstanding
after the Exchange Offer is terminated) will
be, secured equally and ratably as to payment
of principal and interest by $575 million
aggregate principal amount of first mortgage
bonds of Cleveland Electric ("Cleveland
Electric Bonds") and $145 million aggregate
principal amount of first mortgage bonds of
Toledo Edison ("Toledo Edison Bonds") which
have been issued, pledged and delivered by the
Companies to the Note Trustee. The terms of the
Cleveland Electric Bonds and Toledo Edison
Bonds correspond to those of the Secured Notes.
See "Descriptions of Cleveland Electric Bonds
and Toledo Edison Bonds."
CREDIT ENHANCEMENT............ Ambac Assurance Corporation (formerly known as
AMBAC Indemnity Corporation) ("Ambac
Assurance") has issued a financial guaranty
insurance policy relating to the Old Notes due
2007 and has made a commitment to issue a
financial guaranty insurance policy relating to
the New Notes due 2007. The Secured Notes due
2000 and Secured Notes due 2004 are not
supported by such an insurance policy. See
"Credit Enhancement of Secured Notes due 2007."
For a discussion of certain factors that should be considered by holders of the
Old Notes in connection with an investment in the New Notes, see "Risk Factors."
9
<PAGE> 13
SUMMARY FINANCIAL INFORMATION FOR CLEVELAND ELECTRIC
<TABLE>
<CAPTION>
12 MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- 1997
1992 1993 1994 1995 1996 (UNAUDITED)
------ ------ ------ ------ ------ -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating Revenues........................ $1,743 $1,751 $1,698 $1,769 $1,790 $ 1,788
Operating Income.......................... $ 385 $ 222 $ 396 $ 398 $ 359 $ 354
Deferred Carrying Charges, Net(a)......... $ 59 $ (487) $ 25 $ 29 $ -- $ --
Write-off of Perry Nuclear Power Plant
Unit 2 ("Perry Unit 2")................. $ -- $ (351) $ -- $ -- $ -- $ --
Income (Loss) Before Interest Charges..... $ 448 $ (347) $ 427 $ 429 $ 357 $ 341
Interest Charges.......................... $ 243 $ 240 $ 242 $ 245 $ 240 $ 233
Earnings (Loss) Before Interest Charges,
Income Taxes, Depreciation and
Amortization ("EBITDA")(b).............. $ 722 $ (414) $ 708 $ 721 $ 636 $ 628
Net Income (Loss)......................... $ 205 $ (587) $ 185 $ 184 $ 117 $ 108
Ratio of Earnings to Fixed Charges(c)..... 1.89 --(d) 1.81 1.84 1.57 1.58
Ratio of EBITDA to Interest Charges....... 2.97 -- 2.93 2.94 2.65 2.70
BALANCE SHEET DATA (END OF PERIOD)
Total Assets.............................. $8,123 $7,159 $7,151 $7,152 $6,878 $ 7,337
Long-Term Debt............................ $2,515 $2,793 $2,543 $2,666 $2,441 $ 3,011(e)
Preferred Stock
With Mandatory Redemption Provisions.... $ 314 $ 285 $ 246 $ 215 $ 186 $ 172
Without Mandatory Redemption
Provisions........................... $ 144 $ 241 $ 241 $ 241 $ 238 $ 238
Common Stock Equity....................... $1,865 $1,040 $1,058 $1,127 $1,045 $ 1,010
Total Capitalization...................... $4,838 $4,359 $4,088 $4,249 $3,910 $ 4,431(e)
</TABLE>
- ---------------
(a) In 1993, Cleveland Electric wrote off $519 million of deferred carrying
charges. Deferrals under an October 1992 rate stabilization program for
Cleveland Electric ended in November 1995, and amortization of the deferrals
began in December 1995 (see Note 7(d) to Cleveland Electric's 1996 financial
statements in the Financial Statements Section, as hereinafter defined).
(b) EBITDA consists of income before interest charges, plus income taxes charged
to operating expenses and to other income, plus depreciation and
amortization. EBITDA is not a measure of operating results, but rather is a
measure of debt service ability. EBITDA should not be considered as an
alternative to net income or any other measure of performance required by
generally accepted accounting principles or as an indicator of Cleveland
Electric's operating performance.
(c) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of net income plus fixed charges and current and deferred
income taxes. Fixed charges consist of total interest charges (including
interest on first mortgage bonds, bank loans, commercial paper, pollution
control notes and other interest included in operation expenses;
amortization of net premium, discount and expense on debt; and capitalized
interest on nuclear fuel lease obligations) and an estimate of the interest
element of rentals (including the interest component of certain sale and
leaseback rentals, leased nuclear fuel in the reactor and other
miscellaneous rentals).
(d) Not meaningful due to a net loss. For the year ended December 31, 1993, the
net loss before taxes and fixed charges was $502 million. Fixed charges
during the period were $334 million. The net loss before income taxes and
fixed charges included write-offs of $986 million related to Cleveland
Electric's investment in Perry Unit 2 and phase-in plan deferred charges,
and other charges of $79 million attributable to an early retirement
program. Excluding these write-offs, the ratio of earnings to fixed charges
would have been 1.68.
(e) Includes Cleveland Electric's proportionate share of the Secured Notes ($575
million) which were issued on June 18, 1997.
10
<PAGE> 14
SUMMARY FINANCIAL INFORMATION FOR TOLEDO EDISON
<TABLE>
<CAPTION>
12 MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- 1997
1992 1993 1994 1995 1996 (UNAUDITED)
------ ------ ------ ------ ------ -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating Revenues(a)..................... $ 845 $ 871 $ 865 $ 874 $ 897 $ 915
Operating Income.......................... $ 150 $ 89 $ 180 $ 188 $ 156 $ 162
Deferred Carrying Charges, Net(b)......... $ 41 $ (161) $ 15 $ 14 $ -- $ --
Write-off of Perry Unit 2................. $ -- $ (232) $ -- $ -- $ -- $ --
Income (Loss) Before Interest Charges..... $ 192 $ (174) $ 197 $ 207 $ 152 $ 162
Interest Charges.......................... $ 121 $ 115 $ 115 $ 110 $ 95 $ 94
Earnings (Loss) Before Interest Charges,
Income Taxes, Depreciation and
Amortization ("EBITDA")(c).............. $ 303 $ (237) $ 315 $ 335 $ 277 $ 300
Net Income (Loss)......................... $ 71 $ (289) $ 82 $ 97 $ 57 $ 68
Ratio of Earnings to Fixed Charges(d)..... 1.43 --(e) 1.51 1.63 1.43 1.55
Ratio of EBITDA to Interest Charges....... 2.49 -- 2.74 3.05 2.92 3.19
BALANCE SHEET DATA (END OF PERIOD)
Total Assets.............................. $3,939 $3,510 $3,502 $3,474 $3,357 $ 3,572
Long-Term Debt............................ $1,178 $1,225 $1,154 $1,068 $1,003 $ 1,122(f)
Preferred Stock
With Mandatory Redemption Provisions.... $ 50 $ 28 $ 7 $ 5 $ 3 $ 2
Without Mandatory Redemption
Provisions........................... $ 210 $ 210 $ 210 $ 210 $ 210 $ 210
Common Stock Equity....................... $ 935 $ 623 $ 685 $ 763 $ 803 $ 817
Total Capitalization...................... $2,373 $2,086 $2,056 $2,046 $2,019 $ 2,151(f)
</TABLE>
- ---------------
(a) Includes revenues from all bulk power sales to Cleveland Electric of $130
million, $120 million, $111 million, $102 million and $105 million in 1992,
1993, 1994, 1995 and 1996, respectively, and $111 million for the 12 months
ended June 30, 1997.
(b) In 1993, Toledo Edison wrote off $186 million of deferred carrying charges.
Deferrals under an October 1992 rate stabilization program for Toledo Edison
ended in November 1995, and amortization of the deferrals began in December
1995 (see Note 7(d) to Toledo Edison's 1996 financial statements in the
Financial Statements Section).
(c) EBITDA consists of income before interest charges, plus income taxes charged
to operating expenses and to other income, plus depreciation and
amortization. EBITDA is not a measure of operating results, but rather is a
measure of debt service ability. EBITDA should not be considered as an
alternative to net income or any other measure of performance required by
generally accepted accounting principles or as an indicator of Toledo
Edison's operating performance.
(d) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of net income plus fixed charges and current and deferred
income taxes. Fixed charges consist of total interest charges (including
interest on first mortgage bonds, bank loans, commercial paper, pollution
control notes and other interest included in operation expenses;
amortization of net premium, discount and expense on debt; and capitalized
interest on nuclear fuel lease obligations) and an estimate of the interest
element of rentals (including the interest component of certain sale and
leaseback rentals, leased nuclear fuel in the reactor and other
miscellaneous rentals).
(e) Not meaningful due to a net loss. For the year ended December 31, 1993, the
net loss before taxes and fixed charges was $195 million. Fixed charges
during the period were $233 million. The net loss before income taxes and
fixed charges included write-offs of $473 million related to Toledo Edison's
investment in Perry Unit 2 and phase-in plan deferred charges, and other
charges of $56 million attributable to an early retirement program.
Excluding these write-offs, the ratio of earnings to fixed charges would
have been 1.42.
(f) Includes Toledo Edison's proportionate share of the Secured Notes ($145
million) which were issued on June 18, 1997.
11
<PAGE> 15
RISK FACTORS
Holders of the Secured Notes should consider carefully the factors set
forth below, as well as the other information contained in this Prospectus, in
evaluating an investment in the Secured Notes. The information below is
qualified in its entirety by reference to the information in the Companies'
financial statements included as part of this Prospectus and in the documents
incorporated in this Prospectus by reference and should be read in conjunction
with such information and the other information set forth in this Prospectus.
FINANCING CAPABILITY
At June 30, 1997, Cleveland Electric had long-term debt outstanding of
approximately $3,011 million (68% of total capitalization) and Toledo Edison had
long-term debt outstanding of approximately $1,122 million (52% of total
capitalization). Also at June 30, 1997, Cleveland Electric and Toledo Edison had
approximately $3,230 million and $1,262 million, respectively, in aggregate
principal amount of first mortgage bonds outstanding under their respective
mortgages. (The outstanding first mortgage bond amounts for Cleveland Electric
and Toledo Edison include $140.4 million principal amount and $210.6 million
principal amount, respectively, of first mortgage bonds pledged to secure
obligations to various bank creditors.) At June 30, 1997, neither Company was
able to issue a material amount of additional first mortgage bonds except in
connection with refinancings (see "The Companies -- Financing Capability" and
"Pending Merger of Centerior Energy and Ohio Edison -- Regulatory Matters").
Also at June 30, 1997, Cleveland Electric had fixed obligations for debt
other than first mortgage bonds and preferred stock with mandatory redemption
provisions of $229 million, and Toledo Edison had fixed obligations for debt
other than first mortgage bonds and preferred stock with mandatory redemption
provisions of $141 million. The Companies also have future minimum lease
payments of approximately $3,659 million for generation facility leases as of
June 30, 1997. See Note 2 to the 1996 financial statements in the Financial
Statements Section (as hereinafter defined).
As of June 30, 1997, debt and preferred stock maturities and sinking fund
requirements for the remainder of 1997 were $115.9 million (including $70.5
million of first mortgage bonds refinanced in August 1997) for Cleveland
Electric and $41.5 million (including $10.1 million of first mortgage bonds
refinanced in August 1997) for Toledo Edison. In August 1997, Cleveland Electric
and Toledo Edison refinanced $180.6 million aggregate principal amount and $10.1
million principal amount, respectively, of first mortgage bonds issued as
security for certain tax-exempt bonds issued by public authorities. Cleveland
Electric plans to refinance up to $550 million of outstanding first mortgage
bonds during the fourth quarter of 1997.
The Companies have $273 million in financing vehicles to support their
nuclear fuel leases, $83 million of which mature in 1997. Replacement financing
for the maturing issues may not be needed in 1997.
Under its articles of incorporation, Toledo Edison cannot issue preferred
stock unless certain earnings coverage requirements are met. Based on its
earnings for the 12 months ended June 30, 1997, Toledo Edison could not issue
additional preferred stock.
The availability and cost of capital to meet the Companies' external
financing needs depend upon such factors as financial market conditions and the
Companies' credit ratings. At the time of the Offering, credit ratings for the
Companies were as follows:
<TABLE>
<CAPTION>
STANDARD & POOR'S MOODY'S
----------------- -------------
<S> <C> <C>
First mortgage bonds.................................... BB Ba2
Unsecured notes of Cleveland Electric................... B+ Ba3
Unsecured notes of Toledo Edison........................ B+ B1
Preferred stock......................................... B b2
</TABLE>
12
<PAGE> 16
Current credit ratings for the Companies are as follows:
<TABLE>
<CAPTION>
STANDARD & POOR'S MOODY'S
----------------- -------------
<S> <C> <C>
First mortgage bonds.................................... BB+ Ba1
Unsecured notes......................................... BB- Ba3
Preferred stock......................................... BB- b1
</TABLE>
These ratings reflect recent upgrades by both Standard & Poor's Ratings
Group, a division of The McGraw-Hill Companies, Inc. ("Standard & Poor's") and
Moody's Investors Service, Inc. ("Moody's") and assume, among other things,
consummation of the CEC-OE Merger. See "-- Consummation of the CEC-OE Merger,"
"Pending Merger of Centerior Energy and Ohio Edison" and "The
Companies -- Financing Capability."
LACK OF PUBLIC MARKET FOR THE SECURED NOTES
The Old Notes currently have no trading market. There can be no assurance
that an active trading market for the New Notes will develop or be sustained.
The Companies do not presently intend to apply for listing of the New Notes on
any stock exchange or trading market. If the New Notes are traded after their
initial issuance, they may trade at a discount from their initial offering
price, depending upon prevailing interest rates, the market for similar
securities and other factors, including general economic conditions and the
financial condition and performance of, and prospects for, the Companies. The
Placement Agents have advised the Companies that they currently intend to make a
market in the New Notes. However, the Placement Agents are not obligated to do
so, and any market-making activity with respect to the New Notes may be
discontinued at any time without notice.
CONSEQUENCES OF FAILURE TO EXCHANGE
Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities and will not retain any rights under the
Registration Agreement, except in certain limited circumstances. The Old Notes
will continue to be subject to restrictions on transfer such that: (i) Old Notes
may be resold only if registered pursuant to the Securities Act or if an
exemption from registration is available thereunder, (ii) Old Notes will bear a
legend restricting transfer in the absence of registration or an exemption
therefrom and (iii) a holder of Old Notes who desires to sell or otherwise
dispose of all or any part of its Old Notes under an exemption from registration
under the Securities Act, if requested by the Companies, must deliver to the
Companies an opinion of independent counsel, reasonably satisfactory in form and
substance to the Companies, to the effect that such exemption is available.
CONSUMMATION OF THE CEC-OE MERGER
The consummation of the CEC-OE Merger remains subject to various conditions
and regulatory approvals, including the approval of the Federal Energy
Regulatory Commission ("FERC"). There can be no assurance that such conditions
will be satisfied or such approvals can be obtained on terms which Centerior
Energy and Ohio Edison will find acceptable. If the CEC-OE Merger is not
consummated, the benefits which are anticipated from the merger will not be
realized, and the recent upgrade in the ratings of the Companies' securities may
not be maintained. See "Pending Merger of Centerior Energy and Ohio Edison."
REGULATORY MATTERS
The Companies comply with the provisions of Statement of Financial
Accounting Standards 71 ("SFAS 71") which governs accounting for the effects of
certain types of rate regulation. The Companies continually monitor changes in
market and regulatory conditions and consider the effects of such changes in
assessing the continuing applicability of SFAS 71. Criteria that could give rise
to discontinuation of the application of SFAS 71 include: (1) increasing
competition which significantly restricts the Companies' ability to charge
prices which allow them to recover operating costs, earn a fair return on
invested capital and recover the amortization of regulatory assets and (2) a
significant change in the manner in which rates are set
13
<PAGE> 17
by The Public Utilities Commission of Ohio ("PUCO") from cost-based regulation
to some other form of regulation. In the event the Companies determine they no
longer meet the criteria for following SFAS 71, the Companies would be required
to record a before-tax charge to write off their regulatory assets which totaled
$1,334 million and $915 million at June 30, 1997 for Cleveland Electric and
Toledo Edison, respectively. In addition, the Companies would be required to
evaluate whether the changes in the competitive and regulatory environment which
led to discontinuing the application of SFAS 71 would also result in an
impairment of the net book values of the Companies' property, plant and
equipment.
Upon consummation of the CEC-OE Merger, the FirstEnergy Regulatory Plan (as
hereinafter defined) will go into effect. FirstEnergy believes that the
FirstEnergy Regulatory Plan will not provide for the full recovery of costs and
a fair return on the investment associated with the Companies' nuclear
operations. Pursuant to the PUCO's order approving the FirstEnergy Regulatory
Plan, FirstEnergy was required to submit to the PUCO staff the regulatory
accounting and cost recovery details for implementing the FirstEnergy Regulatory
Plan. Such details were submitted in July 1997. FirstEnergy expects that the
Companies will discontinue the application of SFAS 71 for their nuclear
operations if and when consummation of the CEC-OE Merger becomes probable. The
remainder of their business is expected to continue to comply with the
provisions of SFAS 71. At the time the CEC-OE Merger becomes probable, the
Companies would be required to write off certain of their regulatory assets for
financial reporting purposes. The write-off amounts would be determined at that
time. FirstEnergy estimates the write-off will total approximately $750 million.
This write-off is not expected to affect the Companies' first mortgage bond
capacities. For financial reporting purposes, the net book value of the
Companies' nuclear generating units is not expected to be impaired. If events
cause one or both Companies to conclude they no longer meet the criteria for
applying SFAS 71 for the remainder of their business, they would be required to
write off their remaining regulatory assets and measure all other assets for
impairment. See "Pending Merger of Centerior Energy and Ohio Edison" and also
"Management's Financial Analysis" and Note 15 which are contained in each
Company's 1996 financial statements included as a part of this Prospectus
("Financial Statements Section"). (The Financial Statements Section also
contains each Company's First Quarter 1997 Form 10-Q and Second Quarter 1997
Form 10-Q).
In the absence of consummation of the CEC-OE Merger, the PUCO's April 1996
rate order to the Companies remains in effect. In that order, the PUCO granted
price increases totaling $119 million in annualized revenues to the Companies.
The Companies intend to freeze rates at existing levels until at least 2002,
although they are not precluded from requesting further price increases. In the
order, the PUCO provided for recovery of all regulatory assets in the approved
rates, and the Companies continue to comply with the provisions of SFAS 71. In
connection with its order, the PUCO recommended that the Companies write down
certain assets for regulatory purposes by an aggregate of $1.25 billion through
2001. Consideration of whether to implement a plan responsive to the PUCO's
recommendation is pending the CEC-OE Merger.
Notwithstanding the CEC-OE Merger and discussions with regulators
concerning the effect of the FirstEnergy Regulatory Plan on the Companies'
nuclear generating assets, the Companies believe it is reasonable to expect that
rates will be set at levels that will recover all current and anticipated costs
associated with their nuclear operations, including all associated regulatory
assets, and such rates can be charged to and collected from customers. If there
is a change in the Companies' evaluation of the competitive environment,
regulatory framework or other factors, or if the PUCO significantly reduces the
value of their assets or reduces the approved return on common stock equity of
12.59% and overall rate of return of 10.06%, or both, for future regulatory
purposes, the Companies may be required to record material charges to earnings.
See "Management's Financial Analysis" in the Financial Statements Section.
COMPETITION
The Companies face competitive challenges due to regulatory and tax
constraints and their high retail cost structure.
Currently, the Companies' most pressing competition comes from municipal
electric systems in their service areas. Cleveland Electric's and Toledo
Edison's rates are generally higher than those of municipal
14
<PAGE> 18
systems due largely to such systems' exemption from taxation, the lower cost
financing available to them, the continued availability to them of lower cost
power through short-term power purchases and their access to cheaper
governmental power. The Companies face the threat that municipalities in their
service areas could establish new electric systems and continue expanding
existing systems. See "The Companies -- Competition" and "Pending Merger of
Centerior Energy and Ohio Edison -- Regulatory Matters."
Structural changes in the electric utility industry from actions by both
federal and state regulatory bodies are continuing to place downward pressure on
prices and to increase competition for customers. In 1996, the FERC adopted
rules relating to open-access transmission services. The open-access rules
require utilities to deliver power from other utilities or generation sources to
their wholesale customers at nondiscriminatory prices.
A number of states have enacted transition legislation which provides for
introduction of competition for retail electric business and recovery of
stranded investment. Several groups in Ohio are studying the possible
introduction of retail wheeling and stranded investment recovery. Retail
wheeling occurs when a customer obtains power from a utility company other than
its local utility. The term "stranded investment" generally refers to fixed
costs approved for recovery under traditional regulatory methods that would
become unrecoverable, or "stranded," as a result of legislative changes which
allow for widespread competition. The PUCO is sponsoring discussions among a
group of business, utility and consumer interests to explore ways of promoting
competitive options without unduly harming the interests of utility company
share owners or customers. The PUCO also has introduced two pilot projects, both
intended as initial steps to introduce competitive elements into the Ohio
electric utility business. A bill to restructure the electric utility industry
in Ohio has been introduced in the Ohio House of Representatives. A bipartisan
committee from both legislative houses has been formed to study the issue.
The Companies cannot predict when and to what extent retail wheeling or
other forms of competition will be allowed. The Companies believe that pure
competition (unrestricted retail wheeling for all customer classifications) is
at least several years away and that any transition to pure competition will be
in phases. The FERC and the PUCO have acknowledged the need to provide at least
partial recovery of stranded investment as greater competition is permitted and,
therefore, the Companies believe that there will be a mechanism developed for
the recovery of at least some stranded investment. However, due to the
uncertainty involved, there is a risk in connection with the introduction of
retail wheeling that some of the Companies' assets may not be fully recovered.
See "The Companies -- Competition" and "2. Conjunctive Electric Service ("CES")"
under "Part II. Other Information" of the Second Quarter 1997 Form 10-Q in the
Financial Statements Section.
NUCLEAR OPERATIONS
The Companies have interests in three nuclear generating units -- Beaver
Valley Power Station Unit 2 ("Beaver Valley Unit 2"), Davis-Besse Nuclear Power
Station ("Davis-Besse") and Perry Nuclear Power Plant Unit 1 ("Perry Unit 1").
Toledo Edison operates Davis-Besse and Cleveland Electric operates Perry Unit 1.
See "The Companies -- Nuclear Units."
The Companies' three nuclear units may be impacted by activities or events
beyond their control. Operating nuclear units have experienced unplanned outages
or extensions of scheduled outages because of equipment problems or new
regulatory requirements. A major accident at a nuclear facility anywhere in the
world could cause the United States Nuclear Regulatory Commission ("NRC") to
limit or prohibit the operation or licensing of any domestic nuclear unit. If
one of the Companies' nuclear units is taken out of service for an extended
period for any reason, including an accident at such unit or any other nuclear
facility, the Companies cannot predict whether regulatory authorities would
impose unfavorable rate treatment. Such treatment could include taking the
affected unit out of rate base, thereby not permitting the Companies to recover
their investment in and earn a return on that asset, or disallowing certain
construction or maintenance costs. An extended outage coupled with unfavorable
rate treatment could have a material adverse effect on each Company's financial
condition, cash flows and results of operations.
15
<PAGE> 19
SELECTED FINANCIAL INFORMATION FOR CLEVELAND ELECTRIC
<TABLE>
<CAPTION>
12 MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- 1997
1992 1993 1994 1995 1996 (UNAUDITED)
------ ------ ------ ------ ------ -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating Revenues......................... $1,743 $1,751 $1,698 $1,769 $1,790 $ 1,788
Fuel and Purchased Power Expense........... $ 434 $ 423 $ 391 $ 413 $ 408 $ 418
Other Operation and Maintenance Expense.... $ 410 $ 598 $ 394 $ 418 $ 426 $ 415
Depreciation and Amortization Expense...... $ 179 $ 182 $ 195 $ 196 $ 210 $ 213
Operating Income........................... $ 385 $ 222 $ 396 $ 398 $ 359 $ 354
Deferred Carrying Charges, Net (a)......... $ 59 $ (487) $ 25 $ 29 $ -- $ --
Write-off of Perry Unit 2.................. $ -- $ (351) $ -- $ -- $ -- $ --
Income (Loss) Before Interest Charges...... $ 448 $ (347) $ 427 $ 429 $ 357 $ 341
Interest Charges........................... $ 243 $ 240 $ 242 $ 245 $ 240 $ 233
Earnings (Loss) Before Interest Charges,
Income Taxes, Depreciation and
Amortization ("EBITDA") (b).............. $ 722 $ (414) $ 708 $ 721 $ 636 $ 628
Net Income (Loss).......................... $ 205 $ (587) $ 185 $ 184 $ 117 $ 108
Preferred Dividend Requirements............ $ 41 $ 45 $ 45 $ 43 $ 39 $ 37
Earnings (Loss) Available for Common
Stock.................................... $ 164 $ (632) $ 140 $ 141 $ 78 $ 71
Ratio of Earnings to Fixed Charges (c)..... 1.89 --(d) 1.81 1.84 1.57 1.58
Ratio of EBITDA to Interest Charges........ 2.97 -- 2.93 2.94 2.65 2.70
OTHER DATA
Utility Plant Additions.................... $ 156 $ 175 $ 156 $ 155 $ 111 $ --(e)
BALANCE SHEET DATA (END OF PERIOD)
Total Assets............................... $8,123 $7,159 $7,151 $7,152 $6,878 $ 7,337
Current Portion of Long-Term Debt and
Preferred Stock.......................... $ 310 $ 70 $ 282 $ 177 $ 145 $ 135
Long-Term Debt............................. $2,515 $2,793 $2,543 $2,666 $2,441 $ 3,011(f)
Preferred Stock
With Mandatory Redemption Provisions..... $ 314 $ 285 $ 246 $ 215 $ 186 $ 172
Without Mandatory Redemption
Provisions............................. $ 144 $ 241 $ 241 $ 241 $ 238 $ 238
Common Stock Equity........................ $1,865 $1,040 $1,058 $1,127 $1,045 $ 1,010
Total Capitalization................ $4,838 $4,359 $4,088 $4,249 $3,910 $ 4,431(f)
</TABLE>
- ---------------
(a) In 1993, Cleveland Electric wrote off $519 million of deferred carrying
charges. Deferrals under an October 1992 rate stabilization program for
Cleveland Electric ended in November 1995, and amortization of the deferrals
began in December 1995 (see Note 7(d) to Cleveland Electric's 1996 financial
statements in the Financial Statements Section).
(b) EBITDA consists of income before interest charges, plus income taxes charged
to operating expenses and to other income, plus depreciation and
amortization. EBITDA is not a measure of operating results, but rather is a
measure of debt service ability. EBITDA should not be considered as an
alternative to net income or any other measure of performance required by
generally accepted accounting principles or as an indicator of Cleveland
Electric's operating performance.
(c) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of net income plus fixed charges and current and deferred
income taxes. Fixed charges consist of total interest charges (including
interest on first mortgage bonds, bank loans, commercial paper, pollution
control notes and other interest included in operation expenses;
amortization of net premium, discount and expense on debt; and capitalized
interest on nuclear fuel lease obligations) and an estimate of the interest
element of rentals (including the interest component of certain sale and
leaseback rentals, leased nuclear fuel in the reactor and other
miscellaneous rentals).
(d) Not meaningful due to a net loss. For the year ended December 31, 1993, the
net loss before taxes and fixed charges was $502 million. Fixed charges
during the period were $334 million. The net loss before income taxes and
fixed charges included write-offs of $986 million related to Cleveland
Electric's investment in Perry Unit 2 and phase-in plan deferred charges,
and other charges of $79 million attributable to an early retirement
program. Excluding these write-offs, the ratio of earnings to fixed charges
would have been 1.68.
(e) Not available for periods other than calendar year.
(f) Includes Cleveland Electric's proportionate share of the Secured Notes ($575
million) which were issued on June 18, 1997.
16
<PAGE> 20
SELECTED FINANCIAL INFORMATION FOR TOLEDO EDISON
<TABLE>
<CAPTION>
12 MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- 1997
1992 1993 1994 1995 1996 (UNAUDITED)
------ ------ ------ ------ ------ -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating Revenues (a)..................... $ 845 $ 871 $ 865 $ 874 $ 897 $ 915
Fuel and Purchased Power Expense........... $ 169 $ 173 $ 167 $ 157 $ 169 $ 177
Other Operation and Maintenance Expense.... $ 236 $ 352 $ 229 $ 225 $ 231 $ 228
Depreciation and Amortization Expense...... $ 77 $ 76 $ 83 $ 84 $ 94 $ 95
Operating Income........................... $ 150 $ 89 $ 180 $ 188 $ 156 $ 162
Deferred Carrying Charges, Net (b)......... $ 41 $ (161) $ 15 $ 14 $ -- $ --
Write-off of Perry Unit 2.................. $ -- $ (232) $ -- $ -- $ -- $ --
Income (Loss) Before Interest Charges...... $ 192 $ (174) $ 197 $ 207 $ 152 $ 162
Interest Charges........................... $ 121 $ 115 $ 115 $ 110 $ 95 $ 94
Earnings (Loss) Before Interest Charges,
Income Taxes, Depreciation and
Amortization ("EBITDA") (c).............. $ 303 $ (237) $ 315 $ 335 $ 277 $ 300
Net Income (Loss).......................... $ 71 $ (289) $ 82 $ 97 $ 57 $ 68
Preferred Dividend Requirements............ $ 24 $ 23 $ 20 $ 18 $ 17 $ 17
Earnings (Loss) Available for Common
Stock.................................... $ 47 $ (312) $ 62 $ 79 $ 40 $ 51
Ratio of Earnings to Fixed Charges (d)..... 1.43 --(e) 1.51 1.63 1.43 1.55
Ratio of EBITDA to Interest Charges........ 2.49 -- 2.74 3.05 2.92 3.19
OTHER DATA
Utility Plant Additions.................... $ 44 $ 43 $ 41 $ 56 $ 49 $ --(f)
BALANCE SHEET DATA (END OF PERIOD)
Total Assets............................... $3,939 $3,510 $3,502 $3,474 $3,357 $ 3,572
Current Portion of Long-Term Debt and
Preferred Stock.......................... $ 58 $ 57 $ 83 $ 58 $ 51 $ 69
Long-Term Debt............................. $1,178 $1,225 $1,154 $1,068 $1,003 $ 1,122(g)
Preferred Stock
With Mandatory Redemption Provisions..... $ 50 $ 28 $ 7 $ 5 $ 3 $ 2
Without Mandatory Redemption
Provisions............................. $ 210 $ 210 $ 210 $ 210 $ 210 $ 210
Common Stock Equity........................ $ 935 $ 623 $ 685 $ 763 $ 803 $ 817
Total Capitalization................ $2,373 $2,086 $2,056 $2,046 $2,019 $ 2,151(g)
</TABLE>
- ---------------
(a) Includes revenues from all bulk power sales to Cleveland Electric of $130
million, $120 million, $111 million, $102 million and $105 million in 1992,
1993, 1994, 1995 and 1996, respectively, and $111 million for the 12 months
ended June 30, 1997.
(b) In 1993, Toledo Edison wrote off $186 million of deferred carrying charges.
Deferrals under an October 1992 rate stabilization program for Toledo Edison
ended in November 1995, and amortization of the deferrals began in December
1995 (see Note 7(d) to Toledo Edison's 1996 financial statements in the
Financial Statements Section).
(c) EBITDA consists of income before interest charges, plus income taxes charged
to operating expenses and to other income, plus depreciation and
amortization. EBITDA is not a measure of operating results, but rather is a
measure of debt service ability. EBITDA should not be considered as an
alternative to net income or any other measure of performance required by
generally accepted accounting principles or as an indicator of Toledo
Edison's operating performance.
(d) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of net income plus fixed charges and current and deferred
income taxes. Fixed charges consist of total interest charges (including
interest on first mortgage bonds, bank loans, commercial paper, pollution
control notes and other interest included in operation expenses;
amortization of net premium, discount and expense on debt; and capitalized
interest on nuclear fuel lease obligations) and an estimate of the interest
element of rentals (including the interest component of certain sale and
leaseback rentals, leased nuclear fuel in the reactor and other
miscellaneous rentals).
(e) Not meaningful due to a net loss. For the year ended December 31, 1993, the
net loss before taxes and fixed charges was $195 million. Fixed charges
during the period were $233 million. The net loss before income taxes and
fixed charges included write-offs of $473 million related to Toledo Edison's
investment in Perry Unit 2 and phase-in plan deferred charges, and other
charges of $56 million attributable to an early retirement program.
Excluding these write-offs, the ratio of earnings to fixed charges would
have been 1.42.
(f) Not available for periods other than calendar year.
(g) Includes Toledo Edison's proportionate share of the Secured Notes ($145
million) which were issued on June 18, 1997.
17
<PAGE> 21
THE COMPANIES
GENERAL
Cleveland Electric, which was incorporated under the laws of the State of
Ohio in 1892, is a public utility engaged in the generation, purchase,
transmission, distribution and sale of electric energy in an area of
approximately 1,700 square miles in northeastern Ohio, including the City of
Cleveland. Cleveland Electric also provides electric energy at wholesale to
other electric utility companies and to two municipal electric systems (directly
and through AMP-Ohio) in its service area. Cleveland Electric serves
approximately 741,000 customers and derives approximately 77% of its total
electric retail revenue from customers outside the City of Cleveland. Principal
industries served by Cleveland Electric include those producing steel and other
primary metals; automotive and other transportation equipment; chemicals;
electrical and nonelectrical machinery; fabricated metal products; and rubber
and plastic products. Nearly all of Cleveland Electric's operating revenues are
derived from the sale of electric energy. At June 30, 1997, Cleveland Electric
had 3,251 employees of which 1,780 employees (about 55% of total employees) were
represented by one union.
On May 28, 1997, the collective bargaining agreement between Cleveland
Electric and the union expired without agreement on the terms of a new contract.
Cleveland Electric and the union are continuing to negotiate under the
supervision of a federal mediator. Both sides have agreed that there will be no
strike or lock-out while good faith negotiations are continuing. There is a risk
that such an event may occur if Cleveland Electric and the union do not reach an
agreement promptly. However, Cleveland Electric believes that it would be able
to continue to provide substantially normal electric service to its customers if
any such event were to occur. On September 5, 1997, union members voted to give
the union's negotiating committee authority to declare a strike.
Toledo Edison, which was incorporated under the laws of the State of Ohio
in 1901, is a public utility engaged in the generation, purchase, transmission,
distribution and sale of electric energy in an area of approximately 2,500
square miles in northwestern Ohio, including the City of Toledo. Toledo Edison
also provides electric energy at wholesale to other electric utility companies
and to 13 municipally owned distribution systems (through AMP-Ohio) and one
rural electric cooperative distribution system in its service area. Toledo
Edison serves approximately 293,000 customers and derives approximately 56% of
its total electric retail revenues from customers outside the City of Toledo.
Principal industries served by Toledo Edison include metal casting, forming and
fabricating; petroleum refining; automotive equipment and assembly; food
processing; and glass. Nearly all of Toledo Edison's operating revenues are
derived from the sale of electric energy. At June 30, 1997, Toledo Edison had
1,581 employees of which 967 employees (about 61% of total employees) were
represented by three unions having collective bargaining agreements with Toledo
Edison.
The Companies are wholly owned electric utility subsidiaries of Centerior
Energy, a holding company formed by them for the purpose of enabling them to
affiliate. The affiliation became effective in April 1986. Centerior Energy has
a third subsidiary, the Service Company, which furnishes certain administrative
and other services to the two utility subsidiaries and to Centerior Energy.
Cleveland Electric and Toledo Edison operate as separate companies, each
servicing the customers in its respective service area. In March 1994, Centerior
Energy announced a plan to merge Toledo Edison into Cleveland Electric. See
"Pending Merger of Cleveland Electric and Toledo Edison."
In September 1996, Centerior Energy and Ohio Edison entered into an
agreement and plan of merger to form a new holding company, FirstEnergy. See
"Pending Merger of Centerior Energy and Ohio Edison."
The Companies are members of the Central Area Power Coordination Group
("CAPCO Group"), which was created in 1967 by the Companies, Ohio Edison,
Duquesne Light Company ("Duquesne") and Ohio Edison's wholly owned subsidiary,
Pennsylvania Power Company ("Pennsylvania Power"). The CAPCO Group companies
have completed programs to construct larger, more efficient generating units and
to strengthen interconnections within the CAPCO Group. The CAPCO Group companies
have placed in service nine major generating units (four nuclear units and five
coal-fired units), of which the Companies have ownership or leasehold interests
in seven (three nuclear units and four coal-fired units). After the
18
<PAGE> 22
consummation of the CEC-OE Merger, FirstEnergy will have ownership or leasehold
interests in all nine CAPCO generating units.
COMPETITION
The Companies compete in their respective service areas with suppliers of
natural gas to satisfy customers' energy needs with regard to heating and
appliance usage. The Companies also are engaged in competition to a lesser
extent with suppliers of oil and liquefied natural gas for heating purposes and
with suppliers of cogeneration equipment. One competitor provides steam for
heating purposes and provides chilled water for cooling purposes in certain
areas of downtown Cleveland.
The Companies also compete with municipally owned electric systems within
their respective service areas. Several communities have evaluated
municipalization of electric service and decided to continue service from the
Companies. Officials in other communities have indicated an interest in
evaluating the municipalization issue.
The Companies face continuing competition from locations outside their
service areas which are promoted by governmental and private agencies in
attempts to influence potential and existing commercial and industrial customers
to locate in their respective areas.
The Companies also periodically compete with other producers of electricity
for sales to electric utilities which are in the market for bulk power
purchases. The Companies have interconnections with other electric utilities and
have a transmission system capable of transmitting ("wheeling") power between
the Midwest and the East.
In the future, the Companies will encounter an increasingly competitive
environment as a result of the structural changes taking place in the electric
utility industry. For a discussion of these changes, including open-access
transmission, retail wheeling and stranded investment considerations, see "Risk
Factors -- Competition" and "Outlook -- Competition" in Management's Financial
Analysis contained in the Financial Statements.
Cleveland Electric. Located within Cleveland Electric's service area are
two municipally owned electric systems. Cleveland Electric supplies a small
portion of those systems' power needs at wholesale rates.
One of those systems, Cleveland Public Power ("CPP"), is operated by the
City of Cleveland in competition with Cleveland Electric. CPP is primarily an
electric distribution system which currently supplies electric power in
approximately 60% of the City's geographical area and to approximately 33%
(about 72,000) of the electric consumers in the City -- equal to about 10% of
all customers served by Cleveland Electric. CPP's kilowatt-hour sales and
revenues are equal to about 6% of Cleveland Electric's kilowatt-hour sales and
revenues. Much of the area served by CPP overlaps that of Cleveland Electric.
For all classes of customers, Cleveland Electric's rates are higher than CPP's
rates due largely to CPP's exemption from taxation, the lower-cost financing
available to CPP, the continued availability to CPP of lower cost power through
short-term power purchases and CPP's access to cheaper governmental power.
Cleveland Electric makes power available to CPP on a wholesale basis,
subject to FERC regulation. In 1996, Cleveland Electric directly and through
AMP-Ohio provided a negligible amount of CPP's energy requirements. CPP's power
is purchased from other sources and wheeled over Cleveland Electric's
transmission systems. In cases currently pending, the FERC has ruled that
Cleveland Electric is obligated to provide an additional interconnection with
CPP but has not ruled on the terms and conditions thereof. Cleveland Electric
has asked the FERC to reconsider its order that Cleveland Electric provide CPP
with an additional interconnection. Also, the FERC has not ruled on Cleveland
Electric's request for an increase in rates for power and services provided to
CPP. Cleveland Electric believes that it is entitled to a higher level of
compensation for the power and the services it provides because the rates
currently paid by CPP do not adequately cover the cost of providing such power
and services.
CPP has constructed new transmission and distribution facilities extending
into eastern portions of Cleveland and plans to enhance its existing system in
western portions of Cleveland. CPP's expansion has
19
<PAGE> 23
resulted in a reduction in Cleveland Electric's annual net income by about $7
million in 1994, by an additional $1 million (for a total reduction of about $8
million) in 1995 and by an additional $3 million (for a total reduction of about
$11 million) in 1996. Cleveland Electric estimates that its net income will
continue to be reduced by an additional $1-$2 million each year in the
1997 - 2001 period because of CPP's expansion, with the exception of 1997 when
the reduction would be about $7 million including the loss of a commercial
customer, Medical Center Co., as discussed below.
Despite CPP's expansion efforts, Cleveland Electric has been successful in
retaining most of the large industrial and commercial customers in the expansion
areas by providing economic incentives in exchange for sole-supplier contracts.
During 1996, Cleveland Electric renewed and extended for as long as ten years
contracts with many of its large industrial customers, including the five
largest. Prior to these renewals, 61% of Cleveland Electric's industrial base
rate (nonfuel) revenues under contract was scheduled for renewal before 1999.
Following the renewals, only 18% of such revenues under contract is scheduled
for renewal by 1999. At year-end 1996, 51% of Cleveland Electric's industrial
base rate revenues was under long-term contracts. Also, in 1996, Cleveland
Electric reached agreements to serve a number of large commercial customers in
Cleveland, including some previously served by CPP. An increasing number of CPP
customers are converting back to Cleveland Electric service. However,
competition for such customers will continue.
In March 1995, one of Cleveland Electric's large commercial customers which
has provided annual net income to Cleveland Electric of approximately $6
million, Medical Center Co., signed a five-year contract with CPP for electric
service provided by another utility beginning in September 1996, when its
contract with Cleveland Electric terminated. Cleveland Electric believes that
the purchase of power by this customer is a direct purchase from another utility
in violation of Ohio's certified territory statute. After being denied a
rehearing on this matter by the PUCO, Cleveland Electric filed an appeal with
the Ohio Supreme Court. In August 1996, the Court granted Cleveland Electric's
request for rehearing and remanded the case back to the PUCO. Cleveland Electric
also filed a petition with the FERC on the grounds that such a transaction is a
violation of the Federal Power Act. However, in July 1996, the FERC ruled that
the transaction does not violate such Act. On September 18, 1996, the FERC
granted a rehearing to Cleveland Electric, which has agreed to begin providing
the requested transmission service to CPP.
For additional information on the effects of the CEC-OE Merger on Cleveland
Electric's competition with CPP, see "Pending Merger of Centerior Energy and
Ohio Edison -- Regulatory Matters."
Toledo Edison. Located wholly or partly within Toledo Edison's service area
are six rural electric cooperatives, five of which are supplied with power,
transmitted in some cases over Toledo Edison's facilities, by Buckeye Power,
Inc. (an affiliate of a number of Ohio rural electric cooperatives) and the
sixth of which is supplied by Toledo Edison.
Also located within Toledo Edison's service area are 16 municipally owned
electric distribution systems, three of which are supplied by other electric
systems. Toledo Edison provides a portion of the power purchased by the other 13
municipalities at wholesale rates through a contract with AMP-Ohio that expires
in 2009. Rates under this agreement are permitted to increase annually to
compensate for increased costs of operation. Less than 3% of Toledo Edison's
total electric operating revenues in 1996 was derived from sales under the
AMP-Ohio contract.
As does Cleveland Electric, Toledo Edison offers long-term contracts to
large industrial customers who might otherwise consider changing power
suppliers. During 1996, Toledo Edison renewed and extended from seven to ten
years contracts with many of its large industrial customers, including the six
largest. Prior to these renewals, 94% of Toledo Edison's industrial base rate
(nonfuel) revenues under contract was scheduled for renewal before 1999.
Following the renewals, only 19% of such revenues under contract is scheduled
for renewal by 1999. At year-end 1996, 61% of Toledo Edison's industrial base
rate revenues was under long-term contracts.
In October 1989, the City of Toledo ("Toledo") established an Electric
Franchise Review Committee to (i) study Toledo Edison's franchise agreement with
Toledo to determine whether alternate energy sources may be utilized and (ii)
investigate the feasibility of establishing a municipal electric system within
Toledo. In
20
<PAGE> 24
November 1993, Toledo approved a non-exclusive franchise with Toledo Edison
which runs through the end of 1998. In October 1995, the Toledo City Council
responded to a petition drive by appropriating funds to complete the Electric
Franchise Review Committee's study on whether to create a municipal electric
utility in Toledo. The Committee is also expected to look into the aggregating
of load to provide a conduit for retail wheeling to customers. A draft of the
consultant's report in connection with this study states that, if Centerior
Energy and Ohio Edison merge, a municipal system in Toledo could not compete
with Toledo Edison because of the rate reductions contained in the FirstEnergy
Regulatory Plan (see "Pending Merger of Centerior Energy and Ohio Edison" and
"Management's Financial Analysis" and Note 15 to Toledo Edison's financial
statements in the Financial Statements Section). The consultant's draft report
also states that, if the merger does not occur, a municipal system could be
competitive with Toledo Edison in one portion of Toledo. However, errors have
been found in the draft report which may change the content of the final
consultant's report. The final report will be considered by the Electric
Franchise Review Committee before making its recommendation to the Toledo City
Council later in 1997.
In January 1995, the City of Clyde ("Clyde"), which operates its own
municipal electric system, passed ordinances to force Toledo Edison to remove
most of its equipment from within Clyde's borders and to prevent any residential
and commercial customers within Clyde from obtaining service from Toledo Edison.
Clyde subsequently asked the PUCO to authorize the removal of Toledo Edison
equipment under the Miller Act. The Miller Act is an Ohio statute which provides
that a utility cannot be required to withdraw or abandon its facilities and
services in a city without a demonstration that such action is in the public
interest and without the approval of the PUCO. Toledo Edison challenged Clyde's
Miller Act proceeding before the PUCO and filed an action in the Court of
Appeals in Sandusky County, Ohio to challenge Clyde's ordinance prohibiting
customers from using Toledo Edison service. The Court of Appeals denied Toledo
Edison's challenge, and Toledo Edison appealed to the Ohio Supreme Court. In
August 1996, the Supreme Court ruled that Toledo Edison can continue to serve
customers who were customers prior to the establishment of the municipal system,
but Clyde has the exclusive right to serve new customers. The PUCO had
previously issued a ruling in April 1996 that Clyde cannot force Toledo Edison
to abandon service within Clyde. The ordinance that prevented Toledo Edison from
serving customers in Clyde was repealed in an initiative ballot issue in
November 1996. Toledo Edison currently serves approximately 345 customers within
Clyde.
In October 1995, Chase Brass & Copper Co., Inc. ("Chase Brass") terminated
its service with Toledo Edison and began to receive its electric service from a
consortium of four municipal electric systems and AMP-Ohio. Service is being
provided over a transmission line owned by AMP-Ohio. Although the Ohio
Constitution allows municipal electric systems to sell and deliver limited
amounts of power outside their municipal boundaries, Toledo Edison has filed two
lawsuits in Williams County (Ohio) Common Pleas Court against the four
municipalities and AMP-Ohio contending, in part, that this arrangement violates
the legal limits of such sales and that AMP-Ohio's system design for this
transaction raises certain safety issues. North Western Electric Cooperative,
whose certified territory is crossed by AMP-Ohio's transmission line, has also
filed suit to challenge this transaction. The loss of Chase Brass as a customer
reduced Toledo Edison's annual net income by about $1.6 million based on 1994
sales levels. As yet, no ruling has been issued by the Williams County Common
Pleas Court.
In addition, Chase Brass and other surrounding businesses and residences in
Jefferson Township continue to seek incorporation as a municipality to be named
the Village of Holiday City. The Williams County Board of Commissioners and the
Williams County Court of Common Pleas issued an order permitting the area to be
incorporated. Toledo Edison appealed the Court's order to the Sixth District
Court of Appeals, thereby staying the incorporation proceedings. The Court of
Appeals ruled against Toledo Edison, finding a lack of standing. Toledo Edison
then appealed to the Ohio Supreme Court, thereby staying the incorporation
proceedings again. On April 23, 1997, the Ohio Supreme Court denied Toledo
Edison's appeal. Toledo Edison does not plan to apply for reconsideration at the
Ohio Supreme Court.
The new municipality can negotiate with other utilities for electric power.
The other businesses in the proposed municipality previously terminated their
service with Toledo Edison and are receiving electric service from the Village
of Montpelier, one of the consortium now supplying Chase Brass.
21
<PAGE> 25
For additional information on the effects of the CEC-OE Merger on Toledo
Edison's relationship with AMP-Ohio, see "Pending Merger of Centerior Energy and
Ohio Edison -- Regulatory Matters."
SALES OF ELECTRICITY
Kilowatt-hour sales by the Companies follow a seasonal pattern marked by
increased customer usage in the summer for air conditioning and in the winter
for heating. Historically, Cleveland Electric has experienced its heaviest
demand for electric service during the summer months because of a significant
air conditioning load on its system and a relatively low amount of electric
heating load in the winter. Toledo Edison, although having a significant
electric heating load, has experienced in recent years its heaviest demand for
electric service during the summer months because of heavy air conditioning
usage.
Cleveland Electric's largest customer is a steel manufacturer which has two
major steel producing facilities. Sales to these facilities accounted for 3.3%
of Cleveland Electric's 1996 total electric operating revenues. The loss of
these facilities would reduce Cleveland Electric's annual net income by about
$16 million based on 1996 sales levels.
The largest customer served by Toledo Edison is a major automobile
manufacturer. Sales to this customer accounted for 3.9% of Toledo Edison's 1996
total electric operating revenues. The loss of this customer would reduce Toledo
Edison's annual net income by about $11 million based on 1996 sales levels.
FUEL SUPPLY
Generation by type of fuel for 1996 was 68% coal-fired and 32% nuclear for
Cleveland Electric and 48% coal-fired and 52% nuclear for Toledo Edison.
Coal. In 1996, Cleveland Electric and Toledo Edison burned 5.9 million tons
and 2.1 million tons of coal, respectively, for electric generation. Each
utility normally maintains a reserve supply of coal sufficient for about 20 days
of normal operations. On February 1, 1997, this reserve was about 20 days for
plants operated by Cleveland Electric, 16 days for the plant operated by Toledo
Edison and 35 days for the Mansfield Plant, which is operated by Pennsylvania
Power.
In 1996, about 45% of Cleveland Electric's coal requirements were purchased
under long-term contracts, with the longest remaining term being almost seven
years. In most cases, these contracts provide for adjusting the price of the
coal on the basis of changes in coal quality and mining costs. The sulfur
content of the coal purchased under these contracts ranges from less than 1% to
about 4%. Additionally, about 34% of Cleveland Electric's coal requirements were
purchased under short-term contracts (nine to twelve-month terms) with price
adjustments on the basis of coal quality. The sulfur content of the short-term
contracts ranged from 1.5% to 1.9%. The balance of Cleveland Electric's coal was
purchased on the spot market with sulfur content ranging from less than 1% to
4%.
In 1996, about 54% of Toledo Edison's coal requirements were purchased
under long-term contracts, with the longest remaining term being almost four
years. In most cases, these contracts provide for adjusting the price of the
coal on the basis of changes in coal quality and mining costs. The sulfur
content of the coal purchased under these contracts ranges from less than 1% to
4%. The balance of Toledo Edison's coal was purchased on the spot market with
sulfur content from less than 1% to 4%.
In May 1996, Cleveland Electric and The Ohio Valley Coal Company ("Ohio
Valley") terminated their existing coal supply agreement, which was scheduled to
continue until September 1997, and entered into a new coal supply agreement
scheduled to expire in September 1997. Under the prior agreement, Cleveland
Electric had agreed to pay Ohio Valley certain amounts to cover Ohio Valley's
costs, including amounts sufficient to service long-term debt and lease
obligations incurred by Ohio Valley. Cleveland Electric also agreed to assume
certain Ohio Valley costs and expenses, including mine closing costs, upon
termination of that agreement. However, under the new agreement, the terms and
conditions were revised whereby Cleveland Electric is only obligated to purchase
and pay Ohio Valley for a specified tonnage of coal during the term of the
agreement and has no responsibility for Ohio Valley's debt and lease obligations
and other expenses,
22
<PAGE> 26
including mine closing costs. The May 1996 agreement has been replaced by a new
agreement obligating Cleveland Electric to purchase at fixed prices a specified
tonnage of coal by the end of 1999.
The CAPCO Group companies have a long-term contract with Quarto Mining
Company ("Quarto") and Consolidation Coal Company for the supply of about
75%-85% of the annual coal needs of the Mansfield Plant. The contract is
scheduled to run through at least the end of 1999, and the price of coal is
adjustable to reflect changes in labor, materials, transportation and other
costs. The CAPCO Group companies have guaranteed, severally and not jointly, the
debt and lease obligations incurred by Quarto to develop, equip and operate two
of the mines which supply the Mansfield Plant. At December 31, 1996, the total
dollar amount of Quarto's debt and lease obligations guaranteed by Cleveland
Electric was $19.2 million and by Toledo Edison was $11.2 million. Cleveland
Electric and Toledo Edison expect that Quarto revenues from sales of coal to the
CAPCO Group companies will continue to be sufficient for Quarto to meet its debt
and lease obligations.
The Companies' least cost plan for complying with the Clean Air Act of 1970
and its 1990 Amendments, which was included in the agreement approved by the
PUCO in February 1993 in connection with the Companies' 1992 long-term forecast
and updated in 1995 proceedings, calls for compliance either through the use of
low-sulfur coal or the use of high sulfur-coal in combination with emission
allowances.
Nuclear. The acquisition and utilization of nuclear fuel involves six
distinct steps: (i) supply of uranium oxide raw material, (ii) conversion to
uranium hexafluoride, (iii) enrichment, (iv) fabrication into fuel assemblies,
(v) utilization as fuel in a nuclear reactor and (vi) storing or disposing of
spent fuel. The Companies have inventories of raw material sufficient to provide
nuclear fuel through 1997 for the operation of their nuclear generating units
and have contracts for fabrication services for all of that fuel. The CAPCO
Group companies have a contract with the United States Enrichment Corporation
("USEC") which will supply the needed enrichment services for their nuclear
units' fuel supply. However, the amount of enrichment services under the USEC
contract varies by CAPCO Group company, with Cleveland Electric's and Toledo
Edison's enrichment services reduced to 70% in 1997-1999 and reduced to 0% in
2000 and beyond. The additional required enrichment services are available.
Substantial additional fuel will have to be obtained in the future over the
remaining useful lives of the units. There is a plentiful supply of uranium
oxide raw material to meet the industry's nuclear fuel needs.
Oil. The Companies each have adequate supplies of fuel oil for their
oil-fired electric generating units which are used primarily as reserve and
peaking capacity.
NUCLEAR UNITS
The Companies' generating facilities include, among others, three nuclear
units owned or leased by the CAPCO Group -- Perry Unit 1, Beaver Valley Unit 2
and Davis-Besse. These three units are in commercial operation. Cleveland
Electric has responsibility for operating Perry Unit 1, Duquesne has
responsibility for operating Beaver Valley Unit 2 and Toledo Edison has
responsibility for operating Davis-Besse. Cleveland Electric and Toledo Edison
own, respectively, 31.11% and 19.91% of Perry Unit 1, 24.47% and 1.65% of Beaver
Valley Unit 2 and 51.38% and 48.62% of Davis-Besse. Cleveland Electric and
Toledo Edison also lease, as joint lessees, an additional 18.26% of Beaver
Valley Unit 2 as a result of a September 1987 sale and leaseback transaction
(see Note 2 to the 1996 financial statements in the Financial Statements
Section).
Davis-Besse was placed in commercial operation in 1977, and its operating
license expires in 2017. Perry Unit 1 and Beaver Valley Unit 2 were placed in
commercial operation in 1987, and their operating licenses expire in 2026 and
2027, respectively.
In 1989, the PUCO approved nuclear plant performance standards for the
Companies based on rolling three-year industry averages of availability for
pressurized water reactors and for boiling water reactors over the 1988-1998
period. Availability is the ratio of the number of hours a unit is available to
generate electricity (whether or not the unit is operated) to the number of
hours in the period, expressed as a percentage. The three-year availability
averages of the Companies' nuclear units are compared against the industry
averages for the same three-year period with a resultant penalty or banked
benefit. If the industry performance standards are not met, a penalty would be
incurred which would require the Companies to refund incremental
23
<PAGE> 27
replacement power costs to customers through the semiannual fuel cost rate
adjustment. However, if the performance of the Companies' nuclear units exceeds
the industry standards, a banked benefit results which can be used to offset
disallowances of incremental replacement power costs should future performance
be below industry standards.
The relevant industry standards for the 1994-1996 period are 80.7% for
pressurized water reactors such as Davis-Besse and Beaver Valley Unit 2 and
78.2% for boiling water reactors such as Perry Unit 1. The 1994-1996 combined
availability average for Davis-Besse and Beaver Valley Unit 2 was 87.7% and the
availability average for Perry Unit 1 was 72.2%. At December 31, 1996, the total
banked benefit for the Companies is estimated to be between $34 million and $37
million.
All three nuclear units have received generally favorable evaluations from
the NRC in their most recent Systematic Assessment of Licensee Performance
("SALP") reviews. Each of the functional areas evaluated is rated according to
three performance categories, with category 1 indicating performance
substantially exceeding regulatory requirements and that reduced NRC attention
may be appropriate; category 2 indicating performance above that needed to meet
regulatory requirements and that NRC attention may be maintained at normal
levels; and category 3 indicating performance does not significantly exceed that
needed to meet minimal regulatory requirements and that NRC attention should be
increased above normal levels.
The most recent review periods and SALP review scores for Beaver Valley
Unit 2, Perry Unit 1 and Davis-Besse are:
<TABLE>
<CAPTION>
BEAVER VALLEY UNIT 2 PERRY UNIT 1 DAVIS-BESSE
-------------------- --------------- ----------------
<S> <C> <C> <C>
SALP Review Period.................. 6/4/95-9/28/96 1/8/95-9/14/96 1/22/95-1/18/97
Operations.......................... 2 2 2
Engineering......................... 2 2 1
Maintenance......................... 1 2 1
Plant Support....................... 2 2 1
</TABLE>
In 1980, Congress passed the Low-Level Radioactive Waste Policy Act which
provides that the disposal of low-level radioactive waste is the responsibility
of the state where such waste is generated. The Act encourages states to form
compacts among themselves to develop regional disposal facilities. Failure by a
state or compact to begin implementation of a program could result in access
denial to the two facilities currently accepting low-level radioactive waste.
Ohio is part of the Midwest Compact and has responsibility for siting and
constructing a disposal facility. In June 1995, the Ohio legislature authorized
the siting, construction and operation of a disposal facility. In addition, the
South Carolina legislature voted to allow out-of-region generators (such as the
Companies' nuclear units) to resume shipments of low-level radioactive waste to
the Barnwell disposal facility. On June 26, 1997, the Midwest Compact Commission
voted to halt further siting activities in Ohio due to the availability of
disposal capacity at both the Barnwell facility and the Envirocare facility in
Utah. The Companies have also constructed interim storage facilities to house
the waste at each nuclear site. See "5. Ohio Abandons Nuclear Waste Project"
under "Part II. Other Information" of the Second Quarter 1997 Form 10-Q in the
Financial Statements Section.
Off-site disposal of spent nuclear fuel is unavailable, but the CAPCO Group
companies have contracts with the U.S. Department of Energy ("DOE") which
provide for the future acceptance of spent fuel for disposal by the federal
government. On December 17, 1996, the DOE notified the Companies that it would
be unable to begin acceptance of spent fuel for disposal by January 31, 1998 as
mandated by Section 302(a)(5)(B) of the Nuclear Waste Policy Act ("NWPA"). As a
result, the Companies along with 35 other nuclear utilities and 46 state
agencies have asked for federal court approval to stop payments into the Nuclear
Waste Fund and for an order requiring the DOE to take immediate action to comply
with NWPA. On-site storage capacity at Davis-Besse, Perry Unit 1 and Beaver
Valley Unit 2 should be sufficient through 2017, 2011 and 2013, respectively.
See "Risk Factors -- Nuclear Operations" and Note 5(a) to the 1996
financial statements and "Outlook -- Nuclear Operations" in Management's
Financial Analysis contained in the Financial Statements Section for a
discussion of potential risks facing the Companies as owners and lessees of
nuclear generating units.
24
<PAGE> 28
FINANCING CAPABILITY
At June 30, 1997, Cleveland Electric had long-term debt outstanding of
approximately $3,011 million (68% of total capitalization) and Toledo Edison had
long-term debt outstanding of approximately $1,122 million (52% of total
capitalization). Also at June 30, 1997, Cleveland Electric and Toledo Edison had
approximately $3,230 million and $1,262 million, respectively, in aggregate
principal amount of first mortgage bonds outstanding under their respective
mortgages. (The outstanding first mortgage bond amounts for Cleveland Electric
and Toledo Edison include $140.4 million principal amount and $210.6 million
principal amount, respectively, of first mortgage bonds pledged to secure
obligations to various bank creditors.) At June 30, 1997, neither Company was
able to issue a material amount of additional first mortgage bonds except in
connection with refinancings.
Also at June 30, 1997, Cleveland Electric had fixed obligations for debt
other than first mortgage bonds and preferred stock with mandatory redemption
provisions of $229 million, and Toledo Edison had fixed obligations for debt
other than first mortgage bonds and preferred stock with mandatory redemption
provisions of $141 million. The Companies also have future minimum lease
payments of approximately $3,659 million for generation facility leases as of
June 30, 1997. See Note 2 to the 1996 financial statements in the Financial
Statements Section. From 1994-1996, aggregate fixed obligations for debt,
preferred stock and the imputed principal portion of the Companies' generation
facility operating leases have been reduced by $523 million. The net proceeds
from the sale of the Old Notes were used by the Companies to refinance $720
million of the lessor debt related to their operating lease commitments for the
Mansfield Plant, resulting in a reduction of the aggregate principal amount of
the lessor debt by about $153 million after repayment of short-term financing
facilities and a reduction of the average life to maturity of the lessor debt
related to their Mansfield Plant operating lease commitments from approximately
11.8 years to approximately 7.0 years.
As of June 30, 1997, debt and preferred stock maturities and sinking fund
requirements for the remainder of 1997 were $115.9 million (including $70.5
million of first mortgage bonds refinanced in August 1997) for Cleveland
Electric and $41.5 million (including $10.1 million of first mortgage bonds
refinanced in August 1997) for Toledo Edison. In August 1997, Cleveland Electric
and Toledo Edison refinanced $180.6 million aggregate principal amount and $10.1
million principal amount, respectively, of first mortgage bonds issued as
security for certain tax-exempt bonds issued by public authorities. Cleveland
Electric plans to refinance up to $550 million of outstanding first mortgage
bonds during the fourth quarter of 1997.
The Companies have $273 million in financing vehicles to support their
nuclear fuel leases, $83 million of which mature in 1997. Replacement financing
for the maturing issues may not be needed in 1997. A $125 million revolving
credit facility which matured in May 1997 has been extended to May 1998. The
Companies expect to meet their remaining financing requirements with internal
cash generation, cash reserves and short-term borrowings.
Also, in June 1997, in connection with the lease refinancing discussed
above, Centerior Energy and the Companies arranged for $155 million of
short-term borrowings with variable interest rates (at that time, with a
weighted average interest rate of 6.8%). Of that amount, Centerior Energy
borrowed $30 million under the revolving credit facility which was renewed in
May 1997. The Companies also had unsecured borrowings totaling $100 million
guaranteed by Centerior Energy, and Centerior Energy had $25 million of
unsecured borrowings jointly and severally guaranteed by the Companies. While
the $25 million amount is outstanding, Centerior Energy has agreed not to use
$25 million of the revolving credit facility.
The Companies expect their foreseeable future cash needs to be satisfied
with internally generated cash and available credit facilities and, therefore,
that they will not need to issue first mortgage bonds, except in connection with
planned refinancings.
There are no restrictions on Cleveland Electric's ability to issue
preferred or preference stock, and there are no restrictions on Toledo Edison's
ability to issue preference stock. Under its articles of incorporation, Toledo
Edison cannot issue preferred stock unless certain earnings coverage
requirements are met. Based on its earnings for the 12 months ended June 30,
1997, Toledo Edison could not issue additional preferred stock.
25
<PAGE> 29
The availability and cost of capital to meet the Companies' external
financing needs depend upon such factors as financial market conditions and the
Companies' credit ratings. At the time of the Offering, credit ratings for the
Companies were as follows:
<TABLE>
<CAPTION>
STANDARD & POOR'S MOODY'S
----------------- -------------
<S> <C> <C>
First mortgage bonds.................................... BB Ba2
Unsecured notes of Cleveland Electric................... B+ Ba3
Unsecured notes of Toledo Edison........................ B+ B1
Preferred stock......................................... B b2
</TABLE>
Current credit ratings for the Companies are as follows:
<TABLE>
<CAPTION>
STANDARD & POOR'S MOODY'S
----------------- -------------
<S> <C> <C>
First mortgage bonds.................................... BB+ Ba1
Unsecured notes......................................... BB- Ba3
Preferred stock......................................... BB- b1
</TABLE>
These ratings reflect recent upgrades by both Standard & Poor's and Moody's
and assume, among other things, consummation of the CEC-OE Merger. See "Risk
Factors -- Consummation of the CEC-OE Merger" and "Pending Merger of Centerior
Energy and Ohio Edison."
Standard & Poor's has assigned the Secured Notes a rating of "BB+" and
Moody's has assigned the Secured Notes a rating of "Ba1." Any desired further
explanation of the significance of these ratings should be obtained from
Standard & Poor's or Moody's, respectively. The Companies furnished Standard &
Poor's and Moody's with certain information and materials with respect to the
Secured Notes and the Companies. Generally, rating agencies base their ratings
on the information and materials so furnished to them and on their own
investigations, studies and assumptions. There is no assurance that such ratings
will continue for any given period of time or that they will not be lowered or
withdrawn entirely if, in the judgment of the rating agencies, circumstances so
warrant. Any such change in or withdrawal of such ratings could have an adverse
effect on the market price of the Secured Notes. The Companies have not applied
for a rating with respect to the Secured Notes from any other credit rating
agency.
FirstEnergy plans to account for the CEC-OE Merger as a purchase in
accordance with generally accepted accounting principles. If FirstEnergy elects
to apply, or "push down," the effects of purchase accounting to the financial
statements of the Companies, Cleveland Electric would record adjustments to: (1)
reduce the carrying value of its nuclear generating plant by $880 million to
fair value; (2) recognize goodwill of $675 million; (3) reduce its common stock
equity by $258 million; (4) reset its retained earnings to zero; and (5) reduce
its related deferred federal income tax liability by $308 million; and Toledo
Edison would record adjustments to: (1) reduce the carrying value of its nuclear
generating plant by $370 million to fair value; (2) recognize goodwill of $307
million; (3) reduce its common stock equity by $124 million; (4) reset its
retained earnings to zero; and (5) reduce its related deferred federal income
tax liability by $130 million. These amounts reflect FirstEnergy's estimates of
the pro forma adjustments for the Companies as of December 31, 1996. The actual
adjustments to be recorded could be materially different from the estimates.
FirstEnergy has not decided whether to push down the effects of purchase
accounting to the financial statements of the Companies if the CEC-OE Merger is
completed.
If upon completion of the CEC-OE Merger FirstEnergy elects to apply
push-down accounting to the Companies, the available bondable property of each
Company would be reduced to below zero. However, each Company would still be
able to issue refundable bonds subject to certain limitations. See "Description
of Cleveland Electric Bonds and Toledo Edison Bonds," and "Pending Merger of
Centerior Energy and Ohio Edison -- Regulatory Matters." In addition, each
Company will also have the flexibility to issue cash-backed first mortgage bonds
or refinance on an unsecured basis, if necessary.
26
<PAGE> 30
CONSTRUCTION PROGRAM
The Companies carry on a continuous program of constructing transmission,
distribution and general facilities and modifying existing generating facilities
to meet anticipated demand for electric service and to comply with governmental
regulations. The Companies' 1996 long-term (20-year) forecast, as filed with the
PUCO, projects long-term annual growth rates in peak demand and kilowatt-hour
sales of 0.7% and 1.0%, respectively, after demand-side management
considerations. The Companies' integrated resource plan for the 1990s (which is
included in the long-term forecast) combines peak clipping demand-side
management programs with maximum utilization of existing generating capacity to
postpone the need for new generating units until the next decade. Cleveland
Electric's Lake Shore Plant ("Lake Shore") Unit 18, a 245,000-kilowatt unit
which was placed on cold standby status in October 1993, is scheduled to resume
active status in 2000.
According to the current long-term integrated resource plan, the Companies
do not plan to put into service any new generating capacity until 2008.
The following tables show, categorized by major components, the
construction expenditures by Cleveland Electric and Toledo Edison during 1994,
1995 and 1996 and the estimated cost of their construction programs for 1997
through 2001, in each case including allowance for funds used during
construction and excluding nuclear fuel (however, consummation of the CEC-OE
Merger is expected to reduce the Companies' cash construction expenditures from
those reported in the tables):
<TABLE>
<CAPTION>
ACTUAL ESTIMATED
------------------ ---------------------------------
1994 1995 1996 1997 1998 1999 2000 2001
----- ----- ---- ----- ----- ----- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CLEVELAND ELECTRIC
Transmission, Distribution and General
Facilities................................. $ 53 $ 68 $ 79 $ 76 $ 81 $ 94 $ 96 $ 105
Renovation and Modification of Generating
Units
Nuclear.................................... 18 12 17 18 15 17 11 9
Nonnuclear................................. 61 63 19 18 12 18 16 17
Clean Air Act Amendments Compliance.......... 24 12 (4) 1 10 8 3 0
---- ---- ---- ---- ---- ---- ---- ----
Total.............................. $ 156 $ 155 $111 $ 113 $ 118 $ 137 $ 126 $ 131
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
ACTUAL ESTIMATED
------------------ ---------------------------------
1994 1995 1996 1997 1998 1999 2000 2001
----- ----- ---- ----- ----- ----- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOLEDO EDISON
Transmission, Distribution and General
Facilities................................. $ 18 $ 37 $ 32 $ 38 $ 44 $ 34 $ 36 $ 25
Renovation and Modification of Generating
Units
Nuclear.................................... 10 6 12 14 12 14 10 6
Nonnuclear................................. 12 9 5 9 7 8 4 4
Clean Air Act Amendments Compliance.......... 1 3 0 1 6 6 2 0
---- ---- ---- ---- ---- ---- ---- ----
Total.............................. $ 41 $ 55 $ 49 $ 62 $ 69 $ 62 $ 52 $ 35
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
27
<PAGE> 31
Each company in the CAPCO Group is responsible for financing the portion of
the capital costs of nuclear fuel equivalent to its ownership and leased
interest in the unit in which the fuel will be utilized. See "The
Companies -- Fuel Supply -- Nuclear" for information regarding nuclear fuel
supplies and Note 6 in the Financial Statements regarding leasing arrangements
to finance nuclear fuel capital costs. Nuclear fuel capital costs incurred by
Cleveland Electric and Toledo Edison during 1994, 1995 and 1996 and their
estimated nuclear fuel capital costs for 1997 through 2001 are as follows:
<TABLE>
<CAPTION>
ACTUAL ESTIMATED
------------------ ---------------------------------
1994 1995 1996 1997 1998 1999 2000 2001
----- ----- ---- ----- ----- ----- ----- -----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cleveland Electric........................... $ 26 $ 19 $ 37 $ 25 $ 34 $ 40 $ 34 $ 40
Toledo Edison................................ $ 21 $ 12 $ 32 $ 22 $ 30 $ 30 $ 29 $ 32
</TABLE>
PROPERTIES
For a description of Cleveland Electric's properties, see "Descriptions of
Cleveland Electric Bonds and Toledo Edison Bonds -- Cleveland Electric
Bonds -- Title to Property," and for a description of Toledo Edison's
properties, see "Descriptions of Cleveland Electric Bonds and Toledo Edison
Bonds -- Toledo Edison Bonds -- Title to Property."
PENDING MERGER OF CENTERIOR ENERGY
AND OHIO EDISON
On September 16, 1996, Centerior Energy and Ohio Edison jointly announced
an agreement between them under which Centerior Energy would merge with Ohio
Edison in a stock-for-stock transaction to form FirstEnergy. Upon consummation
of the CEC-OE Merger, Centerior Energy common stock share owners will receive
0.525 share of FirstEnergy common stock for each share of Centerior Energy
common stock owned, and Ohio Edison share owners will receive one share of
FirstEnergy common stock for each share of Ohio Edison common stock owned.
Following the CEC-OE Merger, FirstEnergy will directly hold all of the issued
and outstanding common stock of Ohio Edison, Cleveland Electric, Toledo Edison,
the Service Company and the three other wholly owned subsidiaries of Centerior
Energy.
If the CEC-OE Merger were completed today, FirstEnergy would be the 11th
largest investor-owned electric utility system in the U.S., based on combined
annual sales of approximately 64 billion kilowatt-hours, and would have assets
of over $18 billion, a customer base of 2.1 million and a service area of 13,200
square miles located within a 500-mile radius of one-half of the U.S.
population. See "Management's Financial Analysis" and Note 15 to the 1996
financial statements in the Financial Statements Section and "Risk
Factors -- Consummation of the CEC-OE Merger."
Various aspects of the CEC-OE Merger remain subject to approval by the FERC
and the SEC and to certain other conditions. On July 16, 1997, the FERC issued
an order which delayed consummation of the CEC-OE Merger. The FERC gave the
Companies and Ohio Edison 15 days to elect one of two options: proceed to
concurrent trial-type hearings with the FERC and the PUCO, or revise the
screening analysis and propose appropriate mitigation measures. The FERC order
suggested that possible mitigation measures include: (1) divestiture of
generation assets, (2) creation of a regional independent system operator to
manage the two companies' combined transmission grids, (3) expansion of
transmission capacity and (4) commitment of internal transmission capacity to
alternative suppliers.
The order also directed the Companies and Ohio Edison to continue to
attempt to negotiate an adequate ratepayer protection mechanism with three
Pennsylvania municipalities which intervened but have not yet settled, and
report to the FERC within 30 days the results of those negotiations, whereupon
if no settlement is reached the FERC will decide the issue on the written record
or set it for hearing.
On July 30, 1997, the Companies and Ohio Edison formally notified the FERC
of their election to revise the screening analysis and propose appropriate
mitigation measures. On August 8, 1997, Ohio Edison and the Companies filed a
revised analysis, additional testimony and proposed mitigation measures fully
responsive to
28
<PAGE> 32
the FERC's July 16, 1997 order. While the revised analysis suggests potential
anticompetitive effects in certain markets under certain limited circumstances,
the Companies believe that the mitigation measures more than adequately address
these concerns through a variety of transmission solutions which are intended to
ensure that the proposed merger's effects are procompetitive. As a result of the
mitigation measures, municipal electric systems in Ohio Edison's and the
Companies' service areas will be able to take full advantage of additional third
party generation sources made available to them as a result of FirstEnergy's
open access transmission tariff. The comment period on the August 8, 1997
submissions expires on September 22, 1997. The Companies continue to believe the
FERC will approve the proposed merger prior to the end of 1997. See "1. Pending
Merger with Ohio Edison" under "Part II. Other Information" of the Second
Quarter 1997 Form 10-Q in the Financial Statements Section. However, there can
be no assurance that such approval can be obtained on terms which Centerior
Energy and Ohio Edison will find acceptable. See "Risk Factors -- Consummation
of the CEC-OE Merger."
REASONS FOR THE CEC-OE MERGER
The Companies believe that the CEC-OE Merger will create a company that is
better positioned to compete in the increasingly competitive electric utility
industry than either Centerior Energy or Ohio Edison would be on a stand-alone
basis. FirstEnergy expects to achieve this result through:
(a) improved coordination, control and operation of major generating
plants and transmission facilities;
(b) accelerated debt reduction;
(c) elimination of duplicative activities;
(d) reduced operating expenses and cost of capital;
(e) elimination or deferral of certain capital expenditures;
(f) development of opportunities for sales of energy-related products
and services;
(g) enhanced cash flow; and
(h) enhanced purchasing capabilities for goods and services.
The Companies believe the combination of Centerior Energy and Ohio Edison
is a natural alliance of companies with adjoining service areas who already
share ownership in many of their major generating assets. As a result of the
CEC-OE Merger, FirstEnergy expects to realize opportunities to eliminate
duplicative costs, maximize efficiencies and increase management flexibility in
order to enhance revenues, cash flow and earnings and be a more effective
competitor in the increasingly competitive electric utility industry.
REGULATORY MATTERS
On January 30, 1997, the PUCO approved a rate reduction and economic
development plan for the Companies to be effective upon the consummation of the
CEC-OE Merger and extending through 2006 ("FirstEnergy Regulatory Plan"). The
FirstEnergy Regulatory Plan provides for rate reductions, frozen fuel cost
factors, economic development incentive prices, an energy-efficiency program and
an earnings cap. The FirstEnergy Regulatory Plan requires, for regulatory
purposes, a revaluation of or an accelerated reduction in the Companies'
investment in nuclear plant and certain regulatory assets (excluding amounts due
from customers for future federal income taxes) by at least $2 billion by the
end of 2005. Only a portion of the $2 billion of accelerated costs is expected
to be charged against earnings for financial reporting purposes by 2005. To the
extent the revaluation or an accelerated reduction of assets required by the
FirstEnergy Regulatory Plan for Cleveland Electric and Toledo Edison is
reflected on the Companies' financial accounting books (which has not been
determined), and is also satisfied with physical plant rather than regulatory
assets (which also has not been determined), bondable property at each Company
will be reduced. If, in addition, some or all of the required reduction is
obtained by a change in depreciable life, Toledo Edison's (but not Cleveland
Electric's) net earnings would be reduced prospectively. Toledo Edison may issue
some refundable bonds without a net earnings certificate. See "Descriptions of
Cleveland Electric Bonds and Toledo Edison Bonds -- Toledo Edison
Bonds -- Issuance of Additional TE First Mortgage Bonds."
29
<PAGE> 33
FirstEnergy believes that the FirstEnergy Regulatory Plan will not provide
for the full recovery of costs and a fair return on the investment associated
with the Companies' nuclear operations. Pursuant to the order of the PUCO
approving the FirstEnergy Regulatory Plan, FirstEnergy was required to submit to
the PUCO staff the regulatory accounting and cost recovery details for
implementing the FirstEnergy Regulatory Plan. Such details were submitted in
July 1997. FirstEnergy expects that the Companies will discontinue the
application of SFAS 71 for their nuclear operations if and when consummation of
the CEC-OE Merger becomes probable. The remainder of their business is expected
to continue to comply with the provisions of SFAS 71. At the time the CEC-OE
Merger becomes probable, the Companies would be required to write off certain of
their regulatory assets for financial reporting purposes. The write-off amounts
would be determined at that time. FirstEnergy estimates the write-off will total
approximately $750 million. Under the FirstEnergy Regulatory Plan, some or all
of this write-off cannot be applied toward the $2 billion regulatory commitment
discussed above. For financial reporting purposes, the net book value of the
Companies' nuclear generating units is not expected to be impaired. If events
cause one or both Companies to conclude they no longer meet the criteria for
applying SFAS 71 for the remainder of their business, they would be required to
write off their remaining regulatory assets and measure all other assets for
impairment.
On June 11, 1997, an agreement was reached between FirstEnergy and the City
of Cleveland that provides the framework for resolving transmission and
distribution issues between Cleveland Electric and CPP. FirstEnergy believes
that the agreement will enable both Cleveland Electric and CPP to better serve
their customers while enhancing opportunities for economic development and
growth within their respective service areas. In a related development, an
agreement was also reached with AMP-Ohio that forms a framework for resolving
certain transmission and operating issues. As a result of the agreements, the
City of Cleveland and AMP-Ohio have withdrawn their opposition to the CEC-OE
Merger at both the federal and state levels and all pending litigation involving
the City of Cleveland or CPP and the Companies has been stayed to allow for
settlement discussions.
Reference is made to "Management's Financial Analysis" (specifically,
"Strategic Plan," "Pending Merger with Ohio Edison" and "FirstEnergy Rate Plan"
under "Management's Financial Analysis -- Outlook") and Note 15 to the 1996
financial statements in the Financial Statements Section for more information
concerning the CEC-OE Merger and the FirstEnergy Regulatory Plan. Also, see
"Risk Factors -- Consummation of the CEC-OE Merger" and "The
Companies -- Financing Capability."
PENDING MERGER OF
CLEVELAND ELECTRIC AND TOLEDO EDISON
In March 1994, Centerior Energy announced a plan to merge Toledo Edison
into Cleveland Electric. In June 1995, the preferred share owners of Cleveland
Electric and Toledo Edison approved actions necessary for the two companies to
merge. However, the merger agreement between Centerior Energy and Ohio Edison
requires the approval of Ohio Edison prior to the consummation of the Cleveland
Electric and Toledo Edison merger. Ohio Edison has not yet made a decision on
this matter. In the meantime, at the request of the NRC, pending Ohio Edison's
decision, both Cleveland Electric and Toledo Edison have withdrawn their request
for authorization to transfer certain NRC licenses to the merged entity. All
other regulatory approvals have been obtained.
EFFECT OF PENDING MERGER ON CEI FIRST MORTGAGE AND TE FIRST MORTGAGE
Substantially all of the fixed properties and the franchises of Cleveland
Electric ("CEI Mortgaged Property") are subject to the lien of the CEI First
Mortgage (as hereinafter defined), and substantially all of the fixed properties
and the franchises of Toledo Edison ("TE Mortgaged Property") are subject to the
lien of the TE First Mortgage (as hereinafter defined). If the merger of Toledo
Edison into Cleveland Electric is consummated, Cleveland Electric will acquire
all of the assets of Toledo Edison, including the TE Mortgaged Property, and the
TE Mortgaged Property will become subject to the lien of the CEI First Mortgage,
which lien will be junior to the lien of the TE First Mortgage.
30
<PAGE> 34
If the merger is consummated, the only assets of Cleveland Electric which
will be subject to the lien of the TE First Mortgage will be the TE Mortgaged
Property at the time of the merger and properties thereafter acquired by
Cleveland Electric which are betterments, extensions, improvements, additions,
repairs, renewals, replacements, substitutions and alterations to, upon, for and
of the TE Mortgaged Property and all property held or acquired for use or used
upon or in connection with or appertaining to the TE Mortgaged Property. The
lien of the CEI First Mortgage would, after the merger, continue to be a first
lien on the CEI Mortgaged Property. After the merger, the existing junior liens
of the subordinate mortgages of Cleveland Electric and Toledo Edison would be
junior to the liens of the CEI First Mortgage and the TE First Mortgage.
Cleveland Electric expects that, after the merger, it would enter into a
new indenture ("New Indenture") which will prohibit the issuance of any bonds
under the TE First Mortgage or the CEI First Mortgage, except to the trustee
under the New Indenture in the same principal amounts as, and as the basis for
the issuance of, bonds issued by Cleveland Electric under the New Indenture. The
New Indenture trustee would hold such TE First Mortgage bonds and CEI First
Mortgage bonds for the benefit of the holders of the New Indenture bonds, which
are thus expected to be rated the same as the TE First Mortgage bonds and the
CEI First Mortgage bonds.
A substantial portion of the properties owned by Cleveland Electric after
the merger, including some or all of the CEI Mortgaged Property and TE Mortgaged
Property, would be subject to the lien of the New Indenture, and such lien will
be junior to the liens of the CEI First Mortgage and the TE First Mortgage, but
senior to the existing liens of the subordinate mortgages of Cleveland Electric
and Toledo Edison.
At such time as the New Indenture trustee holds all of the outstanding CEI
First Mortgage bonds or TE First Mortgage bonds, such bonds will be canceled,
the indenture under which such bonds were issued will be discharged and the lien
of the New Indenture will become a first mortgage lien on the properties which
were subject to the first mortgage lien of the discharged indenture.
COMBINED PRO FORMA CONDENSED FINANCIAL STATEMENTS FOR CLEVELAND ELECTRIC AND
TOLEDO EDISON
The following pro forma condensed balance sheets and income statements give
effect to the agreement between Cleveland Electric and Toledo Edison to merge
Toledo Edison into Cleveland Electric. These statements are unaudited and based
on accounting for the merger on a method similar to a pooling of interests.
These statements combine the Companies' historical balance sheets at June 30,
1997, December 31, 1996 and December 31, 1995 and their historical income
statements for the 12 months ended June 30, 1997 and for each of the three years
ended December 31, 1996.
The following pro forma data is not necessarily indicative of the results
of operations or the financial condition which would have been reported had the
merger been in effect during those periods or which may be reported in the
future. The pro forma data does not reflect any potential effects related to the
consummation of the CEC-OE Merger. See "The Companies -- Financing Capability"
for a discussion of the effects on the Companies' financial statements if
FirstEnergy elects to apply push-down accounting to the Companies.
31
<PAGE> 35
COMBINED PRO FORMA CONDENSED BALANCE SHEETS
OF CLEVELAND ELECTRIC AND TOLEDO EDISON
(UNAUDITED)
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
AT JUNE 30, 1997
--------------------------------------------------
HISTORICAL
-------------------
CLEVELAND TOLEDO PRO FORMA
ELECTRIC EDISON ADJUSTMENTS TOTALS
--------- ------ ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Property, Plant and Equipment..................... $ 7,859 $3,527 $ -- $11,386
Less: Accumulated Depreciation and Amortization... 3,026 1,552 -- 4,578
------ ------ ----- -------
Net Property, Plant and Equipment............ 4,833 1,975 -- 6,808
Current Assets.................................... 443 240 (92)(a) 591
Regulatory and Other Assets....................... 2,061 1,357 (18)(a,b) 3,400
------ ------ ----- -------
Total Assets............................ $ 7,337 $3,572 $(110) $10,799
====== ====== ===== =======
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock Equity............................. $ 1,010 $ 817 $ -- $ 1,827
Preferred Stock:
With Mandatory Redemption Provisions......... 172 2 -- 174
Without Mandatory Redemption Provisions...... 238 210 -- 448
Long-Term Debt.................................. 3,011 1,122 -- 4,133
------ ------ ----- -------
Total Capitalization.................... 4,431 2,151 -- 6,582
Current Liabilities............................... 794 364 (94)(a) 1,064
Deferred Credits and Other Liabilities............ 2,112 1,057 (16)(b,r) 3,153
------ ------ ----- -------
Total Capitalization and Liabilities.... $ 7,337 $3,572 $(110) $10,799
====== ====== ===== =======
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
--------------------------------------------------
HISTORICAL
-------------------
CLEVELAND TOLEDO PRO FORMA
ELECTRIC EDISON ADJUSTMENTS TOTALS
--------- ------ ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Property, Plant and Equipment..................... $ 7,809 $3,504 $ -- $11,313
Less: Accumulated Depreciation and Amortization... 2,899 1,489 -- 4,388
------ ------ ----- -------
Net Property, Plant and Equipment............ 4,910 2,015 -- 6,925
Current Assets.................................... 498 308 (102)(a,r) 704
Regulatory and Other Assets....................... 1,470 1,034 (18)(a,b,r) 2,486
------ ------ ----- -------
Total Assets............................ $ 6,878 $3,357 $(120) $10,115
====== ====== ===== =======
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock Equity............................. $ 1,045 $ 803 $ -- $ 1,848
Preferred Stock:
With Mandatory Redemption Provisions......... 186 3 -- 189
Without Mandatory Redemption Provisions...... 238 210 -- 448
Long-Term Debt.................................. 2,441 1,003 -- 3,444
------ ------ ----- -------
Total Capitalization.................... 3,910 2,019 -- 5,929
Current Liabilities............................... 878 278 (104)(a) 1,052
Deferred Credits and Other Liabilities............ 2,090 1,060 (16)(b,r) 3,134
------ ------ ----- -------
Total Capitalization and Liabilities.... $ 6,878 $3,357 $(120) $10,115
====== ====== ===== =======
</TABLE>
32
<PAGE> 36
COMBINED PRO FORMA CONDENSED BALANCE SHEETS
OF CLEVELAND ELECTRIC AND TOLEDO EDISON
(UNAUDITED)
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1995
--------------------------------------------------
HISTORICAL
-------------------
CLEVELAND TOLEDO PRO FORMA
ELECTRIC EDISON ADJUSTMENTS TOTALS
--------- ------ ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Property, Plant and Equipment..................... $ 7,724 $3,485 $ -- $11,209
Less: Accumulated Depreciation and Amortization... 2,693 1,405 1(r) 4,099
------ ------ ----- -------
Net Property, Plant and Equipment............ 5,031 2,080 (1) 7,110
Current Assets.................................... 598 327 (24)(a) 901
Regulatory and Other Assets....................... 1,523 1,067 (11)(b) 2,579
------ ------ ----- -------
Total Assets............................ $ 7,152 $3,474 $ (36) $10,590
====== ====== ===== =======
CAPITALIZATION AND LIABILITIES
Capitalization:
Common Stock Equity............................. $ 1,127 $ 763 $ -- $ 1,890
Preferred Stock:
With Mandatory Redemption Provisions......... 215 5 -- 220
Without Mandatory Redemption Provisions...... 241 210 -- 451
Long-Term Debt.................................. 2,666 1,068 -- 3,734
------ ------ ----- -------
Total Capitalization.................... 4,249 2,046 -- 6,295
Current Liabilities............................... 796 329 (27)(a,r) 1,098
Deferred Credits and Other Liabilities............ 2,107 1,099 (9)(a,b) 3,197
------ ------ ----- -------
Total Capitalization and Liabilities.... $ 7,152 $3,474 $ (36) $10,590
====== ====== ===== =======
</TABLE>
33
<PAGE> 37
COMBINED PRO FORMA CONDENSED INCOME STATEMENTS
OF CLEVELAND ELECTRIC AND TOLEDO EDISON
(UNAUDITED)
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
12 MONTHS ENDED JUNE 30, 1997
--------------------------------------------------------
HISTORICAL
--------------------
CLEVELAND TOLEDO PRO FORMA
ELECTRIC EDISON ADJUSTMENTS TOTALS
--------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Operating Revenues.......................... $ 1,788 $915 $(140)(c) $ 2,563
Operating Expenses.......................... 1,434 753 (140)(c,d) 2,047
------ ---- ----- ------
Operating Income.......................... 354 162 -- 516
Nonoperating (Loss)......................... (13) -- (4)(d,e,r) (17)
------ ---- ----- ------
Income Before Interest Charges............ 341 162 (4) 499
Interest Charges............................ 233 94 (5)(e,r) 322
------ ---- ----- ------
Net Income................................ 108 68 1 177
Preferred Dividend Requirements............. 37 17 -- 54
------ ---- ----- ------
Earnings Available for Common Stock......... $ 71 $ 51 $ 1 $ 123
====== ==== ===== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------
HISTORICAL
--------------------
CLEVELAND TOLEDO PRO FORMA
ELECTRIC EDISON ADJUSTMENTS TOTALS
--------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Operating Revenues.......................... $ 1,790 $897 $(133)(c,r) $ 2,554
Operating Expenses.......................... 1,431 741 (134)(c,d,r) 2,038
------ ---- ----- ------
Operating Income.......................... 359 156 1 516
Nonoperating (Loss)......................... (2) (4) (2)(d,e) (8)
------ ---- ----- ------
Income Before Interest Charges............ 357 152 (1) 508
Interest Charges............................ 240 95 (1)(e) 334
------ ---- ----- ------
Net Income................................ 117 57 -- 174
Preferred Dividend Requirements............. 39 17 -- 56
------ ---- ----- ------
Earnings Available for Common Stock......... $ 78 $ 40 $ -- $ 118
====== ==== ===== ======
</TABLE>
34
<PAGE> 38
COMBINED PRO FORMA CONDENSED INCOME STATEMENTS
OF CLEVELAND ELECTRIC AND TOLEDO EDISON
(UNAUDITED)
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------
HISTORICAL
--------------------
CLEVELAND TOLEDO PRO FORMA
ELECTRIC EDISON ADJUSTMENTS TOTALS
--------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Operating Revenues.......................... $ 1,769 $874 $(127)(c,r) $ 2,516
Operating Expenses.......................... 1,371 686 (129)(c,d,r) 1,928
------ ---- ----- ------
Operating Income.......................... 398 188 2 588
Nonoperating Income......................... 31 19 (2)(d) 48
------ ---- ----- ------
Income Before Interest Charges............ 429 207 -- 636
Interest Charges............................ 245 110 -- 355
------ ---- ----- ------
Net Income................................ 184 97 -- 281
Preferred Dividend Requirements............. 43 18 -- 61
------ ---- ----- ------
Earnings Available for Common Stock......... $ 141 $ 79 $ -- $ 220
====== ==== ===== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
--------------------------------------------------------
HISTORICAL
--------------------
CLEVELAND TOLEDO PRO FORMA
ELECTRIC EDISON ADJUSTMENTS TOTALS
--------- ------ ----------- ---------
<S> <C> <C> <C> <C>
Operating Revenues.......................... $ 1,698 $865 $(141)(c) $ 2,422
Operating Expenses.......................... 1,302 685 (143)(c,d) 1,844
------ ---- ----- ------
Operating Income.......................... 396 180 2 578
Nonoperating Income......................... 31 17 (2)(d,e,r) 46
------ ---- ----- ------
Income Before Interest Charges............ 427 197 -- 624
Interest Charges............................ 242 115 (1)(e) 356
------ ---- ----- ------
Net Income................................ 185 82 1 268
Preferred Dividend Requirements............. 45 20 1(r) 66
------ ---- ----- ------
Earnings Available for Common Stock......... $ 140 $ 62 $ -- $ 202
====== ==== ===== ======
</TABLE>
- ---------------
NOTES TO COMBINED PRO FORMA CONDENSED BALANCE SHEETS AND INCOME STATEMENTS
(UNAUDITED)
The Pro Forma Financial Statements include the following adjustments:
(a) Elimination of intercompany accounts and notes receivable and accounts
and notes payable.
(b) Reclassification of prepaid pension costs.
(c) Elimination of intercompany operating revenues and operating expenses.
(d) Elimination of intercompany working capital transactions.
(e) Elimination of intercompany interest income and interest expense.
(r) Rounding adjustments.
35
<PAGE> 39
THE EXCHANGE OFFER
BACKGROUND
The Old Notes were issued and sold by the Companies to the Placement Agents
on June 18, 1997 (the "Old Note Issue Date"). Thereafter, the Old Notes were
resold by the Placement Agents to certain purchasers in reliance on one or more
exemptions from the registration requirements of the Securities Act. Pursuant to
the Registration Agreement entered into by the Companies and the Placement
Agents ("Registration Agreement") as a condition to the obligations of the
Placement Agents under the Placement Agreement among the Companies and the
Placement Agents, the Companies agreed that, unless the Exchange Offer is
prohibited by applicable law, they would (i) use their reasonable best efforts
to cause the Registration Statement to become effective no later than 150 days
after the Old Note Issue Date and (ii) upon effectiveness of Registration
Statement, commence the Exchange Offer, maintain the effectiveness of the
Registration Statement for at least 30 days (or a longer period if required by
law) and deliver to the Exchange Agent New Notes in the same aggregate principal
amount as the Old Notes that were tendered by the holders thereof pursuant to
the Exchange Offer. A copy of the Registration Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part.
GENERAL
Subject to the terms and conditions described herein, all Old Notes validly
tendered and not withdrawn prior to the Expiration Date will be accepted for
exchange for New Notes.
The New Notes have terms identical to the terms of the Old Notes except
that the New Notes have been registered under the Securities Act and, following
the completion of the Exchange Offer and during the effectiveness of any
required Shelf Registration Statement, the holders of the Old Notes will not be
entitled to the contingent increase in the interest rate described below. The
New Notes will evidence the same debt as the Old Notes for which they are
exchanged and will be issued under, and be entitled to the benefits of, the Note
Indenture, which also authorized the issuance of the Old Notes.
If (a) the Companies determine that the Exchange Offer is not available or
may not be consummated as soon as practicable after the last date the Exchange
Offer is open because it would violate applicable law or the applicable
interpretations of the staff of the SEC; (b) the Exchange Offer is not
consummated by December 15, 1997; (c) the Placement Agents so request with
respect to the Old Notes not eligible to be exchanged for New Notes in the
Exchange Offer and held by them following consummation of the Exchange Offer; or
(d) any holder (other than an exchanging dealer) is not eligible to participate
in the Exchange Offer, or any holder (other than an exchanging dealer) that
participates in the Exchange Offer does not receive freely tradeable New Notes
on the date of the exchange for validly tendered (and not withdrawn) Old Notes,
the Companies will use all reasonable efforts to file a Shelf Registration
Statement, cause it to be declared effective and keep it effective for a period
of 120 days or such shorter period as may be necessary to allow for the resale
of all Old Notes. If the Exchange Offer is not consummated or a Shelf
Registration Statement with respect to resales of the Old Notes is not declared
effective by December 15, 1997, the interest rate borne by the Old Notes of each
series will be increased by .50% per annum until such time as such requirements
have been satisfied ("Additional Interest").
The Exchange Offer will be deemed to have been consummated upon the
Companies having exchanged New Notes for all outstanding Old Notes that have
been tendered and not withdrawn prior to the close of business on the Expiration
Date (other than Old Notes held by persons not eligible to participate in the
Exchange Offer) pursuant to the Exchange Offer. Upon consummation of the
Exchange Offer, holders of Old Notes seeking liquidity in their investment
(except, under certain circumstances, Participating Broker Dealers (as defined
in the Registration Agreement) and the Placement Agents) would have to rely on
exemptions to registration requirements under the securities laws, including the
Securities Act, and such holders will retain no rights under the Registration
Agreement except under certain limited circumstances. See "Risk Factors --
Consequences of Failure to Exchange."
36
<PAGE> 40
Upon the terms and subject to the conditions described in this Prospectus
and in the accompanying Letter of Transmittal, the Companies will accept all Old
Notes properly tendered and not withdrawn prior to 5:00 p.m., New York City
time, on the Expiration Date. The Companies will issue $1,000 principal amount
of each series of New Notes in exchange for each $1,000 principal amount of each
corresponding series of outstanding Old Notes accepted in the Exchange Offer.
Holders may tender some or all of their Old Notes pursuant to the Exchange Offer
in denominations of $1,000 and integral multiples thereof.
Based on no-action letters issued by the staff of the SEC to third parties,
the Companies believe that the New Notes issued pursuant to this Exchange Offer
in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by any holder thereof (other than (i) a broker-dealer who purchased
such Old Notes directly from the Companies to resell pursuant to Rule 144A or
any other available exemption under the Securities Act or (ii) a person that is
an "affiliate" of the Companies within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that the holder is acquiring the
New Notes in its ordinary course of business and is not participating, and has
no arrangement or understanding with any person to participate, in a
distribution of the New Notes. See Morgan Stanley & Co. Incorporated, SEC
No-Action Letter (available June 5, 1991) and Exxon Capital Holdings
Corporation, SEC No-Action Letter (available May 13, 1988). Holders of Old Notes
wishing to accept the Exchange Offer must represent to the Companies, as
required by the Registration Agreement, that such conditions have been met.
Each broker-dealer that receives New Notes in exchange for Old Notes held
for its own account, as a result of market-making or other trading activities,
must acknowledge that it will deliver a prospectus in connection with any resale
of such New Notes. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, such broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by such broker-dealer in connection with resales of New Notes if such New Notes
were acquired by such broker-dealer as a result of market-making or other
trading activities. The Companies have agreed that, for a period of 120 days
after the Expiration Date, they will make this Prospectus and any amendment or
supplement to this Prospectus available to any such broker-dealer for use in
connection with any such resale. See "Plan of Distribution." No underwriter is
being used in connection with the Exchange Offer.
As of the date of this Prospectus, $720 million aggregate principal amount
of Old Notes is outstanding. In connection with the issuance of the Old Notes,
the Companies arranged for the Old Notes initially purchased by QIBs or in
offshore transactions in reliance on Regulation S under the Securities Act to be
issued and transferable in book-entry form through the facilities of DTC, acting
as depositary. The New Notes are also issuable and transferable in book-entry
form through DTC. See "Description of the New Notes -- Book-Entry Delivery and
Form."
The Companies will be deemed to have accepted validly tendered Old Notes
when, as and if the Companies have given oral or written notice thereof to the
Exchange Agent. See "--Exchange Agent." The Exchange Agent will act as agent for
the tendering holders of Old Notes for the purpose of receiving New Notes from
the Companies and delivering New Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted Old Notes will be returned, without
expense, to the tendering holder thereof as promptly as practicable after the
Expiration Date.
Holders of the Old Notes do not have any appraisal or dissenters' rights
under the Note Indenture in connection with the Exchange Offer. The Companies
intend to conduct the Exchange Offer in accordance with the Registration
Agreement and the applicable requirements of the Securities Act, the Exchange
Act and the rules and regulations of the SEC thereunder.
Holders of Old Notes who tender in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Companies will pay all reasonable charges
37
<PAGE> 41
and expenses, other than certain applicable taxes and counsel fees, incurred in
connection with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATES; DELAYS; EXTENSIONS; AMENDMENTS
The term "Expiration Date" means the Expiration Date set forth on the cover
of this Prospectus, unless the Companies, in their sole discretion, extend the
Exchange Offer, in which case the term "Expiration Date" means the latest date
to which the Exchange Offer is extended.
The Companies will notify the Exchange Agent of any extension of the
Expiration Date by oral or written notice and will mail to the record holders of
Old Notes an announcement thereof, each prior to 9:00 a.m., New York City time,
on the next business day after the previously scheduled Expiration Date.
In the case of an extension, such announcement shall include disclosure of
the approximate number of Old Notes deposited to date and shall be made prior to
9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
The Companies reserve the right, in their sole discretion, (i) to delay
acceptance of any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer and to refuse to accept Old Notes not previously accepted, if any
of the conditions set forth herein under "--Termination" shall have occurred and
shall not have been waived by the Companies (if permitted to be waived by the
Companies), by giving oral or written notice of such delay, extension or
termination to the Exchange Agent, and (ii) to amend the terms of the Exchange
Offer in any manner deemed by them to be advantageous to the holders of the Old
Notes. Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
Exchange Agent. If the Exchange Offer is amended in a manner determined by the
Companies to constitute a material change, the Companies will promptly disclose
such amendment in a manner reasonably calculated to inform the holders of the
Old Notes of such amendment.
Without limiting the manner in which the Companies may choose to make
public announcements of any delay in acceptance, extension, termination or
amendment of the Exchange Offer, the Companies shall have no obligation to
publish, advertise or otherwise communicate any such public announcement, other
than by making a timely release to the Dow Jones News Service.
INTEREST ON THE SECURED NOTES
The New Notes of each series will bear interest at the same rate and on the
same terms as the Old Notes of the corresponding series. Under the Note
Indenture, interest on each Old Note ceases to accrue upon the exchange of such
Old Note for a New Note. Interest will accrue on each New Note from the date on
which it is authenticated and will be payable to the person in whose name such
New Note is registered at the close of business on the Regular Record Date for
such interest, which will be the December 15 or June 15 (whether or not a
business day), as the case may be, next preceding the payment date for such
interest. If, however, the New Note is authenticated and delivered in exchange
for an Old Note (i) between a record date for the payment of interest on that
Old Note and the related interest payment date, the interest that accrues on the
New Note from the date of authentication thereof to that interest payment date
shall be payable to the person in whose name such New Note was issued on its
issuance date or (ii) between an interest payment date for the payment of
interest on that Old Note and the record date for the next succeeding interest
payment date, the interest that accrues on the Old Note from the earlier
interest payment date to the date on which the Old Note is exchanged for the New
Note will be paid to the person in whose name the New Note is registered on the
record date for that next succeeding interest payment date. The Companies intend
to cause the New Notes to be authenticated on the date on which the New Notes
are exchanged for the Old Notes. Therefore, the exchange will not result in the
loss of interest income to holders of Old Notes exchanged for New Notes.
Interest on the Secured Notes is payable semiannually in cash in arrears on
January 1 and July 1 of each year, commencing July 1, 1997, and the Secured
Notes will bear interest and mature as follows: for the Secured Notes due 2000,
interest at 7.19% with a maturity date of July 1, 2000; for the Secured Notes
due 2004, interest at 7.67% with a maturity date of July 1, 2004; and for the
Secured Notes due 2007, interest at 7.13% with a maturity date of July 1, 2007.
38
<PAGE> 42
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must properly complete, sign and
date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Notes (unless such tender is being effected pursuant to the procedure
for book-entry transfer described below) and any other required documents, to
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date.
Any financial institution that is a participant in DTC's Book-Entry
Transfer Facility system may make book-entry delivery of the Old Notes by
causing DTC to transfer such Old Notes into the Exchange Agent's account in
accordance with DTC's procedures for such transfer. Although delivery of Old
Notes may be effected through book-entry transfer into the Exchange Agent's
account at DTC, the Letter of Transmittal (or facsimile thereof), with any
required signature guarantees and any other required documents, must, in any
case, be transmitted to and received or confirmed by the Exchange Agent at its
addresses set forth herein under "-- Exchange Agent" prior to 5:00 p.m., New
York City time, on the Expiration Date. DELIVERY OF DOCUMENTS TO DTC IN
ACCORDANCE WITH ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Companies in accordance with the terms and subject to the
conditions described herein and set forth in the Letter of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD
BE SENT TO THE COMPANIES. DELIVERY OF ALL DOCUMENTS MUST BE MADE TO THE EXCHANGE
AGENT AT ITS ADDRESS SET FORTH HEREIN. HOLDERS MAY ALSO REQUEST THAT THEIR
RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR NOMINEES
EFFECT SUCH TENDER FOR SUCH HOLDERS.
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
The term "holder" with respect to the Exchange Offer means any person in whose
name Old Notes are registered in the Security Register (as defined herein) or
any other person who has obtained a properly completed bond power from the
registered holder, or any person whose Old Notes are held of record by DTC who
desires to deliver such Old Notes by book-entry transfer at DTC.
Any beneficial holder whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial holder wishes to tender on its own behalf, such beneficial holder
must, prior to completing and executing the Letter of Transmittal and delivering
its Old Notes, either make appropriate arrangements to register ownership of the
Old Notes in such holder's name or obtain a properly completed bond power from
the registered holder which authorizes such owner to tender the Old Notes on
behalf of the registered holder, in each case signed by the registered holder as
the name of such registered holder appears on the Old Notes. The transfer of
record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office of correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution") unless the Old Notes
tendered pursuant thereto are tendered (i) by a registered holder who has
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not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by appropriate bond powers which authorize such person
to tender the Old Notes on behalf of the registered holder, in either case
signed as the name of the registered holder or holders appears on the Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Companies,
evidence satisfactory to the Companies of their authority to so act must be
submitted with the Letter of Transmittal.
The Exchange Agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may utilize DTC's Automated Tender Offer
Program to tender Old Notes.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be determined
by the Companies in their sole discretion, which determination will be final and
binding. The Companies reserve the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes the Companies' acceptance of which
would, in the opinion of counsel for the Companies, be unlawful. The Companies
also reserve the absolute right to waive any irregularities or conditions of
tender as to particular Old Notes. The Companies' interpretation of the terms
and conditions of the Exchange Offer (including the instructions in the Letter
of Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Companies shall determine. Neither the Companies, the
Exchange Agent nor any other person shall be under any duty to give notification
of defects or irregularities with respect to tenders of Old Notes nor shall any
of them incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such irregularities have
been cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned without cost by the Exchange Agent to the
tendering holder of such Old Notes unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
While the Companies have no present plan to acquire any Old Notes which
have not been tendered in the Exchange Offer or to file a registration statement
to permit resales of Old Notes which are not tendered pursuant to the Exchange
Offer (except as may be required under the Registration Agreement), subject to
the terms of the Note Indenture, the Companies reserve the right in their sole
discretion to (a) purchase or make offers for any Old Notes that remain
outstanding subsequent to the Expiration Date, (b) as set forth under
"Termination," terminate the Exchange Offer with respect to such Old Notes or
(c) to the extent permitted by applicable law, purchase Old Notes in the open
market, in privately negotiated transactions or otherwise. The terms of any such
purchases or offers may differ from the terms of the Exchange Offer.
By tendering, each holder of Old Notes will represent to the Companies
that, among other things, the New Notes acquired pursuant to the Exchange Offer
are being obtained in the ordinary course of business of the person receiving
such New Notes, whether or not such person is the holder, that neither the
holder nor any other person has an arrangement or understanding with any person
to participate in a distribution of the New Notes and that neither the holder
nor any such other person is an "affiliate" of the Companies within the meaning
of Rule 405 under the Securities Act or, if an affiliate, such holder or such
other person will comply with the registration and prospectus delivery
requirements of the Securities Act to the extent applicable.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
lost but are not immediately available or (ii) who cannot deliver their Old
Notes, the Letter of Transmittal or any other
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<PAGE> 44
required documents to the Exchange Agent prior to the Expiration Date, or who
cannot complete the procedure for book-entry transfer on a timely basis, may
effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of
Old Notes tendered, stating that the tender is being made thereby, and
guaranteeing that, within three business days after the Expiration Date,
the Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing the Old Notes to be tendered in proper form for
transfer and any other documents required by the Letter of Transmittal,
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing all
tendered Old Notes in proper form for transfer (or confirmation of a
book-entry transfer into the Exchange Agent's account at DTC of Old Notes
delivered electronically) and all other documents required by the Letter of
Transmittal are received by the Exchange Agent within three business days
after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram, telex,
facsimile transmission or letter notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person having deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) include a statement that the Depositor is withdrawing its
election to have Old Notes exchanged, and identify the Old Notes to be withdrawn
(including the certificate number or numbers and principal amount of such Old
Notes), (iii) be signed by the Depositor in the same manner as the original
signature on the Letter of Transmittal by which such Old Notes were tendered
(including any required signature guarantees) or be accompanied by documents of
transfer sufficient to permit the Trustee with respect to the Old Notes to
register the transfer of such Old Notes into the name of the Depositor
withdrawing the tender and (iv) specify the name in which any such Old Notes are
to be registered, if different from that of the Depositor. All questions as to
the validity, form and eligibility (including time of receipt) for such
withdrawal notices will be determined by the Companies, whose determination will
be final and binding on all parties. Any Old Notes so withdrawn will be deemed
not to have been validly tendered for purposes of the Exchange Offer and no New
Notes will be issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Any Old Notes which have been tendered but which are not
accepted for exchange will be returned to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
TERMINATION
The Exchange Offer is not subject to any condition, other than (i) that the
Exchange Offer does not violate applicable law or any applicable interpretation
of the staff of the SEC, (ii) that no action or proceeding shall have been
instituted or threatened in any court or by or before any governmental agency or
statute, rule or regulation that would render the Exchange Offer illegal and
(iii) that there shall not have been adopted or enacted any law, statute, rule
or regulation that would render the Exchange Offer illegal. There can be no
assurance that any such condition will not occur.
If the Companies determine that they may terminate the Exchange Offer, as
set forth above, the Companies may (i) refuse to accept any Old Notes and return
any Old Notes that have been tendered to the
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holders thereof, (ii) extend the Exchange Offer and retain all Old Notes
tendered prior to the Expiration of the Exchange Offer, subject to the rights of
such holders of tendered Old Notes to withdraw their tendered Old Notes or (iii)
waive such termination event with respect to the Exchange Offer and accept all
properly tendered Old Notes that have not been withdrawn. If such waiver
constitutes a material change in the Exchange Offer, the Companies will disclose
such change by means of a supplement to this Prospectus that will be distributed
to each registered holder of Old Notes, and the Companies will extend the
Exchange Offer for a period of five to ten business days, depending upon the
significance of the waiver and the manner of disclosure to the registered
holders of the Old Notes, if the Exchange Offer would otherwise expire during
such period.
EXCHANGE AGENT
The Chase Manhattan Bank, the Note Trustee under the Note Indenture, has
been appointed as Exchange Agent for the Exchange Offer. Questions and requests
for assistance and for additional copies of this Prospectus or of the Letter of
Transmittal should be directed to the Exchange Agent addressed as follows:
By Registered or Certified Mail or Hand or Overnight Delivery:
The Chase Manhattan Bank
55 Water Street
Room 234, North Building
New York, NY 10041
Attention: Carlos Esteves
Confirm by Telephone:
(212) 638-0828
Facsimile Transmissions:
(Eligible Institutions Only)
(212) 638-7375 or (212) 344-9367
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Companies. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Companies and their affiliates in person,
by telegraph or telephone or other means.
The Companies will not make any payments to brokers, dealers or other
persons soliciting acceptances of the Exchange Offer. The Companies, however,
will pay the Exchange Agent reasonable and customary fees for its services and
will reimburse the Exchange Agent for its reasonable out-of-pocket expenses in
connection therewith. The Companies may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus, Letters of Transmittal
and related documents to the beneficial owners of the Old Notes and in handling
or forwarding tenders for exchange.
Reasonable expenses incurred in connection with the Exchange Offer,
including expenses of the Exchange Agent and Note Trustee and accounting and
legal fees, other than certain applicable taxes and counsel fees, will be paid
by the Companies.
The Companies will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other person) will be payable by the tendering
holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering holder.
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DESCRIPTION OF THE NEW NOTES
GENERAL
The Old Notes were, and the New Notes will be, issued pursuant to an
Indenture dated as of June 13, 1997 and a First Supplemental Indenture thereto
dated June 13, 1997 (as supplemented, "Note Indenture") between the Companies
and The Chase Manhattan Bank, as trustee ("Note Trustee"). The terms of the
Secured Notes include those stated in the Note Indenture and those made part of
the Note Indenture by reference to the Trust Indenture Act of 1939, as amended
("Trust Indenture Act"). Holders of Secured Notes are referred to the Note
Indenture and the Trust Indenture Act for a statement of all such terms. The
following summary of the material provisions of the Note Indenture does not
purport to be complete and is qualified in its entirety by reference to the Note
Indenture, including the definitions therein of certain terms used below. Copies
of the Note Indenture are available as set forth below under "Additional
Information."
The obligations of the Companies under the Secured Notes are joint and
several. The Secured Notes are secured equally and ratably as to payment of
principal and interest by $575 million aggregate principal amount of Cleveland
Electric Bonds and $145 million aggregate principal amount of Toledo Edison
Bonds.
The Secured Notes are denominated in United States currency in minimum
denominations of $1,000 and any integral multiple thereof.
PRINCIPAL, MATURITY AND INTEREST
The Secured Notes are limited to an aggregate amount of $720 million
consisting of $220 million aggregate principal amount of Secured Notes due 2000,
$350 million aggregate principal amount of Secured Notes due 2004 and $150
million aggregate principal amount of Secured Notes due 2007. New Notes of each
series will bear interest at the same rate and on the same terms as the Old
Notes of the corresponding series. Under the Note Indenture, interest on each
Old Note ceases to accrue upon the exchange of such Old Note for a new Note.
Interest will accrue on each new Note from the date on which it is authenticated
and will be payable to the person in whose name such New Note is registered at
the close of business on the Regular Record Date for such interest, which will
be the December 15 or June 15 (whether or not a business day), as the case may
be, next preceding the payment date for such interest. If, however, the New Note
is authenticated and delivered in exchange for an Old Note (i) between a record
date for the payment of interest on that Old Note and the related interest
payment date, the interest that accrues on the New Note from the date of
authentication thereof to that interest payment date shall be payable to the
person in whose name such New Note was issued on its issuance date or (ii)
between an interest payment date for the payment of interest on that Old Note
and the record date for the next succeeding interest payment date, the interest
that accrues on the Old Note from the earlier interest payment date to the date
on which the Old Note is exchanged for the New Note will be paid to the person
in whose name the New Note is registered on the record date for that next
succeeding interest payment date. The Companies intend to cause the New Notes to
be authenticated on the date on which the New Notes are exchanged for the Old
Notes. Therefore, the exchange will not result in the loss of interest income to
holders of Old Notes exchanged for New Notes. Interest on the Secured Notes is
payable semiannually in cash in arrears on January 1 and July 1 of each year,
commencing July 1, 1997, and the Secured Notes will bear interest and mature as
follows: for the Secured Notes due 2000, interest at 7.19% with a maturity date
of July 1, 2000; for the Secured Notes due 2004, interest at 7.67% with a
maturity date of July 1, 2004; and for the Secured Notes due 2007, interest at
7.13% with a maturity date of July 1, 2007. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months. Principal, interest
and Additional Interest, if any, on the Secured Notes is payable at the office
or agency of the Companies maintained for such purpose within the City of New
York, State of New York or, at the option of the Companies, payment of interest
may be made by check mailed to the address of the person entitled thereto as
such address shall appear in the register of holders of Secured Notes ("Security
Register"); provided that all payments of principal, interest and Additional
Interest, if any, with respect to Secured Notes the holders of which have given
wire transfer instructions to the Companies will be required to be made by wire
transfer of immediately available funds to the accounts specified by the holders
thereof. Until otherwise designated by the
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Companies, the Companies' office or agency in the City of New York will be the
office of the Note Trustee maintained for such purpose.
SECURITY FOR THE SECURED NOTES
The Old Notes are, and the New Notes (together with any Old Notes that
remain outstanding after the Exchange Offer is terminated) will be, secured
equally and ratably as to payment of principal and interest by the Cleveland
Electric Bonds and the Toledo Edison Bonds, which were issued, pledged and
delivered by the Companies to the Note Trustee in connection with the Offering.
The Cleveland Electric Bonds and the Toledo Edison Bonds consist of three series
each of CEI First Mortgage Bonds and TE First Mortgage Bonds, respectively, all
of which are secured by a lien on certain property owned by Cleveland Electric
and Toledo Edison, respectively. See "Descriptions of Cleveland Electric Bonds
and Toledo Edison Bonds."
REDEMPTION PROVISIONS
The Secured Notes are not subject to redemption prior to maturity. There
are no sinking fund payments for the Secured Notes.
EVENTS OF DEFAULT AND REMEDIES
The Note Indenture describes "Events of Default" relating to the Secured
Notes of any series, which include: (i) default for 30 days in the payment when
due of interest on the Secured Notes of that series; (ii) default in payment
when due of the principal of the Secured Notes of that series; (iii) default for
60 days, after notice to the Companies by the Note Trustee or to the Companies
and the Note Trustee by the holders of a majority in principal amount of the
outstanding Secured Notes of that series, by the Companies in the performance,
or breach, of any covenant or warranty in the Note Indenture, (iv) default
relating to any of the Cleveland Electric Bonds or the Toledo Edison Bonds or
(v) certain events of bankruptcy or insolvency, whether voluntary or
involuntary, with respect to either Company.
If any Event of Default occurs and is continuing, the Note Trustee or the
holders of a majority in principal amount of the then outstanding Secured Notes
of any series may declare all the Secured Notes of such series to be due and
payable immediately. Notwithstanding the foregoing, in the case of an Event of
Default arising from certain events of bankruptcy or insolvency with respect to
either Company, all outstanding Secured Notes will become due and payable
without further action or notice. Holders of the Secured Notes may not enforce
the Note Indenture or the Secured Notes except as provided in the Note
Indenture. Subject to certain limitations, holders of a majority in principal
amount of the then outstanding Secured Notes of any series may direct the Note
Trustee in its exercise of any trust or power with respect to that series. The
Note Trustee may withhold from holders of the Secured Notes notice of any
continuing Event of Default (except an Event of Default relating to the payment
of principal or interest) if it determines that withholding notice is in their
interest.
The holders of a majority in principal amount of the Secured Notes then
outstanding of any series by notice to the Note Trustee may, on behalf of the
holders of all of the Secured Notes of such series, waive any past Event of
Default and its consequences under the Note Indenture except (i) a continuing
Event of Default in the payment of interest on or the principal of the Secured
Notes of such series or (ii) an Event of Default in respect of a covenant under
the Note Indenture which cannot be amended or modified without the consent of
the holders of each Secured Note of that series. In all circumstances in which
the Note Indenture requires the consent of the holders in connection with a
proposed action thereunder or grants to the holders the right to direct an
action thereunder, Ambac Assurance shall be considered the holder of the Secured
Notes due 2007.
The Companies are required to deliver to the Note Trustee annually an
officer's certificate stating whether or not the Companies are in default in the
performance and observance of the terms of the Note Indenture, and, if the
Companies shall be in default, a statement specifying the nature of such
default.
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DEFEASANCE AND COVENANT DEFEASANCE
The Companies may, at their option and at any time, elect to have all of
their respective obligations discharged with respect to the outstanding Secured
Notes ("Defeasance") except for (i) the rights of holders of outstanding Secured
Notes to receive, solely from the trust fund described below, payments in
respect of the principal of and interest on such Secured Notes when such
payments are due, (ii) the Companies' obligations with respect to the Secured
Notes concerning issuing temporary Secured Notes, registration of Secured Notes,
mutilated, destroyed, lost or stolen Secured Notes and the maintenance of an
office or agency for payment of money for security payments held in trust, (iii)
the rights, powers, trusts, duties and immunities of the Note Trustee, and the
Companies' obligations in connection therewith, (iv) the Defeasance provisions
of the Note Indenture and (v) that portion of the principal of and interest on
the Secured Notes due 2007 that is paid by Ambac Assurance pursuant to the
Financial Guaranty Insurance Policy (as defined herein). In addition, the
Companies may, at their option and at any time, elect to have the obligations of
the Companies released with respect to certain covenants that are described in
the Note Indenture ("Covenant Defeasance") and thereafter any omission to comply
with such obligations will not constitute an Event of Default with respect to
the Secured Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Secured Notes.
In order to exercise either Defeasance or Covenant Defeasance, (i) the
Companies must irrevocably deposit with the Note Trustee, in trust, for the
benefit of the holders of the Secured Notes, cash in United States dollars, U.S.
Government Obligations (as hereinafter defined) or a combination thereof, in
such amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of and interest on
the outstanding Secured Notes on the stated maturity; (ii) in the case of
Defeasance, the Companies shall have delivered to the Note Trustee an opinion of
counsel reasonably acceptable to the Note Trustee confirming that (A) the
Companies have received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of the Note Indenture, there has
been a change in the applicable federal income tax law, in either case to the
effect that, and based thereon such opinion of counsel shall confirm that, the
holders of the outstanding Secured Notes will not recognize gain or loss for
federal income tax purposes as a result of such deposit, Defeasance and
discharge and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such deposit,
Defeasance and discharge had not occurred; (iii) in the case of Covenant
Defeasance, the Companies shall have delivered to the Note Trustee an opinion of
counsel reasonably acceptable to the Note Trustee confirming that the holders of
the outstanding Secured Notes will not recognize gain or loss for federal income
tax purposes as a result of the deposit and Covenant Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such deposit and Covenant Defeasance
had not occurred; (iv) the Companies must deliver to the Note Trustee an
officer's certificate to the effect that such Secured Notes, if then listed on
any securities exchange, will not be delisted as a result of such deposit; (v)
no Event of Default shall have occurred and be continuing on the date of such
deposit (other than an Event of Default resulting from the borrowing of funds to
be applied to such deposit which will be cured upon such Defeasance or Covenant
Defeasance) or, insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 90th day after the
date of such deposit; (vi) such Defeasance or Covenant Defeasance shall not
cause the Note Trustee to have a conflicting interest within the meaning of the
Trust Indenture Act; (vii) such Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default under any material
agreement or instrument to which the Companies are a party or by which the
Companies are bound; (viii) such Defeasance or Covenant Defeasance shall not
result in the trust arising from such deposit constituting an investment company
within the meaning of the Investment Company Act of 1940, as amended unless such
trust is registered thereunder; and (ix) the Companies must deliver to the Note
Trustee an officer's certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Defeasance or the Covenant
Defeasance have been complied with.
As used herein, "U.S. Government Obligation" means (x) any security which
is (i) a direct obligation of the United States of America for the payment of
which the full faith and credit of the United States of
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America is pledged or (ii) an obligation of a person controlled or supervised by
and acting as an agency or instrumentality of the United States of America the
payment of which is unconditionally guaranteed as a full faith and credit
obligation of the United States of America, which, in either case (i) or (ii),
is not callable or redeemable at the option of the issuer thereof, (y) any
depositary receipt issued by a bank (as defined in Section 3(a)(2) of the
Securities Act) as custodian with respect to any U.S. Government Obligation
which is specified in clause (x) above and held by such bank for the account of
the holder of such depositary receipt, or with respect to any specific payment
of principal of or interest on any U.S. Government Obligation which is so
specified and held, provided that (except as required by law) such custodian is
not authorized to make any deduction from the amount payable to the holder of
such depositary receipt from any amount received by the custodian in respect of
the U.S. Government Obligation or the specific payment of principal or interest
evidenced by such depositary receipt and (z) any certificates or other evidences
of ownership interest in obligations of the character described in either case
(i) or (ii) or in specified portions thereof, including without limitation,
portions consisting solely of the interest thereon provided that such
obligations are held in a bank or trust company acceptable to the Note Trustee
in a special account separate from the assets of such custodian.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Secured Notes in accordance with the Note
Indenture. The Registrar (as defined in the Note Indenture) and the Note Trustee
may require a holder, among other things, to furnish appropriate endorsements
and transfer documents and the Companies may require a holder to pay any taxes
and fees required by law or permitted by the Note Indenture. See "-- Book Entry,
Delivery and Form."
The registered holder of a Secured Note will be treated as the owner of it
for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as described in the next two succeeding paragraphs, the Note
Indenture or the Secured Notes may be amended or supplemented with the consent
of the holders of at least a majority in principal amount of the Secured Notes
then outstanding of the series affected (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Secured Notes), and any existing default or compliance with any provision
of the Note Indenture or the Secured Notes may be waived with the consent of the
holders of a majority in principal amount of the Secured Notes then outstanding
of the series affected (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Secured
Notes). Notwithstanding the foregoing, the Companies and the Note Trustee may
not, without the prior consent of Ambac Assurance, amend or supplement the Note
Indenture or the Secured Notes due 2007 if such amendment or supplement would
adversely affect the rights of Ambac Assurance to act as the holder of such
series.
Without the consent of each holder affected (and Ambac Assurance with
respect to the Secured Notes due 2007), an amendment or waiver may not (with
respect to any Secured Notes held by a non-consenting holder): (i) reduce the
principal amount of Secured Notes whose holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Secured Note, (iii) reduce the rate of or change the time or place for
payment of interest on any Secured Note, (iv) waive an Event of Default in the
payment of principal of, interest on or Additional Interest, if any, on the
Secured Notes, (v) make any change in the provisions of the Note Indenture
relating to waivers of past defaults or the rights of holders of Secured Notes
to receive payments of principal of or interest on the Secured Notes or (vi)
make any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of Secured
Notes, the Companies and the Note Trustee may amend or supplement the Note
Indenture or the Secured Notes to cure any ambiguity, defect or inconsistency,
to provide for uncertificated Secured Notes in addition to or in place of
certificated Secured Notes, to provide for the assumption of the Companies'
obligations to holders of Secured Notes in the case of a merger or consolidation
of either or both of the Companies, to make any change that would provide any
additional rights or benefits to the holders of Secured Notes or that does not
adversely affect the legal
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rights under the Note Indenture of any such holder, or to comply with
requirements of the SEC in order to effect or maintain the qualification of the
Note Indenture under the Trust Indenture Act or to provide for the acceptance of
appointment under the Note Indenture of a successor Note Trustee.
CONCERNING THE NOTE TRUSTEE
The Chase Manhattan Bank is the Note Trustee. The Note Trustee may resign
by giving written notice of its resignation as provided in the Note Indenture.
The resignation will take effect only upon the appointment of a successor
trustee. The holders of a majority of the then outstanding principal amount of
the Secured Notes may remove the Note Trustee at any time. The Companies may
appoint a successor trustee under the Note Indenture, subject to the right of
the holders to replace the successor trustee appointed by the Companies. Any
successor trustee must be eligible pursuant to the Trust Indenture Act and have
a combined capital and surplus of at least $50,000,000.
The Note Indenture contains certain limitations on the rights of the Note
Trustee, should it become a creditor of the Companies, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Note Trustee will be permitted
to engage in other transactions; however, if it acquires any conflicting
interest, it must eliminate such conflict within 90 days, and apply to the SEC
for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding
Secured Notes have the right to direct the time, method and place of conducting
any proceeding for exercising any remedy available to the Note Trustee, subject
to certain exceptions. The Note Indenture provides that in case an Event of
Default shall occur (which shall not be cured), the Note Trustee is required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Note Trustee is
under no obligation to exercise any of its rights or powers under the Note
Indenture at the request of any holder of Secured Notes, unless such holder
shall have offered to the Note Trustee security and indemnity satisfactory to it
against any loss, liability or expense.
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
The Note Indenture provides that no recourse for the payment of the
principal of or interest on any of the Secured Notes or for any claim based
thereon or otherwise in respect thereof, and no recourse under or upon any
obligation, covenant or agreement of the Companies in the Note Indenture, or in
any of the Secured Notes or because of the creation of any indebtedness
represented thereby, shall be had against any incorporator, stockholder,
officer, director or employee of the Companies or of any successor thereof. Each
holder, by accepting the Secured Notes, waives and releases all such liability
and such waiver and release are part of the consideration for issuance of the
Secured Notes. It is the position of the SEC that, notwithstanding such waiver,
holders of the Secured Notes will continue to have all rights and remedies that
are otherwise available under the anti-fraud provisions of the federal
securities laws.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Note Indenture
without charge by writing to Janis T. Percio, Secretary, Centerior Energy
Corporation, P.O. Box 94661, Cleveland, OH 44101-4661.
BOOK-ENTRY, DELIVERY AND FORM
The certificates representing the Old Notes were, and the certificates
representing the New Notes will be, issued in fully registered form and without
interest coupons. Each series of the New Notes will be represented by a Global
New Note.
Secured Notes sold in reliance on Rule 144A are represented by one or more
Global Notes in definitive, fully registered form and without interest coupons
and have been deposited with the Note Trustee, as custodian for, and registered
in the name of, a nominee of DTC.
The laws of some states require that certain persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interest in the Global Notes to such persons may
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be limited to that extent. Because DTC can act only on behalf of participants,
which in turn act on behalf of indirect participants and certain banks, the
ability of a person having a beneficial interest in the Global Notes to pledge
such interest to persons or entities that do not participate in the DTC system,
or otherwise take actions in respect of such interests, may be affected by the
lack of physical certificate evidencing such interests.
The Global Notes
Ownership of beneficial interests in a Global Note is and will be limited
to persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note is and will be shown on, and the transfer of that ownership is and will be
effected only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants). Qualified institutional buyers
may hold their interests in a Global Note directly through DTC if they are
participants in such system, or indirectly through organizations which are
participants in such system.
Investors may hold their interests in Old Notes sold in reliance on
Regulation S under the Securities Act (each a "Regulation S Global Note")
directly through Cedel Bank ("Cedel Bank") or Morgan Guaranty Trust Company of
New York, Brussels office, as operator of the Euroclear System ("Euroclear"), if
they are participants in such systems, or indirectly through organizations that
are participants in such systems. Beginning 40 days after the Closing Date but
not earlier, investors may also hold such interests through organizations other
than Cedel Bank or Euroclear that are participants in the DTC system. Cedel Bank
and Euroclear will hold interests in the Regulation S Global Notes on behalf of
their participants through DTC.
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Secured Notes represented by such Global Note for
all purposes under the Note Indenture and the Secured Notes. No beneficial owner
of an interest in a Global Note is or will be able to transfer that interest
except in accordance with applicable procedures of DTC, in addition to those
provided for under the Note Indenture and, if applicable, those of Euroclear and
Cedel Bank.
Payments of the principal of, and interest on, the Global Notes are and
will be made to DTC or its nominee, as the case may be, as the registered owner
thereof. Neither the Companies nor the Note Trustee or any paying agent has any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
The Companies expect that DTC or its nominee, upon receipt of any payment
of principal or interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Global Note, as shown on the records
of DTC or its nominee. The Companies also expect that payments by participants
to owners of beneficial interests in such Global Note held through such
participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers registered
in the names of nominees for such customers. Such payments will be the
responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds. Transfers
between participants in Euroclear and Cedel Bank will be effected in the
ordinary way in accordance with their respective rules and operating procedures.
If a holder requires physical delivery of a Certificated Note for any reason,
such holder must transfer its interest in the Global Note in accordance with
DTC's applicable procedures and, if applicable, those of Euroclear and Cedel
Bank.
The Companies expect that DTC will take any action permitted to be taken by
a holder of Secured Notes (including the presentation of Secured Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in the Global Notes are credited and only in
respect of such portion of the aggregate principal amount of Secured Notes as to
which such participant or participants
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has or have given such direction. However, if there is an Event of Default under
the Secured Notes, DTC will exchange the applicable Global Note for Certificated
Notes which it will distribute to its participants and which may be legended as
set forth under "Transfer Restrictions."
The Companies understand that DTC is a limited-purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the Uniform Commercial
Code and a "Clearing Agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC was created to hold securities for its participants
and facilitate the clearance and settlement of securities transactions between
participants through electronic book-entry changes in accounts of its
participants, thereby eliminating the need for physical movement of
certificates, and certain other organizations. Indirect access to the DTC system
is available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a participant, either
directly or indirectly ("indirect participants").
Although DTC, Euroclear and Cedel Bank are expected to follow the foregoing
procedures in order to facilitate transfers of interests in the Global Notes
among participants of DTC, Euroclear and Cedel Bank, they are under no
obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Companies nor the Note
Trustee will have any responsibility for the performance by DTC, Euroclear or
Cedel Bank or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Certificated Notes
If DTC is at any time unwilling or unable to continue as a depository for
the Global Notes and a successor depository is not appointed by the Companies
within 90 days, the Companies will issue Certificated Notes in exchange for the
Global Notes. Holders of an interest in a Global Note may receive a Certificated
Note in accordance with DTC's rules and procedures in addition to those provided
for under the Note Indenture.
CREDIT ENHANCEMENT OF SECURED NOTES DUE 2007
PAYMENT PURSUANT TO FINANCIAL GUARANTY INSURANCE POLICY
At the closing of the issuance of the Old Notes, Ambac Assurance issued a
financial guaranty insurance policy relating to the Old Notes due 2007, and made
a commitment to issue an identical financial guaranty insurance policy relating
to the New Notes due 2007 ("Financial Guaranty Insurance Policy") effective as
of the date of issuance of the New Notes due 2007. Under the terms of the
Financial Guaranty Insurance Policy, Ambac Assurance will pay to the United
States Trust Company of New York, in New York, New York, or any successor
thereto ("Insurance Trustee") that portion of the principal of and interest on
the New Notes due 2007 which shall become Due for Payment but shall be unpaid by
reason of Nonpayment by the Issuer (as such terms are defined in the Financial
Guaranty Insurance Policy attached hereto as Appendix I). Ambac Assurance will
make such payments to the Insurance Trustee on the later of the date on which
such principal and interest become Due for Payment or within one business day
following the date on which Ambac Assurance shall have received notice of
Nonpayment from the Note Trustee. The insurance will extend for the term of the
New Notes due 2007 and, once issued, cannot be canceled by Ambac Assurance.
The Financial Guaranty Insurance Policy will insure payment only on stated
maturity dates. In the event of any acceleration of the principal of the New
Notes due 2007, the insured payments will be made at such times and in such
amounts as would have been made had there not been an acceleration.
In the event the Note Trustee has notice that any payment of principal of
or interest on a New Note due 2007 which has become Due for Payment and which is
made to a holder by or on behalf of the Companies has been deemed a preferential
transfer and theretofore recovered from its registered owner pursuant to the
United States Bankruptcy Code in accordance with a final, nonappealable order of
a court of competent jurisdiction,
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such registered owner will be entitled to payment from Ambac Assurance to the
extent of such recovery if sufficient funds are not otherwise available.
The Financial Guaranty Insurance Policy does not insure any risk other than
Nonpayment. Specifically, the Financial Guaranty Insurance Policy does not
cover:
1. Payment on acceleration, as a result of a call for redemption (other
than mandatory sinking fund redemption) or as a result of any other
advancement of maturity.
2. Payment of any redemption, prepayment or acceleration premium.
3. Nonpayment of principal or interest caused by the insolvency or
negligence of any trustee or paying agent, if any.
If it becomes necessary to call upon the Financial Guaranty Insurance Policy,
payment of principal requires the surrender of New Notes due 2007 to the
Insurance Trustee together with an appropriate instrument of assignment so as to
permit ownership of such New Notes due 2007 to be registered in the name of
Ambac Assurance to the extent of the payment under the Financial Guaranty
Insurance Policy. Payment of interest pursuant to the Financial Guaranty
Insurance Policy requires proof of holder entitlement to interest payments and
an appropriate assignment of the holders' right to payment to Ambac Assurance.
Upon payment of the insurance benefits, Ambac Assurance will become the
owner of the New Notes due 2007, appurtenant coupons, if any, or right to
payment of principal or interest on such New Notes due 2007 and will be fully
subrogated to the surrendering holder's right to payment.
AMBAC ASSURANCE CORPORATION
The information provided in this section and the following two sections was
provided to the Companies by Ambac Assurance.
Ambac Assurance is a Wisconsin-domiciled stock insurance corporation
regulated by the Office of the Commissioner of Insurance of the State of
Wisconsin and licensed to do business in 50 states, the District of Columbia,
the Territory of Guam, and the Commonwealth of Puerto Rico, with admitted assets
of approximately $2,736,000,000 (unaudited) and statutory capital of
approximately $1,548,000,000 (unaudited) as of June 30, 1997. Statutory capital
consists of Ambac Assurance's policyholders' surplus and statutory contingency
reserve. Ambac Assurance is a wholly owned subsidiary of Ambac Financial Group,
Inc., a 100% publicly held company. Standard & Poor's, Moody's and Fitch
Investors Service, L.P. have each assigned a triple-A claims-paying ability
rating to Ambac Assurance.
Ambac Assurance has obtained a ruling from the Internal Revenue Service to
the effect that the insuring of an obligation by Ambac Assurance will not affect
the treatment for federal income tax purposes of interest on such obligation and
that insurance proceeds representing maturing interest paid by Ambac Assurance
under policy provisions substantially identical to those contained in its
Financial Guaranty Insurance Policy shall be treated for federal income tax
purposes in the same manner as if such payments were made by the issuer of the
obligation.
Ambac Assurance makes no representation regarding the New Notes due 2007 or
the advisability of investing in the New Notes due 2007 and makes no
representation regarding, nor has it participated in the preparation of, this
Prospectus other than the information supplied by Ambac Assurance and presented
under the heading "Credit Enhancement of Secured Notes due 2007."
AVAILABLE INFORMATION
The parent company of Ambac Assurance, Ambac Financial Group, Inc. ("Ambac
Financial"), is subject to the informational requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the SEC. Such reports, proxy statements and other information
may be inspected and copied at the public reference facilities maintained by the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional
offices at 7 World Trade Center, New York, New York 10048, and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
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Copies of such material can be obtained from the public reference section of the
SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
SEC also maintains a Web site that contains reports and other information filed
by Ambac Financial. The SEC's Internet address is http://www.sec.gov. In
addition, the aforementioned material may also be inspected at the offices of
the New York Stock Exchange, Inc. ("NYSE") at 20 Broad Street, New York, New
York 10005. Ambac Financial's Common Stock is listed on the NYSE.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by Ambac Financial with the SEC (File No.
1-10777) are incorporated by reference in this Prospectus.
1. Ambac Financial's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, filed on March 31, 1997;
2. Ambac Financial's Current Report on Form 8-K dated March 12, 1997,
filed on March 12, 1997;
3. Ambac Financial's Quarterly Report on Form 10-Q for the fiscal
quarterly period ended March 31, 1997, filed on May 15, 1997;
4. Ambac Financial's Quarterly Report on Form 10-Q for the fiscal
quarterly period ended June 30, 1997, filed on August 14, 1997.
All documents subsequently filed by Ambac Financial pursuant to the
requirements of the Exchange Act after the date of this Prospectus will be
available for inspection in the same manner as described above in "Available
Information."
Ambac Assurance has issued a commitment for financial guaranty insurance
relating to the New Notes due 2007. All tenders of the Secured Notes due 2007
may be conditioned upon the issuance effective as of the date on which the
Secured Notes due 2007 are issued, of a policy of insurance by Ambac Assurance,
insuring the payment when due of principal of and interest on the Secured Notes
due 2007. Each Secured Note due 2007 will bear a legend referring to the
insurance. The purchaser, holder or owner is not authorized to make any
statements concerning the insurance beyond those set out here and in the legend
on the Secured Notes due 2007 without the approval of Ambac Assurance.
DESCRIPTIONS OF CLEVELAND ELECTRIC BONDS AND
TOLEDO EDISON BONDS
The Old Notes are, and the New Notes, together with any Old Notes that
remain outstanding after the Exchange Offer is terminated, will be, secured
equally and ratably as to payment of principal and interest by the Cleveland
Electric Bonds and the Toledo Edison Bonds which were issued, pledged and
delivered by Cleveland Electric and Toledo Edison, respectively, to the Note
Trustee. The Cleveland Electric Bonds and the Toledo Edison Bonds were issued in
the aggregate principal amounts of $575 million and $145 million, respectively.
The Cleveland Electric Bonds and Toledo Edison Bonds held by the Note Trustee
provide, in the aggregate, for interest in an amount equal to the interest
payable on all Secured Notes outstanding. Satisfaction of Cleveland Electric's
and Toledo Edison's obligations with respect to principal of, and interest on,
the Secured Notes will satisfy the respective Company's obligations with respect
to principal of, and interest on, its Bonds.
CLEVELAND ELECTRIC BONDS
General
The Cleveland Electric Bonds were issued as three series of Cleveland
Electric's First Mortgage Bonds ("CEI First Mortgage Bonds") under Cleveland
Electric's Mortgage and Deed of Trust, dated July 1, 1940, from Cleveland
Electric to Guaranty Trust Company of New York as trustee, under which The Chase
Manhattan Bank is successor trustee ("CEI First Mortgage Trustee"), as
supplemented and modified by
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seventy-three supplemental indentures thereto and as further supplemented, for
the issuance of the Cleveland Electric Bonds, by a Seventy-Fourth Supplemental
Indenture ("Seventy-Fourth Supplemental Indenture") dated June 15, 1997 (the
Mortgage and Deed of Trust as so supplemented herein called the "CEI First
Mortgage"). The following summaries of certain provisions of the CEI First
Mortgage do not purport to be complete and are subject to, and qualified in
their entirety by, all of the provisions of the CEI First Mortgage. For a
discussion of the effect on the CEI First Mortgage of the proposed merger of
Toledo Edison into Cleveland Electric, see "Pending Merger of Cleveland Electric
and Toledo Edison -- Effect of Pending Merger on CEI First Mortgage and TE First
Mortgage." The Articles cited below refer to Articles of the CEI First Mortgage.
Security
The Cleveland Electric Bonds and all CEI First Mortgage Bonds of other
series currently outstanding and hereafter issued under the CEI First Mortgage
are, in the opinion of counsel for Cleveland Electric, secured equally and
ratably (except as to any sinking or analogous fund established for the CEI
First Mortgage Bonds of any particular series) by a valid and perfected first
lien, subject only to certain permitted liens and other encumbrances, on
substantially all the property owned and franchises held by Cleveland Electric,
except the following: (a) cash, receivables and contracts not pledged or
required to be pledged under the CEI First Mortgage and leases in which
Cleveland Electric is lessor; (b) securities not specifically pledged or
required to be pledged under the CEI First Mortgage; (c) property held for
consumption in operation or in advance of use for fixed capital purposes or for
resale or lease to customers; (d) electric energy and other materials or
products produced or purchased by Cleveland Electric for sale, distribution or
use in the ordinary conduct of its business; and (e) all the property of any
other corporation which may now or hereafter be wholly or substantially wholly
owned by Cleveland Electric. (Clauses preceding Article I) All property acquired
by Cleveland Electric after June 30, 1940, other than the property excepted from
the lien of the CEI First Mortgage, becomes subject to the lien thereof upon
acquisition. (Article I and granting and other clauses preceding Article I)
Under certain conditions, the CEI First Mortgage permits Cleveland Electric to
acquire property subject to a lien prior to the lien of the CEI First Mortgage.
(Article IV)
Property subject to the lien of the CEI First Mortgage will be released
from the lien upon the sale or transfer of such property if Cleveland Electric
deposits the fair value of the property with the CEI First Mortgage Trustee and
meets certain other conditions specified in the CEI First Mortgage. (Article
VII) Moneys received by the CEI First Mortgage Trustee for the release of
property will, under certain circumstances, be applied to redeem outstanding CEI
First Mortgage Bonds, be applied to satisfy other obligations of Cleveland
Electric or be paid over to Cleveland Electric from time to time based upon
property additions or refundable CEI First Mortgage Bonds. (Article VIII)
In the Nineteenth Supplemental Indenture, the CEI First Mortgage was
modified to permit Cleveland Electric without the vote or consent of the holders
of any CEI First Mortgage Bonds issued after November 1976 (a) to exclude
nuclear fuel from the lien of the CEI First Mortgage to the extent not excluded
therefrom by its existing provisions and (b) to revise the definition of
property additions which can constitute bondable property to include facilities
outside the State of Ohio ("State") even though they are not physically
connected with property of Cleveland Electric in the State and to clarify its
general scope.
