SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification No.
1-9130 CENTERIOR ENERGY CORPORATION 34-1479083
(An Ohio Corporation)
6200 Oak Tree Boulevard
Independence, Ohio 44131
Telephone (216) 447-3100
1-2323 THE CLEVELAND ELECTRIC 34-0150020
ILLUMINATING COMPANY
(An Ohio Corporation)
c/o Centerior Energy Corporation
6200 Oak Tree Boulevard
Independence, Ohio 44131
Telephone (216) 622-9800
1-3583 THE TOLEDO EDISON COMPANY 34-4375005
(An Ohio Corporation)
300 Madison Avenue
Toledo, Ohio 43652
Telephone (419) 249-5000
Indicate by check mark whether each of the registrants (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrants were required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
On August 8, 1997, there were 148,024,178 shares of Centerior
Energy Corporation Common Stock outstanding. Centerior Energy
Corporation is the sole holder of the 79,590,689 shares and 39,133,887
shares of common stock of The Cleveland Electric Illuminating Company
and The Toledo Edison Company, respectively, outstanding on that date.
This combined Form 10-Q is separately filed by Centerior Energy
Corporation ("Centerior Energy"), The Cleveland Electric Illuminating
Company ("Cleveland Electric") and The Toledo Edison Company ("Toledo
Edison"). Centerior Energy, Cleveland Electric and Toledo Edison are
sometimes referred to collectively as the "Companies". Cleveland
Electric and Toledo Edison are sometimes collectively referred to as
the "Operating Companies". Information contained herein relating to
any individual registrant is filed by such registrant on its behalf.
No registrant makes any representation as to information relating to
any other registrant, except that information relating to either or
both of the Operating Companies is also attributed to Centerior Energy.
-i-
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Centerior Energy Corporation and Subsidiaries
The Cleveland Electric Illuminating Company and Subsidiary
The Toledo Edison Company and Subsidiary
Notes to the Financial Statements (Unaudited) 1
Centerior Energy Corporation and Subsidiaries
Income Statement 5
Balance Sheet 6
Cash Flows 7
Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
The Cleveland Electric Illuminating Company and Subsidiary
Income Statement 12
Balance Sheet 13
Cash Flows 14
Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
The Toledo Edison Company and Subsidiary
Income Statement 19
Balance Sheet 20
Cash Flows 21
Management's Discussion and Analysis of Financial 22
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Exhibit Index 28
-ii-
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,
- 1 -
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.
(3) Common Stock Dividends
Cash dividends per common share declared by Centerior Energy during the
six months ended June 30, 1997 and 1996 were as follows:
1997 1996
Paid February 15 $.20 $.20
Paid May 15 .20 .20
Paid August 15 .20 .20
Common stock cash dividends declared by Cleveland Electric during the
six months ended June 30, 1997 and 1996 were as follows:
1997 1996
(millions)
Paid in February $29.6 $29.6
Paid in May 29.6 46.6
Toledo Edison did not declare any common stock dividends during the six
months ended June 30, 1997 and 1996.
(4) New Financings
In a June 1997 offering (Offering), the Operating Companies pledged $720
million aggregate principal amount of first mortgage bonds due in 2000,
2004 and 2007 to a trust as security for the issuance of a like
principal amount of secured notes due in 2000, 2004 and 2007 (Secured
Notes). Cleveland Electric pledged $175 million principal amount of
7.19% First Mortgage Bonds due 2000, $280 million principal amount of
7.67% First Mortgage Bonds due 2004 and $120 million principal amount of
7.13% First Mortgage Bonds due 2007, and Toledo Edison pledged $45
million principal amount of 7.19% First Mortgage Bonds due 2000, $70
million principal amount of 7.67% First Mortgage Bonds due 2004 and $30
million principal amount of 7.13% First Mortgage Bonds due 2007. The
obligations of the Operating Companies under the Secured Notes are joint
and several.
- 2 -
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.
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.
