<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON , 1998
FILE NO. 333-47651
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT
NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
(Exact name of registrant as specified in its charter)
OHIO
(State or other jurisdiction of
incorporation or organization)
4911
(Primary Standard Industrial
Classification Code Number)
34-0150020
(I.R.S. Employer Identification
Number)
C/O FIRSTENERGY CORP., 76 SOUTH MAIN STREET, AKRON, OHIO 44308-1890 (330)
384-5504
(address, including ZIP code, and telephone number, including area code,
of registrant's principal executive offices)
NANCY C. ASHCOM, CORPORATE SECRETARY
C/O FIRSTENERGY CORP.
76 SOUTH MAIN STREET
AKRON, OHIO 44308-1890
(330) 384-5504
(name, address, including ZIP code, and telephone number, including area code,
of agent for service)
COPIES TO:
KEVIN P. MURPHY, ESQ.
COUNSEL
FIRSTENERGY CORP.
76 SOUTH MAIN STREET
AKRON, OHIO 44308-1890
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: [ ]
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THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
OFFER TO EXCHANGE
7.43% SERIES D SECURED NOTES DUE 2009
FOR ALL OUTSTANDING 7.43% SERIES C SECURED NOTES DUE 2009
$150 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING AND
7.88% SERIES D SECURED NOTES DUE 2017
FOR ALL OUTSTANDING 7.88% SERIES C SECURED NOTES DUE 2017
$300 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1998, UNLESS EXTENDED
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The Cleveland Electric Illuminating Company, an Ohio corporation (the
"Company"), hereby offers (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 its 7.43% Series D
Secured Notes due 2009 (the "New Notes due 2009") and 7.88% Series D Secured
Notes due 2017 (the "New Notes due 2017") (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 its
outstanding 7.43% Series C Secured Notes due 2009 (the "Old Notes due 2009" and
together with the New Notes due 2009, the "Secured Notes due 2009") and 7.88%
Series C Secured Notes due 2017 (the "Old Notes due 2017" and together with the
New Notes due 2017, the "Secured Notes due 2017") (the Old Notes due 2009 and
the Old Notes due 2017 are collectively referred to herein as the "Old Notes"),
of which $150 million and $300 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 Company 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 , 1998, 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 Company, 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 Company has 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 Company 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 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
(cover continued on following pages)
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SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN MATTERS THAT SHOULD BE
CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES.
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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.
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The date of this Prospectus is , 1998.
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(Continuation of cover page)
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 Company
has agreed that, for a period of 120 days after the Expiration Date, it 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 April 15 or
October 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 Company intends 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 May 1 and November 1 of each year, commencing May 1, 1998, and the
Secured Notes will bear interest and mature as follows: for the Secured Notes
due 2009, interest at 7.43% with a maturity date of November 1, 2009, and for
the Secured Notes due 2017, interest at 7.88% with a maturity date of November
1, 2017. See "The Exchange Offer -- Interest on the New Notes."
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 issued by the
Company and held by the trustee under the indenture for the Secured Notes. See
"1997 First Mortgage Bonds and First Mortgage."
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 Company believes 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 Company 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 Company 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
i
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(Continuation of cover page)
(available May 13, 1988). Holders of Old Notes wishing to accept the Exchange
Offer must represent to the Company, as required by the Registration Agreement,
that such conditions have been met. If the Company's 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
Company does not assume, or indemnify holders against, any such liability.
The net proceeds from the offering of the Old Notes (the "Offering") were
used by the Company, to refinance certain outstanding first mortgage bonds and
to repay short-term borrowings. The Company 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 COMPANY 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 Company does 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 Company has been advised by Morgan Stanley & Co. Incorporated, Chase
Securities Inc., First Chicago Capital Markets, Inc., McDonald & Company
Securities, Inc., Merrill Lynch & Co. and TD Securities, 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
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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 THE COMPANY 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 Company 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
Nancy C. Ashcom, Corporate Secretary, FirstEnergy Corp., 76 South Main Street,
Akron, Ohio 44308-1890, or telephone (330) 384-5504. In order to assure timely
delivery of the documents, any request should be made by , 1998.
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Neither the Company nor any of its 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.
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THIS PROSPECTUS INCLUDES "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE SECURITIES LAWS. THE COMPANY HAS MADE FORWARD-LOOKING STATEMENTS INCLUDING
STATEMENTS ABOUT ITS FINANCIAL CONDITION, RESULTS OF OPERATIONS AND BUSINESS.
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 COMPANY CLAIMS 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 THE MERGER OF CENTERIOR ENERGY
CORPORATION ("CENTERIOR ENERGY") AND OHIO EDISON COMPANY ("OHIO EDISON") 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 AND OHIO EDISON AS A RESULT OF THEIR
MERGER 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; (5) NATIONAL AND REGIONAL ECONOMIC
CONDITIONS ARE LESS FAVORABLE THAN EXPECTED; AND (6) COSTS OR DIFFICULTIES
RELATED TO THE YEAR 2000 ISSUE ARE GREATER THAN EXPECTED. ALTHOUGH THE COMPANY
BELIEVES THAT THE EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
REASONABLE, IT 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.
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AVAILABLE INFORMATION
The Company has 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 Company
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.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 ("Exchange Act") and in accordance therewith files 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 Company. The
SEC's Internet address is http://www.sec.gov. Such material can also be
inspected at the New York Stock Exchange.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company hereby incorporates 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. The Company's Annual Report on Form 10-K for the year ended
December 31, 1996 ("Form 10-K").
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997 ("First Quarter 1997 Form 10-Q").
3. The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997 ("Second Quarter 1997 Form 10-Q").
4. The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997 ("Third Quarter 1997 Form 10-Q").
5. The Company's Current Reports on Form 8-K dated June 11, 1997, July
8, 1997 and March 16, 1998 and Form 8-K/A dated August 27, 1997.
THE COMPANY HEREBY UNDERTAKES 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 NANCY C. ASHCOM, CORPORATE SECRETARY,
FIRSTENERGY CORP., 76 SOUTH MAIN STREET, AKRON, OHIO 44308-1890, OR TELEPHONE
(330) 384-5504.
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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 COMPANY
The Company, 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. The Company
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. The Company serves approximately
753,000 customers and derives approximately 77% of its total electric retail
revenue from customers outside the City of Cleveland. Principal industries
served by the Company 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 the Company's operating revenues are derived from the
sale of electric energy. At December 31, 1997, the Company had 3,162 employees.
The Company is a wholly-owned subsidiary of FirstEnergy Corp. ("FirstEnergy").
FirstEnergy is a public utility holding company which is also the direct or
indirect parent of three public utility companies in addition to the Company,
namely, Ohio Edison Company ("Ohio Edison"), Pennsylvania Power Company ("Penn
Power") and The Toledo Edison Company ("Toledo Edison").
The mailing address of the Company's principal offices is 76 South Main
Street, Akron, Ohio 44308, and its telephone number is (330) 384-5100.
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SUMMARY OF THE TERMS OF THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $150,000,000 aggregate
principal amount of New Notes due 2009 for an equal aggregate principal amount
of Old Notes due 2009 and up to $300,000,000 aggregate principal amount of New
Notes due 2017 for an equal aggregate principal amount of Old Notes due 2017.
The New Notes are 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 Company is 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 $450 million
aggregate principal amount of Old Notes
outstanding. The Company 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 Company believes 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
Company 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 Company 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
Company's 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 Company does 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 Old Notes. The Company has agreed that, for
a period of 120 days after the Expiration Date,
it will make this Prospectus and any amendment
or supplement to this Prospectus available to
any such
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<PAGE> 9
broker-dealer for use in connection with any
such resales. See "Plan of Distribution." The
Company believes 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 Company.
This Exchange Offer is not being made to, nor
will the Company 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
, 1998, 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 April
15 or October 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 Company
intends 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 May 1 and November 1 of each
year, commencing May 1, 1998, and the Secured
Notes will bear interest and mature as follows:
for the Secured Notes due 2009, interest at
7.43% with a maturity date of November 1, 2009,
and for the Secured Notes due 2017, interest at
7.88% with a maturity date of November 1, 2017.
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
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<PAGE> 10
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 Company
under the Registration Agreement should the
Company 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 Company 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 Company
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."
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 Expira-
7
<PAGE> 11
tion 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 Company 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 Company 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 April 23,
1998, 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
Company from the issuance of the New Notes
pursuant to the Exchange Offer. The proceeds to
the Company from the sale of the Old Notes were
approximately $450 million, net of discounts
and commissions. Such proceeds were used by the
Company to refinance certain outstanding first
mortgage bonds and to repay short-term
borrowings.
8
<PAGE> 12
SUMMARY DESCRIPTION OF THE NEW NOTES
ISSUER........................ The Company.
SECURITIES TO BE OFFERED...... $150 million aggregate principal amount of New
Notes due 2009 and $300 million aggregate
principal amount of New Notes due 2017.
MATURITY...................... November 1, 2009 for the New Notes due 2009 and
November 1, 2017 for the New Notes due 2017.
RECORD DATES.................. April 15 and October 15 of each year,
commencing with April 15, 1998.
INTEREST PAYMENT DATES........ Payable in cash in arrears on May 1 and
November 1 of each year, commencing on May 1,
1998.
REDEMPTION.................... The New Notes will be redeemable in whole or in
part, at the option of the Company at any time,
at a redemption price equal to the greater of
(i) 100% of their principal amount and (ii) the
sum of the present values of the remaining
scheduled payments of principal and interest
thereon discounted to the date of redemption on
a semiannual basis (assuming a 360-day year
consisting of twelve 30-day months) at the
Treasury Yield (as defined herein) plus
twenty-five (25) basis points in the case of
the Secured Notes due 2009 or twenty-five (25)
basis points in the case of the Secured Notes
due 2017, plus in each case accrued interest to
the date of redemption. The New Notes will not
be subject to any sinking fund. See
"Description of the New Notes -- Redemption."
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 $450 million
aggregate principal amount of first mortgage
bonds issued by the Company ("1997 First
Mortgage Bonds") which have been issued,
pledged and delivered by the Company to the
Note Trustee. The terms of the 1997 First
Mortgage Bonds correspond to those of the
Secured Notes. See "1997 First Mortgage Bonds
and First Mortgage."