Title to Property
The generating plants and other principal facilities of Cleveland Electric
are owned by Cleveland Electric, except as follows:
(a) Cleveland Electric and Toledo Edison jointly lease from others for
a term of about 29 1/2 years starting on October 1, 1987 undivided 6.5%,
45.9% and 44.38% tenant-in-common interests in Units 1, 2 and 3,
respectively, of the Mansfield Plant and also jointly lease from others for
the same term an 18.26% undivided tenant-in-common interest in Beaver
Valley Unit 2, all located in Shippingport, Pennsylvania. Cleveland
Electric owns another 24.47% interest in Beaver Valley Unit 2 as a
tenant-in-common.
(b) Most of the Lake Shore facilities are situated on artificially
filled land, extending beyond the natural shoreline of Lake Erie as it
existed in 1910. As of December 31, 1996, the cost of Cleveland
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Electric's facilities, other than water intake and discharge facilities,
located on such artificially filed land aggregated $97,081,000.
Title to land under the water of Lake Erie within the territorial
limits of the State (including artificially filled land) is in the State in
trust for the people of the State for the public uses to which it may be
adapted, subject to the powers of the United States, the public rights of
navigation, water commerce and fishery and the rights of upland owners to
wharf out or fill to make use of the water. The State is required by
statute, after appropriate proceedings, to grant a lease to an upland
owner, such as Cleveland Electric, which erected and maintained facilities
on such filled land prior to October 13, 1955. Cleveland Electric does not
have such a lease from the State with respect to the artificially filled
land on which its Lake Shore facilities are located, but Cleveland
Electric's position, on advice of counsel for Cleveland Electric, is that
the Lake Shore facilities and occupancy may not be disturbed because they
do not interfere with the free flow of commerce in navigable channels and
also constitute, at least in part, and are on land filled pursuant to, the
exercise by it of its property rights as owner of the land above the
shoreline adjacent to the filled land. Cleveland Electric does hold
permits, under federal statutes relating to navigation, to occupy such
artificially filled land.
(c) The facilities at the pumped-storage hydroelectric Seneca Power
Plant in Pennsylvania ("Seneca") are located on land owned by the United
States and occupied by Cleveland Electric and Pennsylvania Electric Company
pursuant to a license issued by the Federal Energy Regulatory Commission
for a 50-year period starting December 1, 1965 for the construction,
operation and maintenance of a pumped-storage hydroelectric plant.
(d) The water intake and discharge facilities at the electric
generating plants located along Lake Erie and the Ohio River are extended
into the lake and river under Cleveland Electric's property rights as owner
of the land above the water line and pursuant to permits under federal
statutes relating to navigation.
(e) The transmission system is located on land, easements or
rights-of-way owned by Cleveland Electric. The distribution system also is
located, in part, on land owned by Cleveland Electric, but, for the most
part, it is located on lands owned by others and on streets and highways.
In most cases, Cleveland Electric has obtained permission from the apparent
owner, or, if located on streets and highways, from the apparent owner of
the abutting property. The electric underground transmission and
distribution systems are located for the most part in public streets. The
Pennsylvania portions of the main transmission lines from Seneca, the
Mansfield Plant and Beaver Valley Unit 2 are not owned by Cleveland
Electric.
The fee title which Cleveland Electric has as a tenant-in-common owner, and
the leasehold interests it has as a joint lessee, of certain generating units do
not include the right to require a partition or sale for division of proceeds of
the units without the concurrence of all the other owners and their respective
mortgage trustees and the CEI First Mortgage Trustee.
Issuance of Additional CEI First Mortgage Bonds
In addition to the $3,230.0 million aggregate principal amount of CEI First
Mortgage Bonds outstanding at June 30, 1997 (which includes $140.4 million
principal amount of CEI First Mortgage Bonds pledged to secure Cleveland
Electric's obligations to various bank creditors), additional CEI First Mortgage
Bonds may be issued under Article III of the CEI First Mortgage, ranking equally
and ratably with such outstanding CEI First Mortgage Bonds and the Cleveland
Electric Bonds and without limit as to amount, on the basis of: (a) 70% of
bondable property (as described under "-- Cleveland Electric Bonds -- Security")
not previously used as the basis for issuance of CEI First Mortgage Bonds or
applied for some other purpose under the CEI First Mortgage; (b) the deposit of
cash (which may be withdrawn thereafter on the basis of bondable property or
refundable CEI First Mortgage Bonds); and (c) substitution for refundable CEI
First Mortgage Bonds. CEI First Mortgage Bonds become refundable CEI First
Mortgage Bonds when they are paid upon maturity, redemption or purchase out of
money deposited with the CEI First Mortgage Trustee for such payment or when
money for such payment is irrevocably deposited with the CEI First Mortgage
Trustee. (Articles I, III and VIII) In general, all property subject to the lien
of the CEI First Mortgage which is used or useful in
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Cleveland Electric's electric business (including property not located in the
State if it is physically connected with property of Cleveland Electric in the
State, either directly or through other property of Cleveland Electric), which
is not subject to an unfunded prior lien and as to which Cleveland Electric has
good title and corporate power to own and operate, is bondable property and as
such is available as a basis for the issuance of CEI First Mortgage Bonds.
(Article I) The facilities of Cleveland Electric on the artificially filled land
at Lake Shore will become bondable property only when Cleveland Electric
acquires, under conditions specified in the CEI First Mortgage, either good
title to such land or the right to occupy it; and the facilities of Cleveland
Electric on the land at Seneca are not now bondable property. See "-- Cleveland
Electric Bonds -- Title to Property." The tenant-in-common interests owned by
Cleveland Electric in certain generating units qualify as bondable property,
except that its interest in property located in Pennsylvania, including Beaver
Valley Unit 2, does not qualify because it is located outside the State and is
not physically connected with property of Cleveland Electric in the State.
(Article I) With certain exceptions, property which Cleveland Electric leases
from others is not bondable property. (Articles I and III)
Also, with certain exceptions, in order to issue additional CEI First
Mortgage Bonds based on bondable property, net earnings of Cleveland Electric
available for interest and property retirement appropriations for any 12
consecutive months within the 15 calendar months immediately preceding the month
in which application for authentication and delivery of such additional CEI
First Mortgage Bonds is made must be at least twice the annual interest charges
on all CEI First Mortgage Bonds outstanding and on the issue applied for.
(Article III)
At June 30, 1997, Cleveland Electric was not able to issue a material
amount of additional CEI First Mortgage Bonds except in connection with
refinancings. The amount of additional CEI First Mortgage Bonds which may be
issued in the future will fluctuate depending upon the amount of available
refundable CEI First Mortgage Bonds, available bondable property, earnings and
interest rates. FirstEnergy has not decided whether to apply, or push down, the
effects of purchase accounting to the financial statements of the Companies if
the CEC-OE Merger is completed. If such push-down accounting is applied,
Cleveland Electric's available bondable property would be reduced to below zero.
See "The Companies -- Financing Capability."
Covenant to Charge Earnings Not Applicable to the Cleveland Electric Bonds
The supplemental indentures applicable to CEI First Mortgage Bonds issued
prior to 1974 contain a covenant to the effect that, so long as any of those CEI
First Mortgage Bonds remain outstanding (which will be until November 15, 2005,
assuming no prior redemption), Cleveland Electric will charge against earnings,
and credit to reserves for depreciation and retirement of property, an amount
not less than 15% of gross operating revenues for each year (after deducting the
costs of purchased power and net electric energy received on interchange), less
the amounts expended for maintenance and repairs during the year. The
Seventy-Fourth Supplemental Indenture does not extend such covenant to the
Cleveland Electric Bonds.
Remedies in the Event of Default
Events of default under the CEI First Mortgage include the failure of
Cleveland Electric (a) to pay the principal of or premium, if any, on any CEI
First Mortgage Bond when due; (b) to pay any interest on or sinking fund
obligation of any CEI First Mortgage Bond within 30 days after it is due; (c) to
pay the principal of or interest on any prior lien bonds within any allowable
period; (d) to discharge, appeal or obtain the stay of any final judgment
against Cleveland Electric in excess of $100,000 within 30 days after it is
rendered; or (e) to perform any other covenant in the CEI First Mortgage within
60 days after notice to Cleveland Electric from the CEI First Mortgage Trustee
or the holders of not less than 15% in principal amount of the CEI First
Mortgage Bonds. Events of default also include certain events of bankruptcy,
insolvency or reorganization in bankruptcy or insolvency of Cleveland Electric.
(Article IX) Cleveland Electric is required to furnish periodically to the CEI
First Mortgage Trustee a certificate as to the absence of any default or as to
compliance with the terms of the CEI First Mortgage, and such a certificate is
also required in connection with the issuance of any additional CEI First
Mortgage Bonds and in certain other circumstances. (Article III) The CEI First
Mortgage provides that the CEI First Mortgage Trustee, within 90 days after
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notice of defaults under the CEI First Mortgage (60 days with respect to events
of default described in (e) above), is required to give notice of such defaults
to all holders of CEI First Mortgage Bonds, but, except in the case of a default
resulting from the failure to make any payment of principal of or interest on
the CEI First Mortgage Bonds or in the payment of any sinking or purchase fund
installments, the CEI First Mortgage Trustee may withhold such notice if it
determines in good faith that it is in the best interests of the holders of the
CEI First Mortgage Bonds to do so. (Article XIII)
Upon the occurrence of any event of default, the CEI First Mortgage Trustee
or the holders of not less than 25% in principal amount of the CEI First
Mortgage Bonds may declare the principal amount of all CEI First Mortgage Bonds
due, and, if Cleveland Electric cures all defaults before a sale of the
mortgaged property, the holders of a majority in principal amount of the CEI
First Mortgage Bonds may waive the default. If any event of default occurs, the
CEI First Mortgage Trustee also may (a) take possession of and operate the
mortgaged property for the purpose of paying the principal of and interest on
the CEI First Mortgage Bonds; (b) sell at public auction all of the mortgaged
property, or such parts thereof as the holders of a majority in principal amount
of the CEI First Mortgage Bonds may request or, in the absence of such request,
as the CEI First Mortgage Trustee may determine; (c) bring suit to enforce
payment of the principal of and interest on the CEI First Mortgage Bonds, to
foreclose the CEI First Mortgage or for the appointment of a receiver of the
mortgaged property; and (d) pursue any other remedy. (Article IX)
No holder of CEI First Mortgage Bonds may institute any action, suit or
proceeding for any remedy under the CEI First Mortgage unless he has previously
given the CEI First Mortgage Trustee written notice of a default by Cleveland
Electric, and in addition: (a) the holders of not less than 25% in principal
amount of the CEI First Mortgage Bonds have requested the CEI First Mortgage
Trustee and afforded it a reasonable opportunity to exercise its powers under
the CEI First Mortgage or to institute such action, suit or proceeding in its
own name; (b) such holder has offered to the CEI First Mortgage Trustee security
and indemnity satisfactory to it against the costs, expenses and liabilities to
be incurred thereby; and (c) the CEI First Mortgage Trustee has refused or
neglected to comply with such request within a reasonable time. The holders of a
majority in outstanding principal amount of the CEI First Mortgage Bonds, upon
furnishing the CEI First Mortgage Trustee with security and indemnification
satisfactory to it, may require the CEI First Mortgage Trustee to pursue any
available remedy, and any holder of the CEI First Mortgage Bonds has the
absolute and unconditional right to enforce the payment of the principal of and
interest on his CEI First Mortgage Bonds. (Article IX)
Modification of CEI First Mortgage and CEI First Mortgage Bonds
Certain modifications which do not in any manner impair any of the rights
of the holders of any series of CEI First Mortgage Bonds then outstanding or of
the CEI First Mortgage Trustee may be made without the vote of the holders of
the CEI First Mortgage Bonds by supplemental indenture entered into between
Cleveland Electric and the CEI First Mortgage Trustee. (Article XIV)
Modifications of the CEI First Mortgage or any indenture supplemental
thereto, and of the rights and obligations of Cleveland Electric and of holders
of all series of CEI First Mortgage Bonds outstanding, may be made with the
consent of Cleveland Electric by the vote of the holders of at least 80% in
principal amount of the outstanding CEI First Mortgage Bonds entitled to vote at
a meeting of the holders of the CEI First Mortgage Bonds or, if one or more, but
less than all, of the series of CEI First Mortgage Bonds outstanding under the
CEI First Mortgage are affected by any such modification, by the vote of the
holders of at least 80% in principal amount of the outstanding CEI First
Mortgage Bonds entitled to vote of each series so affected; but no such
modification may be made which will affect the terms of payment of the principal
of or premium, if any, or interest on any CEI First Mortgage Bond issued under
the CEI First Mortgage or to change the voting percentage described above to
less than 80% with respect to any CEI First Mortgage Bonds outstanding when such
modification becomes effective. CEI First Mortgage Bonds owned or held by or for
the account or benefit of Cleveland Electric or an affiliate of Cleveland
Electric (as defined in the CEI First Mortgage) are not entitled to vote.
(Article XV) In the Nineteenth Supplemental Indenture, the CEI First Mortgage
was modified, effective when none of the CEI First Mortgage Bonds of any series
issued prior to December 1976 are outstanding, so as to change the 80% voting
requirements discussed above to 60%. Based on the series of
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CEI First Mortgage Bonds outstanding at June 30, 1997, the 60% voting
requirement will become effective on May 1, 2009.
Defeasance and Discharge
The CEI First Mortgage provides that Cleveland Electric will be discharged
from any and all obligations under the CEI First Mortgage if Cleveland Electric
pays the principal, interest and premium, if any, due on all CEI First Mortgage
Bonds outstanding in accordance with the terms stipulated in each such Bond and
if Cleveland Electric has performed all other obligations under the CEI First
Mortgage. In the event of such discharge, Cleveland Electric has agreed to
continue to indemnify the CEI First Mortgage Trustee from any liability arising
out of the CEI First Mortgage. (Article XVI)
TOLEDO EDISON BONDS
General
The Toledo Edison Bonds were issued as three series of Toledo Edison's
First Mortgage Bonds ("TE First Mortgage Bonds") under Toledo Edison's Indenture
and Deed of Trust, dated as of April 1, 1947, from Toledo Edison to The Chase
National Bank of the City of New York (predecessor of The Chase Manhattan Bank),
as trustee ("TE First Mortgage Trustee"), as supplemented and modified by
forty-five supplemental indentures thereto and as further supplemented, for the
issuance of the Toledo Edison Bonds, by a Forty-sixth Supplemental Indenture
("Forty-sixth Supplemental Indenture") dated as of June 15, 1997 (the Indenture
and Deed of Trust as so supplemented herein called the "TE First Mortgage"). The
following summaries of certain provisions of the TE First Mortgage do not
purport to be complete and are subject to, and qualified in their entirety by,
all of the provisions of the TE First Mortgage. For a discussion of the effect
on the TE First Mortgage of the proposed merger of Toledo Edison into Cleveland
Electric, see "Pending Merger of Cleveland Electric and Toledo Edison -- Effect
of Pending Merger on CEI First Mortgage and TE First Mortgage." The Articles
cited below refer to Articles of the TE First Mortgage.
Security
The Toledo Edison Bonds and all TE First Mortgage Bonds of other series
currently outstanding and hereafter issued under the TE First Mortgage are, in
the opinion of counsel for Toledo Edison, secured equally and ratably (except as
to any sinking or analogous fund established for the TE First Mortgage Bonds of
any particular series) by a valid and perfected first lien, subject only to
certain permitted encumbrances, on substantially all the property owned and
franchises held by Toledo Edison, except the following: (a) cash, receivables,
contracts and leases in which Toledo Edison is lessor; (b) securities not
specifically pledged or required to be pledged under the TE First Mortgage; (c)
property held for sale or lease to customers or consumable in Toledo Edison's
operations; (d) transportation equipment; and (e) certain parcels of real estate
held for disposition. All property acquired by Toledo Edison after April 1, 1947
of the character initially subjected to the lien of the TE First Mortgage
becomes subject to the lien of the TE First Mortgage upon acquisition. (Granting
and other clauses preceding Article 1) Under certain conditions, the TE First
Mortgage permits Toledo Edison to acquire property subject to a lien prior to
the lien of the TE First Mortgage. (Article 4)
The TE First Mortgage provides that property subject to the lien of the TE
First Mortgage may be released from such lien under certain circumstances. The
following will be automatically released upon disposition by Toledo Edison: (a)
equipment which has become unnecessary for use; (b) property which has been
abandoned and the operation of which has become discontinued; (c) rights under
any leases, rights-of-way, contracts, franchises, licenses, authority or permit;
(d) real estate used solely for right-of-way if an easement over such real
estate is retained; and (e) real estate, the value of which together with the
value of all other real estate released in this manner within the preceding
twelve months does not exceed $25,000. Other property will be released upon
disposition by Toledo Edison subject to Toledo Edison's presentation to the TE
First Mortgage Trustee of documentation that the value received for the property
equals or exceeds the fair value of such property and that all conditions
contained in the TE First Mortgage relating to the release of property have been
complied with. Proceeds of the sale of any property subject to the lien of the
TE First
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Mortgage must be deposited with the TE First Mortgage Trustee and may be
withdrawn by Toledo Edison based upon property additions or refundable TE First
Mortgage Bonds, may be applied to the redemption of outstanding TE First
Mortgage Bonds or may be applied to pay federal or state taxes incurred by
Toledo Edison as a result of such sale. (Article 8)
Title to Property
The generating plants and other principal facilities of Toledo Edison are
owned by Toledo Edison, except as follows:
(a) Toledo Edison and Cleveland Electric lease from others for a term
of about 29 1/2 years starting on October 1, 1987 undivided 6.5%, 45.9% and
44.38% tenant-in-common interests in Units 1, 2 and 3, respectively, of the
Mansfield Plant and also jointly lease from others for the same term an
18.26% undivided tenant-in-common interest in Beaver Valley Unit 2, all
located in Shippingport, Pennsylvania. Toledo Edison owns about another
1.65% interest in Beaver Valley Unit 2 as a tenant-in-common.
(b) The water intake and discharge facilities at the generating plants
located along Lake Erie and the Maumee and Ohio Rivers are extended into
the lake and rivers under Toledo Edison's property rights as owner of the
land above the water line and pursuant to permits under federal statutes
relating to navigation.
(c) The transmission system is located on land, easements or
rights-of-way owned by Toledo Edison. The distribution system also is
located, in part, on land owned by Toledo Edison, but, for the most part,
it is located on lands owned by others and on streets and highways. In most
cases, Toledo Edison has obtained permission from the apparent owner or, if
located on streets and highways, from the apparent owner of the property.
The Pennsylvania portions of the main transmission lines from the Mansfield
Plant and Beaver Valley Unit 2 are not owned by Toledo Edison.
The fee title which Toledo Edison has as a tenant-in-common owner, and the
leasehold interests it has as a joint lessee, of certain generating units do not
include the right to require a partition or sale for division of proceeds of the
units without the concurrence of all the other owners and their respective
mortgage trustees and the TE First Mortgage Trustee.
Issuance of Additional TE First Mortgage Bonds
In addition to the $1,262.2 million aggregate principal amount of TE First
Mortgage Bonds outstanding at June 30, 1997 (which includes $210.6 million
principal amount of TE First Mortgage Bonds pledged to secure Toledo Edison's
obligations to various bank creditors), additional TE First Mortgage Bonds may
be issued under Article 3 of the TE First Mortgage, ranking equally and ratably
with such outstanding TE First Mortgage Bonds and the Toledo Edison Bonds and
without limit as to amount, on the basis of: (a) 60% of property additions not
previously used as the basis for issuance of TE First Mortgage Bonds or applied
for some other purpose under the TE First Mortgage; (b) the deposit of cash
(which may be withdrawn thereafter on the basis of property additions not
previously so used or refundable TE First Mortgage Bonds); and (c) substitution
for refundable TE First Mortgage Bonds. In general, all property subject to the
lien of the TE First Mortgage acquired by Toledo Edison after April 1, 1947
which is used or useful in Toledo Edison's electric business and located within
the State or any state adjacent thereto, which is not subject to the lien of any
outstanding prior lien bonds and as to which Toledo Edison has good title and
corporate power and governmental permission to own and operate constitutes
property additions and as such is available as a basis for the issuance of TE
First Mortgage Bonds. The tenant-in-common ownership interests of Toledo Edison
in certain generating units qualify as property additions. Property which Toledo
Edison leases from others does not qualify as property additions. With certain
exceptions, TE First Mortgage Bonds become refundable TE First Mortgage Bonds
when they are paid upon maturity, redemption or purchase out of money deposited
with the TE First Mortgage Trustee for such payment or when money for such
payment is irrevocably deposited with the TE First Mortgage Trustee. (Articles
1, 3 and 8)
Also, with certain exceptions, in order to issue additional TE First
Mortgage Bonds based on property additions, net earnings of Toledo Edison
available for interest for any 12 consecutive months within the 15 calendar
months immediately preceding the month in which application for authentication
and delivery of
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such additional TE First Mortgage Bonds is made must be at least twice the
annual interest charges on all TE First Mortgage Bonds outstanding and on the
issue applied for. (Article 3)
At June 30, 1997, Toledo Edison was not be able to issue a material amount
of additional TE First Mortgage Bonds except in connection with refinancings.
The amount of additional TE First Mortgage Bonds which may be issued in the
future will fluctuate depending upon the amount of available refundable TE First
Mortgage Bonds, property additions, earnings and interest rates. FirstEnergy has
not decided whether to apply, or push down, the effects of purchase accounting
to the financial statements of the Companies if the CEC-OE Merger is completed.
If such push-down accounting is applied, Toledo Edison's available bondable
property would be reduced to below zero. See "The Companies -- Financing
Capability."
Covenants to Pay into Maintenance and Replacement Fund and
Limiting Dividends Not Applicable to the Toledo Edison Bonds
The supplemental indentures relating to the TE First Mortgage Bonds issued
prior to October 15, 1987 contain the Maintenance and Replacement Fund and
Limitation on Dividends covenants described in the next two paragraphs. Those
covenants will continue in effect so long as any of those TE First Mortgage
Bonds remain outstanding (which will be until November 1, 2003, assuming no
prior redemption). The Forty-sixth Supplemental Indenture does not extend those
covenants to the Toledo Edison Bonds.
MAINTENANCE AND REPLACEMENT FUND. Under this covenant, Toledo Edison is
required to pay to the TE First Mortgage Trustee by May 1, annually, as a
Maintenance and Replacement Fund, an amount, called the Standard of Expenditure,
not less than 15% of gross electric operating revenues derived from the
mortgaged property during the prior calendar year after deducting the cost of
purchased power and net operating rentals paid. Toledo Edison may reduce this
payment by: (a) the amount of any expenditure during the prior year for repairs
and maintenance of the mortgaged property; (b) the cost of property additions
(with certain adjustments) acquired during the prior year equal to property
retirements during the prior year; (c) the principal amount of any TE First
Mortgage Bonds which have been retired and not used for any other purpose under
the TE First Mortgage; (d) the amount of any net property additions which might
otherwise be made the basis for the issuance of TE First Mortgage Bonds; and (e)
the principal amount of any TE First Mortgage Bonds delivered to the TE First
Mortgage Trustee for that purpose. Toledo Edison has been satisfying this
requirement by taking credits as described in clauses (a), (b) and (d) above.
Toledo Edison may elect to have any cash at any time remaining in the
Maintenance and Replacement Fund used, among other things, to purchase TE First
Mortgage Bonds at a price not in excess of the redemption price or to redeem
redeemable TE First Mortgage Bonds or to be paid to Toledo Edison against
funding of property additions not previously applied for any purpose under the
TE First Mortgage or against delivery of TE First Mortgage Bonds. (TE First
Mortgage Section 4.10 and Article IV of the First through Thirtieth Supplemental
Indentures)
LIMITATION ON DIVIDENDS. Under this covenant, Toledo Edison is prohibited
from declaring dividends, other than stock dividends, on common stock and from
making other distributions on or acquisitions of common stock, except out of
retained earnings accumulated after March 31, 1947, determined on the basis of
including in operating expenses for each year an aggregate amount for repairs,
maintenance and depreciation equal to the Standard of Expenditure for such year.
(TE First Mortgage Section 4.11 and Article IV of the First through Thirtieth
Supplemental Indentures)
Remedies in the Event of Default
Defaults under the TE First Mortgage include the failure of Toledo Edison:
(a) to pay the principal of or premium, if any, on any TE First Mortgage Bonds
when due; (b) to pay any interest on or sinking fund obligation of any TE First
Mortgage Bond within 60 days after it is due; (c) to pay the principal of or
interest on any prior lien bonds within any allowable period; or (d) to perform
any other covenant in the TE First Mortgage within 90 days after notice to
Toledo Edison from the TE First Mortgage Trustee or the holders of not less than
10% in principal amount of the TE First Mortgage Bonds. Defaults also include
certain events of bankruptcy, insolvency or reorganization in bankruptcy or
insolvency of Toledo Edison. The TE First Mortgage provides that the TE First
Mortgage Trustee, within 90 days after the occurrence of a default under
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the TE First Mortgage, is required to give the holders of the TE First Mortgage
Bonds notice of such default, unless cured or waived, but, except in the case of
default in the payment of principal of, or premium, if any, or interest on any
TE First Mortgage Bonds, the TE First Mortgage Trustee may withhold such notice
if it determines that it is in the interest of such holders to do so. (Article
9) A certificate regarding compliance with certain provisions of the TE First
Mortgage must be furnished to the TE First Mortgage Trustee annually. (Article 3
and Section 4.22)
If and so long as any default exists, the TE First Mortgage Trustee or the
holders of not less than 25% in principal amount of the TE First Mortgage Bonds
outstanding may declare the principal amount of all TE First Mortgage Bonds due,
and, if Toledo Edison cures all defaults before a sale of the mortgaged
property, the holders of a majority in principal amount of the TE First Mortgage
Bonds may waive the default. In certain circumstances, such a waiver occurs
automatically upon the curing of all defaults. If any default occurs, the TE
First Mortgage Trustee also may: (a) take possession of and operate the
mortgaged property for the purpose of paying the principal of and interest on
the TE First Mortgage Bonds; (b) sell at public auction all of the mortgaged
property or such parts as the TE First Mortgage Trustee may determine; (c) bring
suit to enforce its rights and the rights of the holders of the TE First
Mortgage Bonds to foreclose the TE First Mortgage or to appoint a receiver of
the mortgaged property; and (d) pursue any other remedy. (Article 9)
No holder of TE First Mortgage Bonds may institute any action, suit or
proceeding for any remedy under the TE First Mortgage unless he has previously
given the TE First Mortgage Trustee written notice of a default by Toledo Edison
and, in addition: (a) the holders of not less than a majority in principal
amount of the TE First Mortgage Bonds have requested the TE First Mortgage
Trustee in writing to act; (b) such holder has offered to the TE First Mortgage
Trustee security and indemnity satisfactory to it against the costs, expenses
and liabilities to be incurred thereby, without negligence or bad faith; and (c)
the TE First Mortgage Trustee has refused or neglected to comply with such
request within 60 days. The holders of a majority in principal amount of the TE
First Mortgage Bonds may require the TE First Mortgage Trustee to pursue any
available remedy, upon furnishing the TE First Mortgage Trustee with
indemnification satisfactory to it, if requested by the TE First Mortgage
Trustee, and any holder of the TE First Mortgage Bonds has the absolute and
unconditional right to enforce the payment of the principal of and interest on
his TE First Mortgage Bonds. (Article 9)
Modification of TE First Mortgage and TE First Mortgage Bonds
Certain modifications, which modifications do not in any manner impair any
of the rights of the holders of any series of TE First Mortgage Bonds or of the
TE First Mortgage Trustee, may be made without the vote of the holders of the TE
First Mortgage Bonds by supplemental indenture entered into between Toledo
Edison and the TE First Mortgage Trustee. (Article 14)
Modifications of the TE First Mortgage or any indenture supplemental
thereto, and of the rights and obligations of Toledo Edison and of holders of
all series of TE First Mortgage Bonds outstanding, may be made by the vote of
the holders of at least 75% in principal amount of the outstanding TE First
Mortgage Bonds entitled to vote at a meeting of the holders of the TE First
Mortgage Bonds or, if one or more, but less than all, of the series of
outstanding TE First Mortgage Bonds are affected by any such modification, by
the vote of the holders of at least 75% in principal amount of the outstanding
TE First Mortgage Bonds entitled to vote of any series so affected; but no such
modification may be made, without the consent of the holder of each TE First
Mortgage Bond affected, which will affect the terms of payment of the principal
of or premium, if any, or interest on any TE First Mortgage Bond (except changes
in any sinking fund), which will create any lien prior or equal to or deprive
any such holder of the benefit of the lien of the TE First Mortgage or which
will change the voting percentage described above to less than 75% with respect
to any TE First Mortgage Bonds outstanding when such modification becomes
effective. TE First Mortgage Bonds owned by Toledo Edison, any other obligor
thereon or an affiliate of Toledo Edison are not entitled to vote. (Article 15)
Defeasance and Discharge
The TE First Mortgage provides that Toledo Edison will be discharged from
any and all obligations under the TE First Mortgage if Toledo Edison pays the
principal of and interest and premium, if any, due and
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payable on all TE First Mortgage Bonds outstanding under the TE First Mortgage,
deposits with the TE First Mortgage Trustee cash sufficient to pay or redeem
such outstanding TE First Mortgage Bonds or delivers to the TE First Mortgage
Trustee for cancellation all TE First Mortgage Bonds outstanding under the TE
First Mortgage and if Toledo Edison has paid all other sums payable under the TE
First Mortgage. (Article 16)
CERTAIN TAX CONSIDERATIONS
The following is a summary of the taxation of the Secured Notes and of
certain anticipated United States federal income tax consequences resulting from
the ownership of the Secured Notes and the exchange of Old Notes for New Notes.
This summary does not cover all of the possible tax consequences relating to the
ownership of the Secured Notes and the receipt of interest thereon, and it is
not intended as tax advice to any person. It addresses only beneficial owners
who hold the Secured Notes as capital assets and does not address special
classes of beneficial owners such as dealers in securities or currencies, banks,
tax-exempt entities, life insurance companies, persons holding Secured Notes as
a hedge against interest rate or currency risks or as part of a straddle or
conversion transaction, or beneficial owners whose functional currency is not
the U.S. dollar. This summary is based upon the United States federal income tax
laws as currently in effect and as currently interpreted and does not include
any description of the tax laws of any non-U.S. government that may apply.
Prospective purchasers of Secured Notes should consult their own tax
advisors concerning the application of the United States federal income tax
laws, as well as the possible application of the tax laws of any other
jurisdiction, to their particular situation.
As used herein, the term "U.S. Holder" means a beneficial owner of a
Secured Note that is (for purposes of United States federal income tax) (i) a
citizen or resident of the United States, (ii) a corporation, partnership, or
other entity treated as a partnership organized in or under the laws of the
United States or of any political subdivisions thereof, or (iii) an estate or
trust that is treated as a "United States person" within the meaning of Section
7701(a)(30) of the Internal Revenue Code of 1986, as amended ("Code"). A "Non-
U.S. Holder" means any holder of a Secured Note other than a U.S. Holder.
The exchange of the Old Notes for the New Notes will be a tax-free exchange
for all holders and no gain or loss will be recognized by a holder as a result
of such exchange. A holder's tax basis for a New Note will be equal to the tax
basis of the Old Note exchanged therefor. A holder's holding period for a New
Note will include the period during which the holder held the Old Note exchanged
therefor.
U.S. FEDERAL INCOME TAXATION OF U.S. HOLDERS
General
Under general principles of current law, the interest paid on a Secured
Note will be includable in income by a U.S. Holder when the interest is received
or when it accrues in accordance with the U.S. Holder's regular method of tax
accounting.
Disposition or Retirement of a Secured Note
Upon the sale, exchange or other disposition of a Secured Note, or upon the
retirement of a Secured Note at maturity, a U.S. Holder will recognize gain or
loss equal to the difference, if any, between the amount realized upon the
disposition or retirement and the U.S. Holder's tax basis in the Secured Note. A
U.S. Holder's tax basis for determining gain or loss on the disposition or
retirement of a Secured Note will be the cost of that Secured Note to such U.S.
Holder, increased by the amount of original issue discount ("OID") and any
market discount includable in such U.S. Holder's gross income with respect to
that Secured Note, and decreased by the amount of any payments under the Secured
Note that are part of its stated redemption price at maturity and by the portion
of any premium applied to reduce interest payments as described above.
Gain or loss upon the disposition or retirement of a Secured Note will be
capital gain or loss, except to the extent the gain represents accrued OID not
previously included in gross income or accrued interest, to which
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extent such gain or loss would be treated as ordinary income. Any capital loss
will be long-term capital loss if at the time of disposition or retirement the
Secured Note has been held for more than one year. Any capital gain recognized
on the disposition or retirement of Secured Notes held for more than eighteen
months will be taxed at a maximum rate of 20 percent. Any capital gain
recognized on the disposition or retirement of Secured Notes held for more than
twelve months and less than eighteen months will be treated as mid-term gain and
taxed at a maximum rate of 28 percent.
Secondary Market Purchasers -- Premium and Market Discount
A U.S. Holder who purchases a Secured Note subsequent to its original
issuance for an amount that is greater than its "adjusted issue price" (defined
as the sum of the issue price of the Secured Note and the portion of OID
previously includable, disregarding any reduction on account of acquisition
premium, as discussed below, in the gross income of any owners of the Secured
Note and reduced by the amount of any payment previously made on the Secured
Note other than a qualified periodic interest payment) and less than or equal to
its stated redemption price at maturity, reduced by the amount of any payment
previously made on the Secured Note other than a qualified periodic interest
payment, will be considered to have purchased such Secured Note at an
"acquisition premium." The amount of OID that such U.S. Holder must include in
its gross income with respect to such Secured Note for any taxable year is
generally reduced by the portion of such acquisition premium properly allocable
to such year. If a U.S. Holder purchases a Secured Note for a cost in excess of
its stated redemption price at maturity (reduced by the amount of any payment
made on the debt instrument prior to the purchase date other than a qualified
periodic interest payment), such Secured Note will have no OID and such U.S.
Holder may elect to amortize such premium, using a constant interest method,
generally over the remaining term of the Secured Note. Such premium generally
shall be deemed to be an offset to interest otherwise includable with respect to
the Secured Note. Premium on a Secured Note held by a U.S. Holder that does not
make such an election will decrease the gain or increase the loss otherwise
recognized on disposition of the Secured Note.
If a U.S. Holder purchases a Secured Note subsequent to its original
issuance for an amount that is less than, respectively, its stated redemption
price at maturity or its revised issue price (defined as the sum of the issue
price of the Secured Note and the aggregate amount of OID includable,
disregarding any reduction on account of acquisition premium, as discussed
above, in the gross income of all owners of the Secured Note), the amount of the
difference generally will be treated as "market discount" for federal income tax
purposes, unless such difference is less than a specified de minimis amount.
Under the market discount rules, a U.S. Holder will be required to treat any
principal payment on, or any gain on the sale, exchange, retirement or other
disposition of, a Secured Note as ordinary income to the extent of the market
discount that has accrued (and has not previously been included in income)
during the period such U.S. Holder held the Secured Note. In addition, the U.S.
Holder may be required to defer, until the maturity of the Secured Note or its
earlier disposition in a taxable transaction, the deduction of all or a portion
of the interest expense on any indebtedness incurred or continued to purchase or
carry such Secured Note.
Any market discount will be considered accrued ratably during the period
from the date of acquisition to the maturity date of the Secured Note, unless
the U.S. Holder elects to accrue on a constant interest basis. A U.S. Holder of
a Secured Note may elect to include market discount in income currently as it
accrues (on either a ratable or a constant interest basis with a corresponding
increase in the U.S. Holder's tax basis in the Secured Note), in which case the
rule described above regarding deferral of interest deductions will not apply.
This election to include market discount in income currently, once made, applies
to all market discount obligations acquired on or after the first taxable year
to which the election applies and may not be revoked without the consent of the
Internal Revenue Service.
Backup Withholding
In general, if a U.S. Holder fails to furnish a correct taxpayer
identification number or certification of exempt status, fails to report
dividend and interest income in full, or fails to certify that he has provided a
correct taxpayer identification number and that he is not subject to
withholding, the U.S. Holder may be subject to a 31 percent federal backup
withholding tax on certain amounts paid or deemed paid (including
61
<PAGE> 65
OID) to the U.S. Holder. An individual's taxpayer identification number is his
social security number. The backup withholding tax is not an additional tax and
may be credited against a U.S. Holder's regular federal income tax liability or
refunded by the Internal Revenue Service where applicable.
U.S. FEDERAL INCOME TAXATION OF NON-U.S. HOLDERS
General
A Non-U.S. Holder generally will not be subject to United States federal
withholding tax on interest paid on the Secured Notes as long as either (i) the
beneficial owner of the Secured Note, under penalties of perjury, provides the
Companies or their agent with such beneficial owner's name and address and
certifies on IRS Form W-8 (or a suitable substitute form) that it is not a U.S.
Holder or (ii) a securities clearing organization, bank, or other financial
institution that holds customers' securities in the ordinary course of its trade
or business ("financial institution") holds the Secured Note and provides a
statement to the Companies or their agent under penalties of perjury in which it
certifies that such an IRS Form W-8 (or a suitable substitute) has been received
by it from the beneficial owner of the Secured Note or qualifying intermediary
and furnishes the Companies or their agent a copy thereof. If the information
provided in such statement changes, the Non-U.S. Holder must so inform the payor
within 30 days of such change. The statement generally must be provided in the
year a payment occurs or in either of the two preceding years. A Non-U.S. Holder
is eligible to provide the statement referred to above in this paragraph if the
Non-U.S. Holder: (i) is not actually or constructively a "10 percent
shareholder" of either of the Companies within the meaning of the Code, (ii) is
not a "controlled foreign corporation" with respect to which either of the
Companies is a "related person" within the meaning of Section 881(c)(3)(C) of
the Code, and (iii) is not a bank described in Section 881(c)(3)(A) of the Code.
If the conditions described in the preceding paragraph are not satisfied,
then interest paid on the Secured Notes will be subject to United States
withholding tax at a rate of 30%, unless such rate is reduced or eliminated
pursuant to an applicable tax treaty.
Any capital gain realized by a Non-U.S. Holder on the sale, redemption,
retirement, or other taxable disposition of a Secured Note will be exempt from
United States federal income and withholding tax, provided that (i) the gain is
not effectively connected with the Non-U.S. Holder's conduct of a trade or
business in the United States, (ii) in the case of a Non-U.S. Holder that is an
individual, the holder is not present in the United States for 183 days or more
in the taxable year of the disposition, and (iii) the Non-U.S. Holder is not
subject to tax pursuant to the provisions of Section 877 of the Code applicable
to certain United States expatriates.
Effectively-Connected Income
If the interest, gain, or other income a Non-U.S. Holder recognizes on a
Secured Note is effectively connected with the Non-U.S. Holder's conduct of a
trade or business in the United States, the Non-U.S. Holder (although exempt
from the withholding tax previously discussed if an appropriate statement is
furnished) generally will be subject to United States federal income tax rates
applicable to United States persons. In addition, if the Non-U.S. Holder is a
foreign corporation, it may be subject to a branch profits tax equal to 30% of
its "effectively connected earnings and profits," as adjusted for certain items,
unless it qualifies for a lower rate under an applicable tax treaty.
Backup Withholding
A Non-U.S. Holder will generally be exempt from backup withholding and
information reporting requirements, provided it complies with the certification
and identification procedures as discussed above. The amount of any backup
withholding from a payment to a holder will be allowed as a credit against the
holder's federal income tax liability and may entitle such holder to a refund,
provided that the required information is furnished to the Internal Revenue
Service.
62
<PAGE> 66
PLAN OF DISTRIBUTION
A broker-dealer that is the holder of Old Notes that were acquired for the
account of such broker-dealer as a result of market-making or other trading
activities (other than Old Notes acquired directly from the Companies or any
affiliate of the Companies) may exchange such Old Notes for New Notes pursuant
to the Exchange Offer, provided that each broker-dealer that receives New Notes
for its own account in exchange for Old Notes, if such Old Notes were acquired
by such broker-dealer as a result of market-making or other trading activities,
must acknowledge that it will deliver a prospectus in connection with any resale
of such New Notes. This Prospectus, as it may be amended or supplemented from
time to time, may be used by any such broker-dealer in connection with resales
of New Notes received in exchange for Old Notes if such Old Notes were acquired
as a result of market-making activities or other trading activities. The
Companies have agreed that, for a period of 120 days after the Expiration Date,
they will make this Prospectus, as amended or supplemented, available to any
such broker-dealer for use in connection with any such resales. In addition,
until , 199 , all dealers effecting transactions in the New Notes
may be required to deliver a prospectus.
The Companies will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 120 days after the Expiration Date, the Companies will
promptly send additional copies of this Prospectus, and any amendment or
supplement to this Prospectus, to any broker-dealer that requests those
documents in the Letter of Transmittal. The Companies have agreed to pay all
expenses incident to the Exchange Offer (including the expenses of one counsel
for the holders of the Secured Notes) other than commissions or concessions of
any broker or dealer and will indemnify the holders of the Secured Notes
(including any broker-dealer) against certain liabilities, including liabilities
under the Securities Act.
LEGAL MATTERS
Certain legal matters in connection with the Exchange Offer will be passed
upon for Cleveland Electric and Toledo Edison by Terrence G. Linnert, Mary E.
O'Reilly or Paul N. Edwards, counsel for each Company, and by Squire, Sanders &
Dempsey LLP, 4900 Key Tower, Cleveland, Ohio 44114, special counsel to the
Companies. Mr. Linnert is Vice President and Chief Financial Officer of each
Company, Senior Vice President, Chief Financial Officer and General Counsel of
Centerior Energy and Senior Vice President -- Corporate Administration Group,
Chief Financial Officer and General Counsel of the Service Company. Mrs.
O'Reilly is Managing Attorney of the Service Company and Mr. Edwards is
Principal Counsel of the Service Company.
EXPERTS
The financial statements of each Company as of December 31, 1996 and 1995
and for each of the three years in the period ended December 31, 1996, included
in the Form 10-K and included in or incorporated by reference in this
Prospectus, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
63
<PAGE> 67
INDEX TO FINANCIAL STATEMENTS SECTION
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CLEVELAND ELECTRIC FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996
(Reprinted from Cleveland Electric's Annual Report to Share Owners)
Management's Financial Analysis............................................................. F-3
Report of Independent Public Accountants.................................................... F-10
Income Statement............................................................................ F-11
Retained Earnings........................................................................... F-11
Balance Sheet............................................................................... F-12
Cash Flows.................................................................................. F-14
Statement of Capitalization................................................................. F-15
Notes to the Financial Statements........................................................... F-17
Financial and Statistical Review............................................................ F-28
TOLEDO EDISON FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996
(Reprinted from Toledo Edison's Annual Report to Share Owners)
Management's Financial Analysis............................................................. F-31
Report of Independent Public Accountants.................................................... F-38
Income Statement............................................................................ F-39
Retained Earnings........................................................................... F-39
Balance Sheet............................................................................... F-40
Cash Flows.................................................................................. F-42
Statement of Capitalization................................................................. F-43
Notes to the Financial Statements........................................................... F-45
Financial and Statistical Review............................................................ F-56
FIRST QUARTER 1997 FORM 10-Q
Notes to the Financial Statements (Unaudited)(a)............................................ F-61
Cleveland Electric Income Statement......................................................... F-64
Cleveland Electric Balance Sheet............................................................ F-65
Cleveland Electric Cash Flows............................................................... F-66
Cleveland Electric Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................................. F-67
Toledo Edison Income Statement.............................................................. F-69
Toledo Edison Balance Sheet................................................................. F-70
Toledo Edison Cash Flows.................................................................... F-71
Toledo Edison Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................. F-72
Part II. Other Information(a).............................................................. F-74
SECOND QUARTER 1997 FORM 10-Q
Notes to the Financial Statements (Unaudited)(a)............................................ F-82
Cleveland Electric Income Statement......................................................... F-85
Cleveland Electric Balance Sheet............................................................ F-86
Cleveland Electric Cash Flows............................................................... F-87
Cleveland Electric Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................................. F-88
Toledo Edison Income Statement.............................................................. F-91
Toledo Edison Balance Sheet................................................................. F-92
Toledo Edison Cash Flows.................................................................... F-93
Toledo Edison Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................................. F-94
Part II. Other Information(a).............................................................. F-97
</TABLE>
- ---------------
(a) Combined in each 1997 Form 10-Q for Centerior Energy, Cleveland Electric and
Toledo Edison and relates to all three companies.
F-1
<PAGE> 68
CLEVELAND ELECTRIC
FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 1996
F-2
<PAGE> 69
MANAGEMENT'S FINANCIAL ANALYSIS
OUTLOOK
STRATEGIC PLAN
In early 1994, Centerior Energy Corporation (Centerior Energy), along with The
Cleveland Electric Illuminating Company (Company) and The Toledo Edison Company
(Toledo Edison), created a strategic plan to achieve the twin goals of
strengthening their financial conditions and improving their competitive
positions. The Company and Toledo Edison are the two wholly owned electric
utility subsidiaries of Centerior Energy. The plan's objectives relate to the
combined operations of all three companies. To meet these goals, we seek to
maximize share owner return on Centerior Energy common stock, achieve profitable
revenue growth, become a leader in customer satisfaction, build a winning
employee team and attain increasingly competitive supply costs. During 1996, the
third year of the eight-year plan, we made strong gains toward reaching some
plan objectives but need significant improvement on others.
A major step taken to reach the twin goals was Centerior Energy's agreement to
merge with Ohio Edison Company (Ohio Edison) to form a new holding company
called FirstEnergy Corp. (FirstEnergy). The proposed merger, combined with good
operating performance, a successful price increase and the accelerated paydown
of debt, resulted in a significant stock price gain, such that the total return
to Centerior Energy common stock share owners during 1996 was 33%. The merger is
expected to better position the merged companies to meet coming competitive
challenges.
Revenue growth is a key objective of the plan, from pricing actions as well as
market expansion.
In April 1996, The Public Utilities Commission of Ohio (PUCO) approved in full
the $119 million price increases requested by the Company and Toledo Edison ($84
million and $35 million, respectively). The primary purpose of the increases was
to provide additional revenues to recover all the costs of providing electric
service, including deferred costs, and provide a fair return to Centerior Energy
common stock share owners. The additional revenues also provided cash to
accelerate the redemption of debt and preferred stock.
For the second year in a row, the Company's total kilowatt-hour sales increased.
Although kilowatt-hour sales to our retail customers decreased by 1% compared to
1995 results, our wholesale sales increased by 27% from 1995 as a result of the
good availability of our generating units and a more aggressive bulk power
marketing effort. Adjusted for weather, kilowatt-hour sales to residential and
commercial customers increased by 1% and 0.8%, respectively, from 1995.
Another key element of our revenue strategy is to offer long-term contracts to
large industrial customers who might otherwise consider changing power
suppliers. During 1996, we renewed and extended for as long as ten years
contracts with many of our large industrial customers, including the five
largest. While this strategy has resulted in lower prices for these customers,
in the long run, it is expected to maximize share owner value by retaining our
customer base in a changing industry. Prior to these renewals, 61% of our
industrial base rate (nonfuel) revenues under contract was scheduled for renewal
before 1999. Following the renewals, the comparable percentage is 18%. At
year-end 1996, 51% of our industrial base rate revenues was under long-term
contracts.
Our continued emphasis on economic development activities is adding to our
opportunities for revenue growth. In 1996, we gained commitments on 24 economic
development projects, representing almost $6 million in new and retained annual
base rate revenues and nearly 4,000 new and retained jobs for Northeast Ohio.
Under the strategic plan, Centerior Energy and its subsidiaries are structured
in six strategic business groups to better focus on competitiveness. During
1996, the Company reduced employment from about 3,600 to 3,300. Further
reduction in our work force to about 3,100 is planned by year-end 1997. We also
plan to reduce expenditures for operation and maintenance activities (exclusive
of fuel and purchased power expenses) and capital projects from $593 million in
1996 to approximately $560 million in 1997 by continuing to streamline
operations. We will continue to reduce our unit cost of fuel used for generating
electricity, while safely improving the operating performance of our generation
facilities.
Reducing fixed financing costs is another primary objective in strengthening our
financial and competitive position. In 1996, we reduced our fixed obligations
for debt, preferred stock and generation facilities leases (partially offset by
the new accounts receivable securitization) by $145 million. See Notes 1(j) and
2. Interest expense and preferred dividends dropped $10 million. In the last
three years, fixed obligations were reduced by $246 million.
In 1996, we reported earnings available for common stock of $78 million compared
to $141 million in 1995. The decline in reported earnings is primarily
attributable to the delay in implementing our price increase until late April,
while we began at the end of 1995 to charge earnings for operating expenses and
amortization of deferrals which the price increase was designed to recover. The
price increase contributed approximately $33 million (after tax) more cash to
our earnings in 1996. The change in regulatory accounting measures resulted in
an $85 million decrease in reported earnings for 1996 versus 1995. In addition,
1996 results included a noncash charge against earnings of $11 million after tax
for the disposition of inventory. Excluding these factors, basic earnings from
operations in 1996 were the same as in 1995; however, the quality of reported
earnings improved. The full benefit of our $84 million price increase,
substantial reductions in operation and maintenance expenses and a continuing
decline in interest charges are expected to result in improvement in earnings
and cash flow from operations in 1997.
F-3
<PAGE> 70
PENDING MERGER WITH OHIO EDISON
On September 16, 1996, Centerior Energy announced its merger with Ohio Edison in
a stock-for-stock transaction. Centerior Energy share owners will receive 0.525
of a share of FirstEnergy common stock for each share of Centerior Energy common
stock owned, while Ohio Edison share owners will receive one share of
FirstEnergy common stock for each share of Ohio Edison common stock owned.
Following the merger, FirstEnergy will directly hold all of the issued and
outstanding common stock of the Company, Toledo Edison and Ohio Edison.
FirstEnergy plans to account for the merger as a purchase in accordance with
generally accepted accounting principles. If FirstEnergy elects to apply, or
"push down", the effects of purchase accounting to the financial statements of
the Company and Toledo Edison, the Company and Toledo Edison would record
adjustments to: (1) reduce the carrying value of nuclear generating plant by
$1.25 billion to fair value; (2) recognize goodwill of $865 million; (3) reduce
common stock equity by $401 million; (4) reset retained earnings of the Company
and Toledo Edison to zero; and (5) reduce the related deferred federal income
tax liability by $438 million. These amounts reflect FirstEnergy's estimates of
the pro forma combined adjustments for the Company and Toledo Edison as of
September 30, 1996. The actual adjustments to be recorded could be materially
different from these estimates. FirstEnergy has not decided whether to push down
the effects of purchase accounting to the financial statements of the Company
and Toledo Edison if the merger with Ohio Edison is completed, nor has
FirstEnergy estimated the allocations between the two companies if push-down
accounting is elected.
We believe that the merger will create a company that is better positioned to
compete in the electric utility industry than either Centerior Energy or Ohio
Edison could on a stand-alone basis, enhancing long-term share owner value and
providing customers with reliable service at more stable and competitive prices.
The combination of Centerior Energy and Ohio Edison is a natural alliance of two
companies with adjoining service areas who already share many major generating
units. FirstEnergy expects to reduce costs, maximize efficiencies and increase
management flexibility in order to enhance revenues, cash flows and earnings and
be a more effective competitor in the increasingly competitive electric utility
industry.
FirstEnergy anticipates the merger will result in net savings for the combined
companies of approximately $1 billion over ten years, in addition to the impact
of cost reduction programs underway at both companies. The additional savings,
which probably could not be achieved without the merger, will result primarily
from the reduction of duplicative functions and positions, joint dispatch of
generating facilities and procurement efficiencies. FirstEnergy expects
reductions in labor costs to comprise slightly over half the estimated savings.
In addition, FirstEnergy expects to reduce system-wide debt by at least $2.5
billion through the year 2000, yielding additional long-term savings in the form
of lower interest expense.
The Company's share of the $1 billion of savings will permit the Company to
reduce prices to its customers as discussed below under FirstEnergy Rate Plan.
Absent the merger, the Company plans to achieve savings as well, but at a lower
level, which is expected to allow prices to be frozen at current levels until at
least 2002 despite inflationary pressures.
Various aspects of the merger are subject to the approval of the Federal Energy
Regulatory Commission (FERC) and other regulatory authorities. Common stock
share owners of Centerior Energy and Ohio Edison are expected to vote on
approval of the merger agreement on March 27, 1997. The merger must be approved
by the affirmative votes of the share owners of at least two-thirds of the
outstanding shares of Ohio Edison common stock and a majority of the outstanding
shares of Centerior Energy common stock. The merger is expected to be effective
in late 1997.
FIRSTENERGY RATE PLAN
On January 30, 1997, the PUCO approved a Rate Reduction and Economic Development
Plan (Plan) for the Company and Toledo Edison to be effective upon the
consummation of the Centerior Energy and Ohio Edison merger. The Plan would be
null and void if the merger is not consummated. The rate order granting the
April 1996 price increase will remain in full force and effect during the
pendency of the merger or if the merger is not consummated.
The Plan calls for a base rate freeze through 2005 (except to comply with any
significant changes in environmental, regulatory or tax laws), followed by an
immediate $310 million (which represents a decrease of approximately 15% from
current levels) base rate reduction in 2006 (the Company's share is expected to
be $217 million); interim reductions beginning seven months after consummation
of the merger of $3 per month increasing to $5 per month per residential
customer by July 1, 2001; $105 million for economic development and energy
efficiency programs (the Company's share is expected to be $70 million);
earnings caps for regulatory purposes for the Company and Toledo Edison; a
commitment by FirstEnergy for a reduction, for regulatory accounting purposes,
in nuclear and regulatory assets by the end of 2005 of at least $2 billion more
than it otherwise would be, through revaluing facilities or accelerating
depreciation and amortization; and a freeze in fuel cost factors until December
31, 2005, subject to PUCO review at year-end 2002 and annual inflation
adjustments. The Plan permits the Company and Toledo Edison to dispose of
generating assets subject to notice and possible PUCO approval, and to enter
into associated power purchase arrangements.
F-4
<PAGE> 71
Total price savings for the Company's customers of about $280 million are
anticipated over the term of the Plan, as summarized below, excluding potential
economic development benefits and assuming that the merger takes place on
December 31, 1997. The total price savings for customers of the Company and
Toledo Edison are expected to be about $391 million.
<TABLE>
<CAPTION>
Year Amount
- ---------------------------------------------- ------------
(millions of
dollars)
<S> <C>
1998________________________________________ $ 15
1999________________________________________ 27
2000________________________________________ 31
2001________________________________________ 39
2002________________________________________ 42
2003________________________________________ 42
2004________________________________________ 42
2005________________________________________ 42
--------
Total___________________________________ $280
========
</TABLE>
Under the Plan's earnings cap, the Company and Toledo Edison will be permitted
to earn up to an 11.5% return on common stock equity for regulatory purposes
during calendar years prior to 2000, 12% during calendar years 2000 and 2001,
and 12.59% during calendar years 2001 through 2005. The regulatory return on
equity is generally expected to be lower than the return on equity calculated
for financial reporting purposes due to the calculation methodology defined by
the Plan and, as discussed in the next paragraph, anticipated differences in
accounting for the Plan for financial reporting versus regulatory purposes. If
for any calendar year the regulatory return on equity exceeds the specified
level, the excess will be credited to customers, first through a reduction in
Percentage of Income Payment Plan (PIPP) arrearages and then as a credit to base
rates. PIPP is a deferred payment program for low-income residential customers.
The Plan requires, for regulatory purposes, a revaluation of or an accelerated
reduction in the investment in nuclear plant and certain regulatory assets of
the Company and Toledo Edison (excluding amounts due from customers for future
federal income taxes) by at least $2 billion by the end of 2005. FirstEnergy has
not yet determined each company's estimated share of the $2 billion. Only a
portion of the $2 billion of accelerated costs is expected to be charged against
the two companies' earnings for financial reporting purposes by 2005.
FirstEnergy believes that the Plan will not provide for the full recovery of
costs and a fair return on investment associated with the nuclear operations of
the Company and Toledo Edison. Pursuant to the PUCO's order, FirstEnergy is
required to submit to the PUCO staff the regulatory accounting and cost recovery
details for implementing the Plan. After approval of such details by the PUCO
staff, FirstEnergy expects that the Company and Toledo Edison will discontinue
the application of Statement of Financial Accounting Standards (SFAS) 71 for
their nuclear operations if and when consummation of the merger becomes
probable. The remainder of their business is expected to continue to comply with
the provisions of SFAS 71. At the time the merger is probable, the Company and
Toledo Edison would be required to write off certain of their regulatory assets
for financial reporting purposes. The write-off amounts would be determined at
that time. FirstEnergy estimates the write-off amounts for the Company and
Toledo Edison will total approximately $750 million. The Company's share of the
write-off is expected to be about two-thirds of this amount. Under the Plan,
some or all of this write-off cannot be applied toward the $2 billion regulatory
commitment discussed above. For financial reporting purposes, nuclear generating
units are not expected to be impaired. If events cause either the Company or
Toledo Edison or both companies to conclude they no longer meet the criteria for
applying SFAS 71 for the remainder of their business, they would be required to
write off their remaining regulatory assets and measure all other assets for
impairment. For a discussion of the criteria for complying with SFAS 71, see
Note 7(a).
APRIL 1996 RATE ORDER
In its April 1996 order, the PUCO granted price increases of $84 million and $35
million in annualized revenues to the Company and Toledo Edison, respectively.
The Company and Toledo Edison intend to freeze rates at existing levels until at
least 2002, although they are not precluded from requesting further price
increases. In the order, the PUCO provided for recovery of all regulatory assets
in the approved rates, and the Company and Toledo Edison continue to comply with
the provisions of SFAS 71.
In connection with its order, the PUCO recommended that the Company and Toledo
Edison write down certain assets for regulatory purposes by an aggregate of
$1.25 billion through 2001. If the merger is consummated, the Company and Toledo
Edison believe acceleration of $2 billion of costs under the Plan would fully
satisfy this recommendation. The Company and Toledo Edison agree with the
concept of accelerating the recognition of costs and the recovery of assets as
such concept is consistent with the strategic objective to become more
competitive. However, the Company and Toledo Edison believe that such
acceleration must also be consistent with the reduction of debt and the
opportunity for Centerior Energy common stock share owners to receive a fair
return on their investment. Consideration of whether to implement a plan
responsive to the PUCO's recommendation to revalue assets by $1.25 billion is
pending the merger with Ohio Edison.
Notwithstanding the pending merger with Ohio Edison and discussions with
regulators concerning the effect of the Plan on the Company's nuclear generating
assets, we believe it is reasonable to expect that rates will be set at levels
that will recover all current and anticipated costs associated with the
Company's nuclear operations, including all associated regulatory assets, and
such rates can be charged to and collected from customers. If there is a change
in our evaluation of the competitive environment, regulatory framework or other
factors, or if the PUCO significantly reduces the value of the Company's assets
or reduces the approved return on common stock
F-5
<PAGE> 72
equity of 12.59% and overall rate of return of 10.06%, or both, for future
regulatory purposes, the Company may be required to record material charges to
earnings.
MERGER OF TOLEDO EDISON INTO THE COMPANY
In October 1996, the FERC authorized the merger of Toledo Edison into the
Company. The merger agreement between Centerior Energy and Ohio Edison requires
the approval of Ohio Edison prior to consummation of the proposed merger of
Toledo Edison into the Company. Ohio Edison has not yet made a decision. See
Note 16.
COMPETITION
Structural changes in the electric utility industry from actions by both federal
and state regulatory bodies are continuing to place downward pressure on prices
and increase competition for customers. The Company's nuclear plant licenses
have required open-access transmission for its wholesale customers for 20 years.
More recently, the Federal Energy Policy Act of 1992 initiated broader access to
utility transmission systems and, in 1996, the FERC adopted rules relating to
open-access transmission services. The open-access rules require utilities to
deliver power from other utilities or generation sources to their wholesale
customers at nondiscriminatory prices.
A number of states have enacted transition legislation which provides for
introduction of competition for retail electric business and recovery of
stranded investment. Several groups in Ohio are studying the possible
introduction of retail wheeling and stranded investment recovery. Retail
wheeling occurs when a customer obtains power from a utility company other than
its local utility. The term "stranded investment" generally refers to fixed
costs approved for recovery under traditional regulatory methods that would
become unrecoverable, or "stranded", as a result of legislative changes which
allow for widespread competition. The PUCO is sponsoring discussions among a
group of business, utility and consumer interests to explore ways of promoting
competitive options without unduly harming the interests of utility company
share owners or customers. The PUCO also has introduced two pilot projects, both
intended as initial steps to introduce competitive elements into the Ohio
electric utility business.
A bill to restructure the electric utility industry in Ohio has been introduced
in the Ohio House of Representatives. A bipartisan committee from both
legislative houses has been formed to study the issue. Centerior Energy
presented the Company's model for customer choice, called Energy Choice, to the
PUCO discussion group in August 1996. Under this model, full retail competition
should be introduced by 2002, but two essential elements, recovery of stranded
investment and levelization of tax burdens among energy suppliers, must be
resolved in the interim to assure share owners' recovery of and a fair return on
their investments.
Although competitive pressures are increasing, the traditional regulatory
framework remains in place and is expected to continue for the foreseeable
future. We cannot predict when and to what extent retail wheeling or other forms
of competition will be allowed. We believe that pure competition (unrestricted
retail wheeling for all customer classifications) is at least several years away
and that any transition to pure competition will be in phases. The FERC and the
PUCO have acknowledged the need to provide at least partial recovery of stranded
investment as greater competition is permitted and, therefore, we believe that
there will be a mechanism developed for the recovery of at least some stranded
investment. However, due to the uncertainty involved, there is a risk in
connection with the introduction of retail wheeling that some of the Company's
assets may not be fully recovered.
Competition from municipal electric suppliers for retail business in our service
area is producing both favorable and unfavorable results in our business.
Through aggressive door-to-door campaigns, we have been successful in limiting
the number of conversions of our customers to Cleveland Public Power (CPP) under
its ongoing expansion plan. CPP is the largest municipal supplier in our service
area. In 1996, we reached agreements to serve a number of large Cleveland
commercial customers, including some previously served by CPP. We continue to
pursue legal remedies to halt illegal municipal expansion in our service area.
The merger with Ohio Edison and the benefits of the Plan to our customers are
expected to better position us to deal with the structural changes taking place
in the industry and to improve our competitive position with respect to
municipalization.
NUCLEAR OPERATIONS
The Company has interests in three nuclear generating units -- Davis-Besse
Nuclear Power Station (Davis-Besse), Perry Nuclear Power Plant Unit 1 (Perry
Unit 1) and Beaver Valley Power Station Unit 2 (Beaver Valley Unit 2). Toledo
Edison operates Davis-Besse and the Company operates Perry Unit 1.
All three units were out of service temporarily for refueling during 1996; thus,
plant availability factors for Davis-Besse, Perry Unit 1 and Beaver Valley Unit
2 were 85%, 76% and 70%, respectively, for 1996. The 1994-1996 availability
factors for the units were 91%, 72%, and 85%, for Davis-Besse, Perry Unit 1 and
Beaver Valley Unit 2, respectively. The comparable industry averages for a
three-year period (as of August 31, 1996) are 82% for pressurized water reactors
such as Davis-Besse and Beaver Valley Unit 2 and 78% for boiling water reactors
such as Perry Unit 1. Davis-Besse established a plant record with its 509-day
continuous run at or near full capacity before shutting down for its scheduled
refueling outage in April 1996.
A significant part of the strategic plan involves ongoing efforts to increase
the availability and lower the cost of
F-6
<PAGE> 73
production of our nuclear units. In 1996, we continued our progress toward
increasing long-term unit availability while continuing to lower production
costs. The goal of our nuclear improvement program is to replicate Davis-Besse's
operational excellence and cost reduction gains at Perry Unit 1, while improving
performance ratings.
Our nuclear units may be impacted by activities or events beyond our control.
Operating nuclear units have experienced unplanned outages or extensions of
scheduled outages because of equipment problems or new regulatory requirements.
A major accident at a nuclear facility anywhere in the world could cause the
Nuclear Regulatory Commission (NRC) to limit or prohibit the operation or
licensing of any domestic nuclear unit. If one of our nuclear units is taken out
of service for an extended period for any reason, including an accident at such
unit or any other nuclear facility, we cannot predict whether regulatory
authorities would impose unfavorable rate treatment. Such treatment could
include taking our affected unit out of rate base, thereby not permitting us to
recover our investment in and earn a return on it, or disallowing certain
construction or maintenance costs. An extended outage coupled with unfavorable
rate treatment could have a material adverse effect on our financial condition,
cash flows and results of operations. Premature plant closings could also have a
material adverse effect on our financial condition, cash flows and results of
operations because the estimated cost to decommission a plant exceeds the
current funding in the decommissioning trust.
HAZARDOUS WASTE DISPOSAL SITES
The Company has been named as a "potentially responsible party" (PRP) for three
sites listed on the Superfund National Priorities List (Superfund List) and is
aware of its potential involvement in the cleanup of several other sites.
Allegations that the Company disposed of hazardous waste at these sites, and the
amount involved, are often unsubstantiated and subject to dispute. Federal law
provides that all PRPs for a particular site be held liable on a joint and
several basis. If the Company were held liable for 100% of the cleanup costs of
all the sites referred to above, the cost could be as high as $300 million.
However, we believe that the actual cleanup costs will be substantially lower
than $300 million, that the Company's share of any cleanup costs will be
substantially less than 100% and that most of the other PRPs are financially
able to contribute their share. The Company has accrued a liability totaling $7
million at December 31, 1996 based on estimates of the costs of cleanup and its
proportionate responsibility for such costs. We believe that the ultimate
outcome of these matters will not have a material adverse effect on our
financial condition, cash flows or results of operations.
A new Statement of Position issued by the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants, Inc.
effective January 1, 1997 provides guidance on the recognition and disclosure of
environmental remediation liabilities. Adoption of the statement in 1997 is not
expected to have a material adverse effect on our financial condition or results
of operations.
COMMON STOCK DIVIDENDS
Centerior Energy's common stock dividend has been funded in recent years
primarily by common stock dividends paid by the Company. The declaration and
payment of future common stock dividends is at the discretion of the Company's
Board of Directors, subject to applicable legal restrictions. In 1994, Centerior
Energy lowered its common stock dividend which reduced its cash outflow by over
$110 million annually. This action, in turn, reduced the common stock cash
dividend demand on the Company. The Company used the increased retained cash to
redeem debt and preferred stock more quickly than would otherwise be the case.
In 1996, Centerior Energy increased its common stock cash dividend demand on the
Company to fund its common stock dividend and other corporate activities. See
Capital Resources and Liquidity-Liquidity below.
CAPITAL RESOURCES AND LIQUIDITY
1994-1996 CASH REQUIREMENTS
We need cash for normal corporate operations (including the payment of
dividends), retirement of maturing securities, and an ongoing program of
constructing and improving facilities to meet demand for electric service and to
comply with government regulations. Our cash construction expenditures totaled
$164 million in 1994, $148 million in 1995 and $104 million in 1996. Our debt
and preferred stock maturities and sinking fund requirements totaled $62 million
in 1994, $282 million in 1995 and $176 million in 1996. In addition, we
optionally redeemed $341 million of securities in the 1994-1996 period,
including $143 million of tax-exempt issues refunded in 1995.
In July 1996, Centerior Funding Corporation (Centerior Funding), the Company's
wholly owned subsidiary, issued $150 million in AAA-rated accounts receivable-
backed investor certificates due in 2001 with an interest rate of 7.2%. The
Company's share of the net proceeds from the accounts receivable securitization
was used to redeem higher-cost securities and for general corporate purposes.
As a result of these activities, the embedded cost of the Company's debt at the
end of 1996 declined to 8.83% versus 8.88% in 1995 and 8.96% in 1994.
The Company also utilized short-term borrowings to help meet its cash needs. The
Company had $112 million of notes payable to affiliates at December 31, 1996.
The Company is a party to a $125 million revolving credit facility which was
renewed in May 1996 for a one-year term. In 1996, portions of the nuclear fuel
lease financing vehicles for the Company and Toledo Edison matured: $84 million
of intermediate-term notes in September and a $150 million letter of credit
supporting short-term borrowing in October. These facilities were replaced by
$100 million of intermediate-term notes and a $100 million two-year letter of
credit. The net reduction in the
F-7
<PAGE> 74
facility size results from lower nuclear fuel financing requirements.
1997 AND BEYOND CASH REQUIREMENTS
Our anticipated 1997 cash requirements for construction are $110 million. Debt
and preferred stock maturities and sinking fund requirements are $145 million.
Of this amount, $70 million are for a tax-exempt issue secured by first mortgage
bonds and subject to optional tender by the owners on November 1, 1997, which we
expect to replace with a similar issue at a substantially lower interest rate.
We expect to meet remaining requirements with internal cash generation and cash
reserves. We also expect to be able to optionally redeem more debt and preferred
stock in 1997 than we did in 1996.
We expect to meet all of our 1998-2001 cash requirements with internal cash
generation. Estimated cash requirements for our construction program during this
period total $496 million. Debt and preferred stock maturities and sinking fund
requirements total $445 million for the same period. If economical, additional
securities may be redeemed with funding expected to be provided through internal
cash generation.
Consummation of the merger with Ohio Edison is expected to reduce the Company's
cash construction requirements and improve its ability to redeem fixed
obligations.
LIQUIDITY
Net cash flow from operating activities in 1996 was significantly increased from
1995 by implementation of the price increase effective in April 1996. Most of
the net proceeds from our accounts receivable securitization of $65 million were
used to redeem other higher-cost securities, producing net savings in our
overall cost of borrowing. In 1996, we reduced our fixed obligations for debt,
preferred stock and generation facilities leases (partially offset by the new
accounts receivable securitization) by $145 million. At year-end 1996, we had
$30 million in cash and temporary cash investments, down from $70 million at
year-end 1995.
Additional first mortgage bonds may be issued by the Company under its mortgage
on the basis of property additions, cash or refundable first mortgage bonds. If
the applicable interest coverage test is met, the Company may issue first
mortgage bonds on the basis of property additions and, under certain
circumstances, refundable bonds. At December 31, 1996, the Company would have
been permitted to issue approximately $666 million of additional first mortgage
bonds. If FirstEnergy elects to apply purchase accounting to the Company if the
merger with Ohio Edison is completed, the Company's first mortgage bond capacity
would be adversely affected.
The Company also is able to raise funds through the sale of preferred and
preference stock. There are no restrictions on the Company's ability to issue
preferred or preference stock.
The Company and Toledo Edison have $273 million in financing vehicles to support
their nuclear fuel leases, $83 million of which mature in 1997. Replacement
financing for the maturing issues may not be needed in 1997. The Company is a
party to a $125 million revolving credit facility which is expected to be
renewed when it matures in May 1997.
Current credit ratings for the Company are as follows:
<TABLE>
<CAPTION>
Standard Moody's
& Poor's Investors
Corporation Service, Inc.
----------- -------------
<S> <C> <C>
First mortgage bonds__________________ BB Ba2
Subordinate debt______________________ B+ Ba3
Preferred stock_______________________ B b2
</TABLE>
Following the FirstEnergy merger announcement, both rating agencies placed the
Company's securities on credit watch with positive implications.
Federal law prohibits the Company from paying dividends out of capital accounts.
The Company has since 1993 declared and paid preferred and common stock
dividends out of appropriated current net income included in retained earnings.
At the times of such declarations and payments, the Company had a deficit in its
retained earnings. At December 31, 1996, the Company had $130 million of
appropriated retained earnings for the payment of dividends.
As part of a routine audit, the FERC is considering statements which it
requested and received from the Company and Toledo Edison supporting the payment
of dividends out of appropriated current net income included in retained
earnings while total retained earnings were a deficit. At December 31, 1996, the
Company's retained earnings deficit was $276 million. The final disposition of
this issue is a factor expected to be considered by FirstEnergy in deciding
whether to apply purchase accounting to the Company and Toledo Edison, one
effect of which would be to reset deficit retained earnings to zero. If the
merger is not consummated or if FirstEnergy determines not to apply purchase
accounting to the two companies, the Company and Toledo Edison intend to
continue to support their position and pursue all available alternatives to
allow them to continue the declaration and payment of dividends.
RESULTS OF OPERATIONS
1996 VS. 1995
Factors contributing to the 1.2% increase in 1996 operating revenues are as
follows:
<TABLE>
<CAPTION>
Millions
Increase (Decrease) in Operating Revenues of Dollars
- -------------------------------------------------- -----------
<S> <C>
Base Rates______________________________________ $ 51
KWH Sales Volume and Mix________________________ (41)
Wholesale Revenues______________________________ 14
Fuel Cost Recovery Revenues_____________________ (9)
Miscellaneous Revenues__________________________ 6
-----
Total_______________________________________ $ 21
=====
</TABLE>
The increase in 1996 base rates revenues resulted primarily from the April 1996
rate order issued by the PUCO
F-8
<PAGE> 75
for the Company as discussed under Outlook-April 1996 Rate Order and in Note
7(b). Renegotiated contracts for certain large industrial customers resulted in
a decrease in base revenues which partially offset the effect of the general
price increase. For the second year in a row, total kilowatt-hour sales
increased. Total sales increased 1.3% because of a 27% increase in wholesale
sales, the result of the good availability of our generating units and a more
aggressive bulk power marketing effort. Residential and commercial kilowatt-hour
sales decreased 2.1% and 0.6%, respectively, primarily because of the cooler
summer weather in 1996. On a weather-normalized basis, residential and
commercial sales increased 1% and 0.8%, respectively. Industrial kilowatt-hour
sales decreased 0.2% primarily because of fewer sales to large automotive
manufacturers. Lower 1996 fuel cost recovery revenues resulted from favorable
changes in the fuel cost factors. The weighted average of these fuel cost
factors decreased approximately 3%. Miscellaneous revenues increased in 1996
primarily because of new revenues relating to a generating plant lease agreement
in effect for four months during the year. The parties canceled the agreement
because the FERC insisted on terms which were not economic to the parties.
For 1996, operating revenues were 32% residential, 32% commercial, 29%
industrial and 7% other, and kilowatt-hour sales were 23% residential, 28%
commercial, 37% industrial and 12% other. The average prices per kilowatt-hour
for residential, commercial and industrial customers were 11.34, 9.67 and 6.57
cents, respectively.
Operating expenses increased 4.4% in 1996. The cessation of the Rate
Stabilization Program deferrals and the commencement of their amortization in
December 1995 resulted in the increase in the net amortization of deferred
operating expenses. See Note 7(d). Depreciation and amortization expenses
increased primarily because of a $7 million net increase in depreciation related
to changes in depreciation rates, as discussed in Note 1(e), and the cessation
of the accelerated amortization of unrestricted investment tax credits under the
Rate Stabilization Program, which was reported in 1995 as a $6 million reduction
of depreciation. Other operation and maintenance expenses in 1996 included a $17
million one-time charge for the disposition of inventory as part of a
reengineering of the supply chain process. Reengineering the supply chain
process increases the use of technology, consolidates warehousing and uses
just-in-time purchase and delivery. Federal income taxes decreased as a result
of lower pretax operating income.
A nonoperating loss resulted in 1996 primarily from costs related to the
accounts receivable securitization, as discussed in Note 1(j), and the Company's
share of merger-related expenses. The deferral of carrying charges related to
the Rate Stabilization Program ended in November 1995. The federal income tax
credit for nonoperating income increased in 1996 accordingly.
Interest charges and preferred dividend requirements decreased in 1996 because
of the redemption of securities and refundings at favorable terms in 1996 and
1995.
1995 VS. 1994
Factors contributing to the 4.2% increase in 1995 operating revenues are as
follows:
<TABLE>
<CAPTION>
Millions
Increase (Decrease) in Operating Revenues of Dollars
- --------------------------------------------------- ----------
<S> <C>
KWH Sales Volume and Mix_________________________ $ 52
Wholesale Revenues_______________________________ 11
Fuel Cost Recovery Revenues______________________ 19
Miscellaneous Revenues___________________________ (11)
----
Total________________________________________ $ 71
====
</TABLE>
Industrial kilowatt-hour sales increased 0.3% in 1995, but sales grew 2.4%
excluding reductions at two low-margin steel producers (representing 7.6% of
industrial revenues). Residential and commercial kilowatt-hour sales increased
2.8% and 3%, respectively, primarily because of the hot summer weather, although
there was about 2% nonweather-related growth in commercial kilowatt-hour sales.
Other sales increased 36% because of a 58% increase in wholesale sales due
principally to the hot summer and good availability of our generating units.
Weather accounted for approximately $24 million of the $41 million increase in
1995 base rate revenues. Higher 1995 fuel cost recovery revenues resulted from
an increase in the fuel cost factors. The weighted average of these fuel cost
factors increased approximately 7%. Miscellaneous revenues decreased in 1995
primarily because the 1994 amount included the billings to other utility owners
and lessees for overhead expenses related to the 1994 refueling and maintenance
outage of the jointly owned Perry Unit 1.
For 1995, operating revenues were 32% residential, 32% commercial, 29%
industrial and 7% other, and kilowatt-hour sales were 24% residential, 28%
commercial, 38% industrial and 10% other. The average prices per kilowatt-hour
for residential, commercial and industrial customers were 11.04, 9.47 and 6.54
cents, respectively. The changes from 1994 were not significant.
Operating expenses increased 5.3% in 1995. Fuel and purchased power expenses
increased as higher fuel expense was partially offset by lower purchased power
expense. The higher fuel expense was attributable to increased generation and
more amortization of previously deferred fuel costs than the amount amortized in
1994. The higher other operation and maintenance expenses resulted primarily
from charges for an ongoing inventory reduction program and the recognition of
costs associated with preliminary engineering studies. Federal income taxes
increased as a result of higher pretax operating income. Taxes, other than
federal income taxes, increased primarily due to property tax increases
resulting from plant additions, real estate valuation increases and a
nonrecurring tax credit recorded in 1994.
F-9
<PAGE> 76
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
To the Share Owners and
Board of Directors of
The Cleveland Electric Illuminating Company:
We have audited the accompanying consolidated balance sheet and consolidated
statement of capitalization of The Cleveland Electric Illuminating Company (a
wholly owned subsidiary of Centerior Energy Corporation) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of income,
retained earnings and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Cleveland Electric
Illuminating Company and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Cleveland, Ohio
February 14, 1997
F-10
<PAGE> 77
INCOME STATEMENT The Cleveland Electric Illuminating Company and Subsidiaries
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1996 1995 1994
------ ------ ------
(millions of dollars)
<S> <C> <C> <C>
OPERATING REVENUES_________________________________________________ $1,790 $1,769 $1,698
------ ------ ------
OPERATING EXPENSES
Fuel and purchased power (1)_____________________________________ 408 413 391
Other operation and maintenance__________________________________ 426 418 394
Generation facilities rental expense, net________________________ 56 56 56
------ ------ ------
Total operation and maintenance_______________________________ 890 887 841
Depreciation and amortization____________________________________ 210 196 195
Taxes, other than federal income taxes___________________________ 230 230 218
Amortization of deferred operating expenses, net_________________ 26 (36) (34)
Federal income taxes_____________________________________________ 75 94 82
------ ------ ------
1,431 1,371 1,302
------ ------ ------
OPERATING INCOME___________________________________________________ 359 398 396
------ ------ ------
NONOPERATING INCOME (LOSS)
Allowance for equity funds used during construction______________ 2 2 4
Other income and deductions, net_________________________________ (10) 2 6
Deferred carrying charges________________________________________ -- 29 25
Federal income taxes--credit (expense)___________________________ 6 (2) (4)
------ ------ ------
(2) 31 31
------ ------ ------
INCOME BEFORE INTEREST CHARGES_____________________________________ 357 429 427
------ ------ ------
INTEREST CHARGES
Debt interest____________________________________________________ 242 248 247
Allowance for borrowed funds used during construction____________ (2) (3) (5)
------ ------ ------
240 245 242
------ ------ ------
NET INCOME_________________________________________________________ 117 184 185
PREFERRED DIVIDEND REQUIREMENTS____________________________________ 39 43 45
------ ------ ------
EARNINGS AVAILABLE FOR COMMON STOCK________________________________ $ 78 $ 141 $ 140
====== ====== ======
</TABLE>
- ---------------
(1) Includes purchased power expense of $105 million, $102 million and $111
million in 1996, 1995 and 1994, respectively, for all purchases from Toledo
Edison.
RETAINED EARNINGS
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------
1996 1995 1994
----- ----- -----
(millions of dollars)
<S> <C> <C> <C>
RETAINED EARNINGS (DEFICIT) AT BEGINNING OF YEAR___________________ $(193) $(262) $(280)
----- ----- -----
ADDITIONS
Net income_______________________________________________________ 117 184 185
DEDUCTIONS
Dividends declared:
Common stock__________________________________________________ (161) (74) (122)
Preferred stock_______________________________________________ (39) (41) (45)
----- ----- -----
Net Increase (Decrease)_____________________________________ (83) 69 18
----- ----- -----
RETAINED EARNINGS (DEFICIT) AT END OF YEAR_________________________ $(276) $(193) $(262)
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-11
<PAGE> 78
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995
------ ------
(millions of
dollars)
<S> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility plant in service_________________________________________________________ $6,938 $6,872
Less: accumulated depreciation and amortization_______________________________ 2,252 2,094
------- -------
4,686 4,778
Construction work in progress____________________________________________________ 57 73
------- -------
4,743 4,851
Nuclear fuel, net of amortization________________________________________________ 113 122
Other property, less accumulated depreciation____________________________________ 54 58
------- -------
4,910 5,031
------- -------
CURRENT ASSETS
Cash and temporary cash investments______________________________________________ 30 70
Amounts due from customers and others, net_______________________________________ 181 152
Amounts due from affiliates______________________________________________________ 6 5
Unbilled revenues________________________________________________________________ 9 79
Materials and supplies, at average cost
Owned_________________________________________________________________________ 52 101
Under consignment_____________________________________________________________ 24 --
Taxes applicable to succeeding years_____________________________________________ 182 184
Other____________________________________________________________________________ 14 7
------- -------
498 598
------- -------
REGULATORY AND OTHER ASSETS
Regulatory assets________________________________________________________________ 1,350 1,398
Nuclear plant decommissioning trusts_____________________________________________ 76 61
Other____________________________________________________________________________ 44 64
------- -------
1,470 1,523
------- -------
Total Assets________________________________________________________________ $6,878 $7,152
======= =======
</TABLE>
The accompanying notes are an integral part of this statement.
F-12
<PAGE> 79
The Cleveland Electric Illuminating Company and Subsidiaries
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995
------ ------
(millions of
dollars)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock equity______________________________________________________________ $1,045 $1,127
Preferred stock
With mandatory redemption provisions__________________________________________ 186 215
Without mandatory redemption provisions_______________________________________ 238 241
Long-term debt___________________________________________________________________ 2,441 2,666
------ ------
3,910 4,249
------ ------
CURRENT LIABILITIES
Current portion of long-term debt and preferred stock____________________________ 145 177
Current portion of nuclear fuel lease obligations________________________________ 52 55
Accounts payable_________________________________________________________________ 83 89
Accounts and notes payable to affiliates_________________________________________ 171 64
Accrued taxes____________________________________________________________________ 316 296
Accrued interest_________________________________________________________________ 52 59
Other____________________________________________________________________________ 59 56
------ ------
878 796
------ ------
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized investment tax credits_______________________________________________ 176 184
Accumulated deferred federal income taxes________________________________________ 1,306 1,298
Unamortized gain from Bruce Mansfield Plant sale_________________________________ 296 311
Accumulated deferred rents for Bruce Mansfield Plant_____________________________ 99 92
Nuclear fuel lease obligations___________________________________________________ 74 86
Retirement benefits______________________________________________________________ 73 65
Other____________________________________________________________________________ 66 71
------ ------
2,090 2,107
------ ------
Total Capitalization and Liabilities________________________________________ $6,878 $7,152
====== ======
</TABLE>
F-13
<PAGE> 80
CASH FLOWS The Cleveland Electric Illuminating Company and Subsidiaries
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------
1996 1995 1994
----- ----- -----
(millions of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES (1)
Net Income________________________________________________________________ $ 117 $ 184 $ 185
------ ------ ------
Adjustments to Reconcile Net Income to Cash from Operating Activities:
Depreciation and amortization__________________________________________ 210 196 195
Deferred federal income taxes__________________________________________ 25 56 50
Unbilled revenues______________________________________________________ 5 (7) 27
Deferred fuel__________________________________________________________ 7 9 (20)
Deferred carrying charges______________________________________________ -- (29) (25)
Leased nuclear fuel amortization_______________________________________ 46 71 55
Amortization of deferred operating expenses, net_______________________ 26 (36) (34)
Allowance for equity funds used during construction____________________ (2) (2) (4)
Changes in amounts due from customers and others, net__________________ (4) (6) 10
Net proceeds from accounts receivable securitization___________________ 65 -- --
Changes in materials and supplies______________________________________ 25 10 2
Changes in accounts payable____________________________________________ (6) 1 (34)
Changes in working capital affecting operations________________________ 11 (17) 3
Other noncash items____________________________________________________ (7) -- 4
------ ------ ------
Total Adjustments____________________________________________________ 401 246 229
------ ------ ------
Net Cash from Operating Activities________________________________ 518 430 414
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES (2)
Notes payable to affiliates_______________________________________________ 107 (53) 58
First mortgage bond issues________________________________________________ -- 443 46
Maturities, redemptions and sinking funds_________________________________ (290) (460) (116)
Nuclear fuel lease obligations____________________________________________ (52) (58) (60)
Dividends paid____________________________________________________________ (200) (117) (142)
Premiums, discounts and expenses__________________________________________ (1) (11) (1)
------ ------ ------
Net Cash from Financing Activities________________________________ (436) (256) (215)
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES (2)
Cash applied to construction______________________________________________ (104) (148) (164)
Interest capitalized as allowance for borrowed funds used during
construction___________________________________________________________ (2) (3) (5)
Contributions to nuclear plant decommissioning trusts_____________________ (12) (13) (14)
Other cash applied________________________________________________________ (4) (6) (27)
------ ------ ------
Net Cash from Investing Activities________________________________ (122) (170) (210)
------ ------ ------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS___________________________ (40) 4 (11)
------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF YEAR____________________ 70 66 77
------ ------ ------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF YEAR__________________________ $ 30 $ 70 $ 66
====== ====== ======
- ---------------
(1) Interest paid (net of amounts capitalized)______________________________ $ 237 $ 214 $ 208
====== ====== ======
Federal income taxes paid______________________________________________ $ 30 $ 66 $ 15
====== ====== ======
(2) Increases in Nuclear Fuel and Nuclear Fuel Lease Obligations in the Balance
Sheet resulting from the noncash capitalizations under nuclear fuel
agreements are excluded from this statement.
</TABLE>
The accompanying notes are an integral part of this statement.
F-14
<PAGE> 81
STATEMENT OF CAPITALIZATION
The Cleveland Electric Illuminating Company and Subsidiaries
<TABLE>
<CAPTION>
December 31,
-----------------
1996 1995
------ ------
(millions of
dollars)
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK EQUITY:
Common shares, without par value: 105 million authorized; 79.6 million outstanding in 1996
and 1995________________________________________________________________________________ $1,241 $1,241
Other paid-in capital_____________________________________________________________________ 80 79
Retained earnings (deficit)_______________________________________________________________ (276) (193)
------ ------
Total Common Stock Equity_____________________________________________________________ 1,045 1,127
------ ------
</TABLE>
<TABLE>
<CAPTION>
Current
1996 Shares Call Price
Outstanding Per Share
----------- ----------
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK:
Without par value, 4,000,000 preferred shares authorized
Subject to mandatory redemption:
$ 7.35 Series C___________________________ 120,000 $ 101.00 12 13
88.00 Series E___________________________ 12,000 1,011.48 12 15
9.125 Series N___________________________ 150,000 100.00 15 30
91.50 Series Q___________________________ 53,572 1,000.00 54 64
88.00 Series R___________________________ 50,000 -- 50 50
90.00 Series S___________________________ 74,000 -- 73 73
------ ------
216 245
Less: Current maturities 30 30
------ ------
Total Preferred Stock, with Mandatory Redemption
Provisions_____________________________________________ 186 215
------ ------
Not subject to mandatory redemption:
$ 7.40 Series A___________________________ 500,000 101.00 50 50
7.56 Series B___________________________ 450,000 102.26 45 45
Adjustable Series L___________________________ 474,000 100.00 46 49
42.40 Series T___________________________ 200,000 -- 97 97
------ ------
Total Preferred Stock, without Mandatory Redemption
Provisions_____________________________________________ 238 241
------ ------
LONG-TERM DEBT:
First mortgage bonds:
7.625% due 2002_______________________________________________________________________ 195 245
7.375% due 2003_______________________________________________________________________ 100 100
9.500% due 2005_______________________________________________________________________ 300 300
8.750% due 2005_______________________________________________________________________ 75 75
10.880% due 2006_______________________________________________________________________ -- 50
9.250% due 2009_______________________________________________________________________ 50 50
8.375% due 2011_______________________________________________________________________ 125 125
8.375% due 2012_______________________________________________________________________ 75 75
9.375% due 2017_______________________________________________________________________ 300 300
10.000% due 2020_______________________________________________________________________ 100 100
9.000% due 2023_______________________________________________________________________ 150 150
------ ------
1,470 1,570
------ ------
Tax-exempt issues secured by first mortgage bonds:
7.000% due 2006-2009__________________________________________________________________ 64 64
6.000% due 2011**_____________________________________________________________________ 6 6
6.000% due 2011**_____________________________________________________________________ 2 2
6.200% due 2013_______________________________________________________________________ 48 48
8.000% due 2013_______________________________________________________________________ 79 79
3.500% due 2015**_____________________________________________________________________ 40 40
6.000% due 2017**_____________________________________________________________________ 1 1
3.500% due 2018**_____________________________________________________________________ 73 73
6.000% due 2020**_____________________________________________________________________ 41 41
6.000% due 2020**_____________________________________________________________________ 9 9
9.750% due 2022***____________________________________________________________________ 70 70
6.850% due 2023_______________________________________________________________________ 30 30
8.000% due 2023_______________________________________________________________________ 73 73
7.625% due 2025_______________________________________________________________________ 54 54
7.750% due 2025_______________________________________________________________________ 45 45
7.700% due 2025_______________________________________________________________________ 44 44
------ ------
679 679
------ ------
</TABLE>
The accompanying notes are an integral part of this statement.
F-15
<PAGE> 82
STATEMENT OF CAPITALIZATION (CONTINUED)
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
------ ------
(millions of dollars)
<S> <C> <C> <C>
LONG-TERM DEBT: (CONTINUED)
Medium-term notes secured by first mortgage bonds:
8.700% due 1996_________________________________________________________________________ -- 20
9.100% due 1996_________________________________________________________________________ -- 32
9.110% due 1996_________________________________________________________________________ -- 13
9.000% due 1996_________________________________________________________________________ -- 13
9.140% due 1996_________________________________________________________________________ -- 12
9.050% due 1996_________________________________________________________________________ -- 10
8.950% due 1996_________________________________________________________________________ -- 40
9.450% due 1997_________________________________________________________________________ 43 43
9.000% due 1998_________________________________________________________________________ 5 5
8.870% due 1998_________________________________________________________________________ 10 10
8.260% due 1998_________________________________________________________________________ 2 2
8.330% due 1998_________________________________________________________________________ 25 25
8.170% due 1998_________________________________________________________________________ 11 11
8.150% due 1998_________________________________________________________________________ 8 8
8.160% due 1998_________________________________________________________________________ 5 5
9.250% due 1999_________________________________________________________________________ 52 52
9.300% due 1999_________________________________________________________________________ 25 25
7.670% due 1999_________________________________________________________________________ 3 3
7.250% due 1999_________________________________________________________________________ 12 12
7.850% due 1999_________________________________________________________________________ 25 25
7.770% due 1999_________________________________________________________________________ 17 17
8.290% due 1999_________________________________________________________________________ 10 10
9.200% due 2001_________________________________________________________________________ 15 15
7.420% due 2001_________________________________________________________________________ 10 20
9.050% due 2001_________________________________________________________________________ 5 5
8.680% due 2001_________________________________________________________________________ 15 15
8.540% due 2001_________________________________________________________________________ 3 3
8.560% due 2001_________________________________________________________________________ 4 4
8.550% due 2001_________________________________________________________________________ 5 5
7.850% due 2002_________________________________________________________________________ 5 5
8.130% due 2002_________________________________________________________________________ 28 28
7.750% due 2003_________________________________________________________________________ 15 15
9.520% due 2021_________________________________________________________________________ 8 8
------ ------
366 516
------ ------
Tax-exempt notes:
6.500% due 1996_________________________________________________________________________ -- 3
5.500% due 1997_________________________________________________________________________ * *
6.700% due 2006_________________________________________________________________________ 20 21
5.700% due 2008_________________________________________________________________________ 7 8
6.700% due 2011_________________________________________________________________________ 6 6
5.875% due 2012_________________________________________________________________________ 14 14
------ ------
47 52
------ ------
Bank loans secured by subordinate mortgage:
7.500% due 1996_________________________________________________________________________ -- 2
------ ------
Unamortized premium (discount), net_________________________________________________________ (6) (6)
------ ------
2,556 2,813
Less: Current maturities__________________________________________________________________ 115 147
------ ------
Total Long-Term Debt____________________________________________________________________ 2,441 2,666
------ ------
TOTAL CAPITALIZATION________________________________________________________________________ $3,910 $4,249
====== ======
</TABLE>
- ---------------
* Denotes debt of less than $1 million.
** Denotes variable rate issue with December 31, 1996 interest rate shown.
*** Subject to optional tender by the owners on November 1, 1997.
F-16
<PAGE> 83
NOTES TO THE FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
(a) GENERAL
The Company is an electric utility serving Northeast Ohio and a wholly owned
subsidiary of Centerior Energy. The Company's financial statements have
historically included the accounts of the Company's wholly owned subsidiaries,
which in the aggregate were not material. In 1995, the Company formed a wholly
owned subsidiary, Centerior Funding, to serve as the transferor in connection
with an accounts receivable securitization completed in 1996 as discussed in
Note 1(j). In 1994, the Company transferred its investments in three wholly
owned subsidiaries to Centerior Energy at cost ($26 million) via property
dividends. All significant intercompany items have been eliminated in
consolidation.
The Company follows the Uniform System of Accounts prescribed by the FERC and
adopted by the PUCO. Rate-regulated utilities are subject to SFAS 71 which
governs accounting for the effects of certain types of rate regulation. Pursuant
to SFAS 71, certain incurred costs are deferred for recovery in future rates.
See Note 7(a).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
the disclosure of contingent assets and liabilities. The estimates are based on
an analysis of the best information available. Actual results could differ from
those estimates.
The Company is a member of the Central Area Power Coordination Group (CAPCO).
Other members are Toledo Edison, Duquesne Light Company, Ohio Edison and its
wholly owned subsidiary, Pennsylvania Power Company. The members have
constructed and operate generation and transmission facilities for their joint
use.
(b) RELATED PARTY TRANSACTIONS
Operating revenues, operating expenses and interest charges include those
amounts for transactions with affiliated companies in the ordinary course of
business operations.
The Company's transactions with Toledo Edison are primarily for firm power,
interchange power, transmission line rentals and jointly owned power plant
operations and construction. See Notes 2 and 3. As discussed in Note 1(j),
beginning in May 1996, Centerior Funding began serving as the transferor in
connection with the accounts receivable securitization for the Company and
Toledo Edison.
Centerior Service Company (Service Company), a wholly owned subsidiary of
Centerior Energy, provides management, financial, administrative, engineering,
legal and other services at cost to the Company and other affiliated companies.
The Service Company billed the Company $149 million, $141 million and $136
million in 1996, 1995 and 1994, respectively, for such services.
(c) REVENUES
Customers are billed on a monthly cycle basis for their energy consumption based
on rate schedules or contracts authorized by the PUCO. An accrual is made at the
end of each month to record the estimated amount of unbilled revenues for
kilowatt-hours sold in the current month but not billed by the end of that
month.
A fuel factor is added to the base rates for electric service. This factor is
designed to recover from customers the costs of fuel and most purchased power.
It is reviewed and adjusted semiannually in a PUCO proceeding. See Management's
Financial Analysis -- Outlook-FirstEnergy Rate Plan.
(d) FUEL EXPENSE
The cost of fossil fuel is charged to fuel expense based on inventory usage. The
cost of nuclear fuel, including an interest component, is charged to fuel
expense based on the rate of consumption. Estimated future nuclear fuel disposal
costs are being recovered through base rates.
The Company defers the differences between actual fuel costs and estimated fuel
costs currently being recovered from customers through the fuel factor. This
matches fuel expenses with fuel-related revenues.
Owners of nuclear generating plants are assessed by the federal government for
the cost of decontamination and decommissioning of nuclear enrichment facilities
operated by the United States Department of Energy. The assessments are based
upon the amount of enrichment services used in prior years and cannot be imposed
for more than 15 years (to 2007). The Company has accrued a liability for its
share of the total assessments. These costs have been recorded as a regulatory
asset since the PUCO is allowing the Company to recover the assessments through
its fuel cost factors. See Note 7(a).
(e) DEPRECIATION AND DECOMMISSIONING
The cost of property, plant and equipment is depreciated over their estimated
useful lives on a straight-line basis. In its April 1996 rate order, the PUCO
approved changes
F-17
<PAGE> 84
in depreciation rates for the Company. An increase in the depreciation rate for
nuclear property from 2.5% to 2.88% increased annual depreciation expense
approximately $13 million. A reduction in the composite depreciation rate for
nonnuclear property from 3.34% to 3.23% decreased annual depreciation expense by
approximately $3 million. The changes in depreciation rates were effective in
April 1996 and resulted in a $7 million net increase in 1996 depreciation
expense.
The Company accrues the estimated costs of decommissioning its three nuclear
generating units. The accruals are required to be funded in an external trust.
The PUCO requires that the expense and payments to the external trusts be
determined on a levelized basis by dividing the unrecovered decommissioning
costs in current dollars by the remaining years in the licensing period of each
unit. This methodology requires that the net earnings on the trusts be
reinvested therein with the intent of having net earnings offset inflation. The
PUCO requires that the estimated costs of decommissioning and the funding level
be reviewed at least every five years.
In April 1996, pursuant to the PUCO rate order, the Company decreased its annual
decommissioning expense accruals to $12 million from the $13 million level in
1995. The accruals are reflected in current rates. The accruals are based on
adjustments to updated, site-specific studies for each of the units completed in
1993 and 1994. These estimates reflect the DECON method of decommissioning
(prompt decontamination), and the locations and cost characteristics specific to
the units, and include costs associated with decontamination and dismantlement
for each of the units. The estimate for Davis-Besse also includes the cost of
site restoration. The adjustments to the updated studies which reduced the
annual accruals beginning in April 1996 were attributable to changed assumptions
on radioactive waste burial cost estimates and the exclusion of site restoration
costs for Perry Unit 1 and Beaver Valley Unit 2. After the decommissioning of
these units in the future, the two plant sites may be usable for new power
production facilities or other industrial purposes.
The revised estimates for the units in current dollars and in dollars at the
time of license expiration, assuming a 4% annual inflation rate, are as follows:
<TABLE>
<CAPTION>
License
Expiration Future
Generating Unit Year Amount Amount
- ---------------------------- ---------- ------ ------
(millions of
dollars)
<S> <C> <C> <C>
Davis-Besse_________________ 2017 $176 $ 451
Perry Unit 1________________ 2026 132 482
Beaver Valley Unit 2________ 2027 54 203
---- ------
Total_________________ $362 $1,136
==== ======
</TABLE>
The classification, Accumulated Depreciation and Amortization, in the Balance
Sheet at December 31, 1996 includes $85 million of decommissioning costs
previously expensed and the earnings on the external trust funding. This amount
exceeds the Balance Sheet amount of the external Nuclear Plant Decommissioning
Trusts because the reserve began prior to the external trust funding. The trust
earnings are recorded as an increase to the trust assets and the related
component of the decommissioning reserve (included in Accumulated Depreciation
and Amortization).
The staff of the Securities and Exchange Commission
has questioned certain of the current accounting practices of the electric
utility industry, including those of the Company, regarding the recognition,
measurement and classification of decommissioning costs for nuclear generating
stations in the financial statements. In response to these questions, the
Financial Accounting Standards Board (FASB) is reviewing the accounting for
removal costs, including decommissioning. If current accounting practices are
changed, the annual provision for decommissioning could increase; the estimated
cost for decommissioning could be recorded as a liability rather than as
accumulated depreciation; and trust fund income from the external
decommissioning trusts could be reported as investment income rather than as a
reduction to decommissioning expense. The FASB issued an exposure draft on the
subject on February 7, 1996 and continues to review the subject.
(f) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at original cost less amounts
disallowed by the PUCO. Construction costs include related payroll taxes,
retirement benefits, fringe benefits, management and general overheads and
allowance for funds used during construction (AFUDC). AFUDC represents the
estimated composite debt and equity cost of funds used to finance construction.
This noncash allowance is credited to income. The AFUDC rate was 10.32% in 1996,
10.33% in 1995 and 9.68% in 1994.
Maintenance and repairs for plant and equipment are charged to expense as
incurred. The cost of replacing plant and equipment is charged to the utility
plant accounts. The cost of property retired plus removal costs, after deducting
any salvage value, is charged to the accumulated provision for depreciation.
F-18
<PAGE> 85
(g) DEFERRED GAIN FROM SALE OF UTILITY PLANT
The sale and leaseback transaction discussed in Note 2 resulted in a net gain
for the sale of the Bruce Mansfield Generating Plant (Mansfield Plant). The net
gain was deferred and is being amortized over the term of the leases. The
amortization and the lease expense amounts are reported in the Income Statement
as Generation Facilities Rental Expense, Net.
(h) INTEREST CHARGES
Debt Interest reported in the Income Statement does not include interest on
obligations for nuclear fuel under construction. That interest is capitalized.
See Note 6.
Losses and gains realized upon the reacquisition or redemption of long-term debt
are deferred, consistent with the regulatory rate treatment. See Note 7(a). Such
losses and gains are either amortized over the remainder of the original life of
the debt issue retired or amortized over the life of the new debt issue when the
proceeds of a new issue are used for the debt redemption. The amortizations are
included in debt interest expense.
(i) FEDERAL INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with SFAS 109. See Note 8. This method requires that deferred taxes
be recorded for all temporary differences between the book and tax bases of
assets and liabilities. The majority of these temporary differences are
attributable to property-related basis differences. Included in these basis
differences is the equity component of AFUDC, which will increase future tax
expense when it is recovered through rates. Since this component is not
recognized for tax purposes, the Company must record a liability for its tax
obligation. The PUCO permits recovery of such taxes from customers when they
become payable. Therefore, the net amount due from customers through rates has
been recorded as a regulatory asset and will be recovered over the lives of the
related assets. See Note 7(a).
Investment tax credits are deferred and amortized over the lives of the
applicable property as a reduction of depreciation expense.
(j) ACCOUNTS RECEIVABLE SECURITIZATION
In May 1996, the Company and Toledo Edison began to sell on a daily basis
substantially all of their retail customer accounts receivable and unbilled
revenue receivables to Centerior Funding pursuant to a five-year asset-backed
securitization agreement.
In July 1996, Centerior Funding completed a public sale of $150 million of
receivables-backed investor certificates in a transaction that qualifies for
sale accounting treatment for financial reporting purposes. Costs associated
with the sale totaling $5 million in 1996 are included in Other Income and
Deductions, Net in the Income Statement. These costs are expected to be $11
million annually over the remaining period.
(k) MATERIALS AND SUPPLIES
In December 1996, the Company sold substantially all of its materials and
supplies and fossil fuel inventories for certain generating units and other
storage locations to an independent entity at book value. The buyer now provides
all of these inventories under a consignment arrangement. In accordance with
SFAS 49 accounting for product financing arrangements, the inventories continue
to be reported as assets in the Balance Sheet even though the buyer owns the
inventories since the Company has guaranteed to be a buyer of last resort.
(2) UTILITY PLANT SALE AND LEASEBACK TRANSACTIONS
The Company and Toledo Edison are co-lessees of 18.26% (150 megawatts) of Beaver
Valley Unit 2 and 6.5% (51 megawatts), 45.9% (358 megawatts) and 44.38% (355
megawatts) of Units 1, 2 and 3 of the Mansfield Plant, respectively. These
leases extend through 2017 and are the result of sale and leaseback transactions
completed in 1987.
Under these leases, the Company and Toledo Edison are responsible for paying all
taxes, insurance premiums, operation and maintenance expenses, and all other
similar costs for their interests in the units sold and leased back. They may
incur additional costs in connection with capital improvements to the units. The
Company and Toledo Edison have options to buy the interests back at certain
times at a premium and at the end of the leases for the fair market value at
that time or to renew the leases. The leases include conditions for mandatory
termination (and possible repurchase of the leasehold interests) upon certain
events of default.
As co-lessee with Toledo Edison, the Company is also obligated for Toledo
Edison's lease payments. If Toledo Edison is unable to make its payments under
the Beaver Valley Unit 2 and Mansfield Plant leases, the Company would be
obligated to make such payments. No such payments have been made on behalf of
Toledo Edison.
F-19
<PAGE> 86
Future minimum lease payments under the operating leases at December 31, 1996
are summarized as follows:
<TABLE>
<CAPTION>
For For
the Toledo
Year Company Edison
- --------------------------------------- ------- -------
(millions of
dollars)
<S> <C> <C>
1997_________________________________ $ 63 $ 102
1998_________________________________ 63 102
1999_________________________________ 70 108
2000_________________________________ 76 111
2001_________________________________ 75 111
Later Years__________________________ 1,170 1,696
------ ------
Total Future Minimum Lease
Payments_____________________ $1,517 $2,230
====== ======
</TABLE>
Rental expense is accrued on a straight-line basis over the terms of the leases.
The amount recorded in 1996, 1995 and 1994 as annual rental expense for the
Mansfield Plant leases was $70 million. See Note 1(g). Amounts charged to
expense in excess of the lease payments are classified as Accumulated Deferred
Rents in the Balance Sheet.
The Company is buying 150 megawatts of Toledo Edison's Beaver Valley Unit 2
leased capacity entitlement. Purchased power expense for this transaction was
$99 million, $98 million and $108 million in 1996, 1995 and 1994, respectively.
We anticipate that this purchase will continue indefinitely. The future minimum
lease payments through 2017 associated with Beaver Valley Unit 2 aggregate
$1.265 billion.
(3) PROPERTY OWNED WITH OTHER UTILITIES AND INVESTORS
The Company owns, as a tenant in common with other utilities and those investors
who are owner-participants in various sale and leaseback transactions (Lessors),
certain generating units as listed below. Each owner owns an undivided share in
the entire unit. Each owner has the right to a percentage of the generating
capability of each unit equal to its ownership share. Each utility owner is
obligated to pay for only its respective share of the construction costs and
operating expenses. Each Lessor has leased its capacity rights to a utility
which is obligated to pay for such Lessor's share of the construction costs and
operating expenses. The Company's share of the operating expenses of these
generating units is included in the Income Statement. The Balance Sheet
classification of Property, Plant and Equipment at December 31, 1996 includes
the following facilities owned by the Company as a tenant in common with other
utilities and Lessors:
<TABLE>
<CAPTION>
Property,
Plant and
Ownership Equipment
Megawatts (Exclusive of Accumulated
Generating Unit (% Share) Nuclear Fuel) Depreciation
- ------------------------ ---------- ------------- -----------
(millions of dollars)
<S> <C> <C> <C>
Seneca Pumped Storage___ 351 (80.00%) $ 65 $ 24
Eastlake Unit 5_________ 411 (68.80) 161 --
Davis-Besse_____________ 454 (51.38) 711 250
Perry Unit 1____________ 371 (31.11) 1,774 392
Beaver Valley Unit 2 and
Common Facilities (Note
2)_____________________ 201 (24.47) 1,279 319
------ ------
Total_____________ $ 3,990 $ 985
====== ======
</TABLE>
Depreciation for Eastlake Unit 5 has been accumulated with all other nonnuclear
depreciable property rather than by specific units of depreciable property.
(4) CONSTRUCTION AND CONTINGENCIES
(a) CONSTRUCTION PROGRAM
The estimated cost of the Company's construction program for the 1997-2001
period is $624 million, including AFUDC of $17 million and excluding nuclear
fuel.
The Clean Air Act Amendments of 1990 (Clean Air Act) require, among other
things, significant reductions in the emission of sulfur dioxide and nitrogen
oxides by fossil-fueled generating units. Our strategy provides for compliance
primarily through greater use of low-sulfur coal at some of our units and the
use of emission allowances. Total capital expenditures from 1994 through 1996 in
connection with Clean Air Act compliance amounted to $32 million. The plan will
require additional capital expenditures over the 1997-2006 period of
approximately $25 million for nitrogen oxide control equipment and other plant
process modifications. In addition, higher fuel and other operation and
maintenance expenses will be incurred. Recently proposed particulate and ozone
ambient standards have the potential to increase future compliance costs.
(b) HAZARDOUS WASTE DISPOSAL SITES
The Company is aware of its potential involvement in the cleanup of three sites
listed on the Superfund List and several other sites. The Company has accrued a
liability totaling $7 million at December 31, 1996 based on estimates of the
costs of cleanup and its proportionate responsibility for such costs. We believe
that the ultimate outcome of these matters will not have a material adverse
effect on our financial condition, cash flows or results of operations. See
Management's Financial Analysis -- Outlook-Hazardous Waste Disposal Sites.
F-20
<PAGE> 87
(5) NUCLEAR OPERATIONS AND CONTINGENCIES
(a) OPERATING NUCLEAR UNITS
The Company's three nuclear units may be impacted by activities or events beyond
our control. An extended outage of one of our nuclear units for any reason,
coupled with any unfavorable rate treatment, could have a material adverse
effect on our financial condition, cash flows and results of operations. See the
discussion of these and other risks in Management's Financial
Analysis -- Outlook-Nuclear Operations.
(b) NUCLEAR INSURANCE
The Price-Anderson Act limits the public liability of the owners of a nuclear
power plant to the amount provided by private insurance and an industry
assessment plan. In the event of a nuclear incident at any unit in the United
States resulting in losses in excess of the level of private insurance
(currently $200 million), the Company's maximum potential assessment under that
plan would be $85 million per incident. The assessment is limited to $11 million
per year for each nuclear incident. These assessment limits assume the other
CAPCO companies contribute their proportionate share of any assessment for the
generating units that they have an ownership or leasehold interest in.
The utility owners and lessees of Davis-Besse, Perry and Beaver Valley also have
insurance coverage for damage to property at these sites (including leased fuel
and cleanup costs). Coverage amounted to $1.3 billion for Davis-Besse and $2.75
billion for each of the Perry and Beaver Valley sites as of January 1, 1997.
Damage to property could exceed the insurance coverage by a substantial amount.
If it does, the Company's share of such excess amount could have a material
adverse effect on its financial condition, cash flows and results of operations.
In addition, the Company can be assessed a maximum of $12 million under these
policies during a policy year if the reserves available to the insurer are
inadequate to pay claims arising out of an accident at any nuclear facility
covered by the insurer.
The Company also has extra expense insurance coverage. It includes the
incremental cost of any replacement power purchased (over the costs which would
have been incurred had the units been operating) and other incidental expenses
after the occurrence of certain types of accidents at our nuclear units. The
amounts of the coverage are 100% of the estimated extra expense per week during
the 52-week period starting 21 weeks after an accident and 80% of such estimate
per week for the next
104 weeks. The amount and duration of extra expense could substantially exceed
the insurance coverage.
(6) NUCLEAR FUEL
Nuclear fuel is financed for the Company and Toledo Edison through leases with a
special-purpose corporation. The total amount of financing currently available
under these lease arrangements is $273 million ($173 million from
intermediate-term notes and $100 million from bank credit arrangements). The
intermediate-term notes mature in the 1997 through 2000 period. The bank credit
arrangements terminate in October 1998. The special-purpose corporation may not
need alternate financing in 1997 to replace $83 million of maturing
intermediate-term notes. At December 31, 1996, $129 million of nuclear fuel was
financed for the Company. The Company and Toledo Edison severally lease their
respective portions of the nuclear fuel and are obligated to pay for the fuel as
it is consumed in a reactor. The lease rates are based on various
intermediate-term note rates, bank rates and commercial paper rates.
The amounts financed include nuclear fuel in the Davis-Besse, Perry Unit 1 and
Beaver Valley Unit 2 reactors with remaining lease payments for the Company of
$49 million, $51 million and $18 million, respectively, at December 31, 1996.
The nuclear fuel amounts financed and capitalized also included interest charges
incurred by the lessors amounting to $3 million in 1996, $4 million in 1995 and
$7 million in 1994. The estimated future lease amortization payments for the
Company based on projected consumption are $52 million in 1997, $40 million in
1998, $38 million in 1999, $35 million in 2000 and $34 million in 2001.
(7) REGULATORY MATTERS
(a) REGULATORY ACCOUNTING REQUIREMENTS AND REGULATORY ASSETS
The Company is subject to the provisions of SFAS 71 and has complied with its
provisions. SFAS 71 provides, among other things, for the deferral of certain
incurred costs that are probable of future recovery in rates. We monitor changes
in market and regulatory conditions and consider the effects of such changes in
assessing the continuing applicability of SFAS 71. Criteria that could give rise
to discontinuation of the application of SFAS 71 include: (1) increasing
competition which significantly restricts the Company's ability to charge prices
which allow it to recover operating costs, earn a fair return on invested
capital and recover the amortization of regulatory assets and (2) a significant
change in the manner in which rates are set by the PUCO from cost-based
regulation to some other form of regulation. Regulatory assets
F-21
<PAGE> 88
represent probable future revenues to the Company associated with certain
incurred costs, which it will recover from customers through the rate-making
process.
Effective January 1, 1996, the Company adopted SFAS 121 which imposes stricter
criteria for carrying regulatory assets than SFAS 71 by requiring that such
assets be probable of recovery at each balance sheet date. The criteria under
SFAS 121 for plant assets require such assets to be written down if the book
value exceeds the projected net future undiscounted cash flows.
Regulatory assets in the Balance Sheet are as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
------ ------
(millions of
dollars)
<S> <C> <C>
Amounts due from customers for future federal
income taxes, net__________________________ $ 634 $ 651
Unamortized loss on reacquired debt__________ 58 61
Pre-phase-in deferrals*______________________ 320 331
Rate Stabilization Program deferrals_________ 300 313
Other________________________________________ 38 42
------ ------
Total____________________________________ $1,350 $1,398
====== ======
</TABLE>
* Represent deferrals of operating expenses and carrying charges for Perry Unit
1 and Beaver Valley Unit 2 in 1987 and 1988 which are being amortized over the
lives of the related property.
As of December 31, 1996, customer rates provide for recovery of all the above
regulatory assets. The remaining recovery periods for about $1.2 billion of the
regulatory assets approximate 30 years. The remaining recovery periods for the
rest of the regulatory assets generally range from about two to 20 years.
Regulatory liabilities in the Balance Sheet at December 31, 1996 and 1995
totaled $24 million and $17 million, respectively.
(b) RATE ORDER
On April 11, 1996, the PUCO issued an order for the Company and Toledo Edison
granting price increases aggregating $119 million in annualized revenues ($84
million for the Company and $35 million for Toledo Edison). The PUCO rate order
provided for recovery of all costs to provide regulated services, including
amortization of regulatory assets, in the approved prices. The new prices were
implemented in late April 1996. The average price increase for the Company's
customers was 4.9% with the actual percentage increase depending upon the
customer class. The Company and Toledo Edison intend to freeze prices through at
least 2002, although they are not precluded from requesting further price
increases.
The PUCO also recommended that the Company and Toledo Edison reduce the value of
their assets for regulatory purposes by an aggregate $1.25 billion through 2001.
This represents an incremental reduction beyond the normal level in nuclear
plant and regulatory assets. Implementation of the price increases was not
contingent upon a revaluation of assets. The PUCO invited the Company and Toledo
Edison to file a proposal to effectuate the PUCO's recommendation and expressed
a willingness to consider alternatives to its recommendation. The PUCO stated in
its order that failure by the Company and Toledo Edison to follow the
recommendation could result in a PUCO-ordered write-down of assets for
regulatory purposes. The PUCO approved a return on common stock equity of 12.59%
and an overall rate of return of 10.06% for both companies. However, the PUCO
also indicated the authorized return could be lowered by the PUCO if the Company
and Toledo Edison do not implement the recommendation. In August 1996, various
intervenors appealed the PUCO rate order to the Ohio Supreme Court. The Company
and Toledo Edison did not appeal the order to the Ohio Supreme Court. In
connection with the PUCO order discussed in Management's Financial
Analysis -- Outlook-FirstEnergy Rate Plan, certain parties agreed to request a
stay of their appeals until completion of the pending merger with Ohio Edison.
(c) ASSESSMENT
The Company and Toledo Edison agree with the concept of accelerating the
recognition of costs and recovery of assets as such concept is consistent with
the strategic objective to become more competitive. However, the Company and
Toledo Edison believe that such acceleration must also be consistent with the
reduction of debt and the opportunity for Centerior Energy common stock share
owners to receive a fair return on their investment. Consideration of whether to
implement a plan responsive to the PUCO's recommendation to revalue assets by
$1.25 billion is pending the merger with Ohio Edison.
We have evaluated the Company's markets, regulatory conditions and ability to
bill and collect the approved prices, and conclude that the Company continues to
comply with the provisions of SFAS 71 and its regulatory assets remain probable
of recovery. If there is a change in our evaluation of the competitive
environment, regulatory framework or other factors, or if the PUCO significantly
reduces the value of the Company's assets or reduces the approved return on
common stock equity of 12.59% and overall rate of return of 10.06%, or both, for
future regulatory purposes, the Company may be required to record material
charges to earnings. In particular, if we determine that the Company no longer
meets the criteria for SFAS 71, the Company would be required to record a
before-tax charge to write off the regulatory assets shown above. In the more
likely event that only a portion of operations (such as nuclear operations) no
longer meets the criteria of SFAS 71, a write-off would be limited to regulatory
assets that are not reflected in the Company's cost-based prices established for
the remaining regulated
F-22
<PAGE> 89
operations. In addition, we would be required to evaluate whether the changes in
the competitive and regulatory environment which led to discontinuing the
application of SFAS 71 to some or all of the Company's operations would also
result in a write-down of property, plant and equipment pursuant to SFAS 121.
See Management's Financial Analysis -- Outlook-FirstEnergy Rate Plan for a
discussion of a regulatory plan for the Company and Toledo Edison and its effect
on their compliance with SFAS 71.
(d) RATE STABILIZATION PROGRAM
The Rate Stabilization Program that the PUCO approved in October 1992 allowed
the Company to defer and subsequently amortize and recover certain costs not
being recovered in rates at that time. Recovery of both the costs no longer
being deferred and the amortization of the 1992-1995 deferrals began in late
April 1996 with the implementation of the price increase granted by the PUCO as
discussed above. The cost deferrals recorded in 1995 and 1994 pursuant to the
Rate Stabilization Program were $76 million and $70 million, respectively. The
amortization of the deferrals began in December 1995. The total amortization was
$12 million and $1 million in 1996 and 1995, respectively.
The regulatory accounting measures under the Rate Stabilization Program also
provided for the accelerated amortization of certain benefits during the
1992-1995 period. The total annual amount of such accelerated benefits was $28
million in both 1995 and 1994.
(8) FEDERAL INCOME TAX
The components of federal income tax expense recorded in the Income Statement
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(millions of
dollars)
<S> <C> <C> <C>
Operating Expenses:
Current______________________________ $ 55 $49 $ 53
Deferred_____________________________ 20 45 29
---- ---- ----
Total Charged to Operating
Expenses_________________________ 75 94 82
---- ---- ----
Nonoperating Income:
Current______________________________ (11) (9) (17)
Deferred_____________________________ 5 11 21
---- ---- ----
Total Expense (Credit) to
Nonoperating Income______________ (6) 2 4
---- ---- ----
Total Federal Income Tax Expense_______ $ 69 $96 $ 86
==== ==== ====
</TABLE>
The deferred federal income tax expense results from the temporary differences
that arise from the different years when certain expenses are recognized for tax
purposes as opposed to financial reporting purposes. Such temporary differences
relate principally to depreciation and deferred operating expenses and carrying
charges.
Federal income tax, computed by multiplying income before taxes by the 35%
statutory rate, is reconciled to the amount of federal income tax recorded on
the books as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(millions of
dollars)
<S> <C> <C> <C>
Book Income Before Federal Income Tax__ $186 $280 $271
---- ---- ----
Tax on Book Income at Statutory Rate___ $ 65 $ 98 $ 95
Increase (Decrease) in Tax:
Depreciation_________________________ 8 8 6
Rate Stabilization Program___________ -- (18) (18)
Other items__________________________ (4) 8 3
---- ---- ----
Total Federal Income Tax Expense_______ $ 69 $ 96 $ 86
==== ==== ====
</TABLE>
The Company joins in the filing of a consolidated federal income tax return with
its affiliated companies. The method of tax allocation reflects the benefits and
burdens realized by each company's participation in the consolidated tax return,
approximating a separate return result for each company.
For tax reporting purposes, the Perry Nuclear Power Plant Unit 2 (Perry Unit 2)
abandonment was recognized in 1994 and resulted in a $204 million loss with a
corresponding $71 million reduction in federal income tax liability. Because of
the alternative minimum tax (AMT), $40 million of the $71 million was realized
in 1994. The remaining $31 million will not be realized until 1999.
Additionally, a repayment of approximately $29 million of previously allowed
investment tax credits was recognized in 1994.
Under SFAS 109, temporary differences and carryforwards resulted in deferred tax
assets of $420 million and deferred tax liabilities of $1.726 billion at
December 31, 1996 and deferred tax assets of $425 million and deferred tax
liabilities of $1.723 billion at December 31, 1995. These are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
------ ------
(millions of
dollars)
<S> <C> <C>
Property, plant and equipment________________ $1,482 $1,468
Deferred carrying charges and operating
expenses___________________________________ 134 139
Net operating loss carryforwards_____________ (26) (67)
Investment tax credits_______________________ (95) (99)
Sale and leaseback transactions______________ (121) (123)
Other________________________________________ (68) (20)
------ ------
Net deferred tax liability_______________ $1,306 $1,298
====== ======
</TABLE>
For tax purposes, net operating loss (NOL) carryforwards of approximately $74
million are available to reduce future taxable income and will expire in 2009.
The 35% tax effect of the NOLs is $26 million. Additionally, AMT credits of $174
million that may be carried forward indefinitely are available to reduce future
tax.
F-23
<PAGE> 90
(9) RETIREMENT BENEFITS
(a) RETIREMENT INCOME PLAN
Centerior Energy sponsors jointly with its subsidiaries a noncontributing
pension plan (Centerior Pension Plan) which covers all employee groups. The
amount of retirement benefits generally depends upon the length of service.
Under certain circumstances, benefits can begin as early as age 55. The funding
policy is to comply with the Employee Retirement Income Security Act of 1974
guidelines.
Pension costs (credits) for Centerior Energy and its subsidiaries for 1994
through 1996 were comprised of the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(millions of
dollars)
<S> <C> <C> <C>
Service cost for benefits earned during
the period___________________________ $ 13 $ 10 $ 13
Interest cost on projected benefit
obligation___________________________ 28 26 26
Actual return on plan assets___________ (50) (53) (2)
Net amortization and deferral__________ 2 9 (34)
--- --- ---
Net costs (credits)__________________ $ (7) $ (8) $ 3
=== === ===
</TABLE>
Pension costs (credits) for the Company and its pro rata share of the Service
Company's costs were $(5) million for both 1996 and 1995, and $2 million for
1994.
The following table presents a reconciliation of the funded status of the
Centerior Pension Plan. The Company's share of the Centerior Pension Plan's
total projected benefit obligation approximates 50%.
<TABLE>
<CAPTION>
December 31,
-------------
1996 1995
---- ----
(millions of
dollars)
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefits___________________________ $326 $304
Nonvested benefits________________________ 16 2
---- ----
Accumulated benefit obligation__________ 342 306
Effect of future compensation levels______ 53 54
---- ----
Total projected benefit obligation______ 395 360
Plan assets at fair market value____________ 421 394
---- ----
Funded status___________________________ 26 34
Unrecognized net gain from variance between
assumptions and experience________________ (56) (68)
Unrecognized prior service cost_____________ 14 15
Transition asset at January 1, 1987 being
amortized over 19 years___________________ (32) (36)
---- ----
Net accrued pension liability___________ $(48) $(55)
==== ====
</TABLE>
A September 30 measurement date was used for 1996 and 1995 reporting. At
December 31, 1996, the settlement (discount) rate and long-term rate of return
on plan assets assumptions were 7.75% and 11%, respectively. The long-term rate
of annual compensation increase assumption was 3.5% for 1997 and 4% thereafter.
At December 31, 1995, the settlement rate and long-term rate of return on plan
assets assumptions were 8% and 11%, respectively. The long-term rate of annual
compensation increase assumption was 3.5% for 1996 and 1997 and 4% thereafter.
At December 31, 1996 and 1995, the Company's net prepaid pension cost included
in Regulatory and Other Assets -- Other in the Balance Sheet was $15 million and
$11 million, respectively.
Plan assets consist primarily of investments in common stock, bonds, guaranteed
investment contracts, cash equivalent securities and real estate.
(b) OTHER POSTRETIREMENT BENEFITS
Centerior Energy sponsors jointly with its subsidiaries a postretirement benefit
plan which provides all employee groups certain health care, death and other
postretirement benefits other than pensions. The plan is contributory, with
retiree contributions adjusted annually. The plan is not funded. Under SFAS 106,
the accounting standard for postretirement benefits other than pensions, the
expected costs of such benefits are accrued during the employees' years of
service.
The components of the total postretirement benefit costs for 1994 through 1996
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(millions of
dollars)
<S> <C> <C> <C>
Service cost for benefits earned during
the period___________________________ $ 1 $ 1 $ 1
Interest cost on accumulated
postretirement benefit obligation____ 12 11 11
Amortization of transition obligation
at January 1, 1993 of $104 million
over 20 years________________________ 5 5 5
Amortization of gain___________________ -- (1) --
--- --- ---
Total costs $18 $16 $17
=== === ===
</TABLE>
These amounts included costs for the Company and its pro rata share of the
Service Company's costs.
The accumulated postretirement benefit obligation and accrued postretirement
benefit cost for the Company and its share of the Service Company's obligation
are as follows:
<TABLE>
<CAPTION>
December 31,
-------------
1996 1995
----- -----
(millions of
dollars)
<S> <C> <C>
Accumulated postretirement benefit obligation
attributable to:
Retired participants_______________________ $(108) $(124)
Fully eligible active plan participants____ (3) (2)
Other active plan participants_____________ (21) (19)
----- -----
Accumulated postretirement benefit
obligation_____________________________ (132) (145)
Unrecognized net gain from variance between
assumptions and experience_________________ (31) (12)
Unamortized transition obligation____________ 74 79
----- -----
Accrued postretirement benefit cost______ $ (89) $ (78)
===== =====
</TABLE>
The Balance Sheet classification of Retirement Benefits at December 31, 1996 and
1995 includes only the Company's accrued postretirement benefit cost of $73
million and $65 million, respectively, and excludes the Service Company's
portion since the Service Company's total accrued cost is carried on its books.
A September 30 measurement date was used for 1996 and 1995 reporting. At
December 31, 1996 and 1995, the settlement rate and the long-term rate of annual
compen-
F-24
<PAGE> 91
sation increase assumptions were the same as those discussed for pension
reporting in Note 9(a). At December 31, 1996, the assumed annual health care
cost trend rates (applicable to gross eligible charges) were 7.5% for medical
and 7% for dental in 1997. Both rates reduce gradually to a fixed rate of 4.75%
by 2003. Elements of the obligation affected by contribution caps are
significantly less sensitive to the health care cost trend rate than other
elements. If the assumed health care cost trend rates were increased by one
percentage point in each future year, the accumulated postretirement benefit
obligation as of December 31, 1996 would increase by $3 million and the
aggregate of the service and interest cost components of the annual
postretirement benefit cost would increase by $0.3 million.
(10) GUARANTEES
The Company has guaranteed certain loan and lease obligations of a coal supplier
under a long-term coal supply contract. At December 31, 1996, the principal
amount of the loan and lease obligations guaranteed by the Company under the
contract was $19 million.
The prices under the contract which includes certain minimum payments are
sufficient to satisfy the loan and lease obligations and mine closing costs over
the life of the contract. If the contract is terminated early for any reason,
the Company would attempt to reduce the termination charges and would ask the
PUCO to allow recovery of such charges from customers through the fuel factor.
See Management's Financial Analysis -- Outlook-FirstEnergy Rate Plan.
(11) CAPITALIZATION
(a) CAPITAL STOCK TRANSACTIONS
Preferred stock shares retired during the three years ended December 31, 1996
are listed in the following table.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(thousands of shares)
<S> <C> <C> <C>
Subject to Mandatory Redemption:
$ 7.35 Series C___________________ (10) (10) (10)
88.00 Series E___________________ (3) (3) (3)
Adjustable Series M_______________ -- (100) (100)
9.125 Series N__________________ (150) (111) (189)
91.50 Series Q___________________ (11) (11) --
90.00 Series S___________________ -- (1) --
Not Subject to Mandatory
Redemption:
Adjustable Series L_______________ (26) -- --
---- ---- -----
Total___________________________ (200) (236) (302)
==== ==== =====
</TABLE>
(b) EQUITY DISTRIBUTION RESTRICTIONS
Federal law prohibits the Company from paying dividends out of capital accounts.
The Company has since 1993 declared and paid preferred and common stock
dividends out of appropriated current net income included in retained earnings.
At the times of such declarations and payments, the Company had a deficit in its
retained earnings. At December 31, 1996, the Company had $130 million of
appropriated retained earnings for
the payment of dividends. See Management's Financial Analysis -- Capital
Resources and Liquidity-Liquidity.
(c) PREFERRED AND PREFERENCE STOCK
Amounts to be paid for preferred stock which must be redeemed during the next
five years are $30 million in 1997, $15 million in 1998, $33 million in both
1999 and 2000, and $80 million in 2001.
The annual preferred stock mandatory redemption provisions are as follows:
<TABLE>
<CAPTION>
Shares Price
To Be Beginning Per
Redeemed in Share
-------- --------- ------
<S> <C> <C> <C>
$ 7.35 Series C__________________ 10,000 1984 $ 100
88.00 Series E__________________ 3,000 1981 1,000
9.125 Series N_________________ 150,000 1993 100
91.50 Series Q__________________ 10,714 1995 1,000
88.00 Series R__________________ 50,000 2001* 1,000
90.00 Series S__________________ 18,750 1999 1,000
</TABLE>
* All outstanding shares to be redeemed on December 1, 2001.
In 1995, the Company purchased 1,000 shares of Serial Preferred Stock, $90.00
Series S, which reduces the 2002 redemption requirement shown in the above
table.
The annualized preferred dividend requirement at December 31, 1996 was $38
million.
The preferred dividend rate on the Company's Series L fluctuates based on
prevailing interest rates and market conditions. The dividend rate for this
issue was 7% in 1996.
Preference stock authorized for the Company is 3,000,000 shares without par
value. No preference shares are currently outstanding.
With respect to dividend and liquidation rights, the Company's preferred stock
is prior to its preference stock and common stock, and its preference stock is
prior to its common stock.
(d) LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Long-term debt which matures or is subject to put options during the next five
years is as follows: $115 million in 1997, $68 million in 1998, $149 million in
1999, $5 million in 2000 and $62 million in 2001.
The Company's mortgage constitutes a direct first lien on substantially all
property owned and franchises held by the Company. Excluded from the lien, among
other things, are cash, securities, accounts receivable, fuel and supplies.
Certain credit agreements of the Company contain covenants relating to fixed
charge coverage ratios and limitations on secured financing other than through
first
F-25
<PAGE> 92
mortgage bonds or certain other transactions. The Company was in compliance with
all such covenants as of December 31, 1996. The Company and Toledo Edison have
letters of credit in connection with the sale and leaseback of Beaver Valley
Unit 2 that expire in June 1999. The letters of credit are in an aggregate
amount of approximately $225 million and are secured by first mortgage bonds of
the Company and Toledo Edison in the proportion of 40% and 60%, respectively.
(12) SHORT-TERM BORROWING ARRANGEMENTS
Centerior Energy has a $125 million revolving credit facility through May 1997.
Centerior Energy and the Service Company may borrow under the facility, with all
borrowings jointly and severally guaranteed by the Company and Toledo Edison.
Centerior Energy plans to transfer any of its borrowed funds to the Company and
Toledo Edison. The credit agreement is secured with first mortgage bonds of the
Company and Toledo Edison in the proportion of 40% and 60%, respectively. The
credit agreement also provides the participating banks with a subordinate
mortgage security interest on the properties of the Company and Toledo Edison.
The banks' fee is 0.625% per annum payable quarterly in addition to interest on
any borrowings. There were no borrowings under the facility at December 31,
1996. Also, the Company and Toledo Edison may borrow from each other on a
short-term basis. At December 31, 1996, the Company had total short-term
borrowings of $112 million from its affiliates with a weighted average interest
rate of 6.18%.
(13) FINANCIAL INSTRUMENTS
The estimated fair values at December 31, 1996 and 1995 of financial instruments
that do not approximate their carrying amounts in the Balance Sheet are as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995
---------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
(millions of dollars)
<S> <C> <C> <C> <C>
Capitalization and Liabilities:
Preferred Stock, with
Mandatory Redemption
Provisions_________________ $ 216 $ 220 $ 245 $ 232
Long-Term Debt_______________ 2,562 2,630 2,819 2,824
</TABLE>
Noncash investments in the Nuclear Plant Decommissioning Trusts are summarized
in the following table. In 1996, the Company and Toledo Edison transferred the
bulk of their investment assets in existing trusts into Centerior Energy pooled
trust funds for the two companies. The December 31, 1996 amounts in the table
represent the Company's pro rata share of the fair value of such noncash
investments.
<TABLE>
<CAPTION>
December 31,
--------------
1996 1995
---- ----
(millions of
dollars)
<S> <C> <C>
Type of Securities:
Debt Securities:
Federal Government_____________________ $14 $26
Municipal______________________________ -- 14
Other__________________________________ 5 --
--- ---
19 40
Equity Securities________________________ 56 --
--- ---
Total________________________________ $75 $40
=== ===
Maturities of Debt Securities:
Due within one year______________________ $-- $ 1
Due in one to five years_________________ 10 12
Due in six to 10 years___________________ 4 13
Due after 10 years_______________________ 5 14
--- ---
Total________________________________ $19 $40
=== ===
</TABLE>
The fair value of these trusts is estimated based on the quoted market prices
for the investment securities and approximates the carrying value. The fair
value of the Company's preferred stock, with mandatory redemption provisions,
and long-term debt is estimated based on the quoted market prices for the
respective or similar issues or on the basis of the discounted value of future
cash flows. The discounted value used current dividend or interest rates (or
other appropriate rates) for similar issues and loans with the same remaining
maturities.
The estimated fair values of all other financial instruments approximate their
carrying amounts in the Balance Sheet at December 31, 1996 and 1995 because of
their short-term nature.
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of operations
for the two years ended December 31, 1996.
<TABLE>
<CAPTION>
Quarters Ended
----------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
--------- -------- --------- --------
(millions of dollars)
<S> <C> <C> <C> <C>
1996
Operating Revenues______ $428 $434 $506 $422
Operating Income________ 76 86 121 76
Net Income______________ 17 25 59 16
Earnings Available for
Common Stock__________ 7 15 49 6
1995
Operating Revenues______ $410 $424 $ 526 $408
Operating Income________ 85 91 145 77
Net Income______________ 34 38 90 23
Earnings Available for
Common Stock__________ 23 27 80 12
</TABLE>
Earnings for the quarter ended September 30, 1996 were decreased by $11 million
as a result of a $17 million charge for the disposition of materials and
supplies inventory. The sale and disposal of inventory was part of the
reengineering of the supply chain process.
(15) PENDING MERGER OF CENTERIOR ENERGY AND OHIO EDISON
On September 13, 1996, Centerior Energy and Ohio Edison entered into an
agreement and plan of merger to
F-26
<PAGE> 93
form a new holding company, FirstEnergy. Following the merger, FirstEnergy will
directly hold all of the issued and outstanding common stock of the Company,
Toledo Edison and Ohio Edison. As a result of the merger, the common stock share
owners of Centerior Energy and Ohio Edison will own all of the issued and
outstanding shares of FirstEnergy common stock. Centerior Energy share owners
will receive 0.525 of a share of FirstEnergy common stock for each share of
Centerior Energy common stock owned. Ohio Edison share owners will receive one
share of FirstEnergy common stock for each share of Ohio Edison common stock
owned.
FirstEnergy plans to account for the merger as a purchase in accordance with
generally accepted accounting principles. If FirstEnergy elects to apply, or
"push down", the effects of purchase accounting to the financial statements of
the Company and Toledo Edison, the Company and Toledo Edison would record
adjustments to: (1) reduce the carrying value of nuclear generating plant by
$1.25 billion to fair value; (2) recognize goodwill of $865 million; (3) reduce
common stock equity by $401 million; (4) reset retained earnings of the Company
and Toledo Edison to zero; and (5) reduce the related deferred federal income
tax liability by $438 million. These amounts reflect FirstEnergy's estimates of
the pro forma combined adjustments for the Company and Toledo Edison as of
September 30, 1996. The actual adjustments to be recorded could be materially
different from these estimates. FirstEnergy has not decided whether to push down
the effects of purchase accounting to the financial statements of the Company
and Toledo Edison if the merger with Ohio Edison is completed, nor has
FirstEnergy estimated the allocations between the two companies if push-down
accounting is elected.
In addition to the approvals by the share owners of Centerior Energy and Ohio
Edison common stock, various aspects of the merger are subject to the approval
of the FERC and other regulatory authorities. A rate reduction and economic
development plan for the Company and Toledo Edison has been approved by the
PUCO. From the date of consummation of the merger through 2006, the plan
provides for rate reductions, frozen fuel cost factors, economic development
incentive prices, an energy-efficiency program, an earnings cap and an
accelerated reduction in nuclear and regulatory assets for regulatory purposes.
The plan will require the Company and Toledo Edison to write off certain
regulatory assets at the time the merger becomes probable, which is expected to
be after obtaining the aforementioned approvals of the merger. The write-off
amounts for the Company and Toledo Edison to be charged against earnings,
estimated by FirstEnergy to total approximately $750 million, will be determined
based upon the plan's regulatory accounting and cost recovery details to be
submitted by FirstEnergy to the PUCO staff for approval. The Company's share of
the write-off is expected to be about two-thirds of this amount.
If the merger is not consummated, the plan would be null and void. See
Management's Financial Analysis -- Outlook-Pending Merger with Ohio Edison and
- -FirstEnergy Rate Plan for a discussion of the proposed merger and the plan.
(16) PENDING MERGER OF TOLEDO EDISON INTO THE COMPANY
In March 1994, Centerior Energy announced a plan to merge Toledo Edison into the
Company. The merger agreement between Centerior Energy and Ohio Edison requires
the approval of Ohio Edison prior to consummation of the proposed merger of
Toledo Edison into the Company. Ohio Edison has not yet made a decision. All
necessary regulatory approvals have been obtained, except the NRC's approval.
This application was withdrawn at the NRC's request pending Ohio Edison's
decision whether to complete this merger.
In June 1995, share owners of Toledo Edison's preferred stock approved the
merger and share owners of the Company's preferred stock approved the
authorization of additional shares of preferred stock. If and when the merger
becomes effective, share owners of Toledo Edison's preferred stock will exchange
their shares for preferred stock shares of the Company having substantially the
same terms. Debt holders of the merging companies will become debt holders of
the Company.
For the merging companies, the combined pro forma operating revenues were $2.554
billion, $2.516 billion and $2.422 billion and the combined pro forma net income
was $174 million, $281 million and $268 million for the years 1996, 1995 and
1994, respectively. The pro forma data is based on accounting for the merger on
a method similar to a pooling of interests. The pro forma data is not
necessarily indicative of the results of operations which would have been
reported had the merger been in effect during those years or which may be
reported in the future. The pro forma data does not reflect any potential
effects related to the consummation of the Centerior Energy and Ohio Edison
merger. The pro forma data should be read in conjunction with the audited
financial statements of both the Company and Toledo Edison.
F-27
<PAGE> 94
FINANCIAL AND STATISTICAL REVIEW
OPERATING REVENUES (millions of dollars)
<TABLE>
<CAPTION>
Total Total Steam
Year Residential Commercial Industrial Other Retail Wholesale Electric Heating
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 --------- $ 562 571 524 88 1 745 45 1 790 --
1995 --------- 559 563 523 93 1 738 31 1 769 --
1994 --------- 531 541 508 98 1 678 20 1 698 --
1993 --------- 539 536 510 98 1 683 68 1 751 --
1992 --------- 517 531 530 101 1 679 64 1 743 --
1986 --------- 410 383 461 61 1 315 8 1 323 13
- ----------------------------------------------------------------------------------------------------------------------
<CAPTION>
Total
Operating
Year Revenues
- --------------------------------------------
<S> <C>
1996 --------- $ 1 790
1995 --------- 1 769
1994 --------- 1 698
1993 --------- 1 751
1992 --------- 1 743
1986 --------- 1 336
- --------------------------------------------
</TABLE>
OPERATING EXPENSES (millions of dollars)
<TABLE>
<CAPTION>
Other Generation Amortization of
Fuel & Operation Facilities Depreciation Taxes, Deferred Federal
Purchased & Rental & Other Than Operating Income
Year Power Maintenance Expense, Net Amortization FIT Expenses, Net Taxes
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 --------- $ 408 426 56 210 230 26 75
1995 --------- 413 418 56 196 230 (36) 94
1994 --------- 391 394 56 195 218 (34) 82
1993 --------- 423 598(a) 56 182 221 27(b) 22
1992 --------- 434 410 55 179 226 (35) 89
1986 --------- 372 388 -- 103 144 -- 97
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Total
Operating
Year Expenses
- ----------------------------------------------------------
<S> <<C>
1996 --------- $ 1 431
1995 --------- 1 371
1994 --------- 1 302
1993 --------- 1 529
1992 --------- 1 358
1986 --------- 1 104
- ----------------------------------------------------------
</TABLE>
INCOME (LOSS) (millions of dollars)
<TABLE>
<CAPTION>
Federal Income
Other Deferred Income (Loss)
Income & Carrying Taxes-- Before
Operating AFUDC-- Deductions, Charges, Credit Interest
Year Income Equity Net Net (Expense) Charges
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 --------- $ 359 2 (10) -- 6 $ 357
1995 --------- 398 2 2 29 (2) 429
1994 --------- 396 4 6 25 (4) 427
1993 --------- 222 4 (356)(c) (487)(b) 270 (347)
1992 --------- 385 1 8 59 (5) 448
1986 --------- 232 179 (7) -- 65 469
- ---------------------------------------------------------------------------------------------------
</TABLE>
INCOME (LOSS) (millions of dollars)
<TABLE>
<CAPTION>
Earnings
Preferred & (Loss)
Net Preference Available for
Debt AFUDC-- Income Stock Common
Year Interest Debt (Loss) Dividends Stock
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 --------- $ 242 (2) 117 39 $ 78
1995 --------- 248 (3) 184 43 141
1994 --------- 247 (5) 185 45 140
1993 --------- 244 (4) (587) 45 (632)
1992 --------- 243 -- 205 41 164
1986 --------- 232 (63) 300 40 260
- -----------------------------------------------------------------------------------
</TABLE>
(a) Includes early retirement program expenses and other charges of $165
million.
(b) Includes write-off of phase-in deferrals of $636 million, consisting of $117
million of deferred operating expenses and $519 million of deferred carrying
charges.