- 3 -
(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.
- 4 -
<TABLE>
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
INCOME STATEMENT
(Unaudited)
(Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------------
1997 1996 1997 1996
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 612,575 $ 608,966 $ 1,224,183 $ 1,214,221
OPERATING EXPENSES
Fuel and Purchased Power 113,720 110,248 235,551 225,232
Other Operation and Maintenance 151,820 149,763 294,404 305,668
Generation Facilities Rental Expense, Net 39,814 39,853 79,667 79,706
Depreciation and Amortization 76,740 76,722 153,851 149,954
Taxes, Other Than Federal Income Taxes 80,008 83,411 159,622 167,363
Amortization of Deferred Operating Expenses, Net 10,858 10,868 21,716 21,411
Federal Income Taxes 26,062 21,361 53,428 39,354
-------- -------- ----------- -----------
Total Operating Expenses 499,022 492,226 998,239 988,688
-------- -------- ----------- -----------
OPERATING INCOME 113,553 116,740 225,944 225,533
NONOPERATING INCOME (LOSS)
Allowance for Equity Funds Used During Construction 453 788 1,111 1,699
Other Income and Deductions, Net (6,969) (539) (12,796) (6,999)
Federal Income Taxes - Credit 446 880 416 2,795
-------- -------- ----------- -----------
Total Nonoperating Income (Loss) (6,070) 1,129 (11,269) (2,505)
-------- -------- ----------- -----------
INCOME BEFORE INTEREST CHARGES 107,483 117,869 214,675 223,028
INTEREST CHARGES
Long-term Debt 78,168 83,331 154,671 166,649
Short-term Debt 2,031 2,322 3,679 4,198
Allowance for Borrowed Funds Used During Construction (263) (774) (826) (1,617)
-------- -------- ----------- -----------
Net Interest Charges 79,936 84,879 157,524 169,230
-------- -------- ----------- -----------
INCOME AFTER INTEREST CHARGES 27,547 32,990 57,151 53,798
Preferred Dividend Requirements of Subsidiaries 13,308 14,042 26,815 28,277
-------- -------- ----------- -----------
NET INCOME $ 14,239 $ 18,948 $ 30,336 $ 25,521
======== ======== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 148,026 148,027 148,026 148,027
======== ======== =========== ===========
EARNINGS PER COMMON SHARE $ .10 $ .13 $ .20 $ .17
======== ======== =========== ===========
<FN>
The accompanying notes as they relate to Centerior Energy are an integral part of this statement.
</TABLE>
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<TABLE>
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
BALANCE SHEET
(Thousands)
June 30, December 31,
1997 1996
(Unaudited)
----------- -----------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
<S> <C> <C>
Utility Plant In Service $ 9,999,234 $ 9,867,193
Accumulated Depreciation and Amortization (3,467,146) (3,272,158)
----------- -----------
6,532,088 6,595,035
Construction Work In Progress 96,773 78,669
----------- -----------
6,628,861 6,673,704
Nuclear Fuel, Net of Amortization 162,770 189,148
Other Property, Less Accumulated Depreciation 48,943 89,291
----------- -----------
6,840,574 6,952,143
CURRENT ASSETS
Cash and Temporary Cash Investments 108,550 138,068
Amounts Due from Customers and Others, Net 193,561 212,680
Materials and Supplies, at Average Cost
Owned 84,054 84,846
Under Consignment 37,198 34,039
Taxes Applicable to Succeeding Years 182,489 249,961
Other 57,021 24,283
----------- -----------
662,873 743,877
REGULATORY AND OTHER ASSETS
Regulatory Assets 2,248,339 2,277,083
Mansfield Capital Trust 906,488 --
Nuclear Plant Decommissioning Trusts 158,273 139,667
Investment in Partnership 35,327 23,245
Other 87,555 74,187
----------- -----------
3,435,982 2,514,182
----------- -----------
$ 10,939,429 $ 10,210,202
=========== ===========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION
Common Stock Equity $ 1,928,170 $ 1,986,855