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
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, JANUARY 1- NOVEMBER 8-
------------------------------------------ NOVEMBER 7, DECEMBER 31,
1993 1994 1995 1996 1997(E) 1997(E)
------ ------ ------ ------ ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating Revenues................... $1,751 $1,698 $1,769 $1,790 $1,529 $ 254
Operating Income..................... $ 222 $ 396 $ 398 $ 359 $ 307 $ 50
Deferred Carrying Charges, Net(a).... $ (487) $ 25 $ 29 $ -- $ -- $ --
Write-off of Perry Nuclear Power
Plant Unit 2 ("Perry Unit 2")...... $ (351) $ -- $ -- $ -- $ -- $ --
Income (Loss) Before Interest
Charges............................ $ (347) $ 427 $ 429 $ 357 $ 305 $ 54
Interest Charges..................... $ 240 $ 242 $ 245 $ 240 $ 210 $ 35
Extraordinary Item (Net of Income
Taxes)............................. -- -- -- -- $ (324) $ --
Earnings (Loss) Before Interest
Charges, Income Taxes, Depreciation
and Amortization ("EBITDA")(b)..... $ (414) $ 708 $ 721 $ 636 $ 574 $ 96
Net Income (Loss).................... $ (587) $ 185 $ 184 $ 117 $ (229) $ 19
Ratio of Earnings to Fixed
Charges(c)......................... --(d) 1.81 1.84 1.57 1.64 1.73
Ratio of EBITDA to Interest
Charges............................ -- 2.93 2.94 2.65 2.73 2.74
BALANCE SHEET DATA (END OF PERIOD)
Total Assets......................... $7,159 $7,151 $7,152 $6,878 $6,440
Long-Term Debt....................... $2,793 $2,543 $2,666 $2,441 $3,190
Preferred Stock
With Mandatory Redemption
Provisions...................... $ 285 $ 246 $ 215 $ 186 $ 183
Without Mandatory Redemption
Provisions...................... $ 241 $ 241 $ 241 $ 238 $ 238
Common Stock Equity.................. $1,040 $1,058 $1,127 $1,045 $ 951
Total Capitalization................. $4,359 $4,088 $4,249 $3,910 $4,562
</TABLE>
- ---------------
(a) In 1993, the Company wrote off $519 million of deferred carrying charges.
Deferrals under an October 1992 rate stabilization program for the Company
ended in November 1995, and amortization of the deferrals began in December
1995.
(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 the Company's
operating performance.
(c) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income before extraordinary item 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 the Company'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) The Company is a wholly owned subsidiary of FirstEnergy Corp. Prior to the
merger of Centerior (CEC) and Ohio Edison (OE) to form FirstEnergy Corp. in
November 1997, the Company and Toledo Edison were the principle operating
subsidiaries of Centerior. The CEC-OE merger was accounted for using the
purchase method of accounting in accordance with generally accepted
accounting principles, and the applicable effects were reflected on the
separate financial statements of Centerior's direct subsidiaries as of the
merger date. Accordingly, the post-merger financial statements reflect a new
basis of accounting, and the pre-merger period and post-merger period
financial results (separated by a heavy black line) are presented.
10
<PAGE> 14
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 Company's
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 December 31, 1997, the Company had total long-term debt of approximately
$3,190 million (70% of total capitalization), preferred stock subject to
mandatory redemption provisions of approximately $183 million and current
maturities of approximately $122 million. The Company also has future minimum
lease payments of approximately $1,203 million related to generating facility
leases.
At December 31, 1997, the Company had approximately $3,187 million in
aggregate principal amount of first mortgage bonds outstanding under its
mortgage (including first mortgage bonds pledged to secure certain debt
obligations), and was not able to issue any additional first mortgage bonds
except in connection with refinancings. The Company expects its foreseeable
future cash needs to be satisfied with internally generated cash and short-term
borrowings and, therefore, that it will not need to issue first mortgage bonds
except in connection with refinancings.
The Company and Toledo Edison have the ability to borrow under a $125
million revolving credit facility that matures in May 1998. At December 31,
1997, there were no borrowings under this facility.
There are no restrictions on the Company's ability to issue preferred or
preference stock.
The Company's current credit ratings 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>
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 Company does 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 Company. The
Placement Agents have advised the Company 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 Company, must deliver to the
Company an opinion of independent counsel, reasonably satisfactory in form and
substance to the Company, to the effect that such exemption is available.
11
<PAGE> 15
ACCOUNTING MATTERS
On November 7, 1997, Centerior Energy consummated its merger with Ohio
Edison. The merger was accounted for using the purchase method of accounting and
the applicable effects were pushed down to the financial statements of the
Company as of the merger date. See "Combined Pro Forma Condensed Financial
Statements for the Company and Toledo Edison" for the accounting effects on the
Company and Toledo Edison of the merger of Centerior Energy and Ohio Edison. The
significant accounting adjustments in these pro forma statements are a result of
the implementation of the FirstEnergy Regulatory Plan (as hereinafter defined)
which is discussed below.
Upon consummation of the merger of Centerior Energy and Ohio Edison, the
FirstEnergy Regulatory Plan went into effect. Pursuant to the terms of the
FirstEnergy Regulatory Plan, the Public Utilities Commission of Ohio ("PUCO")
has authorized the Company and Toledo Edison to recognize additional
depreciation related to their generating assets and additional amortization of
regulatory assets during the regulatory plan period of at least $2 billion more
than the amounts that would have been recognized if the regulatory plans were
not in effect. For regulatory purposes only, these additional charges will be
reflected over the rate plan period. The FirstEnergy Regulatory Plan does not
provide for full recovery of the Company's and Toledo Edison's nuclear
operations. Accordingly, the Company and Toledo Edison ceased application of
Statement of Financial Accounting Standards No. 71 "Accounting for the Effects
of Certain Types of Regulations" (SFAS 71) for their nuclear operations when
implementation of the FirstEnergy Regulatory Plan became probable. As a result,
regulatory assets of the Company representing customer receivables for future
income taxes related to nuclear assets of $499 million were written off in
October 1997. At the consummation of the merger in November 1997, the Company
recognized a fair value purchase accounting adjustment that decreased the
carrying value of its nuclear assets by approximately $1.71 billion. The fair
value adjustment recognized for financial reporting purposes together with a
similar fair value adjustment for Toledo Edison will ultimately satisfy the $2
billion asset reduction commitment contained in the Company's and Toledo
Edison's regulatory plan.
COMPETITION
The Company faces competitive challenges due to regulatory and tax
constraints and its high retail cost structure.
Currently, the Company's most pressing competition comes from municipal
electric systems in its service areas. The Company's rates are generally higher
than those of municipal 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 Company faces the threat that municipalities
in its service area could establish new electric systems and continue expanding
existing systems. See "The Company -- Competition" and "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 Federal Energy
Regulatory Commission ("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 legislation.
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
12
<PAGE> 16
Ohio has been introduced in the Ohio House of Representatives. A bipartisan
committee from both legislative houses has been formed to study the issue. On
January 6, 1998, the co-chairs of the Ohio General Assembly's Joint Select
Committee on Electric Industry Deregulation released their draft report of a
plan which proposes to give customers a choice from whom they buy electricity
beginning January 1, 2000. No consensus has been reached by the full Committee;
in the meantime, legislation consistent with the co-chairs' draft report may be
introduced into the General Assembly by one or both of the co-chairs. The
Company cannot predict when or if this legislation will be introduced and if it
will be passed into law. The Company continues to study the potential effects
that such legislation would have on its financial position and results of
operations.
The Company cannot predict when and to what extent retail wheeling or other
forms of competition will be allowed. The Company believes that pure competition
(unrestricted retail wheeling for all customer classifications) is not imminent
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 Company
believes 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. See "The Company -- 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 Company has 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.
Duquesne Light Company ("Duquesne") operates Beaver Valley Unit 2. See "The
Company -- Nuclear Units."
The Company's three nuclear units may be impacted by activities or events
beyond its 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 Company's 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 Company 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 Company to recover its
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 the Company's financial
condition, cash flows and results of operations.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to identify the applicable year. Any of our programs
that have date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in system failures or
miscalculations.
We currently believe that with modifications to existing software and
conversions to new software, the Year 2000 Issue will pose no significant
operational problems for our computer systems as so modified and converted. If
these modifications and conversions are not made, or are not completed on a
timely basis, the Year 2000 Issue could have a material impact on our
operations.
We have initiated formal communications with many of our major suppliers to
determine the extent to which we are vulnerable to those third parties' failure
to resolve their own Year 2000 problems. Our total Year 2000 project cost and
estimates to complete are based on currently available information and do not
include the estimated costs and time associated with the impact of a third
party's Year 2000 issue. There can be no guarantee that the failure of other
companies to resolve their own Year 2000 issues will not have a material adverse
effect on us.
13
<PAGE> 17
We are utilizing both internal and external resources to reprogram and/or
replace and test the Company's software for Year 2000 modifications. Most of our
Year 2000 problems will be resolved through system replacements. The different
phases of our Year 2000 project will be completed at various dates, most of
which occur in 1999. We plan to complete the entire Year 2000 project by
mid-December 1999. Of the total project cost, approximately $22 million will be
capitalized since those costs are attributable to the purchase of new software
for total system replacements (i.e., the Year 2000 solution comprises only a
portion of the benefit resulting from the system replacements). The remaining $3
million will be expensed as incurred over the next two years. To date, we have
incurred approximately $350,000 related to the assessment of, and preliminary
efforts in connection with, our Year 2000 project and the development of a
remediation plan.
The costs of the project and the date on which we plan to complete the Year
2000 modifications are based on management's best estimates, which were derived
from numerous assumptions of future events including the continued availability
of certain resources, and other factors. However, there can be no guarantee that
this project will be completed as planned and actual results could differ
materially from the estimates. Specific factors that might cause material
differences include, but are not limited to, the availability and cost of
trained personnel, the ability to locate and correct all relevant computer code,
and similar uncertainties.