F-28
<PAGE> 95
The Cleveland Electric Illuminating Company and Subsidiaries
<TABLE>
<CAPTION>
ELECTRIC SALES (millions of KWH) ELECTRIC CUSTOMERS
(thousands at year end)
Industrial
Year Residential Commercial Industrial Wholesale Other Total Residential Commercial & Other
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------- ------------------- ------------------------------------------
1996 --- 4 958 5 908 7 977 2 155 522 21 520 663 71 7
1995 --- 5 063 5 946 7 994 1 694 550 21 247 670 72 7
1994 --- 4 924 5 770 7 970 1 073 575 20 312 668 72 7
1993 --- 4 934 5 634 7 911 2 290 532 21 301 669 71 8
1992 --- 4 725 5 467 7 988 1 989 533 20 702 670 71 8
1986 --- 4 586 4 744 7 927 121 460 17 838 651 63 9
- -------------------------------------------------------------------- ------------------- ------------------------------------------
<CAPTION>
ELECTRIC CUSTOMERS RESIDENTIAL USAGE
(thousands at year end)
Average Average
Average Price Revenue
KWH Per Per Per
Year Total Customer KWH Customer
<S> <C> <C> <C> <C>
- --------------------- ----------------------------------
1996 --- 741 7 451 11.34cent $845.12
1995 --- 749 7 570 11.04 835.40
1994 --- 747 7 370 10.79 795.11
1993 --- 748 7 373 10.93 805.68
1992 --- 749 7 071 10.94 773.77
1986 --- 723 6 810 8.94 611.34
- --------------------- ----------------------------------
</TABLE>
<TABLE>
<CAPTION>
LOAD (MW & %) ENERGY (millions of KWH) FUEL
Net Company Generated
Seasonal Peak Capacity Load ----------------------------- Purchased Fuel Cost
Year Capability Load Margin Factor Fossil(d) Nuclear Total Power Total Per KWH
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------- ----------------------------------------------------------- ----------
1996 ------ 3 922 3 938 (0.4)% 60.6% 14 411 6 829 21 240 1 640 22 880 1.35cent
1995 ------ 4 273 4 049 5.2 58.8 12 684 8 175 20 859 1 673 22 532 1.42
1994 ------ 4 500 3 740 16.9 62.4 12 840 6 405 19 245 2 022 21 267 1.35
1993 ------ 4 500 3 862 14.2 59.9 15 557 5 644 21 201 1 454 22 655 1.37
1992 ------ 4 704 3 605 23.4 63.0 12 715 7 521 20 236 1 649 21 885 1.47
1986 ------ 3 775 3 601 4.6 62.2 16 151 12 16 163 2 984 19 147 1.78
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FUEL
BTU Per
Year KWH
<S> <C>
- -------------------------
1996 ------ 10 357
1995 ------ 10 504
1994 ------ 10 538
1993 ------ 10 339
1992 ------ 10 456
1986 ------ 10 464
- -------------------------
</TABLE>
<TABLE>
<CAPTION>
INVESTMENT (millions of dollars)
Construction
Utility Work In Total
Plant Accumulated Progress Nuclear Property, Utility
In Depreciation & Net & Perry Fuel and Plant and Plant Total
Year Service Amortization Plant Unit 2 Other Equipment Additions Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------- ----------- -------
1996 ------ $6 938 2 252 4 686 57 167 $ 4 910 $ 111 $6 878
1995 ------ 6 872 2 094 4 778 73 180 5 031 155 7 152
1994 ------ 6 871 2 014 4 857 99 195 5 151 156 7 151
1993 ------ 6 734 1 889 4 845 141 243 5 229 175 7 159
1992 ------ 6 602 1 728 4 874 501 261 5 636 156 8 123
1986 ------ 3 197 952 2 245 3 013 384 5 642 671 6 155
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
CAPITALIZATION (millions of dollars & %)
Preferred &
Preference Preferred
Stock, with Stock, without
Mandatory Mandatory
Common Stock Redemption Redemption
Year Equity Provisions Provisions Long-Term Debt Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 ------ $1 045 27% 186 5% 238 6% 2 441 62% $3 910
1995 ------ 1 127 26 215 5 241 6 2 666 63 4 249
1994 ------ 1 058 26 246 6 241 6 2 543 62 4 088
1993 ------ 1 040 24 285 7 241 5 2 793 64 4 359
1992 ------ 1 865 39 314 6 144 3 2 515 52 4 838
1986 ------ 1 844 40 339 7 144 3 2 311 50 4 638
- -------------------------------------------------------------------------------------------------------
</TABLE>
(c) Includes write-off of Perry Unit 2 of $351 million.
(d) Reduced by net energy used by the Seneca Pumped Storage Plant for pumping.
F-29
<PAGE> 96
TOLEDO EDISON
FINANCIAL STATEMENTS
FOR THE YEAR ENDED
DECEMBER 31, 1996
F-30
<PAGE> 97
MANAGEMENT'S FINANCIAL ANALYSIS
OUTLOOK
STRATEGIC PLAN
In early 1994, Centerior Energy Corporation (Centerior Energy), along with The
Toledo Edison Company (Company) and The Cleveland Electric Illuminating Company
(Cleveland Electric), created a strategic plan to achieve the twin goals of
strengthening their financial conditions and improving their competitive
positions. The Company and Cleveland Electric are the two wholly owned electric
utility subsidiaries of Centerior Energy. The plan's objectives relate to the
combined operations of all three companies. To meet these goals, we seek to
maximize share owner return on Centerior Energy common stock, achieve
profitable revenue growth, become a leader in customer satisfaction, build a
winning employee team and attain increasingly competitive supply costs. During
1996, the third year of the eight-year plan, we made strong gains toward
reaching some plan objectives but need significant improvement on others.
A major step taken to reach the twin goals was Centerior Energy's agreement to
merge with Ohio Edison Company (Ohio Edison) to form a new holding company
called FirstEnergy Corp. (FirstEnergy). The proposed merger, combined with good
operating performance, a successful price increase and the accelerated paydown
of debt, resulted in a significant stock price gain, such that the total return
to Centerior Energy common stock share owners during 1996 was 33%. The merger
is expected to better position the merged companies to meet coming competitive
challenges.
Revenue growth is a key objective of the plan, from pricing actions as well as
market expansion.
In April 1996, The Public Utilities Commission of Ohio (PUCO) approved in full
the $119 million price increases requested by the Company and Cleveland
Electric ($35 million and $84 million, respectively). The primary purpose of
the increases was to provide additional revenues to recover all the costs of
providing electric service, including deferred costs, and provide a fair return
to Centerior Energy common stock share owners. The additional revenues also
provided cash to accelerate the redemption of debt and preferred stock.
Kilowatt-hour sales to the Company's retail customers increased by 1.6%
compared to 1995 results as sales to industrial and commercial customers
increased by 3% and 2.4%, respectively. Adjusted for weather, kilowatt-hour
sales to commercial and residential customers increased by 4.7% and 1%,
respectively.
Another key element of our revenue strategy is to offer long-term
contracts to large industrial customers who might otherwise consider changing
power suppliers. During 1996, we renewed and extended for seven to ten years
contracts with many of our large industrial customers, including the six
largest. While this strategy has resulted in lower prices for these customers,
in the long run, it is expected to maximize share owner value by retaining our
customer base in a changing industry. Prior to these renewals, 94% of our
industrial base rate (nonfuel) revenues under contract was scheduled for
renewal before 1999. Following the renewals, the comparable percentage is 19%.
At year-end 1996, 61% of our industrial base rate revenues was under long-term
contracts.
Northwest Ohio is recognized as one of the nation's leading areas in job
creation and economic growth. New and expanded operations at businesses such as
Delafoil/Phillips and Alcoa, as well as the development surrounding a new,
major North Star BHP Steel facility, are adding to our opportunities for
revenue growth. In 1996, we gained commitments on 23 economic development
projects, representing almost $5 million in new and retained annual base rate
revenues and over 3,000 new and retained jobs for Northwest Ohio.
Under the strategic plan, Centerior Energy and its subsidiaries are structured
in six strategic business groups to better focus on competitiveness. During
1996, the Company reduced employment from about 1,800 to 1,600. Further
reduction in our work force to about 1,400 is planned by year-end 1997. We also
plan to reduce expenditures for operation and maintenance activities (exclusive
of fuel and purchased power expenses) and capital projects from $384 million in
1996 to approximately $360 million in 1997 by continuing to streamline
operations. We will continue to reduce our unit cost of fuel used for
generating electricity, while safely improving the operating performance of our
generation facilities.
Reducing fixed financing costs is another primary objective in strengthening
the Company's financial and competitive position. In 1996, we reduced our fixed
obligations for debt, preferred stock and generation facilities leases by $82
million. See Note 2. Interest expense and preferred dividends dropped $16
million. In the last three years, fixed obligations were reduced by $277
million.
In 1996, we reported earnings available for common stock of $40 million
compared to $79 million in 1995. The reported decrease masks a $5 million
increase in basic earnings from operations and a significant improvement in the
quality of reported earnings. The decline in reported earnings is primarily
attributable to the delay in implementing our price increase until late April,
while we began at the end of 1995 to charge earnings for operating expenses and
amortization of deferrals which the price increase was designed to recover. The
price increase contributed approximately $14 million (after tax) more cash to
our earnings in 1996. The change in regulatory accounting measures resulted in
a $47 million decrease in reported earnings for 1996 versus 1995. In addition,
1996 results included noncash charges against earnings of $11 million after tax
for the disposition of inventory and write-down of inactive production
facilities. The full benefit of our $35 million price increase, substantial
reductions in operation and maintenance expenses and a continuing decline in
interest charges are expected to result in improvement in earnings and cash
flow from operations in 1997.
F-31
<PAGE> 98
PENDING MERGER WITH OHIO EDISON
On September 16, 1996, Centerior Energy announced its merger with Ohio Edison in
a stock-for-stock transaction. Centerior Energy share owners will receive 0.525
of a share of FirstEnergy common stock for each share of Centerior Energy common
stock owned, while Ohio Edison share owners will receive one share of
FirstEnergy common stock for each share of Ohio Edison common stock owned.
Following the merger, FirstEnergy will directly hold all of the issued and
outstanding common stock of the Company, Cleveland Electric and Ohio Edison.
FirstEnergy plans to account for the merger as a purchase in accordance with
generally accepted accounting principles. If FirstEnergy elects to apply, or
"push down", the effects of purchase accounting to the financial statements of
the Company and Cleveland Electric, the Company and Cleveland Electric would
record adjustments to: (1) reduce the carrying value of nuclear generating plant
by $1.25 billion to fair value; (2) recognize goodwill of $865 million; (3)
reduce common stock equity by $401 million; (4) reset retained earnings of the
Company and Cleveland Electric to zero; and (5) reduce the related deferred
federal income tax liability by $438 million. These amounts reflect
FirstEnergy's estimates of the pro forma combined adjustments for the Company
and Cleveland Electric as of September 30, 1996. The actual adjustments to be
recorded could be materially different from these estimates. FirstEnergy has not
decided whether to push down the effects of purchase accounting to the financial
statements of the Company and Cleveland Electric if the merger with Ohio Edison
is completed, nor has FirstEnergy estimated the allocations between the two
companies if push-down accounting is elected.
We believe that the merger will create a company that is better positioned to
compete in the electric utility industry than either Centerior Energy or Ohio
Edison could on a stand-alone basis, enhancing long-term share owner value and
providing customers with reliable service at more stable and competitive prices.
The combination of Centerior Energy and Ohio Edison is a natural alliance of two
companies with adjoining service areas who already share many major generating
units. FirstEnergy expects to reduce costs, maximize efficiencies and increase
management flexibility in order to enhance revenues, cash flows and earnings and
be a more effective competitor in the increasingly competitive electric utility
industry.
FirstEnergy anticipates the merger will result in net savings for the combined
companies of approximately $1 billion over ten years, in addition to the impact
of cost reduction programs underway at both companies. The additional savings,
which probably could not be achieved without the merger, will result primarily
from the reduction of duplicative functions and positions, joint dispatch of
generating facilities and procurement efficiencies. FirstEnergy expects
reductions in labor costs to comprise slightly over half the estimated savings.
In addition, FirstEnergy expects to reduce system-wide debt by at least $2.5
billion through the year 2000, yielding additional long-term savings in the form
of lower interest expense.
The Company's share of the $1 billion of savings will permit the Company to
reduce prices to its customers as discussed below under FirstEnergy Rate Plan.
Absent the merger, the Company plans to achieve savings as well, but at a lower
level, which is expected to allow prices to be frozen at current levels until at
least 2002 despite inflationary pressures.
Various aspects of the merger are subject to the approval of the Federal Energy
Regulatory Commission (FERC) and other regulatory authorities. Common stock
share owners of Centerior Energy and Ohio Edison are expected to vote on
approval of the merger agreement on March 27, 1997. The merger must be approved
by the affirmative votes of the share owners of at least two-thirds of the
outstanding shares of Ohio Edison common stock and a majority of the outstanding
shares of Centerior Energy common stock. The merger is expected to be effective
in late 1997.
FIRSTENERGY RATE PLAN
On January 30, 1997, the PUCO approved a Rate Reduction and Economic Development
Plan (Plan) for the Company and Cleveland Electric to be effective upon the
consummation of the Centerior Energy and Ohio Edison merger. The Plan would be
null and void if the merger is not consummated. The rate order granting the
April 1996 price increase will remain in full force and effect during the
pendency of the merger or if the merger is not consummated.
The Plan calls for a base rate freeze through 2005 (except to comply with any
significant changes in environmental, regulatory or tax laws), followed by an
immediate $310 million (which represents a decrease of approximately 15% from
current levels) base rate reduction in 2006 (the Company's share is expected to
be $93 million); interim reductions beginning seven months after consummation of
the merger of $3 per month increasing to $5 per month per residential customer
by July 1, 2001; $105 million for economic development and energy efficiency
programs (the Company's share is expected to be $35 million); earnings caps for
regulatory purposes for the Company and Cleveland Electric; a commitment by
FirstEnergy for a reduction, for regulatory accounting purposes, in nuclear and
regulatory assets by the end of 2005 of at least $2 billion more than it
otherwise would be, through revaluing facilities or accelerating depreciation
and amortization; and a freeze in fuel cost factors until December 31, 2005,
subject to PUCO review at year-end 2002 and annual inflation adjustments. The
Plan permits the Company and Cleveland Electric to dispose of generating assets
subject to notice and possible PUCO approval, and to enter into associated power
purchase arrangements.
Total price savings for the Company's customers of about $111 million are
anticipated over the term of the Plan, as summarized below, excluding potential
economic devel-
F-32
<PAGE> 99
opment benefits and assuming that the merger takes place
on December 31, 1997. The total price savings for customers of the Company and
Cleveland Electric are expected to be about $391 million.
<TABLE>
<CAPTION>
Year Amount
- -------------------------------------------------- ------------
(millions of
dollars)
<S> <C>
1998______________________________________________ $ 6
1999______________________________________________ 10
2000______________________________________________ 12
2001______________________________________________ 15
2002______________________________________________ 17
2003______________________________________________ 17
2004______________________________________________ 17
2005______________________________________________ 17
--------
Total_________________________________________ $111
========
</TABLE>
Under the Plan's earnings cap, the Company and Cleveland Electric will be
permitted to earn up to an 11.5% return on common stock equity for regulatory
purposes during calendar years prior to 2000, 12% during calendar years 2000 and
2001, and 12.59% during calendar years 2001 through 2005. The regulatory return
on equity is generally expected to be lower than the return on equity calculated
for financial reporting purposes due to the calculation methodology defined by
the Plan and, as discussed in the next paragraph, anticipated differences in
accounting for the Plan for financial reporting versus regulatory purposes. If
for any calendar year the regulatory return on equity exceeds the specified
level, the excess will be credited to customers, first through a reduction in
Percentage of Income Payment Plan (PIPP) arrearages and then as a credit to base
rates. PIPP is a deferred payment program for low-income residential customers.
The Plan requires, for regulatory purposes, a revaluation of or an accelerated
reduction in the investment in nuclear plant and certain regulatory assets of
the Company and Cleveland Electric (excluding amounts due from customers for
future federal income taxes) by at least $2 billion by the end of 2005.
FirstEnergy has not yet determined each company's estimated share of the $2
billion. Only a portion of the $2 billion of accelerated costs is expected to be
charged against the two companies' earnings for financial reporting purposes by
2005.
FirstEnergy believes that the Plan will not provide for the full recovery of
costs and a fair return on investment associated with the nuclear operations of
the Company and Cleveland Electric. Pursuant to the PUCO's order, FirstEnergy is
required to submit to the PUCO staff the regulatory accounting and cost recovery
details for implementing the Plan. After approval of such details by the PUCO
staff, FirstEnergy expects that the Company and Cleveland Electric will
discontinue the application of Statement of Financial Accounting Standards
(SFAS) 71 for their nuclear operations if and when consummation of the merger
becomes probable. The remainder of their business is expected to continue to
comply with the provisions of SFAS 71. At the time the merger is probable, the
Company and Cleveland Electric would be required to write off certain of their
regulatory assets for financial reporting purposes. The write-off amounts would
be determined at that time. FirstEnergy estimates the write-off amounts for the
Company and Cleveland Electric will total approximately $750 million. The
Company's share of the write-off is expected to be about one-third of this
amount. Under the Plan, some or all of this write-off cannot be applied toward
the $2 billion regulatory commitment discussed above. For financial reporting
purposes, nuclear generating units are not expected to be impaired. If events
cause either the Company or Cleveland Electric or both companies to conclude
they no longer meet the criteria for applying SFAS 71 for the remainder of their
business, they would be required to write off their remaining regulatory assets
and measure all other assets for impairment. For a discussion of the criteria
for complying with SFAS 71, see Note 7(a).
APRIL 1996 RATE ORDER
In its April 1996 order, the PUCO granted price increases of $35 million and $84
million in annualized revenues to the Company and Cleveland Electric,
respectively. The Company and Cleveland Electric intend to freeze rates at
existing levels until at least 2002, although they are not precluded from
requesting further price increases. In the order, the PUCO provided for recovery
of all regulatory assets in the approved rates, and the Company and Cleveland
Electric continue to comply with the provisions of SFAS 71.
In connection with its order, the PUCO recommended that the Company and
Cleveland Electric write down certain assets for regulatory purposes by an
aggregate of $1.25 billion through 2001. If the merger is consummated, the
Company and Cleveland Electric believe acceleration of $2 billion of costs under
the Plan would fully satisfy this recommendation. The Company and Cleveland
Electric agree with the concept of accelerating the recognition of costs and the
recovery of assets as such concept is consistent with the strategic objective to
become more competitive. However, the Company and Cleveland Electric believe
that such acceleration must also be consistent with the reduction of debt and
the opportunity for Centerior Energy common stock share owners to receive a fair
return on their investment. Consideration of whether to implement a plan
responsive to the PUCO's recommendation to revalue assets by $1.25 billion is
pending the merger with Ohio Edison.
Notwithstanding the pending merger with Ohio Edison and discussions with
regulators concerning the effect of the Plan on the Company's nuclear generating
assets, we believe it is reasonable to expect that rates will be set at levels
that will recover all current and anticipated costs associated with the
Company's nuclear operations, including all associated regulatory assets, and
such rates can be charged to and collected from customers. If there is a change
in our evaluation of the competitive environment, regulatory framework or other
factors, or if the PUCO significantly reduces the value of the Company's assets
or reduces the approved return on common stock equity of 12.59% and overall rate
of return of 10.06%, or both, for future regulatory purposes, the Company may be
required to record material charges to earnings.
F-33
<PAGE> 100
MERGER OF THE COMPANY INTO CLEVELAND ELECTRIC
In October 1996, the FERC authorized the merger of the Company into Cleveland
Electric. The merger agreement between Centerior Energy and Ohio Edison requires
the approval of Ohio Edison prior to consummation of the proposed merger of the
Company into Cleveland Electric. Ohio Edison has not yet made a decision. See
Note 16.
COMPETITION
Structural changes in the electric utility industry from actions by both federal
and state regulatory bodies are continuing to place downward pressure on prices
and increase competition for customers. The Company's nuclear plant licenses
have required open-access transmission for its wholesale customers for 20 years.
More recently, the Federal Energy Policy Act of 1992 initiated broader access to
utility transmission systems and, in 1996, the FERC adopted rules relating to
open-access transmission services. The open-access rules require utilities to
deliver power from other utilities or generation sources to their wholesale
customers at nondiscriminatory prices.
A number of states have enacted transition legislation which provides for
introduction of competition for retail electric business and recovery of
stranded investment. Several groups in Ohio are studying the possible
introduction of retail wheeling and stranded investment recovery. Retail
wheeling occurs when a customer obtains power from a utility company other than
its local utility. The term "stranded investment" generally refers to fixed
costs approved for recovery under traditional regulatory methods that would
become unrecoverable, or "stranded", as a result of legislative changes which
allow for widespread competition. The PUCO is sponsoring discussions among a
group of business, utility and consumer interests to explore ways of promoting
competitive options without unduly harming the interests of utility company
share owners or customers. The PUCO also has introduced two pilot projects, both
intended as initial steps to introduce competitive elements into the Ohio
electric utility business.
A bill to restructure the electric utility industry in Ohio has been introduced
in the Ohio House of Representatives. A bipartisan committee from both
legislative houses has been formed to study the issue. Centerior Energy
presented the Company's model for customer choice, called Energy Choice, to the
PUCO discussion group in August 1996. Under this model, full retail competition
should be introduced by 2002, but two essential elements, recovery of stranded
investment and levelization of tax burdens among energy suppliers, must be
resolved in the interim to assure share owners' recovery of and a fair return on
their investments.
Although competitive pressures are increasing, the traditional regulatory
framework remains in place and is expected to continue for the foreseeable
future. We cannot predict when and to what extent retail wheeling or other forms
of competition will be allowed. We believe that pure competition (unrestricted
retail wheeling for all
customer classifications) is at least several years away and that any transition
to pure competition will be in phases. The FERC and the PUCO have acknowledged
the need to provide at least partial recovery of stranded investment as greater
competition is permitted and, therefore, we believe that there will be a
mechanism developed for the recovery of at least some stranded investment.
However, due to the uncertainty involved, there is a risk in connection with the
introduction of retail wheeling that some of the Company's assets may not be
fully recovered.
Competition from municipal electric suppliers for retail business in our service
area is producing both favorable and unfavorable results in our business. All
existing customers in the City of Clyde now have the right to choose between the
municipal supplier and the Company, as a result of a November 1996 referendum
overturning a Clyde ordinance limiting such choice. In the City of Toledo, City
Council funded a consultant's study of alternatives to our service. A draft of
the consultant's report states that, if Centerior Energy and Ohio Edison merge,
a municipal system in Toledo could not compete with the Company because of the
rate reductions contained in the Plan approved by the PUCO. The consultant's
draft report also states that, if the merger does not occur, a municipal system
could be competitive with the Company in one portion of the City. However,
errors have been found in the draft report which may change the content of the
final consultant's report. The final report will be considered by the City's
Electric Franchise Review Committee before making its recommendation to City
Council later in 1997. Municipal expansion activity continues in areas
surrounding several towns serviced by municipal systems in our service area. We
continue to pursue legal remedies to halt illegal municipal expansion in our
service area.
The merger with Ohio Edison and the benefits of the Plan to our customers are
expected to better position us to deal with the structural changes taking place
in the industry and to improve our competitive position with respect to
municipalization.
NUCLEAR OPERATIONS
The Company has interests in three nuclear generating units -- Davis-Besse
Nuclear Power Station (Davis-Besse), Perry Nuclear Power Plant Unit 1 (Perry
Unit 1) and Beaver Valley Power Station Unit 2 (Beaver Valley Unit 2) -- and
operates the first one. Cleveland Electric operates Perry Unit 1.
All three units were out of service temporarily for refueling during 1996; thus,
plant availability factors for Davis-Besse, Perry Unit 1 and Beaver Valley Unit
2 were 85%, 76% and 70%, respectively, for 1996. The 1994-1996 availability
factors for the units were 91%, 72%, and 85%, for Davis-Besse, Perry Unit 1 and
Beaver Valley Unit 2, respectively. The comparable industry averages for a
three-year period (as of August 31, 1996) are 82% for pressurized water reactors
such as Davis-Besse and Beaver Valley Unit 2 and 78% for boiling water reactors
such as Perry Unit 1. Davis-Besse established a plant record with its 509-day
continuous run at or near full capacity
F-34
<PAGE> 101
before shutting down for its scheduled refueling outage in April 1996.
A significant part of the strategic plan involves ongoing efforts to increase
the availability and lower the cost of production of our nuclear units. In 1996,
we continued our progress toward increasing long-term unit availability while
continuing to lower production costs. The goal of our nuclear improvement
program is for Cleveland Electric to replicate Davis-Besse's operational
excellence and cost reduction gains at Perry Unit 1, while improving performance
ratings.
Our nuclear units may be impacted by activities or events beyond our control.
Operating nuclear units have experienced unplanned outages or extensions of
scheduled outages because of equipment problems or new regulatory requirements.
A major accident at a nuclear facility anywhere in the world could cause the
Nuclear Regulatory Commission (NRC) to limit or prohibit the operation or
licensing of any domestic nuclear unit. If one of our nuclear units is taken out
of service for an extended period for any reason, including an accident at such
unit or any other nuclear facility, we cannot predict whether regulatory
authorities would impose unfavorable rate treatment. Such treatment could
include taking our affected unit out of rate base, thereby not permitting us to
recover our investment in and earn a return on it, or disallowing certain
construction or maintenance costs. An extended outage coupled with unfavorable
rate treatment could have a material adverse effect on our financial condition,
cash flows and results of operations. Premature plant closings could also have a
material adverse effect on our financial condition, cash flows and results of
operations because the estimated cost to decommission a plant exceeds the
current funding in the decommissioning trust.
HAZARDOUS WASTE DISPOSAL SITES
The Company is aware of its potential involvement in the cleanup of several
sites. Although these sites are not on the Superfund National Priorities List,
they are generally being administered by various governmental entities in the
same manner as they would be administered if they were on such list. Allegations
that the Company disposed of hazardous waste at these sites, and the amount
involved, are often unsubstantiated and subject to dispute. Federal law provides
that all "potentially responsible parties" (PRPs) for a particular site be held
liable on a joint and several basis. If the Company were held liable for 100% of
the cleanup costs of all the sites referred to above, the cost could be as high
as $115 million. However, we believe that the actual cleanup costs will be
substantially lower than $115 million, that the Company's share of any cleanup
costs will be substantially less than 100% and that most of the other PRPs are
financially able to contribute their share. The Company has accrued a liability
totaling $3 million at December 31, 1996 based on estimates of the costs of
cleanup and its proportionate responsibility for such costs. We believe that the
ultimate outcome of these matters will not have a material adverse effect on our
financial condition, cash flows or results of operations.
A new Statement of Position issued by the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants, Inc.
effective January 1, 1997 provides guidance on the recognition and disclosure of
environmental remediation liabilities. Adoption of the statement in 1997 is not
expected to have a material adverse effect on our financial condition or results
of operations.
COMMON STOCK DIVIDENDS
The Company has not paid a common stock dividend to Centerior Energy since
February 1991. From 1993 through November 1996, the Company was prohibited from
paying a common stock dividend by a provision in its mortgage. See Capital
Resources and Liquidity-Liquidity below. The declaration and payment of future
common stock dividends is at the discretion of the Company's Board of Directors,
subject to applicable legal restrictions.
CAPITAL RESOURCES AND LIQUIDITY
1994-1996 CASH REQUIREMENTS
We need cash for normal corporate operations (including the payment of
dividends), retirement of maturing securities, and an ongoing program of
constructing and improving facilities to meet demand for electric service and to
comply with government regulations. Our cash construction expenditures totaled
$41 million in 1994, $53 million in 1995 and $47 million in 1996. Our debt and
preferred stock maturities and sinking fund requirements totaled $57 million in
1994, $83 million in 1995 and $58 million in 1996. In addition, we optionally
redeemed $184 million of securities in the 1994-1996 period, including $94
million of tax-exempt issues refunded in 1995.
As discussed in Note 1(j), in May 1996, the Company and Cleveland Electric began
to sell on a daily basis substantially all of their retail customer accounts
receivables and unbilled revenue receivables to Centerior Funding Corporation
(Centerior Funding), a wholly owned subsidiary of Cleveland Electric. In July
1996, Centerior Funding issued $150 million in AAA-rated accounts
receivable-backed investor certificates due in 2001 with an interest rate of
7.2%. The Company's share of the net proceeds from the accounts receivable
securitization was used to redeem higher-cost securities and for general
corporate purposes.
As a result of these activities, the embedded cost of the Company's debt at the
end of 1996 declined to 9.13% versus 9.23% in 1995 and 9.48% in 1994.
The Company is a party to a $125 million revolving credit facility which was
renewed in May 1996 for a one-year term. In 1996, portions of the nuclear fuel
lease financing vehicles for the Company and Cleveland Electric matured: $84
million of intermediate-term notes in September and a $150 million letter of
credit supporting short-term borrowing in October. These facilities were
replaced by $100 million of intermediate-term notes and a $100 million two-year
letter of credit. The net reduction in the facility size results from lower
nuclear fuel financing requirements.
F-35
<PAGE> 102
1997 AND BEYOND CASH REQUIREMENTS
Our anticipated 1997 cash requirements for construction are $61 million. Debt
and preferred stock maturities and sinking fund requirements are $51 million. Of
this amount, $10 million are for a tax-exempt issue secured by first mortgage
bonds and subject to optional tender by the owners on November 1, 1997, which we
expect to replace with a similar issue at a substantially lower interest rate.
We expect to meet remaining requirements with internal cash generation and cash
reserves. We also expect to be able to optionally redeem more debt in 1997 than
we did in 1996.
We expect to meet all of our 1998-2001 cash requirements with internal cash
generation. Estimated cash requirements for our construction program during this
period total $213 million. Debt and preferred stock maturities and sinking fund
requirements total $207 million for the same period. If economical, additional
securities may be redeemed with funding expected to be provided through internal
cash generation.
Consummation of the merger with Ohio Edison is expected to reduce the Company's
cash construction requirements and improve its ability to redeem fixed
obligations.
LIQUIDITY
Net cash flow from operating activities in 1996 was significantly increased from
1995 by implementation of the price increase effective in April 1996. A part of
the net proceeds from our accounts receivable securitization of $78 million was
used to redeem other higher-cost securities, producing net savings in our
overall cost of borrowing. In 1996, we reduced our fixed obligations for debt,
preferred stock and generation facilities leases by $82 million. At year-end
1996, we had $81 million in cash and temporary cash investments, down from $94
million at year-end 1995.
Additional first mortgage bonds may be issued by the Company under its mortgage
on the basis of property additions, cash or refundable first mortgage bonds. If
the applicable interest coverage test is met, the Company may issue first
mortgage bonds on the basis of property additions and, under certain
circumstances, refundable bonds. At December 31, 1996, the Company would have
been permitted to issue approximately $148 million of additional first mortgage
bonds. If FirstEnergy elects to apply purchase accounting to the Company if the
merger with Ohio Edison is completed, the Company's first mortgage bond capacity
would be adversely affected.
There are no restrictions on the Company's ability to issue preference stock.
Under its articles of incorporation, the Company cannot issue preferred stock
unless certain earnings coverage requirements are met. Based on its 1996
earnings, the Company could not issue additional preferred stock.
The Company and Cleveland Electric have $273 million in financing vehicles to
support their nuclear fuel leases, $83 million of which mature in 1997.
Replacement financing for the maturing issues may not be needed in 1997. The
Company is a party to a $125 million revolving credit facility which is expected
to be renewed when it matures in May 1997.
Current credit ratings for the Company are as follows:
<TABLE>
<CAPTION>
Standard Moody's
& Poor's Investors
Corporation Service, Inc.
----------- -------------
<S> <C> <C>
First mortgage bonds____________________ BB Ba2
Subordinate debt________________________ B+ B1
Preferred stock_________________________ B b2
</TABLE>
Following the FirstEnergy merger announcement, both rating agencies placed the
Company's securities on credit watch with positive implications.
Federal law prohibits the Company from paying dividends out of capital accounts.
The Company has since 1993 declared and paid preferred stock dividends out of
appropriated current net income included in retained earnings. At the times of
such declarations and payments, the Company had a deficit in its retained
earnings. At December 31, 1996, the Company had $223 million of appropriated
retained earnings for the payment of dividends. The Company also has a provision
in its mortgage applicable to approximately $94 million of outstanding first
mortgage bonds ($31 million of which mature in August 1997) that requires common
stock dividends to be paid out of its total balance of retained earnings, which
had been a deficit from 1993 through November 1996.
As part of a routine audit, the FERC is considering statements which it
requested and received from the Company and Cleveland Electric supporting the
payment of dividends out of appropriated current net income included in
retained earnings while total retained earnings were a deficit. At December 31,
1996, the Company's total retained earnings were $5 million. The final
disposition of this issue is a factor expected to be considered by FirstEnergy
in deciding whether to apply purchase accounting to the Company and
Cleveland Electric, one effect of which would be to reset retained earnings to
zero. If the merger is not consummated or if FirstEnergy determines not to
apply purchase accounting to the two companies, the Company and Cleveland
Electric intend to continue to support their position and pursue all available
alternatives to allow them to continue the declaration and payment of
dividends.
RESULTS OF OPERATIONS
1996 VS. 1995
Factors contributing to the 2.7% increase in 1996 operating revenues are as
follows:
<TABLE>
<CAPTION>
Millions
Increase (Decrease) in Operating Revenues of Dollars
- -------------------------------------------------- -----------
<S> <C>
Base Rates___________________________________ $11
KWH Sales Volume and Mix_____________________ 11
Wholesale Revenues___________________________ 4
Fuel Cost Recovery Revenues__________________ 1
Miscellaneous Revenues_______________________ (4)
---
Total____________________________________ $23
</TABLE> ===
F-36
<PAGE> 103
The increase in 1996 base rates revenues resulted primarily from the April 1996
rate order issued by the PUCO for the Company as discussed under Outlook-April
1996 Rate Order and in Note 7(b). The impact of the April 1996 price increase
was offset by a change in the implementation of summer prices. As a result of
this change, higher summer prices were in effect for most customers from June
through September 1996. Previously, higher summer prices were in effect from
May through September. Consequently, base rates revenues for the May 1996
billing period were lower relative to the May 1995 amount. Renegotiated
contracts for certain large industrial customers also resulted in a decrease
in base revenues which partially offset the effect of the general price
increase. Although total kilowatt-hour sales decreased 0.9% in 1996 from the
1995 amount, industrial and commercial kilowatt-hour sales increased 3% and
2.4%, respectively. Residential kilowatt-hour sales decreased 0.9% primarily
because of the cooler summer weather. The industrial sales growth reflected
increased sales to petroleum refineries, large primary metal and glass
manufacturers, and the broad-based, smaller industrial customer group. On a
weather-normalized basis, commercial and residential sales increased 4.7% and
1%, respectively. The number of commercial customers increased 3.4% in 1996.
Other sales (including wholesale sales) decreased 8%. Wholesale revenues
increased in 1996, although wholesale sales results were adversely affected by
the Beaver Valley Unit 2 refueling outage in 1996. See Note 2 for a discussion
of the Beaver Valley Unit 2 capacity sale to Cleveland Electric. A slight
increase in 1996 fuel cost recovery revenues resulted from an increase in the
fuel cost factors. The weighted average of these fuel cost factors increased
approximately 1%.
For 1996, operating revenues were 27% residential, 22% commercial, 28%
industrial and 23% other, and kilowatt-hour sales were 19% residential, 16%
commercial, 39% industrial and 25% other. The average prices per kilowatt-hour
for residential, commercial and industrial customers were 11.47, 10.82 and 5.87
cents, respectively.
Operating expenses increased 8% in 1996. The cessation of the Rate Stabilization
Program deferrals and the commencement of their amortization in December 1995
resulted in the increase in the net amortization of deferred operating expenses.
See Note 7(d). Depreciation and amortization expenses increased primarily
because of a $4 million net increase in depreciation related to changes in
depreciation rates, as discussed in Note 1(e), and the cessation of the
accelerated amortization of unrestricted investment tax credits under the Rate
Stabilization Program, which was reported in 1995 as a $5 million reduction of
depreciation. Fuel and purchased power expenses increased because of increased
purchased power requirements to meet retail customer sales throughout the year
but particularly during the refueling outages of Perry Unit 1 and Davis-Besse in
1996. Other operation and maintenance expenses in 1996 included a $6 million
one-time charge for the disposition of inventory as part of a reengineering of
the supply chain process. Reengineering the supply chain process increases the
use of technology, consolidates warehousing and uses just-in-time purchase and
delivery. Federal income taxes decreased as a result of lower pretax operating
income.
A nonoperating loss resulted in 1996 primarily from an $11 million write-down of
two inactive production facilities, as discussed in Note 14, and the Company's
share of merger-related expenses. The deferral of carrying charges related to
the Rate Stabilization Program ended in November 1995. The federal income tax
credit for nonoperating income increased in 1996 accordingly.
Interest charges and preferred dividend requirements decreased in 1996 because
of the redemption of securities and refundings at favorable terms in 1996 and
1995.
1995 VS. 1994
Factors contributing to the 1% increase in 1995 operating revenues are as
follows:
<TABLE>
<CAPTION>
Millions
Increase (Decrease) in Operating Revenues of Dollars
- --------------------------------------------------- ----------
<S> <C>
KWH Sales Volume and Mix __________________ $ 29
Wholesale Revenues_________________________ (9)
Fuel Cost Recovery Revenues________________ (10)
Miscellaneous Revenues_____________________ (1)
----
Total__________________________________ $ 9
====
</TABLE>
Total kilowatt-hour sales increased 2.2% in 1995 primarily because of the hot
summer weather. Residential and commercial kilowatt-hour sales increased 5.2%
and 2.2%, respectively, which included about 1% nonweather-related growth in
residential sales. Industrial kilowatt-hour sales increased 1.8% on the strength
of increased sales to large glass manufacturers and the broad-based, smaller
industrial customer group. Other sales increased 0.5%. Weather accounted for
approximately $13 million of the $21 million increase in 1995 base rate
revenues. Wholesale revenues decreased because of the lower revenues associated
with the Beaver Valley Unit 2 capacity sale to Cleveland Electric. Lower 1995
fuel cost recovery revenues resulted from favorable changes in the fuel cost
factors. The weighted average of these fuel cost factors decreased approximately
6%.
For 1995, operating revenues were 27% residential, 21% commercial, 29%
industrial and 23% other, and kilowatt-hour sales were 19% residential, 16%
commercial, 37% industrial and 28% other. The average prices per kilowatt-hour
for residential, commercial and industrial customers were 10.99, 10.51 and 6.09
cents, respectively. The changes from 1994 were not significant.
Operating expenses increased 0.1% in 1995. Federal income taxes increased as a
result of higher pretax operating income. Fuel and purchased power expenses
decreased because of lower purchased power requirements resulting from the
increased availability of the nuclear generating units in 1995.
Interest charges and preferred dividends decreased in 1995 because of the
redemption of securities and refundings at favorable terms in 1995 and 1994.
F-37
<PAGE> 104
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
To the Share Owners and
Board of Directors of
The Toledo Edison Company:
We have audited the accompanying balance sheet and statement of capitalization
of The Toledo Edison Company (a wholly owned subsidiary of Centerior Energy
Corporation) as of December 31, 1996 and 1995, and the related statements of
income, retained earnings and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Toledo Edison Company as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Cleveland, Ohio
February 14, 1997
F-38
<PAGE> 105
INCOME STATEMENT The Toledo Edison Company
<TABLE>
<CAPTION>
For the years ended
December 31,
----------------------
1996 1995 1994
---- ---- ----
(millions of dollars)
<S> <C> <C> <C>
OPERATING REVENUES (1)________________________________________ $897 $874 $865
---- ---- ----
OPERATING EXPENSES
Fuel and purchased power ___________________________________ 169 157 167
Other operation and maintenance ____________________________ 231 225 229
Generation facilities rental expense, net __________________ 104 104 104
---- ---- ----
Total operation and maintenance _________________________ 504 486 500
Depreciation and amortization_______________________________ 94 84 83
Taxes, other than federal income taxes______________________ 90 91 90
Amortization of deferred operating expenses, net____________ 17 (17) (21)
Federal income taxes________________________________________ 36 42 33
---- ---- ----
741 686 685
---- ---- ----
OPERATING INCOME_____________________________________________ 156 188 180
---- ---- ----
NONOPERATING INCOME (LOSS)
Allowance for equity funds used during construction________ 1 1 1
Other income and deductions, net___________________________ (10) 6 3
Deferred carrying charges__________________________________ -- 14 15
Federal income taxes--credit (expense) ____________________ 5 (2) (2)
---- ---- ----
(4) 19 17
---- ---- ----
INCOME BEFORE INTEREST CHARGES_______________________________ 152 207 197
---- ---- ----
INTEREST CHARGES
Debt interest 96 111 116
Allowance for borrowed funds used during construction______ (1) (1) (1)
---- ---- ----
95 110 115
---- ---- ----
NET INCOME 57 97 82
PREFERRED DIVIDEND REQUIREMENTS______________________________ 17 18 20
---- ---- ----
EARNINGS AVAILABLE FOR COMMON STOCK__________________________ $ 40 $ 79 $ 62
==== ==== ====
- ---------------
</TABLE>
(1) Includes revenues from all bulk power sales to Cleveland Electric of $105
million, $102 million and $111 million in 1996, 1995 and 1994, respectively.
RETAINED EARNINGS
<TABLE>
<CAPTION>
For the years ended
December 31,
------------------------
1996 1995 1994
---- ----- -----
(millions of dollars)
<S> <C> <C> <C>
RETAINED EARNINGS (DEFICIT) AT BEGINNING OF YEAR____________ $(35) $(113) $(175)
---- ----- -----
ADDITIONS
Net income________________________________________________ 57 97 82
DEDUCTIONS
Preferred stock dividends declared and other______________ (17) (19) (20)
---- ----- -----
Net Increase___________________________________________ 40 78 62
---- ----- -----
RETAINED EARNINGS (DEFICIT) AT END OF YEAR__________________ $ 5 $ (35) $(113)
==== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-39
<PAGE> 106
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995
------ ------
(millions of dollars)
<S> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility plant in service_____________________________________________________ $2,929 $2,896
Less: accumulated depreciation and amortization___________________________ 1,020 942
------ ------
1,909 1,954
Construction work in progress________________________________________________ 22 28
------ ------
1,931 1,982
Nuclear fuel, net of amortization __________________________________________ 76 78
Other property, less accumulated depreciation_______________________________ 8 20
------ ------
2,015 2,080
------ ------
CURRENT ASSETS
Cash and temporary cash investments ________________________________________ 81 94
Amounts due from customers and others, net _________________________________ 13 68
Amounts due from affiliates ________________________________________________ 13 19
Notes receivable from affiliates ___________________________________________ 82 --
Unbilled revenues __________________________________________________________ 4 22
Materials and supplies, at average cost_____________________________________
Owned____________________________________________________________________ 33 49
Under consignment________________________________________________________ 10 --
Taxes applicable to succeeding years________________________________________ 68 71
Other_______________________________________________________________________ 4 4
------ ------
308 327
------ ------
REGULATORY AND OTHER ASSETS
Regulatory assets___________________________________________________________ 928 978
Nuclear plant decommissioning trusts________________________________________ 64 52
Other_______________________________________________________________________ 42 37
------ ------
1,034 1,067
------ ------
Total Assets $3,357 $3,474
====== ======
</TABLE>
The accompanying notes are an integral part of this statement.
F-40
<PAGE> 107
The Toledo Edison Company
<TABLE>
<CAPTION>
December 31,
----------------
1996 1995
------ ------
(millions of
dollars)
<S> <C> <C>
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common stock equity_________________________________________________________ $ 803 $ 763
Preferred stock
With mandatory redemption provisions_____________________________________ 3 5
Without mandatory redemption provisions__________________________________ 210 210
Long-term debt______________________________________________________________ 1,003 1,068
------ ------
2,019 2,046
------ ------
CURRENT LIABILITIES
Current portion of long-term debt and preferred stock_______________________ 51 58
Current portion of nuclear fuel lease obligations___________________________ 36 40
Accounts payable____________________________________________________________ 46 56
Accounts and notes payable to affiliates____________________________________ 30 53
Accrued taxes_______________________________________________________________ 73 78
Accrued interest____________________________________________________________ 22 24
Other_______________________________________________________________________ 20 20
------ ------
278 329
------ ------
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized investment tax credits__________________________________________ 75 79
Accumulated deferred federal income taxes___________________________________ 566 573
Unamortized gain from Bruce Mansfield Plant sale____________________________ 179 188
Accumulated deferred rents for Bruce Mansfield Plant and Beaver Valley
Unit 2____________________________________________________________________ 39 54
Nuclear fuel lease obligations______________________________________________ 49 52
Retirement benefits_________________________________________________________ 102 103
Other_______________________________________________________________________ 50 50
------ ------
1,060 1,099
------ ------
Total Capitalization and Liabilities $3,357 $3,474
====== ======
</TABLE>
F-41
<PAGE> 108
CASH FLOWS The Toledo Edison Company
<TABLE>
<CAPTION>
For the years ended
December 31,
-------------------------
1996 1995 1994
----- ----- -----
(millions of dollars)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES (1)
Net Income $ 57 $ 97 $ 82
------ ------ ------
Adjustments to Reconcile Net Income to Cash from Operating Activities:
Depreciation and amortization_______________________________________ 94 84 83
Deferred federal income taxes_______________________________________ 18 16 46
Unbilled revenues___________________________________________________ (7) -- 3
Deferred fuel_______________________________________________________ 9 (3) 3
Deferred carrying charges___________________________________________ -- (14) (15)
Leased nuclear fuel amortization____________________________________ 33 54 44
Amortization of deferred operating expenses, net____________________ 17 (17) (21)
Allowance for equity funds used during construction_________________ (1) (1) (1)
Changes in amounts due from customers and others, net_______________ (2) (6) 1
Net proceeds from accounts receivable securitization________________ 78 -- --
Changes in materials and supplies___________________________________ 6 8 (2)
Changes in accounts payable_________________________________________ (10) 8 (15)
Changes in working capital affecting operations ____________________ (1) 4 (16)
Other noncash items_________________________________________________ (10) 9 10
----- ----- -----
Total Adjustments_________________________________________________ 224 142 120
----- ----- -----
Net Cash from Operating Activities_____________________________ 281 239 202
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES (2)
Notes payable to affiliates___________________________________________ (21) 21 --
First mortgage bond issues____________________________________________ -- 99 31
Maturities, redemptions and sinking funds ____________________________ (73) (215) (98)
Nuclear fuel lease obligations________________________________________ (39) (44) (49)
Dividends paid________________________________________________________ (17) (18) (20)
Premiums, discounts and expenses______________________________________ -- (6) --
----- ----- -----
Net Cash from Financing Activities____________________________ (150) (163) (136)
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES (2)
Cash applied to construction__________________________________________ (47) (53) (41)
Interest capitalized as allowance for borrowed funds used during
construction_______________________________________________________ (1) (1) (1)
Loans to affiliates___________________________________________________ (82) -- --
Contributions to nuclear plant decommissioning trusts_________________ (10) (11) (12)
Other cash applied____________________________________________________ (4) (5) (6)
----- ----- -----
Net Cash from Investing Activities____________________________ (144) (70) (60)
----- ----- -----
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS_______________________ (13) 6 6
----- ----- -----
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF YEAR________________ 94 88 82
----- ----- -----
CASH AND TEMPORARY CASH INVESTMENTS AT END OF YEAR______________________ $ 81 $ 94 $ 88
===== ===== =====
- ---------------
(1) Interest paid (net of amounts capitalized) _________________________ $ 92 $ 93 $ 94
===== ===== =====
Federal income taxes paid__________________________________________ $ 16 $ 23 $ 5
===== ===== =====
</TABLE>
(2) Increases in Nuclear Fuel and Nuclear Fuel Lease Obligations in the Balance
Sheet resulting from the noncash capitalizations under nuclear fuel
agreements are excluded from this statement.
The accompanying notes are an integral part of this statement.
F-42
<PAGE> 109
STATEMENT OF CAPITALIZATION The Toledo Edison Company
<TABLE>
<CAPTION>
December 31,
-----------------
1996 1995
------ ------
(millions of
dollars)
<S> <C> <C>
COMMON STOCK EQUITY:
Common shares, $5 par value: 60 million authorized; 39.1 million outstanding in 1996 and
1995____________________________________________________________________________________ $ 196 $ 196
Premium on capital stock__________________________________________________________________ 481 481
Other paid-in capital_____________________________________________________________________ 121 121
Retained earnings (deficit)_______________________________________________________________ 5 (35)
------ ------
Total Common Stock Equity 803 763
------ ------
</TABLE>
<TABLE>
<CAPTION>
Current
1996 Shares Call Price
Outstanding Per Share
----------- ----------
<S> <C> <C> <C> <C>
PREFERRED STOCK:
$100 par value, 3,000,000 preferred shares authorized;
$25 par value, 12,000,000 preferred shares authorized
Subject to mandatory redemption:
$100 par $9.375_____________________________ 50,200 $100.99 5 7
Less: Current maturities 2 2
------ ------
Total Preferred Stock, with Mandatory
Redemption Provisions__________________________________ 3 5
------ ------
Not subject to mandatory redemption:
$100 par $4.25 ______________________________ 160,000 104.625 16 16
4.56 ______________________________ 50,000 101.00 5 5
4.25 ______________________________ 100,000 102.00 10 10
8.32 ______________________________ 100,000 102.46 10 10
7.76 ______________________________ 150,000 102.437 15 15
7.80 ______________________________ 150,000 101.65 15 15
10.00______________________________ 190,000 101.00 19 19
25 par 2.21 ______________________________ 1,000,000 25.25 25 25
2.365______________________________ 1,400,000 27.75 35 35
Series A Adjustable _______________ 1,200,000 25.00 30 30
Series B Adjustable _______________ 1,200,000 25.00 30 30
------ ------
Total Preferred Stock, without Mandatory
Redemption Provisions 210 210
------ ------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
LONG-TERM DEBT:
First mortgage bonds:
6.125% due 1997 __________________________________________________________________________ 31 31
7.250% due 1999 __________________________________________________________________________ 85 100
7.500% due 2002 __________________________________________________________________________ 26 26
8.000% due 2003 __________________________________________________________________________ 36 36
7.875% due 2004 __________________________________________________________________________ 145 145
------ ------
323 338
------ ------
Tax-exempt issues secured by first mortgage bonds:
10.000% due 1998__________________________________________________________________________ 1 1
3.700% due 2011**________________________________________________________________________ 31 31
8.000% due 2019__________________________________________________________________________ 67 67
7.625% due 2020__________________________________________________________________________ 45 45
7.750% due 2020__________________________________________________________________________ 54 54
7.400% due 2022__________________________________________________________________________ 31 31
9.875% due 2022***_______________________________________________________________________ 10 10
7.550% due 2023__________________________________________________________________________ 37 37
6.875% due 2023__________________________________________________________________________ 20 20
8.000% due 2023__________________________________________________________________________ 50 50
------ ------
346 346
------ ------
</TABLE>
The accompanying notes are an integral part of this statement.
F-43
<PAGE> 110
STATEMENT OF CAPITALIZATION (CONTINUED)
<TABLE>
<CAPTION>
December 31,
-----------------
1996 1995
------ ------
(millions of
dollars)
<S> <C> <C>
LONG-TERM DEBT: (CONTINUED)
Medium-term notes secured by first mortgage bonds:
9.050% due 1996 ___________________________________________________________________ -- 10
9.000% due 1996 ___________________________________________________________________ -- 3
9.300% due 1998 ___________________________________________________________________ 26 26
8.000% due 1998 ___________________________________________________________________ 7 7
7.940% due 1998 ___________________________________________________________________ 5 5
8.470% due 1999 ___________________________________________________________________ 4 4
7.720% due 1999 ___________________________________________________________________ 15 15
7.500% due 2000 ___________________________________________________________________ * *
7.380% due 2000 ___________________________________________________________________ 14 14
7.460% due 2000 ___________________________________________________________________ 17 17
9.500% due 2001 ___________________________________________________________________ 21 21
8.500% due 2001 ___________________________________________________________________ 8 8
8.620% due 2002 ___________________________________________________________________ 7 7
8.650% due 2002 ___________________________________________________________________ 5 5
8.180% due 2002 ___________________________________________________________________ 17 17
7.820% due 2003 ___________________________________________________________________ 37 37
7.850% due 2003 ___________________________________________________________________ 15 15
7.760% due 2003 ___________________________________________________________________ 5 5
7.910% due 2003 ___________________________________________________________________ 3 3
7.780% due 2003 ___________________________________________________________________ 1 1
10.000% due 2021 ___________________________________________________________________ 15 15
9.220% due 2021 ___________________________________________________________________ 15 15
------ ------
237 250
Tax-exempt notes: ------ ------
5.750% due 2003 ___________________________________________________________________ 4 4
10.000% due 2010 ___________________________________________________________________ 1 1
------ ------
5 5
------ ------
Bank loans secured by subordinate mortgage:
9.050% due 1996 ___________________________________________________________________ -- 25
7.500% due 1996 ___________________________________________________________________ -- 2
------ ------
-- 27
------ ------
Notes secured by subordinate mortgage:
10.060% due 1996 ___________________________________________________________________ -- 14
8.750% due 1997 ___________________________________________________________________ 8 11
------ ------
8 25
------ ------
Debentures:
8.700% due 2002 ___________________________________________________________________ 135 135
------ ------
Unamortized premium (discount), net __________________________________________________ (2) (2)
------ ------
1,052 1,124
Less: Current maturities ___________________________________________________________ 49 56
------ ------
Total Long-Term Debt _____________________________________________________________ 1,003 1,068
------ ------
TOTAL CAPITALIZATION__________________________________________________________________ $2,019 $2,046
====== ======
<FN>
- ---------------
* Denotes debt of less than $1 million.
** Denotes variable rate issue with December 31, 1996 interest rate shown.
*** Subject to optional tender by the owners on November 1, 1997.
</TABLE>
F-44
<PAGE> 111
NOTES TO THE FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) GENERAL
The Company is an electric utility serving Northwest Ohio and a wholly owned
subsidiary of Centerior Energy. The Company follows the Uniform System of
Accounts prescribed by the FERC and adopted by the PUCO. Rate-regulated
utilities are subject to SFAS 71 which governs accounting for the effects of
certain types of rate regulation. Pursuant to SFAS 71, certain incurred costs
are deferred for recovery in future rates. See Note 7(a).
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
the disclosure of contingent assets and liabilities. The estimates are based on
an analysis of the best information available. Actual results could differ from
those estimates.
The Company is a member of the Central Area Power Coordination Group (CAPCO).
Other members are Cleveland Electric, Duquesne Light Company, Ohio Edison and
its wholly owned subsidiary, Pennsylvania Power Company. The members have
constructed and operate generation and transmission facilities for their joint
use.
(B) RELATED PARTY TRANSACTIONS
Operating revenues, operating expenses and interest charges include those
amounts for transactions with affiliated companies in the ordinary course of
business operations.
The Company's transactions with Cleveland Electric are primarily for firm power,
interchange power, transmission line rentals and jointly owned power plant
operations and construction. See Notes 2 and 3. As discussed in Note 1(j),
beginning in May 1996, Cleveland Electric's wholly owned subsidiary, Centerior
Funding, began serving as the transferor in connection with the accounts
receivable securitization for the Company and Cleveland Electric.
Centerior Service Company (Service Company), a wholly owned subsidiary of
Centerior Energy, provides management, financial, administrative, engineering,
legal and other services at cost to the Company and other affiliated companies.
The Service Company billed the Company $60 million, $67 million and $59 million
in 1996, 1995 and 1994, respectively, for such services.
(C) REVENUES
Customers are billed on a monthly cycle basis for their energy consumption based
on rate schedules or contracts authorized by the PUCO or on ordinances of
individual municipalities. An accrual is made at the end of each month to record
the estimated amount of unbilled revenues for kilowatt-hours sold in the current
month but not billed by the end of that month.
A fuel factor is added to the base rates for electric service. This factor is
designed to recover from customers the costs of fuel and most purchased power.
It is reviewed and adjusted semiannually in a PUCO proceeding. See Management's
Financial Analysis -- Outlook-FirstEnergy Rate Plan.
(D) FUEL EXPENSE
The cost of fossil fuel is charged to fuel expense based on inventory usage. The
cost of nuclear fuel, including an interest component, is charged to fuel
expense based on the rate of consumption. Estimated future nuclear fuel disposal
costs are being recovered through base rates.
The Company defers the differences between actual fuel costs and estimated fuel
costs currently being recovered from customers through the fuel factor. This
matches fuel expenses with fuel-related revenues.
Owners of nuclear generating plants are assessed by the federal government for
the cost of decontamination and decommissioning of nuclear enrichment facilities
operated by the United States Department of Energy. The assessments are based
upon the amount of enrichment services used in prior years and cannot be imposed
for more than 15 years (to 2007). The Company has accrued a liability for its
share of the total assessments. These costs have been recorded as a regulatory
asset since the PUCO is allowing the Company to recover the assessments through
its fuel cost factors. See Note 7(a).
(E) DEPRECIATION AND DECOMMISSIONING
The cost of property, plant and equipment is depreciated over their estimated
useful lives on a straight-line basis. In its April 1996 rate order, the PUCO
approved changes in depreciation rates for the Company. An increase in the
depreciation rate for nuclear property from 2.5% to 2.95% increased annual
depreciation expense approximately $8 million. A reduction in the composite
depreciation rate for nonnuclear property from 3.36% to 3.13% decreased annual
depreciation expense by approximately $2 million. The changes in depreciation
rates were effective in April 1996 and resulted in a $4 million net increase in
1996 depreciation expense.
F-45
<PAGE> 112
The Company accrues the estimated costs of decommissioning its three nuclear
generating units. The accruals are required to be funded in an external trust.
The PUCO requires that the expense and payments to the external trusts be
determined on a levelized basis by dividing the unrecovered decommissioning
costs in current dollars by the remaining years in the licensing period of each
unit. This methodology requires that the net earnings on the trusts be
reinvested therein with the intent of having net earnings offset inflation. The
PUCO requires that the estimated costs of decommissioning and the funding level
be reviewed at least every five years.
In April 1996, pursuant to the PUCO rate order, the Company decreased its annual
decommissioning expense accruals to $10 million from the $11 million level in
1995. The accruals are reflected in current rates. The accruals are based on
adjustments to updated, site-specific studies for each of the units completed in
1993 and 1994. These estimates reflect the DECON method of decommissioning
(prompt decontamination), and the locations and cost characteristics specific to
the units, and include costs associated with decontamination and dismantlement
for each of the units. The estimate for Davis-Besse also includes the cost of
site restoration. The adjustments to the updated studies which reduced the
annual accruals beginning in April 1996 were attributable to changed assumptions
on radioactive waste burial cost estimates and the exclusion of site restoration
costs for Perry Unit 1 and Beaver Valley Unit 2. After the decommissioning of
these units in the future, the two plant sites may be usable for new power
production facilities or other industrial purposes.
The revised estimates for the units in current dollars and in dollars at the
time of license expiration, assuming a 4% annual inflation rate, are as follows:
<TABLE>
<CAPTION>
License
Expiration Future
Generating Unit Year Amount Amount
- ------------------------------- ---------- ------ ------
(millions of
dollars)
<S> <C> <C> <C>
Davis-Besse______________________ 2017 $166 $427
Perry Unit 1_____________________ 2026 85 309
Beaver Valley Unit 2_____________ 2027 44 165
---- ----
Total______________________ $295 $901
==== ====
</TABLE>
The classification, Accumulated Depreciation and Amortization, in the Balance
Sheet at December 31, 1996 includes $71 million of decommissioning costs
previously expensed and the earnings on the external trust funding. This amount
exceeds the Balance Sheet amount of the external Nuclear Plant Decommissioning
Trusts because the reserve began prior to the external trust funding. The trust
earnings are recorded as an increase to the trust assets and the related
component of the decommissioning reserve (included in Accumulated Depreciation
and Amortization).
The staff of the Securities and Exchange Commission
has questioned certain of the current accounting practices of the electric
utility industry, including those of the Company, regarding the recognition,
measurement and classification of decommissioning costs for nuclear generating
stations in the financial statements. In response to these questions, the
Financial Accounting Standards Board (FASB) is reviewing the accounting for
removal costs, including decommissioning. If current accounting practices are
changed, the annual provision for decommissioning could increase; the estimated
cost for decommissioning could be recorded as a liability rather than as
accumulated depreciation; and trust fund income from the external
decommissioning trusts could be reported as investment income rather than as a
reduction to decommissioning expense. The FASB issued an exposure draft on the
subject on February 7, 1996 and continues to review the subject.
(F) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at original cost less amounts
disallowed by the PUCO. Construction costs include related payroll taxes,
retirement benefits, fringe benefits, management and general overheads and
allowance for funds used during construction (AFUDC). AFUDC represents the
estimated composite debt and equity cost of funds used to finance construction.
This noncash allowance is credited to income. The AFUDC rate was 10.12% in 1996,
12.6% in 1995 and 9.87% in 1994.
Maintenance and repairs for plant and equipment are charged to expense as
incurred. The cost of replacing plant and equipment is charged to the utility
plant accounts. The cost of property retired plus removal costs, after deducting
any salvage value, is charged to the accumulated provision for depreciation.
(G) DEFERRED GAIN AND LOSS FROM SALES OF UTILITY PLANT
The sale and leaseback transactions discussed in Note 2 resulted in a net gain
for the sale of the Bruce Mansfield Generating Plant (Mansfield Plant) and a net
loss for the sale of Beaver Valley Unit 2. The net gain and net loss were
deferred and are being amortized over the terms of the leases. See Note 7(a).
These amortizations and the lease expense amounts are reported in the Income
Statement as Generation Facilities Rental Expense, Net.
F-46
<PAGE> 113
(H) INTEREST CHARGES
Debt Interest reported in the Income Statement does not include interest on
obligations for nuclear fuel under construction. That interest is capitalized.
See Note 6.
Losses and gains realized upon the reacquisition or redemption of long-term debt
are deferred, consistent with the regulatory rate treatment. See Note 7(a). Such
losses and gains are either amortized over the remainder of the original life of
the debt issue retired or amortized over the life of the new debt issue when the
proceeds of a new issue are used for the debt redemption. The amortizations are
included in debt interest expense.
(I) FEDERAL INCOME TAXES
The Company uses the liability method of accounting for income taxes in
accordance with SFAS 109. See Note 8. This method requires that deferred taxes
be recorded for all temporary differences between the book and tax bases of
assets and liabilities. The majority of these temporary differences are
attributable to property-related basis differences. Included in these basis
differences is the equity component of AFUDC, which will increase future tax
expense when it is recovered through rates. Since this component is not
recognized for tax purposes, the Company must record a liability for its tax
obligation. The PUCO permits recovery of such taxes from customers when they
become payable. Therefore, the net amount due from customers through rates has
been recorded as a regulatory asset and will be recovered over the lives of the
related assets. See Note 7(a).
Investment tax credits are deferred and amortized over the lives of the
applicable property as a reduction of depreciation expense.
(J) ACCOUNTS RECEIVABLE SECURITIZATION
In May 1996, the Company and Cleveland Electric began to sell on a daily basis
substantially all of their retail customer accounts receivable and unbilled
revenue receivables to Centerior Funding pursuant to a five-year asset-backed
securitization agreement.
In July 1996, Centerior Funding completed a public sale of $150 million of
receivables-backed investor certificates in a transaction that qualifies for
sale accounting treatment for financial reporting purposes.
(K) MATERIALS AND SUPPLIES
In December 1996, the Company sold substantially all of its materials and
supplies and fossil fuel inventories for certain generating units and other
storage locations to an independent entity at book value. The buyer now provides
all of these inventories under a consignment arrangement. In accordance with
SFAS 49 accounting for product financing arrangements, the inventories continue
to be reported as assets in the Balance Sheet even though the buyer owns the
inventories since the Company has guaranteed to be a buyer of last resort.
(2) UTILITY PLANT SALE AND LEASEBACK TRANSACTIONS
The Company and Cleveland Electric are co-lessees of 18.26% (150 megawatts) of
Beaver Valley Unit 2 and 6.5% (51 megawatts), 45.9% (358 megawatts) and 44.38%
(355 megawatts) of Units 1, 2 and 3 of the Mansfield Plant, respectively. These
leases extend through 2017 and are the result of sale and leaseback transactions
completed in 1987.
Under these leases, the Company and Cleveland Electric are responsible for
paying all taxes, insurance premiums, operation and maintenance expenses, and
all other similar costs for their interests in the units sold and leased back.
They may incur additional costs in connection with capital improvements to the
units. The Company and Cleveland Electric have options to buy the interests back
at certain times at a premium and at the end of the leases for the fair market
value at that time or to renew the leases. The leases include conditions for
mandatory termination (and possible repurchase of the leasehold interests) upon
certain events of default.
As co-lessee with Cleveland Electric, the Company is also obligated for
Cleveland Electric's lease payments. If Cleveland Electric is unable to make its
payments under the Mansfield Plant leases, the Company would be obligated to
make such payments. No such payments have been made on behalf of Cleveland
Electric.
Future minimum lease payments under the operating leases at December 31, 1996
are summarized as follows:
<TABLE>
<CAPTION>
For For
the Cleveland
Year Company Electric
- -------------------------------------- ------- ---------
(millions of dollars)
<S> <C> <C>
1997_________________________________ $ 102 $ 63
1998_________________________________ 102 63
1999_________________________________ 108 70
2000_________________________________ 111 76
2001_________________________________ 111 75
Later Years 1,696 1,170
------ ------
Total Future Minimum Lease
Payments_____________________ $2,230 $ 1,517
====== =======
</TABLE>
Rental expense is accrued on a straight-line basis over the terms of the leases.
The amount recorded in 1996, 1995 and 1994 as annual rental expense for the
Mansfield Plant leases was $45 million. The amounts recorded in 1996,
F-47
<PAGE> 114
1995 and 1994 as annual rental expense for the Beaver Valley Unit 2 lease were
$63 million, $63 million and $64 million, respectively. See Note 1(g). Amounts
charged to expense in excess of the lease payments are classified as Accumulated
Deferred Rents in the Balance Sheet.
The Company is selling 150 megawatts of its Beaver Valley Unit 2 leased capacity
entitlement to Cleveland Electric. Revenues recorded for this transaction were
$99 million, $98 million and $108 million in 1996, 1995 and 1994, respectively.
We anticipate that this sale will continue indefinitely. The future minimum
lease payments through 2017 associated with Beaver Valley Unit 2 aggregate
$1.265 billion.
(3) PROPERTY OWNED WITH OTHER UTILITIES AND INVESTORS
The Company owns, as a tenant in common with other utilities and those investors
who are owner-participants in various sale and leaseback transactions (Lessors),
certain generating units as listed below. Each owner owns an undivided share in
the entire unit. Each owner has the right to a percentage of the generating
capability of each unit equal to its ownership share. Each utility owner is
obligated to pay for only its respective share of the construction costs and
operating expenses. Each Lessor has leased its capacity rights to a utility
which is obligated to pay for such Lessor's share of the construction costs and
operating expenses. The Company's share of the operating expenses of these
generating units is included in the Income Statement. The Balance Sheet
classification of Property, Plant and Equipment at December 31, 1996 includes
the following facilities owned by the Company as a tenant in common with other
utilities and Lessors:
<TABLE>
<CAPTION>
Property,
Plant and
Ownership Equipment
Megawatts (Exclusive of Accumulated
Generating Unit (% Share) Nuclear Fuel) Depreciation
- ------------------------ ---------- ------------- -----------
(millions of dollars)
<S> <C> <C> <C>
Davis-Besse_____________ 429 (48.62%) $ 685 $ 235
Perry Unit 1____________ 238 (19.91) 1,048 244
Beaver Valley Unit 2 and
Common Facilities
(Note 2)________________ 13 (1.65) 209 58
------- -----
Total_____________ $ 1,942 $ 537
======= =====
</TABLE>
(4) CONSTRUCTION AND CONTINGENCIES
(A) CONSTRUCTION PROGRAM
The estimated cost of the Company's construction program for the 1997-2001
period is $282 million, including AFUDC of $8 million and excluding nuclear
fuel.
The Clean Air Act Amendments of 1990 (Clean Air Act) require, among other
things, significant reductions in the emission of sulfur dioxide and nitrogen
oxides by fossil-fueled generating units. Our strategy provides for compliance
primarily through greater use of low-sulfur coal at some of our units and the
use of emission allowances. Total capital expenditures from 1994 through 1996 in
connection with Clean Air Act compliance amounted to $4 million. The plan will
require additional capital expenditures over the 1997-2006 period of
approximately $16 million for nitrogen oxide control equipment and other plant
process modifications. In addition, higher fuel and other operation and
maintenance expenses will be incurred. Recently proposed particulate and ozone
ambient standards have the potential to increase future compliance costs.
(B) HAZARDOUS WASTE DISPOSAL SITES
The Company is aware of its potential involvement in the cleanup of several
sites. The Company has accrued a liability totaling $3 million at December 31,
1996 based on estimates of the costs of cleanup and its proportionate
responsibility for such costs. We believe that the ultimate outcome of these
matters will not have a material adverse effect on our financial condition, cash
flows or results of operations. See Management's Financial Analysis --
Outlook-Hazardous Waste Disposal Sites.
(5) NUCLEAR OPERATIONS AND CONTINGENCIES
(A) OPERATING NUCLEAR UNITS
The Company's three nuclear units may be impacted by activities or events beyond
our control. An extended outage of one of our nuclear units for any reason,
coupled with any unfavorable rate treatment, could have a material adverse
effect on our financial condition, cash flows and results of operations. See the
discussion of these and other risks in Management's Financial
Analysis -- Outlook-Nuclear Operations.
(B) NUCLEAR INSURANCE
The Price-Anderson Act limits the public liability of the owners of a nuclear
power plant to the amount provided by private insurance and an industry
assessment plan. In the event of a nuclear incident at any unit in the United
States resulting in losses in excess of the level of private insurance
(currently $200 million), the Company's maximum potential assessment under that
plan would be $70 million per incident. The assessment is limited to $9 million
per year for each nuclear incident. These assessment limits assume the other
CAPCO companies
F-48
<PAGE> 115
contribute their proportionate share of any assessment for the generating units
that they have an ownership or leasehold interest in.
The utility owners and lessees of Davis-Besse, Perry and Beaver Valley also have
insurance coverage for damage to property at these sites (including leased fuel
and cleanup costs). Coverage amounted to $1.3 billion for Davis-Besse and $2.75
billion for each of the Perry and Beaver Valley sites as of January 1, 1997.
Damage to property could exceed the insurance coverage by a substantial amount.
If it does, the Company's share of such excess amount could have a material
adverse effect on its financial condition, cash flows and results of operations.
In addition, the Company can be assessed a maximum of $10 million under these
policies during a policy year if the reserves available to the insurer are
inadequate to pay claims arising out of an accident at any nuclear facility
covered by the insurer.
The Company also has extra expense insurance coverage. It includes the
incremental cost of any replacement power purchased (over the costs which would
have been incurred had the units been operating) and other incidental expenses
after the occurrence of certain types of accidents at our nuclear units. The
amounts of the coverage are 100% of the estimated extra expense per week during
the 52-week period starting 21 weeks after an accident and 80% of such estimate
per week for the next 104 weeks. The amount and duration of extra expense could
substantially exceed the insurance coverage.
(6) NUCLEAR FUEL
Nuclear fuel is financed for the Company and Cleveland Electric through leases
with a special-purpose corporation. The total amount of financing currently
available under these lease arrangements is $273 million ($173 million from
intermediate-term notes and $100 million from bank credit arrangements). The
intermediate-term notes mature in the 1997 through 2000 period. The bank credit
arrangements terminate in October 1998. The special-purpose corporation may not
need alternate financing in 1997 to replace $83 million of maturing
intermediate-term notes. At December 31, 1996, $87 million of nuclear fuel was
financed for the Company. The Company and Cleveland Electric severally lease
their respective portions of the nuclear fuel and are obligated to pay for the
fuel as it is consumed in a reactor. The lease rates are based on various
intermediate-term note rates, bank rates and commercial paper rates.
The amounts financed include nuclear fuel in the Davis-Besse, Perry Unit 1 and
Beaver Valley Unit 2 reactors with remaining lease payments for the Company of
$43 million, $26 million and $14 million, respectively, at December 31, 1996.
The nuclear fuel amounts financed and capitalized also included interest charges
incurred by the lessors amounting to $2 million in both 1996 and 1995, and $4
million in 1994. The estimated future lease amortization payments for the
Company based on projected consumption are $36 million in 1997, $29 million in
both 1998 and 1999, $27 million in 2000 and $28 million in 2001.
(7) REGULATORY MATTERS
(A) REGULATORY ACCOUNTING REQUIREMENTS AND REGULATORY ASSETS
The Company is subject to the provisions of SFAS 71 and has complied with its
provisions. SFAS 71 provides, among other things, for the deferral of certain
incurred costs that are probable of future recovery in rates. We monitor changes
in market and regulatory conditions and consider the effects of such changes in
assessing the continuing applicability of SFAS 71. Criteria that could give rise
to discontinuation of the application of SFAS 71 include: (1) increasing
competition which significantly restricts the Company's ability to charge prices
which allow it to recover operating costs, earn a fair return on invested
capital and recover the amortization of regulatory assets and (2) a significant
change in the manner in which rates are set by the PUCO from cost-based
regulation to some other form of regulation. Regulatory assets represent
probable future revenues to the Company associated with certain incurred costs,
which it will recover from customers through the rate-making process.
Effective January 1, 1996, the Company adopted SFAS 121 which imposes stricter
criteria for carrying regulatory assets than SFAS 71 by requiring that such
assets be probable of recovery at each balance sheet date. The criteria under
SFAS 121 for plant assets require such assets to be written down if the book
value exceeds the projected net future undiscounted cash flows.
F-49
<PAGE> 116
Regulatory assets in the Balance Sheet are as follows:
<TABLE>
<CAPTION>
December 31,
--------------
1996 1995
---- ----
(millions of
dollars)
<S> <C> <C>
Amounts due from customers for future
federal income taxes, net_________________ $391 $416
Unamortized loss from Beaver Valley
Unit 2 sale_______________________________ 92 96
Unamortized loss on reacquired debt_________ 24 28
Pre-phase-in deferrals*_____________________ 215 222
Rate Stabilization Program deferrals________ 180 188
Other_______________________________________ 26 28
---- ----
Total___________________________________ $928 $978
==== ====
</TABLE>
* Represent deferrals of operating expenses and carrying charges for Perry Unit
1 and Beaver Valley Unit 2 in 1987 and 1988 which are being amortized over the
lives of the related property.
As of December 31, 1996, customer rates provide for recovery of all the above
regulatory assets. The remaining recovery periods for about $740 million of the
regulatory assets approximate 30 years. The remaining recovery periods for the
rest of the regulatory assets generally range from about two to 20 years.
Regulatory liabilities in the Balance Sheet at December 31, 1996 and 1995
totaled $13 million and $4 million, respectively.
(B) RATE ORDER
On April 11, 1996, the PUCO issued an order for the Company and Cleveland
Electric granting price increases aggregating $119 million in annualized
revenues ($35 million for the Company and $84 million for Cleveland Electric).
The PUCO rate order provided for recovery of all costs to provide regulated
services, including amortization of regulatory assets, in the approved prices.
The new prices were implemented in late April 1996. The average price increase
for the Company's customers was 4.7% with the actual percentage increase
depending upon the customer class. The Company and Cleveland Electric intend to
freeze prices through at least 2002, although they are not precluded from
requesting further price increases.
The PUCO also recommended that the Company and Cleveland Electric reduce the
value of their assets for regulatory purposes by an aggregate $1.25 billion
through 2001. This represents an incremental reduction beyond the normal level
in nuclear plant and regulatory assets. Implementation of the price increases
was not contingent upon a revaluation of assets. The PUCO invited the Company
and Cleveland Electric to file a proposal to effectuate the PUCO's
recommendation and expressed a willingness to consider alternatives to its
recommendation. The PUCO stated in its order that failure by the Company and
Cleveland Electric to follow the recommendation could result in a PUCO-ordered
write-down of assets for regulatory purposes. The PUCO approved a
return on common stock equity of 12.59% and an overall rate of return of 10.06%
for both companies. However, the PUCO also indicated the authorized return could
be lowered by the PUCO if the Company and Cleveland Electric do not implement
the recommendation. In August 1996, various intervenors appealed the PUCO rate
order to the Ohio Supreme Court. The Company and Cleveland Electric did not
appeal the order to the Ohio Supreme Court. In connection with the PUCO order
discussed in Management's Financial Analysis -- Outlook-FirstEnergy Rate Plan,
certain parties agreed to request a stay of their appeals until completion of
the pending merger with Ohio Edison.
(C) ASSESSMENT
The Company and Cleveland Electric agree with the concept of accelerating the
recognition of costs and recovery of assets as such concept is consistent with
the strategic objective to become more competitive. However, the Company and
Cleveland Electric believe that such acceleration must also be consistent with
the reduction of debt and the opportunity for Centerior Energy common stock
share owners to receive a fair return on their investment. Consideration of
whether to implement a plan responsive to the PUCO's recommendation to revalue
assets by $1.25 billion is pending the merger with Ohio Edison.
We have evaluated the Company's markets, regulatory conditions and ability to
bill and collect the approved prices, and conclude that the Company continues to
comply with the provisions of SFAS 71 and its regulatory assets remain probable
of recovery. If there is a change in our evaluation of the competitive
environment, regulatory framework or other factors, or if the PUCO significantly
reduces the value of the Company's assets or reduces the approved return on
common stock equity of 12.59% and overall rate of return of 10.06%, or both, for
future regulatory purposes, the Company may be required to record material
charges to earnings. In particular, if we determine that the Company no longer
meets the criteria for SFAS 71, the Company would be required to record a
before-tax charge to write off the regulatory assets shown above. In the more
likely event that only a portion of operations (such as nuclear operations) no
longer meets the criteria of SFAS 71, a write-off would be limited to regulatory
assets that are not reflected in the Company's cost-based prices established for
the remaining regulated operations. In addition, we would be required to
evaluate whether the changes in the competitive and regulatory environment which
led to discontinuing the application of
F-50
<PAGE> 117
SFAS 71 to some or all of the Company's operations would also result in a
write-down of property, plant and equipment pursuant to SFAS 121.
See Management's Financial Analysis -- Outlook-FirstEnergy Rate Plan for a
discussion of a regulatory plan for the Company and Cleveland Electric and its
effect on their compliance with SFAS 71.
(D) RATE STABILIZATION PROGRAM
The Rate Stabilization Program that the PUCO approved in October 1992 allowed
the Company to defer and subsequently amortize and recover certain costs not
being recovered in rates at that time. Recovery of both the costs no longer
being deferred and the amortization of the 1992-1995 deferrals began in late
April 1996 with the implementation of the price increase granted by the PUCO as
discussed above. The cost deferrals recorded in 1995 and 1994 pursuant to the
Rate Stabilization Program were $39 million and $43 million, respectively. The
amortization of the deferrals began in December 1995. The total amortization was
$8 million and $1 million in 1996 and 1995, respectively.
The regulatory accounting measures under the Rate Stabilization Program also
provided for the accelerated amortization of certain benefits during the
1992-1995 period. The total annual amount of such accelerated benefits was $18
million in both 1995 and 1994.
(8) FEDERAL INCOME TAX
The components of federal income tax expense recorded in the Income Statement
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(millions of
dollars)
<S> <C> <C> <C>
Operating Expenses:
Current__________________________ $ 23 $ 40 $ 18
Deferred_________________________ 13 2 15
---- ---- ----
Total Charged to Operating
Expenses_____________________ 36 42 33
---- ---- ----
Nonoperating Income:
Current__________________________ (10) (12) (29)
Deferred_________________________ 5 14 31
---- ---- ----
Total Expense (Credit) to
Nonoperating Income__________ (5) 2 2
---- ---- ----
Total Federal Income Tax Expense___ $ 31 $ 44 $ 35
==== ==== ====
</TABLE>
The deferred federal income tax expense results from the temporary differences
that arise from the different years when certain expenses are recognized for tax
purposes as opposed to financial reporting purposes. Such temporary differences
relate principally to depreciation and deferred operating expenses and carrying
charges.
Federal income tax, computed by multiplying income before taxes by the 35%
statutory rate, is reconciled to the amount of federal income tax recorded on
the books as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(millions of
dollars)
<S> <C> <C> <C>
Book Income Before Federal Income Tax__ $88 $141 $117
--- --- ----
Tax on Book Income at Statutory Rate___ $31 $ 49 $ 41
Increase (Decrease) in Tax:
Depreciation_________________________ (4) (1) (3)
Rate Stabilization Program___________ -- (9) (9)
Sale and leaseback transactions and
amortization_______________________ 5 5 5
Other items__________________________ (1) -- 1
--- --- ----
Total Federal Income Tax Expense_______ $31 $ 44 $ 35
=== ==== ====
</TABLE>
The Company joins in the filing of a consolidated federal income tax return with
its affiliated companies. The method of tax allocation reflects the benefits and
burdens realized by each company's participation in the consolidated tax return,
approximating a separate return result for each company.
For tax reporting purposes, the Perry Nuclear Power Plant Unit 2 (Perry Unit 2)
abandonment was recognized in 1994 and resulted in a $122 million loss with a
corresponding $43 million reduction in federal income tax liability. Because of
the alternative minimum tax (AMT), $25 million of the $43 million was realized
in 1994. The remaining $18 million will not be realized until 1999.
Under SFAS 109, temporary differences and carryforwards resulted in deferred tax
assets of $162 million and deferred tax liabilities of $728 million at December
31, 1996 and deferred tax assets of $179 million and deferred tax liabilities of
$752 million at December 31, 1995. These are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------
1996 1995
---- ----
(millions of
dollars)
<S> <C> <C>
Property, plant and equipment________________ $612 $627
Deferred carrying charges and operating
expenses___________________________________ 84 85
Net operating loss carryforwards_____________ (18) (44)
Investment tax credits_______________________ (44) (46)
Sale and leaseback transactions______________ -- (4)
Other________________________________________ (68) (45)
---- ----
Net deferred tax liability_______________ $566 $573
==== ====
</TABLE>
For tax purposes, net operating loss (NOL) carryforwards of approximately $51
million are available to reduce future taxable income and will expire in 2009.
The 35% tax effect of the NOLs is $18 million. Additionally, AMT credits of $100
million that may be carried forward indefinitely are available to reduce future
tax.
(9) RETIREMENT BENEFITS
(A) RETIREMENT INCOME PLAN
Centerior Energy sponsors jointly with its subsidiaries a noncontributing
pension plan (Centerior Pension Plan) which covers all employee groups. The
amount of retire-
F-51
<PAGE> 118
ment benefits generally depends upon the length of service. Under certain
circumstances, benefits can begin as early as age 55. The funding policy is to
comply with the Employee Retirement Income Security Act of 1974 guidelines.
Pension costs (credits) for Centerior Energy and its subsidiaries for 1994
through 1996 were comprised of the following components:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(millions of
dollars)
<S> <C> <C> <C>
Service cost for benefits earned during
the period_________________________ $ 13 $ 10 $ 13
Interest cost on projected benefit
obligation_________________________ 28 26 26
Actual return on plan assets_________ (50) (53) (2)
Net amortization and deferral________ 2 9 (34)
---- ---- ----
Net costs (credits)________________ $ (7) $ (8) $ 3
==== ==== ====
</TABLE>
Pension costs (credits) for the Company and its pro rata share of the Service
Company's costs were $(2) million, $(3) million and $1 million for 1996, 1995
and 1994, respectively.
The following table presents a reconciliation of the funded status of the
Centerior Pension Plan. The Company's share of the Centerior Pension Plan's
total projected benefit obligation approximates 30%.
<TABLE>
<CAPTION>
December 31,
-------------
1996 1995
---- ----
(millions of
dollars)
<S> <C> <C>
Actuarial present value of benefit
obligations:
Vested benefits_______________________ $326 $304
Nonvested benefits____________________ 16 2
---- ----
Accumulated benefit obligation______ 342 306
Effect of future compensation levels__ 53 54
---- ----
Total projected benefit obligation__ 395 360
Plan assets at fair market value________ 421 394
---- ----
Funded status_______________________ 26 34
Unrecognized net gain from variance between
assumptions and experience____________ (56) (68)
Unrecognized prior service cost_________ 14 15
Transition asset at January 1, 1987 being
amortized over 19 years_______________ (32) (36)
---- ----
Net accrued pension liability_______ $(48) $(55)
==== ====
</TABLE>
A September 30 measurement date was used for 1996 and 1995 reporting. At
December 31, 1996, the settlement (discount) rate and long-term rate of return
on plan assets assumptions were 7.75% and 11%, respectively. The long-term rate
of annual compensation increase assumption was 3.5% for 1997 and 4% thereafter.
At December 31, 1995, the settlement rate and long-term rate of return on plan
assets assumptions were 8% and 11%, respectively. The long-term rate of annual
compensation increase assumption was 3.5% for 1996 and 1997 and 4% thereafter.
At December 31, 1996 and 1995, the Company's net accrued pension liability
included in Retirement Benefits in the Balance Sheet was $62 million and $64
million, respectively.
Plan assets consist primarily of investments in common stock, bonds, guaranteed
investment contracts, cash equivalent securities and real estate.
(B) OTHER POSTRETIREMENT BENEFITS
Centerior Energy sponsors jointly with its subsidiaries a postretirement benefit
plan which provides all employee groups certain health care, death and other
postretirement benefits other than pensions. The plan is contributory, with
retiree contributions adjusted annually. The plan is not funded. Under SFAS 106,
the accounting standard for postretirement benefits other than pensions, the
expected costs of such benefits are accrued during the employees' years of
service.
The components of the total postretirement benefit costs for 1994 through 1996
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(millions of
dollars)
<S> <C> <C> <C>
Service cost for benefits earned during
the period____________________________ $1 $ 1 $ 1
Interest cost on accumulated
postretirement benefit obligation_____ 6 7 7
Amortization of transition obligation
at January 1, 1993 of $63 million
over 20 years_________________________ 2 2 3
--
--- ---
Total costs___________________________ $9 $10 $11
== === ===
</TABLE>
These amounts included costs for the Company and its pro rata share of the
Service Company's costs.
The accumulated postretirement benefit obligation and accrued postretirement
benefit cost for the Company and its share of the Service Company's obligation
are as follows:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
(millions of
dollars)
<S> <C> <C>
Accumulated postretirement benefit obligation
attributable to:
Retired participants_________________________ $(69) $(76)
Fully eligible active plan participants _____ (1) (1)
Other active plan participants_______________ (10) (9)
---- ----
Accumulated postretirement benefit
obligation_______________________________ (80) (86)
Unrecognized net gain from variance between
assumptions and experience___________________ (13) (9)
Unamortized transition obligation______________ 46 49
---- ----
Accrued postretirement benefit cost________ $(47) $(46)
==== ====
</TABLE>
The Balance Sheet classification of Retirement Benefits at December 31, 1996 and
1995 includes only the Company's accrued postretirement benefit cost of $40
million and $39 million, respectively, and excludes the Service Company's
portion since the Service Company's total accrued cost is carried on its books.
A September 30 measurement date was used for 1996 and 1995 reporting. At
December 31, 1996 and 1995, the settlement rate and the long-term rate of annual
compensation increase assumptions were the same as those dis-
F-52
<PAGE> 119
cussed for pension reporting in Note 9(a). At December 31, 1996, the assumed
annual health care cost trend rates (applicable to gross eligible charges) were
7.5% for medical and 7% for dental in 1997. Both rates reduce gradually to a
fixed rate of 4.75% by 2003. Elements of the obligation affected by contribution
caps are significantly less sensitive to the health care cost trend rate than
other elements. If the assumed health care cost trend rates were increased by
one percentage point in each future year, the accumulated postretirement benefit
obligation as of December 31, 1996 would increase by $3 million and the
aggregate of the service and interest cost components of the annual
postretirement benefit cost would increase by $0.2 million.
(10) GUARANTEES
The Company has guaranteed certain loan and lease obligations of a coal supplier
under a long-term coal supply contract. At December 31, 1996, the principal
amount of the loan and lease obligations guaranteed by the Company under the
contract was $11 million.
The prices under the contract which includes certain minimum payments are
sufficient to satisfy the loan and lease obligations and mine closing costs over
the life of the contract. If the contract is terminated early for any reason,
the Company would attempt to reduce the termination charges and would ask the
PUCO to allow recovery of such charges from customers through the fuel factor.
See Management's Financial Analysis -- Outlook-FirstEnergy Rate Plan.
(11) CAPITALIZATION
(A) CAPITAL STOCK TRANSACTIONS
Preferred stock shares retired during the three years ended December 31, 1996
are listed in the following table.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(thousands of shares)
<S> <C> <C> <C>
Subject to Mandatory Redemption:
$100 par $9.375___________________ (17) (17) (17)
25 par 2.81____________________ -- (400) (800)
--- ---- ----
Total_________________________ (17) (417) (817)
=== ==== ====
</TABLE>
(B) EQUITY DISTRIBUTION RESTRICTIONS
Federal law prohibits the Company from paying dividends out of capital accounts.
The Company has since 1993 declared and paid preferred stock dividends out of
appropriated current net income included in retained earnings. At the times of
such declarations and payments, the Company had a deficit in its retained
earnings. At December 31, 1996, the Company had $223 million of appropriated
retained earnings for the payment of dividends. The Company also has a provision
in its mortgage applicable to approximately $94 million of outstanding first
mortgage bonds ($31 million of which mature in August 1997) that requires common
stock dividends to be paid out of its total balance of retained earnings, which
had been a deficit from 1993 through November 1996. At December 31, 1996, the
Company's total retained earnings were $5 million. See Management's Financial
Analysis -- Capital Resources and Liquidity-Liquidity.
(C) PREFERRED AND PREFERENCE STOCK
Amounts to be paid for preferred stock which must be redeemed during the next
five years are $1.665 million in each year 1997 through 1999 only.
The annual preferred stock mandatory redemption provisions are as follows:
<TABLE>
<CAPTION>
Shares Price
To Be Beginning Per
Redeemed in Share
-------- --------- -----
<S> <C> <C> <C>
$100 par $9.375____________________ 16,650 1985 $100
</TABLE>
The annualized preferred dividend requirement at December 31, 1996 was $17
million.
The preferred dividend rates on the Company's Series A and B fluctuate based on
prevailing interest rates and market conditions. The dividend rates for these
issues averaged 7.11% and 7.75%, respectively, in 1996.
Preference stock authorized for the Company is 5,000,000 shares with a $25 par
value. No preference shares are currently outstanding.
With respect to dividend and liquidation rights, the Company's preferred stock
is prior to its preference stock and common stock, and its preference stock is
prior to its common stock.
(D) LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS
Long-term debt which matures or is subject to put options during the next five
years is as follows: $49 million in 1997, $39 million in 1998, $104 million in
1999, $31 million in 2000 and $30 million in 2001.
The Company's mortgage constitutes a direct first lien on substantially all
property owned and franchises held by the Company. Excluded from the lien, among
other things, are cash, securities, accounts receivable, fuel, supplies and
automotive equipment.
Certain credit agreements of the Company contain covenants relating to fixed
charge coverage ratios and limitations on secured financing other than through
first mortgage bonds or certain other transactions. The Company was in
compliance with all such covenants as of December 31, 1996. The Company and
Cleveland Elec-
F-53
<PAGE> 120
tric have letters of credit in connection with the sale and leaseback of Beaver
Valley Unit 2 that expire in June 1999. The letters of credit are in an
aggregate amount of approximately $225 million and are secured by first mortgage
bonds of the Company and Cleveland Electric in the proportion of 60% and 40%,
respectively. At December 31, 1996, the Company had outstanding $8 million of
notes secured by subordinated mortgage collateral.
(12) SHORT-TERM BORROWING ARRANGEMENTS
Centerior Energy has a $125 million revolving credit facility through May 1997.
Centerior Energy and the Service Company may borrow under the facility, with all
borrowings jointly and severally guaranteed by the Company and Cleveland
Electric. Centerior Energy plans to transfer any of its borrowed funds to the
Company and Cleveland Electric. The credit agreement is secured with first
mortgage bonds of the Company and Cleveland Electric in the proportion of 60%
and 40%, respectively. The credit agreement also provides the participating
banks with a subordinate mortgage security interest on the properties of the
Company and Cleveland Electric. The banks' fee is 0.625% per annum payable
quarterly in addition to interest on any borrowings. There were no borrowings
under the facility at December 31, 1996. Also, the Company and Cleveland
Electric may borrow from each other on a short-term basis. At December 31, 1996,
the Company had outstanding $82 million of notes receivable from Cleveland
Electric with a weighted average interest rate of 6.18%.
(13) FINANCIAL INSTRUMENTS
The estimated fair values at December 31, 1996 and 1995 of financial instruments
that do not approximate their carrying amounts in the Balance Sheet are as
follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995
---------------- ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------ -------- ------
(millions of dollars)
<S> <C> <C> <C> <C>
Capitalization and Liabilities:
Long-Term Debt_____________ $1,054 $1,086 $1,126 $1,137
</TABLE>
Noncash investments in the Nuclear Plant Decommissioning Trusts are summarized
in the following table. In 1996, the Company and Cleveland Electric transferred
the bulk of their investment assets in existing trusts into Centerior Energy
pooled trust funds for the two companies. The December 31, 1996 amounts in the
table represent the Company's pro rata share of the fair value of such noncash
investments.
<TABLE>
<CAPTION>
December 31,
-------------
1996 1995
---- ----
(millions of
dollars)
<S> <C> <C>
Type of Securities:
Debt Securities:
Federal Government_____________________ $10 $21
Municipal______________________________ -- 11
Other__________________________________ 3 --
--- ---
13 32
Equity Securities________________________ 39 --
--- ---
Total________________________________ $52 $32
=== ===
Maturities of Debt Securities:
Due within one year______________________ $-- $ 1
Due in one to five years_________________ 7 9
Due in six to 10 years___________________ 3 11
Due after 10 years_______________________ 3 11
--- ---
Total $13 $32
==== ===
</TABLE>
The fair value of these trusts is estimated based on the quoted market prices
for the investment securities and approximates the carrying value. The fair
value of the Company's preferred stock, with mandatory redemption provisions,
and long-term debt is estimated based on the quoted market prices for the
respective or similar issues or on the basis of the discounted value of future
cash flows. The discounted value used current dividend or interest rates (or
other appropriate rates) for similar issues and loans with the same remaining
maturities.
The estimated fair values of all other financial instruments approximate their
carrying amounts in the Balance Sheet at December 31, 1996 and 1995 because of
their short-term nature.
(14) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly results of operations
for the two years ended December 31, 1996.
<TABLE>
<CAPTION>
Quarters Ended
----------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
--------- -------- --------- --------
(millions of dollars)
<S> <C> <C> <C> <C>
1996
Operating Revenues_______ $ 211 $211 $ 252 $223
Operating Income_________ 33 31 52 42
Net Income_______________ 3 8 28 18
Earnings (Loss)
Available for Common
Stock__________________ (1) 3 24 14
1995
Operating Revenues_______ $ 206 $215 $ 246 $206
Operating Income_________ 43 45 59 41
Net Income_______________ 20 22 33 22
Earnings Available for
Common Stock___________ 15 17 29 18
</TABLE>
Earnings for the quarter ended March 31, 1996 were decreased by $7 million as a
result of an $11 million write-down of the net book value of two inactive
production facilities. The write-down resulted from a decision that the
facilities are no longer expected to provide revenues.
Earnings for the quarter ended September 30, 1996 were decreased by $4 million
as a result of a $6 million charge
F-54
<PAGE> 121
for the disposition of materials and supplies inventory. The sale and disposal
of inventory was part of the reengineering of the supply chain process.
(15) PENDING MERGER OF CENTERIOR ENERGY AND OHIO EDISON
On September 13, 1996, Centerior Energy and Ohio Edison entered into an
agreement and plan of merger to form a new holding company, FirstEnergy.
Following the merger, FirstEnergy will directly hold all of the issued and
outstanding common stock of the Company, Cleveland Electric and Ohio Edison. As
a result of the merger, the common stock share owners of Centerior Energy and
Ohio Edison will own all of the issued and outstanding shares of FirstEnergy
common stock. Centerior Energy share owners will receive 0.525 of a share of
FirstEnergy common stock for each share of Centerior Energy common stock owned.
Ohio Edison share owners will receive one share of FirstEnergy common stock for
each share of Ohio Edison common stock owned.
FirstEnergy plans to account for the merger as a purchase in accordance with
generally accepted accounting principles. If FirstEnergy elects to apply, or
"push down", the effects of purchase accounting to the financial statements of
the Company and Cleveland Electric, the Company and Cleveland Electric would
record adjustments to: (1) reduce the carrying value of nuclear generating plant
by $1.25 billion to fair value; (2) recognize goodwill of $865 million; (3)
reduce common stock equity by $401 million; (4) reset retained earnings of the
Company and Cleveland Electric to zero; and (5) reduce the related deferred
federal income tax liability by $438 million. These amounts reflect
FirstEnergy's estimates of the pro forma combined adjustments for the Company
and Cleveland Electric as of September 30, 1996. The actual adjustments to be
recorded could be materially different from these estimates. FirstEnergy has not
decided whether to push down the effects of purchase accounting to the financial
statements of the Company and Cleveland Electric if the merger with Ohio Edison
is completed, nor has FirstEnergy estimated the allocations between the two
companies if push-down accounting is elected.
In addition to the approvals by the share owners of Centerior Energy and Ohio
Edison common stock, various aspects of the merger are subject to the approval
of the FERC and other regulatory authorities. A rate reduction and economic
development plan for the Company and Cleveland Electric has been approved by the
PUCO. From the date of consummation of the merger through 2006, the plan
provides for rate reductions, frozen fuel cost factors, economic development
incentive prices, an energy-efficiency program, an earnings cap and an
accelerated reduction in nuclear and regulatory assets for regulatory purposes.
The plan will require the Company and Cleveland Electric to write off certain
regulatory assets at the time the merger becomes probable, which is expected to
be after obtaining the aforementioned approvals of the merger. The write-off
amounts for the Company and Cleveland Electric to be charged against earnings,
estimated by FirstEnergy to total approximately $750 million, will be determined
based upon the plan's regulatory accounting and cost recovery details to be
submitted by FirstEnergy to the PUCO staff for approval. The Company's share of
the write-off is expected to be about one-third of this amount.
If the merger is not consummated, the plan would be null and void. See
Management's Financial Analysis -- Outlook-Pending Merger with Ohio Edison and
- -FirstEnergy Rate Plan for a discussion of the proposed merger and the plan.
(16) PENDING MERGER OF THE COMPANY INTO CLEVELAND ELECTRIC
In March 1994, Centerior Energy announced a plan to merge the Company into
Cleveland Electric. The merger agreement between Centerior Energy and Ohio
Edison requires the approval of Ohio Edison prior to consummation of the
proposed merger of the Company into Cleveland Electric. Ohio Edison has not yet
made a decision. All necessary regulatory approvals have been obtained, except
the NRC's approval. This application was withdrawn at the NRC's request pending
Ohio Edison's decision whether to complete this merger.
In June 1995, share owners of the Company's preferred stock approved the merger
and share owners of Cleveland Electric's preferred stock approved the
authorization of additional shares of preferred stock. If and when the merger
becomes effective, share owners of the Company's preferred stock will exchange
their shares for preferred stock shares of Cleveland Electric having
substantially the same terms. Debt holders of the merging companies will become
debt holders of Cleveland Electric.
For the merging companies, the combined pro forma operating revenues were $2.554
billion, $2.516 billion and $2.422 billion and the combined pro forma net income
was $174 million, $281 million and $268 million for the years 1996, 1995 and
1994, respectively. The pro forma data is based on accounting for the merger on
a method similar to a pooling of interests. The pro forma data is not
necessarily indicative of the results of operations which would have been
reported had the merger been in effect during those years or which may be
reported in the future. The pro forma data does not reflect any potential
effects related to the consummation of the Centerior Energy and Ohio Edison
merger. The pro forma data should be read in conjunction with the audited
financial statements of both the Company and Cleveland Electric.
F-55
<PAGE> 122
FINANCIAL AND STATISTICAL REVIEW
OPERATING REVENUES (millions of dollars)
<TABLE>
<CAPTION>
Total
Total Operating
Year Residential Commercial Industrial Other Retail Wholesale Revenues
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $ 246 194 253 67 760 137 $ 897
1995 238 184 254 65 741 133 874
1994 227 181 251 64 723 142 865
1993 229 180 244 71 724 147 871
1992 215 175 236 61 687 158 845
1986 189 134 214 24 561 13 574
</TABLE>
- --------------------------------------------------------------------------------
OPERATING EXPENSES (millions of dollars)
<TABLE>
<CAPTION>
Other Generation Amortization of Federal
Fuel & Operation Facilities Depreciation Taxes, Deferred Income
Purchased & Rental & Other Than Operating Taxes
Year Power Maintenance Expense, Net Amortization FIT Expenses, Net (Credit)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1996 $ 169 231 104 94 90 17 36
1995 157 225 104 84 91 (17) 42
1994 167 229 104 83 90 (21) 33
1993 173 352(a) 104 76 91 (4)(b) (10)
1992 169 236 106 77 91 (17) 33
1986 160 168 -- 38 51 -- 41
<CAPTION>
Total
Operating
Year Expenses
- ------------------------------------------------------------------------
<S> <<C>
1996 $ 741
1995 686
1994 685
1993 782
1992 695
1986 458
</TABLE>
- --------------------------------------------------------------------------------
INCOME (LOSS) (millions of dollars)
<TABLE>
<CAPTION>
Federal Income
Other Deferred Income (Loss)
Income & Carrying Taxes-- Before
Operating AFUDC-- Deductions, Charges, Credit Interest
Year Income Equity Net Net (Expense) Charges
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 $ 156 1 (10) -- 5 $ 152
1995 188 1 6 14 (2) 207
1994 180 1 3 15 (2) 197
1993 89 1 (232)(c) (161)(b) 129 (174)
1992 150 1 1 41 (1) 192
1986 116 130 (2) -- 52 296
</TABLE>
- --------------------------------------------------------------------------------
INCOME (LOSS) (millions of dollars)
<TABLE>
<CAPTION>
Earnings
(Loss)
Net Preferred Available for
Debt AFUDC-- Income Stock Common
Year Interest Debt (Loss) Dividends Stock
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
1996 $ 96 (1) 57 17 $ 40
1995 111 (1) 97 18 79
1994 116 (1) 82 20 62
1993 116 (1) (289) 23 (312)
1992 122 (1) 71 24 47
1986 174 (55) 177 45 132
</TABLE>
- --------------------------------------------------------------------------------
(a) Includes early retirement program expenses and other charges of $107
million.
(b) Includes write-off of phase-in deferrals of $241 million, consisting of $55
million of deferred operating expenses and $186 million of deferred carrying
charges.
F-56
<PAGE> 123
The Toledo Edison Company
ELECTRIC SALES (millions of KWH)
ELECTRIC CUSTOMERS
RESIDENTIAL USAGE
(thousands at year end)
<TABLE>
<CAPTION>
Industrial
Year Residential Commercial Industrial Wholesale Other Total Residential Commercial & Other
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------- ---------------------------------------
- ---------------------------
1996 2 145 1 790 4 301 2 330 488 11 054 262 27 4
1995 2 164 1 748 4 174 2 563 500 11 149 260 27 4
1994 2 056 1 711 4 099 2 548 499 10 913 257 26 4
1993 2 039 1 672 3 776 2 146 490 10 123 255 26 4
1992 1 941 1 619 3 563 2 753 478 10 354 255 26 5
1986 1 941 1 495 3 482 348 449 7 715 247 25 4
<CAPTION>
Average Average
Year Total Customer KWH Customer
<S> <C> <C> <C> <C>
=========
1996 293 8 284 11.47c $950.10
1995 291 8 384 10.99 921.23
1994 287 8 044 11.04 888.30
1993 285 7 997 11.23 897.65
1992 286 7 632 11.08 845.99
1986 276 7 881 9.75 768.43
</TABLE>
- --------------------------------------------------------------------------------
LOAD (MW & %) ENERGY (millions of KWH)
FUEL
<TABLE>
<CAPTION>
Net Company Generated
Seasonal Peak Capacity Load ----------------------------- Purchased Fuel Cost
Year Capability Load Margin Factor Fossil Nuclear Total Power Total Per KWH
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------- ----------------------------------------------------
- -----------------------
1996 1 951 1 758 9.9% 62.1% 5 173 5 575 10 748 870 11 618 1.26c
1995 1 651 1 738 (5.3) 62.4 4 576 6 761 11 337 299 11 636 1.32
1994 1 726 1 620 6.1 64.7 5 160 5 419 10 579 773 11 352 1.35
1993 1 726 1 568 9.2 64.3 5 548 4 791 10 339 196 10 535 1.42
1992 1 759 1 514 13.9 63.2 4 656 6 293 10 949 (82) 10 867 1.41
1986 1 760 1 423 19.1 64.8 6 462 12 6 474 1 795 8 269 1.82
<CAPTION>
BTU Per
Year KWH
<S> <<C>
============
1996 10 295
1995 10 341
1994 10 298
1993 10 146
1992 10 284
1986 9 860
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT (millions of dollars)
<TABLE>
<CAPTION>
Construction
Utility Work In Total
Plant Accumulated Progress Nuclear Property, Utility
In Depreciation & Net & Perry Fuel and Plant and Plant Total
Year Service Amortization Plant Unit 2 Other Equipment Additions Assets
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
- ------- ------
1996 $2 929 1 020 1 909 22 84 $ 2 015 $ 49 $3 357
1995 2 896 942 1 954 28 98 2 080 56 3 474
1994 2 899 892 2 007 30 125 2 162 41 3 502
1993 2 837 788 2 049 40 142 2 231 43 3 510
1992 2 847 760 2 087 280 164 2 531 44 3 939
1986 1 443 416 1 027 2 130 269 3 426 463 3 774
</TABLE>
- --------------------------------------------------------------------------------
CAPITALIZATION (millions of dollars & %)
<TABLE>
<CAPTION>
Preferred
Preferred Stock,
Stock, without
with Mandatory Mandatory
Common Stock Redemption Redemption
Year Equity Provisions Provisions Long-Term Debt Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $ 803 40% 3 --% 210 10% 1 003 50% $2 019
1995 763 38 5 -- 210 10 1 068 52 2 046
1994 685 34 7 -- 210 10 1 154 56 2 056
1993 623 30 28 1 210 10 1 225 59 2 086
1992 935 39 50 2 210 9 1 178 50 2 373
1986 1 075 36 149 5 260 9 1 481 50 2 965
</TABLE>
- --------------------------------------------------------------------------------
(c) Includes write-off of Perry Unit 2 of $232 million.
F-57
<PAGE> 124
CENTERIOR ENERGY/CLEVELAND
ELECTRIC/TOLEDO EDISON
COMBINED QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1997
[THE INCOME STATEMENT, THE BALANCE SHEET,
THE STATEMENT OF CASH FLOWS AND
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS HAVE BEEN OMITTED
FOR CENTERIOR ENERGY]
F-58
<PAGE> 125
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
<TABLE>
<CAPTION>
COMMISSION REGISTRANT; STATE OF INCORPORATION; I.R.S. EMPLOYER
FILE NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO.
- ----------- ----------------------------------------- ------------------
<S> <C> <C>
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
</TABLE>
Indicate by check mark whether each of the registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
On May 9, 1997, there were 148,025,928 shares of Centerior Energy
Corporation Common Stock outstanding. Centerior Energy Corporation is the sole
holder of the 79,590,689 shares and 39,133,887 shares of common stock of The
Cleveland Electric Illuminating Company and The Toledo Edison Company,
respectively, outstanding on that date.
================================================================================
F-59
<PAGE> 126
This combined Form 10-Q is separately filed by Centerior Energy Corporation
("Centerior Energy"), The Cleveland Electric Illuminating Company ("Cleveland
Electric") and The Toledo Edison Company ("Toledo Edison"). Centerior Energy,
Cleveland Electric and Toledo Edison are sometimes referred to collectively as
the "Companies". Cleveland Electric and Toledo Edison are sometimes collectively
referred to as the "Operating Companies". Information contained herein relating
to any individual registrant is filed by such registrant on its behalf. No
registrant makes any representation as to information relating to any other
registrant, except that information relating to either or both of the Operating
Companies is also attributed to Centerior Energy.
Centerior Energy has made forward-looking statements in this Form 10-Q
which statements are subject to risks and uncertainties, including the impact on
the Companies if: (1) competitive pressure in the electric utility industry
increases significantly; (2) state and federal regulatory initiatives are
implemented that increase competition, threaten costs and investment recovery
and impact dividends or rate structures; or (3) general economic conditions,
either nationally or in the area in which the combined company will be doing
business are less favorable than expected.
F-60
<PAGE> 127
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES,
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY,
AND THE TOLEDO EDISON COMPANY
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
(1) INTERIM FINANCIAL STATEMENTS
Centerior Energy Corporation (Centerior Energy) is the parent company of
Centerior Service Company (Service Company); two electric utilities, The
Cleveland Electric Illuminating Company (Cleveland Electric) and The Toledo
Edison Company (Toledo Edison); and three other wholly owned subsidiaries. The
two utilities are referred to collectively herein as the "Operating Companies"
and individually as an "Operating Company". Centerior Energy, Cleveland Electric
and Toledo Edison are referred to collectively herein as the "Companies".
The comparative income statement and balance sheet and the related
statement of cash flows of each of the Companies have been prepared from the
records of each of the Companies without audit by independent public
accountants. In the opinion of management, all adjustments necessary for a fair
presentation of financial position at March 31, 1997 and results of operations
and cash flows for the three months ended March 31, 1997 and 1996 have been
included. All such adjustments were normal recurring adjustments, except for the
write-down of inactive production facilities in the first quarter of 1996
discussed in Note 6.
A new Statement of Position issued by the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants, Inc.
effective January 1, 1997 provides guidance on the recognition and disclosure of
environmental remediation liabilities. The Companies' adoption of this statement
in 1997 did not materially affect their results of operations or financial
positions.
These financial statements and notes should be read in conjunction with the
financial statements and notes included in the Companies' combined Annual Report
on Form 10-K for the year ended December 31, 1996 (1996 Form 10-K). These
interim period financial results are not necessarily indicative of results for a
12-month period.
(2) EQUITY DISTRIBUTION RESTRICTIONS
The Operating Companies can make cash available to fund Centerior Energy's
common stock dividends by paying dividends on their respective common stock,
which is held solely by Centerior Energy. Federal law prohibits the Operating
Companies from paying dividends out of capital accounts. Cleveland Electric has
since 1993 declared and paid preferred and common stock dividends out of
appropriated current net income included in retained earnings. At the times of
such declarations and payments, Cleveland Electric had a deficit in its retained
earnings. From 1993 through 1996, Toledo Edison declared and paid preferred
stock dividends out of appropriated current net income included in retained
earnings. At the times of such declarations and payments, Toledo Edison had a
deficit in its retained earnings from 1993 through November 1996. Toledo Edison
also has a provision in its mortgage applicable to approximately $94 million of
outstanding first mortgage bonds ($31 million of which mature in August 1997)
that requires common stock dividends to be paid out of its total balance of
retained earnings. At March 31, 1997, Toledo Edison's total retained earnings
were $10 million. At March 31, 1997, Cleveland Electric and Toledo Edison had
$120.4 million and $227.7 million, respectively, of appropriated retained
earnings for the payment of dividends. See "Management's Financial
Analysis -- Capital Resources and Liquidity-Liquidity" contained in Item 7 of
the 1996 Form 10-K for a discussion of a Federal Energy Regulatory Commission
(FERC) audit issue regarding the declaration and payment of dividends.
F-61
<PAGE> 128
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES,
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY,
AND THE TOLEDO EDISON COMPANY
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
(3) COMMON STOCK DIVIDENDS
Cash dividends per common share declared by Centerior Energy during the
three months ended March 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Paid February 15..................................................... $.20 $.20
Paid May 15.......................................................... .20 .20
</TABLE>
Common stock cash dividends declared by Cleveland Electric during the three
months ended March 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1996 1997
----- -----
(MILLIONS)
<S> <C> <C>
Paid in February................................................... $29.6 $29.6
</TABLE>
Toledo Edison did not declare any common stock dividends during the three
months ended March 31, 1997 and 1996.
(4) FINANCING ACTIVITY
During the three months ended March 31, 1997, the Operating Companies
redeemed preferred stock and debt securities as follows:
CLEVELAND ELECTRIC
Mandatory redemptions consisted of $15 million of Serial Preferred Stock,
$9.125 Series N.
TOLEDO EDISON
Mandatory redemptions consisted of $8 million of notes secured by
subordinated mortgage collateral.
(5) SHORT-TERM BORROWING ARRANGEMENTS
In May 1997, Centerior Energy renewed a $125 million revolving credit
facility until May 7, 1998 on the same terms as the existing agreement.
Centerior Energy and the Service Company may borrow under the facility, with all
borrowings jointly and severally guaranteed by the Operating Companies.
Centerior Energy plans to transfer any of its borrowed funds to the Operating
Companies. There have not been any borrowings under the facility.
(6) WRITE-DOWN OF INACTIVE PRODUCTION FACILITIES
In the first quarter of 1996, Toledo Edison wrote down the net book value
of two inactive production facilities, $11.3 million, to "Other Income and
Deductions, Net" resulting in nonoperating losses for Toledo Edison and
Centerior Energy for that period. The net write-down was $7.2 million after
taxes or, for Centerior Energy, $.05 per common share. The write-down resulted
from a decision that the facilities were no longer expected to provide revenues.
(7) COMMITMENTS AND CONTINGENCIES
Various legal actions, claims and regulatory proceedings covering several
matters are pending against the Companies. See "Item 3. Legal Proceedings" in
the 1996 Form 10-K and "Part II, Item 5. Other Information" in this Quarterly
Report on Form 10-Q.
F-62
<PAGE> 129
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES,
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY,
AND THE TOLEDO EDISON COMPANY
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
In September 1996, Centerior Energy and Ohio Edison Company (Ohio Edison)
entered into an agreement and plan of merger to form a new holding company,
FirstEnergy Corp. (FirstEnergy). On March 27, 1997, Centerior Energy and Ohio
Edison common stock share owners approved the merger. Various aspects of the
merger are subject to the approval of the FERC and other regulatory authorities.
FirstEnergy plans to account for the merger as a purchase in accordance
with generally accepted accounting principles. If FirstEnergy elects to apply,
or "push down", the effects of purchase accounting to the financial statements
of the Operating Companies, Cleveland Electric would record adjustments to: (1)
reduce the carrying value of its nuclear generating plant by $880 million to
fair value; (2) recognize goodwill of $675 million; (3) reduce its common stock
equity by $258 million; (4) reset its retained earnings to zero; and (5) reduce
its related deferred federal income tax liability by $308 million; and Toledo
Edison would record adjustments to: (1) reduce the carrying value of its nuclear
generating plant by $370 million to fair value; (2) recognize goodwill of $307
million; (3) reduce its common stock equity by $124 million; (4) reset its
retained earnings to zero; and (5) reduce its related deferred federal income
tax liability by $130 million. These amounts reflect FirstEnergy's estimates of
the pro forma adjustments for the Operating Companies as of December 31, 1996.
The actual adjustments to be recorded could be materially different from the
estimates. FirstEnergy has not decided whether to push down the effects of
purchase accounting to the financial statements of the Operating Companies if
the Ohio Edison-Centerior Energy merger is completed.
F-63
<PAGE> 130
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
INCOME STATEMENT
(UNAUDITED)
(THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING REVENUES....................................................... $431,627 $427,526
OPERATING EXPENSES
Fuel and Purchased Power (1)........................................... 110,530 103,726
Other Operation and Maintenance........................................ 91,447 105,132
Generation Facilities Rental Expense, Net.............................. 13,892 13,892
Depreciation and Amortization.......................................... 53,297 50,816
Taxes, Other Than Federal Income Taxes................................. 56,686 60,010
Amortization of Deferred Operating Expenses, Net....................... 6,567 6,368
Federal Income Taxes................................................... 19,203 11,805
-------- --------
Total Operating Expenses............................................ 351,622 351,749
-------- --------
OPERATING INCOME......................................................... 80,005 75,777
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During Construction.................... 327 498
Other Income and Deductions, Net....................................... (4,649) 1,649
Federal Income Taxes -- Credit (Expense)............................... 658 (752)
-------- --------
Total Nonoperating Income (Loss).................................... (3,664) 1,395
-------- --------
INCOME BEFORE INTEREST CHARGES........................................... 76,341 77,172
INTEREST CHARGES
Long-Term Debt......................................................... 54,393 60,160
Short-Term Debt........................................................ 2,177 692
Allowance for Borrowed Funds Used During Construction.................. (459) (519)
-------- --------
Net Interest Charges................................................ 56,111 60,333
-------- --------
NET INCOME............................................................... 20,230 16,839
Preferred Dividend Requirements........................................ 9,315 10,032
-------- --------
EARNINGS AVAILABLE FOR COMMON STOCK...................................... $ 10,915 $ 6,807
======== ========
(1) Includes purchased power expense for purchases from Toledo Edison.... $ 28,920 $ 26,672
</TABLE>
The accompanying notes as they relate to Cleveland Electric are an integral part
of this statement.
F-64
<PAGE> 131
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
BALANCE SHEET
(THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant In Service....................................................... $ 6,960,941 $ 6,938,535
Accumulated Depreciation and Amortization...................................... (2,306,322) (2,252,321)
----------- -----------
4,654,619 4,686,214
Construction Work In Progress.................................................. 62,173 56,853
----------- -----------
4,716,792 4,743,067
Nuclear Fuel, Net of Amortization.............................................. 100,764 113,030
Other Property, Less Accumulated Depreciation.................................. 51,553 53,547
----------- -----------
4,869,109 4,909,644
CURRENT ASSETS
Cash and Temporary Cash Investments............................................ 26,698 30,273
Amounts Due from Customers and Others, Net..................................... 146,187 189,547
Amounts Due from Affiliates.................................................... 347 5,634
Materials and Supplies, at Average Cost
Owned........................................................................ 50,777 51,686
Under Consignment............................................................ 23,497 23,655
Taxes Applicable to Succeeding Years........................................... 156,147 181,609
Other.......................................................................... 11,416 15,237
----------- -----------
415,069 497,641
REGULATORY AND OTHER ASSETS
Regulatory Assets.............................................................. 1,341,785 1,349,693
Nuclear Plant Decommissioning Trusts........................................... 83,067 75,573
Other.......................................................................... 60,725 44,980
----------- -----------
1,485,577 1,470,246
----------- -----------
$ 6,769,755 $ 6,877,531
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity............................................................ $ 1,034,701 $ 1,044,283
Preferred Stock
With Mandatory Redemption Provisions......................................... 186,118 186,118
Without Mandatory Redemption Provisions...................................... 238,325 238,325
Long-Term Debt................................................................. 2,441,297 2,441,215
----------- -----------
3,900,441 3,909,941
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock.......................... 129,874 144,668
Current Portion of Lease Obligations........................................... 49,266 51,592
Accounts Payable............................................................... 57,092 82,694
Accounts and Notes Payable to Affiliates....................................... 170,966 171,433
Accrued Taxes.................................................................. 253,143 315,998
Accrued Interest............................................................... 60,247 52,487
Dividends Declared............................................................. 5,692 15,228
Other.......................................................................... 40,156 43,672
----------- -----------
766,436 877,772
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits............................................. 174,158 176,130
Accumulated Deferred Federal Income Taxes...................................... 1,316,529 1,305,601
Unamortized Gain from Bruce Mansfield Plant Sale............................... 291,993 295,730
Accumulated Deferred Rents for Bruce Mansfield Plant........................... 99,351 98,767
Nuclear Fuel Lease Obligations................................................. 64,968 73,947
Retirement Benefits............................................................ 74,512 72,843
Other.......................................................................... 81,367 66,800
----------- -----------
2,102,878 2,089,818
COMMITMENTS AND CONTINGENCIES (Note 7)
----------- -----------
$ 6,769,755 $ 6,877,531
=========== ===========
</TABLE>
The accompanying notes as they relate to Cleveland Electric are an integral part
of this statement.
F-65
<PAGE> 132
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
CASH FLOWS
(UNAUDITED)
(THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income............................................................. $ 20,230 $ 16,839
-------- --------
Adjustments to Reconcile Net Income to Cash from Operating Activities:
Depreciation and Amortization....................................... 53,297 50,816
Deferred Federal Income Taxes....................................... 10,736 14,388
Deferred Fuel....................................................... 7,696 (2,639)
Leased Nuclear Fuel Amortization.................................... 13,411 11,339
Amortization of Deferred Operating Expenses, Net.................... 6,567 6,368
Allowance for Equity Funds Used During Construction................. (327) (498)
Changes in Amounts Due from Customers and Others, Net............... 43,360 1,678
Changes in Materials and Supplies................................... 1,067 6,643
Changes in Accounts Payable......................................... (25,602) 27,758
Changes in Working Capital Affecting Operations..................... (27,289) (31,665)
Other Noncash Items................................................. 2,336 (9,791)
-------- --------
Total Adjustments.............................................. 85,252 74,397
-------- --------
Net Cash from Operating Activities............................. 105,482 91,236
CASH FLOWS FROM FINANCING ACTIVITIES
Notes Payable to Affiliates............................................ 2,781 (5,000)
Maturities, Redemptions and Sinking Funds.............................. (15,000) (15,800)
Nuclear Fuel Lease Obligations......................................... (12,450) (18,194)
Dividends Paid......................................................... (39,141) (39,865)
-------- --------
Net Cash from Financing Activities............................. (63,810) (78,859)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction........................................... (32,812) (25,105)
Interest Capitalized as Allowance for Borrowed Funds Used During
Construction........................................................ (459) (519)
Contributions to Nuclear Plant Decommissioning Trusts.................. (2,928) --
Other Cash Received (Applied).......................................... (9,048) 3,486
-------- --------
Net Cash from Investing Activities............................. (45,247) (22,138)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS........................ (3,575) (9,761)
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD............... 30,273 69,770
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD..................... $ 26,698 $ 60,009
======== ========
Other Payment Information:
Interest (net of amounts capitalized).................................. $ 47,000 $ 47,000
Federal Income Taxes................................................... 8,300 --
</TABLE>
The accompanying notes as they relate to Cleveland Electric are an integral part
of this statement.
F-66
<PAGE> 133
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of the 1996 Form 10-K.
The information under "Capital Resources and Liquidity" remains unchanged with
the following exceptions:
During the first quarter of 1997, Cleveland Electric redeemed preferred
stock as discussed in Note 4.
Cleveland Electric is a party to a $125 million revolving credit facility
which Centerior Energy renewed in May 1997 until May 7, 1998 as discussed in
Note 5. Centerior Energy plans to transfer any of its borrowed funds under the
facility to the Operating Companies.
RESULTS OF OPERATIONS
Factors contributing to the 1% increase in 1997 first quarter operating
revenues are shown as follows:
<TABLE>
<CAPTION>
CHANGES FROM
FIRST QUARTER 1996
FACTORS OPERATING REVENUES
------------------------------------------------------------------- ------------------
(MILLIONS)
<S> <C>
Base Rates......................................................... $ 18.7
Kilowatt-hour Sales Volume and Mix................................. (15.0)
Wholesale Revenues................................................. 7.5
Fuel Cost Recovery Revenues........................................ 2.3
Miscellaneous Revenues............................................. (9.4)
------
Total.............................................................. $ 4.1
======
</TABLE>
The increase in first quarter 1997 base rates revenues resulted primarily
from the April 1996 rate order issued by the PUCO. Renegotiated contracts for
certain large industrial customers resulted in a decrease in base rates which
partially offset the effect of the general price increase.
Percentage changes between 1997 and 1996 first quarter billed electric
kilowatt-hour sales are summarized as follows:
<TABLE>
<CAPTION>
CUSTOMER CATEGORIES % CHANGE
- ---------------------------------------- --------
<S> <C>
Residential............................. 0.5%
Commercial.............................. 1.2
Industrial.............................. (1.7)
Other................................... 78.5
Total................................... 8.0
</TABLE>
Despite milder weather, first quarter 1997 total kilowatt-hour sales rose
as increases in residential and commercial sales along with a 99% increase in
wholesale sales (included in the "Other" category) were partially offset by a
decline in industrial sales. Weather-normalized residential and commercial sales
increased 5.4% and 2.2%, respectively, for the 1997 period. The number of
commercial customers at March 31, 1997 was 1.3% above the March 31, 1996 number.
Industrial sales decreased primarily because of fewer sales to large automotive
manufacturers and steel industry customers.
F-67
<PAGE> 134
The increase in fuel cost recovery revenues included in customer bills
resulted from a 3% increase in the weighted average of the fuel cost recovery
factors used in the first quarter of 1997 to calculate these revenues compared
to the 1996 first quarter average.
First quarter miscellaneous revenues in 1997 decreased from the 1996 amount
primarily because of the reclassification of certain revenues as credits to
operating expenses commencing in the second quarter of 1996 and a first quarter
1997 refund payment related to a canceled generating plant lease agreement.
First quarter operating expenses in 1997 were virtually the same as in
1996. Higher fuel and purchased power expenses resulted from increased purchased
power requirements in the 1997 period. Depreciation and amortization expenses
increased primarily because of changes in depreciation rates approved in the
April 1996 PUCO rate order. Federal income taxes increased as a result of higher
pretax operating income. Other operation and maintenance expenses decreased as a
result of ongoing cost cutting and work force reductions; a shift of certain
payroll expenses to the nonoperating classification for work related to the Ohio
Edison-Centerior Energy merger; and the aforementioned reclassification of
certain expense reimbursements as credits to operating expenses. Taxes, other
than federal income taxes, decreased primarily because of lower property and
payroll tax accruals.
A first quarter 1997 nonoperating loss resulted primarily from both
Cleveland Electric's share of merger-related expenses and certain costs
associated with an accounts receivable securitization.
First quarter 1997 interest charges and preferred dividend requirements
decreased because of the redemption of securities in 1996.
NEW ACCOUNTING STANDARD
In February 1997, the FASB issued a new statement of financial accounting
standards for the disclosure of information about capital structure effective
for year-end December 31, 1997 reporting. Cleveland Electric's adoption of the
statement in 1997 will not affect its financial condition.
F-68
<PAGE> 135
THE TOLEDO EDISON COMPANY
INCOME STATEMENT
(UNAUDITED)
(THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING REVENUES (1)................................................... $217,060 $210,793
OPERATING EXPENSES
Fuel and Purchased Power............................................... 43,314 38,768
Other Operation and Maintenance........................................ 56,317 56,519
Generation Facilities Rental Expense, Net.............................. 25,961 25,961
Depreciation and Amortization.......................................... 23,814 22,416
Taxes, Other Than Federal Income Taxes................................. 22,794 23,853
Amortization of Deferred Operating Expenses, Net....................... 4,291 4,175
Federal Income Taxes................................................... 8,212 6,227
-------- --------
Total Operating Expenses............................................ 184,703 177,919
-------- --------
OPERATING INCOME......................................................... 32,357 32,874
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During Construction.................... 332 413
Other Income and Deductions, Net....................................... (427) (9,153)
Federal Income Taxes -- Credit (Expense)............................... (225) 3,195
-------- --------
Total Nonoperating Income (Loss).................................... (320) (5,545)
-------- --------
INCOME BEFORE INTEREST CHARGES........................................... 32,037 27,329
INTEREST CHARGES
Long-Term Debt......................................................... 22,111 23,159
Short-Term Debt........................................................ 1,190 1,218
Allowance for Borrowed Funds Used During Construction.................. (104) (325)
-------- --------
Net Interest Charges................................................ 23,197 24,052
-------- --------
NET INCOME............................................................... 8,840 3,277
Preferred Dividend Requirements........................................ 4,194 4,204
-------- --------
EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK............................... $ 4,646 $ (927)
======== ========
(1) Includes revenues from bulk power sales to Cleveland Electric........ $ 28,920 $ 26,672
</TABLE>
The accompanying notes as they relate to Toledo Edison are an integral part of
this statement.
F-69
<PAGE> 136
THE TOLEDO EDISON COMPANY
BALANCE SHEET
(THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant In Service....................................................... $ 2,932,203 $ 2,928,657
Accumulated Depreciation and Amortization...................................... (1,045,988) (1,019,836)
----------- -----------
1,886,215 1,908,821
Construction Work In Progress.................................................. 26,443 21,479
----------- -----------
1,912,658 1,930,300
Nuclear Fuel, Net of Amortization.............................................. 67,361 76,118
Other Property, Less Accumulated Depreciation.................................. 8,456 8,460
----------- -----------
1,988,475 2,014,878
CURRENT ASSETS
Cash and Temporary Cash Investments............................................ 63,416 81,454
Amounts Due from Customers and Others, Net..................................... 15,948 16,308
Amounts Due from Affiliates.................................................... 130,574 95,336
Materials and Supplies, at Average Cost
Owned........................................................................ 32,127 33,160
Under Consignment............................................................ 10,994 10,383
Taxes Applicable to Succeeding Years........................................... 59,766 68,352
Other.......................................................................... 3,628 3,479
----------- -----------
316,453 308,472
REGULATORY AND OTHER ASSETS
Regulatory Assets.............................................................. 921,175 927,629
Nuclear Plant Decommissioning Trusts........................................... 69,818 64,093
Other.......................................................................... 39,483 42,408
----------- -----------
1,030,476 1,034,130
----------- -----------
$ 3,335,404 $ 3,357,480
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity............................................................ $ 807,883 $ 803,237
Preferred Stock
With Mandatory Redemption Provisions......................................... 3,355 3,355
Without Mandatory Redemption Provisions...................................... 210,000 210,000
Long-Term Debt................................................................. 1,003,055 1,003,026
----------- -----------
2,024,293 2,019,618
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock.......................... 43,365 51,365
Current Portion of Lease Obligations........................................... 35,105 36,244
Accounts Payable............................................................... 52,987 46,496
Accounts Payable to Affiliates................................................. 25,454 30,016
Accrued Taxes.................................................................. 56,203 72,829
Accrued Interest............................................................... 24,998 22,348
Other.......................................................................... 16,437 18,722
----------- -----------
254,549 278,020
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits............................................. 74,434 75,417
Accumulated Deferred Federal Income Taxes...................................... 565,331 565,600
Unamortized Gain from Bruce Mansfield Plant Sale............................... 176,760 179,027
Accumulated Deferred Rents for Bruce Mansfield Plant and Beaver Valley Unit
2............................................................................ 38,675 39,188
Nuclear Fuel Lease Obligations................................................. 41,699 48,491
Retirement Benefits............................................................ 104,210 102,214
Other.......................................................................... 55,453 49,905
----------- -----------
1,056,562 1,059,842
COMMITMENTS AND CONTINGENCIES (Note 7)
----------- -----------
$ 3,335,404 $ 3,357,480
=========== ===========
</TABLE>
The accompanying notes as they relate to Toledo Edison are an integral part of
this statement.
F-70
<PAGE> 137
THE TOLEDO EDISON COMPANY
CASH FLOWS
(UNAUDITED)
(THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income........................................................... $ 8,840 $ 3,277
-------- --------
Adjustments to Reconcile Net Income to Cash from Operating
Activities:
Depreciation and Amortization..................................... 23,814 22,416
Deferred Federal Income Taxes..................................... (269) 4,403
Deferred Fuel..................................................... 2,567 623
Leased Nuclear Fuel Amortization.................................. 9,442 9,349
Amortization of Deferred Operating Expenses, Net.................. 4,291 4,175
Allowance for Equity Funds Used During Construction............... (332) (413)
Changes in Amounts Due from Customers and Others, Net............. 360 3,784
Changes in Materials and Supplies................................. 422 881
Changes in Accounts Payable....................................... 6,491 32,445
Changes in Working Capital Affecting Operations................... (15,042) (12,698)
Other Noncash Items............................................... 4,540 (2,672)
-------- --------
Total Adjustments............................................ 36,284 62,293
-------- --------
Net Cash from Operating Activities........................... 45,124 65,570
CASH FLOWS FROM FINANCING ACTIVITIES
Notes Payable to Affiliates.......................................... -- (20,950)
Maturities, Redemptions and Sinking Funds............................ (8,000) (28,750)
Nuclear Fuel Lease Obligations....................................... (8,617) (13,969)
Dividends Paid....................................................... (4,193) (4,226)
Premiums, Discounts and Expenses..................................... -- (50)
-------- --------
Net Cash from Financing Activities........................... (20,810) (67,945)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction......................................... (10,149) (14,595)
Interest Capitalized as Allowance for Borrowed Funds Used During
Construction...................................................... (104) (325)
Loans to Affiliates.................................................. (32,582) --
Contributions to Nuclear Plant Decommissioning Trusts................ (2,459) --
Other Cash Received.................................................. 2,942 3,451
-------- --------
Net Cash from Investing Activities........................... (42,352) (11,469)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS...................... (18,038) (13,844)
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD............. 81,454 93,669
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD................... $ 63,416 $ 79,825
======== ========
Other Payment Information:
Interest (net of amounts capitalized)................................ $ 19,000 $ 21,000
Federal Income Taxes................................................. 4,300 --
</TABLE>
The accompanying notes as they relate to Toledo Edison are an integral part of
this statement.
F-71
<PAGE> 138
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of the 1996 Form 10-K.
The information under "Capital Resources and Liquidity" remains unchanged with
the following exceptions:
During the first quarter of 1997, Toledo Edison redeemed notes as discussed
in Note 4.
Toledo Edison is a party to a $125 million revolving credit facility which
Centerior Energy renewed in May 1997 until May 7, 1998 as discussed in Note 5.
Centerior Energy plans to transfer any of its borrowed funds under the facility
to the Operating Companies.
RESULTS OF OPERATIONS
Factors contributing to the 3% increase in 1997 first quarter operating
revenues are shown as follows:
<TABLE>
<CAPTION>
CHANGES FROM
FIRST QUARTER 1996
FACTORS OPERATING REVENUES
------------------------------------------------------------------- ------------------
(MILLIONS)
<S> <C>
Base Rates......................................................... $ 3.4
Kilowatt-hour Sales Volume and Mix................................. 2.4
Wholesale Revenues................................................. 2.9
Fuel Cost Recovery Revenues........................................ (1.5)
Miscellaneous Revenues............................................. (0.9)
-----
Total.............................................................. $ 6.3
=====
</TABLE>
The increase in first quarter 1997 base rates revenues resulted primarily
from the April 1996 rate order issued by the PUCO. Renegotiated contracts for
certain large industrial customers also resulted in a decrease in base rates
which partially offset the effect of the general price increase.
Percentage changes between 1997 and 1996 first quarter billed electric
kilowatt-hour sales are summarized as follows:
<TABLE>
<CAPTION>
CUSTOMER CATEGORIES % CHANGE
- ---------------------------------------- --------
<S> <C>
Residential............................. (3.1)%
Commercial.............................. 2.9
Industrial.............................. 8.2
Other................................... 21.0
Total................................... 8.1
</TABLE>
First quarter 1997 total kilowatt-hour sales increased because of increases
in industrial and commercial sales along with a 26% increase in wholesale sales
(included in the "Other" category). Industrial sales growth reflected increased
sales to large primary metals, automotive and glass manufacturers and the
broad-based, smaller industrial customer group. Industrial sales for the 1997
period included sales to the new North Star BHP Steel facility. Commercial sales
increased despite milder weather because of a 3.3% increase in the number of
commercial customers and greater economic activity. Residential sales declined
because of the milder weather. However, weather-normalized commercial and
residential sales increased 3.6% and 0.3%, respectively, for the 1997 period.
F-72
<PAGE> 139
The decrease in fuel cost recovery revenues included in customer bills
resulted from a 5% decrease in the weighted average of the fuel cost recovery
factors used in the first quarter of 1997 to calculate these revenues compared
to the 1996 first quarter average.
First quarter operating expenses in 1997 increased 3.8% from the 1996
amount. Higher fuel and purchased power expenses resulted from increased
purchased power requirements in the 1997 period. Depreciation and amortization
expenses increased primarily because of changes in depreciation rates approved
in the April 1996 PUCO rate order. Federal income taxes increased as a result of
higher pretax operating income. Taxes, other than federal income taxes,
decreased primarily because of lower property and payroll tax accruals.
The first quarter 1997 total nonoperating loss was smaller than the first
quarter 1996 total nonoperating loss. The first quarter 1997 nonoperating loss
resulted primarily from both Toledo Edison's share of expenses related to the
Ohio Edison-Centerior Energy merger and certain costs associated with an
accounts receivable securitization. The first quarter 1996 nonoperating loss
resulted primarily from the write-down of two inactive production facilities as
discussed in Note 6.
First quarter 1997 interest charges and preferred dividend requirements
decreased slightly because of the redemption of securities in 1996.
NEW ACCOUNTING STANDARD
In February 1997, the FASB issued a new statement of financial accounting
standards for the disclosure of information about capital structure effective
for year-end December 31, 1997 reporting. Toledo Edison's adoption of the
statement in 1997 will not affect its financial condition.
F-73
<PAGE> 140
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
1. CENTERIOR ENERGY
a. A Special Meeting of Centerior Energy's common stock share owners was
held on March 27, 1997.
b. The only matter submitted to share owners at the Special Meeting was for
the approval and adoption of an Agreement and Plan of Merger between Ohio Edison
and Centerior Energy. The vote on this issue was as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTE
- ------------ ---------- ------- ---------------
<S> <C> <C> <C>
112,633,407 2,219,786 935,047 Not Applicable
</TABLE>
2. CENTERIOR ENERGY
a. Centerior Energy's Annual Meeting of share owners was held on May 8,
1997.
b. Proxies for the Annual Meeting were solicited pursuant to Regulation 14
under the Securities Exchange Act of 1934. There was no solicitation in
opposition to management's nominees for directors as listed in the proxy
statement dated April 3, 1997, and all such nominees were elected.
c. Three matters were submitted to share owners for a vote at the Annual
Meeting.
Issue 1 was the election of 11 directors of Centerior Energy. The vote on this
issue was as follows:
<TABLE>
<CAPTION>
BROKER
NOMINEE FOR WITHHELD NON-VOTE
- ------------------- ------------ ---------- ----------
<S> <C> <C> <C>
R. P. Anderson 116,211,692 4,643,968 7,108,921
A. C. Bersticker 116,326,706 4,528,954 7,108,921
T. A. Commes 116,397,916 4,457,744 7,108,921
W. F. Conway 116,246,440 4,609,220 7,108,921
W. R. Embry 116,141,102 4,714,558 7,108,921
R. J. Farling 116,097,124 4,758,536 7,108,921
R. A. Miller 113,866,343 6,989,317 7,108,921
F. E. Mosier 116,226,823 4,628,837 7,108,921
Sr. M. M. Reinhard 116,098,360 4,757,301 7,108,921
R. C. Savage 116,274,966 4,580,694 7,108,921
W. J. Williams 116,236,011 4,619,649 7,108,921
</TABLE>
Issue 2 was the ratification of the appointment by the Board of Directors of
Arthur Andersen LLP as the independent accountants of Centerior Energy,
Cleveland Electric and Toledo Edison for 1997.
The vote on this issue was as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTE
- ------------ ---------- ------- ----------
<S> <C> <C> <C>
118,514,019 1,254,749 1,086,892 7,108,921
</TABLE>
Issue 3 was a share owner proposal to eliminate all discretionary voting when
the individual share owner has not actually voted by marking the proxy card. The
vote on this issue was as follows:
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTE
- ------------ ---------- ------- ----------
<S> <C> <C> <C>
15,700,936 79,222,813 4,893,382 28,147,450
</TABLE>
F-74
<PAGE> 141
3. CLEVELAND ELECTRIC
a. In lieu of an Annual Meeting, Cleveland Electric's sole share owner,
Centerior Energy (the sole share owner of all 79,590,689 outstanding shares of
Cleveland Electric common stock), elected directors of Cleveland Electric
through a Written Action of Sole Share Owner on May 8, 1997.
b. The directors elected pursuant to the Written Action were:
Robert J. Farling
Murray R. Edelman
Fred J. Lange, Jr.
c. No other matters were addressed in the Written Action in lieu of an
Annual Meeting.
4. TOLEDO EDISON
a. In lieu of an Annual Meeting, Toledo Edison's sole share owner,
Centerior Energy (the sole share owner of all 39,133,887 outstanding shares of
Toledo Edison common stock), elected directors of Toledo Edison through a
Written Action of Sole Share Owner on May 8, 1997.
b. The directors elected pursuant to the Written Action were:
Robert J. Farling
Murray R. Edelman
Fred J. Lange, Jr.
c. No other matters were addressed in the Written Action in lieu of an
Annual Meeting.
ITEM 5. OTHER INFORMATION
1. 1996 RATE ORDER
For background relating to this topic see "Item 1. Business-Electric
Rates-1996 Rate Order" in the Companies Annual Report on Form 10-K for the year
ended December 31, 1996 ("1996 Form 10-K").
The City of Cleveland, the Office of the Ohio Consumer's Counsel ("OCC"),
the Ohio Council of Retail Merchants, the Empowerment Center of Greater
Cleveland, the City of Toledo, the Lucas County Board of Commissioners and
Congresswoman Marcy Kaptur filed appeals with the Ohio Supreme Court from the
PUCO's April 11, 1996 rate order for the Operating Companies. The Ohio Supreme
Court granted the Operating Companies' motions to dismiss the appeals of the
Lucas County Board of Commissioners and Congresswoman Marcy Kaptur on November
20, 1996. On April 4, 1997, the OCC filed a motion to stay the appeal because of
the Rate Stipulation agreed to by the OCC regarding the FirstEnergy merger, and
the Operating Companies filed a memorandum in support of the stay on April 14,
1997. The Ohio Supreme Court granted OCC's motion to stay on April 21, 1997.
2. JOINT SELECT COMMITTEE HEARINGS
Ohio's General Assembly has commissioned a Joint Committee to study
electric utility deregulation. The Joint Committee is conducting hearings
concerning various issues regarding electric utility deregulation and plans to
have a report completed by October 1997 to present to the full General Assembly
for its consideration. The Operating Companies and other interested parties will
be providing testimony on the issues as the hearings continue throughout the
summer.
3. RACHEL TRANSMISSION LINE
On March 24, 1997, the Ohio Power Siting Board ("OPSB") granted Cleveland
Electric a Certificate of Environmental Compatibility and Public Need
("Certificate") to construct its nine-mile "Rachel" 138,000-volt transmission
line in Geauga County, Ohio. The transmission line is necessary to provide
high-quality and reliable electric service to the general area, which has
experienced above average load growth over the last several decades. On April
24, 1997, Citizens for a Better Way filed an Application for Rehearing of the
F-75
<PAGE> 142
OPSB's decision; however, because the Application for Rehearing was filed late,
it is anticipated that the OPSB will not entertain substantive modifications to
the Certificate.
4. CHASE BRASS
For background relating to this topic, see "Item 1.
Business-Operations-Competitive Conditions-Toledo Edison" in the 1996 Form 10-K.
Chase Brass & Copper Co., Inc. ("Chase Brass"), a former Toledo Edison
customer, and other surrounding businesses and residences in Jefferson Township,
Ohio, have sought incorporation as a municipality to be named the Village of
Holiday City. The Williams County (Ohio) Board of Commissioners and the Williams
County Court of Common Pleas issued an order permitting the area to be
incorporated. Toledo Edison previously appealed the Court's order to the Sixth
District Court of Appeals, but the Court of Appeals ruled against Toledo Edison,
finding a lack of standing. Toledo Edison then appealed to the Ohio Supreme
Court. On April 23, 1997, the Ohio Supreme Court denied Toledo Edison's appeal.
Toledo Edison does not plan to apply for reconsideration at the Court.
The new municipality can negotiate with other utilities for electric power.
The other businesses in the proposed municipality previously terminated their
service with Toledo Edison and are receiving electric service from the Village
of Montpelier, one of the consortium now supplying Chase Brass.
5. DAVIS-BESSE PLANT OUTAGE
The Davis-Besse Nuclear Power Station automatically shut down on Sunday,
May 4, 1997, when a fire suppression system on the station's main transformer
malfunctioned. Although there was no fire, protective circuitry disconnected the
transformer from the electrical system. Safety systems automatically take the
plant offline under these conditions. Plant personnel are investigating the
cause of the malfunction. It is anticipated that the plant will be back on line
by the end of May, 1997. This is the first unplanned shut down at the plant in
three years.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
See Exhibit Index following.