Preferred Stock
With Mandatory Redemption Provisions 174,094 189,473
Without Mandatory Redemption Provisions 448,325 448,325
Long-Term Debt 4,132,863 3,444,241
----------- -----------
6,683,452 6,068,894
CURRENT LIABILITIES
Current Portion of Long-Term Debt and Preferred Stock 204,339 196,033
Current Portion of Lease Obligations 79,696 87,836
Notes Payable to Banks and Others 155,000 --
Accounts Payable 129,672 138,005
Accrued Taxes 306,711 389,014
Accrued Interest 76,405 74,826
Dividends Declared 44,042 13,977
Other 66,447 72,653
----------- -----------
1,062,312 972,344
DEFERRED CREDITS AND OTHER LIABILITIES
Unamortized Investment Tax Credits 245,637 251,547
Accumulated Deferred Federal Income Taxes 1,896,246 1,876,924
Unamortized Gain from Bruce Mansfield Plant Sale 462,710 474,757
Accumulated Deferred Rents for Bruce Mansfield Plant
and Beaver Valley Unit 2 141,711 137,956
Nuclear Fuel Lease Obligations 104,733 122,655
Retirement Benefits 185,700 183,571
Other 156,928 121,554
----------- -----------
3,193,665 3,168,964
COMMITMENTS AND CONTINGENCIES (Note 7)
----------- -----------
$ 10,939,429 $ 10,210,202
=========== ===========
<FN>
The accompanying notes as they relate to Centerior Energy are an integral part of this
statement.
</TABLE>
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<TABLE>
CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
CASH FLOWS
(Unaudited)
(Thousands)
Six Months Ended
June 30,
-----------------------
1997 1996
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income $30,336 $25,521
-------- --------
Adjustments to Reconcile Net Income
to Cash from Operating Activities:
Depreciation and Amortization 153,851 149,954
Deferred Federal Income Taxes 19,071 35,638
Deferred Fuel 18,891 1,591
Leased Nuclear Fuel Amortization 42,820 35,798
Amortization of Deferred Operating Expenses, Net 21,716 21,411
Allowance for Equity Funds Used During Construction (1,111) (1,699)
Changes in Amounts Due from Customers and Others, Net 12,243 (40,574)
Changes in Materials and Supplies (2,367) 9,103
Changes in Accounts Payable (8,333) 1,290
Changes in Working Capital Affecting Operations (52,196) (56,419)
Other Noncash Items 15,522 (25,643)
-------- --------
Total Adjustments 220,107 130,450
-------- --------
Net Cash from Operating Activities 250,443 155,971
CASH FLOWS FROM FINANCING ACTIVITIES
Bank Loans, Commercial Paper and Other Short-Term Debt 155,000 100,000
Secured Note Issues 720,000 --
Reacquired Common Stock -- (20)
Maturities, Redemptions and Sinking Funds (38,879) (94,479)
Nuclear Fuel Lease Obligations (43,921) (52,851)
Common Stock Dividends Paid (59,210) (59,211)
Premiums, Discounts and Expenses (81) (474)
-------- --------
Net Cash from Financing Activities 732,909 (107,035)
CASH FLOWS FROM INVESTING ACTIVITIES
Cash Applied to Construction (79,265) (75,305)
Interest Capitalized as Allowance for Borrowed Funds Used
During Construction (826) (1,617)
Contributions to Nuclear Plant Decommissioning Trusts (10,775) (5,897)
Investment in Mansfield Capital Trust (906,488) --
Investment in Partnership (12,082) (17,000)
Other Cash Received (Applied) (3,434) 8,284
-------- --------
Net Cash from Investing Activities (1,012,870) (91,535)
-------- --------
NET CHANGE IN CASH AND TEMPORARY CASH INVESTMENTS (29,518) (42,599)
CASH AND TEMPORARY CASH INVESTMENTS AT BEGINNING OF PERIOD 138,068 179,038
-------- --------
CASH AND TEMPORARY CASH INVESTMENTS AT END OF PERIOD $108,550 $136,439
======== ========
Other Payment Information:
Interest (net of amounts capitalized) $150,000 $165,000
Federal Income Taxes 14,000 5,200
<FN>
The accompanying notes as they relate to Centerior Energy are an integral part of this
statement.