14
<PAGE> 18
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, JANUARY 1- NOVEMBER 8-
------------------------------------- NOVEMBER 7, DECEMBER 31,
1993 1994 1995 1996 1997(E) 1997(e)
------ ------ ------ ------ ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating Revenues................... $1,751 $1,698 $1,769 $1,790 $1,529 $ 254
Fuel and Purchased Power Expense..... $ 423 $ 391 $ 413 $ 408 $ 359 $ 51
Other Operation and Maintenance
Expense............................ $ 598 $ 394 $ 418 $ 426 $ 381 $ 77
Depreciation and Amortization
Expense............................ $ 182 $ 195 $ 196 $ 210 $ 190 $ 28
Operating Income..................... $ 222 $ 396 $ 398 $ 359 $ 307 $ 50
Deferred Carrying Charges, Net (a)... $ (487) $ 25 $ 29 $ -- $ -- $ --
Write-off of Perry Unit 2............ $ (351) $ -- $ -- $ -- $ -- $ --
Income (Loss) Before Interest
Charges.............................. $ (347) $ 427 $ 429 $ 357 $ 305 $ 54
Interest Charges..................... $ 240 $ 242 $ 245 $ 240 $ 210 $ 35
Extraordinary Item (Net of Income
Taxes)............................. -- -- -- -- $ (324) $ --
Earnings (Loss) Before Interest
Charges, Income Taxes, Depreciation
and Amortization ("EBITDA") (b).... $ (414) $ 708 $ 721 $ 636 $ 574 $ 96
Net Income (Loss).................... $ (587) $ 185 $ 184 $ 117 $ (229) $ 19
Preferred Dividend Requirements...... $ 45 $ 45 $ 43 $ 39 $ 45 $ --
Earnings (Loss) on Common Stock...... $ (632) $ 140 $ 141 $ 78 $ (274) $ 19
Ratio of Earnings to Fixed Charges
(c)................................ --(d) 1.81 1.84 1.57 1.64 1.73
Ratio of EBITDA to Interest
Charges............................ -- 2.93 2.94 2.65 2.73 2.74
OTHER DATA
Utility Plant Additions.............. $ 175 $ 156 $ 155 $ 111 $ 104 $ 18
BALANCE SHEET DATA (END OF PERIOD)
Total Assets......................... $7,159 $7,151 $7,152 $6,878 $6,440
Current Portion of Long-Term Debt and
Preferred Stock.................... $ 70 $ 282 $ 177 $ 145 $ 122
Long-Term Debt....................... $2,793 $2,543 $2,666 $2,441 $3,190
Preferred Stock
With Mandatory Redemption
Provisions....................... $ 285 $ 246 $ 215 $ 186 $ 183
Without Mandatory Redemption
Provisions....................... $ 241 $ 241 $ 241 $ 238 $ 238
Common Stock Equity.................. $1,040 $1,058 $1,127 $1,045 $ 951
Total Capitalization.......... $4,359 $4,088 $4,249 $3,910 $4,562
</TABLE>
- ---------------
(a) In 1993, the Company wrote off $519 million of deferred carrying charges.
Deferrals under an October 1992 rate stabilization program for the Company
ended in November 1995, and amortization of the deferrals began in December
1995.
(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 the Company's
operating performance.
(c) For the purpose of computing the ratio of earnings to fixed charges,
earnings consist of income before extraordinary item 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 the Company'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) The Company is a wholly owned subsidiary of FirstEnergy Corp. Prior to the
merger of Centerior (CEC) and Ohio Edison (OE) to form FirstEnergy Corp. in
November 1997, the Company and Toledo Edison were the principle operating
subsidiaries of Centerior. The CEC-OE merger was accounted for using the
purchase method of accounting in accordance with generally accepted
accounting principles, and the applicable effects were reflected on the
separate financial statements of Centerior's direct subsidiaries as of the
merger date. Accordingly, the post-merger financial statements reflect a new
basis of accounting, and the pre-merger period and post-merger period
financial results (separated by a heavy black line) are presented.
15
<PAGE> 19
THE COMPANY
GENERAL
The Company, 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. The Company
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. The Company serves approximately 753,000 customers and derives
approximately 77% of its total electric retail revenue from customers outside
the City of Cleveland. Principal industries served by the Company 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 the Company's operating
revenues are derived from the sale of electric energy. At December 31, 1997, the
Company had 3,162 employees of which 1,728 employees (about 55% of total
employees) were represented by one union.
The Company is a wholly owned electric utility subsidiary of FirstEnergy, a
public utility holding company. In addition to the Company, the direct or
indirect public utility subsidiaries of FirstEnergy are Ohio Edison, Penn Power
and Toledo Edison. The Company, Ohio Edison, Penn Power and Toledo Edison
operate as separate companies, each servicing the customers in its respective
service area.
COMPETITION
The Company competes in its service area with suppliers of natural gas to
satisfy customers' energy needs with regard to heating and appliance usage. The
Company also is 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 Company also competes with municipally owned electric systems within
its service area. Several communities have evaluated municipalization of
electric service and decided to continue service from the Company. Officials in
other communities have indicated an interest in evaluating the municipalization
issue.
The Company faces continuing competition from locations outside its service
area 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 Company also periodically competes with other producers of electricity
for sales to electric utilities which are in the market for bulk power
purchases. The Company has interconnections with other electric utilities and
has a transmission system capable of transmitting ("wheeling") power between the
Midwest and the East.
In the future, the Company 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.
Located within the Company's service area are two municipally owned
electric systems. The Company 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 the Company. CPP is primarily an electric
distribution system which currently supplies electric power in approximately 60%
of the City's geographical area and to approximately 35% (about 75,000) of the
electric consumers in the City -- equal to about 10% of all customers served by
the Company. CPP's kilowatt-hour sales and revenues are equal to about 6% of the
Company's kilowatt-hour sales and revenues. Much of the area served by CPP
overlaps that of the Company. For all classes of customers, the Company'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.
16
<PAGE> 20
The Company makes power available to CPP on a wholesale basis, subject to
FERC regulation. In 1997, the Company 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 the Company's transmission systems. As part of
the merger of Centerior Energy and Ohio Edison, the Company has agreed to
additional interconnections with CPP.
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 the Company and CPP. The Company believes that the
agreement will enable both the Company 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, all pending litigation
involving the City of Cleveland or CPP and the Company has been stayed to allow
for settlement discussions.
REGULATORY MATTERS
On January 30, 1997, the PUCO approved a rate reduction and economic
development plan for the Company and Toledo Edison which became effective on
November 8, 1997 and will extend 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 of 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. The
FirstEnergy Regulatory Plan does not provide for full recovery of the Company's
and Toledo Edison's nuclear operations. Accordingly, the Company and Toledo
Edison ceased application of SFAS 71 for their nuclear operations when
implementation of the FirstEnergy Regulatory Plan became probable. As a result,
regulatory assets of the Company representing customer receivables for future
income taxes related to nuclear assets of $499 million were written off in
October 1997. At the consummation of the merger in November 1997, the Company
recognized a fair value purchase accounting adjustment that decreased the
carrying value of its nuclear assets by approximately $1.71 billion. The fair
value adjustment recognized for financial reporting purposes together with a
similar fair value adjustment for Toledo Edison will ultimately satisfy the $2
billion asset reduction commitment contained in the Company's and Toledo
Edison's regulatory plan.
The Company's nonnuclear operations continue to comply with the provisions
of SFAS 71 which governs accounting for the effects of certain types of rate
regulation. The Company continually monitors changes in market and regulatory
conditions and considers 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. In the event the Company determines it no longer meets the criteria
for following SFAS 71 for its nonnuclear operations, the Company would be
required to record a before-tax charge to write off its remaining regulatory
assets which total approximately $580 million. In addition, the Company 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 related property, plant
and equipment.
Notwithstanding the effect of the FirstEnergy Regulatory Plan on the
Company's nuclear generating assets, the Company believes it is reasonable to
expect that rates will be set at levels that will recover all current and
anticipated costs associated with its nonnuclear operations, including all
associated regulatory assets, and such rates can be charged to and collected
from customers. If there is a change in the Company's evaluation of the
competitive environment, regulatory framework or other factors, the Company may
be required to record material charges to earnings. See "Management's Financial
Analysis" in the Financial Statements Section.
17
<PAGE> 21
SALES OF ELECTRICITY
Kilowatt-hour sales by the Company follow a seasonal pattern marked by
increased customer usage in the summer for air conditioning and in the winter
for heating. Historically, the Company 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.
The Company's largest customer is a steel manufacturer which has two major
steel producing facilities. Sales to these facilities accounted for 2.4% of the
Company's 1997 total electric operating revenues. The loss of these facilities
would reduce the Company's annual net income by about $17 million based on 1997
sales levels.
FUEL SUPPLY
Generation by type of fuel for 1997 was 63% coal-fired and 37% nuclear.
Coal. In 1997, the Company burned 5 million tons of coal for electric
generation. The Company normally maintains a reserve supply of coal sufficient
for about 20 days of normal operations. On February 1, 1998, this reserve was
about 30 days for plants operated by the Company.
In 1997, about 62% of the Company's coal requirements were purchased under
long-term contracts, with the longest remaining term being almost 5 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 the Company'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 the Company's coal was purchased on the spot
market with sulfur content ranging from less than 1% to 4%.
The Company's 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 Company's 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.
The Company is a member of the Central Area Power Coordination Group
("CAPCO Group"), which was created in 1967 by the Company, Toledo Edison, Ohio
Edison, Duquesne and Ohio Edison's wholly owned subsidiary, Penn Power. 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 Bruce Mansfield Generating Plant ("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, 1997,
the total of Quarto's debt and lease obligations guaranteed by the Company was
$14.3 million. The Company expects that Quarto revenues from sales of coal to
the CAPCO Group companies will continue to be sufficient for Quarto to meets its
debt and lease obligations.
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 Company has inventories of raw material sufficient to provide
nuclear fuel through 1998 for the operation of its nuclear generating units and
has contracts for fabrication services for all 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 contract varies by
CAPCO Group company, with the Company's enrichment services reduced to 70% in
1998-1999, 50% in 2003-2005 and reduced to 0% in 2006 and beyond. However the
additional required enrichment services are available. Substantial additional
fuel will have to be obtained in the future over the
18
<PAGE> 22
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 Company has adequate supplies of fuel oil for its oil-fired
electric generating units which are used primarily as reserve and peaking
capacity.
NUCLEAR UNITS
The Company's 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. The Company 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. The Company owns 31.11% of Perry Unit 1, 24.47% of Beaver
Valley Unit 2 and 51.38% of Davis-Besse. The Company also leases, jointly with
Toledo Edison, 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.