B. REPORTS ON FORM 8-K
During the quarter ended March 31, 1997, Centerior Energy, Cleveland
Electric and Toledo Edison each filed two Current Reports on Form 8-K with the
Securities and Exchange Commission.
A Form 8-K dated January 28, 1997 and filed that date included one item
under "Item 5. Other Events". That item, "Recent Financial Results (Unaudited)",
reported Centerior Energy's operating revenues, net income and earnings per
share for 1996.
A Form 8-K dated January 30, 1997 and filed on February 6, 1997 included
one item under "Item 5. Other Events". That item, "Rate Reduction and Economic
Development Plan", discussed a rate reduction plan approved by the PUCO for the
Operating Companies which would take effect upon the consummation of the merger
of Centerior Energy with Ohio Edison.
F-76
<PAGE> 143
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The person signing this report on behalf
of each such registrant is also signing in his capacity as each registrant's
Chief Accounting Officer.
CENTERIOR ENERGY CORPORATION
--------------------------------------
(Registrant)
THE CLEVELAND ELECTRIC
ILLUMINATING COMPANY
--------------------------------------
(Registrant)
THE TOLEDO EDISON COMPANY
--------------------------------------
(Registrant)
By: E. LYLE PEPIN
--------------------------------------
E. Lyle Pepin, Controller and Chief
Accounting
Officer of each Registrant
Date: May 15, 1997
F-77
<PAGE> 144
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-78
<PAGE> 145
CENTERIOR ENERGY/CLEVELAND
ELECTRIC/TOLEDO EDISON
COMBINED QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
[THE INCOME STATEMENT, THE BALANCE SHEET,
THE STATEMENT OF CASH FLOWS AND
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS HAVE BEEN OMITTED
FOR CENTERIOR ENERGY]
F-79
<PAGE> 146
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
<TABLE>
<CAPTION>
COMMISSION REGISTRANT; STATE OF INCORPORATION; I.R.S. EMPLOYER
FILE NUMBER ADDRESS; AND TELEPHONE NUMBER IDENTIFICATION NO.
- ----------- ----------------------------------------- ------------------
<S> <C> <C>
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
</TABLE>
Indicate by check mark whether each of the registrants (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
On August 8, 1997, there were 148,024,178 shares of Centerior Energy
Corporation Common Stock outstanding. Centerior Energy Corporation is the sole
holder of the 79,590,689 shares and 39,133,887 shares of common stock of The
Cleveland Electric Illuminating Company and The Toledo Edison Company,
respectively, outstanding on that date.
================================================================================
F-80
<PAGE> 147
This combined Form 10-Q is separately filed by Centerior Energy Corporation
("Centerior Energy"), The Cleveland Electric Illuminating Company ("Cleveland
Electric") and The Toledo Edison Company ("Toledo Edison"). Centerior Energy,
Cleveland Electric and Toledo Edison are sometimes referred to collectively as
the "Companies". Cleveland Electric and Toledo Edison are sometimes collectively
referred to as the "Operating Companies". Information contained herein relating
to any individual registrant is filed by such registrant on its behalf. No
registrant makes any representation as to information relating to any other
registrant, except that information relating to either or both of the Operating
Companies is also attributed to Centerior Energy.
F-81
<PAGE> 148
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES,
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY,
AND THE TOLEDO EDISON COMPANY AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED)
(1) INTERIM FINANCIAL STATEMENTS
Centerior Energy Corporation (Centerior Energy) is the parent company of
Centerior Service Company (Service Company); two electric utilities, The
Cleveland Electric Illuminating Company (Cleveland Electric) and The Toledo
Edison Company (Toledo Edison); and three other wholly owned subsidiaries. The
two utilities are referred to collectively herein as the "Operating Companies"
and individually as an "Operating Company". Centerior Energy, Cleveland Electric
and Toledo Edison are referred to collectively herein as the "Companies".
The comparative income statement and balance sheet and the related
statement of cash flows of each of the Companies have been prepared from the
records of each of the Companies without audit by independent public
accountants. In the opinion of management, all adjustments necessary for a fair
presentation of financial position at June 30, 1997 and results of operations
and cash flows for the three months and six months ended June 30, 1997 and 1996
have been included. All such adjustments were normal recurring adjustments,
except for the write-down of inactive production facilities in the first quarter
of 1996 discussed in Note 6.
In June 1997, Toledo Edison formed a subsidiary, Toledo Edison Capital
Corporation (TECC), to serve as an equity partner in a trust in connection with
the financing transaction discussed in Note 4. The subsidiary was capitalized
with Toledo Edison having a 90% interest and Cleveland Electric having a 10%
interest.
These financial statements and notes should be read in conjunction with the
financial statements and notes included in the Companies' combined Annual Report
on Form 10-K for the year ended December 31, 1996 (1996 Form 10-K) and the
Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (First
Quarter 1997 Form 10-Q). These interim period financial results are not
necessarily indicative of results for a 12-month period.
(2) EQUITY DISTRIBUTION RESTRICTIONS
The Operating Companies can make cash available to fund Centerior Energy's
common stock dividends by paying dividends on their respective common stock,
which is held solely by Centerior Energy. Federal law prohibits the Operating
Companies from paying dividends out of capital accounts. Cleveland Electric has
since 1993 declared and paid preferred and common stock dividends out of
appropriated current net income included in retained earnings. At the times of
such declarations and payments, Cleveland Electric had a deficit in its retained
earnings. From 1993 through June 1997, Toledo Edison declared and paid preferred
stock dividends out of appropriated current net income included in retained
earnings. At the times of such declarations and payments, Toledo Edison had a
deficit in its retained earnings from 1993 through November 1996. Toledo Edison
also has a provision in its mortgage applicable to approximately $94 million of
outstanding first mortgage bonds ($31 million of which matured August 1, 1997)
that requires common stock dividends to be paid out of its total balance of
retained earnings. At June 30, 1997, Toledo Edison's total retained earnings
were $19 million. At June 30, 1997, Cleveland Electric and Toledo Edison had
$95.6 million and $236.6 million, respectively, of appropriated retained
earnings for the payment of dividends. See "Management's Financial
Analysis -- Capital Resources and Liquidity-Liquidity" contained in Item 7 of
the 1996 Form 10-K for a discussion of a Federal Energy Regulatory Commission
(FERC) audit issue regarding the declaration and payment of dividends.
F-82
<PAGE> 149
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES,
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY,
AND THE TOLEDO EDISON COMPANY AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
(3) COMMON STOCK DIVIDENDS
Cash dividends per common share declared by Centerior Energy during the six
months ended June 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Paid February 15..................................................... $.20 $.20
Paid May 15.......................................................... .20 .20
Paid August 15....................................................... .20 .20
</TABLE>
Common stock cash dividends declared by Cleveland Electric during the six
months ended June 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1996 1997
----- -----
(MILLIONS)
<S> <C> <C>
Paid in February................................................... $29.6 $29.6
Paid in May........................................................ 29.6 46.6
</TABLE>
Toledo Edison did not declare any common stock dividends during the six
months ended June 30, 1997 and 1996.
(4) NEW FINANCINGS
In a June 1997 offering (Offering), the Operating Companies pledged $720
million aggregate principal amount of first mortgage bonds due in 2000, 2004 and
2007 to a trust as security for the issuance of a like principal amount of
secured notes due in 2000, 2004 and 2007 (Secured Notes). Cleveland Electric
pledged $175 million principal amount of 7.19% First Mortgage Bonds due 2000,
$280 million principal amount of 7.67% First Mortgage Bonds due 2004 and $120
million principal amount of 7.13% First Mortgage Bonds due 2007, and Toledo
Edison pledged $45 million principal amount of 7.19% First Mortgage Bonds due
2000, $70 million principal amount of 7.67% First Mortgage Bonds due 2004 and
$30 million principal amount of 7.13% First Mortgage Bonds due 2007. The
obligations of the Operating Companies under the Secured Notes are joint and
several.
Also in June 1997 in connection with the Offering, the Companies arranged
for $155 million of short-term borrowings with variable interest rates (at that
time, with a weighted average interest rate of 6.8%). Centerior Energy borrowed
$30 million under a $125 million revolving credit facility which was renewed in
May 1997. See Note 5 to the financial statements in the First Quarter 1997 Form
10-Q. The Operating Companies also had unsecured borrowings totaling $100
million guaranteed by Centerior Energy, and Centerior Energy had $25 million of
unsecured borrowings jointly and severally guaranteed by the Operating
Companies. While the $25 million amount is outstanding, Centerior Energy has
agreed not to use $25 million of the revolving credit facility.
Using available cash, the short-term borrowings and the net proceeds from
the Offering, the Operating Companies invested $906.5 million in the Mansfield
Capital Trust (MCT), an unaffiliated business trust, in June 1997. The MCT used
these funds to purchase lease notes and redeem all $873.2 million aggregate
principal amount of 10 1/4% and 11 1/8% secured lease obligation bonds (SLOBs)
due 2003 and 2016 in July 1997. The SLOBs were issued by a special purpose
funding corporation in 1988 on behalf of lessors in the Operating Companies'
1987 sale and leaseback transaction for the Bruce Mansfield Generating Plant.
F-83
<PAGE> 150
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES,
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY,
AND THE TOLEDO EDISON COMPANY AND SUBSIDIARY
NOTES TO THE FINANCIAL STATEMENTS (UNAUDITED) -- CONTINUED
The transaction allows the Operating Companies to capture the benefit of
lower interest rates through the spread between (1) the interest rates on the
Operating Companies' investments in the MCT and the return on TECC's investment
and (2) the cost of funds for the Operating Companies and TECC, resulting in
lower annual lease expense for the Operating Companies.
For supplemental information on this transaction, see "1. Refinancing of
Mansfield SLOBs" under "Item 5. Other Events" in the Companies' combined Current
Report on Form 8-K dated July 8, 1997 (July 8, 1997 Form 8-K).
(5) OTHER FINANCING ACTIVITY
During the three months ended June 30, 1997, the Operating Companies also
redeemed preferred stock and debt securities as follows:
CLEVELAND ELECTRIC
Mandatory redemptions consisted of $3 million of Serial Preferred
Stock, $88.00 Series E; $10.7 million of Serial Preferred Stock,
$91.50 Series Q; and $0.3 million of tax-exempt notes.
TOLEDO EDISON
Mandatory redemptions consisted of $1.7 million of 9 3/8% Cumulative
Preferred Stock, $100 par value, and $0.2 million of tax-exempt notes.
(6) WRITE-DOWN OF INACTIVE PRODUCTION FACILITIES
In the first quarter of 1996, Toledo Edison wrote down the net book value
of two inactive production facilities, $11.3 million, to "Other Income and
Deductions, Net" resulting in nonoperating losses for Toledo Edison and
Centerior Energy for that period. The net write-down was $7.2 million after
taxes or, for Centerior Energy, $.05 per common share.
(7) COMMITMENTS AND CONTINGENCIES
Various legal actions, claims and regulatory proceedings covering several
matters are pending against the Companies. See "Item 3. Legal Proceedings" in
the 1996 Form 10-K; "Part II, Item 5. Other Information" in this Quarterly
Report on Form 10-Q and in the First Quarter 1997 Form 10-Q; and "Item 5. Other
Events" in the Companies' combined Current Report on Form 8-K dated June 11,
1997.
In September 1996, Centerior Energy and Ohio Edison Company (Ohio Edison)
entered into an agreement and plan of merger to form a new holding company,
FirstEnergy Corp. (FirstEnergy). The merger remains subject to the approval of
the FERC and the Securities and Exchange Commission. For a discussion of the
status of the FERC approval process, see "2. Pending Merger with Ohio Edison"
under "Item 5. Other Events" in the July 8, 1997 Form 8-K and "1. Pending Merger
with Ohio Edison" under "Part II, Item 5. Other Information" in this Quarterly
Report on Form 10-Q.
F-84
<PAGE> 151
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
INCOME STATEMENT
(UNAUDITED)
(THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES.................................... $428,246 $434,025 $859,873 $861,551
OPERATING EXPENSES
Fuel and Purchased Power (1)........................ 102,090 98,216 212,620 201,942
Other Operation and Maintenance..................... 101,409 99,083 192,856 204,215
Generation Facilities Rental Expense, Net........... 13,891 13,891 27,783 27,783
Depreciation and Amortization....................... 53,224 53,033 106,521 103,849
Taxes, Other Than Federal Income Taxes.............. 57,274 59,750 113,960 119,760
Amortization of Deferred Operating Expenses, Net.... 6,567 6,575 13,134 12,943
Federal Income Taxes................................ 16,353 17,565 35,556 29,370
-------- -------- -------- --------
Total Operating Expenses......................... 350,808 348,113 702,430 699,862
-------- -------- -------- --------
OPERATING INCOME...................................... 77,438 85,912 157,443 161,689
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During
Construction..................................... 398 601 725 1,099
Other Income and Deductions, Net.................... (7,031) (1,016) (11,680) 633
Federal Income Taxes -- Credit...................... 1,412 1,034 2,070 282
-------- -------- -------- --------
Total Nonoperating Income (Loss)................. (5,221) 619 (8,885) 2,014
-------- -------- -------- --------
INCOME BEFORE INTEREST CHARGES........................ 72,217 86,531 148,558 163,703
INTEREST CHARGES
Long-Term Debt...................................... 56,211 60,626 110,604 120,786
Short-Term Debt..................................... 2,288 1,372 4,465 2,064
Allowance for Borrowed Funds Used During
Construction..................................... (252) (627) (711) (1,146)
-------- -------- -------- --------
Net Interest Charges............................. 58,247 61,371 114,358 121,704
-------- -------- -------- --------
NET INCOME............................................ 13,970 25,160 34,200 41,999
Preferred Dividend Requirements..................... 9,096 9,813 18,411 19,845
-------- -------- -------- --------
EARNINGS AVAILABLE FOR COMMON STOCK................... $ 4,874 $ 15,347 $ 15,789 $ 22,154
======== ======== ======== ========
(1) Includes purchased power expense for purchases
from Toledo Edison................................ $ 29,454 $ 25,908 $ 58,374 $ 52,580
</TABLE>
The accompanying notes as they relate to Cleveland Electric are an integral part
of this statement.
F-85
<PAGE> 152
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
BALANCE SHEET
(THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant In Service....................................................... $ 7,053,571 $ 6,938,535
Accumulated Depreciation and Amortization...................................... (2,400,777) (2,252,321)
----------- -----------
4,652,794 4,686,214
Construction Work In Progress.................................................. 67,121 56,853
----------- -----------
4,719,915 4,743,067
Nuclear Fuel, Net of Amortization.............................................. 97,922 113,030
Other Property, Less Accumulated Depreciation.................................. 14,999 53,547
----------- -----------
4,832,836 4,909,644
CURRENT ASSETS
Cash and Temporary Cash Investments............................................ 22,126 30,273
Amounts Due from Customers and Others, Net..................................... 160,110 189,547
Amounts Due from Affiliates.................................................... 3,160 5,634
Materials and Supplies, at Average Cost
Owned........................................................................ 52,453 51,686
Under Consignment............................................................ 27,028 23,655
Taxes Applicable to Succeeding Years........................................... 130,591 181,609
Other.......................................................................... 47,530 15,237
----------- -----------
442,998 497,641
REGULATORY AND OTHER ASSETS
Regulatory Assets.............................................................. 1,333,979 1,349,693
Mansfield Capital Trust........................................................ 569,389 --
Nuclear Plant Decommissioning Trusts........................................... 85,995 75,573
Other.......................................................................... 72,259 44,980
----------- -----------
2,061,622 1,470,246
----------- -----------
$ 7,337,456 $ 6,877,531
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity............................................................ $ 1,009,866 $ 1,044,283
Preferred Stock
With Mandatory Redemption Provisions......................................... 172,404 186,118
Without Mandatory Redemption Provisions...................................... 238,325 238,325
Long-Term Debt................................................................. 3,011,080 2,441,215
----------- -----------
4,431,675 3,909,941
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock.......................... 134,874 144,668
Current Portion of Lease Obligations........................................... 46,329 51,592
Notes Payable to Banks and Others.............................................. 70,000 --
Accounts Payable............................................................... 71,373 82,694
Accounts and Notes Payable to Affiliates....................................... 129,282 171,433
Accrued Taxes.................................................................. 242,541 315,998
Accrued Interest............................................................... 53,932 52,487
Dividends Declared............................................................. 5,686 15,228
Other.......................................................................... 39,689 43,672
----------- -----------
793,706 877,772
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits............................................. 172,186 176,130
Accumulated Deferred Federal Income Taxes...................................... 1,328,181 1,305,601
Unamortized Gain from Bruce Mansfield Plant Sale............................... 288,256 295,730
Accumulated Deferred Rents for Bruce Mansfield Plant........................... 101,750 98,767
Nuclear Fuel Lease Obligations................................................. 63,429 73,947
Retirement Benefits............................................................ 75,750 72,843
Other.......................................................................... 82,523 66,800
----------- -----------
2,112,075 2,089,818
COMMITMENTS AND CONTINGENCIES (Note 7)
----------- -----------
$ 7,337,456 $ 6,877,531
=========== ===========
</TABLE>
The accompanying notes as they relate to Cleveland Electric are an integral part
of this statement.
F-86
<PAGE> 153
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
CASH FLOWS
(UNAUDITED)
(THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1997 1996
---------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income........................................................ $ 34,200 $ 41,999
-------- --------
Adjustments to Reconcile Net Income to Cash from Operating
Activities:
Depreciation and Amortization.................................. 106,521 103,849
Deferred Federal Income Taxes.................................. 22,197 22,905
Deferred Fuel.................................................. 12,775 (52)
Leased Nuclear Fuel Amortization............................... 25,186 20,338
Amortization of Deferred Operating Expenses, Net............... 13,134 12,943
Allowance for Equity Funds Used During Construction............ (725) (1,099)
Changes in Amounts Due from Customers and Others, Net.......... 14,965 (35,708)
Changes in Materials and Supplies.............................. (4,140) 7,415
Changes in Accounts Payable.................................... (11,321) 4,886
Changes in Working Capital Affecting Operations................ (55,980) (31,895)
Other Noncash Items............................................ 5,636 (12,856)
-------- --------
Total Adjustments............................................ 128,248 90,726
-------- --------
Net Cash from Operating Activities........................... 162,448 132,725
CASH FLOWS FROM FINANCING ACTIVITIES
Bank Loans, Commercial Paper and Other Short-Term Debt............ 70,000 100,000
Notes Payable to Affiliates....................................... (40,967) 41,411
Secured Note Issues............................................... 575,000 --
Maturities, Redemptions and Sinking Funds......................... (29,014) (50,614)
Nuclear Fuel Lease Obligations.................................... (25,861) (29,533)
Dividends Paid.................................................... (77,952) (96,388)
Premiums, Discounts and Expenses.................................. (53) (249)
-------- --------
Net Cash from Financing Activities........................... 471,153 (35,373)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction...................................... (54,261) (51,455)
Interest Capitalized as Allowance for Borrowed Funds Used During
Construction................................................... (711) (1,146)
Contributions to Nuclear Plant Decommissioning Trusts............. (5,856) (3,204)
Investment in Mansfield Capital Trust............................. (569,389) --
Purchases of Accounts Receivable from Affiliate................... -- (76,326)
Other Cash Received (Applied)..................................... (11,531) 6,174
-------- --------
Net Cash from Investing Activities........................... (641,748) (125,957)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS................... (8,147) (28,605)
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD.......... 30,273 69,770
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD................ $ 22,126 $ 41,165
======== ========
Other Payment Information:
Interest (net of amounts capitalized)............................. $110,000 $119,000
Federal Income Taxes (Refund)..................................... 8,300 (6,200)
</TABLE>
The accompanying notes as they relate to Cleveland Electric are an integral part
of this statement.
F-87
<PAGE> 154
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of the 1996 Form 10-K
and in the First Quarter 1997 Form 10-Q. The information under "Capital
Resources and Liquidity" remains unchanged with the following exceptions:
As discussed in Note 4, the Operating Companies refinanced high-cost fixed
obligations through a lower cost transaction.
During the second quarter of 1997, Cleveland Electric redeemed various
securities as discussed in Note 5.
S&P and Moody's raised the credit ratings for Cleveland Electric's
securities in July and August 1997, respectively, in anticipation of Centerior
Energy's pending merger with Ohio Edison. S&P indicated that, should the merger
not be consummated, its prior ratings would be restored. Current credit ratings
for Cleveland Electric are as follows:
<TABLE>
<CAPTION>
SECURITIES S&P MOODY'S
------------------------------------------------------------------ ---- -------
<S> <C> <C>
First Mortgage Bonds.............................................. BB+ Ba1
Subordinate Debt.................................................. BB- Ba3
Preferred Stock................................................... BB- b1
</TABLE>
In the third quarter of 1997, Cleveland Electric plans to refinance with
lower-cost securities $180.6 million principal amount of first mortgage bonds
issued as security for certain tax-exempt bonds issued by public authorities.
Additional first mortgage bonds may be issued by Cleveland Electric under
its mortgage on the basis of property additions, cash or refundable first
mortgage bonds. If the applicable interest coverage test is met, Cleveland
Electric may issue first mortgage bonds on the basis of property additions and,
under certain circumstances, refundable bonds. At June 30, 1997, Cleveland
Electric would not have been permitted to issue a material amount of additional
first mortgage bonds, except in connection with refinancings. If FirstEnergy
elects to apply purchase accounting to Cleveland Electric upon completion of
Centerior Energy's pending merger with Ohio Edison, Cleveland Electric's
available bondable property would be reduced to below zero.
Cleveland Electric expects its foreseeable future cash needs to be
satisfied with internally generated cash and available credit facilities and,
therefore, that it will not need to issue first mortgage bonds, except in
connection with planned refinancings.
F-88
<PAGE> 155
RESULTS OF OPERATIONS
Factors contributing to the 1.3% and 0.2% decreases in 1997 operating
revenues from 1996 for the second quarter and six months, respectively, are
shown as follows:
<TABLE>
<CAPTION>
CHANGES FOR PERIOD
ENDED JUNE 30, 1997
-------------------
THREE SIX
FACTORS MONTHS MONTHS
--------------------------------------------------------------- ------ ------
(MILLIONS)
<S> <C> <C>
Kilowatt-hour Sales Volume and Mix............................. $(9.5) $(8.8)
Unbilled Revenues.............................................. 6.0 (6.0)
Wholesale Revenues............................................. 1.9 9.4
Base Rates..................................................... (6.7) 8.3
Fuel Cost Recovery Revenues.................................... 0.2 2.5
Miscellaneous Revenues......................................... 2.3 (7.1)
----- -----
Total.......................................................... $(5.8) $(1.7)
===== =====
</TABLE>
Percentage changes between 1997 and 1996 billed electric kilowatt-hour
sales are summarized as follows:
<TABLE>
<CAPTION>
CHANGES FOR PERIOD
ENDED JUNE 30, 1997
-------------------
THREE SIX
CUSTOMER CATEGORIES MONTHS MONTHS
- ---------------------------------------- ------ ------
<S> <C> <C>
Residential............................. (5.3)% (2.0)%
Commercial.............................. (4.1) (1.4)
Industrial.............................. 2.0 0.1
Other................................... 20.3 52.7
Total................................... 0.4 4.4
</TABLE>
Second quarter 1997 total kilowatt-hour sales increased slightly as
increases in industrial and other sales were partially offset by fewer
residential and commercial sales. Industrial sales increased on the strength of
increased sales to the broad-based, smaller industrial customer group and large
primary metals industry customers, which were partially offset by fewer sales to
large automotive manufacturers. Other sales increased as a 39% increase in
wholesale sales was partially offset by fewer sales to public authorities.
Residential and commercial sales declined because of a change in the meter
reading schedule in June 1997, which reduced the number of days in the billing
cycles, and the milder weather in the 1997 period. Weather-normalized
residential and commercial sales decreased 3.1% and 3%, respectively, for the
1997 period. Kilowatt-hour sales data does not reflect a significant portion of
the effect of hot weather in the second half of June 1997 because those sales
were not billed by the end of the month. However, the estimated revenues from
those sales have been recorded.
Total kilowatt-hour sales increased for the six-month period in 1997 as
increased wholesale sales were partially offset by fewer residential and
commercial sales. Industrial sales increased slightly primarily because of
increased sales to the broad-based, smaller industrial customer group. Wholesale
sales increased 73%. Residential and commercial sales declined because of the
milder weather in the 1997 period. On a weather-normalized basis, residential
sales increased 1.7% for the 1997 period, while commercial sales decreased 0.4%.
Wholesale sales in 1996 were suppressed by soft market conditions and
limited power availability for bulk power transactions because of nuclear
generating plant refueling and maintenance outages.
The net changes in 1997 base rates revenues resulted from the April 1996
rate order issued by the PUCO and renegotiated contracts for certain large
industrial customers which resulted in a decrease in base rates for those
customers.
F-89
<PAGE> 156
The increases in 1997 fuel cost recovery revenues included in customer
bills resulted from increases in the fuel cost recovery factors used in 1997 to
calculate these revenues compared to those used in 1996. The increases in the
weighted averages of the fuel cost recovery factors for 1997 were about 0.3% and
2% for the second quarter and six months, respectively.
Second quarter miscellaneous revenues in 1997 increased from the 1996
amount primarily because of the retroactive effect of a reclassification of
certain revenues as credits to operating expenses. The reclassification was
recorded in the 1996 second quarter. A significant portion of the six-month
decrease in miscellaneous revenues in 1997 related to a canceled generating
plant lease agreement for which a refund payment was made in the 1997 first
quarter.
Second quarter operating expenses in 1997 increased 0.8% from the 1996
amount. Fuel and purchased power expenses increased as higher purchased power
expense was partially offset by lower fuel expense. A change in the system
generating mix (more nuclear generation and less coal-fired generation in the
1997 period than in the 1996 period) accounted for a large part of the lower
fuel expense for the 1997 period. Taxes, other than federal income taxes,
decreased primarily because of lower property and payroll tax accruals. Federal
income taxes decreased as a result of lower pretax operating income.
The second quarter 1997 nonoperating loss resulted primarily from both
Cleveland Electric's share of expenses related to Centerior Energy's pending
merger with Ohio Edison and certain costs associated with an accounts receivable
securitization.
Second quarter 1997 interest charges and preferred dividend requirements
decreased primarily because of the redemption of securities in 1996 and 1997.
Six-month operating expenses in 1997 increased 0.4% from the 1996 amount.
Fuel and purchased power expenses increased for the same reasons cited for the
second quarter 1997 increase in these expenses. Federal income taxes increased
as a result of higher pretax operating income. Depreciation and amortization
expenses increased primarily because of changes in depreciation rates approved
in the April 1996 PUCO rate order. Other operation and maintenance expenses
decreased as a result of ongoing cost cutting and work force reductions. Taxes,
other than federal income taxes, decreased for the same reason cited for the
second quarter 1997 decrease in these expenses.
The six-month 1997 nonoperating loss resulted primarily from both Cleveland
Electric's share of merger-related expenses and certain costs associated with an
accounts receivable securitization.
Six-month 1997 interest charges and preferred dividend requirements
decreased primarily because of the same reason cited for the second quarter 1997
decrease in these charges.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued two new statements of financial accounting
standards, one for the reporting of comprehensive income and one for the
disclosures about segments of an enterprise and related information. Both
statements are effective for 1998 reporting. Cleveland Electric has not
completed analyses to determine the effects of adopting the new standards.
F-90
<PAGE> 157
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
INCOME STATEMENT
(UNAUDITED)
(THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
OPERATING REVENUES (1).......................... $222,144 $210,940 $439,204 $421,733
OPERATING EXPENSES
Fuel and Purchased Power...................... 44,501 40,652 87,815 79,420
Other Operation and Maintenance............... 55,455 58,244 111,772 114,763
Generation Facilities Rental Expense, Net..... 25,923 25,962 51,884 51,923
Depreciation and Amortization................. 23,516 23,689 47,330 46,105
Taxes, Other Than Federal Income Taxes........ 22,601 23,572 45,395 47,425
Amortization of Deferred Operating Expenses,
Net........................................ 4,291 4,293 8,582 8,468
Federal Income Taxes.......................... 9,780 3,872 17,992 10,099
-------- -------- -------- --------
Total Operating Expenses.............. 186,067 180,284 370,770 358,203
-------- -------- -------- --------
OPERATING INCOME................................ 36,077 30,656 68,434 63,530
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During
Construction............................... 54 186 386 599
Other Income and Deductions, Net.............. 900 374 473 (8,779)
Federal Income Taxes -- Credit (Expense)...... (601) 115 (826) 3,310
-------- -------- -------- --------
Total Nonoperating Income (Loss)...... 353 675 33 (4,870)
-------- -------- -------- --------
INCOME BEFORE INTEREST CHARGES.................. 36,430 31,331 68,467 58,660
INTEREST CHARGES
Long-Term Debt................................ 21,956 22,704 44,067 45,863
Short-Term Debt............................... 1,369 1,145 2,559 2,363
Allowance for Borrowed Funds Used During
Construction............................... (11) (146) (115) (471)
-------- -------- -------- --------
Net Interest Charges.................. 23,314 23,703 46,511 47,755
-------- -------- -------- --------
NET INCOME...................................... 13,116 7,628 21,956 10,905
Preferred Dividend Requirements............... 4,211 4,229 8,405 8,433
-------- -------- -------- --------
EARNINGS AVAILABLE FOR COMMON STOCK............. $ 8,905 $ 3,399 $ 13,551 $ 2,472
-------- -------- -------- --------
(1) Includes revenues from bulk power sales to
Cleveland Electric.......................... $ 29,454 $ 25,908 $ 58,374 $ 52,580
</TABLE>
The accompanying notes as they relate to Toledo Edison are an integral part of
this statement.
F-91
<PAGE> 158
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
BALANCE SHEET
(THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
1996
JUNE 30, ------------
1997
-----------
(UNAUDITED)
<S> <C> <C>
ASSETS
PROPERTY, PLANT AND EQUIPMENT
Utility Plant In Service....................................................... $ 2,945,663 $ 2,928,657
Accumulated Depreciation and Amortization...................................... (1,066,369) (1,019,836)
---------- ----------
1,879,294 1,908,821
Construction Work In Progress.................................................. 23,883 21,479
---------- ----------
1,903,177 1,930,300
Nuclear Fuel, Net of Amortization.............................................. 64,848 76,118
Other Property, Less Accumulated Depreciation.................................. 7,003 8,460
---------- ----------
1,975,028 2,014,878
CURRENT ASSETS
Cash and Temporary Cash Investments............................................ 22,502 81,454
Amounts Due from Customers and Others, Net..................................... 29,007 16,308
Amounts Due from Affiliates.................................................... 92,949 95,336
Materials and Supplies, at Average Cost
Owned........................................................................ 31,601 33,160
Under Consignment............................................................ 10,170 10,383
Taxes Applicable to Succeeding Years........................................... 51,898 68,352
Other.......................................................................... 2,498 3,479
---------- ----------
240,625 308,472
REGULATORY AND OTHER ASSETS
Regulatory Assets.............................................................. 914,600 927,629
Mansfield Capital Trust........................................................ 337,099 --
Nuclear Plant Decommissioning Trusts........................................... 72,277 64,093
Other.......................................................................... 32,669 42,408
---------- ----------
1,356,645 1,034,130
---------- ----------
$ 3,572,298 $ 3,357,480
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity............................................................ $ 816,795 $ 803,237
Preferred Stock
With Mandatory Redemption Provisions......................................... 1,690 3,355
Without Mandatory Redemption Provisions...................................... 210,000 210,000
Long-Term Debt................................................................. 1,121,783 1,003,026
---------- ----------
2,150,268 2,019,618
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock.......................... 69,465 51,365
Current Portion of Lease Obligations........................................... 33,367 36,244
Notes Payable to Banks and Others.............................................. 30,000 --
Accounts Payable............................................................... 44,574 46,496
Accounts and Notes Payable to Affiliates....................................... 81,964 30,016
Accrued Taxes.................................................................. 64,849 72,829
Accrued Interest............................................................... 22,337 22,348
Other.......................................................................... 17,162 18,722
---------- ----------
363,718 278,020
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits............................................. 73,451 75,417
Accumulated Deferred Federal Income Taxes...................................... 562,474 565,600
Unamortized Gain from Bruce Mansfield Plant Sale............................... 174,454 179,027
Accumulated Deferred Rents for Bruce Mansfield Plant and Beaver Valley Unit
2............................................................................ 39,960 39,188
Nuclear Fuel Lease Obligations................................................. 41,303 48,491
Retirement Benefits............................................................ 104,332 102,214
Other.......................................................................... 62,338 49,905
---------- ----------
1,058,312 1,059,842
COMMITMENTS AND CONTINGENCIES (NOTE 7)
---------- ----------
$ 3,572,298 $ 3,357,480
========== ==========
</TABLE>
The accompanying notes as they relate to Toledo Edison are an integral part of
this statement.
F-92
<PAGE> 159
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
CASH FLOWS
(UNAUDITED)
(THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income........................................................... $ 21,956 $ 10,905
-------- --------
Adjustments to Reconcile Net Income to Cash from Operating
Activities:
Depreciation and Amortization..................................... 47,330 46,105
Deferred Federal Income Taxes..................................... (3,126) 13,368
Deferred Fuel..................................................... 6,116 1,643
Leased Nuclear Fuel Amortization.................................. 17,634 15,461
Amortization of Deferred Operating Expenses, Net.................. 8,582 8,468
Allowance for Equity Funds Used During Construction............... (386) (599)
Changes in Amounts Due from Customers and Others, Net............. (5,103) (4,461)
Sales of Accounts Receivable to Affiliate......................... -- 76,326
Changes in Materials and Supplies................................. 1,772 1,689
Changes in Accounts Payable....................................... (1,922) 2,553
Changes in Working Capital Affecting Operations................... (3,947) (30,245)
Other Noncash Items............................................... 9,886 (12,787)
-------- --------
Total Adjustments............................................ 76,836 117,521
-------- --------
Net Cash from Operating Activities........................... 98,792 128,426
CASH FLOWS FROM FINANCING ACTIVITIES
Bank Loans, Commercial Paper and Other Short-Term Debt............... 30,000 --
Notes Payable to Affiliates.......................................... 55,000 (20,950)
Secured Note Issues.................................................. 145,000 --
Maturities, Redemptions and Sinking Funds............................ (9,865) (43,865)
Nuclear Fuel Lease Obligations....................................... (18,060) (23,318)
Dividends Paid....................................................... (8,397) (8,437)
Premiums, Discounts and Expenses..................................... (28) (225)
-------- --------
Net Cash from Financing Activities........................... 193,650 (96,795)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction......................................... (25,004) (23,850)
Interest Capitalized as Allowance for Borrowed Funds Used During
Construction...................................................... (115) (471)
Loans to Affiliates.................................................. 11,166 (46,411)
Contributions to Nuclear Plant Decommissioning Trusts................ (4,919) (2,693)
Investment in Mansfield Capital Trust................................ (337,099) --
Other Cash Received.................................................. 4,577 397
-------- --------
Net Cash from Investing Activities........................... (351,394) (73,028)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS...................... (58,952) (41,397)
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD............. 81,454 93,669
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD................... $ 22,502 $ 52,272
======== ========
Other Payment Information:
Interest (net of amounts capitalized)................................ $ 44,000 $ 46,000
Federal Income Taxes................................................. 4,300 10,400
</TABLE>
The accompanying notes as they relate to Toledo Edison are an integral part of
this statement.
F-93
<PAGE> 160
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAPITAL RESOURCES AND LIQUIDITY
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of the 1996 Form 10-K
and in the First Quarter 1997 Form 10-Q. The information under "Capital
Resources and Liquidity" remains unchanged with the following exceptions:
As discussed in Note 4, the Operating Companies refinanced high-cost fixed
obligations through a lower cost transaction.
During the second quarter of 1997, Toledo Edison redeemed various
securities as discussed in Note 5.
S&P and Moody's raised the credit ratings for Toledo Edison's securities in
July and August 1997, respectively, in anticipation of Centerior Energy's
pending merger with Ohio Edison. S&P indicated that, should the merger not be
consummated, its prior ratings would be restored. Current credit ratings for
Toledo Edison are as follows:
<TABLE>
<CAPTION>
SECURITIES S&P MOODY'S
-------------------------------------------------------- ---- -------
<S> <C> <C>
First Mortgage Bonds.................................... BB+ Ba1
Subordinate Debt........................................ BB- Ba3
Preferred Stock......................................... BB- b1
</TABLE>
In the third quarter of 1997, Toledo Edison plans to refinance with
lower-cost securities $10.1 million principal amount of first mortgage bonds
issued as security for certain tax-exempt bonds issued by public authorities.
Additional first mortgage bonds may be issued by Toledo Edison under its
mortgage on the basis of property additions, cash or refundable first mortgage
bonds. If the applicable interest coverage test is met, Toledo Edison may issue
first mortgage bonds on the basis of property additions and, under certain
circumstances, refundable bonds. At June 30, 1997, Toledo Edison would not have
been permitted to issue a material amount of additional first mortgage bonds,
except in connection with refinancings. If FirstEnergy elects to apply purchase
accounting to Toledo Edison upon completion of Centerior Energy's pending merger
with Ohio Edison, Toledo Edison's available bondable property would be reduced
to below zero.
Toledo Edison expects its foreseeable future cash needs to be satisfied
with internally generated cash and available credit facilities and, therefore,
that it will not need to issue first mortgage bonds, except in connection with
planned refinancings.
F-94
<PAGE> 161
RESULTS OF OPERATIONS
Factors contributing to the 5.3% and 4.1% increases in 1997 operating
revenues from 1996 for the second quarter and six months, respectively, are
shown as follows:
<TABLE>
<CAPTION>
CHANGES FOR PERIOD
ENDED JUNE 30,
1997
------------------
THREE SIX
FACTORS MONTHS MONTHS
---------------------------------------------------------------- ------ -------
(MILLIONS)
<S> <C> <C>
Kilowatt-hour Sales Volume and Mix.............................. $ 10.2 $ 16.4
Unbilled Revenues............................................... 7.0 4.0
Wholesale Revenues.............................................. 4.2 7.1
Base Rates...................................................... (6.0) (3.4)
Fuel Cost Recovery Revenues..................................... (3.0) (4.5)
Miscellaneous Revenues.......................................... (1.2) (2.1)
----- -----
Total........................................................... $ 11.2 $ 17.5
===== =====
</TABLE>
Percentage changes between 1997 and 1996 billed electric kilowatt-hour
sales are summarized as follows:
<TABLE>
<CAPTION>
CHANGES FOR PERIOD
ENDED JUNE 30,
1997
------------------
THREE SIX
CUSTOMER CATEGORIES MONTHS MONTHS
--------------------------------------------------------- ------ -------
<S> <C> <C>
Residential.............................................. (2.4)% (2.8)%
Commercial............................................... (1.5) 0.7
Industrial............................................... 11.9 10.0
Other.................................................... 21.1 21.0
Total.................................................... 9.4 8.7
</TABLE>
Second quarter 1997 total kilowatt-hour sales increased primarily because
of increased industrial and wholesale sales. Industrial sales increased on the
strength of increased sales to large primary metals industry customers
(including the new North Star BHP Steel facility) and the broad-based, smaller
industrial customer group. Wholesale sales (included in the "Other" category)
increased 22%. Residential and commercial sales declined because of the milder
weather in the 1997 period. On a weather-normalized basis, residential sales
increased 0.9% for the 1997 period. Kilowatt-hour sales data does not reflect a
significant portion of the effect of hot weather in the second half of June 1997
because those sales were not billed by the end of the month. However, the
estimated revenues from those sales have been recorded.
Total kilowatt-hour sales increased for the six-month period in 1997
primarily because of increased industrial and wholesale sales. Industrial sales
growth reflected increased sales to large primary metals, automotive and glass
manufacturers and the broad-based, smaller industrial customer group. Wholesale
sales increased 24%. While residential sales declined because of the milder
weather in the 1997 period, commercial sales increased slightly.
Weather-normalized residential and commercial sales increased 0.5% and 1.9%,
respectively, for the 1997 period.
Wholesale sales in 1996 were suppressed by soft market conditions and
limited power availability for bulk power transactions because of nuclear
generating plant refueling and maintenance outages.
Renegotiated contracts for certain large industrial customers resulted in a
decrease in base rates which entirely offset the effect of the general price
increase under the April 1996 rate order issued by the PUCO, resulting in
decreases in 1997 base rates revenues.
The decreases in 1997 fuel cost recovery revenues included in customer
bills resulted from decreases in the fuel cost recovery factors used in 1997 to
calculate these revenues compared to those used in 1996. The decreases in the
weighted averages of the fuel cost recovery factors for 1997 were about 10% and
7% for the second quarter and six months, respectively.
F-95
<PAGE> 162
Second quarter operating expenses in 1997 increased 3.2% from the 1996
amount. Fuel and purchased power expenses increased as higher purchased power
expense was partially offset by lower fuel expense. A change in the system
generating mix (more nuclear generation and less coal-fired generation in the
1997 period than in the 1996 period) accounted for a large part of the lower
fuel expense for the 1997 period. Federal income taxes increased as a result of
higher pretax operating income. Other operation and maintenance expenses
decreased as a result of ongoing cost cutting and work force reductions. Taxes,
other than federal income taxes, decreased primarily because of lower property
and payroll tax accruals.
Second quarter 1997 interest charges and preferred dividend requirements
decreased slightly primarily because of the redemption of securities in 1996 and
1997.
Six-month operating expenses in 1997 increased 3.5% from the 1996 amount.
Fuel and purchased power expenses increased for the same reasons cited for the
second quarter 1997 increase in these expenses. Federal income taxes increased
as a result of higher pretax operating income. Depreciation and amortization
expenses increased primarily because of changes in depreciation rates approved
in the April 1996 PUCO rate order. Other operation and maintenance expenses and
taxes, other than federal income taxes, decreased for the same reasons cited for
the second quarter 1997 decreases in these expenses.
The six-month 1996 nonoperating loss resulted primarily from the write-down
of two inactive production facilities as discussed in Note 6.
Six-month 1997 interest charges and preferred dividend requirements
decreased primarily because of the same reason cited for the second quarter 1997
decrease in these charges.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued two new statements of financial accounting
standards, one for the reporting of comprehensive income and one for the
disclosures about segments of an enterprise and related information. Both
statements are effective for 1998 reporting. Toledo Edison has not completed
analyses to determine the effects of adopting the new standards.
F-96
<PAGE> 163
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
1. PENDING MERGER WITH OHIO EDISON
For additional information relating to this topic, see "Outlook-Pending
Merger with Ohio Edison" under "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" in the Companies' Annual Report
on Form 10-K for the year ended December 31, 1996 ("1996 Form 10-K") and
"Pending Merger with Ohio Edison" under "Item 5. Other Events" in the Companies'
Form 8-K Current Reports dated June 11, 1997 and July 8, 1997.
On August 8, 1997, Ohio Edison Company and the Companies filed a revised
analysis, additional testimony and proposed mitigation measures fully responsive
to the FERC's July 16, 1997 Order. While the revised analysis suggests potential
anticompetitive effects in certain markets under certain limited circumstances,
the Companies believe that the mitigation measures more than adequately address
these concerns through a variety of transmission solutions which are intended to
ensure that the proposed merger's effects are procompetitive. As a result of the
mitigation measures, municipal electric systems in Ohio Edison's and the
Companies' service areas will be able to take full advantage of additional third
party generation sources made available to them as a result of FirstEnergy's
open access transmission tariff. Accordingly, whether or not the FERC grants
their separate request to shorten the comment period from 60 to 30 days, the
Companies continue to believe the FERC will approve the proposed merger prior to
year end.
2. CONJUNCTIVE ELECTRIC SERVICE ("CES")
In December 1996, The Public Utilities Commission of Ohio ("PUCO") ruled
that all Ohio electric utilities were required to file tariffs which would
provide for a new type of electric service in which various customers could
aggregate together and negotiate their electric rates with the utilities. The
Operating Companies filed their version of a CES tariff on March 31, 1997. On
April 28, 1997, Cleveland Electric and Toledo Edison, as well as three other
Ohio utilities, appealed the PUCO's order to the Ohio Supreme Court. The City of
Toledo and Enron Capital and Trade Resources have moved to intervene. The
Operating Companies have filed merit briefs asserting that the PUCO is without
statutory authority to require utilities to file tariffs which will permit
customers to aggregate and negotiate their electric rates with the utilities.
3. FIRSTENERGY RATE PLAN
For additional information relating to this topic, see "Management's
Financial Analysis -- Outlook-FirstEnergy Rate Plan" in the Companies' 1996 Form
10-K.
Various intervenors have filed a motion at the PUCO seeking clarification
of the status of the FirstEnergy Rate Plan in light of their assertions that
PUCO approval of such plan was conditioned upon an acceptable CES tariff, and
that the Operating Companies' CES tariff, discussed in Item 2 above, is
unacceptable. FirstEnergy and the Operating Companies have responded that the
PUCO lacks authority to impose CES tariffs and that the PUCO has not yet
determined whether the Operating Companies' filed version of a CES tariff is
acceptable.
4. PLANTS TO BE DECOMMISSIONED
On June 24, 1997, Cleveland Electric's Board of Directors authorized the
decommissioning later this year of several older coal-fired units with aggregate
generating capacity of 266 MW. This capacity can be economically replaced by
purchasing power, and the planned decommissioning will not materially adversely
affect Cleveland Electric's results of operations.
5. OHIO ABANDONS NUCLEAR WASTE PROJECT
The six-state Midwest Compact Commission has abandoned planning a facility
to store low-level radioactive waste from nuclear power plants and other
producers. Officials from the compact, which included Ohio, said a facility is
no longer needed and would cost too much to build. Disposal sites in South
Carolina
F-97
<PAGE> 164
and Utah are now open to waste generators. The decision has no immediate impact
on the Companies' operations or costs, while long-term implications are under
study.
6. NEW FEDERAL RULES
For additional information relating to this topic, see "Environmental
Regulation -- Air Quality Control" under "Item 1. Business" in the Companies'
1996 Form 10-K.
The U.S. Environmental Protection Agency has issued new clean air standards
for ozone and fine particulates that could require the Operating Companies to
install additional air pollution control equipment and/or switch fuel sources at
the Operating Companies' fossil-fueled plants after 2002. Compliance would be
required by 2004. The new rules have been challenged in court by trade
associations. The PUCO estimates the new rules will cost Ohio utilities
approximately $760 million per year, and increase the average cost of
electricity by 7%. The Companies are evaluating their options.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
See Exhibit Index following.
B. REPORTS ON FORM 8-K
During the quarter ended June 30, 1997, Centerior Energy, Cleveland
Electric and Toledo Edison each filed one Current Report on Form 8-K with the
Securities and Exchange Commission.
A Form 8-K dated June 11, 1997 and filed June 18, 1997 included one item
under "Item 5. Other Events". That item, "Pending Merger with Ohio Edison",
reported on agreements reached with the City of Cleveland and American Municipal
Power-Ohio and the withdrawal of their opposition to the pending merger of
Centerior Energy and Ohio Edison Company.
F-98
<PAGE> 165
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. The person signing this report on behalf
of each such registrant is also signing in his capacity as each registrant's
Chief Accounting Officer.
CENTERIOR ENERGY CORPORATION
--------------------------------------
(Registrant)
THE CLEVELAND ELECTRIC
ILLUMINATING COMPANY
--------------------------------------
(Registrant)
THE TOLEDO EDISON COMPANY
--------------------------------------
(Registrant)
By: E. LYLE PEPIN
--------------------------------------
E. Lyle Pepin, Controller and Chief
Accounting Officer
of each Registrant
Date: August 14, 1997
F-99
<PAGE> 166
APPENDIX I
[SPECIMEN]
<TABLE>
<S> <C>
AMBAC Ambac Assurance Corporation
c/o CT Corporation Systems
44 East Mifflin Street, Madison, Wisconsin 53703
Financial Guaranty Insurance Policy Administrative Office:
One State Street Plaza, New York, New York 10004
Telephone: (212) 668-0340
</TABLE>
Obligor: Policy Number:
Obligations: Premium:
AMBAC ASSURANCE CORPORATION (AMBAC) A Wisconsin Stock Insurance Company in
consideration of the payment of the premium and subject to the terms of this
Policy, hereby agrees to pay to United States Trust Company of New York, as
trustee, or its successor (the "Insurance Trustee"), for the benefit of the
Obligees, that portion of the principal of and interest on the above-described
obligations (the "Obligations") which shall become Due for Payment but shall be
unpaid by reason of Nonpayment by the Obligor.
Ambac will make such payments to the Insurance Trustee within one (1) business
day following notification to Ambac of Nonpayment. Upon an Obligee's
presentation and surrender to the Insurance Trustee of such unpaid Obligations
or appurtenant coupons, uncanceled and in bearer form free of any adverse claim,
the Insurance Trustee will disburse to the Obligee the face amount of principal
and interest which is then Due for Payment but is unpaid. Upon such
disbursement, Ambac shall become the owner of the surrendered Obligations and
coupons and shall be fully subrogated to all of the Obligee's rights to payment.
In cases where the Obligations are issuable only in a form whereby principal is
payable to registered Obligees or their assigns, the Insurance Trustee shall
disburse principal to an Obligee as aforesaid only upon presentation and
surrender to the Insurance Trustee of the unpaid Obligation, uncanceled and free
of any adverse claim, together with an instrument of assignment, in form
satisfactory to the Insurance Trustee duly executed by the Obligee or such
Obligee's duly authorized representative, so as to permit ownership of such
Obligation to be registered in the name of Ambac or its nominee. In cases where
the Obligations are issuable only in a form whereby interest is payable to
registered Obligees or their assigns the Insurance Trustee shall disburse
interest to an Obligee as aforesaid only upon presentation to the Insurance
Trustee of proof that the claimant is the person entitled to the payment of
interest on the Obligation and delivery to the Insurance Trustee of an
instrument of assignment, in form satisfactory to the Insurance Trustee, duly
executed by the claimant Obligee or such Obligee's duly authorized
representative, transferring to Ambac all rights under such Obligation to
receive the interest in respect of which the insurance disbursement was made.
Ambac shall be subrogated to all of the Obligees' rights to payment on
registered Obligations to the extent of the insurance disbursements so made.
In the event that a trustee or paying agent for the Obligations has notice that
any payment of principal of or interest on an Obligation which has become Due
for Payment and which is made to an Obligee by or on behalf of the Obligor has
been deemed a preferential transfer and theretofore recovered from the Obligee
pursuant to the United States Bankruptcy Code in accordance with a final,
nonappealable order of a court of competent jurisdiction, such Obligee will be
entitled to payment from Ambac to the extent of such recovery if sufficient
funds are not otherwise available.
As used herein, the term "Obligee" means any person other than the Obligor who,
at the time of Nonpayment, is the owner of an Obligation or of a coupon
appertaining to an Obligation. As used herein, "Due for Payment", when
referring to the principal of Obligations, is when the stated maturity date or
mandatory redemption date for the application of a required sinking fund
installment has been reached and does not refer to any earlier date on which
payment is due by reason of call for redemption (other than by application of
required sinking fund installments), acceleration or other advancement of
maturity; and, when referring to interest on the Obligations, is when the
stated date for payment of interest has been reached. As used herein,
"Nonpayment" means the failure of the Obligor to have provided sufficient funds
to the paying agent for payment in full of all principal of and interest on the
Obligations which are Due for Payment.
This Policy is noncancelable. The premium on this Policy is not refundable for
any reason, including payment of the Obligations prior to maturity. This
Policy does not insure against loss of any prepayment or other acceleration
payment which at any time may become due in respect of any Obligation, other
than at the sole option of Ambac, nor against any risk other than Nonpayment.
In witness whereof, Ambac has caused this Policy to be affixed with a
facsimile of its corporate seal and to be signed by its duly authorized
officers in facsimile to become effective as its original seal and signatures
and binding upon Ambac by virtue of the countersignature of its duly
authorized representative.
/s/ P. Lassiter AMBAC ASSURANCE CORPORATION /s/ _______ A. Cooke
President SEAL Secretary
WISCONSIN
Effective Date: Authorized Representative
UNITED STATES TRUST COMPANY OF NEW YORK /s/ H. William Weber
acknowledges that it has agreed to perform
the duties of Insurance Trustee under this Authorized Officer
Policy.
Form No.: 2B-0012(7/97)
<PAGE> 167
======================================================
No dealer, salesperson or other individual has been authorized to give any
information or to make any representations in connection with the Exchange Offer
other than those contained or incorporated by reference in this Prospectus and
the accompanying Letter of Transmittal. If given or made, such information or
representations must not be relied upon as having been authorized by the
Companies or the Exchange Agent. Neither this Prospectus nor the accompanying
Letter of Transmittal, or both together, constitute an offer to sell, or a
solicitation of an offer to buy, Secured Notes in any jurisdiction where, or to
any person to whom, it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus nor the accompanying Letter of Transmittal, or
both together, nor any sale made hereunder shall, under any circumstances,
create an implication that there has not been a change in the facts set forth in
this Prospectus or in the affairs of the Companies since the date hereof.
UNTIL ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Available Information.................. 3
Incorporation of Certain Documents by
Reference............................ 3
Summary Information.................... 4
Risk Factors........................... 12
Selected Financial Information for
Cleveland Electric................... 16
Selected Financial Information for
Toledo Edison........................ 17
The Companies.......................... 18
Pending Merger of Centerior Energy and
Ohio Edison.......................... 28
Pending Merger of Cleveland Electric
and Toledo Edison.................... 30
Combined Pro Forma Condensed Balance
Sheets of Cleveland Electric and
Toledo Edison........................ 32
Combined Pro Forma Condensed Income
Statements of Cleveland Electric and
Toledo Edison........................ 34
The Exchange Offer..................... 36
Description of the New Notes........... 43
Credit Enhancement of Secured Notes due
2007................................. 49
Descriptions of Cleveland Electric
Bonds and Toledo Edison Bonds........ 51
Certain Tax Considerations............. 60
Plan of Distribution................... 63
Legal Matters.......................... 63
Experts................................ 63
Index to Financial Statements
Section.............................. F-1
Financial Guaranty Insurance Policy.... Appendix 1
</TABLE>
======================================================
======================================================
$720,000,000
EXCHANGE OFFER
THE CLEVELAND ELECTRIC
ILLUMINATING COMPANY
THE TOLEDO EDISON
COMPANY
OFFER TO EXCHANGE
7.19% SERIES B SECURED NOTES DUE 2000,
7.67% SERIES B SECURED NOTES DUE 2004 OR
7.13% SERIES B SECURED NOTES DUE 2007
FOR ANY AND ALL OUTSTANDING
7.19% SERIES A SECURED NOTES DUE 2000,
7.67% SERIES A SECURED NOTES DUE 2004 OR
7.13% SERIES A SECURED NOTES DUE 2007, RESPECTIVELY
PROSPECTUS
, 1997
======================================================
<PAGE> 168
PART II
ITEM 20 INDEMNIFICATION OF DIRECTORS AND OFFICERS
Cleveland Electric Regulations provide that each person who is or has been
a director or officer of Cleveland Electric shall be indemnified by Cleveland
Electric against judgments, penalties, reasonable settlements, legal fees and
expenses arising out of any threatened, pending or completed proceedings of a
criminal, administrative or investigative nature in which he or she may become
involved by reason of his or her relationship to Cleveland Electric (other than
a proceeding by or on behalf of Cleveland Electric), but only if he or she is
found, by the disinterested members of the Cleveland Electric Board, by
independent counsel or by the Share Owners, (a) to have acted in good faith and
in a manner he or she reasonably believed to be in, or not opposed to, the best
interests of Cleveland Electric and (b) in the case of a criminal matter, to
have had no reasonable cause to believe his or her conduct was unlawful.
In the case of actions brought by or on behalf of Cleveland Electric
against a director or officer, indemnification is provided only for reasonable
legal fees and expenses and only if it is determined that he or she acted in
good faith and in a manner he or she reasonably believed to be in, or not
opposed to, the best interests of Cleveland Electric; but if he or she is
adjudged to be liable due to negligence or misconduct, indemnification is
provided only if an appropriate court determines that indemnification is fair
and reasonable under the circumstances.
Similar indemnification also may be made available by Cleveland Electric to
its directors and officers, and to a limited extent may be available as a matter
of right to such persons, under Section 1701.13 of the Revised Code of Ohio.
The Code of Regulations of Toledo Edison provides that Toledo Edison will
indemnify each director and officer against judgments, fines and amounts paid in
settlement and attorneys' fees and other expenses incurred in connection with
suits and proceedings involving his or her actions as a director or officer to
the full extent Toledo Edison is authorized to do so under the Ohio General
Corporation Law as now in effect or as amended from time to time.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Companies
pursuant to the foregoing provisions, the Companies have been informed that in
the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. In the event
that a claim for indemnification against liabilities described in the preceding
paragraphs (other than the payment by the Companies of expenses incurred or paid
by a director, officer or controlling person of the Companies in the successful
defense of any action, suit or proceeding) is asserted by a director, officer or
controlling person, the Companies will, unless in the opinion of their counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether indemnification by them is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The Companies maintain and pay the premium on contracts insuring the
Companies (with certain exclusions) against any liability to directors and
officers they may incur under the above indemnity provisions and insuring each
director and officer of the Companies (with certain exclusions) against
liability and expense, including legal fees, which he or she may incur by reason
of his or her relationship to the Companies, even if the Companies do no have
the obligation or right to indemnify him or her against such liability or
expense.
ITEM 21 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
See Exhibit Index and exhibits following.
(B) FINANCIAL STATEMENT SCHEDULES.
No schedules are required.
II-1
<PAGE> 169
ITEM 22 UNDERTAKINGS
The undersigned registrants hereby undertake as follows:
(1) To file, during any period when offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering;
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request; and
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it became
effective.
See also the fifth paragraph of Item 20 above.
II-2
<PAGE> 170
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF INDEPENDENCE, STATE OF
OHIO, ON THE 18TH DAY OF SEPTEMBER, 1997.
THE CLEVELAND ELECTRIC ILLUMINATING
COMPANY
Registrant
By JANIS T. PERCIO
--------------------------------------
Janis T. Percio, Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------ --------------------
<S> <C> <C>
(i) Principal executive officer:
*ROBERT J. FARLING Chairman of the Board and
Chief
Executive Officer
(ii) Principal financial officer:
*TERRENCE G. LINNERT Vice President & Chief
Financial Officer
(iii) Principal accounting officer:
*E. LYLE PEPIN Controller September 18, 1997
(iv) Directors:
*ROBERT J. FARLING Director
*MURRAY R. EDELMAN Director
*FRED J. LANGE, JR. Director
</TABLE>
*By JANIS T. PERCIO
---------------------------------------------------------
Janis T. Percio, Attorney-in-fact
II-3
<PAGE> 171
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF INDEPENDENCE, STATE OF
OHIO, ON THE 18TH DAY OF SEPTEMBER, 1997.
THE TOLEDO EDISON COMPANY
Registrant
By JANIS T. PERCIO
--------------------------------------
Janis T. Percio, Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------------------- ------------------------------ --------------------
<S> <C> <C>
(i) Principal executive officer:
*ROBERT J. FARLING Chairman of the Board and
Chief
Executive Officer
(ii) Principal financial officer:
*TERRENCE G. LINNERT Vice President & Chief
Financial Officer
(iii) Principal accounting officer:
*E. LYLE PEPIN Controller September 18, 1997
(iv) Directors:
*ROBERT J. FARLING Director
*MURRAY R. EDELMAN Director
*FRED J. LANGE, JR. Director
</TABLE>
*By JANIS T. PERCIO
---------------------------------------------------------
Janis T. Percio, Attorney-in-fact
II-4
<PAGE> 172
EXHIBIT INDEX
Exhibits Filed Herewith
The following Exhibits are filed herewith and made a part hereof:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- ---------------------------------------------------------------------------------
<C> <S>
1(a) Placement Agreement.
1(b) Registration Agreement.
1(c) Letter of Transmittal.
1(d) Notice of Guaranteed Delivery.
1(e) Nominee Letter.
1(f) Client's Letter.
4(a) Seventy-Fourth Supplemental Indenture of The Cleveland Electric Illuminating
Company dated June 15, 1997.
4(b) Forty-sixth Supplemental Indenture of The Toledo Edison Company dated as of June
15, 1997.
4(c) Note Indenture dated as of June 13, 1997.
4(d) First Supplemental Note Indenture dated as of June 13, 1997.
5 Opinion of counsel for the Companies.
12 Statements regarding computation of ratios.
23(a) Consent of Arthur Andersen LLP.
23(b) Consent of counsel for the Companies (included in Exhibit 5).
24 Powers of Attorney.
25 Form T-1 Statement of Eligibility and Qualification under Trust Indenture of 1939
of The Chase Manhattan Bank, as Note Trustee.
</TABLE>
EXHIBITS INCORPORATED BY REFERENCE
The exhibits listed below have been filed heretofore with the SEC pursuant
to requirements of the Acts administered by the SEC and are incorporated herein
by reference and made a part hereof. The exhibit number and file number of such
documents are stated in parenthesis.
CLEVELAND ELECTRIC EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------- -------------------------------------------------------------------------------
<C> <S>
3a Amended Articles of Incorporation of Cleveland Electric, as amended, effective
May 28, 1993 (Exhibit 3a, 1993 Form 10-K, File No. 1-2323).
3b Regulations of Cleveland Electric, dated April 29, 1981, as amended effective
October 1, 1988 and April 24, 1990 (Exhibit 3b, 1990 Form 10-K, File No.
1-2323).
4b(1) Mortgage and Deed of Trust, dated July 1, 1940, between Cleveland Electric and
Guaranty Trust Company of New York, as trustee, (under which The Chase
Manhattan Bank is successor trustee) (Exhibit 7(a), File No. 2-4450).
Supplemental Indentures between Cleveland Electric and the Trustee,
supplemental to Exhibit 4b(1), dated as follows:
4b(2) July 1, 1940 (Exhibit 7(b), File No. 2-4450).
4b(3) August 18, 1944 (Exhibit 4(c), File No. 2-9887).
</TABLE>
<PAGE> 173
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------- -------------------------------------------------------------------------------
<S> <C>
4b(4) December 1, 1947 (Exhibit 7(d), File No. 2-7306).
4b(5) September 1, 1950 (Exhibit 7(c), File No. 2-8587).
4b(6) June 1, 1951 (Exhibit 7(f), File No. 2-8994).
4b(7) May 1, 1954 (Exhibit 4(d), File No. 2-10830).
4b(8) March 1, 1958 (Exhibit 2(a)(4), File No. 2-13839).
4b(9) April 1, 1959 (Exhibit 2(a)(4), File No. 2-14753).
4b(10) December 20, 1967 (Exhibit 2(a)(4), File No. 2-30759).
4b(11) January 15, 1969 (Exhibit 2(a)(5), File No. 2-30759).
4b(12) November 1, 1969 (Exhibit 2(a)(4), File No. 2-35008).
4b(13) June 1, 1970 (Exhibit 2(a)(4), File No. 2-37235).
4b(14) November 15, 1970 (Exhibit 2(a)(4), File No. 2-38460).
4b(15) May 1, 1974 (Exhibit 2(a)(4), File No. 2-50537).
4b(16) April 15, 1975 (Exhibit 2(a)(4), File No. 2-52995).
4b(17) April 16, 1975 (Exhibit 2(a)(4), File No. 2-53309).
4b(18) May 28, 1975 (Exhibit 2(c), June 5, 1975 Form 8-A, File No. 1-2323).
4b(19) February 1, 1976 (Exhibit 3(d)(6), 1975 Form 10-K, File No. 1-2323).
4b(20) November 23, 1976 (Exhibit 2(a)(4), File No. 2-57375).
4b(21) July 26, 1977 (Exhibit 2(a)(4), File No. 2-59401).
4b(22) September 27, 1977 (Exhibit 2(a)(5), File No. 2-67221).
4b(23) May 1, 1978 (Exhibit 2(b), June 30, 1978 Form 10-Q, File No. 1-2323).
4b(24) September 1, 1979 (Exhibit 2(a), September 30, 1979 Form 10-Q, File No.
1-2323).
4b(25) April 1, 1980 (Exhibit 4(a)(2), September 30, 1980 Form 10-Q, File No. 1-2323).
4b(26) April 15, 1980 (Exhibit 4(b), September 30, 1980 Form 10-Q, File No. 1-2323).
4b(27) May 28, 1980 (Exhibit 2(a)(4), Amendment No. 1, File No. 2-67221).
4b(28) June 9, 1980 (Exhibit 4(d), September 30, 1980 Form 10-Q, File No. 1-2323).
4b(29) December 1, 1980 (Exhibit 4(b)(29), 1980 Form 10-K, File No. 1-2323).
4b(30) July 28, 1981 (Exhibit 4(a), September 30, 1981, Form 10-Q, File No. 1-2323).
4b(31) August 1, 1981 (Exhibit 4(b), September 30, 1981, Form 10-Q, File No. 1-2323).
4b(32) March 1, 1982 (Exhibit 4(b)(3), Amendment No. 1, File No. 2-76029).
4b(33) July 15, 1982 (Exhibit 4(a), September 30, 1982 Form 10-Q, File No. 1-2323).
4b(34) September 1, 1982 (Exhibit 4(a)(1), September 30, 1982 Form 10-Q, File No.
1-2323).
4b(35) November 1, 1982 (Exhibit 4(a)(2), September 30, 1982 Form 10-Q, File No.
1-2323).
4b(36) November 15, 1982 (Exhibit 4(b)(36), 1982 Form 10-K, File No. 1-2323).
4b(37) May 24, 1983 (Exhibit 4(a), June 30, 1983 Form 10-Q, File No. 1-2323).
4b(38) May 1, 1984 (Exhibit 4, June 30, 1984 Form 10-Q, File No. 1-2323).
4b(39) May 23, 1984 (Exhibit 4, May 22, 1984 Form 8-K, File No. 1-2323).
4b(40) June 27, 1984 (Exhibit 4, June 11, 1984 Form 8-K, File No. 1-2323).
4b(41) September 4, 1984 (Exhibit 4b(41), 1984 Form 10-K, File No. 1-2323).
4b(42) November 14, 1984 (Exhibit 4b(42), 1984 Form 10-K, File No. 1-2323).
4b(43) November 15, 1984 (Exhibit 4b(43), 1984 Form 10-K, File No. 1-2323).
4b(44) April 15, 1985 (Exhibit 4(a), May 8, 1985 Form 8-K, File No. 1-2323).
</TABLE>
<PAGE> 174
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- -------------- -------------------------------------------------------------------------------
<S> <C>
4b(45) May 28, 1985 (Exhibit 4(b), May 8, 1985 Form 8-K, File No. 1-2323).
4b(46) August 1, 1985 (Exhibit 4, September 30, 1985 Form 10-Q, File No. 1-2323).
4b(47) September 1, 1985 (Exhibit 4, September 30, 1985 Form 8-K, File No. 1-2323).
4b(48) November 1, 1985 (Exhibit 4, January 31, 1986 Form S-K, File No. 1-2323).
4b(49) April 15, 1986 (Exhibit 4, March 31, 1986 Form 10-Q, File No. 1-2323).
4b(50) May 14, 1986 (Exhibit 4(a), June 30, 1986 Form 10-Q, File No. 1-2323).
4b(51) May 15, 1986 (Exhibit 4(b), June 30, 1986 Form 10-Q, File No. 1-2323).
4b(52) February 25, 1987 (Exhibit 4b(52), 1986 Form 10-K, File No. 1-2323).
4b(53) October 15, 1987 (Exhibit 4, September 30, 1987 Form 10-Q, File No. 1-2323).
4b(54) February 24, 1988 (Exhibit 4b(54), 1987 Form 10-K, File No. 1-2323).
4b(55) September 15, 1988 (Exhibit 4b(55), 1988 Form 10-K, File No. 1-2323).
4b(56) May 15, 1989 (Exhibit 4(a)(2)(i), File No. 33-32724).
4b(57) June 13, 1989 (Exhibit 4(a)(2)(ii), File No. 33-32724).
4b(58) October 15, 1989 (Exhibit 4(a)(2)(iii), File No. 33-32724).
4b(59) January 1, 1990 (Exhibit 4b(59), 1989 Form 10-K, File No. 1-2323).
4b(60) June 1, 1990 (Exhibit 4(a), September 30, 1990 Form 10-Q, File No. 1-2323).
4b(61) August 1, 1990 (Exhibit 4(b), September 30, 1990 Form 10-Q, File No. 1-2323).
4b(62) May 1, 1991 (Exhibit 4(a), June 30, 1991 Form 10-Q, File No. 1-2323).
4b(63) May 1, 1992 (Exhibit 4(a)(3), File No. 33-48845).
4b(64) July 31, 1992 (Exhibit 4(a)(3), File No. 33-57292).
4b(65) January 1, 1993 (Exhibit 4b(65), 1992 Form 10-K, File No. 1-2323).
4b(66) February 1, 1993 (Exhibit 4b(66), 1992 Form 10-K, File No. 1-2323).
4b(67) May 20, 1993 (Exhibit 4(a), July 14, 1993 Form 8-K, File No. 1-2323).
4b(68) June 1, 1993 (Exhibit 4(b), July 14, 1993 Form 8-K, File No. 1-2323).
4b(69) September 15, 1994 (Exhibit 4(a), September 30, 1994 Form 10-Q, File No.
1-2323).
4b(70) May 1, 1995 (Exhibit 4(a), September 30, 1995 Form 10-Q, File No. 1-2323).
4b(71) May 2, 1995 (Exhibit 4(b), September 30, 1995 Form 10-Q, File No. 1-2323).
4b(72) June 1, 1995 (Exhibit 4(c), September 30, 1995 Form 10-Q, File No. 1-2323).
4b(73) July 15, 1995 (Exhibit 4b(73), 1995 Form 10-K, File No. 1-2323).
4b(74) August 1, 1995 (Exhibit 4b(74), 1995 Form 10-K, File No. 1-2323).
4c Open-End Subordinate Indenture of Mortgage between The Cleveland Electric
Illuminating Company and Bank One, Columbus, N.A., as Trustee, Dated as of June
1, 1994 (Exhibit 4(a), August 26, 1994 Form 8-K, File No. 1-2323).
</TABLE>
<PAGE> 175
TOLEDO EDISON EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
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3a Amended Articles of Incorporation of Toledo Edison, as amended effective
October 2, 1992 (Exhibit 3a, 1992 Form 10-K, File No. 1-3583).
3b Code of Regulations of Toledo Edison dated January 28, 1987, as amended
effective July 1 and October 1, 1988 and April 24, 1990 (Exhibit 3b, 1990 Form
10-K, File No. 1-3583).
4b(l) Indenture, dated as of April 1, 1947, between the Company and The Chase
National Bank of the City of New York (now The Chase Manhattan Bank) (Exhibit
2(b), File No. 2-26908).
Supplemental Indentures between Toledo Edison and the Trustee, Supplemental to
Exhibit 4b(l), dated as follows:
4b(2) September 1, 1948 (Exhibit 2(d), File No. 2-26908).
4b(3) April 1, 1949 (Exhibit 2(e), File No. 2-26908).
4b(4) December 1, 1950 (Exhibit 2(f), File No. 2-26908).
4b(5) March 1, 1954 (Exhibit 2(g), File No. 2-26908).
4b(6) February 1, 1956 (Exhibit 2(h), File No. 2-26908).
4b(7) May 1, 1958 (Exhibit 5(g), File No. 2-59794).
4b(8) August 1, 1967 (Exhibit 2(c), File No. 2-26908).
4b(9) November 1, 1970 (Exhibit 2(c), File No. 2-38569).
4b(10) August 1, 1972 (Exhibit 2(c), File No. 2-44873).
4b(11) November 1, 1973 (Exhibit 2(c), File No. 2-49428).
4b(12) July 1, 1974 (Exhibit 2(c), File No. 2-51429).
4b(13) October 1, 1975 (Exhibit 2(c), File No. 2-54627).
4b(14) June 1, 1976 (Exhibit 2(c), File No. 2-56396).
4b(15) October 1, 1978 (Exhibit 2(c), File No. 2-62568).
4b(16) September 1, 1979 (Exhibit 2(c), File No. 2-65350).
4b(17) September 1, 1980 (Exhibit 4(s), File No. 2-69190).
4b(18) October 1, 1980 (Exhibit 4(c), File No. 2-69190).
4b(19) April 1, 1981 (Exhibit 4(c), File No. 2-71580).
4b(20) November 1, 1981 (Exhibit 4(c), File No. 2-74485).
4b(21) June 1, 1982 (Exhibit 4(c), File No. 2-77763).
4b(22) September 1, 1982 (Exhibit 4(x), File No. 2-87323).
4b(23) April 1, 1983 (Exhibit 4(c), March 31, 1983 Form 10-Q, File No. 1-3583).
4b(24) December 1, 1983 (Exhibit 4(x), 1983 Form 10-K, File No. 1-3583).
4b(25) April 1, 1984 (Exhibit 4(c), File No. 2-90059).
4b(26) October 15, 1984 (Exhibit 4(z), 1984 Form 10-K, File No. 1-3583).
4b(27) October 15, 1984 (Exhibit 4(aa), 1984 Form 10-K, File No. 1-3583).
4b(28) August 1, 1985 (Exhibit 4(dd), File No. 33-1689).
4b(29) August 1, 1985 (Exhibit 4(ee), File No. 33-1689).
4b(30) December 1, 1985 (Exhibit 4(c)f File No. 33-1689).
4b(31) March 1, 1986 (Exhibit 4b(31), 1986 Form 10-K, File No.1-3583).
4b(32) October 15, 1987 (Exhibit 4, September 30, 1987 Form 10-Q, File No. l-3583).
</TABLE>
<PAGE> 176
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DOCUMENT
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<S> <C>
4b(33) September 15, 1988 (Exhibit 4b(33), 1988 Form 10-K, File No. 1-3583).
4b(34) June 15, 1989 (Exhibit 4b(34), 1989 Form 10-K, File No. 1-3583).
4b(35) October 15, 1989 (Exhibit 4b(35), 1989 Form 10-K, File No. 1-3583).
4b(36) May 15, 1990 (Exhibit 4, June 30, 1990 Form 10-Q, File No. 1-3583).
4b(37) March 1, 1991 (Exhibit 4(b), June 30, 1991 Form 10-Q, File No. 1-3583).
4b(38) May 1, 1992 (Exhibit 4(a)(3), File No. 33-48844).
4b(39) August 1, 1992 (Exhibit 4b(39), 1992 Form 10-K, File No. 1-3583).
4b(40) October 1, 1992 (Exhibit 4b(40), 1992 Form 10-K, File No. 1-3583).
4b(41) January 1, 1993 (Exhibit 4b(41), 1992 Form 10-K, File No. 1-3583).
4b(42) September 15, 1994 (Exhibit 4(b), September 30, 1994 Form 10-Q, File No.
1-3583).
4b(43) May 1, 1995 (Exhibit 4(d), September 30, 1995 Form 10-Q, File No. 1-3583).
4b(44) June 1, 1995 (Exhibit 4(e), September 30, 1995 Form 10-Q, File No. 1-3583).
4b(45) July 14, 1995 (Exhibit 4(f), September 30, 1995 Form 10-Q, File No. 1-3583).
4b(46) July 15, 1995 (Exhibit 4(g), September 30, 1995 Form 10-Q, File No. 1-3583).
4c Open-End Subordinate Indenture of Mortgage between The Toledo Edison Company
and Bank One, Columbus, N.A., as Trustee, Dated as of June 1, 1994 (Exhibit
4(b), August 26, 1994 Form 8-K, File No. 1-3583).
</TABLE>
Pursuant to Paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, the
Registrants have not filed as an exhibit to this Form S-4 any instrument with
respect to long-term debt if the total amount of securities authorized
thereunder does not exceed 10% of the total assets of the applicable Registrant
and its subsidiaries on a consolidated basis, but each hereby agrees to furnish
to the Securities and Exchange Commission on request any such instruments.
<PAGE> 1
EXHIBIT 1(A)
PLACEMENT AGREEMENT
June 11, 1997
Morgan Stanley & Co.
Incorporated
Citicorp Securities, Inc.
Credit Suisse First Boston
McDonald & Company Securities, Inc.
c/o Morgan Stanley & Co.
Incorporated
1585 Broadway
New York, New York 10036
Dear Sirs:
The Cleveland Electric Illuminating Company, an Ohio
corporation ("Cleveland Electric"), and The Toledo Edison Company, an Ohio
corporation ("Toledo Edison," and each of Cleveland Electric and Toledo Edison,
a "Company" and collectively, the "Companies), propose jointly and severally to
issue and sell to the purchasers named in Schedule I hereto (the "Purchasers")
$220,000,000 principal amount of 7.19% Series A Secured Notes Due 2000,
$350,000,000 principal amount of 7.67% Series A Secured Notes Due 2004, and
$150,000,000 principal amount of 7.13% Series A Secured Notes Due 2007 (those
three tranches of Notes collectively, the "Notes"), to be issued pursuant to an
Indenture to be dated as of June 13, 1997 and a First Supplemental Indenture to
be dated June 13, 1997 (that Indenture, as supplemented by that First
Supplemental Indenture, the "Indenture") between the Company and The Chase
Manhattan Bank, a New York banking corporation, as trustee (the "Trustee").
The Notes will be offered without being registered under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance on
exemptions therefrom. You have advised the Companies and agree that you will
make an offering of the Notes purchased by you hereunder in accordance with
Section 6 hereof on the terms set forth in the Preliminary Memorandum and the
Final Memorandum (each as defined below), as soon as practicable after the date
hereof as in your judgment is advisable. The Companies hereby confirm that they
have authorized the use of the Preliminary Memorandum and the Offering
Memorandum in connection with that offering of the Notes by you. Purchasers of
the Notes (including subsequent transferees) will have the registration rights
set forth in the Registration Agreement of even date
<PAGE> 2
herewith (the "Registration Agreement"), among the Companies and the Purchasers.
Pursuant to the Registration Agreement, the Companies have agreed to file with
the Securities and Exchange Commission (the "Commission") a registration
statement (the "Exchange Offer Registration Statement") under the Securities Act
pursuant to which the Companies will offer to exchange the Notes of each tranche
for an issue under the Indenture of secured notes of the Companies (the
"Exchange Notes") with terms identical to the Notes of that tranche (except that
the Exchange Notes will not contain terms with respect to transfer
restrictions).
In connection with the sale of the Notes, the Companies have
prepared a preliminary offering memorandum (the "Preliminary Memorandum") and
will prepare a final offering memorandum (the "Final Memorandum" and, with the
Preliminary Memorandum, each a "Memorandum") setting forth or including a
description of the terms of the Notes, the terms of the offering, a description
of the Companies and any material developments relating to either Company
occurring after the date of the most recent financial statements included
therein.
1. REPRESENTATIONS AND WARRANTIES. The Companies jointly and
severally represent and warrant to, and agree with, you that as of the date
hereof:
(a) The Preliminary Memorandum does not contain and the Final
Memorandum, in the form used by the Purchasers to confirm sales and on the
Closing Date, will not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this Section l(a) do not apply to
statements or omissions in either Memorandum based upon information relating to
any Purchaser furnished to the Companies in writing by that Purchaser through
you expressly for use therein.
(b) Each Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the State of Ohio,
has the corporate power and authority to own its property and to conduct its
business as described in each Memorandum and is duly qualified to transact
business and is in good standing in each jurisdiction in which the conduct of
its business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or be in
good standing would not have a material adverse effect on that Company and its
Subsidiaries (as defined below), taken as a whole.
(c) Each Subsidiary of each Company (i) other than those
subsidiaries specified in clause (ii) of this paragraph (1)(c) has been duly
incorporated, is validly existing as a
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<PAGE> 3
corporation in good standing under the laws of the jurisdiction of its
incorporation, and has corporate power and authority to own its property and to
conduct its business as described in the Final Memorandum or (ii) that is not a
corporation is a limited partnership, has been duly formed and is validly
existing as a limited partnership in good standing under the laws of the
jurisdiction of its formation, and has full power and authority to own its
property and to conduct its business as described in the Final Memorandum; and,
in either case, is duly qualified to transact business and is in good standing
in each jurisdiction in which the conduct of its business or its ownership or
leasing of property required such qualification, except to the extent that the
failure to be so qualified or be in good standing would not have a material
adverse effect on the Company and its Subsidiaries, taken as a whole; and
neither Company is a general partner in any partnership. As used herein, the
term "Subsidiary" has the meaning ascribed to it in the Indenture.
(d) The financial statements included or incorporated by
reference in each Memorandum present fairly the financial position of each
Company and its consolidated Subsidiaries and the results of their operations
for the periods specified; and except as otherwise stated in each Memorandum,
those financial statements have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis.
(e) The pro forma adjustments described in each Memorandum
have been properly applied on the bases described therein and each Company
believes that such adjustments with respect to it and the assumptions that
underlie those adjustments are reasonable.
(f) [Intentionally omitted.]
(g) This Agreement has been duly authorized, executed and
delivered by each Company.
(h) The Indenture has been duly authorized, and when executed
and delivered by the Companies (assuming due authorization, execution and
delivery by the Trustee) will constitute a valid and binding agreement of each
Company, enforceable in accordance with its terms except as (i) the
enforceability thereof may be limited by bankruptcy, insolvency or similar laws
affecting creditors, rights generally and (ii) rights of acceleration and the
availability of equitable remedies may be limited by equitable principles of
general applicability.
(i) The Notes have been duly authorized by each Company and,
when the Notes are executed by the Companies and authenticated by the Trustee in
accordance with the Indenture and delivered to and paid for by the Purchasers in
accordance with this Agreement, the Notes will be entitled to the benefits of
the Indenture, and will be valid and binding joint and several
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<PAGE> 4
obligations of the Companies, enforceable in accordance with their terms except
as (i) the enforceability thereof may be limited by bankruptcy, insolvency or
similar laws affecting creditors, rights generally and (ii) rights of
acceleration and the availability of equitable remedies may be limited by
equitable principles of general applicability.
(j) The Registration Agreement has been duly authorized,
executed and delivered by the Companies and (assuming due authorization,
execution and delivery by the Purchasers) constitutes a valid and binding
agreement of each Company, enforceable in accordance with its terms except as
(i) the enforceability thereof may be limited by bankruptcy, insolvency or
similar laws affecting creditors' rights generally and (ii) the availability of
equitable remedies may be limited by equitable principles of general
applicability.
(k) The execution and delivery by the Companies of, and the
performance by the Companies of their obligations under, this Agreement, the
Indenture, the Notes and the Registration Agreement will not contravene any
provision of applicable law or the articles of incorporation, regulations,
partnership agreement or other organizational documents of either Company or any
Subsidiary of either Company or any agreement or other instrument binding upon
either Company or any Subsidiary of either Company, or any judgment, order or
decree of any governmental body, agency or court having jurisdiction over either
Company or any Subsidiary of either Company, and no consent, approval,
authorization or order of, or qualification with, any governmental body or
agency is required for the performance by either Company of its obligations
under this Agreement, the Indenture, the Notes or the Registration Agreement,
except such as may be required (i) by the securities or Blue Sky laws of the
various states in connection with the offer and sale of the Notes and (ii) by
the securities or Blue Sky laws of the various states and the Securities Act in
connection with the offer of the Exchange Notes and (iii) from The Public
Utilities Commission of Ohio (whose approval for the performance by the
Companies of their obligations under the Agreement, the Indenture, the Notes and
the Registration Agreement has been obtained).
(l) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the condition,
financial or otherwise, or in the earnings, business or operations of either
Company and its Subsidiaries, taken as a whole, from that set forth in the Final
Memorandum.
(m) Neither Company nor any Subsidiary of either Company is in
violation of its respective articles of incorporation or regulations,
partnership agreement or other organizational documents and neither Company nor
any Subsidiary of either Company is in default in the performance of any bond,
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<PAGE> 5
debenture, note or any other evidence of indebtedness or any indenture,
mortgage, deed of trust or other contract, lease or other instrument to which it
is a party or by which any of them is bound, or to which any of its property or
assets is subject, except such violations or defaults as have been waived or
which would not have, singly or in the aggregate, a material adverse effect on
either Company and its Subsidiaries, taken as a whole.
(n) Each Company and each of its Subsidiaries has obtained all
necessary consents, authorizations, approvals, orders, licenses, certificates
and permits of and from, and has made all declarations and filings with, all
foreign, federal, state, local and other governmental authorities, all
self-regulatory organizations and all courts and other tribunals, required to
own, lease, license, construct, operate and use its properties and assets and to
conduct its business in the manner described in the Final Memorandum, except to
the extent that the failure to obtain, declare or file would not have a material
adverse effect on that Company, and its Subsidiaries, taken as a whole.
(o) There are no legal or governmental proceedings pending or,
to the knowledge of either Company, threatened to which either Company or any
Subsidiary of either Company is a party or to which any of the properties of
either Company or any Subsidiary of either Company is subject other than
proceedings accurately described in all material respects in the Final
Memorandum and proceedings that would not have a material adverse effect on
either Company and its Subsidiaries, taken as a whole, or on the power or
ability of either Company to perform its obligations under this Agreement, the
Indenture, the Notes or the Registration Agreement or to consummate the
transactions contemplated by the Final Memorandum.
(p) Neither Company nor any affiliate (as defined in Rule
501(b) of Regulation D under the Securities Act, an "Affiliate") of either
Company has directly, or through any agent, (i) sold, offered for sale,
solicited offers to buy or otherwise negotiated in respect of, any security (as
defined in the Securities Act) which is or will be integrated with the sale of
the Notes in a manner that would require the registration under the Securities
Act of the Notes or (ii) engaged in any form of general solicitation or general
advertising in connection with the offering of the Notes (as those terms are
used in Regulation D under the Securities Act) or in any manner involving a
public offering within the meaning of section 4(2) of the Securities Act.
(q) Neither Company is an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended.
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<PAGE> 6
(r) It is not necessary in connection with the offer, sale and
delivery of the Notes to the Purchasers in the manner contemplated by this
Agreement to register the Notes under the Securities Act or to qualify the
Indenture under the Trust Indenture Act of 1939, as amended.
(s) Each Company and each of its Subsidiaries (i) is in
compliance with any and all applicable foreign, federal, state and local laws
and regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), (ii) has received all permits, licenses or
other approvals required of it under applicable Environmental Laws to conduct
its business and (iii) is in compliance with all terms and conditions of any
such permit, license or approval, except in cases in which that noncompliance
with Environmental Laws, failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions of such permits,
licenses or approvals would not, singly or in the aggregate, have a material
adverse effect on that Company and its Subsidiaries, taken as a whole.
(t) In the ordinary course of its business, each Company
conducts a periodic review of the effect of Environmental Laws on the business,
operations and properties of that Company and its Subsidiaries, in the course of
which it identifies and evaluates associated costs and liabilities (including,
without limitation, any capital or operating expenditures required for clean-up,
closure of properties or compliance with Environmental Laws or any permit,
license or approval, any related constraints on operating activities and any
potential liabilities to third parties). On the basis of that review, each
Company has reasonably concluded that such associated costs and liabilities
would not, singly or in the aggregate, have a material adverse effect on that
Company and its Subsidiaries, taken as a whole.
(u) Neither Company nor any of either Company's Affiliates or
any person acting on its or their behalf (other than the Purchasers) has engaged
in any directed selling efforts (as that term is defined in Regulation S under
the Securities Act ("Regulation S")) with respect to the Notes and each Company
and its Affiliates and any person acting on its or their behalf (other than the
Purchasers) has complied with the offering restrictions requirement of
Regulation S.
(v) Each Company is a "subsidiary" of Centerior Energy
Corporation, which is a "holding company," as such terms are defined in the
Public Utility Holding Company Act of 1935, as amended. Centerior Energy
Corporation is exempt from regulation under such Act pursuant to Section 3(a)(1)
thereof and the rules and regulations thereunder promulgated by the Securities
and Exchange Commission (the "Commission") and, therefore, each Company is also
exempt from such regulation.
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<PAGE> 7
(w) The Companies have obtained a commitment from AMBAC
Indemnity Corporation, a Wisconsin-domiciled stock insurance company ("AMBAC
Indemnity"), to issue a financial guaranty insurance policy (the "Financial
Guaranty Insurance Policy") relating to the Secured Notes Due 2007 effective as
of the date of issuance of the Notes. The Secured Notes due 2007 will be
entitled to the benefit of the Financial Guaranty Insurance Policy as described
in the Final Memorandum.
(x) Cleveland Electric's Mortgage and Deed of Trust dated July
1, 1940, to Guaranty Trust Company of New York as Trustee, under which The Chase
Manhattan Bank (National Association) is successor trustee (the "Cleveland
Mortgage Trustee"), as supplemented and modified in certain respects by
indentures supplemental thereto (the "CEI Mortgage"), including the
Seventy-Fourth Supplemental Indenture dated June 15, 1997 (the "CEI Supplemental
Indenture"), and the First Mortgage Bonds, Series due 2000, the First Mortgage
Bonds, Series due 2004, and the First Mortgage Bonds, Series due 2007, of
Cleveland Electric (collectively, the "CEI First Mortgage Bonds") issued under
the CEI Mortgage and the CEI Supplemental Indenture, on or before the Closing
Date will have been duly authorized, executed and delivered by Cleveland
Electric and, as to the CEI First Mortgage Bonds, assuming that they have been
duly authenticated by the Cleveland Mortgage Trustee, constitute valid and
binding obligations enforceable against each Company in accordance with their
terms, except to the extent that the binding effect and enforceability thereof
are subject to applicable bankruptcy, insolvency, reorganization, moratorium and
other laws in effect from time to time affecting the rights of creditors
generally or the enforcement of the security provided by the Cleveland Mortgage,
and except to the extent that the enforceability thereof may be limited by the
application of general principles of equity and may be subject to limitations
upon the right to obtain judicial orders requiring specific performance;
(y) The execution and delivery of the CEI Supplemental
Indenture and the CEI First Mortgage Bonds and the performance by Cleveland
Electric of its obligations thereunder and under the CEI Mortgage (to the extent
pertinent to the issuance of the CEI First Mortgage Bonds), will not constitute
a default under, or conflict with or violate any of the provisions of, the
Articles of Incorporation, the Regulations, any law, rule, regulation, judgment,
order or decree to which Cleveland Electric is subject or any agreement,
indenture, mortgage, lease, note or other obligation or instrument to which
Cleveland Electric is a party or by which it is bound;
(z) All consents or approvals of the PUCO and of any other
federal or state regulatory agency required in connection with Cleveland
Electric's execution and delivery of, and the performance of its obligations
under the CEI Supplemental Indenture and the CEI First Mortgage Bonds have been
obtained;
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<PAGE> 8
(aa) Except as specifically described in the Offering
Memorandum, there are no actions, suits, proceedings, inquiries or
investigations at law or in equity before or by any judicial or administrative
court or agency, pending or threatened against Cleveland Electric and there is
no basis for any such action, suit, proceeding, inquiry or investigation wherein
the decision, ruling or finding would materially or adversely affect the
validity or enforceability of the CEI Mortgage (to the extent pertinent to the
issuance of the CEI First Mortgage Bonds) or the CEI First Mortgage Bonds;
(ab) Cleveland Electric has good title to substantially all
the properties referred to or described in the granting clauses of the CEI
Mortgage as being subject to the lien thereof and now owned by it, subject only
to the conditions and exceptions set forth in the Offering Memorandum
"Descriptions of Cleveland Electric Bonds and Toledo Edison Bonds--Cleveland
Electric Bonds--Title to Property," none of which materially impairs the use of
the property affected thereby in the operation of the business of Cleveland
Electric;
(ac) Toledo Edison's Indenture of Mortgage and Deed of Trust
dated April 1, 1947 from Toledo Edison to The Chase Manhattan Bank (National
Association), as trustee (the "Toledo Mortgage Trustee"), as supplemented and
modified in certain respects by indentures supplemental thereto (the "Toledo
Mortgage"), including the Forty-sixth Supplemental Indenture dated as of June
15, 1997 (the "Toledo Supplemental Indenture"), and the First Mortgage Bonds,
Series due 2000, the First Mortgage Bonds, Series due 2004, and the First
Mortgage Bonds, Series due 2007, of Toledo Edison (collectively, the "Toledo
Edison First Mortgage Bonds") issued under the Toledo Mortgage and the Toledo
Supplemental Indenture, on or before the Closing Date will have been duly
authorized, executed and delivered by Toledo Edison and, as to the Toledo Edison
First Mortgage Bonds, assuming that they have been duly authenticated by the
Toledo Mortgage Trustee, constitute valid and binding obligations enforceable
against Toledo Edison in accordance with their terms, except to the extent that
the binding effect and enforceability thereof are subject to applicable
bankruptcy, insolvency, reorganization, moratorium and other laws in effect from
time to time affecting the rights of creditors generally or the enforcement of
the security provided by the Toledo Mortgage, and except to the extent that the
enforceability thereof may be limited by the application of general principles
of equity and may be subject to limitations upon the right to obtain judicial
orders requiring specific performance;
(ad) The execution and delivery of the Toledo Supplemental
Indenture and the Toledo Edison First Mortgage Bonds and the performance by
Toledo Edison of its obligations thereunder and under the Toledo Mortgage (to
the extent pertinent to the issuance of the Toledo Edison First Mortgage Bonds),
will
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<PAGE> 9
not constitute a default under, or conflict with or violate any of the
provisions of, the Articles of Incorporation, the Regulations, the Bylaws, any
law, rule, regulation, judgment, order or decree to which Toledo Edison is
subject or any agreement, indenture, mortgage, lease, note or other obligation
or instrument to which Toledo Edison is a party or by which it is bound;
(ae) All consents or approvals of the PUCO and of any other
federal or state regulatory agency required in connection with Toledo Edison's
execution and delivery of, and the performance of its obligations under the
Toledo Supplemental Indenture and the Toledo Edison First Mortgage Bonds have
been obtained;
(af) Except as specifically described in the Offering
Memorandum, there are no actions, suits, proceedings, inquiries or
investigations at law or in equity before or by any judicial or administrative
court or agency, pending or threatened against Toledo Edison and there is no
basis for any such action, suit, proceeding, inquiry or investigation wherein
the decision, ruling or finding would materially or adversely affect the
validity or enforceability of the Toledo Mortgage (to the extent pertinent to
the issuance of the Toledo Edison First Mortgage Bonds) or the Toledo Edison
First Mortgage Bonds;
(ag) Toledo Edison has good title to substantially all the
properties referred to or described in the granting clauses of the Toledo
Mortgage as being subject to the lien thereof and now owned by it, subject only
to the conditions and exceptions set forth in the Offering Memorandum under
"Descriptions of Cleveland Electric Bonds and Toledo Edison Bonds--Toledo Edison
Bonds--Title Property," none of which materially impairs the use of the property
affected thereby in the operation of the business of Toledo Edison;
2. OFFERING. You have advised the Companies that the
Purchasers will make an offering of the Notes purchased by the Purchasers
hereunder on the terms to be set forth in the Final Memorandum, as soon as
practicable after this Agreement is entered into as in your judgment is
advisable.
3. PURCHASE AND DELIVERY. The Companies hereby agree jointly
and severally to sell to the several Purchasers, and the Purchasers, upon the
basis of the representations and warranties herein contained, but subject to the
conditions hereinafter stated, agree, severally and not jointly, to purchase
from the Companies the respective principal amounts of Notes set forth in
Schedule I hereto opposite their names at a purchase price equal to the sum of
98.875% of the principal amount of the 7.19% Series A Secured Notes Due 2000,
98.625% of the principal amount of the 7.67% Series A Secured Notes Due 2004,
and 99.35% of the principal amount of the 7.13% Series A Secured Notes Due 2007,
in
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<PAGE> 10
each case plus accrued interest, if any, from June 18, 1997, to the date of
payment and delivery.
Payment for the Notes will be made against delivery of the
Notes at a closing to be held at the office of Winthrop, Stimson, Putnam &
Roberts, One Battery Park Plaza, New York, NY, at 10:00 A.M., local time, on
June 18, 1997, or at such other place or time on the same or such other date,
not later than June 25, 1997, as shall be designated in writing by you. The time
and date of that payment are herein referred to as the Closing Date. Payment for
the Notes will be made by wire transfer to the Companies of immediately
available funds.
The Companies will deliver against payment of the purchase
price the Notes of each tranche to be offered and sold by the Purchasers in
reliance on Regulation S (the "Regulation S Notes") in the form of one permanent
global security in definitive form for that tranche (each, a "Regulation S
Global Note") that will be deposited with the Trustee as custodian for The
Depository Trust Company ("DTC") and registered in the name of Cede & Co., as
nominee for DTC, for the accounts of Euroclear System ("Euroclear") or Cedel
Societe Anonyme ("Cedel"). The Companies will deliver against payment of the
purchase price the Notes of each tranche to be purchased by each Purchaser
hereunder and to be offered and sold by each Purchaser in reliance on Rule 144A
under the Securities Act (the "144A Notes") in the form of one permanent global
security in definitive form for that tranche (each, a "Restricted Global Note")
deposited with the Trustee as custodian for DTC and registered in the name of
Cede & Co., as nominee for DTC. The Regulation S Global Notes and the Restricted
Global Notes will be assigned separate CUSIP numbers. The Restricted Global
Notes will include the legend regarding restrictions on transfer set forth under
"Transfer Restrictions" in the Final Memorandum. Until the termination of the
restricted period (as defined in Regulation S) with respect to the offering of
the Regulation S Notes, interests in the Regulation S Global Notes may only be
held by the DTC participants for Euroclear & Cedel. Interests in any permanent
global security will be held only in book-entry form through DTC except in the
limited circumstances described in the Final Memorandum. Both the Restricted
Global Notes and the Regulation S Global Notes will be made available for
inspection by the Purchasers and by DTC by 4:00 p.m., New York time, on the
business day prior to the Closing Date at such place in New York City as the
Purchasers and the Companies shall agree.
The certificates evidencing the Notes will be delivered to you
on the Closing Date for the respective accounts of the several Purchasers, with
any transfer taxes payable in connection with the transfer of the Notes to the
Purchasers duly paid, against payment of the purchase price therefor.
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<PAGE> 11
Notwithstanding the foregoing, any Notes sold to Institutional
Accredited Investors (as hereinafter defined) pursuant to Section 6(a) shall be
issued in definitive, fully registered form and shall bear the legend relating
thereto set forth under "Transfer Restrictions" in the Final Memorandum, but
shall be paid for in the same manner as any Notes to be purchased by the
Purchasers hereunder and to be offered and sold by them in reliance on Rule 144A
under the Securities Act.
4. CONDITIONS TO CLOSING. The several obligations of the
Purchasers under this Agreement to purchase the Notes will be subject to the
following conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date,
(i) there shall not have occurred any
downgrading, nor shall any notice have been given of any
intended or potential downgrading or notice of any review for
a possible change that does not indicate the direction of the
possible change, in the rating accorded any of either
Company's securities by any "nationally recognized statistical
rating organization," as such term is defined for purposes of
Rule 436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any change,
or any development involving a prospective change, in the
condition, financial or otherwise, or in the earnings,
business or operations, of either Company and its
Subsidiaries, taken as a whole, from that set forth in the
Final Memorandum that, in your judgment, is material and
adverse and that makes it, in your judgment, impracticable to
market the Notes on the terms and in the manner contemplated
in the Final Memorandum.
(b) You shall have received on the Closing Date a certificate
or certificates, dated the Closing Date and signed by an executive officer of
each Company, to the effect set forth in clause (a)(i) above and to the effect
that the representations and warranties of that Company contained in this
Agreement are true and correct as of the Closing Date and that that Company has
complied with all of the agreements and satisfied all of the conditions on its
part to be performed or satisfied on or before the Closing Date. The officer
signing and delivering such certificate or certificates may rely upon the best
of knowledge as to proceedings threatened.
(c) You shall have received on the Closing Date an opinion of
Squire, Sanders & Dempsey, L.L.P., counsel for the Companies, dated the Closing
Date, to the effect that:
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<PAGE> 12
(i) the Indenture is a valid and binding
agreement of each Company, enforceable in accordance with its
terms except as (a) the enforceability thereof may be limited
by bankruptcy, insolvency or similar laws affecting creditors'
rights generally and (b) rights of acceleration and the
availability of equitable remedies may be limited by equitable
principles of general applicability; and the Indenture is in
such form that it may be qualified under the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"), in
compliance with the terms of the provisions of the
Registration Agreement without material modification;
(ii) when the Notes are executed by the
Companies and authenticated by the Trustee in accordance with
the provisions of the Indenture and delivered to and paid for
by the Purchasers in accordance with this Agreement, the Notes
will be entitled to the benefits of the Indenture and will be
valid and binding joint and several obligations of the
Companies, enforceable in accordance with their terms except
as (a) the enforceability thereof may be limited by
bankruptcy, insolvency or similar laws affecting creditors'
rights generally and (b) rights of acceleration and the
availability of equitable remedies may be limited by equitable
principles of general applicability;
(iii) the Registration Agreement (assuming due
authorization, execution and delivery by the Purchasers)
constitutes a valid and binding agreement of each Company,
enforceable in accordance with its terms except as (i) the
enforceability thereof may be limited by bankruptcy,
insolvency or similar laws affecting creditors' rights
generally and (ii) the availability of equitable remedies may
be limited by equitable principles of general applicability;
(iv) the execution and delivery by each Company
of, and the performance by that Company of its obligations
under, this Agreement, the Notes, the Indenture and the
Registration Agreement will not, to such counsel's knowledge,
contravene any judgment, order or decree of any governmental
body, agency or court having jurisdiction over that Company or
any Subsidiary of that Company, and no consent, approval,
authorization or order of or qualification with any
governmental body or agency is required for the performance by
that Company of its obligations under this Agreement, the
Notes, the Indenture and the Registration Agreement, except
such as may be required (i) by the securities or Blue Sky laws
of the various
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<PAGE> 13
states in connection with the offer and sale of the Notes,
(ii) by the securities or Blue Sky laws of the various states
and the Securities Act in connection with the offer of the
Exchange Notes and (iii) from The Public Utilities Commission
of Ohio;
(v) the statements in the Final Memorandum
under the captions "Description of Secured Notes,"
"Descriptions of Cleveland Electric Bonds and Toledo Edison
Bonds," "Certain Tax Considerations," "Private Placement,"
"Transfer Restrictions," and "Considerations for Employee
Benefit Plans," insofar as those statements constitute
summaries of the legal matters, documents and proceedings
referred to therein, fairly present the information called for
with respect to those legal matters, documents and proceedings
and fairly summarize the matters referred to therein;
(vi) after due inquiry, such counsel does not
know of any legal or governmental proceedings pending or
threatened to which either Company or any of its Subsidiaries
is a party or to which any of the properties of either Company
or any of its Subsidiaries is subject other than proceedings
fairly summarized in all material respects in the Final
Memorandum and proceedings that such counsel believes are not
likely to have a material adverse effect on either Company and
its Subsidiaries taken as a whole, or on the power or ability
of either Company to perform its obligations under this
Agreement, the Indenture, the Notes or the Registration
Agreement or to consummate the transactions contemplated by
the Final Memorandum;
(vii) based upon the representations, war-
ranties and agreements of the Companies in Sections 1(p),
1(v), 5(f), 5(g), 5(h) and 5(k) of this Agreement and of the
Purchasers in section 6 of this Agreement and on the
representations and agreements contained in Exhibit A to this
Agreement, it is not necessary in connection with the offer,
sale and delivery of the Notes to the Purchasers under this
Agreement or in connection with the initial resale of the
Notes by the Purchasers in accordance with Section 6 of this
Agreement to register the Notes under the Securities Act or to
qualify the Indenture under the Trust Indenture Act, it being
understood that no opinion is expressed as to any subsequent
resale of any Secured Note; and
(viii) the Company is not an "investment company"
or an entity "controlled" by an "investment company," as such
terms are defined in the Investment Company Act of 1940, as
amended.
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<PAGE> 14
Such counsel shall also include a statement to the effect that
no facts have come to such counsel's attention that would lead such counsel to
believe that (except for financial statements, schedules and other financial and
statistical information as to which such counsel need not express any belief)
the Final Memorandum when issued did not, and as of the date such opinion is
delivered does not, contain any untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(d) You shall have received on the Closing Date an opinion of
Terrence G. Linnert or Paul N. Edwards, as counsel of Centerior Energy
Corporation, to the effect that:
(i) each Company has been duly incorporated,
is validly existing as a corporation in good standing under
the laws of the State of Ohio, has the corporate power and
authority to own its property and to conduct its business as
described in the Final Memorandum (references herein to the
Final Memorandum being taken to mean the Final Memorandum, as
amended or supplemented), and is duly qualified to transact
business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of
property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing
would not have a material adverse effect on that Company and
its Subsidiaries, taken as a whole;
(ii) this Agreement has been duly authorized,
executed and delivered by each Company;
(iii) the Indenture has been duly authorized,
executed and delivered by each Company;
(iv) the Notes have been duly authorized by
each Company;
(v) the Registration Agreement has been duly
authorized, executed and delivered by each Company;
(vi) the execution and delivery by each Company
of, and the performance by that Company of its obligations
under, this Agreement, the Notes, the Indenture and the
Registration Agreement will not contravene any provision of
applicable law or the articles of incorporation, regulations,
partnership agreement or other organizational documents of
that Company or of any Subsidiary of that Company or, to such
counsel's knowledge, any agreement or other
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<PAGE> 15
instrument binding on that Company or on any Subsidiary of
that Company that is material to that Company and its
Subsidiaries taken as a whole, or, to such counsel's
knowledge, any judgment, order or decree of any governmental
body, agency or court having jurisdiction over that Company or
any Subsidiary of that Company, and no consent, approval,
authorization or order of or qualification with any
governmental body or agency is required for the performance by
that Company of its obligations under this Agreement, the
Notes, the Indenture and the Registration Agreement, except
such as may be required by (i) the securities or Blue Sky laws
'of the various states in connection with the offer and sale
of the Notes and (ii) the securities or Blue Sky laws of the
various states and the Securities Act in connection with the
offer of the Exchange Notes;
(vii) the statements in the Final Memorandum
under the captions "Description of Secured Notes,"
"Descriptions of Cleveland Electric Bonds and Toledo Edison
Bonds," "Private Placement" and "Transfer Restrictions,"
insofar as those statements constitute summaries of the legal
matters, documents and proceedings referred to therein, fairly
present the information called for with respect to those legal
matters, documents and proceedings and fairly summarize the
matters referred to therein;
(viii) after due inquiry, such counsel does not
know of any legal or governmental proceedings pending or
threatened to which either Company or any of its Subsidiaries
is a party or to which any of the properties of either Company
or any of its Subsidiaries is subject other than proceedings
fairly summarized in all material respects in the Final
Memorandum and proceedings that such counsel believes are not
likely to have a material adverse effect on either Company and
its Subsidiaries taken as a whole, or on the power or ability
of either Company to perform its obligations under this
Agreement, the Indenture, the Notes or the Registration
Agreement or to consummate the transactions contemplated by
the Final Memorandum;
(ix) each Subsidiary of each Company (i) has
been duly incorporated, is validly existing as a corporation
in good standing under the laws of the jurisdiction of its
incorporation, and has corporate power and authority to own
its property and to conduct its business as described in the
Final Memorandum or is duly qualified to transact business and
is in good standing in each jurisdiction in which the conduct
of its business or its ownership or leasing of property
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<PAGE> 16
requires such qualification, except to the extent that the
failure to be so qualified or be in good standing would not
have a material adverse effect on the Company of which it is a
Subsidiary and its Subsidiaries, taken as a whole; and neither
Company is a general partner in any partnership;
(x) each Company and each of its Subsidiaries
has obtained all necessary consents, authorizations,
approvals, orders, licenses, certificates and permits of and
from, and has made all declarations and filings with, all
foreign, federal, state, local and other governmental
authorities, all self-regulatory organizations and all courts
and other tribunals, required to own, lease, license, operate
and use its properties and assets and to conduct its business
in the manner described in the Final Memorandum, except to the
extent that the failure to obtain, declare or file would not
have a material adverse effect on that Company and its
Subsidiaries, taken as a whole;
(xi) such counsel is of the opinion that each
Company and each Subsidiary of each Company (i) is in
compliance with any and all applicable Environmental Laws,
(ii) has received all permits, licenses or other approvals
required of it under applicable Environmental Laws to conduct
its business and (iii) is in compliance with all terms and
conditions of any such permit, license or approval, except in
cases in which that noncompliance with Environmental Laws,
failure to receive required permits, licenses or other
approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals would not, singly or in
the aggregate, have a material adverse effect on that Company;
(xii) each Company is a "subsidiary" of
Centerior Energy Corporation, which is a "holding company," as
such terms are defined in the Public Utility Holding Company
Act of 1935, as amended. Centerior Energy Corporation is
exempt from regulation under such Act pursuant to Section
3(a)(1) thereof and the rules and regulations thereunder
promulgated by the Commission and, therefore, each Company is
also exempt from such regulation.
(xiii) The CEI Mortgage and the CEI First
Mortgage Bonds have been duly authorized, executed and
delivered by Cleveland Electric and, as to the CEI First
Mortgage Bonds, assuming that they have been duly
authenticated by the Cleveland Mortgage Trustee, constitute
valid and binding obligations enforceable
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<PAGE> 17
against each Company in accordance with their terms, except to
the extent that the binding effect and enforceability thereof
are subject to applicable bankruptcy, insolvency,
reorganization, moratorium and other laws in effect from time
to time affecting the rights of creditors generally or the
enforcement of the security provided by the Cleveland
Mortgage, and except to the extent that the enforceability
thereof may be limited by the application of general
principles of equity and may be subject to limitations upon
the right to obtain judicial orders requiring specific
performance;
(xiv) The execution and delivery of the CEI
Supplemental Indenture and the CEI First Mortgage Bonds and
the performance by Cleveland Electric of its obligations
thereunder and under the CEI Mortgage (to the extent pertinent
to the issuance of the CEI First Mortgage Bonds), does not
constitute a default under, or conflict with or violate any of
the provisions of, the Articles of Incorporation, the
Regulations, any law, rule, regulation, judgment, order or
decree to which Cleveland Electric is subject or any
agreement, indenture, mortgage, lease, note or other
obligation or instrument to which Cleveland Electric is a
party or by which it is bound;
(xv) All consents or approvals of the PUCO and
of any other federal or state regulatory agency required in
connection with Cleveland Electric's execution and delivery
of, and the performance of its obligations under the CEI
Supplemental Indenture and the CEI First Mortgage Bonds have
been obtained;
(xvi) Except as specifically described in the
Offering Memorandum, there are no actions, suits, proceedings,
inquiries or investigations at law or in equity before or by
any judicial or administrative court or agency, pending or
threatened against Cleveland Electric and there is no basis
for any such action, suit, proceeding, inquiry or
investigation wherein the decision, ruling or finding would
materially or adversely affect the validity or enforceability
of the CEI Mortgage (to the extent pertinent to the issuance
of the CEI First Mortgage Bonds) or the CEI First Mortgage
Bonds;
(xvii) Cleveland Electric has good title to
substantially all the properties referred to or described in
the granting clauses of the CEI Mortgage as being subject to
the lien thereof and now owned by it, subject only to the
conditions and exceptions set forth in the Offering Memorandum
under "Descriptions of
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<PAGE> 18
Cleveland Electric Bonds and Toledo Edison Bonds -- Cleveland
Electric Bonds -- Title to Property," none of which materially
impairs the use of the property affected thereby in the
operation of the business of Cleveland Electric;
(xviii) The CEI Mortgage and all financing
statements have been duly filed and recorded in all places
where such filing or recording is necessary for the perfection
or preservation of the lien of the CEI Mortgage and the CEI
Mortgage constitutes a valid and direct first lien upon all of
the property referred to in subparagraph (xvii) above, subject
only to the conditions and exceptions referred to therein and,
under current law, all property acquired by Cleveland Electric
hereafter, other than property excepted from the lien of the
CEI Mortgage, will become subject to the lien thereof upon
acquisition;
(xix) The CEI First Mortgage Bonds are entitled
to the benefits and security of the CEI Mortgage, equally and
ratably with all other bonds outstanding under the CEI
Mortgage, except as the enforceability thereof may be subject
to the limitations set forth in subparagraph (xiii), above;
(xx) The CEI First Mortgage Bonds are not
required to be registered under the Securities Act of 1933, as
amended, and the CEI Supplemental Indenture is exempt from
qualification under the Trust Indenture Act of 1933, as
amended;
(xxi) Assuming that the Trustee holds the CEI
First Mortgage Bonds as provided in the Indenture, the
Indenture creates a valid and perfected first priority
security interest in the CEI First Mortgage Bonds.
(xxii) The Toledo Mortgage and the Toledo Edison
First Mortgage Bonds have been duly authorized, executed and
delivered by Toledo Edison and, as to the Toledo Edison First
Mortgage Bonds, assuming that they have been duly
authenticated by the Toledo Mortgage Trustee, constitute valid
and binding obligations enforceable against Toledo Edison in
accordance with their terms, except to the extent that the
binding effect and enforceability thereof are subject to
applicable bankruptcy, insolvency, reorganization, moratorium
and other laws in effect from time to time affecting the
rights of creditors generally or the enforcement of the
security provided by the Toledo Mortgage, and except to the
extent that the enforceability thereof may be limited by the
application of general principles of equity and may be
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<PAGE> 19
subject to limitations upon the right to obtain
judicial orders requiring specific performance;
(xxiii) The execution and delivery of the Toledo
Supplemental Indenture and the Toledo Edison First Mortgage
Bonds and the performance by Toledo Edison of its obligations
thereunder and under the Toledo Mortgage (to the extent
pertinent to the issuance of the Toledo Edison First Mortgage
Bonds), does not constitute a default under, or conflict with
or violate any of the provisions of, the Articles of
Incorporation, the Regulations, the Bylaws, any law, rule,
regulation, judgment, order or decree to which Toledo Edison
is subject or any agreement, indenture, mortgage, lease, note
or other obligation or instrument to which Toledo Edison is a
party or by which it is bound;
(xxiv) All consents or approvals of the PUCO and
of any other federal or state regulatory agency required in
connection with Toledo Edison's execution and delivery of, and
the performance of its obligations under the Toledo
Supplemental Indenture and the Toledo Edison First Mortgage
Bonds have been obtained;
(xxv) Except as specifically described in the
Offering Memorandum, there are no actions, suits, proceedings,
inquiries or investigations at law or in equity before or by
any judicial or administrative court or agency, pending or
threatened against Toledo Edison and there is no basis for any
such action, suit, proceeding, inquiry or investigation
wherein the decision, ruling or finding would materially or
adversely affect the validity or enforceability of the Toledo
Mortgage (to the extent pertinent to the issuance of the
Toledo Edison First Mortgage Bonds) or the Toledo Edison First
Mortgage Bonds;
(xxvi) Toledo Edison has good title to
substantially all the properties referred to or described in
the granting clauses of the Toledo Mortgage as being subject
to the lien thereof and now owned by it, subject only to the
conditions and exceptions set forth in the Offering Memorandum
under "Descriptions of Cleveland Electric Bonds and Toledo
Edison Bonds -- Toledo Edison Bonds -- Title to Property,"
none of which materially impairs the use of the property
affected thereby in the operation of the business of Toledo
Edison;
(xxvii) The Toledo Mortgage and all financing
statements have been duly filed and recorded in all places
where such filing or recording is necessary for
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<PAGE> 20
the perfection or preservation of the lien of the Toledo
Mortgage and the Toledo Mortgage constitutes a valid and
direct first lien upon all of the property referred to in
subparagraph (xxvi) above, subject only to the conditions and
exceptions referred to therein and, under current law, all
property acquired by Toledo Edison hereafter, other than
property excepted from the lien of the Toledo Mortgage, will
become subject to the lien thereof upon acquisition;
(xxviii) The Toledo Edison First Mortgage Bonds are
entitled to the benefits and security of the Toledo Mortgage,
equally and ratably with all other bonds outstanding under the
Toledo Mortgage, except as the enforceability thereof may be
subject to the limitations set forth in subparagraph (xxii),
above;
(xxix) The Toledo Edison First Mortgage Bonds are
not required to be registered under the Securities Act of
1933, as amended, and the Toledo Supplemental Indenture is
exempt from qualification under the Trust Indenture Act of
1933, as amended;
(xxx) Assuming that the Trustee holds the Toledo
Edison First Mortgage Bonds as provided in the Indenture, the
Indenture creates a valid and perfected first priority
security interest in the Toledo Edison First Mortgage Bonds.
(e) You shall have received on the Closing Date an opinion of
Baker & Hostetler LLP, counsel for the Purchasers, dated the Closing Date,
covering the matters referred to in subparagraphs (i), (ii), (iii), (v) (but
only as to the statements under the captions "Description of the Secured Notes,"
"Private Placement" and "Transfer Restrictions") and (vii), and the final
subparagraph of paragraph (c) above, and the matters referred to in
subparagraphs (ii), (iii), (iv) and (v) of paragraph (d) above.
With respect to the final subparagraph of paragraph (c) above,
Squire, Sanders & Dempsey, L.L.P. and Baker & Hostetler LLP may state that their
belief is based upon their participation in the preparation of each Memorandum
and any amendments or supplements thereto and review and discussion of the
contents thereof, but is without independent check or verification except as
specified. With respect to matters of fact, such counsel may rely on
certificates of officers of the relevant Company and of governmental officials,
in which case their opinion is to state that they are so doing and that the
Purchasers are justified in relying on such opinions or certificates and copies
of said opinions or certificates are to be attached to the opinion.
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<PAGE> 21
The opinion of Squire, Sanders & Dempsey, L.L.P. described in
paragraph (c) above shall be rendered to you at the request of the Companies and
shall so state therein.
(f) You shall have received on the Closing Date (i) a letter,
substantially in the form attached hereto as Exhibit B (with the exhibits to
that letter omitted for purposes of this Agreement only), dated the Closing Date
from Winthrop, Stimson, Putnam & Roberts, and (ii) a letter dated the Closing
Date from Squire, Sanders & Dempsey, L.L.P., as counsel to the Companies,
stating that you are entitled to rely on the opinions rendered by such counsel
on the Closing Date to IBJ Schroder Bank & Trust Company in connection with the
secured lease obligation bond refinancing referred to under the caption "Use of
Proceeds" in the Final Memorandum.
(g) You shall have received on the Closing Date an opinion of
an Assistant General Counsel of AMBAC Indemnity, dated the Closing Date,
substantially in the form attached hereto as Exhibit C.
(h) You shall have received on each of the date hereof and the
Closing Date a letter, dated the date hereof or the Closing Date, as the case
may be, in form and substance satisfactory to you, from Arthur Andersen LLP,
independent public accountants for the Companies, containing statements and
information of the type ordinarily included in accountants' "comfort letters" to
underwriters (of the type ordinarily applicable for registration statements
filed under the Securities Act) with respect to the financial statements and
certain financial information contained in each Memorandum.
5. COVENANTS OF THE COMPANIES. In further consideration of
the agreements of the Purchasers herein contained, the Companies jointly and
severally covenant as follows:
(a) To furnish to you, without charge, during the period
mentioned in paragraph (c) below, as many copies of the Final Memorandum, any
documents incorporated by reference therein and any supplements and amendments
thereto as you may reasonably request; with respect to the Final Memorandum, to
furnish copies of the Final Memorandum in New York City, prior to 3:00 p.m. on
the business day following the date of this Agreement, in such quantities as you
reasonably request; but the Companies are not responsible for the costs of
distributing either Memorandum other than to the Purchasers.
(b) Before amending or supplementing either Memorandum, to
furnish to you a copy of each such proposed amendment or supplement and not to
use any such proposed amendment or supplement to which you reasonably object.
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<PAGE> 22
(c) If, during such period after the date hereof and prior to
the date on which all of the Notes shall have been sold by the Purchasers, any
event shall occur or condition exist as a result of which it is necessary to
amend or supplement the Final Memorandum in order to make the statements
therein, in the light of the circumstances when such Memorandum is delivered to
a purchaser, not misleading, or if, in the opinion of your counsel, it is
necessary to amend or supplement that Memorandum to comply with applicable law,
forthwith to prepare and furnish, at its own expense, to the Purchasers, either
amendments or supplements to that Memorandum so that the statements in that
Memorandum as so amended or supplemented will not, in the light of the
circumstances when that Memorandum is delivered to a purchaser, be misleading or
so that that Memorandum, as so amended or supplemented, will comply with
applicable law.
(d) To endeavor to qualify the Notes for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall reasonably
request.
(e) Whether or not any sale of Notes is consummated, to pay
all expenses incident to the performance of their obligations under this
Agreement, including: (i) the preparation of each Memorandum and all amendments
and supplements thereto, (ii) the preparation, issuance and delivery of the
Notes, (iii) the fees and disbursements of the Companies' counsel and
accountants and the Trustee and its counsel, if any, (iv) the qualification of
the Notes under securities or Blue Sky laws in accordance with Section 5(d),
including filing fees and the fees and disbursements of counsel for the
Purchasers in connection therewith and in connection with the preparation of any
Blue Sky or legal investment memoranda, (v) the printing and delivery to the
Purchasers in quantities as hereinabove stated of copies of the Memorandum and
any amendment or supplement thereto, (vi) any fees charged by rating agencies
for the rating of Notes, (vii) all document production charges and expenses of
counsel to the Purchasers (but not including their fees for professional
services) in connection with the preparation of this Agreement and (viii) the
fees and expenses, if any, incurred in connection with the admission of Notes
for trading in any appropriate market system.
(f) Neither Company nor any Affiliate of either Company will
sell, offer for sale or solicit offers to buy or otherwise negotiate in respect
of any security (as defined in the Securities Act) that could be integrated with
the sale of the Notes in a manner that would require the registration under the
Securities Act of those Notes.
(g) Not to solicit any offer to buy or offer or sell the Notes
by means of any form of general solicitation or general advertising (as those
terms are used in Regulation D under the
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Securities Act) or in any manner involving a public offering within the meaning
of section 4(2) of the Securities Act.
(h) While any of the Notes remain outstanding, to make
available, upon request, to any seller of Notes the information specified in
Rule 144A(d)(4) under the Securities Act, unless the Company is then subject to
section 13 or 15(d) of the Exchange Act.
(i) To include information substantially in the form set forth
in Exhibit A in each Memorandum.
(j) If requested by you, to use its best efforts to permit the
Notes to be designated PORTAL securities in accordance with the rules and
regulations adopted by the National Association of Securities Dealers, Inc.
relating to trading in the PORTAL Market.
(k) None of either Company, its Affiliates or any person
acting on its or their behalf (other than the Purchasers) will engage in any
directed selling efforts (as that term is defined in Regulation S) with respect
to the Notes, and each Company and its Affiliates and each person acting on its
or their behalf (other than the Purchasers) will comply with the offering
restrictions of Regulation S.
(l) During the period beginning on the date hereof and
continuing to and including the Closing Date, not to offer, sell, contract to
sell or otherwise dispose of any debt securities of either Company or warrants
to purchase debt securities of either Company substantially similar to the Notes
(other than the Notes), without your prior written consent.
(m) To use the proceeds from the sale of the Notes in the
manner discussed in the Final Memorandum under the caption "Use of Proceeds".
6. OFFERING OF NOTES; RESTRICTIONS ON TRANSFER.
(a) Each Purchaser, severally and not jointly, represents and
warrants that Purchaser is a qualified institutional buyer as defined in Rule
144A under the Securities Act (a "QIB"). Each Purchaser, severally and not
jointly, agrees with the Company that (a) it has not solicited and will not
solicit offers for, and it has not offered and sold and it will not offer or
sell, Notes by any form of general solicitation or general advertising (as those
terms are used in Regulation D under the Securities Act) or in any manner
involving a public offering within the meaning of section 4(2) of the Securities
Act and (b) it has solicited and will solicit offers for Notes only from, and
has offered and will offer Notes only to, persons that it reasonably believes to
be (A) in the case of offers or sales inside the United States, (i) QIBs or (ii)
other institutional
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<PAGE> 24
accredited investors (as defined in Rule 501 (a) (1), (2), (3) or (7) under the
Securities Act (each, an "Institutional Accredited Investor") that, prior to
their purchase of Notes, deliver to that Purchaser a letter containing the
representations and agreements set forth in Annex A to the Memorandum and (B) in
the case of offers or sales outside the United States, to persons other than
U.S. persons ("foreign purchasers," which term shall include dealers or other
professional fiduciaries in the United States acting on a discretionary basis
for foreign beneficial owners (other than an estate or trust)) that, in each
case, in purchasing Notes are deemed to have represented and agreed as provided
in Exhibit A hereto.
(b) Each Purchaser, severally and not jointly, represents,
warrants, and agrees with respect to offers and sales outside the United States
that:
(i) it understands that no action has been or
will be taken in any jurisdiction by any Purchaser or either
Company that would permit a public offering of the Notes, or
possession or distribution of either Memorandum or any other
offering or publicity material relating to the Notes, in any
country or jurisdiction where action for that purpose is
required;
(ii) that Purchaser will comply with all
applicable laws and regulations in each jurisdiction in which
it acquires, offers, sells or delivers Notes or has in its
possession or distributes either Memorandum or any such other
material, in all cases at its own expense;
(iii) the Notes have not been and will not be
registered under the Securities Act and may not be offered or
sold within the United States or to, or for the account or
benefit of, U.S. persons except in accordance with Regulation
S under the Securities Act or pursuant to another exemption
from the registration requirements of the Securities Act;
(iv) that Purchaser has offered the Notes and
will offer and sell the Notes (A) as part of their
distribution, at any time and (B) otherwise until 40 days
after the later of the commencement of the Offering and the
closing Date, only in accordance with Rule 903 of Regulation
S. Accordingly, neither that Purchaser, its Affiliates nor any
persons acting on its or their behalf have engaged or will
engage in any directed selling efforts (within the meaning of
Regulation S) with respect to the Notes, and any such
Purchaser, its Affiliates and any such persons have complied
and will comply with the offering restrictions requirement of
Regulation S;
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<PAGE> 25
(v) that Purchaser has (1) not offered or
sold, and prior to the date 180 days after the Closing Date
will not offer or sell any Notes in the United Kingdom except
to persons whose ordinary activities involve them in
acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom
within the meaning of the Public Offers of Securities
Regulations 1995, (2) it has complied and will comply with all
applicable provisions of the Financial Services Act 1986 with
respect to anything done by it in relation to the Notes in,
from or otherwise involving the United Kingdom, and (3) it has
only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with
the offering of the Notes to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1996 or is a
person to whom that document may otherwise lawfully be issued
or passed on;
(vi) that Purchaser understands that the Notes
have not been and will not be registered under the Securities
and Exchange Law of Japan, and represents that it has not
offered or sold, and agrees that it will not offer or sell,
any Notes acquired by it in connection with the distribution
contemplated hereby, directly or indirectly, in Japan or to or
for the account of any resident thereof, except for offers or
sales to Japanese dealers and except pursuant to any exemption
from the registration requirements of the Securities and
Exchange Law of Japan and otherwise in compliance with
applicable provisions of Japanese law, and further agrees that
it will send to any dealer who purchases from it any of the
Notes a notice stating in substance that, by purchasing those
Notes, that dealer represents and agrees that it has not
offered or sold, and will not offer or sell, any Notes,
directly or indirectly, in Japan or to or for the account of
any resident thereof, except for offers or sales to Japanese
dealers and except pursuant to any exemption from the
registration requirements of the Securities and Exchange Law
of Japan and otherwise in compliance with applicable
provisions of Japanese law, and that that dealer will send to
any other dealer to whom it sells any of the Notes a notice
containing substantially the same statement as is contained in
this sentence.
(vii) that Purchaser agrees that, at or prior
to confirmation of sales of the Notes made in reliance
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<PAGE> 26
on Regulation S, it will have sent to each distributor, dealer
or person receiving a selling concession, fee or other
remuneration that purchases Notes from it during the
restricted period a confirmation or notice substantially to
the following effect:
"The Notes covered hereby have not been registered
under the U.S. Securities Act of 1933, as amended (the
"Securities Act") and may not be offered and sold within the
United States or to, or for the account or benefit of, U.S.
persons (i) as part of their distribution, at any time or,
(ii) otherwise until 40 days after the later of the
commencement of the offering and the closing date, except in
either case in accordance with Regulation S (or Rule 144A if
available) under the Securities Act. Terms used above have the
meaning given to them by Regulation S."
Terms used in this Section 6 have the meanings given to them by Regulation S.
(c) Each Purchaser understands and agrees that, upon original
issuance of the Notes, and until such time as the applicable provisions of the
Securities Act and the rules promulgated thereunder and under the Indenture no
longer so require, the Notes will bear the legends set forth in "Transfer
Restrictions" in the Final Memorandum.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Companies agree jointly and severally to indemnify and
hold harmless each Purchaser, and each person, if any, who controls that
Purchaser within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act, or is under common control with, or is
controlled by, that Purchaser, from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred by any Purchaser or any such controlling of
affiliated person in connection with defending or investigating any such action
or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in either Memorandum (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact necessary
to make the statements therein in light of the circumstances under which they
were made not misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information relating to any Purchaser
furnished to the Companies in writing by such Purchaser through you expressly
for use therein. The indemnity agreement contained in this Section 7(a) with
respect to any Preliminary Memorandum does not inure to the benefit of
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<PAGE> 27
any Purchaser (or the benefit of any person controlling any Purchaser) if the
person asserting any such losses, liabilities, claims, damages, or expenses
purchased the Notes which are the subject thereof if at or prior to the written
confirmation of the sale of the Notes a copy of the Final Memorandum (or the
Final Memorandum as amended or supplemented) was not sent or delivered to that
person and the Final Memorandum (or the Final Memorandum as amended or
supplemented) would have cured the defect giving rise to those losses, claims,
damages or liabilities so long as the Companies have complied with their
obligations set forth in Sections 5(a) and 5(c) hereof to permit that sending or
delivery.
(b) Each Purchaser agrees, severally and not jointly, to
indemnify and hold harmless each Company, its directors, its officers and each
person, if any, who controls that Company within the meaning of either Section
15 of the Securities Act or Section 20 of the Exchange Act to the same extent as
the foregoing indemnity from the Companies to that Purchaser, but only with
reference to information relating to that Purchaser furnished to the Companies
by that Purchaser in writing through you expressly for use in either Memorandum
or any amendment or supplement thereto.
(c) If any proceeding (including any governmental
investigation) is instituted involving any person in respect of which indemnity
may be sought pursuant to either paragraph (a) or (b) above, that person (the
"indemnified party") shall promptly notify the person against whom that
indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in that proceeding and
shall pay the fees and disbursements of that counsel related to that proceeding.
In any such proceeding, any indemnified party has the right to retain its own
counsel, but the fees and expenses of that counsel will be at the expense of
that indemnified party unless (i) the indemnifying party and the indemnified
party have mutually agreed to the retention of that counsel or (ii) the named
parties to any such proceeding (including any impleaded parties) include both
the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate because of actual or
potential differing interests between them. It is understood that the
indemnifying party will not in respect of the legal expenses of any indemnified
party in connection with any proceeding or related proceedings in the same
jurisdiction, be liable for the fees and expenses of more than one separate firm
(in addition to any local counsel) for all such indemnified parties and that all
such fees and expenses shall be reimbursed as they are incurred. That firm shall
be designated in writing by Morgan Stanley & Co. Incorporated in the case of
parties indemnified pursuant to paragraph (a) above and by the Companies in the
case of parties indemnified pursuant to
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<PAGE> 28
paragraph (b) above. The indemnifying party will not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with that consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of that settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party has requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel as contemplated by the second and third sentences of this paragraph, the
indemnifying party agrees that it will be liable for any settlement of any
proceeding affected without its written consent if (i) that settlement is
entered into more than 60 days after receipt by that indemnifying party of the
aforesaid request and (ii) that indemnifying party has not reimbursed the
indemnified party in accordance with that request prior to the date of that
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which any indemnified party is or could have been a
party and indemnity could have been sought hereunder by that indemnified party,
unless that settlement includes an unconditional release of that indemnified
party from all liability on claims that are the subject matter of that
proceeding.
(d) To the extent the indemnification provided for in
paragraph (a) or (b) of this Section 7 is unavailable to an indemnified party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each indemnifying party under that paragraph, in lieu of
indemnifying that indemnified party thereunder, shall contribute to the amount
paid or payable by that indemnified party as a result of those losses, claims,
damages or liabilities (i) in such proportion as is appropriate to reflect the
relative benefits received by the Companies on the one hand and the Purchasers
on the other hand from the offering of those Notes or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand and the Purchasers on the other hand in connection with the statements or
omissions that resulted in those losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Purchasers on the other hand in
connection with the offering of Notes will be deemed to be in the same
respective proportions as the aggregate net proceeds from the offering of those
Notes (before deducting expenses) received by the Companies and the total
discounts and commissions received by the Purchasers in respect thereof, in each
case as set forth in the Final Memorandum, bear to the aggregate offering price
of those Notes. The relative fault of the Companies on the one hand and of the
Purchasers on the other hand will be determined by reference to,
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<PAGE> 29
among other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Companies or by the Purchasers and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent that statement or omission. The Purchasers' respective obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective principal amount of Notes they have purchased hereunder, and not
joint.
(e) The Companies and the Purchasers agree that it would not
be just or equitable if contribution pursuant to this Section 7 were determined
by PRO RATA allocation (even if the Purchasers were treated as one entity for
that purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in paragraph (d) above. The amount paid
or payable by an indemnified party as a result of the losses, claims, damages
and liabilities referred to in paragraph (d) above will be deemed to include,
subject to the limitations set forth above, any legal or other expenses
reasonably incurred by that indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 7, no Purchaser will be required to contribute any amount in excess of
the amount by which the total price at which the Notes resold by it in the
initial placement of those Notes were offered to investors exceeds the amount of
any damages that that Purchaser has otherwise been required to pay by reason of
that untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) is entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The indemnity and contribution
provisions contained in this Section 7 and the representations and warranties of
the Companies contained in this Agreement will remain operative and in full
force and effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of the Purchasers or any person controlling
the Purchasers or by or on behalf of either Company, its officers or directors
or any person controlling either Company and (iii) acceptance of and payment for
any of the Notes. The remedies provided for in this Section 7 are not exclusive
and do not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
8. TERMINATION. This Agreement is subject to termination by
notice given by Morgan Stanley & Co. Incorporated (the "Purchaser
Representative") to the Companies, if (a) after the execution and delivery of
this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of
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<PAGE> 30
Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade,
(ii) trading of any securities of either Company shall have been suspended on
any exchange or in any over-the-counter market, (iii) a general moratorium on
commercial banking activities in New York shall have been declared by either
Federal or New York State authorities or (iv) there shall have occurred any
outbreak or escalation of hostilities or any change in financial markets or any
calamity or crisis that, in your judgment, is material and adverse and (b) in
the case of any of the events specified in clauses (a) (i) through (iv), that
event singly or together with any other such event makes it, in the Purchaser
Representative's judgment, impracticable to market the Notes on the terms and in
the manner contemplated in the Final Memorandum.
9. MISCELLANEOUS. If, on the Closing Date, any one or more of
the Purchasers fails or refuses to purchase Notes that it or they have agreed to
purchase hereunder on that date, and the aggregate principal amount of Notes
that that defaulting Purchaser or Purchasers agreed but failed or refused to
purchase is not more than one-tenth of the aggregate principal amount of Notes
to be purchased on that date, the other Purchasers will be obligated severally
in the proportions that the principal amount of Notes set forth opposite their
respective names in Schedule I bear to the aggregate principal amount of Notes
set forth opposite the names of all such non-defaulting Purchasers, or in such
other proportions as you may specify, to purchase the Notes that the defaulting
Purchaser or Purchasers agreed but failed or refused to purchase on that date,
but in no event will the principal amount of Notes that any Purchaser has agreed
to purchase pursuant to Section 3 be increased pursuant to this Section 9 by an
amount in excess of one-ninth of that principal amount of Notes without the
written consent of that Purchaser. If, on the Closing Date any Purchaser or
Purchasers fails or refuses to purchase Notes that it or they have agreed to
purchase hereunder on that date and the aggregate principal amount of Notes with
respect to which that default occurs is more than one-tenth of the aggregate
principal amount of Notes to be purchased on that date, and arrangements
satisfactory to you and the Company for the purchase of those Notes are not made
within 36 hours after that default, this Agreement will terminate without
liability on the part of any non-defaulting Purchaser or of either Company. In
any such case either you or the Companies may postpone the Closing Date, but in
no event for longer than seven days, in order that the required changes, if any,
in the Final Memorandum or in any other document or arrangement may be effected.
Any action taken under this paragraph will not relieve any defaulting Purchaser
from liability in respect of any default of that Purchaser under this Agreement.
This Agreement may be signed in any number of counterparts,
each of which is an original, with the same effect
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<PAGE> 31
as if the signatures thereto and hereto were on the same instrument.
If this Agreement is terminated by the Purchasers, or any of
them, because of any failure or refusal on the part of either Company to comply
with the terms or to fulfill any of the conditions of this Agreement, or if for
any reason either Company is unable to perform its obligations under this
Agreement, the Companies will reimburse the Purchasers or such Purchasers as
have so terminated this Agreement with respect to themselves, severally, for all
out-of-pocket expenses (including the fees and disbursements of their counsel)
reasonably incurred by those Purchasers in connection with this Agreement or the
offering contemplated hereunder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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<PAGE> 32
This Agreement shall be governed by and construed in accordance with the
internal laws of the State of New York.
The headings of the sections of this Agreement have been
inserted for convenience of reference only and will not be deemed a part of this
Agreement.
Please confirm your agreement to the foregoing by signing in
the space provided below for that purpose and returning to us a copy hereof,
whereupon this Agreement will constitute a binding agreement between us.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
and
THE TOLEDO EDISON COMPANY
By /s/ Terrence G. Linnert
-----------------------------------------
Name: Terrence G. Linnert
Title: Vice President, of each
---------------
Accepted as of the date first written above
MORGAN STANLEY & CO.
INCORPORATED
CITICORP SECURITIES, INC.
CREDIT SUISSE
FIRST BOSTON
McDONALD & COMPANY SECURITIES, INC.
By Morgan Stanley & Co.
Incorporated
By /s/ W.L. Blais
----------------------------------------
Name: W.L. Blais
Title: Principal
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<PAGE> 33
SCHEDULE I
Principal Amount
Purchaser of Notes to be Purchased
- --------- ------------------------
Morgan Stanley & Co. $220,000,000 principal amount of
Incorporated 7.19% Series A Secured Notes
Due 2000;
$350,000,000 principal amount of
7.67% Series A Secured Notes
Due 2004; and
$150,000,000 principal
amount of 7.13% Series A
Secured Notes Due 2007.
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<PAGE> 34
EXHIBIT A
Each Memorandum will contain language to the following effect:
"Each purchaser of the Notes will be deemed to:
(1) represent that it is purchasing the Notes for its own
account with respect to which it exercises sole investment discretion
and that it and any such account is (i) a QIB and is aware that the
sale to it is being made in reliance on Rule 144A, (ii) an
Institutional Accredited Investor or (iii) a foreign purchaser that is
outside the United States (or a foreign purchaser that is a dealer or
other fiduciary as referred to above);
(2) acknowledge that the Notes have not been registered under
the Securities Act and may not be offered or sold in the United States
or to, or for the account or benefit of, U.S. persons except as set
forth below;
(3) if it is a person other than a foreign purchaser outside
of the United States, agree that if it should resell or otherwise
transfer any of the Notes within three years after the later of the
original issuance of those Notes or the last date on which those Notes
were held by an affiliate of either The Cleveland Electric Illuminating
Company or The Toledo Edison Company (each, a "Company," and
collectively, the "Companies"), it will do so only (i) to either
Company or any Subsidiary thereof, (ii) inside the United States to a
QIB in compliance with Rule 144A, (iii) inside the United States to an
Institutional Accredited Investor that, prior to that transfer,
furnishes to the Trustee a signed letter containing certain
representations and agreements relating to the restrictions on transfer
of the Notes (the form of which letter can be obtained from the
Trustee) and, if that transfer is in respect of an aggregate principal
amount of Notes at the time of transfer of less than $100,000, an
opinion of counsel acceptable to the Companies that that transfer is in
compliance with the Securities Act, (iv) outside the United States in
compliance with Rule 904 under the Securities Act, (v) pursuant to the
exemption from registration provided by Rule 144 under the Securities
Act (if available) or (vi) pursuant to an effective registration
statement under the Securities Act. Each Institutional Accredited
Investor that is not a QIB and that is an original purchaser of the
Notes will be required to sign an agreement to the foregoing effect in
the form attached hereto as Appendix A. Subject to the procedures set
forth under "Description of Secured Notes--Book Entry; Delivery and
Form," prior to any proposed transfer of any of the
A-1
<PAGE> 35
Notes (otherwise than pursuant to an effective registration statement)
within three years after the later of the original issuance of those
Notes or the last date on which those Notes were held by an affiliate
of either Company, the holder thereof must check the appropriate box
set forth on the reverse of its Notes relating to the manner of that
transfer and submit the Notes to the Trustee;
(4) agree that it will deliver to each person to whom it
transfers any of the Notes notice of any restrictions on transfer of
those Notes;
(5) if it is a foreign purchaser outside the United States,
understand that the Notes will initially be represented by a
Regulations S Global Note and that transfers thereof are restricted as
described under "Description of Secured Notes--Book Entry; Delivery and
Form" for a period ending 40 days after the later of the commencement
of the offering and the closing date;
(6) if it is a QIB, understand that the Notes offered in
reliance on Rule 144A will be represented by a Restricted Global Note.
Before any interest in a Restricted Global Note may be offered, sold,
pledged or otherwise transferred to a person who is not a QIB, the
transferee will be required to provide the Trustee with a written
certification (the form of which certification can be obtained from the
Trustee) as to compliance with the transfer restriction referred to
above;
(7) understand that, unless or until registered under the
Securities Act, the Notes (other than those issued to foreign
purchasers) will bear a legend to the following effect unless otherwise
agreed by the Companies and the holder thereof:
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE U.S. SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND,
ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED
STATES OR TO OR FOR THE ACCOUNT OR BENEFIT OF U.S. PERSONS
EXCEPT AS SET FORTH IN THE FOLLOWING SENTENCE. BY ITS
ACQUISITION HEREOF, THE HOLDER (1) REPRESENTS THAT (A) IT IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER
THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED
INVESTOR" (AS DEFINED IN RULE 501 (A)(1), (2), (3) or (7) OF
REGULATION D UNDER THE SECURITIES ACT) (AN "INSTITUTIONAL
ACCREDITED INVESTOR") OR (C) IT IS NOT A U.S. PERSON AND IS
ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE
WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT
WILL NOT, WITHIN THREE YEARS AFTER THE LATER OF THE ORIGINAL
ISSUANCE OF THIS NOTE OR THE LAST DATE ON WHICH THIS NOTE WAS
HELD
A-2
<PAGE> 36
BY AN AFFILIATE OF EITHER COMPANY, RESELL OR OTHERWISE
TRANSFER THIS NOTE EXCEPT (A) TO EITHER COMPANY OR ANY
SUBSIDIARY THEREOF, (B) INSIDE THE UNITED STATES TO A
QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH RULE 144A
UNDER THE SECURITIES ACT, (C) INSIDE THE UNITED STATES TO AN
INSTITUTIONAL ACCREDITED INVESTOR THAT PRIOR TO SUCH TRANSFER,
FURNISHED TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN
REPRESENTATIONS AND AGREEMENTS RELATING TO THE RESTRICTIONS ON
TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER CAN BE
OBTAINED FROM THE TRUSTEE) AND, IF THAT TRANSFER IS IN RESPECT
OF AN AGGREGATE PRINCIPAL AMOUNT OF NOTES AT THE TIME OF
TRANSFER OF LESS THAN $100,000, AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANIES THAT THAT TRANSFER IS IN
COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED
STATES IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904
UNDER THE SECURITIES ACT,(E) PURSUANT TO THE EXEMPTION FROM
REGISTRATION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF
AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL
DELIVER TO EACH PERSON TO WHOM THIS NOTE IS TRANSFERRED A
NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. IN
CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN THREE YEARS
AFTER THE LATER OF THE ORIGINAL ISSUANCE OF THIS NOTE OR THE
LAST DATE ON WHICH THIS NOTE WAS HELD BY AN AFFILIATE OF
EITHER COMPANY, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET
FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF THAT
TRANSFER AND SUBMIT THIS CERTIFICATE TO THE TRUSTEE. IF THE
PROPOSED TRANSFEREE IS AN INSTITUTIONAL ACCREDITED INVESTOR,
THE HOLDER MUST, PRIOR TO THAT TRANSFER, FURNISH TO THE
TRUSTEE AND THE COMPANIES SUCH CERTIFICATIONS, LEGAL OPINIONS
OR OTHER INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE
TO CONFIRM THAT THAT TRANSFER IS BEING MADE PURSUANT TO AN
EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED
HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND
"U.S. PERSONS" HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S
UNDER THE SECURITIES ACT. THE INDENTURE CONTAINS A PROVISION
REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF
THIS NOTE IN VIOLATION OF THE FOREGOING RESTRICTIONS;
(8) acknowledge that the Companies, the Placement Agents and
others will rely upon the truth and accuracy of the foregoing
acknowledgements, representations and agreements, and agree that if any
of the acknowledgements, representations or warranties deemed to have
been made by it by its purchase of Notes are no longer accurate, it
shall promptly notify the Companies and the Placement Agents. If it is
acquiring Notes as a fiduciary or agent for one or more investor
accounts, it represents that is has sole
A-3
<PAGE> 37
investment discretion with respect to each such account and it has full
power to make the foregoing acknowledgements, representations and
agreements, on behalf of each such account; and
(9) represent that (i) it is not purchasing Notes with the
assets of any pension, profit-sharing, retirement, or other employee
benefit plan subject to Title 7 of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA Plan"), with respect to which
either Company or any lender to be repaid with proceeds of the offering
is a "party in interest" within the meaning of Section 3(14) of ERISA
or a "Disqualified Person" within the meaning of Section 4975(e)(2) of
the Code or (ii) if it is purchasing the Notes with the assets of any
such ERISA Plan, those assets are (a) assets of a bank collective
investment fund, with respect to which Prohibited Transaction Class
Exemption 91-38 issued by the Department of Labor provides an exemption
for that purchase, (b) assets of a pooled separate account, with
respect to which Prohibited Transaction Class Exemption 90-1 issued by
the Department of Labor provides and exemption for that purchase, (c)
assets of an investment fund managed by a "qualified professional asset
manager," with respect to which Prohibited Transaction Class Exemption
84-14 issued by the Department of Labor provides an exemption for that
purchase or (d) assets of an insurance company general account with
respect to which Prohibited Transaction Class Exemption 95-60 issued by
the Department of Labor provides an exemption for that purchase. Each
subsequent transferee of the Notes is deemed to have made the
representation in this paragraph 9 upon its acquisition of Notes, but
upon that subsequent transfer the representation in clause (i) of this
paragraph 9 may be made without regard to whether any lender to be
repaid with proceeds of the offering is a party in interest or
Disqualified Person with respect to an ERISA Plan whose assets are a
source of funds for the transfer.
