SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to to
-------- --------
Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification No.
- ----------- ----------------------------- ------------------
333-21011 FIRSTENERGY CORP. 34-1843785
(An Ohio Corporation)
76 South Main Street
Akron, Ohio 44308
Telephone (800)736-3402
1-2578 OHIO EDISON COMPANY 34-0437786
(An Ohio Corporation)
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-2323 THE CLEVELAND ELECTRIC
ILLUMINATING COMPANY 34-0150020
(An Ohio Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-3583 THE TOLEDO EDISON COMPANY 34-4375005
(An Ohio Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-3491 PENNSYLVANIA POWER COMPANY 25-0718810
(A Pennsylvania Corporation)
1 East Washington Street
P. O. Box 891
New Castle, Pennsylvania 16103
Telephone (412)652-5531
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. (X)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
State the aggregate market value of the voting stock held
by non-affiliates of the registrant: $6,831,426,606 as of March
6, 1998. Indicate the number of shares outstanding of each of
the registrant's classes of common stock, as of the latest
practicable date:
OUTSTANDING
CLASS AT MARCH 26, 1998
----- -----------------
FirstEnergy Corp., $.10 par value 230,207,141
Ohio Edison Company, $9 par value 100
The Cleveland Electric Illuminating
Company, no par value 79,590,689
The Toledo Edison Company, $5 par value 39,133,887
Pennsylvania Power Company, $30 par value 6,290,000
FirstEnergy Corp. is the sole holder of Ohio Edison Company, The
Cleveland Electric Illuminating Company and The Toledo Edison
Company common stock; Ohio Edison Company is the sole holder of
Pennsylvania Power Company common stock.
Documents incorporated by reference (to the extent indicated
herein):
PART OF FORM 10-K INTO WHICH
DOCUMENT DOCUMENT IS INCORPORATED
-------- ----------------------------
FirstEnergy Corp. Annual Report
to Stockholders for
the fiscal year ended
December 31, 1997 (Pages 16-38) Part II
Proxy Statement for 1998 Annual
Meeting of Stockholders
to be held April 30, 1998 Part III
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Registrant Title of Each Class on Which Registered
---------- --------------------- ---------------------
FirstEnergy Corp. Common Stock,
$.10 par value New York Stock
Exchange
Ohio Edison Company Cumulative Preferred
Stock, $100 par value
3.90% Series All series
4.40% Series registered on New
4.44% Series York Stock
4.56% Series Exchange and
Chicago Stock
Exchange
Cumulative Preferred
Stock, $25 par value
7.75% Series Registered on New
York
Stock Exchange and
Chicago Stock
Exchange
The Cleveland
Electric Cumulative Serial
Illuminating Preferred Stock,
Company without par value:
$7.40 Series A All series
$7.56 Series B registered on New
Adjustable Rate, York Stock
Series L Exchange
Depositary Shares:
1993 Series A,
each share New York Stock
representing 1/20 of Exchange
a share of Serial
Preferred Stock,
$42.40 Series T
(without par value)
First Mortgage Bonds:
8-3/4% Series due 2005 New York Stock
Exchange
8-3/8% Series due 2011 New York Stock
Exchange
8-3/8% Series due 2012 New York Stock
Exchange
The Toledo Edison Cumulative Preferred
Company Stock, par value
$100 per share: All series
4-1/4% Series registered on
8.32% Series American Stock
7.76% Series Exchange
10% Series
Cumulative Preferred
Stock, par value
$25 per share:
8.84% Series All series
$2.365 Series registered on
Adjustable Rate, New York Stock
Series A Exchange
Adjustable Rate,
Series B
First Mortgage Bonds:
7-1/2% Series All series
due 2002 registered on
8% Series New York Stock
due 2003 Exchange
Pennsylvania Power Cumulative Preferred
Company Stock, $100 par value:
4.24% Series All series
4.25% Series registered on
4.64% Series Philadelphia
7.64% Series Stock Exchange,
8.00% Series Inc.
This combined Form 10-K is separately filed by
FirstEnergy Corp., Ohio Edison Company, Pennsylvania Power
Company, The Cleveland Electric Illuminating Company and The
Toledo Edison Company. Information contained herein relating to
any individual registrant is filed by such registrant on its own
behalf. No registrant makes any representation as to information
relating to any other registrant, except that information
relating to any of the four FirstEnergy subsidiaries is also
attributed to FirstEnergy.
FORM 10-K
TABLE OF CONTENTS
Page
Part I
Item 1. Business 1
The Company 1
Utility Regulation 1
PUCO Rate Matters 2
PPUC Rate Matters 3
FERC Rate Matters 3
Fuel Recovery Procedures 3
Capital Requirements 4
Central Area Power Coordination Group 6
Nuclear Regulation 7
Nuclear Insurance 7
Environmental Matters 9
Air Regulation 9
Water Regulation 10
Waste Disposal 10
Summary 10
Fuel Supply 11
System Capacity and Reserves 12
Regional Reliability 12
Competition 13
Research and Development 13
Executive Officers 14
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a
Vote of Security Holders 16
Part II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 16
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes In and Disagreements with Accountants
on Accounting and Financial Disclosure 17
Part III
Item 10. Directors and Executive Officers of the
Registrant 17
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial
Owners and Management 23
Item 13. Certain Relationships and Related Transactions 24
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 24
PART I
ITEM 1. BUSINESS
The Company
FirstEnergy Corp. (Company) was organized under the
laws of the State of Ohio in 1996 and became a holding company on
November 8, 1997 in connection with the merger of Ohio Edison
Company (OE) and Centerior Energy Corporation (Centerior). The
Company's principal business is the holding, directly or
indirectly, of all of the outstanding common stock of its four
principal electric utility operating subsidiaries, OE, The
Cleveland Electric Illuminating Company (CEI), Pennsylvania Power
Company (Penn) and The Toledo Edison Company (TE). These utility
subsidiaries are referred to throughout as "Companies." Nearly
all of the Company's consolidated operating revenues are derived
from electric service provided by its utility operating
subsidiaries. In addition, the Company holds all of the
outstanding common stock of its other seven direct subsidiaries,
FirstEnergy Services Corp. (whose subsidiaries include Roth
Bros., Inc., a major provider of energy equipment, management and
control systems), Centerior Service Company (CSC), Centerior
Properties Company, Centerior Enterprises Corporation,
FirstEnergy Trading and Power Marketing, Inc., FirstEnergy
Telecom Corp., and FirstEnergy Securities Transfer Company.
The Companies' combined service areas encompass
approximately 13,200 square miles in central and northern Ohio
and western Pennsylvania. The areas they serve have combined
populations of approximately 5,577,000.
OE was organized under the laws of the State of Ohio in
1930 and owns property and does business as an electric public
utility in that state. OE also has ownership interests in certain
generating facilities located in the Commonwealth of
Pennsylvania. OE furnishes electric service to communities in a
7,500 square mile area of central and northeastern Ohio. It also
provides transmission services and electric energy for resale to
certain municipalities in OE's service area and transmission
services to certain rural cooperatives. OE also engages in the
sale, purchase and interchange of electric energy with other
electric companies. The area it serves has a population of
approximately 2,542,000.
OE owns all of the outstanding common stock of Penn, a
Pennsylvania corporation, which furnishes electric service to
communities in a 1,500 square mile area of western Pennsylvania.
Penn also provides transmission services and electric energy for
resale to certain municipalities in Pennsylvania. The area served
by Penn has a population of approximately 343,000.
CEI was organized under the laws of the State of Ohio
in 1892 and does business as an electric public utility in that
state. It also has ownership interests in certain generating
facilities in Pennsylvania. CEI furnishes electric service in an
area of approximately 1,700 square miles in northeastern Ohio,
including the City of Cleveland. The area CEI serves has a
population of approximately 2,007,000.
TE was organized under the laws of the State of Ohio in
1901 and does business as an electric public utility in that
state. It also has ownership interests in certain generating
facilities in Pennsylvania. TE furnishes electric service in an
area of approximately 2,500 square miles in northwestern Ohio,
including the City of Toledo. The area TE serves has a population
of approximately 685,000.
Utility Regulation
The Companies are subject to broad regulation as to
rates and other matters by the Public Utilities Commission of
Ohio (PUCO) and the Pennsylvania Public Utility Commission
(PPUC). With respect to their wholesale and interstate electric
operations and rates, the Companies are subject to regulation,
including regulation of their accounting policies and practices,
by the Federal Energy Regulatory Commission (FERC). Under Ohio
law, municipalities may regulate rates, subject to appeal to the
PUCO if not acceptable to the utility.
In 1986, a law was passed which extended the
jurisdiction of the PUCO to nonutility affiliates of holding
companies exempt under Section 3(a)(1) and 3(a)(2) of the Public
Utility Holding Company Act of 1935 (1935 Act) to the extent that
the activities of such affiliates affect or relate to the cost of
providing electric utility service in Ohio. The law, among other
things, requires PUCO approval of investments in, or the transfer
of assets to, nonutility affiliates. Investments in such
affiliates are limited to 15% of the aggregate capitalization of
the holding company on a consolidated basis. The Company is an
exempt holding company under Section 3(a)(1) of the 1935 Act, but
the law has not had any effect on its operations as they are
currently conducted.
The Energy Policy Act of 1992 (1992 Act) amended
portions of the 1935 Act, providing independent power producers
and other nonregulated generating facilities easier entry into
electric generation markets. The 1992 Act also amended portions
of the Federal Power Act, authorizing the FERC, under certain
circumstances, to mandate access to utility-owned transmission
facilities. Following the enactment of the 1992 Act, the FERC has
ordered all utilities to file open access tariffs applicable to
transmission facilities, including provisions which require
utilities to offer comparable services on a nondiscriminatory
basis. The FirstEnergy system has such an open access tariff
currently in effect (see "FERC Rate Matters").
PUCO Rate Matters
OE's Rate Reduction and Economic Development Plan was
approved by the PUCO in 1995 and a Rate Reduction and Economic
Development Plan for CEI and TE was approved in January 1997.
These plans are designed to enhance and accelerate economic
development within the Companies' Ohio service areas and to
assure the Companies' customers in those service areas of long-
term competitive pricing for energy services.
These plans initially maintain current base electric
rates for OE, CEI and TE through December 31, 2005, unless
additional revenues are needed to recover the costs of changes in
environmental, regulatory or tax laws or regulations. At the end
of the plan periods, OE base rates will be reduced by $300
million (approximately 20 percent below current levels) and CEI
and TE base rates will be reduced by a combined $310 million
(approximately 15 percent below current levels). As part of these
plans, transition rate credits were implemented for customers,
which are expected to reduce operating revenues for OE by
approximately $600 million and CEI and TE by approximately $391
million during the plan period. The plans also established
revised fuel recovery rate formulas which eliminated the
automatic pass-through of fuel costs to their retail customers
(see "Fuel Recovery Procedures").
All of OE's regulatory assets and CEI's and TE's
regulatory assets related to their nonnuclear operations are
being recovered under provisions of these plans. In addition, the
PUCO has authorized OE to recognize additional capital recovery
related to its generating assets (which is reflected as
additional depreciation expense) and additional amortization of
regulatory assets during the plan period of at least $2 billion
more than the amount that would have been recognized if OE's plan
were not in effect. These additional amounts are being recovered
through current rates. CEI and TE recognized fair value purchase
accounting adjustments to reduce nuclear plant by $1.71 billion
and $.84 billion, respectively, in connection with the
FirstEnergy merger; these fair value adjustments recognized for
financial reporting purposes will ultimately satisfy the asset
reduction commitments of at least $1.4 billion for CEI and $0.6
billion for TE contained in the CEI and TE plan. For regulatory
purposes, CEI and TE will recognize accelerated amortization over
the plan period.
Based on the Ohio plans, at this time, OE, CEI and TE
believe they will continue to be able to bill and collect cost-
based rates (with the exception of CEI's and TE's nuclear
operations); accordingly, it is appropriate that they continue
the application of SFAS No. 71 "Accounting for the Effects of
Certain Types of Regulation" (SFAS 71). However, as discussed
under "Competition" below, changes in the regulatory environment
are on the horizon in Ohio. The Companies do not expect any
changes in Ohio regulation to be effective within the next two
years and cannot assess what the ultimate impact may be. CEI's
and TE's plan does not provide for full recovery of their nuclear
operations. As a result, in October 1997 CEI and TE discontinued
application of SFAS 71 for their nuclear operations and decreased
their regulatory assets of customer receivables for future income
taxes related to the nuclear assets by $499 million and $295
million, respectively, in addition to the fair value adjustments
referred to above.
PPUC Rate Matters
Penn's Rate Stability and Economic Development Plan was
approved by the PPUC in the second quarter of 1996. This plan
initially maintains current base electric rates for Penn through
June 20, 2006 and revised its fuel recovery method (see "Fuel
Recovery Procedures"). All of Penn's regulatory assets are being
recovered under provisions of the plan. In addition, the PPUC has
authorized Penn to recognize additional capital recovery related
to its generating assets (which is reflected as additional
depreciation expense) and additional amortization of regulatory
assets during the plan period of at least $358 million more than
the amounts that would have been recognized if the plan were not
in effect. These additional amounts are being recovered through
current rates.
In December 1996, Pennsylvania enacted "The Electricity
Generation Customer Choice and Competition Act," which permitted
customers, including Penn's customers, to choose their electric
generation supplier, while transmission and distribution services
will continue to be supplied by their current providers. In
accordance with this law, on September 30, 1997, Penn filed a
restructuring plan with the PPUC. The plan describes how Penn
will restructure its rates and provide customers with direct
access to alternative electricity suppliers; customer choice is
to be phased in over three years beginning in 1999, after
completion of a two-year pilot program. Penn will continue to
deliver power to homes and businesses through its transmission
and distribution system, which remains regulated by the PPUC.
Penn also plans to sell electricity and energy-related services
in its own territory and throughout Pennsylvania as an
alternative supplier through its nonregulated subsidiary, Penn
Power Energy, Inc. Through the restructuring plan, Penn is
seeking recovery of $293 million of stranded costs through a
competitive transition charge starting in 1999 and ending in
2005, which is consistent with Penn's regulatory plan. The PPUC
plans to hold public hearings on Penn's restructuring plan early
in 1998. Based on the changing regulatory environment in
Pennsylvania, Penn is expected to discontinue its application of
SFAS 71 for its generation operations, possibly as early as 1998.
The impact of Penn discontinuing SFAS 71 is not expected to be
material. However, Penn believes that this legislation will
continue to provide for cost recovery in a manner which meets the
criteria for application of SFAS 71 for all non-generation
operations as described above.
FERC Rate Matters
Rates for wholesale customers are regulated by the
FERC. The FirstEnergy merger was approved by the FERC on October
29, 1997, and the Companies have operated as a single utility
system since December 1997. An open access transmission tariff
and joint dispatch agreement for the FirstEnergy system are
currently in effect, subject to refund, pending the outcome of
hearings before the FERC. A decision is expected on this
proceeding in late 1998.
Fuel Recovery Procedures
In accordance with their respective plans, OE's, CEI's
and TE's fuel recovery rates have been frozen, subject only to
limited periodic adjustments. The respective rates are adjusted
annually based on changes in the GDP Implicit Price Deflator,
unless significant changes in environmental, regulatory or tax
laws or regulations increase or decrease the cost of fuel. Such
changes in laws, regulations and/or taxes would require PUCO
approval in order to be reflected as an adjustment to the
Electric Fuel Component (EFC) rate.
Furthermore, for the period through June 30, 2000, the
OE EFC rate will be limited to the average fuel cost rate of
certain utilities within the state. Commencing July 1, 2000, the
OE EFC rate will be limited to 97% of the average fuel cost rate
of these companies. The average fuel cost rate for these
utilities may be adjusted by the PUCO to reflect any significant
changes in the Phase II environmental compliance plans of such
companies involving capital additions or equipment utilization.
After January 1, 2000, the respective EFC rates in
effect for CEI and TE will be reduced to reflect the elimination
of annual fixed charges related to a Bruce Mansfield Plant coal
supply contract (see "Fuel Supply"), which amounts to $13.96
million for CEI and $8.74 million for TE. The resulting reduced
EFC rates would be used as the basis for the annual GDP
adjustment, but, in no event, would either company's annual EFC
rate exceed 1.465 cents per kWh during the plan period.
Under its plan, Penn eliminated its energy cost rate
for the recovery of fuel and net purchased power costs as a
separate component of customer charges. Energy costs were rolled
into Penn's base electric rates at their projected 1996-1997
level.
Capital Requirements
The Companies' respective total 1997 construction
costs, excluding nuclear fuel, are shown on the following table.
Such costs included expenditures for the betterment of existing
facilities and for the construction of transmission lines,
distribution lines, substations and other additions. For the
years 1998 -2002, such construction costs related to their
regulated businesses are also shown on the following table. The
Company also expects to invest approximately $300 million during
1998-2002 ($65 million in 1998) relating to various nonregulated
business ventures. See "Environmental Matters" below with regard
to possible environment-related expenditures not included in this
estimate.
1997 1998-2002 Construction Forecast
Actual ----------------------------------
------ 1998 1999-2002 Total
---- --------- -----
(In millions)
OE $107 $147 $363 $ 510
Penn 15 18 72 90
CEI 135 * 105 325 430
TE 52 * 50 150 200
---- ---- ------
Total $320 $910 $1,230
* Includes CEI's and TE's costs of approximately $17 million
and $13 million, respectively, for the period from the
November 8, 1997 merger date to December 31, 1997.
During the 1998 -2002 period, maturities of, and
sinking fund requirements for, long-term debt and preferred stock
of the Companies are:
Preferred Stock and Long-Term Debt
1998-2002 Redemption Schedule
----------------------------------
1998 1999-2002 Total
---- --------- -----
(In millions)
OE $166 $901 $1,067
Penn 1 27 28
CEI 81 775 856
TE 40 402 442
---- ------ ------
Total $288 $2,105 $2,393
OE's and Penn's nuclear fuel purchases are financed
through OES Fuel (a wholly owned subsidiary of OE) commercial
paper and loans, both of which are supported by a $225 million
long-term bank credit agreement. CEI and TE severally lease their
respective portions of nuclear fuel and pay for the fuel as it is
consumed. The Companies' respective investments for additional
nuclear fuel, and nuclear fuel investment reductions as the fuel
is consumed, during the 1998 -2002 period are represented in the
following table. The table also shows the Companies' net
operating lease commitments for the 1998-2002 period. The
Companies recover the cost of nuclear fuel consumed and operating
leases through their electric rates.
<TABLE>
<CAPTION>
Nuclear Fuel 1998-2002 Forecasts
----------------------------------------------- Net Operating Lease Commitments
New Investments Fuel Burn 1998-2002 Schedule
----------------------- ---------------------- ---------------------------------
1998 1999-2002 Total 1998 1999-2002 Total 1998 1999-2002 Total
---- --------- ----- ---- --------- ----- ---- --------- -----
(In millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
OE $24 $145 $169 $34 $116 $150 $83 $358 $441
Penn 2 35 37 7 25 32 -- 1 1
CEI 32 140 172 41 72 113 25 142 167
TE 27 113 140 30 55 85 81 351 432
--- ---- ---- ---- ---- ---- ---- ---- ------
Total $85 $433 $518 $112 $268 $380 $189 $852 $1,041
</TABLE>
Short-term borrowings outstanding at December 31, 1997,
consisted of $182.2 million of OE's bank borrowings and $120.0
million of OES Capital, Incorporated commercial paper. OES
Capital is a wholly owned subsidiary of OE whose borrowings are
secured by customer accounts receivable. OES Capital can borrow
up to $120 million under a receivables financing agreement at
rates based on certain bank commercial paper. The Company and its
utility operating subsidiaries also had $162 million (Company-
$125 million, OE-$35 million and Penn-$2 million) available under
revolving lines of credit as of December 31, 1997. The Company
plans to transfer any of its borrowings under its $125 million
line of credit to CEI and/or TE. In addition, $26 million (OE-$14
million and Penn-$12 million) was available through bank
facilities that provide for borrowings on a short-term basis at
the banks' discretion.
Based on their present plans, the Companies could
provide for their cash requirements in 1998 from the following
sources: funds to be received from operations; available cash and
temporary cash investments (approximate amounts as of December
31, 1997: Company's nonutility subsidiaries-$37 million, OE-$4
million, Penn-$1 million, CEI-$34 million and TE-$22 million);
the issuance of long-term debt (for refunding purposes) and funds
available under revolving credit arrangements.
The extent and type of future financings will depend on
the need for external funds as well as market conditions, the
maintenance of an appropriate capital structure and the ability
of the Companies to comply with coverage requirements in order to
issue first mortgage bonds and preferred stock. The Companies
will continue to monitor financial market conditions and, where
appropriate, may take advantage of economic opportunities to
refund debt and preferred stock to the extent that their
financial resources permit.
The coverage requirements contained in the first
mortgage indentures under which the Companies issue first
mortgage bonds provide that, except for certain refunding
purposes, the Companies may not issue first mortgage bonds unless
applicable net earnings (before income taxes), calculated as
provided in the indentures, for any period of twelve consecutive
months within the fifteen calendar months preceding the month in
which such additional bonds are issued, are at least twice annual
interest requirements on outstanding first mortgage bonds,
including those being issued. Under OE's first mortgage
indenture, the availability of property additions is more
restrictive than the earnings test at the present time and would
limit the amount of first mortgage bonds issuable against
property additions to $350 million. OE is currently able to issue
$1.05 billion principal amount of first mortgage bonds against
previously retired bonds without the need to meet the above
restrictions. Under Penn's first mortgage indenture, other
requirements also apply and are more restrictive than the
earnings test at the present time. Penn is currently able to
issue $248 million principal amount of first mortgage bonds, with
up to $111 million of such amount issuable against property
additions; the remainder could be issued against previously
retired bonds. Purchase accounting revaluation applied to CEI's
and TE's net assets under the merger reduced CEI's and TE's
available bondable property so that first mortgage bonds cannot
currently be issued against property additions.
OE's , Penn's and TE's respective articles of
incorporation prohibit the sale of preferred stock unless
applicable gross income, calculated as provided in the articles
of incorporation, is equal to at least 1-1/2 times the aggregate
of the annual interest requirements on indebtedness and annual
dividend requirements on preferred stock outstanding immediately
thereafter. Based upon earnings for 1997 and at an assumed
dividend rate of 8.5%, OE and Penn would be permitted, under the
earnings coverage test contained in their respective charters, to
issue at least $1.3 billion and $107 million of preferred stock,
respectively. Based on its 1997 earnings, TE could not issue
additional preferred stock. There are no restrictions on CEI's
ability to issue preferred stock.
To the extent that coverage requirements or market
conditions restrict the Companies' abilities to issue desired
amounts of first mortgage bonds or preferred stock, the Companies
may seek other methods of financing. Such financings could
include the sale of preferred or and preference stock or of such
other types of securities as might be authorized by applicable
regulatory authorities which would not otherwise be sold and
could result in annual interest charges and/or dividend
requirements in excess of those that would otherwise be incurred.
Central Area Power Coordination Group (CAPCO)
In September 1967, the CAPCO companies, which consists
of the Companies and Duquesne Light Company (Duquesne), announced
a program for joint development of power generation and
transmission facilities. Included in the program are Unit 7 at
the W. H. Sammis Plant, Unit 5 at the Eastlake Plant, Units 1, 2
and 3 at the Bruce Mansfield Plant, Units 1 and 2 at the Beaver
Valley Power Station, the Perry Nuclear Power Plant and the
Davis-Besse Nuclear Power Station, each now in service.
The present CAPCO Basic Operating Agreement provides,
among other things, for coordinated maintenance responsibilities
among the CAPCO companies, a limited and qualified mutual backup
arrangement in the event of outage of CAPCO units and certain
capacity and energy transactions among the CAPCO companies.
The agreements among the CAPCO companies generally
treat OE and Penn as a single system as between them and the
other three CAPCO companies, but, in agreements between the CAPCO
companies and others, all five companies are treated as separate
entities. Subject to any rights that might arise among the CAPCO
companies as such, each member company, severally and not
jointly, is obligated to pay only its proportionate share of the
costs associated with the facilities and the cost of required
fuel. The CAPCO companies have agreed that any modification of
their arrangements or of their agreed-upon programs requires
their unanimous consent. Should any member become unable to
continue to pay its share of the costs associated with a CAPCO
facility, each of the other CAPCO companies could be adversely
affected in varying degrees because it may become necessary for
the remaining members to assume such costs for the account of the
defaulting member.
Under the agreements governing the construction and
operation of CAPCO generating units, the responsibility is
assigned to a specific CAPCO company. CEI has such
responsibilities for Perry and Eastlake Unit 5, Duquesne is
responsible for Beaver Valley Units 1 and 2, TE is responsible
for Davis-Besse, OE for Sammis Unit 7 and Penn for Bruce
Mansfield Units 1, 2 and 3. The Companies monitor activities in
connection with Beaver Valley Units 1 and 2 but must rely to a
significant degree on Duquesne for necessary information. The
Companies in their oversight role as a practical matter cannot be
privy to every detail; it is Duquesne that must directly
supervise activities and then exercise its reporting
responsibilities to the co-owners. The Companies critically
review the information given to it by Duquesne, but they cannot
be absolutely certain that things they would have considered
significant have been reported or that they always would have
reached exactly the same conclusion about matters that are
reported. In addition, the time that is necessarily part of the
compiling and analyzing process creates a lag between the
occurrence of events and the time the Companies becomes aware of
their significance.
Nuclear Regulation
The construction and operation of nuclear generating
units are subject to the regulatory jurisdiction of the Nuclear
Regulatory Commission (NRC) including the issuance by it of
construction permits and operating licenses. The NRC's procedures
with respect to application for construction permits and
operating licenses afford opportunities for interested parties to
request public hearings on health, safety, environmental and
antitrust issues. In this connection, the NRC may require
substantial changes in operation or the installation of
additional equipment to meet safety or environmental standards
with resulting delay and added costs. The possibility also exists
for modification, denial or revocation of licenses or permits.
Davis-Besse was placed in commercial operation in 1977, and its
operating license expires in 2017. Beaver Valley Unit 1 was
placed in commercial operation in 1976, and its opening license
expires in 2016. 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.
The NRC has promulgated and continues to promulgate
regulations related to the safe operation of nuclear power
plants. The Companies cannot predict what additional regulations
will be promulgated or design changes required or the effect that
any such regulations or design changes, or the consideration
thereof, may have upon Beaver Valley, Davis-Besse and Perry.
Although the Companies have no reason to anticipate an accident
at any nuclear plant in which they have an interest, if such an
accident did happen, it could have a material but currently
undeterminable adverse effect on the Company's consolidated
financial position. In addition, such an accident at any
operating nuclear plant, whether or not owned by the Companies,
could result in regulations or requirements that could affect the
operation or licensing of plants that the Companies do own with a
consequent but currently undeterminable adverse impact, and could
affect the Companies' abilities to raise funds in the capital
markets.
Nuclear Insurance
The Price-Anderson Act limits the public liability
which can be assessed with respect to a nuclear power plant to
$8.92 billion (assuming 110 units licensed to operate) for a
single nuclear incident, which amount is covered by: (i) private
insurance amounting to $200 million; and (ii) $8.72 billion
provided by an industry retrospective rating plan required by the
NRC pursuant thereto. Under such retrospective rating plan, in
the event of a nuclear incident at any unit in the United States
resulting in losses in excess of private insurance, up to $75.5
million (but not more than $10 million per unit per year in the
event of more than one incident) must be contributed for each
nuclear unit licensed to operate in the country by the licensees
thereof to cover liabilities arising out of the incident. Based
on their present ownership and leasehold interests in Beaver
Valley, Perry and Davis-Besse, the Companies' maximum potential
assessment under these provisions (assuming the other co-owner
were to contribute its proportionate share of any assessments
under the retrospective rating plan) would be $257.7 million (OE-
$84.8 million, Penn-$18.0 million, CEI-$84.8 million and TE-$70.1
million) per incident but not more than $32.5 million (OE-$10.7
million, Penn-$2.3 million, CEI-$10.7 million and TE-$8.8
million) in any one year for each incident.
In addition to the public liability insurance provided
pursuant to the Price-Anderson Act, the Companies have also
obtained insurance coverage in limited amounts for economic loss
and property damage arising out of nuclear incidents. The
Companies are members of Nuclear Electric Insurance Limited
(NEIL) which provides coverage (NEIL I) for the extra expense of
replacement power incurred due to prolonged accidental outages of
nuclear units. Under NEIL I, the Companies have policies,
renewable yearly, corresponding to their respective interests in
Beaver Valley, Perry and Davis-Besse, which provide an aggregate
indemnity of up to approximately $809 million (OE-$180 million,
Penn-$53 million, CEI-$316 million and TE-$260 million) for
replacement power costs incurred during an outage after an
initial 21-week (17 weeks for Davis-Besse) waiting period.
Members of NEIL I pay annual premiums and are subject to
assessments if losses exceed the accumulated funds available to
the insurer. The Companies' present maximum aggregate assessment
for incidents at any covered nuclear facility occurring during a
policy year would be approximately $7.2 million (OE-$1.8 million,
Penn-$.5 million, CEI-$2.7 million and TE-$2.2 million).
The Companies are insured as to their respective
interests in Beaver Valley, Perry and Davis-Besse under property
damage insurance provided by American Nuclear Insurers, Mutual
Atomic Energy Liability Underwriters and NEIL to the operating
company for each plant. Under these arrangements, $2.75 billion
of coverage for decontamination costs, decommissioning costs,
debris removal and repair and/or replacement of property is
provided for Beaver Valley, Perry and Davis-Besse. The Companies
pay annual premiums for this coverage and are liable for
retrospective assessments of up to approximately $29.4 million
(OE-$8.9 million, Penn-$1.8 million, CEI-$10.3 million and TE-
$8.4 million) during a policy year.
The Companies intend to maintain insurance against
nuclear risks as described above as long as it is available. To
the extent that replacement power, property damage,
decontamination, decommissioning, repair and replacement costs
and other such costs arising from a nuclear incident at any of
the Companies' plants exceed the policy limits of the insurance
in effect with respect to that plant, to the extent a nuclear
incident is determined not to be covered by the Companies'
insurance policies, or to the extent such insurance becomes
unavailable in the future, the Companies would remain at risk for
such costs.
The NRC requires nuclear power plant licensees to
obtain minimum property insurance coverage of $1.06 billion or
the amount generally available from private sources, whichever is
less. The proceeds of this insurance are required to be used
first to ensure that the licensed reactor is in a safe and stable
condition and can be maintained in that condition so as to
prevent any significant risk to the public health and safety.
Within 30 days of stabilization, the licensee is required to
prepare and submit to the NRC a cleanup plan for approval. The
plan is required to identify all cleanup operations necessary to
decontaminate the reactor sufficiently to permit the resumption
of operations or to commence decommissioning. Any property
insurance proceeds not already expended to place the reactor in a
safe and stable condition must be used first to complete those
decontamination operations that are ordered by the NRC. The
Companies are unable to predict what effect these requirements
may have on the availability of insurance proceeds to the
Companies for the Companies' bondholders.
Environmental Matters
Various federal, state and local authorities regulate
the Companies with regard to air and water quality and other
environmental matters. The Companies have estimated capital
expenditures for environmental compliance of approximately $50
million, which is included in the construction estimate given
under "Capital Requirements" for 1998 through 2002.
Air Regulation
Under the provisions of the Clean Air Act of 1970, both
the State of Ohio and the Commonwealth of Pennsylvania adopted
ambient air quality standards, and related emission limits,
including limits for sulfur dioxide (SO2) and particulates. In
addition, the U.S. Environmental Protection Agency (EPA)
promulgated an SO2 regulatory plan for Ohio which became
effective for OE's, CEI's and TE's plants in 1977. Generating
plants to be constructed in the future and some future
modifications of existing facilities will be covered not only by
the applicable state standards but also by EPA emission
performance standards for new sources. In both Ohio and
Pennsylvania the construction or modification of emission sources
requires approval from appropriate environmental authorities, and
the facilities involved may not be operated unless a permit or
variance to do so has been issued by those same authorities.
The Companies are in compliance with the current SO2
and nitrogen oxides (NOx) reduction requirements under the Clean
Air Act Amendments of 1990. SO2 reductions through the year 1999
will be achieved by burning lower-sulfur fuel, generating more
electricity from lower-emitting plants, and/or purchasing
emission allowances. Plans for complying with reductions required
for the year 2000 and thereafter have not been finalized. EPA is
conducting additional studies which could indicate the need for
additional NOx reductions from the Companies' Pennsylvania
facilities by the year 2003. In addition, the EPA is also
considering the need for additional NOx reductions from the
Companies' Ohio facilities. On November 7, 1997, the EPA proposed
uniform reductions of NOx emissions across a region of twenty-two
states, including Ohio and the District of Columbia (NOx
Transport Rule) after determining that such NOx emissions are
contributing significantly to ozone pollution in the eastern
United States. In a separate but related action, eight states
filed petitions with the EPA under Section 126 of the Clean Air
Act seeking reductions of NOx emissions which are alleged to
contribute to ozone pollution in the eight petitioning states. A
December 1997 EPA Memorandum of Agreement proposes to finalize
the NOx Transport Rule by September 30, 1998, and establishes a
schedule for EPA action on the Section 126 petitions. The cost of
such reductions, if required, may be substantial. The Companies
continue to evaluate their compliance plans and other compliance
options.
The Companies are required to meet federally approved
SO2 regulations. Violations of such regulations can result in
shutdown of the generating unit involved and/or civil or criminal
penalties of up to $25,000 for each day the unit is in violation.
The EPA has an interim enforcement policy for SO2 regulations in
Ohio that allows for compliance based on a 30-day averaging
period. The Companies cannot predict what action the EPA may take
in the future with respect to proposed regulations or the interim
enforcement policy.
In July 1997, EPA promulgated changes in the National
Ambient Air Quality Standard (NAAQS)for ozone and proposed a new
NAAQS for previously unregulated ultra-fine particulate matter.
The cost of compliance with these regulations may be substantial
and depends on the manner in which they are implemented by the
states in which the Companies operate affected facilities.
Water Regulation
Various water quality regulations, the majority of
which are the result of the federal Clean Water Act and its
amendments, apply to the Companies' plants. In addition, Ohio and
Pennsylvania have water quality standards applicable to the
Companies' operations. As provided in the Clean Water Act,
authority to grant federal National Pollutant Discharge
Elimination System (NPDES) water discharge permits can be assumed
by a state. Ohio and Pennsylvania have assumed such authority.
Waste Disposal
As a result of the Resource Conservation and Recovery
Act of 1976, as amended, and the Toxic Substances Control Act of
1976, federal and state hazardous waste regulations have been
promulgated. Certain fossil-fuel combustion waste products, such
as coal ash, were exempted from hazardous waste disposal
requirements pending EPA's evaluation of the need for future
regulation. EPA has issued its final regulatory determination
that regulation of coal ash as a hazardous waste is unnecessary.
OE,CEI and TE have been named as "potentially
responsible parties" (PRPs) at waste disposal sites which may
require cleanup under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980. Allegations that the
Companies disposed of hazardous substances at historical sites
and the liability involved, are often unsubstantiated and subject
to dispute. Federal law provides that all PRPs for a particular
site be held liable on a joint and several basis. CEI and TE have
accrued a liability totaling $5.9 million at December 31, 1997
based on estimates of the costs of cleanup and the proportionate
responsibility of other PRPs for such costs. OE, CEI and TE
believe that waste disposal costs will not have a material
adverse effect on their financial condition, cash flows or
results of operations.
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. On June 26, 1997, the Midwest Compact Commission
(Compact) voted to cease all siting activities in the host state
of Ohio and to dismantle the Ohio Low-Level Radioactive Waste
Facility Development Authority, the statutory agency charged with
siting and constructing the low-level radioactive waste disposal
facility. While the Compact remains intact, it has no plans to
site or construct a low-level radioactive waste disposal facility
in the Midwest. The Companies continue to ship low-level
radioactive waste from their nuclear facilities to the Barnwell,
South Carolina waste disposal facility.
Summary
Environmental controls are still in the process of
development and require, in many instances, balancing the needs
for additional quantities of energy in future years and the need
to protect the environment. As a result, the Companies cannot now
estimate the precise effect of existing and potential regulations
and legislation upon any of their existing and proposed
facilities and operations or upon their ability to issue
additional first mortgage bonds under their respective mortgages.
These mortgages contain covenants by the Companies to observe and
conform to all valid governmental requirements at the time
applicable unless in course of contest, and provisions which, in
effect, prevent the issuance of additional bonds if there is a
completed default under the mortgage. The provisions of each of
the mortgages, in effect, also require, in the opinion of counsel
for the respective Companies, that certification of property
additions as the basis for the issuance of bonds or other action
under the mortgages be accompanied by an opinion of counsel that
the company certifying such property additions has all
governmental permissions at the time necessary for its then
current ownership and operation of such property additions. The
Companies intend to contest any requirements they deem
unreasonable or impossible for compliance or otherwise contrary
to the public interest. Developments in these and other areas of
regulation may require the Companies to modify, supplement or
replace equipment and facilities, and may delay or impede the
construction and operation of new facilities, at costs which
could be substantial.
Fuel Supply
The Companies' sources of generation during 1997 were:
Coal Nuclear
---- -------
OE 76.5% 23.5%
Penn 73.8% 26.2%
CEI 63.0% 37.0%
TE 43.0% 57.0%
The Companies have long-term coal contracts providing
for annual tons of approximately: OE - 6,400,000; Penn -
1,248,000; CEI - 3,900,000; and TE-1,100,000. These contracts
include the Companies' portion of the coal purchase contract
relating to the Bruce Mansfield Plant discussed below. This
contract coal is produced primarily from mines located in Ohio,
Pennsylvania, Kentucky, Wyoming and West Virginia; the contracts
expire at various times through December 31, 2003.
The Companies estimate their 1998 coal requirements to
be approximately 18,646,000 tons (including their respective
shares of the coal requirements of CAPCO's Eastlake Unit 5,
Sammis Unit 7 and the Bruce Mansfield Plant). See "Environmental
Matters" for factors pertaining to meeting environmental
regulations affecting coal-fired generating units.
The Companies have each severally guaranteed (OE's,
CEI's, TE's and Penn's composite percentages being approximately
46.8%, 17.6%, 10.3% and 6.7%, respectively) certain debt and
lease obligations in connection with a coal supply contract for
the Bruce Mansfield Plant (see "Commitments, Guarantees and
Contingencies" notes to the respective financial statements). As
of December 31, 1997, the Companies' shares of the guarantees
were $66.1 million. The price under the coal supply contract,
which includes certain minimum payments, has been determined to
be sufficient to satisfy the debt and lease obligations. This
contract expires December 31, 1999.
The Companies' fuel costs (excluding disposal costs)
for each of the five years ended December 31, 1997, were as
follows:
1997 1996 1995 1994 1993
Cost of fuel consumed
per million BTUs:
Coal: OE $1.31 $1.33 $1.37 $1.36 $1.37
Penn 1.27 1.31 1.30 1.34 1.37
CEI 1.41 1.50 1.56 1.50 1.40
TE 1.54 1.79 1.86 1.76 1.82
Nuclear: OE $ .58 $ .66 $ .79 $ .94 $1.04
Penn .61 .64 .77 .88 .97
CEI .76 .84 .98 .98 1.02
TE .66 .74 .91 .92 .95
Average fuel cost per
kilowatt-hour
generated (cents):
OE 1.17 1.20 1.27 1.31 1.36
Penn 1.17 1.15 1.20 1.29 1.36
CEI 1.23 1.35 1.42 1.35 1.37
TE 1.06 1.26 1.32 1.35 1.42
OES Fuel is the sole lessor for OE's and Penn's nuclear
fuel requirements (see "Capital Requirements" and Note 4G of
Notes to OE's Consolidated Financial Statements). Nuclear fuel is
currently financed for CEI and TE through leases with a special-
purpose corporation.
OE, Penn and OES Fuel have contracts for the supply of
uranium sufficient to meet projected needs through 2000 and
conversion services sufficient to meet projected needs through
2001. Fabrication services for fuel assemblies have been
contracted by the CAPCO companies for the next four reloads for
Beaver Valley Unit 1, three reloads for Beaver Valley Unit 2
(through approximately 2003 and 2002, respectively), the next two
reloads for Perry (through approximately 2001), and the next four
reloads for Davis-Besse (through approximately 2004). The
Companies have a contract with U.S. Enrichment Corporation for
the majority of their enrichment requirements for nuclear fuel
through 2014.
Prior to the expiration of existing commitments, the
Companies intend to make additional arrangements for the supply
of uranium and for the subsequent conversion, enrichment,
fabrication, reprocessing and/or waste disposal services, the
specific prices and availability of which are not known at this
time. Due to the present lack of availability of domestic
reprocessing services, to the continuing absence of any program
to begin development of such reprocessing capability and
questions as to the economics of reprocessing, the Companies are
calculating nuclear fuel costs based on the assumption that spent
fuel will not be reprocessed. On-site spent fuel storage
facilities for Perry and Davis-Besse, are expected to be adequate
through 2010 and 2017, respectively; facilities at Beaver Valley
Units 1 and 2 are expected to be adequate through 2011 and 2005,
respectively. After on-site storage capacity is exhausted,
additional storage capacity will have to be obtained which could
result in significant additional costs unless reprocessing
services or permanent waste disposal facilities become available.
The Federal Nuclear Waste Policy Act of 1982 provides for the
construction of facilities for the disposal of high-level nuclear
wastes, including spent fuel from nuclear power plants operated
by electric utilities; however, the selection of a suitable site
has become embroiled in the political process. Duquesne, CEI and
TE have each previously entered into contracts with the U.S.
Department of Energy (DOE) for the disposal of spent fuel from
Beaver Valley, Perry, and Davis-Besse, respectively. On December
17, 1996, the DOE notified the Companies that it would be unable
to begin acceptance of spent fuel for disposal by January 31,
1998 as mandated by Section 302(a)(5)(B) of the Nuclear Waste
Policy Act (NPA). As a result, the Companies along with over 40
other nuclear utilities and more than 50 state agencies have
asked for federal court approval to stop payments into the
Nuclear Waste Fund and for an order requiring DOE to take
immediate action to accept delivery of spent nuclear fuel.
System Capacity and Reserves
The respective 1997 net maximum hourly demand on each
of the Companies was OE-5,389,000 kilowatts (kW) (including
387,000 kW of firm power sales which extend through 2005 as
discussed under "Competition") on June 25, 1997; Penn-836,000 kW
(including 63,000 kW of firm power sales) on June 25, 1997; CEI-
3,955,000 kW on June 25, 1997; and TE-1,813,000 kW on July 14
1997.
Based on existing capacity plans, the load forecast
made in December 1997 and anticipated term power sales to other
utilities, the capacity margins during the 1998-2002 period are
expected to range from about 8% to 10% for the FirstEnergy
system.
Regional Reliability
The Companies participate with 24 other electric
companies operating in nine states in the East Central Area
Reliability Coordination Agreement (ECAR), which was organized
for the purpose of furthering the reliability of bulk power
supply in the area through coordination of the planning and
operation by the ECAR members of their bulk power supply
facilities. The ECAR members have established principles and
procedures regarding matters affecting the reliability of the
bulk power supply within the ECAR region. Procedures have been
adopted regarding: i) the evaluation and simulated testing of
systems' performance; ii) the establishment of minimum levels of
daily operating reserves; iii) the development of a program
regarding emergency procedures during conditions of declining
system frequency; and iv) the basis for uniform rating of
generating equipment.
Competition
The Companies compete with other utilities for
intersystem bulk power sales and for sales to municipalities and
cooperatives. The Companies compete with suppliers of natural gas
and other forms of energy in connection with their industrial and
commercial sales and in the home climate control market, both
with respect to new customers and conversions, and with all other
suppliers of electricity. To date, there has been no substantial
cogeneration by the Companies' customers.
Technological advances and regulatory changes are
driving forces toward increasing competition in the energy
market. The Pennsylvania pilot program, which allows residents to
choose their electric generation supplier (see "Utility
Regulation--PPUC Rate Matters") is one such regulatory change. In
addition, many large electricity users continue to push for some
form of retail wheeling, which would enable retail customers to
purchase electricity from producers other than the local utility.
In February 1996, the PUCO approved a change allowing large
industrial customers that have interruptible service contracts to
buy their power from other sources when they have been advised by
their local utility that service will be interrupted. 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.
In an effort to more fully utilize their facilities and
hold down rates to their other customers, OE and Penn have
entered into a long-term power sales agreement with another
utility. Currently, OE and Penn are selling 450,000 kW annually
under this contract through December 31, 2005. OE and Penn have
the option to reduce this commitment by 150,000 kW, with three
years' advance notice.
Research and Development
The Companies participate in funding the Electric Power
Research Institute (EPRI), which was formed for the purpose of
expanding electric research and development under the voluntary
sponsorship of the nation's electric utility industry -- public,
private and cooperative. Its goal is to mutually benefit
utilities and their customers by promoting the development of new
and improved technologies to help the utility industry meet
present and future electric energy needs in environmentally and
economically acceptable ways. EPRI conducts research on all
aspects of electric power production and use, including fuels,
generating, delivery, energy management and conservation,
environmental effects and energy analysis. The major portion of
EPRI research and development projects is directed toward
practical solutions and their applications to problems currently
facing the electric utility industry. In 1997, approximately 69%
of the Companies' research and development expenditures were
related to EPRI.
Executive Officers
The executive officers are elected at the annual
organization meeting of the Board of Directors, held immediately
after the annual meeting of stockholders, and hold office until
the next such organization meeting, unless the Board of Directors
shall otherwise determine, or unless a resignation is submitted.
<TABLE>
<CAPTION>
Position Held During
Name Age Past Five Years Dates
- --------------- --- -------------------------------------------------------- ------------
<S> <C> <C> <C>
W. R. Holland 61 Chairman of the Board and Chief Executive Officer 1997-present
Chairman of the Board and Chief Executive Officer-OE 1996-1997
President and Chief Executive Officer-OE 1993-1996
President and Chief Operating Officer-OE *-1993
H. P. Burg 51 President and Chief Financial Officer 1997-present
President, Chief Operating Officer and Chief Financial
Officer-OE 1996-1997
Senior Vice President and Chief Financial Officer-OE *-1996
A. J. Alexander 46 Executive Vice President and General Counsel 1997-present
Executive Vice President and General Counsel-OE 1997-1996
Senior Vice President and General Counsel-OE *-1996
E. T. Carey 55 Vice President - Distribution 1997-present
Vice President--Regional Operations and Customer
Service-OE 1995-1997
Vice President--Marketing and Customer Service
Support-OE 1994-1995
Manager, Performance Initiatives-OE 1993-1994
Manager-Youngstown Division-OE *-1993
M. B. Carroll 46 Vice President - Corporate Affairs 1997-present
Manager - Sandusky Area-OE 1994-1997
Director, Communications and Mission
Services - Providence Hospital *-1994
D. S. Elliott 43 Vice President - Sales and Marketing 1997-present
Manager - FirstEnergy Services - OE 1997
Manager - Eastern Division - OE 1996-1997
Manager - Youngstown Division - OE 1993-1996
Manager - Customer Accounts - OE * 1993
A. R. Garfield 59 Vice President - Business Development 1997-present
Vice President - System Operations - OE *-1997
J. A. Gill 60 Vice President - Administrative Services 1997-present
Vice President - Administration - OE *-1997
R. H. Marsh 47 Vice President - Finance 1997-present
Treasurer - OE *-1997
G. L. Pipitone 48 Vice President - Fossil Production 1997-present
Vice President - Generation and Transmission - OE 1996-1997
Manager - Akron Division - OE 1993-1996
Manager - Production Dept. - OE *-1993
S. F. Szwed 45 Vice President - Transmission 1997-present
Vice President - Engineering & Planning - CSC 1995-1997
Director - System Planning & Operations - CSC 1993-1995
Director - System Planning - CSC *-1993
N. C. Ashcom 50 Corporate Secretary 1997-present
Secretary - OE 1994-1997
Assistant Secretary - OE *-1994
T. F. Struck II 54 Treasurer 1997-present
Assistant Treasurer and Assistant Secretary - OE 1994-1997
Assistant Treasurer - OE *-1994
H. L. Wagner 45 Controller 1997-present
Comptroller - OE *-1997
<FN>
Except for W. R. Holland, M. B. Carroll and D. S. Elliott, the officers above hold the same offices for
FirstEnergy, OE, CEI and TE.
*Indicates position held at least since January 1, 1993.
</TABLE>
At December 31, 1997, the Company's nonutility
subsidiaries and the Companies had a total of 10,020 employees
consisting of the following: OE-3,218, CEI - 3,162, TE - 1,532,
Penn - 997 and CSC - 1,111 employees.
ITEM 2. PROPERTIES
The Companies' respective first mortgage indentures
constitute, in the opinion of the Companies' counsel, direct
first liens on substantially all of the respective Companies'
physical property, subject only to excepted encumbrances, as
defined in the indentures. See "Leases" and "Capitalization"
notes to the respective financial statements for information
concerning leases and financing encumbrances affecting certain of
the Companies' properties.