</TABLE>
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CENTERIOR ENERGY CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Liquidity
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of the 1996
Form 10-K and in the First 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, the Operating Companies redeemed
various securities as discussed in Note 5.
Standard & Poor's Ratings Group (S&P) and Moody's Investors Service,
Inc. (Moody's) raised the credit ratings for the Operating Companies'
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 the Operating Companies are as
follows:
Securities S&P Moody's
First Mortgage Bonds BB+ Ba1
Subordinate Debt BB- Ba3
Preferred Stock BB- b1
In the third quarter of 1997, Cleveland Electric and Toledo Edison plan
to refinance with lower-cost securities $180.6 million 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.
Additional first mortgage bonds may be issued by the Operating Companies
under their respective mortgages on the basis of property additions,
cash or refundable first mortgage bonds. If the applicable interest
coverage test is met, each Operating Company may issue first mortgage
bonds on the basis of property additions and, under certain
circumstances, refundable bonds. At June 30, 1997, neither Operating
Company would 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 the Operating
Companies upon completion of Centerior Energy's pending merger with Ohio
Edison, each Operating Company's available bondable property would be
reduced to below zero.
The Operating Companies expect their foreseeable future cash needs to be
satisfied with internally generated cash and available credit facilities
and, therefore, that they will not need to issue first mortgage bonds,
except in connection with planned refinancings.
- 8 -
Results of Operations
Factors contributing to the 0.6% and 0.8% increases in 1997 operating
revenues from 1996 for the second quarter and six months, respectively,
are shown as follows:
Changes for Period
Ended June 30, 1997
Three Six
Factors Months Months
(millions)
Kilowatt-hour Sales Volume and Mix $ 0.7 $ 7.6
Unbilled Revenues 13.0 (2.0)
Wholesale Revenues 1.8 7.7
Base Rates (12.7) 4.9
Fuel Cost Recovery Revenues (2.8) (2.0)
Miscellaneous Revenues 3.6 (6.2)
Total $ 3.6 $10.0
Percentage changes between 1997 and 1996 billed electric kilowatt-hour
sales are summarized as follows:
Changes for Period
Ended June 30, 1997
Three Six
Customer Categories Months Months
Residential (4.5)% (2.3)%
Commercial (3.5) (0.9)
Industrial 5.5 3.6
Other 12.6 30.2
Total 1.5 3.6
Second quarter 1997 total kilowatt-hour sales increased as increases in
industrial and wholesale sales were partially offset by fewer
residential and commercial sales. Industrial sales increased as more
sales to large primary metals industry customers (including the new
North Star BHP Steel facility) and the broad-based, smaller industrial
customer group were partially offset by fewer sales to large automotive
manufacturers. Wholesale sales (included in the "Other" category)
increased 26%. Residential and commercial sales declined because of the
milder weather in the 1997 period. Weather-normalized residential and
commercial sales decreased 1.9% and 2.3%, 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.
- 9 -
Total kilowatt-hour sales increased for the six-month period in 1997 as
increases in industrial and wholesale sales were partially offset by
fewer residential and commercial sales. Industrial sales increased
primarily for the same reasons cited for the second quarter 1997
increase. Wholesale sales increased 46%. Residential and commercial
sales declined because of the milder weather in the 1997 period.
However, weather-normalized residential and commercial sales increased
1.4% and 0.1%, 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.
The net changes in 1997 base rates revenues resulted from the April 1996
rate order issued by The Public Utilities Commission of Ohio (PUCO) for
the Operating Companies and renegotiated contracts for certain large
industrial customers of the Operating Companies which resulted in a
decrease in base rates for those customers.