Each Memorandum must also contain language to the following
effect:
"Each person receiving this Memorandum acknowledges that (i)
that person has been afforded an opportunity to request from the
Company, and to review, all additional information considered by it to
be necessary to verify the accuracy of, or to supplement, the
information contained herein; (ii) that person has not relied on the
Placement Agents or any person affiliated with the Placement Agents in
connection with its investigation of the accuracy of that information
or its investment decision; and (iii) no person has been authorized to
give any information or to make any representation concerning either
Company or the Notes (other than as contained herein and information
given by duly
A-4
<PAGE> 38
authorized officers and employees of either Company in connection with
the investor's examination of the Companies and the terms of the sale
of the Notes), and, if given or made, any such other information or
representation should not be relied upon as having been authorized by
either Company or the Placement Agents.
A-5
<PAGE> 39
EXHIBIT B
June ____, 1997
Morgan Stanley & Co. Incorporated
Citicorp Securities, Inc.
Credit Suisse First Boston
McDonald & Company Securities, Inc.
c/o Morgan Stanley Dean Witter
1585 Broadway
New York, New York 10036
Dear Sirs:
Listed on Schedule I hereto are certain opinions dated the
same date as this letter rendered by us concurrently with this letter (the
"WINTHROP STIMSON OPINIONS"). Copies of the Winthrop Stimson Opinions are
attached as Exhibits A through Y hereto. You are entitled to rely on each
Winthrop Stimson Opinion to the same extent as if it had been specifically
addressed to you, in each case with respect to your purchase of an aggregate of
$720,000,000 of 7.19 Series A Secured Notes due 2000, 7.67% Series A Senior
Secured Notes due 2004 and 7.13% Series A Secured Notes due 2007 of The
Cleveland Electric Illuminating Company and The Toledo Edison Company.
Very truly yours,
B-1
<PAGE> 40
Schedule I to
Reliance Letter
---------------
Exhibit
-------
1. Opinion addressed to Mansfield Capital Trust A
("MANSFIELD") and others with respect to
Sections 1.2(m) of the Tax Indemnity
Agreement.
2. Opinion addressed to IBJ Schroder Bank & B
Trust Company ("IBJ"), as trustee, with
respect to the registration of transfer of
all Secured Notes, Bruce Mansfield 1987 Trust A.
3. Opinion addressed to IBJ, as trustee, with C
respect to the registration of transfer of all
Secured Notes, Bruce Mansfield 1987 Trust B.
4. Opinion addressed to IBJ, as trustee, with D
respect to the registration of transfer of all
Secured Notes, Bruce Mansfield 1987 Trust C.
5. Opinion addressed to IBJ, as trustee, with E
respect to the registration of transfer of all
Secured Notes, Bruce Mansfield 1987 Trust D.
6. Opinion addressed to IBJ, as trustee, with F
respect to the registration of transfer of all
Secured Notes, Bruce Mansfield 1987 Trust E.
7. Opinion addressed to IBJ, as trustee, with G
respect to the registration of transfer of all
Secured Notes, Bruce Mansfield 1987 Trust F.
8. Opinion addressed to IBJ, as trustee, with H
respect to the registration of transfer of all
Secured Notes, Bruce Mansfield 1987 Trust G.
9. Opinion addressed to IBJ, as trustee, with I
respect to the registration of transfer of all
Secured Notes, Bruce Mansfield 1987 Trust J.
10. Opinion addressed to IBJ, as trustee, with J
respect to the registration of transfer of all
Secured Notes, Bruce Mansfield 1987 Trust K.
11. Opinion addressed to IBJ, as trustee, with K
respect to the registration of transfer of all
Secured Notes, Bruce Mansfield 1987 Trust L.
B-2
<PAGE> 41
12. Opinion addressed to IBJ, as trustee, with L
respect to Irrevocable Payment Instruction,
General Power of Attorney and Compliance with
Operative Documents, Bruce Mansfield Trust A.
13. Opinion addressed to IBJ, as trustee, with M
respect to Irrevocable Payment Instruction,
General Power of Attorney and Compliance with
Operative Documents, Bruce Mansfield Trust B.
14. Opinion addressed to IBJ, as trustee, with N
respect to Irrevocable Payment Instruction,
General Power of Attorney and Compliance with
Operative Documents, Bruce Mansfield Trust C.
15. Opinion addressed to IBJ, as trustee, with O
respect to Irrevocable Payment Instruction,
General Power of Attorney and Compliance with
Operative Documents, Bruce Mansfield Trust D.
16. Opinion addressed to IBJ, as trustee, with P
respect to Irrevocable Payment Instruction,
General Power of Attorney and Compliance with
Operative Documents, Bruce Mansfield Trust E.
17. Opinion addressed to IBJ, as trustee, with Q
respect to Irrevocable Payment Instruction,
General Power of Attorney and Compliance with
Operative Documents, Bruce Mansfield Trust F.
18. Opinion addressed to IBJ, as trustee, with R
respect to Irrevocable Payment Instruction,
General Power of Attorney and Compliance with
Operative Documents, Bruce Mansfield Trust G.
19. Opinion addressed to IBJ, as trustee, with S
respect to Irrevocable Payment Instruction,
General Power of Attorney and Compliance with
Operative Documents, Bruce Mansfield Trust J.
20. Opinion addressed to IBJ, as trustee, with T
respect to Irrevocable Payment Instruction,
General Power of Attorney and Compliance with
Operative Documents, Bruce Mansfield Trust K.
21. Opinion addressed to IBJ, as trustee, with U
respect to Irrevocable Payment Instruction,
General Power of Attorney and Compliance with
Operative Documents, Bruce Mansfield Trust L.
22. Opinion addressed to IBJ, as trustee, with V
respect to the defeasance and redemption of
all outstanding Secured Lease Obligation
B-3
<PAGE> 42
Bonds.
23. Opinion addressed to The Cleveland Electric W
Illuminating Company, The Toledo Edison
Company and The Toledo Edison Capital
Corporation (collectively, the "CENTERIOR
COMPANIES") [, among other addressees,] with
respect to certain matters of New York law
concerning the Group 1 Lessor Notes.
24. Opinion addressed to IBJ with respect to the X
issuance of Refunding Notes by Bruce
Mansfield 1987 Trusts H and I.
25. Opinion addressed to the Centerior Companies, Y
among others, with respect to certain New
York law matters relating to Mansfield.
B-4
<PAGE> 43
EXHIBIT C
FORM OF AMBAC LEGAL OPINION
Morgan Stanley & Co.
Incorporated
Citicorp Securities, Inc.
Credit Suisse First Boston
McDonald & Company Securities, Inc.
c/o Morgan Stanley & Co.
Incorporated
1585 Broadway
New York, New York 10036
Ladies and Gentlemen:
This opinion has been requested of the undersigned, a Vice
President and an Assistant General Counsel of AMBAC Indemnity Corporation, a
Wisconsin stock insurance company ("AMBAC Indemnity"), in connection with the
issuance by AMBAC Indemnity of a certain Financial Guaranty Insurance Policy and
endorsement thereto, effective as of the date hereof (the "Policy"), insuring >
in aggregate principal amount of the > (the "Issuer"), > (the "Obligations").
In connection with my opinion herein, I have examined the
Policy, such statutes, documents and proceedings as I have considered necessary
or appropriate under the circumstances to render the following opinion,
including, without limiting the generality of the foregoing, certain statements
contained in the Offering Memorandum of the Issuer dated >, relating to the
Obligations (the "Offering Memorandum") under the heading "Credit Enhancement".
Based upon the foregoing and having regard to legal
considerations I deem relevant, I am of the opinion that:
1. AMBAC Indemnity is a stock insurance company duly
organized and validly existing under the laws of the
State of Wisconsin and duly qualified to conduct an
insurance business in the State of Ohio.
2. AMBAC Indemnity has full corporate power and
authority to execute and deliver the Policy and the
Policy has been duly authorized, executed and
delivered by AMBAC Indemnity and constitutes a legal,
valid and binding obligation of AMBAC Indemnity
enforceable in accordance with its terms except to
the extent that the enforceability (but
C-1
<PAGE> 44
not the validity) of such obligation may be limited
by any applicable bankruptcy, insolvency,
liquidation, rehabilitation or other similar law or
enactment now or hereafter enacted affecting the
enforcement of creditors' rights.
3. The execution and delivery by AMBAC Indemnity of
the Policy will not, and the consummation of the
transactions contemplated thereby and the
satisfaction of the terms thereof will not,
conflict with or result in a breach of any of the
terms, conditions or provisions of the Certificate
of Incorporation of By-Laws of AMBAC Indemnity, or
any restriction contained in any contract,
agreement or instrument to which AMBAC Indemnity
is a party or by which it is bound or constitute a
default under any of the foregoing.
4. Proceedings legally required for the issuance of
the Policy have been taken by AMBAC Indemnity and
licenses, orders, consents or other authorizations
or approvals of any governmental boards or bodies
legal required for the enforceability of the
Policy have been obtained; any proceedings not
taken and any licenses, authorizations or
approvals not obtained are not material to the
enforceability of the Policy.
5. The statements contained in the Official Statement
under the heading "Credit Enhancement," insofar as
such statements constitute summaries of the
matters referred to therein, accurately reflect
and fairly present the information purported to be
shown and, insofar as such statements describe
AMBAC Indemnity, fairly and accurately describe
AMBAC Indemnity.
6. The form of Policy attached hereto as Appendix I
is a true and complete copy of the form of Policy.
Very truly yours,
>
Vice President
Assistant General Counsel
C-2
<PAGE> 1
Exhibit 1(b)
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
THE TOLEDO EDISON COMPANY
REGISTRATION AGREEMENT
Morgan Stanley & Co. Incorporated
Citicorp Securities, Inc.
Credit Suisse First Boston
McDonald & Company Securities, Inc. June 11, 1997
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The Cleveland Electric Illuminating Company, an Ohio corporation, and
The Toledo Edison Company, an Ohio corporation (collectively, the "Companies"),
propose to issue and sell jointly and severally to Morgan Stanley & Co.
Incorporated, CitiCorp Securities, Inc., Credit Suisse First Boston, McDonald &
Company Securities, Inc. and the other purchasers identified in Schedule I of
the Placement Agreement (defined below) (collectively, the "Purchasers"), on the
terms set forth in a placement agreement of even date herewith (the "Placement
Agreement"), $220,000,000 principal amount of 7.19% Series A Secured Notes Due
2000, $350,000,000 principal amount of 7.67% Series A Secured Notes Due 2004,
and $150,000,000 principal amount of 7.13% Series A Secured Notes Due 2007
(those three tranches of notes, collectively, the "Notes"). The Notes will be
issued pursuant to an Indenture to be dated as of June 13, 1997 and a First
Supplemental Indenture to be dated June 13, 1997 (that Indenture, as
supplemented by that First Supplemental Indenture, the "Indenture") between the
Company and The Chase Manhattan Bank, a New York banking corporation, as trustee
(the "Trustee").
As an inducement to the Purchasers to enter into the Placement
Agreement and in satisfaction of a condition to your obligations thereunder, the
Companies agree with the Purchasers for the benefit of the registered holders of
the Notes (including, without limitation, the Purchasers) and the Exchange Notes
(as defined below) (collectively, the "Holders"), as follows:
SECTION 1. REGISTERED EXCHANGE OFFER. The Companies shall use their
best efforts to prepare and file with the Securities and Exchange Commission
(the "Commission") a registration statement (the "Exchange Offer Registration
Statement") on an appropriate form under the Securities Act of 1933, as amended
(the "Securities Act"), with respect to an offer (the "Registered Exchange
Offer") to the Holders of Transfer
<PAGE> 2
Restricted Notes (as defined in Section 6 hereof) , who are not prohibited by
any law or policy of the Commission from participating in the Registered
Exchange offer, to issue and deliver to such Holders, in exchange for the Notes
of each tranche, a like aggregate principal amount of debt securities (the
"Exchange Notes") of the Companies issued under the indenture and identical in
all material respects to the Notes of that tranche (including having, with
respect to the Secured Notes Due 2007 (as defined in the Placement Agreement),
the benefit of the Financial Guaranty Insurance Policy (as defined in the
Placement Agreement), but excluding the transfer restrictions relating to the
Notes) that would be registered under the Securities Act. The Companies shall
use their best efforts to cause that Exchange Offer Registration Statement to
become effective under the Securities Act within 150 days after the date of
original issue of the Notes and shall keep the Exchange Offer Registration
Statement effective for not less than 30 days (or longer, if required by
applicable law) after the date on which notice of the Registered Exchange Offer
is mailed to the Holders (that period being called the "Exchange Offer
Registration Period").
If the Companies effect the Registered Exchange offer, the Companies
will be entitled to close the Registered Exchange Offer 30 days after the
commencement thereof if the Companies have accepted all the Notes validly
tendered by the 30th day after that commencement in accordance with the terms of
the Registered Exchange Offer.
Following the declaration of the effectiveness of the Exchange Offer
Registration Statement, the Companies shall promptly commence the Registered
Exchange Offer, it being the objective of the Registered Exchange Offer to
enable each Holder of Transfer Restricted Notes electing to exchange those
Transfer Restricted Notes for Exchange Notes (assuming that Holder is not an
affiliate of either Company within the meaning of the Securities Act, acquires
the Exchange Notes in the ordinary course of that Holder's business and has no
arrangement with any person to participate in the distribution of the Exchange
Notes, and is not prohibited by any law or policy of the Commission from
participating in the Registered Exchange Offer) to trade those Exchange Notes
from and after their receipt without any limitations or restrictions under the
Securities Act and without material restrictions under the securities laws of
the several states of the United States. In connection with the Registered
Exchange Offer, the Companies shall use their best efforts to consummate the
Registered Exchange Offer and shall comply with the applicable requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and other
applicable laws and regulations in connection with the Registered Exchange
Offer.
The Companies acknowledge that, pursuant to current interpretations
by the Commission's staff of section 5 of the
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<PAGE> 3
Securities Act, in the absence of an applicable exemption therefrom, (a) each
Holder that is a broker-dealer electing to exchange Notes, acquired for its own
account as a result of market-making activities or other trading activities, for
Exchange Notes (an "Exchanging Dealer"), is required to deliver a prospectus
containing the information set forth in Annex A hereto on the cover, in
Annex B hereto in the "Exchange Offer Procedures" section and the "Purpose of
the Exchange Offer" section, and in Annex C hereto and the "Plan of
Distribution" section, in connection with a sale of any such Exchange Notes
received by that Exchanging Dealer pursuant to the Registered Exchange Offer;
and (b) if the Purchasers are permitted to and elect to sell Exchange Notes
accrued in exchange for Notes constituting any portion of an unsold
allotment, they are required to deliver a prospectus containing the information
required by item 507 or 508 of Regulation S-K under the Securities Act, as
applicable, in connection with that sale.
The Companies shall include in the prospectus contained in the
Exchange Offer Registration Statement a section entitled "Plan of
Distribution," reasonably acceptable to the Purchasers, that contains a summary
statement of the positions taken or policies made by the staff of the Commission
with respect to the potential "underwriter" status of any broker-dealer that is
the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of
Exchange Notes received by that broker-dealer in the Registered Exchange Offer
(a "Participating Broker-Dealer"), whether those positions or policies have been
publicly disseminated by the staff of the Commission or those positions or
policies, in the reasonable judgment of the Purchasers based on advice of
counsel (which may be in-house counsel), represent the prevailing views of the
staff of the Commission.
The Companies shall use their best efforts to keep the Exchange Offer
Registration Statement effective and to amend and supplement the prospectus
contained therein, in order to permit that prospectus to be lawfully delivered
by the Purchasers and all Exchanging Dealers subject to the prospectus delivery
requirements of the Securities Act and shall make that prospectus available to
the Purchasers and those Exchanging Dealers for such period of time after the
consummation of the Registered Exchange offer as those persons must comply with
those requirements in order to resell the Exchange Notes, but that period shall
not exceed 120 days (unless extended pursuant to Section 3(j) below), and
those persons are not authorized by the Companies to deliver and shall not
deliver any such prospectus after the expiration of that period in connection
with the resales contemplated by this paragraph.
The Companies shall make available for a period of 120 days after the
consummation of the Registered Exchange Offer a copy of the prospectus, and
any amendment or supplement thereto, forming part of the Exchange Offer
Registration Statement, to any
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<PAGE> 4
broker-dealer for use in connection with any resale of any Exchange Notes. The
Notes and the Exchange Notes are herein collectively called the "Securities."
In connection with the Registered Exchange Offer, the Companies shall:
(a) mail to each Holder a copy of the prospectus forming part of the
Exchange Offer Registration Statement, together with an appropriate letter
of transmittal and related documents;
(b) keep the Registered Exchange Offer open for not less than 30 days
(or longer, if required by applicable law) after the date notice thereof is
mailed to the Holders;
(c) utilize the services of a depositary for the Registered Exchange
Offer with an address in the Borough of Manhattan, The City of New York,
which may be the Trustee or an affiliate of the Trustee;
(d) permit Holders to withdraw tendered Notes at any time prior to the
close of business, New York time, on the last business day on which the
Registered Exchange Offer remains open; and
(e) otherwise comply in all material respects with all applicable
laws.
As soon as practicable after the close of the Registered Exchange Offer,
the Companies shall:
(i) accept for exchange all the Notes validly tendered and not
withdrawn pursuant to the Registered Exchange Offer;
(ii) deliver, or cause to be delivered, to the Trustee for
cancellation all the Notes so accepted for exchange; and
(iii) issue, and cause the Trustee to authenticate and deliver
promptly to each Holder of the Notes of any tranche, Exchange Notes of
the same tranche, equal in principal amount to the Notes of that
tranche of that Holder so accepted for exchange.
The Indenture will provide that the Exchange Notes will not be
subject to the transfer restrictions set forth in the Indenture and that all
the Securities will vote and consent together on all matters as one class and
that none of the Securities will have the right to vote or consent as a class
separate from one another on any matter.
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<PAGE> 5
Interest on each Exchange Note Issued pursuant to the Registered
Exchange Offer will accrue from the last interest payment date on which interest
was paid on the Notes surrendered in exchange therefor or, if no interest has
been paid on those Notes, from the date of original issue of those Notes.
Each Holder participating in the Registered Exchange offer will be
required to represent to the Companies at the time of the consummation of the
Registered Exchange Offer (a) that any Exchange Note received by that Holder
will be acquired in the ordinary course of business; (b) that the Holder will
have no arrangement or understanding with any person to participate in the
distribution of the Notes or the Exchange Notes within the meaning of the
Securities Act; (c) that the Holder is not an "affiliate," as defined in Rule
405 of the Securities Act, of either Company or if it is an affiliate, that
Holder will comply with the registration and prospectus delivery requirements of
the Securities Act to the extent applicable; (d) if that Holder is not a
broker-dealer, that it is not engaged in, and does not intend to engage in, any
distribution of the Exchange Notes; and (v) if that Holder is a broker-dealer,
that it will receive Exchange Notes for its own account in exchange for Notes
that were acquired as a result of market-making activities or other trading
activities and that it will deliver a prospectus in connection with any resale
of those Exchange Notes.
Notwithstanding any other provision hereof, the Companies will ensure
that (a) any Exchange Offer Registration Statement and any amendment thereto and
any prospectus forming part thereof and any supplement thereto complies in all
material respects with the Securities Act and the rules and regulations
thereunder; (b) any Exchange Offer Registration Statement and any amendment
thereto does not, when it becomes effective, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; and (c) any prospectus forming part of any
Exchange Offer Registration Statement, and any supplement to that prospectus,
at the time of issuance does not include an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
SECTION 2. SHELF REGISTRATION. If (a) the Companies determine that a
Registered Exchange Offer, as contemplated by Section 1 hereof, is not available
or may not be consummated as soon as practicable after the last date the
Registered Exchange Offer is open because it would violate applicable law or the
applicable interpretations of the staff of the Commission; (b) the Registered
Exchange Offer is not consummated within 180 days after the date of original
issue of the Notes; (c) the Purchasers so request with respect to the Notes not
eligible to be exchanged
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<PAGE> 6
for Exchange Notes in the Registered Exchange Offer and held BY them following
consummation of the Registered Exchange Offer; or (d) any Holder (other than an
Exchanging Dealer) is not eligible to participate in the Registered Exchange
Offer, or any Holder (other than an Exchanging Dealer) that participates in the
Registered Exchange Offer does not receive freely tradeable Exchange Notes on
the date of the exchange for validity tendered (and not withdrawn) Notes:
(i) The Companies shall use all reasonable efforts to prepare and
file, as promptly as practicable, with the Commission and thereafter
to cause to be declared effective a registration statement (the "Shelf
Registration Statement" and, together with the Exchange Offer
Registration Statement, a "Registration Statement") on an appropriate
form under the Securities Act relating to the offer and sale of the
Transfer Restricted Notes (as defined below), by the Holders thereof
from time to time in accordance with the methods of distribution set
forth in the Shelf Registration Statement and Rule 415 under the
Securities Act (hereinafter, the "Shelf Registration") , but no Holder
(other than the Purchasers) is entitled to have any Securities held by
it covered by that Shelf Registration Statement unless that Holder
agrees in writing to be bound by all the provisions of this Agreement
applicable to that Holder.
(ii) The Companies shall use all reasonable efforts to keep the
Shelf Registration Statement continuously effective in order to permit
the prospectus included therein to be lawfully delivered by the
Holders of the relevant Securities, until the earlier of (A) the end
of the period referred to in Rule 144(k) under the Securities Act
after the original issue date of the Notes expires (or the end of such
longer period as may result from an extension pursuant to Section
3(j) below), and (E) the date on which all the Securities covered by
the Shelf Registration Statement have been sold pursuant thereto.
(iii) Notwithstanding any other provision of this Agreement to
the contrary, the Companies shall cause the Shelf Registration
Statement and the related prospectus and any amendment or supplement
thereto, as of the effective date of the Shelf Registration Statement,
amendment or supplement, (A) to comply in all material respects with
the applicable requirements of the Securities Act and the rules and
regulations of the Commission and (B) not to contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
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<PAGE> 7
SECTION 3. REGISTRATION PROCEDURES. in connection with any Shelf
Registration contemplated by Section 2 hereof and, to the extent applicable, any
Registered Exchange Offer contemplated by Section 1 hereof, the following
provisions shall apply:
(a) The Companies shall (i) furnish to the Purchasers, prior to the
filing thereof with the Commission, a copy of the Registration Statement
and each amendment thereof and each supplement, if any, to the prospectus
included therein and shall not file any such Registration Statement or
amendment thereto or any prospectus or any supplement thereto (including
any document that, upon filing, would be incorporated or deemed to be
incorporated by reference therein and any amendment to any such document
other than documents required to be filed pursuant to the Exchange Act) to
which the Purchasers shall reasonably object, except for any Registration
Statement or amendment thereto or prospectus or supplement thereto (a copy
of which has been previously furnished to the Purchasers and their counsel
(and, in the case of a Shelf Registration Statement, the Holders and their
counsel)) which counsel to the Companies has advised the Companies in
writing is required to be filed, notwithstanding any such objection, in
order to comply with applicable law; (ii) include information substantially
to the effect set forth (A) in Annex A hereto on the cover, (B) in Annex B
hereto in the "Exchange Offer Procedures" section and the "Purpose of the
Exchange Offer" section, (C) in Annex C hereto in the "Plan of
Distribution" section, of the prospectus forming a part of the Exchange
Offer Registration Statement, and (D) include the information set forth in
Annex D hereto in the Letter of Transmittal delivered in connection with
the Registered Exchange Offer; (iii) to the extent required by law or
interpretation of the staff of the Commission, if requested by the
Purchasers, include the information required by Item 507 or 508 of
Regulation S-K under the Securities Act, as applicable, in the prospectus
forming a part of the Exchange Offer Registration Statement; and (iv) to
the extent required by law or interpretation of the staff of the
Commission, in the case of a Shelf Registration Statement, include the
names of the Holders who propose to sell Securities pursuant to the Shelf
Registration Statement as selling securityholders.
(b) The Companies shall notify promptly the Purchasers, the Holders
and any Participating Broker-Dealer from whom the Companies have received
prior written notice stating that it will be a Participating Broker-Dealer
in the Registered Exchange Offer (which notice pursuant to clauses (ii)
through (v) hereof shall be accompanied by an instruction to suspend the
use of the prospectus until the requisite changes have been made) and, if
requested by the
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<PAGE> 8
Purchasers, the Holders or any such Participating Broker-Dealer, confirm such
notice in writing:
(i) when the Registration Statement or any amendment thereto has
been filed with the Commission and when the Registration Statement or
any post effective amendment thereto has become effective;
(ii) of any request BY the Commission for an amendment or
supplement to the Registration Statement or the prospectus included
therein or for additional information;
(iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
initiation of any proceeding for that purpose;
(iv) of the receipt by either Company or its legal counsel of
any notification with respect to the suspension of the qualification
of the Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for that purpose;
(iv) of the happening of any event that requires the Companies to
make changes in the Registration Statement or the prospectus in order
that the Registration Statement or the prospectus does not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading; and
(vi) of any determination by the Companies that a post-effective
amendment to a Registration Statement would be appropriate.
(c) The Companies shall make every reasonable effort to prevent the
issuance, and if issued to obtain the withdrawal at the earliest possible time,
of any order suspending the effectiveness of the Registration Statement and
shall provide prompt written notice to the Purchasers and each Holder of the
withdrawal of any such order.
(d) The Companies shall furnish to each Holder of Securities included in
the Shelf Registration, without charge, at least one conformed copy of the Shelf
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules (without documents incorporated therein by
reference or exhibits thereto, unless a Holder so requests in writing).
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<PAGE> 9
(e) The Companies shall deliver to the Purchasers, and to any other
Holder that so requests, without charge, at least one conformed copy of the
Exchange Offer Registration Statement and any post-effective amendment thereto,
including financial statements and schedules (without documents incorporated
therein by reference or exhibits thereto, unless the Purchasers or any such
Holder so request in writing).
(f) The Companies shall deliver to each Holder of Securities included
in the Shelf Registration, without charge, as many copies of the prospectus
(including each preliminary prospectus) included in the Shelf Registration
Statement and any amendment or supplement thereto as that Holder may reasonably
request. The Companies consent, subject to the provisions of this Agreement, to
the use of the prospectus or any amendment or supplement thereto by each of the
selling Holders of the Securities in connection with the offering and sale of
the Securities covered by, and as contemplated by, the prospectus, or any
amendment or supplement thereto, Concluded in the Shelf Registration Statement.
(g) The Companies shall deliver to each Purchaser, any Participating
Broker-Dealer and any Exchanging Dealer, without charge, as many copies of the
final prospectus included in the Exchange Offer Registration Statement and any
amendment or supplement thereto as that person or entity may reasonably request,
during a period not exceeding 120 days following the consummation of the
Registered Exchange Offer. The Companies consent, subject to the provisions of
this Agreement, to the use of the prospectus or any amendment or supplement
thereto by the Purchasers, if necessary, any Participating Broker-Dealer and any
Exchanging Dealer and such other persons as may be required to deliver a
prospectus following the Registered Exchange Offer in connection with the
offering and sale of the Exchange Notes covered by the prospectus, or any
amendment or supplement thereto, included in the Exchange Offer Registration
Statement, but no such person or entity is authorized by the Companies to
deliver and no such person or entity shall deliver any such prospectus after the
expiration of the period referred to in the immediately preceding sentence, in
connection with any resale contemplated by this paragraph.
(h) Prior to any public offering of Securities pursuant to any
Registration Statement, the Companies shall use their best efforts to register
or qualify or cooperate with the Holders of the Securities included therein
and their respective counsel in connection with the registration or
qualification of the Securities for offer and sale under the securities or Blue
Sky laws of such state of the United
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<PAGE> 10
States as any Holder of the Securities reasonably requests in writing and shall
do any and all other acts or things necessary or advisable to enable that Holder
to offer and sell in such jurisdictions the Securities covered by that
Registration Statement owned by that Holder, but the Companies are not
required to (i) qualify generally or as foreign corporations to do business in
any jurisdiction where they are not then so qualified or (ii) take any action
which would subject them to general service of process or to taxation in any
jurisdiction where they are not then so subject.
(i) The Companies shall cooperate with the Holders of the Securities to
facilitate the timely preparation and delivery of certificates representing the
Securities to be sold pursuant to any Shelf Registration Statement free of any
restrictive legend and in such denominations (consistent with the provisions of
the Indenture) and registered in such names as the Holders may request at least
two business days prior to closing of any sale of the Securities pursuant to
such Shelf Registration Statement.
(j) If any event contemplated by paragraphs (ii) through (vi) of Section
3(b) above occurs during the period in which the Companies are required to
maintain an effective Registration Statement, the Companies shall promptly
prepare and file a post-effective amendment to the Registration Statement or a
supplement to the related prospectus and any other required document so that, as
thereafter delivered to Holders of the Notes or purchasers of Securities, the
prospectus will not contain an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading. If the Companies notify the Purchasers, the Holders of the
Securities and any known Participating Broker-Dealer in accordance with
paragraphs (ii) through (vi) of Section 3(b) above to suspend the use of the
prospectus until the requisite changes to the prospectus have been made, then
the Purchasers, the Holders of the Securities and any such Participating
Broker-Dealer shall suspend use of that prospectus until the Companies have
amended or supplemented the prospectus to correct that misstatement or omission,
and the period of effectiveness of the Shelf Registration Statement provided for
in Section 2(b) above and the Exchange Offer Registration Statement provided for
in Section 1 above shall each be extended by the number of days from and
including the date of the giving of that notice to and including the date when
the Purchasers, the Holders of the Securities and any known Participating
Broker-Dealer shall have received that amended or supplemented prospectus
pursuant to this Section 3(j), but the minimum time period before the Companies
are
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entitled to close the Registered Exchange Offer will be extended only to the
extent required by the Commission Each Purchaser, Holder and Participating
Broker-Dealer agrees that on receipt of any such notice from the Companies it
will not distribute copies of the prospectus that are the subject of that notice
and will retain those copies in its files.
(k) Not later than the effective date of the applicable Registration
Statement, the Companies will obtain a CUSIP number for each tranche of the
Transfer Restricted Notes or the Exchange Notes, as the case may be, and provide
the Trustee with printed certificates for the Notes or the Exchange Notes, as
the case may be, in a form eligible for deposit with The Depository Trust
Company.
(1) The Companies will comply with all rules and regulations of the
Commission to the extent and so long as they are applicable to the Registered
Exchange offer or the Shelf Registration and will make generally available to
their security holders (or otherwise provide in accordance with section 11(a)
of the Securities Act) an earnings statement satisfying the provisions of
section 11(a) of the Securities Act, no later than 45 days after the end of the
12-month period (or 90 days, if that period is a fiscal year) that begins with
the first month of the Companies' first fiscal quarter commencing after the
effective date of the Registration Statement, which statement will cover that
12-month period.
(m) The Companies shall cause the Indenture to be qualified under the
Trust Indenture Act of 1939, as amended, in a timely manner and to contain any
changes that are necessary for that qualification. If that qualification would
require the appointment of a new trustee under the Indenture, the Companies
shall appoint a new trustee thereunder pursuant to the applicable provisions of
the Indenture.
(n) The Companies may require each Holder of Securities to be sold
pursuant to any Shelf Registration Statement to furnish to the Companies such
information regarding that Holder and the distribution of the Securities as the
Companies may from time to time reasonably request for inclusion in the Shelf
Registration Statement, and the Companies may exclude from that registration
the Securities of any Holder that unreasonably fails to furnish that information
within a reasonable time after receiving that request.
(o) In the case of any Shelf Registration, the Companies shall enter into
such customary agreements (including, if requested, an underwriting agreement in
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<PAGE> 12
customary form) and take all such other action, if any, as the Holders of a
majority of the Securities being sold shall reasonably request in order to
facilitate the disposition of the Securities pursuant to that Shelf
Registration.
(p) in the case of any Shelf Registration, the Companies shall make
available for Inspection by a representative of the Holders of Securities being
sold, their counsel and an accountant retained by those Holders, in a manner
designed to permit underwriters to satisfy their due diligence investigation
under the Securities Act, all financial and other records, pertinent corporate
documents and properties of the Companies customarily inspected by underwriters
in primary underwritten offerings and shall cause the officers, directors and
employees of the Companies and their subsidiaries to supply all information
reasonably requested by, and customarily supplied in connection with primary
underwritten offerings to, any such representative, attorney or accountant in
connection with that but any records, information or documents that designated
by the Companies as confidential at delivery thereof shall be kept confidential
by persons, unless (i) those records, information are in the public domain or
otherwise publicly (ii) disclosure of those records, information or documents
is required by a court or administrative order; or (iii) disclosure of those
records, information or documents, in the written opinion of counsel to those
persons, is otherwise required by law (including, without limitation, pursuant
to the Securities Act).
(q) In the case of any Shelf Registration, the Companies, if requested by
any Holder of Securities covered thereby, shall (i) cause their counsel to
deliver an opinion and updates thereof relating to the Securities in
customary form addressed to the selling Holder and the managing underwriters,
if any, covering matters customarily covered in opinions requested in
underwritten offerings; (ii) cause their officers to execute and deliver such
documents and certificates and updates thereof as may be reasonably requested by
any underwriter of the applicable Securities, and which are customarily
delivered in underwritten offerings, to evidence the continued validity of the
representations and warranties of the Companies made pursuant to, and to
evidence compliance with any customary conditions contained in, an underwriting
agreement; and (ii) cause their independent public accountants to provide to
the selling Holders of the applicable Securities (and any underwriter therefor)
a comfort letter in customary form and covering matters of the type customarily
covered in comfort letters in connection with primary underwritten offerings,
subject to receipt of appropriate documentation as
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<PAGE> 13
contemplated, and only if permitted, by Statement of Auditing Standards No.
72.
(r) If a Registered Exchange offer is to be consummated, upon delivery
of the Notes by Holders to the Companies (or to any other Person designated
by the Companies) in exchange for the Exchange Notes, the Companies shall
mark, or caused to be marked, on the Notes so exchanged that those Notes
are being canceled in exchange for the Exchange Notes, and in no event
shall the Notes be marked as paid or otherwise satisfied.
(s) The Companies shall use their best efforts to cause the Securities
covered by a Registration Statement to be rated by two nationally
recognized statistical rating organizations (as that term is defined in
Rule 436(g)(2) under the Securities Act) if so requested by Holders of a
majority in aggregate principal amount of the Securities covered by that
Registration Statement, or by the managing underwriters, if any.
(t) If any broker-dealer registered under the Exchange Act underwrites
any Securities or participates as a member of an underwriting syndicate
or selling group or "assists in the distribution" (within the meaning of
the Conduct Rules of the National Association of Securities Dealers, Inc.
("NASD")) thereof, whether as a Holder of those Securities or as an
underwriter, a placement or sales agent or a broker or dealer in respect
thereof, or otherwise, the Companies shall assist such broker-dealer in
complying with the requirements of those Rules and By-Laws, including by
(i) if those Rules, including Rule 2720, shall so require, engaging a
"qualified independent underwriter" (as defined in Rule 2720) to
participate in the preparation of the Registration Statement relating to
those Securities, to exercise usual standards of due diligence in respect
thereto and, if any portion of the offering contemplated by that
Registration Statement is an underwritten offering or is made through a
placement or sales agent, to recommend the yield of such Securities, (ii)
indemnifying any such qualified independent underwriter to the extent of
the of underwriters provided in Section 5 hereof; and (iii) providing such
information to that broker-dealer as may be required in order for that
broker-dealer to comply with the requirements of the Conduct Rules of the
NASD.
SECTION 4. REGISTRATION EXPENSES. The Companies shall pay all fees
and expenses incident to the performance of or compliance with this Agreement by
the Companies including, without limitation, (a) all Commission, stock exchange
or NASD registration and filing fees; (b) all fees and expenses incurred in
connection with compliance with. state securities or Blue Sky laws (including
reasonable fees and disbursements of counsel for
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<PAGE> 14
any underwriters or holders in connection with Blue Sky qualification of any of
the Securities); (c) all out of pocket expenses of any persons in preparing or
assisting in preparing, word processing, printing and distributing any
Registration Statement, any prospectus, any amendment or supplement to either
thereof, any underwriting agreement, securities sales agreement or other
document relating to the performance of and compliance with this Agreement; (d)
all rating agency fees; and (e) the fees and disbursements of counsel for the
Companies and, in the event of a Shelf Registration, the reasonable fees and
disbursements of one firm of counsel designated by the Holders of a majority in
principal amount of the Securities covered thereby and of the independent public
accountants of the Companies, including the expense of any special audit or
"cold comfort" letter required by or incident to that performance and
compliance, but excluding fees and expenses of counsel to the underwriters and
underwriting discounts and commissions and transfer taxes, if any, relating to
the sale or disposition of Securities by a Holder.
SECTION 5. INDEMNIFICATION. (a) The Companies agree to indemnify and
hold harmless each Holder of Securities, any Participating Broker-Dealer, and
each person, if any, who controls that Holder or Participating Broker-Dealer
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act, or is under common control with, or is controlled by, that
Holder or Participating Broker-Dealer, from and against any and all losses,
claims, damages and liabilities (including, without limitation, any legal or
other expenses reasonably incurred in connection with defending or investigating
any such action or claim) caused by any untrue statement or alleged untrue
statement of a material fact contained in a Registration Statement or prospectus
(as amended or supplemented if the Companies shall have furnished any amendment
or supplement thereto), or caused by any omission or alleged emission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except insofar as such losses, claims, damages or liabilities
are caused by any such untrue statement or omission or alleged untrue statement
or omission based on information relating to that Holder or Participating
Broker-Dealer furnished to the Companies in writing by that Holder or
Participating Broker-Dealer expressly for use therein, but the foregoing
indemnity with respect to any preliminary prospectus will not inure to the
benefit of any Holder or Participating Broker-Dealer from whom the person
asserting any such losses, claims, damages or liabilities purchased Securities,
or any person controlling or affiliated with that Holder or Participating
Broker-Dealer, is a copy of the final prospectus (as then amended or
supplemented if the Companies shall have furnished any amendment or supplement
thereto) was not sent or given by or on behalf of that Holder or Participating
Broker-Dealer to that person, if required by law so to have been delivered, at
or prior to the written confirmation
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<PAGE> 15
of the sale of the Securities to that person, and if the final prospectus (as
so amended or supplemented) would have cured the defect giving rise to that
loss, claim, damage or liability.
(b) Each Participating Broker-Dealer and Holder of Securities, severally
and not jointly, agrees to indemnify and hold harmless the Companies, other
selling Holders and Participating Broker-Dealers, directors of the Companies,
the officers of the Companies who sign a Registration Statement and each
person, if any, who controls either Company or any selling Holder or
Participating Broker-Dealer, within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Companies to that Holder or Participating
Broker-Dealer, but only with reference to information relating to that Holder
furnished to the Companies in writing by that Holder or Participating
Broker-Dealer expressly for use in a Registration Statement, any preliminary
prospectus, prospectus or any amendment or supplement to any thereof.
(c) If any proceeding (including any governmental investigation) is
instituted involving any person in respect of which indemnity may be sought
pursuant to either paragraph (a) or (b) above, that person (the "indemnified
party") shall promptly notify the person against whom that indemnity may be
sought (the "indemnifying party") in writing and the indemnifying party, upon
request of the indemnified party, shall retain counsel reasonably satisfactory
to the indemnified party to represent the indemnified party and any others the
indemnifying party may designate in that proceeding and shall pay the fees and
expenses of that counsel related to that proceeding. In any such proceeding, any
indemnified party may retain its own counsel, but the fees and expenses of that
counsel will be at the expense of that indemnified party unless (i) the
indemnifying party and the indemnified party shall have mutually agreed to
the retention of that counsel, or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate because of actual or potential differing interests between
them. It is understood that the indemnifying party shall not, in respect of the
legal expenses of any indemnified party in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the fees and
expenses of more than one separate firm (in addition to any local counsel) for
all such indemnified parties and that all such fees and expenses shall be
reimbursed as they are incurred. If an indemnified party includes (x) the
Purchasers or such controlling persons of the Purchasers, that firm will be
designated in writing by Morgan Stanley & Co. Incorporated; or (y) Holders of
Securities (other than the Purchasers) or controlling persons of those Holders,
that firm will be designated in writing by the Holders of a majority in
aggregate principal amount of those Securities. In all other
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cases, that firm will be designated by the Companies. The indemnifying party
will not be liable for any settlement of any proceeding effected without its
written consent, but if settled with that consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnity the
indemnified party from and against any loss or Liability by reason of that
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party has requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by the second
and third sentences of this paragraph, the indemnifying party agrees that it
will be liable for any settlement of any proceeding effected without its
written consent if (i) that settlement is entered into more than 90 days after
receipt by the indemnifying party of the aforesaid request and (ii) the
indemnifying party shall not have reimbursed the indemnified party in accordance
with that request prior to the date of that settlement. No indemnifying party
may, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by that indemnified party, unless that settlement includes an
unconditional release of that indemnified party from all liability on claims
that are the subject matter of that proceeding.
(d) To the extent the indemnification provided for in paragraph (a)
or (b) of this Section 5 is unavailable to an indemnified party or insufficient
in respect of any losses, claims, damages or liabilities referred to therein,
then each indemnifying party under that paragraph, in lieu of indemnifying that
indemnified party thereunder, shall contribute to the amount paid or payable by
that indemnified party as a result of those losses, claims, damages or
liabilities in such proportion as is appropriate to reflect the relative fault
of the indemnifying party or parties, on the one hand, and the indemnified party
or parties, on the other hand, in connection with the statements or omissions
that resulted in those losses, claims, damages or liabilities, as well as any
other relevant equitable considerations. The relative fault of the parties
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Companies or by
that Holder, Participating Broker-Dealer or other party and the parties,
relative intent, knowledge, access to information and opportunity to correct or
prevent that statement or omission. The Holders, and Participating
Broker-Dealers' respective obligations to contribute pursuant to this Section 5
are several in proportion to the respective amount of Notes they have purchased,
not joint.
(e) The Companies, each Participating Broker-Dealer and each Holder
agree that it would not be just or equitable if
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<PAGE> 17
contribution pursuant to this Section 5 were determined by PRO RATA allocation
or by any other method of allocation that does not take account of the equitable
considerations referred to in subsection (d) of this Section 5. The amount paid
or payable by an indemnified party as a result of the losses, claims, damages
and liabilities referred to in subsection (d) above is deemed to include,
subject to the limitations set forth, above, any legal or other expenses
reasonably incurred by that indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the Provisions of this
Section 5, no Holder of Securities is required to contribute any amount in
excess of the amount by which the total price at which the Securities were sold
by that Holder pursuant to a Registration Statement exceeds the amount of any
damages that Holder has otherwise been required to pay by reason of that untrue
or alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) is entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation.
(f) The indemnity and contribution provisions contained in this
Section 5 will remain operative and in full force and effect regardless of (i)
any termination of this Agreement; (ii) any investigation made by or on behalf
of any Holder or Participating Broker-Dealer or any person controlling that
Holder or Participating Broker-Dealer or by or on behalf of either Company,
its officers or directors or any person controlling either Company; and (iii)
the sale of the Securities. The remedies provided for in this Section 5 are not
exclusive and do not limit any rights or remedies which may otherwise be
available to any indemnified party at law or in equity.
SECTION 6. ADDITIONAL INTEREST UNDER CERTAIN CIRCUMSTANCES.
(a) Additional interest (the "Additional Interest") with respect to the
Securities will be assessed as follows if any of the following events occurs
(each event identified in clause (i), (ii) or (iii) below, a "Failure to
Register):
(i) If by the 150th day after the date of the original issue of the
Notes (that date of issue, the "Closing Date"), neither the Exchange Offer
Registration Statement nor a Shelf Registration Statement has been filed
with the Commission,
(ii) If by the 180th day after the Closing Date, the Registered
Exchange Offer is not consummated and, if required in lieu thereof, the
Shelf Registration Statement is not declared effective by the
Commission; or
(iii) If, after the 180th day after the Closing Date, and after either
the Exchange Offer Registration
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Statement or the Shelf Registration Statement is declared effective,
(A) that Registration Statement thereafter ceases to be effective prior to
completion of the Exchange Offer or the sale of all the Transfer Restricted
Notes registered pursuant to the Shelf Registration Statement, as the case
may be; or (B) that Registration Statement or the related prospectus ceases
to be usable in connection with resales of transfer Restricted Notes during
the periods specified in this Agreement (except as permitted in paragraph
(b) of this Section 6) because either (1) any event occurs as a result of
which the related prospectus forming part of that Registration Statement
would include any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or (2) it shall be
necessary to amend that Registration Statement, or supplement the related
prospectus, to comply with the Securities Act or the Exchange Act or the
respective rules thereunder.
Additional Interest shall accrue on the Notes of each tranche over
and above the interest set forth in the title of the Notes of that tranche from
and including the date on which any such Failure to Register shall occur to but
excluding the date on which all such Failures to Register have been cured, at a
rate of 0.50% per annum.
(b) A Failure to Register referred to in Section 6(a)(iii) is
deemed not to be continuing in relation to a Registration Statement or the
related prospectus if (i) that Failure to Register has occurred solely as a
result of (x) the filing of a post-effective amendment to that Registration
Statement to incorporate annual audited financial information with respect to
the Companies, when such post-effective amendment is not yet effective and needs
to be declared effective to permit Holders to use the related prospectus or (y)
the occurrence of other material events or developments with respect to the
Companies or their Affiliates that would need to be described in that
Registration Statement or the related prospectus, and (ii) in the case of clause
(y), the Companies are proceeding promptly and in good faith to amend or
supplement that Registration Statement and related prospectus to describe those
events or, in the case of material developments that the Companies determine in
good faith must remain confidential for business reasons, the Companies are
proceeding promptly and in good faith to take such steps as are necessary so
that those developments need no longer remain confidential, but in any case, if
any Failure to Register (including any referred to in clause (x) or (y), above)
continues for a Period in excess of 45 days, Additional Interest will be payable
in accordance with the above paragraph from the day following the last day of
that 45-day period until the date on which that Failure to Register is cured.
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(c) Any Additional Interest payable will be payable on the regular
interest payment dates with respect to the Notes, in the same manner as the
manner in which regular interest is payable. The amount of Additional Interest
for any period will be determined by multiplying the applicable Additional
Interest rate by the principal amount of the applicable Notes, multiplied by a
fraction, the numerator of which is the number of days that Additional Interest
rate was applicable during that period (determined on the basis of a 360-day
year comprised of twelve 30-day months), and the denominator of which is 360.
(d) "Transfer Restricted Note" means each Security until (i) the date
on which that Security has been exchanged by a person other than a broker-dealer
for a freely transferrable Exchange Note in the Registered Exchange Offer; (ii)
following the exchange by a broker-dealer in the Registered Exchange Offer of a
Transfer Restricted Note for an Exchange Note, the date on which that Exchange
Note is sold to a purchaser who receives from that broker-dealer on or prior to
the date of that sale a copy of the prospectus contained in the Exchange Offer
Registration Statement; (iii) the date on which that Security has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement; or (iv) the date on which that Security
is distributed to the public pursuant to Rule 144 under the Securities Act or is
saleable pursuant to Rule 144(k) under the Securities Act.
SECTION 7. RULES 144 AND 144A. The Companies shall use their best
efforts to file the reports required to be filed by them under the Securities
Act and the Exchange Act in a timely manner and, if at any time the Companies
are not required to file those reports, they will, upon the request of any
Holder of Transfer Restricted Notes, make publicly available other information
so long as is necessary to permit sales of Securities pursuant to Rules 144 and
144A. The Companies covenant that they wall take such further action as any
Holder of Transfer Restricted Notes may reasonably request, all to the extent
required from time to time to enable that Holder to sell Transfer Restricted
Notes without registration under the Securities Act within the limitation of the
exemptions provided by Rules 144 and 144A (including the requirements of Rule
144A(d)(4)). Upon request by a Purchaser, the Companies will provide a copy
of this Agreement to prospective purchasers of Notes identified to the Companies
by that Purchaser. Upon the request of any Holder of Transfer Restricted Notes,
the Companies shall deliver to that Holder a written statement as to whether it
has complied with those requirements. Notwithstanding the foregoing, nothing in
this Section 7 requires either Company to register any of its securities under
the Exchange Act.
SECTION 8. Underwritten Registrations. If any of the Transfer
Restricted Notes covered by any Shelf Registration are to be sold in an
underwritten offering, the investment banker or
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investment bankers and manager or managers that will administer the offering
("Managing Underwriters") will be selected by the Holders of a majority in
aggregate principal amount of the Transfer Restricted Notes included in that
offering, but the Managing Underwriters must be reasonably satisfactory to the
Companies.
No person may participate in any underwritten registration hereunder
unless that person (a) agrees to sell that person's Transfer Restricted Notes on
the basis reasonably provided in any underwriting arrangements approved by the
persons entitled hereunder to approve those arrangements; and (b) completes and
executes all questionnaires, powers of attorney, indemnities, underwriting
agreements and other documents reasonably required under the terms of those
underwriting arrangements.
SECTION 9. MISCELLANEOUS. (a) AMENDMENTS AND WAIVERS. The provisions
of this Agreement may not be amended, modified or supplemented, and waivers or
consents to departures from the provisions hereof may not be given, except by
the Companies and the written consent of the Holders of a majority in principal
amount of the Securities affected thereby.
(b) NOTICES. ALL notices and other communications provided for or
permitted hereunder must be given in writing by hand-delivery, first-class
mail, facsimile transmission, or air courier that guarantees overnight delivery:
(i) if to a Holder of Securities, at the most current address given by
that Holder to the Companies in accordance with this Section 9(b) , which
address initially is, with respect to each Holder, the address of that
Holder to which confirmation of the sale of the Notes to that Holder was
first sent by the Purchasers, with a copy in like manner to you as follows:
Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Facsimile: (212) 761-0359
Attention: Managing Director, Syndicate
-20-
<PAGE> 21
with a copy to:
Baker & Hostetler LLP
3200 National City Center
1900 East 9th Street
Cleveland, Ohio 44114-3485
Facsimile: (216) 696-0740
Attention: Robert A. Weible
(2) if to the Companies, at the following address:
Centerior Energy
6200 Oak Tree Boulevard
Independence, Ohio 44131
Facsimile: (216) 447-3100
Attention: Terrence G. Linnert
with a copy to:
Squire, Sanders & Dempsey, L.L.P.
4900 Key Tower
127 Public Square
Cleveland, Ohio 44114-1304
Facsimile: (216) 479-8793
Attention: Gordon S. Kaiser
All such notices and communications will be deemed to have been duly
given: at the time delivered by hand, if personally delivered; three business
days after being deposited in the mail, postage prepaid, if mailed; when
receipt is acknowledged by the recipient's facsimile machine operator, if sent
by facsimile transmission; and on the day delivered, if sent by overnight air
courier guaranteeing next day delivery.
(c) NO INCONSISTENT AGREEMENTS. Neither Company has, as of the date
hereof, entered into, nor may either Company, on or after the date hereof, enter
into, any agreement with respect to the Securities that is inconsistent with the
rights granted to the Holders herein or that otherwise conflicts with this
Agreement.
(d) SUCCESSORS AND ASSIGNS. This Agreement is binding on the
Companies and their successors and assigns.
(e) COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed will constitute an original and all of which taken together
constitute one and the same agreement.
-21-
<PAGE> 22
(f) GOVERNING LAW. THIS AGREEMENT IS GOVERNED BY, AND IS TO BE
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
(h) SEVERABILITY. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid,
illegal or unenforceable, the validity, legality and enforceability of any such
provision in every other respect and of the remaining provisions contained
herein is not affected or impaired thereby.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-22-
<PAGE> 23
(i) SECURITIES HELD BY THE COMPANIES. Whenever the consent or
approval of Holders of a specified percentage of principal amount of Securities
is required hereunder, Securities held by the Companies or their affiliates
will not be counted in determining whether that consent or approval was given
by the Holders of that required percentage.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Companies a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the Purchasers and the Companies in accordance with its terms.
Very truly yours,
THE CLEVELAND ELECTRIC
ILLUMINATING COMPANY and
THE TOLEDO EDISON COMPANY
By:
------------------------------------
Name:
Title: of each
------------------
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Citicorp Securities, Inc.
Credit Suisse First Boston
McDonald & Company Securities, Inc.
Acting severally on behalf of
themselves and the several Purchasers
BY MORGAN STANLEY & CO. INCORPORATED
By:
------------------------------------
Name:
Title:
-23-
<PAGE> 24
(i) SECURITIES HELD BY THE COMPANIES. Whenever the consent or
approval of Holders of a specified percentage of principal amount of Securities
is required hereunder, Securities held by the Companies or their affiliates
will not be counted in determining whether that consent or approval was
given by the Holders of that required percentage.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Companies a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the Purchasers and the Companies in accordance with its terms.
Very truly yours,
THE CLEVELAND ELECTRIC
ILLUMINATING COMPANY and
THE TOLEDO EDISON COMPANY
BY:
-------------------------------
Name:
Title: of each
----------------
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
Citicorp Securities, Inc.
Credit Suisse First Boston
McDonald & Company Securities, Inc.
Acting severally on behalf of
themselves and the several Purchasers
By MORGAIN STANLEY, INCORPORATED
By:
--------------------------------
Name:
Title:
-23-
<PAGE> 25
ANNEX A
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer wi11 not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Existing Notes where
such Existing Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities. The Company has agreed
that, for a period of 120 days after the consummation of the Exchange Offer, it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution".
<PAGE> 26
ANNEX B
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Notes, that were acquired by that broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of those Exchange
Notes. See "Plan of Distribution."
<PAGE> 27
ANNEX C
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of those Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Existing Notes when those Existing Notes were acquired as a result
of market making activities or other trading activities. The Companies have
agreed that, for a period of 120 days after the consummation of the Exchange
Offer, they will make this prospectus, as amended or supplemented, available to
any broker-dealer for use in connection with any such resale. In addition, until
__________________, 199_, all dealers effecting transactions in the Exchange
Notes may be required to deliver a prospectus.
The Companies will not receive any proceeds from any sale of Exchange
Notes by broker-dealers. Exchange Notes received by any broker-dealer for its
own account pursuant to the Exchange Offer may be sold from time to time in one
or more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of those
methods of resale, at market prices prevailing at the time of resale or at
prices related to those prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from any
such broker-dealer or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of those Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commission or concessions received by any
such person may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that, by acknowledging that it will
deliver and by delivering a prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
For a period of 120 days after the Expiration Date the Companies will
promptly send additional copies of this Prospectus, and any amendment or
supplement to this Prospectus, to any broker-dealer that requests those
documents in the Letter of Transmittal. The Companies have agreed to pay all
expenses incident to the Exchange Offer (including the expenses of one counsel
for the Holders of the Notes) other than commissions or concessions of any
broker or dealer and will indemnify the Holders of the Securities (including any
broker-dealer) against
<PAGE> 28
certain liabilities, including liabilities under the Securities Act.
- ---------------------------
*/ In addition, the legend required by Item 502(e) of Regulation S-K will
appear on the back cover page of the Exchange Offer prospectus.
-2-
<PAGE> 29
ANNEX D
[]
CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENT OR SUPPLEMENT
THERETO.
Name:
Address:
If the undersigned is not a broker-dealer, the undersigned represents that it is
not engaged in, and does not intend to engage in, a distribution of Exchange
Notes. If the undersigned is a broker-dealer that will receive Exchange Notes
for its own account in exchange for Notes that were acquired as a result of
market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
<PAGE> 1
Exhibit 1(c)
LETTER OF TRANSMITTAL
FOR
7.19% SERIES A SECURED NOTES DUE 2000,
7.67% SERIES A SECURED NOTES DUE 2004
AND
7.13% SERIES A SECURED NOTES DUE 2007
OF
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
AND
THE TOLEDO EDISON COMPANY
PURSUANT TO THE EXCHANGE OFFER IN RESPECT OF ALL OF THEIR OUTSTANDING
7.19% SERIES A SECURED NOTES DUE 2000,
7.67% SERIES A SECURED NOTES DUE 2004 AND
7.13% SERIES A SECURED NOTES DUE 2007
FOR
7.19% SERIES B SECURED NOTES DUE 2000,
7.67% SERIES B SECURED NOTES DUE 2004 AND
7.13% SERIES B SECURED NOTES DUE 2007, RESPECTIVELY
------------------------------------------------------------
PURSUANT TO THE PROSPECTUS DATED , 1997
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1997 UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE"). TENDERS
OF OLD NOTES (AS DEFINED HEREIN) MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M.
ON THE EXPIRATION DATE.
The Exchange Agent for the Exchange Offer is:
THE CHASE MANHATTAN BANK
By Registered or Certified Mail:
The Chase Manhattan Bank
55 Water Street
Room 234, North Building
New York, New York 10041
Attention: Carlos Esteves
Facsimile Transmissions:
(Eligible Institutions Only)
(212) 638-7375 or (212) 344-9367
Confirm by Telephone:
(212) 638-0828
By Hand or Overnight Delivery:
The Chase Manhattan Bank
55 Water Street
Room 234, North Building
New York, New York 10041
Attention: Carlos Esteves
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION VIA
TELEGRAM, TELEX OR FACSIMILE, OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE
A VALID DELIVERY. THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY
BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE NEW NOTES FOR THEIR OLD NOTES
PURSUANT TO THE EXCHANGE OFFER MUST VALIDLY TENDER (AND NOT WITHDRAW) THEIR OLD
NOTES TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
By execution hereof, the undersigned acknowledges receipt of the Prospectus
dated , 1997 (the "Prospectus") of The Cleveland Electric
Illuminating Company and The Toledo Edison Company (the "Companies"), which,
together with this Letter of Transmittal and the instructions hereto (the
"Letter of Transmittal"), constitute the Companies' offer (the "Exchange Offer")
to exchange $1,000 principal amount of their 7.19% Series B Secured Notes due
2000 (the "New Notes due 2000"), 7.67% Series B Secured Notes due 2004 (the "New
Notes due 2004") and 7.13% Series B Secured Notes due 2007 (the "New Notes due
2007") (collectively, the "New Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
registration statement of which the Prospectus constitutes a part, for each
$1,000 principal amount of their outstanding 7.19% Series A Secured Notes due
2000 (the "Old Notes due 2000"), 7.67% Series A Secured Notes due 2004 (the "Old
Notes due 2004") and 7.13% Series A Secured Notes due 2007 (the "Old Notes due
2007") (collectively, the "Old Notes"), upon the terms and subject to the
conditions set forth in the Prospectus.
This Letter of Transmittal is to be used by Holders (as defined below) if:
(i) certificates representing Old Notes are to be physically delivered to the
Exchange Agent herewith by Holders; (ii) tender of Old Notes is to be made by
book-
<PAGE> 2
entry transfer to the Exchange Agent's account at The Depository Trust Company
("DTC") pursuant to the procedures set forth in the Prospectus under "The
Exchange Offer -- Procedures for Tendering" by any financial institution that is
a participant in DTC and whose name appears on a security position listing as
the owner of Old Notes (such participants acting on behalf of Holders are
referred to herein, together with such Holders, as "Acting Holders"); or (iii)
tender of Old Notes is to be made according to the guaranteed delivery
procedures set forth in the Prospectus under "The Exchange Offer -- Guaranteed
Delivery Procedures," and, in each case, instructions are being transmitted
through the DTC Automated Tender Offer Program ("ATOP"). See Instruction 1.
Delivery of documents to DTC does not constitute delivery to the Exchange Agent.
The term "Holder" with respect to the Exchange Offer means any person: (i)
in whose name Old Notes are registered on the books of the Companies or any
other person who has obtained a properly completed bond power from the
registered Holder; or (ii) whose Old Notes are held of record by DTC and who
desires to deliver such Old Notes by book-entry transfer at DTC.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned desires to take with respect
to the Exchange Offer.
THE EXCHANGE OFFER IS NOT BEING MADE TO (NOR WILL THE SURRENDER OF OLD
NOTES FOR EXCHANGE BE ACCEPTED FROM OR ON BEHALF OF) HOLDERS IN ANY JURISDICTION
IN WHICH THE MAKING OR ACCEPTANCE OF THE EXCHANGE OFFER WOULD NOT BE IN
COMPLIANCE WITH THE LAWS OF SUCH JURISDICTION.
All capitalized terms used herein and not defined shall have the meaning
ascribed to them in the Prospectus.
The instructions included with this Letter of Transmittal must be followed.
Questions and requests for assistance or for additional copies of the
Prospectus, this Letter of Transmittal and the Notice of Guaranteed Delivery may
be directed to the Exchange Agent. See Instruction 8 herein.
HOLDERS WHO WISH TO ACCEPT THE EXCHANGE OFFER AND TENDER THEIR OLD NOTES
MUST COMPLETE THIS LETTER OF TRANSMITTAL IN ITS ENTIRETY.
THE UNDERSIGNED, BY COMPLETING THE BOX ENTITLED "DESCRIPTION OF NOTES" AND
SIGNING THIS LETTER OF TRANSMITTAL, WILL BE DEEMED TO HAVE TENDERED THE OLD
NOTES AND MADE CERTAIN REPRESENTATIONS DESCRIBED IN THE PROSPECTUS AND HEREIN.
List below the Old Notes to which this Letter of Transmittal relates. If
the space provided below is inadequate, list the certificate numbers and
principal amounts on a separately executed schedule and affix the schedule to
this Letter of Transmittal. Tenders of Old Notes will be accepted only in
principal amounts equal to $1,000 or integral multiples thereof.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
DESCRIPTION OF NOTES
- --------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF HOLDER(S) CERTIFICATE NUMBERS* AGGREGATE PRINCIPAL
(PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) (ATTACH SIGNED LIST AMOUNT TENDERED
APPEAR(S) ON OLD NOTES BEING TENDERED) IF NECESSARY) (IF LESS THAN ALL)**
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
--------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
TOTAL PRINCIPAL AMOUNT OF OLD NOTES TENDERED
- --------------------------------------------------------------------------------------------------------
* Need not be completed by Holders tendering by book-entry transfer
** Need not be completed by Holders who wish to tender with respect to all Old Notes listed. See
Instruction 2.
- --------------------------------------------------------------------------------------------------------
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY DTC TO THE EXCHANGE AGENT'S ACCOUNT AT DTC
AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: ________________________________________________________________
DTC Book-Entry Account No.: ___________________________________________________________________
Transaction Code No.: _________________________________________________________________________
</TABLE>
<PAGE> 3
If Holders desire to tender Old Notes pursuant to the Exchange Offer and
(i) certificates representing such Old Notes are not lost but are not
immediately available, (ii) time will not permit the Letter of Transmittal,
certificates representing such Old Notes or other required documents to reach
the Exchange Agent prior to the Expiration Date, or (iii) the procedure for
book-entry transfer cannot be completed prior to the Expiration Date, such
Holders may effect a tender of such Old Notes in accordance with the guaranteed
delivery procedures set forth in the Prospectus under "The Exchange
Offer -- Guaranteed Delivery Procedures." DTC participants may also accept the
Exchange Offer by submitting the notice of guaranteed delivery through ATOP.
<TABLE>
<S> <C>
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY
PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE THE FOLLOWING (See Instructions 1 and 4):
Name(s) of Holder(s) of Old
Notes:___________________________________________________________________________________________
Window Ticket No. (if any):______________________________________________________________________
Date of Execution of
Notice of Guaranteed Delivery:___________________________________________________________________
Name of Eligible Institution that Guaranteed Delivery:
_________________________________________________________________________________________________
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER FACILITY, AND PROVIDE
THE FOLLOWING INFORMATION:
Name of Tendering Institution:___________________________________________________________________
DTC Book-Entry Account No.:______________________________________________________________________
Transaction Code No.:_____________________________________________________________________________
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND
10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name:_____________________________________________________________________________________________
Address:__________________________________________________________________________________________
__________________________________________________________________________________________________
[ ] CHECK HERE IF CERTIFICATES FOR TENDERED OLD NOTES ARE ENCLOSED HEREWITH.
</TABLE>
<PAGE> 4
NOTE: SIGNATURES MUST BE PROVIDED BELOW. PLEASE READ THE ACCOMPANYING
INSTRUCTIONS CAREFULLY.
LADIES AND GENTLEMEN:
Subject to the terms of the Exchange Offer, the undersigned hereby tenders
to the Companies the principal amount of Old Notes indicated in the box entitled
"Description of Notes." Subject to and effective upon the acceptance for
exchange of the principal amount of Old Notes tendered in accordance with this
Letter of Transmittal, the undersigned sells, assigns and transfers to, or upon
the order of, the Companies all right, title and interest in and to the Old
Notes tendered hereby. The undersigned hereby irrevocably constitutes and
appoints the Exchange Agent its agent and attorney-in-fact (with full knowledge
that the Exchange Agent also acts as the agent of the Companies and as Trustee
under the Indenture for the Old Notes and the New Notes) with respect to the
tendered Old Notes with full power of substitution to (i) deliver certificates
for such Old Notes to the Companies, or transfer ownership of such Old Notes on
the account books maintained by DTC together, in either such case, with all
accompanying evidences of transfer and authenticity to, or upon the order of,
the Companies and (ii) present such Old Notes for transfer on the books of the
Companies and receive all benefits and otherwise execute all rights of
beneficial ownership of such Old Notes, all in accordance with the terms of the
Exchange Offer. The power of attorney granted in this paragraph shall be deemed
irrevocable and coupled with an interest.
The undersigned hereby represents and warrants that (a) the undersigned
accepts the terms and conditions of the Exchange Offer, (b) the undersigned has
full power and authority to tender, exchange, assign and transfer the Old Notes
tendered hereby, and (c) when the same are accepted for exchange by the
Companies, the Companies will acquire good and unencumbered title thereto, free
and clear of all liens, restrictions, charges and encumbrances and not subject
to any adverse claim or right. The undersigned will, upon request, execute and
deliver any additional documents deemed by the Exchange Agent or the Companies
to be necessary or desirable to complete the sale, assignment and transfer of
the Old Notes tendered hereby.
The undersigned hereby represents and warrants that he or she has full
power and authority to tender, sell, assign and transfer the Old Notes tendered
hereby and that the Companies will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges and encumbrances and not
subject to any adverse claim, when the same are acquired by the Companies. The
undersigned also acknowledges that this Exchange Offer is being made in reliance
upon interpretations by the staff of the Securities and Exchange Commission that
the New Notes issued in exchange for the Old Notes pursuant to the Exchange
Offer may be offered for sale, resold and otherwise transferred by any holder
thereof (other than (i) a broker-dealer who purchased such Old Notes directly
from the Companies to resell pursuant to Rule 144A or any other available
exemption under the Securities Act, or (ii) a person that is an "affiliate" of
the Companies within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that the holder is acquiring the New Notes in its
ordinary course of business and is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of the New
Notes.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL TENDERS BE ACCEPTED FROM
OR ON BEHALF OF, HOLDERS OF THE OLD NOTES IN ANY JURISDICTION IN WHICH THE
MAKING OF THE OFFER OR ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
LAWS OF SUCH JURISDICTION OR WOULD OTHERWISE NOT BE IN COMPLIANCE WITH ANY
PROVISION OF ANY APPLICABLE SECURITY LAW.
The undersigned represents that (i) the New Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary course of such holder's
business, (ii) such holder has no arrangement or understanding with any person
to participate in the distribution of the New Notes and (iii) such holder is not
an "affiliate," as defined under Rule 405 of the Securities Act, of the
Companies or, if such holder is an affiliate, such holder will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable. If the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of New Notes. If the undersigned is a broker-dealer that will
receive New Notes for its own account in exchange for Old Notes that were
acquired as a result of market-making or other trading activities, it
acknowledges that it will deliver a prospectus in connection with any resale of
such New Notes; however, by so acknowledging and by delivering a prospectus, the
undersigned will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Companies to be necessary or
desirable to complete the assignment and transfer of the Old Notes tendered
hereby.
The undersigned understands and acknowledges that the Companies reserve the
right, in their sole discretion, to purchase or make offers for any Old Notes
that remain outstanding subsequent to the Expiration Date or to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately
<PAGE> 5
negotiated transactions or otherwise. The terms of any such purchases or offers
will differ from the terms of the Exchange Offer.
The undersigned understands that by tendering Old Notes pursuant to one of
the procedures described in the Prospectus and the instructions thereto, the
exchange of the Old Notes for the New Notes will not result in the loss of
interest income for the tendering holder.
For purposes of the Exchange Offer, the Companies shall be deemed to have
accepted validly tendered Old Notes when the Companies have given oral or
written notice thereof to the Exchange Agent. If any tendered Old Notes are not
accepted for exchange pursuant to the Exchange Offer for any reason,
certificates for any such unaccepted Old Notes will be returned (except as noted
below with respect to tenders through DTC), without expense, to the undersigned
at the address shown below or at a different address as may be indicated under
"Special Issuance Instructions" as promptly as practicable after the Expiration
Date.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death, incapacity or dissolution of the
undersigned and every obligation under this Letter of Transmittal shall be
binding upon the undersigned's heirs, personal representatives, successors and
assigns.
The undersigned understands that tenders of Old Notes pursuant to the
procedures described under the caption "The Exchange Offer -- Procedures for
Tendering" in the Prospectus and in the instructions hereto will constitute a
binding agreement between undersigned and the Companies upon the terms and
subject to the conditions of the Exchange Offer.
All questions as to form, validity, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Companies in their sole discretion, which determination will be final and
binding.
Unless otherwise indicated under "Special Issuance Instructions," please
issue the certificates representing the New Notes issued in exchange for the Old
Notes accepted for exchange and return any Old Notes not tendered or not
exchanged in the name(s) of the undersigned (or in either such event in the case
of Old Notes tendered by DTC, by credit to the account at DTC). Similarly,
unless otherwise indicated under "Special Delivery Instructions," please send
the certificates representing the New Notes issued in exchange for the Old Notes
accepted for exchange and any certificates for Old Notes not tendered or not
exchanged (and accompanying documents, as appropriate) to the undersigned at the
address shown below the undersigned's signature(s), unless, in either event,
tender is being made through DTC. In the event that both "Special Issuance
Instructions" and "Special Delivery Instructions" are completed, please issue
the certificates representing the New Notes issued in exchange for the Old Notes
accepted for exchange and return any Old Notes not tendered or not exchanged in
the name(s) of, and send said certificates to, the person(s) so indicated. The
undersigned recognizes that the Companies have no obligation pursuant to the
"Special Issuance Instructions" and "Special Delivery Instructions" to transfer
any Old Notes from the name of the registered holder(s) thereof if the Companies
do not accept for exchange any of the Old Notes so tendered.
<PAGE> 6
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS OF OLD NOTES
REGARDLESS OF WHETHER OLD NOTES ARE BEING PHYSICALLY DELIVERED HEREWITH)
This Letter of Transmittal must be signed by the Holder(s) of Old Notes
exactly as their name(s) appear(s) on certificate(s) for Old Notes or, if
tendered by a participant in DTC, exactly as such participant's name appears on
a security position listing as the owner of Old Notes, or by person(s)
authorized to become registered Holder(s) by endorsements and documents
transmitted with this Letter of Transmittal. If signature is by a trustee,
executor, administrator, guardian, attorney-in-fact, officer or other person
acting in a fiduciary or representative capacity, such person must set forth his
or her full title below under "Capacity" and submit evidence satisfactory to the
Companies of such person's authority to so act. See Instruction 3 herein.
<TABLE>
<S> <C>
X _______________________________________________ Date: ___________________________________________
X
_______________________________________________ Date: ___________________________________________
SIGNATURE(S) OF HOLDER(S) OR
AUTHORIZED SIGNATORY
Name(s): ______________________________________ Address ________________________________________
_________________________________________________ _________________________________________________
(PLEASE PRINT) (INCLUDING ZIP CODE)
Area Code and
Capacity: _______________________________________ Telephone No.: __________________________________
Social Security No.: ___________________________
</TABLE>
PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN
MEDALLION SIGNATURE GUARANTEE
(IF REQUIRED -- SEE INSTRUCTION 3 HEREIN)
________________________________________________________________________________
(NAME OF ELIGIBLE INSTITUTION GUARANTEEING SIGNATURE(S))
________________________________________________________________________________
(ADDRESS (INCLUDING ZIP CODE) AND TELEPHONE NUMBER
(INCLUDING AREA CODE) OF FIRM)
________________________________________________________________________________
(AUTHORIZED SIGNATURE)
________________________________________________________________________________
(PRINTED NAME)
________________________________________________________________________________
(TITLE)
Date: _________________________________________________________________________
<PAGE> 7
______________________________________________________________________________
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTION 2, 3, 4 AND 5 HEREIN)
To be completed ONLY if certificates for Old Notes in a principal
amount not tendered are to be issued in the name of, or the New Notes
issued pursuant to the Exchange Offer are to be issued to the order of,
someone other than the person(s) whose signature(s) appear(s) within this
Letter of Transmittal, or issued to an address different from that shown
in the box entitled "Description of Notes" within this Letter of
Transmittal, or if Old Notes tendered by book-entry transfer are not
accepted for purchase are to be credited to an account maintained at DTC
other than the account indicated above.
Name: ____________________________________________________
(PLEASE PRINT)
Address: __________________________________________________
__________________________________________________
(ZIP CODE)
__________________________________________________
TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER
(YOU MUST ALSO COMPLETE SUBSTITUTE FORM W-9 HEREIN)
Credit unaccepted Old Notes tendered by book-entry transfer to:
[ ] The Depository Trust Company account set forth below:
____________________________________________________________
(DTC ACCOUNT NUMBER)
____________________________________________________________
______________________________________________________________________________
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTION 2, 3, 4 AND 5 HEREIN)
To be completed ONLY if certificates for Old Notes in a principal
amount not tendered or not accepted for purchase or the New Notes issued
pursuant to the Exchange Offer are to be sent to someone other than the
person(s) whose signature(s) appear(s) within this Letter of Transmittal,
or issued to an address different from that shown in the box entitled
"Description of Notes" within this Letter of Transmittal.
Name: _______________________________________________________________
(PLEASE PRINT)
Address: ____________________________________________________________
____________________________________________________________
(ZIP CODE)
____________________________________________________________
TAXPAYER IDENTIFICATION OR SOCIAL SECURITY NUMBER
(YOU MUST ALSO COMPLETE SUBSTITUTE FORM W-9 HEREIN)
______________________________________________________________________________
<PAGE> 8
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER AND THE
SOLICITATION
1. Delivery of this Letter of Transmittal and Old Notes; Guaranteed
Delivery Procedures. The certificates for the tendered Old Notes (or a
confirmation of a book-entry transfer into the Exchange Agent's account at DTC
of all Old Notes delivered electronically), as well as a properly completed and
duly executed copy of this Letter of Transmittal or facsimile hereof and any
other documents required by this Letter of Transmittal must be received by the
Exchange Agent at one of its addresses set forth on the first page of this
Letter of Transmittal, prior to 5:00 P.M., New York City time, on the Expiration
Date. The method of delivery of the tendered Old Notes, this Letter of
Transmittal and all other required documents to the Exchange Agent is at the
election and risk of the Holder and, except as otherwise provided below, the
delivery will be deemed made only when actually received by the Exchange Agent.
Instead of delivery by mail, it is recommended that the Holder use an overnight
or hand delivery service. In all cases, sufficient time should be allowed to
assure timely delivery. No Letter of Transmittal or Old Notes should be sent to
the Companies.
THE METHOD OF DELIVERY OF OLD NOTES AND ALL OTHER REQUIRED DOCUMENTS TO THE
EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER.
SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY TO THE EXCHANGE
AGENT BY 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
lost but are not immediately available or (ii) who cannot deliver their Old
Notes, this Letter of Transmittal or any other documents required hereby to the
Exchange Agent prior to the Expiration Date must tender their Old Notes and
follow the guaranteed delivery procedures set forth in the Prospectus. Pursuant
to such procedures: (i) such tender must be made by or through an Eligible
Institution; (ii) prior to the Expiration Date, the Exchange Agent must have
received from the Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder of the Old Notes, the
certificate number or numbers of such Old Notes and the principal amount of Old
Notes tendered, stating that the tender is being made thereby and guaranteeing
that, within three business days after the Expiration Date, this Letter of
Transmittal (or a facsimile hereof) together with the certificate(s)
representing the Old Notes (or a confirmation of electronic delivery of
book-entry delivery into the Exchange Agent's account at DTC) and any of the
required documents will be deposited by the Eligible Institution with the
Exchange Agent; and (iii) such properly completed and executed Letter of
Transmittal (or a facsimile hereof), as well as other documents required by this
Letter of Transmittal and the certificate(s) representing all tendered Old Notes
in proper form for transfer (or a confirmation of electronic mail delivery of
book-entry delivery into the Exchange Agent's account at DTC), must be received
by the Exchange Agent within three business days after the Expiration Date, all
as provided in the Prospectus under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures." Any Holder of Old Notes who wishes to
tender his Old Notes pursuant to the guaranteed delivery procedures described
above must ensure that the Exchange Agent receives the Notice of Guaranteed
Delivery prior to 5:00 P.M., New York City time, on the Expiration Date.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
the Companies in their sole discretion, which determination will be final and
binding. The Companies reserve the absolute right to reject any and all Old
Notes not properly tendered or any Old Notes the Companies' acceptance of which
would, in the opinion of counsel for the Companies, be unlawful. The Companies
also reserve the right to waive any irregularities or conditions of tender as to
particular Old Notes. The Companies' interpretation of the terms and conditions
of the Exchange Offer (including the instructions in this Letter of Transmittal)
will be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured within such
time as the Companies shall determine. Neither the Companies, the Exchange Agent
nor any other person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Old Notes, nor shall any of them incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned without cost to the holders by the Exchange
Agent to the tendering Holders of Old Notes, unless otherwise provided in this
Letter of Transmittal, as soon as practicable following the Expiration Date.
2. Partial Tenders. Tenders of Old Notes will be accepted in all
denominations of $1,000 and integral multiples in excess thereof. If less than
the entire principal amount of any Old Notes is tendered, the tendering Holder
should fill in the principal amount tendered in the third column of the chart
entitled "Description of Notes." The entire principal amount of Old Notes
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated. If the entire principal amount of Old Notes is not
tendered, Old Notes for the principal amount of Old Notes not tendered and a
certificate or certificates representing New Notes issued in exchange for any
Old Notes accepted will be sent to the Holder at his or her registered address,
unless a different address is provided in the appropriate box on this Letter of
Transmittal or unless tender is made through DTC, promptly after the Old Notes
are accepted for exchange.
<PAGE> 9
3. Signatures on the Letter of Transmittal; Bond Powers and Endorsements;
Guarantee of Signatures. If this Letter of Transmittal (or a facsimile hereof)
is signed by the registered Holder(s) of the Old Notes tendered hereby, the
signature must correspond with the name(s) as written on the face of the Old
Notes without alteration, enlargement or any change whatsoever.
If this Letter of Transmittal (or a facsimile hereof) is signed by the
registered Holder(s) of Old Notes tendered and the certificate(s) for New Notes
issued in exchange therefor is to be issued (or any untendered principal amount
of Old Notes is to be reissued) to the registered Holder, such Holder need not
and should not endorse the Old Notes tendered or transmit a properly completed
separate bond power with this Letter of Transmittal, with the signatures on the
endorsement or bond power guaranteed by a recognized member of the Medallion
Signature Guarantee Program.
If this Letter of Transmittal (or a facsimile hereof) is signed by a person
other than the registered Holder(s) of any Certificates listed, such
Certificates must be endorsed or accompanied by appropriate bond powers signed
as the name of the registered Holder(s) appears on the Certificates.
If this Letter of Transmittal (or a facsimile hereof) or any Old Notes or
bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, or officers of corporations or others acting in a fiduciary
or representative capacity, such persons should so indicate when signing, and
unless waived by the Companies, evidence satisfactory to the Companies of their
authority so to act must be submitted with this Letter of Transmittal. If any
Old Notes tendered hereby are owned of record by two or more joint owners, all
such owners must sign this Letter of Transmittal. If any Old Notes tendered
hereby are registered in different names on several certificates, it will be
necessary to complete, sign and submit as many separate copies of this Letter of
Transmittal as there are different registrations of certificates.
Endorsements on Old Notes or signatures on bond powers required by this
Instruction 3 must be guaranteed by a recognized member of the Medallion
Signature Guarantee Program.
Signatures on this Letter of Transmittal (or a facsimile hereof) must be
guaranteed by a recognized member of the Medallion Signature Guarantee Program
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
Holder (including any participant in DTC whose name appears on a security
position listing as the owner of Old Notes) who has not completed the box set
forth herein entitled "Special Issuance Instructions" or the box entitled
"Special Delivery Instructions" or (ii) for the account of a member of a
registered national securities exchange, a member of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an office
or correspondent in the United States (each of the foregoing being referred to
as an "Eligible Institution").
4. Special Issuance and Delivery Instructions. Tendering Holders should
indicate, in the applicable spaces, the name and address to which New Notes or
substitute Old Notes for principal amounts not tendered or not accepted for
exchange are to be issued or sent, if different from the name or address of the
person signing this Letter of Transmittal (or in the case of tender of the Old
Notes through DTC, if such Old Notes are to be credited to an account maintained
at DTC other than the account indicated above). In the case of issuance in a
different name, the taxpayer identification or social security number of the
person named must also be indicated. If no such instructions are given, any Old
Notes not exchanged will be returned to the name and address of the person
signing this Letter of Transmittal.
5. Transfer Taxes. The Companies will pay all transfer taxes, if any,
applicable to the exchange of Old Notes pursuant to the Exchange Offer. If,
however, certificates representing New Notes or Old Notes for principal amounts
not tendered or accepted for exchange are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered Holder
of the Old Notes tendered hereby, or if tendered Old Notes are registered in the
name of any person other than the person signing this Letter of Transmittal, or
if a transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered Holder or any other person) will be payable
by the tendering Holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with this Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering Holder.
Except as provided in this Instruction 5, it will not be necessary for
transfer tax stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
6. Waiver of Conditions. The Companies reserve the absolute right to
amend, waive or modify specified conditions in the Exchange Offer in the case of
any Old Notes tendered.
7. Mutilated, Lost, Stolen or Destroyed Old Notes. Any tendering Holder
whose Old Notes have been mutilated, lost, stolen or destroyed should contact
the Exchange Agent at the address indicated herein for further instruction.
8. Requests for Assistance or Additional Copies. Questions and requests
for assistance and requests for additional copies of the Prospectus or this
Letter of Transmittal may be directed to the Exchange Agent at the address
specified in
<PAGE> 10
the Prospectus. Holders may also contact their broker, dealer, commercial bank,
trust company or other nominee for assistance concerning the Exchange Offer.
9. Withdrawal. Tenders may be withdrawn only pursuant to the withdrawal
rights set forth in the Prospectus under the caption "The Exchange
Offer -- Withdrawal of Tenders".
To be effective, a written or facsimile transmission notice of withdrawal
must (a) be received by the Exchange Agent at one of its addresses set forth on
the first page of this Letter of Transmittal prior to 5:00 p.m., New York City
time, on the Expiration Date, (b) specify the name of the person who tendered
the Old Notes, (c) include a statement that the person who tendered Old Notes is
withdrawing its election to have such Old Notes exchanged and contain the
description of the Old Notes to be withdrawn, the certificate numbers shown on
the particular certificates evidencing such Old Notes and the aggregate
principal amount represented by such Old Notes and (d) be signed by the holder
of such Old Notes in the same manner as the original signature appears on this
Letter of Transmittal (including any required signature guarantees) or be
accompanied by evidence sufficient to have the Note Trustee with respect to the
Old Notes register the transfer of such Old Notes into the name of the holder
withdrawing the tender. The signature(s) on the notice of withdrawal must be
guaranteed by an Eligible Institution unless such Old Notes have been tendered
(a) by a registered holder of Old Notes who has not completed either the box
entitled "Special Issuance Instructions" or the box entitled "Special Delivery
Instructions" on this Letter of Transmittal or (b) for the account of an
Eligible Institution. All questions as to the validity, form and eligibility
(including time of receipt) of such withdrawal notices shall be determined by
the Companies, whose determination shall be final and binding on all parties. If
the Old Notes to be withdrawn have been delivered or otherwise identified to the
Exchange Agent, a signed notice of withdrawal is effective immediately upon
receipt by the Exchange Agent of a written or facsimile transmission notice of
withdrawal even if physical release is not yet effected. In addition, such
notice must specify, in the case of Old Notes tendered by delivery of
certificates for such Old Notes, the name of the registered holder (if different
from that of the tendering holder) to be credited with the withdrawn Old Notes.
Withdrawals may not be rescinded, and any Old Notes withdrawn will thereafter be
deemed not validly tendered for purposes of the Exchange Offer. However,
properly withdrawn Old Notes may be retendered by following one of the
procedures described under "The Exchange Offer -- Procedures for Tendering" in
the Prospectus at any time on or prior to the Expiration Date.
<PAGE> 11
<TABLE>
<CAPTION>
_______________________________________________________________________________________________________
(DO NOT WRITE IN SPACE BELOW)
- -------------------------------------------------------------------------------------------------------
CERTIFICATE SURRENDERED OLD NOTES TENDERED OLD NOTES ACCEPTED
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
________________________________________________________________________________________________________
________________________________________________________________________________________________________
____________________________________________________
Delivery Prepared by ____________ Checked by ____________ Date ____________
_________________________________________________________________________________________________________
</TABLE>
IMPORTANT TAX INFORMATION
Under federal income tax laws, a Holder whose tendered Old Notes are
accepted for payment is required to provide the Exchange Agent (as payer) with
such Holder's correct TIN on Substitute Form W-9 below or otherwise establish a
basis for exemption from backup withholding. If such Holder is an individual,
the TIN is his social security number. If the Exchange Agent is not provided
with the correct TIN, a $50 penalty may be imposed by the Internal Revenue
Service, and payments made with respect to New Notes purchased pursuant to the
Exchange Offer may be subject to backup withholding.
Certain Holders (including, among others, all corporations and certain
foreign persons) are not subject to these backup withholding and reporting
requirements. Exempt Holders should indicate their exempt status on Substitute
Form W-9. A foreign person may qualify as an exempt recipient by submitting to
the Exchange Agent a properly completed Internal Revenue Service Form W-8,
signed under penalties of perjury, attesting to that Holder's exempt status. A
Form W-8 can be obtained from the Exchange Agent. See the enclosed "Guidelines
for Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional instructions.
If backup withholding applies, the Exchange Agent is required to withhold
31% of any payments made to the Holder or other payee. Backup withholding is not
an additional federal income tax. Rather, the federal income tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on payments made with respect to the Exchange
Offer, the Holder is required to provide the Exchange Agent with either: (i) the
Holder's correct TIN by completing the form below, certifying that the TIN
provided on Substitute Form W-9 is correct (or that the Holder is awaiting a
TIN) and that (A) the Holder has not been notified by the Internal Revenue
Service that the Holder is subject to backup withholding as a result of failure
to report all interest or dividends or (B) the Internal Revenue Service has
notified the Holder that the Holder is no longer subject to backup withholding;
or (ii) an adequate basis for exemption.
WHAT NUMBER TO GIVE THE EXCHANGE AGENT
The Holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered Holder of
the Old Notes. If the Old Notes are held in more than one name or are held not
in the name of the actual owner, consult the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional guidance on which number to report.
<PAGE> 12
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
PAYER'S NAME
- --------------------------------------------------------------------------------------------------------------
SUBSTITUTE PART 1 -- PROVIDE YOUR TIN IN THE BOX AT PART 3 --
FORM W-9 RIGHT AND CERTIFY BY SIGNING AND DATING
BELOW Awaiting TIN [ ]
--------------------------------------------------------------------------------------
DEPARTMENT OF THE PART 2 -- Certification -- Under Penalties ------------------------------------
TREASURY INTERNAL of Perjury, SOCIAL SECURITY NUMBER
REVENUE SERVICE I certify that: OR
PAYER'S REQUEST (1) The number shown on this form is my - ------------------------------------
FOR TAXPAYER correct Taxpayer Identification Number (or I EMPLOYER IDENTIFICATION NUMBER(S)
IDENTIFICATION am waiting for a number to be issued to
NUMBER (TIN) me) and
(2) I am not subject to backup withholding
either because I have not been notified by
the Internal Revenue Service (the "IRS")
that I am subject to backup withholding
as a result of failure to report all
interest or dividends, or the IRS has
notified me that I am no longer subject
to backup withholding.
---------------------------------------------------------------------------------------
CERTIFICATION INSTRUCTIONS -- You must cross out item (2) in Part 2 above if you have
been notified by the IRS that you are subject to backup withholding because of
underreporting interest or dividends on your tax returns. However, if after being
notified by the IRS that you were subject to backup withholding you received another
notification from the IRS stating that you are no longer subject to backup
withholding, do not cross out such item (2).
SIGNATURE __________________________________ DATE _________________
- --------------------------------------------------------------------------------------------------------------
</TABLE>
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NUMBER (TIN)
Please fill out your name and address below:
------------------------------------------------------------------------------
Name
------------------------------------------------------------------------------
Address (Number and street)
------------------------------------------------------------------------------
City, State and Zip Code
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO HOLDERS OF NEW NOTES PURSUANT TO THE
EXCHANGE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL
DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 3 OF SUBSTITUTE FORM W-9.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification
number has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number within 60
days, 31 percent of all reportable payments made to me thereafter will be
withheld until I provide a number and that, if I do not provide my taxpayer
identification number within 60 days, such retained amounts shall be remitted
to the IRS as backup withholding.
<TABLE>
<S> <C>
----------------------------------------------- -----------------------------------------------
SIGNATURE DATE
</TABLE>
<PAGE> 13
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
The Chase Manhattan Bank
<TABLE>
<S> <C> <C>
By Registered or Certified By Facsimile: By Hand or Overnight Courier:
Mail:
The Chase Manhattan Bank (Eligible Institutions Only) The Chase Manhattan Bank
55 Water Street (212) 638-7375 or (212) 344-9367 55 Water Street
Room 234, North Building Room 234, North Building
New York, New York 10041 Confirm by Telephone: New York, New York 10041
Attention: Carlos Esteves (212) 638-0828 Attention: Carlos Esteves
</TABLE>
<PAGE> 1
Exhibit 1 (d)
NOTICE OF GUARANTEED DELIVERY
TO TENDER FOR EXCHANGE
7.19% SERIES A SECURED NOTES DUE 2000,
7.67% SERIES A SECURED NOTES DUE 2004 AND
7.13% SERIES A SECURED NOTES DUE 2007
OF
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
AND
THE TOLEDO EDISON COMPANY
As set forth in the Prospectus dated , 1997 (the "Prospectus"),
of The Cleveland Electric Illuminating Company and The Toledo Edison Company
(the "Companies") and in the accompanying Letter of Transmittal and instructions
thereto (the "Letter of Transmittal"), this form or one substantially equivalent
hereto must be used to accept the Companies' exchange offer (the "Exchange
Offer") to exchange any or all of their outstanding 7.19% Series A Secured Notes
due 2000 (the "Old Notes due 2000"), 7.67% Series A Secured Notes due 2004 (the
"Old Notes due 2004") and 7.13% Series A Secured Notes due 2007 (the "Old Notes
due 2007") (collectively, the "Old Notes") if (i) certificates representing the
Old Notes to be tendered for purchase and payment are not lost but are not
immediately available, (ii) time will not permit the Letter of Transmittal,
certificates representing such Old Notes or other required documents to reach
the Exchange Agent prior to the Expiration Date, or (iii) the procedure for
book-entry transfer cannot be completed prior to the Expiration Date. This form
may be delivered by an Eligible Institution (as defined herein) by mail or hand
delivery or transmitted, via telegram, telex or facsimile, to the Exchange Agent
as set forth below. All capitalized terms used herein but not defined herein
shall have the meanings ascribed to them in the Prospectus.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1997 UNLESS THE OFFER IS EXTENDED (THE "EXPIRATION DATE"). TENDERS
OF OLD NOTES MAY BE WITHDRAWN AT ANY TIME PRIOR TO 5:00 P.M. ON THE EXPIRATION
DATE.
To: The Chase Manhattan Bank, Exchange Agent
<TABLE>
<S> <C> <C>
By Registered or Certified By Facsimile: By Hand or Overnight Courier:
Mail:
The Chase Manhattan Bank (Eligible Institutions Only) The Chase Manhattan Bank
55 Water Street (212) 638-7375 or (212) 344-9367 55 Water Street
Room 234, North Building Room 234, North Building
New York, New York 10041 Confirm by Telephone: New York, New York 10041
Attention: Carlos Esteves (212) 638-0828 Attention: Carlos Esteves
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION VIA TELEGRAM,
TELEX OR FACSIMILE, OTHER THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID
DELIVERY.
This form is not to be used to guarantee signatures. If a signature on the
Letter of Transmittal is required to be guaranteed by an "Eligible Institution"
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
LADIES AND GENTLEMEN:
The undersigned hereby tender(s) to the Companies, upon the terms and
subject to the conditions set forth in the Prospectus and the Letter of
Transmittal, receipt of which is hereby acknowledged, the aggregate principal
amount of Old Notes set forth below, pursuant to the guaranteed delivery
procedures set forth in the Prospectus under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures."
Subject to and effective upon acceptance for exchange of the Old Notes
tendered herewith, the undersigned hereby sells, assigns and transfers to or
upon the order of the Companies all right, title and interest in and to, and any
and all claims in respect of or arising or having arisen as a result of the
undersigned's status as a holder of, all Old Notes tendered hereby. In the event
of a termination of the Exchange Offer, the Old Notes tendered pursuant hereto
will be returned to the tendering Old Note holder promptly.
The undersigned hereby represents and warrants that the undersigned accepts
the terms and conditions of the Prospectus and the Letter of Transmittal, has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Companies will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim. The undersigned will, upon request, execute
<PAGE> 2
and deliver any additional documents deemed by the Exchange Agent or the
Companies to be necessary or desirable to complete the sale, assignment and
transfer of the Old Notes tendered.
The undersigned understands that tenders of Old Notes will be accepted only
in principal amounts equal to $1,000 or integral multiples thereof. The
undersigned understands that tenders of Old Notes pursuant to the Exchange Offer
may not be withdrawn after 5:00 p.m., New York City time, on the Expiration
Date. Tenders of Old Notes may also be withdrawn if the Exchange Offer is
terminated without any such Old Notes being purchased thereunder or as otherwise
provided in the Prospectus under the caption "The Exchange Offer -- Withdrawal
of Tenders."
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned,
and every obligation of the undersigned under this Notice of Guaranteed Delivery
shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
PLEASE COMPLETE AND SIGN
Signature(s) of Registered Owner(s) or
Authorized Signatory:
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
Principal Amount and Series of Old Notes Tendered:
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
Certificate No(s). of Old Notes (if available):
- ------------------------------------------------------------
- ------------------------------------------------------------
Date:
- ------------------------------------------------------------
Name(s) of Registered Holder(s):
- ------------------------------------------------------------
- ------------------------------------------------------------
- ------------------------------------------------------------
Address:
- ------------------------------------------------------------
- ------------------------------------------------------------
Area Code and Telephone No.:
- ------------------------------------------------------------
If Old Notes will be delivered by book-entry transfer at The Depository Trust
Company, insert The Depository Account No.:
- ------------------------------------------------------------
Transaction Code No.:
- ------------------------------------------------------------
This Notice of Guaranteed Delivery must be signed by the registered
holder(s) of Old Notes exactly as its (their) name(s) appear on certificates for
Old Notes or on a security position listing as the owner of Old Notes, or by
person(s) authorized to become registered holder(s) by endorsements and
documents transmitted with this Notice of Guaranteed Delivery. If signature is
by a trustee, executor, administrator, guardian, attorney-in-fact, officer or
other person acting in a fiduciary or representative capacity, such person must
provide the following information:
Please print name(s) and address(es)
Name(s):___________________________
Capacity:__________________________
Address(es):_______________________
DO NOT SEND OLD NOTES WITH THIS FORM. OLD NOTES SHOULD BE SENT TO THE EXCHANGE
AGENT TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF
TRANSMITTAL.
<PAGE> 3
Guarantee
(not to be used for signature guarantee)
The undersigned, a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc. or a commercial bank
or trust company having an office or a correspondent in the United States,
hereby guarantees that, within three New York Stock Exchange trading days from
the date of this Notice of Guaranteed Delivery, a properly completed and duly
executed Letter of Transmittal (or a facsimile thereof), together with
certificates representing the Old Notes tendered hereby in proper form for
transfer (or confirmation of the book-entry transfer of such Old Notes into the
Exchange Agent's account at The Depository Trust Company, pursuant to the
procedure for book-entry transfer set forth in the Prospectus) and required
documents will be deposited by the undersigned with the Exchange Agent at one of
its addresses set forth above.
The undersigned acknowledges that it must deliver the Letter of Transmittal
and Old Notes tendered hereby to the Exchange Agent within the time period set
forth above and that failure to do so could result in financial loss to the
undersigned.
<TABLE>
<S> <C>
Name of Firm:________________________ ___________________________
AUTHORIZED SIGNATURE
Address:_____________________________ Name:______________________
Title:_____________________
Area Code and Telephone No.__________ Date:______________________
</TABLE>
<PAGE> 1
Exhibit 1(e)
[CEI LOGO] [TE LOGO]
OFFER TO EXCHANGE
7.19% SERIES B SECURED NOTES DUE 2000
FOR ALL OUTSTANDING 7.19% SERIES A SECURED NOTES DUE 2000
$220 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING,
7.67% SERIES B SECURED NOTES DUE 2004
FOR ALL OUTSTANDING 7.67% SERIES A SECURED NOTES DUE 2004
$350 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING, AND
7.13% SERIES B SECURED NOTES DUE 2007
FOR ALL OUTSTANDING 7.13% SERIES A SECURED NOTES DUE 2007
$150 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING
OF
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
AND
THE TOLEDO EDISON COMPANY
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME ON
, , 1997, UNLESS EXTENDED. TENDERS OF OLD NOTES MAY ONLY
BE WITHDRAWN UNDER THE CIRCUMSTANCES DESCRIBED IN THE PROSPECTUS AND THE LETTER
OF TRANSMITTAL.
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
We are enclosing herewith an offer by The Cleveland Electric Illuminating
Company and The Toledo Edison Company (the "Companies") to exchange (the
"Exchange Offer") their 7.19% Series B Secured Notes due 2000 (the "New Notes
due 2000"), 7.67% Series B Secured Notes due 2004 (the "New Notes due 2004") and
7.13% Series B Secured Notes due 2007 (the "New Notes due 2007") (collectively,
the "New Notes") for all outstanding 7.19% Series A Secured Notes due 2000 (the
"Old Notes due 2000"), 7.67% Series A Secured Notes due 2004 (the "Old Notes due
2004") and 7.13% Series A Secured Notes due 2007 (the "Old Notes due 2007")
(collectively, the "Old Notes"), upon the terms and conditions set forth in the
accompanying Prospectus dated , 1997 (the "Prospectus") and related
Letter of Transmittal and instructions thereto (the "Letter of Transmittal").
The Letter of Transmittal is being circulated to holders of Old Notes with
the Prospectus. The Exchange Offer also provides a procedure for holders to
tender the Old Notes by means of guaranteed delivery.
Based on an interpretation of the Securities and Exchange Commission (the
"Commission"), New Notes issued pursuant to the Exchange Offer in exchange for
Old Notes may be offered for resale, resold and otherwise transferred by holders
thereof (other than (i) a broker-dealer who purchased such Old Notes directly
from the Companies for resale pursuant to Rule 144A or any other available
exemption under the Securities Act of 1933, as amended (the "Securities Act") or
(ii) a person that is an "affiliate" of the Companies within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that the holder
is acquiring the New Notes in its ordinary course of business and is not
participating, and has no arrangement or understanding with any person to
participate, in the distribution of the New Notes. Holders of Old Notes wishing
to accept the Exchange Offer must represent to the Companies that such
conditions have been met.
Each broker-dealer that receives New Notes in exchange for Old Notes held
for its own account, as a result of market making or other trading activities,
must acknowledge that it will deliver a prospectus in connection with any resale
of such New Notes. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, such broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by such broker-dealer in connection with resales of New Notes received in
exchange for Old Notes. The Companies have agreed that, for a period of 90 days
after the Expiration Date, as defined herein, they will make this Prospectus and
any amendment or supplement thereto available to any broker-dealer for use in
connection with any such resale.
Notwithstanding any other term of the Exchange Offer, the Companies may
terminate or amend the Exchange Offer as provided in the Prospectus and will not
be required to accept for exchange, or exchange New Notes for, any Old Notes not
accepted for exchange prior to such termination.
<PAGE> 2
THE COMPANIES RESERVE THE RIGHT NOT TO ACCEPT TENDERED OLD NOTES FROM ANY
TENDERING HOLDER IF THE COMPANIES DETERMINE, IN THEIR SOLE AND ABSOLUTE
DISCRETION, THAT SUCH ACCEPTANCE COULD RESULT IN A VIOLATION OF APPLICABLE
SECURITIES LAWS.
We are asking you to contact your clients for whom you hold Old Notes
registered in your name or in the name of your nominee. In addition, we ask you
to contact your clients who, to your knowledge, hold Old Notes registered in
their own names. The Companies will not pay any fees or commissions to any
broker, dealer or other person (other than the Exchange Agent as described in
the Prospectus) in connection with the solicitation of tenders of Old Notes
pursuant to the Exchange Offer. You will, however, be reimbursed by the
Companies for customary mailing and handling expenses incurred by you in
forwarding any of the enclosed materials to your clients. The Companies will pay
any transfer taxes applicable to the tender of Old Notes to them or their order,
except as otherwise provided in the Prospectus and the Letter of Transmittal.
Enclosed is a copy of each of the following documents:
1. The Prospectus.
2. A Letter of Transmittal for your use in connection with the
Exchange Offer and for the information of your clients.
3. A form of letter that may be sent to your clients for whose
accounts you hold Old Notes registered in your name or the name of your
nominee, with space provided for obtaining the clients' instructions with
regard to the Exchange Offer.
4. A form of Notice of Guaranteed Delivery.
5. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
6. A return envelope addressed to The Chase Manhattan Bank, the
Exchange Agent.
YOUR PROMPT ATTENTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 5:00
P.M., NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED (THE "EXPIRATION
DATE"). OLD NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN,
SUBJECT TO THE PROCEDURES DESCRIBED IN THE PROSPECTUS AND THE LETTER OF
TRANSMITTAL, AT ANY TIME PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE
EXPIRATION DATE. THE EXCHANGE OFFER IS NOT CONDITIONED ON ANY MINIMUM PRINCIPAL
AMOUNT OF OLD NOTES BEING TENDERED.
To tender Old Notes in the Exchange Offer, certificates for Old Notes (or
confirmation of a book-entry transfer into the Exchange Agent's account at The
Depository Trust Company of Old Notes tendered electronically) and a duly
executed and properly completed Letter of Transmittal or a facsimile thereof,
together with any other required documents, must be received by the Exchange
Agent as indicated in the Prospectus.
If holders desire to tender Old Notes pursuant to the Exchange Offer and
(i) certificates representing such Old Notes are not lost but are not
immediately available, (ii) time will not permit the Letter of Transmittal,
certificates evidencing such Old Notes or other required documents to reach the
Exchange Agent prior to the Expiration Date or (iii) the procedures for
book-entry transfer cannot be completed prior to the Expiration Date, such
holders may effect a tender of such Old Notes in accordance with the guaranteed
delivery procedures set forth in the Prospectus under the caption "The Exchange
Offer -- Guaranteed Delivery Procedures." Holders following the guaranteed
delivery procedure must still fully complete, execute and deliver the Letter of
Transmittal or facsimile thereof.
THE EXCHANGE OFFER IS NOT BE MADE TO, NOR WILL TENDERS BE ACCEPTED FROM OR
ON BEHALF OF, HOLDERS OF THE OLD NOTES IN ANY JURISDICTION IN WHICH THE MAKING
OF THE EXCHANGE OFFER OR ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
LAWS OF SUCH JURISDICTION OR WOULD OTHERWISE NOT BE IN COMPLIANCE WITH ANY
PROVISION OF ANY APPLICABLE SECURITIES LAW.
Additional copies of the enclosed material may be obtained from the
Exchange Agent.
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY
PERSON AS AN AGENT OF THE COMPANIES, THE TRUSTEE OR THE EXCHANGE AGENT, OR
AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENTS ON BEHALF OF ANY OF
THEM WITH RESPECT TO THE EXCHANGE OFFER OR THE SOLICITATION, EXCEPT FOR
STATEMENTS EXPRESSLY MADE IN THE PROSPECTUS OR THE LETTER OF TRANSMITTAL.
Very truly yours,
Janis T. Percio, Secretary
THE CLEVELAND ELECTRIC ILLUMINATING
COMPANY and
THE TOLEDO EDISON COMPANY
<PAGE> 1
Exhibit 1 (f)
OFFER TO EXCHANGE
7.19% SERIES B SECURED NOTES DUE 2000
FOR ALL OUTSTANDING 7.19% SERIES A SECURED NOTES DUE 2000
$220 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING,
7.67% SERIES B SECURED NOTES DUE 2004
FOR ALL OUTSTANDING 7.67% SERIES A SECURED NOTES DUE 2004
$350 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING AND
7.13% SERIES B SECURED NOTES DUE 2007
FOR ALL OUTSTANDING 7.13% SERIES A SECURED NOTES DUE 2007
$150 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING
OF
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
AND
THE TOLEDO EDISON COMPANY
To Our Clients:
Enclosed for your consideration are the Prospectus dated , 1997
(the "Prospectus") and the related Letter of Transmittal and instructions
thereto (the "Letter of Transmittal") in connection with the offer by The
Cleveland Electric Illuminating Company and The Toledo Edison Company (the
"Companies") to exchange (the "Exchange Offer") their 7.19% Series B Secured
Notes due 2000 (the "New Notes due 2000"), 7.67% Series B Secured Notes due 2004
(the "New Notes due 2004") and 7.13% Series B Secured Notes due 2007 (the "New
Notes due 2007") (collectively, the "New Notes") for all outstanding 7.19%
Series A Secured Notes due 2000 (the "Old Notes due 2000"), 7.67% Series A
Secured Notes due 2004 (the "Old Notes due 2004") and 7.13% Series A Secured
Notes due 2007 (the "Old Notes due 2007") (collectively, the "Old Notes" and,
together with the New Notes, the "Secured Notes"), upon the terms and conditions
set forth in the Prospectus and Letter of Transmittal.
WE ARE THE REGISTERED HOLDER (THE "REGISTERED HOLDER") OF OLD NOTES HELD
FOR YOUR ACCOUNT. AN EXCHANGE OF THE OLD NOTES CAN BE MADE ONLY BY US AS THE
REGISTERED HOLDER AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL
IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO
EXCHANGE THE OLD NOTES HELD BY US FOR YOUR ACCOUNT. THE PROSPECTUS AND RELATED
LETTER OF TRANSMITTAL ALSO PROVIDE A PROCEDURE FOR HOLDERS TO TENDER THEIR OLD
NOTES BY MEANS OF GUARANTEED DELIVERY.
We request information as to whether you wish us to exchange any or all of
the Old Notes held by us for your account upon the terms and subject to the
conditions of the Exchange Offer. We urge you to read carefully the Prospectus
and the Letter of Transmittal before instructing us to tender your Old Notes.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to tender Old Notes on your behalf in accordance with the
provisions of the Exchange Offer. THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON , , 1997 (THE "EXPIRATION DATE"),
UNLESS EXTENDED. Old Notes tendered pursuant to the Exchange Offer may only be
withdrawn under the circumstances described in the Prospectus and the Letter of
Transmittal.
Your attention is directed to the following:
1. The New Notes will be exchanged for the Old Notes at the rate of
$1,000 principal amount of New Notes for each $1,000 principal amount of
Old Notes. There will be no loss of interest income to holders of Old Notes
whose Old Notes are accepted for exchange, as more fully explained in the
Prospectus. The form and terms of the New Notes are identical in all
material respects to the form and terms of the Old Notes, except that the
New Notes have been registered under the Securities Act of 1933, as amended
(the "Securities Act"). Following completion of the Exchange Offer and
during the effectiveness of any required Shelf Registration Statement, none
of the Secured Notes will be entitled to the benefits of the Registration
Agreement (as defined in the Prospectus) relating to a contingent increase
in the interest rate borne by the Secured Notes under certain
circumstances.
2. Based on an interpretation of the Securities and Exchange
Commission (the "Commission"), New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other than (i) a broker-dealer
who purchased Old Notes directly from the Companies for resale pursuant to
Rule 144A or any other available exemption under the Securities Act or (ii)
a person that is an "affiliate" of the Companies within the meaning of Rule
405 under the Securities Act) without compliance with the
<PAGE> 2
registration and prospectus delivery provisions of the Securities Act,
provided that the holder is acquiring the New Notes in its ordinary course
of business and is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of the
New Notes. Holders of Old Notes wishing to accept the Exchange Offer must
represent to the Companies that such conditions have been met.
3. THE EXCHANGE OFFER IS NOT CONDITIONED ON ANY MINIMUM PRINCIPAL
AMOUNT OF OLD NOTES BEING TENDERED.
4. Notwithstanding any other term of the Exchange Offer, the Companies
may terminate or amend the Exchange Offer as provided in the Prospectus and
will not be required to accept for exchange, or exchange New Notes for, any
Old Notes not accepted for exchange prior to such termination.
5. The Exchange Offer will expire at 5:00 p.m., New York City time, on
, 1997, unless extended (the "Expiration Date"). Tendered Old
Notes may be withdrawn, subject to the procedures described in the
Prospectus, at any time prior to 5:00 p.m., New York City time, on the
Expiration Date if such Old Notes have not previously been accepted for
exchange pursuant to the Exchange Offer.
6. Any transfer taxes applicable to the exchange of the Old Notes
pursuant to the Exchange Offer will be paid by the Companies, except as
otherwise provided in Instruction 5 of the Letter of Transmittal.
7. Tendering holders may withdraw their tender at any time until the
Expiration Date.
8. The acceptance for exchange of Old Notes validly tendered and not
validly withdrawn and the issuance of New Notes will be made as promptly as
practicable after the Expiration Date. Subject to rules promulgated
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the Companies, however, expressly reserve the right to delay
acceptance of any of the Old Notes or to terminate the Exchange Offer and
not accept for purchase any Old Notes not theretofore accepted if any of
the conditions set forth in the Prospectus under the caption "The Exchange
Offer -- Termination" shall not have been satisfied or waived by the
Companies.
9. The Companies expressly reserve the right, in their sole
discretion, (i) to amend the terms of the Exchange Offer or (ii) to
terminate the Exchange Offer. Any delay, extension, amendment or
termination will be followed as promptly as practicable by oral or written
notice to the Exchange Agent and a public announcement thereof. In the case
of an extension, such public announcement shall include disclosure of the
approximate number of Old Notes deposited to date and shall be made prior
to 9:00 a.m., New York City time, on the next business day after the
previously scheduled Expiration Date.
10. Consummation of the Exchange Offer may have adverse consequences
to non-tendering Old Note holders, including that the reduced amount of
outstanding Old Notes as a result of the Exchange Offer may adversely
affect the trading market, liquidity and market price of the Old Notes.
If you wish to have us tender any or all of your Old Notes, please so
instruct us by completing, detaching and returning to us the instruction form
attached hereto. An envelope to return your instructions is enclosed. If you
authorize a tender of your Old Notes, the entire principal amount of Old Notes
held for your account will be tendered unless otherwise specified on the
instruction form. Your instructions should be forwarded to us in ample time to
permit us to submit a tender on your behalf by the Expiration Date.
THE EXCHANGE OFFER IS NOT BE MADE TO, NOR WILL TENDERS BE ACCEPTED FROM OR
ON BEHALF OF, HOLDERS OF THE OLD NOTES IN ANY JURISDICTION IN WHICH THE MAKING
OF THE EXCHANGE OFFER OR ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
LAWS OF SUCH JURISDICTION OR WOULD OTHERWISE NOT BE IN COMPLIANCE WITH ANY
PROVISION OF ANY APPLICABLE SECURITIES LAW.
<PAGE> 3
OFFER TO EXCHANGE
7.19% SERIES B SECURED NOTES DUE 2000
FOR ALL OUTSTANDING 7.19% SERIES A SECURED NOTES DUE 2000
$220 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING,
7.67% SERIES B SECURED NOTES DUE 2004
FOR ALL OUTSTANDING 7.67% SERIES A SECURED NOTES DUE 2004
$350 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING AND
7.13% SERIES B SECURED NOTES DUE 2007
FOR ALL OUTSTANDING 7.13% SERIES A SECURED NOTES DUE 2007
$150 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING
OF
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
AND
THE TOLEDO EDISON COMPANY
The undersigned acknowledge(s) receipt of your letter and the enclosed
Prospectus and the related Letter of Transmittal, in connection with the offer
by the Companies to exchange the Old Notes for the New Notes.
This will instruct you to tender the principal amount of Old Notes
indicated below held by you for the account of the undersigned, upon the terms
and subject to the conditions set forth in the Prospectus and the related Letter
of Transmittal, and the undersigned hereby makes the applicable representations
set forth in such Letter of Transmittal.
SIGN HERE
--------------------------------------
Signature
--------------------------------------
Signature
[ ] Please tender the Old Notes held
by you for my account, as indicated
below.:
[ ] Please do not tender any Old Notes
held by you for my account.
Principal Amount*
of Old Notes to be Tendered: $
(must be in the principal amount of
$1,000 or an integral multiple
thereof)
[ ]
Name(s) (Please Print)
- --------------------------------------
Address
- --------------------------------------
Zip Code
- --------------------------------------
Area Code and Telephone Number
Dated: , 1997
- --------------------------------------------------------------------------------
*Unless otherwise indicated, it will be assumed that all of the securities
listed are to be tendered.
<PAGE> 1
Exhibit 4(a)
================================================================================
THE CLEVELAND ELECTRIC ILLUMINATING
COMPANY
TO
THE CHASE MANHATTAN BANK,
as Trustee.
(successor to Morgan Guaranty Trust Company
of New York,
formerly Guaranty Trust Company of New York)
As Trustee under
The Cleveland Electric Illuminating Company's
Mortgage and Deed of Trust,
Dated July 1, 1940
------------------------
SEVENTY-FOURTH SUPPLEMENTAL INDENTURE
DATED JUNE 15, 1997
FIRST MORTGAGE BONDS, SERIES DUE 2000
FIRST MORTGAGE BONDS, SERIES DUE 2004
FIRST MORTGAGE BONDS, SERIES DUE 2007
================================================================================
<PAGE> 2
i
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
SEVENTY-FOURTH SUPPLEMENTAL INDENTURE
DATED JUNE 15, 1997
TABLE OF CONTENTS*
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PARTIES..................................................... 1
RECITALS:
Indenture and Supplemental Indentures..................... 1
First Mortgage Bonds outstanding.......................... 1
Authorization by Indenture of issue of additional Bonds... 2
Pledge Bonds.............................................. 2
Purpose of Seventy-Fourth Supplemental Indenture.......... 2
Authorization of Seventy-Fourth Supplemental Indenture.... 2
Compliance with conditions to making of Seventy-Fourth
Supplemental Indenture................................. 2
ARTICLE I -- CONFIRMATION OF 1940 MORTGAGE AND SUPPLEMENTAL
INDENTURES..................................... 3
ARTICLE II -- CREATION, PROVISIONS, REDEMPTION, PRINCIPAL
AMOUNT AND FORM OF BONDS OF 2000 SERIES....... 4
Section 1 -- Creation and designation of Bonds and
compliance with Indenture................. 4
Section 2 -- Registered Bonds and denominations........ 4
Section 3 -- Date of Bonds, maturity date, interest
rate, accrual date, payment dates, Record
Date and place of payments................ 4
Section 4 -- Transfer and exchange of Bonds............ 6
Section 5 -- Redemption of Bonds....................... 6
Section 6 -- Notice of redemption...................... 6
Section 7 -- Purchase, prepayment or payment of
principal of Notes deemed to be
corresponding payment of Bonds............ 7
Section 8 -- Redemption of Bonds in an "Event of
Default" under the Note Indenture......... 7
</TABLE>
- ---------------
*The Table of Contents, the page headings and the recording data are not
part of the Seventy-Fourth Supplemental Indenture as executed.
<PAGE> 3
ii
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Section 9 -- Payment of interest or premium on Notes
deemed to be corresponding payment on
Bonds..................................... 7
Section 10 -- Surrender of Bonds purchased or otherwise
acquired................................. 8
Section 11 -- Bonds deemed to be paid in full upon
surrendering Secured Notes for
cancellation under the Note Indenture.... 8
Section 12 -- Notation of payments on Bonds before
transfer................................. 8
Section 13 -- Principal amount of Bonds which may be
authenticated and delivered.............. 8
Section 14 -- Form of Fully Registered Pledge Bonds.... 8
Form of Trustee's Certificate of
Authentication....................... 9
ARTICLE III -- CREATION, PROVISIONS, REDEMPTION, PRINCIPAL
AMOUNT AND FORM OF BONDS OF 2004 SERIES...... 15
Section 1 -- Creation and designation of Bonds and
compliance with Indenture................. 15
Section 2 -- Registered Bonds and denominations........ 15
Section 3 -- Date of Bonds, maturity date, interest
rate, accrual date, payment dates, Record
Date and place of payments................ 15
Section 4 -- Transfer and exchange of Bonds............ 17
Section 5 -- Redemption of Bonds....................... 17
Section 6 -- Notice of redemption...................... 18
Section 7 -- Purchase, prepayment or payment of
principal of Notes deemed to be
corresponding payment of Bonds............ 18
Section 8 -- Redemption of Bonds in an "Event of
Default" under the Note Indenture......... 18
Section 9 -- Payment of interest or premium on Notes
deemed to be corresponding payment on
Bonds..................................... 19
Section 10 -- Surrender of Bonds purchased or otherwise
acquired................................. 19
</TABLE>
<PAGE> 4
iii
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Section 11 -- Surrender of Bonds in the event of
payment in full or partial payment
thereof and issuance of new Bonds for the
unpaid balance........................... 19
Section 12 -- Notation of payments on Bonds before
transfer................................. 19
Section 13 -- Principal amount of Bonds which may be
authenticated and delivered.............. 20
Section 14 -- Form of Fully Registered Pledge Bonds.... 20
Form of Trustee's Certificate of
Authentication....................... 20
ARTICLE IV -- CREATION, PROVISIONS, REDEMPTION, PRINCIPAL
AMOUNT AND FORM OF BONDS OF 2007 SERIES....... 25
Section 1 -- Creation and designation of Bonds and
compliance with Indenture................. 25
Section 2 -- Registered Bonds and denominations........ 26
Section 3 -- Date of Bonds, maturity date, interest
rate, accrual date, payment dates, Record
Date and place of payments................ 26
Section 4 -- Transfer and exchange of Bonds............ 27
Section 5 -- Redemption of Bonds....................... 28
Section 6 -- Notice of redemption...................... 28
Section 7 -- Purchase, prepayment or payment of
principal of Notes deemed to be
corresponding payment of Bonds............ 28
Section 8 -- Redemption of Bonds in an "Event of
Default" under the Note Indenture......... 29
Section 9 -- Payment of interest or premium on Notes
deemed to be corresponding payment on
Bonds..................................... 29
Section 10 -- Surrender of Bonds purchased or otherwise
acquired................................. 29
Section 11 -- Surrender of Bonds in the event of
payment in full or partial payment
thereof and issuance of new Bonds for the
unpaid balance........................... 30
</TABLE>
<PAGE> 5
iv
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Section 12 -- Notation of payments on Bonds before
transfer................................. 30
Section 13 -- Principal amount of Bonds which may be
authenticated and delivered.............. 30
Section 14 -- Form of Fully Registered Pledge Bonds.... 30
Form of Trustee's Certificate of
Authentication........................ 30
ARTICLE V -- THE TRUSTEE.................................... 37
Section 1 -- Acceptance by Trustee..................... 37
Section 2 -- Responsibility of Trustee................. 37
Section 3 -- Reliance by Trustee upon certain demands,
certificates and opinions................. 37
Section 4 -- Records kept and indemnity given by agency
of the Company............................ 37
Section 5 -- Certain advices to the Company............ 38
Section 6 -- Certificates regarding interest rates..... 38
ARTICLE VI -- MISCELLANEOUS PROVISIONS...................... 39
EXECUTION................................................... 39
COMPANY'S ACKNOWLEDGMENT.................................... S-1
TRUSTEE'S ACKNOWLEDGMENT.................................... S-2
RECORDING AND FILING DATA................................... R-1
</TABLE>
<PAGE> 6
SEVENTY-FOURTH SUPPLEMENTAL INDENTURE, dated June 15, 1997, made by and
between THE CLEVELAND ELECTRIC ILLUMINATING COMPANY, a corporation organized and
existing under the laws of the State of Ohio (the "Company"), and THE CHASE
MANHATTAN BANK, successor by merger to The Chase Manhattan Bank (National
Association), which in turn was successor to Morgan Guaranty Trust Company of
New York, formerly Guaranty Trust Company of New York), a corporation organized
and existing under the laws of the State of New York (the "Trustee"), as Trustee
under the Mortgage and Deed of Trust dated July 1, 1940, hereinafter mentioned:
RECITALS
In order to secure First Mortgage Bonds of the Company ("Bonds"), the
Company has heretofore executed and delivered to the Trustee the Mortgage and
Deed of Trust dated July 1, 1940 (the "1940 Mortgage") and seventy-three
Supplemental Indentures thereto dated, respectively, July 1, 1940, August 18,
1944, December 1, 1947, September 1, 1950, June 1, 1951, May 1, 1954, March 1,
1958, April 1, 1959, December 20, 1967, January 15, 1969, November 1, 1969, June
1, 1970, November 15, 1970, May 1, 1974, April 15, 1975, April 16, 1975, May 28,
1975, February 1, 1976, November 23, 1976, July 26, 1977, September 27, 1977,
May 1, 1978, September 1, 1979, April 1, 1980, April 15, 1980, May 28, 1980,
June 9, 1980, December 1, 1980, July 28, 1981, August 1, 1981, March 1, 1982,
July 15, 1982, September 1, 1982, November 1, 1982, November 15, 1982, May 24,
1983, May 1, 1984, May 23, 1984, June 27, 1984, September 4, 1984, November 14,
1984, November 15, 1984, April 15, 1985, May 28, 1985, August 1, 1985, September
1, 1985, November 1, 1985, April 15, 1986, May 14, 1986, May 15, 1986, February
25, 1987, October 15, 1987, February 24, 1988, September 15, 1988, May 15, 1989,
June 13, 1989, October 15, 1989, January 1, 1990, June 1, 1990, August 1, 1990,
May 1, 1991, May 1, 1992, July 31, 1992, January 1, 1993, February 1, 1993, May
20, 1993, June 1, 1993, September 15, 1994, May 1, 1995, May 2, 1995, June 1,
1995, July 15, 1995 and August 1, 1995; and
The 1940 Mortgage, as supplemented and modified by said Supplemental
Indentures and by this Seventy-Fourth Supplemental Indenture, will be
hereinafter collectively referred to as the "Indenture" and this Seventy-Fourth
Supplemental Indenture will be hereinafter referred to as "this Supplemental
Indenture"; and
Pursuant to the provisions of the Indenture, the Company has issued 117
series of Bonds in the aggregate principal amount of $5,541,402,000, of which 79
series in the aggregate principal amount of $2,886,387,000 are no longer
outstanding; and
<PAGE> 7
2
The Indenture provides among other things that the Company, from time to
time, in addition to the Bonds authorized to be executed, authenticated and
delivered pursuant to other provisions therein, may execute and deliver
additional Bonds to the Trustee and the Trustee shall thereupon authenticate and
deliver such Bonds to or upon the order of the Company; and
The Company has determined to create pursuant to the provisions of the
Indenture three new series of first mortgage bonds (collectively, the "Cleveland
Electric Pledge Bonds"), to be pledged as security for the payment of principal
of and interest on certain notes (as hereinafter defined), with such Cleveland
Electric Pledge Bonds to have the denominations, rate of interest, date of
maturity, redemption provisions and other provisions and agreements in respect
thereof as in this Supplemental Indenture set forth; and
The Cleveland Electric Pledge Bonds are to be limited in aggregate
principal amount to $575 million and are to be delivered to The Chase Manhattan
Bank, as Note Trustee (hereinafter called the "Note Trustee") pursuant to an
Indenture dated as of June 13, 1997, among the Company, The Toledo Edison
Company and the Note Trustee, as amended and supplemented from time to time
(hereinafter called the "Note Indenture") under which the Note Trustee will hold
the Cleveland Electric Pledge Bonds, together with bonds issued by The Toledo
Edison Company under the Forty-sixth Supplemental Indenture to an Indenture of
Mortgage and Deed of Trust dated as of April 1, 1947 by and between The Toledo
Edison Company and The Chase Manhattan Bank as Trustee ("Toledo Supplement," and
those bonds, the "Toledo Edison Pledge Bonds"), as security for the payment of
principal of and interest on three new series of notes to be issued in a private
placement and three new series of notes that may be exchanged therefor pursuant
to a registered exchange offer (hereinafter collectively called the "Notes");
and
The Company, in the exercise of the powers and authority conferred upon and
reserved to it under the provisions of the Indenture, and pursuant to
appropriate resolutions of its Board of Directors, has duly resolved and
determined to make, execute and deliver to the Trustee this Supplemental
Indenture in the form hereof for the purposes herein provided; and
All conditions and requirements necessary to make this Supplemental
Indenture a valid, binding and legal instrument have been done, performed and
fulfilled and the execution and delivery hereof have been in all respects duly
authorized.
<PAGE> 8
3
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:
That The Cleveland Electric Illuminating Company, in consideration of the
premises and of the mutual covenants herein contained and of the sum of One
Dollar ($1.00) to it duly paid by the Trustee at or before the ensealing and
delivery of these presents and for other valuable considerations, the receipt
whereof is hereby acknowledged, hereby covenants and agrees to and with the
Trustee and its successors in the Trust under the Indenture, for the benefit of
those who shall hold the Bonds and coupons, if any, issued and to be issued
thereunder and under this Supplemental Indenture as hereinafter provided, as
follows:
ARTICLE I
CONFIRMATION OF 1940 MORTGAGE AND
SUPPLEMENTAL INDENTURES
The 1940 Mortgage (as modified in Article V of the Supplemental Indenture
dated December 1, 1947, Article V of the Supplemental Indenture dated May 1,
1954, Article V of the Supplemental Indenture dated March 1, 1958, Article V of
the Supplemental Indenture dated January 15, 1969, Article III of the
Supplemental Indenture dated November 23, 1976 and Article III of the
Supplemental Indenture dated April 15, 1985) and the Supplemental Indentures
dated July 1, 1940, August 18, 1944, December 1, 1947, September 1, 1950, June
1, 1951, May 1, 1954, March 1, 1958, April 1, 1959, December 20, 1967, January
15, 1969, November 1, 1969, June 1, 1970, November 15, 1970, May 1, 1974, April
15, 1975, April 16, 1975, May 28, 1975, February 1, 1976, November 23, 1976,
July 26, 1977, September 27, 1977, May 1, 1978, September 1, 1979, April 1,
1980, April 15, 1980, May 28, 1980, June 9, 1980, December 1, 1980, July 28,
1981, August 1, 1981, March 1, 1982, July 15, 1982, September 1, 1982, November
1, 1982, November 15, 1982, May 24, 1983, May 1, 1984, May 23, 1984, June 27,
1984, September 4, 1984, November 14, 1984, November 15, 1984, April 15, 1985,
May 28, 1985, August 1, 1985, September 1, 1985, November 1, 1985, April 15,
1986, May 14, 1986, May 15, 1986, February 25, 1987, October 15, 1987, February
24, 1988, September 15, 1988, May 15, 1989, June 13, 1989, October 15, 1989,
January 1, 1990, June 1, 1990, August 1, 1990, May 1, 1991, May 1, 1992, July
31, 1992, January 1, 1993, February 1, 1993, May 20, 1993, June 1, 1993,
September 15, 1994, May 1, 1995, May 2, 1995, June 1, 1995, July 15, 1995 and
August 1, 1995, respectively, are hereby in all respects confirmed.
<PAGE> 9
4
ARTICLE II
CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT
AND FORM OF BONDS OF 2000 SERIES
SECTION 1. The Company hereby creates a new series of Bonds to be issued
under and secured by the Indenture and to be designated as "First Mortgage
Bonds, Series due 2000" of the Company and hereinabove and hereinafter called
the "Cleveland Electric Pledge Bonds due 2000". The Cleveland Electric Pledge
Bonds due 2000 shall be executed, authenticated and delivered in accordance with
the provisions of, and shall in all respects be subject to, all of the terms,
conditions and covenants of the Indenture.
SECTION 2. The Cleveland Electric Pledge Bonds due 2000 shall be issued as
fully registered Bonds only, without coupons, in the denominations of $1,000 or
any multiple thereof.
SECTION 3. The Cleveland Electric Pledge Bonds due 2000 shall be dated the
date of authentication, shall mature July 1, 2000, and shall bear interest from
the time hereinafter provided at such rate per annum as shall cause the amount
of interest payable on such Cleveland Electric Pledge Bonds due 2000 then
outstanding to equal the amount of interest payable on the same proportion of
the Notes due 2000 (as defined below) then outstanding as those Cleveland
Electric Pledge Bonds due 2000 are to the aggregate principal amount of (i) the
Cleveland Electric Pledge Bonds due 2000 then outstanding and (ii) the Toledo
Edison Pledge Bonds due 2000 issued pursuant to (and as defined in) the Toledo
Supplement ("Toledo Edison Pledge Bonds due 2000") then outstanding. The ratio
of the Cleveland Electric Pledge Bonds due 2000 outstanding at any time to the
aggregate principal amount of the Cleveland Electric Pledge Bonds due 2000 then
outstanding and Toledo Edison Pledge Bonds due 2000 then outstanding is
hereinafter referred to as the "Cleveland Electric 2000 Ratio." The interest on
the Cleveland Electric Pledge Bonds due 2000 is payable on January 1 and July 1
in each year starting on July 1, 1997 (each such date hereinafter called an
"interest payment date") on and until maturity, or, in the case of any such
Cleveland Electric Pledge Bonds due 2000 duly called for redemption, on and
until the redemption date, or in the case of any default by the Company in the
payment of the principal due on any such Cleveland Electric Pledge Bonds due
2000, until the Company's obligation with respect to the payment of the
principal shall be discharged as provided in the Indenture. The amount of
interest payable on the Cleveland Electric Pledge Bonds due 2000 on any interest
payment date, on the date of maturity and on any redemption date shall be
computed on the same basis as the basis on which such interest is computed on
the Secured Notes due 2000 provided for in the Note Indenture, which shall
include the notes
<PAGE> 10
5
initially issued and any notes exchanged therefor pursuant to the terms of the
Note Indenture (either or both of such series of notes, the "Notes due 2000").
The Cleveland Electric Pledge Bonds due 2000 shall be payable as to
principal and interest at the agency of the Company in the Borough of Manhattan,
The City of New York, or, at the option of the registered owner, at the agency
of the Company in the City of Cleveland, State of Ohio, in any coin or currency
of the United States of America which at the time of payment is legal tender for
the payment of public and private debts.
Except as hereinafter provided, each Cleveland Electric Pledge Bond due
2000 shall bear interest from the later of the date of initial authentication of
the Cleveland Electric Pledge Bonds due 2000 or the most recent date to which
interest has been paid or duly provided for until the principal of such
Cleveland Electric Pledge Bond due 2000 is paid or duly provided for.
The interest payable on any interest payment date shall be paid to the
respective persons in whose names the Cleveland Electric Pledge Bonds due 2000
shall be registered at the close of business on the Record Date next preceding
such interest payment date, notwithstanding the cancellation of any such Bond
upon any transfer or exchange thereof subsequent to such Record Date and prior
to such interest payment date; provided, however, that, if and to the extent the
Company shall default in the payment of the interest due on such interest
payment date (other than an interest payment date that is a redemption date or
maturity date), such defaulted interest shall be paid to the respective persons
in whose names such outstanding Cleveland Electric Pledge Bonds due 2000 are
registered at the close of business on a date (the "Subsequent Record Date") not
less than ten days nor more than 15 days next preceding the date of payment of
such defaulted interest, such Subsequent Record Date to be established by the
Company by notice given by mail by or on behalf of the Company to the registered
owners of Cleveland Electric Pledge Bonds due 2000 not less than 10 days next
preceding such Subsequent Record Date. If any interest payment date should fall
on a day which is not a business day, then such interest payment date shall be
the next preceding business day.
The initial interest rate on the Secured Notes due 2000, and therefore on
the Cleveland Electric Pledge Bonds due 2000, is 7.19%. Under certain
circumstances specified in a Registration Agreement dated as of June 11, 1997
among the Company, Toledo Edison and the Purchasers (as defined therein) of the
Secured Notes, the interest rate on the Secured Notes due 2000, and therefore on
the Cleveland Electric Pledge Bonds due 2000, will increase temporarily to
7.69%.
<PAGE> 11
6
The term "Record Date", with respect to any interest payment date,
redemption date or date of maturity of any Cleveland Electric Pledge Bond due
2000, shall have the same meaning as the term "Record Date" has with respect to
those events for the Notes due 2000.
SECTION 4. In the manner and subject to the limitations provided in the
Indenture, Cleveland Electric Pledge Bonds due 2000 may be transferred or may be
exchanged for a like aggregate principal amount of Bonds of such series of other
authorized denominations, in either case without charge, except for any tax or
taxes or other governmental charges incident to such transfer or exchange, at
the agency of the Company in the Borough of Manhattan, The City of New York.
In the event less than all of the Cleveland Electric Pledge Bonds due 2000
at the time outstanding are called for redemption, the Company shall not be
required (a) to register any transfer or make any exchange of any such bond for
a period of 15 days before the mailing of the notice of redemption of any such
bonds, (b) to register any transfer or make any exchange of any such bond so
called for redemption in its entirety or (c) to register any transfer or make
any exchange of any portion of any such bond so called for redemption.
Except as otherwise provided in Section 3 of this Article II with respect
to the payment of interest, the Company, the agencies of the Company and the
Trustee may deem and treat the person in whose name a Cleveland Electric Pledge
Bond due 2000 is registered as the absolute owner thereof for the purpose of
receiving any payment and for all other purposes.
SECTION 5. The Cleveland Electric Pledge Bonds due 2000 shall be redeemable
only to the extent provided in this Article II, subject to the provisions
contained in Article V of the Indenture and the form of Cleveland Electric
Pledge Bond due 2000.
SECTION 6. Subject to the applicable provisions of the Indenture, written
notice of redemption of Cleveland Electric Pledge Bonds due 2000 pursuant to
this Supplemental Indenture shall be given by the Trustee by mailing to each
registered owner of such Cleveland Electric Pledge Bonds due 2000 to be redeemed
a notice of such redemption, first class postage prepaid, at its last address as
it shall appear upon the books of the Company for the registration and transfer
of such Cleveland Electric Pledge Bonds due 2000. Any notice of redemption shall
be mailed at least 30 days, but no more than 60 days, prior to the redemption
date. In the event of partial redemption of Cleveland Electric Pledge Bonds due
2000, the Trustee shall select the Cleveland Electric Pledge Bonds due 2000 or
portions thereof to be redeemed,
<PAGE> 12
7
subject to the provisions of this Supplemental Indenture, in such manner as the
Trustee shall deem appropriate and fair.
SECTION 7. If and when any Notes due 2000 shall be purchased and
surrendered to the Note Trustee for cancellation pursuant to the Note Indenture,
or if and when the principal of any Notes due 2000 shall be paid pursuant to the
Note Indenture, then there shall be deemed to have been paid a principal amount
of the Cleveland Electric Pledge Bonds due 2000 then outstanding which bears the
same ratio to the aggregate principal amount of Cleveland Electric Pledge Bonds
due 2000 then outstanding as the principal amount of the Notes due 2000 so
purchased or paid bears to the aggregate principal amount of the Notes due 2000
outstanding immediately before such purchase or payment; provided however, that
such purchase or payment of Cleveland Electric Pledge Bonds due 2000 shall be
deemed to have been made only when and to the extent that notice of such
purchase or payment of the principal amount of such Notes due 2000 shall have
been given by the Company to the Trustee. The Trustee may rely upon any such
notification by the Company that such purchase or payment of Notes due 2000 has
been so made.
SECTION 8. The Cleveland Electric Pledge Bonds due 2000 shall be redeemed
by the Company in whole at any time prior to maturity at a redemption price of
100% of the principal amount to be redeemed, plus accrued and unpaid interest to
the redemption date, but only if the Trustee shall receive a written demand from
the Note Trustee for redemption of all Cleveland Electric Pledge Bonds due 2000
held by the Note Trustee stating that an "Event of Default" under the Note
Indenture has occurred and is continuing, that payment of the principal of the
Notes due 2000 has been accelerated and that the Note Trustee is waiving notice
of redemption; provided, however, that the Cleveland Electric Pledge Bonds due
2000 shall not be redeemed in the event that prior to such redemption (a) the
Trustee shall have received a certificate of the Note Trustee (i) stating that
there has been a waiver of such Event of Default and a rescission and annulment
of such acceleration or (ii) withdrawing said written demand or (b) an event of
default under Section 6.01 of Article VI of the Indenture shall have occurred
and be continuing, and there has been a declaration of acceleration of the
principal of the Cleveland Electric Pledge Bonds due 2000. The redemption of the
Cleveland Electric Pledge Bonds due 2000 pursuant to this Section shall be made
not more than 60 days after receipt of the written demand.
SECTION 9. Any payment of interest on the Notes due 2000 shall be deemed to
constitute payment of interest on the Cleveland Electric Pledge Bonds due 2000
in an amount equal to the amount of interest paid on the Notes due 2000
multiplied by the Cleveland Electric 2000
<PAGE> 13
8
Ratio; provided, however, that such payment of interest shall be deemed to have
been made only when and to the extent that notice of such payment of interest on
such Notes due 2000 shall have been given by the Company to the Trustee. The
Trustee may rely upon any such notification by the Company that such payment of
interest has been so made.
SECTION 10. Any Cleveland Electric Pledge Bonds due 2000 at any time
purchased or otherwise acquired by the Company shall be surrendered to the
Trustee for cancellation and the Trustee shall forthwith cancel the same.
SECTION 11. All Cleveland Electric Pledge Bonds due 2000 deemed to have
been redeemed or paid in full as provided in Section 7 of this Article II shall
be surrendered to the Trustee for cancellation and the Trustee shall forthwith
cancel the same. In the event that part of a Cleveland Electric Pledge Bond due
2000 shall be deemed to have been redeemed or paid as provided in said Section
7, the registered owner may, at its option, surrender such bond to the Trustee
for cancellation, in which event the Trustee shall cancel such bond and the
Company shall execute and the Trustee shall authenticate and deliver to the
registered owner one or more new fully registered Cleveland Electric Pledge
Bonds due 2000 in such authorized denominations as shall be specified by the
registered owner in an aggregate principal amount equal to the unpaid balance of
the principal amount of such surrendered Bond.
SECTION 12. Cleveland Electric Pledge Bonds due 2000 shall not be
transferable unless the registered owner shall have first surrendered the same
to the Trustee for notation thereon of all payments of principal deemed to have
been made thereon under Section 7 of this Article II or for cancellation and
execution, authentication and delivery of Cleveland Electric Pledge Bonds due
2000 in an aggregate principal amount equal to the unpaid balance of the
principal amount of such surrendered Cleveland Electric Pledge Bonds due 2000
under Section 11 of this Article II.
SECTION 13. The aggregate principal amount of Cleveland Electric Pledge
Bonds due 2000 which may be authenticated and delivered hereunder shall not
exceed $175 million, except as otherwise provided in the Indenture.
SECTION 14. The form of the fully registered Cleveland Electric Pledge
Bonds due 2000, and of the Trustee's certificate of authentication thereon,
shall be substantially as follows:
<PAGE> 14
9
[FORM OF FULLY REGISTERED BOND OF 2000 SERIES]
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
Incorporated under the laws of the State of Ohio
FIRST MORTGAGE BOND, SERIES DUE 2000
Due July 1, 2000
No. $
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY, a corporation organized and
existing under the laws of the State of Ohio (hereinafter called the "Company",
which term shall include any successor corporation as defined in the Indenture
hereinafter referred to), for value received, hereby promises to pay to
, or registered assigns,
the sum of Dollars ($ ) or the
aggregate unpaid principal amount hereof (as shown on the Schedule of Payments
hereon), whichever is less, on July 1, 2000, in any coin or currency of the
United States of America which at the time of payment is legal tender for the
payment of public and private debts, and to pay interest on the unpaid principal
amount hereof in like coin or currency from the time hereinafter provided, at
such rate per annum as shall cause the amount of interest payable hereon to
equal the amount of interest payable on the same proportion of the Notes due
2000 (hereinafter defined) then outstanding as this Cleveland Electric Pledge
Bond due 2000 is to the aggregate principal amount of (i) the Cleveland Electric
Pledge Bonds due 2000 then outstanding and (ii) the Toledo Edison Pledge Bonds
due 2000 issued pursuant to the Forty-sixth Supplemental Indenture to an
Indenture of Mortgage and Deed of Trust dated as of April 1, 1947 by and between
The Toledo Edison Company and The Chase Manhattan Bank as Trustee ("Toledo
Edison Pledge Bonds due 2000") then outstanding. The ratio of the Cleveland
Electric Pledge Bonds due 2000 outstanding at any time to the aggregate
principal amount of the Cleveland Electric Pledge Bonds due 2000 then
outstanding and Toledo Edison Pledge Bonds due 2000 then outstanding is
hereinafter referred to as the "Cleveland Electric 2000 Ratio." The interest on
the Cleveland Electric Pledge Bonds due 2000 is payable on January 1 and July 1
in each year starting on July 1, 1997 (each such date herein called an "interest
payment date"), and on and until the date of maturity of this Bond, or, if this
Bond shall be duly called for redemption, on and until the redemption date, or,
if the Company shall default in the payment of the principal amount of this
Bond, until the Company's obligation with respect to the payment of such
principal shall be discharged as provided in said Indenture. Except as
hereinafter provided, this Bond shall bear interest from the date of initial
authentication of this Bond or the most recent date to which interest has been
paid or duly provided for until the principal of
<PAGE> 15
10
this Bond has been paid or duly provided for. Subject to certain exceptions
provided in said Indenture, the interest payable on any interest payment date
shall be paid to the person in whose name this Bond shall be registered at the
close of business on the Record Date or, in the case of defaulted interest, on a
day preceding the date of payment thereof established by notice to the
registered owner of this Bond in the manner provided in the Supplemental
Indenture (hereinafter defined). Principal of and interest on this Bond are
payable at the agency of the Company in the Borough of Manhattan, The City of
New York, or, at the option of the registered owner, at the agency of the
Company in the City of Cleveland, State of Ohio.