The Companies own, individually or together with other
companies as tenants in common, and/or lease, the generating
units in service as of March 1, 1998, shown on the table below.
<TABLE>
<CAPTION>
Net Demonstrated
Capacity (kW)
------------------ OE Penn CEI TE
Companies' -------------- ---------------- -------------------- ---------------
Unit Total Entitlement % kW % kW % kW % kW
---- ----- ----------- - -- - -- - -- - --
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Plant - Location
- ----------------
Coal-Fired Units
- ----------------
Ashtabula- 5 244,000 244,000 -- -- -- -- 100.00% 244,000 -- --
Ashtabula, OH
Avon Lake- 9 596,000 596,000 -- -- -- -- 100.00% 596,000 -- --
Avon Lake, OH
Bay Shore- 1-4 631,000 631,000 -- -- -- -- -- -- 100.00% 631,000
Toledo, OH
R. E. Burger- 3-5 406,000 406,000 100.00% 406,000 -- -- -- -- -- --
Shadyside, OH
Eastlake-Eastlake, OH 1-4 636,000 636,000 -- -- -- 100.00% 636,000 -- --
5 597,000 411,000 -- -- -- -- 68.80% 411,000 -- --
Lakeshore- 18 245,000 245,000 -- -- -- -- 100.00% 245,000 -- --
Cleveland, OH
B. Mansfield- 1 780,000 552,000 60.00% 468,000 4.20% 33,000 6.50%(b) 51,000 -- --
Shippingport, PA 2 780,000 718,000 39.30% 307,000 6.80% 53,000 28.60%(b) 223,000 17.30%(b) 135,000
3 800,000 690,000 35.60% 285,000 6.28% 50,000 24.47%(b) 196,000 19.91%(b) 159,000
New Castle- 3-5 333,000 333,000 -- -- 100.00% 333,000 -- -- -- --
W.Pittsburg, PA
Niles-Niles, OH 1-2 216,000 216,000 100.00% 216,000 -- -- -- -- -- --
W.H. Sammis- 1-6 1,620,000 1,620,000 100.00% 1,620,000 -- -- -- -- -- --
Stratton, OH 7 600,000 413,000 48.00% 288,000 20.80% 125,000 -- -- -- --
---------- --------- ------- --------- ---------
Total 7,711,000 3,590,000 594,000 2,602,000 925,000
---------- --------- ------- --------- ---------
Nuclear Units
- -------------
Beaver Valley- 1 810,000 425,000 35.00% 283,000 17.50% 142,000 -- -- -- --
Shippingport, PA 2 820,000 707,000 41.88%(a)343,000 -- -- 24.47% 201,000 19.91%(c) 163,000
Davis-Besse- 1 883,000 883,000 -- -- -- -- 51.38% 454,000 48.62% 429,000
Oak Harbor, OH
Perry- 1 1,194,000 1,030,000 30.00%(a)358,000 5.24% 63,000 31.11% 371,000 19.91% 238,000
N. Perry Village, OH
---------- --------- ------- --------- ---------
Total 3,045,000 984,000 205,000 1,026,000 830,000
---------- --------- ------- ---------
Oil/Gas-Fired/
Pumped Storage Units
- --------------------
Edgewater-Lorain, OH 4 100,000 100,000 100.00% 100,000 -- -- -- -- -- --
Seneca-Warren, PA 439,000 351,000 -- -- -- -- 80.00% 351,000 -- --
West Lorain-
Lorain, OH 1 120,000 120,000 100.00% 120,000 -- -- -- -- -- --
Other 303,000 303,000 139,000 25,000 62,000 77,000
---------- --------- ------- --------- --------
Total 874,000 359,000 25,000 413,000 77,000
---------- --------- ------- --------- --------
Total 11,630,000 4,933,000 824,000 4,041,000 1,832,000
========== ========= ======= ========= =========
<FN>
Notes: (a) OE's interests consist of 20.22% owned and 21.66% leased for Beaver Valley Unit 2; and 17.42%
owned (representing portion leased from a wholly owned subsidiary of OE) and 12.58% leased for Perry.
(b) CEI's and TE's Bruce Mansfield interests are leased.
(c) TE's interests consist of 1.65% owned and 18.26% leased.
</TABLE>
Prolonged outages of existing generating units might
make it necessary for the Companies, depending upon the demand
for electric service upon their system, to use to a greater
extent than otherwise, less efficient and less economic
generating units, or purchased power, and in some cases may
require the reduction of load during peak periods under the
Companies' interruptible programs, all to an extent not presently
determinable.
The Companies' generating plants and load centers are
connected by a transmission system consisting of elements having
various voltage ratings ranging from 23 kilovolts (kV) to 345 kV.
The Companies' overhead and underground transmission lines
aggregate 7,505 miles.
The Companies' electric distribution systems include
55,141 miles of overhead pole line and underground conduit
carrying primary, secondary and street lighting circuits. They
own, individually or together with one or more of the other CAPCO
companies as tenants in common, substations with a total
installed transformer capacity of 49,286, 125 kilovolt-amperes.
The Companies' transmission lines also interconnect
with those of AEP, The Dayton Power and Light Company, Duquesne,
Monongahela Power Company, West Penn Power Company, Detroit
Edison Company and Pennsylvania Electric Company. These
interconnections make possible utilization by the Companies of
generating capacity constructed as a part of the CAPCO program,
as well as providing opportunities for the sale of power to other
utilities.
Substation
Distribution Transmission Transformer
Systems Lines Capacity
------------ ------------ -----------
(Miles) (kV-amperes)
OE 26,220 3,873 20,603,056
Penn 5,110 606 3,938,069
CEI 23,305 2,351 16,669,000
TE 506 675 8,076,000
------ ----- ----------
Total 55,141 7,505 49,286,125
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The information required for this item for FirstEnergy
and OE (through November 7, 1997) is included on page 17 of
FirstEnergy's 1997 Annual Report to Stockholders (Exhibit 13).
The information required for CEI, TE and Penn is not applicable
because they are wholly owned subsidiaries.
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by Items 6 through 8 is
incorporated herein by reference to Selected Financial Data,
Management's Discussion and Analysis of Results of Operations and
Financial Condition, and Financial Statements included on the
pages shown in the following table in the respective company's
1997 Annual Report to Stockholders (Exhibit 13).
Item 6 Item 7 Item 8
------ ------ ------
FirstEnergy 17 18-21 16,22-38
OE 1 2-7 8-29
Penn 1 2-4 5-16
CEI 1 2-7 8-30
TE 1 2-7 8-30
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
FirstEnergy
-----------
The information required by Item 10, with respect to
Identification of FirstEnergy's Directors and with respect to
reports required to be filed under Section 16 of the Securities
Exchange Act of 1934, is incorporated herein by reference to the
Company's 1998 Proxy Statement filed with the Securities and
Exchange Commission (SEC) pursuant to Regulation 14A and, with
respect to Identification of Executive Officers, to "Part I, Item
1. Business- Executive Officers" herein.
OE, CEI and TE
--------------
W. R. Holland, H. P. Burg and A. J. Alexander are the
Directors of OE, CEI, and TE since the Ohio Edison-Centerior
merger. Information concerning these individuals is shown in the
"Executive Officers" section of Item 1.
Penn
----
The present term of office of each Penn director
extends until the next succeeding annual meeting of stockholders
and until his successor is elected and shall qualify.
The Penn executive officers are elected at the annual
organization meeting of the Penn Board of Directors, held
immediately after the annual meeting of stockholders, and hold
office until the next such organization meeting, unless the Board
of Directors shall otherwise determine, or unless a resignation
is submitted.
H. Peter Burg -Age 51
President and Chief Financial Officer of the Company; and
President of OE, CEI and TE since 1997.
President, Chief Operating Officer and Chief Financial Officer
of OE from 1996 to 1997. Senior Vice President and Chief
Financial Officer of OE from 1989 to 1996. President of Penn
from 1994 to 1995. Director of Penn since 1989. Mr. Burg is
also a director of the Company, OE, CEI and TE.
Willard R. Holland -Age 61
Chairman of the Board and Chief Executive Officer of the
Company since 1997.
Chairman of the Board and Chief Executive Officer, and Chief
Financial Officer of Penn, since 1993. Chairman of the Board
and Chief Executive Officer of OE, from 1996 to 1997.
President and Chief Executive Officer of OE, from 1993 to
1996. President and Chief Operating Officer of OE from 1991
to 1993. Director of Penn since 1991. Mr. Holland is also a
director of the Company, OE, CEI, TE and A. Schulman, Inc.
R. Joseph Hrach -Age 49
President of Penn since 1996. Division Manager, Stark Division,
of OE from 1991 to 1996. Director of Penn since 1996.
Joseph J. Nowak -Age 66
Retired. Consultant to Armco Inc. during 1993 and Vice
President during 1992 of Armco Inc., and Executive Vice
President-Operations from 1988 to 1992 of Cyclops Industries,
Inc., manufacturers of steel products. Cyclops Industries, Inc.
merged with Armco Inc. in 1992. Director of Penn since 1982.
Jack E. Reed -Age 55
Vice President of Penn since 1992. Director of Penn since 1992.
Richard L. Werner -Age 66
Retired in 1997 as Chairman of the Board, President, and Chief
Executive Officer of Werner Co., Inc., manufacturer of aluminum
extrusions, ladders and scaffolding. Director of Penn since
1993.
Robert P. Wushinske -Age 58
Secretary and General Counsel of Penn since 1994 and Vice
President and Treasurer of Penn since 1987.
David W. McKean -Age 45
Director, Budget and Financial Reporting Services of the
Company since 1997. Comptroller of Penn since 1992.
ITEM 11. EXECUTIVE COMPENSATION
FirstEnergy - The information required by this item is
incorporated herein by reference to the Company's 1998 Proxy
Statement filed with the SEC pursuant to Regulation 14A.
OE CEI and TE - The information required by this item follows:
<TABLE>
<CAPTION>
SUMMARY EXECUTIVE COMPENSATION TABLE
Annual Compensation
-----------------------------------
Long-Term
Name and Compensation All Other
Principal Position Year Salary Bonus Other Payouts Compensation
------------------ ---- ------ ----- ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
H. Peter Burg (1)
President
Anthony J. Alexander (1)
Executive Vice President
and General Counsel
Earl T. Carey (1)
Vice President
John A. Gill (1)
Vice President
Fred J. Lange, Jr. (2) 1997 $222,946 $ 18,000 $0 $ 8,665 $5,241
Vice President 1996 215,020 100,000 0 0 6,447
1995 201,220 0 0 0 6,369
Robert J. Farling (3)
Murray R. Edelman (4) 1997 $265,044 $ 21,204 $0 $15,754 $5,871
1996 265,044 100,000 0 0 6,141
1995 265,044 0 0 0 6,136
<FN>
(1) The compensation of Messrs. Burg, Alexander, Carey and Gill, who are also officers of the Company,
are incorporated herein by reference to the Company's 1998 Proxy Statement filed with the SEC
pursuant to Regulation 14A.
(2) Mr. Lange was Vice President of CEI and President of TE until consummation of the merger in 1997.
His compensation for services rendered in 1997 as Senior Vice President of Centerior Energy
Corporation was comprised of his base salary of $222,946, an incentive award of $18,000 pursuant to
Centerior's Executive Incentive Compensation Plan, and payment of $8,665 for long-term Deferred
Incentive Units issued in 1992. The "All-Other Compensation" amount of $5,241 represents the
portion of premiums for life, accident, personal liability, and supplemental retirement insurance
benefits paid by Centerior to Mr. Lange to the extent those benefits exceeded that which was
uniformly available to salaried employees under Centerior's benefit plans. Mr. Lange also
exercised stock options with respect to 26,250 shares of common stock in 1997, realizing $124,359.
At December 31, 1997, there were 43,450 shares of underlying unexercised options with a value of
$97,136 all of which are exercisable.
(3) Mr. Farling was Chairman of the Board and Chief Executive Officer of CEI and TE in the 1997
pre-merger period. His compensation is incorporated herein by reference to the Company's 1998 Proxy
Statement filed with the SEC pursuant to Regulation 14A..
(4) Mr. Edelman was President of CEI and Vice Chairman of the Board of TE until consummation of merger
in 1997.
His compensation for services rendered in 1997 as Executive Vice President of Centerior Energy
Corporation was comprised of his base salary of $265,044, an incentive award of $221,204 pursuant
to Centerior's Executive Incentive Compensation Plan, and payment of $15,754 for long-term Deferred
Incentive Units issued in 1992. The "All-Other Compensation" amount of $5,871 represents the
portion of premiums for life, accident, personal liability, and supplemental retirement insurance
benefits paid by Centerior to Mr. Edelman to the extent those benefits exceeded that which was
uniformly available to salaried employees under Centerior's benefit plans.
Following his termination of employment on January 31, 1998, payments were made to Mr. Edelman
consistent with the terms of a special severance agreement applying to certain Centerior
executives. These included a severance benefit of $1,237,842, a payment of $23,180 for benefit
continuation, and a makeup pension benefit of $1,186,590 based on the assumption that he would have
continued to work until age 62. In addition, a payment was made to reimburse him, on an after-tax
basis, for the excise tax payments withheld from the above payments. Consistent with Mr. Edelman's
experience in the electric utility industry, Mr. Edelman has agreed to act as a consultant to the
Company for a twenty-four month period beginning February 1, 1998. His monthly fees for those
services will be $10,000.
</TABLE>
CERTAIN SEVERANCE PAY AGREEMENTS
Information related to severance pay agreements with
each of Messrs. Holland, Burg, Alexander and Gill are
incorporated herein by reference to the Company's 1998 Proxy
Statement. In 1996, Centerior entered into a severance pay
agreement with Mr. Lange providing for the payment of severance
benefits in the event that his employment was to terminate other
than for cause, death or disability as a result of a merger. This
agreement was extended to November 7, 1998. The severance
agreement provided that in the event of a termination of
employment (other than for cause, death or disability), he shall
be entitled to receive a payment equal to three times his base
salary. In addition, (i) certain benefit plans would be continued
for three years following termination, (ii) he would be entitled
to a payment reflecting the retirement benefit he would have been
entitled to had his employment continued for the three-year
period following termination of his employment, and (iii) certain
additional payments will be made to him if he is subject to an
excise tax.
Penn - The information required by this item follows:
- ----
<TABLE>
<CAPTION>
SUMMARY EXECUTIVE COMPENSATION TABLE
Annual Compensation
--------------------------------- Long-Term
Name and Compensation All Other
Principal Position Year Salary Bonus Other(1) Payouts(2) Compensation(3)
------------------ ---- ------ ----- ------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Willard R. Holland 1997 $ 117,449 $ 57,909 $ 113 $ 35,919 $ 17,269
Chairman of the Board and 1996 103,332 42,639 126 12,420 14,461
Chief Executive Officer 1995 100,473 35,907 281 5,294 7,701
Jack E. Reed 1997 123,759 23,702 244 9,039 7,951
Vice President 1996 121,900 27,783 623 5,606 7,371
1995 117,619 26,247 28 2,683 6,042
R. Joseph Hrach 1997 144,249 26,807 3,473 0 7,367
President (4) 1996 64,165 26,820 10,770 0 4,901
1995 0 0 0 0 0
Robert P. Wushinske 1997 120,927 27,037 200 0 5,967
Vice President, Secretary, 1996 116,773 27,882 102 0 6,230
Treasurer and General Counsel 1995 112,738 21,774 113 0 5,652
<FN>
(1) Consists of reimbursement for income tax obligations on Executive Indemnity Program premium and
on perquisites.
(2) These amounts represent cash payouts of the portion of 1993 Executive Incentive Compensation Plan
annual award previously deferred into a Common Stock Equivalent Account.
(3) For 1997, amount is comprised of (1) matching FirstEnergy common stock contributions under the
tax qualified Savings Plan: Holland - $1,425; Hrach - $6,112; Reed - $5,133; Wushinske - $5,021;
(2) the current dollar value of Penn's portion of the premiums paid in 1997 for insurance
policies under the Executive Supplemental Life Plan: Holland - $3,257;Hrach - $1,255; Reed -
$1,333; Wushinske - $946; (3) above market interest earned under the Executive Deferred
Compensation Plan: Holland - $12,587; Reed - $1,464; and (4) a portion of the Executive Indemnity
Program premium reportable as income: Reed - $21.
(4) Mr. Hrach became President on July 1,1996, and his salary for 1996 reflects the amount paid by
Penn since that date.
</TABLE>
<TABLE>
<CAPTION>
LONG-TERM INCENTIVE PLAN TABLE
AWARDS IN LAST FISCAL YEAR
1997 Target Equivalent Estimated Future Payouts Under
Long-Term Number of Performance or Other Non-Stock Price Based Plan
Incentive Performance Period Until (Number of Performance Shares)
Name Opportunity Shares Maturation or Payout --------------------------------
---- ----------- ----------- -------------------- Below
Threshold Threshold Target Maximum
--------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
W. R. Holland-CEO $70,512 3,141 4 years -0- 1,570 3,141 4,711
J. E. Reed 12,228 545 4 years -0- 272 545 817
R. P. Wushinske 4,431 197 4 years -0- 99 197 296
</TABLE>
Each executive's 1997 target long-term incentive
opportunity was converted into performance shares equal to an
equivalent number of shares of FirstEnergy's common stock based
on the average price of such stock during December 1996, and will
be held in a Common Stock Equivalent Account through 2000. The
Common Stock Equivalent Account was converted to FirstEnergy
common stock upon the consummation of the merger of OE and
Centerior Energy Corporation. At the end of this four-year
performance period, this Common Stock Equivalent Account will be
valued based on the average price of FirstEnergy's common stock
during December 2000 and as if any dividends that would have been
paid on such stock during the performance period had been
reinvested on the date paid. This value may be increased or
decreased based upon the total return of FirstEnergy's common
stock relative to the Edison Electric Institute's Index of
Investor-owned Electric Utility Companies (Index) during the
period. If an executive retires, dies or otherwise leaves the
employment of the Company prior to the end of the four-year
period, the value will be further proportionally decreased based
on the number of months worked during the period. However, an
executive must work at least twelve months during the four-year
period to be eligible for an award payout. The final value of an
executive's account, if any, will be paid to the executive in
cash early in the year 2001.
The final value of an executive's account may range
from zero to 150% of the target amount. The maximum amount in the
above table is equal to 150% of the target 1997 long-term
incentive opportunity and will be earned if FirstEnergy's total
shareholder return is in the top 15% compared to the Index noted
above. An amount equal to 100% of the target 1997 long-term
incentive opportunity will be earned if FirstEnergy's total
shareholder return is in the 38th percentile compared to the
Index. The threshold amount is equal to 50% of the target 1997
long-term incentive opportunity and will be earned if
FirstEnergy's total shareholder return is in the 60th percentile
compared to the Index. Payouts for a total shareholder return
ranking between the 15th percentile and 60th percentile will be
interpolated. However, there will be no long-term award payouts
if FirstEnergy's total shareholder return compared to the Index
falls below the 60th percentile.
Supplemental Executive Retirement Plan
Penn participates in the FirstEnergy System
Supplemental Executive Retirement Plan. Mr. Holland is the only
executive officer listed above who is eligible to participate in
the Plan. At normal retirement, eligible senior executives of
Penn who have five or more years of service with the FirstEnergy
System are provided a retirement benefit equal to the greater of
65 percent of their highest annual salary from Penn, or 55
percent of the average of their highest three consecutive years
of salary plus annual incentive awards paid after January 1, 1996
and paid prior to retirement, reduced by the executive's pensions
under tax-qualified pension plans of Penn or other employers, any
supplementary pension under Penn's Executive Deferred
Compensation Plan, and social security benefits. Subject to
exceptions that might be made in specific cases, senior
executives retiring prior to age 65, or with less than five years
of service, or both, may receive a similar but reduced benefit.
This Plan also provides for disability and surviving spouse
benefits. As of the end of 1997, the estimated annual retirement
benefits at age 65 from all of the above sources was $76,963 for
Mr. Holland.
Pension Plan
The Company's trusteed noncontributory Pension Plan
covers substantially all full-time employees including officers
of the Company. Pension benefits are determined using a formula
based on a Pension Plan participant's years of accrued service
and average rate of monthly earnings for the highest 60 months of
the last 120 months of accrued service immediately preceding
retirement or termination of service.
Compensation covered by the Pension Plan consists of
basic cash wages and compensation deferred through the Savings
Plan up to the maximum amount permitted under the Internal
Revenue Code of 1986, as adjusted in accordance with regulations.
This amount was $160,000 per year for 1997 and $160,000 per year
for 1998. In addition, a supplementary pension benefit may be
payable to participants in the Executive Deferred Compensation
Plan. Compensation for 1997 covered by these two plans for the
officers shown in the Executive Compensation Table who are not
currently participants in the FirstEnergy System Supplemental
Executive Retirement Plan is shown under the Salary column of the
Table. The credited years of service for these same officers are
as follows: J. E. Reed -31 years; and R. P. Wushinske -24
years.
The following table shows the estimated annual amounts
payable upon retirement as pension benefits under the Pension
Plan and the supplemental pension benefit under the Executive
Deferred Compensation Plan, based on specified compensation and
years of credited service classifications, assuming continuation
of both such present Plans and employment until age 65.
Retirement prior to age 62 results in a reduction of pension
benefits. The amounts shown are subject to a reduction based on
an individual's covered compensation, date of birth and years of
credited service as defined by the Pension Plan and its optional
survivorship provision.
<TABLE>
<CAPTION>
Estimated Annual Retirement Payment from the
Pension Plan and the Annual Supplementary Pension
Benefit under the Executive Deferred Compensation Plan
Applicable 15 Years 25 Years 35 Years 45 Years
Annual Earnings Service Service Service Service
--------------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
$120,000 $31,959 $50,865 $64,970 $ 78,170
130,000 34,809 55,415 70,820 85,120
140,000 37,659 59,965 76,670 92,070
150,000 40,509 64,515 82,520 99,060
160,000 43,359 69,065 88,370 105,970
170,000 46,209 73,615 94,220 112,920
</TABLE
Compensation Committee Interlocks and Insider Participation in
Compensation Decisions
The Penn Board of Directors has no compensation
committee. The Penn Board of Directors, other than Mr. Holland,
establishes the compensation of Mr. Holland as chief executive
officer; Mr. Holland establishes the compensation of the other
executive officers of Penn. During 1997 Mr. Holland served as a
director of the Company and H. Peter Burg served as an executive
officer of the Company and as a director of Penn. In his capacity
as a director of Penn, Mr. Burg participated in decisions
relating to the compensation of Mr. Holland.
Compensation of Directors
Directors who are not employees of the Companies
receive an annual retainer of $4,200 and 100 shares of
FirstEnergy Common Stock for each full year of service. Such
directors are also paid a meeting fee of $375 for each board
meeting attended and are reimbursed for expenses for the
attendance thereof, if any. Directors who are also employees of
Penn or of OE or FirstEnergy receive no compensation for serving
as directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
FirstEnergy - The information required by this item is
- -----------
incorporated herein by reference to the Company's
1998 Proxy Statement filed with the SEC pursuant
to Regulation 14A.
(a) Security Ownership of Certain Beneficial Owners at March
30, 1998:
OE, CEI, TE and Penn - The information required by this item
-------------------- follows:
</TABLE>
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Percent
Title of Class Beneficial Owner Beneficial Ownership of Class
-------------- ------------------- -------------------- --------
<S> <C> <C> <C> <C>
OE
- --
Common Stock, FirstEnergy Corp. 100 shares held directly 100%
$9 par value 76 South Main Street
Akron, Ohio 44308
CEI
- ---
Common Stock FirstEnergy Corp. 79,590,689 shares 100%
No par value 76 South Main Street held directly
Akron, Ohio 444308
TE
- --
Common Stock FirstEnergy Corp. 39,133,887 shares 100%
$5 par value 76 South Main Street held directly
Akron, Ohio 44308
Penn
- ----
Common Stock, Ohio Edison Company 6,290,000 shares 100%
$30 par value 76 South Main Street held directly
Akron, Ohio 44308
</TABLE>
(b) Security Ownership of Management at December 31, 1997:
OE, CEI, TE
- -----------
The information required by this item for all
individuals with the exception of Messrs. Lange and Edelman is
incorporated herein by reference to the Company's 1998 Proxy
Statement filed with the SEC pursuant to Regulation 14A. Messrs.
Lange and Edelman hold 5,964 and 4,974 shares, respectively, of
FirstEnergy Common Stock as of December 31, 1997.
Penn
- ----
<TABLE>
<CAPTION>
Title of Class Percent of Class
-------------- ----------------
FirstEnergy Nature of FirstEnergy Common
Common Stock Beneficial Common Stock
No. of Shares Ownership Stock Equivalents*
-------------- ---------- ----- ------------
<S> <C> <C> <C> <C>
H. P. Burg 10,983 Direct or Indirect Less than one percent 21,079
W. R. Holland 8,605 " " 61,833
R. J. Hrach 1,899 " " 2,001
J. J. Nowak 1,348 " "
J. E. Reed 4,481 " " 2,351
R. L. Werner 562
R. P. Wushinske 2,455 " " 691
All directors and executive
officers as a group 32,323 " " 88,425
<FN>
* Common Stock Equivalents are the cumulative number of performance shares credited to each executive
officer as of December 31, 1997. These performance shares are the portion of the 1993 and 1994
annual incentive awards under the Executive Incentive Compensation Plan that were deferred for four
years, and the 1995, 1996 and 1997 long-term incentive opportunities that were deferred for four
years under such Plan. For a detailed explanation of the Plan, see the footnote to the Long-Term
Incentive Plan Table. Such performance shares do not have voting rights or other rights associated
with ownership.
</TABLE>
(c) Changes in Control: Not applicable
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
FirstEnergy - The information required by this item is
- -----------
incorporated herein by reference to the Company's
1998 Proxy Statement filed with the SEC pursuant
to Regulation 14A.
OE, CEI, TE and Penn - The information required by this item
- -------------------- follows:
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) 1. Financial Statements
Included in Part II of this report and incorporated
herein by reference to the respective company's 1997 Annual
Report to Stockholders (Exhibit 13 below) at the pages indicated.
<TABLE>
<CAPTION>
FE OE Penn CEI TE
-- -- ---- --- --
<S> <C> <C> <C> <C> <C>
Report of Independent Public Accountants . 16 29 16 30 30
Statements of Income--Three Years Ended December 31, 1997 22 8 5 8 8
Balance Sheets--December 31, 1997 and 1996 23 9 6 9 9
Statements of Capitalization--December 31, 1997 and 1996 24-26 10-11 7 10-11 10-11
Statements of Retained Earnings--Three Years Ended December 31, 1997 27 12 8 12 12
Statements of Capital Stock and Other Paid-In Capital--
Three Years Ended December 31, 1997 27 12 8 12 12
Statements of Cash Flows--Three Years Ended December 31, 1997 28 13 9 13 13
Statements of Taxes--Three Years Ended December 31, 1997 29 14 10 14 14
Notes to Financial Statements 30-38 15 11 15 15
</TABLE
2. Financial Statement Schedules
Included in Part IV of this report:
FE OE Penn CEI TE
Report of Independent Public
Accountants 52 53 56 54 55
Schedule - Three Years Ended
December 31, 1997:
II -- Valuation and
Qualifying Accounts 57 58 61 59 60
Schedules other than the schedule listed above are omitted for the reason
that they are not required or are not applicable, or the required
information is shown in the financial statements or notes thereto.
3. Exhibits - FirstEnergy
Exhibit
Number
- ------
4-1 - Rights Agreement (December 1, 1997 Form 8-
K, Exhibit 4.1)
(A) 13 - 1997 Annual Report to Stockholders. (Only
those portions expressly incorporated by
reference in this Form 10-K are to be
deemed "filed" with the SEC.)
(A) 21 - List of Subsidiaries of the Registrant at
December 31, 1997.
(A) 23 - Consent of Independent Public Accountants.
(A) 27 - Financial Data Schedule.
(A) Provided herein in electronic format as an
exhibit.
3. Exhibits - Ohio Edison
Exhibit
Number
- -------
2-1 - Agreement and Plan of Merger, dated as of
September 13, 1996, between Ohio Edison
Company (OE) and Centerior Energy
Corporation. (September 17, 1996 Form 8-K,
Exhibit 2-1.)
3-1 - Amended Articles of Incorporation,
Effective June 21, 1994, constituting OE's
Articles of Incorporation. (1994 Form 10-
K, Exhibit 3-1)
3-2 - Code of Regulations of OE as amended
April 24, 1986. (Registration No. 33-5081,
Exhibit (4)(d).)
(B) 4-1 - Indenture dated as of August 1, 1930 between
OE and Bankers Trust Company, as Trustee, as
amended and supplemented by Supplemental
Indentures
</TABLE>
<TABLE>
<CAPTION>
Dated as of File Reference Exhibit No.
------------ -------------- -----------
<S> <C> <C>
March 3, 1931 2-1725 B-1,B-1(a),B-1(b)
November 1, 1935 2-2721 B-4
January 1, 1937 2-3402 B-5
September 1, 1937 Form 8-A B-6
June 13, 1939 2-5462 7(a)-7
August 1, 1974 Form 8-A, August 28, 1974 2(b)
July 1, 1976 Form 8-A, July 28, 1976 2(b)
December 1, 1976 Form 8-A, December 15, 1976 2(b)
June 15, 1977 Form 8-A, June 27, 1977 2(b)
Supplemental Indentures:
September 1, 1944 2-61146 2(b)(2)
April 1, 1945 2-61146 2(b)(2)
September 1, 1948 2-61146 2(b)(2)
May 1, 1950 2-61146 2(b)(2)
January 1, 1954 2-61146 2(b)(2)
May 1, 1955 2-61146 2(b)(2)
August 1, 1956 2-61146 2(b)(2)
March 1, 1958 2-61146 2(b)(2)
April 1, 1959 2-61146 2(b)(2)
June 1, 1961 2-61146 2(b)(2)
September 1, 1969 2-34351 2(b)(2)
May 1, 1970 2-37146 2(b)(2)
September 1, 1970 2-38172 2(b)(2)
June 1, 1971 2-40379 2(b)(2)
August 1, 1972 2-44803 2(b)(2)
September 1, 1973 2-48867 2(b)(2)
May 15, 1978 2-66957 2(b)(4)
February 1, 1980 2-66957 2(b)(5)
April 15, 1980 2-66957 2(b)(6)
June 15, 1980 2-68023 (b)(4)(b)(5)
October 1, 1981 2-74059 (4)(d)
October 15, 1981 2-75917 (4)(e)
February 15, 1982 2-75917 (4)(e)
July 1, 1982 2-89360 (4)(d)
March 1, 1983 2-89360 (4)(e)
March 1, 1984 2-89360 (4)(f)
September 15, 1984 2-92918 (4)(d)
September 27, 1984 33-2576 (4)(d)
November 8, 1984 33-2576 (4)(d)
December 1, 1984 33-2576 (4)(d)
December 5, 1984 33-2576 (4)(e)
January 30, 1985 33-2576 (4)(e)
February 25, 1985 33-2576 (4)(e)
July 1, 1985 33-2576 (4)(e)
October 1, 1985 33-2576 (4)(e)
January 15, 1986 33-8791 (4)(d)
May 20, 1986 33-8791 (4)(d)
June 3, 1986 33-8791 (4)(e)
October 1, 1986 33-29827 (4)(d)
August 25, 1989 33-34663 (4)(d)
February 15, 1991 33-39713 (4)(d)
May 1, 1991 33-45751 (4)(d)
May 15, 1991 33-45751 (4)(d)
September 15, 1991 33-45751 (4)(d)
April 1, 1992 33-48931 (4)(d)
June 15, 1992 33-48931 (4)(d)
September 15, 1992 33-48931 (4)(e)
April 1, 1993 33-51139 (4)(d)
June 15, 1993 33-51139 (4)(d)
September 15, 1993 33-51139 (4)(d)
November 15, 1993 1-2578 (4)(2)
April 1, 1995 1-2578 (4)(2)
May 1, 1995 1-2578 (4)(2)
July 1, 1995 1-2578 (4)(2)
</TABLE
10-1 - Administration Agreement between the CAPCO
Group dated as of September 14, 1967.
(Registration No. 2-43102, Exhibit
5(c)(2).)
10-2 - Amendment No. 1 dated January 4, 1974 to
Administration Agreement between the CAPCO
Group dated as of September 14, 1967.
(Registration No. 2-68906, Exhibit
5(c)(3).)
10-3 - Transmission Facilities Agreement between
the CAPCO Group dated as of September 14,
1967. (Registration No. 2-43102, Exhibit
5(c)(3).)
10-4 - Amendment No. 1 dated as of January 1, 1993
to Transmission Facilities Agreement
between the CAPCO Group dated as of
September 14, 1967. (1993 Form 10-K,
Exhibit 10 -4.)
10-5 - Agreement for the Termination or
Construction of Certain Agreements
effective September 1, 1980 among the CAPCO
Group. (Registration No. 2-68906, Exhibit
10-4.)
10-6 - Amendment dated as of December 23, 1993
to Agreement for the Termination or
Construction of Certain Agreements
effective September 1, 1980 among the CAPCO
Group. (1993 Form 10-K, Exhibit 10-6.)
10-7 - CAPCO Basic Operating Agreement, as amended
September 1, 1980. (Registration
No. 2-68906, Exhibit 10-5.)
10-8 - Amendment No. 1 dated August 1, 1981, and
Amendment No. 2 dated September 1, 1982 to
CAPCO Basic Operating Agreement, as amended
September 1, 1980. (September 30, 1981
Form 10-Q, Exhibit 20-1 and 1982 Form 10-K,
Exhibit 19-3, respectively.)
10-9 - Amendment No. 3 dated July 1, 1984 to CAPCO
Basic Operating Agreement, as amended
September 1, 1980. (1985 Form 10-K, Exhibit
10-7.)
10-10 - Basic Operating Agreement between the
CAPCO Companies as amended October 1, 1991.
(1991 Form 10-K, Exhibit 10-8.)
10-11 - Basic Operating Agreement between the CAPCO
Companies as amended January 1, 1993. (1993
Form 10-K, Exhibit 10-11.)
10-12 - Memorandum of Agreement effective as of
September 1, 1980 among the CAPCO Group.
(1982 Form 10-K, Exhibit 19-2.)
10-13 - Operating Agreement for Beaver Valley Power
Station Units Nos. 1 and 2 as Amended and
Restated September 15, 1987, by and between
the CAPCO Companies. (1987 Form 10-K,
Exhibit 10-15.)
10-14 - Construction Agreement with respect to
Perry Plant between the CAPCO Group dated
as of July 22, 1974. (Registration No. 2-
52251 of Toledo Edison Company, Exhibit
5(yy).)
10-15 - Participation Agreement No. 1 relating to
the financing of the development of certain
coal mines, dated as of October 1, 1973,
among Quarto Mining Company, the CAPCO
Group, Energy Properties, Inc., General
Electric Credit Corporation, the Loan
Participants listed in Schedules A and B
thereto, Central National Bank of
Cleveland, as Owner Trustee, National City
Bank, as Loan Trustee, and Owner Trustee,
National City Bank, as Loan Trustee, and
National City Bank, as Bond Trustee.
(Registration No. 2-61146, Exhibit
5(e)(1).)
10-16 - Amendment No. 1 dated as of September 15,
1978 to Participation Agreement No. 1 dated
as of October 1, 1973 among Quarto Mining
Company, the CAPCO Group, Energy
Properties, Inc., General Electric Credit
Corporation, the Loan Participants listed
in Schedules A and B thereto, Central
National Bank of Cleveland as Owner
Trustee, National City Bank as Loan Trustee
and National City Bank as Bond Trustee.
(Registration No. 2-68906 of Pennsylvania
Power Company, Exhibit 5(e)(2).)
10-17 - Participation Agreement No. 2 relating to
the financing of the development of certain
coal mines, dated as of August 1, 1974,
among Quarto Mining Company, the CAPCO
Group, Energy Properties, Inc., General
Electric Credit Corporation, the Loan
Participants listed in Schedules A and B
thereto, Central National Bank of
Cleveland, as Owner Trustee, National City
Bank, as Loan Trustee, and National City
Bank, as Bond Trustee. (Registration No. 2-
53059, Exhibit 5(h)(2).)
10-18 - Amendment No. 1 dated as of September 15,
1978 to Participation Agreement No. 2 dated
as of August 1, 1974 among Quarto Mining
Company, the CAPCO Group, Energy
Properties, Inc., General Electric Credit
Corporation, the Loan Participants listed
in Schedules A and B thereto, Central
National Bank of Cleveland as Owner
Trustee, National City Bank as Loan Trustee
and National City Bank as Bond Trustee.
(Registration No. 2-68906 of Pennsylvania
Power Company, Exhibit 5(e)(4).)
10-19 - Participation Agreement No. 3 dated as of
September 15, 1978 among Quarto Mining
Company, the CAPCO Companies, Energy
Properties, Inc., General Electric Credit
Corporation, the Loan Participants listed
in Schedules A and B thereto, Central
National Bank of Cleveland as Owner
Trustee, and National City Bank as Loan
Trustee and Bond Trustee. (Registration No.
2-68906 of Pennsylvania Power Company,
Exhibit 5(e)(5).)
10-20 - Participation Agreement No. 4 dated as of
October 31, 1980 among Quarto Mining
Company, the CAPCO Group, the Loan
Participants listed in Schedule A thereto
and National City Bank as Bond Trustee.
(Registration No. 2- 68906 of Pennsylvania
Power Company, Exhibit 10-16.)
10-21 - Participation Agreement dated as of May 1,
1986, among Quarto Mining Company, the
CAPCO Companies, the Loan Participants
thereto, and National City Bank as Bond
Trustee. (1986 Form 10-K, Exhibit 10-22.)
10-22 - Participation Agreement No. 6 dated as of
December 1, 1991 among Quarto Mining
Company, The Cleveland Electric
Illuminating Company, Duquesne Light
Company, Ohio Edison Company, Pennsylvania
Power Company, the Toledo Edison Company,
the Loan Participants listed in Schedule A
thereto, National City Bank, as Mortgage
Bond Trustee and National City Bank, as
Refunding Bond Trustee. (1991 Form 10-K,
Exhibit 10-19.)
10-23 - Agreement entered into as of October 20,
1981 among the CAPCO Companies regarding
the use of Quarto coal at Mansfield Units
1, 2 and 3. (1981 Form 10-K, Exhibit 20-1.)
10-24 - Restated Option Agreement dated as of May
1, 1983 by and between the North American
Coal Corporation and the CAPCO Companies.
(1983 Form 10-K, Exhibit 19-1.)
10-25 - Trust Indenture and Mortgage dated as of
October 1, 1973 between Quarto Mining
Company and National City Bank, as Bond
Trustee, together with Guaranty dated as of
October 1, 1973 with respect thereto by the
CAPCO Group. (Registration No. 2-61146,
Exhibit 5(e)(5).)
10-26 - Amendment No. 1 dated August 1, 1974 to
Trust Indenture and Mortgage dated as of
October 1, 1973 between Quarto Mining
Company and National City Bank, as Bond
Trustee, together with Amendment No. 1
dated August 1, 1974 to Guaranty dated as
of October 1, 1973 with respect thereto by
the CAPCO Group. (Registration No. 2-53059,
Exhibit 5(h)(2).)
10-27 - Amendment No. 2 dated as of September 15,
1978 to the Trust Indenture and Mortgage
dated as of October 1, 1973, as amended,
between Quarto Mining Company and National
City Bank, as Bond Trustee, together with
Amendment No. 2 dated as of September 15,
1978 to Guaranty dated as of October 1,
1973 with respect to the CAPCO Group.
(Registration No. 2-68906 of Pennsylvania
Power Company, Exhibits 5(e)(11) and
5(e)(12).)
10-28 - Amendment No. 3 dated as of October 31,
1980, to Trust Indenture and Mortgage dated
as of October 1, 1973, as amended between
Quarto Mining Company and National City
Bank as Bond Trustee. (Registration No. 2-
68906 of Pennsylvania Power Company,
Exhibit 10-16.)
10-29 - Amendment No. 4 dated as of July 1, 1985 to
the Trust Indenture and Mortgage dated as
of October 1, 1973, as amended between
Quarto Mining Company and National City
Bank as Bond Trustee. (1985 Form 10-K,
Exhibit 10-28.)
10-30 - Amendment No. 5 dated as of May 1, 1986, to
the Trust Indenture and Mortgage between
Quarto and National City Bank as Bond
Trustee. (1986 Form 10-K, Exhibit 10-30.)
10-31 - Amendment No. 6 dated as of December 1,
1991, to the Trust Indenture and Mortgage
dated as of October 1, 1973, between Quarto
Mining Company and National City Bank, as
Bond Trustee. (1991 Form 10-K, Exhibit 10-
28.)
10-32 - Trust Indenture dated as of December 1,
1991, between Quarto Mining Company and
National City Bank, as Bond Trustee. (1991
Form 10-K, Exhibit 10-29.)
10-33 - Amendment No. 3 dated as of October 31,
1980 to the Bond Guaranty dated as of
October 1, 1973, as amended, with respect
to the CAPCO Group. (Registration No. 2-
68906 of Pennsylvania Power Company,
Exhibit 10-16.)
10-34 - Amendment No. 4 dated as of July 1, 1985 to
the Bond Guaranty dated as of October 1,
1973, as amended, by the CAPCO Companies to
National City Bank as Bond Trustee. (1985
Form 10-K, Exhibit 10-30.)
10-35 - Amendment No. 5 dated as of May 1, 1986, to
the Bond Guaranty by the CAPCO Companies to
National City Bank as Bond Trustee. (1986
Form 10-K, Exhibit 10-33.)
10-36 - Amendment No. 6A dated as of December 1,
1991, to the Bond Guaranty dated as of
October 1, 1973, by The Cleveland Electric
Illuminating Company, Duquesne Light
Company, Ohio Edison Company, Pennsylvania
Power Company, the Toledo Edison Company to
National City Bank, as Bond Trustee. (1991
Form 10-K, Exhibit 10-33.)
10-37 - Amendment No. 6B dated as of December 30,
1991, to the Bond Guaranty dated as of
October 1, 1973 by The Cleveland Electric
Illuminating Company, Duquesne Light
Company, Ohio Edison Company, Pennsylvania
Power Company, the Toledo Edison Company to
National City Bank, as Bond Trustee. (1991
Form 10-K, Exhibit 10-34.)
10-38 - Bond Guaranty dated as of December 1, 1991,
by The Cleveland Electric
Company, Duquesne Light Company, Ohio
Edison Company, Pennsylvania Power Company,
the Toledo Edison Company to National City
Bank, as Bond Trustee. (1991 Form 10-K,
Exhibit 10-35.)
10-39 - Open end Mortgage dated as of October 1,
1973 between Quarto Mining Company and the
CAPCO Companies and Amendment No. 1
thereto, dated as of September 15, 1978.
(Registration No. 2-68906 of Pennsylvania
Power Company, Exhibit 10-23.)
10-40 - Repayment and Security Agreement and
Assignment of Lease dated as of October 1,
1973 between Quarto Mining Company and Ohio
Edison Company as Agent for the CAPCO
Companies and Amendment No. 1 thereto,
dated as of September 15, 1978. (1980 Form
10-K, Exhibit 20-2.)
10-41 - Restructuring Agreement dated as of April
1, 1985 among Quarto Mining Company, the
Company and the other CAPCO Companies,
Energy Properties, Inc., General Electric
Credit Corporation, the Loan Participants
signatories thereto, Central National Bank
of Cleveland, as Owner Trustee and National
City Bank as Loan Trustee and Bond Trustee.
(1985 Form 10-K, Exhibit 10-33.)
10-42 - Unsecured Note Guaranty dated as of July 1,
1985 by the CAPCO Companies to General
Electric Credit Corporation. (1985 Form 10-
K, Exhibit 10-34.)
10-43 - Memorandum of Understanding dated March 31,
1985 among the CAPCO Companies. (1985 Form
10-K, Exhibit 10-35.)
(C) 10-44 - Ohio Edison System Executive Supplemental
Life Insurance Plan. (1995 Form 10-K,
Exhibit 10-44.)
(C) 10-45 - Ohio Edison System Executive Incentive
Compensation Plan. (1995 Form 10-K, Exhibit
10-45.)
(C) 10-46 - Ohio Edison System Restated and Amended
Executive Deferred Compensation Plan. (1995
Form 10-K, Exhibit 10-46.)
(C) 10-47 - Ohio Edison System Restated and Amended
Supplemental Executive Retirement Plan.
(1995 Form 10-K, Exhibit 10-47.)
(C) 10-48 - Severance pay agreement between Ohio Edison
Company and W. R. Holland. (1995 Form 10-K,
Exhibit 10-48.)
(C) 10-49 - Severance pay agreement between Ohio Edison
Company and H. P. Burg. (1995 Form 10-K,
Exhibit 10-49.)
(C) 10-50 - Severance pay agreement between Ohio Edison
Company and A. J. Alexander. (1995 Form
10-K, Exhibit 10-50.)
(C) 10-51 - Severance pay agreement between Ohio Edison
Company and J. A. Gill. (1995 Form 10-K,
Exhibit 10-51.)
(D) 10-52 - Participation Agreement dated as of March
16, 1987 among Perry One Alpha Limited
Partnership, as Owner Participant, the
Original Loan Participants listed in
Schedule 1 Hereto, as Original Loan
Participants, PNPP Funding Corporation, as
Funding Corporation, The First National
Bank of Boston, as Owner Trustee, Irving
Trust Company, as Indenture Trustee and
Ohio Edison Company, as Lessee. (1986 Form
10-K, Exhibit 28-1.)
(D) 10-53 - Amendment No. 1 dated as of September 1,
1987 to Participation Agreement dated as of
March 16, 1987 among Perry One Alpha
Limited Partnership, as Owner Participant,
the Original Loan Participants listed in
Schedule 1 thereto, as Original Loan
Participants, PNPP Funding Corporation, as
Funding Corporation, The First National
Bank of Boston, as Owner Trustee, Irving
Trust Company (now The Bank of New York),
as Indenture Trustee, and Ohio Edison
Company, as Lessee. (1991 Form 10-K,
Exhibit 10-46.)
(D) 10-54 - Amendment No. 3 dated as of May 16, 1988 to
Participation Agreement dated as of
March 16, 1987, as amended among Perry One
Alpha Limited Partnership, as Owner
Participant, PNPP Funding Corporation, The
First National Bank of Boston, as Owner
Trustee, Irving Trust Company, as Indenture
Trustee, and Ohio Edison Company, as
Lessee. (1992 Form 10-K, Exhibit 10-47.)
(D) 10-55 - Amendment No. 4 dated as of November 1,
1991 to Participation Agreement dated as of
March 16, 1987 among Perry One Alpha
Limited Partnership, as Owner Participant,
PNPP Funding Corporation, as Funding
Corporation, PNPP II Funding Corporation,
as New Funding Corporation, The First
National Bank of Boston, as Owner Trustee,
The Bank of New York, as Indenture Trustee
and Ohio Edison Company, as Lessee. (1991
Form 10-K, Exhibit 10-47.)
(D) 10-56 - Amendment No. 5 dated as of November 24,
1992 to Participation Agreement dated as of
March 16, 1987, as amended, among Perry One
Alpha Limited Partnership, as Owner
Participant, PNPP Funding Corporation, as
Funding Corporation, PNPPII Funding
Corporation, as New Funding Corporation,
The First National Bank of Boston, as Owner
Trustee, The Bank of New York, as Indenture
Trustee and Ohio Edison Company as Lessee.
(1992 Form 10-K, Exhibit 10-49.)
(D) 10-57 - Amendment No. 6 dated as of January 12,
1993 to Participation Agreement dated as of
March 16, 1987 among Perry One Alpha
Limited Partnership, as Owner Participant,
PNPP Funding Corporation, as Funding
Corporation, PNPP II Funding Corporation,
as New Funding Corporation, The First
National Bank of Boston, as Owner Trustee,
The Bank of New York, as Indenture Trustee
and Ohio Edison Company, as Lessee. (1992
Form 10-K, Exhibit 10-50.)
(D) 10-58 - Amendment No. 7 dated as of October 12,
1994 to Participation Agreement dated as of
March 16, 1987 as amended, among Perry One
Alpha Limited Partnership, as Owner
Participant, PNPP Funding Corporation, as
Funding Corporation, PNPP II Funding
Corporation, as New Funding Corporation,
The First National Bank of Boston, as Owner
Trustee, The Bank of New York, as Indenture
Trustee and Ohio Edison Company, as Lessee.
(1994 Form 10-K, Exhibit 10-54.)
(D) 10-59 - Facility Lease dated as of March 16, 1987
between The First National Bank of Boston,
as Owner Trustee, with Perry One Alpha
Limited Partnership, Lessor, and Ohio
Edison Company, Lessee. (1986 Form 10-K,
Exhibit 28-2.)
(D) 10-60 - Amendment No. 1 dated as of September 1,
1987 to Facility Lease dated as of March
16, 1987 between The First National Bank of
Boston, as Owner Trustee, Lessor and Ohio
Edison Company, Lessee. (1991 Form 10-K,
Exhibit 10-49.)