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
Company's 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 Company has 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 Company that it would be
unable to begin acceptance of spent fuel for disposal by January 31, 1998 as
mandated by Section
19
<PAGE> 23
302(a)(5)(B) of the Nuclear Waste Policy Act ("NWPA"). As a result, the Company
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 Company as an owner and lessee of
nuclear generating units.
FINANCING CAPABILITY
At December 31, 1997, the Company had total long-term debt of approximately
$3,190 million (70% of total capitalization), preferred stock subject to
mandatory redemption provisions of approximately $183 million and current
maturities of approximately $122 million. The Company also has future minimum
lease payments of approximately $1,203 million related to generating facility
leases.
At December 31, 1997, the Company had approximately $3,187 million in
aggregate principal amount of first mortgage bonds outstanding under its
mortgage (including first mortgage bonds pledged to secure certain debt
obligations), and was not able to issue any additional first mortgage bonds
except in connection with refinancings. The Company expects its foreseeable
future cash needs to be satisfied with internally generated cash and short-term
borrowings and, therefore, that it will not need to issue first mortgage bonds
except in connection with refinancings.
The Company and Toledo Edison have the ability to borrow under a $125
million revolving credit facility and matures in May 1998. At December 31, 1997,
there were no borrowings under this facility.
There are no restrictions on the Company's ability to issue preferred or
preference stock.
The Company's current credit ratings 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>
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 Company furnished Standard &
Poor's and Moody's with certain information and materials with respect to the
Secured Notes and the Company. 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 Company has not applied for
a rating with respect to the Secured Notes from any other credit rating agency.
CONSTRUCTION PROGRAM
The Company carries 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 Company's 1997 long-term (20-year) forecast, as filed with the
PUCO, projects long-term annual growth rates in peak demand and kilowatt-hour
sales of 0.5% and 0.8%, respectively after demand-side management
considerations. The Company's 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
20
<PAGE> 24
units until the next decade. The Company'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 Company
does not plan to put into service any new generating capacity until 2008.
The following tables show, categorized by major components, the
construction expenditures by the Company during 1995, 1996 and 1997 and the
estimated cost of its construction programs for 1998 through 2002, in each case
including allowance for funds used during construction and excluding nuclear
fuel:
<TABLE>
<CAPTION>
ACTUAL ESTIMATED
------------------ --------------------------------
1995 1996 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transmission, Distribution and General
Facilities................................... $ 68 $ 79 $ 94 $ 69 $ 70 $57 $49 $41
Renovation and Modification of Generating Units
Nuclear...................................... 12 17 17 14 15 8 8 10
Nonnuclear................................... 63 19 24 25 16 13 15 16
Clean Air Act Amendments Compliance............ 12 (4) 0 0 7 2 0 2
---- ---- ---- ---- ---- --- --- ---
Total................................ $155 $111 $135 $105 $108 $80 $72 $69
==== ==== ==== ==== ==== === === ===
</TABLE>
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
Company -- 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
the Company during 1995, 1996 and 1997 and its estimated nuclear fuel capital
costs for 1998 through 2002 are as follows:
<TABLE>
<CAPTION>
ACTUAL ESTIMATED
------------------ --------------------------------
1995 1996 1997 1998 1999 2000 2001 2002
---- ---- ---- ---- ---- ---- ---- ----
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nuclear Fuel Capital Costs..................... $ 19 $ 37 $ 16 $ 32 $ 38 $26 $38 $38
</TABLE>
PROPERTIES
For a description of the Company's properties, see "1997 First Mortgage
Bonds and First Mortgage -- Title to Property."
PENDING MERGER OF THE COMPANY AND TOLEDO EDISON
In March 1994, Centerior Energy announced a plan to merge Toledo Edison
into the Company. In June 1995, the preferred share owners of the Company and
Toledo Edison approved actions necessary for the two companies to merge.
FirstEnergy has not yet made a decision on this matter. In the meantime, at the
request of the NRC, pending FirstEnergy's decision, both the Company 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 FIRST MORTGAGE AND TE FIRST MORTGAGE
Substantially all of the fixed properties and the franchises of the Company
("CEI Mortgaged Property") are subject to the lien of the 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 Forty-Sixth Supplemental Indenture and Deed of Trust of Toledo Edison ("TE
First Mortgage"). If the merger of Toledo Edison into the Company is
consummated, the Company 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 First Mortgage, which lien will be junior to the lien
of the TE First Mortgage.
If the merger is consummated, the only assets of the Company 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 the Company
which are betterments, extensions, improvements, additions, repairs, renewals,
replacements, substitutions and alterations to, upon, for and of the TE
Mortgaged Property and all property
21
<PAGE> 25
held or acquired for use or used upon or in connection with or appertaining to
the TE Mortgaged Property. The lien of the 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 the Company
and Toledo Edison would be junior to the liens of the First Mortgage and the TE
First Mortgage.
The Company 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 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 the Company under the New Indenture. The New Indenture
trustee would hold such TE First Mortgage Bonds and 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 First Mortgage Bonds.
A substantial portion of the properties owned by the Company 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 First Mortgage and the TE First Mortgage, but
senior to the existing liens of the subordinate mortgages of the Company and
Toledo Edison.
At such time as the New Indenture trustee holds all of the outstanding
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 THE COMPANY AND TOLEDO
EDISON
The Unaudited Cleveland Electric and Toledo Edison Combined Pro Forma
Condensed Balance Sheets as of December 31, 1997 and the Unaudited Combined Pro
Forma Condensed Income Statements for the Year Ended December 31, 1997 and for
the Year Ended December 31, 1996, give effect to:
(i) the impact on the Company and Toledo Edison of the merger of
Centerior Energy and Ohio Edison. These adjustments were prepared using the
purchase method of accounting based on the assumptions specified in Note 1
of the Notes to Combined Pro Forma Condensed Balance Sheets and Income
Statements. These purchase accounting adjustments are estimates and
therefore subject to change within one year of consummation of the merger
of Centerior Energy and Ohio Edison; and
(ii) the agreement between the Company and Toledo Edison to merge
Toledo Edison into the Company. These adjustments are based on accounting
for the merger of the Company and Toledo Edison on a method similar to a
pooling of interests.
The Combined Pro Forma Condensed Income Statements of Cleveland Electric
and Toledo Edison for the Years ended December 31, 1995 and 1994 give effect
only to the agreements between the Company and Toledo Edison to merge Toledo
Edison into the Company. These adjustments are based on accounting for the
merger of the Company and Toledo Edison on a method similar to a pooling of
interests.
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 the periods or which would have been reported in
the future.
22
<PAGE> 26
COMBINED PRO FORMA CONDENSED BALANCE SHEETS
OF CLEVELAND ELECTRIC AND TOLEDO EDISON
(UNAUDITED)
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
AT DECEMBER 31, 1997
-------------------------------------------------------
PRO FORMA
COMBINED
CLEVELAND
CLEVELAND TOLEDO PRO ELECTRIC
ELECTRIC EDISON FORMA & TOLEDO
HISTORICAL HISTORICAL ADJUSTMENTS EDISON
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Net Property, Plant and Equipment........................... $3,858 $1,572 $5,430
Current Assets.............................................. $ 301 $ 168 $ (57)(2a) $ 412
Regulatory and other assets................................. $ 729 $ 504 $1,233
Goodwill.................................................... $1,552 $ 514 $2,066
------ ------ ----- ------
Total Assets................................................ $6,440 $2,758 $ (57) $9,141
====== ====== ===== ======
CAPITALIZATION AND LIABILITIES
Capitalization
Common Stock Equity....................................... $ 951 $ 532 $1,483
Preferred Stock
With Mandatory Redemption Provisions.................... $ 183 $ 2 $ 185
Without Mandatory Redemption Provisions................. $ 238 $ 210 $ 448
Long-term debt............................................ $3,190 $1,210 $4,400
------ ------ ------
Total Capitalization........................................ $4,562 $1,954 $6,516
Current Liabilities......................................... $ 640 $ 235 $ (57)(2a) $ 818
Deferred Credits and Other Liabilities...................... $1,238 $ 569 $1,807
------ ------ ----- ------
Total Capitalization and Liabilities........................ $6,440 $2,758 $ (57) $9,141
====== ====== ===== ======
</TABLE>
The accompanying notes are an integral part of the statement.