The decreases in 1997 fuel cost recovery revenues included in customer
bills resulted from changes in the fuel cost recovery factors used by
the Operating Companies to calculate these revenues. The weighted
average of the respective fuel cost recovery factors used for the second
quarter of 1997 decreased about 10% for Toledo Edison and increased
about 0.3% for Cleveland Electric compared to the weighted average of
the respective fuel cost recovery factors used for the second quarter of
1996. The weighted average of the respective fuel cost recovery factors
used for the 1997 six-month period decreased about 7% for Toledo Edison
and increased about 2% for Cleveland Electric compared to the weighted
average of the respective fuel cost recovery factors used for the 1996
six-month period.
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 1.4% 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.
Taxes, other than federal income taxes, decreased primarily because of
lower property and payroll tax accruals.
The second quarter 1997 nonoperating loss resulted primarily from
expenses related to the 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.
- 10 -
Six-month operating expenses in 1997 increased 1% 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
merger-related expenses and certain costs associated with an accounts
receivable securitization. The six-month 1996 nonoperating loss
resulted primarily from Toledo Edison's 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 Financial Accounting Standards Board (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. The Companies have not completed analyses to determine
the effects of adopting the new standards.
- 11 -
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
INCOME STATEMENT
(Unaudited)
(Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------------
1997 1996 1997 1996
-------- -------- ---------- ----------
<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
<FN>
The accompanying notes as they relate to Cleveland Electric are an integral part of this statement.
</TABLE>
- 12 -
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
BALANCE SHEET
(Thousands)
June 30, December 31,
1997 1996
(Unaudited)
----------- -----------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
<S> <C> <C>
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
=========== ===========
<FN>
The accompanying notes as they relate to Cleveland Electric are an integral part of this
statement.
</TABLE>
- 13 -
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
CASH FLOWS
(Unaudited)
(Thousands)
Six Months Ended
June 30,
---------------------
1997 1996
--------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
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)
<FN>
The accompanying notes as they relate to Cleveland Electric are an integral part of
this statement.
</TABLE>
- 14 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Liquidity
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of the 1996
Form 10-K and in the First Quarter 1997 Form 10-Q. The information
under "Capital Resources and Liquidity" remains unchanged with the
following exceptions:
As discussed in Note 4, the Operating Companies refinanced high-cost
fixed obligations through a lower cost transaction.
During the second quarter of 1997, Cleveland Electric redeemed various
securities as discussed in Note 5.
S&P and Moody's raised the credit ratings for Cleveland Electric's
securities in July and August 1997, respectively, in anticipation of
Centerior Energy's pending merger with Ohio Edison. S&P indicated that,
should the merger not be consummated, its prior ratings would be
restored. Current credit ratings for Cleveland Electric are as follows:
Securities S&P Moody's
First Mortgage Bonds BB+ Ba1
Subordinate Debt BB- Ba3
Preferred Stock BB- b1
In the third quarter of 1997, Cleveland Electric plans to refinance with
lower-cost securities $180.6 million principal amount of first mortgage
bonds issued as security for certain tax-exempt bonds issued by public
authorities.
Additional first mortgage bonds may be issued by Cleveland Electric
under its mortgage on the basis of property additions, cash or
refundable first mortgage bonds. If the applicable interest coverage
test is met, Cleveland Electric may issue first mortgage bonds on the
basis of property additions and, under certain circumstances, refundable
bonds. At June 30, 1997, Cleveland Electric would not have been
permitted to issue a material amount of additional first mortgage bonds,
except in connection with refinancings. If FirstEnergy elects to apply
purchase accounting to Cleveland Electric upon completion of Centerior
Energy's pending merger with Ohio Edison, Cleveland Electric's available
bondable property would be reduced to below zero.
Cleveland Electric expects its foreseeable future cash needs to be
satisfied with internally generated cash and available credit facilities
and, therefore, that it will not need to issue first mortgage bonds,
except in connection with planned refinancings.