(D) 10-61 - Amendment No. 2 dated as of November 1,
1991, to Facility Lease dated as of
March 16, 1987, between The First National
Bank of Boston, as Owner Trustee, Lessor
and Ohio Edison Company, Lessee. (1991 Form
10-K, Exhibit 10-50.)
(D) 10-62 - Amendment No. 3 dated as of November 24,
1992 to Facility Lease dated as of
March 16, 1987, as amended, between The
First National Bank of Boston, as Owner
Trustee, with Perry One Alpha Limited
Partnership, as Owner Participant and Ohio
Edison Company, as Lessee. (1992 Form 10-K,
Exhibit 10-54.)
(D) 10-63 - Amendment No. 4 dated as of January 12,
1993 to Facility Lease dated as of
March 16, 1987 as amended, between, The
First National Bank of Boston, as Owner
Trustee, with Perry One Alpha Limited
Partnership, as Owner Participant, and Ohio
Edison Company, as Lessee. (1994 Form 10-K,
Exhibit 10-59.)
(D) 10-64 - Amendment No. 5 dated as of October 12,
1994 to Facility Lease dated as of
March 16, 1987 as amended, between, The
First National Bank of Boston, as Owner
Trustee, with Perry One Alpha Limited
Partnership, as Owner Participant, and Ohio
Edison Company, as Lessee. (1994 Form 10-K,
Exhibit 10-60.)
(D) 10-65 - Letter Agreement dated as of March 19, 1987
between Ohio Edison Company, Lessee, and
The First National Bank of Boston, as Owner
Trustee under a Trust dated March 16, 1987
with Chase Manhattan Realty Leasing
Corporation, required by Section 3(d) of
the Facility Lease. (1986 Form 10-K,
Exhibit 28-3.)
(D) 10-66 - Ground Lease dated as of March 16, 1987
between Ohio Edison Company, Ground Lessor,
and The First National Bank of Boston, as
Owner Trustee under a Trust Agreement,
dated as of March 16, 1987, with the Owner
Participant, Tenant. (1986 Form 10-K,
Exhibit 28-4.)
(D) 10-67 - Trust Agreement dated as of March 16, 1987
between Perry One Alpha Limited
Partnership, as Owner Participant, and The
First National Bank of Boston. (1986 Form
10-K, Exhibit 28-5.)
(D) 10-68 - Trust Indenture, Mortgage, Security
Agreement and Assignment of Facility Lease
dated as of March 16, 1987 between The
First National Bank of Boston, as Owner
Trustee under a Trust Agreement dated as of
March 16, 1987 with Perry One Alpha Limited
Partnership, and Irving Trust Company, as
Indenture Trustee. (1986 Form 10-K, Exhibit
28-6.)
(D) 10-69 - Supplemental Indenture No. 1 dated as of
September 1, 1987 to Trust Indenture,
Mortgage, Security Agreement and Assignment
of Facility Lease dated as of March 16,
1987 between The First National Bank of
Boston as Owner Trustee and Irving Trust
Company (now The Bank of New York), as
Indenture Trustee. (1991 Form 10-K, Exhibit
10-55.)
(D) 10-70 - Supplemental Indenture No. 2 dated as of
November 1, 1991 to Trust Indenture,
Mortgage, Security Agreement and Assignment
of Facility Lease dated as of March 16,
1987 between The First National Bank of
Boston, as Owner Trustee and The Bank of
New York, as Indenture Trustee. (1991 Form
10-K, Exhibit 10-56.)
(D) 10-71 - Tax Indemnification Agreement dated as of
March 16, 1987 between Perry One, Inc. and
PARock Limited Partnership as General
Partners and Ohio Edison Company, as
Lessee. (1986 Form 10-K, Exhibit 28-7.)
(D) 10-72 - Amendment No. 1 dated as of November 1,
1991 to Tax Indemnification Agreement dated
as of March 16, 1987 between Perry One,
Inc. and Parock Limited Partnership and
Ohio Edison Company. (1991 Form 10-K,
Exhibit 10-58.)
(D) 10-73 - Amendment No. 2 dated as of January 12,
1993 to Tax Indemnification Agreement dated
as of March 16, 1987 between Perry One,
Inc. and Parock Limited Partnership and
Ohio Edison Company. (1994 Form 10-K,
Exhibit 10-69.)
(D) 10-74 - Amendment No. 3 dated as of October 12,
1994 to Tax Indemnification Agreement dated
as of March 16, 1987 between Perry One,
Inc. and Parock Limited Partnership and
Ohio Edison Company. (1994 Form 10-K,
Exhibit 10-70.)
(D) 10-75 - Partial Mortgage Release dated as of March
19, 1987 under the Indenture between Ohio
Edison Company and Bankers Trust Company,
as Trustee, dated as of the 1st day of
August, 1930. (1986 Form 10-K, Exhibit 28-
8.)
(D) 10-76 - Assignment, Assumption and Further
Agreement dated as of March 16, 1987 among
The First National Bank of Boston, as Owner
Trustee under a Trust Agreement, dated as
of March 16, 1987, with Perry One Alpha
Limited Partnership, The Cleveland Electric
Illuminating Company, Duquesne Light
Company, Ohio Edison Company, Pennsylvania
Power Company and Toledo Edison Company.
(1986 Form 10-K, Exhibit 28-9.)
(D) 10-77 - Additional Support Agreement dated as of
March 16, 1987 between The First National
Bank of Boston, as Owner Trustee under a
Trust Agreement, dated as of March 16,
1987, with Perry One Alpha Limited
Partnership, and Ohio Edison Company. (1986
Form 10-K, Exhibit 28-10.)
(D) 10-78 - Bill of Sale, Instrument of Transfer and
Severance Agreement dated as of March 19,
1987 between Ohio Edison Company, Seller,
and The First National Bank of Boston, as
Owner Trustee under a Trust Agreement,
dated as of March 16, 1987, with Perry One
Alpha Limited Partnership. (1986 Form 10-K,
Exhibit 28- 11.)
(D) 10-79 - Easement dated as of March 16, 1987 from
Ohio Edison Company, Grantor, to The First
National Bank of Boston, as Owner Trustee
under a Trust Agreement, dated as of
March 16, 1987, with Perry One Alpha
Limited Partnership, Grantee. (1986 Form
10-K, File Exhibit 28-12.)
10-80 - Participation Agreement dated as of March
16, 1987 among Security Pacific Capital
Leasing Corporation, as Owner Participant,
the Original Loan Participants listed in
Schedule 1 Hereto, as Original Loan
Participants, PNPP Funding Corporation, as
Funding Corporation, The First National
Bank of Boston, as Owner Trustee, Irving
Trust Company, as Indenture Trustee and
Ohio Edison Company, as Lessee. (1986 Form
10-K, as Exhibit 28-13.)
10-81 - Amendment No. 1 dated as of September 1,
1987 to Participation Agreement dated as of
March 16, 1987 among Security Pacific
Capital Leasing Corporation, as Owner
Participant, The Original Loan Participants
Listed in Schedule 1 thereto, as Original
Loan Participants, PNPP Funding
Corporation, as Funding Corporation, The
First National Bank of Boston, as Owner
Trustee, Irving Trust Company, as Indenture
Trustee and Ohio Edison Company, as Lessee.
(1991 Form 10-K, Exhibit 10-65.)
10-82 - Amendment No. 4 dated as of November 1,
1991, to Participation Agreement dated as
of March 16, 1987 among Security Pacific
Capital Leasing Corporation, as Owner
Participant, PNPP Funding Corporation, as
Funding Corporation, PNPP II Funding
Corporation, as New Funding Corporation,
The First National Bank of Boston, as Owner
Trustee, The Bank of New York, as Indenture
Trustee and Ohio Edison Company, as Lessee.
(1991 Form 10-K, Exhibit 10-66.)
10-83 - Amendment No. 5 dated as of November 24,
1992 to Participation Agreement dated as of
March 16, 1987 as amended among Security
Pacific Capital Leasing Corporation, as
Owner Participant, PNPP Funding
Corporation, as Funding Corporation, PNPP
II Funding Corporation, as New Funding
Corporation, The First National Bank of
Boston, as Owner Trustee, The Bank of New
York, as Indenture Trustee and Ohio Edison
Company, as Lessee. (1992 Form 10-K,
Exhibit 10-71.)
10-84 - Amendment No. 6 dated as of January 12,
1993 to Participation Agreement dated as of
March 16, 1987 as amended among Security
Pacific Capital Leasing Corporation, as
Owner Participant, PNPP Funding
Corporation, as Funding Corporation, PNPP
II Funding Corporation, as New Funding
Corporation, The First National Bank of
Boston, as Owner Trustee, The Bank of New
York, as Indenture Trustee and Ohio Edison
Company, as Lessee. (1994 Form 10-K,
Exhibit 10-80.)
10-85 - Amendment No. 7 dated as of October 12,
1994 to Participation Agreement dated as of
March 16, 1987 as amended among Security
Pacific Capital Leasing Corporation, as
Owner Participant, PNPP Funding
Corporation, as Funding Corporation, PNPP
II Funding Corporation, as New Funding
Corporation, The First National Bank of
Boston, as Owner Trustee, The Bank of New
York, as Indenture Trustee and Ohio Edison
Company, as Lessee. (1994 Form 10-K,
Exhibit 10-81.)
10-86 - Facility Lease dated as of March 16, 1987
between The First National Bank of Boston,
as Owner Trustee, with Security Pacific
Capital Leasing Corporation, Lessor, and
Ohio Edison Company, as Lessee. (1986 Form
10-K, Exhibit 28-14.)
10-87 - Amendment No. 1 dated as of September 1,
1987 to Facility Lease dated as of March
16, 1987 between The First National Bank of
Boston as Owner Trustee, Lessor and Ohio
Edison Company, Lessee. (1991 Form 10-K,
Exhibit 10-68.)
10-88 - Amendment No. 2 dated as of November 1,
1991 to Facility Lease dated as of March
16, 1987 between The First National Bank of
Boston as Owner Trustee, Lessor and Ohio
Edison Company, Lessee. (1991 Form 10-K,
Exhibit 10-69.)
10-89 - Amendment No. 3 dated as of November 24,
1992 to Facility Lease dated as of
March 16, 1987, as amended, between, The
First National Bank of Boston, as Owner
Trustee, with Security Pacific Capital
Leasing Corporation, as Owner Participant
and Ohio Edison Company, as Lessee. (1992
Form 10-K, Exhibit 10-75.)
10-90 - Amendment No. 4 dated as of January 12,
1993 to Facility Lease dated as of
March 16, 1987 as amended between, The
First National Bank of Boston, as Owner
Trustee, with Security Pacific Capital
Leasing Corporation, as Owner Participant,
and Ohio Edison Company, as Lessee. (1992
Form 10-K, Exhibit 10-76.)
10-91 - Amendment No. 5 dated as of October 12,
1994 to Facility Lease dated as of
March 16, 1987 as amended between, The
First National Bank of Boston, as Owner
Trustee, with Security Pacific Capital
Leasing Corporation, as Owner Participant,
and Ohio Edison Company, as Lessee. (1994
Form 10-K, Exhibit 10-87.)
10-92 - Letter Agreement dated as of March 19, 1987
between Ohio Edison Company, as Lessee, and
The First National Bank of Boston, as Owner
Trustee under a Trust, dated as of March
16, 1987, with Security Pacific Capital
Leasing Corporation, required by Section
3(d) of the Facility Lease. (1986 Form 10-
K, Exhibit 28-15.)
10-93 - Ground Lease dated as of March 16, 1987
between Ohio Edison Company, Ground Lessor,
and The First National Bank of Boston, as
Owner Trustee under a Trust Agreement,
dated as of March 16, 1987, with Perry One
Alpha Limited Partnership, Tenant. (1986
Form 10-K, Exhibit 28-16.)
10-94 - Trust Agreement dated as of March 16, 1987
between Security Pacific Capital Leasing
Corporation, as Owner Participant, and The
First National Bank of Boston. (1986 Form
10-K, Exhibit 28-17.)
10-95 - Trust Indenture, Mortgage, Security
Agreement and Assignment of Facility Lease
dated as of March 16, 1987 between The
First National Bank of Boston, as Owner
Trustee under a Trust Agreement, dated as
of March 16, 1987, with Security Pacific
Capital Leasing Corporation, and Irving
Trust Company, as Indenture Trustee. (1986
Form 10-K, Exhibit 28-18.)
10-96 - Supplemental Indenture No. 1 dated as of
September 1, 1987 to Trust Indenture,
Mortgage, Security Agreement and Assignment
of Facility Lease dated as of March 16,
1987 between The First National Bank of
Boston, as Owner Trustee and Irving Trust
Company (now The Bank of New York), as
Indenture Trustee. (1991 Form 10-K, Exhibit
10-74.)
10-97 - Supplemental Indenture No. 2 dated as of
November 1, 1991 to Trust Indenture,
Mortgage, Security Agreement and Assignment
of Facility Lease dated as of March 16,
1987 between The First National Bank of
Boston, as Owner Trustee and The Bank of
New York, as Indenture Trustee. (1991 Form
10-K, Exhibit 10-75.)
10-98 - Tax Indemnification Agreement dated as of
March 16, 1987 between Security Pacific
Capital Leasing Corporation, as Owner
Participant, and Ohio Edison Company, as
Lessee. (1986 Form 10-K, Exhibit 28-19.)
10-99 - Amendment No. 1 dated as of November 1,
1991 to Tax Indemnification Agreement dated
as of March 16, 1987 between Security
Pacific Capital Leasing Corporation and
Ohio Edison Company. (1991 Form 10-K,
Exhibit 10-77.)
10-100 - Amendment No. 2 dated as of January 12,
1993 to Tax Indemnification Agreement dated
as of March 16, 1987 between Security
Pacific Capital Leasing Corporation and
Ohio Edison Company. (1994 Form 10-K,
Exhibit 10-96.)
10-101 - Amendment No. 3 dated as of October 12,
1994 to Tax Indemnification Agreement dated
as of March 16, 1987 between Security
Pacific Capital Leasing Corporation and
Ohio Edison Company. (1994 Form 10-K,
Exhibit 10-97.)
10-102 - Assignment, Assumption and Further
Agreement dated as of March 16, 1987 among
The First National Bank of Boston, as Owner
Trustee under a Trust Agreement, dated as
of March 16, 1987, with Security Pacific
Capital Leasing Corporation, The Cleveland
Electric Illuminating Company, Duquesne
Light Company, Ohio Edison Company,
Pennsylvania Power Company and Toledo
Edison Company. (1986 Form 10-K, Exhibit
28-20.)
10-103 - Additional Support Agreement dated as of
March 16, 1987 between The First National
Bank of Boston, as Owner Trustee under a
Trust Agreement, dated as of March 16,
1987, with Security Pacific Capital Leasing
Corporation, and Ohio Edison Company. (1986
Form 10-K, Exhibit 28-21.)
10-104 - Bill of Sale, Instrument of Transfer and
Severance Agreement dated as of March 19,
1987 between Ohio Edison Company, Seller,
and The First National Bank of Boston, as
Owner Trustee under a Trust Agreement,
dated as of March 16, 1987, with Security
Pacific Capital Leasing Corporation, Buyer.
(1986 Form 10-K, Exhibit 28-22.)
10-105 - Easement dated as of March 16, 1987 from
Ohio Edison Company, Grantor, to The First
National Bank of Boston, as Owner Trustee
under a Trust Agreement, dated as of
March 16, 1987, with Security Pacific
Capital Leasing Corporation, Grantee. (1986
Form 10-K, Exhibit 28-23.)
10-106 - Refinancing Agreement dated as of November
1, 1991 among Perry One Alpha Limited
Partnership, as Owner Participant, PNPP
Funding Corporation, as Funding
Corporation, PNPP II Funding Corporation,
as New Funding Corporation, The First
National Bank of Boston, as Owner Trustee,
The Bank of New York, as Indenture Trustee,
The Bank of New York, as Collateral Trust
Trustee, The Bank of New York, as New
Collateral Trust Trustee and Ohio Edison
Company, as Lessee. (1991 Form 10-K,
Exhibit 10-82.)
10-107 - Refinancing Agreement dated as of November
1, 1991 among Security Pacific Leasing
Corporation, as Owner Participant, PNPP
Funding Corporation, as Funding
Corporation, PNPP II Funding Corporation,
as New Funding Corporation, The First
National Bank of Boston, as Owner Trustee,
The Bank of New York, as Indenture Trustee,
The Bank of New York, as Collateral Trust
Trustee, The Bank of New York, as New
Collateral Trust Trustee and Ohio Edison
Company, as Lessee. (1991 Form 10-K,
Exhibit 10-83.)
10-108 - Ohio Edison Company Master Decommissioning
Trust Agreement for Perry Nuclear Power
Plant Unit One, Perry Nuclear Power Plant
Unit Two, Beaver Valley Power Station Unit
One and Beaver Valley Power Station Unit
Two dated July 1, 1993. (1993 Form 10-K,
Exhibit 10-94.)
10-109 - Nuclear Fuel Lease dated as of March 31,
1989, between OES Fuel, Incorporated, as
Lessor, and Ohio Edison Company, as Lessee.
(1989 Form 10-K, Exhibit 10-62.)
10-110 - Receivables Purchase Agreement dated as
November 28, 1989, as amended and restated
as of April 23, 1993, between OES Capital,
Incorporated, Corporate Asset Funding
Company, Inc. and Citicorp North America,
Inc. (1994 Form 10-K, Exhibit 10-106.)
10-111 - Guarantee Agreement entered into by Ohio
Edison Company dated as of January 17,
1991. (1990 Form 10-K, Exhibit 10-64).
10-112 - Transfer and Assignment Agreement among
Ohio Edison Company and Chemical Bank, as
trustee under the OE Power Contract Trust.
(1990 Form 10-K, Exhibit 10-65).
10-113 - Renunciation of Payments and Assignment
among Ohio Edison Company, Monongahela
Power Company, West Penn Power Company, and
the Potomac Edison Company dated as of
January 4, 1991. (1990 Form 10-K, Exhibit
10-66).
10-114 - Transfer and Assignment Agreement dated
May 20, 1994 among Ohio Edison Company and
Chemical Bank, as trustee under the OE
Power Contract Trust. (1994 Form 10-K,
Exhibit 10-110.)
10-115 - Renunciation of Payments and Assignment
among Ohio Edison Company, Monongahela
Power Company, West Penn Power Company, and
the Potomac Edison Company dated as of
May 20, 1994. (1994 Form 10-K, Exhibit 10-
111.)
10-116 - Transfer and Assignment Agreement dated
October 12, 1994 among Ohio Edison Company
and Chemical Bank, as trustee under the OE
Power Contract Trust. (1994 Form 10-K,
Exhibit 10-112.)
10-117 - Renunciation of Payments and Assignment
among Ohio Edison Company, Monongahela
Power Company, West Penn Power Company, and
the Potomac Edison Company dated as of
October 12, 1994. (1994 Form 10-K, Exhibit
10-113.)
(E) 10-118 - Participation Agreement dated as of
September 15, 1987, among Beaver Valley Two
Pi Limited Partnership, as Owner
Participant, the Original Loan Participants
listed in Schedule 1 Thereto, as Original
Loan Participants, BVPS Funding
Corporation, as Funding Corporation, The
First National Bank of Boston, as Owner
Trustee, Irving Trust Company, as Indenture
Trustee and Ohio Edison Company, as Lessee.
(1987 Form 10-K, Exhibit 28-1.)
(E) 10-119 - Amendment No. 1 dated as of February 1,
1988, to Participation Agreement dated as
of September 15, 1987, among Beaver Valley
Two Pi Limited Partnership, as Owner
Participant, the Original Loan Participants
listed in Schedule 1 Thereto, as Original
Loan Participants, BVPS Funding
Corporation, as Funding Corporation, The
First National Bank of Boston, as Owner
Trustee, Irving Trust Company, as Indenture
Trustee and Ohio Edison Company, as Lessee.
(1987 Form 10-K, Exhibit 28-2.)
(E) 10-120 - Amendment No. 3 dated as of March 16, 1988
to Participation Agreement dated as of
September 15, 1987, as amended, among
Beaver Valley Two Pi Limited Partnership,
as Owner Participant, BVPS Funding
Corporation, The First National Bank of
Boston, as Owner Trustee, Irving Trust
Company, as Indenture Trustee and Ohio
Edison Company, as Lessee. (1992 Form 10-K,
Exhibit 10-99.)
(E) 10-121 - Amendment No. 4 dated as of November 5,
1992 to Participation Agreement dated as of
September 15, 1987, as amended, among
Beaver Valley Two Pi Limited Partnership,
as Owner Participant, BVPS Funding
Corporation, BVPS II Funding Corporation,
The First National Bank of Boston, as Owner
Trustee, The Bank of New York, as Indenture
Trustee and Ohio Edison Company, as Lessee.
(1992 Form 10-K, Exhibit 10-100.)
(E) 10-122 - Amendment No. 5 dated as of September 30,
1994 to Participation Agreement dated as of
September 15, 1987, as amended, among
Beaver Valley Two Pi Limited Partnership,
as Owner Participant, BVPS Funding
Corporation, BVPS II Funding Corporation,
The First National Bank of Boston, as Owner
Trustee, The Bank of New York, as Indenture
Trustee and Ohio Edison Company, as Lessee.
(1994 Form 10-K, Exhibit 10-118.)
(E) 10-123 - Facility Lease dated as of September 15,
1987, between The First National Bank of
Boston, as Owner Trustee, with Beaver
Valley Two Pi Limited Partnership, Lessor,
and Ohio Edison Company, Lessee. (1987 Form
10-K, Exhibit 28-3.)
(E) 10-124 - Amendment No. 1 dated as of February 1,
1988, to Facility Lease dated as of
September 15, 1987, between The First
National Bank of Boston, as Owner Trustee,
with Beaver Valley Two Pi Limited
Partnership, Lessor, and Ohio Edison
Company, Lessee. (1987 Form 10-K, Exhibit
28-4.)
(E) 10-125 - Amendment No. 2 dated as of November 5,
1992 to Facility Lease dated as of
September 15, 1987, as amended, between The
First National Bank of Boston, as Owner
Trustee, with Beaver Valley Two Pi Limited
Partnership, as Owner Participant, and Ohio
Edison Company, as Lessee. (1992 Form 10-K,
Exhibit 10-103.)
(E) 10-126 - Amendment No. 3 dated as of September 30,
1994 to Facility Lease dated as of
September 15, 1987, as amended, between The
First National Bank of Boston, as Owner
Trustee, with Beaver Valley Two Pi Limited
Partnership, as Owner Participant, and Ohio
Edison Company, as Lessee. (1994 Form 10-K,
Exhibit 10-122.)
(E) 10-127 - Ground Lease and Easement Agreement dated
as of September 15, 1987, between Ohio
Edison Company, Ground Lessor, and The
First National Bank of Boston, as Owner
Trustee under a Trust Agreement, dated as
of September 15, 1987, with Beaver Valley
Two Pi Limited Partnership, Tenant. (1987
Form 10-K, Exhibit 28- 5.)
(E) 10-128 - Trust Agreement dated as of September 15,
1987, between Beaver Valley Two Pi Limited
Partnership, as Owner Participant, and The
First National Bank of Boston. (1987 Form
10-K, Exhibit 28-6.)
(E) 10-129 - Trust Indenture, Mortgage, Security
Agreement and Assignment of Facility Lease
dated as of September 15, 1987, between The
First National Bank of Boston, as Owner
Trustee under a Trust Agreement dated as of
September 15, 1987, with Beaver Valley Two
Pi Limited Partnership, and Irving Trust
Company, as Indenture Trustee. (1987 Form
10-K, Exhibit 28-7.)
(E) 10-130 - Supplemental Indenture No. 1 dated as of
February 1, 1988 to Trust Indenture,
Mortgage, Security Agreement and Assignment
of Facility Lease dated as of September 15,
1987 between The First National Bank of
Boston, as Owner Trustee under a Trust
Agreement dated as of September 15, 1987
with Beaver Valley Two Pi Limited
Partnership and Irving Trust Company, as
Indenture Trustee. (1987 Form 10-K, Exhibit
28-8.)
(E) 10-131 - Tax Indemnification Agreement dated as of
September 15, 1987, between Beaver Valley
Two Pi Inc. and PARock Limited Partnership
as General Partners and Ohio Edison
Company, as Lessee. (1987 Form 10-K,
Exhibit 28-9.)
(E) 10-132 - Amendment No. 1 dated as of November 5,
1992 to Tax Indemnification Agreement dated
as of September 15, 1987, between Beaver
Valley Two Pi Inc. and PARock Limited
Partnership as General Partners and Ohio
Edison Company, as Lessee. (1994 Form 10-K,
Exhibit 10-128.)
(E) 10-133 - Amendment No. 2 dated as of September 30,
1994 to Tax Indemnification Agreement dated
as of September 15, 1987, between Beaver
Valley Two Pi Inc. and PARock Limited
Partnership as General Partners and Ohio
Edison Company, as Lessee. (1994 Form 10-K,
Exhibit 10-129.)
(E) 10-134 - Tax Indemnification Agreement dated as of
September 15, 1987, between HG Power Plant,
Inc., as Limited Partner and Ohio Edison
Company, as Lessee. (1987 Form 10-K,
Exhibit 28-10.)
(E) 10-135 - Amendment No. 1 dated as of November 5,
1992 to Tax Indemnification Agreement dated
as of September 15, 1987, between HG Power
Plant, Inc., as Limited Partner and Ohio
Edison Company, as Lessee. (1994 Form 10-K,
Exhibit 10-131.)
(E) 10-136 - Amendment No. 2 dated as of September 30,
1994 to Tax Indemnification Agreement dated
as of September 15, 1987, between HG Power
Plant, Inc., as Limited Partner and Ohio
Edison Company, as Lessee. (1994 Form 10-K,
Exhibit 10-132.)
(E) 10-137 - Assignment, Assumption and Further
Agreement dated as of September 15, 1987,
among The First National Bank of Boston, as
Owner Trustee under a Trust Agreement,
dated as of September 15, 1987, with Beaver
Valley Two Pi Limited Partnership, The
Cleveland Electric Illuminating Company,
Duquesne Light Company, Ohio Edison
Company, Pennsylvania Power Company and
Toledo Edison Company. (1987 Form 10-K,
Exhibit 28-11.)
(E) 10-138 - Additional Support Agreement dated as of
September 15, 1987, between The First
National Bank of Boston, as Owner Trustee
under a Trust Agreement, dated as of
September 15, 1987, with Beaver Valley Two
Pi Limited Partnership, and Ohio Edison
Company. (1987 Form 10-K, Exhibit 28-12.)
(F) 10-139 - Participation Agreement dated as of
September 15, 1987, among Chrysler
Consortium Corporation, as Owner
Participant, the Original Loan Participants
listed in Schedule 1 Thereto, as Original
Loan Participants, BVPS Funding
Corporation, as Funding Corporation, The
First National Bank of Boston, as Owner
Trustee, Irving Trust Company, as Indenture
Trustee and Ohio Edison Company, as Lessee.
(1987 Form 10-K, Exhibit 28-13.)
(F) 10-140 - Amendment No. 1 dated as of February 1,
1988, to Participation Agreement dated as
of September 15, 1987, among Chrysler
Consortium Corporation, as Owner
Participant, the Original Loan Participants
listed in Schedule I Thereto, as Original
Loan Participants, BVPS Funding
Corporation, as Funding Corporation, The
First National Bank of Boston, as Owner
Trustee, Irving Trust Company, as Indenture
Trustee, and Ohio Edison Company, as
Lessee. (1987 Form 10-K, Exhibit 28-14.)
(F) 10-141 - Amendment No. 3 dated as of March 16, 1988
to Participation Agreement dated as of
September 15, 1987, as amended, among
Chrysler Consortium Corporation, as Owner
Participant, BVPS Funding Corporation, The
First National Bank of Boston, as Owner
Trustee, Irving Trust Company, as Indenture
Trustee, and Ohio Edison Company, as
Lessee. (1992 Form 10-K, Exhibit 10-114.)
(F) 10-142 - Amendment No. 4 dated as of November 5,
1992 to Participation Agreement dated as of
September 15, 1987, as amended, among
Chrysler Consortium Corporation, as Owner
Participant, BVPS Funding Corporation, BVPS
II Funding Corporation, The First National
Bank of Boston, as Owner Trustee, The Bank
of New York, as Indenture Trustee and Ohio
Edison Company, as Lessee. (1992 Form 10-K,
Exhibit 10-115.)
(F) 10-143 - Amendment No. 5 dated as of January 12,
1993 to Participation Agreement dated as of
September 15, 1987, as amended, among
Chrysler Consortium Corporation, as Owner
Participant, BVPS Funding Corporation, BVPS
II Funding Corporation, The First National
Bank of Boston, as Owner Trustee, The Bank
of New York, as Indenture Trustee and Ohio
Edison Company, as Lessee. (1994 Form 10-K,
Exhibit 10-139.)
(F) 10-144 - Amendment No. 6 dated as of September 30,
1994 to Participation Agreement dated as of
September 15, 1987, as amended, among
Chrysler Consortium Corporation, as Owner
Participant, BVPS Funding Corporation, BVPS
II Funding Corporation, The First National
Bank of Boston, as Owner Trustee, The Bank
of New York, as Indenture Trustee and Ohio
Edison Company, as Lessee. (1994 Form 10-K,
Exhibit 10-140.)
(F) 10-145 - Facility Lease dated as of September 15,
1987, between The First National Bank of
Boston, as Owner Trustee, with Chrysler
Consortium Corporation, Lessor, and Ohio
Edison Company, as Lessee. (1987 Form 10-K,
Exhibit 28-15.)
(F) 10-146 - Amendment No. 1 dated as of February 1,
1988, to Facility Lease dated as of
September 15, 1987, between The First
National Bank of Boston, as Owner Trustee,
with Chrysler Consortium Corporation,
Lessor, and Ohio Edison Company, Lessee.
(1987 Form 10-K, Exhibit 28-16.)
(F) 10-147 - Amendment No. 2 dated as of November 5,
1992 to Facility Lease dated as of
September 15, 1987, as amended, between The
First National Bank of Boston, as Owner
Trustee, with Chrysler Consortium
Corporation, as Owner Participant and Ohio
Edison Company, as Lessee. (1992 Form 10-K,
Exhibit 118.)
(F) 10-148 - Amendment No. 3 dated as of January 12,
1993 to Facility Lease dated as of
September 15, 1987, as amended, between The
First National Bank of Boston, as Owner
Trustee, with Chrysler Consortium
Corporation, as Owner Participant, and Ohio
Edison Company, as Lessee. (1992 Form 10-K,
Exhibit 10-119.)
(F) 10-149 - Amendment No. 4 dated as of September 30,
1994 to Facility Lease dated as of
September 15, 1987, as amended, between The
First National Bank of Boston, as Owner
Trustee, with Chrysler Consortium
Corporation, as Owner Participant, and Ohio
Edison Company, as Lessee. (1994 Form 10-K,
Exhibit 10-145.)
(F) 10-150 - Ground Lease and Easement Agreement dated
as of September 15, 1987, between Ohio
Edison Company, Ground Lessor, and The
First National Bank of Boston, as Owner
Trustee under a Trust Agreement, dated as
of September 15, 1987, with Chrysler
Consortium Corporation, Tenant. (1987 Form
10-K, Exhibit 28-17.)
(F) 10-151 - Trust Agreement dated as of September 15,
1987, between Chrysler Consortium
Corporation, as Owner Participant, and The
First National Bank of Boston. (1987 Form
10-K, Exhibit 28-18.)
(F) 10-152 - Trust Indenture, Mortgage, Security
Agreement and Assignment of Facility Lease
dated as of September 15, 1987, between the
First National Bank of Boston, as Owner
Trustee under a Trust Agreement, dated as
of September 15, 1987, with Chrysler
Consortium Corporation and Irving Trust
Company, as Indenture Trustee. (1987 Form
10-K, Exhibit 28-19.)
(F) 10-153 - Supplemental Indenture No. 1 dated as of
February 1, 1988 to Trust Indenture,
Mortgage, Security Agreement and Assignment
of Facility Lease dated as of September 15,
1987 between The First National Bank of
Boston, as Owner Trustee under a Trust
Agreement dated as of September 15, 1987
with Chrysler Consortium Corporation and
Irving Trust Company, as Indenture Trustee.
(1987 Form 10-K, Exhibit 28-20.)
(F) 10-154 - Tax Indemnification Agreement dated as of
September 15, 1987, between Chrysler
Consortium Corporation, as Owner
Participant, and Ohio Edison Company, as
Lessee. (1987 Form 10-K, Exhibit 28-21.)
(F) 10-155 - Amendment No. 1 dated as of November 5,
1992 to Tax Indemnification Agreement dated
as of September 15, 1987, between Chrysler
Consortium Corporation, as Owner
Participant, and Ohio Edison Company, as
Lessee. (1994 Form 10-K, Exhibit 10-151.)
(F) 10-156 - Amendment No. 2 dated as of January 12,
1993 to Tax Indemnification Agreement dated
as of September 15, 1987, between Chrysler
Consortium Corporation, as Owner
Participant, and Ohio Edison Company, as
Lessee. (1994 Form 10-K, Exhibit 10-152.)
(F) 10-157 - Amendment No. 3 dated as of September 30,
1994 to Tax Indemnification Agreement dated
as of September 15, 1987, between Chrysler
Consortium Corporation, as Owner
Participant, and Ohio Edison Company, as
Lessee. (1994 Form 10-K, Exhibit 10-153.)
(F) 10-158 - Assignment, Assumption and Further
Agreement dated as of September 15, 1987,
among The First National Bank of Boston, as
Owner Trustee under a Trust Agreement,
dated as of September 15, 1987, with
Chrysler Consortium Corporation, The
Cleveland Electric Illuminating Company,
Duquesne Light Company, Ohio Edison
Company, Pennsylvania Power Company, and
Toledo Edison Company. (1987 Form 10-K,
Exhibit 28-22.)
(F) 10-159 - Additional Support Agreement dated as of
September 15, 1987, between The First
National Bank of Boston, as Owner Trustee
under a Trust Agreement, dated as of
September 15, 1987, with Chrysler
Consortium Corporation, and Ohio Edison
Company. (1987 Form 10-K, Exhibit 28-23.)
10-160 - Operating Agreement dated March 10, 1987
with respect to Perry Unit No. 1 between
the CAPCO Companies. (1987 Form 10-K,
Exhibit 28-24.)
10-161 - Operating Agreement for Bruce Mansfield
Units Nos. 1, 2 and 3 dated as of June 1,
1976, and executed on September 15, 1987,
by and between the CAPCO Companies. (1987
Form 10-K, Exhibit 28-25.)
10-162 - Operating Agreement for W. H. Sammis Unit
No. 7 dated as of September 1, 1971 by and
between the CAPCO Companies. (1987 Form 10-
K, Exhibit 28-26.)
10-163 - OE-APS Power Interchange Agreement dated
March 18, 1987, by and among Ohio Edison
Company and Pennsylvania Power Company, and
Monongahela Power Company and West Penn
Power Company and The Potomac Edison
Company. (1987 Form 10-K, Exhibit 28-27.)
10-164 - OE-PEPCO Power Supply Agreement dated March
18, 1987, by and among Ohio Edison Company
and Pennsylvania Power Company and Potomac
Electric Power Company. (1987 Form 10-K,
Exhibit 28-28.)
10-165 - Supplement No. 1 dated as of April 28,
1987, to the OE-PEPCO Power Supply
Agreement dated March 18, 1987, by and
among Ohio Edison Company, Pennsylvania
Power Company, and Potomac Electric Power
Company. (1987 Form 10-K, Exhibit 28-29.)
10-166 - APS-PEPCO Power Resale Agreement dated
March 18, 1987, by and among Monongahela
Power Company, West Penn Power Company, and
The Potomac Edison Company and Potomac
Electric Power Company. (1987 Form 10-K,
Exhibit 28-30.)
(A) 12.1 - Consolidated fixed charge ratios.
(A) 13.1 - 1997 Annual Report to Stockholders. (Only
those portions expressly incorporated by
reference in this Form 10-K are to be
deemed "filed" with the SEC.)
(A) 21.1 - List of Subsidiaries of the Registrant at
December 31, 1997.
(A) 23.1 - Consent of Independent Public Accountants.
(A) 27.1 - Financial Data Schedule.
(A) Provided herein in electronic format as an
exhibit.
(B) Pursuant to paragraph (b)(4)(iii)(A) of
Item 601 of Regulation S-K, the Company has
not filed as an exhibit to this Form 10-K
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 Company and
its subsidiaries on a consolidated basis,
but hereby agrees to furnish to the SEC on
request any such instruments.
(C) Management contract or compensatory plan
Regulation S-K.
(D) Substantially similar documents have been
entered into relating to three additional
Owner Participants.
(E) Substantially similar documents have been
entered into relating to five additional
Owner Participants.
(F) Substantially similar documents have been
entered into relating to two additional
Owner Participants.
Note: Reports of OE on Forms 10-Q and 10-K
are on file with the SEC under number 1-
2578.
Pursuant to Rule 14a - 3 (10) of the
Securities Exchange Act of 1934, the
Company will furnish any exhibit in this
Report upon the payment of the Company's
expenses in furnishing such exhibit.
3. Exhibits - Penn
Exhibit
Number
- -------
3-1 - Agreement of Merger and Consolidation dated
April 1, 1929, among Pennsylvania Power
Company (Penn), Harmony Electric Company
and Peoples Power Company (consummated May
31, 1930), copies of Letters Patent issued
thereon, together with the Election Return
and Treasurer's Return, relative to
decrease of capital stock; Election Return
authorizing change of capital stock and
increase of indebtedness; Election Return
authorizing change of capital stock;
Election Return authorizing increase of
capital stock; Election Return establishing
4.24% Preferred Stock; Certificate with
respect to the establishment of the 4.64%
Preferred Stock; Election Returns and
Certificates of Actual Sale in connection
with the purchase by Penn Power of all the
property of Pine-Mercer Electric Company,
Industry Borough Electric Company, Ohio
Township Electric Company, and Shippingport
Borough Electric Company; Certificate of
Change of Location of Penn Power's
principal office; Certificate of Consent
authorizing increase in authorized Common
Stock; Certificate of Consent with respect
to the removal of limitations on the
authorized amount of indebtedness of Penn
Power; Election Returns and Certificates of
Actual Sale in connection with the purchase
by Penn Power of all the property of
Borolak Public Service Company, Eastfax
Public Service Company, Norango Public
Service Company, Sadwick Public Service
Company, Sosango Public Service Company,
Surrick Public Service Company, Wesango
Public Service Company, and Westfax Public
Service Company; Certificate of Change of
Location of Penn Power's principal office;
Amendment to the Charter extending the
territory in which Penn Power may operate
in the Borough of Shippingport, Beaver
County, Pennsylvania; Certificate of
Consent authorizing increase in authorized
Common Stock; Certificate with respect to
the establishment of the 8% Preferred
Stock; Certificate accepting Business
Corporation Law of Pennsylvania for
government and regulation of affairs of
Penn Power; Articles of Amendment
incorporating certain protective provisions
relating to Preferred Stock, increasing
amount of authorized Preferred Stock and
authorizing future increases in amounts of
authorized Preferred Stock without a vote
of the holders of Preferred Stock; Articles
of Amendment increasing the authorized
number of shares of Common Stock; Statement
Affecting Class or Series of Shares with
respect to the establishment of the 7.64%
Preferred Stock; Articles of Amendment
increasing the authorized number of shares
of Common Stock; Articles of Amendment
increasing the number of authorized shares
of Preferred Stock; Statement Affecting
Class or Series of Shares with respect to
the establishment of the 8.48% Preferred
Stock; Articles of Amendment authorizing
sinking fund requirements for Preferred
Stock; Statement Affecting Class or Series
of Shares with respect to the establishment
of the 11% Preferred Stock; Articles of
Amendment increasing the authorized number
of shares of Common Stock; Statement
Affecting Class or Series of Shares with
respect to the establishment of the 9.16%
Preferred Stock; Articles of Amendment
increasing authorized number of shares of
Common Stock; Articles of Amendment
increasing authorized number of shares of
Preferred Stock; Statement Affecting Class
or Series of Shares with respect to the
establishment of the 8.24% Preferred Stock;
Statement Affecting Class or Series of
Shares with respect to the establishment of
the 10.50% Preferred Stock; Articles of
Amendment increasing authorized number of
shares of Common Stock; Articles of
Amendment increasing authorized number of
shares of Preferred Stock; Statement
Affecting Class or Series of Shares with
respect to the establishment of the 15.00%
Preferred Stock; Statement Affecting Class
or Series of Shares with respect to the
establishment of the 11.50% Preferred
Stock; Articles of Amendment increasing
authorized number of shares of Preferred
Stock; Statement Affecting Class or Series
of Shares with respect to the establishment
of the 13.00% Preferred Stock; Statement
Affecting Class or Series of Shares with
respect to the establishment of the 11.50%
Preferred Stock, Series B; Articles of
Amendment effective April 2, 1987, adding a
standard of care for, and limiting the
personal liability of, officers and
directors; Articles of Amendment effective
April 1, 1992, setting forth corporate
purposes of the Company; Statement With
Respect to Shares with respect to the
establishment of the 7.625% Preferred Stock
and Statement with Respect to Shares with
respect to the establishment of the 7.75%
Preferred Stock.(Physically filed and
designated respectively, as follows: in
Form A-2, Registration No. 2-3889, as
Exhibit A-1; in Form 1-MD for 1938, File
No.2-3889, as Exhibit (a)-1; in Form 1-MD
for 1945, File No. 2-3889, as Exhibit A; in
Form U-1, File No. 70-2310, as Exhibit A-3
(d); in Form 8-K for March 1951, File No.
1-3491, as Exhibit B; in Form 8-K for June
1958, File No. 1-3491B, as Exhibit 1; in
Form 10-K for 1959 as Exhibits 1, 2, 3 and
4; in Form 8-K for March 1960, File No. 1-
3491B as Exhibit A; in Form U-1, File No.
70-3971, as Exhibit A-2; in Form U-1, File
No. 70-4055, as Exhibit A-2; as Exhibits 1
through 8 in Form 8-K for January 1962,
File No. 1-3491; as Exhibit A in Form 8-K
for August 1963, File No. 1-3491; as
Exhibits A and B in Form 8-K for September
1969, File No. 1-3491; as Exhibit B in Form
8-K for April 1971, File No. 1-3491; as
Exhibit B in Form 8-K for September 1971,
File No. 1-3491; in Form U-1, File No. 70-
5264, as Exhibit A-2; as Exhibit A in Form
8-K for September 1972, File No. 1-3491; as
Exhibit A in Form 8-K for December 1972,
File No. 1-3491; as Exhibit A in Form 8-K
for March 1973, File No. 1-3491; as Exhibit
A in Form 8-K for December 1973, File No.
1-3491; as Exhibits A and C in Form 8-K for
February 1974, File No. 1-3491; as Exhibits
A and B in Form 8-K for January 1975, File
No. 1-3491; as Exhibit F in Form 8-K for
May 1975, File No. 1-3491; as Exhibit A in
Form 8-K for April 1976, File No. 1-3491;
as Exhibit G in Form 10-Q for quarter ended
June 30, 1977, File No. 1-3491; as Exhibit
C in Form 10-K for 1977, File No. 1-3491;
as Exhibit A in Form 10-K for 1977, File
No. 1-3491; as Exhibit D in Form 10-Q for
quarter ended June 30, 1980, File No. 1-
3491; as Exhibit (4) in Form 10-Q for
quarter ended June 30, 1981, File No. 1-
3491; as Exhibit 4 in Form 10-Q for quarter
ended June 30, 1982, File No. 1-3491; as
Exhibit 4 in Form 10-Q for quarter ended
September 30, 1982, File No. 1-3491; as
Exhibit 4 in Form 10-Q for quarter ended
September 30, 1983, File No. 1-3491; as
Exhibit 4 in Form 10-Q for quarter ended
March 31, 1984, File No. 1-3491; as Exhibit
4 in Form 10-Q for quarter ended June 30,
1984, File No. 1-3491; as Exhibit 4 in Form
10-Q for quarter ended September 30, 1985,
File No. 1-3491; as Exhibit 3-2 in Form 10-
K for 1987 File No. 1-3491; as Exhibit 3-2
in Form 10-K for 1992 File No. 1-3491; as
Exhibit 19-2 in Form 10-K for 1992 File
No. 1-3491; and as Exhibit 3-2 in Form 10-K
for 1993 File No. 1-3491.)
3-2 - By-Laws of Penn as amended March 25, 1992.
(1992 Form 10-K, Exhibit 3-3, File No. 1-
3491.)
4-1* - Indenture dated as of November 1, 1945,
between Penn and The First National Bank of
the City of New York (now Citibank, N.A.),
as Trustee, as supplemented and amended by
Supplemental Indentures dated as of May 1,
1948, March 1, 1950, February 1, 1952,
October 1, 1957, September 1, 1962, June 1,
1963, June 1, 1969, May 1, 1970, April 1,
1971, October 1, 1971, May 1, 1972,
December 1, 1974, October 1, 1975,
September 1, 1976, April 15, 1978, June 28,
1979, January 1, 1980, June 1, 1981,
January 14, 1982, August 1, 1982, December
15, 1982, December 1, 1983, September 6,
1984, December 1, 1984, May 30, 1985,
October 29, 1985, August 1, 1987, May 1,
1988, November 1, 1989, December 1, 1990,
September 1, 1991, May 1, 1992, July 15,
1992, August 1, 1992, and May 1, 1993, July
1, 1993, August 31, 1993, September 1,
1993, September 15, 1993, October 1, 1993,
November 1, 1993 and August 1, 1994.
(Physically filed and designated as
Exhibits 2(b) (1)-1 through 2(b) (l)-15 in
Registration Statement File No. 2-60837; as
Exhibits 2(b) (2), 2(b) (3), and 2 (b) (4)
in Registration Statement File No. 2-68906;
as Exhibit 4-2 in Form 10-K for 1981 File
No. 1-3491; as Exhibit 19-1 in Form 10-K
for 1982 File No. 1-3491; as Exhibit 19-1
in Form 10-K for 1983 File No. 1-3491; as
Exhibit 19-1 in Form 10-K for 1984 File No.
1-3491; as Exhibit 19-1 in Form 10-K for
1985 File No. 1-3491; as Exhibit 19-1 in
Form 10-K for 1987 File No. 1-3491; as
Exhibit 19-1 in Form 10-K for 1988 File No.
1-3491; as Exhibit 19 in Form 10-K for 1989
File No. 1-3491; as Exhibit 19 in Form 10-K
for 1990 File No. 1-3491; as Exhibit 19 in
Form 10-K for 1991 File No. 1-3491; as
Exhibit 19-1 in Form 10-K for 1992 File
No. 1-3491; as Exhibit 4-2 in Form 10-K for
1993 File No. 1-3491; and as Exhibit 4-2 in
Form 10-K for 1994 File No. 1-3491.)
- ----------------
* Pursuant to paragraph (b) (4) (iii) (A) of
Item 601 of Regulation S-K, the Company has
not filed as an exhibit to this Form 10-K 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
Company, but hereby agrees to furnish to the
Commission on request any such instruments.
4-2 - Supplemental Indenture dated as of
September 1, 1995, between Penn and
Citibank, N.A., as Trustee. (1995 Form 10-
K, Exhibit 4-2.)
(A)4-3 - Supplemental Indenture dated as of June 1,
1997, between Penn and Citibank, N.A., as
Trustee.
10-1 - Administration Agreement between the CAPCO
Group dated as of September 14, 1967.
(Registration Statement of Ohio Edison
Company, File No. 2-43102, Exhibit 5 (c)
(2).)
10-2 - Amendment No. 1 dated January 4, 1974 to
Administration Agreement between the CAPCO
Group dated as of September 14, 1967.
(Registration Statement No. 2-68906,
Exhibit 5 (c) (3).)
10-3 - Transmission Facilities Agreement between
the CAPCO Group dated as of September 14,
1967. (Registration Statement of Ohio
Edison Company, File No. 2-43102, Exhibit 5
(c) (3).)
10-4 - Amendment No. 1 dated as of January 1, 1993
to Transmission Facilities Agreement
between the CAPCO Group dated as of
September 14, 1967. (1993 Form 10-K,
Exhibit 10-4, Ohio Edison Company.)
10-5 - Agreement for the Termination or
Construction of Certain Agreements
effective September 1, 1980 among the CAPCO
Group. (Registration Statement No. 2-68906,
Exhibit 10-4.)
10-6 - Amendment dated as of December 23, 1993 to
Agreement for the Termination or
Construction of Certain Agreements
effective September 1, 1980 among the CAPCO
Group. (1993 Form 10-K, Exhibit 10-6, Ohio
Edison Company.)
10-7 - CAPCO Basic Operating Agreement, as amended
September 1, 1980. (Registration Statement
No. 2-68906, as Exhibit 10-5.)