23
<PAGE> 27
COMBINED PRO FORMA CONDENSED INCOME STATEMENTS
OF CLEVELAND ELECTRIC AND TOLEDO EDISON
(UNAUDITED)
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
---------------------------------------------
CLEVELAND ELECTRIC TOLEDO EDISON
---------------------------------------------- ---------------------------------------------
HISTORIC HISTORIC HISTORIC HISTORIC
JAN. 1 - NOV. 8 - JAN. 1 - NOV. 8 -
NOV. 7, DEC. 31, PRO FORMA 1997 NOV. 7, DEC. 31, PRO FORMA 1997 PRO
1997 1997 ADJUSTMENTS PRO FORMA 1997 1997 ADJUSTMENTS FORMA
-------- -------- ----------- --------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues.............. $1,529 $254 $1,783 $ 773 $122 $895
Operating Expenses.............. $1,222 $204 $ (8)(1f,1g) $1,418 $ 649 $104 $(11)(1f,1g) $742
------ ---- ----- ------ ----- ---- ---- ----
Operating Income.............. $ 307 $ 50 $ 8 $ 365 $ 124 $ 18 $ 11 $153
Nonoperating Income (Loss).... $ (2) $ 4 $ 13(1j) $ 15 $ 2 $ 2 $ 6(1j) $ 10
------ ---- ----- ------ ----- ---- ---- ----
Income Before Interest
Charges..................... $ 305 $ 54 $ 21 $ 380 $ 126 $ 20 $ 17 $163
Interest Charges................ $ 210 $ 35 $ (13)(1d,1k) $ 232 $ 84 $ 13 $ (6)(1d) $ 91
Extraordinary Loss.............. $ (324) -- $ 324 $ 0 $(192) $192 $ 0
------ ---- ----- ------ ----- ---- ---- ----
Net Income.................... $ (229) $ 19 $ 357 $ 148 $(150) $ 7 $215 $ 72
Preferred Dividend
Requirements.................. $ 45 -- $ 45 $ 19 $ 19
------ ---- ----- ------ ----- ---- ---- ----
Earnings On Common Stock........ $ (274) $ 19 $ 357 $ 103 $(169) $ 7 $215 $ 53
====== ==== ===== ====== ===== ==== ==== ====
<CAPTION>
PRO FORMA
COMBINED
PRO FORMA CLEVELAND ELECTRIC
ADJUSTMENTS & TOLEDO EDISON
----------- ------------------
<S> <C> <C>
Operating Revenues.............. $(151)(2b) $2,527
Operating Expenses.............. $(151)(2b,2c) $2,009
----- ------
Operating Income.............. $ 0 $ 518
Nonoperating Income (Loss).... $ (6)(2d) $ 19
----- ------
Income Before Interest
Charges..................... $ (6) $ 537
Interest Charges................ $ (6)(2d) $ 317
Extraordinary Loss.............. $ 0
----- ------
Net Income.................... $ 0 $ 220
Preferred Dividend
Requirements.................. $ 64
----- ------
Earnings On Common Stock........ $ 0 $ 156
===== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------
CLEVELAND ELECTRIC TOLEDO EDISON
-------------------------------------- --------------------------------------
PRO FORMA PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS
---------- ----------- --------- ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Revenues........... $1,790 $1,790 $897 $897 $(133)(2b)
Operating Expenses........... $1,431 $ (7)(1f,1g) $1,424 $740 $(12)(1f,1g) $728 $(134)(2b,2c)
------ ---- ------ ---- ---- ---- -----
Operating Income........... $ 359 $ 7 $ 366 $157 $ 12 $169 $ 1
Nonoperating Income (Loss)... $ (2) $ 4(1j) $ 2 $ (5) $ 2(1j) $ (3) $ (2)(2d)
------ ---- ------ ---- ---- ---- -----
Income Before Interest
Charges.................. $ 357 $ 11 $ 368 $152 $ 14 $166 $ (1)
Interest Charges............. $ 240 $(13)(1d) $ 227 $ 95 $ (6)(1d) $ 89 $ (1)(2d)
------ ---- ------ ---- ---- ---- -----
Net Income................. $ 117 $ 24 $ 141 $ 57 $ 20 $ 77 $ 0
Preferred Dividend
Requirements............... $ 39 $ 39 $ 17 $ 17
------ ---- ------ ---- ---- ---- -----
Earnings On Common Stock..... $ 78 $ 24 $ 102 $ 40 $ 20 $ 60 $ 0
====== ==== ====== ==== ==== ==== =====
<CAPTION>
PRO FORMA
COMBINED
CLEVELAND ELECTRIC
& TOLEDO EDISON
------------------
<S> <C>
Operating Revenues........... $2,554
Operating Expenses........... $2,018
------
Operating Income........... $ 536
Nonoperating Income (Loss)... $ (3)
------
Income Before Interest
Charges.................. $ 533
Interest Charges............. $ 315
------
Net Income................. $ 218
Preferred Dividend
Requirements............... $ 56
------
Earnings On Common Stock..... $ 162
======
</TABLE>
The accompanying notes are an integral part of the statement.
24
<PAGE> 28
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)(2b) $2,516
Operating Expenses.......................... 1,371 686 (129)(2b,2c) 1,928
------ ---- ----- ------
Operating Income.......................... 398 188 2 588
Nonoperating Income (Loss).................. 31 19 (2)(2c) 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 On 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)(2b) $2,422
Operating Expenses.......................... 1,302 685 (143)(2b,2c) 1,844
------ ---- ----- ------
Operating Income.......................... 396 180 2 578
Nonoperating Income (Loss).................. 31 17 (2)(2c) 46
------ ---- ----- ------
Income Before Interest Charges............ 427 197 -- 624
Interest Charges............................ 242 115 (1)(2d) 356
------ ---- ----- ------
Net Income................................ 185 82 1 268
Preferred Dividend Requirements............. 45 20 1 66
------ ---- ----- ------
Earnings Available for Common Stock......... $ 140 $ 62 $ -- $ 202
====== ==== ===== ======
</TABLE>
The accompanying notes are an integral part of the statement.
25
<PAGE> 29
NOTES TO COMBINED PRO FORMA CONDENSED BALANCE SHEETS AND INCOME STATEMENTS
(UNAUDITED)
Note 1 -- Pro Forma Adjustments (FirstEnergy Merger)
(a) As required by Accounting Principles Board Opinion No. 16, pro forma
adjustments have been recognized by FirstEnergy to adjust Cleveland
Electric (CEI) and Toledo Edison (Toledo) utility plant to fair
value. The major adjustment relates to the nuclear generating units.
Such adjustment has been based upon the results of an independent
appraisal and on the estimated discounted future cash flows expected
to be generated by their nuclear generating units. The estimated cash
flows are based upon management's current view of the likely cost
recovery associated with the nuclear units. As a result of
discontinuing Statement of Financial Accounting Standards No. 71 for
CEI and Toledo nuclear assets and operations, a pro forma adjustment
has been made to reflect the write-off of unrecoverable regulatory
assets prior to consummation of the merger.
(b) A pro forma adjustment has been made to recognize goodwill in
connection with the FirstEnergy Merger. The goodwill represents the
excess of the purchase price over CEI's and Toledo's net assets after
taking into account the pro forma adjustments. The carrying cost for
all other assets and liabilities (except as described in (d), (e),
(h), (r) and (g) below) is assumed to be equal to fair market value.
If it is determined, within one year, that the ultimate fair market
value of CEI's and Toledo's net assets is more or less than their
estimated carrying value at the time of consummation, goodwill would
be adjusted accordingly. The purchase price was based on the imputed
value to holders of Centerior Energy Common Stock using a market
value of Ohio Edison Common Stock of $20.125 per share.
(c) Pro forma equity adjustments recognize the elimination of CEI's and
Toledo's accumulated deficit as of the consummation of the
FirstEnergy Merger and the purchase price computed as described in
(b) above.
(d) A pro forma adjustment has been made to recognize CEI's and Toledo's
preferred stock of consolidated subsidiaries subject to mandatory
redemption and long-term debt at estimated fair market value.
(e) A pro forma adjustment has been made to recognize CEI's and Toledo's
net unamortized transition obligation related to certain retirement
benefits.
(f) Pro forma adjustments have been made to recognize amortization of
goodwill in connection with the FirstEnergy Merger over a 40-year
period, offset by reductions in depreciation expense resulting from
the assumed revaluation of CEI's and Toledo's assets described in (a)
above.
(g) Pro forma adjustments have been made for the estimated tax effects of
the adjustments discussed in (a), (b), (e), (f), (h) and (i).
(h) Pro forma adjustments for Beaver Valley Unit 2 deferred rent
liability to reflect remaining payments on a straight-line basis.
(i) Pro forma adjustments for estimated severance and other compensation
costs payable.
(j) Pro forma adjustments for the FirstEnergy Merger related costs.
(k) Rounding adjustment.
Note 2 -- Pro Forma Adjustments (CEI and Toledo merger)
(a) Elimination of intercompany accounts and notes receivable and
accounts and notes payable.
(b) Elimination of intercompany operating revenues and operating
expenses.
(c) Elimination of intercompany working capital transactions.
(d) Elimination of intercompany interest income and interest expense.
26
<PAGE> 30
THE EXCHANGE OFFER
BACKGROUND
The Old Notes were issued and sold by the Company to the Placement Agents
on October 24, 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 Company and the Placement Agents
("Registration Agreement") as a condition to the obligations of the Placement
Agents under the Placement Agreement between the Company and the Placement
Agents, the Company agreed that, unless the Exchange Offer is prohibited by
applicable law, it would (i) use its 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 Company determines 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 April 23, 1998; (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 Company 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 March 23, 1998, 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 Company
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."
27
<PAGE> 31
Upon the terms and subject to the conditions described in this Prospectus
and in the accompanying Letter of Transmittal, the Company 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 Company 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 Company believes 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 Company 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 Company 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 Company, 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 Company has agreed that, for a period of 120 days after
the Expiration Date, it 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, $450 million aggregate principal amount
of Old Notes is outstanding. In connection with the issuance of the Old Notes,
the Company 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 Company will be deemed to have accepted validly tendered Old Notes
when, as and if the Company has 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 Company 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 Company
intends 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 Company will pay all reasonable charges and
28
<PAGE> 32
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 Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" means the latest date
to which the Exchange Offer is extended.
The Company 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 Company reserves the right, in its 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 Company (if permitted to be waived by the
Company), 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 it 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
Company to constitute a material change, the Company 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 Company may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the Exchange Offer, the Company 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 April 15 or October 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 Company intends
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 May
1 and November 1 of each year, commencing May 1, 1998, and the Secured Notes
will bear interest and mature as follows: for the Secured Notes due 2009,
interest at 7.43% with a maturity date of November 1, 2009 and for the Secured
Notes due 2017, interest at 7.88% with a maturity date of November 1, 2017.
29
<PAGE> 33
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 Company 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 COMPANY. 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
30
<PAGE> 34
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 Company,
evidence satisfactory to the Company 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 Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of counsel for the Company, be unlawful. The Company also
reserves the absolute right to waive any irregularities or conditions of tender
as to particular Old Notes. The Company's 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 Company shall determine. Neither the Company, 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 Company has 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 Company reserves the right in its 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 Company 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 Company 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
31
<PAGE> 35
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 Company, 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 Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any Old Notes and return any
Old Notes that have been tendered to the holders
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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 Company 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 Company 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:
<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) 55 Water Street
Room 234, North Building 344-9367 Room 234, North Building
New York, New York 10041 New York, New York 10041
Attention: Carlos Esteves Confirm by Telephone: Attention: Carlos Esteves
(212) 638-0828
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. 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 Company and its affiliates in person, by
telegraph or telephone or other means.
The Company will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. The Company, 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 Company 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 Company.