This Bond is one of the duly authorized Bonds of the Company (herein called
the "Bonds"), all issued and to be issued under and equally secured by a
Mortgage and Deed of Trust dated July 1, 1940, executed by the Company to
Guaranty Trust Company of New York (subsequently Morgan Guaranty Trust Company
of New York and then The Chase Manhattan Bank (National Association)), now
succeeded by The Chase Manhattan Bank as Trustee (herein called the "Trustee"),
and all indentures supplemental thereto (said Mortgage as so supplemented herein
called the "Indenture") to which reference is hereby made for a description of
the properties mortgaged and pledged, the nature and extent of the security, the
rights of the registered owner or owners of the Bonds and of the Trustee in
respect thereof, and the terms and conditions upon which the Bonds are, and are
to be, secured. The Bonds may be issued in series, for various principal sums,
may mature at different times, may bear interest at different rates and may
otherwise vary as in the Indenture provided. This Bond is one of a series
designated as the First Mortgage Bonds, Series due 2000 (herein called the
"Cleveland Electric Pledge Bonds due 2000") limited, except as otherwise
provided in the Indenture, in aggregate principal amount to $175 million, issued
under and secured by the Indenture and described in the Seventy-Fourth
Supplemental Indenture dated June 15, 1997, between the Company and the Trustee
(herein called the "Supplemental Indenture").
The Cleveland Electric Pledge Bonds due 2000 have been delivered by the
Company to The Chase Manhattan Bank, as trustee (hereinafter called the "Note
Trustee"), pursuant to a Note Indenture, dated as of June 13, 1997, among the
Company, The Toledo Edison Company and the Note Trustee, under which the Note
Trustee holds the Cleveland Electric Pledge Bonds due 2000, together with the
Toledo Edison Pledge Bonds due 2000, as a portion of the security for the
payment of principal of and interest on the Secured Notes issued under the Note
Indenture.
<PAGE> 16
11
If and when any Secured Notes due 2000 issued under the Note Indenture
(herein called the "Notes due 2000") are purchased and surrendered to the Note
Trustee for cancellation pursuant to the Note Indenture, or the principal of any
Notes due 2000 is paid pursuant to the Note Indenture, then there shall be
deemed to be paid a principal amount of the Cleveland Electric Pledge Bonds due
2000 then outstanding which bears the same ratio to the aggregate principal
amount of Cleveland Electric Pledge Bonds due 2000 outstanding immediately
before such purchase or payment as the principal amount of the Notes due 2000 so
purchased or paid bears to the aggregate principal amount of the Notes due 2000
outstanding immediately before such purchase or payment; provided, however, that
such purchase or payment of Cleveland Electric Pledge Bonds due 2000 is deemed
to be made only when and to the extent that notice of such purchase or payment
of such Notes due 2000 is given by the Company to the Trustee.
Any payment of interest on the Notes due 2000 shall be deemed to constitute
payment of interest on the Cleveland Electric Pledge Bonds due 2000 in an amount
equal to the amount of interest paid on the Notes due 2000 multiplied by the
Cleveland Electric 2000 Ratio; provided, however, that such payment of interest
is deemed to be made only when and to the extent that notice of such payment of
interest on such Notes due 2000 is given by the Company to the Trustee.
In the event that this Bond is deemed to be paid or redeemed in full, this
Bond shall be surrendered to the Trustee for cancellation. In the event that
this Bond is deemed to be paid or redeemed in part, this Bond may, at the option
of the registered owner, be surrendered to the Trustee for cancellation, in
which event the Trustee will cancel this Bond and the Company will execute and
the Trustee will authenticate and deliver to the registered owner Cleveland
Electric Pledge Bonds due 2000 in authorized denominations in aggregate
principal amount equal to the unpaid balance of the principal amount of this
Bond.
The Cleveland Electric Pledge Bonds due 2000 shall be redeemed by the
Company prior to maturity in whole at any time as provided in Section 8 of
Article II of the Supplemental Indenture at a redemption price of 100% of the
principal amount to be redeemed, plus accrued and unpaid interest to the
redemption date.
In the Forty-Third Supplemental Indenture dated April 15, 1985 between the
Company and the Trustee, the Company has modified, in certain respects, the
redemption provisions in the Indenture effective only with respect to the Bonds
of all series established or created in said Forty-Third Supplemental Indenture
and all supplemental indentures dated after May 28, 1985.
<PAGE> 17
12
To the extent permitted by and as provided in the Indenture, modifications
or alterations of the Indenture, or of any indenture supplemental thereto, and
of the rights and obligations of the Company and of the holders of the Bonds and
coupons may be made with the consent of the Company by an affirmative vote of
not less than 80% in principal amount of the Bonds entitled to vote then
outstanding, at a meeting of Bondholders called and held as provided in the
Indenture, and, in case one or more but less than all of the series of Bonds
then outstanding under the Indenture are so affected, by an affirmative vote of
not less than 80% in principal amount of the Bonds of any series entitled to
vote then outstanding and affected by such modification or alteration; provided,
however, that no such modification or alteration shall be made which will affect
the terms of payment of the principal of or interest on this Bond. In the
Nineteenth Supplemental Indenture dated November 23, 1976 between the Company
and the Trustee, the Company has modified the Indenture effective from and after
the time when none of the Bonds of any series established prior to the execution
of the Nineteenth Supplemental Indenture shall remain outstanding so as to
change "80%" in the foregoing sentence to "60%" and to make certain other
modifications of the Indenture and has reserved the right to make certain other
modifications of the Indenture without any vote, consent or other action by the
holders of Bonds of any series established in the Nineteenth Supplemental
Indenture or in any subsequent supplemental indenture.
If an event of default, as defined in the Indenture, shall occur, the
principal of all the Bonds at any such time outstanding under the Indenture may
be declared or may become due and payable, upon the conditions and in the manner
and with the effect provided in the Indenture. The Indenture provides that such
declaration may in certain events be waived by the holders of a majority in
principal amount of the Bonds outstanding.
Subject to the limitations provided in the Indenture and the Note
Indenture, this Bond is transferable by the registered owner hereof, in person
or by duly authorized attorney, on the books of the Company to be kept for that
purpose at the agency of the Company in the Borough of Manhattan, The City of
New York, upon surrender and cancellation of this Bond, and upon presentation of
a duly executed written instrument of transfer, and thereupon a new fully
registered bond or bonds of the same series, of the same aggregate principal
amount and in authorized denominations will be issued to the transferee or
transferees in exchange herefor; and this Bond, with or without others of the
same series, may in like manner be exchanged for one or more new fully
registered Cleveland Electric Pledge Bonds due 2000 of other authorized
denominations but of the same aggregate principal amount; all without charge
except for any tax or taxes or other governmental
<PAGE> 18
13
charges incidental to such transfer or exchange and all subject to the terms and
conditions set forth in the Indenture. In the event less than all of the
Cleveland Electric Pledge Bonds due 2000 at the time outstanding are called for
redemption, the Company shall not be required (a) to register any transfer or
make any exchange of any such Bond for a period of 15 days before the mailing of
the notice of redemption of any such Bonds, (b) to register any transfer or make
any exchange of any such Bond called for redemption in its entirety, or (c) to
register any transfer or make any exchange of any portion of any such Bond which
has been called for redemption. Except as otherwise provided herein with respect
to the payment of interest, the Company, the agencies of the Company and the
Trustee may deem and treat the person in whose name this Bond is registered as
the absolute owner hereof for the purpose of receiving any payment and for all
other purposes.
No recourse shall be had for the payment of the principal of or the
interest on this Bond, or for any claim based hereon or on the Indenture or any
indenture supplemental thereto, against any incorporator, or against any
stockholder, director or officer, past, present or future, of the Company, or of
any predecessor or successor corporation, as such, either directly or through
the Company or any such predecessor or successor corporation, whether by virtue
of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability, whether at common law,
in equity, by any constitution or statute or otherwise, of incorporators,
stockholders, directors or officers being released by every owner hereof by the
acceptance of this Bond and as part of the consideration for the issue hereof,
and being likewise released by the terms of the Indenture.
This Bond shall not be entitled to any benefit under the Indenture or any
indenture supplemental thereto, or become valid or obligatory for any purpose,
until the Trustee under the Indenture, or a successor trustee thereto under the
Indenture, shall have signed the form of certificate of authentication endorsed
hereon.
<PAGE> 19
14
IN WITNESS WHEREOF, The Cleveland Electric Illuminating Company has caused
this Bond to be signed in its name by its President or a Vice President (whose
signature may be manual or a facsimile thereof) and its corporate seal (or a
facsimile thereof) to be hereto affixed and attested by its Secretary or an
Assistant Secretary (whose signature may be manual or a facsimile thereof).
Dated:
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
By ....................................................
Attest:
.............................
Secretary
[FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
This Bond is one of the Bonds of the series designated and described in the
within-mentioned Indenture and Supplemental Indenture.
THE CHASE MANHATTAN BANK,
TRUSTEE
By ...........................................
AUTHORIZED OFFICER
<PAGE> 20
15
[FORM OF SCHEDULE OF PAYMENTS]
SCHEDULE OF PAYMENTS
<TABLE>
<CAPTION>
AGENCY
OF THE
UNPAID COMPANY
PRINCIPAL PRINCIPAL PREMIUM INTEREST MAKING AUTHORIZED
DATE PAYMENT AMOUNT PAYMENT PAYMENT NOTATION OFFICER TITLE
- --------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
[END OF FORM OF FULLY REGISTERED BOND]
ARTICLE III
CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT
AND FORM OF BONDS OF 2004 SERIES
SECTION 1. The Company hereby creates a new series of Bonds to be issued
under and secured by the Indenture and to be designated as "First Mortgage
Bonds, Series due 2004" of the Company and hereinabove and hereinafter called
the "Cleveland Electric Pledge Bonds due 2004". The Cleveland Electric Pledge
Bonds due 2004 shall be executed, authenticated and delivered in accordance with
the provisions of, and shall in all respects be subject to, all of the terms,
conditions and covenants of the Indenture.
SECTION 2. The Cleveland Electric Pledge Bonds due 2004 shall be issued as
fully registered Bonds only, without coupons, in the denomi nations of $1,000 or
any multiple thereof.
SECTION 3. The Cleveland Electric Pledge Bonds due 2004 shall be dated the
date of authentication, shall mature July 1, 2004, and shall bear interest from
the time hereinafter provided at such rate per annum as shall cause the amount
of interest payable on such Cleveland Electric Pledge Bonds due 2004 then
outstanding to equal the amount of interest payable on the same proportion of
the Notes due 2004 (as defined below) then outstanding as those Cleveland
Electric Pledge Bonds due 2004 are to the aggregate principal amount of (i) the
Cleveland Electric Pledge Bonds due 2004 then outstanding and (ii) the Toledo
Edison Pledge Bonds due 2004 issued pursuant to the Toledo Supplement then
outstanding. The ratio of the Cleveland Electric Pledge Bonds due 2004
outstanding at any time to the aggregate principal amount of the Cleveland
Electric Pledge Bonds due 2004 then outstanding and Toledo Edison Pledge Bonds
due 2004 then outstanding is hereinafter referred to as the "Cleveland Electric
2004 Ratio." The interest on the Cleveland Electric Pledge Bonds due 2004 is
payable on January 1 and July 1 in each year starting on July 1, 1997
<PAGE> 21
16
(each such date hereinafter called an "interest payment date") on and until
maturity, or, in the case of any such Cleveland Electric Pledge Bonds due 2004
duly called for redemption, on and until the redemption date, or in the case of
any default by the Company in the payment of the principal due on any such
Cleveland Electric Pledge Bonds due 2004, until the Company's obligation with
respect to the payment of the principal shall be discharged as provided in the
Indenture. The amount of interest payable on the Cleveland Electric Pledge Bonds
due 2004 on any interest payment date, on the date of maturity and on any
redemption date shall be computed on the same basis as the basis on which such
interest is computed on the Secured Notes due 2004 provided for in the Note
Indenture, which shall include the notes initially issued and any notes
exchanged therefor pursuant to the terms of the Note Indenture (either or both
of such series of notes, the "Notes due 2004").
The Cleveland Electric Pledge Bonds due 2004 shall be payable as to
principal and interest at the agency of the Company in the Borough of Manhattan,
The City of New York, or, at the option of the registered owner, at the agency
of the Company in the City of Cleveland, State of Ohio, in any coin or currency
of the United States of America which at the time of payment is legal tender for
the payment of public and private debts.
Except as hereinafter provided, each Cleveland Electric Pledge Bond due
2004 shall bear interest from the later of the date of initial authentication of
the Cleveland Electric Pledge Bonds due 2004 or the most recent date to which
interest has been paid or duly provided for until the principal of such
Cleveland Electric Pledge Bond due 2004 is paid or duly provided for.
The interest payable on any interest payment date shall be paid to the
respective persons in whose names the Cleveland Electric Pledge Bonds due 2004
shall be registered at the close of business on the Record Date next preceding
such interest payment date, notwithstanding the cancellation of any such Bond
upon any transfer or exchange thereof subsequent to such Record Date and prior
to such interest payment date; provided, however, that, if and to the extent the
Company shall default in the payment of the interest due on such interest
payment date (other than an interest payment date that is a redemption date or
maturity date), such defaulted interest shall be paid to the respective persons
in whose names such outstanding Cleveland Electric Pledge Bonds due 2004 are
registered at the close of business on a date (the "Subsequent Record Date") not
less than ten days nor more than 15 days next preceding the date of payment of
such defaulted interest, such Subsequent Record Date to be established by the
Company by notice given by mail by or on behalf of the
<PAGE> 22
17
Company to the registered owners of Cleveland Electric Pledge Bonds due 2004 not
less than 10 days next preceding such Subsequent Record Date. If any interest
payment date should fall on a day which is not a business day, then such
interest payment date shall be the next preceding business day.
The initial interest rate on the Secured Notes due 2004, and therefore on
the Cleveland Electric Pledge Bonds due 2004, is 7.67%. Under certain
circumstances specified in a Registration Agreement dated as of June 11, 1997
among the Company, Toledo Edison and the Purchasers (as defined therein) of the
Secured Notes, the interest rate on the Secured Notes due 2004, and therefore on
the Cleveland Electric Pledge Bonds due 2004, will increase temporarily to
8.17%.
The term "Record Date", with respect to any interest payment date,
redemption date or date of maturity of any Cleveland Electric Pledge Bond due
2004 shall have the same meaning as the term "Record Date" has with respect to
those events for the Notes due 2004.
SECTION 4. In the manner and subject to the limitations provided in the
Indenture, Cleveland Electric Pledge Bonds due 2004 may be transferred or may be
exchanged for a like aggregate principal amount of Bonds of such series of other
authorized denominations, in either case without charge, except for any tax or
taxes or other governmental charges incident to such transfer or exchange, at
the agency of the Company in the Borough of Manhattan, The City of New York.
In the event less than all of the Cleveland Electric Pledge Bonds due 2004
at the time outstanding are called for redemption, the Company shall not be
required (a) to register any transfer or make any exchange of any such bond for
a period of 15 days before the mailing of the notice of redemption of any such
bonds, (b) to register any transfer or make any exchange of any such bond so
called for redemption in its entirety or (c) to register any transfer or make
any exchange of any portion of any such bond so called for redemption.
Except as otherwise provided in Section 3 of this Article III with respect
to the payment of interest, the Company, the agencies of the Company and the
Trustee may deem and treat the person in whose name a Cleveland Electric Pledge
Bond due 2004 is registered as the absolute owner thereof for the purpose of
receiving any payment and for all other purposes.
SECTION 5. The Cleveland Electric Pledge Bonds due 2004 shall be
redeemable only to the extent provided in this Article III, subject to the
provisions contained in Article V of the Indenture and the form of Cleveland
Electric Pledge Bond due 2004.
<PAGE> 23
18
SECTION 6. Subject to the applicable provisions of the Indenture, written
notice of redemption of Cleveland Electric Pledge Bonds due 2004 pursuant to
this Supplemental Indenture shall be given by the Trustee by mailing to each
registered owner of such Cleveland Electric Pledge Bonds due 2004 to be redeemed
a notice of such redemption, first class postage prepaid, at its last address as
it shall appear upon the books of the Company for the registration and transfer
of such Cleveland Electric Pledge Bonds due 2004. Any notice of redemption shall
be mailed at least 30 days, but no more than 60 days, prior to the redemption
date. In the event of partial redemption of Cleveland Electric Pledge Bonds due
2004, the Trustee shall select the Cleveland Electric Pledge Bonds due 2004 or
portions thereof to be redeemed, subject to the provisions of this Supplemental
Indenture, in such manner as the Trustee shall deem appropriate and fair.
SECTION 7. If and when any Notes due 2004 shall be purchased and
surrendered to the Note Trustee for cancellation pursuant to the Note Indenture,
or if and when the principal of any Notes due 2004 shall be paid pursuant to the
Note Indenture, then there shall be deemed to have been paid a principal amount
of the Cleveland Electric Pledge Bonds due 2004 then outstanding which bears the
same ratio to the aggregate principal amount of Cleveland Electric Pledge Bonds
due 2004 then outstanding as the principal amount of the Notes due 2004 so
purchased or paid bears to the aggregate principal amount of the Notes due 2004
outstanding immediately before such purchase or payment; provided however, that
such purchase or payment of Cleveland Electric Pledge Bonds due 2004 shall be
deemed to have been made only when and to the extent that notice of such
purchase or payment of the principal amount of such Notes due 2004 shall have
been given by the Company to the Trustee. The Trustee may rely upon any such
notification by the Company that such purchase or payment of Notes due 2004 has
been so made.
SECTION 8. The Cleveland Electric Pledge Bonds due 2004 shall be redeemed
by the Company in whole at any time prior to maturity at a redemption price of
100% of the principal amount to be redeemed, plus accrued and unpaid interest to
the redemption date, but only if the Trustee shall receive a written demand from
the Note Trustee for redemption of all Cleveland Electric Pledge Bonds due 2004
held by the Note Trustee stating that an "Event of Default" under the Note
Indenture has occurred and is continuing, that payment of the principal of the
Notes due 2004 has been accelerated and that the Note Trustee is waiving notice
of redemption; provided, however, that the Cleveland Electric Pledge Bonds due
2004 shall not be redeemed in the event that prior to such redemption (a) the
Trustee shall have received a certificate of the Note Trustee (i) stating that
there has been a waiver of such Event of Default and a rescission and annulment
of
<PAGE> 24
19
such acceleration or (ii) withdrawing said written demand or (b) an event of
default under Section 6.01 of Article VI of the Indenture shall have occurred
and be continuing, and there has been a declaration of acceleration of the
principal of the Cleveland Electric Pledge Bonds due 2004. The redemption of the
Cleveland Electric Pledge Bonds due 2004 pursuant to this Section shall be made
not more than 60 days after receipt of the written demand.
SECTION 9. Any payment of interest on the Notes due 2004 shall be deemed
to constitute payment of interest on the Cleveland Electric Pledge Bonds due
2004 in an amount equal to the amount of interest paid on the Notes due 2004
multiplied by the Cleveland Electric 2004 Ratio; provided, however, that such
payment of interest shall be deemed to have been made only when and to the
extent that notice of such payment of interest on such Notes due 2004 shall have
been given by the Company to the Trustee. The Trustee may rely upon any such
notification by the Company that such payment of interest has been so made.
SECTION 10. Any Cleveland Electric Pledge Bonds due 2004 at any time
purchased or otherwise acquired by the Company shall be surrendered to the
Trustee for cancellation and the Trustee shall forthwith cancel the same.
SECTION 11. All Cleveland Electric Pledge Bonds due 2004 deemed to have
been redeemed or paid in full as provided in Section 7 of this Article III shall
be surrendered to the Trustee for cancellation and the Trustee shall forthwith
cancel the same. In the event that part of a Cleveland Electric Pledge Bond due
2004 shall be deemed to have been redeemed or paid as provided in said Section
7, the registered owner may, at its option, surrender such bond to the Trustee
for cancellation, in which event the Trustee shall cancel such bond and the
Company shall execute and the Trustee shall authenticate and deliver to the
registered owner one or more new fully registered Cleveland Electric Pledge
Bonds due 2004 in such authorized denominations as shall be specified by the
registered owner in an aggregate principal amount equal to the unpaid balance of
the principal amount of such surrendered Bond.
SECTION 12. Cleveland Electric Pledge Bonds due 2004 shall not be
transferable unless the registered owner shall have first surrendered the same
to the Trustee for notation thereon of all payments of principal deemed to have
been made thereon under Section 7 of this Article III or for cancellation and
execution, authentication and delivery of Cleveland Electric Pledge Bonds due
2004 in an aggregate principal amount equal to the unpaid balance of the
principal amount of such surrendered Cleveland Electric Pledge Bonds due 2004
under Section 11 of this Article III.
<PAGE> 25
20
SECTION 13. The aggregate principal amount of Cleveland Electric Pledge
Bonds due 2004 which may be authenticated and delivered hereunder shall not
exceed $280 million, except as otherwise provided in the Indenture.
SECTION 14. The form of the fully registered Cleveland Electric Pledge
Bonds due 2004, and of the Trustee's certificate of authentication thereon,
shall be substantially as follows:
[FORM OF FULLY REGISTERED BOND OF 2004 SERIES]
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
Incorporated under the laws of the State of Ohio
FIRST MORTGAGE BOND, SERIES DUE 2004
Due July 1, 2004
No. $
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY, a corporation organized and
existing under the laws of the State of Ohio (hereinafter called the "Company",
which term shall include any successor corporation as defined in the Indenture
hereinafter referred to), for value received, hereby promises to pay to
, or registered assigns, the sum of Dollars
($ ) or the aggregate unpaid principal amount hereof (as shown on the
Schedule of Payments hereon), whichever is less, on July 1, 2004, in any coin or
currency of the United States of America which at the time of payment is legal
tender for the payment of public and private debts, and to pay interest on the
unpaid principal amount hereof in like coin or currency from the time
hereinafter provided, at such rate per annum as shall cause the amount of
interest payable hereon to equal the amount of interest payable on the same
proportion of the Notes due 2004 (hereinafter defined) then outstanding as this
Cleveland Electric Pledge Bond due 2004 is to the aggregate principal amount of
(i) the Cleveland Electric Pledge Bonds due 2004 then outstanding and (ii) the
Toledo Edison Pledge Bonds due 2004 issued pursuant to the Forty-sixth
Supplemental Indenture to an Indenture of Mortgage and Deed of Trust dated as of
April 1, 1947 by and between The Toledo Edison Company and The Chase Manhattan
Bank as Trustee ("Toledo Edison Pledge Bonds due 2004") then outstanding. The
ratio of the Cleveland Electric Pledge Bonds due 2004 outstanding at any time to
the aggregate principal amount of the Cleveland Electric Pledge Bonds due 2004
then outstanding and Toledo Edison Pledge Bonds due 2004 then outstanding is
hereinafter referred to as the "Cleveland Electric 2004 Ratio." The interest on
the Cleveland Electric Pledge Bonds due 2004 is payable on January 1 and July 1
in each year starting on July 1, 1997 (each such date herein called an "interest
payment date"), and on and until the date of maturity of this Bond, or, if this
Bond shall be duly
<PAGE> 26
21
called for redemption, on and until the redemption date, or, if the Company
shall default in the payment of the principal amount of this Bond, until the
Company's obligation with respect to the payment of such principal shall be
discharged as provided in said Indenture. Except as hereinafter provided, this
Bond shall bear interest from the date of initial authentication of this Bond or
the most recent date to which interest has been paid or duly provided for until
the principal of this Bond has been paid or duly provided for. Subject to
certain exceptions provided in said Indenture, the interest payable on any
interest payment date shall be paid to the person in whose name this Bond shall
be registered at the close of business on the Record Date or, in the case of
defaulted interest, on a day preceding the date of payment thereof established
by notice to the registered owner of this Bond in the manner provided in the
Supplemental Indenture (hereinafter defined). Principal of and interest on this
Bond are payable at the agency of the Company in the Borough of Manhattan, The
City of New York, or, at the option of the registered owner, at the agency of
the Company in the City of Cleveland, State of Ohio.
This Bond is one of the duly authorized Bonds of the Company (herein called
the "Bonds"), all issued and to be issued under and equally secured by a
Mortgage and Deed of Trust dated July 1, 1940, executed by the Company to
Guaranty Trust Company of New York (subsequently Morgan Guaranty Trust Company
of New York and then The Chase Manhattan Bank (National Association)), now
succeeded by The Chase Manhattan Bank as Trustee (herein called the "Trustee"),
and all indentures supplemental thereto (said Mortgage as so supplemented herein
called the "Indenture") to which reference is hereby made for a description of
the properties mortgaged and pledged, the nature and extent of the security, the
rights of the registered owner or owners of the Bonds and of the Trustee in
respect thereof, and the terms and conditions upon which the Bonds are, and are
to be, secured. The Bonds may be issued in series, for various principal sums,
may mature at different times, may bear interest at different rates and may
otherwise vary as in the Indenture provided. This Bond is one of a series
designated as the First Mortgage Bonds, Series due 2004 (herein called the
"Cleveland Electric Pledge Bonds due 2004") limited, except as otherwise
provided in the Indenture, in aggregate principal amount to $280 million, issued
under and secured by the Indenture and described in the Seventy-Fourth
Supplemental Indenture dated June 15, 1997, between the Company and the Trustee
(herein called the "Supplemental Indenture").
The Cleveland Electric Pledge Bonds due 2004 have been delivered by the
Company to The Chase Manhattan Bank, as trustee (hereinafter called the "Note
Trustee"), pursuant to a Note Indenture, dated as of June 13, 1997, among the
Company, The Toledo Edison Company and
<PAGE> 27
22
the Note Trustee, under which the Note Trustee holds the Cleveland Electric
Pledge Bonds due 2004, together with the Toledo Edison Pledge Bonds due 2004, as
a portion of the security for the payment of principal and interest on the
Secured Notes issued under the Note Indenture.
If and when any Secured Notes due 2004 issued under the Note Indenture
(herein called the "Notes due 2004") are purchased and surrendered to the Note
Trustee for cancellation pursuant to the Note Indenture, or the principal of any
Notes due 2004 is paid pursuant to the Note Indenture, then there shall be
deemed to be paid a principal amount of the Cleveland Electric Pledge Bonds due
2004 then outstanding which bears the same ratio to the aggregate principal
amount of Cleveland Electric Pledge Bonds due 2004 outstanding immediately
before such purchase or payment as the principal amount of the Notes due 2004 so
purchased or paid bears to the aggregate principal amount of the Notes due 2004
outstanding immediately before such purchase or payment; provided, however, that
such purchase or payment of Cleveland Electric Pledge Bonds due 2004 is deemed
to be made only when and to the extent that notice of such purchase or payment
of such Notes due 2004 is given by the Company to the Trustee.
Any payment of interest on the Notes due 2004 shall be deemed to constitute
payment of interest on the Cleveland Electric Pledge Bonds due 2004 in an amount
equal to the amount of interest paid on the Notes due 2004 multiplied by the
Cleveland Electric 2004 Ratio; provided, however, that such payment of interest
is deemed to be made only when and to the extent that notice of such payment of
interest on such Notes due 2004 is given by the Company to the Trustee.
In the event that this Bond is deemed to be paid or redeemed in full, this
Bond shall be surrendered to the Trustee for cancellation. In the event that
this Bond is deemed to be paid or redeemed in part, this Bond may, at the option
of the registered owner, be surrendered to the Trustee for cancellation, in
which event the Trustee will cancel this Bond and the Company will execute and
the Trustee will authenticate and deliver to the registered owner Cleveland
Electric Pledge Bonds due 2004 in authorized denominations in aggregate
principal amount equal to the unpaid balance of the principal amount of this
Bond.
The Cleveland Electric Pledge Bonds due 2004 shall be redeemed by the
Company prior to maturity in whole at any time as provided in Section 8 of
Article III of the Supplemental Indenture at a redemption price of 100% of the
principal amount to be redeemed, plus accrued and unpaid interest to the
redemption date.
<PAGE> 28
23
In the Forty-Third Supplemental Indenture dated April 15, 1985 between the
Company and the Trustee, the Company has modified, in certain respects, the
redemption provisions in the Indenture effective only with respect to the Bonds
of all series established or created in said Forty-Third Supplemental Indenture
and all supplemental indentures dated after May 28, 1985.
To the extent permitted by and as provided in the Indenture, modifications
or alterations of the Indenture, or of any indenture supplemental thereto, and
of the rights and obligations of the Company and of the holders of the Bonds and
coupons may be made with the consent of the Company by an affirmative vote of
not less than 80% in principal amount of the Bonds entitled to vote then
outstanding, at a meeting of Bondholders called and held as provided in the
Indenture, and, in case one or more but less than all of the series of Bonds
then outstanding under the Indenture are so affected, by an affirmative vote of
not less than 80% in principal amount of the Bonds of any series entitled to
vote then outstanding and affected by such modification or alteration; provided,
however, that no such modification or alteration shall be made which will affect
the terms of payment of the principal of or interest on this Bond. In the
Nineteenth Supplemental Indenture dated November 23, 1976 between the Company
and the Trustee, the Company has modified the Indenture effective from and after
the time when none of the Bonds of any series established prior to the execution
of the Nineteenth Supplemental Indenture shall remain outstanding so as to
change "80%" in the foregoing sentence to "60%" and to make certain other
modifications of the Indenture and has reserved the right to make certain other
modifications of the Indenture without any vote, consent or other action by the
holders of Bonds of any series established in the Nineteenth Supplemental
Indenture or in any subsequent supplemental indenture.
If an event of default, as defined in the Indenture, shall occur, the
principal of all the Bonds at any such time outstanding under the Indenture may
be declared or may become due and payable, upon the conditions and in the manner
and with the effect provided in the Indenture. The Indenture provides that such
declaration may in certain events be waived by the holders of a majority in
principal amount of the Bonds outstanding.
Subject to the limitations provided in the Indenture and the Note
Indenture, this Bond is transferable by the registered owner hereof, in person
or by duly authorized attorney, on the books of the Company to be kept for that
purpose at the agency of the Company in the Borough of Manhattan, The City of
New York, upon surrender and cancellation of this Bond, and upon presentation of
a duly executed written instrument of transfer, and thereupon a new fully
registered bond or
<PAGE> 29
24
bonds of the same series, of the same aggregate principal amount and in
authorized denominations will be issued to the transferee or transferees in
exchange herefor; and this Bond, with or without others of the same series, may
in like manner be exchanged for one or more new fully registered Cleveland
Electric Pledge Bonds due 2004 of other authorized denominations but of the same
aggregate principal amount; all without charge except for any tax or taxes or
other governmental charges incidental to such transfer or exchange and all
subject to the terms and conditions set forth in the Indenture. In the event
less than all of the Cleveland Electric Pledge Bonds due 2004 at the time
outstanding are called for redemption, the Company shall not be required (a) to
register any transfer or make any exchange of any such Bond for a period of 15
days before the mailing of the notice of redemption of any such Bonds, (b) to
register any transfer or make any exchange of any such Bond called for
redemption in its entirety, or (c) to register any transfer or make any exchange
of any portion of any such Bond which has been called for redemption. Except as
otherwise provided herein with respect to the payment of interest, the Company,
the agencies of the Company and the Trustee may deem and treat the person in
whose name this Bond is registered as the absolute owner hereof for the purpose
of receiving any payment and for all other purposes.
No recourse shall be had for the payment of the principal of or the
interest on this Bond, or for any claim based hereon or on the Indenture or any
indenture supplemental thereto, against any incorporator, or against any
stockholder, director or officer, past, present or future, of the Company, or of
any predecessor or successor corporation, as such, either directly or through
the Company or any such predecessor or successor corporation, whether by virtue
of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability, whether at common law,
in equity, by any constitution or statute or otherwise, of incorporators,
stockholders, directors or officers being released by every owner hereof by the
acceptance of this Bond and as part of the consideration for the issue hereof,
and being likewise released by the terms of the Indenture.
This Bond shall not be entitled to any benefit under the Indenture or any
indenture supplemental thereto, or become valid or obligatory for any purpose,
until the Trustee under the Indenture, or a successor trustee thereto under the
Indenture, shall have signed the form of certificate of authentication endorsed
hereon.
IN WITNESS WHEREOF, The Cleveland Electric Illuminating Company has caused
this Bond to be signed in its name by its President or a Vice President (whose
signature may be manual or a facsimile thereof) and its corporate seal (or a
facsimile thereof) to be hereto
<PAGE> 30
25
affixed and attested by its Secretary or an Assistant Secretary (whose signature
may be manual or a facsimile thereof).
Dated:
THE CLEVELAND ELECTRIC ILLUMINATING
COMPANY
By........................................
Attest:
...............................
Secretary
[FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
This Bond is one of the Bonds of the series designated and described in the
within-mentioned Indenture and Supplemental Indenture.
THE CHASE MANHATTAN BANK,
TRUSTEE
By ...........................................
AUTHORIZED OFFICER
[FORM OF SCHEDULE OF PAYMENTS]
SCHEDULE OF PAYMENTS
<TABLE>
<CAPTION>
AGENCY
OF THE
UNPAID COMPANY
PRINCIPAL PRINCIPAL PREMIUM INTEREST MAKING AUTHORIZED
DATE PAYMENT AMOUNT PAYMENT PAYMENT NOTATION OFFICER TITLE
- --------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
[END OF FORM OF FULLY REGISTERED BOND]
ARTICLE IV
CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT
AND FORM OF BONDS OF 2007 SERIES
SECTION 1. The Company hereby creates a new series of Bonds to be issued
under and secured by the Indenture and to be designated as "First Mortgage
Bonds, Series due 2007" of the Company and hereinabove and hereinafter called
the "Cleveland Electric Pledge Bonds due 2007". The Cleveland Electric Pledge
Bonds due 2007 shall be executed, authenticated and delivered in accordance with
the provisions
<PAGE> 31
26
of, and shall in all respects be subject to, all of the terms, conditions and
covenants of the Indenture.
SECTION 2. The Cleveland Electric Pledge Bonds due 2007 shall be issued as
fully registered Bonds only, without coupons, in the denominations of $1,000 or
any multiple thereof.
SECTION 3. The Cleveland Electric Pledge Bonds due 2007 shall be dated the
date of authentication, shall mature July 1, 2007, and shall bear interest from
the time hereinafter provided at such rate per annum as shall cause the amount
of interest payable on such Cleveland Electric Pledge Bonds due 2007 then
outstanding to equal the amount of interest payable on the same proportion of
the Notes due 2007 (as defined below) then outstanding as those Cleveland
Electric Pledge Bonds due 2007 are to the aggregate principal amount of (i) the
Cleveland Electric Pledge Bonds due 2007 then outstanding and (ii) the Toledo
Edison Pledge Bonds due 2007 issued pursuant to the Toledo Supplement then
outstanding. The ratio of the Cleveland Electric Pledge Bonds due 2007
outstanding at any time to the aggregate principal amount of the Cleveland
Electric Pledge Bonds due 2007 then outstanding and Toledo Edison Pledge Bonds
due 2007 then outstanding is hereinafter referred to as the "Cleveland Electric
2007 Ratio." The interest on the Cleveland Electric Pledge Bonds due 2007 is
payable on January 1 and July 1 in each year starting on July 1, 1997 (each such
date hereinafter called an "interest payment date") on and until maturity, or,
in the case of any such Cleveland Electric Pledge Bonds due 2007 duly called for
redemption, on and until the redemption date, or in the case of any default by
the Company in the payment of the principal due on any such Cleveland Electric
Pledge Bonds due 2007, until the Company's obligation with respect to the
payment of the principal shall be discharged as provided in the Indenture. The
amount of interest payable on the Cleveland Electric Pledge Bonds due 2007 on
any interest payment date, on the date of maturity and on any redemption date
shall be computed on the same basis as the basis on which such interest is
computed on the Secured Notes due 2007 provided for in the Note Indenture, which
shall include the notes initially issued and any notes exchanged therefor
pursuant to the terms of the Note Indenture (either or both of such series of
notes, the "Notes due 2007").
The Cleveland Electric Pledge Bonds due 2007 shall be payable as to
principal and interest at the agency of the Company in the Borough of Manhattan,
The City of New York, or, at the option of the registered owner, at the agency
of the Company in the City of Cleveland, State of Ohio, in any coin or currency
of the United States of America which at the time of payment is legal tender for
the payment of public and private debts.
<PAGE> 32
27
Except as hereinafter provided, each Cleveland Electric Pledge Bond due
2007 shall bear interest from the later of the date of initial authentication of
the Cleveland Electric Pledge Bonds due 2007 or the most recent date to which
interest has been paid or duly provided for until the principal of such
Cleveland Electric Pledge Bond due 2007 is paid or duly provided for.
The interest payable on any interest payment date shall be paid to the
respective persons in whose names the Cleveland Electric Pledge Bonds due 2007
shall be registered at the close of business on the Record Date next preceding
such interest payment date, notwithstanding the cancellation of any such Bond
upon any transfer or exchange thereof subsequent to such Record Date and prior
to such interest payment date; provided, however, that, if and to the extent the
Company shall default in the payment of the interest due on such interest
payment date (other than an interest payment date that is a redemption date or
maturity date), such defaulted interest shall be paid to the respective persons
in whose names such outstanding Cleveland Electric Pledge Bonds due 2007 are
registered at the close of business on a date (the "Subsequent Record Date") not
less than ten days nor more than 15 days next preceding the date of payment of
such defaulted interest, such Subsequent Record Date to be established by the
Company by notice given by mail by or on behalf of the Company to the registered
owners of Cleveland Electric Pledge Bonds due 2007 not less than 10 days next
preceding such Subsequent Record Date. If any interest payment date should fall
on a day which is not a business day, then such interest payment date shall be
the next preceding business day.
The initial interest rate on the Secured Notes due 2007, and therefore on
the Cleveland Electric Pledge Bonds due 2007, is 7.13%. Under certain
circumstances specified in a Registration Agreement dated as of June 11, 1997
among the Company, Toledo Edison and the Purchasers (as defined therein) of the
Secured Notes, the interest rate on the Secured Notes due 2007, and therefore on
the Cleveland Electric Pledge Bonds due 2007, will increase temporarily to
7.63%.
The term "Record Date", with respect to any interest payment date,
redemption date or date of maturity of any Cleveland Electric Pledge Bond due
2007, shall have the same meaning as the term "Record Date" has with respect to
those events for the Notes due 2007.
SECTION 4. In the manner and subject to the limitations provided in the
Indenture, Cleveland Electric Pledge Bonds due 2007 may be transferred or may be
exchanged for a like aggregate principal amount of Bonds of such series of other
authorized denominations, in either case without charge, except for any tax or
taxes or other governmental
<PAGE> 33
28
charges incident to such transfer or exchange, at the agency of the Company in
the Borough of Manhattan, The City of New York.
In the event less than all of the Cleveland Electric Pledge Bonds due 2007
at the time outstanding are called for redemption, the Company shall not be
required (a) to register any transfer or make any exchange of any such bond for
a period of 15 days before the mailing of the notice of redemption of any such
bonds, (b) to register any transfer or make any exchange of any such bond so
called for redemption in its entirety or (c) to register any transfer or make
any exchange of any portion of any such bond so called for redemption.
Except as otherwise provided in Section 3 of this Article III with respect
to the payment of interest, the Company, the agencies of the Company and the
Trustee may deem and treat the person in whose name a Cleveland Electric Pledge
Bond due 2007 is registered as the absolute owner thereof for the purpose of
receiving any payment and for all other purposes.
SECTION 5. The Cleveland Electric Pledge Bonds due 2007 shall be redeemable
only to the extent provided in this Article III, subject to the provisions
contained in Article V of the Indenture and the form of Cleveland Electric
Pledge Bond due 2007.
SECTION 6. Subject to the applicable provisions of the Indenture, written
notice of redemption of Cleveland Electric Pledge Bonds due 2007 pursuant to
this Supplemental Indenture shall be given by the Trustee by mailing to each
registered owner of such Cleveland Electric Pledge Bonds due 2007 to be redeemed
a notice of such redemption, first class postage prepaid, at its last address as
it shall appear upon the books of the Company for the registration and transfer
of such Cleveland Electric Pledge Bonds due 2007. Any notice of redemption shall
be mailed at least 30 days, but no more than 60 days, prior to the redemption
date. In the event of partial redemption of Cleveland Electric Pledge Bonds due
2007, the Trustee shall select the Cleveland Electric Pledge Bonds due 2007 or
portions thereof to be redeemed, subject to the provisions of this Supplemental
Indenture, in such manner as the Trustee shall deem appropriate and fair.
SECTION 7. If and when any Notes due 2007 shall be purchased and
surrendered to the Note Trustee for cancellation pursuant to the Note Indenture,
or if and when the principal of any Notes due 2007 shall be paid pursuant to the
Note Indenture, then there shall be deemed to have been paid a principal amount
of the Cleveland Electric Pledge Bonds due 2007 then outstanding which bears the
same ratio to the aggregate principal amount of Cleveland Electric Pledge Bonds
due 2007 then outstanding as the principal amount of the Notes due 2007 so
purchased or paid bears to the aggregate principal amount of the
<PAGE> 34
29
Notes due 2007 outstanding immediately before such purchase or payment; provided
however, that such purchase or payment of Cleveland Electric Pledge Bonds due
2007 shall be deemed to have been made only when and to the extent that notice
of such purchase or payment of the principal amount of such Notes due 2007 shall
have been given by the Company to the Trustee. The Trustee may rely upon any
such notification by the Company that such purchase or payment of Notes due 2007
has been so made.
SECTION 8. The Cleveland Electric Pledge Bonds due 2007 shall be redeemed
by the Company in whole at any time prior to maturity at a redemption price of
100% of the principal amount to be redeemed, plus accrued and unpaid interest to
the redemption date, but only if the Trustee shall receive a written demand from
the Note Trustee for redemption of all Cleveland Electric Pledge Bonds due 2007
held by the Note Trustee stating that an "Event of Default" under the Note
Indenture has occurred and is continuing, that payment of the principal of the
Notes due 2007 has been accelerated and that the Note Trustee is waiving notice
of redemption; provided, however, that the Cleveland Electric Pledge Bonds due
2007 shall not be redeemed in the event that prior to such redemption (a) the
Trustee shall have received a certificate of the Note Trustee (i) stating that
there has been a waiver of such Event of Default and a rescission and annulment
of such acceleration or (ii) withdrawing said written demand or (b) an event of
default under Section 6.01 of Article VI of the Indenture shall have occurred
and be continuing, and there has been a declaration of acceleration of the
principal of the Cleveland Electric Pledge Bonds due 2007. The redemption of the
Cleveland Electric Pledge Bonds due 2007 pursuant to this Section shall be made
not more than 60 days after receipt of the written demand.
SECTION 9. Any payment of interest on the Notes due 2007 shall be deemed to
constitute payment of interest on the Cleveland Electric Pledge Bonds due 2007
in an amount equal to the amount of interest paid on the Notes due 2007
multiplied by the Cleveland Electric 2007 Ratio; provided, however, that such
payment of interest shall be deemed to have been made only when and to the
extent that notice of such payment of interest on such Notes due 2007 shall have
been given by the Company to the Trustee. The Trustee may rely upon any such
notification by the Company that such payment of interest has been so made.
SECTION 10. Any Cleveland Electric Pledge Bonds due 2007 at any time
purchased or otherwise acquired by the Company shall be surrendered to the
Trustee for cancellation and the Trustee shall forthwith cancel the same.
<PAGE> 35
30
SECTION 11. All Cleveland Electric Pledge Bonds due 2007 deemed to have
been redeemed or paid in full as provided in Section 7 of this Article IV shall
be surrendered to the Trustee for cancellation and the Trustee shall forthwith
cancel the same. In the event that part of a Cleveland Electric Pledge Bond due
2007 shall be deemed to have been redeemed or paid as provided in said Section
7, the registered owner may, at its option, surrender such bond to the Trustee
for cancellation, in which event the Trustee shall cancel such bond and the
Company shall execute and the Trustee shall authenticate and deliver to the
registered owner one or more new fully registered Cleveland Electric Pledge
Bonds due 2007 in such authorized denominations as shall be specified by the
registered owner in an aggregate principal amount equal to the unpaid balance of
the principal amount of such surrendered Bond.
SECTION 12. Cleveland Electric Pledge Bonds due 2007 shall not be
transferable unless the registered owner shall have first surrendered the same
to the Trustee for notation thereon of all payments of principal deemed to have
been made thereon under Section 7 of this Article IV or for cancellation and
execution, authentication and delivery of Cleveland Electric Pledge Bonds due
2007 in an aggregate principal amount equal to the unpaid balance of the
principal amount of such surrendered Cleveland Electric Pledge Bonds due 2007
under Section 11 of this Article IV.
SECTION 13. The aggregate principal amount of Cleveland Electric Pledge
Bonds due 2007 which may be authenticated and delivered hereunder shall not
exceed $120 million, except as otherwise provided in the Indenture.
SECTION 14. The form of the fully registered Cleveland Electric Pledge
Bonds due 2007, and of the Trustee's certificate of authentication thereon,
shall be substantially as follows:
[FORM OF FULLY REGISTERED BOND OF 2007 SERIES]
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
Incorporated under the laws of the State of Ohio
FIRST MORTGAGE BOND, SERIES DUE 2007
Due July 1, 2007
No. $
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY, a corporation organized and
existing under the laws of the State of Ohio (hereinafter called the "Company",
which term shall include any successor corporation as defined in the Indenture
hereinafter referred to), for value received, hereby promises to pay to
<PAGE> 36
31
, or registered assigns,
the sum of Dollars ($ ) or the
aggregate unpaid principal amount hereof (as shown on the Schedule of Payments
hereon), whichever is less, on July 1, 2007, in any coin or currency of the
United States of America which at the time of payment is legal tender for the
payment of public and private debts, and to pay interest on the unpaid principal
amount hereof in like coin or currency from the time hereinafter provided, at
such rate per annum as shall cause the amount of interest payable hereon to
equal the amount of interest payable on the same proportion of the Notes due
2007 (hereinafter defined) then outstanding as this Cleveland Electric Pledge
Bond due 2007 is to the aggregate principal amount of (i) the Cleveland Electric
Pledge Bonds due 2007 then outstanding and (ii) the Toledo Edison Pledge Bonds
due 2007 issued pursuant to the Forty-sixth Supplemental Indenture to an
Indenture of Mortgage and Deed of Trust dated as of April 1, 1947 by and between
The Toledo Edison Company and The Chase Manhattan Bank as Trustee ("Toledo
Edison Pledge Bonds due 2007") then outstanding. The ratio of the Cleveland
Electric Pledge Bonds due 2007 outstanding at any time to the aggregate
principal amount of the Cleveland Electric Pledge Bonds due 2007 then
outstanding and Toledo Edison Pledge Bonds due 2007 then outstanding is
hereinafter referred to as the "Cleveland Electric 2007 Ratio." The interest on
the Cleveland Electric Pledge Bonds due 2007 is payable on January 1 and July 1
in each year starting on July 1, 1997 (each such date herein called an "interest
payment date"), and on and until the date of maturity of this Bond, or, if this
Bond shall be duly called for redemption, on and until the redemption date, or,
if the Company shall default in the payment of the principal amount of this
Bond, until the Company's obligation with respect to the payment of such
principal shall be discharged as provided in said Indenture. Except as
hereinafter provided, this Bond shall bear interest from the date of initial
authentication of this Bond or the most recent date to which interest has been
paid or duly provided for until the principal of this Bond has been paid or duly
provided for. Subject to certain exceptions provided in said Indenture, the
interest payable on any interest payment date shall be paid to the person in
whose name this Bond shall be registered at the close of business on the Record
Date or, in the case of defaulted interest, on a day preceding the date of
payment thereof established by notice to the registered owner of this Bond in
the manner provided in the Supplemental Indenture (hereinafter defined).
Principal of and interest on this Bond are payable at the agency of the Company
in the Borough of Manhattan, The City of New York, or, at the option of the
registered owner, at the agency of the Company in the City of Cleveland, State
of Ohio.
<PAGE> 37
32
This Bond is one of the duly authorized Bonds of the Company (herein called
the "Bonds"), all issued and to be issued under and equally secured by a
Mortgage and Deed of Trust dated July 1, 1940, executed by the Company to
Guaranty Trust Company of New York (subsequently Morgan Guaranty Trust Company
of New York and then The Chase Manhattan Bank (National Association)), now
succeeded by The Chase Manhattan Bank as Trustee (herein called the "Trustee"),
and all indentures supplemental thereto (said Mortgage as so supplemented herein
called the "Indenture") to which reference is hereby made for a description of
the properties mortgaged and pledged, the nature and extent of the security, the
rights of the registered owner or owners of the Bonds and of the Trustee in
respect thereof, and the terms and conditions upon which the Bonds are, and are
to be, secured. The Bonds may be issued in series, for various principal sums,
may mature at different times, may bear interest at different rates and may
otherwise vary as in the Indenture provided. This Bond is one of a series
designated as the First Mortgage Bonds, Series due 2007 (herein called the
"Cleveland Electric Pledge Bonds due 2007") limited, except as otherwise
provided in the Indenture, in aggregate principal amount to $120 million, issued
under and secured by the Indenture and described in the Seventy-Fourth
Supplemental Indenture dated June 15, 1997, between the Company and the Trustee
(herein called the "Supplemental Indenture").
The Cleveland Electric Pledge Bonds due 2007 have been delivered by the
Company to The Chase Manhattan Bank, as trustee (hereinafter called the "Note
Trustee"), pursuant to a Note Indenture, dated as of June 13, 1997, among the
Company, The Toledo Edison Company and the Note Trustee, under which the Note
Trustee holds the Cleveland Electric Pledge Bonds due 2007, together with the
Toledo Edison Pledge Bonds due 2007, as a portion of the security for the
payment of principal of and interest on the Secured Notes issued under the Note
Indenture.
If and when any Secured Notes due 2007 issued under the Note Indenture
(herein called the "Notes due 2007") are purchased and surrendered to the Note
Trustee for cancellation pursuant to the Note Indenture or the principal of any
Notes due 2007 is paid pursuant to the Note Indenture, then there shall be
deemed to be paid a principal amount of the Cleveland Electric Pledge Bonds due
2007 then outstanding which bears the same ratio to the aggregate principal
amount of Cleveland Electric Pledge Bonds due 2007 outstanding immediately
before such purchase or payment as the principal amount of the Notes due 2007 so
purchased or paid bears to the aggregate principal amount of the Notes due 2007
outstanding immediately before such purchase or payment; provided, however, that
such purchase or payment of Cleveland Electric Pledge Bonds due 2007 is deemed
to be made only
<PAGE> 38
33
when and to the extent that notice of such purchase or payment of such Notes due
2007 is given by the Company to the Trustee.
Any payment of interest on the Notes due 2007 shall be deemed to constitute
payment of interest on the Cleveland Electric Pledge Bonds due 2007 in an amount
equal to the amount of interest paid on the Notes due 2007 multiplied by the
Cleveland Electric 2007 Ratio; provided, however, that such payment of interest
is deemed to be made only when and to the extent that notice of such payment of
interest on such Notes due 2007 is given by the Company to the Trustee.
In the event that this Bond is deemed to be paid or redeemed in full, this
Bond shall be surrendered to the Trustee for cancellation. In the event that
this Bond is deemed to be paid or redeemed in part, this Bond may, at the option
of the registered owner, be surrendered to the Trustee for cancellation, in
which event the Trustee will cancel this Bond and the Company will execute and
the Trustee will authenticate and deliver to the registered owner Cleveland
Electric Pledge Bonds due 2007 in authorized denominations in aggregate
principal amount equal to the unpaid balance of the principal amount of this
Bond.
The Cleveland Electric Pledge Bonds due 2007 shall be redeemed by the
Company prior to maturity in whole at any time as provided in Section 8 of
Article IV of the Supplemental Indenture at a redemption price of 100% of the
principal amount to be redeemed, plus accrued and unpaid interest to the
redemption date.
In the Forty-Third Supplemental Indenture dated April 15, 1985 between the
Company and the Trustee, the Company has modified, in certain respects, the
redemption provisions in the Indenture effective only with respect to the Bonds
of all series established or created in said Forty-Third Supplemental Indenture
and all supplemental indentures dated after May 28, 1985.
To the extent permitted by and as provided in the Indenture, modifications
or alterations of the Indenture, or of any indenture supplemental thereto, and
of the rights and obligations of the Company and of the holders of the Bonds and
coupons may be made with the consent of the Company by an affirmative vote of
not less than 80% in principal amount of the Bonds entitled to vote then
outstanding, at a meeting of Bondholders called and held as provided in the
Indenture, and, in case one or more but less than all of the series of Bonds
then outstanding under the Indenture are so affected, by an affirmative vote of
not less than 80% in principal amount of the Bonds of any series entitled to
vote then outstanding and affected by such modification or alteration; provided,
however, that no such modification or alteration shall be made which will affect
the terms of payment of the principal
<PAGE> 39
34
of or interest on this Bond. In the Nineteenth Supplemental Indenture dated
November 23, 1976 between the Company and the Trustee, the Company has modified
the Indenture effective from and after the time when none of the Bonds of any
series established prior to the execution of the Nineteenth Supplemental
Indenture shall remain outstanding so as to change "80%" in the foregoing
sentence to "60%" and to make certain other modifications of the Indenture and
has reserved the right to make certain other modifications of the Indenture
without any vote, consent or other action by the holders of Bonds of any series
established in the Nineteenth Supplemental Indenture or in any subsequent
supplemental indenture.
If an event of default, as defined in the Indenture, shall occur, the
principal of all the Bonds at any such time outstanding under the Indenture may
be declared or may become due and payable, upon the conditions and in the manner
and with the effect provided in the Indenture. The Indenture provides that such
declaration may in certain events be waived by the holders of a majority in
principal amount of the Bonds outstanding.
Subject to the limitations provided in the Indenture and the Note
Indenture, this Bond is transferable by the registered owner hereof, in person
or by duly authorized attorney, on the books of the Company to be kept for that
purpose at the agency of the Company in the Borough of Manhattan, The City of
New York, upon surrender and cancellation of this Bond, and upon presentation of
a duly executed written instrument of transfer, and thereupon a new fully
registered bond or bonds of the same series, of the same aggregate principal
amount and in authorized denominations will be issued to the transferee or
transferees in exchange herefor; and this Bond, with or without others of the
same series, may in like manner be exchanged for one or more new fully
registered Cleveland Electric Pledge Bonds due 2007 of other authorized
denominations but of the same aggregate principal amount; all without charge
except for any tax or taxes or other governmental charges incidental to such
transfer or exchange and all subject to the terms and conditions set forth in
the Indenture. In the event less than all of the Cleveland Electric Pledge Bonds
due 2007 at the time outstanding are called for redemption, the Company shall
not be required (a) to register any transfer or make any exchange of any such
Bond for a period of 15 days before the mailing of the notice of redemption of
any such Bonds, (b) to register any transfer or make any exchange of any such
Bond called for redemption in its entirety, or (c) to register any transfer or
make any exchange of any portion of any such Bond which has been called for
redemption. Except as otherwise provided herein with respect to the payment of
interest, the Company, the agencies of the Company and the Trustee may deem and
treat the person in whose name this Bond is registered as the absolute
<PAGE> 40
35
owner hereof for the purpose of receiving any payment and for all other
purposes.
No recourse shall be had for the payment of the principal of or the
interest on this Bond, or for any claim based hereon or on the Indenture or any
indenture supplemental thereto, against any incorporator, or against any
stockholder, director or officer, past, present or future, of the Company, or of
any predecessor or successor corporation, as such, either directly or through
the Company or any such predecessor or successor corporation, whether by virtue
of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability, whether at common law,
in equity, by any constitution or statute or otherwise, of incorporators,
stockholders, directors or officers being released by every owner hereof by the
acceptance of this Bond and as part of the consideration for the issue hereof,
and being likewise released by the terms of the Indenture.
This Bond shall not be entitled to any benefit under the Indenture or any
indenture supplemental thereto, or become valid or obligatory for any purpose,
until the Trustee under the Indenture, or a successor trustee thereto under the
Indenture, shall have signed the form of certificate of authentication endorsed
hereon.
<PAGE> 41
36
IN WITNESS WHEREOF, The Cleveland Electric Illuminating Company has caused
this Bond to be signed in its name by its President or a Vice President (whose
signature may be manual or a facsimile thereof) and its corporate seal (or a
facsimile thereof) to be hereto affixed and attested by its Secretary or an
Assistant Secretary (whose signature may be manual or a facsimile thereof).
Dated:
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
By ....................................................
Attest:
.............................
Secretary
[FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
This Bond is one of the Bonds of the series designated and described in the
within-mentioned Indenture and Supplemental Indenture.
THE CHASE MANHATTAN BANK,
TRUSTEE
By ...........................................
AUTHORIZED OFFICER
<PAGE> 42
37
[FORM OF SCHEDULE OF PAYMENTS]
SCHEDULE OF PAYMENTS
<TABLE>
<CAPTION>
AGENCY
OF THE
UNPAID COMPANY
PRINCIPAL PRINCIPAL PREMIUM INTEREST MAKING AUTHORIZED
DATE PAYMENT AMOUNT PAYMENT PAYMENT NOTATION OFFICER TITLE
- --------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
[END OF FORM OF FULLY REGISTERED BOND]
ARTICLE V
THE TRUSTEE
SECTION 1. The Trustee hereby accepts the trusts hereby declared and
provided upon the terms and conditions in the Indenture set forth and upon the
terms and conditions set forth in this Article V.
SECTION 2. The Trustee shall not be responsible in any manner whatsoever
for or in respect of the validity or sufficiency of this Supplemental Indenture
or the due execution hereof by the Company or for or in respect of the recitals
contained herein, all of which recitals are made by the Company solely. In
general, each and every term and condition contained in Article XIII of the
Indenture shall apply to this Supplemental Indenture with the same force and
effect as if the same were herein set forth in full, with such omissions,
variations and modifications thereof as may be appropriate.
SECTION 3. For purposes of this Supplemental Indenture (a) the Trustee may
conclusively rely and shall be protected in acting upon the written demand from,
or certificate of, any agency duly appointed by resolution of the Board of
Directors of the Company or any officers' certificate or opinion of counsel, as
to the truth of the statements and the correctness of the opinions expressed
therein, without independent investigation or verification thereof, subject to
Article XIII of the Indenture and (b) a written demand from, or certificate of,
an agency of the Company shall mean a written demand or certificate executed by
the president, any vice president or any trust officer of, or any other person
authorized to act for, such agency, as such.
SECTION 4. The Company shall cause any agency of the Company, other than
the Trustee, which it may appoint from time to time to act as such agency in
respect of the Cleveland Electric Pledge Bonds, to execute and deliver to the
Trustee an instrument in which such agency shall:
<PAGE> 43
38
(a) Agree to keep and maintain, and furnish to the Trustee from time
to time as reasonably requested by the Trustee, appropriate records of all
transactions carried out by it as such agency and to furnish the Trustee
such other information and reports as the Trustee may reasonably require;
(b) Certify that it is eligible for appointment as such agency and
agree to notify the Trustee promptly if it shall cease to be so eligible;
and
(c) Agree to indemnify the Trustee, in a manner satisfactory to the
Trustee, against any loss, liability or expense incurred by, and defend any
claim asserted against, the Trustee by reason of any acts or failures to
act as such agency, except for any liability resulting from any action
taken by it at the specific direction of the Trustee;
provided, however, that the Company, in lieu of causing any such agency to
furnish such an instrument, may make such other arrangements with the Trustee in
respect of any such agency as shall be satisfactory to the Trustee.
SECTION 5. The Trustee shall advise the Company in writing of the receipt
of any notification provided for in or any cancellation made pursuant to
Sections 7, 8, 9, 10 and 11 of Articles II, III and IV of this Supplemental
Indenture.
SECTION 6. For purposes of the Original Indenture, the Supplemental
Indenture and the Cleveland Electric Pledge Bonds, the Trustee is permitted to
assume for all purposes that the rates of interest on the Cleveland Electric
Pledge Bonds are the applicable initial interest rates expressed in this
Supplemental Indenture until such time as the Company shall deliver an Officers'
Certificate stating a change in the interest rates and the dates from which such
rates shall be effective. Upon receipt of such an Officers' Certificate, the
Trustee is permitted to assume for all purposes that the rates of interest on
the Cleveland Electric Pledge Bonds are as set forth in such Officers'
Certificate until such time as such Officers' Certificate shall be superseded by
a subsequent Officers' Certificate delivered pursuant to this Section 6, in
which case, the Trustee is permitted to assume for all purposes that the rates
of interest on the Cleveland Electric Pledge Bonds are those set forth in the
most current Officers' Certificate delivered pursuant to this Section 6. Absent
the receipt by it of an Officers' Certificate specifying a change in interest
rates pursuant to this Supplemental Indenture and the Cleveland Electric Pledge
Bonds, the Trustee shall not be charged with having had knowledge of such change
in rates of interest regardless of any notice it may receive or knowledge it may
have in its capacity as Note Trustee.
<PAGE> 44
39
ARTICLE VI
MISCELLANEOUS PROVISIONS
This Supplemental Indenture may be executed in any number of counterparts,
each of which when so executed shall be deemed to be an original; but such
counterparts shall together constitute but one and the same instrument.
EXECUTION
IN WITNESS WHEREOF, said The Cleveland Electric Illuminating Company has
caused this Supplemental Indenture to be executed on its behalf by its President
or one of its Vice Presidents and its corporate seal to be hereto affixed and
said seal and this Supplemental Indenture to be attested by its Secretary or an
Assistant Secretary, and said The Chase Manhattan Bank, in evidence of its
acceptance of the trust hereby created, has caused this Supplemental Indenture
to be executed on its behalf by one of its Vice Presidents or one of its
Corporate Trust Officers, and its corporate seal to be hereto affixed and said
seal and this Supplemental Indenture to be attested by one of its Assistant
Secretaries, all as of the day and year first above written.
<PAGE> 45
R-1
This page contains information as to recording and filing which was not set
forth in this Supplemental Indenture at the time of execution. This page is not
a part of this Supplemental Indenture.
RECORDING AND FILING DATA
This Supplemental Indenture was filed for record and recorded in the record
of mortgages in the offices of the Recorders of the following Counties:
<TABLE>
<CAPTION>
COUNTY VOLUME PAGE FILED FOR RECORD
- ------------------------------- --------------- -------------------------
<S> <C> <C> <C>
Ohio
Ashtabula
Cuyahoga
Geauga
Lake
Lorain
Ottawa
Portage June 17, 1997
Stark
Summit
Trumbull
Pennsylvania
Warren
Beaver
</TABLE>
This Supplemental Indenture was filed for record and recorded in the
Registered Land Department of the offices of the Recorders of the following
Counties in the State of Ohio
<TABLE>
<CAPTION>
FILED FOR
COUNTY DOCUMENT NUMBER RECORD
- ------------------------------- ---------------
<S> <C> <C>
Cuyahoga
Lake June 17, 1997
</TABLE>
An amendment to a previously filed financing statement and a counterpart of
this Supplemental Indenture were filed in the office of the Secretary of the
Commonwealth of Pennsylvania on June 17, 1997 under original file number
13451763, microfilm number 18111533, to comply with the filing requirements of
the Pennsylvania enactment of the Uniform Commercial Code.
<PAGE> 1
Exhibit 4(b)
================================================================================
THE TOLEDO EDISON COMPANY
TO
THE CHASE MANHATTAN BANK
as Trustee.
------------------------
FORTY-SIXTH SUPPLEMENTAL INDENTURE
DATED AS OF JUNE 15, 1997
(Supplemental to Indenture dated as of April 1, 1947)
FIRST MORTGAGE BONDS, SERIES DUE 2000
FIRST MORTGAGE BONDS, SERIES DUE 2004
FIRST MORTGAGE BONDS, SERIES DUE 2007
================================================================================
<PAGE> 2
i
THE TOLEDO EDISON COMPANY
FORTY-SIXTH SUPPLEMENTAL INDENTURE
DATED AS OF JUNE 15, 1997
TABLE OF CONTENTS*
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PARTIES..................................................... 1
RECITALS.................................................... 1
GRANTING CLAUSES............................................ 3
ARTICLE I -- CREATION, PROVISIONS, REDEMPTION, PRINCIPAL
AMOUNT AND FORM OF BONDS OF 2000 SERIES........ 4
Section 1 -- Creation and designation of Bonds and
compliance with Indenture................. 4
Section 2 -- Registered Bonds and denominations........ 4
Section 3 -- Date of Bonds, maturity date, interest
rate, accrual date, payment dates, Record
Date and place of payments................ 4
Section 4 -- Transfer and exchange of Bonds............ 6
Section 5 -- Redemption of Bonds....................... 6
Section 6 -- Notice of redemption...................... 6
Section 7 -- Purchase, prepayment or payment of
principal of Notes deemed to be
corresponding payment of Bonds............ 7
Section 8 -- Redemption of Bonds in an "Event of
Default" under the Note Indenture......... 7
Section 9 -- Payment of interest or premium on Notes
deemed to be corresponding payment on
Bonds..................................... 8
Section 10 -- Surrender of Bonds purchased or otherwise
acquired................................. 8
Section 11 -- Surrender of Bonds in the event of
payment in full or partial payment
thereof and issuance of new Bonds for the
unpaid balance........................... 8
</TABLE>
- ---------------
*The Table of Contents, the page headings and the recording data are not
part of the Forty-sixth Supplemental Indenture as executed.
<PAGE> 3
ii
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Section 12 -- Notation of payments on Bonds before
transfer................................. 8
Section 13 -- Principal amount of Bonds which may be
authenticated and delivered.............. 8
Section 14 -- Form of Fully Registered Pledge Bonds.... 9
Form of Trustee's Certificate of
Authentication....................... 14
ARTICLE II -- CREATION, PROVISIONS, REDEMPTION, PRINCIPAL
AMOUNT AND FORM OF BONDS OF 2004 SERIES....... 14
Section 1 -- Creation and designation of Bonds and
compliance with Indenture................. 14
Section 2 -- Registered Bonds and denominations........ 14
Section 3 -- Date of Bonds, maturity date, interest
rate, accrual date, payment dates, Record
Date and place of payments................ 14
Section 4 -- Transfer and exchange of Bonds............ 16
Section 5 -- Redemption of Bonds....................... 17
Section 6 -- Notice of redemption...................... 17
Section 7 -- Purchase, prepayment or payment of
principal of Notes deemed to be
corresponding payment of Bonds............ 17
Section 8 -- Redemption of Bonds in an "Event of
Default" under the Note Indenture......... 17
Section 9 -- Payment of interest or premium on Notes
deemed to be corresponding payment on
Bonds..................................... 18
Section 10 -- Surrender of Bonds purchased or otherwise
acquired................................. 18
Section 11 -- Surrender of Bonds in the event of
payment in full or partial payment
thereof and issuance of new Bonds for the
unpaid balance........................... 18
Section 12 -- Notation of payments on Bonds before
transfer................................. 19
Section 13 -- Principal amount of Bonds which may be
authenticated and delivered.............. 19
</TABLE>
<PAGE> 4
iii
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Section 14 -- Form of Fully Registered Pledge Bonds.... 19
Form of Trustee's Certificate of
Authentication....................... 24
ARTICLE III -- CREATION, PROVISIONS, REDEMPTION, PRINCIPAL
AMOUNT AND FORM OF BONDS OF 2007 SERIES...... 25
Section 1 -- Creation and designation of Bonds and
compliance with Indenture................. 25
Section 2 -- Registered Bonds and denominations........ 25
Section 3 -- Date of Bonds, maturity date, interest
rate, accrual date, payment dates, Record
Date and place of payments................ 25
Section 4 -- Transfer and exchange of Bonds............ 27
Section 5 -- Redemption of Bonds....................... 27
Section 6 -- Notice of redemption...................... 27
Section 7 -- Purchase, prepayment or payment of
principal of Notes deemed to be
corresponding payment of Bonds............ 28
Section 8 -- Redemption of Bonds in an "Event of
Default" under the Note Indenture......... 28
Section 9 -- Payment of interest or premium on Notes
deemed to be corresponding payment on
Bonds..................................... 29
Section 10 -- Surrender of Bonds purchased or otherwise
acquired................................. 29
Section 11 -- Surrender of Bonds in the event of
payment in full or partial payment
thereof and issuance of new Bonds for the
unpaid balance........................... 29
Section 12 -- Notation of payments on Bonds before
transfer................................. 29
Section 13 -- Principal amount of Bonds which may be
authenticated and delivered.............. 30
Section 14 -- Form of Fully Registered Pledge Bonds.... 30
Form of Trustee's Certificate of
Authentication........................... 35
</TABLE>
<PAGE> 5
iv
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
ARTICLE IV -- THE TRUSTEE................................... 36
Section 1 -- Acceptance by Trustee..................... 36
Section 2 -- Agency of the Company other than the
Trustee................................... 36
Section 3 -- Certain advices to the Company............ 37
Section 4 -- Certificates regarding interest rates..... 37
ARTICLE V -- MISCELLANEOUS PROVISIONS....................... 37
TESTIMONIUM CLAUSE.......................................... 37
EXECUTION................................................... 38
COMPANY'S ACKNOWLEDGMENT.................................... S-1
TRUSTEE'S ACKNOWLEDGMENT.................................... S-2
RECORDING AND FILING DATA................................... R-1
</TABLE>
<PAGE> 6
FORTY-SIXTH SUPPLEMENTAL INDENTURE, dated as of June 15, 1997, made by and
between THE TOLEDO EDISON COMPANY, a corporation organized and existing under
the laws of the State of Ohio (hereinafter called the "Company"), and THE CHASE
MANHATTAN BANK, a corporation organized and existing under the laws of the State
of New York (the "Trustee"), as Trustee.
RECITALS
The Company has heretofore executed and delivered an Indenture of Mortgage
and Deed of Trust dated as of April 1, 1947 (the "Original Indenture") to The
Chase National Bank of the City of New York, predecessor Trustee, to secure an
issue of First Mortgage Bonds of the Company, issuable in series, and created
thereunder an initial series of bonds designated as First Mortgage Bonds, 2 7/8%
Series due 1977, being the initial series of bonds issued under the Original
Indenture; and
The Company has heretofore executed and delivered to The Chase National
Bank of the City of New York, predecessor Trustee, four Supplemental Indentures
supplementing the Original Indenture dated, respectively, September 1, 1948,
April 1, 1949, December 1, 1950 and March 1, 1954 and has heretofore executed
and delivered to The Chase Manhattan Bank, which on March 31, 1955, became the
Trustee under the Original Indenture by virtue of the merger of The Chase
National Bank of the City of New York into President and Directors of The
Manhattan Company under the name of The Chase Manhattan Bank, the Fifth and the
Sixth Supplemental Indentures dated, respectively, February 1, 1956, and May 1,
1958, supplementing the Original Indenture; and
The Chase Manhattan Bank was converted into a national banking association
under the name The Chase Manhattan Bank (National Association), effective
September 23, 1965; and by virtue of said conversion the continuity of the
business of Chase Manhattan Bank, including its business of acting as corporate
trustee, and its corporate existence, were not affected, so that Chase Manhattan
Bank is vested with all the trusts, powers, discretion, immunities, privileges
and all other matters as were vested in said Chase Manhattan Bank under the
Indenture, with like effect as if originally named as Trustee therein; and
The Company has heretofore executed and delivered to The Chase Manhattan
Bank (National Association), predecessor Trustee, 38 Supplemental Indentures
dated, respectively, as follows: Seventh, August 1, 1967, Eighth, November 1,
1970, Ninth, August 1, 1972, Tenth, November 1, 1973, Eleventh, July 1, 1974,
Twelfth, October 1, 1975, Thirteenth, June 1, 1976, Fourteenth, October 1, 1978,
Fifteenth,
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September 1, 1979, Sixteenth, September 1, 1980, Seventeenth, October 1, 1980,
Eighteenth, April 1, 1981, Nineteenth, November 1, 1981, Twentieth, June 1,
1982, Twenty-first, September 1, 1982, Twenty-second, April 1, 1983,
Twenty-third, December 1, 1983, Twenty-fourth, April 1, 1984, Twenty-fifth,
October 15, 1984, Twenty-sixth, October 15, 1984, Twenty-seventh, August 1,
1985, Twenty-eighth, August 1, 1985, Twenty-ninth, December 1, 1985, Thirtieth,
March 1, 1986, Thirty-first, October 15, 1987, Thirty-second, September 15,
1988, Thirty-third, June 15, 1989, Thirty-fourth, October 15, 1989,
Thirty-fifth, May 15, 1990, Thirty-sixth, March 1, 1991, Thirty-seventh, May 1,
1992, Thirty-eighth, August 1, 1992, Thirty-ninth, October 1, 1992, Fortieth,
January 1, 1993, Forty-first, September 15, 1994, Forty-second, May 1, 1995,
Forty-third, June 1, 1995, Forty-fourth, July 14, 1995 and Forty-fifth, July 15,
1995 supplementing the Original Indenture; and
The Chase Manhattan Bank (National Association), Successor Trustee, was
merged on July 1, 1996, with and into Chemical Bank, a New York banking
corporation, which changed its name to The Chase Manhattan Bank, and which
became the Trustee under the Original Indenture by virtue of such merger; and
The Company is executing and delivering to The Chase Manhattan Bank,
Trustee, this Forty-sixth Supplemental Indenture, dated June , 1997,
supplementing the Original Indenture (The Original Indenture, all the
aforementioned Supplemental Indentures, this Forty-sixth Supplemental Indenture
and any other indentures supplemental to the Original Indenture are herein
collectively called the "Indenture" and this Forty-sixth Supplemental Indenture
is hereinafter called "this Supplemental Indenture"); and
Pursuant to the provisions of the Indenture, the Company has issued 52
series of bonds in the aggregate principal amount of $2,327,400,000, of which 29
series (including the Bonds of the 1977 Series issued pursuant to the Original
Indenture) in the aggregate principal amount of $1,145,800,000 are no longer
outstanding and of which additional portions, aggregating $64,375,000 in
principal amount, of 5 other series have been retired; and
The Company covenanted in and by the Original Indenture to execute and
deliver such further instruments and do such further acts as may be necessary or
proper to carry out more effectually the purposes of the Original Indenture and
to make subject to the lien thereof property acquired after the execution and
delivery of the Original Indenture; and
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3
Under Article 3 of the Original Indenture, the Company is authorized to
issue additional bonds upon the terms and conditions expressed in the Original
Indenture; and
The Company has determined to create pursuant to the provisions of the
Indenture three new series of first mortgage bonds (collectively, the "Toledo
Edison Pledge Bonds"), to be pledged as security for the payment of principal of
and interest on certain notes (as hereinafter defined), with such Toledo Edison
Pledge Bonds to have the denominations, rate of interest, date of maturity,
redemption provisions and other provisions and agreements in respect thereof as
in this Supplemental Indenture set forth; and
The Toledo Edison Pledge Bonds are to be limited in aggregate principal
amount to $145 million are to be delivered to The Chase Manhattan Bank, as Note
Trustee (hereinafter called the "Note Trustee"), pursuant to an Indenture dated
as of June 13, 1997, among the Company, The Cleveland Electric Illuminating
Company and the Note Trustee, as amended and supplemented from time to time
(hereinafter called the "Note Indenture") under which the Note Trustee will hold
the Toledo Edison Pledge Bonds, together with bonds issued by The Cleveland
Electric Illuminating Company under the Seventy-Fourth Supplemental Indenture to
a Mortgage and Deed of Trust dated July 1, 1940 by and between The Cleveland
Electric Illuminating Company and The Chase Manhattan Bank as Trustee (the
"Cleveland Electric Supplement," and those bonds, the "Cleveland Electric Pledge
Bonds"), as security for the payment of principal and interest on three new
series of notes to be issued in a private placement and three new series of
notes that may be exchanged therefor pursuant to a registered exchange offer
(hereinafter collectively called the "Notes"); and
The Company, by appropriate corporate action, has duly resolved and
determined to execute this Supplemental Indenture for the purpose of providing
for the creation of the Toledo Edison Pledge Bonds and of specifying the form,
provisions and particulars thereof as in said Original Indenture, as amended,
provided or permitted, including the issuance only of fully registered Toledo
Edison Pledge Bonds, and of giving to the Toledo Edison Pledge Bonds the
protection and security of the Indenture; and
All conditions and requirements necessary to make this Supplemental
Indenture a valid, legal and binding instrument in accordance with its terms and
to make the Toledo Edison Pledge Bonds, when duly executed by the Company and
authenticated and delivered by the Trustee, and duly issued, the valid, binding
and legal obligations of the Company, have been done and performed, and the
execution and delivery of this Supplemental Indenture have been in all respects
duly authorized;
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NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: That The Toledo
Edison Company, the Company herein named, in consideration of the premises and
of One Dollar ($1.00) to it duly paid by the Trustee at or before the ensealing
and delivery of these presents, the receipt whereof is hereby acknowledged, does
hereby covenant and agree to and with the Trustee and its successors in the
trust under the Indenture, for the benefit of those who shall hold the bonds to
be issued hereunder and thereunder, as hereinafter provided, as follows:
ARTICLE I
CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT
AND FORM OF BONDS OF 2000 SERIES
SECTION 1. The Company hereby creates a new series of Bonds to be issued
under and secured by the Indenture and to be designated as "First Mortgage
Bonds, Series due 2000" of the Company and hereinabove and hereinafter called
the "Toledo Edison Pledge Bonds due 2000". The Toledo Edison Pledge Bonds due
2000 shall be executed, authenticated and delivered in accordance with the
provisions of, and shall in all respects be subject to, all of the terms,
conditions and covenants of the Indenture.
SECTION 2. The Toledo Edison Pledge Bonds due 2000 shall be issued as fully
registered Bonds only, without coupons, in the denominations of $1,000 or any
multiple thereof.
SECTION 3. The Toledo Edison Pledge Bonds due 2000 shall be dated the date
of authentication, shall mature July 1, 2000, and shall bear interest from the
time hereinafter provided at such rate per annum as shall cause the amount of
interest payable on such Toledo Edison Pledge Bonds due 2000 then outstanding to
equal the amount of interest payable on the same proportion of the Notes due
2000 (as defined below) then outstanding as those Toledo Edison Pledge Bonds due
2000 are to the aggregate principal amount of (i) the Toledo Edison Pledge Bonds
due 2000 then outstanding and (ii) the Cleveland Electric Pledge Bonds due 2000
issued pursuant to (and as defined in) the Cleveland Electric Supplement (the
"Cleveland Electric Pledge Bonds due 2000") then outstanding. The ratio of the
Toledo Edison Pledge Bonds due 2000 outstanding at any time to the aggregate
principal amount of the Cleveland Electric Pledge Bonds due 2000 then
outstanding and the Toledo Edison Pledge Bonds due 2000 then outstanding is
hereinafter referred to as the "Toledo Edison 2000 Ratio." The interest on the
Toledo Edison Pledge Bonds due 2000 is payable on January 1 and July 1 in each
year starting on July 1, 1997 (each such date hereinafter called an "interest
payment date") on and until maturity, or, in the case of any such Toledo Edison
Pledge Bonds due
<PAGE> 10
5
2000 duly called for redemption, on and until the redemption date, or in the
case of any default by the Company in the payment of the principal due on any
such Toledo Edison Pledge Bonds due 2000, until the Company's obligation with
respect to the payment of the principal shall be discharged as provided in the
Indenture. The amount of interest payable on the Toledo Edison Pledge Bonds due
2000 on any interest payment date, on the date of maturity and on any redemption
date shall be computed on the same basis as the basis on which such interest is
computed on the Secured Notes due 2000 provided for in the Note Indenture, which
shall include the notes initially issued and any notes exchanged therefor
pursuant to the terms of the Note Indenture (either or both of such series of
notes, the "Notes due 2000").
The Toledo Edison Pledge Bonds due 2000 shall be payable as to principal
and interest at the agency of the Company in the Borough of Manhattan, The City
of New York, or, at the option of the registered owner, at the agency of the
Company in the City of Toledo, State of Ohio, in any coin or currency of the
United States of America which at the time of payment is legal tender for the
payment of public and private debts.
Except as hereinafter provided, each Toledo Edison Pledge Bond due 2000
shall bear interest from the later of the date of initial authentication of the
Toledo Edison Pledge Bonds due 2000 or the most recent date to which interest
has been paid or duly provided for until the principal of such Toledo Edison
Pledge Bond due 2000 is paid or duly provided for.
The interest payable on any interest payment date shall be paid to the
respective persons in whose names the Toledo Edison Pledge Bonds due 2000 shall
be registered at the close of business on the Record Date next preceding such
interest payment date, notwithstanding the cancellation of any such Toledo
Edison Pledge Bond upon any transfer or exchange thereof subsequent to such
Record Date and prior to such interest payment date; provided, however, that, if
and to the extent the Company shall default in the payment of the interest due
on such interest payment date (other than an interest payment date that is a
redemption date or maturity date), such defaulted interest shall be paid to the
respective persons in whose names such outstanding Toledo Edison Pledge Bonds
due 2000 are registered at the close of business on a date (the "Subsequent
Record Date") not less than ten days nor more than 15 days next preceding the
date of payment of such defaulted interest, such Subsequent Record Date to be
established by the Company by notice given by mail by or on behalf of the
Company to the registered owners of Toledo Edison Pledge Bonds due 2000 not less
than 10 days next preceding such Subsequent Record Date. If any interest payment
date should fall on a day which is not a business day,
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6
then such interest payment date shall be the next preceding business day.
The initial interest rate on the Secured Notes due 2000, and therefore on
the Toledo Edison Pledge Bonds due 2000, is 7.19%. Under certain circumstances
specified in a Registration Agreement dated as of June 11, 1997 among Cleveland
Electric, the Company and the Purchasers (as defined therein) of the Secured
Notes, the interest rate on the Secured Notes due 2000, and therefore on the
Toledo Edison Pledge Bonds due 2000, will increase temporarily to 7.69%.
The term "Record Date", with respect to any interest payment date,
redemption date or date of maturity of any Toledo Edison Pledge Bond due 2000,
shall have the same meaning as the term "Record Date" has with respect to those
events for the Notes due 2000.
SECTION 4. In the manner and subject to the limitations provided in the
Indenture, Toledo Edison Pledge Bonds due 2000 may be transferred or may be
exchanged for a like aggregate principal amount of Toledo Edison Pledge Bonds of
such series of other authorized denominations, in either case without charge,
except for any tax or taxes or other governmental charges incident to such
transfer or exchange, at the agency of the Company in the Borough of Manhattan,
The City of New York.
In the event less than all of the Toledo Edison Pledge Bonds due 2000 at
the time outstanding are called for redemption, the Company shall not be
required (a) to register any transfer or make any exchange of any such bond for
a period of 15 days before the mailing of the notice of redemption of any such
bonds, (b) to register any transfer or make any exchange of any such bond so
called for redemption in its entirety or (c) to register any transfer or make
any exchange of any portion of any such bond so called for redemption.
Except as otherwise provided in Section 3 of this Article I with respect to
the payment of interest, the Company, the agencies of the Company and the
Trustee may deem and treat the person in whose name a Toledo Edison Pledge Bond
due 2000 is registered as the absolute owner thereof for the purpose of
receiving any payment and for all other purposes.
SECTION 5. The Toledo Edison Pledge Bonds due 2000 shall be redeemable only
to the extent provided in this Article I, subject to the provisions contained in
Article V of the Indenture and the form of Toledo Edison Pledge Bond due 2000.
SECTION 6. Subject to the applicable provisions of the Indenture, written
notice of redemption of Toledo Edison Pledge Bonds due 2000 pursuant to this
Supplemental Indenture shall be given by the Trustee
<PAGE> 12
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by mailing to each registered owner of such Toledo Edison Pledge Bonds due 2000
to be redeemed a notice of such redemption, first class postage prepaid, at its
last address as it shall appear upon the books of the Company for the
registration and transfer of such Toledo Edison Pledge Bonds due 2000. Any
notice of redemption shall be mailed at least 30 days, but no more than 60 days,
prior to the redemption date. In the event of partial redemption of Toledo
Edison Pledge Bonds due 2000, the Trustee shall select the Toledo Edison Pledge
Bonds due 2000 or portions thereof to be redeemed, subject to the provisions of
this Supplemental Indenture, in such manner as the Trustee shall deem
appropriate and fair.
SECTION 7. If and when any Notes due 2000 shall be purchased and
surrendered to the Note Trustee for cancellation pursuant to the Note Indenture,
or if and when the principal of any Notes due 2000 shall be paid pursuant to the
Note Indenture, then there shall be deemed to have been paid a principal amount
of the Toledo Edison Pledge Bonds due 2000 then outstanding which bears the same
ratio to the aggregate principal amount of Toledo Edison Pledge Bonds due 2000
then outstanding as the principal amount of the Notes due 2000 so purchased or
paid bears to the aggregate principal amount of the Notes due 2000 outstanding
immediately before such purchase or payment; provided however, that such
purchase or payment of Toledo Edison Pledge Bonds due 2000 shall be deemed to
have been made only when and to the extent that notice of such purchase or
payment of the principal amount of such Notes due 2000 shall have been given by
the Company to the Trustee. The Trustee may rely upon any such notification by
the Company that such purchase or payment of Notes due 2000 has been so made.
SECTION 8. The Toledo Edison Pledge Bonds due 2000 shall be redeemed by the
Company in whole at any time prior to maturity at a redemption price of 100% of
the principal amount to be redeemed, plus accrued and unpaid interest to the
redemption date, but only if the Trustee shall receive a written demand from the
Note Trustee for redemption of all Toledo Edison Pledge Bonds due 2000 held by
the Note Trustee stating that an "Event of Default" under the Note Indenture has
occurred and is continuing, that payment of the principal of the Notes due 2000
has been accelerated and that the Note Trustee is waiving notice of redemption;
provided, however, that the Toledo Edison Pledge Bonds due 2000 shall not be
redeemed in the event that prior to such redemption (a) the Trustee shall have
received a certificate of the Note Trustee (i) stating that there has been a
waiver of such Event of Default and a rescission and annulment of such
acceleration or (ii) withdrawing said written demand or (b) an event of default
under Section 6.01 of Article VI of the Indenture shall have occurred and be
continuing, there has been a declaration of
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acceleration of the principal of the Toledo Edison Pledge Bonds due 2000. The
redemption of the Toledo Edison Pledge Bonds due 2000 pursuant to this Section
shall be made not more than 60 days after receipt of the written demand.
SECTION 9. Any payment of interest on the Notes due 2000 shall be deemed to
constitute payment of interest on the Toledo Edison Pledge Bonds due 2000 in an
amount equal to the amount of interest paid on the Notes due 2000 multiplied by
the Toledo Edison 2000 Ratio; provided, however, that such payment of interest
shall be deemed to have been made only when and to the extent that notice of
such payment of interest on such Notes due 2000 shall have been given by the
Company to the Trustee. The Trustee may rely upon any such notification by the
Company that such payment of interest has been so made.
SECTION 10. Any Toledo Edison Pledge Bonds due 2000 at any time purchased
or otherwise acquired by the Company shall be surrendered to the Trustee for
cancellation and the Trustee shall forthwith cancel the same.
SECTION 11. All Toledo Edison Pledge Bonds due 2000 deemed to have been
redeemed or paid in full as provided in Section 7 of this Article I shall be
surrendered to the Trustee for cancellation and the Trustee shall forthwith
cancel the same. In the event that part of a Toledo Edison Pledge Bond due 2000
shall be deemed to have been redeemed or paid as provided in said Section 7, the
registered owner may, at its option, surrender such bond to the Trustee for
cancellation, in which event the Trustee shall cancel such bond and the Company
shall execute and the Trustee shall authenticate and deliver to the registered
owner one or more new fully registered Toledo Edison Pledge Bonds due 2000 in
such authorized denominations as shall be specified by the registered owner in
an aggregate principal amount equal to the unpaid balance of the principal
amount of such surrendered Bond.
SECTION 12. Toledo Edison Pledge Bonds due 2000 shall not be transferable
unless the registered owner shall have first surrendered the same to the Trustee
for notation thereon of all payments of principal deemed to have been made
thereon under Section 7 of this Article I or for cancellation and execution,
authentication and delivery of Toledo Edison Pledge Bonds due 2000 in an
aggregate principal amount equal to the unpaid balance of the principal amount
of such surrendered Toledo Edison Pledge Bonds due 2000 under Section 11 of this
Article I.
SECTION 13. The aggregate principal amount of Toledo Edison Pledge Bonds
due 2000 which may be authenticated and delivered
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hereunder shall not exceed $45 million, except as otherwise provided in the
Indenture.
SECTION 14. The form of the fully registered Toledo Edison Pledge Bonds due
2000, and of the Trustee's certificate of authentication thereon, shall be
substantially as follows:
[FORM OF FULLY REGISTERED BOND OF 2000 SERIES]
THE TOLEDO EDISON COMPANY
Incorporated under the laws of the State of Ohio
FIRST MORTGAGE BOND, SERIES DUE 2000
Due July 1, 2000
No. $
THE TOLEDO EDISON COMPANY, a corporation organized and existing under the
laws of the State of Ohio (hereinafter called the "Company", which term shall
include any successor corporation as defined in the Indenture hereinafter
referred to), for value received, hereby promises to pay to
, or registered assigns, the sum of Dollars
($ ) or the aggregate unpaid principal amount hereof (as shown on the
Schedule of Payments hereon), whichever is less, on July 1, 2000, in any coin or
currency of the United States of America which at the time of payment is legal
tender for the payment of public and private debts, and to pay interest on the
unpaid principal amount hereof in like coin or currency from the time
hereinafter provided, at such rate per annum as shall cause the amount of
interest payable hereon to equal the amount of interest payable on the same
proportion of the Notes due 2000 (hereinafter defined) then outstanding as this
Toledo Edison Pledge Bond due 2000 is to the aggregate principal amount of (i)
the Toledo Edison Pledge Bonds due 2000 then outstanding and (ii) the Cleveland
Electric Pledge Bonds due 2000 issued pursuant to (and defined in) the
Seventy-Fourth Supplemental Indenture to a Mortgage and Deed of Trust dated July
1, 1940 by and between The Cleveland Electric Illuminating Company and The Chase
Manhattan Bank as Trustee (the "Cleveland Electric Pledge Bonds due 2000") then
outstanding. The ratio of the Toledo Edison Pledge Bonds due 2000 outstanding at
any time to the aggregate principal amount of the Cleveland Electric Pledge
Bonds due 2000 then outstanding and the Toledo Edison Pledge Bonds due 2000 then
outstanding is hereinafter referred to as the "Toledo Edison 2000 Ratio." The
interest on the Toledo Edison Pledge Bonds due 2000 is payable on January 1 and
July 1 in each year starting on July 1, 1997 (each such date herein called an
"interest payment date"), and on and until the date of maturity of this Bond,
or, if this Bond shall be duly called for redemption, on and until the
redemption date, or, if the Company shall default in the payment of the
principal
<PAGE> 15
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amount of this Bond, until the Company's obligation with respect to the payment
of such principal shall be discharged as provided in said Indenture. Except as
hereinafter provided, this Bond shall bear interest from the date of initial
authentication of this Bond or the most recent date to which interest has been
paid or duly provided for until the principal of this Bond has been paid or duly
provided for. Subject to certain exceptions provided in said Indenture, the
interest payable on any interest payment date shall be paid to the person in
whose name this Bond shall be registered at the close of business on the Record
Date or, in the case of defaulted interest, on a day preceding the date of
payment thereof established by notice to the registered owner of this Bond in
the manner provided in the Supplemental Indenture (hereinafter defined).
Principal of and interest on this Bond are payable at the agency of the Company
in the Borough of Manhattan, The City of New York, or, at the option of the
registered owner, at the agency of the Company in the City of Toledo, State of
Ohio.
This Bond is one of the duly authorized Bonds of the Company (herein called
the "Bonds"), all issued and to be issued under and equally secured by a
Mortgage and Deed of Trust, dated as of April 1, 1947 (herein called the
"Original Indenture"), executed by the Company to The Chase National Bank of the
City of New York, now succeeded by The Chase Manhattan Bank as Trustee (herein
called the "Trustee"), and all indentures supplemental thereto (said Mortgage as
so supplemented herein called the "Indenture") to which reference is hereby made
for a description of the properties mortgaged and pledged, the nature and extent
of the security, the rights of the registered owner or owners of the Bonds and
of the Trustee in respect thereof, and the terms and conditions upon which the
Bonds are, and are to be, secured. The Bonds may be issued in series, for
various principal sums, may mature at different times, may bear interest at
different rates and may otherwise vary as in the Indenture provided. This Bond
is one of a series designated as the First Mortgage Bonds, Series due 2000
(herein called the "Toledo Edison Pledge Bonds due 2000") limited, except as
otherwise provided in the Indenture, in aggregate principal amount to $45
million, issued under and secured by the Indenture and described in the
Forty-sixth Supplemental Indenture dated as of June 15, 1997, between the
Company and the Trustee (herein called the "Supplemental Indenture").
The Toledo Edison Pledge Bonds due 2000 have been delivered by the Company
to The Chase Manhattan Bank, as trustee (hereinafter called the "Note Trustee"),
pursuant to a Note Indenture, dated as of June 13, 1997, among the Company, The
Cleveland Electric Illuminating Company and the Note Trustee, under which the
Note Trustee holds the Toledo Edison Pledge Bonds due 2000, together with the
Cleveland Electric Pledge Bonds due 2000, as a portion of the security
<PAGE> 16
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for the payment of principal of and interest on the Secured Notes issued under
the Note Indenture.
If and when any Secured Notes due 2000 issued under the Note Indenture
(herein called the "Notes due 2000") are purchased and surrendered to the Note
Trustee for cancellation pursuant to the Note Indenture, or the principal of any
Notes due 2000 is paid pursuant to the Note Indenture, then there shall be
deemed to be paid a principal amount of the Toledo Edison Pledge Bonds due 2000
then outstanding which bears the same ratio to the aggregate principal amount of
Toledo Edison Pledge Bonds due 2000 outstanding immediately before such purchase
or payment as the principal amount of the Notes due 2000 so purchased or paid
bears to the aggregate principal amount of the Notes due 2000 outstanding
immediately before such purchase or payment; provided, however, that such
purchase or payment of Pledge Bonds due 2000 is deemed to be made only when and
to the extent that notice of such purchase or payment of such Notes due 2000 is
given by the Company to the Trustee.
Any payment of interest on the Notes due 2000 shall be deemed to constitute
payment of interest on the Toledo Edison Pledge Bonds due 2000 in an amount
equal to the amount of interest paid on the Notes due 2000 multipled by the
Toledo Edison 2000 Ratio; provided, however, that such payment of interest is
deemed to be made only when and to the extent that notice of such payment of
interest on such Notes due 2000 is given by the Company to the Trustee.
In the event that this Bond is deemed to be paid or redeemed in full, this
Bond shall be surrendered to the Trustee for cancellation. In the event that
this Bond is deemed to be paid or redeemed in part, this Bond may, at the option
of the registered owner, be surrendered to the Trustee for cancellation, in
which event the Trustee will cancel this Bond and the Company will execute and
the Trustee will authenticate and deliver to the registered owner Toledo Edison
Pledge Bonds due 2000 in authorized denominations in aggregate principal amount
equal to the unpaid balance of the principal amount of this Bond.
The Toledo Edison Pledge Bonds due 2000 shall be redeemed by the Company
prior to maturity in whole at any time as provided in Section 8 of Article I of
the Supplemental Indenture at a redemption price of 100% of the principal amount
to be redeemed, plus accrued and unpaid interest to the redemption date.
Any redemption of the Pledge Bonds due 2000 shall be made in accordance
with the applicable provisions of Sections 5.02, 5.03, 5.04 and 5.05 of the
Original Indenture, unless and to the extent waived in writing by the registered
owner or owners of all Pledge Bonds due 2000 and such waiver is filed with the
Trustee.
<PAGE> 17
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To the extent permitted by and as provided in the Indenture, the rights and
obligations of the Company and of the holders of said Bonds and coupons
(including those pertaining to any sinking or other fund) may be changed and
modified, with the consent of the Company by the holders of at least 75% in
aggregate principal amount of the Bonds then outstanding, such percentage being
determined as provided in the Indenture; provided, however, that in case such
changes and modifications affect one or more but less than all series of Bonds
then outstanding, they shall be required to be adopted only by the affirmative
vote of the holders of at least 75% in aggregate principal amount of outstanding
Bonds of such one or more series so affected; and further provided, that without
the consent of the holder hereof no such change or modification shall be made
which will extend the time of payment of the principal of or interest on this
Bond or reduce the principal amount hereof or the rate of interest hereon, or
affect any other modification of the terms of payment of such principal or
interest or will permit the creation of any lien ranking prior to or on a party
with the lien of the Indenture on any of the mortgaged property, or will deprive
the holder hereof of the benefit of a lien upon the mortgaged property for the
security of this Bond, or will reduce the percentage of Bonds required for the
adoption of changes or modifications as aforesaid.
If an event of default, as defined in the Indenture, shall occur, the
principal of all the Bonds at any such time outstanding under the Indenture may
be declared or may become due and payable, upon the conditions and in the manner
and with the effect provided in the Indenture. The Indenture provides that such
declaration may in certain events be waived by the holders of a majority in
principal amount of the Bonds outstanding.
Subject to the limitations provided in the Indenture and the Note
Indenture, this Bond is transferable by the registered owner hereof, in person
or by duly authorized attorney, on the books of the Company to be kept for that
purpose at the agency of the Company in the Borough of Manhattan, The City of
New York, upon surrender and cancellation of this Bond, and upon presentation of
a duly executed written instrument of transfer, and thereupon a new fully
registered bond or bonds of the same series, of the same aggregate principal
amount and in authorized denominations will be issued to the transferee or
transferees in exchange herefor; and this Bond, with or without others of the
same series, may in like manner be exchanged for one or more new fully
registered Toledo Edison Pledge Bonds due 2000 of other authorized denominations
but of the same aggregate principal amount; all without charge except for any
tax or taxes or other governmental charges incidental to such transfer or
exchange and all subject to the terms and conditions set forth in the Indenture.
In the event less than all of the Toledo Edison Pledge Bonds due 2000 at the
time outstanding
<PAGE> 18
13
are called for redemption, the Company shall not be required (a) to register any
transfer or make any exchange of any such Bond for a period of 15 days before
the mailing of the notice of redemption of any such Bonds, (b) to register any
transfer or make any exchange of any such Bond called for redemption in its
entirety, or (c) to register any transfer or make any exchange of any portion of
any such Bond which has been called for redemption. Except as otherwise provided
herein with respect to the payment of interest, the Company, the agencies of the
Company and the Trustee may deem and treat the person in whose name this Bond is
registered as the absolute owner hereof for the purpose of receiving any payment
and for all other purposes.
No recourse shall be had for the payment of the principal of or the
interest on this Bond, or for any claim based hereon or on the Indenture or any
indenture supplemental thereto, against any incorporator, or against any
stockholder, director or officer, past, present or future, of the Company, or of
any predecessor or successor corporation, as such, either directly or through
the Company or any such predecessor or successor corporation, whether by virtue
of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability, whether at common law,
in equity, by any constitution or statute or otherwise, of incorporators,
stockholders, directors or officers being released by every owner hereof by the
acceptance of this Bond and as part of the consideration for the issue hereof,
and being likewise released by the terms of the Indenture.
This Bond shall not be entitled to any benefit under the Indenture or any
indenture supplemental thereto, or become valid or obligatory for any purpose,
until the Trustee under the Indenture, or a successor trustee thereto under the
Indenture, shall have signed the form of certificate of authentication endorsed
hereon.
IN WITNESS WHEREOF, The Toledo Edison Company has caused this Bond to be
signed in its name by its President or a Vice President (whose signature may be
manual or a facsimile thereof) and its corporate seal (or a facsimile thereof)
to be hereto affixed and attested by its Secretary or an Assistant Secretary
(whose signature may be manual or a facsimile thereof).
Dated:
THE TOLEDO EDISON COMPANY
By ....................................................
Attest:
.............................
Secretary
<PAGE> 19
14
[FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
This Bond is one of the Bonds of the series designated and described in the
within-mentioned Indenture and Supplemental Indenture.
THE CHASE MANHATTAN BANK,
TRUSTEE
By ...........................................
AUTHORIZED OFFICER
[FORM OF SCHEDULE OF PAYMENTS]
SCHEDULE OF PAYMENTS
<TABLE>
<CAPTION>
AGENCY
OF THE
UNPAID COMPANY
PRINCIPAL PRINCIPAL PREMIUM INTEREST MAKING AUTHORIZED
DATE PAYMENT AMOUNT PAYMENT PAYMENT NOTATION OFFICER TITLE
- --------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
[END OF FORM OF FULLY REGISTERED BOND]
ARTICLE II
CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT
AND FORM OF BONDS OF 2004 SERIES
SECTION 1. The Company hereby creates a new series of Bonds to be issued
under and secured by the Indenture and to be designated as "First Mortgage
Bonds, Series due 2004" of the Company and hereinabove and hereinafter called
the "Toledo Edison Pledge Bonds due 2004". The Toledo Edison Pledge Bonds due
2004 shall be executed, authenticated and delivered in accordance with the
provisions of, and shall in all respects be subject to, all of the terms,
conditions and covenants of the Indenture.
SECTION 2. The Toledo Edison Pledge Bonds due 2004 shall be issued as fully
registered Bonds only, without coupons, in the denominations of $1,000 or any
multiple thereof.
SECTION 3. The Toledo Edison Pledge Bonds due 2004 shall be dated the date
of authentication, shall mature July 1, 2004, and shall bear interest from the
time hereinafter provided at such rate per annum as shall cause the amount of
interest payable on such Toledo Edison Pledge Bonds due 2004 then outstanding to
equal the amount of
<PAGE> 20
15
interest payable on the same proportion of the Notes due 2004 (as defined below)
then outstanding as those Toledo Edison Pledge Bonds due 2004 are to the
aggregate principal amount of (i) the Toledo Edison Pledge Bonds due 2004 then
outstanding and (ii) the Cleveland Electric Pledge Bonds due 2004 issued
pursuant to (and as defined in) the Cleveland Electric Supplement (the
"Cleveland Electric Pledge Bonds due 2004") then outstanding. The ratio of the
Toledo Edison Pledge Bonds due 2004 outstanding at any time to the aggregate
principal amount of the Cleveland Electric Pledge Bonds due 2004 then
outstanding and the Toledo Edison Pledge Bonds due 2004 then outstanding is
hereinafter referred to as the "Toledo Edison 2004 Ratio." The interest on the
Toledo Edison Pledge Bonds due 2004 is payable on January 1 and July 1 in each
year starting on July 1, 1997 (each such date hereinafter called an "interest
payment date") on and until maturity, or, in the case of any such Toledo Edison
Pledge Bonds due 2004 duly called for redemption, on and until the redemption
date, or in the case of any default by the Company in the payment of the
principal due on any such Toledo Edison Pledge Bonds due 2004, until the
Company's obligation with respect to the payment of the principal shall be
discharged as provided in the Indenture. The amount of interest payable the
Toledo Edison Pledge Bonds due 2004 on any interest payment date, on the date of
maturity and on any redemption date shall be computed on the same basis as the
basis on which such interest is computed on the Secured Notes due 2004 provided
for in the Note Indenture, which shall include the notes initially issued and
any notes exchanged therefor pursuant to the terms of the Note Indenture (either
or both of such series of notes, the "Notes due 2004").
The Toledo Edison Pledge Bonds due 2004 shall be payable as to principal
and interest at the agency of the Company in the Borough of Manhattan, The City
of New York, or, at the option of the registered owner, at the agency of the
Company in the City of Toledo, State of Ohio, in any coin or currency of the
United States of America which at the time of payment is legal tender for the
payment of public and private debts.
Except as hereinafter provided, each Toledo Edison Pledge Bond due 2004
shall bear interest from the later of the date of initial authentication of the
Toledo Edison Pledge Bonds due 2004 or the most recent date to which interest
has been paid or duly provided for until the principal of such Toledo Edison
Pledge Bond due 2004 is paid or duly provided for.
The interest payable on any interest payment date shall be paid to the
respective persons in whose names the Toledo Edison Pledge Bonds due 2004 shall
be registered at the close of business on the Record Date next preceding such
interest payment date, notwithstanding the can-
<PAGE> 21
16
cellation of any such Bond upon any transfer or exchange thereof subsequent to
such Record Date and prior to such interest payment date; provided, however,
that, if and to the extent the Company shall default in the payment of the
interest due on such interest payment date (other than an interest payment date
that is a redemption date or maturity date), such defaulted interest shall be
paid to the respective persons in whose names such outstanding Toledo Edison
Pledge Bonds due 2004 are registered at the close of business on a date (the
"Subsequent Record Date") not less than ten days nor more than 15 days next
preceding the date of payment of such defaulted interest, such Subsequent Record
Date to be established by the Company by notice given by mail by or on behalf of
the Company to the registered owners of Toledo Edison Pledge Bonds due 2004 not
less than 10 days next preceding such Subsequent Record Date. If any interest
payment date should fall on a day which is not a business day, then such
interest payment date shall be the next preceding business day.
The initial interest rate on the Secured Notes due 2004, and therefore on
the Toledo Edison Pledge Bonds due 2004, is 7.67%. Under certain circumstances
specified in a Registration Agreement dated as of June 11, 1997 among Cleveland
Electric, the Company and the Purchasers (as defined therein) of the Secured
Notes, the interest rate on the Secured Notes due 2004, and therefore on the
Toledo Edison Pledge Bonds due 2004, will increase temporarily to 8.17%.
The term "Record Date", with respect to any interest payment date,
redemption date or date of maturity of any Toledo Edison Pledge Bond due 2004,
shall have the same meaning as the term "Record Date" has with respect to those
events for the Notes due 2004.
SECTION 4. In the manner and subject to the limitations provided in the
Indenture, Toledo Edison Pledge Bonds due 2004 may be transferred or may be
exchanged for a like aggregate principal amount of Bonds of such series of other
authorized denominations, in either case without charge, except for any tax or
taxes or other governmental charges incident to such transfer or exchange, at
the agency of the Company in the Borough of Manhattan, The City of New York.
In the event less than all of the Toledo Edison Pledge Bonds due 2004 at
the time outstanding are called for redemption, the Company shall not be
required (a) to register any transfer or make any exchange of any such bond for
a period of 15 days before the mailing of the notice of redemption of any such
bonds, (b) to register any transfer or make any exchange of any such bond so
called for redemption in its entirety or (c) to register any transfer or make
any exchange of any portion of any such bond so called for redemption.
<PAGE> 22
17
Except as otherwise provided in Section 3 of this Article I with respect to
the payment of interest, the Company, the agencies of the Company and the
Trustee may deem and treat the person in whose name a Toledo Edison Pledge Bond
due 2004 is registered as the absolute owner thereof for the purpose of
receiving any payment and for all other purposes.
SECTION 5. The Toledo Edison Pledge Bonds due 2004 shall be redeemable only
to the extent provided in this Article I, subject to the provisions contained in
Article V of the Indenture and the form of Toledo Edison Pledge Bond due 2004.
SECTION 6. Subject to the applicable provisions of the Indenture, written
notice of redemption of Toledo Edison Pledge Bonds due 2004 pursuant to this
Supplemental Indenture shall be given by the Trustee by mailing to each
registered owner of such Toledo Edison Pledge Bonds due 2004 to be redeemed a
notice of such redemption, first class postage prepaid, at its last address as
it shall appear upon the books of the Company for the registration and transfer
of such Toledo Edison Pledge Bonds due 2004. Any notice of redemption shall be
mailed at least 30 days, but no more than 60 days, prior to the redemption date.
In the event of partial redemption of Toledo Edison Pledge Bonds due 2004, the
Trustee shall select the Toledo Edison Pledge Bonds due 2004 or portions thereof
to be redeemed, subject to the provisions of this Supplemental Indenture, in
such manner as the Trustee shall deem appropriate and fair.
SECTION 7. If and when any Notes due 2004 shall be purchased and
surrendered to the Note Trustee for cancellation pursuant to the Note Indenture,
or if and when the principal of any Notes due 2004 shall be paid pursuant to the
Note Indenture, then there shall be deemed to have been paid a principal amount
of the Toledo Edison Pledge Bonds due 2004 then outstanding which bears the same
ratio to the aggregate principal amount of Toledo Edison Pledge Bonds due 2004
then outstanding as the principal amount of the Notes due 2004 so purchased or
paid bears to the aggregate principal amount of the Notes due 2004 outstanding
immediately before such purchase or payment; provided however, that such
purchase or payment of Toledo Edison Pledge Bonds due 2004 shall be deemed to
have been made only when and to the extent that notice of such purchase or
payment of the principal amount of such Notes due 2004 shall have been given by
the Company to the Trustee. The Trustee may rely upon any such notification by
the Company that such purchase or payment of Notes due 2004 has been so made.
SECTION 8. The Toledo Edison Pledge Bonds due 2004 shall be redeemed by the
Company in whole at any time prior to maturity at a redemption price of 100% of
the principal amount to be redeemed, plus
<PAGE> 23
18
accrued and unpaid interest to the redemption date, but only if the Trustee
shall receive a written demand from the Note Trustee for redemption of all
Toledo Edison Pledge Bonds due 2004 held by the Note Trustee stating that an
"Event of Default" under the Note Indenture has occurred and is continuing, that
payment of the principal of the Notes due 2004 has been accelerated and that the
Note Trustee is waiving notice of redemption; provided, however, that the Toledo
Edison Pledge Bonds due 2004 shall not be redeemed in the event that prior to
such redemption (a) the Trustee shall have received a certificate of the Note
Trustee (i) stating that there has been a waiver of such Event of Default and a
rescission and annulment of such acceleration or (ii) withdrawing said written
demand or (b) an event of default under Section 6.01 of Article VI of the
Indenture shall have occurred and be continuing, there has been a declaration of
acceleration of the principal of the Toledo Edison Pledge Bonds due 2004. The
redemption of the Toledo Edison Pledge Bonds due 2004 pursuant to this Section
shall be made not more than 60 days after receipt of the written demand.
SECTION 9. Any payment of interest on the Notes due 2004 shall be deemed to
constitute payment of interest on the Toledo Edison Pledge Bonds due 2004 in an
amount equal to the amount of interest paid on the Notes due 2004 multiplied by
the Toledo Edison 2004 Ratio; provided, however, that such payment of interest
shall be deemed to have been made only when and to the extent that notice of
such payment of interest on such Notes due 2004 shall have been given by the
Company to the Trustee. The Trustee may rely upon any such notification by the
Company that such payment of interest has been so made.
SECTION 10. Any Toledo Edison Pledge Bonds due 2004 at any time purchased
or otherwise acquired by the Company shall be surrendered to the Trustee for
cancellation and the Trustee shall forthwith cancel the same.
SECTION 11. All Toledo Edison Pledge Bonds due 2004 deemed to have been
redeemed or paid in full as provided in Section 7 of this Article I shall be
surrendered to the Trustee for cancellation and the Trustee shall forthwith
cancel the same. In the event that part of a Toledo Edison Pledge Bond due 2004
shall be deemed to have been redeemed or paid as provided in said Section 7, the
registered owner may, at its option, surrender such bond to the Trustee for
cancellation, in which event the Trustee shall cancel such bond and the Company
shall execute and the Trustee shall authenticate and deliver to the registered
owner one or more new fully registered Toledo Edison Pledge Bonds due 2004 in
such authorized denominations as shall be specified by the registered owner in
an aggregate principal amount
<PAGE> 24
19
equal to the unpaid balance of the principal amount of such surrendered Bond.
SECTION 12. Toledo Edison Pledge Bonds due 2004 shall not be transferable
unless the registered owner shall have first surrendered the same to the Trustee
for notation thereon of all payments of principal deemed to have been made
thereon under Section 7 of this Article I or for cancellation and execution,
authentication and delivery of Toledo Edison Pledge Bonds due 2004 in an
aggregate principal amount equal to the unpaid balance of the principal amount
of such surrendered Toledo Edison Pledge Bonds due 2004 under Section 11 of this
Article I.
SECTION 13. The aggregate principal amount of Toledo Edison Pledge Bonds
due 2004 which may be authenticated and delivered hereunder shall not exceed $70
million, except as otherwise provided in the Indenture.
SECTION 14. The form of the fully registered Toledo Edison Pledge Bonds due
2004, and of the Trustee's certificate of authentication thereon, shall be
substantially as follows:
[FORM OF FULLY REGISTERED BOND OF 2004 SERIES]
THE TOLEDO EDISON COMPANY
Incorporated under the laws of the State of Ohio
FIRST MORTGAGE BOND, SERIES DUE 2004
Due July 1, 2004
No. $
THE TOLEDO EDISON COMPANY, a corporation organized and existing under the
laws of the State of Ohio (hereinafter called the "Company", which term shall
include any successor corporation as defined in the Indenture hereinafter
referred to), for value received, hereby promises to pay to
, or registered assigns, the sum of Dollars ($ ) or
the aggregate unpaid principal amount hereof (as shown on the Schedule of
Payments hereon), whichever is less, on July 1, 2004, in any coin or currency of
the United States of America which at the time of payment is legal tender for
the payment of public and private debts, and to pay interest on the unpaid
principal amount hereof in like coin or currency from the time hereinafter
provided, at such rate per annum as shall cause the amount of interest payable
hereon to equal the amount of interest payable on the same proportion of the
Notes due 2004 (hereinafter defined) then outstanding as this Toledo Edison
Pledge Bond due 2004 is to the aggregate principal amount of (i) the Toledo
Edison Pledge Bonds due 2004 then outstanding and (ii) the Cleveland Electric
Pledge Bonds due 2004 issued pursuant to (and as defined in) the Seventy-Fourth
Supplemental
<PAGE> 25
20
Indenture to a Mortgage and Deed of Trust dated July 1, 1940 by and between The
Cleveland Electric Illuminating Company and The Chase Manhattan Bank as Trustee
(the "Cleveland Electric Pledge Bonds due 2004") then outstanding. The ratio of
the Toledo Edison Pledge Bonds due 2004 outstanding at any time to the aggregate
principal amount of the Cleveland Electric Pledge Bonds due 2004 then
outstanding and the Toledo Edison Pledge Bonds due 2004 then outstanding is
hereinafter referred to as the "Toledo Edison 2004 Ratio." The interest on the
Toledo Edison Pledge Bonds due 2004 is payable on January 1 and July 1 in each
year starting on July 1, 1997 (each such date herein called an "interest payment
date"), and on and until the date of maturity of this Bond, or, if this Bond
shall be duly called for redemption, on and until the redemption date, or, if
the Company shall default in the payment of the principal amount of this Bond,
until the Company's obligation with respect to the payment of such principal
shall be discharged as provided in said Indenture. Except as hereinafter
provided, this Bond shall bear interest from the date of initial authentication
of this Bond or the most recent date to which interest has been paid or duly
provided for until the principal of this Bond has been paid or duly provided
for. Subject to certain exceptions provided in said Indenture, the interest
payable on any interest payment date shall be paid to the person in whose name
this Bond shall be registered at the close of business on the Record Date or, in
the case of defaulted interest, on a day preceding the date of payment thereof
established by notice to the registered owner of this Bond in the manner
provided in the Supplemental Indenture (hereinafter defined). Principal of and
interest on this Bond are payable at the agency of the Company in the Borough of
Manhattan, The City of New York, or, at the option of the registered owner, at
the agency of the Company in the City of Toledo, State of Ohio.
This Bond is one of the duly authorized Bonds of the Company (herein called
the "Bonds"), all issued and to be issued under and equally secured by a
Mortgage and Deed of Trust, dated as of April 1, 1947 (herein called the
"Original Indenture"), executed by the Company to The Chase National Bank of the
City of New York, now succeeded by The Chase Manhattan Bank as Trustee (herein
called the "Trustee"), and all indentures supplemental thereto (said Mortgage as
so supplemented herein called the "Indenture") to which reference is hereby made
for a description of the properties mortgaged and pledged, the nature and extent
of the security, the rights of the registered owner or owners of the Bonds and
of the Trustee in respect thereof, and the terms and conditions upon which the
Bonds are, and are to be, secured. The Bonds may be issued in series, for
various principal sums, may mature at different times, may bear interest at
different rates and may otherwise vary as in the Indenture provided.
<PAGE> 26
21
This Bond is one of a series designated as the First Mortgage Bonds, Series due
2004 (herein called the "Toledo Edison Pledge Bonds due 2004") limited, except
as otherwise provided in the Indenture, in aggregate principal amount to $70
million, issued under and secured by the Indenture and described in the
Forty-sixth Supplemental Indenture dated as of June 15, 1997, between the
Company and the Trustee (herein called the "Supplemental Indenture").
The Toledo Edison Pledge Bonds due 2004 have been delivered by the Company
to The Chase Manhattan Bank, as trustee (hereinafter called the "Note Trustee"),
pursuant to a Note Indenture, dated as of June 13, 1997, among the Company, The
Cleveland Electric Illuminating Company and the Note Trustee, under which the
Note Trustee holds the Toledo Edison Pledge Bonds due 2004, together with the
Cleveland Electric Pledge Bonds due 2004, as a portion of the security for the
payment of principal of and interest on the Secured Notes issued under the Note
Indenture.
If and when any Secured Notes due 2004 issued under the Note Indenture
(herein called the "Notes due 2004") are purchased and surrendered to the Note
Trustee for cancellation pursuant to the Note Indenture, or the principal of any
Notes due 2004 is paid pursuant to the Note Indenture, then there shall be
deemed to be paid a principal amount of the Toledo Edison Pledge Bonds due 2004
then outstanding which bears the same ratio to the aggregate principal amount of
Toledo Edison Pledge Bonds due 2004 outstanding immediately before such purchase
or payment as the principal amount of the Notes due 2004 so purchased or paid
bears to the aggregate principal amount of the Notes due 2004 outstanding
immediately before such purchase or payment; provided, however, that such
purchase or payment of Toledo Edison Pledge Bonds due 2004 is deemed to be made
only when and to the extent that notice of such purchase or payment of such
Notes due 2004 is given by the Company to the Trustee.
Any payment of interest on the Notes due 2004 shall be deemed to constitute
payment of interest on the Toledo Edison Pledge Bonds due 2004 in an amount
equal to the amount of interest paid on the Notes due 2004 multiplied by the
Toledo Edison 2004 Ratio; provided, however, that such payment of interest is
deemed to be made only when and to the extent that notice of such payment of
interest on such Notes due 2004 is given by the Company to the Trustee.
In the event that this Bond is deemed to be paid or redeemed in full, this
Bond shall be surrendered to the Trustee for cancellation. In the event that
this Bond is deemed to be paid or redeemed in part, this Bond may, at the option
of the registered owner, be surrendered to the Trustee for cancellation, in
which event the Trustee will cancel this Bond and the Company will execute and
the Trustee will authenticate
<PAGE> 27
22
and deliver to the registered owner Toledo Edison Pledge Bonds due 2004 in
authorized denominations in aggregate principal amount equal to the unpaid
balance of the principal amount of this Bond.
The Toledo Edison Pledge Bonds due 2004 shall be redeemed by the Company
prior to maturity in whole at any time as provided in Section 8 of Article I of
the Supplemental Indenture at a redemption price of 100% of the principal amount
to be redeemed, plus accrued and unpaid interest to the redemption date.
Any redemption of the Pledge Bonds due 2004 shall be made in accordance
with the applicable provisions of Sections 5.02, 5.03, 5.04 and 5.05 of the
Original Indenture, unless and to the extent waived in writing by the registered
owner or owners of all Pledge Bonds due 2004 and such waiver is filed with the
Trustee.
To the extent permitted by and as provided in the Indenture, the rights and
obligations of the Company and of the holders of said Bonds and coupons
(including those pertaining to any sinking or other fund) may be changed and
modified, with the consent of the Company by the holders of at least 75% in
aggregate principal amount of the Bonds then outstanding, such percentage being
determined as provided in the Indenture; provided, however, that in case such
changes and modifications affect one or more but less than all series of Bonds
then outstanding, they shall be required to be adopted only by the affirmative
vote of the holders of at least 75% in aggregate principal amount of outstanding
Bonds of such one or more series so affected; and further provided, that without
the consent of the holder hereof no such change or modification shall be made
which will extend the time of payment of the principal of, or of the interest or
premium, if any, on this Bond or reduce the principal amount hereof or the rate
of interest or the premium, if any, hereon, or affect any other modification of
the terms of payment of such principal or interest, or premium, if any, or will
permit the creation of any lien ranking prior to or on a party with the lien of
the Indenture on any of the mortgaged property, or will deprive the holder
hereof of the benefit of a lien upon the mortgaged property for the security of
this Bond, or will reduce the percentage of Bonds required for the adoption of
changes or modifications as aforesaid.
If an event of default, as defined in the Indenture, shall occur, the
principal of all the Bonds at any such time outstanding under the Indenture may
be declared or may become due and payable, upon the conditions and in the manner
and with the effect provided in the Indenture. The Indenture provides that such
declaration may in certain events be waived by the holders of a majority in
principal amount of the Bonds outstanding.
<PAGE> 28
23
Subject to the limitations provided in the Indenture and the Note
Indenture, this Bond is transferable by the registered owner hereof, in person
or by duly authorized attorney, on the books of the Company to be kept for that
purpose at the agency of the Company in the Borough of Manhattan, The City of
New York, upon surrender and cancellation of this Bond, and upon presentation of
a duly executed written instrument of transfer, and thereupon a new fully
registered bond or bonds of the same series, of the same aggregate principal
amount and in authorized denominations will be issued to the transferee or
transferees in exchange herefor; and this Bond, with or without others of the
same series, may in like manner be exchanged for one or more new fully
registered Toledo Edison Pledge Bonds due 2004 of other authorized denominations
but of the same aggregate principal amount; all without charge except for any
tax or taxes or other governmental charges incidental to such transfer or
exchange and all subject to the terms and conditions set forth in the Indenture.
In the event less than all of the Toledo Edison Pledge Bonds due 2004 at the
time outstanding are called for redemption, the Company shall not be required
(a) to register any transfer or make any exchange of any such Bond for a period
of 15 days before the mailing of the notice of redemption of any such Bonds, (b)
to register any transfer or make any exchange of any such Bond called for
redemption in its entirety, or (c) to register any transfer or make any exchange
of any portion of any such Bond which has been called for redemption. Except as
otherwise provided herein with respect to the payment of interest, the Company,
the agencies of the Company and the Trustee may deem and treat the person in
whose name this Bond is registered as the absolute owner hereof for the purpose
of receiving any payment and for all other purposes.
No recourse shall be had for the payment of the principal of or the
interest on this Bond, or for any claim based hereon or on the Indenture or any
indenture supplemental thereto, against any incorporator, or against any
stockholder, director or officer, past, present or future, of the Company, or of
any predecessor or successor corporation, as such, either directly or through
the Company or any such predecessor or successor corporation, whether by virtue
of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability, whether at common law,
in equity, by any constitution or statute or otherwise, of incorporators,
stockholders, directors or officers being released by every owner hereof by the
acceptance of this Bond and as part of the consideration for the issue hereof,
and being likewise released by the terms of the Indenture.
This Bond shall not be entitled to any benefit under the Indenture or any
indenture supplemental thereto, or become valid or obligatory for any purpose,
until the Trustee under the Indenture, or a successor
<PAGE> 29
24
trustee thereto under the Indenture, shall have signed the form of certificate
of authentication endorsed hereon.
IN WITNESS WHEREOF, The Toledo Edison Company has caused this Bond to be
signed in its name by its President or a Vice President (whose signature may be
manual or a facsimile thereof) and its corporate seal (or a facsimile thereof)
to be hereto affixed and attested by its Secretary or an Assistant Secretary
(whose signature may be manual or a facsimile thereof).
Dated:
THE TOLEDO EDISON COMPANY
By ..............................................
Attest:
.............................
Secretary
[FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
This Bond is one of the Bonds of the series designated and described in the
within-mentioned Indenture and Supplemental Indenture.
THE CHASE MANHATTAN BANK,
TRUSTEE
By ...........................................
Authorized Officer
<PAGE> 30
25
[FORM OF SCHEDULE OF PAYMENTS]
SCHEDULE OF PAYMENTS
<TABLE>
<CAPTION>
AGENCY
OF THE
UNPAID COMPANY
PRINCIPAL PRINCIPAL PREMIUM INTEREST MAKING AUTHORIZED
DATE PAYMENT AMOUNT PAYMENT PAYMENT NOTATION OFFICER TITLE
- --------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
[END OF FORM OF FULLY REGISTERED BOND]
ARTICLE III
CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT
AND FORM OF BONDS OF 2007 SERIES
SECTION 1. The Company hereby creates a new series of Bonds to be issued
under and secured by the Indenture and to be designated as "First Mortgage
Bonds, Series due 2007" of the Company and hereinabove and hereinafter called
the "Toledo Edison Pledge Bonds due 2007". The Toledo Edison Pledge Bonds due
2007 shall be executed, authenticated and delivered in accordance with the
provisions of, and shall in all respects be subject to, all of the terms,
conditions and covenants of the Indenture.
SECTION 2. The Toledo Edison Pledge Bonds due 2007 shall be issued as
fully registered Bonds only, without coupons, in the denominations of $1,000 or
any multiple thereof.
SECTION 3. The Toledo Edison Pledge Bonds due 2007 shall be dated the date
of authentication, shall mature July 1, 2007, and shall bear interest from the
time hereinafter provided at such rate per annum as shall cause the amount of
interest payable on such Toledo Edison Pledge Bonds due 2007 then outstanding to
equal the amount of interest payable on the same proportion of the Notes due
2007 (as defined below) then outstanding as those Toledo Edison Pledge Bonds due
2007 are to the aggregate principal amount of (i) the Toledo Edison Pledge Bonds
due 2007 then outstanding and (ii) the Cleveland Electric Pledge Bonds due 2007
issued pursuant to (and as defined in) the Cleveland Electric Supplement (the
"Cleveland Electric Pledge Bonds due 2007") then outstanding. The ratio of the
Toledo Edison Pledge Bonds due 2007 outstanding at any time to the aggregate
principal amount of the Cleveland Electric Pledge Bonds due 2007 then
outstanding and the Toledo Edison Pledge Bonds due 2007 then outstanding is
hereinafter referred to as the "Toledo Edison 2007 Ratio." The interest on the
Toledo Edison Pledge Bonds due 2007 is payable on
<PAGE> 31
26
January 1 and July 1 in each year starting on July 1, 1997 (each such date
hereinafter called an "interest payment date") on and until maturity, or, in the
case of any such Toledo Edison Pledge Bonds due 2007 duly called for redemption,
on and until the redemption date, or in the case of any default by the Company
in the payment of the principal due on any such Toledo Edison Pledge Bonds due
2007, until the Company's obligation with respect to the payment of the
principal shall be discharged as provided in the Indenture. The amount of
interest payable on the Toledo Edison Pledge Bonds due 2007 on any interest
payment date, on the date of maturity and on any redemption date shall be
computed on the same basis as the basis on which such interest is computed on
the Secured Notes due 2007 provided for in the Note Indenture, which shall
include the notes initially issued and any notes exchanged therefor pursuant to
the terms of the Note Indenture (either or both of such series of notes, the
"Notes due 2007").
The Toledo Edison Pledge Bonds due 2007 shall be payable as to principal
and interest at the agency of the Company in the Borough of Manhattan, The City
of New York, or, at the option of the registered owner, at the agency of the
Company in the City of Toledo, State of Ohio, in any coin or currency of the
United States of America which at the time of payment is legal tender for the
payment of public and private debts.
Except as hereinafter provided, each Toledo Edison Pledge Bond due 2007
shall bear interest from the later of the date of initial authentication of the
Toledo Edison Pledge Bonds due 2007 or the most recent date to which interest
has been paid or duly provided for until the principal of such Toledo Edison
Pledge Bond due 2007 is paid or duly provided for.
The interest payable on any interest payment date shall be paid to the
respective persons in whose names the Toledo Edison Pledge Bonds due 2007 shall
be registered at the close of business on the Record Date next preceding such
interest payment date, notwithstanding the cancellation of any such Bond upon
any transfer or exchange thereof subsequent to such Record Date and prior to
such interest payment date; provided, however, that, if and to the extent the
Company shall default in the payment of the interest due on such interest
payment date (other than an interest payment date that is a redemption date or
maturity date), such defaulted interest shall be paid to the respective persons
in whose names such outstanding Toledo Edison Pledge Bonds due 2007 are
registered at the close of business on a date (the "Subsequent Record Date") not
less than ten days nor more than 15 days next preceding the date of payment of
such defaulted interest, such Subsequent Record Date to be established by the
Company by notice given by mail by or on behalf of the Company to the registered
<PAGE> 32
27
owners of Toledo Edison Pledge Bonds due 2007 not less than 10 days next
preceding such Subsequent Record Date. If any interest payment date should fall
on a day which is not a business day, then such interest payment date shall be
the next preceding business day.
The initial interest rate on the Secured Notes due 2007, and therefore on
the Toledo Edison Pledge Bonds due 2007, is 7.13%. Under certain circumstances
specified in a Registration Agreement dated as of June 11, 1997 among Cleveland
Electric, the Company and the Purchasers (as defined therein) of the Secured
Notes, the interest rate on the Secured Notes due 2007, and therefore on the
Toledo Edison Pledge Bonds due 2007, will increase temporarily to 7.63%.
The term "Record Date", with respect to any interest payment date,
redemption date or date of maturity of any Toledo Edison Pledge Bond due 2007,
shall have the same meaning as the term "Record Date" has with respect to those
events for the Notes due 2007.
SECTION 4. In the manner and subject to the limitations provided in the
Indenture, Toledo Edison Pledge Bonds due 2007 may be transferred or may be
exchanged for a like aggregate principal amount of Bonds of such series of other
authorized denominations, in either case without charge, except for any tax or
taxes or other governmental charges incident to such transfer or exchange, at
the agency of the Company in the Borough of Manhattan, The City of New York.
In the event less than all of the Toledo Edison Pledge Bonds due 2007 at
the time outstanding are called for redemption, the Company shall not be
required (a) to register any transfer or make any exchange of any such bond for
a period of 15 days before the mailing of the notice of redemption of any such
bonds, (b) to register any transfer or make any exchange of any such bond so
called for redemption in its entirety or (c) to register any transfer or make
any exchange of any portion of any such bond so called for redemption.
Except as otherwise provided in Section 3 of this Article I with respect to
the payment of interest, the Company, the agencies of the Company and the
Trustee may deem and treat the person in whose name a Toledo Edison Pledge Bond
due 2007 is registered as the absolute owner thereof for the purpose of
receiving any payment and for all other purposes.
SECTION 5. The Toledo Edison Pledge Bonds due 2007 shall be redeemable only
to the extent provided in this Article I, subject to the provisions contained in
Article V of the Indenture and the form of Toledo Edison Pledge Bond due 2007.
SECTION 6. Subject to the applicable provisions of the Indenture, written
notice of redemption of Toledo Edison Pledge Bonds due 2007
<PAGE> 33
28
pursuant to this Supplemental Indenture shall be given by the Trustee by mailing
to each registered owner of such Toledo Edison Pledge Bonds due 2007 to be
redeemed a notice of such redemption, first class postage prepaid, at its last
address as it shall appear upon the books of the Company for the registration
and transfer of such Toledo Edison Pledge Bonds due 2007. Any notice of
redemption shall be mailed at least 30 days, but no more than 60 days, prior to
the redemption date. In the event of partial redemption of Toledo Edison Pledge
Bonds due 2007, the Trustee shall select the Toledo Edison Pledge Bonds due 2007
or portions thereof to be redeemed, subject to the provisions of this
Supplemental Indenture, in such manner as the Trustee shall deem appropriate and
fair.
SECTION 7. If and when any Notes due 2007 shall be purchased and
surrendered to the Note Trustee for cancellation pursuant to the Note Indenture,
or if and when the principal of any Notes due 2007 shall be paid pursuant to the
Note Indenture, then there shall be deemed to have been paid a principal amount
of the Toledo Edison Pledge Bonds due 2007 then outstanding which bears the same
ratio to the aggregate principal amount of Toledo Edison Pledge Bonds due 2007
then outstanding as the principal amount of the Notes due 2007 so purchased or
paid bears to the aggregate principal amount of the Notes due 2007 outstanding
immediately before such purchase or payment; provided however, that such
purchase or payment of Toledo Edison Pledge Bonds due 2007 shall be deemed to
have been made only when and to the extent that notice of such purchase or
payment of the principal amount of such Notes due 2007 shall have been given by
the Company to the Trustee. The Trustee may rely upon any such notification by
the Company that such purchase or payment of Notes due 2007 has been so made.
SECTION 8. The Toledo Edison Pledge Bonds due 2007 shall be redeemed by the
Company in whole at any time prior to maturity at a redemption price of 100% of
the principal amount to be redeemed, plus accrued and unpaid interest to the
redemption date, but only if the Trustee shall receive a written demand from the
Note Trustee for redemption of all Toledo Edison Pledge Bonds due 2007 held by
the Note Trustee stating that an "Event of Default" under the Note Indenture has
occurred and is continuing, that payment of the principal of the Notes due 2007
has been accelerated and that the Note Trustee is waiving notice of redemption;
provided, however, that the Toledo Edison Pledge Bonds due 2007 shall not be
redeemed in the event that prior to such redemption (a) the Trustee shall have
received a certificate of the Note Trustee (i) stating that there has been a
waiver of such Event of Default and a rescission and annulment of such
acceleration or (ii) withdrawing said written demand or (b) an event of default
under Section 6.01 of Article VI of the Indenture shall
<PAGE> 34
29
have occurred and be continuing, there has been a declaration of acceleration of
the principal of the Toledo Edison Pledge Bonds due 2007. The redemption of the
Toledo Edison Pledge Bonds due 2007 pursuant to this Section shall be made not
more than 60 days after receipt of the written demand.
SECTION 9. Any payment of interest on the Notes due 2007 shall be deemed to
constitute payment of interest on the Toledo Edison Pledge Bonds due 2007 in an
amount equal to the amount of interest paid on the Notes due 2007 multiplied by
the Toledo Edison 2007 Ratio; provided, however, that such payment of interest
shall be deemed to have been made only when and to the extent that notice of
such payment of interest on such Notes due 2007 shall have been given by the
Company to the Trustee. The Trustee may rely upon any such notification by the
Company that such payment of interest has been so made.
SECTION 10. Any Toledo Edison Pledge Bonds due 2007 at any time purchased
or otherwise acquired by the Company shall be surrendered to the Trustee for
cancellation and the Trustee shall forthwith cancel the same.
SECTION 11. All Toledo Edison Pledge Bonds due 2007 deemed to have been
redeemed or paid in full as provided in Section 7 of this Article I shall be
surrendered to the Trustee for cancellation and the Trustee shall forthwith
cancel the same. In the event that part of a Toledo Edison Pledge Bond due 2007
shall be deemed to have been redeemed or paid as provided in said Section 7, the
registered owner may, at its option, surrender such Toledo Edison Pledge Bond
due 2007 to the Trustee for cancellation, in which event the Trustee shall
cancel such Toledo Edison Pledge Bond due 2007 and the Company shall execute and
the Trustee shall authenticate and deliver to the registered owner one or more
new fully registered Toledo Edison Pledge Bonds due 2007 in such authorized
denominations as shall be specified by the registered owner in an aggregate
principal amount equal to the unpaid balance of the principal amount of such
surrendered Bond.
SECTION 12. Toledo Edison Pledge Bonds due 2007 shall not be transferable
unless the registered owner shall have first surrendered the same to the Trustee
for notation thereon of all payments of principal deemed to have been made
thereon under Section 7 of this Article I or for cancellation and execution,
authentication and delivery of Toledo Edison Pledge Bonds due 2007 in an
aggregate principal amount equal to the unpaid balance of the principal amount
of such surrendered Toledo Edison Pledge Bonds due 2007 under Section 11 of this
Article I.
<PAGE> 35
30
SECTION 13. The aggregate principal amount of Toledo Edison Pledge Bonds
due 2007 which may be authenticated and delivered hereunder shall not exceed $30
million, except as otherwise provided in the Indenture.
SECTION 14. The form of the fully registered Toledo Edison Pledge Bonds
due 2007, and of the Trustee's certificate of authentication thereon, shall be
substantially as follows:
[FORM OF FULLY REGISTERED BOND OF 2007 SERIES]
THE TOLEDO EDISON COMPANY
Incorporated under the laws of the State of Ohio
FIRST MORTGAGE BOND, SERIES DUE 2007
Due July 1, 2007
No. $
THE TOLEDO EDISON COMPANY, a corporation organized and existing under the
laws of the State of Ohio (hereinafter called the "Company", which term shall
include any successor corporation as defined in the Indenture hereinafter
referred to), for value received, hereby promises to pay to
, or registered assigns,
the sum of Dollars ($ ) or
the aggregate unpaid principal amount hereof (as shown on the Schedule of
Payments hereon), whichever is less, on July 1, 2007, in any coin or currency of
the United States of America which at the time of payment is legal tender for
the payment of public and private debts, and to pay interest on the unpaid
principal amount hereof in like coin or currency from the time hereinafter
provided, at such rate per annum as shall cause the amount of interest payable
hereon to equal the amount of interest payable on the same proportion of the
Notes due 2007 (hereinafter defined) then outstanding as this Toledo Edison
Pledge Bond due 2007 is to the aggregate principal amount of (i) the Toledo
Edison Pledge Bonds due 2007 then outstanding and (ii) the Cleveland Electric
Pledge Bonds due 2007 issued pursuant to (and as defined in) the Seventy-Fourth
Supplemental Indenture to a Mortgage and Deed of Trust dated July 1, 1940 by and
between The Cleveland Electric Illuminating Company and The Chase Manhattan Bank
as Trustee (the "Cleveland Electric Pledge Bonds due 2007") then outstanding.
The ratio of Toledo Edison Pledge Bonds due 2007 outstanding at any time to the
aggregate principal amount of the Cleveland Electric Pledge Bonds due 2007 then
outstanding and the Toledo Edison Pledge Bonds due 2007 then outstanding is
hereinafter referred to as the "Toledo Edison 2007 Ratio." The interest on the
Toledo Edison Pledge Bonds due 2007 is payable on January 1 and July 1 in each
year starting on July 1, 1997 (each such date herein called an
<PAGE> 36
31
"interest payment date"), and on and until the date of maturity of this Bond,
or, if this Bond shall be duly called for redemption, on and until the
redemption date, or, if the Company shall default in the payment of the
principal amount of this Bond, until the Company's obligation with respect to
the payment of such principal shall be discharged as provided in said Indenture.
Except as hereinafter provided, this Bond shall bear interest from the date of
initial authentication of this Bond or the most recent date to which interest
has been paid or duly provided for until the principal of this Bond has been
paid or duly provided for. Subject to certain exceptions provided in said
Indenture, the interest payable on any interest payment date shall be paid to
the person in whose name this Bond shall be registered at the close of business
on the Record Date or, in the case of defaulted interest, on a day preceding the
date of payment thereof established by notice to the registered owner of this
Bond in the manner provided in the Supplemental Indenture (hereinafter defined).
Principal of and interest on this Bond are payable at the agency of the Company
in the Borough of Manhattan, The City of New York, or, at the option of the
registered owner, at the agency of the Company in the City of Toledo, State of
Ohio.
This Bond is one of the duly authorized Bonds of the Company (herein called
the "Bonds"), all issued and to be issued under and equally secured by a
Mortgage and Deed of Trust, dated as of April 1, 1947 (herein called the
"Original Indenture"), executed by the Company to The Chase National Bank of the
City of New York, now succeeded by The Chase Manhattan Bank as Trustee (herein
called the "Trustee"), and all indentures supplemental thereto (said Mortgage as
so supplemented herein called the "Indenture") to which reference is hereby made
for a description of the properties mortgaged and pledged, the nature and extent
of the security, the rights of the registered owner or owners of the Bonds and
of the Trustee in respect thereof, and the terms and conditions upon which the
Bonds are, and are to be, secured. The Bonds may be issued in series, for
various principal sums, may mature at different times, may bear interest at
different rates and may otherwise vary as in the Indenture provided. This Bond
is one of a series designated as the First Mortgage Bonds, Series due 2007
(herein called the "Toledo Edison Pledge Bonds due 2007") limited, except as
otherwise provided in the Indenture, in aggregate principal amount to $30
million, issued under and secured by the Indenture and described in the
Forty-sixth Supplemental Indenture dated as of June 15, 1997, between the
Company and the Trustee (herein called the "Supplemental Indenture").
The Toledo Edison Pledge Bonds due 2007 have been delivered by the Company
to The Chase Manhattan Bank, as trustee (hereinafter called the "Note Trustee"),
pursuant to a Note Indenture, dated as of
<PAGE> 37
32
June 13, 1997, among the Company, The Cleveland Electric Illuminating Company
and the Note Trustee, under which the Note Trustee holds the Toledo Edison
Pledge Bonds due 2007, together with the Cleveland Electric Pledge Bonds due
2007, as a portion of the security for the payment of principal of and interest
on the Secured Notes issued under the Note Indenture.
If and when any Secured Notes due 2007 issued under the Note Indenture
(herein called the "Notes due 2007") are purchased and surrendered to the Note
Trustee for cancellation pursuant to the Note Indenture, or the principal of any
Notes due 2007 is paid pursuant to the Note Indenture, then there shall be
deemed to be paid a principal amount of the Toledo Edison Pledge Bonds due 2007
then outstanding which bears the same ratio to the aggregate principal amount of
Toledo Edison Pledge Bonds due 2007 outstanding immediately before such purchase
or payment as the principal amount of the Notes due 2007 so purchased or paid
bears to the aggregate principal amount of the Notes due 2007 outstanding
immediately before such purchase or payment; provided, however, that such
purchase or payment of Toledo Edison Pledge Bonds due 2007 is deemed to be made
only when and to the extent that notice of such purchase or payment of such
Notes due 2007 is given by the Company to the Trustee.
Any payment of interest on the Notes due 2007 shall be deemed to constitute
payment of interest on the Toledo Edison Pledge Bonds due 2007 in an amount
equal to the amount of interest paid on the Notes due 2007 multipled by the
Toledo Edison 2007 Ratio; provided, however, that such payment of interest is
deemed to be made only when and to the extent that notice of such payment of
interest on such Notes due 2007 is given by the Company to the Trustee.
In the event that this Bond is deemed to be paid or redeemed in full, this
Bond shall be surrendered to the Trustee for cancellation. In the event that
this Bond is deemed to be paid or redeemed in part, this Bond may, at the option
of the registered owner, be surrendered to the Trustee for cancellation, in
which event the Trustee will cancel this Bond and the Company will execute and
the Trustee will authenticate and deliver to the registered owner Toledo Edison
Pledge Bonds due 2007 in authorized denominations in aggregate principal amount
equal to the unpaid balance of the principal amount of this Bond.
The Toledo Edison Pledge Bonds due 2007 shall be redeemed by the Company
prior to maturity in whole at any time as provided in Section 8 of Article I of
the Supplemental Indenture at a redemption price of 100% of the principal amount
to be redeemed, plus accrued and unpaid interest to the redemption date.
<PAGE> 38
33
Any redemption of the Toledo Edison Pledge Bonds due 2007 shall be made in
accordance with the applicable provisions of Sections 5.02, 5.03, 5.04 and 5.05
of the Original Indenture, unless and to the extent waived in writing by the
registered owner or owners of all Toledo Edison Pledge Bonds due 2007 and such
waiver is filed with the Trustee.