10-8 - Amendment No. 1 dated August 1, 1981 and
Amendment No. 2 dated September 1, 1982, to
CAPCO Basic Operating Agreement as amended
September 1, 1980. (September 30, 1981 Form
10-Q, Exhibit 20-1, and 1982 Form 10-K,
Exhibit 19-3, File No. 1-2578, of Ohio
Edison Company.)
10-9 - Amendment No. 3 dated as of July 1, 1984,
to CAPCO Basic Operating Agreement as
amended September 1, 1980. (1985 Form 10-K,
Exhibit 10-7, File No. 1-2578, of Ohio
Edison Company.)
10-10 - Basic Operating Agreement between the CAPCO
Companies as amended October 1, 1991. (1991
Form 10-K, Exhibit 10-8, File No. 1-2578,
of Ohio Edison Company.)
10-11 - Basic Operating Agreement between the CAPCO
Companies, as amended January 1, 1993.
(1993 Form 10-K, Exhibit 10-11, Ohio Edison
Company.)
10-12 - Memorandum of Agreement effective as of
September 1, 1980, among the CAPCO Group.
(1991 Form 10-K, Exhibit 19-2, Ohio Edison
Company.)
10-13 - Operating Agreement for Beaver Valley Power
15, 1987, by and between the CAPCO
Companies. (1987 Form 10-K, Exhibit 10-15,
File No. 1-2578, of Ohio Edison Company.)
10-14 - Construction Agreement with respect to
Perry Plant between the CAPCO Group dated
as of July 22, 1974. (Registration
Statement of Toledo Edison Company, File
No. 2-52251, as Exhibit 5 (yy).)
10-15 - Participation Agreement No. 1 relating to
the financing of the development of certain
coal mines, dated as of October 1, 1973,
among Quarto Mining Company, the CAPCO
Group, Energy Properties, Inc., General
Electric Credit Corporation, the Loan
Participants listed in Schedules A and B
thereto, Central National Bank of
Cleveland, as Owner Trustee, National City
Bank, as Loan Trustee, and National City
Bank, as Bond Trustee. (Registration
Statement of Ohio Edison Company, File No.
2-61146, Exhibit 5 (e) (1).)
10-16 - Amendment No. 1 dated as of September 15,
1978, to Participation Agreement No. 1
dated as of October 1, 1973, among Quarto
Mining Company, the CAPCO Group, Energy
Properties, Inc., General Electric Credit
Corporation, the Loan Participants listed
in Schedules A and B thereto, Central
National Bank of Cleveland, as Owner
Trustee, National City Bank, as Loan
Trustee, and National City Bank, as Bond
Trustee. (Registration Statement No. 2-
68906, Exhibit 5 (e) (2).)
10-17 - Participation Agreement No. 2 relating to
the financing of the development of certain
coal mines, dated as of August 1, 1974,
among Quarto Mining Company, the CAPCO
Group, Energy Properties, Inc., General
Electric Credit Corporation, the Loan
Participants listed in Schedules A and B
thereto, Central National Bank of
Cleveland, as Owner Trustee, National City
Bank, as Loan Trustee, and National City
Bank, as Bond Trustee. (Ohio Edison
Company, File No. 2-53059, Exhibit 5 (h)
(2).)
10-18 - Amendment No. 1 dated as of September 15,
1978, to Participation Agreement No. 2
dated as of August 1, 1974, among Quarto
Mining Company, the CAPCO Group, Energy
Properties, Inc., General Electric Credit
Corporation, the Loan Participants listed
in Schedules A and B thereto, Central
National Bank of Cleveland, as Owner
Trustee, National City Bank, as Loan
Trustee, and National City Bank, as Bond
Trustee. (Registration Statement No. 2-
68906, Exhibit 5 (e) (4).)
10-19 - Participation Agreement No. 3 relating to
the financing of the development of certain
coal mines, dated as of September 15, 1978,
among Quarto Mining Company, the CAPCO
Group, Energy Properties, Inc., General
Electric Credit Corporation, the Loan
Participants listed in Schedules A and B
thereto, Central National Bank of
Cleveland, as Owner Trustee, National City
Bank, as Loan Trustee, and National City
Bank, as Bond Trustee. (Registration
Statement No. 2-68906, Exhibit 5 (e) (5).)
10-20 - Participation Agreement No. 4 relating to
the financing of the development of certain
coal mines, dated as of October 31, 1980,
among Quarto Mining Company, the CAPCO
Group, the Loan Participants listed in
Schedule A thereto and National City Bank,
as Bond Trustee. (Registration Statement
No. 2-68906, Exhibit 10-16.)
10-21 - Participation Agreement No. 5 dated as of
May 1, 1986, among Quarto Mining Company,
the CAPCO Companies, the Loan Participants
listed in Schedule A thereto, and National
City Bank, as Bond Trustee. (1986 Form 10-
K, Exhibit 10-22, File No. 1-2578, Ohio
Edison Company.)
10-22 - Participation Agreement No. 6 dated as of
December 1, 1991, among Quarto Mining
Company, the CAPCO Companies, the Loan
Participants listed in Schedule A thereto,
National City Bank, as Mortgage Bond
Trustee, and National City Bank, as
Refunding Bond Trustee. (1991 Form 10-K,
Exhibit 10-19, File No. 1-2578, Ohio Edison
Company.)
10-23 - Agreement entered into as of October 20,
1981, among the CAPCO Companies regarding
the use of Quarto Coal at Mansfield Units
Nos. 1, 2 and 3. (1981 Form 10-K, Exhibit
20-1, File No. 1-2578, Ohio Edison
Company.)
10-24 - Restated Option Agreement dated as of May
1, 1983, by and between The North American
Coal Corporation and the CAPCO Companies.
(1983 Form 10-K, Exhibit 19-1, File No. 1-
2578, Ohio Edison Company.)
10-25 - Trust Indenture and Mortgage dated as of
October 1, 1973, between Quarto Mining
Company and National City Bank, as Bond
Trustee, together with Guaranty, dated as
of October 1, 1973, with respect thereto by
the CAPCO Group. (Registration Statement of
Ohio Edison Company, File No. 2-61146,
Exhibit 5 (e) (5).)
10-26 - Amendment No. 1 dated August 1, 1974, to
Trust Indenture and Mortgage dated as of
October 1, 1973, between Quarto Mining
Company and National City Bank, as Bond
Trustee, together with Amendment No. 1
dated August 1, 1974, to Guaranty dated as
of October 1, 1973, with respect thereto by
the CAPCO Group. (Registration Statement of
Ohio Edison Company, File No. 2-53059,
Exhibit 5 (h) (2).)
10-27 - Amendment No. 2 dated as of September 15,
1978, to Trust Indenture and Mortgage dated
as of October 1, 1973, as amended, between
Quarto Mining Company and National City
Bank, as Bond Trustee, together with
Amendment No. 2 dated as of September 15,
1978, to Bond Guaranty dated as of October
1, 1973, as amended, between the CAPCO
Group and National City Bank, as Bond
Trustee. (Registration Statement No. 2-
68906, Exhibits 5 (e) (11) and 5 (e) (12).)
10-28 - Amendment No. 3 dated as of October 31,
1980, to Trust Indenture and Mortgage dated
as of October 1, 1973, as amended, between
Quarto Mining Company and National City
Bank, as Bond Trustee. (Registration
Statement No. 2-68906, Exhibit 10-16.)
10-29 - Amendment No. 4 dated as of July 1, 1985,
to Trust Indenture and Mortgage dated as of
October 1, 1973, as amended, between Quarto
Mining Company and National City Bank, as
Bond Trustee. (1985 Form 10-K, Exhibit 10-
28, File No. 1-2578, Ohio Edison Company.)
10-30 - Amendment No. 5 dated as of May 1, 1986, to
Trust Indenture and Mortgage dated as of
October 1, 1973, as amended, between Quarto
Mining Company and National City Bank, as
Bond Trustee. (1986 Form 10-K, Exhibit 10-
30, File No. 1-2578, Ohio Edison Company.)
10-31 - Amendment No. 6 dated as of December 1,
1991, to Trust Indenture and Mortgage dated
as of October 1, 1973, as amended, between
Quarto Mining Company and National City
Bank, as Bond Trustee. (1991 Form 10-K,
Exhibit 10-28, File No. 1-2578, Ohio Edison
Company.)
10-32 - Trust Indenture dated as of December 1,
1991, between Quarto Mining Company and
National City Bank, as Bond Trustee. (1991
Form 10-K, Exhibit 10-29, File No. 1-2578,
Ohio Edison Company.)
10-33 - Amendment No. 3 dated as of October 31,
1980, to the Bond Guaranty dated as of
October 1, 1973, as amended, with respect
to the CAPCO Group. (Registration Statement
No. 2-68906, Exhibit 10-16.)
10-34 - Amendment No. 4 dated as of July 1, 1985,
to the Bond Guaranty dated as of October 1,
1973, as amended, by the CAPCO Companies to
National City Bank, as Bond Trustee. (1985
Form 10-K, Exhibit 10-30 , File No. 1-2578,
Ohio Edison Company.)
10-35 - Amendment No. 5 dated as of May 1, 1986, to
the Bond Guaranty dated as of October 1,
1973, as amended, by the CAPCO Companies to
National City Bank, as Bond Trustee. (1986
Form 10-K, Exhibit 10-33, File No. 1-2578,
Ohio Edison Company.)
10-36 - Amendment No. 6A dated as of December 1,
1991, to the Bond Guaranty dated as of
October 1, 1973, as amended, by the CAPCO
Companies to National City Bank, as Bond
Trustee. (1991 Form 10-K, Exhibit 10-33,
File No. 1-2578, Ohio Edison Company.)
10-37 - Amendment No. 6B dated as of December 30,
1991, to the Bond Guaranty dated as of
October 1, 1973, as amended, by the CAPCO
Companies to National City Bank, as Bond
Trustee. (1991 Form 10-K, Exhibit 10-34,
File No. 1-2578, Ohio Edison Company.)
10-38 - Bond Guaranty dated as of December 1, 1991,
by the CAPCO Companies to National City
Bank, as Bond Trustee. (1991 Form 10-K,
Exhibit 10-35, File No. 1-2578, Ohio Edison
Company.)
10-39 - Open End Mortgage dated as of October 1,
1973, between Quarto Mining Company and the
CAPCO Companies and Amendment No. 1 thereto
dated as of September 15, 1978.
(Registration Statement No. 2-68906,
Exhibit 10-23.)
10-40 - Restructuring Agreement dated as of April
1, 1985, among Quarto Mining Company, the
CAPCO Companies, Energy Properties, Inc.,
General Electric Credit Corporation, the
Loan Participants listed in schedules
thereto, Central National Bank of
Cleveland, as Owner Trustee, National City
Bank, as Loan Trustee, and National City
Bank, as Bond Trustee. (1985 Form 10-K,
Exhibit 10-33, File No. 1-2578, Ohio Edison
Company.)
10-41 - Unsecured Note Guaranty dated as of July 1,
1985, by the CAPCO Companies to General
Electric Credit Corporation. (1985 Form 10-
K, Exhibit 10-34, File No. 1-2578, Ohio
Edison Company.)
10-42 - Memorandum of Understanding dated as of
March 31, 1985, among the CAPCO Companies.
(1985 Form 10-K, Exhibit 10-35, File No. 1-
2578, Ohio Edison Company.)
(B) 10-43 - Ohio Edison System Executive Supplemental
Life Insurance Plan. (1995 Form 10-K,
Exhibit 10-44, File No. 1-2578, Ohio Edison
Company.)
(B) 10-44 - Ohio Edison System Executive Incentive
Compensation Plan. (1995 Form 10-K, Exhibit
10-45, File No. 1-2578, Ohio Edison
Company.)
(B) 10-45 - Ohio Edison System Restated and Amended
Executive Deferred Compensation Plan. (1995
Form 10-K, Exhibit 10-46, File No. 1-2578,
Ohio Edison Company.)
(B) 10-46 - Ohio Edison System Restated and Amended
Supplemental Executive Retirement Plan.
(1995 Form 10-K, Exhibit 10-47, File No. 1-
2578, Ohio Edison Company.)
10-47 - Operating Agreement for Perry Unit No. 1
dated March 10, 1987, by and between the
CAPCO Companies. (1987 Form 10-K, Exhibit
28-24, File No. 1-2578, Ohio Edison
Company.)
10-48 - Operating Agreement for Bruce Mansfield
Units Nos. 1, 2 and 3 dated as of June 1,
1976, and executed on September 15, 1987,
by and between the CAPCO Companies. (1987
Form 10-K, Exhibit 28-25, File No. 1-2578,
Ohio Edison Company.)
10-49 - Operating Agreement for W. H. Sammis Unit
No. 7 dated as of September 1, 1971, by and
between the CAPCO Companies. (1987 Form 10-
K, Exhibit 28-26, File No. 1-2578, Ohio
Edison Company.)
10-50 - OE-APS Power Interchange Agreement dated
March 18, 1987, by and among Ohio Edison
Company and Pennsylvania Power Company, and
Monongahela Power Company and West Penn
Power Company and The Potomac Edison
Company. (1987 Form 10-K, Exhibit 28-27,
File No. 1-2578, of Ohio Edison Company.)
10-51 - OE-PEPCO Power Supply Agreement dated March
18, 1987, by and among Ohio Edison Company
and Pennsylvania Power Company and Potomac
Electric Power Company. (1987 Form 10-K,
Exhibit 28-28, File No. 1-2578, of Ohio
Edison Company.)
10-52 - Supplement No. 1 dated as of April 28,
1987, to the OE-PEPCO Power Supply
Agreement dated March 18, 1987, by and
among Ohio Edison Company, Pennsylvania
Power Company and Potomac Electric Power
Company. (1987 Form 10-K, Exhibit 28-29,
File No. 1-2578, of Ohio Edison Company.)
10-53 - APS-PEPCO Power Resale Agreement dated
March 18, 1987, by and among Monongahela
Power Company, West Penn Power Company, and
The Potomac Edison Company and Potomac
Electric Power Company. (1987 Form 10-K,
Exhibit 28-30, File No. 1-2578, of Ohio
Edison Company.)
10-54 - Pennsylvania Power Company Master
Decommissioning Trust Agreement for Beaver
Valley Power Station and Perry Nuclear
Power Plant dated as of April 21, 1995.
(Quarter ended June 30, 1995 Form 10-Q,
Exhibit 10, File No. 1-3491.)
10-55 - Nuclear Fuel Lease dated as of March 31,
1989, between OES Fuel, Incorporated, as
Lessor, and Pennsylvania Power Company, as
Lessee. (1989 Form 10-K, Exhibit 10-39,
File No. 1-3491.)
(A) 12.2 - Fixed Charge Ratios
(A) 13.4 - 1997 Annual Report to Stockholders. (Only
those portions expressly incorporated by
reference in this Form 10-K are to be
deemed "filed" with the Securities and
Exchange Commission.)
(A) 23.3 - Consent of Independent Public Accountants.
(A) 27.4 - Financial Data Schedule
(A) Provided herein in electronic format as
an exhibit.
(B) Management contract or compensatory plan
contract or arrangement filed pursuant to
Item 601 of Regulation S-K.
Pursuant to Rule 14a - 3(10) of the
Securities Exchange Act of 1934, Penn will
furnish any exhibit in this Report upon the
payment of Penn's expenses in furnishing
such exhibit.
3. Exhibits -Common Exhibits to CEI and TE
Exhibit
Number
- -------
2(a) - Agreement and Plan of Merger between Ohio
Edison and Centerior Energy dated as of
September 13, 1996 (Exhibit (2)-1, Form S-4
File No. 333-21011, filed by FirstEnergy).
2(b) - Merger Agreement by and among Centerior
Acquisition Corp., FirstEnergy and
Centerior (Exhibit (2)-3, Form S-4 File No.
333-21011, filed by FirstEnergy.
4(a) - Rights Agreement (Exhibit 4, June 25, 1996
Form 8-K, File Nos. 1-9130, 1-2323 and 1-
3583).
4(b)(1) - Form of Note Indenture between Cleveland
Electric, Toledo Edison and The Chase
Manhattan Bank, as Trustee dated as of June
13, 1997 (Exhibit 4(c), Form S-4 File No.
333-35931, filed by Cleveland Electric and
Toledo Edison).
4(b)(2) - Form of First Supplemental Note Indenture
between Cleveland Electric, Toledo Edison
and The Chase Manhattan Bank, as Trustee
dated as of June 13, 1997 (Exhibit 4(d),
Form S-4 File No. 333-35931, filed by
Cleveland Electric and Toledo Edison).
10b(1)(a) - CAPCO Administration Agreement dated
November 1, 1971, as of September 14, 1967,
among the CAPCO Group members regarding the
organization and procedures for
implementing the objectives of the CAPCO
Group (Exhibit 5(p), Amendment No. 1, File
No. 2-42230, filed by Cleveland Electric).
10b(1)(b) - Amendment No. 1, dated January 4, 1974, to
CAPCO Administration Agreement among the
CAPCO Group members (Exhibit 5(c)(3), File
No. 2-68906, filed by Ohio Edison).
10b(2) - CAPCO Transmission Facilities Agreement
dated November 1, 1971, as of September 14,
1967, among the CAPCO Group members
regarding the installation, operation and
maintenance of transmission facilities to
carry out the objectives of the CAPCO Group
(Exhibit 5(q), Amendment No. 1, File No. 2-
42230, filed by Cleveland Electric).
10b(2)(1) - Amendment No. 1 to CAPCO Transmission
Facilities Agreement, dated December 23,
1993 and effective as of January 1, 1993,
among the CAPCO Group members regarding
requirements for payment of invoices at
specified times, for payment of interest on
non-timely paid invoices, for restricting
adjustment of invoices after a four-year
period, and for revising the method for
computing the Investment Responsibility
charge for use of a member's transmission
facilities (Exhibit 10b(2)(1), 1993 Form
10-K, File Nos. 1-9130, 1-2323 and 1-3583).
10b(3) - CAPCO Basic Operating Agreement As Amended
January 1, 1993 among the CAPCO Group
members regarding coordinated operation of
the members' systems (Exhibit 10b(3), 1993
Form 10-K, File Nos. 1-9130, 1-2323 and 1-
3583).
10b(4) - Agreement for the Termination or
Construction of Certain Agreement By and
Among the CAPCO Group members, dated
December 23, 1993 and effective as of
September 1, 1980 (Exhibit 10b(4), 1993
Form 10-K, File Nos. 1-9130, 1-2323 and 1-
3583).
10b(5) - Construction Agreement, dated July 22,
1974, among the CAPCO Group members and
relating to the Perry Nuclear Plant
(Exhibit 5 (yy), File No. 2-52251, filed by
Toledo Edison).
10b(6) - Contract, dated as of December 5, 1975,
among the CAPCO Group members for the
construction of Beaver Valley Unit No. 2
(Exhibit 5 (g), File No. 2-52996, filed by
Cleveland Electric).
10b(7) - Amendment No. 1, dated May 1, 1977, to
Contract, dated as of December 5, 1975,
among the CAPCO Group members for the
construction of Beaver Valley Unit No. 2
(Exhibit 5(d)(4), File No. 2-60109, filed
by Ohio Edison).
10d(1)(a) - Form of Collateral Trust Indenture among
CTC Beaver Valley Funding Corporation,
Cleveland Electric, Toledo Edison and
Irving Trust Company, as Trustee (Exhibit
4(a), File No. 33-18755, filed by Cleveland
Electric and Toledo Edison).
10d(1)(b) - Form of Supplemental Indenture to
Collateral Trust Indenture constituting
Exhibit 10d(1)(a) above, including form of
Secured Lease Obligation Bond (Exhibit
4(b), File No. 33-18755, filed by Cleveland
Electric and Toledo Edison).
10d(1)(c) - Form of Collateral Trust Indenture among
Beaver Valley II Funding Corporation, The
Cleveland Electric Illuminating Company and
The Toledo Edison Company and The Bank of
New York, as Trustee (Exhibit (4) (a), File
No. 33-46665, filed by Cleveland Electric
and Toledo Edison).
10d(1)(d) - Form of Supplemental Indenture to
Collateral Trust Indenture constituting
Exhibit 10d(1)(c) above, including form of
Secured Lease Obligation Bond (Exhibit (4)
(b), File No. 33-46665, filed by Cleveland
Electric and Toledo Edison).
10d(2)(a) - Form of Collateral Trust Indenture among
CTC Mansfield Funding Corporation,
Cleveland Electric, Toledo Edison and IBJ
Schroder Bank & Trust Company, as Trustee
(Exhibit 4(a), File No. 33-20128, filed by
Cleveland Electric and Toledo Edison).
10d(2)(b) - Form of Supplemental Indenture to
Collateral Trust Indenture constituting
Exhibit 10d(2)(a) above, including forms of
Secured Lease Obligation Bonds (Exhibit
4(b), File No. 33-20128, filed by Cleveland
Electric and Toledo Edison).
10d(3)(a) - Form of Facility Lease dated as of
September 15, 1987 between The First
National Bank of Boston, as Owner Trustee
under a Trust Agreement dated as of
September 15, 1987 with the limited
partnership Owner Participant named
therein, Lessor, and Cleveland Electric and
Toledo Edison, Lessees (Exhibit 4(c), File
No. 33-18755, filed by Cleveland Electric
and Toledo Edison).
10d(3)(b) - Form of Amendment No. 1 to Facility Lease
constituting Exhibit 10d(3)(a) above
(Exhibit 4(e), File No. 33-18755, filed by
Cleveland Electric and Toledo Edison).
10d(4)(a) - Form of Facility Lease dated as of
September 15, 1987 between The First
National Bank of Boston, as Owner Trustee
under a Trust Agreement dated as of
September 15, 1987 with the corporate Owner
Participant named therein, Lessor, and
Cleveland Electric and Toledo Edison,
Lessees (Exhibit 4(d), File No. 33-18755,
filed by Cleveland Electric and Toledo
Edison).
10d(4)(b) - Form of Amendment No. 1 to Facility Lease
constituting Exhibit 10d(4)(a) above
(Exhibit 4(f), File No. 33-18755, filed by
Cleveland Electric and Toledo Edison).
10d(5)(a) - Form of Facility Lease dated as of
September 30, 1987 between Meridian Trust
Company, as Owner Trustee under a Trust
Agreement dated as of September 30, 1987
with the Owner Participant named therein,
Lessor, and Cleveland Electric and Toledo
Edison, Lessees (Exhibit 4(c), File No. 33-
20128, filed by Cleveland Electric and
Toledo Edison).
10d(5)(b) - Form of Amendment No. 1 to the Facility
Lease constituting Exhibit 10d(5)(a) above
(Exhibit 4(f), File No. 33-20128, filed by
Cleveland Electric and Toledo Edison).
10d(6)(a) - Form of Participation Agreement dated as of
September 15, 1987 among the limited
partnership Owner participant named
therein, the Original Loan Participants
listed in Schedule 1 thereto, as Original
Loan Participants, CTC Beaver Valley Fund
Corporation, as Funding Corporation, The
First National Bank of Boston, as Owner
Trustee, Irving Trust Company, as Indenture
Trustee, and Cleveland Electric and Toledo
Edison, as Lessees (Exhibit 28(a), File No.
33-18755, filed by Cleveland Electric and
Toledo Edison).
10d(6)(b) - Form of Amendment No. 1 to Participation
Agreement constituting Exhibit 10d(6) (a)
above (Exhibit 28(c), File No. 33-18755,
filed by Cleveland Electric and Toledo
Edison).
10d(7)(a) - Form of Participation Agreement dated as of
September 15, 1987 among the corporate
Owner Participant named therein, the
Original Loan Participants listed in
Schedule 1 thereto, as Owner Loan
Participants, CTC Beaver Valley Funding
Corporation, as Funding Corporation, The
First National Bank of Boston, as Owner
Trustee, Irving Trust Company, as Indenture
Trustee, and Cleveland Electric and Toledo
Edison, as Lessees (Exhibit 28(b), File No.
33-18755, filed by Cleveland Electric and
Toledo Edison).
10d(7)(b) - Form of Amendment No. 1 to Participation
Agreement constituting Exhibit 10d(7) (a)
above (Exhibit 28(d), File No. 33-18755,
filed by Cleveland Electric and Toledo
Edison).
10d(8)(a) - Form of Participation Agreement dated as of
September 30, 1987 among the Owner
Participant named therein, the Original
Loan Participants listed in Schedule II
thereto, as Owner Loan Participants, CTC
Mansfield Funding Corporation, Meridian
Trust Company, as Owner Trustee, IBJ
Schroder Bank & Trust Company, as Indenture
Trustee, and Cleveland Electric and Toledo
Edison, as Lessees (Exhibit 28(a), File No.
33-20128, filed by Cleveland Electric and
Toledo Edison).
10d(8)(b) - Form of Amendment No. 1 to the
Participation Agreement constituting
Exhibit 10d(8) (a) above (Exhibit 28(b),
File No. 33-20128, filed by Cleveland
Electric and Toledo Edison).
10d(9) - Form of Ground Lease dated as of September
15, 1987 between Toledo Edison, Ground
Lessor, and The First National Bank of
Boston, as Owner Trustee under a Trust
Agreement dated as of September 15, 1987
with the Owner Participant named therein,
Tenant (Exhibit 28(e), File No. 33-18755,
filed by Cleveland Electric and Toledo
Edison).
10d(10) - Form of Site Lease dated as of September
30, 1987 between Toledo Edison, Lessor, and
Meridian Trust Company, as Owner Trustee
under a Trust Agreement dated as of
September 30, 1987 with the Owner
Participant named therein, Tenant (Exhibit
28(c), File No. 33-20128, filed by
Cleveland Electric and Toledo Edison).
10d(11) - Form of Site Lease dated as of September
30, 1987 between Cleveland Electric,
Lessor, and Meridian Trust Company, as
Owner Trustee under a Trust Agreement dated
as of September 30, 1987 with the Owner
Participant named therein, Tenant (Exhibit
28(d), File No. 33-20128, filed by
Cleveland Electric and Toledo Edison).
10d(12) - Form of Amendment No. 1 to the Site Leases
constituting Exhibits 10d(10) and 10d(11)
above (Exhibit 4 (f), File No. 33-20128,
filed by Cleveland Electric and Toledo
Edison).
10d(13) - Form of Assignment, Assumption and Further
Agreement dated as of September 15, 1987
among The First National Bank of Boston, as
Owner Trustee under a Trust Agreement dated
as of September 15, 1987 with the Owner
Participant named therein, Cleveland
Electric, Duquesne, Ohio Edison,
Pennsylvania Power and Toledo Edison
(Exhibit 28(f), File No. 33-18755, filed by
Cleveland Electric and Toledo Edison).
10d(14) - Form of Additional Support Agreement dated
as of September 15, 1987 between The First
National Bank of Boston, as Owner Trustee
under a Trust Agreement dated as of
September 15, 1987 with the Owner
Participant named therein, and Toledo
Edison (Exhibit 28(g), File No. 33-18755,
filed by Cleveland Electric and Toledo
Edison).
10d(15) - Form of Support Agreement dated as of
September 30, 1987 between Meridian Trust
Company, as Owner Trustee under a Trust
Agreement dated as of September 30, 1987
with the Owner Participant named therein,
Toledo Edison, Cleveland Electric,
Duquesne, Ohio Edison and Pennsylvania
Power (Exhibit 28(e), File No. 33-20128,
filed by Cleveland Electric and Toledo
Edison).
10d(16) - Form of Indenture, Bill of Sale, Instrument
of Transfer and Severance Agreement dated
as of September 30, 1987 between Toledo
Edison, Seller, and The First National Bank
of Boston, as Owner Trustee under a Trust
Agreement dated as of September 15, 1987
with the Owner Participant named therein,
Buyer (Exhibit 28 (h), File No. 33-18755,
filed by Cleveland Electric and Toledo
Edison).
10d(17) - Form of Bill of Sale, Instrument of
Transfer and Severance Agreement dated as
of September 30, 1987 between Toledo
Edison, Seller, and Meridian Trust Company,
as Owner Trustee under a Trust Agreement
dated as of September 30, 1987 with the
Owner Participant named therein, Buyer
(Exhibit 28(f), File No. 33-20128, filed by
Cleveland Electric and Toledo Edison).
10d(18) - Form of Bill of Sale, Instrument of
Transfer and Severance Agreement dated as
of September 30, 1987 between Cleveland
Electric, Seller, and Meridian Trust
Company, as Owner Trustee under a Trust
Agreement dated as of September 30, 1987
with the Owner Participant named therein,
Buyer (Exhibit 28(g), File No. 33-20128,
filed by Cleveland Electric and Toledo
Edison).
10d(19) - Forms of Refinancing Agreement, including
exhibits thereto, among the Owner
Participant named therein, as Owner
Participant, CTC Beaver Valley Funding
Corporation, as Funding Corporation, Beaver
Valley II Funding Corporation, as New
Funding Corporation, The Bank of New York,
as Indenture Trustee, The Bank of New York,
as New Collateral Trust Trustee, and The
Cleveland Electric Illuminating Company and
The Toledo Edison Company, as Lessees
(Exhibit (28) (e) (i), File No. 33-46665,
filed by Cleveland Electric and Toledo
Edison).
10d(20)(a) - Form of Amendment No. 2 to Facility Lease
among Citicorp Lescaman, Inc., Cleveland
Electric and Toledo Edison (Exhibit 10(a),
Form S-4 File No. 333-47651, filed by
Cleveland Electric).
10d(20)(b) - Form of Amendment No. 3 to Facility Lease
among Citicorp Lescaman, Inc., Cleveland
Electric and Toledo Edison (Exhibit 10(b),
Form S-4 File No. 333-47651, filed by
Cleveland Electric).
10d(21)(a) - Form of Amendment No. 2 to Facility Lease
among US West Financial Services, Inc.,
Cleveland Electric and Toledo Edison
(Exhibit 10(c), Form S-4 File No. 333-
47651, filed by Cleveland Electric).
10d(21)(b) - Form of Amendment No. 3 to Facility Lease
among US West Financial Services, Inc.,
Cleveland Electric and Toledo Edison
(Exhibit 10(d), Form S-4 File No. 333-
47651, filed by Cleveland Electric).
10d(22) - Form of Amendment No. 2 to Facility Lease
among Midwest Power Company, Cleveland
Electric and Toledo Edison (Exhibit 10(e),
Form S-4 File No. 333-47651, filed by
Cleveland Electric).
10e(1) - Centerior Energy Corporation Equity
Compensation Plan (Exhibit 99, Form S-8,
File No. 33-59635).
3. Exhibits - Cleveland Electric Illuminating (CEI)
Exhibit
Number
- -------
3a - Amended Articles of Incorporation of CEI,
as amended, effective May 28, 1993 (Exhibit
3a, 1993 Form 10-K, File No. 1-2323).
3b - Regulations of CEI, 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 between CEI and
Guaranty Trust Company of New York (now
Morgan Guaranty Trust Company of New York),
as Trustee, dated July 1, 1940 (Exhibit
7(a), File No. 2-4450).
Supplemental Indentures between CEI and the Trustee,
supplemental to Exhibit 4b(1), dated as follows:
4b(2) - July 1, 1940 (Exhibit 7(b), File No. 2-
4450).
4b(3) - August 18, 1944 (Exhibit 4(c), File No. 2-
9887).
4b(4) - December 1, 1947 (Exhibit 7(d), File No. 2-
7306).
4b(5) - September 1, 1950 (Exhibit 7(c), File No.
2-8587).
4b(6) - June 1, 1951 (Exhibit 7(f), File No. 2-
8994).
4b(7) - May 1, 1954 (Exhibit 4(d), File No. 2-
10830).
4b(8) - March 1, 1958 (Exhibit 2(a)(4), File No. 2-
13839).
4b(9) - April 1, 1959 (Exhibit 2(a)(4), File No. 2-
14753).
4b(10) - December 20, 1967 (Exhibit 2(a)(4), File
No. 2-30759).
4b(11) - January 15, 1969 (Exhibit 2(a)(5), File No.
2-30759).
4b(12) - November 1, 1969 (Exhibit 2(a)(4), File No.
2-35008).
4b(13) - June 1, 1970 (Exhibit 2(a)(4), File No. 2-
37235).
4b(14) - November 15, 1970 (Exhibit 2(a)(4), File
No. 2-38460).
4b(15) - May 1, 1974 (Exhibit 2(a)(4), File No. 2-
50537).
4b(16) - April 15, 1975 (Exhibit 2(a)(4), File No.
2-52995).
4b(17) - April 16, 1975 (Exhibit 2(a)(4), File No.
2-53309).
4b(18) - May 28, 1975 (Exhibit 2(c), June 5, 1975
Form 8-A, File No. 1-2323).
4b(19) - February 1, 1976 (Exhibit 3(d)(6),
1975 Form 10-K, File No. 1-2323).
4b(20) - November 23, 1976 (Exhibit 2(a)(4), File
No. 2-57375).
4b(21) - July 26, 1977 (Exhibit 2(a)(4), File No. 2-
59401).
4b(22) - September 27, 1977 (Exhibit 2(a)(5), File
No. 2-67221).
4b(23) - May 1, 1978 (Exhibit 2(b), June 30, 1978
Form 10-Q, File No. 1-2323).
4b(24) - September 1, 1979 (Exhibit 2(a), September
30, 1979 Form 10-Q, File No. 1-2323).
4b(25) - April 1, 1980 (Exhibit 4(a)(2), September
30, 1980 Form 10-Q, File No. 1-2323).
4b(26) - April 15, 1980 (Exhibit 4(b), September 30,
1980 Form 10-Q, File No. 1-2323).
4b(27) - May 28, 1980 (Exhibit 2(a)(4), Amendment
No. 1, File No. 2-67221).
4b(28) - June 9, 1980 (Exhibit 4(d), September 30,
1980 Form 10-Q, File No. 1-2323).
4b(29) - December 1, 1980 (Exhibit 4(b) (29), 1980
Form 10-K, File No. 1-2323).
4b(30) - July 28, 1981 (Exhibit 4(a), September 30,
1981, Form 10-Q, File No. 1-2323).
4b(31) - August 1, 1981 (Exhibit 4(b), September 30,
1981, Form 10-Q, File No. 1-2323).
4b(32) - March 1, 1982 (Exhibit 4(b)(3), Amendment
No. 1, File No. 2-76029).
4b(33) - July 15, 1982 (Exhibit 4(a), September 30,
1982 Form 10-Q, File No. 1-2323).
4b(34) - September 1, 1982 (Exhibit 4(a)(1),
September 30, 1982 Form 10-Q, File No. 1-
2323).
4b(35) - November 1, 1982 (Exhibit 4(a)(2),
September 30, 1982 Form 10-Q, File No. 1-
2323).
4b(36) - November 15, 1982 (Exhibit 4(b)(36), 1982
Form 10-K, File No. 1-2323).
4b(37) - May 24, 1983 (Exhibit 4(a), June 30, 1983
Form 10-Q, File No. 1-2323).
4b(38) - May 1, 1984 (Exhibit 4, June 30, 1984 Form
10-Q, File No. 1-2323).
4b(39) - May 23, 1984 (Exhibit 4, May 22, 1984 Form
8-K, File No. 1-2323).
4b(40) - June 27, 1984 (Exhibit 4, June 11, 1984
Form 8-K, File No. 1-2323).
4b(41) - September 4, 1984 (Exhibit 4b(41), 1984
Form 10-K, File No. 1-2323).
4b(42) - November 14, 1984 (Exhibit 4b(42), 1984
Form 10-K, File No. 1-2323).
4b(43) - November 15, 1984 (Exhibit 4b(43), 1984
Form 10-K, File No. 1-2323).
4b(44) - April 15, 1985 (Exhibit 4(a), May 8, 1985
Form 8-K, File No. 1-2323).
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 8-K, File No. 1-2323).
4b(49) - April 15, 19 86 (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.
4b(63) - May 1, 1992 (Exhibit 4(a)(3), File No. 33-
48845).
4b(64) - July 31, 1992 (Exhibit 4(a)(3), File No.
33-57292).
4b(65) - January 1, 1993 (Exhibit 4b(65), 1992 Form
10-K, File No. 1-2323).
4b(66) - February 1, 1993 (Exhibit 4b(66), 1992 Form
10-K, File No. 1-2323).
4b(67) - May 20, 1993 (Exhibit 4(a), July 14, 1993
Form 8-K, File No. 1-2323).
4b(68) - June 1, 1993 (Exhibit 4(b), July 14, 1993
Form 8-K, File No. 1-2323).
4b(69) - September 15, 1994 (Exhibit 4(a), September
30, 1994 Form 10-Q, File No. 1-2323).
4b(70) - May 1, 1995 (Exhibit 4(a), September 30,
1995 Form 10-Q, File No. 1-2323).
4b(71) - May 2, 1995 (Exhibit 4(b), September 30,
1995 Form 10-Q, File No. 1-2323).
4b(72) - June 1, 1995 (Exhibit 4(c), September 30,
1995 Form 10-Q, File No. 1-2323).
4b(73) - July 15, 1995 (Exhibit 4b(73), 1995 Form
10-K, File No. 1-2323).
4b(74) - August 1, 1995 (Exhibit 4b(74), 1995 Form
10-K, File No. 1-2323).
4b(75) - June 15, 1997 (Exhibit 4(a), Form S-4 File
No. 333-35931, filed by Cleveland Electric
and Toledo Edison).
4b(76) - October 15, 1997 (Exhibit 4(a), Form S-4
File No. 333-47651, filed by Cleveland
Electric).
4c - Open-End Subordinate Indenture of Mortgage
between The Cleveland Electric Illuminating
Company and Bank One, Columbus, N.A., as
Trustee, Dated as of June 1, 1994 (Exhibit
4(a), August 26, 1994 Form 8-K, File No. 1-
2323).
10-1 - Administration Agreement between the CAPCO
Group dated as of September 14, 1967.
(Registration No. 2-43102, Exhibit
5(c)(2).)
10-2 - Amendment No. 1 dated January 4, 1974 to
Administration Agreement between the CAPCO
Group dated as of September 14, 1967.
(Registration No. 2-68906, Exhibit
5(c)(3).)
10-3 - Transmission Facilities Agreement between
the CAPCO Group dated as of September 14,
1967. (Registration No. 2-43102, Exhibit
5(c)(3).)
10-4 - Amendment No. 1 dated as of January 1, 1993
to Transmission Facilities Agreement
between the CAPCO Group dated as of
September 14, 1967. (1993 Form 10-K,
Exhibit 10 -4.)
10-5 - Agreement for the Termination or
Construction of Certain Agreements
effective September 1, 1980 October 15,
1997 (Exhibit 4(a), Form S-4 File No. 333-
47651, filed by Cleveland Electric).
10a(1) - Form of Note Indenture between Cleveland
Electric and The Chase Manhattan Bank, as
Trustee dated as of October 24, 1997
(Exhibit 4(b), Form S-4 File No. 333-47651,
filed by Cleveland Electric).
10a(2) - Form of Supplemental Note Indenture between
Cleveland Electric and The Chase Manhattan
Bank, as Trustee dated as of October 24,
1997 (Exhibit 4(c), Form S-4 File No. 333-
47651, filed by Cleveland Electric).
(A)13.2 - 1997 Annual Report to Stockholders. (only
those portions expressly incorporated by
reference in this Form 10-K are to be
deemed "filed" with the SEC.)
(A)21.2 - List of Subsidiaries of the Registrant at
December 31, 1997.
(A)23.2 - Consent of Independent Public Accountants.
(A)27.2 - Financial Data Schedule for the period
ended December 31, 1997.
(A) - Provided herein in electronic format as an
exhibit.
3. Exhibits -Toledo Edison (TE)
Exhibit
Number
- -------
3a - Amended Articles of Incorporation of TE, as
amended effective October 2, 1992 (Exhibit
3a, 1992 Form 10-K, File No. 1-3583).
3b - Code of Regulations of TE dated January 28,
1987, as amended effective July 1 and
October 1, 1988 and April 24, 1990 (Exhibit
3b, 1990 Form 10-K, File No. 1-3583).
4b(1) - Indenture, dated as of April 1, 1947,
between TE and The Chase National Bank of
the City of New York (now The Chase
Manhattan Bank (National Association))
(Exhibit 2(b), File No. 2-26908).
Supplemental Indentures between TE and the
Trustee, Supplemental to Exhibit 4b(1),
dated as follows:
4b(2) - September 1, 1948 (Exhibit 2(d), File No.
2-26908).
4b(3) - April 1, 1949 (Exhibit 2(e), File No. 2-
26908).
4b(4) - December 1, 1950 (Exhibit 2(f), File No. 2-
26908).
4b(5) - March 1, 1954 (Exhibit 2(g), File No. 2-
26908).
4b(6) - February 1, 1956 (Exhibit 2(h), File No. 2-
26908).
4b(7) - May 1, 1958 (Exhibit 5(g), File No. 2-
59794).
4b(8) - August 1, 1967 (Exhibit 2(c), File No. 2-
26908).
4b(9) - November 1, 1970 (Exhibit 2(c), File No. 2-
38569).
4b(10) - August 1, 1972 (Exhibit 2(c), File No. 2-
44873).
4b(11) - November 1, 1973 (Exhibit 2(c), File No. 2-
49428).
4b(12) - July 1, 1974 (Exhibit 2(c), File No. 2-
51429).
4b(13) - October 1, 1975 (Exhibit 2(c), File No. 2-
54627).
4b(14) - June 1, 1976 (Exhibit 2(c), File No. 2-
56396).
4b(15) - October 1, 1978 (Exhibit 2(c), File No. 2-
62568).
4b(16) - September 1, 1979 (Exhibit 2(c), File No.
2-65350).
4b(17) - September 1, 1980 (Exhibit 4(s), File No.
2-69190).
4b(18) - October 1, 1980 (Exhibit 4(c), File No. 2-
69190).
4b(19) - April 1, 1981 (Exhibit 4(c), File No. 2-
71580).
4b(20) - November 1, 1981 (Exhibit 4(c), File No. 2-
74485).
4b(21) - June 1, 1982 (Exhibit 4(c), File No. 2-
77763).
4b(22) - September 1, 1982 (Exhibit 4(x), File No.
2-87323).
4b(23) - April 1, 1983 (Exhibit 4(c), March 31, 1983
Form 10-Q, File No. 1-3583).
4b(24) - December 1, 1983 (Exhibit 4(x), 1983 Form
10-K, File No. 1-3583).
4b(25) - April 1, 1984 (Exhibit 4(c), File No. 2-
90059).
4b(26) - October 15, 1984 (Exhibit 4(z), 1984 Form
10-K, File No. 1-3583).
4b(27) - October 15, 1984 (Exhibit 4(aa), 1984 Form
10-K, File No. 1-3583).
4b(28) - August 1, 1985 (Exhibit 4(dd),
File No. 33-1689).
4b(29) - August 1, 1985 (Exhibit 4(ee),
File No. 33-1689).
4b(30) - December 1, 1985 (Exhibit 4(c), File No.
33-1689).
4b(31) - March 1, 1986 (Exhibit 4b(31), 1986 Form
10-K, File No. 1-3583).
4b(32) - October 15, 1987 (Exhibit 4, September 30,
1987 Form 10-Q, File No. 1-3583).
4b(33) - September 15, 1988 (Exhibit 4b(33), 1988
Form 10-K, File No. 1-3583).
4b(34) - June 15, 1989 (Exhibit 4b(34), 1989 Form
10-K, File No. 1-3583).
(A) 13.3 - 1997 Annual Report to Stockholders. (Only
those portions expressly incorporated by
reference in this Form 10-K are to be
deemed "filed" with the SEC.)
(A) 21.3 - List of Subsidiaries of the Registrant at
December 31, 1997.
(A) 27.3 - Financial Data Schedule.
(A) Provided herein in electronic format as an
exhibit.
(b) Reports on Form 8-K
FirstEnergy
-----------
- The Company filed three reports on Form 8-K since the
November 8, 1997 merger date. A report dated November
10, 1997 reported the merger of Ohio Edison Company
and Centerior Energy Corporation to form the Company
effective November 8, 1997, amendment to such Form 8-
K on Form 8-K/A dated January 22, 1998, and a report
dated December 1, 1997, reported a Company common
stock rights agreement.
OE
--
- OE filed two reports on Form 8-K since September 30,
1997. A report dated November 12, 1997, reported the
merger of Ohio Edison Company and Centerior Energy
Corporation effective November 8, 1997 and a report
dated March 23, 1998, reported audited consolidated
financial statements for the year ended December 31,
1997, and related matters.
CEI
---
- CEI filed one report on Form 8-K since September 30,
1997. A report dated March 16, 1998 reported audited
consolidated financial statements for the year ended
December 31, 1997, and related matters.
TE
--
- None
Penn
----
- None
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of FirstEnergy Corp.:
We have audited, in accordance with generally accepted
auditing standards, the consolidated financial statements
included in FirstEnergy Corp.'s Annual Report to Stockholders
incorporated by reference in this Form 10-K and have issued our
report thereon dated February 13, 1998. Our audit was made for
the purpose of forming an opinion on those statements taken as a
whole. The schedule of consolidated valuation and qualifying
accounts listed in Item 14 is the responsibility of the Company's
management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the
basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the
basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data
required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
February 13, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Ohio Edison
Company:
We have audited, in accordance with generally accepted
auditing standards, the consolidated financial statements
included in Ohio Edison Company's Annual Report to Stockholders
incorporated by reference in this Form 10-K and have issued our
report thereon dated February 13, 1998. Our audit was made for
the purpose of forming an opinion on those statements taken as a
whole. The schedule of consolidated valuation and qualifying
accounts listed in Item 14 is the responsibility of the Company's
management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the
basic consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the
basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data
required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
February 13, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of The Cleveland
Electric Illuminating Company:
We have audited, in accordance with generally accepted
auditing standards, the consolidated financial statements
included in The Cleveland Electric Illuminating Company's Annual
Report to Stockholders incorporated by reference in this Form 10-
K and have issued our report thereon dated February 13, 1998. Our
audit was made for the purpose of forming an opinion on those
statements taken as a whole. The schedule of consolidated
valuation and qualifying accounts listed in Item 14 is the
responsibility of the Company's management and is presented for
the purpose of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated
financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic
consolidated financial statements and, in our opinion, fairly
states in all material respects the financial data required to be
set forth therein in relation to the basic consolidated financial
statements taken as a whole.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
February 13, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of The Toledo Edison
Company:
We have audited, in accordance with generally accepted
auditing standards, the consolidated financial statements
included in The Toledo Edison Company's Annual Report to
Stockholders incorporated by reference in this Form 10-K and have
issued our report thereon dated February 13, 1998. Our audit was
made for the purpose of forming an opinion on those statements
taken as a whole. The schedule of consolidated valuation and
qualifying accounts listed in Item 14 is the responsibility of
the Company's management and is presented for the purpose of
complying with the Securities and Exchange Commission's rules and
is not part of the basic consolidated financial statements. This
schedule has been subjected to the auditing procedures applied in
the audit of the basic consolidated financial statements and, in
our opinion, fairly states in all material respects the financial
data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
February 13, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Pennsylvania Power
Company:
We have audited, in accordance with generally accepted
auditing standards, the financial statements included in
Pennsylvania Power Company's Annual Report to Stockholders
incorporated by reference in this Form 10-K and have issued our
report thereon dated February 13, 1998. Our audit was made for
the purpose of forming an opinion on those statements taken as a
whole. The schedule of valuation and qualifying accounts listed
in Item 14 is the responsibility of the Company's management and
is presented for the purpose of complying with the Securities and
Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
February 13, 1998
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE II
FIRSTENERGY CORP.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Additions
-----------------------
Charged Charged
(Credited) (Credited)
Beginning to to Other Ending
Description Balance Income Accounts Deductions Balance
----------- ------- ---------- --------- ---------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
Accumulated provision for
uncollectible accounts - customers $ 2,306 $ 13,565 $ 2,277(a) $12,530(b) $ 5,618
====== ======== ======= ======= =======
- other $ -- $ 941 $ 4,808(c) $ 1,723 $ 4,026
======= ======== ======= ======= =======
Year Ended December 31, 1996:
Accumulated provision for
uncollectible accounts - customers $ 2,528 $ 6,949 $ 2,008(a) $ 9,179(b) $ 2,306
======= ======== ======= ======= =======
Year Ended December 31, 1995:
Accumulated provision for
uncollectible accounts - customers $ 2,517 $ 5,236 $ 1,836(a) $ 7,061(b) $ 2,528
======= ======== ======= ======= =======
- ------------------------------------
<FN>
(a) Represents recoveries and reinstatements of accounts previously written off.
(b) Represents the write-off of accounts considered to be uncollectible.
(c) Includes the $4,026,000 effect of the FirstEnergy merger on November 8, 1997.