The Company 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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<PAGE> 37
DESCRIPTION OF THE NEW NOTES
GENERAL
The Old Notes were, and the New Notes will be, issued pursuant to an
Indenture dated as of October 24, 1997 and a First Supplemental Indenture
thereto dated as of October 24, 1997 (as supplemented, "Note Indenture") between
the Company 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 Secured Notes are secured equally and ratably as to payment of
principal and interest by $450 million aggregate principal amount of the 1997
First Mortgage 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 $450 million
consisting of $150 million aggregate principal amount of Secured Notes due 2009
and $300 million aggregate principal amount of Secured Notes due 2017. 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 April 15 or October 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 Company intends 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 May 1 and November 1 of each
year, commencing May 1, 1998, and the Secured Notes will bear interest and
mature as follows: for the Secured Notes due 2009, interest at 7.43% with a
maturity date of November 1, 2009 and for the Secured Notes due 2017, interest
at 7.88% with a maturity date of November 1, 2017. 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 Company maintained for such purpose within the City of
New York, State of New York or, at the option of the Company, 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 Company 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 Company, the Company's office
or agency in the City of New York will be the office of the Note Trustee
maintained for such purpose.
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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 1997 First
Mortgage Bonds, which were issued, pledged and delivered by the Company to the
Note Trustee in connection with the Offering. The 1997 First Mortgage Bonds
consist of two series of the Company's first mortgage bonds which are secured by
a lien on certain property owned by the Company. See "1997 First Mortgage Bonds
and First Mortgage."
REDEMPTION
The Old Notes due 2009 and the Old Notes due 2017 are, and the New Notes
due 2009 and the New Notes due 2017 will be, redeemable in whole or in part, at
the option of the Company at any time, at a redemption price equal to the
greater of (i) 100% of their principal amount and (ii) the sum of the present
values of the remaining scheduled payments of principal and interest thereon
discounted to the date of redemption on a semiannual basis (assuming a 360-day
year consisting of twelve 30-day months) at the Treasury Yield plus twenty-five
(25) basis points in the case of the Secured Notes due 2009 or twenty-five (25)
basis points in the case of the Secured Notes due 2017, plus, in each case,
accrued interest to the date of redemption.
"Treasury Yield" means, with respect to any redemption date, the rate per
annum equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as
a percentage of its principal amount) equal to the Comparable Treasury Price for
such redemption date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the applicable series of Secured Notes that would be
utilized, at the time of selection and in accordance with customary financial
practice, in pricing new issues of corporate debt securities of comparable
maturity to the remaining term of such series of Secured Notes. "Independent
Investment Banker" means Morgan Stanley & Co. Incorporated or, if such firm is
unwilling or unable to select the Comparable Treasury Issue, another independent
banking institution of national standing selected by the Company.
"Comparable Treasury Price" means, with respect to any redemption date (i)
the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) on the third
business day preceding such redemption date, as set forth in the daily
statistical release (or any successor release) published by the Federal Reserve
Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S.
Government Securities" or (ii) if such release (or any successor release) is not
published or does not contain such prices on such business day, (A) the average
of the Reference Treasury Dealer Quotations for such redemption date, after
excluding the highest and lowest such Reference Treasury Dealer Quotations or
(B) if fewer than four such Reference Treasury Dealer Quotations are obtained,
the average of all such Quotations. "Reference Treasury Dealer Quotations"
means, with respect to each Reference Treasury Dealer and any redemption date,
the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing by such Reference Treasury Dealer at 5:00 p.m. on the third business day
preceding such redemption date.
"Reference Treasury Dealer" means each of Morgan Stanley & Co.
Incorporated, Chase Securities Inc., First Chicago Capital Markets, Inc. and
Merrill Lynch, Pierce, Fenner & Smith Incorporated and their respective
successors: provided, however, that if any of the foregoing shall cease to be a
primary U.S. Government securities dealer in New York City (a "Primary Treasury
Dealer"), the Company shall substitute therefor another Primary Treasury Dealer.
Holders of Secured Notes to be redeemed will receive notice thereof by
first-class mail at least 30 and not more than 60 days prior to the date fixed
for redemption.
The New Notes will not be subject to any sinking fund.
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<PAGE> 39
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 Company by the Note Trustee or to the Company and
the Note Trustee by the holders of a majority in principal amount of the
outstanding Secured Notes of that series, by the Company in the performance, or
breach, of any covenant or warranty in the Note Indenture, (iv) default relating
to any of the 1997 First Mortgage Bonds or (v) certain events of bankruptcy or
insolvency, whether voluntary or involuntary, with respect to the 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
the 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 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 outstanding series Secured Notes.
The Company is required to deliver to the Note Trustee annually an
officer's certificate stating whether or not the Company is in default in the
performance and observance of the terms of the Note Indenture, and, if the
Company shall be in default, a statement specifying the nature of such default.
DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
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 Company's 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
Company's obligations in connection therewith and (iv) the Defeasance provisions
of the Note Indenture. In addition, the Company may, at its option and at any
time, elect to have the obligations of the Company 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
Company 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,
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<PAGE> 40
to pay the principal of and interest on the outstanding Secured Notes on the
stated maturity; (ii) in the case of Defeasance, the Company shall have
delivered to the Note Trustee an opinion of counsel reasonably acceptable to the
Note Trustee confirming that (A) the Company has 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 Company 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 Company 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 Company is a
party or by which the Company is 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 Company 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 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 Company 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."
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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).
Without the consent of each holder affected, 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 Company 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 Company's
obligations to holders of Secured Notes in the case of a merger or consolidation
of the Company, 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 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 Company may
appoint a successor trustee under the Note Indenture, subject to the right of
the holders to replace the successor trustee appointed by the Company. 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 Company, 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.
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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 Company 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 Company 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 Nancy C. Ashcom, Corporate Secretary, FirstEnergy
Corp., 76 South Main Street, Akron, Ohio 44308-1890.
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 be limited
to that extent. Because DTC can act only on behalf of persons who have accounts
with DTC ("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 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 directly through Cedel Bank or 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
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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 Company 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 Company expects 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 Company also expects 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 Company expects 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 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.
The Company understands 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 Company 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 Company
within 90 days, the Company 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.
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1997 FIRST MORTGAGE BONDS AND FIRST MORTGAGE
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 1997 First
Mortgage Bonds, which were issued, pledged and delivered by the Company to the
Note Trustee. The 1997 First Mortgage Bonds were issued in the aggregate
principal amount of $450 million. The 1997 First Mortgage Bonds held by the Note
Trustee provide for interest in an amount equal to the interest payable on all
Secured Notes outstanding. Satisfaction of the Company's obligations with
respect to principal of, and interest on, the Secured Notes will satisfy the
Company's obligations with respect to principal of, and interest on, the 1997
First Mortgage Bonds.
GENERAL
The 1997 First Mortgage Bonds were issued as two series of the Company's
first mortgage bonds ("First Mortgage Bonds") under the Company's Mortgage and
Deed of Trust, dated July 1, 1940, from the Company to Guaranty Trust Company of
New York as trustee, under which The Chase Manhattan Bank is successor trustee
("First Mortgage Trustee"), as supplemented and modified by seventy-five
supplemental indentures thereto and as further supplemented, for the issuance of
the 1997 First Mortgage Bonds, by a Seventy-Sixth Supplemental Indenture
("Seventy-Sixth Supplemental Indenture") dated October 15, 1997 (the Mortgage
and Deed of Trust as so supplemented herein called the "First Mortgage"). The
following summary of certain provisions of the First Mortgage do not purport to
be complete and are subject to, and qualified in their entirety by, all of the
provisions of the First Mortgage. For a discussion of the effect on the First
Mortgage of the proposed merger of Toledo Edison into the Company, see "Pending
Merger of the Company and Toledo Edison -- Effect of Pending Merger on the First
Mortgage." The Articles cited below refer to Articles of the First Mortgage.
SECURITY
The 1997 First Mortgage Bonds and all First Mortgage Bonds of other series
currently outstanding and hereafter issued under the First Mortgage are, in the
opinion of counsel for the Company, secured equally and ratably (except as to
any sinking or analogous fund established for the 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 the Company, except the following: (a) cash, receivables
and contracts not pledged or required to be pledged under the First Mortgage and
leases in which the Company is lessor; (b) securities not specifically pledged
or required to be pledged under the 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 the Company 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 the Company. (Clauses preceding Article I) All property acquired by the
Company after June 30, 1940, other than the property excepted from the lien of
the First Mortgage, becomes subject to the lien thereof upon acquisition.
(Article I and granting and other clauses preceding Article I) Under certain
conditions, the First Mortgage permits the Company to acquire property subject
to a lien prior to the lien of the First Mortgage. (Article IV)
Property subject to the lien of the First Mortgage will be released from
the lien upon the sale or transfer of such property if the Company deposits the
fair value of the property with the First Mortgage Trustee and meets certain
other conditions specified in the First Mortgage. (Article VII) Moneys received
by the First Mortgage Trustee for the release of property will, under certain
circumstances, be applied to redeem outstanding First Mortgage Bonds, be applied
to satisfy other obligations of the Company or be paid over to the Company from
time to time based upon property additions or refundable First Mortgage Bonds.
(Article VIII)
In the Nineteenth Supplemental Indenture, the First Mortgage was modified
to permit the Company without the vote or consent of the holders of any First
Mortgage Bonds issued after November 1976 (a) to exclude nuclear fuel from the
lien of the First Mortgage to the extent not excluded therefrom by its existing
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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 the
Company in the State and to clarify its general scope.
TITLE TO PROPERTY
The generating plants and other principal facilities of the Company are
owned by the Company, except as follows:
(a) The Company 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. The Company 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 the Company's
facilities, other than water intake and discharge facilities, located on
such artificially filled 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 the Company, which erected and maintained facilities on such
filled land prior to October 13, 1955. The Company 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 the Company's position, on
advice of counsel for the Company, 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. The Company 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 the Company and Pennsylvania Electric Company
pursuant to a license issued by the FERC 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 the Company'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 the Company. The distribution system also is
located, in part, on land owned by the Company, but, for the most part, it
is located on lands owned by others and on streets and highways. In most
cases, the Company 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 the Company.
The fee title which the Company 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 First Mortgage Trustee.