To the extent permitted by and as provided in the Indenture, the rights and
obligations of the Company and of the holders of said Bonds and coupons
(including those pertaining to any sinking or other fund) may be changed and
modified, with the consent of the Company by the holders of at least 75% in
aggregate principal amount of the Bonds then outstanding, such percentage being
determined as provided in the Indenture; provided, however, that in case such
changes and modifications affect one or more but less than all series of Bonds
then outstanding, they shall be required to be adopted only by the affirmative
vote of the holders of at least 75% in aggregate principal amount of outstanding
Bonds of such one or more series so affected; and further provided, that without
the consent of the holder hereof no such change or modification shall be made
which will extend the time of payment of the principal of, or of the interest or
premium, if any, on this Bond or reduce the principal amount hereof or the rate
of interest or the premium, if any, hereon, or affect any other modification of
the terms of payment of such principal or interest, or premium, if any, or will
permit the creation of any lien ranking prior to or on a party with the lien of
the Indenture on any of the mortgaged property, or will deprive the holder
hereof of the benefit of a lien upon the mortgaged property for the security of
this Bond, or will reduce the percentage of Bonds required for the adoption of
changes or modifications as aforesaid.
If an event of default, as defined in the Indenture, shall occur, the
principal of all the Bonds at any such time outstanding under the Indenture may
be declared or may become due and payable, upon the conditions and in the manner
and with the effect provided in the Indenture. The Indenture provides that such
declaration may in certain events be waived by the holders of a majority in
principal amount of the Bonds outstanding.
Subject to the limitations provided in the Indenture and the Note
Indenture, this Bond is transferable by the registered owner hereof, in person
or by duly authorized attorney, on the books of the Company to be kept for that
purpose at the agency of the Company in the Borough of Manhattan, The City of
New York, upon surrender and cancellation of this Bond, and upon presentation of
a duly executed written instrument of transfer, and thereupon a new fully
registered bond or bonds of the same series, of the same aggregate principal
amount and in authorized denominations will be issued to the transferee or
trans-
<PAGE> 39
34
ferees in exchange herefor; and this Bond, with or without others of the same
series, may in like manner be exchanged for one or more new fully registered
Toledo Edison Pledge Bonds due 2007 of other authorized denominations but of the
same aggregate principal amount; all without charge except for any tax or taxes
or other governmental charges incidental to such transfer or exchange and all
subject to the terms and conditions set forth in the Indenture. In the event
less than all of the Toledo Edison Pledge Bonds due 2007 at the time outstanding
are called for redemption, the Company shall not be required (a) to register any
transfer or make any exchange of any such Bond for a period of 15 days before
the mailing of the notice of redemption of any such Bonds, (b) to register any
transfer or make any exchange of any such Bond called for redemption in its
entirety, or (c) to register any transfer or make any exchange of any portion of
any such Bond which has been called for redemption. Except as otherwise provided
herein with respect to the payment of interest, the Company, the agencies of the
Company and the Trustee may deem and treat the person in whose name this Bond is
registered as the absolute owner hereof for the purpose of receiving any payment
and for all other purposes.
No recourse shall be had for the payment of the principal of or the
interest on this Bond, or for any claim based hereon or on the Indenture or any
indenture supplemental thereto, against any incorporator, or against any
stockholder, director or officer, past, present or future, of the Company, or of
any predecessor or successor corporation, as such, either directly or through
the Company or any such predecessor or successor corporation, whether by virtue
of any constitution, statute or rule of law, or by the enforcement of any
assessment or penalty or otherwise, all such liability, whether at common law,
in equity, by any constitution or statute or otherwise, of incorporators,
stockholders, directors or officers being released by every owner hereof by the
acceptance of this Bond and as part of the consideration for the issue hereof,
and being likewise released by the terms of the Indenture.
This Bond shall not be entitled to any benefit under the Indenture or any
indenture supplemental thereto, or become valid or obligatory for any purpose,
until the Trustee under the Indenture, or a successor trustee thereto under the
Indenture, shall have signed the form of certificate of authentication endorsed
hereon.
<PAGE> 40
35
IN WITNESS WHEREOF, The Toledo Edison Company has caused this Bond to be
signed in its name by its President or a Vice President (whose signature may be
manual or a facsimile thereof) and its corporate seal (or a facsimile thereof)
to be hereto affixed and attested by its Secretary or an Assistant Secretary
(whose signature may be manual or a facsimile thereof).
Dated:
THE TOLEDO EDISON COMPANY
By ....................................................
Attest:
.............................
Secretary
[FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION]
This Bond is one of the Bonds of the series designated and described in the
within-mentioned Indenture and Supplemental Indenture.
THE CHASE MANHATTAN BANK,
TRUSTEE
By ...........................................
AUTHORIZED OFFICER
<PAGE> 41
36
[FORM OF SCHEDULE OF PAYMENTS]
SCHEDULE OF PAYMENTS
<TABLE>
<CAPTION>
AGENCY
OF THE
UNPAID COMPANY
PRINCIPAL PRINCIPAL PREMIUM INTEREST MAKING AUTHORIZED
DATE PAYMENT AMOUNT PAYMENT PAYMENT NOTATION OFFICER TITLE
- --------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
[END OF FORM OF FULLY REGISTERED BOND]
ARTICLE IV
THE TRUSTEE
SECTION 1. The Trustee accepts the trusts created by this Supplemental
Indenture upon the terms and conditions in the Original Indenture and in this
Supplemental Indenture set forth. The recitals in this Supplemental Indenture
are made by the Company only and not by the Trustee. Each and every term and
condition contained in Article 13 of the Original Indenture shall apply to this
Supplemental Indenture with the same force and effect as if the same were herein
set forth in fully, with such omissions, variations and modifications thereof as
may be appropriate to make the same conform to this Supplemental Indenture.
SECTION 2. The Company shall cause any agency of the Company, other than
the Trustee, which it may appoint from time to time to act as such agency in
respect of the Toledo Edison Pledge Bonds, to execute and deliver to the Trustee
an instrument in which such agency shall:
(a) Agree to keep and maintain, and furnish to the Trustee from time
to time as reasonably requested by the Trustee, appropriate records of all
transactions carried out by it as such agency and to furnish the Trustee
such other information and reports as the Trustee may reasonably require;
(b) Certify that it is eligible for appointment as such agency and
agree to notify the Trustee promptly if it shall cease to be so eligible;
and
(c) Agree to indemnify the Trustee, in a manner satisfactory to the
Trustee, against any loss, liability or expense incurred by, and defend any
claim asserted against, the Trustee by reason of any acts or failures to
act as such agency, except for any liability resulting from any action
taken by it at the specific direction of the Trustee;
<PAGE> 42
37
provided, however, that the Company, in lieu of causing any such agency to
furnish such an instrument, may make such other arrangements with the Trustee in
respect of any such agency as shall be satisfactory to the Trustee.
SECTION 3. The Trustee shall advise the Company in writing of the notation
or receipt of written notice of notation on or cancellation of any Toledo Edison
Pledge Bond provided for in Sections 7, 8, 9, 10 and 11, Articles I, II and III
of this Supplemental Indenture.
SECTION 4. For purposes of the Original Indenture, the Supplemental
Indenture and the Toledo Edison Pledge Bonds, the Trustee is permitted to assume
for all purposes that the rates of interest on the Toledo Edison Pledge Bonds
are the applicable initial interest rates expressed in this Supplemental
Indenture until such time as the Company shall deliver an Officers' Certificate
stating a change in the interest rates and the dates from which such rates shall
be effective. Upon receipt of such an Officers' Certificate, the Trustee is
permitted to assume for all purposes that the rates of interest on the Toledo
Edison Pledge Bonds are as set forth in such Officers' Certificate until such
time as such Officers' Certificate shall be superseded by a subsequent Officers'
Certificate delivered pursuant to this Section 4, in which case, the Trustee is
permitted to assume for all purposes that the rates of interest on the Toledo
Edison Pledge Bonds are those set forth in the most current Officers'
Certificate delivered pursuant to this Section 4. Absent the receipt by it of an
Officers' Certificate specifying a change in interest rates pursuant to this
Supplemental Indenture and the Toledo Edison Pledge Bonds, the Trustee shall not
be charged with having had knowledge of such change in rates of interest
regardless of any notice it may receive or knowledge it may have in its capacity
as Note Trustee.
ARTICLE V
MISCELLANEOUS PROVISIONS
SECTION 1. The Original Indenture, as heretofore supplemented, is in all
respects ratified and confirmed, and the Original Indenture, this Supplemental
Indenture and all other indentures supplemental to the Original Indenture shall
be read, taken and construed as one and the same instrument. Neither the
execution of this Supplemental Indenture nor anything herein contained shall be
construed to impair the lien of the Indenture on any of the property subject
thereto, and such lien shall remain in full force and effect as security for all
bonds now outstanding or hereafter issued under the Indenture. All covenants and
provisions of the Original Indenture, except as modified by this Supplemental
Indenture and all other indentures supplemental to the Original
<PAGE> 43
38
Indenture, shall continue in full force and effect for the respective periods of
time therein specified, and this Supplemental Indenture shall form part of the
Indenture. All terms defined in Article 1 of the Original Indenture shall, for
all purposes of this Supplemental Indenture, have the meanings in said Article 1
specified, except as modified by this Supplemental Indenture and all other
indentures supplemental to the Original Indenture and unless the context
otherwise requires.
SECTION 2. This Supplemental Indenture may be simultaneously executed in
any number of counterparts, and all said counterparts executed and delivered,
each as an original, shall constitute but one and the same instrument.
EXECUTION
IN WITNESS WHEREOF, The Toledo Edison Company has caused its corporate name
to be hereunto affixed, this instrument to be signed by its President or a Vice
President and its corporate seal to be hereunto affixed and attested by its
Secretary or an Assistant Secretary for and in its behalf and The Chase
Manhattan Bank, as Trustee, in evidence of its acceptance of the trust hereby
created, has caused its corporate name to be hereunto affixed, this instrument
to be signed by its President or a Vice President and its corporate seal to be
hereunto affixed and attested by its Secretary, an Assistant Secretary or a
Corporate Trust Officer, for and in its behalf, all as of the day and year first
above written.
<PAGE> 44
R-1
This page contains information as to recording and filing which was not set
forth in this Supplemental Indenture at the time of execution. This page is not
a part of this Supplemental Indenture.
RECORDING AND FILING DATA
This Supplemental Indenture was filed for record and recorded in the record
of mortgages in the offices of the Recorders of the following Counties:
<TABLE>
<CAPTION>
COUNTY VOLUME PAGE FILED FOR RECORD
- ---------------- --------------- -------------------------------------
<S> <C> <C> <C>
Ohio
Belmont
Defiance
Erie
Fulton
Henry
Lake
Monroe
Ottawa
Paulding June 17, 1997
Putnam
Sandusky
Seneca
Williams
Wood
Pennsylvania
Beaver
MICROFICHE
----------
Lucas, Ohio June 17, 1997
</TABLE>
An amendment to a previously filed financing statement and a counterpart of
this Supplemental Indenture were filed in the office of the Secretary of the
Commonwealth of Pennsylvania on June 17, 1997 under original or amendment file
number 07851362, microfilm number 24581784, to comply with the filing
requirements of the Pennsylvania enactment of the Uniform Commercial Code.
<PAGE> 1
Exhibit 4(c)
================================================================================
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
AND
THE TOLEDO EDISON COMPANY
-----------------------------------
INDENTURE
DATED AS OF JUNE 13, 1997
-----------------------------------
THE CHASE MANHATTAN BANK
Trustee
================================================================================
<PAGE> 2
Certain Sections of this Indenture relating to Sections 310 through 318,
inclusive, of the Trust Indenture Act of 1939:
Trust Indenture Indenture
Act Section Section
Section 310(a) (1)........................................... 7.09
(a) (2).............................................. 7.09
(a) (3).............................................. Not Applicable
(a) (4).............................................. Not Applicable
(b).................................................. 7.08
...................................... 7.10
311 (a).................................................. 7.13
(b).................................................. 7.13
312 (a).................................................. 8.01
...................................... 8.02
(b).................................................. 8.02
(c).................................................. 8.02
313 (a).................................................. 8.03
(b).................................................. 8.03
(c).................................................. 8.03
(d).................................................. 8.03
314 (a).................................................. 8.04
(a) (4).............................................. 1.01
...................................... 11.04
(b).................................................. 11.05
(c) (1).............................................. 1.02
(c) (2).............................................. 1.02
(c) (3).............................................. Not Applicable
(d).................................................. 1.02
(e).................................................. 1.02
315 (a).................................................. 7.01
(b).................................................. 7.02
(c).................................................. 7.01
(d).................................................. 7.01
(e).................................................. 6.14
316 (a).................................................. 1.01
(a) (1) (A).......................................... 6.02
...................................... 6.12
(a) (1) (B).......................................... 6.13
(a) (2).............................................. Not Applicable
(b).................................................. 6.08
(c).................................................. 1.04
317 (a) (1).............................................. 6.03
(a) (2).............................................. 6.04
(b).................................................. 11.03
318 (a).................................................. 1.07
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Note: This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Indenture.
<PAGE> 3
TABLE OF CONTENTS
Page
----
<TABLE>
<CAPTION>
ARTICLE I.
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
<S> <C>
SECTION 1.01. Definitions.............................................................................. 1
Act............................................................................................ 2
Affiliate...................................................................................... 2
AMBAC Indemnity................................................................................ 2
Authenticating Agent........................................................................... 2
Board of Directors............................................................................. 2
Board Resolutions.............................................................................. 2
Business Day................................................................................... 2
Cleveland Electric............................................................................. 2
Cleveland Electric First Mortgage.............................................................. 2
Cleveland Electric First Mortgage Bonds........................................................ 2
Commission..................................................................................... 2
Company........................................................................................ 2
Company Request or Company Order............................................................... 3
Corporate Trust Office......................................................................... 3
Corporation.................................................................................... 3
Covenant Defeasance............................................................................ 3
Defaulted Interest............................................................................. 3
Defeasance..................................................................................... 3
Depository..................................................................................... 3
Event of Default............................................................................... 3
Exchange Act................................................................................... 3
Expiration Date................................................................................ 3
Financial Guaranty Insurance Policy............................................................ 3
First Mortgage................................................................................. 3
First Mortgage Bonds........................................................................... 3
Global Security................................................................................ 3
Holder......................................................................................... 3
Indenture...................................................................................... 3
independent.................................................................................... 4
Insured Security............................................................................... 4
Interest....................................................................................... 4
Interest Payment Date.......................................................................... 4
Investment Company Act......................................................................... 4
Maturity....................................................................................... 4
Mortgage Trustees.............................................................................. 4
Notice of Default.............................................................................. 4
Officer's Certificate.......................................................................... 4
Opinion of Counsel............................................................................. 4
Original Issue Discount Security............................................................... 4
</TABLE>
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<TABLE>
<S> <C>
Outstanding.................................................................................... 4
Paying Agent................................................................................... 5
Person......................................................................................... 5
Place of Payment............................................................................... 5
Predecessor Security........................................................................... 5
Redemption Date................................................................................ 6
Redemption Price............................................................................... 6
Regular Record Date............................................................................ 6
Responsible Officer............................................................................ 6
Securities..................................................................................... 6
Securities Act................................................................................. 6
Security Register and Security Registrar....................................................... 6
Special Record Date............................................................................ 6
Stated Maturity................................................................................ 6
Subsidiary..................................................................................... 6
Toledo Edison.................................................................................. 6
Toledo Edison First Mortgage................................................................... 6
Toledo Edison First Mortgage Bonds............................................................. 7
Trust Indenture Act............................................................................ 7
Trustee........................................................................................ 7
U.S. Government Obligation..................................................................... 7
Vice President................................................................................. 7
SECTION 1.02. Compliance Certificates and Opinions..................................................... 7
SECTION 1.03. Form of Documents Delivered to Trustee................................................... 7
SECTION 1.04. Acts of Holders; Record Dates........................................................... 8
SECTION 1.05. Notices, Etc., to the Trustee and the Companies..........................................10
SECTION 1.06. Notice to Holders; Waiver............................................................... 10
SECTION 1.07. Conflict with Trust Indenture Act....................................................... 11
SECTION 1.08. Effect of Headings and Table of Contents ............................................... 11
SECTION 1.09. Successors and Assigns.................................................................. 11
SECTION 1.10. Separability Clause..................................................................... 11
SECTION 1.11. Benefits of Indenture................................................................... 11
SECTION 1.12. Governing Law........................................................................... 11
SECTION 1.13. Legal Holidays.......................................................................... 11
SECTION 1.14. Joint and Several Liability of the Companies............................................ 12
SECTION 1.15. Immunity of Incorporators, Stockholders, Officers and Directors..........................12
ARTICLE II.
SECURITY FORMS
SECTION 2.01. Forms Generally......................................................................... 12
SECTION 2.02. Reserved................................................................................ 12
SECTION 2.03. Reserved................................................................................ 12
SECTION 2.04. Form of Legend for Global Securities.................................................... 12
SECTION 2.05. Form of Trustee's Certificate of Authentication......................................... 13
</TABLE>
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<TABLE>
<CAPTION>
ARTICLE III.
THE SECURITIES
<S> <C> <C>
SECTION 3.01. Amount Unlimited; Issuable in Series.................................................... 13
SECTION 3.02. Denominations........................................................................... 15
SECTION 3.03. Execution, Authentication, Delivery and Dating.......................................... 15
SECTION 3.04. Temporary Securities.................................................................... 17
SECTION 3.05. Registration, Registration of Transfer and Exchange..................................... 18
SECTION 3.06. Mutilated, Destroyed, Lost and Stolen Securities........................................ 19
SECTION 3.07. Payment of Interest; Interest Rights Preserved.......................................... 20
SECTION 3.08. Persons Deemed Owners................................................................... 20
SECTION 3.09. Cancellation............................................................................ 21
SECTION 3.10. Computation of Interest................................................................. 21
SECTION 3.11. CUSIP Numbers........................................................................... 21
SECTION 3.12. Payments on First Mortgage Bonds........................................................ 21
ARTICLE IV.
FIRST MORTGAGE BONDS
SECTION 4.01. Acceptance of First Mortgage Bonds...................................................... 21
SECTION 4.02. Terms of First Mortgage Bonds........................................................... 21
SECTION 4.03. First Mortgage Bonds as Security for Securities......................................... 22
SECTION 4.04. Reserved................................................................................ 22
SECTION 4.05. First Mortgage Bonds Held by the Trustee................................................ 22
SECTION 4.06. No Transfer of First Mortgage Bonds; Exception.......................................... 22
SECTION 4.07. Delivery to the Companies of all First Mortgage Bonds................................... 22
SECTION 4.08. Further Assurances...................................................................... 23
SECTION 4.09. Exchange and Surrender of First Mortgage Bonds.......................................... 23
ARTICLE V.
SATISFACTION AND DISCHARGE
SECTION 5.01. Satisfaction and Discharge of Indenture................................................. 24
SECTION 5.02. Application of Trust Money.............................................................. 25
SECTION 5.03 Paying Agent to Repay Moneys Held........................................................25
SECTION 5.04 Return of Unclaimed Moneys...............................................................25
ARTICLE VI.
REMEDIES
SECTION 6.01. Events of Default....................................................................... 25
SECTION 6.02. Acceleration of Maturity; Rescission and Annulment...................................... 27
SECTION 6.03. Collection of Indebtedness and Suits for Enforcement by Trustee......................... 28
SECTION 6.04. Trustee May File Proofs of Claim........................................................ 28
SECTION 6.05. Trustee May Enforce Claims Without Possession of Securities............................. 29
SECTION 6.06. Application of Money Collected...........................................................29
</TABLE>
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<TABLE>
<S> <C> <C>
SECTION 6.07. Limitation on Suits..................................................................... 29
SECTION 6.08. Unconditional Right of Holders to Receive Principal,
Premium and Interest.............................................................. 30
SECTION 6.09. Restoration of Rights and Remedies...................................................... 30
SECTION 6.10. Rights and Remedies Cumulative.......................................................... 30
SECTION 6.11. Delay or Omission Not Waiver............................................................ 30
SECTION 6.12. Control by Holders...................................................................... 30
SECTION 6.13. Waiver of Past Defaults................................................................. 31
SECTION 6.14. Undertaking for Costs................................................................... 31
SECTION 6.15. Waiver of Usury, Stay or Extension Laws................................................. 31
ARTICLE VII.
THE TRUSTEE
SECTION 7.01. Certain Duties and Responsibilities..................................................... 32
SECTION 7.02. Notice of Defaults...................................................................... 32
SECTION 7.03. Certain Rights of Trustee............................................................... 32
SECTION 7.04. Not Responsible for Recitals or Issuance of Securities ................................. 33
SECTION 7.05. May Hold Securities..................................................................... 34
SECTION 7.06. Money Held in Trust..................................................................... 34
SECTION 7.07. Compensation and Reimbursement ......................................................... 34
SECTION 7.08. Conflicting Interests................................................................... 34
SECTION 7.09. Corporate Trustee Required; Eligibility................................................. 35
SECTION 7.10. Resignation and Removal; Appointment of Successor....................................... 35
SECTION 7.11. Acceptance of Appointment by Successor.................................................. 36
SECTION 7.12. Merger, Conversion, Consolidation or Succession to Business............................. 37
SECTION 7.13. Preferential Collection of Claims Against Companies..................................... 37
SECTION 7.14. Appointment of Authenticating Agent..................................................... 37
ARTICLE VIII.
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANIES
SECTION 8.01. Companies to Furnish Trustee Names and Addresses of Holders............................. 39
SECTION 8.02. Preservation of Information; Communications to Holders.................................. 39
SECTION 8.03. Reports by Trustee...................................................................... 39
SECTION 8.04. Reports by Companies.................................................................... 40
ARTICLE IX.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 9.01. Companies May Consolidate, Etc., Only on Certain Terms.................................. 40
SECTION 9.02. Successor Substituted................................................................... 41
</TABLE>
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<TABLE>
<CAPTION>
ARTICLE X.
AMENDMENTS, SUPPLEMENTS AND WAIVERS
<S> <C> <C>
SECTION 10.01. Without Consent of Holders............................................................. 41
SECTION 10.02. With Consent of Holders................................................................ 42
SECTION 10.03. Execution of Amendments or Supplements................................................. 43
SECTION 10.04. Effect of Amendments or Supplements.................................................... 43
SECTION 10.05. Conformity with Trust Indenture Act.................................................... 43
SECTION 10.06. Reference in Securities to Amendments or Supplements................................... 43
ARTICLE XI.
COVENANTS
SECTION 11.01. Payment of Principal, Premium and Interest............................................. 44
SECTION 11.02. Maintenance of Office or Agency........................................................ 44
SECTION 11.03. Money for Securities Payments to Be Held in Trust...................................... 44
SECTION 11.04. Statement by Officers as to Default.................................................... 45
SECTION 11.05. Recording, Filing, Etc.; Opinions of Counsel........................................... 45
SECTION 11.06. Waiver of Certain Covenants............................................................ 46
SECTION 11.07. Calculation of Original Issue Discount................................................. 46
ARTICLE XII.
REDEMPTION OF SECURITIES
SECTION 12.01. Applicability of Article............................................................... 46
SECTION 12.02. Election to Redeem; Notice to Trustee.................................................. 46
SECTION 12.03. Selection by Trustee of Securities to Be Redeemed...................................... 47
SECTION 12.04. Notice of Redemption................................................................... 47
SECTION 12.05. Securities Payable on Redemption Date; Deposit
of Redemption Price............................................................ 48
SECTION 12.06. Reserved .............................................................................. 48
SECTION 12.07. Securities Redeemed in Part............................................................ 48
ARTICLE XIII.
SINKING FUNDS
SECTION 13.01. Applicability of Article............................................................... 49
SECTION 13.02. Satisfaction of Sinking Fund Payments with Securities.................................. 49
SECTION 13.03. Redemption of Securities for Sinking Fund.............................................. 49
</TABLE>
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<TABLE>
<CAPTION>
ARTICLE XIV.
DEFEASANCE AND COVENANT DEFEASANCE
<S> <C> <C>
SECTION 14.01. Option of the Companies to Effect Defeasance or
Covenant Defeasance.............................................................. 50
SECTION 14.02. Defeasance and Discharge............................................................... 50
SECTION 14.03. Covenant Defeasance.................................................................... 50
SECTION 14.04. Conditions to Defeasance or Covenant Defeasance........................................ 51
SECTION 14.05. Deposited Money and U.S. Government Obligations to Be Held in
Trust; Miscellaneous Provisions.................................................. 52
SECTION 14.06. Reinstatement.......................................................................... 53
SIGNATURES.............................................................................................S-1
</TABLE>
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<PAGE> 9
INDENTURE, dated as of June 13, 1997, among THE CLEVELAND
ELECTRIC ILLUMINATING COMPANY, a corporation duly organized and existing under
the laws of the State of Ohio (herein called "CLEVELAND ELECTRIC"), having its
principal office at 6200 Oak Tree Boulevard, Independence, Ohio 44131, THE
TOLEDO EDISON COMPANY, a corporation duly organized and existing under the laws
of the State of Ohio (herein called "TOLEDO EDISON"), having its principal
office at 300 Madison Avenue, Toledo, Ohio 43652, and THE CHASE MANHATTAN BANK,
a New York banking corporation, as Trustee (herein called the "TRUSTEE").
RECITALS OF THE COMPANY
The Companies (as hereinafter defined) have duly authorized
the execution and delivery of this Indenture to provide for the issuance from
time to time of bonds, debentures, notes or other evidences of indebtedness
(herein called the "SECURITIES"), to be issued in one or more series as in this
Indenture provided.
Subject to the provisions of SECTION 4.03, each or either
Company may issue one or more series of First Mortgage Bonds (as hereinafter
defined) and deliver such First Mortgage Bonds to the Trustee to hold in trust
for the benefit of the respective Holders from time to time of the related
series of Securities, or require the Trustee to deliver to the applicable
Company for cancellation any and all First Mortgage Bonds held by the Trustee.
All things necessary to make this Indenture a valid agreement
of the Companies in accordance with its terms, have been done.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of
the Securities by the Holders thereof, it is mutually agreed, for the benefit of
all Holders of the Securities or of series thereof, as follows:
ARTICLE I.
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 1.01. DEFINITIONS.
For all purposes of this Indenture, except as otherwise
expressly provided or unless the context otherwise requires:
(1) the terms defined in this Article have the meanings
assigned to them in this Article and include the plural as well as the
singular;
(2) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the
meanings assigned to them therein;
(3) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles, and, except as otherwise herein expressly
provided, the term "GENERALLY ACCEPTED ACCOUNTING PRINCIPLES" with
respect to any computation required or permitted hereunder shall mean
such accounting principles as are generally accepted in the United
States of America;
<PAGE> 10
(4) unless the context otherwise requires, any reference to an
"ARTICLE" or a "SECTION" refers to an Article or a Section, as the case
may be, of this Indenture; and
(5) the words "HEREIN", "HEREOF" and "HEREUNDER" and other
words of similar import refer to this Indenture as a whole and not to
any particular Article, Section or other subdivision.
"ACT", when used with respect to any Holder, has the meaning
specified in SECTION 1.04.
"AFFILIATE" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"CONTROL" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "CONTROLLING" and "CONTROLLED" have meanings correlative to the
foregoing.
"AMBAC INDEMNITY" means AMBAC Indemnity Corporation, a
Wisconsin-domiciled stock insurance company.
"AUTHENTICATING AGENT" means any Person authorized by the
Trustee pursuant to SECTION 7.14 to act on behalf of the Trustee to authenticate
Securities of one or more series.
"BOARD OF DIRECTORS" means the board of directors of either
Company or any duly authorized committee of either such board.
"BOARD RESOLUTIONS" mean copies of resolutions certified by
the Secretary or an Assistant Secretary or Associate Secretary of either Company
to have been duly adopted by the Board of Directors of that Company and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"BUSINESS DAY", when used with respect to any Place of
Payment, means each Monday, Tuesday, Wednesday, Thursday and Friday that is not
a day on which banking institutions in that Place of Payment are authorized or
obligated by law or executive order to close.
"CLEVELAND ELECTRIC" means the Person named as "CLEVELAND
ELECTRIC" in the first paragraph of this instrument until a successor Person
shall have become such pursuant to the applicable provisions of this Indenture,
and thereafter "CLEVELAND ELECTRIC" shall mean such successor Person.
"CLEVELAND ELECTRIC FIRST MORTGAGE" means the Mortgage and
Deed of Trust between Cleveland Electric and Guaranty Trust Company of New York
(now The Chase Manhattan Bank as successor trustee), as trustee, dated as of
July 1, 1940, as supplemented and amended from time to time, and including
without limitation, the Seventy-Fourth Supplemental Indenture thereto to be
dated June 15, 1997.
"CLEVELAND ELECTRIC FIRST MORTGAGE BONDS" mean any series of
first mortgage bonds issued by Cleveland Electric under the Cleveland Electric
First Mortgage and delivered to the Trustee pursuant to Section 4.01 hereof.
"COMMISSION" means the Securities and Exchange Commission,
from time to time constituted, created under the Exchange Act, or, if at any
time after the execution of this instrument such
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<PAGE> 11
Commission is not existing and performing the duties now assigned to it under
the Trust Indenture Act, then the body performing such duties at such time.
"COMPANY" means each of Cleveland Electric and Toledo Edison
and "COMPANIES" means, collectively, Cleveland Electric and Toledo Edison.
"COMPANY REQUEST" or "COMPANY ORDER" means a written request
or order signed in the name of either Company by one of its Chairman of the
Board, its President, its Vice President, its Chief Financial Officer, its
Treasurer, its Controller, its Secretary, or an Assistant Secretary, and
delivered to the Trustee.
"CORPORATE TRUST OFFICE" means the office of the Trustee in
New York at which at any particular time its corporate trust business shall be
principally administered, which office at the date hereof is located at 450 W.
33rd Street, New York, New York 10001.
"CORPORATION" means a corporation, association, company,
joint-stock company or business trust.
"COVENANT DEFEASANCE" has the meaning specified in SECTION
14.03.
"DEFAULTED INTEREST" has the meaning specified in SECTION
3.07.
"DEFEASANCE" has the meaning specified in SECTION 14.02.
"DEPOSITORY" means, with respect to Securities of any series
issuable in whole or in part in the form of one or more Global Securities, a
clearing agency registered under the Exchange Act that is designated to act as
Depository for such Securities as contemplated by SECTION 3.01.
"EVENT OF DEFAULT" has the meaning specified in SECTION 6.01.
"EXCHANGE ACT" means the Securities Exchange Act of 1934 and
any statute successor thereto, in each case as amended from time to time.
"EXPIRATION DATE" has the meaning specified in SECTION 1.04.
"FINANCIAL GUARANTY INSURANCE POLICY" shall mean the financial
guaranty insurance policy issued by AMBAC Indemnity insuring the payment when
due of the principal of and interest on any series of Securities issued
hereunder as provided therein.
"FIRST MORTGAGE" means each of the Cleveland Electric First
Mortgage and the Toledo Edison First Mortgage and "FIRST MORTGAGES" mean,
collectively, the Cleveland Electric First Mortgage and the Toledo Edison First
Mortgage.
"FIRST MORTGAGE BONDS" mean Cleveland Electric First Mortgage
Bonds or Toledo Edison First Mortgage Bonds delivered to the Trustee pursuant to
SECTION 4.01.
"GLOBAL SECURITY" means a Security that evidences all or part
of the Securities of any series and bears the legend described in SECTION 2.04
(or such legend as may be specified as contemplated by SECTION 3.01 for such
Securities), that is delivered to a Depository and that shall be registered in
the name of a Depository or nominee.
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<PAGE> 12
"HOLDER" means a Person in whose name a Security is registered
in the Security Register.
"INDENTURE" means this instrument as originally executed and
as it may from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof,
including, for all purposes of this instrument and any such supplemental
indenture, the provisions of the Trust Indenture Act that are deemed to be a
part of and govern this instrument and any such supplemental indenture,
respectively. The term "Indenture" shall also include the terms of particular
series of Securities established as contemplated by SECTION 3.01.
"INDEPENDENT", when applied to any accountant, appraiser, or
other expert, shall mean such a Person who is in fact independent, selected by
either Company and approved by the Trustee in the exercise of reasonable care.
"INSURED SECURITY" means a Security that is insured by a
Financial Guaranty Insurance Policy issued by AMBAC Indemnity.
"INTEREST", when used with respect to an Original Issue
Discount Security that by its terms bears interest only after Maturity, means
interest payable after Maturity.
"INTEREST PAYMENT DATE", when used with respect to any
Security, means the Stated Maturity of an installment of interest on such
Security.
"INVESTMENT COMPANY ACT" means the Investment Company Act of
1940 and any statute successor thereto, in each case as amended from time to
time.
"MATURITY", when used with respect to any Security, means the
date on which the principal of such Security or an installment of principal
becomes due and payable as therein or herein provided, whether at the Stated
Maturity or by declaration of acceleration, call for redemption or otherwise.
"MORTGAGE TRUSTEES" mean the Persons serving as trustee at the
time under the First Mortgages. "MORTGAGE TRUSTEE" means either of the Mortgage
Trustees.
"NOTICE OF DEFAULT" means a written notice of the kind
specified in SECTION 6.01(4).
"OFFICER'S CERTIFICATE" means a certificate signed by one of
the Chairman of the Board, the President, the Vice President, the Chief
Financial Officer, the Treasurer, the Controller, the Secretary or an Assistant
Secretary, of either Company, and delivered to the Trustee. The officer of
either Company signing an Officer's Certificate given pursuant to SECTION 11.04
shall be the principal executive, financial or accounting officer of that
Company.
"OPINION OF COUNSEL" means a written opinion of counsel, who
may be counsel for the Companies or other counsel, who shall be reasonably
acceptable to the Trustee.
"ORIGINAL ISSUE DISCOUNT SECURITY" means any Security that
provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration of the Maturity thereof pursuant to
SECTION 6.02.
"OUTSTANDING", when used with respect to Securities, means, as
of the date of
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<PAGE> 13
determination, all Securities theretofore authenticated and delivered under this
Indenture, except:
(1) Securities theretofore canceled by the Trustee or
delivered to the Trustee for cancellation;
(2) Securities for whose payment or redemption funds in the
necessary amount have been theretofore deposited with the Trustee or
any Paying Agent (other than either Company) in trust or set aside and
segregated in trust by the Companies (if either Company shall act as
Paying Agent for the Companies) for the Holders of such Securities;
provided that, if such Securities are to be redeemed, notice of such
redemption has been duly given pursuant to this Indenture or provision
therefor satisfactory to the Trustee has been made;
(3) Securities as to which Defeasance has been effected
pursuant to SECTION 14.02; and
(4) Securities that have been replaced pursuant to SECTION
3.06 or in exchange for or in lieu of which other Securities have been
authenticated and delivered pursuant to this Indenture, other than any
such Securities in respect of which there shall have been presented to
the Trustee proof satisfactory to it that such Securities are held by a
bona fide purchaser in whose hands such Securities are valid
obligations of the Companies;
provided, however, that in determining whether the Holders of the requisite
principal amount of the Outstanding Securities have given, made or taken any
request, demand, authorization, direction, notice, consent, waiver or other
action hereunder as of any date, (A) the principal amount of an Original Issue
Discount Security that shall be deemed to be Outstanding shall be the amount of
the principal thereof that would be due and payable as of such date upon
acceleration of the Maturity thereof to such date pursuant to SECTION 6.02, (B)
if, as of such date, the principal amount payable at the Stated Maturity of a
Security is not determinable, the principal amount of such Security that shall
be deemed to be Outstanding shall be the amount as specified or determined as
contemplated by SECTION 3.01, (C) the principal amount of a Security denominated
in one or more foreign currencies or currency units that shall be deemed to be
Outstanding shall be the U.S. dollar equivalent, determined as of such date in
the manner provided as contemplated by SECTION 3.01, of the principal amount of
such Security (or, in the case of a Security described in Clause (A) or (B)
above, of the amount determined as provided in such Clause), and (D) Securities
owned by either Company or any other obligor upon the Securities or any
Affiliate of either Company or of such other obligor shall be disregarded and
deemed not to be Outstanding, except that, in determining whether the Trustee
shall be protected in relying upon any such request, demand, authorization,
direction, notice, consent, waiver or other action, only Securities that the
Trustee actually knows to be so owned shall be so disregarded. Securities so
owned that have been pledged in good faith may be regarded as Outstanding if the
pledgee establishes to the satisfaction of the Trustee the pledgee's right so to
act with respect to such Securities and that the pledgee is not either Company
or any other obligor upon the Securities or any Affiliate of either Company or
of such other obligor. In the event that the principal and/or interest due on
any Security shall be paid by AMBAC Indemnity pursuant to a Financial Guaranty
Insurance Policy, such Security shall remain Outstanding for all purposes until
the Companies have reimbursed AMBAC Indemnity for such principal and/or interest
payments; and the Trustee shall be entitled to assume that any such Security is
Outstanding until it has received an Officer's Certificate from the Companies
stating that the Companies have reimbursed AMBAC Indemnity for the principal
and/or interest payments made by AMBAC Indemnity for such Security.
"PAYING AGENT" means any Person authorized by the Companies to
pay the principal of or any premium or interest on any Securities on behalf of
the Companies.
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<PAGE> 14
"PERSON" means any individual, corporation, partnership,
limited liability company, joint venture, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"PLACE OF PAYMENT", when used with respect to the Securities
of any series, means the place or places where the principal of and any premium
and interest on the Securities of that series are payable as specified as
contemplated by SECTION 3.01.
"PREDECESSOR SECURITY" of any particular Security means every
previous Security evidencing all or a portion of the same debt as that evidenced
by such particular Security; and, for the purposes of this definition, any
Security authenticated and delivered under SECTION 3.06 in exchange for or in
lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to
evidence the same debt as the mutilated, destroyed, lost or stolen Security.
"REDEMPTION DATE", when used with respect to any Security to
be redeemed, means the date fixed for such redemption by or pursuant to this
Indenture.
"REDEMPTION PRICE", when used with respect to any Security to
be redeemed, means the price at which it is to be redeemed pursuant to this
Indenture.
"REGULAR RECORD DATE" means, unless otherwise specified
pursuant to SECTION 3.01, the fifteenth day of the calendar month immediately
preceding an Interest Payment Date.
"RESPONSIBLE OFFICER", when used with respect to the Trustee,
means the chairman or any vice-chairman of the board of directors, the chairman
or any vice-chairman of the executive committee of the board of directors, the
chairman of the trust committee, the president, any vice president, the
secretary, any assistant secretary, the treasurer, any assistant treasurer, the
cashier, any assistant cashier, any senior trust officer, any trust officer or
assistant trust officer, the controller or any assistant controller or any other
officer of the Trustee customarily performing functions similar to those
performed by any of the above designated officers and also means, with respect
to a particular corporate trust matter, any other officer to whom such matter is
referred because of his knowledge of and familiarity with the particular
subject.
"SECURITIES" has the meaning stated in the first recital of
this Indenture and more particularly means any Securities authenticated and
delivered under this Indenture.
"SECURITIES ACT" means the Securities Act of 1933 and any
statute successor thereto, in each case as amended from time to time.
"SECURITY REGISTER" and "SECURITY REGISTRAR" have the
respective meanings specified in SECTION 3.05.
"SPECIAL RECORD DATE" for the payment of any Defaulted
Interest means a date fixed by the Trustee pursuant to SECTION 3.07.
"STATED MATURITY", when used with respect to any Security or
any installment of principal thereof or interest thereon, means the date
specified in such Security as the fixed date on which the principal of such
Security or such installment of principal or interest is due and payable.
"SUBSIDIARY" means a corporation more than 50% of the
outstanding voting stock of
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<PAGE> 15
which is owned, directly or indirectly, by either Company or by one or more
other Subsidiaries, or by either Company and one or more other Subsidiaries. For
the purposes of this definition, "VOTING STOCK" means stock which ordinarily has
voting power for the election of directors, whether at all times or only so long
as no senior class of stock has such voting power by reason of any contingency.
"TOLEDO EDISON" means the Person named as "TOLEDO EDISON" in
the first paragraph of this instrument until a successor Person shall have
become such pursuant to the applicable provisions of this Indenture, and
thereafter "TOLEDO EDISON" shall mean such successor Person.
"TOLEDO EDISON FIRST MORTGAGE" means the Indenture of Mortgage
and Deed of Trust between Toledo Edison and The Chase National Bank of the City
of New York (now The Chase Manhattan Bank as successor trustee), as trustee,
dated as of April 1, 1947, as supplemented and amended from time to time, and
including without limitation, the Forty-Sixth Supplemental Indenture thereto to
be dated as of June 15, 1997.
"TOLEDO EDISON FIRST MORTGAGE BONDS" mean any series of first
mortgage bonds issued by Toledo Edison under the Toledo Edison First Mortgage
and delivered to the Trustee pursuant to Section 4.01 hereof.
"TRUST INDENTURE ACT" means the Trust Indenture Act of 1939 as
in force at the date as of which this instrument was executed; provided,
however, that in the event the Trust Indenture Act of 1939 is amended after such
date, "TRUST INDENTURE ACT" means, to the extent required by any such amendment,
the Trust Indenture Act of 1939 as so amended.
"TRUSTEE" means the Person named as the "TRUSTEE" in the first
paragraph of this instrument until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"TRUSTEE" shall mean or include each Person who is then a Trustee hereunder, and
if at any time there is more than one such Person, "TRUSTEE" as used with
respect to the Securities of any series shall mean the Trustee with respect to
Securities of that series.
"U.S. GOVERNMENT OBLIGATION" has the meaning specified in
SECTION 14.04.
"VICE PRESIDENT", when used with respect to the Companies or
the Trustee, means any vice president, whether or not designated by a number or
a word or words added before or after the title "vice president".
SECTION 1.02. COMPLIANCE CERTIFICATES AND OPINIONS.
Upon any application or request by the Companies to the Trustee to take
any action under any provision of this Indenture, the Companies shall furnish to
the Trustee such certificates and opinions as may be required under the Trust
Indenture Act. Each such certificate or opinion shall be given in the form of an
Officer's Certificate, if to be given by officers of the Companies, or an
Opinion of Counsel, if to be given by counsel, and shall comply with the
requirements of the Trust Indenture Act and any other requirements set forth in
this Indenture.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include,
(1) a statement that each individual signing such certificate
or opinion has read such
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covenant or condition and the definitions herein relating thereto;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of each such individual,
he has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant
or condition has been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
SECTION 1.03. FORM OF DOCUMENTS DELIVERED TO TRUSTEE.
In any case where several matters are required to be certified
by, or covered by an opinion of, any specified Person, it is not necessary that
all such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of each Company may
be based, insofar as it relates to legal matters, upon a certificate or opinion
of, or representations by, counsel, unless such officer knows, or in the
exercise of reasonable care should know, that the certificate or opinion or
representations with respect to the matters upon which his certificate or
opinion is based are erroneous. Any such certificate or Opinion of Counsel may
be based, insofar as it relates to factual matters, upon a certificate or
opinion of, or representations by, an officer or officers of each Company
stating that the information with respect to such factual matters is in the
possession of either Company, unless such counsel knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to such matters are erroneous. Any Opinion of Counsel delivered
hereunder may contain standard exceptions and qualifications reasonably
satisfactory to the Trustee.
Any certificate or opinion of an officer of either Company, or
of counsel, may be based, insofar as it relates to accounting matters, upon a
certificate or opinion of, or representations by, an independent public
accountant or firm of accountants, unless such officer or counsel, as the case
may be, knows that the certificate or opinions or representations with respect
to the accounting matters upon which the certificate or opinion of such officer
or counsel may be based are erroneous, or in the exercise of reasonable care
should know, that the certificate or opinion or representations with respect to
such matters are erroneous.
Where any Person is required to make, give or execute two or
more applications, requests, consents, certificates, statements, opinions or
other instruments under this Indenture, they may, but need not, be consolidated
and form one instrument.
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SECTION 1.04. ACTS OF HOLDERS; RECORD DATES.
Any request, demand, authorization, direction, notice,
consent, waiver or other action provided or permitted by this Indenture to be
given, made or taken by Holders may be embodied in and evidenced by one or more
instruments of substantially similar tenor signed by such Holders in person or
by agent duly appointed in writing; and, except as herein otherwise expressly
provided, such action shall become effective when such instrument or instruments
are delivered to the Trustee and, where it is hereby expressly required, to the
Companies. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "ACT" of the Holders
signing such instrument or instruments. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for any
purpose of this Indenture and conclusive in favor of the Trustee and the
Companies, if made in the manner provided in this Section.
The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute sufficient proof
of his authority. The fact and date of the execution of any such instrument or
writing, or the authority of the Person executing the same, may also be proved
in any other manner which the Trustee deems sufficient.
All of the Holders of Outstanding Securities of each series
will give, make or take any request, demand, authorization, direction, notice,
consent, waiver or other action provided or permitted by this Indenture together
as one class and none of the Holders of Outstanding Securities of any such
series will have the right to act as a class separate from any other Holder
within the same series on any matter.
The ownership of Securities shall be proved by the Security
Register.
Any request, demand, authorization, direction, notice,
consent, waiver or other Act of the Holder of any Security shall bind every
future Holder of the same Security and the Holder of every Security issued upon
the registration of transfer thereof or in exchange therefor or in lieu thereof
in respect of anything done, omitted or suffered to be done by the Trustee or
the Companies in reliance thereon, whether or not notation of such action is
made upon such Security.
Notwithstanding anything to the contrary herein, AMBAC
Indemnity shall be considered the Holder of any Insured Security for the
purposes of any request, demand, authorization, direction, notice, consent,
waiver or other action provided or permitted by this Indenture to be given, made
or taken by the Holder of such Insured Security.
The Companies may set any day that is after the day on which
the record date is set as a record date for the purpose of determining the
Holders of Outstanding Securities of any series entitled to give, make or take
any request, demand, authorization, direction, notice, consent, waiver or other
action provided or permitted by this Indenture to be given, made or taken by
Holders of Securities of such series, provided that the Companies may not set a
record date for, and the provisions of this paragraph shall not apply with
respect to, the giving or making of any notice, declaration, request or
direction referred to in the next paragraph. If any record date is set pursuant
to this paragraph, the Holders of Outstanding Securities of the relevant series
on such record date, and no other Holders, shall be entitled to
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<PAGE> 18
take or revoke the relevant action, whether or not such Holders remain Holders
after such record date; provided that no such action shall be effective
hereunder unless taken on or prior to the applicable Expiration Date by Holders
of the requisite principal amount of Outstanding Securities of such series on
such record date. Nothing in this paragraph shall be construed to prevent the
Companies from setting a new record date that is after the day on which the new
record date is set for any action for which a record date has previously been
set pursuant to this paragraph (whereupon the record date previously set shall
automatically and with no action by any Person be canceled and of no effect),
and nothing in this paragraph shall be construed to render ineffective any
action taken by Holders of the requisite principal amount of Outstanding
Securities of the relevant series on the date such action is taken. Promptly
after any record date is set pursuant to this paragraph, the Companies, at their
own expense, shall cause notice of such record date, the proposed action by
Holders and the applicable Expiration Date to be given to the Trustee in writing
and to each Holder of Securities of the relevant series in the manner set forth
in SECTION 1.06.
The Trustee may set any day that is after the day on which the
record date is set as the record date for the purpose of determining the Holders
of Outstanding Securities of any series entitled to join in the giving or making
of (i) any Notice of Default, (ii) any declaration of acceleration referred to
in SECTION 6.02, (iii) any request to institute proceedings referred to in
SECTION 6.07(2) or (iv) any direction referred to in SECTION 6.12 or SECTION
6.13, in each case with respect to Securities of such series. If any record date
is set pursuant to this paragraph, the Holders of Outstanding Securities of such
series on such record date, and no other Holders, shall be entitled to join in
such notice, declaration, request or direction or to revoke the same, whether or
not such Holders remain Holders after such record date; provided that no such
action shall be effective hereunder unless taken on or prior to the applicable
Expiration Date by Holders of the requisite principal amount of Outstanding
Securities of such series on such record date. Nothing in this paragraph shall
be construed to prevent the Trustee from setting a new record date that is after
the day on which the new record date is set for any action for which a record
date has previously been set pursuant to this paragraph (whereupon the record
date previously set shall automatically and with no action by any Person be
canceled and of no effect), and nothing in this paragraph shall be construed to
render ineffective any action taken by Holders of the requisite principal amount
of Outstanding Securities of the relevant series on the date such action is
taken. Promptly after any record date is set pursuant to this paragraph, the
Trustee, at the expense of the Companies, shall cause notice of such record
date, the proposed action by Holders and the applicable Expiration Date to be
given to the Companies in writing and to each Holder of Securities of the
relevant series in the manner set forth in SECTION 1.06.
With respect to any record date set pursuant to this Section,
the party hereto that sets such record date may designate any day after that
record date as the "EXPIRATION DATE" and from time to time may change the
Expiration Date to any earlier or later day that is after that record date;
provided that no such change shall be effective unless notice of the proposed
new Expiration Date is given to the other parties hereto in writing, and to each
Holder of Securities of the relevant series in the manner set forth in SECTION
1.06, on or prior to the existing Expiration Date. If an Expiration Date is not
designated with respect to any record date set pursuant to this Section, the
party hereto which set such record date shall be deemed to have initially
designated the 180th day after such record date as the Expiration Date with
respect thereto, subject to its right to change the Expiration Date as provided
in this paragraph. Notwithstanding the foregoing, no Expiration Date shall be
later than the 180th day after the applicable record date.
Without limiting the foregoing, a Holder entitled hereunder to
take any action hereunder with regard to any particular Security may do so with
regard to all or any part of the principal amount of such Security or by one or
more duly appointed agents each of which may do so pursuant to such appointment
with regard to all or any part of such principal amount.
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SECTION 1.05. NOTICES, ETC., TO THE TRUSTEE AND THE COMPANIES.
Any request, demand, authorization, direction, notice,
consent, waiver or Act of Holders or other document provided or permitted by
this Indenture to be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Companies shall be
sufficient for every purpose hereunder if made, given, furnished or
filed in writing to or with the Trustee at 450 W. 33rd Street, New
York, New York 10001, Attention: Corporate Trust Administration, or
(2) the Companies by the Trustee or by any Holder shall be
sufficient for every purpose hereunder (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage
prepaid, to each Company addressed to it at the address of its
principal office specified in the first paragraph of this instrument or
at any other address previously furnished in writing to the Trustee by
the Companies, or
(3) AMBAC Indemnity by the Trustee or by the Companies shall
be sufficient for every purpose hereunder if in writing and mailed,
first-class postage prepaid, to AMBAC Indemnity at One State Street
Plaza, New York, New York 10004.
SECTION 1.06. NOTICE TO HOLDERS; WAIVER.
Where this Indenture provides for notice to Holders of any
event, such notice shall be sufficiently given (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage prepaid, to
each Holder affected by such event, at his address as it appears in the Security
Register, not later than the latest date (if any), and not earlier than the
earliest date (if any), prescribed for the giving of such notice. Where this
Indenture provides for notice to Holders of any event, such notice shall also be
given to AMBAC Indemnity for so long as any Financial Guaranty Insurance is in
effect with respect to any Securities issued hereunder. In any case where notice
to Holders is given by mail, neither the failure to mail such notice, nor any
defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders. Where this Indenture
provides for notice in any manner, such notice may be waived in writing by the
Person entitled to receive such notice, either before or after the event, and
such waiver shall be the equivalent of such notice. Waivers of notice by Holders
shall be filed with the Trustee, but such filing shall not be a condition
precedent to the validity of any action taken in reliance upon such waiver.
In case by reason of the suspension of regular mail service or
by reason of any other cause it shall be impracticable to give such notice by
mail, then such notification as shall be made with the approval of the Trustee
shall constitute a sufficient notification for every purpose hereunder.
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SECTION 1.07. CONFLICT WITH TRUST INDENTURE ACT.
If any provision hereof limits, qualifies or conflicts with a
provision of the Trust Indenture Act which is required under such Act to be a
part of and govern this Indenture, the latter provision shall control. If any
provision of this Indenture modifies or excludes any provision of the Trust
Indenture Act which may be so modified or excluded, the latter provision shall
be deemed to apply to this Indenture as so modified or to be excluded, as the
case may be.
SECTION 1.08. EFFECT OF HEADINGS AND TABLE OF CONTENTS.
The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction hereof.
SECTION 1.09. SUCCESSORS AND ASSIGNS.
All covenants and agreements in this Indenture by the
Companies shall bind their successors and assigns, whether so expressed or not.
SECTION 1.10. SEPARABILITY CLAUSE.
In case any provision in this Indenture or in the Securities
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
SECTION 1.11. BENEFITS OF INDENTURE.
Nothing in this Indenture or in the Securities, express or
implied, shall give to any Person, other than the parties hereto and their
successors hereunder and the Holders, any benefit or any legal or equitable
right, remedy or claim under this Indenture.
SECTION 1.12. GOVERNING LAW.
This Indenture and the Securities shall be governed by and
construed in accordance with the law of the State of New York, without regard to
conflicts of laws or principles thereof.
SECTION 1.13. LEGAL HOLIDAYS.
In any case when any Interest Payment Date, Redemption Date or
Stated Maturity of any Security shall not be a Business Day at any Place of
Payment, then (notwithstanding any other provision of this Indenture or of the
Securities (other than a provision of any Security that specifically states that
such provision shall apply in lieu of this Section)) payment of interest or
principal (and premium, if any) need not be made at such Place of Payment on
such date, but may be made on the next preceding Business Day at such Place of
Payment with the same force and effect as if made on the Interest Payment Date
or Redemption Date or at the Stated Maturity.
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SECTION 1.14. JOINT AND SEVERAL LIABILITY OF THE COMPANIES.
Each Company hereby acknowledges and agrees that the
Securities of each series are joint and several obligations of the Companies in
accordance with the terms thereof and this Indenture and that it and the other
Company shall be jointly and severally liable for all of the obligations of
either Company arising under this Indenture.
SECTION 1.15. IMMUNITY OF INCORPORATORS, STOCKHOLDERS,
OFFICERS AND DIRECTORS.
No recourse for the payment of the principal of or any premium
or interest on any Security, or for any claim based thereon or otherwise in
respect thereof, and no recourse under or upon any obligation, covenant or
agreement of the Companies, contained in this Indenture or in any supplemental
indenture, or in any Security, or because of the creation of any indebtedness
represented thereby, shall be had against any incorporator, stockholder, officer
or director, as such, past, present or future, of the Companies or any successor
corporation, either directly or through the Companies or any successor
corporation(s), whether by virtue of any constitution, statute or rule of law,
or by the enforcement of any assessment or penalty or otherwise; it being
expressly understood that all such liability is hereby expressly waived and
released as a condition of, and as a consideration for, the execution of this
Indenture and the issue of the Securities.
ARTICLE II.
SECURITY FORMS
SECTION 2.01. FORMS GENERALLY.
The Securities of each series shall be in substantially such
form as shall be established by or pursuant to Board Resolutions or in one or
more indentures supplemental hereto, in each case with such appropriate
insertions, omissions, substitutions and other variations as are required or
permitted by this Indenture, and may have such letters, numbers or other marks
of identification and such legends or endorsements placed thereon as may be
required to comply with the rules of any securities exchange or Depository
therefor or as may, consistently herewith, be determined by the officers
executing such Securities, as evidenced by their execution thereof. If the form
of Securities of any series is established by action taken pursuant to Board
Resolutions, a copy of an appropriate record of such action shall be certified
by the Secretary or an Assistant Secretary of each Company and delivered to the
Trustee at or prior to the delivery of the Company Order contemplated by SECTION
3.03 for the authentication and delivery of such Securities.
The definitive Securities shall be printed, lithographed or engraved on
steel engraved borders or may be produced in any other manner, all as determined
by the officers executing such Securities, as evidenced by their execution of
such Securities.
SECTION 2.02. RESERVED.
SECTION 2.03. RESERVED.
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SECTION 2.04. FORM OF LEGEND FOR GLOBAL SECURITIES.
Unless otherwise specified as contemplated by SECTION 3.01 for
the Securities evidenced thereby, every Global Security authenticated and
delivered hereunder shall bear a legend as shall be established in one or more
indentures supplemental hereto.
SECTION 2.05. FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION.
The Trustee's certificate of authentication shall be in
substantially the following form:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein
referred to in the within-mentioned Indenture.
Dated: THE CHASE MANHATTAN BANK,
As Trustee
By
--------------------------------
Authorized Signatory
ARTICLE III.
THE SECURITIES
SECTION 3.01. AMOUNT UNLIMITED; ISSUABLE IN SERIES.
The aggregate principal amount of Securities that may be
authenticated and delivered under this Indenture is unlimited. Notwithstanding
the foregoing, no Company shall issue any Securities, if, after giving effect to
such issuance the aggregate principal amount of outstanding Securities would
exceed the aggregate principal amount of the outstanding Cleveland Electric
First Mortgage Bonds and Toledo Edison First Mortgage Bonds. The Securities may
be issued in one or more series. There shall be established by or pursuant to
Board Resolutions and, subject to SECTION 3.03, set forth or determined in the
manner provided, or established in one or more indentures supplemental hereto,
prior to the issuance of Securities of any series,
(1) the title of the Securities of the series (which shall
distinguish the Securities of the series from Securities of any other
series);
(2) any limit upon the aggregate principal amount of the
Securities of the series that may be authenticated and delivered under
this Indenture (except for Securities authenticated and delivered upon
registration of transfer of, or in exchange for, or in lieu of, other
Securities of the series pursuant to SECTION 3.04, 3.05, 3.06, 10.06 or
12.07 and except for any Securities that,
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pursuant to SECTION 3.03, are deemed never to have been authenticated and
delivered hereunder);
(3) the Person to whom interest on a Security of the series
shall be payable, if other than the Person in whose name that Security
(or one or more Predecessor Securities) is registered at the close of
business on the Regular Record Date for such interest;
(4) the date or dates on which the principal of any Securities
of the series is payable;
(5) the rate or rates at which any Securities of the series
shall bear interest, the date or dates from which such interest shall
accrue, the Interest Payment Dates on which interest shall be payable,
the manner (if any) of determination of such Interest Payment Dates and
the Regular Record Date for such interest payable on any Interest
Payment Date;
(6) the right, if any, to extend the interest payment periods
and the duration of such extension;
(7) the place or places where the principal of and any premium
and interest on any Securities of the series shall be payable;
(8) the period or periods within which, the price or prices at
which and the terms and conditions upon which any Securities of the
series may be redeemed, in whole or in part, at the option of the
Companies and, if other than by Board Resolutions, the manner in which
any election by the Companies to redeem the Securities shall be
evidenced;
(9) the obligation, if any, of the Companies to redeem or
purchase any Securities of the series pursuant to any sinking fund or
analogous provisions or at the option of the Holder thereof and the
period or periods within which, the price or prices at which and the
terms and conditions upon which any Securities of the series shall be
redeemed or purchased, in whole or in part, pursuant to such
obligation;
(10) if other than denominations of $1,000 and any integral
multiple thereof, the denominations in which any Securities of the
series shall be issuable;
(11) if the amount of principal of or any premium or interest
on any Securities of the series may be determined with reference to an
index or pursuant to a formula, the manner in which such amounts shall
be determined;
(12) if other than the currency of the United States of
America, the currency, currencies or currency units in which the
principal of or any premium or interest on any Securities of the series
shall be payable and the manner of determining the equivalent thereof
in the currency of the United States of America for any purpose,
including for purposes of the definition of "Outstanding" in SECTION
1.01;
(13) if the principal of or any premium or interest on any
Securities of the series is to be payable, at the election of the
Companies or the Holder thereof, in one or more currencies or currency
units other than that or those in which such Securities are stated to
be payable, the currency, currencies or currency units in which the
principal of or any premium or interest on such Securities as to which
such election is made shall be payable, the periods within which and
the terms and conditions upon which such election is to be made and the
amount so payable (or the manner in which such amount shall be
determined);
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(14) if other than the entire principal amount thereof, the
portion of the principal amount of any Securities of the series which
shall be payable upon declaration of acceleration of the Maturity
thereof pursuant to SECTION 6.02;
(15) if the principal amount payable at the Stated Maturity of
any Securities of the series will not be determinable as of any one or
more dates prior to the Stated Maturity, the amount which shall be
deemed to be the principal amount of such Securities as of any such
date for any purpose thereunder or hereunder, including the principal
amount thereof which shall be due and payable upon any Maturity other
than the Stated Maturity or which shall be deemed to be Outstanding as
of any date prior to the Stated Maturity (or, in any such case, the
manner in which such amount deemed to be the principal amount shall be
determined);
(16) if applicable, that the Securities of the series, in
whole or any specified part, shall be defeasible pursuant to SECTION
14.02 or SECTION 14.03 or both such Sections and, if other than by
Board Resolutions, the manner in which any election by the Companies to
defease such Securities shall be evidenced;
(17) if applicable, that any Securities of the series shall be
issuable in whole or in part in the form of one or more Global
Securities and, in such case, the respective Depositories for such
Global Securities, the form of any legend or legends which shall be
borne by any such Global Security in addition to or in lieu of that set
forth in SECTION 2.04 and any circumstances in addition to or in lieu
of those set forth in Clause (2) of the last paragraph of SECTION 3.05
in which any such Global Security may be exchanged in whole or in part
for Securities registered, and any transfer of such Global Security in
whole or in part may be registered, in the name or names of Persons
other than the Depository for such Global Security or a nominee
thereof;
(18) the designation of the series of First Mortgage Bonds to
be delivered to the Trustee in connection with the issuance of such
series of Securities pursuant to SECTION 4.01;
(19) any addition to or change in the Events of Default that
applies to any Securities of the series and any change in the right of
the Trustee or the requisite Holders of such Securities to declare the
principal amount thereof due and payable pursuant to SECTION 6.02;
(20) any addition to or change in the covenants set forth in
ARTICLE XI that applies to Securities of the series; and
(21) any other terms of the series (which terms shall not be
inconsistent with the provisions of this Indenture, except as permitted
by SECTION 10.01(5)).
All Securities of any one series shall be substantially
identical except as to denomination and except as may otherwise be provided in
or pursuant to the Board Resolutions referred to above and (subject to SECTION
3.03) set forth, or determined in the manner provided in any such indenture
supplemental hereto.
If any of the terms of the series are established by action
taken pursuant to Board Resolutions, a copy of an appropriate record of such
action shall be certified by the Secretary or an Assistant Secretary of each
Company and delivered to the Trustee at or prior to the delivery of the Company
Order for the authentication and delivery of the series of Securities.
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SECTION 3.02. DENOMINATIONS.
The Securities of each series shall be issuable only in fully
registered form without coupons and only in such denominations as shall be
specified as contemplated by SECTION 3.01. In the absence of any such specified
denomination with respect to the Securities of any series, the Securities of
such series shall be issuable in denominations of $1,000 and any integral
multiple thereof.
SECTION 3.03. EXECUTION, AUTHENTICATION, DELIVERY AND DATING.
Unless otherwise provided as contemplated by SECTION 3.01 with
respect to any series of Securities, the Securities shall be executed on behalf
of each Company by its Chairman of the Board, its President or one of its Vice
Presidents. The signature of any of these officers on the Securities may be
manual or facsimile.
Securities bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of each Company shall bind
each Company, notwithstanding that such individuals or any of them have ceased
to hold such offices prior to the authentication and delivery of such Securities
or did not hold such offices at the date of such Securities.
At any time and from time to time after the execution and
delivery of this Indenture, the Companies may deliver Securities of any series
executed by the Companies to the Trustee for authentication, together with a
Company Order for the authentication and delivery of such Securities, and First
Mortgage Bonds conforming to the requirements of SECTIONS 4.01 and 4.02, and the
Trustee in accordance with the Company Order shall authenticate and deliver such
Securities. In authenticating such Securities, and accepting the additional
responsibilities under this Indenture in relation to such Securities, the
Trustee shall be entitled to receive, and (subject to SECTION 7.01) shall be
fully protected in relying upon, (1) First Mortgage Bonds meeting the
requirements of SECTION 4.02, and (2) an Opinion of Counsel stating,
(A) if the form of such Securities has been established by or
pursuant to Board Resolutions or in a supplemental indenture as
permitted by SECTION 2.01, that such form has been duly authorized by
each Company and established in conformity with the provisions of this
Indenture;
(B) if the terms of such Securities have been duly authorized
by the Companies and established by or pursuant to Board Resolutions or
in a supplemental indenture as permitted by SECTION 3.01, that such
terms have been established in conformity with the provisions of this
Indenture;
(C) that such Securities, when authenticated and delivered by
the Trustee and issued by the Companies in the manner and subject to
any conditions specified in such Opinion of Counsel, will have been
duly issued under the Indenture and will constitute valid and legally
binding obligations of each Company, entitled to the benefits provided
by the Indenture, and enforceable in accordance with their terms,
subject to (a) bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles, (b) the necessity for compliance with the statutory
procedural rights governing the exercise of remedies by a secured
creditor, and (c) the qualification that certain waivers, procedures,
remedies, and other specified provisions of such Securities and this
Indenture may be unenforceable under or limited by the laws of the
State of
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Ohio;
(D) that the First Mortgage Bonds being delivered to the
Trustee in connection with the issuance of such series of Securities
have been duly authorized, executed, authenticated, issued, and
delivered by the applicable Company, constitute valid and legally
binding obligations of such Company entitled to the benefits and
security provided by the applicable First Mortgage, and enforceable in
accordance with their terms, subject to (a) bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and to
general equity principles, (b) the necessity for compliance with the
statutory procedural requirements governing the exercise of remedies by
a secured creditor, and (c) the qualification that certain waivers,
procedures, remedies, and other specified provisions of the First
Mortgage Bonds and the applicable First Mortgage may be unenforceable
under or limited by the law of the State of Ohio or Commonwealth of
Pennsylvania or the laws of the United States of America; and that the
First Mortgage Bonds are entitled to the benefits provided by the
applicable First Mortgage, equally and ratably, with all first mortgage
bonds outstanding thereunder, except as to sinking fund provisions; and
(E) that the execution and delivery of this Indenture and the
Securities by the Companies and the execution and delivery of the
Cleveland Electric First Mortgage and any Cleveland Electric First
Mortgage Bonds by Cleveland Electric or the Toledo Edison First
Mortgage and any Toledo Edison First Mortgage Bonds by Toledo Edison,
as applicable, have been duly authorized by the Public Utilities
Commission of the State of Ohio (the "PUCO"), the PUCO had jurisdiction
in the premises, and no further approval, authorization, or consent of
any other public board or body is necessary to the validity of such
execution and delivery of this Indenture, the Securities, the First
Mortgages, and the First Mortgage Bonds, except as may be required
under state securities or blue sky laws, as to which laws such counsel
shall not be required to express an opinion.
If such form or terms have been so established, the Trustee shall not be
required to authenticate such Securities if the issue of such Securities
pursuant to this Indenture will affect the Trustee's own rights, duties or
immunities under the Securities and this Indenture or otherwise in a manner
which is not reasonably acceptable to the Trustee.
In the event that all of the Securities of a series are not
issued at one time, for each issuance of Securities after the original issuance
of Securities, the Companies shall be required only to deliver to the Trustee
(i) the Securities, (ii) a written request to the Trustee to authenticate such
Securities and to deliver such Securities in accordance with the instructions
specified by such request and (iii) an Opinion of Counsel. Any such request
shall constitute a representation and warranty by the Companies that the
Securities are being issued pursuant to the same Board Resolutions or
supplemental indenture as the original issuance of Securities of such series.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this
Indenture or be valid or obligatory for any purpose unless there appears on such
Security a certificate of authentication substantially in the form provided for
herein executed by the Trustee by manual signature of an authorized signatory,
and such certificate upon any Security shall be conclusive evidence, and the
only evidence, that such Security has been duly authenticated and delivered
hereunder.
Notwithstanding the foregoing, if any Security shall have been
authenticated and
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delivered hereunder but never issued and sold by the Companies, and the
Companies shall deliver such Security to the Trustee for cancellation as
provided in SECTION 3.09, then such Security shall be deemed never to have been
authenticated and delivered hereunder and shall never be entitled to the
benefits of this Indenture.
SECTION 3.04. TEMPORARY SECURITIES.
Pending the preparation of definitive Securities of any
series, the Companies may execute, and upon Company Order the Trustee shall
authenticate and deliver, temporary Securities that are printed, lithographed,
typewritten, mimeographed or otherwise produced, in any authorized denomination,
substantially of the tenor of the definitive Securities in lieu of which they
are issued and with such appropriate insertions, omissions, substitutions and
other variations as the officers executing such Securities may determine, as
evidenced by their execution of such Securities.
If temporary Securities of any series are issued, the
Companies will cause definitive Securities of that series to be prepared without
unreasonable delay. After the preparation of definitive Securities of such
series, the temporary Securities of such series shall be exchangeable for
definitive Securities of such series upon surrender of the temporary Securities
of such series at the office or agency of the Companies in a Place of Payment
for that series, without charge to the Holder. Upon surrender for cancellation
of any one or more temporary Securities of any series, the Companies shall
execute and the Trustee shall authenticate and deliver in exchange therefor one
or more definitive Securities of the same series, of any authorized
denominations and of like tenor and aggregate principal amount. Until so
exchanged, the temporary Securities of any series shall in all respects be
entitled to the same benefits under this Indenture as definitive Securities of
such series and tenor.
SECTION 3.05. REGISTRATION, REGISTRATION OF TRANSFER AND
EXCHANGE.
The Companies shall cause to be maintained in the Borough of
Manhattan, the City and State of New York a register (the register maintained in
such office or in any other office or agency of the Companies in a Place of
Payment being herein sometimes referred to as the "SECURITY REGISTER") in which,
subject to such reasonable regulations as the Trustee may prescribe, the
Companies shall provide for the registration of Securities and of transfers of
Securities. The Trustee is hereby appointed "SECURITY REGISTRAR" for the purpose
of registering Securities and transfers of Securities as herein provided. The
Security Registrar shall be in written form or in any other form capable of
being converted into written form within a reasonable time. At all reasonable
times such register shall be open for inspection by each Company.
Upon surrender for registration of transfer of any Security of
a series at the office or agency of the Companies in a Place of Payment for that
series, the Companies shall execute, and the Trustee shall authenticate and
deliver, in the name of the designated transferee or transferees, one or more
new Securities of the same series, of any authorized denominations and of like
tenor and aggregate principal amount.
At the option of the Holder, Securities of any series may be
exchanged for other Securities of the same series, of any authorized
denominations and of like tenor and aggregate principal amount, upon surrender
of the Securities to be exchanged at such office or agency. Whenever any
Securities are so surrendered for exchange, the Companies shall execute, and the
Trustee shall authenticate and deliver, the Securities that the Holder making
the exchange is entitled to receive.
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All Securities issued upon any registration of transfer or
exchange of Securities shall be the valid obligations of the Companies,
evidencing the same debt, and entitled to the same benefits under this
Indenture, as the Securities surrendered upon such registration of transfer or
exchange.
Every Security presented or surrendered for registration of
transfer or for exchange shall (if so required by the Companies or the Trustee)
be duly endorsed, or be accompanied by a written instrument of transfer in form
satisfactory to the Companies and the Security Registrar duly executed, by the
Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of
transfer or exchange of Securities, but the Companies may require payment of a
sum sufficient to cover any tax or other governmental charge that may be imposed
in connection with any registration of transfer or exchange of Securities.
If the Securities of any series (or of any series and
specified tenor) are to be redeemed, the Companies shall not be required (A) to
issue, register the transfer of or exchange any Securities of that series (or of
that series and specified tenor, as the case may be) during a period beginning
at the opening of business 15 days before the day of the mailing of a notice of
redemption of any such Securities selected for redemption and ending at the
close of business on the day of such mailing, or (B) to register the transfer of
or exchange any Security so selected for redemption in whole or in part, except
the unredeemed portion of any Security being redeemed in part.
The provisions of Clauses (1), (2), (3) and (4) below shall
apply only to Global Securities:
(1) Each Global Security authenticated under this Indenture
shall be registered in the name of the Depository designated for such Global
Security or a nominee thereof and delivered to such Depository or a nominee
thereof or custodian therefor.
(2) Notwithstanding any other provision in this Indenture, no
Global Security may be exchanged in whole or in part for Securities registered,
and no transfer of a Global Security in whole or in part may be registered, in
the name of any Person other than the Depository for such Global Security or a
nominee thereof unless (A) such Depository (i) has notified the Companies that
it is unwilling or unable to continue as Depository for such Global Security or
(ii) has ceased to be a clearing agency registered under the Exchange Act, (B)
there shall have occurred and be continuing an Event of Default with respect to
such Global Security or (C) there shall exist such circumstances, if any, in
addition to or in lieu of the foregoing as have been specified for this purpose
as contemplated by SECTION 3.01.
(3) Subject to Clause (2) above, any exchange of a Global
Security for other Securities may be made in whole or in part, and all
Securities issued in exchange for a Global Security or any portion thereof shall
be registered in such names as the Depository for such Global Security shall
direct.
(4) Every Security authenticated and delivered upon
registration of transfer of, or in exchange for or in lieu of, a Global Security
or any portion thereof, whether pursuant to this Section, SECTION 3.04, 3.06,
10.06 or 12.07 or otherwise, shall be authenticated and delivered in the form
of, and shall be, a Global Security, unless such Security is registered in the
name of a Person other than the Depository for such Global Security or a nominee
thereof.
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SECTION 3.06. MUTILATED, DESTROYED, LOST AND STOLEN
SECURITIES.
If any mutilated Security is surrendered to the Trustee, the
Companies shall execute and the Trustee shall authenticate and deliver in
exchange therefor a new Security of the same series and of like tenor and
principal amount and bearing a number not contemporaneously outstanding.
If there shall be delivered to the Companies and the Trustee
(i) evidence to their satisfaction of the destruction, loss or theft of any
Security and (ii) such security or indemnity as may be required by them to save
each of them and any agent of either of them harmless, then, in the absence of
notice to the Companies or the Trustee that such Security has been acquired by a
bona fide purchaser, the Companies shall execute and the Trustee shall
authenticate and deliver, in lieu of any such destroyed, lost or stolen
Security, a new Security of the same series and of like tenor and principal
amount and bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security
has become or is about to become due and payable, the Companies in their
discretion may, instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the
Companies may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security of any series issued pursuant to this
Section in lieu of any destroyed, lost or stolen Security shall constitute an
original additional contractual obligation of the Companies, whether or not the
destroyed, lost or stolen Security shall be at any time enforceable by anyone,
and shall be entitled to all the benefits of this Indenture equally and
proportionately with any and all other Securities of that series duly issued
hereunder.
The provisions of this Section are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 3.07. PAYMENT OF INTEREST; INTEREST RIGHTS PRESERVED.
Except as otherwise provided as contemplated by SECTION 3.01
with respect to any series of Securities, interest on any Security which is
payable, and is punctually paid or duly provided for, on any Interest Payment
Date shall be paid to the Person in whose name that Security (or one or more
Predecessor Securities) is registered at the close of business on the Regular
Record Date for such interest.
Any interest on any Security of any series which is payable,
but is not punctually paid or duly provided for, on any Interest Payment Date
(herein called "DEFAULTED INTEREST") shall forthwith cease to be payable to the
Holder on the relevant Regular Record Date by virtue of having been such Holder,
and such Defaulted Interest may be paid by the Companies, at their election in
each case, as provided in Clause (1) or (2) below:
(1) The Companies may elect to make payment of any Defaulted
Interest to the Persons in whose names the Securities of such series (or their
respective Predecessor Securities) are
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registered at the close of business on a Special Record Date for the payment of
such Defaulted Interest, which shall be fixed in the following manner. The
Companies shall notify the Trustee in writing of the amount of Defaulted
Interest proposed to be paid on each Security of such series and the date of the
proposed payment, and at the same time the Companies shall deposit with the
Trustee an amount of money equal to the aggregate amount proposed to be paid in
respect of such Defaulted Interest or shall make arrangements satisfactory to
the Trustee for such deposit prior to the date of the proposed payment, such
money when deposited to be held in trust for the benefit of the Persons entitled
to such Defaulted Interest as in this Clause provided. Thereupon the Trustee
shall fix a Special Record Date for the payment of such Defaulted Interest that
shall be not more than 15 days and not less than 10 days prior to the date of
the proposed payment and not less than 10 days after the receipt by the Trustee
of the notice of the proposed payment. The Trustee shall promptly notify the
Companies of such Special Record Date and, in the name and at the expense of the
Companies, shall cause notice of the proposed payment of such Defaulted Interest
and the Special Record Date therefor to be given to each Holder of Securities of
such series in the manner set forth in SECTION 1.06, not less than 10 days prior
to such Special Record Date. Notice of the proposed payment of such Defaulted
Interest and the Special Record Date therefor having been so mailed, such
Defaulted Interest shall be paid to the Persons in whose names the Securities of
such series (or their respective Predecessor Securities) are registered at the
close of business on such Special Record Date and shall no longer be payable
pursuant to the following Clause (2).
(2) The Companies may make payment of any Defaulted Interest
on the Securities of any series in any other lawful manner not inconsistent with
the requirements of any securities exchange on which such Securities may be
listed, and upon such notice as may be required by such exchange, if, after
notice given by the Companies to the Trustee of the proposed payment pursuant to
this Clause, such manner of payment shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each
Security delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Security shall carry the rights to interest
accrued and unpaid, and to accrue, that were carried by such other Security.
SECTION 3.08. PERSONS DEEMED OWNERS.
Prior to due presentment of a Security for registration of
transfer, the Companies, the Trustee and any agent of the Companies or the
Trustee may treat the Person in whose name such Security is registered as the
owner of such Security for the purpose of receiving payment of principal of and
any premium and (subject to SECTION 3.07) any interest on such Security and for
all other purposes whatsoever, whether or not such Security shall be overdue,
and neither the Companies, the Trustee nor any agent of the Companies or the
Trustee shall be affected by notice to the contrary.
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SECTION 3.09. CANCELLATION.
All Securities surrendered for payment, redemption,
registration of transfer or exchange or for credit against any sinking fund
payment shall, if surrendered to any Person other than the Trustee, be delivered
to the Trustee and shall be promptly canceled by it. The Companies may at any
time deliver to the Trustee for cancellation any Securities previously
authenticated and delivered hereunder that the Companies may have acquired in
any manner whatsoever, and may deliver to the Trustee (or to any other Person
for delivery to the Trustee) for cancellation any Securities previously
authenticated hereunder that the Companies have not issued and sold, and all
Securities so delivered shall be promptly canceled by the Trustee. No Securities
shall be authenticated in lieu of or in exchange for any Securities canceled as
provided in this Section, except as expressly permitted by this Indenture. All
canceled Securities held by the Trustee shall be disposed of as directed by a
Company Order; provided, however, that the Trustee shall not be required to
destroy such canceled Securities.
SECTION 3.10. COMPUTATION OF INTEREST.
Except as otherwise specified as contemplated by SECTION 3.01
for Securities of any series, interest on the Securities of each series shall be
computed on the basis of a 360-day year of twelve 30-day months.
SECTION 3.11. CUSIP NUMBERS.
The Companies in issuing the Securities may use "CUSIP"
numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP"
numbers in notices of redemption as a convenience to Holders; provided that any
such notice may state that no representation is made as to the correctness of
such numbers either as printed on the Securities or as contained in any notice
of a redemption and that reliance may be placed only on the other identification
numbers printed on the Securities, and any such redemption shall not be affected
by any defect in or omission of such numbers.
SECTION 3.12. PAYMENTS ON FIRST MORTGAGE BONDS.
Subject to ARTICLE V and ARTICLE XIV hereof, all payments made
by the applicable Company to the Trustee on First Mortgage Bonds shall be
applied by the Trustee to pay, when due, principal of, premium, if any, and
interest on the related series of Securities and, to the extent so applied,
shall satisfy the obligations of the Companies on such Securities.
ARTICLE IV.
FIRST MORTGAGE BONDS
SECTION 4.01. ACCEPTANCE OF FIRST MORTGAGE BONDS.
At or prior to the time of issuance of a series of Securities
hereunder, there shall have been delivered to the Trustee, and the Trustee shall
have accepted, for the benefit of the Holders of the Securities as described in
SECTION 4.03, Cleveland Electric First Mortgage Bonds, Toledo Edison First
Mortgage Bonds, or any combination thereof, each of a series not theretofore
delivered to the Trustee, registered in the name of the Trustee and conforming
to the requirements of SECTION 4.02.
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SECTION 4.02. TERMS OF FIRST MORTGAGE BONDS.
First Mortgage Bonds delivered to the Trustee pursuant to
SECTION 4.01 shall have the same rate or rates of interest (or interest
calculated in the same manner), interest payment dates, maturity and redemption
provisions, and shall be in the same aggregate principal amount, as the series
of Securities being issued.
SECTION 4.03. FIRST MORTGAGE BONDS AS SECURITY FOR SECURITIES.
Subject to ARTICLE V and ARTICLE XIV hereof, First Mortgage
Bonds delivered to the Trustee pursuant to SECTION 4.01 for the benefit of the
Holders of Securities shall serve equally and ratably as security for any and
all obligations of the Companies under such Securities, including, but not
limited to (1) the full and prompt payment of the principal and premium, if any,
on such Securities when and as the same shall become due and payable in
accordance with the terms and provisions of this Indenture or the Securities
either at the Stated Maturity thereof, upon acceleration of the maturity thereof
or upon redemption, and (2) the full and prompt payment of any interest on such
Securities when and as the same shall become due and payable in accordance with
the terms and provisions of this Indenture or the Securities.
SECTION 4.04. RESERVED.
SECTION 4.05. FIRST MORTGAGE BONDS HELD BY THE TRUSTEE.
The Trustee, as a Holder of First Mortgage Bonds, shall attend
any meeting of holders of First Mortgage Bonds under the applicable First
Mortgage as to which it receives due notice, or, at its option, shall deliver
its proxy in connection therewith. Either at such meeting, or otherwise where
consent of holders of First Mortgage Bonds issued under the applicable First
Mortgage is sought without a meeting, the Trustee shall vote all of such First
Mortgage Bonds held by it, or shall consent or withhold its consent with respect
thereto, as directed by the Holders of not less than a majority in aggregate
principal amount of the Outstanding Securities; provided, however, that the
Trustee shall not vote as such holder of a particular series of First Mortgage
Bonds in favor of, or give its consent to, any action that, in the Trustee's
opinion, would materially adversely affect such series of First Mortgage Bonds
in a manner not shared generally by all other First Mortgage Bonds, except upon
notification by the Trustee to the Holders of the related series of Outstanding
Securities of such proposal and consent thereto of the holders of not less than
a majority in aggregate principal amount of the Outstanding Securities of such
series.
SECTION 4.06. NO TRANSFER OF FIRST MORTGAGE BONDS; EXCEPTION.
Except as required to effect an assignment to a successor
trustee under this Indenture or pursuant to SECTION 4.07 or SECTION 4.09, the
Trustee shall not sell, assign or transfer the First Mortgage Bonds and the
applicable Company shall issue stop transfer instructions to the applicable
Mortgage Trustee and any transfer agent under the applicable First Mortgage to
effect compliance with this SECTION 4.06.
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SECTION 4.07. DELIVERY TO THE COMPANIES OF ALL FIRST MORTGAGE
BONDS.
When the obligation of either Company to make payment with
respect to the principal of and premium, if any, and interest on the First
Mortgage Bonds shall be satisfied or deemed satisfied pursuant to SECTION 5.01
or ARTICLE XIV, the Trustee shall, upon written request of such Company, deliver
to such Company without charge therefor all of the First Mortgage Bonds,
together with such appropriate instruments of transfer or release as may be
reasonably requested by such Company. All such First Mortgage Bonds delivered to
such Company in accordance with this SECTION 4.07 shall be delivered by such
Company to the applicable Mortgage Trustee for cancellation.
SECTION 4.08. FURTHER ASSURANCES.
Each Company, at its own expense, shall do such further lawful
acts and things, and execute and deliver such additional conveyances,
assignments, assurances, agreements, financing statements and instruments, as
may be necessary in order to further assign, assure, perfect and confirm to the
Trustee its security interest in the First Mortgage Bonds and for maintaining,
protecting and preserving such security interest.
SECTION 4.09. EXCHANGE AND SURRENDER OF FIRST MORTGAGE BONDS.
At any time upon receipt of a Company Order at the written
direction of either Company, the Trustee shall surrender to such Company all or
part of the First Mortgage Bonds in exchange for First Mortgage Bonds equal in
aggregate principal amount to, in different denominations than but of the same
series and with all other terms identical to, the First Mortgage Bonds so
surrendered to such Company. If at any time a Security shall cease to be
entitled to any lien, benefit or security under this Indenture pursuant to
SECTION 5.01 or ARTICLE XIV, the Trustee shall surrender an equal principal
amount of First Mortgage Bonds of the related series to the applicable Company
for cancellation, such First Mortgage Bonds to be either or both of Cleveland
Electric First Mortgage Bonds and Toledo Edison First Mortgage Bonds in the same
proportion as the proportion in which such First Mortgage Bonds were initially
delivered to and accepted by the Trustee pursuant to SECTION 4.01 for the
benefit of the series of Securities of which such Security is a part. The
Trustee shall, together with any such First Mortgage Bonds, deliver to the
applicable Company such appropriate instruments of transfer or release as such
Company may reasonably request. Prior to the surrender required by this
paragraph, the Trustee shall receive from such Company, and (subject to SECTION
7.01) shall be fully protected in relying upon, an Officer's Certificate stating
(i) the aggregate Outstanding principal amount of the First Mortgage Bonds of
the series surrendered by the Trustee and the portion (if any) of such First
Mortgage Bonds that are Cleveland Electric First Mortgage Bonds or Toledo Edison
First Mortgage Bonds, after giving effect to such surrender, (ii) the aggregate
Outstanding principal amount of the related series of Securities, (iii) that the
surrender of the First Mortgage Bonds will not change the proportion of
Cleveland Electric First Mortgage Bonds and Toledo Edison First Mortgage Bonds
outstanding with respect to the series of Securities in question or otherwise
result in any default under this Indenture, and (iv) that any First Mortgage
Bonds to be delivered in exchange for the First Mortgage Bonds being surrendered
comply with the provisions of this Section.
Neither Company shall be permitted to cause the surrender or
exchange of all or any part of the First Mortgage Bonds contemplated in this
Section, if, after such surrender or exchange, (i) the aggregate Outstanding
principal amount of the related series of Securities would exceed the aggregate
Outstanding principal amount of the First Mortgage Bonds held by the Trustee
relating to such series of
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Securities or (ii) the First Mortgage Bonds held by the Trustee relating to such
series of Securities would be comprised of a proportion of Cleveland Electric
First Mortgage Bonds and Toledo Edison First Mortgage Bonds that is different
from the proportion in which such First Mortgage Bonds were initially delivered
to and accepted by the Trustee pursuant to SECTION 4.01. Any First Mortgage
Bonds received by such Company pursuant to this SECTION 4.09 shall be delivered
to the applicable Mortgage Trustee for cancellation.
ARTICLE V.
SATISFACTION AND DISCHARGE
SECTION 5.01. SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture shall upon Company Request cease to be of
further effect (except as to any surviving rights of registration of transfer or
exchange of Securities herein expressly provided for), and the Trustee, at the
expense of the Companies, shall execute proper instruments acknowledging
satisfaction and discharge of this Indenture, when
(1) either
(A) all Securities theretofore authenticated and
delivered (other than (i) Securities which have been destroyed, lost or
stolen and which have been replaced or paid as provided in SECTION 3.06
and (ii) Securities for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Companies and
thereafter repaid to the Companies or discharged from such trust, as
provided in SECTION 11.03) have been delivered to the Trustee for
cancellation; or
(B) all such Securities not theretofore delivered to
the Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their
Stated Maturity within one year, or
(iii) are to be called for redemption within
one year under arrangements satisfactory to the Trustee for
the giving of notice of redemption by the Trustee in the name,
and at the expense, of the Companies, and the Companies, in
the case of (i), (ii) or (iii) above, have deposited or caused
to be deposited with the Trustee as trust funds in trust for
this purpose funds in an amount sufficient to pay and
discharge the entire indebtedness on such Securities not
theretofore delivered to the Trustee for cancellation, for
principal and any premium and interest to the date of such
deposit (in the case of Securities which have become due and
payable) or to the Stated Maturity or Redemption Date, as the
case may be;
(2) the Companies have paid or caused to be paid all other
sums payable hereunder by the Companies; and
(3) the Companies have delivered to the Trustee an Officer's
Certificate and an
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Opinion of Counsel, each stating that all conditions precedent herein provided
for relating to the satisfaction and discharge of this Indenture have been
complied with.
Notwithstanding the satisfaction and discharge of this
Indenture, the obligations of the Companies to the Trustee under SECTION 7.07,
the obligations of the Companies to any Authenticating Agent under SECTION 7.14
and, if money shall have been deposited with the Trustee pursuant to subclause
(B) of Clause (1) of this Section, the obligations of the Trustee under SECTION
5.02 and the last paragraph of SECTION 11.03 shall survive.
If the Securities are deemed paid and discharged pursuant to
this SECTION 5.01 or defeased pursuant to ARTICLE XIV, the obligation of the
applicable Company to make payment with respect to the principal of and premium,
if any, and interest on the First Mortgage Bonds shall be satisfied and
discharged, as provided in the supplemental trust indenture or indentures to the
applicable First Mortgage creating such First Mortgage Bonds, and the First
Mortgage Bonds shall cease to secure the Securities in any manner.
If the Companies shall have paid or caused to be paid the
principal of and premium, if any, and interest on any Security, as and when the
same shall have become due and payable or the Companies shall have delivered to
the Trustee for cancellation any outstanding Security, such Security shall cease
to be entitled to any lien, benefit or security under this Indenture. Upon a
Security of any series ceasing to be entitled to any lien, benefit or security
under this Indenture, the obligation of the applicable Company to make payment
with respect to principal of and premium, if any, and interest on a principal
amount of the related First Mortgage Bonds (pro rata as between Cleveland
Electric First Mortgage Bonds and Toledo Edison First Mortgage Bonds) equal to
the principal amount of such Security shall be satisfied and discharged and such
portion of the principal amount of such First Mortgage Bonds (pro rata as
aforesaid) shall cease to secure the Securities in any manner.
SECTION 5.02. APPLICATION OF TRUST MONEY.
Subject to the provisions of the last paragraph of SECTION
11.03, all money deposited with the Trustee pursuant to SECTION 5.01 shall be
held in trust and applied by it, in accordance with the provisions of the
Securities and this Indenture, to the payment, either directly or through any
Paying Agent (including either Company acting as the Paying Agent for the
Companies) as the Trustee may determine, to the Persons entitled thereto, of the
principal and any premium and interest for whose payment such money has been
deposited with the Trustee.
SECTION 5.03. PAYING AGENT TO REPAY MONEYS HELD.
Upon the satisfaction and discharge of this Indenture all
moneys then held by any Paying Agent for the Securities (other than the Trustee)
shall, upon written demand by the Companies, be repaid to the Companies or paid
to the Trustee, and thereupon such Paying Agent shall be released from all
further liability with respect to such moneys.
SECTION 5.04. RETURN OF UNCLAIMED MONEYS.
Any moneys deposited with or paid to the Trustee for payment
of the principal of or any premium or interest on any Securities and not applied
but remaining unclaimed by the holders of such Securities for two years after
the date upon which the principal of or any premium or interest on such
Securities, as the case may be, shall have become due and payable, shall be
repaid to the Companies by the Trustee on written demand by the Companies, and
all liability of the Trustee shall thereupon cease;
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and any holder of any such Securities shall thereafter look only to the
Companies for any payment which such holder may be entitled to collect.
ARTICLE VI.
REMEDIES
SECTION 6.01. EVENTS OF DEFAULT.
"EVENT OF DEFAULT", wherever used herein with respect to
Securities of any series, means any one of the following events (whatever the
reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(1) default in the payment of any interest upon any Security
of that series when it becomes due and payable, and continuance of such
default for a period of 30 days; or
(2) default in the payment of the principal of or any premium
on any Security of that series at its Maturity; or
(3) default in the deposit of any sinking fund payment, when
and as due by the terms of a Security of that series; or
(4) default in the performance, or breach, of any covenant or
warranty of either Company in this Indenture (other than a covenant or
warranty a default in whose performance or whose breach is elsewhere in
this Section specifically dealt with or which has expressly been
included in this Indenture solely for the benefit of series of
Securities other than that series), and continuance of such default or
breach for a period of 60 days after there has been given, by
registered or certified mail, to the Companies by the Trustee or to the
Companies and the Trustee by the Holders of a majority in principal
amount of the Outstanding Securities of that series a written notice
specifying such default or breach and requiring it to be remedied and
stating that such notice is a "NOTICE OF DEFAULT" hereunder; or
(5) if any First Mortgage Bonds held by the Trustee relating
to such series pursuant to ARTICLE IV are Cleveland Electric First
Mortgage Bonds, a Default (as defined in the Cleveland Electric First
Mortgage) has occurred and is continuing, and the Mortgage Trustee
under the Cleveland Electric First Mortgage, Cleveland Electric or
Holders of at least 25% in principal amount of the outstanding
Securities shall have given written notice thereof to the Trustee; or
(6) if any First Mortgage Bonds held by the Trustee relating
to such series pursuant to ARTICLE IV are Toledo Edison First Mortgage
Bonds, a Default (as defined in the Toledo Edison First Mortgage) has
occurred and is continuing, and the Mortgage Trustee under the Toledo
Edison First Mortgage, Toledo Edison or Holders of at least 25% in
principal amount of the outstanding Securities shall have given written
notice thereof to the Trustee; or
(7) the entry by a court having jurisdiction in the premises
of (A) a decree or order for relief in respect of either Company in an
involuntary case or proceeding under any applicable Federal or State
bankruptcy, insolvency, reorganization or other similar law or (B) a
decree or order adjudging either Company a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization,
arrangement, adjustment or composition of or in respect of either
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Company under any applicable Federal or State law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator or
other similar official of either Company or of any substantial part of
its property, or ordering the winding up or liquidation of its affairs,
and the continuance of any such decree or order for relief or any such
other decree or order unstayed and in effect for a period of 90
consecutive days; or
(8) the commencement by either Company of a voluntary case or
proceeding under any applicable Federal or State bankruptcy,
insolvency, reorganization or other similar law or of any other case or
proceeding to be adjudicated a bankrupt or insolvent, or the consent by
it to the entry of a decree or order for relief in respect of either
Company in an involuntary case or proceeding under any applicable
Federal or State bankruptcy, insolvency, reorganization or other
similar law or to the commencement of any bankruptcy or insolvency case
or proceeding against it, or the filing by it of a petition or answer
or consent seeking reorganization or relief under any applicable
Federal or State law, or the consent by it to the filing of such
petition or to the appointment of or taking possession by a custodian,
receiver, liquidator, assignee, trustee, sequestrator or other similar
official of either Company or of any substantial part of its property,
or the making by it of an assignment for the benefit of creditors, or
the admission by it in writing of its inability to pay its debts
generally as they become due, or the taking of corporate action by
either Company in furtherance of any such action; or
(9) any other Event of Default provided with respect to
Securities of that series.
SECTION 6.02. ACCELERATION OF MATURITY; RESCISSION AND
ANNULMENT.
If an Event of Default (other than an Event of Default
specified in SECTION 6.01(7) or 6.01(8)) with respect to Securities of any
series at the time Outstanding occurs and is continuing, then in every such case
the Trustee or the Holders of a majority in principal amount of the Outstanding
Securities of that series may declare the principal amount of all the Securities
of that series (or, if any Securities of that series are Original Issue Discount
Securities, such portion of the principal amount of such Securities as may be
specified by the terms thereof) to be due and payable immediately, by a notice
in writing to the Companies (and to the Trustee if given by Holders), and upon
any such declaration such principal amount (or specified amount) shall become
immediately due and payable. If an Event of Default specified in SECTION 6.01(7)
or 6.01(8) with respect to Securities of any series at the time Outstanding
occurs, the principal amount of all the Securities of that series (or, if any
Securities of that series are Original Issue Discount Securities, such portion
of the principal amount of such Securities as may be specified by the terms
thereof) shall automatically, and without any declaration or other action on the
part of the Trustee or any Holder, become immediately due and payable. Upon such
Securities becoming immediately due and payable, by declaration or otherwise,
pursuant to any of the foregoing provisions of this SECTION 6.02, the Trustee
shall immediately file with the applicable Mortgage Trustee or Mortgage Trustees
a written demand for the acceleration of the payment of principal of all First
Mortgage Bonds relating to such series of outstanding Securities pursuant to the
applicable provisions of the supplemental indenture to the applicable First
Mortgage or First Mortgages relating to such First Mortgage Bonds.
At any time after such a declaration of acceleration with
respect to Securities of any series has been made and before a judgment or
decree for payment of the money due has been obtained by the Trustee as
hereinafter in this Article provided, and prior to the receipt by the Trustee
from the applicable Mortgage Trustee of an irrevocable, valid and unconditional
notice to the Trustee of the acceleration of the payment of principal, by
declaration or otherwise, of all of the First Mortgage Bonds relating to such
series of Securities, the related Event of Default and its consequences
(including, if given, the written
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demand for the acceleration of the payment of principal of all such First
Mortgage Bonds) will be automatically waived, resulting in an automatic
rescission and annulment of the acceleration of the Securities if
(1) there shall have been paid to or deposited with the
Trustee a sum sufficient to pay
(A) all overdue interest on all Securities of that
series,
(B) the principal of (and premium, if any, on) any
Securities of that series that have become due otherwise than by such
declaration of acceleration and any interest thereon at the rate or
rates prescribed therefor in such Securities,
(C) to the extent that payment of such interest is
lawful, interest upon overdue interest at the rate or rates prescribed
therefor in such Securities, and
(D) all sums paid or advanced by the Trustee
hereunder and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel; and
(2) all Events of Default with respect to Securities of that
series, other than the nonpayment of the principal of Securities of that series
that have become due solely by such declaration of acceleration, have been cured
(including any Defaults (as defined in the Cleveland Electric First Mortgage)
under the Cleveland Electric First Mortgage, as evidenced by notice thereof
received by the Trustee from the Mortgage Trustee under the Cleveland Electric
First Mortgage and any Defaults (as defined in the Toledo Edison First Mortgage)
under the Toledo Edison First Mortgage, as evidenced by notice thereof received
by the Trustee from the Mortgage Trustee under the Toledo Edison First Mortgage,
as the case may be) or waived as provided in SECTION 6.13 or under the
applicable First Mortgage.
No such rescission and annulment shall affect any subsequent default or impair
any right consequent thereon.
SECTION 6.03. COLLECTION OF INDEBTEDNESS AND SUITS FOR
ENFORCEMENT BY TRUSTEE.
The Companies covenant that if
(1) default is made in the payment of any interest on any
Security when such interest becomes due and payable and such default continues
for a period of 30 days, or
(2) default is made in the payment of the principal of (or
premium, if any, on) any Security at the Maturity thereof, the Companies will,
upon demand of the Trustee, pay to it, for the benefit of the Holders of such
Securities, the whole amount then due and payable on such Securities for
principal and any premium and interest and, to the extent that payment of such
interest shall be legally enforceable, interest on any overdue principal and
premium and on any overdue interest, at the rate or rates prescribed therefor in
such Securities, and, in addition thereto, such further amount as shall be
sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel other than through its negligence or bad faith, and any
other amounts due the Trustee under SECTION 7.07 hereof.
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If an Event of Default with respect to Securities of any
series occurs and is continuing, the Trustee may in its discretion proceed to
protect and enforce its rights (including any rights that the Trustee may have
as a holder of First Mortgage Bonds relating to the series of such Securities)
and the rights of the Holders of Securities of such series by such appropriate
judicial proceedings as the Trustee shall deem most effectual to protect and
enforce any such rights, whether for the specific enforcement of any covenant or
agreement in this Indenture or in aid of the exercise of any power granted
herein, or to enforce any other proper remedy.
SECTION 6.04. TRUSTEE MAY FILE PROOFS OF CLAIM.
In case of any judicial proceeding relative to either Company
(or any other obligor upon the Securities), its property or its creditors, the
Trustee shall be entitled and empowered, by intervention in such proceeding or
otherwise, to take any and all actions authorized under the Trust Indenture Act
in order to have claims of the Holders and the Trustee (including any claims of
the Trustee as a holder of First Mortgage Bonds) allowed in any such proceeding.
In particular, the Trustee shall be authorized to collect and receive any moneys
or other property payable or deliverable on any such claims and to distribute
the same; and any custodian, receiver, assignee, trustee, liquidator,
sequestrator or other similar official in any such judicial proceeding is hereby
authorized by each Holder to make such payments to the Trustee and, in the event
that the Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Trustee any amount due it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under SECTION 7.07.
No provision of this Indenture shall be deemed to authorize
the Trustee to authorize or consent to or accept or adopt on behalf of any
Holder any plan of reorganization, arrangement, adjustment or composition
affecting the Securities or the rights of any Holder thereof or to authorize the
Trustee to vote in respect of the claim of any Holder in any such proceeding;
provided, however, that the Trustee may, on behalf of the Holders, vote for the
election of a trustee in bankruptcy or similar official and be a member of a
creditors' or other similar committee.
SECTION 6.05. TRUSTEE MAY ENFORCE CLAIMS WITHOUT POSSESSION OF
SECURITIES.
All rights of action and claims under this Indenture or the
Securities may be prosecuted and enforced by the Trustee without the possession
of any of the Securities or the production thereof in any proceeding relating
thereto, and any such proceeding instituted by the Trustee shall be brought in
its own name as trustee of an express trust, and any recovery of judgment shall,
after provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, be for the
ratable benefit of the Holders of the Securities in respect of which such
judgment has been recovered.
SECTION 6.06. APPLICATION OF MONEY COLLECTED.
Any money collected by the Trustee pursuant to this Article
shall be applied in the following order, at the date or dates fixed by the
Trustee and, in case of the distribution of such money on account of principal
or any premium or interest, upon presentation of the Securities and the notation
thereon of the payment if only partially paid and upon surrender thereof if
fully paid:
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FIRST: To the payment of all amounts due the Trustee under
SECTION 7.07;
SECOND: To the payment of the amounts then due and unpaid for
principal of and any premium and interest on the Securities in respect
of which or for the benefit of which such money has been collected,
ratably, without preference or priority of any kind, according to the
amounts due and payable on such Securities for principal and any
premium and interest, respectively; and
THIRD: To the payment of the balance, if any, to the Companies
in the manner set forth in a Company Request or any other Person or
Persons legally entitled thereto.
SECTION 6.07. LIMITATION ON SUITS.
No Holder of any Security of any series shall have any right
to institute any proceeding, judicial or otherwise, with respect to this
Indenture, or for the appointment of a receiver or trustee, or for any other
remedy hereunder, unless
(1) such Holder has previously given written notice to the
Trustee of a continuing Event of Default with respect to the Securities
of that series;
(2) the Holders of not less than a majority in principal
amount of the Outstanding Securities of that series shall have made
written request to the Trustee to institute proceedings in respect of
such Event of Default in its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee
reasonable indemnity against the costs, expenses and liabilities to be
incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(5) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of a
majority in principal amount of the Outstanding Securities of that
series;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other of
such Holders, or to obtain or to seek to obtain priority or preference over any
other of such Holders or to enforce any right under this Indenture, except in
the manner herein provided and for the equal and ratable benefit of all of such
Holders.
SECTION 6.08. UNCONDITIONAL RIGHT OF HOLDERS TO RECEIVE
PRINCIPAL, PREMIUM AND INTEREST.
Notwithstanding any other provision in this Indenture, the
Holder of any Security shall have the right, which is absolute and
unconditional, to receive payment of the principal of and any premium and
(subject to SECTION 3.07) interest on such Security on the respective Stated
Maturities expressed in such Security (or, in the case of redemption, on the
Redemption Date) and to institute suit for the enforcement of any such payment,
and such rights shall not be impaired without the consent of such Holder.
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SECTION 6.09. RESTORATION OF RIGHTS AND REMEDIES.
If the Trustee or any Holder has instituted any proceeding to
enforce any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Companies, the Trustee and the Holders
shall be restored severally and respectively to their former positions hereunder
and thereafter all rights and remedies of the Trustee and the Holders shall
continue as though no such proceeding had been instituted.
SECTION 6.10. RIGHTS AND REMEDIES CUMULATIVE.
Except as otherwise provided with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities in the last
paragraph of SECTION 3.06, no right or remedy herein conferred upon or reserved
to the Trustee or to the Holders is intended to be exclusive of any other right
or remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent the
concurrent assertion or employment of any other appropriate right or remedy.
SECTION 6.11. DELAY OR OMISSION NOT WAIVER.
No delay or omission of the Trustee or of any Holder of any
Securities to exercise any right or remedy accruing upon any Event of Default
shall impair any such right or remedy or constitute a waiver of any such Event
of Default or an acquiescence therein. Every right and remedy given by this
Article or by law to the Trustee or to the Holders may be exercised from time to
time, and as often as may be deemed expedient, by the Trustee or by the Holders,
as the case may be.
SECTION 6.12. CONTROL BY HOLDERS.
The Holders of a majority in principal amount of the
Outstanding Securities of any series shall have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred on the Trustee, with respect
to the Securities of such series, provided that
(1) such direction shall not be in conflict with any rule of
law or with this Indenture,
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction,
(3) subject to the provisions of SECTION 7.01, the Trustee
shall have the right to decline to follow any such direction if the
Trustee in good faith shall, by a Responsible Officer or Officers of
the Trustee, determine that the proceeding so directed would involve
the Trustee in personal liability, and
(4) the Trustee shall have the right to decline to follow any
such direction if the Trustee in good faith shall so determine that the
actions or forebearances specified in or pursuant to such direction
would be unduly prejudicial to the interests of Holders of the
Securities of all
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series so affected not joining in the giving of said direction, it
being understood that the Trustee shall have no duty to ascertain
whether or not such actions or forebearances are unduly prejudicial to
such Holders.
SECTION 6.13. WAIVER OF PAST DEFAULTS.
The Holders of not less than a majority in principal amount of
the Outstanding Securities of any series by notice to the Trustee may, on behalf
of the Holders of all the Securities of such series, waive any existing or past
default hereunder with respect to such series and its consequences (including by
way of consents obtained in connection with a tender offer or exchange for
Securities of such series), except a default
(1) in the payment of the principal of or any premium or
interest on any Security of such series, or
(2) in respect of a covenant or provision hereof which under
ARTICLE X cannot be modified or amended without the consent of the
Holder of each Outstanding Security of such series affected.
Upon any such waiver, such default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured, for
every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other default or impair any right consequent thereon.
SECTION 6.14. UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, a court may require any party litigant in
such suit to file an undertaking to pay the costs of such suit, and may assess
costs against any such party litigant, in the manner and to the extent provided
in the Trust Indenture Act; provided that neither this Section nor the Trust
Indenture Act shall be deemed to authorize any court to require such an
undertaking or to make such an assessment in any suit instituted by the
Companies or the Trustee.
SECTION 6.15. WAIVER OF USURY, STAY OR EXTENSION LAWS.
Each Company covenants (to the extent that it may lawfully do
so) that it will not at any time insist upon, or plead, or in any manner
whatsoever claim or take the benefit or advantage of, any usury, stay or
extension law wherever enacted, now or at any time hereafter in force, that may
affect the covenants or the performance of this Indenture; and each Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law and covenants that it will not hinder, delay or impede
the execution of any power herein granted to the Trustee, but will suffer and
permit the execution of every such power as though no such law had been enacted.
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ARTICLE VII.
THE TRUSTEE
SECTION 7.01. CERTAIN DUTIES AND RESPONSIBILITIES.
Except during the continuance of a default, the duties and
responsibilities of the Trustee shall be as provided by the Trust Indenture Act,
and no implied covenants or obligations shall be read into the Indenture against
the Trustee. The phrase "default (as such term is defined in such indenture)" as
it appears in SECTION 3.15 of the Trust Indenture Act shall mean an Event of
Default with respect to a series of Securities which shall have occurred and is
continuing. Notwithstanding the foregoing, no provision of this Indenture shall
require the Trustee to expend or risk its own funds or otherwise incur any
financial liability in the performance of any of its duties hereunder, or in the
exercise of any of its rights or powers, if it shall have reasonable grounds for
believing that repayment of such funds or adequate indemnity against such risk
or liability is not reasonably assured to it. Whether or not herein expressly so
provided, every provision of this Indenture relating to the conduct or affecting
the liability of or affording protection to the Trustee shall be subject to the
provisions of this Section.
If default of which the Trustee has knowledge has occurred and
is continuing, the Trustee shall exercise such of the rights and powers vested
in it by this Indenture and use the same degree of care and skill in its
exercise, as a prudent man would exercise or use under the circumstance in the
conduct of his own affairs.
SECTION 7.02. NOTICE OF DEFAULTS.
If a default occurs hereunder with respect to Securities of
any series, the Trustee shall give the Holders of Securities of such series
notice of such default known to the Trustee within 90 days after it occurs;
provided, however, that in the case of any default of the character specified in
SECTION 6.01(4) with respect to Securities of such series, no such notice to
Holders shall be given until at least 30 days after the occurrence thereof.
Except in the case of an Event of Default in payment on any Security pursuant to
SECTION 6.01(1) or (2) hereof, the Trustee may withhold the notice if the
Trustee in good faith determines that withholding the notice is in the interest
of the Holders. For the purpose of this Section, the term "DEFAULT" means any
event which is, or after notice or lapse of time or both would become, an Event
of Default with respect to Securities of such series.
SECTION 7.03. CERTAIN RIGHTS OF TRUSTEE.
Subject to the provisions of SECTION 7.01:
(1) the Trustee may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction, consent,
order, bond, debenture, note, other evidence of indebtedness or other
paper or document believed by it to be genuine and to have been signed
or presented by the proper party or parties;
(2) any request or direction of the Companies mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order,
and any resolutions of the Board of Directors shall be sufficiently
evidenced by Board Resolutions;
(3) whenever in the administration of this Indenture the
Trustee shall deem it
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desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of
negligence or bad faith on its part, rely upon an Officer's Certificate
and/or an Opinion of Counsel;
(4) the Trustee may consult with counsel of its selection and
the advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance
thereon;
(5) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request
or direction of any of the Holders pursuant to this Indenture, unless
such Holders shall have offered to the Trustee reasonable security or
indemnity against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction;
(6) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, note, other evidence of indebtedness
or other paper or document, but the Trustee, in its discretion, may
make such further inquiry or investigation into such facts or matters
as it may see fit, and, if the Trustee shall determine to make such
further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Companies, personally or by agent or
attorney;
(7) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through agents or attorneys and the Trustee shall not be responsible
for any misconduct or negligence on the part of any agent or attorney
appointed with due care by it hereunder; and
(8) except as otherwise provided in SECTION 6.01(4), the
Trustee shall not be charged with knowledge of any default or Event of
Default unless either (i) a Responsible Officer of the Trustee assigned
to the Corporate Trustee Administration of the Trustee (or any
successor division or department of the Trustee) shall have actual
knowledge of the default or Event of Default, or (ii) written notice of
such default or Event of Default shall have been given to the Trustee
by the Companies, any other obligor on the Securities or by any Holder
of such Securities or, in the case of an Event of Default described in
SECTION 6.01(5), by the Mortgage Trustee under the Cleveland Electric
First Mortgage, or in the case of an Event of Default described in
SECTION 6.01(6), by the Mortgage Trustee under the Toledo Edison First
Mortgage, or Holders of at least 25% in principal amount of the
Outstanding Securities.
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SECTION 7.04. NOT RESPONSIBLE FOR RECITALS OR ISSUANCE OF
SECURITIES.
The recitals contained herein and in the Securities, except
the Trustee's certificates of authentication, shall be taken as the statements
of the Companies, and neither the Trustee nor any Authenticating Agent assumes
any responsibility for their correctness. The Trustee makes no representations
as to the validity or sufficiency of this Indenture or of the Securities or as
to the value, title or validity of any First Mortgage Bonds or other securities
at any time pledged or deposited with the Trustee hereunder or as to the
security offered thereby or hereby. Neither the Trustee nor any Authenticating
Agent shall be accountable for the use or application by the Companies of
Securities or the proceeds thereof or of any moneys paid to the Companies under
any provision hereof. The Trustee shall not be responsible for recording or
filing this Indenture, any indenture supplemented hereto or any financing or
continuation statement in any public office or elsewhere at any time or times.
SECTION 7.05. MAY HOLD SECURITIES.
The Trustee, any Authenticating Agent, any Paying Agent, any
Security Registrar or any other agent of the Companies, in their individual or
any other capacity, may become the owner or pledgee of Securities and, subject
to SECTIONS 6.08 and 6.13, may otherwise deal with the Companies with the same
rights it would have if it were not Trustee, Authenticating Agent, Paying Agent,
Security Registrar or such other agent.
SECTION 7.06. MONEY HELD IN TRUST.
Money held by the Trustee in trust hereunder need not be
segregated from other funds except to the extent required by law. The Trustee
shall be under no liability for interest on any money received by it hereunder
except as otherwise agreed in writing with the Companies.
SECTION 7.07. COMPENSATION AND REIMBURSEMENT.SECTION 7.07.
COMPENSATION AND REIMBURSEMENT.
The Companies agree
(1) to pay to the Trustee from time to time such compensation
as shall be agreed to in writing between the Companies and the Trustee
for all services rendered by it hereunder (which compensation shall not
be limited by any provision of law in regard to the compensation of a
trustee of an express trust);
(2) except as otherwise expressly provided herein, to
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Indenture (including the
reasonable compensation and the expenses and disbursements of its
agents and counsel), except any such expense, disbursement or advance
as may be attributable to its negligence or bad faith; and
(3) to indemnify the Trustee for, and to hold it harmless
against, any loss, liability or expense incurred without negligence or
bad faith on its part, arising out of or in connection with the
acceptance or administration of the trust or trusts hereunder,
including the costs and expenses of defending itself against any claim
or liability in connection with the exercise or performance of any of
its powers or duties hereunder.
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The Trustee shall have a lien prior to the Securities upon all
property and funds held by it hereunder for any amount owing it or any
predecessor Trustee pursuant to this SECTION 7.07, except with respect to funds
held in trust for the benefit of the Holders of particular Securities.
Without limiting any rights available to the Trustee under
applicable law, when the Trustee incurs expenses or renders services in
connection with an Event of Default specified in SECTION 6.01(7) or SECTION
6.01(8), the expenses (including the reasonable charges and expenses of its
agents and counsel) and the compensation for the services are intended to
constitute expenses of administration under any applicable Federal or State
bankruptcy, insolvency or other similar law.
The provisions of this Section shall survive the termination
of this Indenture.
SECTION 7.08. CONFLICTING INTERESTS.
If the Trustee has or shall acquire a conflicting interest
within the meaning of the Trust Indenture Act, the Trustee shall eliminate such
conflict within 90 days, apply to the Commission for permission to continue as
Trustee or resign. To the extent permitted by such Act, the Trustee shall not be
deemed to have a conflicting interest by virtue of being a trustee under this
Indenture with respect to Securities of more than one series.
SECTION 7.09. CORPORATE TRUSTEE REQUIRED; ELIGIBILITY.
There shall at all times be one (and only one) Trustee
hereunder with respect to the Securities of each series, which may be Trustee
hereunder for Securities of one or more other series. Each Trustee shall be a
Person that is eligible pursuant to the Trust Indenture Act to act as such and
has a combined capital and surplus of at least $50,000,000. If any such Person
publishes reports of condition at least annually, pursuant to law or to the
requirements of its supervising or examining authority, then for the purposes of
this Section and to the extent permitted by the Trust Indenture Act, the
combined capital and surplus of such Person shall be deemed to be its combined
capital and surplus as set forth in its most recent report of condition so
published. If at any time the Trustee with respect to the Securities of any
series shall cease to be eligible in accordance with the provisions of this
Section, it shall resign immediately in the manner and with the effect
hereinafter specified in this Article.
SECTION 7.10. RESIGNATION AND REMOVAL; APPOINTMENT OF
SUCCESSOR.
No resignation or removal of the Trustee and no appointment of
a successor Trustee pursuant to this Article shall become effective until the
acceptance of appointment by the successor Trustee in accordance with the
applicable requirements of SECTION 7.11.
The Trustee may resign at any time with respect to the
Securities of one or more series by giving written notice thereof to the
Companies. If the instrument of acceptance by a successor Trustee required by
SECTION 7.11 shall not have been delivered to the Trustee within 30 days after
the giving of such notice of resignation, the resigning Trustee may petition any
court of competent jurisdiction for the appointment of a successor Trustee with
respect to the Securities of such series.
The Trustee may be removed at any time with respect to the
Securities of any series by Act of the Holders of a majority in principal amount
of the Outstanding Securities of such series, delivered to the Trustee and to
the Companies.
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If at any time:
(1) the Trustee shall fail to comply with SECTION 7.08 after
written request therefor by the Companies or by any Holder who has been
a bona fide Holder of a Security for at least six months, or
(2) the Trustee shall cease to be eligible under SECTION 7.09
and shall fail to resign after written request therefor by the
Companies or by any such Holder, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation, then, in any such case,
(A) the Companies by Board Resolutions may remove the Trustee with
respect to all Securities, or (B) subject to SECTION 6.14, any Holder
who has been a bona fide Holder of a Security for at least six months
may, on behalf of himself and all others similarly situated, petition
any court of competent jurisdiction for the removal of the Trustee with
respect to all Securities and the appointment of a successor Trustee or
Trustees.
If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, with
respect to the Securities of one or more series, the Companies, by Board
Resolutions, shall promptly appoint a successor Trustee or Trustees with respect
to the Securities of that or those series (it being understood that any such
successor Trustee may be appointed with respect to the Securities of one or more
or all of such series and that at any time there shall be only one Trustee with
respect to the Securities of any particular series) and shall comply with the
applicable requirements of SECTION 7.11. If, within one year after such
resignation, removal or incapability, or the occurrence of such vacancy, a
successor Trustee with respect to the Securities of any series shall be
appointed by Act of the Holders of a majority in principal amount of the
Outstanding Securities of such series delivered to the Companies and the
retiring Trustee, the successor Trustee so appointed shall, forthwith upon its
acceptance of such appointment in accordance with the applicable requirements of
SECTION 7.11, become the successor Trustee with respect to the Securities of
such series and to that extent supersede the successor Trustee appointed by the
Companies. If no successor Trustee with respect to the Securities of any series
shall have been so appointed by the Companies or the Holders and accepted
appointment in the manner required by SECTION 7.11, any Holder who has been a
bona fide Holder of a Security of such series for at least six months may, on
behalf of himself and all others similarly situated, petition any court of
competent jurisdiction for the appointment of a successor Trustee with respect
to the Securities of such series.
The Companies shall give notice of each resignation and each
removal of the Trustee with respect to the Securities of any series and each
appointment of a successor Trustee with respect to the Securities of any series
to all Holders of Securities of such series in the manner provided in SECTION
1.06. Each notice shall include the name of the successor Trustee with respect
to the Securities of such series and the address of its Corporate Trust Office.
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SECTION 7.11. ACCEPTANCE OF APPOINTMENT BY SUCCESSOR.
In case of the appointment hereunder of a successor Trustee
with respect to all Securities, every such successor Trustee so appointed shall
execute, acknowledge and deliver to the Companies and to the retiring Trustee an
instrument accepting such appointment, and thereupon the resignation or removal
of the retiring Trustee shall become effective and such successor Trustee,
without any further act, deed or conveyance, shall become vested with all the
rights, powers, trusts and duties of the retiring Trustee, including right,
title and interest in the First Mortgage Bonds; but, on the request of the
Companies or the successor Trustee, such retiring Trustee shall, upon payment of
its charges, execute and deliver an instrument transferring to such successor
Trustee all the rights, powers and trusts of the retiring Trustee and shall duly
assign, transfer and deliver to such successor Trustee all property and money
held by such retiring Trustee hereunder. The successor Trustee shall mail a
notice of its succession to the Holders of the Securities.
In case of the appointment hereunder of a successor Trustee
with respect to the Securities of one or more (but not all) series, the
Companies, the retiring Trustee and each successor Trustee with respect to the
Securities of one or more series shall execute and deliver an indenture
supplemental hereto wherein each successor Trustee shall accept such appointment
and which (1) shall contain such provisions as shall be necessary or desirable
to transfer and confirm to, and to vest in, each successor Trustee all the
rights, powers, trusts and duties of the retiring Trustee with respect to the
Securities of that or those series to which the appointment of such successor
Trustee relates, (2) if the retiring Trustee is not retiring with respect to
all Securities, shall contain such provisions as shall be deemed necessary or
desirable to confirm that all the rights, powers, trusts and duties of the
retiring Trustee with respect to the Securities of that or those series as to
which the retiring Trustee is not retiring shall continue to be vested in the
retiring Trustee, and (3) shall add to or change any of the provisions of this
Indenture as shall be necessary to provide for or facilitate the administration
of the trusts hereunder by more than one Trustee, it being understood that
nothing herein or in such supplemental indenture shall constitute such Trustees
as co-trustees of the same trust and that each such Trustee shall be trustee of
a trust or trusts hereunder separate and apart from any trust or trusts
hereunder administered by any other such Trustee; and upon the execution and
delivery of such supplemental indenture the resignation or removal of the
retiring Trustee shall become effective to the extent provided therein and each
such successor Trustee, without any further act, deed or conveyance, shall
become vested with all the rights, powers, trusts and duties of the retiring
Trustee with respect to the Securities of that or those series to which the
appointment of such successor Trustee relates; but, on request of the Companies
or any successor Trustee, such retiring Trustee shall duly assign, transfer and
deliver to such successor Trustee all property and money held by such retiring
Trustee hereunder with respect to the Securities of that or those series to
which the appointment of such successor Trustee relates.
Upon request of any such successor Trustee, the Companies
shall execute any and all instruments for more fully and certainly vesting in
and confirming to such successor Trustee all such rights, powers and trusts
referred to in the first or second preceding paragraph, as the case may be.
No successor Trustee shall accept its appointment unless at
the time of such acceptance such successor Trustee shall be qualified and
eligible under this Article.
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SECTION 7.12. MERGER, CONVERSION, CONSOLIDATION OR SUCCESSION
TO BUSINESS.
Any corporation into which the Trustee may be merged or
converted or with which it may be consolidated, or any corporation resulting
from any merger, conversion or consolidation to which the Trustee shall be a
party, or any corporation succeeding to all or substantially all the corporate
trust business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article, without the execution or filing of any paper or any further act on the
part of any of the parties hereto. In case any Securities shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Securities so authenticated with the same
effect as if such successor Trustee had itself authenticated such Securities.
SECTION 7.13. PREFERENTIAL COLLECTION OF CLAIMS AGAINST
COMPANIES.
If and when the Trustee shall be or become a creditor of the
Companies (or any other obligor upon the Securities), the Trustee shall be
subject to the provisions of the Trust Indenture Act regarding the collection of
claims against the Companies (or any such other obligor).
SECTION 7.14. APPOINTMENT OF AUTHENTICATING AGENT.
The Trustee may appoint an Authenticating Agent or Agents with
respect to one or more series of Securities which shall be authorized to act on
behalf of the Trustee to authenticate Securities of such series issued upon
exchange, registration of transfer or partial redemption thereof or pursuant to
SECTION 3.06, and Securities so authenticated shall be entitled to the benefits
of this Indenture and shall be valid and obligatory for all purposes as if
authenticated by the Trustee hereunder. Wherever reference is made in this
Indenture to the authentication and delivery of Securities by the Trustee or the
Trustee's certificate of authentication, such reference shall be deemed to
include authentication and delivery on behalf of the Trustee by an
Authenticating Agent and a certificate of authentication executed on behalf of
the Trustee by an Authenticating Agent. Each Authenticating Agent shall be
acceptable to the Companies and shall at all times be a corporation organized
and doing business under the laws of the United States of America, any State
thereof or the District of Columbia, authorized under such laws to act as
Authenticating Agent, having a combined capital and surplus of not less than
$50,000,000 and subject to supervision or examination by Federal or State
authority. If such Authenticating Agent publishes reports of condition at least
annually, pursuant to law or to the requirements of said supervising or
examining authority, then for the purposes of this Section, the combined capital
and surplus of such Authenticating Agent shall be deemed to be its combined
capital and surplus as set forth in its most recent report of condition so
published. If at any time an Authenticating Agent shall cease to be eligible in
accordance with the provisions of this Section, such Authenticating Agent shall
resign immediately in the manner and with the effect specified in this Section.
Any corporation into which an Authenticating Agent may be
merged or converted or with which it may be consolidated, or any corporation
resulting from any merger, conversion or consolidation to which such
Authenticating Agent shall be a party, or any corporation succeeding to the
corporate agency or corporate trust business of an Authenticating Agent, shall
continue to be an Authenticating Agent, provided such corporation shall be
otherwise eligible under this Section, without the execution or filing of any
paper or any further act on the part of the Trustee or the Authenticating Agent.
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An Authenticating Agent may resign at any time by giving
written notice thereof to the Trustee and to the Companies. The Trustee may at
any time terminate the agency of an Authenticating Agent by giving written
notice thereof to such Authenticating Agent and to the Companies. Upon receiving
such a notice of resignation or upon such a termination, or in case at any time
such Authenticating Agent shall cease to be eligible in accordance with the
provisions of this Section, the Trustee may appoint a successor Authenticating
Agent that shall be acceptable to the Companies and shall give notice of such
appointment in the manner provided in SECTION 1.06 to all Holders of Securities
of the series with respect to which such Authenticating Agent will serve. Any
successor Authenticating Agent upon acceptance of its appointment hereunder
shall become vested with all the rights, powers and duties of its predecessor
hereunder, with like effect as if originally named as an Authenticating Agent.
No successor Authenticating Agent shall be appointed unless eligible under the
provisions of this Section.
The Companies agree to pay to each Authenticating Agent from
time to time reasonable compensation for its services under this Section.
If an appointment with respect to one or more series is made
pursuant to this Section, the Securities of such series may have endorsed
thereon, in addition to the Trustee's certificate of authentication, an
alternative certificate of authentication in the following form:
This is one of the Securities of the series designated therein
referred to in the within-mentioned Indenture.
Dated: THE CHASE MANHATTAN BANK,
As Trustee
By
----------------------------
Authenticating Agent
By
----------------------------
Authorized Officer
ARTICLE VIII.
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANIES
SECTION 8.01. COMPANIES TO FURNISH TRUSTEE NAMES AND ADDRESSES
OF HOLDERS.
The Companies will furnish or cause to be furnished to the
Trustee
(1) within fifteen days after each Regular Record Date, a
list, in such form as the Trustee may reasonably require, of the names
and addresses of the Holders of Securities of each series as of such
Regular Record Date, and
(2) at such other times as the Trustee may request in writing,
within 30 days after the receipt by any Company of any such request, a
list of similar form and content as of a date not more than 15 days
prior to the time such list is furnished;
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provided, however, the Companies may exclude from any such list names and
addresses received by the Trustee in its capacity as Security Registrar.
SECTION 8.02. PRESERVATION OF INFORMATION; COMMUNICATIONS TO
HOLDERS. COMMUNICATIONS TO HOLDERS.
The Trustee shall preserve, in as current a form as is
reasonably practicable, the names and addresses of Holders contained in the most
recent list furnished to the Trustee as provided in SECTION 8.01 and the names
and addresses of Holders received by the Trustee in its capacity as Security
Registrar. The Trustee may destroy any list furnished to it as provided in
SECTION 8.01 upon receipt of a new list so furnished.
The rights of Holders to communicate with other Holders with
respect to their rights under this Indenture or under the Securities, and the
corresponding rights and privileges of the Trustee, shall be as provided by the
Trust Indenture Act.
Every Holder of Securities, by receiving and holding the same,
agrees with the Companies and the Trustee that neither the Companies nor the
Trustee nor any agent of either of them shall be held accountable by reason of
any disclosure of information as to names and addresses of Holders made pursuant
to the Trust Indenture Act.
SECTION 8.03. REPORTS BY TRUSTEE.
The Trustee shall transmit to Holders (and to AMBAC Indemnity,
for so long as any Financial Guaranty Insurance Policy is in effect) such
reports concerning the Trustee and its actions under this Indenture as may be
required pursuant to the Trust Indenture Act at the times and in the manner
provided pursuant thereto. If required by Section 3.13(a) of the Trust Indenture
Act, the Trustee shall, within sixty days after each May 15 following the date
of this Indenture deliver to Holders a brief report, dated as of such May 15,
which complies with the provisions of such Section 3.13(a).
A copy of each such report shall, at the time of such
transmission to Holders (and to AMBAC Indemnity, for so long as any Financial
Guaranty Insurance Policy is in effect), be filed by the Trustee with each stock
exchange upon which any Securities are listed, with the Commission and with the
Companies. The Companies will promptly notify the Trustee when any Securities
are listed on any stock exchange.
SECTION 8.04. REPORTS BY COMPANIES.
The Companies shall file with the Trustee and the Commission,
and transmit to Holders (and to AMBAC Indemnity, for so long as any Financial
Guaranty Insurance Policy is in effect), such information, documents and other
reports, and such summaries thereof, as may be required pursuant to the Trust
Indenture Act at the times and in the manner provided pursuant to such Act;
provided that any such information, documents or reports required to be filed
with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be
filed with the Trustee within 15 days after the same is so required to be filed
with the Commission.
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ARTICLE IX.
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 9.01. COMPANIES MAY CONSOLIDATE, ETC., ONLY ON CERTAIN
TERMS.
(1) Except for a consolidation or merger of Cleveland Electric
and Toledo Edison pursuant to Clause (2) hereof, a Company shall not consolidate
with or merge into any other Person or convey, transfer or lease its properties
and assets substantially as an entirety to any Person, and a Company shall not
permit any Person to consolidate with or merge into such Company or convey,
transfer or lease its properties and assets substantially as an entirety to such
Company, unless:
(a) in case a Company shall consolidate with or merge into
another Person or convey, transfer or lease its properties and assets
substantially as an entirety to any Person, the Person formed by such
consolidation or into which such Company is merged or the Person which
acquires by conveyance or transfer, or which leases, the properties and
assets of such Company substantially as an entirety shall be a
corporation, partnership, unincorporated organization or trust, shall
be organized and validly existing under the laws of the United States
of America, any State thereof or the District of Columbia and (a) shall
expressly assume, by an indenture supplemental hereto, executed and
delivered to the Trustee, in form satisfactory to the Trustee, the due
and punctual payment of the principal of and any premium and interest
on all the Securities and the performance or observance of every
covenant of this Indenture on the part of such Company to be performed
or observed and (b) shall expressly assume, by an indenture
supplemental to the applicable First Mortgage, executed and delivered
to the Trustee and the applicable Mortgage Trustee, in form
satisfactory to the Trustee and the applicable Mortgage Trustee, the
due and punctual payment of the principal of and any premium and
interest on the Cleveland Electric First Mortgage Bonds or the Toledo
Edison First Mortgage Bonds then held by the Trustee pursuant to
ARTICLE IV, as the case may be, and the performance of every covenant
of the applicable First Mortgage on the part of such Company to be
performed or observed;
(b) immediately after giving effect to such transaction and
treating any indebtedness which becomes an obligation of either Company
or any Subsidiary as a result of such transaction as having been
incurred by such Company or such Subsidiary at the time of such
transaction, no Event of Default, and no event which, after notice or
lapse of time or both, would become an Event of Default, shall have
happened and be continuing; and
(c) the applicable Company has delivered to the Trustee an
Officer's Certificate and an Opinion of Counsel, each stating that such
consolidation, merger, conveyance, transfer or lease and, if a
supplemental indenture is required in connection with such transaction,
such supplemental indenture comply with this Article and that all
conditions precedent herein provided for relating to such transaction
have been complied with.
(2) Cleveland Electric and Toledo Edison may consolidate with
or merge into each other, or convey, transfer or lease its properties and assets
substantially as an entirety one to the other, upon the satisfaction or waiver
of any conditions set forth in each First Mortgage with respect to such
consolidation, merger, conveyance, transfer or lease.
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SECTION 9.02. SUCCESSOR SUBSTITUTED.
Upon any consolidation of either Company with, or merger of
such Company into, any other Person or any conveyance, transfer or lease of the
properties and assets of such Company substantially as an entirety in accordance
with SECTION 9.01, the successor Person formed by such consolidation or into
which such Company is merged or to which such conveyance, transfer or lease is
made shall succeed to, and be substituted for, and may exercise every right and
power of, such Company under this Indenture with the same effect as if such
successor Person had been named as such Company herein, and thereafter, except
in the case of any conveyance, transfer or lease of less than all of the
properties or assets of the Company, the predecessor Person shall be relieved of
all obligations and covenants under this Indenture and the Securities.
ARTICLE X.
AMENDMENTS, SUPPLEMENTS AND WAIVERS
SECTION 10.01. WITHOUT CONSENT OF HOLDERS.
Without the consent of any Holders, the Companies, when
authorized by Board Resolutions, and the Trustee, at any time and from time to
time, may amend or supplement this Indenture or the Securities for any of the
following purposes:
(1) to cure any ambiguity, defect or inconsistency; or
(2) to provide for uncertificated Securities in addition to or
in place of certificated Securities; or
(3) to evidence the succession of another Person to either
Company in accordance with this Indenture and the assumption by any
such successor of the covenants of such Company herein and in the
Securities; or
(4) to add to or change any of the provisions of this
Indenture to such extent as shall be necessary to permit or facilitate
the issuance of Securities in bearer form, registrable or not
registrable as to principal, and with or without interest coupons, or
to permit or facilitate the issuance of Securities in uncertificated
form; or
(5) to add to, change or eliminate any of the provisions of
this Indenture in respect of one or more series of Securities, provided
that any such addition, change or elimination (A) shall neither (i)
apply to any Security of any series created prior to the execution of
such supplemental indenture and entitled to the benefit of such
provision nor (ii) modify the rights of the Holder of any such Security
with respect to such provision or (B) shall become effective only when
there is no such Security Outstanding; or
(6) to make any change that would provide any additional
rights or benefits to the Holders of the Securities or that does not
adversely affect the legal rights of any Holder; or
(7) to comply with the requirements of the Commission in order
to effect or maintain the qualification of this Indenture under the
Trust Indenture Act or to evidence or provide for the
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acceptance of appointment hereunder by a successor Trustee with respect
to the Securities of one or more series and to add to or change any of
the provisions of this Indenture as shall be necessary to provide for
or facilitate the administration of the trusts hereunder by more than
one Trustee, pursuant to the requirements of SECTION 7.11; or
(8) to secure the Securities; or
(9) to establish the form or terms of Securities of any series
as permitted by SECTIONS 2.01 and 3.01.
SECTION 10.02. WITH CONSENT OF HOLDERS.
With the consent of the Holders of a majority in principal
amount of the Outstanding Securities of each series affected by such
supplemental indenture (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Securities
of each such series), by Act of said Holders delivered to the Companies and the
Trustee, the Companies, when authorized by Board Resolutions, and the Trustee
may (a) amend or supplement the Indenture or the Securities or (b) subject to
SECTION 6.13 hereof, waive compliance with any provision of this Indenture or
the Securities; provided, however, that, without the consent of the Holder of
each Outstanding Security affected thereby, no such amendment, supplement or
waiver shall (with respect to any Securities held by a non-consenting Holder),
(1) change the Stated Maturity of the principal of, or any
installment of principal of or interest on, any Security, or reduce the
principal amount thereof or the rate of interest thereon or any premium
payable upon the redemption thereof, or reduce the amount of the
principal of an Original Issue Discount Security or any other Security
which would be due and payable upon a declaration of acceleration of
the Maturity thereof pursuant to SECTION 6.02, or change any Place of
Payment where, or the coin or currency in which, any Security or any
premium or interest thereon is payable, or impair the interest
hereunder of the Trustee in the First Mortgage Bonds, or impair the
right to institute suit for the enforcement of any such payment on or
after the Stated Maturity thereof (or, in the case of redemption, on or
after the Redemption Date), impair the interest hereunder of the
Trustee in the First Mortgage Bonds, reduce the principal amount of
First Mortgage Bonds to an amount less than the principal amount of the
related series of Securities or alter the payment provisions of such
First Mortgage Bonds in a manner adverse to the Holders of the
Securities, or
(2) reduce the percentage in principal amount of the
Outstanding Securities of any series, the consent of whose Holders is
required for any such supplemental indenture, or the consent of whose
Holders is required for any waiver (of compliance with certain
provisions of this Indenture or certain defaults hereunder and their
consequences) provided for in this Indenture, or
(3) modify any of the provisions of this Section, SECTION 6.13
or SECTION 11.06, except to increase any such percentage or to provide
that certain other provisions of this Indenture cannot be modified or
waived (with respect to any Securities held by a non-consenting Holder)
without the consent of the Holder of each Outstanding Security affected
thereby; provided, however, that this clause shall not be deemed to
require the consent of any Holder with respect to changes in the
references to "the Trustee" and concomitant changes in this Section and
SECTION 11.06, or the deletion of this proviso, in accordance with the
requirements of SECTIONS 7.11 and 10.01(7).
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In addition, for so long as any Financial Guaranty Insurance Policy is in effect
with respect to any Securities, no amendment, supplement or waiver shall
adversely affect the right of AMBAC Indemnity to act as the Holder of any
Insured Security in accordance with SECTION 1.04 hereof without the consent of
AMBAC Indemnity. An amendment or supplement which changes or eliminates any
covenant or other provision of this Indenture which has expressly been included
solely for the benefit of one or more particular series of Securities, or which
modifies the rights of the Holders of Securities of such series with respect to
such covenant or other provision, shall be deemed not to affect the rights under
this Indenture of the Holders of Securities of any other series.
It shall not be necessary for any Act of Holders under this
Section to approve the particular form of any proposed amendment or supplement,
but it shall be sufficient if such Act shall approve the substance thereof.
SECTION 10.03. EXECUTION OF AMENDMENTS OR SUPPLEMENTS.
In executing, or accepting the additional trusts created by,
any amendment or supplement permitted by this Article or the modifications
thereby of the trusts created by this Indenture, the Trustee shall be entitled
to receive, and (subject to SECTION 7.01) shall be fully protected in relying
upon, an Opinion of Counsel stating that the execution of such amendment or
supplement is authorized or permitted by this Indenture. The Trustee may, but
shall not be obligated to, enter into any such amendment or supplement which
affects the Trustee's own rights, duties or immunities under this Indenture or
otherwise.
SECTION 10.04. EFFECT OF AMENDMENTS OR SUPPLEMENTS.
Upon the execution of any amendment or supplement under this
Article, this Indenture shall be modified in accordance therewith, and such
amendment or supplement shall form a part of this Indenture for all purposes;
and every Holder of Securities theretofore or thereafter authenticated and
delivered hereunder shall be bound thereby.
SECTION 10.05. CONFORMITY WITH TRUST INDENTURE ACT.
Every amendment or supplement executed pursuant to this
Article shall conform to the requirements of the Trust Indenture Act.
SECTION 10.06. REFERENCE IN SECURITIES TO AMENDMENTS OR
SUPPLEMENTS.
Securities of any series authenticated and delivered after the
execution of any amendment or supplement pursuant to this Article may, and shall
if required by the Trustee, bear a notation in form approved by the Trustee as
to any matter provided for in such amendment or supplement. If the Companies
shall so determine, new Securities of any series so modified as to conform, in
the opinion of the Trustee and the Companies, to any such amendment or
supplement may be prepared and executed by the Companies and authenticated and
delivered by the Trustee in exchange for Outstanding Securities of such series.
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ARTICLE XI.
COVENANTS
SECTION 11.01. PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST.
Each Company covenants and agrees for the benefit of each
series of Securities that it will duly and punctually pay the principal of and
any premium and interest on the Securities of that series in accordance with the
terms of the Securities and this Indenture.
SECTION 11.02. MAINTENANCE OF OFFICE OR AGENCY.
The Companies will maintain in each Place of Payment for any
series of Securities an office or agency where Securities of that series may be
presented or surrendered for payment, where Securities of that series may be
surrendered for registration of transfer or exchange and where notices and
demands to or upon the Companies in respect of the Securities of that series and
this Indenture may be served. The Companies will give prompt written notice to
the Trustee of the location, and any change in the location, of such office or
agency. If at any time the Companies shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee, and the Companies hereby appoint the
Trustee as their agent to receive all such presentations, surrenders, notices
and demands.
The Companies may also from time to time designate one or more
other offices or agencies where the Securities of one or more series may be
presented or surrendered for any or all such purposes and may from time to time
rescind such designations; provided, however, that no such designation or
rescission shall in any manner relieve the Companies of their obligation to
maintain an office or agency in each Place of Payment for Securities of any
series for such purposes. The Companies will give prompt written notice to the
Trustee of any such designation or rescission and of any change in the location
of any such other office or agency.
SECTION 11.03. MONEY FOR SECURITIES PAYMENTS TO BE HELD IN
TRUST.
If either Company shall at any time act as Paying Agent for
the Companies with respect to any series of Securities, it will, on or before
each due date of the principal of or any premium or interest on any of the
Securities of that series, segregate and hold in trust for the benefit of the
Persons entitled thereto a sum sufficient to pay the principal and any premium
and interest so becoming due until such sums shall be paid to such Persons or
otherwise disposed of as herein provided and will promptly notify the Trustee of
its action or failure so to act.
Whenever the Companies shall have one or more Paying Agents
for any series of Securities, they will, prior to each due date of the principal
of or any premium or interest on any Securities of that series, deposit with a
Paying Agent a sum sufficient to pay such amount, such sum to be held as
provided by the Trust Indenture Act, and (unless such Paying Agent is the
Trustee) the Companies will promptly notify the Trustee of their action or
failure so to act.
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The Companies will cause each Paying Agent for any series of
Securities other than the Trustee to execute and deliver to the Trustee an
instrument in which such Paying Agent shall agree with the Trustee, subject to
the provisions of this Section, that such Paying Agent will (1) comply with the
provisions of the Trust Indenture Act applicable to it as a Paying Agent and (2)
during the continuance of any default by the Companies (or any other obligor
upon the Securities of that series) in the making of any payment in respect of
the Securities of that series, upon the written request of the Trustee to the
Paying Agent, forthwith pay to the Trustee all sums held in trust by such Paying
Agent for payment in respect of the Securities of that series.
The Companies may at any time, for the purpose of obtaining
the satisfaction and discharge of this Indenture or for any other purpose, pay,
or by Company Order direct any Paying Agent to pay, to the Trustee all sums held
in trust by the Companies or such Paying Agent, such sums to be held by the
Trustee upon the same terms as those upon which such sums were held by the
Companies or such Paying Agent; and, upon such payment by any Paying Agent to
the Trustee, such Paying Agent shall be released from all further liability with
respect to such money.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Companies, in trust for the payment of the principal of or any
premium or interest on any Security of any series and remaining unclaimed for
two years after such principal, premium or interest has become due and payable
shall be paid to the Companies on Company Request and in the manner set forth in
such Company Request, or (if then held by either Company) shall be discharged
from such trust; and the Holder of such Security shall thereafter, as an
unsecured general creditor, look only to the Companies for payment thereof, and
all liability of the Trustee or such Paying Agent with respect to such trust
money, and all liability of the Companies as trustee thereof, shall thereupon
cease; provided, however, that the Trustee or such Paying Agent, before being
required to make any such repayment, may at the expense of the Companies cause
to be published once, in a newspaper published in the English language,
customarily published on each Business Day and of general circulation in the
Borough of Manhattan, The City of New York, New York, notice that such money
remains unclaimed and that, after a date specified therein, which shall not be
less than 30 days from the date of such publication, any unclaimed balance of
such money then remaining will be repaid to the Companies.
SECTION 11.04. STATEMENT BY OFFICERS AS TO DEFAULT.
The Companies will deliver to the Trustee, within 120 days
after the end of each fiscal year of the Companies ending after the date hereof,
an Officer's Certificate, stating whether or not to the best knowledge of the
signers thereof the Companies are in default in the performance and observance
of any of the terms, provisions and conditions of this Indenture (without regard
to any period of grace or requirement of notice provided hereunder) and, if the
Companies shall be in default, specifying all such defaults and the nature and
status thereof of which they may have knowledge.
SECTION 11.05. RECORDING, FILING, ETC.; OPINIONS OF COUNSEL.