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE II
OHIO EDISON COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Additions
-----------------------
Charged Charged
(Credited) (Credited)
Beginning to to Other Ending
Description Balance Income Accounts Deductions Balance
----------- ------- ---------- --------- ---------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
Accumulated provision for
uncollectible accounts - customers $ 2,306 $ 10,979 $ 2,277(a) $ 9,944(b) $ 5,618
====== ======== ======= ======= =======
Year Ended December 31, 1996:
Accumulated provision for
uncollectible accounts - customers $ 2,528 $ 6,949 $ 2,008(a) $ 9,179(b) $ 2,306
======= ======== ======= ======= =======
Year Ended December 31, 1995:
Accumulated provision for
uncollectible accounts - customers $ 2,517 $ 5,236 $ 1,836(a) $ 7,061(b) $ 2,528
======= ======== ======= ======= =======
- ------------------------------------
<FN>
(a) Represents recoveries and reinstatements of accounts previously written off.
(b) Represents the write-off of accounts considered to be uncollectible.
</TABLE>
<TABLE>
SCHEDULE II
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<CAPTION>
Additions
-----------------------
Charged Charged
(Credited) (Credited)
Beginning to to Other Ending
Description Balance Income Accounts Deductions Balance
----------- ------- ---------- --------- ---------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
Accumulated provision for
uncollectible accounts:
Nov. 8 - Dec. 31, 1997 $ 1,226 $ 2,331 $ 216(a) $ 2,547(b) $ 1,226
======= ======== ======= ======== =======
- ----------------------------------------------------------------------------------------------------
Jan. 1 - Nov. 7, 1997 $ 58 $ 12,853 $ 1,366(a) $ 13,051(b) $ 1,226
======= ======== ======= ======== =======
Year Ended December 31, 1996:
Accumulated provision for
uncollectible accounts $ 2,326 $ 14,872 $ 1,353(a) $ 18,493(b)(c) $ 58
======== ======== ======= ======== =======
Year Ended December 31, 1995:
Accumulated provision for
uncollectible accounts $ 2,129 $ 12,665 $ 2,585(a) $ 15,053(b) $ 2,326
======== ======== ======= ======== =======
<FN>
- -------------------------------
(a) Represents recoveries and reinstatements of accounts previously written off.
(b) Represents the write-off of accounts considered to be uncollectible.
(c) Sale of retail customer accounts receivable net of Accumulated Provision for Uncollectible
Accounts.
</TABLE>
<TABLE>
SCHEDULE II
THE TOLEDO EDISON COMPANY
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<CAPTION>
Additions
-----------------------
Charged Charged
(Credited) (Credited)
Beginning to to Other Ending
Description Balance Income Accounts Deductions Balance
----------- ------- ---------- --------- ---------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
Accumulated provision for
uncollectible accounts:
Nov. 8 - Dec. 31, 1997 $ 2,800 $ 1,196 $ 566(a) $ 1,762(b) $ 2,800
======= ======== ======= ======== =======
- ----------------------------------------------------------------------------------------------------
Jan. 1 - Nov. 7, 1997 $ 100 $ 9,367 $ 1,797(a) $ 8,464(b) $ 2,800
======= ======== ======= ======== =======
Year Ended December 31, 1996:
Accumulated provision for
uncollectible accounts $ 1,046 $ 6,223 $ 1,879(a) $ 9,048(b)(c) $ 100
======== ======== ======= ======== =======
Year Ended December 31, 1995:
Accumulated provision for
uncollectible accounts $ 1,390 $ 5,342 $ 1,282(a) $ 6,968 $ 1,046
======== ======== ======= ======== =======
<FN>
- -------------------------------
(a) Represents recoveries and reinstatements of accounts previously written off.
(b) Represents the write-off of accounts considered to be uncollectible.
(c) Sale of retail customer accounts receivable net of Accumulated Provision for Uncollectible
Accounts.
</TABLE>
<TABLE>
SCHEDULE II
PENNSYLVANIA POWER COMPANY
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<CAPTION>
Additions
-----------------------
Charged Charged
(Credited) (Credited)
Beginning to to Other Ending
Description Balance Income Accounts Deductions Balance
----------- ------- ---------- --------- ---------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997:
Accumulated provision for
uncollectible accounts $ 569 $ 4,409 $ 397(a) $ 1,766(b) $ 3,609
====== ======= ====== ======= =======
Year Ended December 31, 1996:
Accumulated provision for
uncollectible accounts $ 563 $ 1,308 $ 362(a) $ 1,664(b) $ 569
====== ======= ====== ======= =======
Year Ended December 31, 1995:
Accumulated provision for
uncollectible accounts $ 515 $ 1,140 $ 344(a) $ 1,436(b) $ 563
====== ======= ====== ======= =======
- ----------------------------
<FN>
(a) Represents recoveries and reinstatements of accounts previously written off.
(b) Represents the write-off of accounts considered to be uncollectible.
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FIRSTENERGY CORP.
BY /s/ W. R. Holland
-------------------------
W. R. Holland
Chairman of the Board
and Chief Executive
Officer
Date: March 17, 1998
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the
capacities and on the date indicated:
/s/ W. R. Holland /s/ H. P. Burg
- -------------------------------- ------------------------
W. R. Holland H. P. Burg
Chairman of the Board President and Chief
and Chief Executive Officer Financial Officer
and Director (Principal and Director (Principal
Executive Officer) Financial Officer)
/s/ Harvey L. Wagner /s/ Glenn H. Meadows
- -------------------------------- ------------------------
Harvey L. Wagner Glenn H. Meadows
Controller (Principal Director
Accounting Officer)
/s/ Paul J. Powers
- -------------------------------- -------------------------
Robert M. Carter Paul J. Powers
Director Director
/s/ Carol A. Cartwright /s/ Charles W. Rainger
- -------------------------------- ------------------------
Carol A. Cartwright Charles W. Rainger
Director Director
/s/ William F. Conway /s/ Robert C. Savage
- -------------------------------- ----------------------
William F. Conway Robert C. Savage
Director Director
/s/ Robert L. Loughhead /s/ George M. Smart
- -------------------------------- -------------------------
Robert L. Loughhead George M. Smart
Director Director
/s/ Russell W. Maier /s/ Jesse T. Williams, Sr.
- -------------------------------- ----------------------
Russell W. Maier Jesse T. Williams, Sr.
Director Director
Date: March 17, 1998
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
OHIO EDISON COMPANY
BY /s/ H. P. Burg
-------------------
H. P. Burg
President
Date: March 17, 1998
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the
capacities and on the date indicated:
/s/ H. P. Burg /s/ R. H. Marsh
- -------------------------- ----------------------------
H. P. Burg R. H. Marsh
President and Director Vice President
(Principal Executive Officer) (Principal Financial
Officer)
/s/ Harvey L. Wagner /s/ W. R. Holland
- -------------------------- ----------------------------
Harvey L. Wagner W. R. Holland
Controller Director
(Principal Accounting Officer)
/s/ Anthony J. Alexander
- -------------------------------
Anthony J. Alexander
Director
Date: March 17, 1998
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
THE CLEVELAND ELECTRIC
ILLUMINATING COMPANY
BY /s/ H. P. Burg
--------------------
H. P. Burg
President
Date: March 17, 1998
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the
capacities and on the date indicated:
/s/ H. P. Burg /s/ R. H. Marsh
- ------------------------- ----------------------------
H. P. Burg R. H. Marsh
President and Director Vice President
(Principal Executive Officer) (Principal Financial
Officer)
/s/ Harvey L. Wagner /s/ W. R. Holland
- ---------------------------- ----------------------------
Harvey L. Wagner W. R. Holland
Controller Director
(Principal Accounting Officer)
/s/ Anthony J. Alexander
- -------------------------------------
Anthony J. Alexander
Director
Date: March 17, 1998
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
THE TOLEDO EDISON COMPANY
BY /s/ H. P. Burg
--------------------------
H. P. Burg
President
Date: March 17, 1998
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the
capacities and on the date indicated:
/s/ H. P. Burg /s/ R. H. Marsh
- --------------------------- ----------------------------
H. P. Burg R. H. Marsh
President and Director Vice President
(Principal Executive Officer) (Principal Financial
Officer)
/s/ Harvey L. Wagner /s/ W. R. Holland
- --------------------------- -----------------------------
Harvey L. Wagner W. R. Holland
Controller Director
(Principal Accounting Officer)
/s/ Anthony J. Alexander
- -----------------------------------
Anthony J. Alexander
Director
Date: March 17, 1998
SIGNATURES
Pursuant to the requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PENNSYLVANIA POWER COMPANY
BY /s/ Willard R. Holland
-----------------------------
Willard R. Holland
Chairman of the Board
and Chief Executive
Officer
Date: March 25, 1998
Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the
capacities and on the date indicated:
/s/ Willard R. Holland /s/ Robert P. Wushinske
- ----------------------------- ----------------------------
Willard R. Holland Robert P. Wushinske
Chairman of the Board Vice President and
and Chief Executive Office and Treasurer
(Principal Executive Officer (Principal Accounting
and Principal Financial Officer)
Officer)
/s/ H. P. Burg /s/ Jack E. Reed
- ----------------------------- --------------------------
H. P. Burg Jack E. Reed
Director Director
/s/ R. Joseph Hrach
- ----------------------------- ----------------------------
R. Joseph Hrach Richard L. Werner
Director Director
- ----------------------------
Joseph J. Nowak
Director
Date: March 25, 1998
<TABLE>
FIRSTENERGY CORP.
SELECTED FINANCIAL DATA
<CAPTION>
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 2,821,435 $2,469,785 $2,465,846 $2,368,191 $2,369,940
-----------------------------------------------------------
Net Income $ 305,774 $ 302,673 $ 294,747 $ 281,852 $ 59,017
-----------------------------------------------------------
Earnings per Share of Common Stock $1.94 $2.10 $2.05 $1.97 $0.39
Dividends Declared per Share
of Common Stock $1.50 $1.50 $1.50 $1.50 $1.50
-----------------------------------------------------------
Total Assets $18,080,795 $9,054,457 $8,892,088 $9,045,255 $8,964,841
-----------------------------------------------------------
Capitalization at December 31:
Common Stockholders' Equity $ 4,159,598 $2,503,359 $2,407,871 $2,317,197 $2,243,292
Preferred Stock:
Not Subject to Mandatory
Redemption 660,195 211,870 211,870 328,240 328,240
Subject to Mandatory Redemption 334,864 155,000 160,000 40,000 45,500
Long-Term Debt 6,969,835 2,712,760 2,786,256 3,166,593 3,039,263
-----------------------------------------------------------
Total Capitalization $12,124,492 $5,582,989 $5,565,997 $5,852,030 $5,656,295
===========================================================
PRICE RANGE OF COMMON STOCK
FirstEnergy Corp.'s Common Stock is listed on the New York Stock Exchange and is traded on other
registered exchanges. Trading of the common stock began on November 10, 1997. Prices represent Ohio
Edison Company Common Stock before November 10, 1997 and FirstEnergy Corp. Common Stock beginning
November 10, 1997.
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter High-Low 23-7/8 20-7/8 24-7/8 21-7/8
--------------------------------------
Second Quarter High-Low 22 19-1/4 23 20-1/4
--------------------------------------
Third Quarter High-Low 23-5/8 21-3/4 22-1/4 19-1/4
--------------------------------------
Fourth Quarter High-Low 29 22-13/16 23-1/4 19-3/8
--------------------------------------
Yearly High-Low 29 19-1/4 24-7/8 19-1/4
--------------------------------------
<FN>
Prices are based on reports published in The Wall Street Journal
for New York Stock Exchange Composite Transactions.
</TABLE>
<TABLE>
CLASSIFICATION OF HOLDERS OF COMMON STOCK AS OF DECEMBER 31, 1997
<CAPTION>
Holders of Record Shares Held
- ----------------------------------------------------------------------------
Number % Number %
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Individuals 179,862 82.41 61,232,003 26.60
Fiduciaries 36,439 16.69 12,348,785 5.36
Nominees 60 0.02 155,109,173 67.38
All Others 1,928 0.88 1,517,180 0.66
-----------------------------------------------
Total 218,289 100.00 230,207,141 100.00
===============================================
<FN>
As of January 31, 1998, there were 217,565 holders of 230,207,141
shares of the Company's Common Stock. Information regarding retained
earnings available for payment of cash dividends is given in Note 4A.
</TABLE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
This discussion includes forward looking statements based
on information currently available to management. Such statements
are subject to certain risks and uncertainties. These statements
typically contain, but are not limited to, the terms "anticipate",
"potential", "expect", "believe", "estimate" and similar words.
Actual results may differ materially due to the speed and nature of
increased competition and deregulation in the electric utility
industry, economic or weather conditions affecting future sales and
margins, changes in markets for energy services, changing energy
market prices, legislative and regulatory changes (including
revised environmental requirements), availability and cost of
capital and other similar factors.
RESULTS OF OPERATIONS
FirstEnergy Corp. was formed when the merger of Ohio
Edison Company (OE) and Centerior Energy Corporation (Centerior)
became effective on November 8, 1997. The Federal Energy Regulatory
Commission (FERC) approved our merger on October 29, 1997, and the
Securities and Exchange Commission followed with their approval on
November 5, 1997. The merger of the companies has been accounted
for by using purchase accounting under the guidelines of Accounting
Principles Board Opinion No. 16, "Business Combinations." Under
purchase accounting, the results of operations for the combined
entity are reported from the point of consummation forward. As a
result, FirstEnergy financial statements for 1997 reflect twelve
months of operations for OE and its wholly owned subsidiary,
Pennsylvania Power Company (Penn), but include only seven weeks
(November 8, 1997 to December 31, 1997) for the former Centerior
companies, which include The Cleveland Electric Illuminating
Company (CEI) and The Toledo Edison Company (TE). Results reported
for prior periods are for OE and Penn only (OE companies).
We continued to make significant progress in 1997 as our
companies prepare for a more competitive environment in the
electric utility industry. The most significant event during the
year was the consummation of our merger. We expect the merger to
produce a minimum of $1 billion in savings during the first ten
years of joint operations through the elimination of duplicative
activities, improved operating efficiencies, lower capital
expenditures, accelerated debt reduction, the coordination of the
Companies' work forces and enhanced purchasing opportunities.
During 1997, we reviewed every facet of our operations to
determine best practices and opportunities for increasing
efficiency and reducing costs. On January 29, 1998, our workforce
was reduced by 310 employees to eliminate duplicative activities
resulting from the merger. Total merger-related staffing reductions
to date are 1,336, including 582 employees who recently accepted
voluntary retirement programs and 444 employees who left the
Companies in 1997 and were not replaced. These reductions are
expected to produce approximately $90 million in annual savings.
Earnings per share of $1.94 for 1997 were adversely
affected by net nonrecurring charges, primarily related to the
staffing reductions discussed above, amounting to $.22 per share.
Excluding these charges, 1997 earnings per share were $2.16,
compared to $2.10 in 1996. The 1997 results reflect accelerated
depreciation and amortization of nuclear and regulatory assets
totaling approximately $211 million under OE's Rate Reduction and
Economic Development Plan and Penn's Rate Stability and Economic
Development Plan; results for 1996 included approximately $178
million of accelerated depreciation and amortization. The 1996
results compared favorably to earnings of $2.05 per share in 1995.
Operating revenues were up $351.7 million in 1997,
compared to 1996. Excluding the seven weeks of former Centerior
results, we achieved record operating revenues for the third
consecutive year with an increase of $3.8 million over 1996. The OE
companies also achieved record retail sales for the fifth
consecutive year. The following table summarizes the sources of
changes in operating revenues for the OE companies for 1997 and
1996 as compared to the previous year:
1997 1996
- ---------------------------------------------------------------
(In millions)
Increased retail kilowatt-hour sales $ 7.8 $ 58.1
Change in average retail prices 13.3 (46.1)
Sales to utilities (25.8) (4.5)
Other 8.5 (3.6)
- ---------------------------------------------------------------
Net Increase $ 3.8 $ 3.9
===============================================================
An improving local economy helped the OE companies
achieve record retail sales of 27.3 billion kilowatt-hours. Our
customer base continues to grow with approximately 4,900 new retail
customers added in 1997, after gaining more than 12,200 customers
the previous year. Residential sales decreased 0.8% in 1997,
following a 1.8% gain the previous year. Commercial sales rose 1.2%
and 1.3% in 1997 and 1996, respectively. Increased demand by rubber
and plastics and primary metal manufacturers contributed to a 1.0%
rise in industrial sales during 1997, following a 5.5% increase the
previous year. Sales to other utilities fell 26.4% in 1997 as a
result of the December 31, 1996 expiration of a one-year contract
with another utility to supply 250 megawatts of power. This follows
a 2.7% increase the previous year. As a result of the above
factors, total kilowatt-hour sales for the OE companies dropped
5.0%, compared with sales in 1996, which were up 3.0% from 1995.
Fuel and purchased power expenses increased $29.6 million
in 1997. Excluding the seven weeks of former Centerior results,
fuel and purchased power costs were down $19.4 million. Because of
lower total kilowatt-hour sales, the OE companies spent less for
fuel and purchased power during 1997, compared to 1996 costs, which
were also down compared to 1995. Higher nuclear expenses in 1997
reflect increased operating costs at the Beaver Valley Plant and
the seven weeks of former Centerior results. Excluding the
Centerior costs, 1997 nuclear expenses increased $20 million
compared to 1996. Nuclear operating costs were lower in 1996,
compared to 1995, due primarily to lower refueling outage cost
levels. Other operating costs in 1997 were $105.6 million higher
than in 1996. The seven weeks of Centerior results contributed $81
million to the increase. For the OE companies, the increase in
other operating costs in 1997 reflects a fourth quarter charge of
approximately $41.5 million for the voluntary retirement program
mentioned above and estimated severance expenses. These cost
increases were partially offset by gains on the sale of emission
allowances during the year. The decrease in other operating costs
in 1996, compared to 1995, reflects lower maintenance costs at our
fossil-fuel generating units.
The changes in depreciation and regulatory asset
amortization in 1997 and 1996 reflect accelerations under the
regulatory plans discussed above. The changes between 1997 and 1996
also include $31.2 million of former Centerior depreciation, $6.2
million of former Centerior regulatory asset amortization and $7.7
million of goodwill amortization. General taxes were up $40.2
million in 1997, compared to 1996. Excluding the former Centerior's
results for the seven weeks ended December 31, 1997, general taxes
were down $7 million, compared to last year. The decrease in 1997
was due to lower property taxes and an adjustment in the second
quarter of 1997 which reduced the OE companies' liabilities for
gross receipts taxes.
Other income rose $20.8 million in 1997. The former
Centerior's seven-week results contributed $5.6 million of the
increase. For the OE companies, the increases in other income in
1997 and 1996 were principally due to higher investment income--
primarily through our PNBV Capital Trust investment, which was
effective in the third quarter of 1996. Excluding the seven-week
results for the former Centerior, overall interest costs continue
to trend downward. For the OE companies, total interest costs were
$4.2 million lower in 1997 than in 1996. Interest on long-term debt
decreased due to our economic refinancings and redemption of
higher-cost debt totaling approximately $282 million that had been
outstanding as of December 31, 1996. Other interest expense
increased compared to 1996 due mainly to higher levels of short-
term borrowing. We also discontinued deferring nuclear unit
interest in the second half of 1995, consistent with OE's
regulatory plan.
CAPITAL RESOURCES AND LIQUIDITY
We have significantly improved our financial position
over the past five years. For the OE companies, cash generated from
operations was nearly 25% higher in 1997 than it was in 1992 due to
higher revenues and aggressive cost controls. At the same time,
return on common equity improved from 10.8% in 1992 to 12.1% in
1997, excluding the net nonrecurring charges discussed above. By
the end of 1997, the OE companies were serving about 57,000 more
customers than they were five years ago, with approximately 2,000
fewer employees. As a result, our customer/employee ratio has
increased by 56% over the past five years, standing at 264
customers per employee at the end of 1997, compared with 169 at the
end of 1992. In addition, capital expenditures for the OE companies
have dropped substantially during that period. Expenditures in 1997
were approximately 37% lower than they were in 1992 and annual
depreciation charges have exceeded property additions since the end
of 1987.
Over the past five years, the OE companies have
aggressively taken advantage of opportunities in the financial
markets to reduce our average capital costs. Through refinancing
activities, we have reduced the average cost of debt from 8.53% at
the end of 1992 to 7.77% at the end of 1997. Excluding the
nonrecurring charges mentioned above, our fixed charge coverage
ratios continue to improve. The indenture ratio, which is used to
determine OE's ability to issue first mortgage bonds, improved from
4.34 at the end of 1992 to 6.21 at the end of 1997. Over the same
period, the charter ratio--a measure of our ability to issue
preferred stock--improved from 1.89 to 2.35.
At the end of 1997, FirstEnergy's common equity as a
percentage of capitalization stood at 34% compared to 40% at the
end of 1992 for OE. This decrease occurred due to the addition of
$4.4 billion of debt, $633.2 million of preferred stock and $1.6
billion of equity to our capital structure as a result of the
merger.
Our cash requirements in 1998 for operating expenses,
construction expenditures and scheduled debt maturities are
expected to be met without issuing additional securities. During
1997, the OE companies reduced their total debt by approximately
$245 million. FirstEnergy has cash requirements of approximately
$2.4 billion for the 1998-2002 period to meet scheduled maturities
of long-term debt and preferred stock. Of that amount,
approximately $288 million applies to 1998.
We had about $98.2 million of cash and temporary
investments and $302.2 million of short-term indebtedness on
December 31, 1997. As of December 31, 1997, we had the capability
to borrow $61 million through unused OES Fuel credit facilities. In
addition, our unused borrowing capability included $162 million
under revolving lines of credit and $26 million of bank facilities
that provide for borrowings on a short-term basis at the banks'
discretion.
Our capital spending for the period 1998-2002 is expected
to be about $1.5 billion (excluding nuclear fuel), of which
approximately $385 million applies to 1998. These spending plans
include investing approximately $300 million during the five-year
period ($65 million in 1998) in nonregulated business ventures.
Investments for additional nuclear fuel during the 1998-2002 period
are estimated to be approximately $518 million, of which about $85
million applies to 1998. During the same periods, our nuclear fuel
investments are expected to be reduced by approximately $380
million and $112 million, respectively, as the nuclear fuel is
consumed. Also, we have operating lease commitments (net of related
trust income) of approximately $1.0 billion for the 1998-2002
period, of which approximately $189 million relates to 1998. We
recover the cost of nuclear fuel consumed and operating leases
through our electric rates.
Interest Rate Risk
Our exposure to fluctuations in market interest rates is
mitigated by the fact that a significant portion of our debt has
fixed interest rates, as noted in the following table. As discussed
in Note 3, our investments in capital trusts effectively reduce
future lease obligations, also reducing interest rate risk. As
discussed in Note 1, changes in the market value of our
decommissioning trust funds are recognized with a corresponding
change to the decommissioning liability.
The table below presents principal amounts and related
weighted average interest rates by year of maturity for our
investment portfolio, debt obligations and preferred stock with
mandatory redemption provisions:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
There- Fair
1998 1999 2000 2001 2002 after Total Value
(Dollars in Millions)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments other than Cash
and Cash Equivalents
Fixed Income $ 39 $ 45 $ 56 $ 55 $ 83 $1,443 $1,721 $1,796
Average interest rate 7.3% 7.4% 7.5% 7.7% 7.7% 6.2% 6.4%
- -------------------------------------------------------------------------------------------------
Liabilities
- -------------------------------------------------------------------------------------------------
Long-term Debt
Fixed rate $267 $411 $369 $102 $745 $4,294 $6,188 $6,548
Average interest rate 8.6% 7.6% 7.0% 8.7% 7.9% 7.8% 7.8%
Variable rate $215 $ 577 $ 792 $ 743
Average interest rate 6.4% 4.2% 4.8%
Short-term Borrowings $302 $302 $ 302
Average interest rate 6.0% 6.0%
- -------------------------------------------------------------------------------------------------
Preferred Stock $ 21 $ 40 $ 39 $ 85 $ 19 $ 140 $ 344 $ 362
Average dividend rate 7.4% 8.9% 8.9% 8.9% 8.9% 8.8% 8.7%
- -------------------------------------------------------------------------------------------------
</TABLE>
OUTLOOK
We face many competitive challenges in the years ahead as the
electric utility industry undergoes significant changes, including
changing regulation and the entrance of more energy suppliers into the
marketplace. Retail wheeling, which would allow retail customers to
purchase electricity from other energy producers, will be one of those
challenges. Our regulatory plans provide the foundation to position us
to meet the challenges we are facing by significantly reducing fixed
costs and lowering rates to a more competitive level.
OE's Rate Reduction and Economic Development Plan was approved
by the Public Utilities Commission of Ohio (PUCO) in 1995; Penn's Rate
Stability and Economic Development Plan was approved by the Pennsylvania
Public Utility Commission (PPUC) in the second quarter of 1996 and
FirstEnergy's Rate Reduction and Economic Development Plan for CEI and
TE was approved in January 1997. These regulatory plans initially
maintain current base electric rates for OE, CEI and TE through December
31, 2005, and Penn through June 20, 2006. The plans also revised the
Companies' fuel cost recovery methods.
As part of OE's regulatory plan, transition rate credits were
implemented for customers, which are expected to reduce operating
revenues by approximately $600 million during the regulatory plan period
which is to be followed by a base rate reduction of approximately $300
million in 2006. The base rate freeze for CEI and TE is to be followed
by a $310 million base rate reduction in 2006; interim reductions
beginning in June 1998 of $3 per month will increase to $5 per month per
residential customer by July 1, 2001. Total savings of $391 million are
anticipated over the term of the plan for CEI's and TE's customers. CEI
and TE have also committed $105 million for economic development and
energy efficiency programs.
All of the Companies' regulatory assets are being recovered
under provisions of the regulatory plans. In addition, the PUCO and PPUC
have authorized OE and Penn to recognize additional capital recovery
related to their generating assets (which is reflected as additional
depreciation expense) and additional amortization of regulatory assets
during the regulatory plan periods of at least $2 billion and $358
million, respectively, more than the amounts that would have been
recognized if the regulatory plans were not in effect. These additional
amounts are being recovered through current rates.
Based on the regulatory environment we operate in today and
the regulatory plans, we believe we will continue to be able to bill and
collect cost-based rates relating to CEI's and TE's nonnuclear
operations and all of OE's and Penn's operations; accordingly, it is
appropriate that we continue the application of Statement of Financial
Accounting Standards No. 71 "Accounting for the Effects of Certain Types
of Regulation" (SFAS 71). However, as discussed below, changes in the
regulatory environment are on the horizon. With respect to Penn, we
expect to discontinue the application of SFAS 71 for the generation
portion of that business, possibly as early as 1998. We do not expect
the impact of Penn discontinuing SFAS 71 to be material. As further
discussed below, the Ohio legislature is in the discussion stages of
restructuring the electric utility industry within the State. We do not
expect any changes in regulation to be effective within the next two
years and we cannot assess what the ultimate impact may be.
The PUCO has authorized CEI and TE to recognize additional
capital recovery 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, these additional charges will be reflected over the rate plan
period. The FirstEnergy regulatory plan does not provide for full
recovery of CEI's and TE's nuclear operations. Accordingly, regulatory
assets representing customer receivables for future income taxes related
to nuclear assets of $794 million were written off prior to consummation
of the merger since CEI and TE ceased application of SFAS 71 for their
nuclear operations when implementation of the FirstEnergy regulatory
plan became probable. At the consummation of the merger in November
1997, CEI and TE recognized a fair value purchase accounting adjustment
which decreased the carrying value of their nuclear assets by
approximately $2.55 billion. The fair value adjustment recognized for
financial reporting purposes will ultimately satisfy the $2 billion
asset reduction commitment contained in the CEI and TE regulatory plan
over the regulatory plan period.
On September 30, 1997, Penn filed a restructuring plan with
the PPUC. The plan describes how Penn will restructure its rates and
provide customers with direct access to alternative electricity
suppliers; customer choice is to be phased in over three years beginning
in 1999, after completion of a two-year pilot program. Penn will
continue to deliver power to homes and businesses through its
transmission and distribution system, which remains regulated by the
PPUC. Penn also plans to sell electricity and energy-related services in
its own territory and throughout Pennsylvania as an alternative supplier
through its nonregulated subsidiary, Penn Power Energy. Through the
restructuring plan, Penn is seeking recovery of $293 million of stranded
costs through a competitive transition charge starting in 1999 and
ending in 2005, which is consistent with Penn's Rate Stability and
Economic Development Plan currently in effect. The PPUC plans to hold
public hearings on Penn's restructuring plan early in 1998.
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. We
cannot predict when or if this legislation will be introduced and if it
will be passed into law. We continue to study the potential effects that
such legislation would have on our financial position and results of
operations.
The Financial Accounting Standards Board (FASB) issued a
proposed accounting standard for nuclear decommissioning costs in
February 1996. If the standard is adopted as proposed: (1) annual
provisions for decommissioning could increase; (2) the net present value
of estimated decommissioning costs could be recorded as a liability; and
(3) income from the external decommissioning trusts could be reported as
investment income. The FASB reported in October 1997 that it plans to
continue working on the proposal in 1998.
The Clean Air Act Amendments of 1990, discussed in Note 6,
require additional emission reductions by 2000. We are pursuing cost-
effective compliance strategies for meeting the reduction requirements
that begin in 2000.
CEI and TE have been named as "potentially responsible
parties" (PRPs) for three sites listed on the Superfund National
Priorities List and are aware of their potential involvement in the
cleanup of several other sites. Allegations that CEI and TE disposed of
hazardous waste at these sites, and the amount involved are often
unsubstantiated and subject to dispute. Federal law provides that all
PRPs for a particular site be held liable on a joint and several basis.
If CEI and TE were held liable for 100% of the cleanup costs of all the
sites referred to above, the cost could be as high as $313 million.
However, we believe that the actual cleanup costs will be substantially
lower than $313 million, that CEI's and TE's share of any cleanup costs
will be substantially less than 100% and that most of the other PRPs are
financially able to contribute their share. CEI and TE have accrued a
$5.9 million liability as of December 31, 1997, based on estimates of
the costs of cleanup and their proportionate responsibility for such
cost. We believe that the ultimate outcome of these matters will not
have a material adverse effect on our financial condition, cash flows or
results of operations.
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 material adverse effect on us.
We are utilizing both internal and external resources to
reprogram and/or replace and test the 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 $64 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 $8
million will be expensed as incurred over the next two years. To date,
we have incurred and expensed approximately $1 million 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.
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
OPERATING REVENUES $2,821,435 $2,469,785 $2,465,846
---------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 486,267 456,629 465,483
Nuclear operating costs 312,123 247,708 289,717
Other operating costs 526,072 420,523 446,967
---------- ---------- -----------
Total operation and maintenance expenses 1,324,462 1,124,860 1,202,167
Provision for depreciation and amortization 431,431 355,780 256,085
Amortization of net regulatory assets 43,621 27,661 5,825
General taxes 282,163 241,998 243,179
Income taxes 183,798 189,417 191,972
---------- ---------- ----------
Total operating expenses and taxes 2,265,475 1,939,716 1,899,228
---------- ---------- ----------
OPERATING INCOME 555,960 530,069 566,618
OTHER INCOME 58,343 37,537 14,424
---------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 614,303 567,606 581,042
---------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 252,815 211,935 243,570
Deferred nuclear unit interest - - (4,250)
Allowance for borrowed funds used during
construction and capitalized interest (3,469) (3,136) (5,668)
Other interest expense 31,365 28,211 22,944
Subsidiaries' preferred stock dividend requirements 27,818 27,923 29,699
---------- ---------- ----------
Net interest charges 308,529 264,933 286,295
---------- ---------- ----------
NET INCOME $305,774 $302,673 $294,747
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 157,464 144,095 143,692
======= ======= =======
EARNINGS PER SHARE OF COMMON STOCK (Note 4c) $1.94 $2.10 $2.05
===== ===== =====
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $1.50 $1.50 $1.50
===== ===== =====
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
At December 31, 1997 1996
- ----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
ASSETS
UTILITY PLANT:
In service $15,008,448 $8,634,030
Less--Accumulated provision for depreciation 5,635,900 3,226,259
----------- ----------
9,372,548 5,407,771
----------- ----------
Construction work in progress--
Electric plant 165,837 93,413
Nuclear fuel 34,825 5,786
----------- ----------
200,662 99,199
----------- ----------
9,573,210 5,506,970
----------- ----------
OTHER PROPERTY AND INVESTMENTS:
Capital trust investments (Note 3) 1,370,177 487,979
Letter of credit collateralization (Note 3) 277,763 277,763
Other 659,162 323,316
----------- ----------
2,307,102 1,089,058
----------- ----------
CURRENT ASSETS:
Cash and cash equivalents 98,237 5,253
Receivables--
Customers (less accumulated provisions of
$5,618,000 and $2,306,000, respectively,
for uncollectible accounts) 284,162 247,027
Other 219,106 58,327
Materials and supplies, at average cost--
Owned 154,961 66,177
Under consignment 82,839 44,468
Prepayments and other 163,686 75,681
----------- ----------
1,002,991 496,933
----------- ----------
DEFERRED CHARGES:
Regulatory assets 2,624,144 1,703,111
Goodwill 2,107,795 -
Unamortized sale and leaseback costs 95,096 100,066
Property taxes 270,585 100,802
Other 99,872 57,517
----------- ----------
5,197,492 1,961,496
----------- ----------
$18,080,795 $9,054,457
=========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (See Consolidated Statements of
Capitalization):
Common stockholders' equity $ 4,159,598 $2,503,359
Preferred stock of consolidated subsidiaries--
Not subject to mandatory redemption 660,195 211,870
Subject to mandatory redemption 214,864 35,000
Ohio Edison obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely Ohio Edison subordinated debentures 120,000 120,000
Long-term debt 6,969,835 2,712,760
----------- ----------
12,124,492 5,582,989
----------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 470,436 333,667
Short-term borrowings (Note 5) 302,229 349,480
Accounts payable 312,690 93,509
Accrued taxes 381,937 142,909
Accrued interest 147,694 52,855
Other 193,850 131,275
----------- ----------
1,808,836 1,103,695
----------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 2,304,305 1,777,086
Accumulated deferred investment tax credits 324,200 199,835
Pensions and other postretirement benefits 492,425 123,446
Other 1,026,537 267,406
----------- ----------
4,147,467 2,367,773
----------- ----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES
(Notes 3 and 6 ) $18,080,795 $9,054,457
=========== ==========
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these balance sheets.
</TABLE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<CAPTION>
At December 31, 1997 1996
- ----------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
COMMON STOCKHOLDERS' EQUITY:
Common stock, $.10 par value, and $9 par value, respectively -
authorized 300,000,000 shares--230,207,141 and 152,569,437
shares outstanding, respectively $ 23,021 $1,373,125
Other paid-in capital 3,636,908 727,602
Retained earnings (Note 4A) 646,646 557,642
Unallocated employee stock ownership plan common stock-
7,829,538 and 8,259,053 shares, respectively (Note 4B) (146,977) (155,010)
---------- ----------
Total common stockholders' equity 4,159,598 2,503,359
---------- ----------
Number of Shares Optional
Outstanding Redemption Price
----------------- -----------------------
1997 1996 Per Share Aggregate
---- ---- --------- ---------
<S> <C> <C> <C> <C>
PREFERRED STOCK OF CONSOLIDATED
SUBSIDIARIES (Note 4D)
Ohio Edison Company (OE)
Cumulative, $100 par value-
Authorized 6,000,000 shares
Not Subject to Mandatory
Redemption:
3.90% 152,510 152,510 $103.63 $15,804 15,251 15,251
4.40% 176,280 176,280 108.00 19,038 17,628 17,628
4.44% 136,560 136,560 103.50 14,134 13,656 13,656
4.56% 144,300 144,300 103.38 14,917 14,430 14,430
--------- --------- ------- ---------- ----------
609,650 609,650 63,893 60,965 60,965
Cumulative, $25 par value-
Authorized 8,000,000 shares
Not Subject to Mandatory
Redemption:
7.75% 4,000,000 4,000,000 100,000 100,000
--------- --------- ------- ---------- ----------
Total not subject to
mandatory redemption 4,609,650 4,609,650 $63,893 160,965 160,965
========= ========= ======= ========== ==========
Cumulative, $100 par value-
Subject to Mandatory
Redemption (Note 4E):
8.45% 200,000 250,000 20,000 25,000
Redemption within one year (5,000) (5,000)
---------- --------- ---------- ----------
200,000 250,000 15,000 20,000
========== ========= ---------- ----------
Pennsylvania Power Company
Cumulative, $100 par value-
Authorized 1,200,000 shares
Not Subject to Mandatory
Redemption:
4.24% 40,000 40,000 $103.13 $ 4,125 4,000 4,000
4.25% 41,049 41,049 105.00 4,310 4,105 4,105
4.64% 60,000 60,000 102.98 6,179 6,000 6,000
7.64% 60,000 60,000 101.42 6,085 6,000 6,000
7.75% 250,000 250,000 - - 25,000 25,000
8.00% 58,000 58,000 102.07 5,920 5,800 5,800
---------- --------- ------- ---------- ----------
Total not subject to
mandatory redemption 509,049 509,049 $26,619 50,905 50,905
========== ========= ======= ---------- ----------
Subject to Mandatory
Redemption (Note 4E):
7.625% 150,000 150,000 15,000 15,000
========== ========= ---------- ----------
OE OBLIGATED MANDATORILY
REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY OE
SUBORDINATED DEBENTURES
(Note 4F):
Cumulative, $25 par value-
Authorized 4,800,000 shares
Subject to Mandatory
Redemption:
9.00% 4,800,000 4,800,000 120,000 120,000
========= ========= ---------- ----------
</TABLE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont.)
<CAPTION>
At December 31, 1997 1996
- -----------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Number of Shares Optional
Outstanding Redemption Price
----------------- -----------------------
1997 1996 Per Share Aggregate
---- ---- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
PREFERRED STOCK OF CONSOLIDATED
SUBSIDIARIES (Cont.)
Cleveland Electric
Illuminating Company
Cumulative, Without Par Value--
Authorized 4,000,000 shares
Not Subject to Mandatory
Redemption:
$ 7.40 Series A 500,000 $101.00 $ 50,500 $ 50,000
$ 7.56 Series B 450,000 102.26 46,017 45,071
Adjustable Series L 474,000 100.00 47,400 46,404
$42.40 Series T 200,000 500.00 100,000 96,850
--------- --------- ----------
Total Not Subject to
Mandatory Redemption 1,624,000 $ 243,917 238,325
========= ========= ----------
Subject to Mandatory
Redemption:
$ 7.35 Series C 110,000 101.00 $ 11,110 11,110
$88.00 Series E 9,000 1,007.65 9,069 9,000
$91.50 Series Q 42,858 1,000.00 42,858 42,858
$88.00 Series R 50,000 - - 55,000
$90.00 Series S 74,000 - - 79,920
---------- -------- ----------
285,858 63,037 197,888
Redemption Within One
Year (14,714)
---------- -------- ----------
Total Subject to
Mandatory Redemption 285,858 $ 63,037 183,174
========== ======== ----------
Toledo Edison Company
Cumulative, $100 Par Value-
Authorized 3,000,000 shares
Not Subject to Mandatory
Redemption:
$ 4.25 160,000 104.63 $ 16,740 16,000
$ 4.56 50,000 101.00 5,050 5,000
$ 4.25 100,000 102.00 10,200 10,000
$ 8.32 100,000 102.46 10,246 10,000
$ 7.76 150,000 102.44 15,366 15,000
$ 7.80 150,000 101.65 15,248 15,000
$10.00 190,000 101.00 19,190 19,000
---------- -------- ----------
900,000 92,040 90,000
---------- -------- ----------
Cumulative, $25 Par Value-
Authorized 12,000,000 shares
Not Subject to Mandatory
Redemption:
$ 2.21 1,000,000 25.25 25,250 25,000
$ 2.365 1,400,000 27.75 38,850 35,000
Adjustable Series A 1,200,000 25.00 30,000 30,000
Adjustable Series B 1,200,000 25.00 30,000 30,000
--------- -------- ----------
4,800,000 124,100 120,000
--------- -------- ----------
Total Not Subject to
Mandatory Redemption 5,700,000 $216,140 210,000
========= ======== ----------
Cumulative, $100 par value-
Subject to Mandatory
Redemption:
$ 9.375 33,550 100.49 $ 3,371 3,355
Redemption Within One Year (1,665)
--------- -------- ----------
Total Subject to
Mandatory Redemption 33,550 $ 3,371 1,690
========= ======== ----------
</TABLE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont.)
<CAPTION>
LONG-TERM DEBT (Note 4G) (Interest rates reflect weighted average rates) (In thousands)
- --------------------------------------------------------------------------------------------------------------------------
FIRST MORTGAGE BONDS SECURED NOTES UNSECURED NOTES TOTAL
- --------------------------------------------------------------------------------------------------------------------------
At December 31, 1997 1996 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ohio Edison Co.-
Due 1997-2002 7.63% $ 659,265 $ 659,265 7.45% $ 92,442 $ 102,263 5.51% $531,500 $691,500
Due 2003-2007 8.02% 230,000 230,000 7.68% 158,204 158,204 - - -
Due 2008-2012 - - - - - - - - -
Due 2013-2017 - - - 7.13% 87,725 87,725 - - -
Due 2018-2022 8.75% 50,960 50,960 7.04% 155,943 155,943 - - -
Due 2023-2027 7.77% 175,000 175,000 7.77% 188,000 188,000 - - -
Due 2028-2032 - - - 5.80% 106,212 106,212 - - -
Due 2033-2037 - - - 5.45% 14,800 14,800 - - -
---------- ---------- ---------- ---------- -------- -------- ----------- ----------
Total-Ohio Edison 1,115,225 1,115,225 803,326 813,147 531,500 691,500 $ 2,450,051 $2,619,872
---------- ---------- ---------- ---------- -------- -------- ----------- ----------
Cleveland Elec-
tric Illumin-
ating Co.-
Due 1997-2002 7.63% 195,000 8.01% 475,150 6.24% 5,050
Due 2003-2007 8.93% 475,000 7.52% 415,150 6.46% 22,550
Due 2008-2012 8.38% 200,000 7.36% 158,960 6.10% 19,000
Due 2013-2017 - - 7.51% 419,820 - -
Due 2018-2022 - - 5.25% 310,855 - -
Due 2023-2027 9.00% 150,000 7.68% 246,650 - -
Due 2028-2032 - - - - - -
Due 2033-2037 - - - - - -
---------- ---------- -------- -----------
Total-Cleveland
Electric 1,020,000 2,026,585 46,600 3,093,185
---------- ---------- -------- -----------
Toledo Edison
Co. -
Due 1997-2002 7.31% 111,000 8.13% 190,750 8.65% 137,490
Due 2003-2007 7.90% 180,725 7.63% 162,400 6.14% 1,650
Due 2008-2012 - - 3.80% 31,250 10.00% 760
Due 2013-2017 - - - - - -
Due 2018-2022 - - 8.00% 227,200 - -
Due 2023-2027 - - 7.50% 116,900 - -
Due 2028-2032 - - - - - -
Due 2033-2037 - - - - - -
---------- --------- -------- -------- -----------
Total-Toledo
Edison 291,725 728,500 139,900 1,160,125
---------- --------- -------- -----------
Pennsylvania
Power Co.-
Due 1997-2002 9.74% 3,409 3,409 6.03% 23,850 23,850 - - -
Due 2003-2007 7.19% 79,370 101,870 - - - - - -
Due 2008-2012 9.74% 4,870 4,870 - - - - - -
Due 2013-2017 9.74% 4,870 4,870 6.46% 29,525 29,525 - - -
Due 2018-2022 8.58% 29,231 29,231 6.71% 36,482 46,782 - - -
Due 2023-2027 7.63% 6,500 6,500 5.65% 37,500 27,200 - - -
Due 2028-2032 - - - 5.82% 21,438 21,438 - - -
Due 2033-2037 - - - - - - - - -
---------- --------- --------- --------- -------- -------- ----------- ----------
Total-Penn Power 128,250 150,750 148,795 148,795 - - 277,045 299,545
---------- --------- --------- --------- -------- -------- ----------- ----------
OES Fuel 6.19% 80,755 84,000 80,755 84,000
--------- --------- ----------- ----------
Total $2,555,200 $1,265,975 $3,787,961 $1,045,942 $718,000 $691,500 7,061,161 3,003,417
========== ========== ========== ========== ======== ======== ----------- ----------
Capital lease obligations 204,213 43,775
----------- ----------
Net unamortized premium (discount) on debt 153,518 (5,765)
----------- ----------
Long-term debt due within one year (449,057) (328,667)
----------- ----------
Total long-term debt 6,969,835 2,712,760
----------- ----------
TOTAL CAPITALIZATION $12,124,492 $5,582,989
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $557,642 $471,095 $389,600
Net income 305,774 302,673 294,747
-------- -------- --------
863,416 773,768 684,347
- -------------------------------------------------------------------------------------------------
Cash dividends on common stock 216,770 216,126 215,512
Preferred stock redemption adjustments - - (2,260)
-------- -------- --------
216,770 216,126 213,252
-------- -------- --------
Balance at end of year (Note 4A) $646,646 $557,642 $471,095
- -------------------------------------------------------------------------------------------------
<TABLE
CONSOLIDATED STATEMENTS OF CAPITAL STOCK AND OTHER PAID-IN CAPITAL
<CAPTION>
Preferred Stock
-------------------------------------------
Not Subject to Subject to
Common Stock Unallocated Mandatory Redemption Mandatory Redemption
---------------------------------- --------------------- --------------------
Other ESOP Par or Par or
Number Par Paid-In Common Number Stated Number Stated
of Shares Value Capital Stock of Shares Value of Shares Value
--------- ------- --------- --------- ----------- -------- ---------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 152,569,437 $1,373,125 $724,848 $(170,376) 6,282,399 $328,240 400,000 $40,000
Minimum liability for unfunded
retirement benefits 2,446
Allocation of ESOP Shares 1,274 7,720
Sale of 9% Preferred Stock 4,800,000 120,000
Redemptions--
7.24% Series (720) (363,700) (36,370)
7.36% Series (609) (350,000) (35,000)
8.20% Series (932) (450,000) (45,000)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 152,569,437 1,373,125 726,307 (162,656) 5,118,699 211,870 5,200,000 160,000
Minimum liability for unfunded
retirement benefits (51)
Allocation of ESOP Shares 1,346 7,646
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 152,569,437 1,373,125 727,602 (155,010) 5,118,699 211,870 5,200,000 160,000
Centerior acquisition 77,637,704 (1,350,104) 2,907,387 7,324,000 448,325 319,408 201,243
Minimum liability for unfunded
retirement benefits 45
Allocation of ESOP Shares 1,874 8,033
Redemptions--
8.45% Series (50,000) (5,000)
- ------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 230,207,141 $23,021 $3,636,908 $(146,977) 12,442,699 $660,195 5,469,408 $356,243
==============================================================================================================================
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------
(In thousands)
(S) <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 305,774 $ 302,673 $ 294,747
Adjustments to reconcile net income to net
cash from operating activities:
Provision for depreciation and amortization 431,431 355,780 256,085
Nuclear fuel and lease amortization 61,960 52,784 70,849
Other amortization, net 42,434 25,961 5,885
Deferred income taxes, net (29,642) 41,365 53,395
Investment tax credits, net (16,252) (14,041) (9,951)
Allowance for equity funds used during construction (201) - -
Receivables 21,846 24,326 (20,452)
Materials and supplies (18,909) (736) 12,428
Accounts payable 57,807 962 3,545
Other 909 (41,317) 66,060
---------- -------- ---------
Net cash provided from operating activities 856,437 747,757 732,591
---------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Common stock 1,558,237 - -
Preferred stock - - 120,000
Long-term debt 89,773 306,313 254,365
Short-term borrowings, net - 229,515 -
Redemptions and Repayments-
Preferred stock 5,000 1,016 117,528
Long-term debt 335,909 438,916 499,276
Short-term borrowings, net 47,251 - 54,677
Common Stock Dividend Payments 237,848 218,656 217,192
---------- -------- ---------
Net cash provided from (used for) financing
activities 1,022,002 (122,760) (514,308)
---------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Centerior acquisition 1,582,459 - -
Property additions 203,839 148,189 198,103
Capital trust investments 8,934 487,979 -
Other 62,237 13,406 13,641
---------- -------- ---------
Net cash used for investing activities 1,857,469 649,574 211,744
---------- -------- ---------
Net increase (decrease) in cash and cash equivalents 20,970 (24,577) 6,539
Cash and cash equivalents at beginning of period* 77,267 29,830 23,291
---------- -------- ---------
Cash and cash equivalents at end of year $ 98,237 $ 5,253 $ 29,830
========== ======== =========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash Paid During the Year-
Interest (net of amounts capitalized) $ 281,670 $ 224,541 $ 254,789
Income taxes $ 265,615 $ 157,477 $ 78,643
<FN>
* 1997 beginning balance includes Centerior cash and cash
equivalents as of the November 8, 1997 acquisition date.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF TAXES
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
GENERAL TAXES:
Real and personal property $137,816 $ 115,443 $ 118,707
State gross receipts 118,390 104,158 100,591
Social security and unemployment 16,551 14,602 15,787
Other 9,406 7,795 8,094
-------- ---------- ----------
Total general taxes $282,163 $ 241,998 $ 243,179
======== ========== ==========
PROVISION FOR INCOME TAXES:
Currently payable-
Federal $235,728 $ 164,132 $ 145,511
State 18,152 9,839 10,352
-------- ---------- ----------
253,880 173,971 155,863
-------- ---------- ----------
Deferred, net-
Federal (23,716) 37,277 50,631
State (5,926) 4,088 2,764
-------- ---------- ----------
(29,642) 41,365 53,395
-------- ---------- ----------
Investment tax credit amortization (16,252) (14,041) (9,951)
-------- ---------- ----------
Total provision for income taxes $207,986 $ 201,295 $ 199,307
======== ========== ==========
INCOME STATEMENT CLASSIFICATION
OF PROVISION FOR INCOME TAXES:
Operating income $183,798 $ 189,417 $ 191,972
Other income 24,188 11,878 7,335
-------- ---------- ----------
Total provision for income taxes $207,986 $ 201,295 $ 199,307
======== ========== ==========
RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT
STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES:
Book income before provision for income taxes $513,760 $ 503,968 $ 494,054
======== ========== ==========
Federal income tax expense at statutory rate $179,816 $ 176,389 $ 172,919
Increases (reductions) in taxes resulting from-
Amortization of investment tax credits (16,252) (14,041) (9,951)
State income taxes net of federal income tax benefit 7,947 9,053 8,525
Amortization of tax regulatory assets 30,402 26,945 19,690
Other, net 6,073 2,949 8,124
---------- ---------- ----------
Total provision for income taxes $ 207,986 $ 201,295 $ 199,307
========== ========== ==========
ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31:
Property basis differences $2,091,207 $1,319,878 $1,310,852
Deferred nuclear expense 454,902 262,123 271,114
Customer receivables for future income taxes 262,428 191,537 204,978
Deferred sale and leaseback costs (121,974) 78,607 82,381
Unamortized investment tax credits (116,593) (72,663) (77,777)
Unused alternative minimum tax credits (243,039) - -
Other (22,626) (2,396) (19,114)
---------- ---------- ----------
Net deferred income tax liability $2,304,305 $1,777,086 $1,772,434
========== ========== ==========
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements include
FirstEnergy Corp. (Company) and its principal electric utility
operating subsidiaries, Ohio Edison Company (OE), The Cleveland
Electric Illuminating Company (CEI), Pennsylvania Power Company
(Penn) and The Toledo Edison Company (TE). The Company and its
utility subsidiaries are referred to throughout as "Companies."