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:
- 15 -
Changes for Period
Ended June 30, 1997
Three Six
Factors Months Months
(millions)
Kilowatt-hour Sales Volume and Mix $(9.5) $(8.8)
Unbilled Revenues 6.0 (6.0)
Wholesale Revenues 1.9 9.4
Base Rates (6.7) 8.3
Fuel Cost Recovery Revenues 0.2 2.5
Miscellaneous Revenues 2.3 (7.1)
Total $(5.8) $(1.7)
Percentage changes between 1997 and 1996 billed electric kilowatt-hour
sales are summarized as follows:
Changes for Period
Ended June 30, 1997
Three Six
Customer Categories Months Months
Residential (5.3)% (2.0)%
Commercial (4.1) (1.4)
Industrial 2.0 0.1
Other 20.3 52.7
Total 0.4 4.4
Second quarter 1997 total kilowatt-hour sales increased slightly as
increases in industrial and other sales were partially offset by fewer
residential and commercial sales. Industrial sales increased on the
strength of increased sales to the broad-based, smaller industrial
customer group and large primary metals industry customers, which were
partially offset by fewer sales to large automotive manufacturers.
Other sales increased as a 39% increase in wholesale sales was partially
offset by fewer sales to public authorities. Residential and commercial
sales declined because of a change in the meter reading schedule in June
1997, which reduced the number of days in the billing cycles, and the
milder weather in the 1997 period. Weather-normalized residential and
commercial sales decreased 3.1% and 3%, respectively, for the 1997
period. Kilowatt-hour sales data does not reflect a significant portion
of the effect of hot weather in the second half of June 1997 because
those sales were not billed by the end of the month. However, the
estimated revenues from those sales have been recorded.
Total kilowatt-hour sales increased for the six-month period in 1997 as
increased wholesale sales were partially offset by fewer residential and
commercial sales. Industrial sales increased slightly primarily because
of increased sales to the broad-based, smaller industrial customer
group. Wholesale sales increased 73%. Residential and commercial sales
declined because of the milder weather in the 1997 period. On a
weather-normalized basis, residential sales increased 1.7% for the 1997
period, while commercial sales decreased 0.4%.
- 16 -
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.
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.
- 17 -
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.
- 18 -
<TABLE>
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
INCOME STATEMENT
(Unaudited)
(Thousands)
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
<FN>
The accompanying notes as they relate to Toledo Edison are an integral part of this statement.
</TABLE>
- 19 -
<TABLE>
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
BALANCE SHEET
(Thousands)
June 30, December 31,
1997 1996
(Unaudited)
----------- -----------
ASSETS
PROPERTY, PLANT AND EQUIPMENT
<S> <C> <C>
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
=========== ===========
<FN>
The accompanying notes as they relate to Toledo Edison are an integral part of this
statement.
</TABLE>
- 20 -
<TABLE>
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
CASH FLOWS
(Unaudited)
(Thousands)
Six Months Ended
June 30,
-------------------
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
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
<FN>
The accompanying notes as they relate to Toledo Edison are an integral part of this
statement.
</TABLE>
-21 -
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital Resources and Liquidity
Reference is made to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained in Item 7 of the 1996
Form 10-K and in the First Quarter 1997 Form 10-Q. The information
under "Capital Resources and Liquidity" remains unchanged with the
following exceptions:
As discussed in Note 4, the Operating Companies refinanced high-cost
fixed obligations through a lower cost transaction.
During the second quarter of 1997, Toledo Edison redeemed various
securities as discussed in Note 5.
S&P and Moody's raised the credit ratings for Toledo Edison's securities
in July and August 1997, respectively, in anticipation of Centerior
Energy's pending merger with Ohio Edison. S&P indicated that, should
the merger not be consummated, its prior ratings would be restored.