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ISSUANCE OF ADDITIONAL FIRST MORTGAGE BONDS
In addition to the $3,187 million aggregate principal amount of First
Mortgage Bonds outstanding at December 31, 1997 (which includes $140.4 million
principal amount of First Mortgage Bonds pledged to secure the Company's
obligations to various bank creditors), additional First Mortgage Bonds may be
issued under Article III of the First Mortgage, ranking equally and ratably with
such outstanding First Mortgage Bonds and the 1997 First Mortgage Bonds and
without limit as to amount, on the basis of: (a) 70% of bondable property (as
described under "-- Security") not previously used as the basis for issuance of
First Mortgage Bonds or applied for some other purpose under the First Mortgage;
(b) the deposit of cash (which may be withdrawn thereafter on the basis of
bondable property or refundable First Mortgage Bonds); and (c) substitution for
refundable First Mortgage Bonds. First Mortgage Bonds become refundable First
Mortgage Bonds when they are paid upon maturity, redemption or purchase out of
money deposited with the First Mortgage Trustee for such payment or when money
for such payment is irrevocably deposited with the First Mortgage Trustee.
(Articles I, III and VIII) In general, all property subject to the lien of the
First Mortgage which is used or useful in the Company's electric business
(including property not located in the State if it is physically connected with
property of the Company in the State, either directly or through other property
of the Company), which is not subject to an unfunded prior lien and as to which
the Company 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 First Mortgage
Bonds. (Article I) The facilities of the Company on the artificially filled land
at Lake Shore will become bondable property only when the Company acquires,
under conditions specified in the First Mortgage, either good title to such land
or the right to occupy it; and the facilities of the Company on the land at
Seneca are not now bondable property. See "-- Title to Property." The
tenant-in-common interests owned by the Company 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 the
Company in the State. (Article I) With certain exceptions, property which the
Company leases from others is not bondable property. (Articles I and III)
Also, with certain exceptions, in order to issue additional First Mortgage
Bonds based on bondable property, net earnings of the Company 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 First Mortgage
Bonds is made must be at least twice the annual interest charges on all First
Mortgage Bonds outstanding and on the issue applied for. (Article III)
At December 31, 1997, the Company was not able to issue additional First
Mortgage Bonds except in connection with refinancings. The amount of additional
First Mortgage Bonds which may be issued in the future will fluctuate depending
upon the amount of available refundable First Mortgage Bonds, available bondable
property, earnings and interest rates. See "The Company -- Financing
Capability."
COVENANT TO CHARGE EARNINGS NOT APPLICABLE TO THE 1997 FIRST MORTGAGE BONDS
The supplemental indentures applicable to First Mortgage Bonds issued prior
to 1974 contain a covenant to the effect that, so long as any of those First
Mortgage Bonds remain outstanding (which will be until November 15, 2005,
assuming no prior redemption), the Company 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-Sixth Supplemental Indenture does not extend such covenant to the 1997
First Mortgage Bonds.
REMEDIES IN THE EVENT OF DEFAULT
Events of default under the First Mortgage include the failure of the
Company (a) to pay the principal of or premium, if any, on any First Mortgage
Bond when due; (b) to pay any interest on or sinking fund obligation of any
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 the Company
in excess of $100,000 within 30 days after it is rendered; or (e) to perform any
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other covenant in the First Mortgage within 60 days after notice to the Company
from the First Mortgage Trustee or the holders of not less than 15% in principal
amount of the First Mortgage Bonds. Events of default also include certain
events of bankruptcy, insolvency or reorganization in bankruptcy or insolvency
of the Company. (Article IX) The Company is required to furnish periodically to
the First Mortgage Trustee a certificate as to the absence of any default or as
to compliance with the terms of the First Mortgage, and such a certificate is
also required in connection with the issuance of any additional First Mortgage
Bonds and in certain other circumstances. (Article III) The First Mortgage
provides that the First Mortgage Trustee, within 90 days after notice of
defaults under the 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 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 First
Mortgage Bonds or in the payment of any sinking or purchase fund installments,
the 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 First Mortgage
Bonds to do so. (Article XIII)
Upon the occurrence of any event of default, the First Mortgage Trustee or
the holders of not less than 25% in principal amount of the First Mortgage Bonds
may declare the principal amount of all First Mortgage Bonds due, and, if the
Company cures all defaults before a sale of the mortgaged property, the holders
of a majority in principal amount of the First Mortgage Bonds may waive the
default. If any event of default occurs, the 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 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 First Mortgage Bonds may request or, in the
absence of such request, as the First Mortgage Trustee may determine; (c) bring
suit to enforce payment of the principal of and interest on the First Mortgage
Bonds, to foreclose the First Mortgage or for the appointment of a receiver of
the mortgaged property; and (d) pursue any other remedy. (Article IX)
No holder of First Mortgage Bonds may institute any action, suit or
proceeding for any remedy under the First Mortgage unless he has previously
given the First Mortgage Trustee written notice of a default by the Company, and
in addition: (a) the holders of not less than 25% in principal amount of the
First Mortgage Bonds have requested the First Mortgage Trustee and afforded it a
reasonable opportunity to exercise its powers under the First Mortgage or to
institute such action, suit or proceeding in its own name; (b) such holder has
offered to the First Mortgage Trustee security and indemnity satisfactory to it
against the costs, expenses and liabilities to be incurred thereby; and (c) the
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 First Mortgage Bonds, upon furnishing the First Mortgage Trustee
with security and indemnification satisfactory to it, may require the First
Mortgage Trustee to pursue any available remedy, and any holder of the First
Mortgage Bonds has the absolute and unconditional right to enforce the payment
of the principal of and interest on his First Mortgage Bonds. (Article IX)
MODIFICATION OF FIRST MORTGAGE AND FIRST MORTGAGE BONDS
Certain modifications which do not in any manner impair any of the rights
of the holders of any series of First Mortgage Bonds then outstanding or of the
First Mortgage Trustee may be made without the vote of the holders of the First
Mortgage Bonds by supplemental indenture entered into between the Company and
the First Mortgage Trustee. (Article XIV)
Modifications of the First Mortgage or any indenture supplemental thereto,
and of the rights and obligations of the Company and of holders of all series of
First Mortgage Bonds outstanding, may be made with the consent of the Company by
the vote of the holders of at least 80% in principal amount of the outstanding
First Mortgage Bonds entitled to vote at a meeting of the holders of the First
Mortgage Bonds or, if one or more, but less than all, of the series of First
Mortgage Bonds outstanding under the First Mortgage are affected by any such
modification, by the vote of the holders of at least 80% in principal amount of
the outstanding 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 First
Mortgage Bond issued under the First Mortgage or to change the voting percentage
described above to less
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than 80% with respect to any First Mortgage Bonds outstanding when such
modification becomes effective. First Mortgage Bonds owned or held by or for the
account or benefit of the Company or an affiliate of the Company (as defined in
the First Mortgage) are not entitled to vote. (Article XV) In the Nineteenth
Supplemental Indenture, the First Mortgage was modified, effective when none of
the 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 First Mortgage Bonds outstanding at December 31, 1997,
the 60% voting requirement will become effective on November 15, 2005.
DEFEASANCE AND DISCHARGE
The First Mortgage provides that the Company will be discharged from any
and all obligations under the First Mortgage if the Company pays the principal,
interest and premium, if any, due on all First Mortgage Bonds outstanding in
accordance with the terms stipulated in each such Bond and if the Company has
performed all other obligations under the First Mortgage. In the event of such
discharge, the Company has agreed to continue to indemnify the First Mortgage
Trustee from any liability arising out of the First Mortgage. (Article XVI)
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.
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Secured Notes Purchased at a Premium
If a U.S. Holder purchases a Secured Note for an amount that is greater
than the amount payable at maturity, that U.S. Holder will be considered to have
purchased such Secured Note with "amortizable bond premium" equal in amount to
such excess, and may elect, in accordance with the applicable provisions of
Section 171 of the Code, to amortize that premium as an offset to the interest
payments on the Secured Note using a constant yield to maturity method over the
remaining term of the Secured Note. Pursuant to Section 67(b)(11) of the Code,
the amortization of that premium is not considered a miscellaneous itemized
deduction. Any amortization of such premium with respect to the Secured Notes
will reduce the basis of the Secured Note pursuant to Section 1016(a)(5) of the
Code. If a U.S. Holder does not elect to amortize such premium, the premium paid
by such a holder will be included in the basis of the Secured Note and will
decrease the gain, or increase the loss, on a disposition or retirement of the
Secured Note.
Secured Notes Issued at a Discount
In the case of Secured Notes that are offered to the public at a price that
is less than their stated redemption price at maturity (i.e., their principal
amount), the Secured Notes may bear original issue discount, or "OID," for
federal income tax purposes.
Original issue discount is defined as the excess of the Secured Note's
stated redemption price over its issue price (which is the initial offering
price to the public at which a substantial amount of the Secured Notes are
sold), provided that excess equals or exceeds a statutory de minimis amount
(one-quarter of one percent of the Secured Note's stated redemption price at
maturity multiplied by the number of complete years to its maturity).
OID will accrue to U.S. Holders of the Secured Notes over the period to
maturity based on a constant yield to maturity method, using semiannual
compounding. The portion of OID that accrues during the time a U.S. Holder owns
the Secured Notes (i) constitutes interest includable in the U.S. Holder's gross
income for federal income tax purposes and (ii) is added to the U.S. Holder's
tax basis for purposes of determining gain or loss on the maturity, redemption,
prior sale, or other disposition of the Secured Notes. Thus, the effect of OID
is to increase the amount of taxable interest income above the actual interest
payments during the life of the Secured Notes.
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 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 or
market discount not previously included in gross income or accrued interest, to
which 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
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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 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
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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
Company or its 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 Company or its 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 (or, in the case of payments
after December 31, 1998, three 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 the
Company within the meaning of the Code, (ii) is not a "controlled foreign
corporation" with respect to which the Company 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.
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 Company or any
affiliate of the Company) 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 Company
has agreed that,
48
<PAGE> 52
for a period of 120 days after the Expiration Date, it 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 Company 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 Company 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 Company has 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 the Company by David L. Feltner, 76 South Main Street, Akron, Ohio
44308, Associate General Counsel of the Company and by Squire, Sanders & Dempsey
LLP, 4900 Key Tower, Cleveland, Ohio 44114, special counsel to the Company.
EXPERTS
The financial statements of the Company as of December 31, 1997
(post-merger) and 1996 (pre-merger) and for the years ended December 31, 1996
and 1995 and the period from January 1, 1997 to November 7, 1997 (pre-merger),
and the period from November 8, 1997 to December 31, 1997 (post-merger),
included in the Form 8-K dated March 16, 1998 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.