The Company's 1997 results of operations include the results of
CEI and TE for the period November 8, 1997 through December 31,
1997. All significant intercompany transactions have been
eliminated. The Companies follow the accounting policies and
practices prescribed by the Public Utilities Commission of Ohio
(PUCO), the Pennsylvania Public Utility Commission (PPUC) and the
Federal Energy Regulatory Commission (FERC). The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make periodic
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Certain prior year
amounts have been reclassified to conform with the current year
presentation.
REVENUES-
The Companies' principal business is providing electric
service to customers in central and northern Ohio and western
Pennsylvania. The Companies' retail customers are metered on a
cycle basis. Revenue is recognized for unbilled electric service
through the end of the year.
Receivables from customers include sales to
residential, commercial and industrial customers located in the
Companies' service area and sales to wholesale customers. There
was no material concentration of receivables at December 31, 1997
or 1996, with respect to any particular segment of the Companies'
customers.
CEI and TE sell substantially all of their retail
customer accounts receivable to Centerior Funding Corp. under an
asset-backed securitization agreement which expires in 2001.
Centerior Funding completed a public sale of $150 million of
receivables-backed investor certificates in a transaction that
qualified for sale accounting treatment.
REGULATORY PLANS-
OE's Rate Reduction and Economic Development Plan was
approved by the PUCO in 1995; Penn's Rate Stability and Economic
Development Plan was approved by the PPUC in the second quarter
of 1996 and FirstEnergy's Rate Reduction and Economic Development
Plan for CEI and TE was approved in January 1997. These
regulatory plans initially maintain current base electric rates
for OE, CEI and TE through December 31, 2005, and Penn through
June 20, 2006. At the end of the regulatory plan periods, OE base
rates will be reduced by $300 million (approximately 20 percent
below current levels) and CEI and TE base rates will be reduced
by a combined $310 million (approximately 15 percent below
current levels). The plans also revised the Companies' fuel cost
recovery methods. The Companies formerly recovered fuel-related
costs not otherwise included in base rates from retail customers
through separate energy rates. In accordance with the respective
regulatory plans, OE's, CEI's and TE's fuel rates will be frozen
through the regulatory plan period, subject to limited periodic
adjustments; Penn's plan provided for the roll-in to base rates
of its fuel rate. As part of OE's and FirstEnergy's regulatory
plans, transition rate credits were implemented for customers,
which are expected to reduce operating revenues for OE by
approximately $600 million and CEI and TE by approximately $391
million during the regulatory plan period.
All of the Companies' regulatory assets are being
recovered under provisions of the regulatory plans. In addition,
the PUCO has authorized OE to recognize additional capital
recovery related to its generating assets (which is reflected as
additional depreciation expense) and additional amortization of
regulatory assets during the regulatory plan period of at least
$2 billion, and the PPUC has authorized Penn to accelerate at
least $358 million, more than the amounts that would have been
recognized if the regulatory plans were not in effect. These
additional amounts are being recovered through current rates. As
of December 31, 1997, OE's and Penn's cumulative additional
capital recovery and regulatory asset amortization amounted to
$427 million. CEI and TE recognized a fair value purchase
accounting adjustment of $2.55 billion in connection with the
FirstEnergy merger; that fair value adjustment recognized for
financial reporting purposes will ultimately satisfy the $2
billion asset reduction commitment contained in the CEI and TE
regulatory plan. For regulatory purposes, CEI and TE will
recognize the $2 billion of accelerated amortization over the
rate plan period.
UTILITY PLANT AND DEPRECIATION-
Utility plant reflects the original cost of
construction (except for CEI's and TE's nuclear generating units
which were adjusted to fair value), including payroll and related
costs such as taxes, employee benefits, administrative and
general costs and financing costs (allowance for funds used
during construction).
The Companies provide for depreciation on a straight-
line basis at various rates over the estimated lives of property
included in plant in service. The annual composite rate for OE's
and Penn's electric plant was approximately 3.0% in 1997, 1996,
and 1995. CEI's and TE's composite rates were both approximately
3.0% in 1997. In addition to the straight-line depreciation
recognized in 1997, 1996 and 1995, OE and Penn recognized
additional capital recovery of $172 million, $144 million and $27
million, respectively, as additional depreciation expense in
accordance with their regulatory plans. Such additional charges
in the accumulated provision for depreciation were $343 million
and $171 million as of December 31, 1997 and 1996, respectively.
Annual depreciation expense includes approximately
$30.3 million for future decommissioning costs applicable to the
Companies' ownership and leasehold interests in four nuclear
generating units. The Companies' share of the future obligation
to decommission these units is approximately $1.2 billion in
current dollars and (using a 3.5% escalation rate) approximately
$2.9 billion in future dollars. The estimated obligation and the
escalation rate were developed based on site specific studies.
Payments for decommissioning are expected to begin in 2016, when
actual decommissioning work begins. The Companies have recovered
approximately $252 million for decommissioning through their
electric rates from customers through December 31, 1997. If the
actual costs of decommissioning the units exceed the funds
accumulated from investing amounts recovered from customers, the
Companies expect that additional amount to be recoverable from
their customers. The Companies have approximately $301.2 million
invested in external decommissioning trust funds as of
December 31, 1997. Earnings on these funds are reinvested with a
corresponding increase to the decommissioning liability. The
Companies have also recognized an estimated liability of
approximately $34.9 million related to decontamination and
decommissioning of nuclear enrichment facilities operated by the
United States Department of Energy (DOE), as required by the
Energy Policy Act of 1992.
The Financial Accounting Standards Board (FASB) issued
a proposed accounting standard for nuclear decommissioning costs
in February 1996. If the standard is adopted as proposed: (1)
annual provisions for decommissioning could increase; (2) the net
present value of estimated decommissioning costs could be
recorded as a liability; and (3) income from the external
decommissioning trusts could be reported as investment income.
The FASB indicated in October 1997 that it plans to continue work
on the proposal.
COMMON OWNERSHIP OF GENERATING FACILITIES-
The Companies and Duquesne Light Company constitute the
Central Area Power Coordination Group (CAPCO). The CAPCO
companies own and/or lease, as tenants in common, various power
generating facilities. Each of the companies is obligated to pay
a share of the costs associated with any jointly owned facility
in the same proportion as its interest. The Companies' portions
of operating expenses associated with jointly owned facilities
are included in the corresponding operating expenses on the
Consolidated Statements of Income. The amounts reflected on the
Consolidated Balance Sheet under utility plant at December 31,
1997, include the following:
<TABLE>
<CAPTION>
Companies'
Utility Accumulated Construction Ownership/
Plant Provision for Work in Leasehold
Generating Units in Service Depreciation Progress Interest
- --------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
W.H. Sammis #7 $ 305.5 $ 100.8 $ .8 68.80%
Bruce Mansfield #1,
#2 and #3 886.6 408.1 2.1 83.01%
Beaver Valley
#1 and #2 2,299.9 656.3 3.9 69.46%
Davis-Besse 400.9 - - 100.00%
Perry 2,674.6 720.3 3.1 86.26%
Eastlake # 5 159.9 94.6 - 68.80%
Seneca 64.9 24.3 - 80.00%
- -----------------------------------------------------------------------
Total $6,792.3 $2,004.4 $ 9.9
=======================================================================
</TABLE>
The Seneca Unit is jointly owned by CEI and a non-CAPCO company.
NUCLEAR FUEL-
OE's and Penn's nuclear fuel is recorded at original
cost, which includes material, enrichment, fabrication and
interest costs incurred prior to reactor load. CEI and TE
severally lease their respective portions of nuclear fuel and pay
for the fuel as it is consumed (see Note 3). The Companies
amortize the cost of nuclear fuel based on the rate of
consumption. The Companies' electric rates include amounts for
the future disposal of spent nuclear fuel based upon the formula
used to compute payments to the DOE.
INCOME TAXES-
Details of the total provision for income taxes are
shown on the Consolidated Statements of Taxes. Deferred income
taxes result from timing differences in the recognition of
revenues and expenses for tax and accounting purposes. Investment
tax credits, which were deferred when utilized, are being
amortized over the recovery period of the related property. The
liability method is used to account for deferred income taxes.
Deferred income tax liabilities related to tax and accounting
basis differences are recognized at the statutory income tax
rates in effect when the liabilities are expected to be paid.
Alternative minimum tax credits of $243 million, which may be
carried forward indefinitely, are available to reduce future
federal income taxes.
RETIREMENT BENEFITS-
The Companies' trusteed, noncontributory defined
benefit pension plans cover almost all full-time employees. Upon
retirement, employees receive a monthly pension based on length
of service and compensation. The Companies use the projected unit
credit method for funding purposes and were not required to make
pension contributions during the three years ended December 31,
1997.
The following sets forth the funded status of the plans
and amounts recognized on the Consolidated Balance Sheets as of
December 31:
1997 1996
- -----------------------------------------------------------------
(In millions)
Actuarial present value of benefit
obligations:
Vested benefits $1,096.3 $ 562.0
Nonvested benefits 60.4 38.9
- ----------------------------------------------------------------
Accumulated benefit obligation $1,156.7 $ 600.9
================================================================
Plan assets at fair value $1,542.5 $ 946.3
Actuarial present value of
projected benefit obligation 1,327.5 688.5
- ----------------------------------------------------------------
Plan assets in excess of
projected benefit obligation 215.0 257.8
Unrecognized net gain (136.5) (106.2)
Unrecognized prior service cost 21.0 20.1
Unrecognized net transition asset (25.9) (33.9)
- ----------------------------------------------------------------
Net pension asset $ 73.6 $ 137.8
================================================================
The assets of the plans consist primarily of common
stocks, United States government bonds and corporate bonds. Net
pension costs for the three years ended December 31, 1997, were
computed as follows:
1997 1996 1995
- ----------------------------------------------------------------
(In millions)
Service cost-benefits earned
during the period $ 15.2 $ 14.2 $ 12.8
Interest on projected benefit
obligation 55.9 49.3 48.1
Return on plan assets (194.0) (141.6) (194.5)
Net deferral 87.5 52.7 118.7
Voluntary early retirement
program expense 54.5 12.5 -
Gain on plan curtailment - (12.8) -
- ----------------------------------------------------------------
Net pension cost $ 19.1 $ (25.7) $(14.9)
================================================================
The assumed discount rates used in determining the
actuarial present value of the projected benefit obligation were
7.25% in 1997 and 7.5% in 1996 and 1995. The assumed rates of
increase in future compensation levels used to measure this
obligation were 4.0% in 1997 and 4.5% in 1996 and 1995. Expected
long-term rates of return on plan assets were assumed to be 10%
in 1997, 1996 and 1995.
The Companies provide a minimum amount of
noncontributory life insurance to retired employees in addition
to optional contributory insurance. Health care benefits, which
include certain employee deductibles and copayments, are also
available to retired employees, their dependents and, under
certain circumstances, their survivors. The Companies pay
insurance premiums to cover a portion of these benefits in excess
of set limits; all amounts up to the limits are paid by the
Companies. The Companies recognize the expected cost of providing
other postretirement benefits to employees and their
beneficiaries and covered dependents from the time employees are
hired until they become eligible to receive those benefits.
In accordance with Statement of Financial Accounting
Standards (SFAS) No. 88 "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," the 1996 net pension costs shown above and
the 1996 postretirement benefit costs shown below included
curtailment effects (significant changes in projected plan
assumptions) relating to the pension and postretirement benefit
plans. The employee terminations reflected in OE's and Penn's
1996 voluntary early retirement program represented a plan
curtailment that significantly reduced the expected future
employee service years and the related accrual of defined pension
and postretirement benefits. In the pension plan, the reduction
in the benefit obligation increased the net pension asset and was
shown as a plan curtailment gain. In the postretirement benefit
plan, the unrecognized prior service cost associated with service
years no longer expected to be rendered as a result of the
terminations was shown as a plan curtailment loss.
The following sets forth the funded status of the plans
and amounts recognized on the Consolidated Balance Sheets as of
December 31:
1997 1996
- --------------------------------------------------------------
(In millions)
Accumulated postretirement benefit
obligation allocation:
Retirees $384.8 $155.5
Fully eligible active plan
participants 25.5 10.1
Other active plan participants 123.8 75.5
- --------------------------------------------------------------
Accumulated postretirement benefit
obligation 534.1 241.1
Plan assets at fair value 2.8 2.0
- --------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets 531.3 239.1
Unrecognized transition obligation (125.1) (133.5)
Unrecognized net loss (24.0) (7.4)
- -------------------------------------------------------------
Net postretirement benefit liability $382.2 $ 98.2
==============================================================
Net periodic postretirement benefit costs for the three
years ended December 31, 1997, were computed as follows:
1997 1996 1995
- -----------------------------------------------------------------
(In millions)
Service cost-benefits
attributed to the period $ 4.6 $ 4.3 $ 4.5
Interest cost on accumulated
benefit obligation 20.4 17.4 21.1
Amortization of transition obligation 8.3 8.8 10.2
Amortization of loss - .1 .1
Voluntary early retirement program
expense 1.9 .5 -
Loss on plan curtailment - 13.1 -
- ----------------------------------------------------------------
Net periodic postretirement
benefit cost $35.2 $44.2 $35.9
================================================================
The health care trend rate assumption is 6.0% in the
first year gradually decreasing to 4.0% for the year 2008 and
later. The discount rates used to compute the accumulated
postretirement benefit obligation were 7.25% in 1997 and 7.5% in
1996 and 1995. An increase in the health care trend rate
assumption by one percentage point in all years would increase
the accumulated postretirement benefit obligation by
approximately $42.3 million and the aggregate annual service and
interest costs by approximately $3.6 million.
SUPPLEMENTAL CASH FLOWS INFORMATION-
All temporary cash investments purchased with an
initial maturity of three months or less are reported as cash
equivalents on the Consolidated Balance Sheets. The Companies
reflect temporary cash investments at cost, which approximates
their market value. Noncash financing and investing activities
included capital lease transactions amounting to $3.0 million,
$2.0 million and $1.0 million for the years 1997, 1996 and 1995,
respectively. Commercial paper transactions of OES Fuel (a wholly
owned subsidiary of OE) that have initial maturity periods of
three months or less are reported net within financing activities
under long-term debt and are reflected as long-term debt on the
Consolidated Balance Sheets (see Note 4G).
All borrowings with initial maturities of less than one
year are defined as financial instruments under generally
accepted accounting principles and are reported on the
Consolidated Balance Sheets at cost, which approximates their
fair market value. The following sets forth the approximate fair
value and related carrying amounts of all other long-term debt,
preferred stock subject to mandatory redemption and investments
other than cash and cash equivalents as of December 31:
1997 1996
- ----------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- ---------------------------------------------------------------
(In millions)
Long-term debt $6,980 $7,334 $2,919 $2,963
Preferred stock $ 356 $ 362 $ 160 $ 160
Investments other than
cash and cash equivalents:
Debt securities
- Maturity (5-10 years) $ 487 $ 512 $ 364 $ 364
- Maturity (more
than 10 years) 1,134 1,149 387 390
Equity securities 24 24 14 14
All other 336 337 104 102
- ---------------------------------------------------------------
$1,981 $2,022 $ 869 $ 870
===============================================================
The fair values of long-term debt and preferred stock
reflect the present value of the cash outflows relating to those
securities based on the current call price, the yield to maturity
or the yield to call, as deemed appropriate at the end of each
respective year. The yields assumed were based on securities with
similar characteristics offered by a corporation with credit
ratings similar to the Companies' ratings. Long-term debt and
preferred stock subject to mandatory redemption of CEI and TE
were recognized at fair value in connection with the merger.
The fair value of investments other than cash and cash
equivalents represent cost (which approximates fair value) or the
present value of the cash inflows based on the yield to maturity.
The yields assumed were based on financial instruments with
similar characteristics and terms. Investments other than cash
and cash equivalents include decommissioning trust investments.
Unrealized gains and losses applicable to the decommissioning
trust have been recognized in the trust investment with a
corresponding change to the decommissioning liability. The debt
and equity securities referred to above are in the held-to-
maturity category. The Companies have no securities held for
trading purposes.
REGULATORY ASSETS-
The Companies recognize, as regulatory assets, costs
which the FERC, PUCO and PPUC have authorized for recovery from
customers in future periods. Without such authorization, the
costs would have been charged to income as incurred. All
regulatory assets are being recovered from customers under the
Companies' respective regulatory plans. Based on those regulatory
plans, at this time, the Companies believe they will continue to
be able to bill and collect cost-based rates (with the exception
of CEI's and TE's nuclear operations as discussed below);
accordingly, it is appropriate that the Companies continue the
application of SFAS No. 71 "Accounting for the Effects of Certain
Types of Regulation" (SFAS 71). However, based on the regulatory
environment in Pennsylvania, Penn is expected to discontinue its
application of SFAS 71 for its generation operations, possibly as
early as 1998. The impact of Penn discontinuing SFAS 71 is not
expected to be material. OE and Penn recognized additional cost
recovery of $39 million, $34 million and $11 million in 1997,
1996 and 1995, respectively, as additional regulatory asset
amortization in accordance with their regulatory plans.
FirstEnergy's regulatory plan does not provide for full recovery
of CEI's and TE's nuclear operations. As a result, in October
1997 CEI and TE discontinued application of SFAS 71 for their
nuclear operations and decreased their regulatory assets of
customer receivables for future income taxes related to the
nuclear assets by $794 million.
Net regulatory assets on the Consolidated Balance
Sheets are comprised of the following:
1997 1996
- -------------------------------------------------------------
(In millions)
Nuclear unit expenses $1,224.2 $ 733.4
Customer receivables for
future income taxes 724.2 523.0
Rate stabilization program deferrals 460.2 -
Sale and leaseback costs (141.1) 220.8
Loss on reacquired debt 191.1 95.8
Employee postretirement benefit costs 25.9 29.2
Uncollectible customer accounts 18.9 29.8
Perry Unit 2 termination 36.7 40.4
DOE decommissioning and
decontamination costs 39.3 18.0
Other 44.7 12.7
- -----------------------------------------------------------
Total $2,624.1 $1,703.1
===========================================================
2. MERGER
The Company was formed on November 8, 1997, by the
merger of OE and Centerior Energy Corporation (Centerior). The
Company holds directly all of the issued and outstanding common
shares of OE and all of the issued and outstanding common shares
of Centerior's former direct subsidiaries, which include, among
others, CEI and TE. As a result of the merger, the former common
shareholders of OE and Centerior now own all of the outstanding
shares of FirstEnergy Common Stock. All other classes of capital
stock of OE and its subsidiaries and of the subsidiaries of
Centerior are unaffected by the Merger and remain outstanding.
The merger was accounted for as a purchase of
Centerior's net assets with 77,637,704 shares of FirstEnergy
Common Stock through the conversion of each outstanding Centerior
Common Stock share into 0.525 of a share of FirstEnergy Common
Stock (fractional shares were paid in cash). Based on an imputed
value of $20.125 per share, the purchase price was approximately
$1.582 billion, which also included approximately $20 million of
merger related costs. Goodwill of approximately $2.1 billion was
recognized (to be amortized on a straight-line basis over forty
years), which represented the excess of the purchase price over
Centerior's net assets after fair value adjustments. Such amount
may be adjusted if additional information produces changed
assumptions over the twelve months following the merger as the
Company continues to integrate operations and evaluate options
with respect to its generation portfolio.
The merger purchase accounting adjustments, which were
recorded in the records of Centerior's direct subsidiaries,
primarily consist of: (1) revaluation of CEI's and TE's nuclear
generating units to fair value ($1.60 billion), based upon the
results of an independent appraisal and 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); (2) adjusting their preferred stock
subject to mandatory redemption and long-term debt to estimated
fair value; (3) recognizing additional obligations related to
retirement benefits; (4) recognizing estimated severance and
other compensation liabilities ($80 million); and (5) adjustment
of the Beaver Valley Unit 2 deferred rent liability to reflect
remaining payments on a straight-line basis. The nuclear assets
revaluation does not include decommissioning since that
obligation is expected to be recovered with the cash flows
provided by the regulated portion of the business. Other assets
and liabilities were not adjusted since they remain subject to
rate regulation on a historical cost basis.
3. LEASES:
The Companies lease certain generating facilities,
nuclear fuel, certain transmission facilities, office space and
other property and equipment under cancelable and noncancelable
leases.
OE sold portions of its ownership interests in Perry
Unit 1 and Beaver Valley Unit 2 and entered into operating leases
on the portions sold for basic lease terms of approximately 29
years. CEI and TE also sold portions of their ownership interests
in Beaver Valley Unit 2 and Bruce Mansfield Units 1, 2, and 3 and
entered into similar operating leases for lease terms of
approximately 30 years. During the terms of their respective
leases OE, CEI and TE continue to be responsible, to the extent
of their individual combined ownership and leasehold interests,
for costs associated with the units including construction
expenditures, operation and maintenance expenses, insurance,
nuclear fuel, property taxes and decommissioning. They have the
right, at the end of the respective basic lease terms, to renew
their respective leases. They also have the right to purchase the
facilities at the expiration of the basic lease term or renewal
term (if elected) at a price equal to the fair market value of
the facilities. The basic rental payments are adjusted when
applicable federal tax law changes.
OES Finance, Incorporated (OES Finance), a wholly owned
subsidiary of OE, maintains deposits pledged as collateral to
secure reimbursement obligations relating to certain letters of
credit supporting OE's obligations to lessors under the Beaver
Valley Unit 2 sale and leaseback arrangements. The deposits
pledged to the financial institution providing those letters of
credit are the sole property of OES Finance. In the event of
liquidation, OES Finance, as a separate corporate entity, would
have to satisfy its obligations to creditors before any of its
assets could be made available to OE as sole owner of OES Finance
common stock.
Nuclear fuel is currently financed for CEI and TE
through leases with a special-purpose corporation. As of December
31, 1997, $157 million of nuclear fuel was financed under a lease
financing arrangement totaling $190 million ($90 million of
intermediate-term notes and $100 million from bank credit
arrangements). The notes mature from 1998 through 2000 and the
bank credit arrangements expire in October 1998. Lease rates are
based on intermediate-term note rates, bank rates and commercial
paper rates.
Consistent with the regulatory treatment, the rentals
for capital and operating leases are charged to operating
expenses on the Consolidated Statements of Income. Such costs for
the three years ended December 31, 1997, are summarized as
follows:
1997 1996 1995
- -------------------------------------------------------------
(In millions)
Operating leases
Interest element $ 149.9 $107.6 $104.6
Other 45.2 18.3 13.9
Capital leases
Interest element 6.1 6.5 7.0
Other 6.0 6.3 6.6
- ------------------------------------------------------------
Total rentals $207.2 $138.7 $132.1
============================================================
The future minimum lease payments as of December 31,
1997, are:
Operating Leases
-------------------------------
Capital Lease Capital Trusts
Leases Payments Income Net
- --------------------------------------------------------------
(In millions)
1998 $ 93.0 $ 290.1 $ 101.0 $ 189.1
1999 67.6 301.6 98.0 203.6
2000 42.0 296.4 94.5 201.9
2001 24.3 307.3 90.6 216.7
2002 16.3 315.3 85.4 229.9
Years thereafter 93.6 4,263.3 607.4 3,655.9
- -----------------------------------------------------------
Total minimum
lease payments 336.8 $5,774.0 $1,076.9 $4,697.1
======== ======== ========
Executory costs 36.0
- ----------------------------
Net minimum lease
payments 300.8
Interest portion 96.6
- ----------------------------
Present value of
net minimum lease
payments 204.2
Less current portion 74.6
- ----------------------------
Noncurrent portion $ 129.6
============================
OE invested in the PNBV Capital Trust in the third
quarter of 1996. The Trust was established to purchase a portion
of the lease obligation bonds issued on behalf of lessors in OE's
Perry Unit 1 and Beaver Valley Unit 2 sale and leaseback
transactions. CEI and TE established the Shippingport Capital
Trust in the fourth quarter of 1997 to purchase the lease
obligation bonds issued on behalf of lessors in their Bruce
Mansfield Units 1, 2 and 3 sale and leaseback transactions. As
noted in the table on page 34, the PNBV and Shippingport Capital
Trusts' income, which is included in other income in the
Consolidated Statements of Income, effectively reduces lease
costs related to those transactions.
4. CAPITALIZATION:
(A) RETAINED EARNINGS-
There are no restrictions on retained earnings for
payment of cash dividends on the Company's common stock.
(B) EMPLOYEE STOCK OWNERSHIP PLAN-
The Companies fund the matching contribution for their
401(k) savings plan through an ESOP Trust. All full-time
employees eligible for participation in the 401(k) savings plan
are covered by the ESOP. The ESOP borrowed $200 million from OE
and acquired 10,654,114 shares of OE's common stock through
market purchases; the shares were converted into the Company's
common stock in connection with the merger. Dividends on ESOP
shares are used to service the debt. Shares are released from the
ESOP on a pro-rata basis as debt service payments are made. In
1997, 1996 and 1995, 429,515 shares, 404,522 shares and 412,914
shares, respectively, were allocated to OE and Penn employees
with the corresponding expense recognized based on the shares
allocated method. The fair value of 7,829,538 shares unallocated
as of December 31, 1997, was approximately $227.1 million. Total
ESOP-related compensation expense was calculated as follows:
- --------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------
(In millions)
Base compensation $ 9.9 $ 9.0 $ 9.0
Dividends on common stock
held by the ESOP and
used to service debt (3.4) (2.9) (2.5)
- -------------------------------------------------------------
Net expense $ 6.5 $ 6.1 $ 6.5
- -------------------------------------------------------------
(C) EQUITY COMPENSATION PLAN
Under an Equity Compensation Plan adopted by Centerior
in 1994, restricted common stock and common stock options were
granted to management employees. Upon consummation of the merger,
outstanding options became exercisable for FirstEnergy common
stock with option prices and the number of shares adjusted to
reflect the merger conversion ratio. A total of 222,023 options
for FirstEnergy common stock were exercised and 68,592 shares of
restricted stock were distributed in 1997. Unexercised options
totaling 517,388 shares were outstanding as of December 31, 1997.
Computing compensation costs for the options consistent with SFAS
No. 123 "Accounting for Stock-Based Compensation" would not have
materially affected net income in 1997 and basic and diluted
earnings per common share are the same.
(D) PREFERRED STOCK-
Penn's 7.75% series of preferred stock has a
restriction which prevents early redemption prior to July 2003.
OE's 8.45% series of preferred stock has no optional redemption
provision, and its 7.75% series is not redeemable before April
1998. CEI's $42.40 and $88.00 series of preferred stock are not
redeemable before June 1998 and December 2001, respectively, and
its $90.00 series has no optional redemption provision. All other
preferred stock may be redeemed by the Companies in whole, or in
part, with 30-90 days' notice.
(E) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION-
Annual sinking fund provisions for the Companies'
preferred stock are as follows:
Redemption
Price Per
Series Shares Share Date Beginning
- --------------------------------------------------------------
OE 8.45% 50,000 $100 (i)
CEI $ 7.35 C 10,000 100 (i)
88.00 E 3,000 1,000 (i)
91.50 Q 10,714 1,000 (i)
90.00 S 18,750 1,000 November 1 1999
88.00 R 50,000 1,000 December 1 2001
TE $ 9.375 16,650 100 (i)
Penn 7.625% 7,500 100 October 1 2002
- -----------------------------------------------------------
(i) Sinking fund provisions are in effect.
Annual sinking fund requirements for the next five years are $21
million in 1998, $40 million in 1999, $38 million in 2000, $85
million in 2001 and $19 million in 2002. A liability of $19
million was included in the net assets acquired from CEI and TE
for preferred dividends declared attributable to the post-merger
period. Accordingly, no accruals for CEI and TE preferred
dividends are included in the Company's Statement of Consolidated
Income for the period November 8, 1997 through December 31, 1997.
(F) OHIO EDISON OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY OHIO EDISON
SUBORDINATED DEBENTURES-
Ohio Edison Financing Trust, a wholly owned subsidiary
of OE, has issued $120 million of 9% Cumulative Trust Preferred
Capital Securities. OE purchased all of the Trust's Common
Securities and simultaneously issued to the Trust $123.7 million
principal amount of 9% Junior Subordinated Debentures due 2025 in
exchange for the proceeds that the Trust received from its sale
of Preferred and Common Securities. The sole assets of the Trust
are the Subordinated Debentures whose interest and other payment
dates coincide with the distribution and other payment dates on
the Trust Securities. Under certain circumstances the
Subordinated Debentures could be distributed to the holders of
the outstanding Trust Securities in the event the Trust is
liquidated. The Subordinated Debentures may be optionally
redeemed by OE beginning December 31, 2000, at a redemption price
of $25 per Subordinated Debenture plus accrued interest, in which
event the Trust Securities will be redeemed on a pro-rata basis
at $25 per share plus accumulated distributions. OE's
obligations under the Subordinated Debentures along with the
related Indenture, amended and restated Trust Agreement,
Guarantee Agreement and the Agreement for expenses and
liabilities, constitute a full and unconditional guarantee by OE
of payments due on the Preferred Securities.
(G) LONG-TERM DEBT-
The first mortgage indentures and their supplements,
which secure all of the Companies' first mortgage bonds, serve as
direct first mortgage liens on substantially all property and
franchises, other than specifically excepted property, owned by
the Companies.
Based on the amount of bonds authenticated by the
Trustee through December 31, 1997, OE's annual sinking and
improvement fund requirement for all bonds issued under the
mortgage amounts to $30 million. OE expects to deposit funds in
1998 that will be withdrawn upon the surrender for cancellation
of a like principal amount of bonds, which are specifically
authenticated for such purposes against unfunded property
additions or against previously retired bonds. This method can
result in minor increases in the amount of the annual sinking
fund requirement.
Sinking fund requirements for first mortgage bonds and
maturing long-term debt (excluding capital leases) for the next
five years are:
(In millions)
- ---------------------------------------------------------------
1998 $374.4
1999 866.5
2000 418.4
2001 101.6
2002 744.7
- ---------------------------------------------------------------
The Companies' obligations to repay certain pollution
control revenue bonds are secured by several series of first
mortgage bonds and, in some cases, by subordinate liens on the
related pollution control facilities. Certain pollution control
revenue bonds are entitled to the benefit of irrevocable bank
letters of credit of $419.0 million. To the extent that drawings
are made under those letters of credit to pay principal of, or
interest on, the pollution control revenue bonds, OE, CEI and/or
TE are entitled to a credit against their obligation to repay
those bonds. The Companies pay annual fees of 0.43% to 1.875% of
the amounts of the letters of credit to the issuing banks and are
obligated to reimburse the banks for any drawings thereunder.
OE had unsecured borrowings of $215 million at December
31, 1997, which are supported by a $250 million long-term
revolving credit facility agreement which expires December 30,
1999. OE must pay an annual facility fee of 0.20% on the total
credit facility amount. In addition, the credit agreement
provides that OE maintain unused first mortgage bond capability
for the full credit agreement amount under OE's indenture as
potential security for the unsecured borrowings.
OE's and Penn's nuclear fuel purchases are financed
through the issuance of OES Fuel commercial paper and loans, both
of which are supported by a $225 million long-term bank credit
agreement which expires March 31, 1999. Accordingly, the
commercial paper and loans are reflected as long-term debt on the
Consolidated Balance Sheets. OES Fuel must pay an annual facility
fee of 0.1875% on the total line of credit and an annual
commitment fee of 0.0625% on any unused amount.
5. SHORT-TERM BORROWINGS AND BANK LINES OF CREDIT:
Short-term borrowings outstanding at December 31, 1997,
consisted of $182.2 million of bank borrowings and $120.0 million
of OES Capital, Incorporated commercial paper. OES Capital is a
wholly owned subsidiary of OE whose borrowings are secured by
customer accounts receivable. OES Capital can borrow up to $120
million under a receivables financing agreement at rates based on
certain bank commercial paper and is required to pay an annual
fee of 0.26% on the amount of the entire finance limit. The
receivables financing agreement expires in 1999.
The Companies have various credit facilities with
domestic banks that provide for borrowings of up to $202 million
under various interest rate options, including a $125 million
revolving credit facility which expires in May 1998. OE's and
Penn's short-term borrowings may be made under these lines of
credit on their unsecured notes. To assure the availability of
these lines, the Companies are required to pay annual commitment
fees that vary from 0.22% to 0.625%. These lines expire at
various times during 1998. The weighted average interest rates on
short-term borrowings outstanding at December 31, 1997 and 1996,
were 6.02% and 5.77%, respectively.
6. COMMITMENTS, GUARANTEES AND CONTINGENCIES:
CAPITAL EXPENDITURES-
The Companies' current forecasts reflect expenditures
of approximately $1.2 billion for property additions and
improvements related to their regulated businesses from 1998-
2002, of which approximately $320 million is applicable to 1998.
Investments for additional nuclear fuel during the 1998-2002
period are estimated to be approximately $518 million, of which
approximately $85 million applies to 1998. During the same
periods, the Companies' nuclear fuel investments are expected to
be reduced by approximately $380 million and $112 million,
respectively, as the nuclear fuel is consumed. The Companies also
expect to invest approximately $300 million during 1998-2002 ($65
million in 1998) relating to various nonregulated business
ventures.
NUCLEAR INSURANCE-
The Price-Anderson Act limits the public liability
relative to a single incident at a nuclear power plant to $8.92
billion. The amount is covered by a combination of private
insurance and an industry retrospective rating plan. Based on
their present ownership and leasehold interests in the Beaver
Valley Station, Davis-Besse Plant and the Perry Plant, the
Companies' maximum potential assessment under the industry
retrospective rating plan (assuming the other co-owner
contributes its proportionate share of any assessments under the
retrospective rating plan) would be $257.7 million per incident
but not more than $32.5 million in any one year for each
incident.
The Companies are also insured as to their respective
interests in the Beaver Valley Station, Davis-Besse Plant and the
Perry Plant under policies issued to the operating company for
each plant. Under these policies, up to $2.75 billion is provided
for property damage and decontamination and decommissioning
costs. The Companies have also obtained approximately $809
million of insurance coverage for replacement power costs for
their respective interests in Perry, Davis-Besse and Beaver
Valley. Under these policies, the Companies can be assessed a
maximum of approximately $36.6 million for incidents at any
covered nuclear facility occurring during a policy year which are
in excess of accumulated funds available to the insurer for
paying losses.
The Companies intend to maintain insurance against
nuclear risks as described above as long as it is available. To
the extent that replacement power, property damage,
decontamination, decommissioning, repair and replacement costs
and other such costs arising from a nuclear incident at any of
the Companies' plants exceed the policy limits of the insurance
in effect with respect to that plant, to the extent a nuclear
incident is determined not to be covered by the Companies'
insurance policies, or to the extent such insurance becomes
unavailable in the future, the Companies would remain at risk for
such costs.
GUARANTEES-
The CAPCO companies have each severally guaranteed
certain debt and lease obligations in connection with a coal
supply contract for the Bruce Mansfield Plant. As of December 31,
1997, the Companies' shares of the guarantees (which approximate
fair market value) were $66.1 million. The price under the coal
supply contract, which includes certain minimum payments, has
been determined to be sufficient to satisfy the debt and lease
obligations. The Companies' total payments under the coal supply
contract were $135.3 million, $113.8 million and $120.0 million
during 1997, 1996 and 1995, respectively. The Companies' minimum
annual payments are approximately $58 million under the contract,
which expires December 31, 1999.
ENVIRONMENTAL MATTERS-
Various federal, state and local authorities regulate
the Companies with regard to air and water quality and other
environmental matters. The Companies estimate additional capital
expenditures for environmental compliance of approximately $50
million, which is included in the construction forecast for their
regulated businesses provided under "Capital Expenditures" for
1998 through 2002.
The Companies are in compliance with the current sulfur
dioxide (SO2) and nitrogen oxides (NOX) reduction requirements
under the Clean Air Act Amendments of 1990. SO2 reductions
through the year 1999 will be achieved by burning lower-sulfur
fuel, generating more electricity from lower-emitting plants,
and/or purchasing emission allowances. Plans for complying with
reductions required for the year 2000 and thereafter have not
been finalized. The Environmental Protection Agency (EPA) is
conducting additional studies which could indicate the need for
additional NOX reductions from the Companies' Pennsylvania
facilities by the year 2003. In addition, the EPA is also
considering the need for additional NOX reductions from the
Companies' Ohio facilities. On November 7, 1997, the EPA proposed
uniform reductions of NOX emissions across a region of twenty-two
states, including Ohio and the District of Columbia (NOX
Transport Rule) after determining that such NOX emissions are
contributing significantly to ozone pollution in the eastern
United States. In a separate but related action, eight states
filed petitions with the EPA under Section 126 of the Clean Air
Act seeking reductions of NOX emissions which are alleged to
contribute to ozone pollution in the eight petitioning states. A
December 1997 EPA Memorandum of Agreement proposes to finalize
the NOX Transport Rule by September 30, 1998, and establishes a
schedule for EPA action on the Section 126 petitions. The cost of
NOX reductions, if required, may be substantial. The Companies
continue to evaluate their compliance plans and other compliance
options.
The Companies are required to meet federally approved
SO2 regulations. Violations of such regulations can result in
shutdown of the generating unit involved and/or civil or criminal
penalties of up to $25,000 for each day the unit is in violation.
The EPA has an interim enforcement policy for SO2 regulations in
Ohio that allows for compliance based on a 30-day averaging
period. The Companies cannot predict what action the EPA may take
in the future with respect to the interim enforcement policy.
CEI and TE have been named as "potentially responsible
parties" (PRPs) for three sites listed on the Federal Superfund
National Priorities List and several other sites. Federal
environmental regulations provide that PRPs for specific sites
would be held liable on a joint and several basis. CEI and TE
have accrued a liability of $5.9 million based on estimates of
their share of potential cleanup costs.
Legislative, administrative and judicial actions will
continue to change the way that the Companies must operate in
order to comply with environmental laws and regulations. With
respect to any such changes and to the environmental matters
described above, the Companies expect that any resulting
additional capital costs which may be required, as well as any
required increase in operating costs, would ultimately be
recovered from their customers.
7. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED):
The following summarizes certain consolidated operating
results by quarter for 1997 and 1996.
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
Three Months Ended 1997 1997 1997 1997
- ------------------------------------------------------------------------------------
(In millions, except per share amounts)
<S> <C> <C> <C> <C>
Operating Revenues $604.8 $593.3 $652.7 $970.8
Operating Expenses and Taxes 478.5 467.3 511.6 808.2
- ---------------------------------------------------------------------------------
Operating Income 126.3 126.0 141.1 162.6
Other Income 13.5 14.1 12.0 18.7
Net Interest Charges 66.9 66.3 64.4 110.9
- ---------------------------------------------------------------------------------
Net Income $ 72.9 $ 73.8 $ 88.7 $ 70.4
=================================================================================
Earnings per Share of Common
Stock $ .51 $ .51 $ .61 $ .36
==================================================================================
March 31, June 30, September 30, December 31,
Three Months Ended 1996 1996 1996 1996
- ------------------------------------------------------------------------------------
(In millions, except per share amounts)
Operating Revenues $611.6 $599.3 $646.9 $611.9
Operating Expenses and Taxes 481.1 471.7 500.0 486.8
- ---------------------------------------------------------------------------------
Operating Income 130.5 127.6 146.9 125.1
Other Income 7.0 10.7 7.1 12.7
Net Interest Charges 67.2 64.8 64.6 68.3
- ---------------------------------------------------------------------------------
Net Income $ 70.3 $ 73.5 $ 89.4 $ 69.5
=================================================================================
Earnings per Share of Common
Stock $ .49 $ .51 $ .62 $ .48
=================================================================================
</TABLE>
Results for CEI and TE are included from the November
8, 1997 acquisition date through December 31, 1997.
8. PRO FORMA COMBINED CONDENSED FIRSTENERGY FINANCIAL STATEMENTS
(UNAUDITED):
The pro forma statements of income of FirstEnergy give
effect to the Merger as if it had been consummated on January 1,
1996, with the purchase accounting adjustments actually
recognized in the business combination.
Year Ended December 31,
------------------------
1997 1996
- --------------------------------------------------------------
(In millions, except per share amounts)
Operating revenues $4,975 $5,006
Operating expenses 3,966 3,941
- -------------------------------------------------------------
Operating income 1,009 1,065
Other income 61 37
Net interest 643 634
- ------------------------------------------------------------
Net income $ 427 $ 468
============================================================
Earnings per share of common stock $ 1.92 $ 2.11
============================================================
Pro forma adjustments reflected above include: (1)
adjusting CEI and TE nuclear generating units to fair value based
upon independent appraisals and estimated discounted future cash
flows based on management's current view of cost recovery; (2)
goodwill recognized representing the excess of the purchase price
over Centerior's adjusted net assets; (3) elimination of revenue
and expense transactions between OE and Centerior; (4)
amortization of the fair value adjustment of long-term debt; and
(5) adjustments for estimated tax effects of the above
adjustments.
Report of Independent Public Accountants
To the Stockholders and Board of Directors of FirstEnergy Corp.:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of FirstEnergy Corp.
(an Ohio corporation) and subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of income, retained earnings,
capital stock and other paid-in capital, cash flows and taxes for each
of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the financial position
of FirstEnergy Corp. and subsidiaries as of December 31, 1997 and
1996, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
February 13, 1998
EXHIBIT 21
FIRSTENERGY CORP.
LIST OF SUBSIDIARIES OF THE REGISTRANT
AT DECEMBER 31, 1997
Ohio Edison Company - Incorporated in Ohio
The Cleveland Electric Illuminating Company - Incorporated in
Ohio
The Toledo Edison Company - Incorporated in Ohio
Centerior Service Company - Incorporated in Ohio
Centerior Properties Company - Incorporated in Ohio
Centerior Enterprises Corporation - Incorporated in Delaware
FirstEnergy Trading and Power Marketing, Inc. - Incorporated in
Delaware
FirstEnergy Telecom Corp. - Incorporated in Ohio
FirstEnergy Securities Transfer Company - Incorporated in Ohio
FirstEnergy Services Corp. - Incorporated in Ohio
Statement of Differences
-------------------------
Exhibit Number 21, List of Subsidiaries of the Registrant at
December 31, 1997, is not included in the printed document.
EXHIBIT 23
FIRSTENERGY CORP.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to
the incorporation of our reports included or incorporated by
reference in this Form 10-K, into FirstEnergy Corp.'s previously
filed Registration Statements, File No. 333-48587 and No. 333-
48651.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
(AMOUNTS IN 1,000'S, EXCEPT EARNINGS PER SHARE)
INCOME TAX EXPENSE INCLUDES $24,188,000 RELATED TO OTHER INCOME
</LEGEND>
<CIK> 0001031296
<NAME> FIRSTENERGY CORP.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 9,573,210
<OTHER-PROPERTY-AND-INVEST> 2,307,102
<TOTAL-CURRENT-ASSETS> 1,002,991
<TOTAL-DEFERRED-CHARGES> 5,197,492
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 18,080,795
<COMMON> 23,021
<CAPITAL-SURPLUS-PAID-IN> 3,489,931
<RETAINED-EARNINGS> 646,646
<TOTAL-COMMON-STOCKHOLDERS-EQ> 4,159,598
334,864
660,195
<LONG-TERM-DEBT-NET> 6,969,835
<SHORT-TERM-NOTES> 182,245
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 119,984
<LONG-TERM-DEBT-CURRENT-PORT> 374,401
21,379
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 74,656
<OTHER-ITEMS-CAPITAL-AND-LIAB> 5,183,638
<TOT-CAPITALIZATION-AND-LIAB> 18,080,795
<GROSS-OPERATING-REVENUE> 2,821,435
<INCOME-TAX-EXPENSE> 207,986
<OTHER-OPERATING-EXPENSES> 2,081,677
<TOTAL-OPERATING-EXPENSES> 2,265,475
<OPERATING-INCOME-LOSS> 555,960
<OTHER-INCOME-NET> 58,343
<INCOME-BEFORE-INTEREST-EXPEN> 614,303
<TOTAL-INTEREST-EXPENSE> 308,529
<NET-INCOME> 305,774
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 216,770
<TOTAL-INTEREST-ON-BONDS> 482,450
<CASH-FLOW-OPERATIONS> 856,437
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.94
</TABLE>
<TABLE>
EXHIBIT 12.1
Page 1
OHIO EDISON COMPANY
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Year Ended December 31,
---------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
EARNINGS AS DEFINED IN REGULATION S-K:
Income before extraordinary items $ 24,523 $303,531 $317,241 $315,170 $293,194
Interest and other charges, before
reduction for amounts capitalized 285,169 283,849 273,719 255,572 250,920
Provision for income taxes 32,431 188,886 199,307 201,295 187,805
Interest element of rentals
charged to income (a) 104,700 108,463 111,534 114,093 117,409
--------- -------- -------- -------- --------
Earnings as defined $446,823 $884,729 $901,801 $886,130 $849,328
========= ======== ======== ======== ========
FIXED CHARGES AS DEFINED IN
REGULATION S-K:
Interest on long-term debt $262,861 $259,554 $243,570 $211,935 $204,285
Other interest expense 16,445 18,931 22,944 28,211 31,209
Subsidiaries' preferred
stock dividend requirements 5,863 5,364 7,205 15,426 15,426
Adjustment to subsidiaries'
preferred stock dividends
to state on a pre-income
tax basis 7,659 3,294 2,956 2,910 2,918
Interest element of rentals
charged to income (a) 104,700 108,463 111,534 114,093 117,409
-------- -------- -------- -------- --------
Fixed charges as defined $397,528 $395,606 $388,209 $372,575 $371,247
======== ======== ======== ======== ========
CONSOLIDATED RATIO OF EARNINGS
TO FIXED CHARGES (b) 1.12 2.24 2.32 2.38 2.29
==== ==== ==== ==== ====
<FN>
- -------------------
(a) Includes the interest element of rentals where determinable
plus 1/3 of rental expense where no readily defined interest
element can be determined.
(b) These ratios exclude fixed charges applicable to the guarantee
of the debt of a coal supplier aggregating $8,565,000, $7,424,000,
$6,315,000, $5,093,000 and $3,828,000 for each of the five years
ended December 31, 1997, respectively.