The Companies will cause this Indenture, any Indentures
supplemental to this Indenture, and any financing or continuation statements to
be promptly recorded and filed and rerecorded and refiled in such a manner and
in such places as may be required by law in order fully to preserve, protect and
perfect the security of the Holders and all rights of the Trustee, and shall
deliver to the Trustee:
(a) upon the execution and delivery of this Indenture and of
any indenture
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supplemental to this Indenture, an Opinion of Counsel either stating
that, in the opinion of such counsel, this Indenture or such
supplemental indenture and any financing or continuation statements
have been properly recorded and filed so as to make effective and to
perfect the security interest of the Trustee intended to be created by
this Indenture for the benefit of the Holders from time to time in the
First Mortgage Bonds, and reciting the details of such action, or
stating that, in the opinion of such counsel, no such action is
necessary to perfect or make such security interest effective and
stating what, if any, action of the foregoing character may reasonably
be expected to become necessary prior to August 1, 1998 to maintain,
perfect and make such security interest effective; and
(b) on or before August 1 of each year, beginning in 1998, an
Opinion of Counsel either stating that in the opinion of such counsel
such action has been taken, since the date of the most recent Opinion
of Counsel furnished pursuant to this SECTION 11.05(b) or the first
Opinion of Counsel furnished pursuant to SECTION 11.05(a), with respect
to the recording, filing, rerecording, or refiling of this Indenture,
each supplemental indenture and any financing or continuation
statements, as is necessary to maintain and perfect the security
interest of the Trustee intended to be created by this Indenture for
the benefit of the Holders from time to time of the Securities in the
First Mortgage Bonds, and reciting the details of such action, or
stating that in the opinion of such counsel no such action is necessary
to maintain and perfect such security interest and stating what, if
any, action of the foregoing character may reasonably be expected to
become necessary prior to the next succeeding August 1 to maintain,
perfect and make such security interest effective.
SECTION 11.06. WAIVER OF CERTAIN COVENANTS.
Except as otherwise specified as contemplated by SECTION 3.01
for Securities of such series, the Companies may, with respect to the Securities
of any series, omit in any particular instance to comply with any term,
provision or condition set forth in any covenant provided pursuant to this
ARTICLE 11 (except for the covenants set forth in SECTIONS 11.01 through 11.03
hereof) for the benefit of the Holders of such series if before the time for
such compliance the Holders of a majority in principal amount of the Outstanding
Securities of such series shall, by Act of such Holders, either waive such
compliance in such instance or generally waive compliance with such term,
provision or condition, but no such waiver shall extend to or affect such term,
provision or condition except to the extent so expressly waived, and, until such
waiver shall become effective, the obligations of the Companies and the duties
of the Trustee in respect of any such term, provision or condition shall remain
in full force and effect.
SECTION 11.07. CALCULATION OF ORIGINAL ISSUE DISCOUNT.
If applicable, the Companies shall file with the Trustee
promptly at the end of each calendar year a written notice specifying the amount
of original issue discount (including daily rates and accrual periods) accrued
on Outstanding Securities as of the end of such year.
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ARTICLE XII.
REDEMPTION OF SECURITIES
SECTION 12.01. APPLICABILITY OF ARTICLE.
Securities of any series which are redeemable before their
Stated Maturity shall be redeemable in accordance with their terms and (except
as otherwise specified as contemplated by SECTION 3.01 for such Securities) in
accordance with this Article.
SECTION 12.02. ELECTION TO REDEEM; NOTICE TO TRUSTEE.
The election of the Companies to redeem any Securities shall
be evidenced by Board Resolutions or in another manner specified as contemplated
by SECTION 3.01 for such Securities. In case of any redemption at the election
of the Companies, the Companies shall, at least 30 days prior to the Redemption
Date fixed by the Companies (unless a shorter notice shall be satisfactory to
the Trustee), notify the Trustee of such Redemption Date, of the principal
amount of Securities of such series to be redeemed and, if applicable, of the
tenor of the Securities to be redeemed. In the case of any redemption of
Securities (a) prior to the expiration of any restriction on such redemption
provided in the terms of such Securities or elsewhere in this Indenture, or (b)
pursuant to an election of the Companies that is subject to a condition
specified in the terms of such Securities or elsewhere in this Indenture, the
Companies shall furnish the Trustee with an Officer's Certificate evidencing
compliance with such restriction or condition.
SECTION 12.03. SELECTION BY TRUSTEE OF SECURITIES TO BE
REDEEMED.
If less than all the Securities of any series are to be
redeemed (unless all the Securities of such series and of a specified tenor are
to be redeemed or unless such redemption affects only a single Security), the
particular Securities to be redeemed shall be selected not more than 30 days
prior to the Redemption Date by the Trustee, from the Outstanding Securities of
such series not previously called for redemption, by such method as the Trustee
shall deem fair and appropriate and that may provide for the selection for
redemption of a portion of the principal amount of any Security of such series,
provided that the unredeemed portion of the principal amount of any Security
shall be in an authorized denomination (which shall not be less than the minimum
authorized denomination) for such Security. If less than all the Securities of
such series and of a specified tenor are to be redeemed (unless such redemption
affects only a single Security), the particular Securities to be redeemed shall
be selected not more than 30 days prior to the Redemption Date by the Trustee,
from the Outstanding Securities of such series and specified tenor not
previously called for redemption in accordance with the preceding sentence.
The Trustee shall promptly notify the Companies in writing of
the Securities selected for redemption as aforesaid and, in case of any
Securities selected for partial redemption as aforesaid, the principal amount
thereof to be redeemed.
The provisions of the two preceding paragraphs shall not apply
with respect to any redemption affecting only a single Security, whether such
Security is to be redeemed in whole or in part. In the case of any such
redemption in part, the unredeemed portion of the principal amount of the
Security shall be in an authorized denomination (which shall not be less than
the minimum authorized denomination) for such Security.
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For all purposes of this Indenture, unless the context
otherwise requires, all provisions relating to the redemption of Securities
shall relate, in the case of any Securities redeemed or to be redeemed only in
part, to the portion of the principal amount of such Securities which has been
or is to be redeemed.
SECTION 12.04. NOTICE OF REDEMPTION.
Notice of redemption shall be given by first-class mail,
postage prepaid, mailed not less than 15 nor more than 60 days prior to the
Redemption Date, to each Holder of Securities to be redeemed, at his address
appearing in the Security Register.
All notices of redemption shall identity the Securities to be
redeemed (including CUSIP number) and shall state:
(1) the Redemption Date,
(2) the Redemption Price,
(3) if less than all the Outstanding Securities of any series
and of a specified tenor consisting of more than a single Security are
to be redeemed, the identification (and, in the case of partial
redemption of any such Securities, the principal amounts) of the
particular Securities to be redeemed and, if less than all the
Outstanding Securities of any series and of a specified tenor
consisting of a single Security are to be redeemed, the principal
amount of the particular Security to be redeemed,
(4) that on the Redemption Date the Redemption Price will
become due and payable upon each such Security to be redeemed and, if
applicable, that interest thereon will cease to accrue on and after
said date,
(5) the place or places where each such Security is to be
surrendered for payment of the Redemption Price, and
(6) that the redemption is for a sinking fund, if such is the
case.
Any notice which is given in the manner herein provided shall
be conclusively presumed to have been duly given, whether or not the Holder
receives the notice. In any case, failure duly to give such notice, or any
defect in notice, to the Holder of any Security designated for redemption as a
whole or in part shall not affect the validity of the proceedings for the
redemption of any other Security.
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SECTION 12.05. SECURITIES PAYABLE ON REDEMPTION DATE; DEPOSIT
OF REDEMPTION PRICE.
Notice of redemption having been given as aforesaid, the
Securities so to be redeemed shall, on the Redemption Date, become due and
payable at the Redemption Price therein specified; provided that the Companies
shall have deposited with the Trustee or with a Paying Agent on or prior to such
Redemption Date an amount sufficient to pay the Redemption Price, together with
accrued interest to the Redemption Date. Interest on the Securities or portions
thereof so called for redemption shall cease to bear interest from and after the
Redemption Date. Upon surrender of any such Security for redemption in
accordance with said notice, such Security shall be paid by the Companies at the
Redemption Price, together with accrued interest to the Redemption Date;
provided, however, that, unless otherwise specified as contemplated by SECTION
3.01, installments of interest whose Stated Maturity is on or prior to the
Redemption Date will be payable to the Holders of such Securities, or one or
more Predecessor Securities, registered as such at the close of business on the
relevant Record Dates according to their terms and the provisions of SECTION
3.07.
If any Security called for redemption shall not be so paid
upon surrender thereof for redemption, or if the Companies shall not have
deposited with the Trustee or a Paying Agent on or prior to the Redemption Date
an amount sufficient to pay the Redemption Price of all Securities called for
redemption, together with the interest accrued to the Redemption Date, the
notice of redemption shall be ineffective and the principal and any premium
shall continue to bear interest from the Redemption Date at the rate prescribed
therefor in the Security as if the notice of redemption had not been given.
SECTION 12.06. RESERVED.
SECTION 12.07. SECURITIES REDEEMED IN PART.
Any Security that is to be redeemed only in part shall be
surrendered at a Place of Payment therefor (with, if the Companies or the
Trustee so require, due endorsement by, or a written instrument of transfer in
form satisfactory to the Companies and the Trustee duly executed by, the Holder
thereof or his attorney duly authorized in writing), and the Companies shall
execute, and the Trustee shall authenticate and deliver to the Holder of such
Security without service charge, a new Security or Securities of the same series
and of like tenor, of any authorized denomination as requested by such Holder,
in aggregate principal amount equal to and in exchange for the unredeemed
portion of the principal of the Security so surrendered.
ARTICLE XIII.
SINKING FUNDS
SECTION 13.01. APPLICABILITY OF ARTICLE.
The provisions of this Article shall be applicable to any
sinking fund for the retirement of Securities of any series except as otherwise
specified as contemplated by SECTION 3.01 for such Securities.
The minimum amount of any sinking fund payment provided for by
the terms of any Securities is herein referred to as a "MANDATORY SINKING FUND
PAYMENT", and any payment in excess of
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such minimum amount provided for by the terms of such Securities is herein
referred to as an "OPTIONAL SINKING FUND PAYMENT". If provided for by the terms
of any Securities, the cash amount of any sinking fund payment may be subject to
reduction as provided in SECTION 13.02. Each sinking fund payment shall be
applied to the redemption of Securities as provided for by the terms of such
Securities.
SECTION 13.02. SATISFACTION OF SINKING FUND PAYMENTS WITH
SECURITIES.
The Companies (1) may deliver Outstanding Securities of a
series (other than any previously called for redemption) and (2) may apply as a
credit Securities of a series which have been redeemed either at the election of
the Companies pursuant to the terms of such Securities or through the
application of permitted optional sinking fund payments pursuant to the terms of
such Securities, in each case in satisfaction of all or any part of any sinking
fund payment with respect to any Securities of such series required to be made
pursuant to the terms of such Securities as and to the extent provided for by
the terms of such Securities; provided that the Securities to be so credited
have not been previously so credited. The Securities to be so credited shall be
received and credited for such purpose by the Trustee at the Redemption Price,
as specified in the Securities so to be redeemed, for redemption through
operation of the sinking fund and the amount of such sinking fund payment shall
be reduced accordingly.
SECTION 13.03. REDEMPTION OF SECURITIES FOR SINKING FUND.
Not less than 30 days prior to each sinking fund payment date
for any Securities, the Companies will deliver to the Trustee an Officer's
Certificate specifying the amount of the next ensuing sinking fund payment for
such Securities pursuant to the terms of such Securities, the portion thereof,
if any, that is to be satisfied by payment of cash and the portion thereof, if
any, that is to be satisfied by delivering and crediting Securities pursuant to
SECTION 13.02 and stating the basis for such credit and that such Securities
have not been previously so credited and will also deliver to the Trustee any
Securities to be so delivered. Not less than 15 days prior to each such sinking
fund payment date, the Trustee shall select the Securities to be redeemed upon
such sinking fund payment date in the manner specified in SECTION 12.03 and
cause notice of the redemption thereof to be given in the name of and at the
expense of the Companies in the manner provided in SECTION 12.04. Such notice
having been duly given, the redemption of such Securities shall be made upon the
terms and in the manner stated in SECTIONS 12.05 and 12.07.
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ARTICLE XIV.
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 14.01. OPTION OF THE COMPANIES TO EFFECT DEFEASANCE OR
COVENANT DEFEASANCE.
The Companies may elect, at their option at any time, to have
SECTION 14.02 or SECTION 14.03 applied to any Securities or any series of
Securities, as the case may be, designated pursuant to SECTION 3.01 as being
defeasible pursuant to such SECTION 14.02 or 14.03, in accordance with any
applicable requirements provided pursuant to SECTION 3.01 and upon compliance
with the conditions set forth below in this Article. Any such election shall be
evidenced by Board Resolutions or in another manner specified as contemplated by
SECTION 3.01 for such Securities.
SECTION 14.02. DEFEASANCE AND DISCHARGE.
Upon the exercise of the option (if any) of the Companies to
have this Section applied to any Securities or any series of Securities, as the
case may be, the Companies shall be deemed to have been discharged from their
obligations with respect to such Securities as provided in this Section on and
after the date the conditions set forth in SECTION 14.04 are satisfied
(hereinafter called "Defeasance") and the obligation of the applicable Company
to make payment with respect to the principal of and premium, if any, and
interest on the First Mortgage Bonds shall be satisfied and discharged, as
provided in the supplemental trust indenture or indentures to the applicable
First Mortgage creating such First Mortgage Bonds and the First Mortgage Bonds
shall cease to secure the Securities in any manner. For this purpose, such
Defeasance means that the Companies shall be deemed to have paid and discharged
the entire indebtedness represented by such Securities and to have satisfied all
their other obligations under such Securities and this Indenture insofar as such
Securities are concerned (and the Trustee, at the expense of the Companies,
shall execute proper instruments acknowledging the same), subject to the
following which shall survive until otherwise terminated or discharged
hereunder: (1) the rights of Holders of such Securities to receive, solely from
the trust fund described in SECTION 14.04 and as more fully set forth in such
Section, payments in respect of the principal of and any premium and interest on
such Securities when payments are due, (2) the obligations of the Companies with
respect to such Securities under SECTIONS 3.04, 3.05, 3.06, 11.02 and 11.03 and
with respect to the Trustee under SECTION 7.07, (3) the rights, powers, trusts,
duties and immunities of the Trustee hereunder, (4) this Article, and (5) the
obligation to repay that portion of the principal of and interest on the Insured
Security that is paid by AMBAC Indemnity pursuant to the Financial Guaranty
Insurance Policy. Subject to compliance with this Article, the Companies may
exercise their option (if any) to have this Section applied to any Securities
notwithstanding the prior exercise of their option (if any) to have SECTION
14.03 applied to such Securities.
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SECTION 14.03. COVENANT DEFEASANCE.
Upon the exercise of the option (if any) of the Companies to
have this Section applied to any Securities or any series of Securities, as the
case may be, (1) the Companies shall be released from any covenants provided
pursuant to SECTIONS 11.04 through 11.07 for the benefit of the Holders of such
Securities and (2) the occurrence of any event specified in SECTION 6.01(4)
(with respect to any such covenants provided pursuant to SECTIONS 11.04 through
11.07 shall be deemed not to be or result in an Event of Default with respect to
such Securities as provided in this Section on and after the date the conditions
set forth in SECTION 14.04 are satisfied (hereinafter called "COVENANT
DEFEASANCE"). For this purpose, such Covenant Defeasance means that, with
respect to such Securities, the Companies may omit to comply with and shall have
no liability in respect of any term, condition or limitation set forth in any
such specified Section (to the extent so specified in the case of SECTION
6.01(4)), whether directly or indirectly by reason of any reference elsewhere
herein to any such Section or by reason of any reference in any such Section to
any other provision herein or in any other document, but the remainder of this
Indenture and such Securities shall be unaffected thereby. In addition, upon the
Companies' exercise under SECTION 14.01 hereof of the option applicable to this
SECTION 14.03, subject to the satisfaction of the conditions set forth in
SECTION 14.04 hereof, SECTIONS 6.01(1) through 6.01(6) and SECTION 6.01(9)
hereof shall not constitute Events of Default.
SECTION 14.04. CONDITIONS TO DEFEASANCE OR COVENANT
DEFEASANCE.
The following shall be the conditions to the application of
SECTION 14.02 or SECTION 14.03 to any Securities or any series of Securities, as
the case may be:
(1) The Companies shall irrevocably have deposited or caused
to be deposited with the Trustee as trust funds in trust for the purpose of
making the following payments, specifically pledged as security for, and
dedicated solely to, the benefit of the Holders of such Securities, (A) money in
an amount, or (B) U.S. Government Obligations which through the scheduled
payment of principal and interest in respect thereof in accordance with their
terms will provide, not later than one day before the due date of any payment,
money in an amount, or (C) a combination thereof, in each case sufficient, in a
report from a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, to pay
and discharge, and that shall be applied by the Trustee to pay and discharge,
the principal of and any premium and interest on such Securities on the
respective Stated Maturities or on any Redemption Date established pursuant to
Clause (9) below, in accordance with the terms of this Indenture and such
Securities. As used herein, "U.S. GOVERNMENT OBLIGATION" means (x) any security
which is (i) a direct obligation of the United States of America for the payment
of which the full faith and credit of the United States of America is pledged or
(ii) an obligation of a Person controlled or supervised by and acting as an
agency or instrumentality of the United States of America the payment of which
is unconditionally guaranteed as a full faith and credit obligation by the
United States of America, which, in either case (i) or (ii), is not callable or
redeemable at the option of the issuer thereof, and (y) any depositary receipt
issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as
custodian with respect to any U.S. Government Obligation which is specified in
Clause (x) above and held by such bank for the account of the holder of such
depositary receipt, or with respect to any specific payment of principal of or
interest on any U.S. Government Obligation which is so specified and held,
provided that (except as required by law) such custodian is not authorized to
make any deduction from the amount payable to the holder of such depositary
receipt from any amount received by the custodian in respect of the U.S.
Government Obligation or the specific payment of principal or interest evidenced
by such depositary receipt, and (z) any certificates or other evidences of
ownership interest in obligations of the character described in either case (i)
or (ii) or in specified portions thereof, including without
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limitation, portions consisting solely of the interest thereon provided that
such obligations are held in a bank or trust company acceptable to the Trustee
in a special account separate from the assets of such custodian.
(2) In the event of an election to have SECTION 14.02 apply to
any Securities or any series of Securities, as the case may be, the Companies
shall have delivered to the Trustee an Opinion of Counsel stating that (A) the
Companies have received from, or there has been published by, the Internal
Revenue Service a ruling or (B) since the date of this instrument, there has
been a change in the applicable Federal income tax law, in either case (A) or
(B) to the effect that, and based thereon such opinion shall confirm that, the
Holders of such Securities will not recognize gain or loss for Federal income
tax purposes as a result of the deposit, Defeasance and discharge to be effected
with respect to such Securities and will be subject to Federal income tax on the
same amount, in the same manner and at the same times as would be the case if
such deposit, Defeasance and discharge were not to occur.
(3) In the event of an election to have SECTION 14.03 apply to
any Securities or any series of Securities, as the case may be, the Companies
shall have delivered to the Trustee an Opinion of Counsel to the effect that the
Holders of such Securities will not recognize gain or loss for Federal income
tax purposes as a result of the deposit and Covenant Defeasance to be effected
with respect to such Securities and will be subject to Federal income tax on the
same amount, in the same manner and at the same times as would be the case if
such deposit and Covenant Defeasance were not to occur.
(4) The Companies shall have delivered to the Trustee an
Officer's Certificate to the effect that neither such Securities nor any other
Securities of the same series, if then listed on any securities exchange, will
be delisted as a result of such deposit.
(5) No event that is, or after notice or lapse of time or both
would become, an Event of Default with respect to such Securities or any other
Securities shall have occurred and be continuing at the time of such deposit
(other than an Event of Default resulting from the borrowing of funds to be
applied to such deposit which will be cured upon such Defeasance or Covenant
Defeasance) or, with regard to any such event specified in SECTIONS 6.01(7) and
(8), at any time on or prior to the 90th day after the date of such deposit (it
being understood that this condition shall not be deemed satisfied until after
such 90th day).
(6) Such Defeasance or Covenant Defeasance shall not cause the
Trustee to have a conflicting interest within the meaning of the Trust Indenture
Act (assuming all Securities are in default within the meaning of such Act).
(7) Such Defeasance or Covenant Defeasance shall not result in
a breach or violation of, or constitute a default under, any material agreement
or instrument to which the Companies are a party or by which they are bound.
(8) Such Defeasance or Covenant Defeasance shall not result in
the trust arising from such deposit constituting an investment company within
the meaning of the Investment Company Act unless such trust shall be registered
under such Act or exempt from registration thereunder.
(9) The Companies shall have delivered to the Trustee an
Officer's Certificate and an Opinion of Counsel, each stating that all
conditions precedent with respect to such Defeasance or Covenant Defeasance have
been complied with.
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SECTION 14.05. DEPOSITED MONEY AND U.S. GOVERNMENT OBLIGATIONS
TO BE HELD IN TRUST; MISCELLANEOUS PROVISIONS.
Subject to the provisions of the last paragraph of SECTION
11.03, all money and U.S. Government Obligations (including the proceeds
thereof) deposited with the Trustee pursuant to SECTION 14.04 in respect of any
Securities shall be held in trust and applied by the Trustee, in accordance with
the provisions of such Securities and this Indenture, to the payment, either
directly or through any such Paying Agent (including either Company acting as
Paying Agent for the Companies) as the Trustee may determine, to the Holders of
such Securities, of all sums due and to become due thereon in respect of
principal and any premium and interest, but money so held in trust need not be
segregated from other funds except to the extent required by law.
Any moneys held by the Trustee in accordance with the
provision of this Article shall be invested by the Trustee only in U.S.
Government Obligations having maturity dates, which, at the option of the holder
of those obligations, shall be not later than the date or dates at which moneys
will be required for the purposes described above. Unless otherwise directed by
the Companies, the Trustee shall not be obligated to invest U.S. Government
Obligations deposited with the Trustee in accordance with the provisions of this
Article.
The Companies shall pay and indemnify the Trustee against any
tax, fee or other charge imposed on or assessed against the U.S. Government
Obligations deposited pursuant to SECTION 14.04 or the principal and interest
received in respect thereof other than any such tax, fee or other charge which
by law is for the account of the Holders of Outstanding Securities.
Anything in this Article to the contrary notwithstanding, the
Trustee shall deliver or pay to the Companies from time to time upon Company
Request and in the manner set forth in such Company Request any money or U.S.
Government Obligations (including any income or interest earned by, or increment
to, the investments held under this Section) held by it as provided in SECTION
14.04 with respect to any Securities that, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee, are in excess of the amount
thereof that would then be required to be deposited to effect the Defeasance or
Covenant Defeasance, as the case may be, with respect to such Securities.
SECTION 14.06. REINSTATEMENT.
If the Trustee or the Paying Agent is unable to apply any
money in accordance with this Article with respect to any Securities by reason
of any order or judgment of any court or governmental authority enjoining,
restraining or otherwise prohibiting such application, then the obligations
under this Indenture and such Securities from which the Companies have been
discharged or released pursuant to SECTION 14.02 or 14.03 shall be revived and
reinstated as though no deposit had occurred pursuant to this Article with
respect to such Securities, until such time as the Trustee or Paying Agent is
permitted to apply all money held in trust pursuant to SECTION 14.05 with
respect to such Securities in accordance with this Article; provided, however,
that if the Companies make any payment of principal of or any premium or
interest on any such Security following such reinstatement of its obligations,
the Companies shall be subrogated to the rights (if any) of the Holders of such
Securities to receive such payment from the money so held in trust.
This instrument may be executed in any number of counterparts,
each of which so
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<PAGE> 67
executed shall be deemed to be an original, but all such counterparts shall
together constitute but one and the same instrument.
[SIGNATURES APPEAR ON FOLLOWING PAGE.]
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<PAGE> 68
IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed as of the day and year first above written.
THE CLEVELAND ELECTRIC
ILLUMINATING COMPANY
and
THE TOLEDO EDISON COMPANY
By:
----------------------------------
Name:
-------------------------------
Title:______________for each Company
THE CHASE MANHATTAN BANK, as Trustee
By:
----------------------------------
Name:
-------------------------------
Title:
------------------------------
S-1
<PAGE> 1
Exhibit 4 (d)
================================================================================
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
AND
THE TOLEDO EDISON COMPANY
-----------------------------------
$720,000,000
7.19% SERIES A SECURED NOTES DUE 2000
7.67% SERIES A SECURED NOTES DUE 2004
7.13% SERIES A SECURED NOTES DUE 2007
7.19% SERIES B SECURED NOTES DUE 2000
7.67% SERIES B SECURED NOTES DUE 2004
7.13% SERIES B SECURED NOTES DUE 2007
-----------------------------------
FIRST SUPPLEMENTAL INDENTURE
DATED JUNE 13, 1997
-----------------------------------
THE CHASE MANHATTAN BANK
Trustee
================================================================================
<PAGE> 2
FIRST SUPPLEMENTAL INDENTURE, dated June 13, 1997, among THE
CLEVELAND ELECTRIC ILLUMINATING COMPANY, a corporation duly organized and
existing under the laws of the State of Ohio (herein called "Cleveland
Electric"), having its principal office at 6200 Oak Tree Boulevard,
Independence, Ohio 44131, THE TOLEDO EDISON COMPANY, a corporation duly
organized and existing under the laws of the State of Ohio (herein called
"Toledo Edison"), having its principal office at 300 Madison Avenue, Toledo,
Ohio 43652, and THE CHASE MANHATTAN BANK, a New York banking corporation, as
Trustee (herein called the "Trustee") under the Indenture dated as of June 13,
1997 between the Companies and the Trustee (the "Indenture").
RECITALS OF THE COMPANIES
The Companies have executed and delivered the Indenture to the
Trustee to provide for the issuance from time to time of their securities (the
"Securities"), said Securities to be issued in one or more series as in the
Indenture provided. Unless otherwise defined in Article III hereof, capitalized
terms used herein shall have the meaning ascribed to such terms in the
Indenture.
Pursuant to the terms of the Indenture, the Companies desire to
provide for the establishment of six new series of their Securities to be known
as their 7.19% Series A Secured Notes due 2000 (herein called the "Initial 2000
Notes"), 7.67% Series A Secured Notes due 2004 (herein called the "Initial 2004
Notes") and 7.13% Series A Secured Notes due 2007 (herein called the "Initial
2007 Notes" and, together with the Initial 2000 Notes and the Initial 2004
Notes, the "Initial Notes") and, if and when issued pursuant to a Registered
Exchange Offer, 7.19% Series B Secured Notes due 2000 (herein called the
"Exchange 2000 Notes"), 7.67% Series B Secured Notes due 2004 (herein called the
"Exchange 2004 Notes") and 7.13% Series B Secured Notes due 2007 (herein called
the "Exchange 2007 Notes" and, together with the Exchange 2000 Notes and the
Exchange 2004 Notes, the "Exchange Notes" and, together with the Initial Notes,
the "Notes"), the form and substance of such Notes and the terms, provisions,
and conditions thereof to be set forth as provided in the Indenture and this
First Supplemental Indenture.
All things necessary to make this First Supplemental Indenture a
valid agreement of each Company, and to make the Notes, when executed by each
Company and authenticated and delivered by the Trustee, the valid joint and
several obligations of each Company, have been done.
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the
Notes by the Holders thereof, and for the purpose of setting forth, as provided
in the Indenture, the form and substance of the Notes and the terms, provisions,
and conditions thereof, it is mutually agreed, for the equal and proportionate
benefit of all Holders of the Notes, as follows:
ARTICLE I.
GENERAL TERMS AND
CONDITIONS OF THE NOTES
SECTION I.01 ESTABLISHMENT OF NOTES.
(a) INITIAL NOTES. There shall be and are hereby authorized three
series of Securities as follows:
<PAGE> 3
<TABLE>
<CAPTION>
==================================================================================================
<S> <C>
DESIGNATION PRINCIPAL AMOUNT
----------- ----------------
- --------------------------------------------------------------------------------------------------
7.19% Series A Secured Notes due 2000 $220,000,000
- --------------------------------------------------------------------------------------------------
7.67% Series A Secured Notes due 2004 $350,000,000
- --------------------------------------------------------------------------------------------------
7.13% Series A Secured Notes due 2007 $150,000,000
==================================================================================================
</TABLE>
The Initial Notes shall mature and the principal thereof shall be due and
payable together with all accrued and unpaid interest thereon on the following
dates:
<TABLE>
<CAPTION>
=====================================================================================================================
SERIES MATURITY DATE
------ -------------
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Initial 2000 Notes July 1, 2000
- ---------------------------------------------------------------------------------------------------------------------
Initial 2004 Notes July 1, 2004
- ---------------------------------------------------------------------------------------------------------------------
Initial 2007 Notes July 1, 2007
=====================================================================================================================
</TABLE>
The Initial Notes are being offered and sold by the Companies pursuant to the
Placement Agreement and shall be issued in the form of registered Initial Notes
without interest coupons. Principal of and interest on the Initial Notes will be
payable, the transfer of Initial Notes will be registrable and Initial Notes
will be exchangeable for Exchange Notes bearing identical terms and provisions
(except with respect to transfer restrictions), at the office or agency of the
Companies in the Borough of Manhattan, The City and State of New York; provided,
however, that payment of interest may be made at the option of the Companies by
check mailed to the registered holder at such address as shall appear in the
Security Register.
(b) EXCHANGE NOTES. There shall be and are hereby authorized three
series of Securities as follows:
<TABLE>
<CAPTION>
==================================================================================================
DESIGNATION PRINCIPAL AMOUNT
----------- ----------------
- --------------------------------------------------------------------------------------------------
<S> <C>
7.19% Series B Secured Notes due 2000 $220,000,000
- --------------------------------------------------------------------------------------------------
7.67% Series B Secured Notes due 2004 $350,000,000
- --------------------------------------------------------------------------------------------------
7.13% Series B Secured Notes due 2007 $150,000,000
==================================================================================================
</TABLE>
The Exchange Notes are issuable only in exchange for the Initial Notes in the
Registered Exchange Offer,
- 3 -
<PAGE> 4
as described in the Registration Agreement. The Exchange Notes shall mature and
the principal shall be due and payable together with all accrued and unpaid
interest thereon on the following dates:
<TABLE>
<CAPTION>
=====================================================================================================================
SERIES MATURITY DATE
------ -------------
- ---------------------------------------------------------------------------------------------------------------------
<S> <C>
Exchange 2000 Notes July 1, 2000
- ---------------------------------------------------------------------------------------------------------------------
Exchange 2004 Notes July 1, 2004
- ---------------------------------------------------------------------------------------------------------------------
Exchange 2007 Notes July 1, 2007
=====================================================================================================================
</TABLE>
SECTION I.02 FORM OF INITIAL NOTES, GLOBAL NOTES AND DEFINITIVE
NOTES.
(a) FORM OF INITIAL NOTES. The Initial Notes shall be substantially
in the form of Exhibit A hereto, which is hereby incorporated in and expressly
made a part of this First Supplemental Indenture.
(b) GLOBAL NOTES.
(i) Initial Notes offered and sold to a QIB in reliance on Rule 144A
under the Securities Act ("Rule 144A"), as provided in the Placement Agreement,
shall be issued initially in the form of one or more permanent global securities
in definitive, fully registered form without interest coupons with the global
notes legend and the restricted notes legend set forth in Exhibit A hereto
(each, a "Restricted Global Note"), which shall be deposited on behalf of the
Purchasers with the Trustee, at its New York office, as Securities Custodian,
and registered in the name of the Depository or a nominee of the Depository,
duly executed by the Companies and authenticated by the Trustee as hereinafter
provided. The aggregate principal amount of each Restricted Global Note may from
time to time be increased or decreased by adjustments made on the records of the
Trustee and the Depository or its nominee, as the case may be, as hereinafter
provided.
(ii) Initial Notes offered and sold in reliance on Regulation S
under the Securities Act ("Regulation S"), as provided in the Placement
Agreement, shall be issued initially in the form of one or more permanent global
securities in definitive, fully registered form without interest coupons with
the global notes legend and the restricted notes legend set forth in Exhibit A
hereto (each, a "Regulation S Global Note" and, together with the Restricted
Global Notes, the "Global Notes"), which shall be deposited on behalf of the
Purchasers with the Trustee, at its New York office, as Securities Custodian,
and registered in the name of the Depository or a nominee of the Depository,
duly executed by the Companies and authenticated by the Trustee as hereinafter
provided. Prior to the 40th day after the Closing Date, beneficial interests in
the Regulation S Global Note may only be held for the accounts of designated
agents holding on behalf of the Euroclear System ("Euroclear") or Cedel Bank
("Cedel"). Following the 40th day after the Closing Date, beneficial interests
in the Regulation S Global Note may be held through Euroclear, Cedel or other
participants having accounts at the Depository. The aggregate principal amount
of each Regulation S Global Note may from time to time be increased or decreased
by adjustments made on the records of the Trustee and the Depository or its
nominee, as the case may be, as
- 4 -
<PAGE> 5
hereinafter provided.
(iii) Members of, or participants in, the Depository ("Agent
Members") shall have no rights under this First Supplemental Indenture or the
Indenture with respect to any Global Note held on their behalf by the Depository
or by the Trustee as the Securities Custodian or under such Global Note, and the
Depository may be treated by the Companies, the Trustee and any agent of the
Companies or the Trustee as the absolute owner of such Global Note for all
purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent
the Companies, the Trustee or any agent of the Companies or the Trustee from
giving effect to any written certification, proxy or other authorization
furnished by the Depository or impair, as between the Depository and its Agent
Members, the operation of customary practices of such Depository governing the
exercise of the rights of a holder of a beneficial interest in any Global Note.
(iv) The provisions of the "Operating Procedures of the Euroclear
System" and "Terms and Conditions Governing Use of Euroclear" and the
"Management Regulations" and "Instructions to Participants" of Cedel shall be
applicable to interests in the Regulations S Global Notes that are held by Agent
Members through Euroclear or Cedel. The Trustee shall have no obligation to
notify Holders of any such procedures or to monitor or enforce compliance with
the same.
(c) DEFINITIVE NOTES. Except as provided in this Section 1.02 or
Article II, owners of beneficial interests in Global Notes will not be entitled
to receive physical delivery of Initial Notes. Purchasers of Initial Notes who
are Institutional Accredited Investors and are not QIBs and did not purchase
Initial Notes sold in reliance on Regulation S will receive Definitive Notes;
PROVIDED, HOWEVER, that upon transfer of such Definitive Notes to a QIB or in
accordance with Regulation S, such Definitive Notes will, unless the relevant
Global Note has previously been exchanged, be exchanged for an interest in a
Global Note pursuant to the provisions of Article II.
SECTION I.03 INTEREST ON THE INITIAL NOTES.
(a) THE INITIAL 2000 NOTES. Each Initial 2000 Note will bear
interest at the rate of 7.19% per annum from June 18, 1997 until the principal
thereof is paid or duly provided for, and on any overdue principal and (to the
extent that payment of such interest is enforceable under applicable law) on any
overdue installment of interest at the same rate per annum, payable on January 1
and July 1 of each year, commencing on July 1, 1997 to the Person in whose name
such Initial 2000 Note or any predecessor Initial Note is registered, at the
close of business on the December 15 or June 15 next preceding such interest
payment date; provided, however, that the record date for the interest payment
due on July 1, 1997 shall be June 25, 1997 and provided further that the
interest payable at maturity will be payable to the Person to whom principal
shall be payable. Interest on each Initial 2000 Note will cease to accrue upon
the exchange of such Note for an Exchange 2000 Note, and if the record date for
the interest payment date next following that exchange occurs after that
exchange, the accrued and unpaid interest on that Initial 2000 Note will be
payable to the Person in whose name such Exchange 2000 Note is registered on
that record date. Each Initial 2000 Note will bear Additional Interest as and to
the extent required under and in accordance with Section 1.03(f) hereof.
- 5 -
<PAGE> 6
(b) THE INITIAL 2004 NOTES. Each Initial 2004 Note will bear
interest at the rate of 7.67% per annum from June 18, 1997 until the principal
thereof is paid or duly provided for, and on any overdue principal and (to the
extent that payment of such interest is enforceable under applicable law) on any
overdue installment of interest at the same rate per annum, payable on January 1
and July 1 of each year, commencing on July 1, 1997 to the Person in whose name
such Initial 2004 Note or any predecessor Initial Note is registered, at the
close of business on the December 15 or June 15 next preceding such interest
payment date; provided, however, that the record date for the interest payment
due on July 1, 1997 shall be June 25, 1997 and provided further that the
interest payable at maturity will be payable to the Person to whom principal
shall be payable. Interest on each Initial 2004 Note will cease to accrue upon
the exchange of such Note for an Exchange 2004 Note, and if the record date for
the interest payment date next following that exchange occurs after that
exchange, the accrued and unpaid interest on that Initial 2004 Note will be
payable to the Person in whose name such Exchange 2004 Note is registered on
that record date. Each Initial 2004 Note will bear Additional Interest as and to
the extent required under and in accordance with Section 1.03(f) hereof.
(c) THE INITIAL 2007 NOTES. Each Initial 2007 Note will bear
interest at the rate of 7.13% per annum from June 18, 1997 until the principal
thereof is paid or duly provided for, and on any overdue principal and (to the
extent that payment of such interest is enforceable under applicable law) on any
overdue installment of interest at the same rate per annum, payable on January 1
and July 1 of each year, commencing on July 1, 1997 to the Person in whose name
such Initial 2007 Note or any predecessor Initial Note is registered, at the
close of business on the December 15 or June 15 next preceding such interest
payment date; provided, however, that the record date for the interest payment
due on July 1, 1997 shall be June 25, 1997 and provided further that the
interest payable at maturity will be payable to the Person to whom principal
shall be payable. Interest on each Initial 2007 Note will cease to accrue upon
the exchange of such Note for an Exchange 2007 Note, and if the record date for
the interest payment date next following that exchange occurs after that
exchange, the accrued and unpaid interest on that Initial 2007 Note will be
payable to the Person in whose name such Exchange 2007 Note is registered on
that record date. Each Initial 2007 Note will bear Additional Interest as and to
the extent required under and in accordance with Section 1.03(f) hereof.
(d) DEFAULTED INTEREST ON THE INITIAL NOTES. Any interest
installment on the Initial Notes not punctually paid or duly provided for shall
forthwith cease to be payable to the registered holders on the Regular Record
Date, and may be paid to the Person in whose name the Initial Note (or one or
more Predecessor Securities) is registered at the close of business on a Special
Record Date to be fixed by the Trustee for the payment of such defaulted
interest, notice of which shall be given to the registered holders of the
Initial Notes not less than 10 days prior to such Special Record Date, or may be
paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Initial Notes may be
listed, and upon such notice as may be required by such exchange, all as more
fully provided in the Indenture.
(e) CALCULATION OF INTEREST ON THE INITIAL NOTES. The amount of
interest or Additional Interest payable for any period on the Initial Notes will
be computed on the basis of a 360 day year of
- 6 -
<PAGE> 7
twelve 30-day months. In the event that any date on which interest or Additional
Interest is payable on the Initial Notes is not a Business Day, then payment of
interest or Additional Interest payable on such date will be made on the next
preceding day that is a Business Day.
(f) ADDITIONAL INTEREST UNDER CERTAIN CIRCUMSTANCES. (i) Additional
interest (the "Additional Interest") with respect to the Initial Notes will
accrue as follows if any of the following events occurs (each event identified
in clause (A), (B) or (C) below, a "Failure to Register"):
(A) If by the 150th day after the date of the original issue of the
Initial Notes (that date of issue, the "Closing Date"), neither the
Exchange Offer Registration Statement nor a Shelf Registration Statement
has been filed with the Commission;
(B) If by the 180th day after the Closing Date, the Registered
Exchange Offer is not consummated and, if required in lieu thereof, the
Shelf Registration Statement is not declared effective by the Commission;
or
(C) If, after the 180th day after the Closing Date, and after either
the Exchange Offer Registration Statement or the Shelf Registration
Statement is declared effective, (1) that Registration Statement
thereafter ceases to be effective prior to completion of the Exchange
Offer or the sale of all the Transfer Restricted Notes registered pursuant
to the Shelf Registration Statement, as the case may be; or (2) that
Registration Statement or the related prospectus ceases to be usable in
connection with resales of Transfer Restricted Notes during the periods
specified in the Registration Agreement (except as permitted in paragraph
(ii) of this paragraph (f)) because either (x) any event occurs as a
result of which the related prospectus forming part of that Registration
Statement would include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein in the
light of the circumstances under which they were made not misleading, or
(y) it shall be necessary to amend that Registration Statement, or
supplement the related prospectus, to comply with the Securities Act or
the Exchange Act or the respective rules thereunder.
Additional Interest shall accrue on the Initial Notes of each series
over and above the interest set forth in the title of the Initial Notes of that
series from and including the date on which any such Failure to Register shall
occur to but excluding the date on which all such Failures to Register have been
cured, at a rate of 0.50% per annum.
(ii) A Failure to Register referred to in Section 1.03(f)(i)(C) is
deemed not to be continuing in relation to a Registration Statement or the
related prospectus if (A) that Failure to Register has occurred solely as a
result of (x) the filing of a post-effective amendment to that Registration
Statement to incorporate annual audited financial information with respect to
the Companies, when such post-effective amendment is not yet effective and needs
to be declared effective to permit Holders to use the related prospectus or (y)
the occurrence of other material events or developments with respect to the
Companies or their Affiliates that would need to be described in that
Registration Statement or the related prospectus, and (B) in the case of clause
(y), the Companies are proceeding promptly and in good faith to
- 7 -
<PAGE> 8
amend or supplement that Registration Statement and related prospectus to
describe those events or, in the case of material developments that the
Companies determine in good faith must remain confidential for business reasons,
the Companies are proceeding promptly and in good faith to take such steps as
are necessary so that those developments need no longer remain confidential, but
in any case, if any Failure to Register (including any referred to in clause (x)
or (y), above) continues for a period in excess of 45 days, Additional Interest
will be payable in accordance with the above paragraph from the day following
the last day of that 45-day period until the date on which that Failure to
Register is cured.
(iii) Any Additional Interest payable will be payable on the regular
interest payment dates with respect to the Initial Notes, in the same manner as
the manner in which regular interest is payable. The amount of Additional
Interest for any period will be determined by multiplying the applicable
Additional Interest rate by the principal amount of the applicable Initial
Notes, multiplied by a fraction, the numerator of which is the number of days
that Additional Interest rate was applicable during that period (determined on
the basis of a 360-day year comprised of twelve 30-day months), and the
denominator of which is 360.
(iv) For all purposes of the Indenture, this First Supplemental
Indenture and the Initial Notes, the Trustee is permitted to assume for all
purposes that Additional Interest is not due in respect of an Initial Note until
such time as the Company shall deliver an Officer's Certificate to the Trustee
stating that Additional Interest is due in respect of one or more series of
Initial Notes (such Officer's Certificate to also state the date on which
Additional Interest began to accrue). Upon receipt of such an Officer's
Certificate, the Trustee is permitted to assume for all purposes that Additional
Interest shall be due as set forth in such Officer's Certificate until such time
as such Officer's Certificate shall be superseded by a subsequent Officer's
Certificate pursuant to this Section 1.03 stating that Additional Interest is no
longer due in respect of the Initial Notes (such Officer's Certificate to also
state the date on which Additional Interest ceased to accrue). Absent receipt by
it of an Officer's Certificate specifying that Additional Interest has begun
accruing or an Officer's Certificate that Additional Interest is no longer
accruing, the Trustee shall not be charged with knowledge of such matters unless
a Responsible Officer of the Trustee assigned to the Corporate Trustee
Administration of the Trustee (or any successor division or department of the
Trustee) shall have actual knowledge that a Failure to Register has occurred and
is continuing, or has been cured, as applicable.
SECTION I.04 THE EXCHANGE NOTES. The Exchange Notes shall be
substantially in the form of, and contain the terms and provisions set forth in,
Exhibit B hereto, which is hereby incorporated in and expressly made a part of
this First Supplemental Indenture. The Trustee shall authenticate and deliver
Exchange Notes of any series for issue only in a Registered Exchange Offer
pursuant to the Registration Agreement, for a like principal amount of Initial
Notes of the series bearing interest at the same rate, in each case pursuant to
a Company Order. Such Company Order shall specify the series and the amount of
the Exchange Notes to be authenticated and the date on which the original issue
of such Exchange Notes is to be authenticated. Prior to authenticating and
delivering Exchange Notes pursuant to this Section 1.04, the Trustee may request
that the Companies deliver an Officer's Certificate and/or an Opinion of Counsel
stating that the Exchange Notes are being issued pursuant to an effective
registration statement in accordance with the Registration Agreement. Except as
provided in the Indenture, the
- 8 -
<PAGE> 9
aggregate principal amount of Notes outstanding at any time may not exceed (x)
$220,000,000 with respect to the Initial 2000 Notes and the Exchange 2000 Notes,
(y) $350,000,000 with respect to the Initial 2004 Notes and the Exchange 2004
Notes and (z) $150,000,000 with respect to the Initial 2007 Notes and the
Exchange 2007 Notes. If an Exchange Note is authenticated and delivered in
exchange for an Initial Note between a record date for the payment of interest
on that Initial Note and the related interest payment date, the interest that
accrues on such Exchange Note from the date of authentication thereof to that
interest payment date shall be payable to the Person in whose name such Exchange
Note was issued on its issuance date.
SECTION I.05 INTEREST ON THE EXCHANGE NOTES.
(a) THE EXCHANGE 2000 NOTES. Each Exchange 2000 Note will bear
interest at the rate of 7.19% per annum from its date of authentication until
the principal thereof is paid or duly provided for, and on any overdue principal
and (to the extent that payment of such interest is enforceable under applicable
law) on any overdue installment of interest at the same rate per annum, payable
on January 1 and July 1 of each year, commencing on July 1, 1997 to the Person
in whose name such Exchange 2000 Note or any predecessor Exchange Note is
registered, at the close of business on the December 15 or June 15 next
preceding such interest payment date; provided, however, that the interest
payable at maturity will be payable to the Person to whom principal shall be
payable.
(b) THE EXCHANGE 2004 NOTES. Each Exchange 2004 Note will bear
interest at the rate of 7.67% per annum from its date of authentication until
the principal thereof is paid or duly provided for, and on any overdue principal
and (to the extent that payment of such interest is enforceable under applicable
law) on any overdue installment of interest at the same rate per annum, payable
on January 1 and July 1 of each year, commencing on July 1, 1997 to the Person
in whose name such Exchange 2004 Note or any predecessor Exchange Note is
registered, at the close of business on the December 15 or June 15 next
preceding such interest payment date; provided, however, that the interest
payable at maturity will be payable to the Person to whom principal shall be
payable.
(c) THE EXCHANGE 2007 NOTES. Each Exchange 2007 Note will bear
interest at the rate of 7.13% per annum from its date of authentication until
the principal thereof is paid or duly provided for, and on any overdue principal
and (to the extent that payment of such interest is enforceable under applicable
law) on any overdue installment of interest at the same rate per annum, payable
on January 1 and July 1 of each year, commencing on July 1, 1997 to the Person
in whose name such Exchange 2007 Note or any predecessor Exchange Note is
registered, at the close of business on the December 15 or June 15 next
preceding such interest payment date; provided, however, that the interest
payable at maturity will be payable to the Person to whom principal shall be
payable.
(d) DEFAULTED INTEREST ON THE EXCHANGE NOTES. Any interest
installment on the Exchange Notes not punctually paid or duly provided for shall
forthwith cease to be payable to the registered holders on the Regular Record
Date, and may be paid to the Person in whose name the Exchange Note (or one or
more Predecessor Securities) is registered at the close of business on a Special
Record Date to be fixed by the Trustee for the payment of such defaulted
interest, notice of which shall be given to the registered
- 9 -
<PAGE> 10
holders of the Exchange Notes not less than 10 days prior to such Special Record
Date, or may be paid at any time in any other lawful manner not inconsistent
with the requirements of any securities exchange on which the Exchange Notes may
be listed, and upon such notice as may be required by such exchange, all as more
fully provided in the Indenture.
(e) CALCULATION OF INTEREST ON THE EXCHANGE NOTES. The amount of
interest payable for any period on the Exchange Notes will be computed on the
basis of a 360 day year of twelve 30-day months. In the event that any date on
which interest is payable on the Exchange Notes is not a Business Day, then
payment of interest payable on such date will be made on the next preceding day
that is a Business Day.
SECTION I.06 FIRST MORTGAGE BONDS.
(a) The Companies hereby deliver to the Trustee, for the benefit of
the holders of the Notes, First Mortgage Bonds, which shall serve equally and
ratably as security for any and all obligations of the Companies under the
Notes, including, but not limited to, the payment of principal and interest on
such Notes when and as the same shall become due and payable. The First Mortgage
Bonds so delivered consist of (1) $175,000,000 principal amount of Cleveland
Electric's First Mortgage Bonds, Series due 2000, and $45,000,000 principal
amount of Toledo Edison's First Mortgage Bonds, Series due 2000, (2)
$280,000,000 principal amount of Cleveland Electric's First Mortgage Bonds,
Series due 2004, and $70,000,000 principal amount of Toledo Edison's First
Mortgage Bonds, Series due 2004-A, and (3) $120,000,000 principal amount of
Cleveland Electric's First Mortgage Bonds, Series due 2007, and $30,000,000
principal amount of Toledo Edison's First Mortgage Bonds, Series due 2007. The
aggregate principal amount of the First Mortgage Bonds being delivered hereunder
is subject to reduction in accordance with the terms of the Cleveland Electric
First Mortgage and the Toledo Edison First Mortgage.
(b) The Trustee acknowledges receipt of and accepts the First
Mortgage Bonds in the aggregate principal amount of $720,000,000, for the
benefit of the holders of the Notes, as security for any and all obligations of
the Companies under the Notes, including, but not limited to, the payment of
principal and interest on the Notes when and as the same shall become due and
payable.
SECTION I.07 DEFEASANCE. The Notes shall be defeasible pursuant to
Section 14.02 and Section 14.03 of the Indenture.
SECTION I.08 PAYING AGENT. The Chase Manhattan Bank will be the
Paying Agent for the Notes. The Depository Trust Company will be the Depository
for the Notes.
SECTION I.09 AMBAC INDEMNITY INSURED NOTES. Payment of the principal
of and interest on the Initial 2007 Notes and the Exchange 2007 Notes
(collectively, the "2007 Notes" and each, a "2007 Note") is insured by a
financial guaranty insurance policy ("Policy") issued by AMBAC Indemnity. Each
2007 Note shall bear the AMBAC Indemnity insurance legend set forth in Exhibit A
hereto. For as long as the Policy is in full force and effect, the Companies and
the Trustee agree as
- 10 -
<PAGE> 11
follows:
(a) the Trustee or the Paying Agent, if any, shall notify AMBAC
Indemnity at least one (1) day after any Interest Payment Date of the nonpayment
of the principal of or interest on the 2007 Notes on such Interest Payment Date.
Such notice shall specify the amount of the deficiency, the 2007 Notes to which
such deficiency is applicable and whether such 2007 Notes is deficient as to
principal or interest, or both. If the Trustee or Paying Agent, if any, has not
so notified AMBAC Indemnity at least one (1) day after an Interest Payment Date,
AMBAC Indemnity will make payments of principal or interest due on the 2007
Notes on or before the first (1st) day next following the date on which AMBAC
Indemnity shall have received notice of nonpayment from the Trustee or Paying
Agent, if any.
(b) the Trustee or Paying Agent, if any, shall, after giving notice
to AMBAC Indemnity as provided in (a) above, make available to AMBAC Indemnity
and, at AMBAC Indemnity's direction, to the United States Trust Company of New
York, as insurance trustee for AMBAC Indemnity or any successor insurance
trustee (the "Insurance Trustee"), the registration books of the Companies
relating to the 2007 Notes maintained by the Trustee or Paying Agent, if any.
(c) the Trustee or Paying Agent, if any, shall provide AMBAC
Indemnity and the Insurance Trustee with a list of registered owners of 2007
Notes entitled to receive principal or interest payments from AMBAC Indemnity
under the terms of the Policy, and shall make arrangements with the Insurance
Trustee (i) to mail checks or drafts to the registered owners of 2007 Notes
entitled to receive full or partial interest payments from AMBAC Indemnity and
(ii) to pay principal upon 2007 Notes surrendered to the Insurance Trustee by
the registered owners of 2007 Notes entitled to receive full or partial
principal payments from AMBAC Indemnity.
(d) the Trustee or Paying Agent, if any, shall, at the time it
provides notice to AMBAC Indemnity pursuant to (a) above, notify registered
owners of 2007 Notes entitled to receive the payment of principal or interest
thereon from AMBAC Indemnity (i) as to the fact of such entitlement, (ii) that
AMBAC Indemnity will remit to them all or a part of the interest payments next
coming due upon proof of the holder's entitlement to interest payments and
delivery to the Insurance Trustee, in form satisfactory to the Insurance
Trustee, of an appropriate assignment of the registered owner's right to
payment, (iii) that should they be entitled to receive full payment of principal
from AMBAC Indemnity, they must surrender their 2007 Notes (along with an
appropriate instrument of assignment in form satisfactory to the Insurance
Trustee to permit ownership of such 2007 Notes to be registered in the name of
AMBAC Indemnity) for payment to the Insurance Trustee, and not the Trustee or
Paying Agent, if any, and (iv) that should they be entitled to receive partial
payment of principal from AMBAC Indemnity, they must surrender their 2007 Notes
for payment thereon first to the Trustee or Paying Agent, if any, who shall note
on such 2007 Notes the portion of the principal paid by the Trustee or Paying
Agent, if any, and then, along with an appropriate instrument of assignment in
form satisfactory to the Insurance Trustee, to the Insurance Trustee, which will
then pay the unpaid portion of principal.
(e) in the event that the Trustee or Paying Agent, if any, has
notice that any payment of principal of or interest on a 2007 Note which has
become due for payment and which is made to a holder
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<PAGE> 12
by or on behalf of the Companies has been deemed a preferential transfer and
theretofore recovered from its registered owner pursuant to the United States
Bankruptcy Code by a trustee in bankruptcy in accordance with the final,
nonappealable order of a court having competent jurisdiction, the Trustee or
Paying Agent, if any, shall, at the time AMBAC Indemnity is notified pursuant to
(a) above, notify all registered owners that in the event that any registered
owner's payment is so recovered, such registered owner will be entitled to
payment from AMBAC Indemnity to the extent of such recovery if sufficient funds
are not otherwise available, and the Trustee or Paying Agent, if any, shall
furnish to AMBAC Indemnity its records evidencing the payments of principal of
and interest on the 2007 Notes which have been made by the Trustee or Paying
Agent, if any, and subsequently recovered from registered owners and the dates
on which such payments were made.
In addition to those rights granted AMBAC Indemnity hereunder, AMBAC
Indemnity shall, to the extent it makes payment of principal of or interest on
the 2007 Notes, become subrogated to the rights of the recipients of such
payments in accordance with the terms of the Policy, and to evidence such
subrogation (i) in the case of subrogation as to claims for past due interest,
the Trustee or Paying Agent, if any, shall note AMBAC Indemnity's rights as
subrogee on the registration books of the Companies maintained by the Trustee or
Paying Agent, if any, upon receipt from AMBAC Indemnity of proof of the payment
of interest thereon to the registered owners of the 2007 Notes, and (ii) in the
case of subrogation as to claims for past due principal, the Trustee or Paying
Agent, if any shall note AMBAC Indemnity's rights as subrogee on the
registration books of the Companies maintained by the Trustee or Paying Agent,
if any, upon surrender of the 2007 Notes by the registered owners thereof
together with proof of the payment of principal thereof.
ARTICLE II.
TRANSFER AND EXCHANGE OF NOTES
SECTION II.01 TRANSFER AND EXCHANGE OF DEFINITIVE NOTES. When
Definitive Notes are presented to the Security Registrar with a request to
register the transfer of such Definitive Notes or to exchange such Definitive
Notes for an equal principal amount of Definitive Notes of other authorized
denominations, the Security Registrar shall register the transfer or make the
exchange as requested if its reasonable requirements for such transaction are
met; PROVIDED, HOWEVER, that the Definitive Notes surrendered for transfer or
exchange:
(a) shall be duly endorsed or accompanied by a written instrument of
transfer in form reasonably satisfactory to the Companies and the Security
Registrar, duly executed by the Holder thereof or his attorney duly
authorized in writing; and
(b) are being transferred or exchanged pursuant to an effective
registration statement under the Securities Act pursuant to Section 2.02,
or pursuant to clause (i), (ii) or (iii) below, and are accompanied by the
following additional information and documents, as applicable:
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<PAGE> 13
(i) if such Definitive Notes are being delivered to the
Security Registrar by a Holder for registration in the name of such
Holder, without transfer, a certification from such Holder to that
effect (in the form set forth on the reverse of the Note); or
(ii) if such Definitive Notes are being transferred to the
Companies, a certification to that effect (in the form set forth on
the reverse of the Note); or
(iii) if such Definitive Notes are being transferred (x)
pursuant to an exemption from registration in accordance with Rule
144, (y) in reliance on another exemption from the registration
requirements of the Securities Act or (z) to an Institutional
Accredited Investor that is acquiring the Note for its own account,
or for the account of such an Institutional Accredited Investor, in
each case for investment purposes and not with a view to, or for
offer or sale in connection with, any distribution in violation of
the Securities Act: (A) a certification to that effect (in the form
set forth on the reverse of the Note) and (B) in the case of clause
(y), an Opinion of Counsel from such Holder or the transferee
reasonably acceptable to the Companies to the effect that such
transfer is in compliance with the Securities Act and (C) in the
case of clause (z), if the aggregate principal amount of such
Definitive Notes being transferred is less than $100,000, an opinion
of counsel addressed to the Companies as to the compliance with the
restrictions set forth in the legend set forth in Exhibit A hereto.
SECTION II.02 RESTRICTIONS ON TRANSFER OF A DEFINITIVE NOTE FOR A
BENEFICIAL INTEREST IN A GLOBAL NOTE. A Definitive Note may not be exchanged for
a beneficial interest in a Global Note except upon satisfaction of the
requirements set forth below. Upon receipt by the Trustee of a Definitive Note,
duly endorsed or accompanied by appropriate instruments of transfer, in form
satisfactory to the Trustee, together with:
(a) certification, in the form set forth on the reverse of the Note,
that such Definitive Note is being transferred (A) to a QIB in accordance
with Rule 144A, or (B) outside the United States in an offshore
transaction within the meaning of Regulation S and in compliance with Rule
904 under the Securities Act; and
(b) written instructions directing the Trustee to make, or to direct
the Securities Custodian to make, an adjustment on its books and records
with respect to the Restricted Global Note or the Regulation S Global
Note, as the case may be, to reflect an increase in the aggregate
principal amount of the Notes represented by such Global Note, such
instructions to contain information regarding the Depository account (or
in the case of the Regulation S Global Note only, the Euroclear or Cedel
account) to be credited with such increase,
then the Trustee shall cancel such Definitive Note and cause, or direct the
Securities Custodian to cause, in accordance with the standing instructions and
procedures existing between the Depository and the Securities Custodian
(including the rules of Euroclear and Cedel, if applicable), the aggregate
principal amount of Notes represented by the Restricted Global Note or the
Regulation S Global Note, as the case
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<PAGE> 14
may be, to be increased by the principal amount of the Definitive Note to be
exchanged and shall credit or cause to be credited to the account of the Person
specified in such instructions a beneficial interest in such Global Note equal
to the principal amount of the Definitive Note so canceled. If no Global Notes
are then outstanding, the Companies shall issue and the Trustee shall
authenticate, pursuant to a Company Order, a new Restricted Global Note or
Regulation S Global Note, as the case may be, in the appropriate principal
amount.
SECTION II.03 TRANSFER AND EXCHANGE OF GLOBAL NOTES AND BENEFICIAL
INTERESTS THEREIN.
(a) The transfer and exchange of Global Notes or beneficial
interests therein shall be effected through the Depository in accordance with
this First Supplemental Indenture (including applicable restrictions on transfer
set forth herein, if any) and the procedures of the Depository therefor,
including the rules and procedures of Euroclear and Cedel, if applicable. A
transferor of a beneficial interest in a Global Note shall deliver to the
Security Registrar a written order given in accordance with the Depository's
procedures containing information regarding the Euroclear, Cedel or other
participant account of the Depository to be credited with a beneficial interest
in the Global Note. The Security Registrar shall, in accordance with such
instructions instruct the Depository to credit to the account of the Person
specified in such instructions a beneficial interest in the Global Note and to
debit the account of the Person making the transfer the beneficial interest in
the Global Note being transferred.
Transfers of beneficial interests in the Global Notes to Persons
required to take delivery in the form of an interest in another Global Note
shall be permitted as follows:
(i) Restricted Global Note to Regulation S Global Note.
If, at any time, an owner of a beneficial interest in a
Restricted Global Note deposited with the Depository (or the
Trustee as custodian for the Depository) wishes to transfer
its beneficial interest in such Restricted Global Note to a
Person who is required or permitted to take delivery thereof
in the form of an interest in a Regulation S Global Note, such
owner shall, subject to the Depository's procedures, exchange
or cause the exchange of such interest for an equivalent
beneficial interest in a Regulation S Global Note as provided
in this Section 2.03(a)(i). Upon receipt by the Trustee of (1)
instructions given in accordance with the Depository's
procedures from an Agent Member directing the Trustee to
credit or cause to be credited a beneficial interest in the
Regulation S Global Note in an amount equal to the beneficial
interest in the Restricted Global Note to be exchanged, (2) a
written order given in accordance with the Depository's
procedures containing information regarding the Agent Member
account of the Depository and the Euroclear or Cedel account
to be credited with such increase, and (3) a certificate given
by the owner of such beneficial interest stating that the
transfer of such interest has been made in compliance with the
transfer restriction applicable to the Global Notes and
pursuant to and in accordance with Rule 903 or Rule 904 of
Regulation S, then the Security Registrar shall instruct the
Depository to reduce or cause to be reduced the aggregate
principal amount at maturity of the
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<PAGE> 15
applicable Restricted Global Note and to increase or cause to
be increased the aggregate principal amount at maturity of the
applicable Regulation S Global Note by the principal amount at
maturity of the beneficial interest in the Restricted Global
Note to be exchanged or transferred, to credit or cause to be
credited to the account of the Person specified in such
instructions, a beneficial interest in the Regulation S Global
Note equal to the reduction in the aggregate principal amount
at maturity of the Restricted Global Note, and to debit, or
cause to be debited, from the account of the Person making
such exchange or transfer the beneficial interest in the
Restricted Note that is being exchanged or transferred.
(ii) Regulation S Global Note to Restricted Global Note. If,
at any time, after the expiration of the 40-day restricted
period (as defined in Regulation S), an owner of a beneficial
interest in a Regulation S Global Note deposited with the
Depository or with the Trustee as custodian for the Depository
wishes to transfer its beneficial interest in such Regulation
S Global Note to a Person who is required or permitted to take
delivery thereof in the form of an interest in a Restricted
Global Note, such owner shall, subject to the Depository's
procedures, exchange or cause the exchange of such interest
for an equivalent beneficial interest of a Restricted Global
Note as provided in this Section 2.03(a)(ii). Upon receipt by
the Trustee of (1) instructions from Euroclear or Cedel, if
applicable, and the Depository, directing the Security
Registrar to credit or cause to be credited a beneficial
interest in the Restricted Global Note equal to the beneficial
interest in the Regulation S Global Note to be exchanged, such
instructions to contain information regarding the Agent Member
account with the Depository to be credited with such increase,
(2) a written order given in accordance with the Depository's
procedures containing information regarding the participant
account of the Depository and (3) a certificate given by the
owner of such beneficial interest stating (A) if the transfer
is pursuant to Rule 144A, that the Person transferring such
interest in a Regulation S Global Note reasonably believes
that the Person acquiring such interest in the Regulation S
Global Note is a QIB and is obtaining such beneficial interest
in a transaction meeting the requirement of Rule 144A and any
applicable blue sky or securities laws of any state of the
United States, (B) that the transfer complies with the
requirements of Rule 144 under the Securities Act, or (C) if
the transfer is pursuant to any other exemption from the
registration requirements of the Securities Act, that the
transfer of such interest has been made in compliance with the
transfer restrictions applicable to the Global Notes and
pursuant to and in accordance with the requirements of the
exemption claimed, such statement to be supported by an
Opinion of Counsel from the transferee or the transferor in
form reasonably acceptable to the Companies and to the
Security Registrar and in each case, in accordance with any
applicable securities laws of any state of the United States
or any other applicable jurisdiction, then the Security
Registrar shall instruct the Depository to reduce or cause to
be reduced the aggregate principal amount at maturity of such
Regulation
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<PAGE> 16
S Global Note and to increase or cause to be increased the
aggregate principal amount at maturity of the applicable
Restricted Global Note by the principal amount at maturity of
the beneficial interest in the Regulation S Global Note to be
exchanged or transferred, and the Security Registrar shall
instruct the Depository, concurrently with such reduction, to
credit or cause to be credited to the account of the Person
specified in such instructions a beneficial interest in the
applicable Restricted Global Note equal to the reduction in
the aggregate principal amount at maturity of such Regulation
S Global Note and to debit or cause to be debited from the
account of the Person making such transfer the beneficial
interest in the Regulation S Global Note that is being
exchanged or transferred.
(b) Notwithstanding any other provisions of this First Supplemental
Indenture (other than the provisions set forth in Section 2.09), a Global Note
may not be transferred as a whole except by the Depository to a nominee of the
Depository or by a nominee of the Depository to the Depository or another
nominee of the Depository or by the Depository or any such nominee to a
successor Depository or a nominee of such successor Depository.
(c) The Companies shall advise the Trustee as to the commencement of
the Registered Exchange Offer or the effectiveness of the Shelf Registration
Statement and the Trustee may rely conclusively thereon.
(d) In the event that a Global Note is exchanged for Notes in
definitive registered form pursuant to this First Supplemental Indenture or
Section 3.04 of the Indenture, prior to the consummation of a Registered
Exchange Offer or the effectiveness of a Shelf Registration Statement with
respect to such Notes, such Notes may be exchanged only in accordance with such
procedures as are substantially consistent with the provisions of this Section
2.03 (including the certification requirements set forth on the reverse of the
Initial Notes intended to ensure that such transfers comply with Rule 144A or
Regulation S, as the case may be) and such other procedures as may from time to
time be adopted by the Companies.
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<PAGE> 17
SECTION II.04 TRANSFER OF A BENEFICIAL INTEREST IN A GLOBAL NOTE FOR
A DEFINITIVE NOTE.
(a) Subject to Section 2.03(b), any Person having a beneficial
interest in a Transfer Restricted Note that is a Global Note may transfer such
beneficial interest to an Institutional Accredited Investor that is acquiring
the Note for its own account, or for the account of such an Institutional
Accredited Investor, in each case for investment purposes and not with a view
to, or for offer or sale in connection with, any distribution in violation of
the Securities Act; provided, however, that any written order or such other form
of instructions as is customary for the Depository, from the Depository or its
nominee on behalf of any Person having a beneficial interest in such Global Note
shall be accompanied by (i) a certification from the transferee or transferor
with respect to the transfer (in the form set forth on the reverse of the Note)
and such other certifications as the Trustee may reasonably request and (ii) if
the aggregate principal amount of the applicable Global Note being transferred
is less than $100,000, an opinion of counsel addressed to the Companies as to
the compliance with the restrictions set forth in the legend described in
Section 2.05(a). Upon receipt by the Trustee of such information and documents,
the Trustee or the Securities Custodian, at the direction of the Trustee, will
cause, in accordance with the standing instructions and procedures existing
between the Depository and the Securities Custodian, including the rules and
procedures of Euroclear or Cedel, if applicable, the aggregate principal amount
of the applicable Global Note to be reduced on its books and records and,
following such reduction, the Companies will execute and the Trustee will
authenticate and deliver to the transferee a Definitive Note.
(b) Definitive Notes issued in exchange for a beneficial interest in
a Global Note pursuant to this Section 2.04 shall be registered in such names
and in such authorized denominations as Euroclear or Cedel, if applicable, and
the Depository, pursuant to instructions from its direct or indirect
participants or otherwise, shall instruct the Trustee. The Trustee shall deliver
such Definitive Notes to the Persons in whose names such Notes are so registered
in accordance with the instructions of the Depository.
SECTION II.05 LEGENDS.
(a) Except as permitted by the following paragraphs (b), (c) and
(d), each Note certificate evidencing the Global Notes and the Definitive Notes
(and all Notes issued in exchange or in substitution therefor) shall bear the
restricted notes legend set forth in Exhibit A hereto ("Restricted Notes
Legend").
(b) Upon any sale or transfer of a Transfer Restricted Note
(including any Transfer Restricted Note represented by a Global Note) pursuant
to Rule 144 under the Securities Act:
(i) in the case of any Transfer Restricted Note that is a
Definitive Note, the Security Registrar shall permit the Holder
thereof to exchange such Transfer Restricted Note for a certificated
Note that does not bear the Restricted Notes Legend and rescind any
restriction on the transfer of such Transfer Restricted Note; and
(ii) in the case of any Transfer Restricted Note that is
represented by a Global Note, the Security Registrar shall permit
the Holder thereof to exchange such Transfer Restricted Note for a
certificated Note that does not bear the Restricted Notes Legend and
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<PAGE> 18
rescind any restriction on the transfer of such Transfer Restricted
Note, if the Holder certifies in writing to the Security Registrar
that its request for such exchange was made in reliance on Rule 144
(such certification to be in the form set forth on the reverse of
the Note).
(c) After a transfer of any Initial Notes under and in the manner
described in a Shelf Registration Statement with respect to such Initial Notes,
all requirements pertaining to legends on such Initial Note will cease to apply,
the requirements requiring any such Initial Note issued to certain Holders to be
issued in global form will cease to apply, and a certificated Initial Note
without legends will be available to the transferee of the Holder of such
Initial Notes upon exchange of such transferring Holder's certificated Initial
Note or directions to transfer such Holder's interest in the Global Note, as
applicable.
(d) Upon the consummation of a Registered Exchange Offer with
respect to the Initial Notes pursuant to which Holders of such Initial Notes are
offered Exchange Notes in exchange for their Initial Notes, all requirements
pertaining to such Initial Notes that Initial Notes issued to certain Holders be
issued in global form will cease to apply and certificated Initial Notes with
the Restricted Notes Legend set forth in Exhibit A hereto will be available to
Holders of such Initial Notes that do not exchange their Initial Notes, and
Exchange Notes in certificated or global form will be available to Holders that
exchange such Initial Notes in such Registered Exchange Offer.
SECTION II.06 CANCELLATION OR ADJUSTMENT OF GLOBAL NOTE. At such
time as all beneficial interests in a Global Note have either been exchanged for
certificated Notes, redeemed, repurchased or canceled, such Global Note shall be
returned to the Depository for cancellation or retained and canceled by the
Trustee. At any time prior to such cancellation, if any beneficial interest in a
Global Note is exchanged for certificated Notes, redeemed, repurchased or
canceled, the principal amount of Notes represented by such Global Note shall be
reduced and an adjustment shall be made on the books and records of the Trustee
(if it is then the Securities Custodian for such Global Note) with respect to
such Global Note, by the Trustee or the Securities Custodian, to reflect such
reduction.
SECTION II.07 OBLIGATIONS WITH RESPECT TO TRANSFERS AND EXCHANGES OF
NOTES.
(a) To permit registrations of transfers and exchanges, the
Companies shall execute and the Trustee shall authenticate Definitive Notes and
Global Notes at the Security Registrar's request.
(b) No service charge shall be made for any registration of transfer
or exchange, but the Companies may require payment of a sum sufficient to cover
any transfer tax, assessments, or similar governmental charge payable in
connection therewith.
(c) Prior to the due presentation for registration of transfer of
any Note, the Companies, the Trustee, the Paying Agent or the Security Registrar
may deem and treat the Person in whose name a Note is registered as the absolute
owner of such Note for the purpose of receiving payment of principal of and
interest on such Note and for all other purposes whatsoever, whether or not such
Note is overdue, and none of the Companies, the Trustee, the Paying Agent or the
Security Registrar shall be affected by notice
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<PAGE> 19
to the contrary.
(d) All Notes issued upon any transfer or exchange pursuant to the
terms of this First Supplemental Indenture and the Indenture shall evidence the
same debt and shall be entitled to the same benefits under this First
Supplemental Indenture and the Indenture as the Notes surrendered upon such
transfer or exchange.
SECTION II.08 NO OBLIGATION OF THE TRUSTEE.
(a) The Trustee shall have no responsibility or obligation to any
beneficial owner of a Global Note, a member of, or a participant in the
Depository or other Person with respect to the accuracy of the records of the
Depository or its nominee or of any participant or member thereof, with respect
to any ownership interest in the Notes or with respect to the delivery to any
participant, member, beneficial owner or other Person (other than the
Depository) of any notice (including any notice of redemption) or the payment of
any amount, under or with respect to such Notes. All notices and communications
to be given to the Holders and all payments to be made to Holders under the
Notes shall be given or made only to or upon the order of the registered Holders
(which shall be the Depository or its nominee in the case of a Global Note). The
rights of beneficial owners in any Global Note shall be exercised only through
the Depository subject to the applicable rules and procedures of the Depository.
The Trustee may rely and shall be fully protected in relying upon information
furnished by the Depository with respect to its members, participants and any
beneficial owners.
(b) The Trustee shall have no obligation or duty to monitor,
determine or inquire as to compliance with any restrictions on transfer imposed
under this First Supplemental Indenture or the Indenture or under applicable law
with respect to any transfer of any interest in any Note (including any
transfers between or among Depository participants, members or beneficial owners
in any Global Note) other than to require delivery of such certificates and
other documentation or evidence as are expressly required by, and to do so if
and when expressly required by, the terms of this First Supplemental Indenture
or the Indenture, and to examine the same to determine substantial compliance as
to form with the express requirements hereof.
SECTION II.09 ISSUANCE OF DEFINITIVE NOTES.
(a) A Global Note deposited with the Depository or with the
Securities Custodian pursuant to Section 1.02 shall be transferred to the
beneficial owners thereof in the form of Definitive Notes in an aggregate
principal amount equal to the principal amount of such Global Note, in exchange
for such Global Note, only if such transfer complies with Section 2.03 and (i)
the Depository notifies the Companies that it is unwilling or unable to continue
as Depository for such Global Note or if at any time such Depository ceases to
be a "clearing agency" registered under the Exchange Act and a successor
depositary is not appointed by the Companies within 90 days of such notice, (ii)
an Event of Default has occurred and is continuing or (iii) the Companies, in
their sole discretion, notify the Trustee in writing that they elect to cause
the issuance of Definitive Notes under this First Supplemental Indenture.
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<PAGE> 20
(b) Any Global Note that is transferable to the beneficial owners
thereof pursuant to this Section 2.09 shall be surrendered by the Depository to
the Trustee located in New York, New York, to be so transferred, in whole or
from time to time in part, without charge, and the Trustee shall authenticate
and deliver, upon such transfer of each portion of such Global Note, an equal
aggregate principal amount of Definitive Notes of authorized denominations. Any
portion of a Global Note transferred pursuant to this Section 2.09 shall be
executed, authenticated and delivered only in denominations of $1,000 and any
integral multiple thereof and registered in such names as the Depository shall
direct. Any Definitive Note delivered in exchange for an interest in the Global
Note shall, except as otherwise provided by Section 2.05, bear the restricted
notes legend set forth in Exhibit A hereto.
(c) Subject to the provisions of this Section 2.09, the registered
Holder of a Global Note may grant proxies and otherwise authorize any Person,
including Agent Members and Persons that may hold interests through Agent
Members, to take any action that a Holder is entitled to take under this First
Supplemental Indenture or the Indenture or the Notes.
(d) In the event of the occurrence of any of the events specified in
Section 2.09(a), the Companies will promptly make available to the Trustee a
reasonable supply of Definitive Notes in definitive, fully registered form
without interest coupons.
ARTICLE III.
DEFINITIONS
SECTION III.01 DEFINITIONS. For the purposes of this First
Supplemental Indenture the following terms shall have the meanings indicated
below:
"AMBAC Indemnity" means AMBAC Indemnity Corporation, a
Wisconsin-domiciled stock insurance company.
"Definitive Note" means a certificated Initial Note bearing the
restricted notes legend described in Section 2.05(a) and which may be held by an
Institutional Accredited Investor in accordance with Section 1.02(c).
"Depository" means The Depository Trust Company, New York, New York,
its nominees and their respective successors.
"Exchange Notes" has the meaning set forth in the second paragraph
under "RECITALS OF THE COMPANIES."
"Exchange Offer Registration Statement" has the meaning set forth in
Section 1 of the Registration Agreement.
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<PAGE> 21
"Institutional Accredited Investor" means an institutional
"accredited investor" as described in Rule 501(a) (1), (2), (3) or (7) under the
Securities Act.
"Paying Agent" means The Chase Manhattan Bank.
"Placement Agreement" means the Placement Agreement dated June 11,
1997 between the Companies and the Purchasers.
"Purchasers" means Morgan Stanley & Co. Incorporated, Citicorp
Securities, Inc., Credit Suisse First Boston and McDonald & Company Securities,
Inc.
"QIB" means a "qualified institutional buyer" as defined in Rule
144A.
"Registered Exchange Offer" means the offer by the Companies,
pursuant to the Registration Agreement, to certain Holders of Initial Notes, to
issue and deliver to such Holders, in exchange for the Initial Notes, a like
aggregate principal amount of Exchange Notes registered under the Securities
Act.
"Registration Agreement" means the Registration Agreement dated June
11, 1997 between the Companies and the Purchasers.
"Registration Statement" means each of the Exchange Offer
Registration Statement and the Shelf Registration Statement.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Custodian" means the custodian with respect to a Global
Note (as appointed by the Depository), or any successor Person thereto and shall
initially be the Trustee.
"Shelf Registration Statement" means any registration statement
filed by the Companies in connection with the offer and sale of Initial Notes
pursuant to the Registration Agreement.
"Transfer Restricted Notes" means each Definitive Note and each Note
that bears or is required to bear the legend described in Section 2.05 until (i)
the date on which that Note has been exchanged by a person other than a
broker-dealer for a freely transferrable Exchange Note in the Registered
Exchange Offer; (ii) following the exchange by a broker-dealer in the Registered
Exchange Offer of a Transfer Restricted Note for an Exchange Note, the date on
which that Exchange Note is sold to a purchaser who receives from that
broker-dealer on or prior to the date of that sale a copy of the prospectus
contained in the Exchange Offer Registration Statement; (iii) the date on which
that Note has been effectively registered under the Securities Act and disposed
of in accordance with the Shelf Registration Statement; or (iv) the date on
which that Note is distributed to the public pursuant to Rule 144 under the
Securities Act or is saleable pursuant to Rule 144(k) under the Securities Act.
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ARTICLE IV.
SUNDRY PROVISIONS
SECTION IV.01 TERMS. Except as otherwise expressly provided in this
First Supplemental Indenture or in the forms of Notes or otherwise clearly
required by the context hereof or thereof, all terms used herein or in said
forms of Notes that are defined in the Indenture shall have the several meanings
respectively assigned to them thereby.
SECTION IV.02 INDENTURE. This First Supplemental Indenture shall be
deemed part of the Indenture in the manner and to the extent herein and therein
provided.
SECTION IV.03 TRUSTEE. The Trustee hereby accepts the trusts herein
declared, provided, created, supplemented, or amended and agrees to perform the
same upon the terms and conditions herein and in the Indenture, as heretofore
supplemented and amended, set forth and upon the following terms and conditions:
the Trustee shall not be responsible in any manner whatsoever for or in respect
of the validity or sufficiency of this First Supplemental Indenture or for or in
respect of the recitals contained herein, all of which recitals are made by the
Companies solely. In general, each and every term and condition contained in
Article VII of the Indenture shall apply to and form part of this First
Supplemental Indenture with the same force and effect as if the same were herein
set forth in full. If there is a conflict in the terms of the Indenture and this
First Supplemental Indenture that affects the Trustee's rights and obligations,
then the terms of the Indenture shall govern.
SECTION IV.04 COUNTERPARTS. This instrument may be executed in any
number of counterparts, each of which so executed shall be deemed to be an
original, but all such counterparts shall together constitute but one and the
same instrument.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
- 22 -
<PAGE> 23
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be duly executed as of the day and year first above
written.
THE CLEVELAND ELECTRIC
ILLUMINATING COMPANY
and
THE TOLEDO EDISON COMPANY
By:_______________________________________
Name:_____________________________________
Title:_____________________of each Company
THE CHASE MANHATTAN BANK, as Trustee
By:_______________________________________
Name:_____________________________________
Title:____________________________________
S-1
<PAGE> 24
EXHIBIT A
[FORM OF FACE OF INITIAL NOTE]
[___% Series A Secured Note due ____]
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
THE TOLEDO EDISON COMPANY
No. .............. $ .............
CUSIP No. ____________
The Cleveland Electric Illuminating Company and The Toledo Edison
Company hereby promise, jointly and severally, to pay to ________, or registered
assigns, the principal sum of .......................................... Dollars
on .......................
Interest Payment Dates: January 1 and July 1, commencing July 1, 1997.
Record Dates: December 15 and June 15, provided, however, the record date for
the interest payment due on July 1, 1997 shall be June 25, 1997.
Reference is hereby made to the further provisions of this Note attached
hereto which further provisions shall for all purposes have the same effect as
if set forth in this place.
IN WITNESS WHEREOF, each Company has caused this instrument to be
executed by its duly authorized officer.
Dated: ___________________
THE CLEVELAND ELECTRIC ILLUMINATING
COMPANY
By:_____________________________________
Name:
Title:
THE TOLEDO EDISON COMPANY
By:_____________________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated
therein referred to in he within-mentioned Indenture.
THE CHASE MANHATTAN BANK, as Trustee
A-1
<PAGE> 25
EXHIBIT A
By:___________________________
Name:
Title:
Date of Authentication:__________________
A-2
<PAGE> 26
EXHIBIT A
[FORM OF REVERSE SIDE OF INITIAL NOTE]
[___% Series A Secured Note due ____]
[Global Notes Legend]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW
YORK, TO THE COMPANIES OR THEIR AGENTS FOR REGISTRATION OF TRANSFER, EXCHANGE OR
PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
[Restricted Notes Legend]
THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE
"SECURITIES ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD WITHIN THE
UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS EXCEPT AS
SET FORTH IN THE FOLLOWING SENTENCE. BY ITS ACQUISITION HEREOF, THE HOLDER (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE
144A UNDER THE SECURITIES ACT), OR (B) IT IS AN INSTITUTIONAL "ACCREDITED
INVESTOR" (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) OF REGULATION D UNDER
THE SECURITIES ACT) (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR (C) IT IS NOT A
U.S. PERSON AND IS ACQUIRING THIS NOTE IN AN OFFSHORE TRANSACTION IN COMPLIANCE
WITH REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT, IF IT IS A
PURCHASER OTHER THAN A FOREIGN PURCHASER OUTSIDE THE UNITED STATES, IT WILL NOT,
WITHIN THE TIME PERIOD REFERRED TO IN RULE 144(k) UNDER THE SECURITIES ACT AS IN
EFFECT WITH RESPECT TO SUCH TRANSFER, RESELL OR OTHERWISE TRANSFER THIS NOTE
EXCEPT (A) TO THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND THE TOLEDO EDISON
COMPANY ("COMPANIES"), (B) INSIDE THE UNITED STATES TO A QUALIFIED INSTITUTIONAL
BUYER IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, (C) INSIDE THE
UNITED STATES TO AN INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH
TRANSFER, FURNISHES
A-3
<PAGE> 27
EXHIBIT A
TO THE TRUSTEE A SIGNED LETTER CONTAINING CERTAIN REPRESENTATIONS AND AGREEMENTS
RELATING TO THE RESTRICTIONS ON TRANSFER OF THIS NOTE (THE FORM OF WHICH LETTER
CAN BE OBTAINED FROM THE TRUSTEE) AND IF SUCH TRANSFER IS IN RESPECT OF AN
AGGREGATE PRINCIPAL AMOUNT OF NOTES AT THE TIME OF TRANSFER OF LESS THAN
$100,000, AN OPINION OF COUNSEL ACCEPTABLE TO THE COMPANIES THAT SUCH TRANSFER
IS IN COMPLIANCE WITH THE SECURITIES ACT, (D) OUTSIDE THE UNITED STATES IN AN
OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904 UNDER THE SECURITIES ACT, (E)
PURSUANT TO THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144 UNDER THE
SECURITIES ACT (IF AVAILABLE) OR (F) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT AND (3) AGREES THAT IT WILL DELIVER TO EACH
PERSON TO WHOM THIS NOTE IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF
THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THIS NOTE WITHIN THE TIME PERIOD
REFERRED TO ABOVE, THE HOLDER MUST CHECK THE APPROPRIATE BOX SET FORTH ON THE
REVERSE SIDE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND SUBMIT THIS
CERTIFICATE TO THE TRUSTEE. IF THE PROPOSED TRANSFEREE IS AN INSTITUTIONAL
ACCREDITED INVESTOR, THE HOLDER MUST, PRIOR TO SUCH TRANSFER, FURNISH TO THE
TRUSTEE AND THE COMPANIES SUCH CERTIFICATIONS, LEGAL OPINIONS OR OTHER
INFORMATION AS EITHER OF THEM MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
TRANSFER IS BEING MADE PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT
SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT. AS USED HEREIN,
THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE
MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. THE INDENTURE
CONTAINS A PROVISION REQUIRING THE TRUSTEE TO REFUSE TO REGISTER ANY TRANSFER OF
THIS SECURITY IN VIOLATION OF THE FOREGOING RESTRICTIONS.
[AMBAC Indemnity Insurance Legend
To be Inserted in Initial 2007 Notes Only]
FINANCIAL GUARANTY INSURANCE POLICY NO. FG0264BE (THE "POLICY") WITH RESPECT TO
PAYMENTS DUE FOR PRINCIPAL OF AND INTEREST ON THIS NOTE HAS BEEN ISSUED BY AMBAC
INDEMNITY CORPORATION ("AMBAC INDEMNITY"). THE POLICY HAS BEEN DELIVERED TO THE
UNITED STATES TRUST COMPANY OF NEW YORK, NEW YORK, NEW YORK, AS THE INSURANCE
TRUSTEE UNDER SAID POLICY AND WILL BE HELD BY SUCH INSURANCE TRUSTEE OR ANY
SUCCESSOR INSURANCE TRUSTEE. THE POLICY IS ON FILE AND AVAILABLE FOR INSPECTION
AT THE PRINCIPAL OFFICE OF THE INSURANCE TRUSTEE AND A COPY THEREOF MAY BE
SECURED FROM AMBAC INDEMNITY OR THE INSURANCE TRUSTEE. ALL PAYMENTS REQUIRED TO
BE MADE UNDER THE POLICY SHALL BE MADE IN ACCORDANCE WITH THE PROVISIONS
THEREOF. THE OWNER OF THIS NOTE ACKNOWLEDGES AND CONSENTS TO THE SUBROGATION
RIGHTS OF AMBAC INDEMNITY AS MORE FULLY SET FORTH IN THE POLICY.
A-4
<PAGE> 28
EXHIBIT A
Capitalized terms used herein shall have the meanings assigned to them
in the Indenture referred to below unless otherwise indicated.
1. INTEREST. The Cleveland Electric Illuminating Company, a corporation
duly organized and existing under the laws of the State of Ohio ("CLEVELAND
ELECTRIC", which term includes any successor Person under the Indenture
hereinafter referred to), and The Toledo Edison Company, a corporation duly
organized and existing under the laws of the State of Ohio ("TOLEDO EDISON",
which term includes any successor Person under the Indenture hereinafter
referred to, and, together with Cleveland Electric, the "COMPANIES"), hereby
promise, jointly and severally, to pay interest on the principal amount of this
Note and Additional Interest, if any. The Companies will pay interest from the
later of June 18, 1997 or the most recent Interest Payment Date to which
interest has been paid or duly provided for, semi-annually on January 1 and July
1 in each year, commencing July 1, 1997, at the rate of ....% per annum, until
the principal hereof is paid or made available for payment and will pay
Additional Interest, if any. The interest and any Additional Interest so
payable, and punctually paid or duly provided for, on any Interest Payment Date
will, as provided in such Indenture, be paid to the Person in whose name this
Note (or one or more Predecessor Securities) is registered at the close of
business on the Regular Record Date for such interest, which shall be the
December 15 or June 15 (whether or not a Business Day), as the case may be, next
preceding such Interest Payment Date; provided, however, the Regular Record Date
for the interest payment due on July 1, 1997 shall be June 25, 1997. Any such
interest or Additional Interest not so punctually paid or duly provided for will
forthwith cease to be payable to the Holder on such Regular Record Date and may
either be paid to the Person in whose name this Note (or one or more Predecessor
Securities) is registered at the close of business on a Special Record Date for
the payment of such Defaulted Interest to be fixed by the Trustee, notice of
which shall be given to Holders of Notes of this series not less than 10 days
prior to such Special Record Date, or be paid at any time in any other lawful
manner not inconsistent with the requirements of any securities exchange on
which the Notes of this series may be listed, and upon such notice as may be
required by such exchange, all as more fully provided in said Indenture.
Interest on this Note shall cease to accrue upon the exchange of this Note
for an Exchange Note in like principal amount and having substantially identical
terms to this Note pursuant to a Registered Exchange Offer. If the record date
for the interest payment date next following the exchange of this Note occurs
after the exchange of this Note, the accrued and unpaid interest on this Note
will be payable to the Person in whose name the Exchange Note is registered on
that record date.
The amount of interest or Additional Interest payable for any period will
be computed on the basis of a 360 day year of twelve 30-day months. In the event
that any date on which interest or Additional Interest is payable on this Note
is not a Business Day, then payment of interest or Additional Interest payable
on such date will be made on the next preceding day that is a Business Day.
2. METHOD OF PAYMENT. Payment of the principal of, interest and Additional
Interest, if any, on this Note will be made at the office or agency of the
Companies maintained for that purpose in the Borough of Manhattan, New York, New
York, in such coin or currency of the United States of America as at the time of
payment is legal tender for payment of public and private debts or, at the
option of the
A-5
<PAGE> 29
EXHIBIT A
Companies payment of interest or Additional Interest may be made by check mailed
to the address of the Person entitled thereto as such address shall appear in
the Security Register; provided that payment by wire transfer of immediately
available funds shall be required with respect to principal of, and interest and
Additional Interest, if any, on all Global Notes and all other Notes the Holders
of which shall have provided written wire transfer instructions to the Companies
or the Paying Agent.
3. PAYING AGENT AND SECURITY REGISTRAR. Initially, the Trustee shall act as
the Paying Agent and Security Registrar. The Companies may change any Paying
Agent or Security Registrar without notice to any Holder. The Companies or any
of their Affiliates may act in any such capacity.
4. INDENTURE. This Note is one of a duly authorized issue of Securities of
the Companies (herein called the "NOTES"), issued and to be issued in one or
more series under an Indenture, dated as of June 13, 1997 (herein called the
"INDENTURE", which term shall have the meaning assigned to it in such
instrument), between the Companies and The Chase Manhattan Bank, as Trustee
(herein called the "TRUSTEE", which term includes any successor trustee under
the Indenture), and reference is hereby made to the Indenture for a statement of
the respective rights, limitations of rights, duties and immunities thereunder
of the Companies, the Trustee and the Holders of the Notes and of the terms upon
which the Notes are, and are to be, authenticated and delivered. This Note is
one of the series designated on the face hereof, limited in aggregate principal
amount to $............
5. SECURITY. This Note will be secured equally and ratably by First
Mortgage Bonds delivered by one or both of the Companies to the Trustee for the
benefit of the Holders of the Notes. Such First Mortgage Bonds shall be issued
under one or both of the Mortgage and Deed of Trust between Cleveland Electric
and Guaranty Trust Company of New York (now The Chase Manhattan Bank as
successor trustee), as trustee (the "CLEVELAND Trustee"), dated as of July 1,
1940, as supplemented and amended from time to time (the "CLEVELAND ELECTRIC
FIRST MORTGAGE"), and the Indenture of Mortgage and Deed of Trust between Toledo
Edison and The Chase National Bank of the City of New York (now The Chase
Manhattan Bank as successor trustee), as trustee (the "TOLEDO TRUSTEE"; with the
Cleveland Trustee, collectively, the "MORTGAGE TRUSTEES" and, individually, a
"MORTGAGE TRUSTEE"), dated as of April 1, 1947, as supplemented and amended from
time to time (the "TOLEDO EDISON FIRST MORTGAGE"; with the Cleveland Electric
First Mortgage, collectively, the "FIRST MORTGAGES" and, individually, a "FIRST
MORTGAGE") (the "FIRST MORTGAGE BONDS"). Reference is made to the First
Mortgages for a description of property mortgaged and pledged thereunder, the
nature and extent of the security, the rights of the holders of first mortgage
bonds under each First Mortgage and of the Mortgage Trustee in respect thereof,
the duties and immunities of the Mortgage Trustees and the terms and conditions
upon which the First Mortgage Bonds are secured and the circumstances under
which additional first mortgage bonds may be issued under each First Mortgage.
6. REGISTRATION. Pursuant to the Registration Agreement by and between the
Companies and the Purchasers, the Companies will be obligated to consummate an
exchange offer pursuant to which the Holders of the Notes shall have the right
to exchange the Notes for [___]% Series B Secured Notes due [_____], of the
Companies, which are to be registered under the Securities Act, in like
principal amount and having identical terms as the Notes except with respect to
transfer restrictions. If the Exchange Offer
A-6
<PAGE> 30
EXHIBIT A
is not accomplished, the Companies will be obligated to file a shelf
registration statement to cover resales of the Notes under certain
circumstances. The Holders of the Notes shall be entitled to receive certain
additional interest payments in the event such exchange offer is not
consummated, the shelf registration statement is not filed and upon certain
other conditions, all pursuant to and in accordance with the terms of the
Registration Agreement.
7. MANDATORY REDEMPTION. The Company shall not be required to make
mandatory redemption or sinking fund payments with respect to the Notes.
8. DEFAULT AND REMEDIES. If an Event of Default with respect to Notes of
this series shall occur and be continuing, the principal of the Notes may be
declared due and payable in the manner and with the effect provided in the
Indenture and, upon such declaration, the Trustee can demand the acceleration of
the payment of principal of the First Mortgage Bonds as provided in the
Indenture.
As provided in and subject to the provisions of the Indenture, the
Holder of this Note shall not have the right to institute any proceeding with
respect to the Indenture or for the appointment of a receiver or trustee or for
any other remedy thereunder, unless such Holder shall have previously given the
Trustee written notice of a continuing Event of Default with respect to the
Notes of this series, the Holders of not less than a majority in principal
amount of the Notes of this series at the time Outstanding shall have made
written request to the Trustee to institute proceedings in respect of such Event
of Default as Trustee and offered the Trustee reasonable indemnity, and the
Trustee shall not have received from the Holders of a majority in principal
amount of Notes of this series at the time Outstanding a direction inconsistent
with such request, and shall have failed to institute any such proceeding, for
60 days after receipt of such notice, request and offer of indemnity. The
foregoing shall not apply to any suit instituted by the Holder of this Note for
the enforcement of any payment of principal hereof or any premium or interest
hereon on or after the respective due dates expressed herein.
9. AMENDMENT, SUPPLEMENT AND WAIVER. The Indenture permits, with certain
exceptions as therein provided, the amendment thereof and the modification of
the rights and obligations of the Companies and the rights of the Holders of the
Notes of each series to be affected under the Indenture at any time by the
Companies and the Trustee with the consent of the Holders of a majority in
principal amount of the Notes at the time Outstanding of each series to be
affected. The Indenture also contains provisions permitting the Holders of
specified percentages in principal amount of the Notes of each series at the
time Outstanding, on behalf of the Holders of all Notes of such series, to waive
compliance by the Companies with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver by the Holder of this Note shall be conclusive and binding upon such
Holder and upon all future Holders of this Note and of any Note issued upon the
registration of transfer hereof or in exchange therefor or in lieu hereof,
whether or not notation of such consent or waiver is made upon this Note.
10. DENOMINATIONS, TRANSFER AND EXCHANGE. The Notes of this series are
issuable only in registered form without coupons in denominations of $1,000 and
any integral multiple thereof. As provided in the Indenture and subject to
certain limitations therein set forth, Notes of this series are
A-7
<PAGE> 31
EXHIBIT A
exchangeable for a like aggregate principal amount of Notes of this series and
of like tenor of a different authorized denomination, as requested by the Holder
surrendering the same.
No service charge shall be made for any such registration of transfer
or exchange, but the Companies may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
11. PERSONS DEEMED OWNERS. Prior to due presentment of this Note for
registration of transfer, the Companies, the Trustee and any agent of the
Companies or the Trustee may treat the Person in whose name this Note is
registered as the owner hereof for all purposes, whether or not this Note be
overdue, and neither the Companies, the Trustee nor any such agent shall be
affected by notice to the contrary.
12. UNCLAIMED MONEY. If money for the payment of principal or interest
remains unclaimed for two years, the Trustee or Paying Agent shall pay the money
back to the Companies at its request unless an abandoned property law designates
another person. After any such payment, Holders entitled to any portion of such
money must look only to the Companies, and not to the Trustee or Paying Agent,
for payment as general creditors, or, as applicable law designates, another
person.
13. TRUSTEE DEALINGS WITH THE COMPANIES. Subject to certain limitations
imposed by the Trust Indenture Act, the Trustee under the Indenture, in its
individual or any other capacity, may become the owner or pledgee of the Notes,
and may otherwise deal with and collect obligations owed to it by the Companies
or its Affiliates and may otherwise deal with the Companies or its Affiliates
with the same rights it would have if it were not Trustee.
14. DISCHARGE PRIOR TO MATURITY. The Companies' obligations pursuant to the
Indenture will be discharged, except for obligations pursuant to certain
sections thereof, subject to the terms of the Indenture, upon the payment of all
the Securities or upon the irrevocable deposit with the Trustee of money or U.S.
Government Obligations sufficient to pay when due the principal of and interest
on the Notes to maturity.
The Indenture contains provisions for defeasance at any time of the entire
indebtedness of this Note or certain restrictive covenants and Events of Default
with respect to this Note, in each case upon compliance with certain conditions
set forth in the Indenture.
15. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Companies have
caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP
numbers in notices of redemption as a convenience to the Holders. No
representation is made as to the accuracy of such numbers either as printed on
the Notes or as contained in any notice of redemption and reliance may be placed
only on the other identification numbers placed thereon.
16. NO RECOURSE AGAINST OTHERS. No director, officer, employee, or
stockholder of the
A-8
<PAGE> 32
EXHIBIT A
Companies shall have any liability for any obligation of the Companies under the
Notes or the Indenture or for any claim based on, in respect of or by reason of
such obligations or their creation. By accepting a Note, each Holder hereof
waives and releases all such liability. The waiver and release are part of the
consideration for the issue of this Note.
17. AUTHENTICATION. Unless the certificate of authentication hereon has
been executed by the Trustee, this Note shall not be entitled to any benefit
under the Indenture or be valid or obligatory for any purpose.
The Companies shall furnish to any Holder upon written request and
without charge a copy of the Indenture or the Registration Agreement. Requests
may be made to:
Janis T. Percio, Secretary
Centerior Energy Corporation
P.O. Box 94661
Cleveland, Ohio 44101-4661
A-9
<PAGE> 33
EXHIBIT A
- --------------------------------------------------------------------------------
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
- --------------------------------------------------------------------------------
(Insert assignee's Soc. Sec. or Tax I.D. No.)
And irrevocably appoint_________________________________________________________
agent to transfer this Note on the books of the Companies. The agent may
substitute another to act for him.
- --------------------------------------------------------------------------------
Date: __________ Your Signature:
Sign exactly as your name appears on the other side of this Note.
In connection with any transfer of any of the Notes evidenced by this
certificate occurring prior to the expiration of the period referred to in Rule
144(k) under the Securities Act of 1933 after the later of the date of original
issuance of such Notes and the last date, if any, on which such Notes were owned
by the Companies or any Affiliate of the Companies, the undersigned confirms
that such Notes are being transferred in accordance with its terms:
CHECK ONE BOX BELOW
(1) [ ] to the Companies; or
(2) [ ] pursuant to an effective registration statement under the
Securities Act of 1933; or
(3) [ ] inside the United States to a "qualified institutional
buyer" (as defined in Rule 144A under the Securities Act of
1933) that purchases for its own account or for the account
of a qualified institutional buyer to whom notice is given
that such transfer is being made in reliance on Rule 144A,
in each case pursuant to and in compliance with Rule 144A
under the Securities Act of 1933; or
A-10
<PAGE> 34
EXHIBIT A
(4) [ ] outside the United States in an offshore transaction
within the meaning of Regulation S under the Securities Act
in compliance with Rule 904 under the Securities Act of
1933; or
(5) [ ] inside the United States to an institutional
"accredited investor" (as defined in Rule 501(a)(1), (2),
(3) or (7) of Regulation D under the Securities Act of 1933)
that, prior to such transfer, furnishes to the Trustee a
signed letter containing certain representations and
agreements (the form of which letter can be obtained from
the Trustee) and, if such transfer is in respect of an
aggregate principal amount of Notes at the time of transfer
of less than $100,000, an opinion of counsel acceptable to
the Companies that such transfer is in compliance with the
restrictions set forth in the legend on the Notes; or
(6) [ ] pursuant to another available exemption from
registration provided by Rule 144 under the Securities Act
of 1933.
Unless one of the boxes is checked, the Trustee will refuse to register any of
the Notes evidenced by this certificate in the name of any person other than the
registered holder thereof; PROVIDED, HOWEVER, that if box (4), (5) or (6) is
checked, the Trustee may require, prior to registering any such transfer of the
Notes, such legal opinions, certifications and other information as the Company
has reasonably requested to confirm that such transfer is being made pursuant to
an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act of 1933, such as the exemption provided by
Rule 144 under such Act.
---------------------------------------------
Signature
- --------------------------
Signature Guarantee:
---------------------------------------------
(Signature must be guaranteed by an
"eligible guarantor institution" meeting the
requirements of the Security Registrar,
which requirements include membership or
participation in the Security Transfer Agent
Medallion Program ("STAMP") or such other
"signature guarantee program" as may be
determined by the Security Registrar in
addition to, or in substitution for, STAMP,
all in accordance with the Securities
Exchange Act of 1934, as amended.)
A-11
<PAGE> 35
EXHIBIT A
TO BE COMPLETED BY PURCHASER IF (3) ABOVE IS CHECKED.
The undersigned represents and warrants that it is purchasing this
Note for its own account or an account with respect to which it exercises sole
investment discretion and that it and any such account is a "qualified
institutional buyer" within the meaning of Rule 144A under the Securities Act of
1933, and is aware that the sale to it is being made in reliance on Rule 144A
and acknowledges that it has received such information regarding the Companies
as the undersigned has requested pursuant to Rule 144A or has determined not to
request such information and that it is aware that the transferor is relying
upon the undersigned's foregoing representations in order to claim the exemption
from registration provided by Rule 144A.
Dated: ____________________ __________
NOTICE: To be executed by an executive officer
A-12
<PAGE> 36
[TO BE ATTACHED TO GLOBAL NOTES]
SCHEDULE OF INCREASES OR DECREASES IN GLOBAL NOTE
The following increases or decreases in this Global Note have been
made:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Principal amount of
Amount of decrease in Amount of increase in this Global Note Signature of authorized
Date of Principal Amount of Principal Amount of following such officer of Trustee or
Exchange this Global Note this Global Note decrease or increase Securities Custodian
- -------- ---------------- ---------------- -------------------- --------------------
</TABLE>
A-13
<PAGE> 37
EXHIBIT B
[FORM OF FACE OF EXCHANGE NOTE]
[___% Series B Secured Note due ____]
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
THE TOLEDO EDISON COMPANY
No. .............. $ .............
CUSIP No. ____________
The Cleveland Electric Illuminating Company and The Toledo Edison
Company hereby promise, jointly and severally, to pay to _______, or registered
assigns, the principal sum of ...........................................
Dollars on ...................
Interest Payment Dates: January 1 and July 1, commencing July 1, 1997.
Record Dates: December 15 and June 15.
Reference is hereby made to the further provisions of this Note attached
hereto which further provisions shall for all purposes have the same effect as
if set forth in this place.
IN WITNESS WHEREOF, each Company has caused this instrument to be
executed by its duly authorized officer.
Dated: ___________________
THE CLEVELAND ELECTRIC ILLUMINATING
COMPANY
By:_____________________________________
Name:
Title:
THE TOLEDO EDISON COMPANY
By:_____________________________________
Name:
Title:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
B-1
<PAGE> 38
EXHIBIT B
This is one of the Securities of the series designated
therein referred to in the within-mentioned Indenture.
THE CHASE MANHATTAN BANK, as Trustee
By:___________________________
Name:
Title:
Date of Authentication:__________________
B-2
<PAGE> 39
EXHIBIT B
[FORM OF REVERSE SIDE OF EXCHANGE NOTE]
[___% Series B Secured Note due ____]
[1/]
[AMBAC Indemnity Insurance Legend
To be Inserted in Exchange 2007 Notes Only]
FINANCIAL GUARANTY INSURANCE POLICY NO. FG0264BE (THE "POLICY") WITH RESPECT TO
PAYMENTS DUE FOR PRINCIPAL OF AND INTEREST ON THIS NOTE HAS BEEN ISSUED BY AMBAC
INDEMNITY CORPORATION ("AMBAC INDEMNITY"). THE POLICY HAS BEEN DELIVERED TO THE
UNITED STATES TRUST COMPANY OF NEW YORK, NEW YORK, NEW YORK, AS THE INSURANCE
TRUSTEE UNDER SAID POLICY AND WILL BE HELD BY SUCH INSURANCE TRUSTEE OR ANY
SUCCESSOR INSURANCE TRUSTEE. THE POLICY IS ON FILE AND AVAILABLE FOR INSPECTION
AT THE PRINCIPAL OFFICE OF THE INSURANCE TRUSTEE AND A COPY THEREOF MAY BE
SECURED FROM AMBAC INDEMNITY OR THE INSURANCE TRUSTEE. ALL PAYMENTS REQUIRED TO
BE MADE UNDER THE POLICY SHALL BE MADE IN ACCORDANCE WITH THE PROVISIONS
THEREOF. THE OWNER OF THIS NOTE ACKNOWLEDGES AND CONSENTS TO THE SUBROGATION
RIGHTS OF AMBAC INDEMNITY AS MORE FULLY SET FORTH IN THE POLICY.
Capitalized terms used herein shall have the meanings assigned to them
in the Indenture referred to below unless otherwise indicated.
1. INTEREST. The Cleveland Electric Illuminating Company, a corporation
duly organized and existing under the laws of the State of Ohio ("CLEVELAND
ELECTRIC", which term includes any successor Person under the Indenture
hereinafter referred to), and The Toledo Edison Company, a corporation duly
organized and existing under the laws of the State of Ohio ("TOLEDO EDISON",
which term includes any successor Person under the Indenture hereinafter
referred to, and, together with Cleveland Electric, the "COMPANIES"), hereby
promise, jointly and severally, to pay interest on the principal amount of this
Note from the date of authentication of this Note. Interest shall be payable
semi-annually on January 1 and July 1 in each year, commencing July 1, 1997, at
the rate of ....% per annum, until the principal hereof is paid or made
available for payment. The interest so payable, and punctually paid or duly
provided for, on any Interest Payment Date will, as provided in such Indenture,
be paid to the Person in whose name this Note (or one or more Predecessor
Securities) is registered at the close of business on the Regular Record Date
for such interest, which shall be the December 15 or June 15 (whether or not a
Business Day), as the case
- -----------------------
1. If the Note is to be issued in global form add the global notes legend
from Exhibit A and the attachment from such Exhibit A captioned "TO BE
ATTACHED TO GLOBAL NOTES - SCHEDULE OF INCREASES OR DECREASES IN GLOBAL
NOTE."
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may be, next preceding such Interest Payment Date. If this Note is authenticated
and delivered in exchange for an Initial Note between a record date for the
payment of interest on that Initial Note and the related interest payment date,
the interest that accrues on this Note from the date of authentication hereof to
that interest payment date shall be payable to the Person in whose name this
Note was issued on its issuance date. Any interest on this Note not punctually
paid or duly provided for will forthwith cease to be payable to the Holder on
such Regular Record Date and may either be paid to the Person in whose name this
Note (or one or more Predecessor Securities) is registered at the close of
business on a Special Record Date for the payment of such Defaulted Interest to
be fixed by the Trustee, notice whereof shall be given to Holders of Notes of
this series not less than 10 days prior to such Special Record Date, or be paid
at any time in any other lawful manner not inconsistent with the requirements of
any securities exchange on which the Notes of this series may be listed, and
upon such notice as may be required by such exchange, all as more fully provided
in said Indenture.
The amount of interest payable for any period will be computed on the basis
of a 360 day year of twelve 30-day months. In the event that any date on which
interest is payable on this Note is not a Business Day, then payment of interest
payable on such date will be made on the next preceding day that is a Business
Day.
2. METHOD OF PAYMENT. Payment of the principal of and interest on this Note
will be made at the office or agency of the Companies maintained for that
purpose in the Borough of Manhattan, New York, New York, in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts or, at the option of the
Companies payment of interest may be made by check mailed to the address of the
Person entitled thereto as such address shall appear in the Security Register;
provided that payment by wire transfer of immediately available funds shall be
required with respect to principal of and interest on all Global Notes and all
other Notes the Holders of which shall have provided written wire transfer
instructions to the Companies or the Paying Agent.
3. PAYING AGENT AND SECURITY REGISTRAR. Initially, the Trustee shall act as
the Paying Agent and Security Registrar. The Companies may change any Paying
Agent or Security Registrar without notice to any Holder. The Companies or any
of their Affiliates may act in any such capacity.
4. INDENTURE. This Note is one of a duly authorized issue of Securities of
the Companies (herein called the "NOTES"), issued and to be issued in one or
more series under an Indenture, dated as of June 13, 1997 (herein called the
"INDENTURE", which term shall have the meaning assigned to it in such
instrument), between the Companies and The Chase Manhattan Bank, as Trustee
(herein called the "TRUSTEE", which term includes any successor trustee under
the Indenture), and reference is hereby made to the Indenture for a statement of
the respective rights, limitations of rights, duties and immunities thereunder
of the Companies, the Trustee and the Holders of the Notes and of the terms upon
which the Notes are, and are to be, authenticated and delivered. This Note is
one of the series designated on the face hereof, limited in aggregate principal
amount to $............
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EXHIBIT B
5. SECURITY. This Note will be secured by First Mortgage Bonds delivered by
one or both of the Companies to the Trustee for the benefit of the Holders of
the Notes. Such First Mortgage Bonds shall be issued under one or both of the
Mortgage and Deed of Trust between Cleveland Electric and Guaranty Trust Company
of New York (now The Chase Manhattan Bank as successor trustee), as trustee (the
"CLEVELAND TRUSTEE"), dated as of July 1, 1940, as supplemented and amended from
time to time (the "CLEVELAND ELECTRIC FIRST MORTGAGE"), and the Indenture of
Mortgage and Deed of Trust between Toledo Edison and The Chase National Bank of
the City of New York (now The Chase Manhattan Bank as successor trustee), as
trustee (the "TOLEDO TRUSTEE"; with the Cleveland Trustee, collectively, the
"MORTGAGE TRUSTEES" and, individually, a "MORTGAGE TRUSTEE"), dated as of April
1, 1947, as supplemented and amended from time to time (the "TOLEDO EDISON FIRST
MORTGAGE"; with the Cleveland Electric First Mortgage, collectively, the "FIRST
MORTGAGES" and, individually, a "FIRST MORTGAGE") (the "FIRST MORTGAGE BONDS").
Reference is made to the First Mortgages for a description of property mortgaged
and pledged thereunder, the nature and extent of the security, the rights of the
holders of first mortgage bonds under each First Mortgage and of the Mortgage
Trustee in respect thereof, the duties and immunities of the Mortgage Trustees
and the terms and conditions upon which the First Mortgage Bonds are secured and
the circumstances under which additional first mortgage bonds may be issued
under each First Mortgage.
6. EXCHANGE OFFER. This Note is issued pursuant to a Registered Exchange
Offer under which the Initial Note of the Companies, in like principal amount
and having substantially identical terms to this Note, was exchanged for this
Note.
7. MANDATORY REDEMPTION. The Company shall not be required to make
mandatory redemption or sinking fund payments with respect to the Notes.
8. DEFAULT AND REMEDIES. If an Event of Default with respect to Notes of
this series shall occur and be continuing, the principal of the Notes may be
declared due and payable in the manner and with the effect provided in the
Indenture and, upon such declaration, the Trustee can demand the acceleration of
the payment of principal of the First Mortgage Bonds as provided in the
Indenture.
As provided in and subject to the provisions of the Indenture, the
Holder of this Note shall not have the right to institute any proceeding with
respect to the Indenture or for the appointment of a receiver or trustee or for
any other remedy thereunder, unless such Holder shall have previously given the
Trustee written notice of a continuing Event of Default with respect to the
Notes of this series, the Holders of not less than a majority in principal
amount of the Notes of this series at the time Outstanding shall have made
written request to the Trustee to institute proceedings in respect of such Event
of Default as Trustee and offered the Trustee reasonable indemnity, and the
Trustee shall not have received from the Holders of a majority in principal
amount of Notes of this series at the time Outstanding a direction inconsistent
with such request, and shall have failed to institute any such proceeding, for
60 days after receipt of such notice, request and offer of indemnity. The
foregoing shall not apply to any suit instituted by the Holder of this Note for
the enforcement of any payment of principal hereof or any premium or
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<PAGE> 42
EXHIBIT B
interest hereon on or after the respective due dates expressed herein.
9. AMENDMENT, SUPPLEMENT AND WAIVER. The Indenture permits, with certain
exceptions as therein provided, the amendment thereof and the modification of
the rights and obligations of the Companies and the rights of the Holders of the
Notes of each series to be affected under the Indenture at any time by the
Companies and the Trustee with the consent of the Holders of a majority in
principal amount of the Notes at the time Outstanding of each series to be
affected. The Indenture also contains provisions permitting the Holders of
specified percentages in principal amount of the Notes of each series at the
time Outstanding, on behalf of the Holders of all Notes of such series, to waive
compliance by the Companies with certain provisions of the Indenture and certain
past defaults under the Indenture and their consequences. Any such consent or
waiver by the Holder of this Note shall be conclusive and binding upon such
Holder and upon all future Holders of this Note and of any Note issued upon the
registration of transfer hereof or in exchange therefor or in lieu hereof,
whether or not notation of such consent or waiver is made upon this Note.
10. DENOMINATIONS, TRANSFER AND EXCHANGE. The Notes of this series are
issuable only in registered form without coupons in denominations of $1,000 and
any integral multiple thereof. As provided in the Indenture and subject to
certain limitations therein set forth, Notes of this series are exchangeable for
a like aggregate principal amount of Notes of this series and of like tenor of a
different authorized denomination, as requested by the Holder surrendering the
same.
No service charge shall be made for any such registration of transfer
or exchange, but the Companies may require payment of a sum sufficient to cover
any tax or other governmental charge payable in connection therewith.
11. PERSONS DEEMED OWNERS. Prior to due presentment of this Note for
registration of transfer, the Companies, the Trustee and any agent of the
Companies or the Trustee may treat the Person in whose name this Note is
registered as the owner hereof for all purposes, whether or not this Note be
overdue, and neither the Companies, the Trustee nor any such agent shall be
affected by notice to the contrary.
12. UNCLAIMED MONEY. If money for the payment of principal or interest
remains unclaimed for two years, the Trustee or Paying Agent shall pay the money
back to the Companies at its request unless an abandoned property law designates
another person. After any such payment, Holders entitled to any portion of such
money must look only to the Companies, and not to the Trustee or Paying Agent,
for payment as general creditors, or, as applicable law designates, another
person.
13. TRUSTEE DEALINGS WITH THE COMPANIES. Subject to certain limitations
imposed by the Trust Indenture Act, the Trustee under the Indenture, in its
individual or any other capacity, may become the owner or pledgee of the Notes,
and may otherwise deal with and collect obligations owed to it by the Companies
or its Affiliates and may otherwise deal with the Companies or its Affiliates
with the same
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EXHIBIT B
rights it would have if it were not Trustee.
14. DISCHARGE PRIOR TO MATURITY. The Companies' obligations pursuant to the
Indenture will be discharged, except for obligations pursuant to certain
sections thereof, subject to the terms of the Indenture, upon the payment of all
the Securities or upon the irrevocable deposit with the Trustee of money or U.S.
Government Obligations sufficient to pay when due the principal of and interest
on the Notes to maturity.
The Indenture contains provisions for defeasance at any time of the entire
indebtedness of this Note or certain restrictive covenants and Events of Default
with respect to this Note, in each case upon compliance with certain conditions
set forth in the Indenture.
15. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Companies have
caused CUSIP numbers to be printed on the Notes and the Trustee may use CUSIP
numbers in notices of redemption as a convenience to the Holders. No
representation is made as to the accuracy of such numbers either as printed on
the Notes or as contained in any notice of redemption and reliance may be placed
only on the other identification numbers placed thereon.
16. NO RECOURSE AGAINST OTHERS. No director, officer, employee, or
stockholder of the Companies shall have any liability for any obligation of the
Companies under the Notes or the Indenture or for any claim based on, in respect
of or by reason of such obligations or their creation. By accepting a Note, each
Holder hereof waives and releases all such liability. The waiver and release are
part of the consideration for the issue of this Note.
17. AUTHENTICATION. Unless the certificate of authentication hereon has
been executed by the Trustee, this Note shall not be entitled to any benefit
under the Indenture or be valid or obligatory for any purpose.
The Companies shall furnish to any Holder upon written request and
without charge a copy of the Indenture. Requests may be made to:
Janis T. Percio, Secretary
Centerior Energy Corporation
P.O. Box 94661
Cleveland, Ohio 44101-4661
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EXHIBIT B
- --------------------------------------------------------------------------------
ASSIGNMENT FORM
To assign this Note, fill in the form below:
I or we assign and transfer this Note to
- --------------------------------------------------------------------------------
(Print or type assignee's name, address and zip code)
- --------------------------------------------------------------------------------
(Insert assignee's Soc. Sec. or Tax I.D. No.)
And irrevocably appoint_________________________________________________________
agent to transfer this Note on the books of the Companies. The agent may
substitute another to act for him.
Date:_________ Your Signature:
- --------------------------------------------------------------------------------
Sign exactly as your name appears on the other side of this Note.
- ------------------------------
Signature Guarantee:
---------------------------------------------
(Signature must be guaranteed by an
"eligible guarantor institution" meeting the
requirements of the Security Registrar,
which requirements include membership or
participation in the Security Transfer Agent
Medallion Program ("STAMP") or such other
"signature guarantee program" as may be
determined by the Security Registrar in
addition to, or in substitution for, STAMP,
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<PAGE> 45
EXHIBIT B
all in accordance with the Securities
Exchange Act of 1934, as amended.)
B-9
<PAGE> 1
Exhibit 5
September 18, 1997
The Cleveland Electric
Illuminating Company
The Toledo Edison Company
c/o Centerior Energy Corporation
P.O. Box 94661
Cleveland, Ohio 44101
Gentlemen:
With reference to the proposed issue and sale of the principal amounts
of Series B Secured Notes (the "Notes") of The Cleveland Electric Illuminating
Company and The Toledo Edison Company (each a "Company" and together, the
"Companies") set forth in the Registration Statement described below and to be
issued and sold under an Indenture dated as of June 13, 1997 and a First
Supplemental Indenture thereto dated June 13, 1997 (as supplemented, the "Note
Indenture") between the Companies and The Chase Manhattan Bank, as trustee, I am
counsel for the Companies, and attorneys acting under my supervision have
examined the following:
(a) A copy of each Company's Amended Articles of Incorporation, as
filed with the Secretary of the State of Ohio;
(b) A copy of each Company's Regulations, certified by the Secretary of
the Company;
(c) The Application (as amended and supplemented) filed by the
Companies with The Public Utilities Commission of Ohio for authority to issue
and sell the Notes;
(d) The Note Indenture;
(e) The proposed form of the Notes;
(f) The Registration Statement on Form S-4 (including the Prospectus
and exhibits) relating to the Notes and the documents incorporated by reference
therein, in the form in which it is being filed with the Securities and Exchange
Commission (such Registration Statement being herein called the "Registration
Statement" and the Prospectus contained therein being herein called the
"Prospectus"); and
<PAGE> 2
The Cleveland Electric
Illuminating Company
The Toledo Edison Company
c/o Centerior Energy Corporation
September 18, 1997
Page 2
(g) Such other documents and matters as I deem necessary to express
this opinion.
Based on the foregoing and such legal considerations as I deem
relevant, I am of the opinion that:
1. Each Company is a corporation duly organized and validly existing
and in good standing under the laws of the State of Ohio, with power to
authorize the issue and sale of the Notes;
2. The Note Indenture and the Notes are in due and legal form; and
3. Upon (a) due execution by the Companies and authentication by the
trustee of the Notes as provided in the Note Indenture and (b) issuance and sale
of the Notes in accordance with the Registration Statement when the same shall
have become effective, the Notes will be legally issued, valid and binding joint
and several obligations of the Companies, enforceable against the Companies in
accordance with their terms except as (i) the enforceability thereof may be
limited by bankruptcy, insolvency or similar laws affecting creditors' rights
generally and (ii) rights of acceleration and the availability of equitable
remedies may be limited by equitable principles of general applicability.
I hereby consent (a) to the use of my name in connection with the
statements made under the heading "Legal Opinions" in the Prospectus, and (b) to
the filing of this opinion and consent with the Securities and Exchange
Commission as an exhibit to the Registration Statement.
Respectfully submitted,
/s/ Paul N. Edwards
----------------------------------------------
Paul N. Edwards
Principal Counsel for The Cleveland Electric
Illuminating Company and The Toledo
Edison Company
<PAGE> 1
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY Exhibit 12
----------
Computation of Ratio of Earnings to Fixed Charges Page 1 of 1
----------------------
(Thousands of Dollars)
<TABLE>
<CAPTION>
Statement Setting Forth Computations Showing Satisfaction of the Requirements Specified in Regulation S-K, Item 503(d):
Year Ended December 31 12 Months
------------------------------------------------------ Ended
1992 1993 1994 1995 1996 6/30/97
-------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Net Income (Loss) $204,939 ($587,147) $185,431 $183,719 $116,553 $108,754
Add
Federal Income Taxes Expense (Credit) 94,627 (247,966) 85,455 95,561 69,120 73,518
Interest (a) 253,042 252,479 254,248 251,793 244,789 235,751
Provision for Interest Element of Rentals (b) 81,948 81,131 79,462 79,642 79,503 79,217
-------- --------- -------- -------- -------- --------
Total Earnings $634,556 ($501,503) $604,596 $610,715 $509,965 $497,240
-------- --------- -------- -------- -------- --------
Fixed Charges
Interest (a) $253,042 $ 252,479 $254,248 $251,793 $244,789 $235,751
Provision for Interest Element of Rentals (b) 81,948 81,131 79,462 79,642 79,503 79,217
-------- --------- -------- -------- -------- --------
Total Fixed Charges $334,990 $ 333,610 $333,710 $331,435 $324,292 $314,968
-------- --------- -------- -------- -------- --------
Ratio of Earnings to Fixed Charges 1.89 (1.50) 1.81 1.84 1.57 1.58
======== ========= ======== ======== ======== ========
<FN>
- ---------------------------
(a) Includes interest on first mortgage bonds, bank loans, commercial paper,
pollution control notes, and other interest included in operation expenses;
amortization of net premium, discount and expense on debt; and capitalized
interest on nuclear fuel lease obligations.
(b) Includes the interest component of Bruce Mansfield sale and leaseback
rentals, leased nuclear fuel in the reactor, and other miscellaneous
rentals.
</TABLE>
<PAGE> 2
THE TOLEDO EDISON COMPANY Exhibit 12
-----------
Computation of Ratio of Earnings to Fixed Charges Page 1 of 1
----------------------
(Thousands of Dollars)
Statement Setting Forth Computations Showing Satisfaction of the Requirements
Specified in Regulation S-K, Item 503(d):
<TABLE>
<CAPTION>
Year Ended December 31 12 Months
------------------------------------------------------ Ended
1992 1993 1994 1995 1996 6/30/97
-------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Net Income (Loss) $ 70,677 ($289,275) $ 82,531 $ 96,762 $ 57,289 $ 68,340
Add
Federal Income Taxes Expense (Credit) 33,905 (139,479) 34,342 43,828 31,501 43,530
Interest (a) 128,779 121,221 119,421 112,344 97,329 94,955
Provision for Interest Element of Rentals (b) 115,638 112,266 111,163 110,977 109,935 109,743
-------- --------- -------- -------- -------- --------
Total Earnings $348,999 ($195,267) $347,457 $363,911 $296,054 $316,568
-------- --------- -------- -------- -------- --------
Fixed Charges
Interest (a) $128,779 $ 121,221 $119,421 $112,344 $ 97,329 $ 94,955
Provision for Interest Element of Rentals (b) 115,638 112,266 111,163 110,977 109,935 109,743
-------- --------- -------- -------- -------- --------
Total Fixed Charges $244,417 $ 233,487 $230,584 $223,321 $207,264 $204,698
-------- --------- -------- -------- -------- --------
Ratio of Earnings to Fixed Charges 1.43 (0.84) 1.51 1.63 1.43 1.55
======== ========= ======== ======== ======== ========
<FN>
- -----------------------------
(a) Includes interest on first mortgage bonds, bank loans, commercial paper,
pollution control notes, and other interest included in operation expenses;
amortization of net premium, discount and expense on debt; and capitalized
interest on nuclear fuel lease obligations.
(b) Includes the interest component of Beaver Valley and Bruce Mansfield sale
and leaseback rentals, leased nuclear fuel in the reactor, and other
miscellaneous rentals.
</TABLE>
<PAGE> 1
Ehibit 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our report dated February 14, 1997
included in The Cleveland Electric Illuminating Company Form 10-K for the year
ended December 31, 1996, and our report dated February 14, 1997 included in The
Toledo Edison Company Form 10-K for the year ended December 31, 1996. We also
consent to the use of our reports included in this registration statement, and
to all references to our Firm included in this registration statement.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
September 16, 1997
<PAGE> 1
Exhibit 24
POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF
-----------------------------------------------
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
-------------------------------------------
The undersigned, being a director or officer or both (as stated under his
or her signature below) of The Cleveland Electric Illuminating Company, an Ohio
corporation (hereinafter called the "Company"), does hereby constitute and
appoint each of Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary
R. Leidich, Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio,
Ronald J. Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards
as an attorney of the undersigned with power to act alone for and in the name,
place and stead of the undersigned, with power of substitution and
resubstitution, to sign and file, including electronic filing, on behalf of the
undersigned acting in his or her capacity as such director or officer the
Company's Registration Statement on Form S-4 relating to the registration of up
to $720 million of the Company's Series B Secured Notes in the third quarter of
1997, and any and all amendments, exhibits and supplementary information
thereto, with the Securities and Exchange Commission pursuant to the Securities
Act of 1933, with full power and authority to do and perform any and all acts
and things whatsoever requisite and necessary to be done in the premises and the
undersigned hereby ratifies and approves the acts of each such attorney and any
such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this
15th day of September, 1997.
ROBERT J. FARLING
--------------------------------
Robert J. Farling
Chairman, Chief Executive Officer
and Director
Signed and acknowledged in the presence of: J. T. PERCIO
------------------
<PAGE> 2
POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF
-----------------------------------------------
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
-------------------------------------------
The undersigned, being a director or officer or both (as stated under his
or her signature below) of The Cleveland Electric Illuminating Company, an Ohio
corporation (hereinafter called the "Company"), does hereby constitute and
appoint each of Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary
R. Leidich, Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio,
Ronald J. Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards
as an attorney of the undersigned with power to act alone for and in the name,
place and stead of the undersigned, with power of substitution and
resubstitution, to sign and file, including electronic filing, on behalf of the
undersigned acting in his or her capacity as such director or officer the
Company's Registration Statement on Form S-4 relating to the registration of up
to $720 million of the Company's Series B Secured Notes in the third quarter of
1997, and any and all amendments, exhibits and supplementary information
thereto, with the Securities and Exchange Commission pursuant to the Securities
Act of 1933, with full power and authority to do and perform any and all acts
and things whatsoever requisite and necessary to be done in the premises and the
undersigned hereby ratifies and approves the acts of each such attorney and any
such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this
16th day of September, 1997.
MURRAY R. EDELMAN
-----------------------------------
Murray R. Edelman
President and Director
Signed and acknowledged in the presence of: J. T. PERCIO
-------------------
<PAGE> 3
POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF
-----------------------------------------------
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
-------------------------------------------
The undersigned, being a director or officer or both (as stated under his
or her signature below) of The Cleveland Electric Illuminating Company, an Ohio
corporation (hereinafter called the "Company"), does hereby constitute and
appoint each of Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary
R. Leidich, Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio,
Ronald J. Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards
as an attorney of the undersigned with power to act alone for and in the name,
place and stead of the undersigned, with power of substitution and
resubstitution, to sign and file, including electronic filing, on behalf of the
undersigned acting in his or her capacity as such director or officer the
Company's Registration Statement on Form S-4 relating to the registration of up
to $720 million of the Company's Series B Secured Notes in the third quarter of
1997, and any and all amendments, exhibits and supplementary information
thereto, with the Securities and Exchange Commission pursuant to the Securities
Act of 1933, with full power and authority to do and perform any and all acts
and things whatsoever requisite and necessary to be done in the premises and the
undersigned hereby ratifies and approves the acts of each such attorney and any
such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this
15th day of September, 1997.
FRED J. LANGE, JR.
-----------------------------------
Fred J. Lange, Jr.
Vice President and Director
Signed and acknowledged in the presence of: MARY V. FRAIN
-----------------------
<PAGE> 4
POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF
-----------------------------------------------
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
-------------------------------------------
The undersigned, being a director or officer or both (as stated under his
or her signature below) of The Cleveland Electric Illuminating Company, an Ohio
corporation (hereinafter called the "Company"), does hereby constitute and
appoint each of Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary
R. Leidich, Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio,
Ronald J. Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards
as an attorney of the undersigned with power to act alone for and in the name,
place and stead of the undersigned, with power of substitution and
resubstitution, to sign and file, including electronic filing, on behalf of the
undersigned acting in his or her capacity as such director or officer the
Company's Registration Statement on Form S-4 relating to the registration of up
to $720 million of the Company's Series B Secured Notes in the third quarter of
1997, and any and all amendments, exhibits and supplementary information
thereto, with the Securities and Exchange Commission pursuant to the Securities
Act of 1933, with full power and authority to do and perform any and all acts
and things whatsoever requisite and necessary to be done in the premises and the
undersigned hereby ratifies and approves the acts of each such attorney and any
such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this
16th day of September, 1997.
TERRENCE G. LINNERT
----------------------------------
Terrence G. Linnert
Vice President and Chief Financial
Officer
Signed and acknowledged in the presence of: PATRICIA M. MITCHELL
---------------------------
<PAGE> 5
POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF
-----------------------------------------------
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
-------------------------------------------
The undersigned, being a director or officer or both (as stated under his
or her signature below) of The Cleveland Electric Illuminating Company, an Ohio
corporation (hereinafter called the "Company"), does hereby constitute and
appoint each of Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary
R. Leidich, Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio,
Ronald J. Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards
as an attorney of the undersigned with power to act alone for and in the name,
place and stead of the undersigned, with power of substitution and
resubstitution, to sign and file, including electronic filing, on behalf of the
undersigned acting in his or her capacity as such director or officer the
Company's Registration Statement on Form S-4 relating to the registration of up
to $720 million of the Company's Series B Secured Notes in the third quarter of
1997, and any and all amendments, exhibits and supplementary information
thereto, with the Securities and Exchange Commission pursuant to the Securities
Act of 1933, with full power and authority to do and perform any and all acts
and things whatsoever requisite and necessary to be done in the premises and the
undersigned hereby ratifies and approves the acts of each such attorney and any
such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this
15 day of September, 1997.
E. LYLE PEPIN
--------------------------------
E. Lyle Pepin
Controller
Signed and acknowledged in the presence of: RUTH A. HARNER
-------------------
<PAGE> 6
POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF
-----------------------------------------------
THE TOLEDO EDISON COMPANY
-------------------------
The undersigned, being a director or officer or both (as stated under his
or her signature below) of The Toledo Edison Company, an Ohio corporation
(hereinafter called the "Company"), does hereby constitute and appoint each of
Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary R. Leidich,
Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio, Ronald J.
Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards as an
attorney of the undersigned with power to act alone for and in the name, place
and stead of the undersigned, with power of substitution and resubstitution, to
sign and file, including electronic filing, on behalf of the undersigned acting
in his or her capacity as such director or officer the Company's Registration
Statement on Form S-4 relating to the registration of up to $720 million of the
Company's Series B Secured Notes in the third quarter of 1997, and any and all
amendments, exhibits and supplementary information thereto, with the Securities
and Exchange Commission pursuant to the Securities Act of 1933, with full power
and authority to do and perform any and all acts and things whatsoever requisite
and necessary to be done in the premises and the undersigned hereby ratifies and
approves the acts of each such attorney and any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this
15th day of September, 1997.
ROBERT J. FARLING
--------------------------------
Robert J. Farling
Chairman, Chief Executive Officer
and Director
Signed and acknowledged in the presence of: J. T. PERCIO
----------------
<PAGE> 7
POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF
-----------------------------------------------
THE TOLEDO EDISON COMPANY
-------------------------
The undersigned, being a director or officer or both (as stated under his
or her signature below) of The Toledo Edison Company, an Ohio corporation
(hereinafter called the "Company"), does hereby constitute and appoint each of
Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary R. Leidich,
Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio, Ronald J.
Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards as an
attorney of the undersigned with power to act alone for and in the name, place
and stead of the undersigned, with power of substitution and resubstitution, to
sign and file, including electronic filing, on behalf of the undersigned acting
in his or her capacity as such director or officer the Company's Registration
Statement on Form S-4 relating to the registration of up to $720 million of the
Company's Series B Secured Notes in the third quarter of 1997, and any and all
amendments, exhibits and supplementary information thereto, with the Securities
and Exchange Commission pursuant to the Securities Act of 1933, with full power
and authority to do and perform any and all acts and things whatsoever requisite
and necessary to be done in the premises and the undersigned hereby ratifies and
approves the acts of each such attorney and any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this
16th day of September, 1997.
MURRAY R. EDELMAN
--------------------------------
Murray R. Edelman
Vice Chairman and Director
Signed and acknowledged in the presence of: J. T. PERCIO
-----------------
<PAGE> 8
POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF
-----------------------------------------------
THE TOLEDO EDISON COMPANY
-------------------------
The undersigned, being a director or officer or both (as stated under his
or her signature below) of The Toledo Edison Company, an Ohio corporation
(hereinafter called the "Company"), does hereby constitute and appoint each of
Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary R. Leidich,
Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio, Ronald J.
Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards as an
attorney of the undersigned with power to act alone for and in the name, place
and stead of the undersigned, with power of substitution and resubstitution, to
sign and file, including electronic filing, on behalf of the undersigned acting
in his or her capacity as such director or officer the Company's Registration
Statement on Form S-4 relating to the registration of up to $720 million of the
Company's Series B Secured Notes in the third quarter of 1997, and any and all
amendments, exhibits and supplementary information thereto, with the Securities
and Exchange Commission pursuant to the Securities Act of 1933, with full power
and authority to do and perform any and all acts and things whatsoever requisite
and necessary to be done in the premises and the undersigned hereby ratifies and
approves the acts of each such attorney and any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this
15th day of September, 1997.
FRED J. LANGE, JR.
------------------------------
Fred J. Lange, Jr.
President and Director
Signed and acknowledged in the presence of: MARY V. FRAIN
-----------------
<PAGE> 9
POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF
-----------------------------------------------
THE TOLEDO EDISON COMPANY
-------------------------
The undersigned, being a director or officer or both (as stated under his
or her signature below) of The Toledo Edison Company, an Ohio corporation
(hereinafter called the "Company"), does hereby constitute and appoint each of
Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary R. Leidich,
Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio, Ronald J.
Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards as an
attorney of the undersigned with power to act alone for and in the name, place
and stead of the undersigned, with power of substitution and resubstitution, to
sign and file, including electronic filing, on behalf of the undersigned acting
in his or her capacity as such director or officer the Company's Registration
Statement on Form S-4 relating to the registration of up to $720 million of the
Company's Series B Secured Notes in the third quarter of 1997, and any and all
amendments, exhibits and supplementary information thereto, with the Securities
and Exchange Commission pursuant to the Securities Act of 1933, with full power
and authority to do and perform any and all acts and things whatsoever requisite
and necessary to be done in the premises and the undersigned hereby ratifies and
approves the acts of each such attorney and any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this
16th day of September, 1997.
TERRENCE G. LINNERT
------------------------------------
Terrence G. Linnert
Vice President and Chief Financial
Officer
Signed and acknowledged in the presence of: PATRICIA M. MITCHELL
-------------------------
<PAGE> 10
POWER OF ATTORNEY OF DIRECTOR AND/OR OFFICER OF
THE TOLEDO EDISON COMPANY
The undersigned, being a director or officer or both (as stated under his
or her signature below) of The Toledo Edison Company, an Ohio corporation
(hereinafter called the "Company"), does hereby constitute and appoint each of
Robert J. Farling, Murray R. Edelman, Fred J. Lange, Jr., Gary R. Leidich,
Terrence G. Linnert, David M. Blank, E. Lyle Pepin, Janis T. Percio, Ronald J.
Studeny, Mary E. O'Reilly, Michael C. Regulinski and Paul N. Edwards as an
attorney of the undersigned with power to act alone for and in the name, place
and stead of the undersigned, with power of substitution and resubstitution, to
sign and file, including electronic filing, on behalf of the undersigned acting
in his or her capacity as such director or officer the Company's Registration
Statement on Form S-4 relating to the registration of up to $720 million of the
Company's Series B Secured Notes in the third quarter of 1997, and any and all
amendments, exhibits and supplementary information thereto, with the Securities
and Exchange Commission pursuant to the Securities Act of 1933, with full power
and authority to do and perform any and all acts and things whatsoever requisite
and necessary to be done in the premises and the undersigned hereby ratifies and
approves the acts of each such attorney and any such substitute or substitutes.
IN WITNESS WHEREOF, the undersigned hereby has signed his or her name this
15 day of September, 1997.
E. LYLE PEPIN
----------------------------
E. Lyle Pepin
Controller
Signed and acknowledged in the presence of: RUTH A. HARNER
------------------
<PAGE> 1
Exhibit 25
-------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
-------------------------------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________
----------------------------------------
THE CHASE MANHATTAN BANK
(Exact name of trustee as specified in its charter)
NEW YORK 13-4994650
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)
270 PARK AVENUE
NEW YORK, NEW YORK 10017
(Address of principal executive offices) (Zip Code)
William H. McDavid
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
THE TOLEDO EDISON COMPANY
----------------------
(Exact name of obligors as specified in its charter)
OHIO 34-0150020
OHIO 34-4375005
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
C/O CENTERIOR ENERGY CORPORATION, 6200 OAK TREE BOULEVARD,
INDEPENDENCE, OHIO 44131
300 MADISON AVENUE, TOLEDO, OHIO 43652
(Address of principal executive offices) (Zip Code)
-------------------------------------
7.19% SERIES B SECURED NOTES DUE 2000
7.67% SERIES B SECURED NOTES DUE 2004
7.13% SERIES B SECURED NOTES DUE 2007
(Title of the indenture securities)
-------------------------------------
<PAGE> 2
GENERAL
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
New York State Banking Department, State House, Albany, New York
12110.
Board of Governors of the Federal Reserve System, Washington, D.C.,
20551
Federal Reserve Bank of New York, District No. 2, 33 Liberty Street,
New York, N.Y.
Federal Deposit Insurance Corporation, Washington, D.C., 20429.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with the Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
<PAGE> 3
- 2 -
Item 16. List of Exhibits
List below all exhibits filed as a part of this Statement of
Eligibility.
1. A copy of the Articles of Association of the Trustee as now in
effect, including the Organization Certificate and the Certificates of Amendment
dated February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982,
February 28, 1985, December 2, 1991 and July 10, 1996 (see Exhibit 1 to Form T-1
filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
2. A copy of the Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference. On July 14, 1996, in
connection with the merger of Chemical Bank and The Chase Manhattan Bank
(National Association), Chemical Bank, the surviving corporation, was renamed
The Chase Manhattan Bank).
3. None, authorization to exercise corporate trust powers being
contained in the documents identified above as Exhibits 1 and 2.
4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to
Form T-1 filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).
5. Not applicable.
6. The consent of the Trustee required by Section 321(b) of the Act
(see Exhibit 6 to Form T-1 filed in connection with Registration Statement No.
33-50010, which is incorporated by reference. On July 14, 1996, in connection
with the merger of Chemical Bank and The Chase Manhattan Bank (National
Association), Chemical Bank, the surviving corporation, was renamed The Chase
Manhattan Bank).
7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.
8. Not applicable.
9. Not applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Chase Manhattan Bank, a corporation organized and existing under
the laws of the State of New York, has duly caused this statement of eligibility
to be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of New York and State of New York, on the 16th day of September, 1997.
THE CHASE MANHATTAN BANK
By /s/ James P. Freeman
-----------------------------------
James P. Freeman
Assistant Vice President
- 2 -
<PAGE> 4
Exhibit 7 to Form T-1
Bank Call Notice
RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF
The Chase Manhattan Bank
of 270 Park Avenue, New York, New York 10017
and Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System,
at the close of business June 30, 1997, in accordance
with a call made by the Federal Reserve Bank of this District
pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
DOLLAR AMOUNTS
ASSETS IN MILLIONS
<S> <C> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and
currency and coin ................................................... $ 13,892
Interest-bearing balances ........................................... 4,282
Securities: .............................................................
Held to maturity securities............................................... 2,857
Available for sale securities.............................................. 34,091
Federal Funds sold and securities purchased under
agreements to resell ................................................. 29,970
Loans and lease financing receivables:
Loans and leases, net of unearned income $124,827
Less: Allowance for loan and lease losses 2,753
Less: Allocated transfer risk reserve ......... 13
----------
Loans and leases, net of unearned income,
allowance, and reserve ............................................... 122,061
Trading Assets ............................................................ 56,042
Premises and fixed assets (including capitalized
leases)............................................................... 2,904
Other real estate owned ................................................... 306
Investments in unconsolidated subsidiaries and
associated companies.................................................. 232
Customers' liability to this bank on acceptances
outstanding .......................................................... 2,092
Intangible assets ......................................................... 1,532
Other assets .............................................................. 10,448
--------
TOTAL ASSETS .............................................................. $280,709
========
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
LIABILITIES
<S> <C>
Deposits
In domestic offices ....................................................................... $ 91,249
Noninterest-bearing ............................................................. $38,157
Interest-bearing ................................................................ 53,092
In foreign offices, Edge and Agreement subsidiaries, -------
and IBF's ................................................................................. 70,192
Noninterest-bearing ............................................................. $ 3,712
Interest-bearing ................................................................ 66,480
Federal funds purchased and securities sold under agree-
ments to repurchase ............................................................................ 35,185
Demand notes issued to the U.S. Treasury ....................................................... 1,000
Trading liabilities ............................................................................ 42,307
OtherBorrowed money (includes mortgage indebtedness and obligations under
calitalized leases):
With a remaining maturity of one year or less ............................................. 4,593
With a remaining maturity of more than one year ...........................................
through three years..................................................................... 260
With a remaining maturity of more than three years........................................ 146
Bank's liability on acceptances executed and outstanding ....................................... 2,092
Subordinated notes and debentures .............................................................. 5,715
Other liabilities
. .............................................................................................. 11,373
TOTAL LIABILITIES .............................................................................. 264,112
-------
EQUITY CAPITAL
Perpetual Preferred stock and related surplus .................................................. 0
Common stock ................................................................................... 1,211
Surplus (exclude all surplus related to preferred stock) ...................................... 10,283
Undivided profits and capital reserves ......................................................... 5,280
Net unrealized holding gains (Losses)
on available-for-sale securities ............................................................... (193)
Cumulative foreign currency translation adjustments ............................................ 16
TOTAL EQUITY CAPITAL ........................................................................... 16,597
---------
TOTAL LIABILITIES AND EQUITY CAPITAL ........................................................... $ 280,709
=========
</TABLE>
I, Joseph L. Sclafani, E.V.P. & Controller of the above-named bank, do hereby
declare that this Report of Condition has been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and is true
to the best of my knowledge and belief.
JOSEPH L. SCLAFANI
We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us, and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and is true and correct.
WALTER V. SHIPLEY )
THOMAS G. LABRECQUE ) DIRECTORS
WILLIAM B. HARRISON, JR. )