49
<PAGE> 53
INDEX TO FINANCIAL STATEMENTS SECTION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996
(Reprinted from the Company's Annual Report to Share
Owners)
Management's Financial Analysis........................
Report of Independent Public Accountants...............
Income Statement.......................................
Retained Earnings......................................
Balance Sheet..........................................
Cash Flows.............................................
Statement of Capitalization............................
Notes to the Financial Statements......................
Financial and Statistical Review.......................
FIRST QUARTER 1997 FORM 10-Q
Notes to the Financial Statements (Unaudited)(a).......
Income Statement.......................................
Balance Sheet..........................................
Cash Flows.............................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................
Part II. Other Information(a).........................
SECOND QUARTER 1997 FORM 10-Q
Notes to the Financial Statements (Unaudited)(a).......
Income Statement.......................................
Balance Sheet..........................................
Cash Flows.............................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................
Part II. Other Information(a).........................
THIRD QUARTER 1997 FORM 10-Q
Notes to the Financial Statements (Unaudited)(a).......
Income Statement.......................................
Balance Sheet..........................................
Cash Flows.............................................
Management's Discussion and Analysis of Financial
Condition and Results of Operations...................
Part II. Other Information(a).........................
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997
(Reprinted from the Company's Annual Report to Share
Owners)
Management's Financial Analysis........................
Report of Independent Public Accountants...............
Income Statement.......................................
Retained Earnings......................................
Balance Sheet..........................................
Cash Flows.............................................
Statement of Capitalization............................
Notes to the Financial Statements......................
Financial and Statistical Review.......................
</TABLE>
- ---------------
(a) Combined in each 1997 Form 10-Q for Centerior Energy, the Company and Toledo
Edison and relates to all three companies.
F-1
<PAGE> 54
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> 55
======================================================
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 Company
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 Company 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.................................. 11
Selected Financial Information................ 15
The Company................................... 16
Pending Merger of the Company and Toledo
Edison...................................... 21
Combined Pro Forma Condensed Balance Sheets of
Cleveland Electric and Toledo Edison........ 23
Combined Pro Forma Condensed Income Statements
of Cleveland Electric and Toledo Edison..... 24
The Exchange Offer............................ 27
Description of the New Notes.................. 34
1997 First Mortgage Bonds and First
Mortgage.................................... 41
Certain Tax Considerations.................... 45
Plan of Distribution.......................... 48
Legal Matters................................. 49
Experts....................................... 49
Index to Financial Statements Section......... F-1
</TABLE>
======================================================
======================================================
$450,000,000
EXCHANGE OFFER
THE CLEVELAND ELECTRIC
ILLUMINATING COMPANY
OFFER TO EXCHANGE
7.43% SERIES D SECURED NOTES DUE 2009 OR
7.88% SERIES D SECURED NOTES DUE 2017
FOR ANY AND ALL OUTSTANDING
7.43% SERIES C SECURED NOTES DUE 2009 OR
7.88% SERIES C SECURED NOTES DUE 2017, RESPECTIVELY
PROSPECTUS
, 1998
======================================================
<PAGE> 56
PART II
ITEM 20 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Regulations provide that each person who is or has been a
director or officer of the Company shall be indemnified by the Company 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 the Company (other than a proceeding by or
on behalf of the Company, but only if he or she is found, by the disinterested
members of the Company's 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 the Company 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 the Company 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 the Company; 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 the Company 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 Ohio Revised Code.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable. In the event that a claim for
indemnification against liabilities described in the preceding paragraphs (other
than the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of any
action, suit or proceeding) is asserted by a director, officer or controlling
person, the Company 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 it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The Company maintains and pays the premium on contracts insuring the
Company (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 Company (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 Company, even if the Company does not 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.
ITEM 22 UNDERTAKINGS
The undersigned registrant hereby undertakes as follows:
(1) To file, during any period when offers or sales are being made, a
post-effective amendment to this Registration Statement:
II-1
<PAGE> 57
(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 fourth paragraph of Item 20 above.
II-2
<PAGE> 58
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 1 TO REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF AKRON,
STATE OF OHIO, ON THE DAY OF MARCH, 1998.
THE CLEVELAND ELECTRIC ILLUMINATING
COMPANY
Registrant
By
--------------------------------------
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO 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:
H. Peter Burg President
(ii) Principal financial officer:
Richard H. Marsh Vice President
(iii) Principal accounting officer:
Harvey L. Wagner Controller March , 1998
(iv) Directors:
Willard R. Holland Director
H. Peter Burg Director
Anthony J. Alexander Director
</TABLE>
II-3
<PAGE> 59
EXHIBIT INDEX
Exhibits Filed Herewith
The following Exhibits are filed herewith and made a part hereof:
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<C> <S>
12 Statements regarding computation of ratios.
23(a) Consent of Arthur Andersen LLP.
</TABLE>
Exhibits Filed Previously
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-Sixth Supplemental Indenture dated October 15, 1997.
4(b) Note Indenture dated as of October 24, 1997.
4(c) First Supplemental Note Indenture dated as of October 24,
1997.
5 Opinion of counsel for the Company.
*10(a) Form of Amendment No. 2 to Facility Lease among Citicorp
Lescaman, Inc., The Cleveland Electric Illuminating Company
and The Toledo Edison Company.
*10(b) Form of Amendment No. 3 to Facility Lease among Citicorp
Lescaman, Inc., The Cleveland Electric Illuminating Company
and The Toledo Edison Company.
**10(c) Form of Amendment No. 2 to Facility Lease among US West
Financial Services, Inc., The Cleveland Electric
Illuminating Company and The Toledo Edison Company.
**10(d) Form of Amendment No. 3 to Facility Lease among US West
Financial Services, Inc., The Cleveland Electric
Illuminating Company and The Toledo Edison Company.
***10(e) Form of Amendment No. 2 to Facility Lease among Midwest
Power Company, The Cleveland Electric Illuminating Company
and The Toledo Edison Company.
12 Statements regarding computation of ratios.
23(a) Consent of Arthur Andersen LLP.
23(b) Consent of counsel for the Company (included in Exhibit 5).
25(a) Form T-1 Statement of Eligibility and Qualification for
7.43% Series D Secured Notes due 2009 under Trust Indenture
of 1939 of The Chase Manhattan Bank, as Note Trustee.
25(b) Form T-1 Statement of Eligibility and Qualification for
7.88% Series D Secured Notes due 2017 under Trust Indenture
of 1939 of The Chase Manhattan Bank, as Note Trustee.
</TABLE>
* Documents, substantially identical in all material respects to this Exhibit,
have been entered into relating to two owner participants. Although such
documents may differ in some respects (such as name of the trust, dollar
amounts and percentages), there are no material details in which such
document differs from this Exhibit.
** Documents, substantially identical in all material respects to this Exhibit,
have been entered into relating to three owner participants. Although such
documents may differ in some respects (such as name of the trust, dollar
amounts and percentages), there are no material details in which such
document differs from this Exhibit.
*** Documents, substantially identical in all material respects to this Exhibit,
have been entered into relating to seven owner participants. Although such
documents may differ in some respects (such as name of the trust, dollar
amounts and percentages), there are no material details in which such
document differs from this Exhibit.
<PAGE> 60
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.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3a Amended Articles of Incorporation of the Company, as
amended, effective May 28, 1993 (Exhibit 3a, 1993 Form 10-K,
File No. 1-2323).
3b Regulations of the Company, 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 the
Company 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 the Company and the First
Mortgage 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).
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).
</TABLE>
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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).
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).
</TABLE>
<PAGE> 62
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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).
4b(75) June 15, 1997 (Exhibit 4(a), File No. 333-35931).
4c Open-End Subordinate Indenture of Mortgage between the
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>
Pursuant to Paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, the
Registrant has 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 Registrant and its
subsidiaries on a consolidated basis, but the Registrant hereby agrees to
furnish to the Securities and Exchange Commission on request any such
instruments.
<PAGE> 1
Exhibit 12
----------
Page 1 of 1
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
Computation of Ratio of Earnings to Fixed Charges
-------------------------------------------------
(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 Jan. 1 - Nov. 8 -
---------------------------------------------------- Nov. 7 Dec. 31,
1993 1994 1995 1996 1997 1997
---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C>
Consolidated Net Income (Loss) ($587,147) $ 185,431 $ 183,719 $ 116,553 $ 95,191 $ 19,290
Add
Federal Income Taxes Expense (Credit) (247,966) 85,455 95,561 69,120 78,940 14,029
Interest (a) 252,479 254,248 251,793 244,789 212,957 35,472
Provision for Interest Element of Rentals (b) 81,131 79,462 79,642 79,503 59,078 10,008
--------- --------- --------- --------- --------- --------
Total Earnings ($501,503) $ 604,596 $ 610,715 $ 509,965 $ 446,166 $ 78,799
--------- --------- --------- --------- --------- --------
Fixed Charges
Interest (a) $ 252,479 $ 254,248 $ 251,793 $ 244,789 $ 212,957 $ 35,472
Provision for Interest Element of Rentals (b) 81,131 79,462 79,642 79,503 59,078 10,008
--------- --------- --------- --------- --------- --------
Total Fixed Charges $ 333,610 $ 333,710 $ 331,435 $ 324,292 $ 272,035 $ 45,480
--------- --------- --------- --------- --------- --------
Ratio of Earnings to Fixed Charges (1.50) 1.81 1.84 1.57 1.64 1.73
========= ========= ========= ========= ========= ========
- ---------------------------------
(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> 1
Exhibit 23(a)
Consent of Independent Public Accountants
-----------------------------------------
As independent public accountants, we hereby consent to the use of our report
on the consolidated financial statements of The Cleveland Electric Illuminating
Company dated February 13, 1998. Such report is included in this registration
statement and in the Company's Form 8-K dated March 16, 1997, which Form 8-K
is incorporated by reference in this registration statement. We also consent
to the use of our report dated February 14, 1997, included in this registration
statement, and to the incorporation by reference in this registration statement
of our report dated February 14, 1997, included in the Company's Form 10-K for
the year ended December 31, 1996, and to all references to our Firm included in
this registration statement.
Arthur Andersen LLP
Cleveland, Ohio
March 17, 1998