</TABLE>
<TABLE>
EXHIBIT 12.1
Page 2
OHIO EDISON COMPANY
CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED AND
PREFERENCE STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS)
<CAPTION>
Year Ended December 31,
---------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
EARNINGS AS DEFINED IN REGULATION S-K:
Income before extraordinary items $ 24,523 $303,531 $317,241 $315,170 $293,194
Interest and other charges,
before reduction for amounts
capitalized 285,169 283,849 273,719 255,572 250,920
Provision for income taxes 32,431 188,886 199,307 201,295 187,805
Interest element of rentals
charged to income (a) 104,700 108,463 111,534 114,093 117,409
-------- -------- -------- -------- --------
Earnings as defined $446,823 $884,729 $901,801 $886,130 $849,328
======== ======== ======== ======== ========
FIXED CHARGES AS DEFINED IN
REGULATION S-K PLUS PREFERRED
AND PREFERENCE STOCK DIVIDEND
REQUIREMENTS(PRE-INCOME TAX BASIS):
Interest on long-term debt $262,861 $259,554 $243,570 $211,935 $204,285
Other interest expense 16,445 18,931 22,944 28,211 31,209
Preferred and preference stock
dividend requirements 29,570 27,043 29,699 27,923 27,817
Adjustment to preferred and
preference stock dividends
to state on a pre-income tax basis 38,265 16,444 16,745 10,542 10,503
Interest element of rentals
charged to income (a) 104,700 108,463 111,534 114,093 117,409
-------- -------- -------- -------- --------
Fixed charges as defined plus
preferred and preference
stock dividend requirements
(pre-income tax basis) $451,841 $430,435 $424,492 $392,704 $391,223
======== ======== ======== ======== ========
CONSOLIDATED RATIO OF EARNINGS TO
FIXED CHARGES PLUS PREFERRED AND
PREFERENCE STOCK DIVIDEND REQUIREMENTS
PRE-INCOME TAX BASIS) (b) 0.99(c) 2.06 2.12 2.26 $2.17
==== ==== ==== ==== =====
<FN>
- ---------------
(a) Includes the interest element of rentals where determinable
plus 1/3 of rental expense where no readily defined interest
element can be determined.
(b) These ratios exclude fixed charges applicable to the guarantee
of the debt of a coal supplier aggregating $8,565,000, $7,424,000,
$6,315,000, $5,093,000 and $3,828,000 for each of the five years
ended December 31, 1997, respectively.
(c) Earnings as defined were deficient in 1993 by $5,018,000 to cover
fixed charges plus preferred stock dividend requirements (pre-
income tax basis).
</TABLE>
<TABLE>
OHIO EDISON COMPANY
SELECTED FINANCIAL DATA
<CAPTION>
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating Revenues $2,473,582 $2,469,785 $2,465,846 $2,368,191 $2,369,940
----------------------------------------------------------
Net Income $ 293,194 $ 315,170 $ 317,241 $ 303,531 $ 82,724
----------------------------------------------------------
Earnings on Common Stock $ 280,802 $ 302,673 $ 294,747 $ 281,852 $ 59,017
----------------------------------------------------------
Total Assets $8,977,455 $9,054,457 $8,892,088 $9,045,255 $8,964,841
----------------------------------------------------------
Capitalization at December 31:
Common Stockholders' Equity $2,724,319 $2,503,359 $2,407,871 $2,317,197 $2,243,292
Preferred Stock:
Not Subject to Mandatory
Redemption 211,870 211,870 211,870 328,240 328,240
Subject to Mandatory Redemption 150,000 155,000 160,000 40,000 45,500
Long-Term Debt 2,569,802 2,712,760 2,786,256 3,166,593 3,039,263
----------------------------------------------------------
Total Capitalization $5,655,991 $5,582,989 $5,565,997 $5,852,030 $5,656,295
----------------------------------------------------------
Capitalization Ratios:
Common Stockholders' Equity 48.2% 44.8% 43.3% 39.6% 39.7%
Preferred Stock:
Not Subject to Mandatory
Redemption 3.7 3.8 3.8 5.6 5.8
Subject to Mandatory Redemption 2.7 2.8 2.9 0.7 0.8
Long-Term Debt 45.4 48.6 50.0 54.1 53.7
----------------------------------------------------------
Total Capitalization 100.0% 100.0% 100.0% 100.0% 100.0%
----------------------------------------------------------
Kilowatt-Hour Sales (Millions):
Residential 8,631 8,704 8,546 8,201 8,237
Commercial 7,335 7,246 7,151 6,885 6,787
Industrial 11,202 11,089 10,513 9,841 9,874
Other 150 147 146 144 144
----------------------------------------------------------
Total Retail 27,318 27,186 26,356 25,071 25,042
Total Wholesale 5,241 7,076 6,920 5,879 7,162
----------------------------------------------------------
Total 32,559 34,262 33,276 30,950 32,204
----------------------------------------------------------
Customers Served:
Residential 995,605 988,179 978,118 968,483 957,867
Commercial 111,189 113,795 111,978 109,832 107,401
Industrial 4,568 4,590 4,268 3,786 3,685
Other 1,415 1,331 1,308 1,226 1,199
----------------------------------------------------------
Total 1,112,777 1,107,895 1,095,672 1,083,327 1,070,152
----------------------------------------------------------
Average Annual Residential kWh
Usage 8,720 8,861 8,787 8,524 8,660
Cost of Fuel per Million Btu $1.10 $1.13 $1.18 $1.21 $1.26
Peak Load-Megawatts 6,225 6,027 6,332 5,744 5,729
Number of Employees 4,215 4,273 4,812 5,166 5,978
PRICE RANGE OF COMMON STOCK
The Company's Common Stock became wholly owned by FirstEnergy Corp. effective with the
November 8, 1997 merger date. Prices shown below are for the period through November 7, 1997.
<S> <C> <C> <C> <C>
1997 1996
- ----------------------------------------------------------------------------------------
First Quarter High-Low 23-7/8 20-7/8 24-7/8 21-7/8
-----------------------------------------
Second Quarter High-Low 22 19-1/4 23 20-1/4
-----------------------------------------
Third Quarter High-Low 23-5/8 21-3/4 22-1/4 19-1/4
-----------------------------------------
Fourth Quarter High-Low - - 23-1/4 19-3/8
-----------------------------------------
Yearly High-Low - - 24-7/8 19-1/4
-----------------------------------------
<FN>
Prices are based on reports published in The Wall Street Journal for
New York Stock Exchange Composite Transactions.
</TABLE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
This discussion includes forward looking statements based
on information currently available to management. Such statements
are subject to certain risks and uncertainties. These statements
typically contain, but are not limited to, the terms "anticipate",
"potential", "expect", "believe", "estimate" and similar words.
Actual results may differ materially due to the speed and nature of
increased competition and deregulation in the electric utility
industry, economic or weather conditions affecting future sales and
margins, changes in markets for energy services, changing energy
market prices, legislative and regulatory changes (including
revised environmental requirements), availability and cost of
capital and other similar factors.
RESULTS OF OPERATIONS
We continued to make significant progress in 1997 as our
companies prepare for a more competitive environment in the
electric utility industry.
The most significant event during the year was the
approval by the Federal Energy Regulatory Commission (FERC) of our
merger with Centerior Energy Corporation to form FirstEnergy Corp.,
which came into existence on November 8, 1997. We expect the merger
to produce a minimum of $1 billion in savings for FirstEnergy Corp.
during the first ten years of joint operations through the
elimination of duplicative activities, improved operating
efficiencies, lower capital expenditures, accelerated debt
reduction, the coordination of the companies' work forces and
enhanced purchasing power.
Earnings on common stock of $280.8 million were adversely
affected by net nonrecurring charges amounting to $26.4 million
relating to a voluntary retirement program and estimated severance
expenses. Excluding these charges, 1997 earnings on common stock
were $307.2 million, compared to $302.7 million in 1996. The 1997
results reflect accelerated depreciation and amortization of
nuclear and regulatory assets totaling approximately $211 million
under our Rate Reduction and Economic Development Plan and
Pennsylvania Power Company's (Penn's) Rate Stability and Economic
Development Plan; results for 1996 included approximately $178
million of accelerated depreciation and amortization. The 1996
results compared favorably to earnings on common stock of $294.7
million in 1995.
For the third consecutive year, we achieved record
operating revenues and for the fifth consecutive year, we achieved
record retail sales. The following table summarizes the sources of
changes in operating revenues for 1997 and 1996 as compared to the
previous year:
1997 1996
---- ----
(In millions)
Increased retail kilowatt-hour sales $ 7.8 $ 58.1
Change in average retail price 13.3 (46.1)
Sales to utilities (25.8) (4.5)
Other 8.5 (3.6)
------ ------
Net Increase $ 3.8 $ 3.9
====== ======
An improving local economy helped us achieve record
retail sales of 27.3 billion kilowatt-hours. Our customer base
continues to grow with approximately 4,900 new retail customers
added in 1997, after gaining more than 12,200 customers the
previous year. Residential sales decreased 0.8% in 1997, following
a 1.8% gain the previous year. Commercial sales rose 1.2% and 1.3%
in 1997 and 1996, respectively. Increased demand by rubber and
plastics and primary metal manufacturers contributed to a 1.0% rise
in industrial sales during 1997, following a 5.5% increase the
previous year. Sales to other utilities fell 26.4% in 1997 as a
result of the December 31, 1996, expiration of a one-year contract
with another utility to supply 250 megawatts of power. This
reduction follows a 2.7% increase the previous year. As a result of
the above factors, total kilowatt-hour sales dropped 5.0%, compared
with sales in 1996, which were up 3.0% from 1995.
Because of lower kilowatt-hour sales, the Companies spent
less on fuel and purchased power during 1997, compared to 1996
costs, which were also down compared to 1995. Higher nuclear
expenses in 1997 reflect increased operating costs at the Beaver
Valley Plant. Nuclear operating costs were lower in 1996, compared
to 1995, due primarily to lower refueling outage cost levels. The
increase in other operating costs in 1997 reflects a fourth quarter
charge of approximately $41.5 million for a voluntary retirement
program and estimated severance expenses. These cost increases were
partially offset by gains on the sale of emission allowances during
the year. The decrease in other operating costs in 1996, compared
to 1995, reflects lower maintenance costs at our fossil-fuel
generating units.
The changes in depreciation and regulatory asset
amortization in 1997 and 1996 reflect accelerations under the
regulatory plans discussed above. General taxes decreased in 1997,
compared to 1996, due to lower property taxes and an adjustment in
the second quarter of 1997 which reduced the Companies' liabilities
for gross receipts taxes.
The increases in other income in 1997 and 1996 were
principally due to higher investment income--primarily through our
PNBV Capital Trust investment, which was effective in the third
quarter of 1996. Overall, interest costs continue to trend
downward. Total interest costs were lower in 1997 than in 1996.
Interest on long-term debt decreased due to our economic
refinancings and redemption of higher-cost debt totaling
approximately $282 million that had been outstanding as of December
31, 1996. Other interest expense increased compared to 1996 due
mainly to higher levels of short-term borrowing. We also
discontinued deferring nuclear unit interest in the second half of
1995, consistent with our regulatory plan.
CAPITAL RESOURCES AND LIQUIDITY
We have significantly improved our financial position
over the past five years. Cash generated from operations was nearly
25% higher in 1997 than it was in 1992 due to higher revenues and
aggressive cost controls. At the same time, return on common equity
improved from 10.8% in 1992 to 12.0% in 1997, excluding the net
nonrecurring charges discussed above. By the end of 1997, we were
serving about 57,000 more customers than we were five years ago,
with approximately 2,000 fewer employees. As a result, our
customer/employee ratio has increased by 56% over the past five
years, standing at 264 customers per employee at the end of 1997,
compared with 169 at the end of 1992. In addition, capital
expenditures have dropped substantially during that period.
Expenditures in 1997 were approximately 37% lower than they were in
1992, and total depreciation charges have exceeded property
additions since the end of 1987.
Over the past five years, we have aggressively taken
advantage of opportunities in the financial markets to reduce our
average capital costs. Through refinancing activities, we have
reduced the average cost of outstanding debt from 8.53% at the end
of 1992 to 7.77% at the end of 1997. Excluding the nonrecurring
charges mentioned above, our fixed charge coverage ratios continue
to improve. Our indenture ratio, which is used to measure our
ability to issue first mortgage bonds, improved from 4.34 at the
end of 1992 to 6.21 at the end of 1997. Over the same period, our
charter ratio--a measure of our ability to issue preferred stock--
improved from 1.89 to 2.35. At the end of 1997, our common equity
as a percentage of capitalization stood at 48% compared to 40% at
the end of 1992.
Our cash requirements in 1998 for operating expenses,
construction expenditures and scheduled debt maturities are
expected to be met without issuing additional securities. During
1997, we reduced our total debt by approximately $245 million. We
also have cash requirements of approximately $1,015 million for the
1998-2002 period to meet scheduled maturities of long-term debt and
preferred stock. Of that amount, approximately $167 million applies
to 1998.
We had about $4.7 million of cash and temporary
investments and $302.2 million of short-term indebtedness on
December 31, 1997. As of December 31, 1997, we had the capability
to borrow $61 million through unused OES Fuel credit facilities. In
addition, our unused borrowing capability included $37 million
under revolving lines of credit and $26 million of bank facilities
that provide for borrowings on a short-term basis at the banks'
discretion.
Our capital spending for the period 1998-2002 is expected
to be about $600 million (excluding nuclear fuel), of which
approximately $165 million applies to 1998. This spending level is
nearly $300 million lower than actual capital outlays over the past
five years. Investments for additional nuclear fuel during the
1998-2002 period are estimated to be approximately $206 million, of
which about $26 million applies to 1998. During the same periods,
our nuclear fuel investments are expected to be reduced by
approximately $182 million and $41 million, respectively, as the
nuclear fuel is consumed. Also, we have operating lease commitments
(net of PNBV Capital Trust income) of approximately $442 million
for the 1998-2002 period, of which approximately $83 million
relates to 1998. We recover the cost of nuclear fuel consumed and
operating leases through our electric rates.
INTEREST RATE RISK
Our exposure to fluctuations in market interest rates is
mitigated by the fact that a significant portion of our debt has
fixed interest rates, as noted in the table below. We are subject
to the inherent interest rate risks related to refinancing maturing
debt by issuing new debt securities. As discussed in Note 3, our
investment in the PNBV Capital Trust effectively reduces future
lease obligations, also reducing interest rate risk. As discussed
in Note 1, changes in the market value of our decommissioning trust
funds are recognized with a corresponding change to the
decommissioning liability.
The table below presents principal amounts and related
weighted average interest rates by year of maturity for our
investment portfolio, debt obligations and preferred stock with
mandatory redemption provisions:
<TABLE>
<CAPTION>
There- Fair
1998 1999 2000 2001 2002 after Total Value
- -------------------------------------------------------------------------------------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments other than Cash
and Cash Equivalents
Fixed Income $ 7 $ 6 $ 17 $ 23 $ 26 $ 738 $ 817 $ 880
Average interest rate 5.9% 5.5% 7.3% 7.7% 7.8% 7.8% 7.8%
- --------------------------------------------------------------------------------------
Liabilities
- --------------------------------------------------------------------------------------
Long-term Debt
Fixed rate $162 $162 $116 $ 15 $324 $1,406 $2,185 $2,297
Average interest rate 8.7% 6.9% 6.5% 8.1% 7.8% 7.4% 7.5%
Variable rate $215 $ 327 $ 542 $ 538
Average interest rate 6.4% 4.1% 5.0%
Short-term Borrowings $302 $ 302 $ 302
Average interest rate 6.0% 6.0%
- --------------------------------------------------------------------------------------
Preferred Stock $ 5 $ 5 $ 5 $ 5 $ 1 $ 134 $ 155 $ 161
Average dividend rate 8.5% 8.5% 8.5% 8.5% 7.6% 8.9% 8.8%
- --------------------------------------------------------------------------------------
</TABLE>
OUTLOOK
We face many competitive challenges in the years ahead as
the electric utility industry undergoes significant changes,
including changing regulation and the entrance of more energy
suppliers into the marketplace. Retail wheeling, which would allow
retail customers to purchase electricity from other energy
producers, will be one of those challenges. Our regulatory plans
provide the foundation to position us to meet the challenges we are
facing by significantly reducing fixed costs and lowering rates to
a more competitive level.
The Company's Rate Reduction and Economic Development
Plan was approved by the Public Utilities Commission of Ohio (PUCO)
in 1995; Penn's Rate Stability and Economic Development Plan was
approved by the Pennsylvania Public Utility Commission (PPUC) in
the second quarter of 1996. These regulatory plans initially
maintain the Company's current base electric rates through December
31, 2005, and Penn's through June 20, 2006. The plans also revised
the Companies' fuel cost recovery methods.
As part of the Company's regulatory plan, transition rate
credits were implemented for customers, which are expected to
reduce operating revenues by approximately $600 million during the
regulatory plan period, which is to be followed by a base rate
reduction of approximately $300 million in 2006.
The Companies' regulatory assets are being recovered
under provisions of the regulatory plans. In addition, we have been
authorized by the PUCO and PPUC to recognize additional capital
recovery related to our generating assets (which is reflected as
additional depreciation expense) and additional amortization of
regulatory assets during the regulatory plan periods of at least $2
billion for the Company and $358 million for Penn, more than the
amounts that would have been recognized if the regulatory plans
were not in effect. These additional amounts are being recovered
through current rates.
Based on the regulatory environment we operate in today
and the regulatory plans, we believe we will continue to be able to
bill and collect cost-based rates for all of our operations;
accordingly, it is appropriate that we continue the application of
Statement of Financial Accounting Standards No. 71 "Accounting for
the Effects of Certain Types of Regulation" (SFAS 71). However, as
discussed below, changes in the regulatory environment are on the
horizon. With respect to Penn, we expect to discontinue the
application of SFAS 71 for the generation portion of that business,
possibly as early as 1998. We do not expect the impact of Penn
discontinuing SFAS 71 to be material. As further discussed below,
the Ohio legislature is in the discussion stages of restructuring
the electric utility industry within the State. We do not expect
any changes in Ohio regulation to be effective within the next two
years and we cannot assess what the ultimate impact may be.
On September 30, 1997, Penn filed a restructuring plan
with the PPUC. The plan describes how Penn will restructure its
rates and provide customers with direct access to alternative
electricity suppliers; customer choice is to be phased in over
three years beginning in 1999, after completion of a two-year pilot
program. Penn will continue to deliver power to homes and
businesses through its transmission and distribution system, which
remains regulated by the PPUC. Penn also plans to sell electricity
and energy-related services in its own territory and throughout
Pennsylvania as an alternative supplier through its nonregulated
subsidiary, Penn Power Energy. Through the restructuring plan, Penn
is seeking recovery of $293 million of stranded costs through a
competitive transition charge starting in 1999 and ending in 2005,
which is consistent with Penn's Rate Stability and Economic
Development Plan currently in effect. The PPUC plans to hold public
hearings on Penn's restructuring plan early in 1998.
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. We cannot predict when or if this legislation
will be introduced and if it will be passed into law. We continue
to study the potential effects that such legislation would have on
our financial position and results of operations.
The Financial Accounting Standards Board (FASB) issued a
proposed accounting standard for nuclear decommissioning costs in
February 1996. If the standard is adopted as proposed: (1) annual
provisions for decommissioning could increase; (2) the net present
value of estimated decommissioning costs could be recorded as a
liability; and (3) income from the external decommissioning trusts
could be reported as investment income. The FASB reported in
October 1997 that it plans to continue working on the proposal in
1998.
The Clean Air Act Amendments of 1990, discussed in Note
6, require additional emission reductions by 2000. We are pursuing
cost-effective compliance strategies for meeting the reduction
requirements that begin in 2000.
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.
We are utilizing both internal and external resources to
reprogram and/or replace and test the 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 $30 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 $4 million
will be expensed as incurred over the next two years. To date, we
have incurred approximately $0.5 million 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.
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING REVENUES $2,473,582 $2,469,785 $2,465,846
---------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 437,223 456,629 465,483
Nuclear operating costs 267,681 247,708 289,717
Other operating costs 446,778 420,523 446,967
---------- ---------- ----------
Total operation and maintenance expenses 1,151,682 1,124,860 1,202,167
Provision for depreciation 392,525 355,780 256,085
Amortization of net regulatory assets 37,416 27,661 5,825
General taxes 234,964 241,998 243,179
Income taxes 168,427 189,417 191,972
---------- ---------- ----------
Total operating expenses and taxes 1,985,014 1,939,716 1,899,228
---------- ---------- ----------
OPERATING INCOME 488,568 530,069 566,618
OTHER INCOME 52,847 37,537 14,424
---------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 541,415 567,606 581,042
---------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 204,285 211,935 243,570
Deferred nuclear unit interest - - (4,250)
Allowance for borrowed funds used during
construction and capitalized interest (2,699) (3,136) (5,668)
Other interest expense 31,209 28,211 22,944
Subsidiaries' preferred stock dividend requirements 15,426 15,426 7,205
---------- ---------- ----------
Net interest charges 248,221 252,436 263,801
---------- ---------- ----------
NET INCOME $293,194 $315,170 $317,241
PREFERRED STOCK DIVIDEND REQUIREMENTS 12,392 12,497 22,494
-------- -------- --------
EARNINGS ON COMMON STOCK $280,802 $302,673 $294,747
======== ======== ========
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
At December 31, 1997 1996
- -----------------------------------------------------------------------------------------
(In thousands)
ASSETS
<S> <C> <C>
UTILITY PLANT:
In service, at original cost $8,666,272 $8,634,030
Less--Accumulated provision for depreciation 3,546,594 3,226,259
---------- ----------
5,119,678 5,407,771
---------- ----------
Construction work in progress--
Electric plant 99,158 93,413
Nuclear fuel 21,360 5,786
---------- ----------
120,518 99,199
---------- ----------
5,240,196 5,506,970
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
PNBV Capital Trust (Note 3) 482,220 487,979
Letter of credit collateralization (Note 3) 277,763 277,763
Other (Note 4B) 529,408 323,316
---------- ----------
1,289,391 1,089,058
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 4,680 5,253
Receivables--
Customers (less accumulated provisions of
$5,618,000 and $2,306,000, respectively,
for uncollectible accounts) 235,332 247,027
Associated companies 25,348 -
Other 87,566 58,327
Materials and supplies, at average cost--
Owned 75,580 66,177
Under consignment 47,890 44,468
Prepayments and other 78,348 75,681
---------- ----------
554,744 496,933
---------- ----------
DEFERRED CHARGES:
Regulatory assets 1,601,709 1,703,111
Unamortized sale and leaseback costs 95,096 100,066
Property taxes 100,043 100,802
Other 96,276 57,517
---------- ----------
1,893,124 1,961,496
---------- ----------
$8,977,455 $9,054,457
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (See Consolidated Statements
of Capitalization):
Common stockholders' equity $2,724,319 $2,503,359
Preferred stock --
Not subject to mandatory redemption 160,965 160,965
Subject to mandatory redemption 15,000 20,000
Preferred stock of consolidated subsidiary--
Not subject to mandatory redemption 50,905 50,905
Subject to mandatory redemption 15,000 15,000
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely Company
subordinated debentures 120,000 120,000
Long-term debt 2,569,802 2,712,760
---------- ----------
5,655,991 5,582,989
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 278,492 333,667
Short-term borrowings (Note 5) 302,229 349,480
Accounts payable 115,836 93,509
Accrued taxes 157,095 142,909
Accrued interest 53,165 52,855
Other 115,256 131,275
---------- ----------
1,022,073 1,103,695
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 1,698,354 1,777,086
Accumulated deferred investment tax credits 184,804 199,835
Pensions and other postretirement benefits 158,038 123,446
Other 258,195 267,406
---------- ----------
2,299,391 2,367,773
---------- ----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES
(Notes 3 and 6 ) $8,977,455 $9,054,457
========== ==========
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these balance sheets.
</TABLE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<CAPTION>
At December 31, 1997 1996
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C>
COMMON STOCKHOLDERS' EQUITY:
Common stock, $9 par value, authorized 175,000,000 shares-100 shares
and 152,569,437 shares outstanding, respectively $ 1 $1,373,125
Other paid-in capital 2,102,644 727,602
Retained earnings (Note 4A) 621,674 557,642
Unallocated employee stock ownership plan common stock-
8,259,053 shares (Note 4B) - (155,010)
---------- ----------
Total common stockholders' equity 2,724,319 2,503,359
---------- ----------
Number of Shares Optional
Outstanding Redemption Price
------------------ --------------------
1997 1996 Per Share Aggregate
<S> <C> <C> <C> <C>
PREFERRED STOCK (Note 4C):
Cumulative, $100 par value-
Authorized 6,000,000 shares
Not Subject to Mandatory
Redemption:
3.90% 152,510 152,510 $103.63 $15,804 15,251 15,251
4.40% 176,280 176,280 108.00 19,038 17,628 17,628
4.44% 136,560 136,560 103.50 14,134 13,656 13,656
4.56% 144,300 144,300 103.38 14,917 14,430 14,430
---------- ---------- ------- ---------- ----------
609,650 609,650 63,893 60,965 60,965
Cumulative, $25 par value-
Authorized 8,000,000 shares
Not Subject to Mandatory
Redemption:
7.75% 4,000,000 4,000,000 100,000 100,000
---------- ---------- ------- ---------- ----------
Total not subject to
mandatory redemption 4,609,650 4,609,650 $63,893 160,965 160,965
========== ========== ======= ---------- ----------
Cumulative, $100 par value-
Subject to Mandatory
Redemption (Note 4D):
8.45% 200,000 250,000 20,000 25,000
Redemption within
one year (5,000) (5,000)
---------- ---------- --------- ----------
Total subject to
mandatory redemption 200,000 250,000 15,000 20,000
========== ========== --------- ----------
PREFERRED STOCK OF
CONSOLIDATED SUBSIDIARY
(Note 4C):
Pennsylvania Power Company
Cumulative, $100 par value-
Authorized 1,200,000 shares
Not Subject to Mandatory
Redemption:
4.24% 40,000 40,000 $103.13 $ 4,125 4,000 4,000
4.25% 41,049 41,049 105.00 4,310 4,105 4,105
4.64% 60,000 60,000 102.98 6,179 6,000 6,000
7.64% 60,000 60,000 101.42 6,085 6,000 6,000
7.75% 250,000 250,000 - - 25,000 25,000
8.00% 58,000 58,000 102.07 5,920 5,800 5,800
---------- ---------- ------- --------- ----------
Total not subject to
mandatory redemption 509,049 509,049 $26,619 50,905 50,905
========== ========== ======= --------- ----------
Subject to Mandatory
Redemption (Note 4D):
7.625% 150,000 150,000 $107.63 $16,145 15,000 15,000
========== ========== ======= ---------- ----------
COMPANY OBLIGATED MANDATOR-
ILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY COMPANY
SUBORDINATED DEBENTURES
(Note 4E):
Cumulative, $25 par value-
Authorized 4,800,000 shares
Subject to Mandatory
Redemption:
9.00% 4,800,000 4,800,000 120,000 120,000
========= ========= ---------- ----------
</TABLE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont.)
<CAPTION>
At December 31, 1997 1996 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT (Note 4F):
First mortgage bonds:
Ohio Edison Company-- Pennsylvania Power Company--
8.750% due 1998 150,000 150,000 9.740% due 1999-2019 20,000 20,000
6.875% due 1999 150,000 150,000 7.500% due 2003 40,000 40,000
6.375% due 2000 80,000 80,000 6.375% due 2004 20,500 37,000
7.375% due 2002 120,000 120,000 6.625% due 2004 14,000 20,000
7.500% due 2002 34,265 34,265 8.500% due 2022 27,250 27,250
8.250% due 2002 125,000 125,000 7.625% due 2023 6,500 6,500
------- -------
8.625% due 2003 150,000 150,000
6.875% due 2005 80,000 80,000
8.750% due 2022 50,960 50,960
7.625% due 2023 75,000 75,000
7.875% due 2023 100,000 100,000
--------- ---------
Total first mortgage
bonds. 1,115,225 1,115,225 128,250 150,750 1,243,475 1,265,975
--------- --------- ------- ------- ---------- ----------
Secured notes:
Ohio Edison Company-- Pennsylvania Power Company--
7.930% due 2002 50,646 60,467 4.750% due 1998 850 850
7.680% due 2005 200,000 200,000 6.080% due 2000 23,000 23,000
6.750% due 2015 40,000 40,000 5.400% due 2013 1,000 1,000
7.450% due 2016 47,725 47,725 5.400% due 2017 10,600 10,600
7.100% due 2018 26,000 26,000 7.150% due 2017 17,925 17,925
7.050% due 2020 60,000 60,000 5.900% due 2018 16,800 16,800
7.000% due 2021 69,500 69,500 8.100% due 2018 - 10,300
7.150% due 2021 443 443 8.100% due 2020 5,200 5,200
7.625% due 2023 50,000 50,000 7.150% due 2021 14,482 14,482
8.100% due 2023 30,000 30,000 6.150% due 2023 12,700 12,700
7.750% due 2024 108,000 108,000 3.900% due 2027 10,300 -
5.625% due 2029 50,000 50,000 6.450% due 2027 14,500 14,500
5.950% due 2029 56,212 56,212 5.450% due 2028 6,950 6,950
5.450% due 2033 14,800 14,800 6.000% due 2028 14,250 14,250
5.950% due 2029 238 238
--------- --------- ------- -------
803,326 813,147 148,795 148,795 952,121 961,942
--------- --------- ------- ------- ---------- ----------
OES Fuel--
5.86% weighted
average interest
rate 80,755 84,000
---------- ----------
Total secured notes 1,032,876 1,045,942
---------- ----------
Unsecured notes:
Ohio Edison Company--
7.430% due 1997 - 100,000
8.735% due 1997 - 50,000
6.088% due 1999 - 225,000
6.338% due 1999 40,000 -
6.400% due 1999 175,000 -
4.300% due 2012 50,000 50,000
4.350% due 2014 50,000 50,000
3.950% due 2015 50,000 50,000
4.100% due 2018 57,100 57,100
4.200% due 2018 56,000 56,000
4.050% due 2032 53,400 53,400
---------- ----------
Total unsecured notes 531,500 691,500
---------- ----------
Capital lease obligations (Note 3) 40,614 43,775
---------- ----------
Net unamortized discount on debt (5,171) (5,765)
---------- ----------
Long-term debt due within one year (273,492) (328,667)
---------- ----------
Total long-term debt 2,569,802 2,712,760
---------- ----------
TOTAL CAPITALIZATION $5,655,991 $5,582,989
========== ==========
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $557,642 $471,095 $389,600
Net income 293,194 315,170 317,241
-------- -------- --------
850,836 786,265 706,841
- --------------------------------------------------------------------------------
Cash dividends on preferred stock 12,392 12,497 20,234
Cash dividends on common stock 216,770 216,126 215,512
-------- -------- --------
229,162 228,623 235,746
-------- -------- --------
Balance at end of year (Note 4A) $621,674 $557,642 $471,095
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CAPITAL STOCK AND OTHER PAID-IN CAPITAL
<CAPTION>
Preferred Stock
-----------------------------------------
Unallo- Not Subject to Subject to
Common Stock cated Mandatory Redemption Mandatory Redemption
------------------------------ --------------------- --------------------
Other ESOP Par or Par or
Number Par Paid-In Common Number Stated Number Stated
of Shares Value Capital Stock of Shares Value of Shares Value
----------- ---------- -------- ---------- --------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995 152,569,437 $1,373,125 $ 724,848 $(170,376) 6,282,399 $328,240 400,000 $40,000
Minimum liability
for unfunded
retirement benefits 2,446
Allocation of ESOP
Shares 1,274 7,720
Sale of 9%
Preferred Stock 4,800,000 120,000
Redemptions--
7.24% Series (720) (363,700) (36,370)
7.36% Series (609) (350,000) (35,000)
8.20% Series (932) (450,000) (45,000)
- --------------------------------------------------------------------------------------------------------
Balance, December 31,
1995 152,569,437 1,373,125 726,307 (162,656) 5,118,699 211,870 5,200,000 160,000
Minimum liability
for unfunded
retirement benefits (51)
Allocation of ESOP
Shares 1,346 7,646
- --------------------------------------------------------------------------------------------------------
Balance, December 31,
1996 152,569,437 1,373,125 727,602 (155,010) 5,118,699 211,870 5,200,000 160,000
FirstEnergy merger(152,569,337)(1,373,124) 1,373,124 146,977
Minimum liability
for unfunded
retirement benefits 44
Allocation of
ESOP Shares 1,874 8,033
Redemptions--
8.45% Series (50,000) (5,000)
- --------------------------------------------------------------------------------------------------------
Balance, December 31,
1997 100 $ 1 $2,102,644 $ - 5,118,699 $211,870 5,150,000 $155,000
=========================================================================================================
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $293,194 $315,170 $317,241
Adjustments to reconcile net income to net
cash from operating activities:
Provision for depreciation 392,525 355,780 256,085
Nuclear fuel and lease amortization 49,251 52,784 70,849
Other amortization, net 36,229 25,961 5,885
Deferred income taxes, net (40,478) 41,365 53,395
Investment tax credits, net (15,031) (14,041) (9,951)
Receivables (23,887) 24,326 (20,452)
Materials and supplies (10,557) (736) 12,428
Accounts payable 32,531 962 3,545
Other 22,943 (41,254) 64,189
-------- -------- --------
Net cash provided from operating activities 736,720 760,317 753,214
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Preferred stock - - 120,000
Long-term debt 89,773 306,313 254,365
Short-term borrowings, net - 229,515 -
Redemptions and Repayments-
Preferred stock 5,000 1,016 117,528
Long-term debt 292,409 438,916 499,276
Short-term borrowings, net 47,251 - 54,677
Dividend Payments-
Common stock 237,848 218,656 217,192
Preferred stock 12,559 12,560 20,623
-------- -------- --------
Net cash used for financing activities 505,294 135,320 534,931
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 179,328 148,189 198,103
PNBV capital trust investment - 487,979 -
Other 52,671 13,406 13,641
-------- -------- --------
Net cash used for investing activities 231,999 649,574 211,744
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (573) (24,577) 6,539
Cash and cash equivalents at beginning of year 5,253 29,830 23,291
-------- -------- --------
Cash and cash equivalents at end of year $ 4,680 $ 5,253 $ 29,830
======== ======== ========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash Paid During the Year-
Interest (net of amounts capitalized) $212,987 $224,541 $254,789
======== ======== ========
Income taxes $228,399 $157,477 $178,643
======== ======== ========
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF TAXES
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
GENERAL TAXES:
Real and personal property $ 114,111 $ 115,443 $ 118,707
State gross receipts 99,262 104,158 100,591
Social security and unemployment 14,113 14,602 15,787
Other 7,478 7,795 8,094
---------- ---------- ----------
Total general taxes $ 234,964 $ 241,998 $ 243,179
========== ========== ==========
PROVISION FOR INCOME TAXES:
Currently payable-
Federal $ 225,529 $ 164,132 $ 145,511
State 17,784 9,839 10,352
---------- ---------- ----------
243,313 173,971 155,863
---------- ---------- ----------
Deferred, net-
Federal (34,429) 37,277 50,631
State (6,048) 4,088 2,764
---------- ---------- ----------
(40,477) 41,365 53,395
---------- ---------- ----------
Investment tax credit amortization (15,031) (14,041) (9,951)
---------- ---------- ----------
Total provision for income taxes $ 187,805 $ 201,295 $ 199,307
========== ========== ==========
INCOME STATEMENT CLASSIFICATION
OF PROVISION FOR INCOME TAXES:
Operating income $ 168,427 $ 189,417 $ 191,972
Other income 19,378 11,878 7,335
---------- ---------- ----------
Total provision for income taxes $ 187,805 $ 201,295 $ 199,307
========== ========== ==========
RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT
STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES:
Book income before provision for income taxes $ 480,999 $ 516,465 $ 516,548
========== ========== ==========
Federal income tax expense at statutory rate $ 168,350 $ 180,763 $ 180,792
Increases (reductions) in taxes resulting from-
Amortization of investment tax credits (15,031) (14,041) (9,951)
State income taxes net of federal income tax benefit 7,628 9,053 8,525
Amortization of tax regulatory assets 28,277 26,945 19,690
Other, net (1,419) (1,425) 251
---------- ---------- -----------
Total provision for income taxes $ 187,805 $ 201,295 $ 199,307
========== ========== ==========
ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31:
Property basis differences $1,019,952 $1,086,533 $1,047,387
Allowance for equity funds used during construction 210,136 233,345 263,465
Deferred nuclear expense 252,946 262,123 271,114
Customer receivables for future income taxes 177,578 191,537 204,978
Deferred sale and leaseback costs 74,861 78,607 82,381
Unamortized investment tax credits (67,208) (72,663) (77,777)
Other 30,089 (2,396) (19,114)
---------- ---------- ----------
Net deferred income tax liability $1,698,354 $1,777,086 $1,772,434
========== ========== ==========
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements include Ohio
Edison Company (Company), and its wholly owned subsidiaries.
Pennsylvania Power Company (Penn) is the Company's principal
operating subsidiary. All significant intercompany transactions
have been eliminated. The Company became a wholly owned
subsidiary of FirstEnergy Corp. on November 8, 1997. The Company
and Penn (Companies) follow the accounting policies and practices
prescribed by the Public Utilities Commission of Ohio (PUCO), the
Pennsylvania Public Utility Commission (PPUC) and the Federal
Energy Regulatory Commission (FERC). The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make periodic estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Certain prior year amounts
have been reclassified to conform with the current year
presentation.
REVENUES-
The Companies' principal business is providing electric
service to customers in central and northeastern Ohio and western
Pennsylvania. The Companies' retail customers are metered on a
cycle basis. Revenue is recognized for unbilled electric service
through the end of the year.
Receivables from customers include sales to
residential, commercial and industrial customers located in the
Companies' service area and sales to wholesale customers. There
was no material concentration of receivables at December 31, 1997
or 1996, with respect to any particular segment of the Companies'
customers.
REGULATORY PLANS-
The Company's Rate Reduction and Economic Development
Plan was approved by the PUCO in 1995 and Penn's Rate Stability
and Economic Development Plan was approved by the PPUC in the
second quarter of 1996. These regulatory plans initially maintain
current base electric rates for the Company and Penn through
December 31, 2005 and June 20, 2006, respectively. At the end of
the regulatory plan period, the Company's base rates will be
reduced by $300 million (approximately 20 percent below current
levels). The plans also revised the Companies' fuel cost recovery
methods. The Companies formerly recovered fuel-related costs not
otherwise included in base rates from retail customers through
separate energy rates. In accordance with the respective
regulatory plans, the Company's fuel rate will be frozen through
the regulatory plan period, subject to limited periodic
adjustments; Penn's plan provided for the roll-in to base rates
of its fuel rate. As part of the Company's regulatory plan,
transition rate credits were implemented for customers, which are
expected to reduce operating revenues for the Company by
approximately $600 million during the regulatory plan period.
All of the Companies' regulatory assets are being
recovered under provisions of the regulatory plans. In addition,
the PUCO has authorized the Company to recognize additional
capital recovery related to its generating assets (which is
reflected as additional depreciation expense) and additional
amortization of regulatory assets during the regulatory plan
period of at least $2 billion, and the PPUC has authorized Penn
to accelerate at least $358 million, more than the amounts that
would have been recognized if the regulatory plans were not in
effect. These additional amounts are being recovered through
current rates. As of December 31, 1997, the Companies' cumulative
additional capital recovery and regulatory asset amortization
amounted to $427 million.
UTILITY PLANT AND DEPRECIATION-
Utility plant reflects the original cost of
construction, including payroll and related costs such as taxes,
employee benefits, administrative and general costs and financing
costs (allowance for funds used during construction).
The Companies provide for depreciation on a straight-
line basis at various rates over the estimated lives of property
included in plant in service. The annual composite rate for
electric plant was approximately 3.0% in 1997, 1996, and 1995. In
addition to the straight-line depreciation recognized in 1997,
1996 and 1995, the Companies recognized additional capital
recovery of $172 million, $144 million and $27 million,
respectively, as additional depreciation expense in accordance
with their regulatory plans. Such additional charges in the
accumulated provision for depreciation were $343 million and $171
million as of December 31, 1997 and 1996, respectively.
Annual depreciation expense includes approximately $8.8
million for future decommissioning costs applicable to the
Companies' ownership and leasehold interests in three nuclear
generating units. The Companies' share of the future obligation
to decommission these units is approximately $481 million in
current dollars and (using a 3.5% escalation rate) approximately
$1.2 billion in future dollars. The estimated obligation and the
escalation rate were developed based on site specific studies.
Payments for decommissioning are expected to begin in 2016, when
actual decommissioning work begins. The Companies have recovered
approximately $72 million for decommissioning through their
electric rates from customers through December 31, 1997. If the
actual costs of decommissioning the units exceed the funds
accumulated from investing amounts recovered from customers, the
Companies expect that additional amount to be recoverable from
their customers. The Companies have approximately $109.9 million
invested in external decommissioning trust funds as of
December 31, 1997. Earnings on these funds are reinvested with a
corresponding increase to the decommissioning liability. The
Companies have also recognized an estimated liability of
approximately $15.2 million related to decontamination and
decommissioning of nuclear enrichment facilities operated by the
United States Department of Energy (DOE), as required by the
Energy Policy Act of 1992.
The Financial Accounting Standards Board (FASB) issued
a proposed accounting standard for nuclear decommissioning costs
in February 1996. If the standard is adopted as proposed: (1)
annual provisions for decommissioning could increase; (2) the net
present value of estimated decommissioning costs could be
recorded as a liability; and (3) income from the external
decommissioning trusts could be reported as investment income.
The FASB indicated in October 1997 that it plans to continue work
on the proposal.
COMMON OWNERSHIP OF GENERATING FACILITIES-
The Companies, together with the other FirstEnergy
Corp. (FirstEnergy) utilities, The Cleveland Electric
Illuminating Company (CEI) and The Toledo Edison Company (TE),
and Duquesne Light Company constitute the Central Area Power
Coordination Group (CAPCO). The CAPCO companies own and/or lease,
as tenants in common, various power generating facilities. Each
of the companies is obligated to pay a share of the costs
associated with any jointly owned facility in the same proportion
as its interest. The Companies' portions of operating expenses
associated with jointly owned facilities are included in the
corresponding operating expenses on the Consolidated Statements
of Income. The amounts reflected on the Consolidated Balance
Sheet under utility plant at December 31, 1997, include the
following:
<TABLE>
<CAPTION>
Companies'
Utility Accumulated Construction Ownership/
Plant Provision for Work in Leasehold
Generating Units in Service Depreciation Progress Interest
- ----------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
W.H. Sammis #7 $ 305.5 $ 100.8 $ .8 68.80%
Bruce Mansfield #1,
#2 and #3 786.3 380.3 2.1 50.68%
Beaver Valley
#1 and #2 1,900.0 651.7 3.9 47.11%
Perry 1,837.0 720.4 3.1 35.24%
- ----------------------------------------------------------------------------
Total $4,828.8 $1,853.2 $9.9
- ----------------------------------------------------------------------------
</TABLE>
NUCLEAR FUEL-
Nuclear fuel is recorded at original cost, which
includes material, enrichment, fabrication and interest costs
incurred prior to reactor load. The Companies amortize the cost
of nuclear fuel based on the rate of consumption. The Companies'
electric rates include amounts for the future disposal of spent
nuclear fuel based upon the formula used to compute payments to
the DOE.
INCOME TAXES-
Details of the total provision for income taxes are
shown on the Consolidated Statements of Taxes. Deferred income
taxes result from timing differences in the recognition of
revenues and expenses for tax and accounting purposes. Investment
tax credits, which were deferred when utilized, are being
amortized over the recovery period of the related property. The
liability method is used to account for deferred income taxes.
Deferred income tax liabilities related to tax and accounting
basis differences are recognized at the statutory income tax
rates in effect when the liabilities are expected to be paid.
RETIREMENT BENEFITS-
The Companies' trusteed, noncontributory defined
benefit pension plans cover almost all full-time employees. Upon
retirement, employees receive a monthly pension based on length
of service and compensation. The Companies use the projected unit
credit method for funding purposes and were not required to make
pension contributions during the three years ended December 31,
1997.
The following sets forth the funded status of the plans
and amounts recognized on the Consolidated Balance Sheets as of
December 31:
1997 1996
- -----------------------------------------------------------------
(In millions)
Actuarial present value of benefit
obligations:
Vested benefits $ 677.4 $ 562.0
Nonvested benefits 29.9 38.9
- ----------------------------------------------------------------
Accumulated benefit obligation $ 707.3 $ 600.9
================================================================
Plan assets at fair value $1,080.6 $ 946.3
Actuarial present value of projected
benefit obligation 794.1 688.5
- ----------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 286.5 257.8
Unrecognized net gain (139.5) (106.2)
Unrecognized prior service cost 21.0 20.1
Unrecognized net transition asset (25.9) (33.9)
- ----------------------------------------------------------------
Net pension asset $ 142.1 $ 137.8
================================================================
The assets of the plans consist primarily of common
stocks, United States government bonds and corporate bonds. Net
pension costs for the three years ended December 31, 1997, were
computed as follows:
1997 1996 1995
- ----------------------------------------------------------------
(In millions)
Service cost-benefits earned
during the period $ 12.9 $ 14.2 $ 12.8
Interest on projected benefit
obligation 49.8 49.3 48.1
Return on plan assets (188.8) (141.6) (194.5)
Net deferral 90.1 52.7 118.7
Voluntary early retirement
program expense 31.5 12.5 -
Gain on plan curtailment - (12.8) -
- ----------------------------------------------------------------
Net pension cost $ (4.5) $ (25.7) $ (14.9)
================================================================
The assumed discount rates used in determining the
actuarial present value of the projected benefit obligation were
7.25% in 1997 and 7.5% in 1996 and 1995. The assumed rates of
increase in future compensation levels used to measure this
obligation were 4.0% in 1997 and 4.5% in 1996 and 1995. Expected
long-term rates of return on plan assets were assumed to be 10%
in 1997, 1996 and 1995.
The Companies provide a minimum amount of
noncontributory life insurance to retired employees in addition
to optional contributory insurance. Health care benefits, which
include certain employee deductibles and copayments, are also
available to retired employees, their dependents and, under
certain circumstances, their survivors. The Companies pay
insurance premiums to cover a portion of these benefits in excess
of set limits; all amounts up to the limits are paid by the
Companies. The Companies recognize the expected cost of providing
other postretirement benefits to employees and their
beneficiaries and covered dependents from the time employees are
hired until they become eligible to receive those benefits.
In accordance with Statement of Financial Accounting
Standards (SFAS) No. 88 "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," the 1996 net pension costs shown above and
the 1996 postretirement benefit costs shown below included
curtailment effects (significant changes in projected plan
assumptions) relating to the pension and postretirement benefit
plans. The employee terminations reflected in the Companies' 1996
voluntary early retirement program represented a plan curtailment
that significantly reduced the expected future employee service
years and the related accrual of defined pension and
postretirement benefits. In the pension plan, the reduction in
the benefit obligation increased the net pension asset and was
shown as a plan curtailment gain. In the postretirement benefit
plan, the unrecognized prior service cost associated with service
years no longer expected to be rendered as a result of the
terminations, was shown as a plan curtailment loss.
The following sets forth the funded status of the plans
and amounts recognized on the Consolidated Balance Sheets as of
December 31:
1997 1996
- ----------------------------------------------------------------
(In millions)
Accumulated postretirement benefit
obligation allocation:
Retirees $174.9 $155.5
Fully eligible active plan participants 15.8 10.1
Other active plan participants 76.9 75.5
- ----------------------------------------------------------------
Accumulated postretirement benefit obligation 267.6 241.1
Plan assets at fair value 2.8 2.0
- ----------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets 264.8 239.1
Unrecognized transition obligation (125.1) (133.5)
Unrecognized net loss (24.0) (7.4)
- ----------------------------------------------------------------
Net postretirement benefit liability $115.7 $ 98.2
================================================================
Net periodic postretirement benefit costs for the three
years ended December 31, 1997, were computed as follows:
1997 1996 1995
- ----------------------------------------------------------------
(In millions)
Service cost-benefits attributed to
the period $ 4.1 $ 4.3 $ 4.5
Interest cost on accumulated
benefit obligation 17.6 17.4 21.1
Amortization of transition
obligation 8.3 8.8 10.2
Amortization of loss - .1 .1
Voluntary early retirement program
expense 1.9 .5 -
Loss on plan curtailment - 13.1 -
- -----------------------------------------------------------------
Net periodic postretirement
benefit cost $31.9 $44.2 $35.9
================================================================
The health care trend rate assumption is 6.0% in the
first year gradually decreasing to 4.0% for the year 2008 and
later. The discount rates used to compute the accumulated
postretirement benefit obligation were 7.25% in 1997 and 7.5% in
1996 and 1995. An increase in the health care trend rate
assumption by one percentage point in all years would increase
the accumulated postretirement benefit obligation by
approximately $34.6 million and the aggregate annual service and
interest costs by approximately $3.1 million.
TRANSACTIONS WITH AFFILIATED COMPANIES-
Operating revenues and operating expenses include
amounts for affiliated transactions with CEI and TE since the
November 8, 1997 merger date. The Company's transactions with CEI
and TE from the merger date were primarily for electric sales.
The amounts related to CEI and TE were $4.3 million and $0.4
million, respectively.