Current credit ratings for Toledo Edison are as follows:
Securities S&P Moody's
First Mortgage Bonds BB+ Ba1
Subordinate Debt BB- Ba3
Preferred Stock BB- b1
In the third quarter of 1997, Toledo Edison plans to refinance with
lower-cost securities $10.1 million principal amount of first mortgage
bonds issued as security for certain tax-exempt bonds issued by public
authorities.
Additional first mortgage bonds may be issued by Toledo Edison under its
mortgage on the basis of property additions, cash or refundable first
mortgage bonds. If the applicable interest coverage test is met, Toledo
Edison may issue first mortgage bonds on the basis of property additions
and, under certain circumstances, refundable bonds. At June 30, 1997,
Toledo Edison would not have been permitted to issue a material amount
of additional first mortgage bonds, except in connection with
refinancings. If FirstEnergy elects to apply purchase accounting to
Toledo Edison upon completion of Centerior Energy's pending merger with
Ohio Edison, Toledo Edison's available bondable property would be
reduced to below zero.
Toledo Edison expects its foreseeable future cash needs to be satisfied
with internally generated cash and available credit facilities and,
therefore, that it will not need to issue first mortgage bonds, except
in connection with planned refinancings.
- 22 -
Results of Operations
Factors contributing to the 5.3% and 4.1% increases in 1997 operating
revenues from 1996 for the second quarter and six months, respectively,
are shown as follows:
Changes for Period
Ended June 30, 1997
Three Six
Factors Months Months
(millions)
Kilowatt-hour Sales Volume and Mix $10.2 $16.4
Unbilled Revenues 7.0 4.0
Wholesale Revenues 4.2 7.1
Base Rates (6.0) (3.4)
Fuel Cost Recovery Revenues (3.0) (4.5)
Miscellaneous Revenues (1.2) (2.1)
Total $11.2 $17.5
Percentage changes between 1997 and 1996 billed electric kilowatt-hour
sales are summarized as follows:
Changes for Period
Ended June 30, 1997
Three Six
Customer Categories Months Months
Residential (2.4)% (2.8)%
Commercial (1.5) 0.7
Industrial 11.9 10.0
Other 21.1 21.0
Total 9.4 8.7
Second quarter 1997 total kilowatt-hour sales increased primarily
because of increased industrial and wholesale sales. Industrial sales
increased on the strength of increased sales to large primary metals
industry customers (including the new North Star BHP Steel facility) and
the broad-based, smaller industrial customer group. Wholesale sales
(included in the "Other" category) increased 22%. Residential and
commercial sales declined because of the milder weather in the 1997
period. On a weather-normalized basis, residential sales increased 0.9%
for the 1997 period. Kilowatt-hour sales data does not reflect a
significant portion of the effect of hot weather in the second half of
June 1997 because those sales were not billed by the end of the month.
However, the estimated revenues from those sales have been recorded.
Total kilowatt-hour sales increased for the six-month period in 1997
primarily because of increased industrial and wholesale sales.
Industrial sales growth reflected increased sales to large primary
metals, automotive and glass manufacturers and the broad-based, smaller
industrial customer group. Wholesale sales increased 24%. While
residential sales declined because of the milder weather in the 1997
period, commercial sales increased slightly. Weather-normalized
residential and commercial sales increased 0.5% and 1.9%, respectively,
for the 1997 period.
- 23 -
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.
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.
- 24 -
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.
- 25 -
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 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.
- 26 -
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
- 27 -
EXHIBIT INDEX
The following exhibits are submitted herewith:
CENTERIOR ENERGY EXHIBIT
Exhibit Number Description
27(a) Financial Data Schedule for the period
ended June 30, 1997.
CLEVELAND ELECTRIC EXHIBIT
Exhibit Number Description
27(b) Financial Data Schedule for the period
ended June 30, 1997.
TOLEDO EDISON EXHIBIT
Exhibit Number Description
27(c) Financial Data Schedule for the period
ended June 30, 1997.
- 28 -
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