SUPPLEMENTAL CASH FLOWS INFORMATION-
All temporary cash investments purchased with an
initial maturity of three months or less are reported as cash
equivalents on the Consolidated Balance Sheets. The Companies
reflect temporary cash investments at cost, which approximates
their market value. Noncash financing and investing activities
included capital lease transactions amounting to $3.0 million,
$2.0 million and $1.0 million for the years 1997, 1996 and 1995,
respectively. Commercial paper transactions of OES Fuel (a wholly
owned subsidiary of the Company) that have initial maturity
periods of three months or less are reported net within financing
activities under long-term debt and are reflected as long-term
debt on the Consolidated Balance Sheets (see Note 4F).
All borrowings with initial maturities of less than one
year are defined as financial instruments under generally
accepted accounting principles and are reported on the
Consolidated Balance Sheets at cost, which approximates their
fair market value. The following sets forth the approximate fair
value and related carrying amounts of all other long-term debt,
preferred stock subject to mandatory redemption and investments
other than cash and cash equivalents as of December 31:
1997 1996
---------------- ---------------
Carrying Fair Carrying Fair
Value Value Value Value
- ----------------------------------------------------------------
(In millions)
Long-term debt $2,727 $2,835 $2,919 $2,963
Preferred stock $ 155 $ 161 $ 160 $ 160
Investments other than
cash and cash equivalents:
Debt securities
- Maturity (5-10 years) $ 486 $ 512 $ 364 $ 364
- Maturity (more than
10 years) 259 294 387 390
Equity securities 14 14 14 14
All other 145 147 104 102
---------------------------------------------------------------
$ 904 $ 967 $ 869 $ 870
================================================================
The fair values of long-term debt and preferred stock
reflect the present value of the cash outflows relating to those
securities based on the current call price, the yield to maturity
or the yield to call, as deemed appropriate at the end of each
respective year. The yields assumed were based on securities with
similar characteristics offered by a corporation with credit
ratings similar to the Companies' ratings.
The fair value of investments other than cash and cash
equivalents represent cost (which approximates fair value) or the
present value of the cash inflows based on the yield to maturity.
The yields assumed were based on financial instruments with
similar characteristics and terms. Investments other than cash
and cash equivalents include decommissioning trust investments.
Unrealized gains and losses applicable to the decommissioning
trust have been recognized in the trust investment with a
corresponding change to the decommissioning liability. The other
debt and equity securities referred to above are in the held-to-
maturity category. The Companies have no securities held for
trading purposes.
REGULATORY ASSETS-
The Companies recognize, as regulatory assets, costs
which the FERC, PUCO and PPUC have authorized for recovery from
customers in future periods. Without such authorization, the
costs would have been charged to income as incurred. All
regulatory assets are being recovered from customers under the
Companies' respective regulatory plans. Based on those regulatory
plans, at this time, the Companies believe they will continue to
be able to bill and collect cost-based rates; accordingly, it is
appropriate that the Companies continue the application of SFAS
No. 71 "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71). However, based on the regulatory
environment in Pennsylvania, Penn is expected to discontinue its
application of SFAS 71 for its generation operations, possibly as
early as 1998. The impact of Penn discontinuing SFAS 71 is not
expected to be material. The Companies also recognized additional
cost recovery of $39 million, $34 million and $11 million in
1997, 1996 and 1995, respectively, as additional regulatory asset
amortization in accordance with their regulatory plans.
Regulatory assets on the Consolidated Balance Sheets
are comprised of the following:
At December 31, 1997 1996
- ---------------------------------------------------------------
(In millions)
Nuclear unit expenses $ 707.7 $ 733.4
Customer receivables for future
income taxes 484.7 523.0
Sale and leaseback costs 210.3 220.8
Loss on reacquired debt 89.1 95.8
Employee postretirement benefit costs 25.9 29.2
Uncollectible customer accounts 18.9 29.8
Perry Unit 2 termination 36.7 40.4
DOE decommissioning and
decontamination costs 16.5 18.0
Other 11.9 12.7
- ---------------------------------------------------------------
Total $1,601.7 $1,703.1
===============================================================
2. MERGER:
FirstEnergy was formed on November 8, 1997, by the
merger of the Company and Centerior Energy Corporation
(Centerior). FirstEnergy holds directly all of the issued and
outstanding common shares of the Company and all of the issued
and outstanding common shares of Centerior's former direct
subsidiaries, which include, among others, CEI and TE. As a
result of the merger, the former common shareholders of the
Company and Centerior now own all of the outstanding shares of
FirstEnergy Common Stock. All other classes of capital stock of
the Company and its subsidiaries and of the subsidiaries of
Centerior are unaffected by the Merger and remain outstanding.
3. LEASES:
The Companies lease certain generating facilities,
certain transmission facilities, office space and other property
and equipment under cancelable and noncancelable leases.
The Company sold portions of its ownership interests in
Perry Unit 1 and Beaver Valley Unit 2 and entered into operating
leases on the portions sold for basic lease terms of
approximately 29 years. During the terms of the leases the
Company continues to be responsible, to the extent of its
individual combined ownership and leasehold interests, for costs
associated with the units including construction expenditures,
operation and maintenance expenses, insurance, nuclear fuel,
property taxes and decommissioning. The Company has the right, at
the end of the respective basic lease terms, to renew the leases
for up to two years. The Company also has the right to purchase
the facilities at the expiration of the basic lease term or
renewal term (if elected) at a price equal to the fair market
value of the facilities. The basic rental payments are adjusted
when applicable federal tax law changes.
OES Finance, Incorporated (OES Finance), a wholly owned
subsidiary of the Company, maintains deposits pledged as
collateral to secure reimbursement obligations relating to
certain letters of credit supporting the Company's obligations to
lessors under the Beaver Valley Unit 2 sale and leaseback
arrangements. The deposits pledged to the financial institution
providing those letters of credit are the sole property of OES
Finance. In the event of liquidation, OES Finance, as a separate
corporate entity, would have to satisfy its obligations to
creditors before any of its assets could be made available to the
Company as sole owner of OES Finance common stock.
Consistent with the regulatory treatment, the rentals
for capital and operating leases are charged to operating
expenses on the Consolidated Statements of Income. Such costs for
the three years ended December 31, 1997, are summarized as
follows:
1997 1996 1995
- ------------------------------------------------------------
(In millions)
Operating leases
Interest element $111.3 $107.6 $104.6
Other 23.2 18.3 13.9
Capital leases
Interest element 6.1 6.5 7.0
Other 6.0 6.3 6.6
- -------------------------------------------------------------
Total rentals $146.6 $138.7 $132.1
=============================================================
The future minimum lease payments as of December 31,
1997, are:
<TABLE>
<CAPTION>
Operating Leases
--------------------------------------
Capital Lease PNBV Capital
Leases Payments Trust Income Net
- --------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
1998 $ 13.8 $ 120.9 $ 38.4 $ 82.5
1999 11.7 125.8 38.0 87.8
2000 10.3 125.0 37.6 87.4
2001 9.7 127.6 36.2 91.4
2002 9.2 127.8 34.5 93.3
Years thereafter 80.0 1,979.6 249.4 1,730.2
- -------------------------------------------------------------------------------
Total minimum lease payments 134.7 $2,606.7 $ 434.1 $2,172.6
======== ======= ========
Executory costs 36.0
- -------------------------------------
Net minimum lease payments 98.7
Interest portion 58.1
- -------------------------------------
Present value of net minimum
lease payments 40.6
Less current portion 4.9
- -------------------------------------
Noncurrent portion $ 35.7
=====================================
</TABLE>
The Company invested in the PNBV Capital Trust in the
third quarter of 1996. The Trust was established to purchase a
portion of the lease obligation bonds issued on behalf of lessors
in the Company's Perry Unit 1 and Beaver Valley Unit 2 sale and
leaseback transactions. As noted in the table above, the PNBV
Capital Trust income, which is included in Other Income in the
Consolidated Statements of Income, effectively reduces lease
costs related to those transactions.
4. CAPITALIZATION:
(A) RETAINED EARNINGS-
Under the Company's first mortgage indenture, the
Company's consolidated retained earnings unrestricted for payment
of cash dividends on the Company's common stock were $554.9
million at December 31, 1997.
(B) EMPLOYEE STOCK OWNERSHIP PLAN-
The Companies fund the matching contribution for their
401(k) savings plan through an ESOP Trust. All full-time
employees eligible for participation in the 401(k) savings plan
are covered by the ESOP. The ESOP borrowed $200 million from the
Company and acquired 10,654,114 shares of the Company's common
stock through market purchases; the shares were converted into
FirstEnergy's common stock in connection with the merger. The
ESOP loan, which was shown as a reduction to common equity on the
Consolidated Balance Sheet as of December 31, 1996, is included
in Other Property and Investments on the Consolidated Balance
Sheet as of December 31, 1997 as an investment with FirstEnergy
related to the FirstEnergy savings plan. Dividends on ESOP shares
are used to service the debt. Shares are released from the ESOP
on a pro-rata basis as debt service payments are made. In 1997,
1996 and 1995, 429,515 shares, 404,522 shares and 412,914 shares,
respectively, were allocated to the Companies' employees with the
corresponding expense recognized based on the shares allocated
method. Total ESOP-related compensation expense was calculated as
follows:
1997 1996 1995
- --------------------------------------------------------------
(In millions)
Base compensation $ 9.9 $ 9.0 $ 9.0
Dividends on common stock
held by the ESOP and
used to service debt (3.4) (2.9) (2.5)
- ---------------------------------------------------------------
Net expense $ 6.5 $ 6.1 $ 6.5
===============================================================
(C) PREFERRED STOCK-
Penn's 7.75% series of preferred stock has a
restriction which prevents early redemption prior to July 2003.
The Company's 8.45% series of preferred stock has no optional
redemption provision, and its 7.75% series is not redeemable
before April 1998. All other preferred stock may be redeemed by
the Companies in whole, or in part, with 30-60 days' notice.
(D) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION-
The Company's 8.45% series of preferred stock has an
annual sinking fund requirement for 50,000 shares that began on
September 16, 1997. Penn's 7.625% series has an annual sinking
fund requirement for 7,500 shares beginning on October 1, 2002.
The Companies' preferred shares are retired at $100 per
share plus accrued dividends. Annual sinking fund requirements
are $5 million in each year 1998-2001 and $1 million in 2002.
(E) COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY
SUBORDINATED DEBENTURES-
Ohio Edison Financing Trust, a wholly owned subsidiary
of the Company, has issued $120 million of 9% Cumulative Trust
Preferred Capital Securities. The Company purchased all of the
Trust's Common Securities and simultaneously issued to the Trust
$123.7 million principal amount of 9% Junior Subordinated
Debentures due 2025 in exchange for the proceeds that the Trust
received from its sale of Preferred and Common Securities. The
sole assets of the Trust are the Subordinated Debentures whose
interest and other payment dates coincide with the distribution
and other payment dates on the Trust Securities. Under certain
circumstances the Subordinated Debentures could be distributed to
the holders of the outstanding Trust Securities in the event the
Trust is liquidated. The Subordinated Debentures may be
optionally redeemed by the Company beginning December 31, 2000,
at a redemption price of $25 per Subordinated Debenture plus
accrued interest, in which event the Trust Securities will be
redeemed on a pro-rata basis at $25 per share plus accumulated
distributions. The Company's obligations under the Subordinated
Debentures along with the related Indenture, amended and restated
Trust Agreement, Guarantee Agreement and the Agreement for
expenses and liabilities, constitute a full and unconditional
guarantee by the Company of payments due on the Preferred
Securities.
(F) LONG-TERM DEBT-
The first mortgage indentures and their supplements,
which secure all of the Companies' first mortgage bonds, serve as
direct first mortgage liens on substantially all property and
franchises, other than specifically excepted property, owned by
the Companies.
Based on the amount of bonds authenticated by the
Trustee through December 31, 1997, the Company's annual sinking
and improvement fund requirement for all bonds issued under the
mortgage amounts to $30 million. The Company expects to deposit
funds in 1998 that will be withdrawn upon the surrender for
cancellation of a like principal amount of bonds, which are
specifically authenticated for such purposes against unfunded
property additions or against previously retired bonds. This
method can result in minor increases in the amount of the annual
sinking fund requirement.
Sinking fund requirements for first mortgage bonds and
maturing long-term debt (excluding capital leases) for the next
five years are:
(In millions)
- -------------------------------------------------------
1998 $268.6
1999 617.2
2000 166.5
2001 14.5
2002 324.4
- --------------------------------------------------------
The Companies' obligations to repay certain pollution
control revenue bonds are secured by several series of first
mortgage bonds and, in some cases, by subordinate liens on the
related pollution control facilities. Certain pollution control
revenue bonds are entitled to the benefit of irrevocable bank
letters of credit of $338.8 million. To the extent that drawings
are made under those letters of credit to pay principal of, or
interest on, the pollution control revenue bonds, the Company is
entitled to a credit against their obligation to repay those
bonds. The Company pays annual fees of 0.43% to 0.625% of the
amounts of the letters of credit to the issuing banks and are
obligated to reimburse the banks for any drawings thereunder.
The Company had unsecured borrowings of $215 million at
December 31, 1997, which are supported by a $250 million long-
term revolving credit facility agreement which expires
December 30, 1999. The Company must pay an annual facility fee of
0.20% on the total credit facility amount. In addition, the
credit agreement provides that the Company maintain unused first
mortgage bond capability for the full credit agreement amount
under the Company's indenture as potential security for the
unsecured borrowings.
Nuclear fuel purchases are financed through the
issuance of OES Fuel commercial paper and loans, both of which
are supported by a $225 million long-term bank credit agreement
which expires March 31, 1999. Accordingly, the commercial paper
and loans are reflected as long-term debt on the Consolidated
Balance Sheets. OES Fuel must pay an annual facility fee of
0.1875% on the total line of credit and an annual commitment fee
of 0.0625% on any unused amount.
5. SHORT-TERM BORROWINGS AND BANK LINES OF CREDIT:
Short-term borrowings outstanding at December 31, 1997,
consisted of $182.2 million of bank borrowings and $120.0 million
of OES Capital, Incorporated commercial paper. OES Capital is a
wholly owned subsidiary of the Company whose borrowings are
secured by customer accounts receivable. OES Capital can borrow
up to $120 million under a receivables financing agreement at
rates based on certain bank commercial paper and is required to
pay an annual fee of 0.26% on the amount of the entire finance
limit. The receivables financing agreement expires in 1999.
The Companies have lines of credit with domestic banks
that provide for borrowings of up to $77 million under various
interest rate options. Short-term borrowings may be made under
these lines of credit on their unsecured notes. To assure the
availability of these lines, the Companies are required to pay
annual commitment fees that vary from 0.22% to 0.50%. These lines
expire at various times during 1998. The weighted average
interest rates on short-term borrowings outstanding at December
31, 1997 and 1996, were 6.02% and 5.77%, respectively.
6. COMMITMENTS, GUARANTEES AND CONTINGENCIES:
CAPITAL EXPENDITURES-
The Companies' current forecasts reflect expenditures
of approximately $600 million for property additions and
improvements from 1998-2002, of which approximately $165 million
is applicable to 1998. Investments for additional nuclear fuel
during the 1998-2002 period are estimated to be approximately
$206 million, of which approximately $26 million applies to 1998.
During the same periods, the Companies' nuclear fuel investments
are expected to be reduced by approximately $182 million and $41
million, respectively, as the nuclear fuel is consumed.
NUCLEAR INSURANCE-
The Price-Anderson Act limits the public liability
relative to a single incident at a nuclear power plant to $8.92
billion. The amount is covered by a combination of private
insurance and an industry retrospective rating plan. Based on
their present ownership and leasehold interests in the Beaver
Valley Station and the Perry Plant, the Companies' maximum
potential assessment under the industry retrospective rating plan
(assuming the other co-owners contribute their proportionate
shares of any assessments under the retrospective rating plan)
would be $102.8 million per incident but not more than $13
million in any one year for each incident.
The Companies are also insured as to their respective
interests in the Beaver Valley Station and the Perry Plant under
policies issued to the operating company for each plant. Under
these policies, up to $2.75 billion is provided for property
damage and decontamination and decommissioning costs. The
Companies have also obtained approximately $232 million of
insurance coverage for replacement power costs for their
respective interests in Perry and Beaver Valley. Under these
policies, the Companies can be assessed a maximum of
approximately $13 million for incidents at any covered nuclear
facility occurring during a policy year which are in excess of
accumulated funds available to the insurer for paying losses.
The Companies intend to maintain insurance against
nuclear risks as described above as long as it is available. To
the extent that replacement power, property damage,
decontamination, decommissioning, repair and replacement costs
and other such costs arising from a nuclear incident at any of
the Companies' plants exceed the policy limits of the insurance
in effect with respect to that plant, to the extent a nuclear
incident is determined not to be covered by the Companies'
insurance policies, or to the extent such insurance becomes
unavailable in the future, the Companies would remain at risk for
such costs.
GUARANTEES-
The CAPCO companies have each severally guaranteed
certain debt and lease obligations in connection with a coal
supply contract for the Bruce Mansfield Plant. As of December 31,
1997, the Companies' shares of the guarantees (which approximate
fair market value) were $43.4 million. The price under the coal
supply contract, which includes certain minimum payments, has
been determined to be sufficient to satisfy the debt and lease
obligations. The Companies' total payments under the coal supply
contract were $119.5 million, $113.8 million and $120.0 million
during 1997, 1996 and 1995, respectively. The Companies' minimum
annual payments are approximately $35 million under the contract,
which expires December 31, 1999.
ENVIRONMENTAL MATTERS-
Various federal, state and local authorities regulate
the Companies with regard to air and water quality and other
environmental matters. The Companies estimate additional capital
expenditures for environmental compliance of approximately $27
million, which is included in the construction forecast provided
under "Capital Expenditures" for 1998 through 2002.
The Companies are in compliance with the current sulfur
dioxide (SO2) and nitrogen oxides (NOX) reduction requirements
under the Clean Air Act Amendments of 1990. SO2 reductions
through the year 1999 will be achieved by burning lower-sulfur
fuel, generating more electricity from lower-emitting plants,
and/or purchasing emission allowances. Plans for complying with
reductions required for the year 2000 and thereafter have not
been finalized. The Environmental Protection Agency (EPA) is
conducting additional studies which could indicate the need for
additional NOX reductions from the Companies' Pennsylvania
facilities by the year 2003. In addition, the EPA is also
considering the need for additional NOX reductions from the
Companies' Ohio facilities. On November 7, 1997, the EPA proposed
uniform reductions of NOX emissions across a region of twenty-two
states, including Ohio and the District of Columbia (NOX
Transport Rule) after determining that such NOX emissions are
contributing significantly to ozone pollution in the eastern
United States. In a separate but related action, eight states
filed petitions with the EPA under Section 126 of the Clean Air
Act seeking reductions of NOX emissions which are alleged to
contribute to ozone pollution in the eight petitioning states. A
December 1997 EPA Memorandum of Agreement proposes to finalize
the NOX Transport Rule by September 30, 1998, and establishes a
schedule for EPA action on the Section 126 petitions. The cost of
NOX reductions, if required, may be substantial. The Companies
continue to evaluate their compliance plans and other compliance
options.
The Companies are required to meet federally approved
SO2 regulations. Violations of such regulations can result in
shutdown of the generating unit involved and/or civil or criminal
penalties of up to $25,000 for each day the unit is in violation.
The EPA has an interim enforcement policy for SO2 regulations in
Ohio that allows for compliance based on a 30-day averaging
period. The Companies cannot predict what action the EPA may take
in the future with respect to the interim enforcement policy.
Legislative, administrative and judicial actions will
continue to change the way that the Companies must operate in
order to comply with environmental laws and regulations. With
respect to any such changes and to the environmental matters
described above, the Companies expect that any resulting
additional capital costs which may be required, as well as any
required increase in operating costs, would ultimately be
recovered from their customers.
7. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED):
The following summarizes certain consolidated operating
results by quarter for 1997 and 1996.
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
Three Months Ended 1997 1997 1997 1997
- ----------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Operating Revenues $604.8 $593.3 $652.7 $622.9
Operating Expenses and Taxes 478.5 467.3 511.6 527.7
- --------------------------------------------------------------------------------------------
Operating Income 126.3 126.0 141.1 95.2
Other Income 13.5 14.1 12.0 13.3
Net Interest Charges 63.8 63.2 61.3 60.0
- --------------------------------------------------------------------------------------------
Net Income $ 76.0 $ 76.9 $ 91.8 $ 48.5
- --------------------------------------------------------------------------------------------
Earnings on Common Stock $ 72.9 $ 73.8 $ 88.7 $ 45.4
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
Three Months Ended 1996 1996 1996 1996
- ----------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Operating Revenues $611.6 $599.3 $646.9 $611.9
Operating Expenses and Taxes 481.1 471.7 500.0 486.8
- -------------------------------------------------------------------------------------------
Operating Income 130.5 127.6 146.9 125.1
Other Income 7.0 10.7 7.1 12.7
Net Interest Charges 64.1 61.7 61.5 65.1
- -------------------------------------------------------------------------------------------
Net Income $ 73.4 $ 76.6 $ 92.5 $ 72.7
- -------------------------------------------------------------------------------------------
Earnings on Common Stock $ 70.3 $ 73.5 $ 89.4 $ 69.5
- -------------------------------------------------------------------------------------------
</TABLE>
Report of Independent Public Accountants
To the Stockholders and Board of Directors of Ohio Edison
Company:
We have audited the accompanying consolidated balance
sheets and consolidated statements of capitalization of Ohio
Edison Company (an Ohio corporation and wholly owned subsidiary
of FirstEnergy Corp.) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income,
retained earnings, capital stock and other paid-in capital, cash
flows and taxes for each of the three years in the period ended
December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of Ohio Edison Company and subsidiaries as of December
31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
February 13, 1998
EXHIBIT 21.1
OHIO EDISON COMPANY
LIST OF SUBSIDIARIES OF THE REGISTRANT
AT DECEMBER 31, 1997
Pennsylvania Power Company - Incorporated in Pennsylvania
OES Fuel, Incorporated - Incorporated in Ohio
OES Ventures, Incorporated - Incorporated in Ohio
OES Capital, Incorporated - Incorporated in Ohio
OES Finance, Incorporated - Incorporated in Ohio
OES Nuclear, Incorporated - Incorporated in Ohio
Ohio Edison Financing Trust - Incorporated in Delaware
Ohio Edison Financing Trust II - Incorporated in Delaware
Statement of Differences
------------------------
Exhibit Number 21, List of Subsidiaries of the Registrant at
December 31, 1997, is not included in the printed document.
EXHIBIT 23.1
OHIO EDISON COMPANY
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to
the incorporation of our reports included or incorporated by
reference in this Form 10-K, into Ohio Edison Company's
previously filed Registration Statements, File No. 33-49135, No.
33-49259, No. 33-49413, No. 33-51139, No. 333-01489 and No. 333-
05277.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
(AMOUNTS IN 1,000'S, EXCEPT PER SHARE)
INCOME TAX EXPENSE INCLUDES $19,378,000 RELATED TO OTHER INCOME
</LEGEND>
<CIK> 0000073960
<NAME> OHIO EDISON COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 5,240,196
<OTHER-PROPERTY-AND-INVEST> 1,289,391
<TOTAL-CURRENT-ASSETS> 554,744
<TOTAL-DEFERRED-CHARGES> 1,893,124
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 8,977,455
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 2,102,644
<RETAINED-EARNINGS> 621,674
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,724,319
150,000
211,870
<LONG-TERM-DEBT-NET> 2,569,802
<SHORT-TERM-NOTES> 182,245
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 119,984
<LONG-TERM-DEBT-CURRENT-PORT> 268,621
5,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 4,871
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,740,743
<TOT-CAPITALIZATION-AND-LIAB> 8,977,455
<GROSS-OPERATING-REVENUE> 2,473,582
<INCOME-TAX-EXPENSE> 187,805
<OTHER-OPERATING-EXPENSES> 1,816,587
<TOTAL-OPERATING-EXPENSES> 1,985,014
<OPERATING-INCOME-LOSS> 488,568
<OTHER-INCOME-NET> 52,847
<INCOME-BEFORE-INTEREST-EXPEN> 541,415
<TOTAL-INTEREST-EXPENSE> 248,221
<NET-INCOME> 293,194
12,392
<EARNINGS-AVAILABLE-FOR-COMM> 280,802
<COMMON-STOCK-DIVIDENDS> 216,770
<TOTAL-INTEREST-ON-BONDS> 204,285
<CASH-FLOW-OPERATIONS> 736,720
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED FINANCIAL AND OPERATING STATISTICS
<CAPTION>
Nov. 8 - | Jan. 1 -
Dec. 31, 1997 | Nov. 7, 1997 1996 1995 1994 1993
| (Dollars in thousands)
GENERAL FINANCIAL INFORMATION: |
<S> <S> | <S> <S> <S> <S> <S>
Operating Revenues $ 253,963 | $1,529,014 $1,789,961 $1,768,737 $1,698,021 $1,751,330
========== | ========== ========== ========== ========== ==========
Operating Income $ 49,502 | $ 307,332 $ 358,620 $ 397,899 $ 396,009 $ 222,941
========== | ========== ========== ========== ========== ==========
Income (Loss) Before |
Extraordinary Item $ 19,290 | $ 95,191 $ 116,553 $ 183,719 $ 185,431 $ (587,147)
========== | ========== ========== ========== ========== ==========
Net Income (Loss) $ 19,290 | $ (229,247) $ 116,553 $ 183,719 $ 185,431 $ (587,147)
========== | ========== ========== ========== ========== ==========
Earnings (Loss) on Common |
Stock $ 19,290 | $ (274,276) $ 77,810 $ 141,275 $ 139,994 $ (631,797)
========== | ========== ========== ========== ========== ==========
Net Utility Plant $3,156,659 | $4,983,219 $5,090,315 $5,191,628 $5,257,080
========== | ========== ========== ========== ==========
Total Assets $6,440,284 | $6,962,297 $7,222,416 $7,204,045 $7,199,763
========== | ========== ========== ========== ==========
|
CAPITALIZATION: |
Common Stockholder's Equity $ 950,904 | $1,044,283 $1,126,762 $1,058,190 $1,039,947
Preferred Stock-- |
Not Subject to Mandatory |
Redemption 238,325 | 238,325 240,871 240,871 240,871
Subject to Mandatory |
Redemption 183,174 | 186,118 215,420 245,971 285,225
Long-Term Debt 3,189,590 | 2,523,030 2,759,492 2,683,207 2,951,981
---------- | ---------- ---------- ---------- ----------
Total Capitalization $4,561,993 | $3,991,756 $4,342,545 $4,228,239 $4,518,024
========== | ========== ========== ========== ==========
|
CAPITALIZATION RATIOS: |
Common Stockholder's Equity 20.9% | 26.2% 25.9% 25.0% 23.0%
Preferred Stock-- |
Not Subject to Mandatory |
Redemption 5.2 | 6.0 5.6 5.7 5.3
Subject to Mandatory |
Redemption 4.0 | 4.6 5.0 5.8 6.3
Long-Term Debt 69.9 | 63.2 63.5 63.5 65.4
----- | ----- ----- ----- -----
Total Capitalization 100.0% | 100.0% 100.0% 100.0% 100.0%
===== | ===== ===== ===== =====
|
KILOWATT-HOUR SALES (Millions): |
Residential 790 | 4,062 4,958 5,063 4,924 4,934
Commercial 893 | 4,990 5,908 5,946 5,770 5,634
Industrial 1,285 | 6,710 7,977 7,994 7,970 7,911
Other 89 | 476 522 550 575 532
---------- | ---------- ---------- ---------- ---------- ----------
Total Retail 3,057 | 16,238 19,365 19,553 19,239 19,011
Total Wholesale 575 | 2,408 2,155 1,694 1,073 2,290
---------- | ---------- ---------- ---------- ---------- ----------
Total 3,632 | 18,646 21,520 21,247 20,312 21,301
========== | ========== ========== ========== ========== ==========
|
CUSTOMERS SERVED (Year-End): |
Residential 671,265 | 663,130 669,725 668,346 669,118
Commercial 74,597 | 70,886 72,259 71,609 70,442
Industrial 6,515 | 6,545 6,649 6,993 7,852
Other 432 | 446 442 417 297
---------- | ---------- ---------- ---------- ----------
Total 752,809 | 741,007 749,075 747,365 747,709
========== | ========== ========== ========== ==========
|
Average Annual Residential |
kWh Usage 7,235 | 7,451 7,570 7,370 7,373
Peak Load-Megawatts 3,955 | 3,938 4,049 3,740 3,862
Number of Employees (Year-End) 3,162 | 3,282 3,636 3,547 3,606
</TABLE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
This discussion includes forward looking statements based
on information currently available to management. Such statements
are subject to certain risks and uncertainties. These statements
typically contain, but are not limited to, the terms "anticipate",
"potential", "expect", "believe", "estimate" and similar words.
Actual results may differ materially due to the speed and nature of
increased competition and deregulation in the electric utility
industry, economic or weather conditions affecting future sales and
margins, changes in markets for energy services, changing energy
market prices, legislative and regulatory changes (including
revised environmental requirements), availability and cost of
capital and other similar factors.
RESULTS OF OPERATIONS
We continued to make significant progress in 1997 as we
prepare for a more competitive environment in the electric utility
industry.
The most significant event during the year was the
approval by the Federal Energy Regulatory Commission (FERC) of the
merger of our former parent company, Centerior Energy Corporation,
with Ohio Edison Company to form FirstEnergy Corp., which came into
existence on November 8, 1997. We expect the merger to produce a
minimum of $1 billion in savings for FirstEnergy Corp. during the
first ten years of joint operations through the elimination of
duplicative activities, improved operating efficiencies, lower
capital expenditures, accelerated debt reduction, the coordination
of the companies' work forces and enhanced purchasing power.
The merger was accounted for using the purchase method of
accounting in accordance with generally accepted accounting
principles (see Note 2), and the applicable effects were "pushed
down," or reflected on the separate financial statements of
Centerior's direct subsidiaries as of the merger date. As a result,
we recorded purchase accounting fair value adjustments to: (1)
revalue our nuclear generating units to fair value, (2) adjust
preferred stock and long-term debt to fair value, (3) recognize
additional retirement and severance benefit liabilities, and (4)
record goodwill. Accordingly, the post-merger financial statements
reflect a new basis of accounting, and separate financial
statements are presented for the pre-merger and post-merger
periods. For the remainder of this discussion, for categories
substantially unaffected by the merger and with no significant pre-
merger or post-merger accounting events, we have combined the 1997
pre-merger and post-merger periods and have compared the total to
1996.
Earnings on common stock in the 1997 pre-merger period were
adversely affected by an extraordinary item resulting from the
October 1997 write-off of certain regulatory assets discussed
below. Excluding this write-off, pre-merger 1997 earnings on common
stock were $50.2 million. Earnings on common stock for the 1997
post-merger period were $19.3 million. In 1996, earnings on common
stock were $77.8 million which was lower than 1995 due primarily to
the delay in implementing our 1996 rate increase and the end of
certain regulatory accounting deferrals in November 1995.
Operating revenues were down $7.0 million in 1997 from
1996 levels following a $21.2 million increase in 1996 compared to
1995. A significant factor contributing to lower operating revenues
was the cancellation of a generating plant lease agreement for
which revenues were recorded in 1996; a related refund was
recognized in the 1997 first quarter which reduced other operating
revenue. The following table summarizes the sources of changes in
operating revenues for 1997 and 1996 as compared to the previous
year:
1997 1996
---- ----
(In millions)
Reduced retail kilowatt-hour sales $ (9.8) $(40.7)
Change in average retail price (4.8) 42.2
Sales to utilities 18.6 14.6
Other (11.0) 5.1
------ ------
Net Change $ (7.0) $ 21.2
====== ======
Total kilowatt-hour sales were at a new high for the
second consecutive year with 22.3 billion kilowatt-hours sold.
Sales to other utilities increased 38.4% in 1997. This followed a
27.2% increase from the previous year resulting from greater
availability of our generating units and an aggressive bulk power
marketing effort. Retail sales totaled 19.3 billion kilowatt-hours
in 1997, a decline of 0.4% from the prior year level. Residential
sales decreased 2.2% in 1997 following a 2.1% decline the previous
year. Commercial sales were down 0.4% and 0.6% in 1997 and 1996,
respectively. Industrial sales increased slightly in 1997,
following a small decline the previous year. Overall, there was a
3.5% increase in total kilowatt-hour sales following a 1.3%
increase in 1996 based on the strength of wholesale sales.
We spent more on fuel and purchased power during 1997, as
higher purchased power expense was partially offset by lower fuel
expense. An increase in the mix of nuclear generation to coal-fired
generation contributed to the lower fuel costs. Lower nuclear
expenses in 1997 resulted from lower operating costs at the Perry
and Davis-Besse plants offset in part by increased operating costs
at the Beaver Valley Plant. The decrease in other operating costs
in 1997 resulted from ongoing cost cutting and the effect of work
force reductions. Also, other operation and maintenance expenses in
1996 included an $11.9 million charge for the disposal of obsolete
materials and supplies. The 1997 decrease in other operating costs
was offset in part by a fourth quarter, pre-merger charge for
estimated severance expenses totaling $9.9 million.
Depreciation and amortization increased in the 1997 pre-
merger period and in 1996 principally due to changes in
depreciation rates approved in the April 1996 Public Utilities
Commission of Ohio (PUCO) rate order. In the post-merger period
depreciation and amortization was lower due to a fair value
adjustment which was recorded in connection with accounting for the
merger. Amortization of regulatory assets remained nearly unchanged
in 1997 after a large increase in 1996 following cessation of the
Rate Stabilization Program deferrals and initiation of their
amortization. Income taxes increased in 1997, compared to 1996, as
a function of taxable income. Income taxes decreased in 1996 from
the prior year due to lower pretax operating income.
Other income decreased in the 1997 pre-merger period and
in 1996 principally due to merger-related expenses and costs
associated with the accounts receivable securitization. In the
post-merger period, other income increased primarily because of
interest income on trust notes acquired in connection with the
Bruce Mansfield Plant lease refinancing. Interest costs were higher
overall in 1997 because new secured notes and short-term borrowings
for the Bruce Mansfield Plant lease refinancing exceeded the
expense reduction from the redemption and refinancing of debt
securities in 1997 and 1996.
CAPITAL RESOURCES AND LIQUIDITY
Our financial position has improved over the past five
years. Cash generated from operations was 24% higher in 1997 than
it was in 1992 due to higher revenues and aggressive cost controls.
At the end of 1997 we had 1,300 fewer employees than five years ago
as a result of our focus on becoming more competitive. The
availability of additional cash generated from operations increased
the Company's ability to redeem higher cost debt and preferred
stock. We have also actively pursued refinancing activities which
replace higher cost debt and preferred stock with lower cost
issues. The merger has resulted in improved credit ratings which
has lowered the cost of new issues. The following table summarizes
changes in credit ratings resulting from the merger.
Pre-Merger Post-Merger
--------------------- --------------------
Standard Moody's Standard Moody's
& Poor's Investors & Poor's Investors
Corporation Service, Inc. Corporation Service, Inc.
----------- ------------- ----------- ------------
First mortgage
bonds BB Ba2 BB+ Ba1
Subordinated debt B+ Ba3 BB- Ba3
Preferred Stock B b2 BB- b1
Excluding the effect of the Bruce Mansfield Plant lease refinancing
described below, interest costs and preferred dividends have been
reduced by approximately $22 million from 1996 levels. Through
economic refinancings and redemption of higher cost debt we have
reduced the average cost of outstanding debt from 8.90% in 1992 to
8.15% in 1997. The Bruce Mansfield Plant lease refinancing is
expected to provide an annual after tax savings of about $13
million resulting from an increase in interest income and a
decrease in rent expense offset in part by increased interest
expense on secured notes issued as part of the transaction.
Our cash requirements in 1998 for operating expenses,
construction expenditures and scheduled debt maturities are
expected to be met without issuing additional securities. We have
cash requirements of approximately $856.1 million for the 1998-2002
period to meet scheduled maturities of long-term debt and preferred
stock. Of that amount, approximately $81.5 million applies to 1998.
We had about $33.8 million of cash and temporary
investments and $56.8 million of short-term indebtedness to an
associated company on December 31, 1997. Upon completion of the
merger, application of purchase accounting reduced bondable
property such that we are not currently able to issue additional
first mortgage bonds, except in connection with refinancings.
Together with Toledo Edison Company as of December 31, 1997, we had
unused borrowing capability of $125 million under a revolving line
of credit.
Our capital spending for the period 1998-2002 is expected
to be about $430 million (excluding nuclear fuel), of which
approximately $105 million applies to 1998. This spending level is
over $300 million lower than actual capital outlays over the past
five years. Investments for additional nuclear fuel during the
1998-2002 period are estimated to be approximately $172 million, of
which about $32 million applies to 1998. During the same periods,
our nuclear fuel investments are expected to be reduced by
approximately $113 million and $42 million, respectively, as the
nuclear fuel is consumed. Also, we have operating lease commitments
net of trust income of approximately $167 million for the 1998-2002
period, of which approximately $25 million relates to 1998. We
recover the cost of nuclear fuel consumed and operating leases
through our electric rates.
OUTLOOK
We face many competitive challenges in the years ahead as
the electric utility industry undergoes significant changes,
including changing regulation and the entrance of more energy
suppliers into the marketplace. Retail wheeling, which would allow
retail customers to purchase electricity from other energy
producers, will be one of those challenges. The FirstEnergy Rate
Reduction and Economic Development Plan provides the foundation to
position us to meet the challenges we are facing by significantly
reducing fixed costs and lowering rates to a more competitive
level. The plan was approved by the PUCO in January 1997, and
initially maintains current base electric rates through December
31, 2005. The plan also revised our fuel recovery methods.
As part of the regulatory plan, interim reductions
beginning in June 1998 of $3 per month will increase to $5 per
month per residential customer by July 1, 2001 followed by a $217
million base rate reduction in 2006. Total savings of $280 million
are anticipated over the term of the plan for our customers. We
have also committed $70 million for economic development and energy
efficiency programs.
We have been authorized by the PUCO to recognize
additional depreciation related to our generating assets and
additional amortization of regulatory assets during the regulatory
plan period of at least $1.4 billion more than the amounts that
would have been recognized if the regulatory plan was not in
effect. For regulatory purposes these additional charges will be
reflected over the rate plan period. Our regulatory plan does not
provide for full recovery of nuclear operations. Accordingly,
regulatory assets representing customer receivables for future
income taxes related to nuclear assets of $499 million were written
off ($324 net of tax impact) prior to consummation of the merger
since we ceased application of Statement of Financial Accounting
Standards No. 71 "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71) for our nuclear operations when
implementation of the FirstEnergy regulatory plan became probable.
Based on the regulatory environment we operate in today
and our regulatory plan, we believe we will continue to be able to
bill and collect cost-based rates relating to our nonnuclear
operations; accordingly, it is appropriate that we continue the
application of SFAS 71 for those operations. However, as discussed
below, changes in the regulatory environment are on the horizon.
The Ohio legislature is in the discussion stages of restructuring
the electric utility industry within the State. We do not expect
any changes in regulation to be effective within the next two years
and we cannot assess what the ultimate impact may be.
At the consummation of the merger in November 1997, we
recognized a fair value purchase accounting adjustment which
decreased the carrying value of our nuclear assets by approximately
$1.7 billion based upon cash flow models. The fair value adjustment
to nuclear plant recognized for financial reporting purposes will
ultimately satisfy the asset reduction commitment contained in our
regulatory plan over the regulatory plan period.
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. We cannot predict when or if this legislation
will be introduced and if it will be passed into law. We continue
to study the potential effects that such legislation would have on
our financial position and results of operations.
The Financial Accounting Standards Board (FASB) issued a
proposed accounting standard for nuclear decommissioning costs in
February 1996. If the standard is adopted as proposed: (1) annual
provisions for decommissioning could increase; (2) the net present
value of estimated decommissioning costs could be recorded as a
liability; and (3) income from the external decommissioning trusts
could be reported as investment income. The FASB reported in
October 1997 that it plans to continue working on the proposal in
1998.
The Clean Air Act Amendments of 1990, discussed in Note
6, require additional emission reductions by 2000. We are pursuing
cost-effective compliance strategies for meeting the reduction
requirements that begin in 2000.
We have been named as a "potentially responsible party"
(PRP) for three sites listed on the Superfund National Priorities
List and are aware of our potential involvement in the cleanup of
several other sites. Allegations that we disposed of hazardous
waste at these sites, and the amount involved are often
unsubstantiated and subject to dispute. Federal law provides that
all PRPs for a particular site be held liable on a joint and
several basis. If we were held liable for 100% of the cleanup costs
of all the sites referred to above, the cost could be as high as
$212 million. However, we believe that the actual cleanup costs
will be substantially lower than $212 million, that our share of
any cleanup costs will be substantially less than 100% and that
most of the other PRPs are financially able to contribute their
share. We have accrued a $4.8 million liability as of December 31,
1997, based on estimates of the costs of cleanup and our
proportionate responsibility for such cost. We believe that the
ultimate outcome of these matters will not have a material adverse
effect on our financial condition, cash flows or results of
operations.
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 material adverse effect on us.
We are utilizing both internal and external resources to
reprogram and/or replace and test the 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.
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Nov. 8 - | Jan. 1 - For the Years Ended December 31,
| --------------------------------
Dec. 31, 1997 | Nov. 7, 1997 1996 1995
- -----------------------------------------------------|----------------------------------------------
| (In thousands)
<S> <C> | <C> <C> <C>
OPERATING REVENUES $253,963 | $1,529,014 $1,789,961 $1,768,737
-------- | ---------- ---------- ----------
OPERATING EXPENSES AND TAXES: |
Fuel and purchased power 51,381 | 359,048 407,632 413,391
Nuclear operating costs 15,465 | 77,228 96,150 95,791
Other operating costs 61,036 | 303,558 385,853 377,720
-------- | ---------- ---------- ----------
Total operation and maintenance |
expenses 127,882 | 739,834 889,635 886,902
Provision for depreciation and |
amortization 28,111 | 189,937 218,539 208,812
Amortization (deferral) of net |
regulatory assets 3,867 | 21,890 26,076 (36,148)
General taxes 33,912 | 194,400 229,856 229,962
Income taxes 10,689 | 75,621 67,235 81,310
-------- | ---------- ---------- ----------
Total operating expenses and taxes 204,461 | 1,221,682 1,431,341 1,370,838
-------- | ---------- ---------- ----------
|
OPERATING INCOME 49,502 | 307,332 358,620 397,899
|
OTHER INCOME (LOSS) 4,572 | (2,476) (2,089) 31,298
-------- | ---------- ---------- ----------
|
INCOME BEFORE NET INTEREST CHARGES 54,074 | 304,856 356,531 429,197
-------- | ---------- ---------- ----------
|
NET INTEREST CHARGES: |
Interest on long-term debt 35,300 | 197,323 229,491 238,684
Allowance for borrowed funds used |
during construction (631) | (1,928) (2,110) (2,701)
Other interest expense 115 | 14,270 12,597 9,495
-------- | ---------- ---------- ----------
Net interest 34,784 | 209,665 239,978 245,478
-------- | ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 19,290 | 95,191 116,553 183,719
|
EXTRAORDINARY ITEM (NET OF INCOME |
TAXES) (Note 1) - | (324,438) - -
-------- | ---------- ---------- ----------
|
NET INCOME (LOSS) 19,290 | (229,247) 116,553 183,719
|
PREFERRED STOCK DIVIDEND |
REQUIREMENTS - | 45,029 38,743 42,444
-------- | ---------- ---------- ----------
|
EARNINGS (LOSS) ON COMMON STOCK $ 19,290 | $ (274,276) $ 77,810 $ 141,275
======== | ========== ========== ==========
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
At December 31, 1997 1996
- --------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
ASSETS |
UTILITY PLANT: |
In service $4,578,649 | $7,330,963
Less--Accumulated provision for depreciation 1,470,084 | 2,415,226
---------- | ----------
3,108,565 | 4,915,737
---------- | ----------
|
Construction work in progress-- |
Electric plant 41,261 | 56,853
Nuclear fuel 6,833 | 10,629
---------- | ----------
48,094 | 67,482
---------- | ----------
3,156,659 | 4,983,219
---------- | ----------
|
OTHER PROPERTY AND INVESTMENTS: |
Shippingport Capital Trust (Note 3) 575,084 | -
Nuclear plant decommissioning trusts 105,334 | 75,573
Other 21,482 | 20,805
---------- | ----------
701,900 | 96,378
---------- | ----------
|
CURRENT ASSETS: |
Cash and cash equivalents 33,775 | 30,273
Receivables-- |
Customers 29,759 | 4,339
Associated companies 8,695 | 5,634
Other 98,077 | 170,736
Materials and supplies, at average cost-- |
Owned 47,489 | 51,686
Under consignment 25,411 | 23,655
Prepayments and other 57,763 | 58,235
---------- | ----------
300,969 | 344,558
---------- | ----------
DEFERRED CHARGES: |
Regulatory assets 579,711 | 1,349,694
Goodwill 1,552,483 | -
Property taxes 125,204 | 129,048
Other 23,358 | 59,400
---------- | ----------
2,280,756 | 1,538,142
---------- | ----------
$6,440,284 | $6,962,297
========== | ==========
CAPITALIZATION AND LIABILITIES |
|
CAPITALIZATION (See Consolidated Statements of Capitalization): |
Common stockholder's equity $ 950,904 | $1,044,283
Preferred stock-- |
Not subject to mandatory redemption 238,325 | 238,325
Subject to mandatory redemption 183,174 | 186,118
Long-term debt 3,189,590 | 2,523,030
---------- | ----------
4,561,993 | 3,991,756
---------- | ----------
|
CURRENT LIABILITIES: |
Currently payable long-term debt and preferred stock 121,965 | 196,260
Accounts payable-- |
Associated companies 56,109 | 59,815
Other 90,737 | 82,693
Notes payable to associated companies 56,802 | 111,618
Accrued taxes 194,394 | 183,998
Accrued interest 67,896 | 52,487
Other 52,297 | 58,900
---------- | ----------
640,200 | 745,771
---------- | ----------
DEFERRED CREDITS: |
Accumulated deferred income taxes 496,437 | 1,305,601
Accumulated deferred investment tax credits 96,131 | 183,026
Pensions and other postretirement benefits 198,642 | 72,843
Other 446,881 | 663,300
---------- | ----------
1,238,091 | 2,224,770
---------- | ----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES |
(Notes 3 and 6 ) ---------- | ----------
$6,440,284 | $6,962,297
========== | ==========
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these balance sheets.
</TABLE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<CAPTION>
At December 31, 1997 | 1996
- ---------------------------------------------------------------------------------------- |----------
- -
(Dollars in thousands, except per share amounts) |
<S> <C> | <C>
COMMON STOCKHOLDER'S EQUITY: |
Common stock, without par value, authorized 105,000,000 shares-- |
79,590,689 shares outstanding $ 931,614 |$1,241,287
Other paid-in capital - | 79,454
Retained earnings (deficit) (Note 4A) 19,290 |
(276,458)
---------- |----------
Total common stockholder's equity 950,904 | 1,044,283
---------- |----------
|
|
Number of Shares Optional |
Outstanding Redemption Price |
---------------- --------------------- |
1997 1996 Per Share Aggregate |
---- ---- --------- --------- |
<S> <C> <C> <C> <C> |
PREFERRED STOCK (Note 4B): |
Without par value, authorized |
4,000,000 shares |
Not Subject to Mandatory |
Redemption: |
$ 7.40 Series A 500,000 500,000 $ 101.00 $ 50,500 50,000 | 50,000
$ 7.56 Series B 450,000 450,000 102.26 46,017 45,071 | 45,071
Adjustable Series L 474,000 474,000 100.00 47,400 46,404 | 46,404
$42.40 Series T 200,000 200,000 500.00 100,000 96,850 | 96,850
--------- --------- --------- --------- |----------
1,624,000 1,624,000 $ 243,917 238,325 | 238,325
========= ========= ========= --------- |----------
Subject to Mandatory |
Redemption (Note 4C): |
$ 7.35 Series C. 110,000 120,000 $ 101.00 $ 11,110 11,110 | 12,000
$88.00 Series E 9,000 12,000 1,007.65 9,069 9,000 | 12,000
$ 9.125 Series N - 150,000 - - - | 14,794
$91.50 Series Q 42,858 53,572 1,000.00 42,858 42,858 | 53,572
$88.00 Series R 50,000 50,000 - - 55,000 | 50,000
$90.00 Series S 74,000 74,000 - - 79,920 | 73,260
Redemption within one year (14,714)|
(29,508)
--------- --------- -------- --------- |----------
285,858 459,572 $ 63,037 183,174 | 186,118
========= ========= ======== --------- |----------
LONG-TERM DEBT (Note 4D): |
First mortgage bonds: |
7.625% due 2002 195,000 | 195,000
7.375% due 2003 100,000 | 100,000
8.750% due 2005 75,000 | 75,000
9.500% due 2005 300,000 | 300,000
9.250% due 2009 - | 50,000
8.375% due 2011 125,000 | 125,000
8.375% due 2012 75,000 | 75,000
9.375% due 2017 - | 300,000
10.000% due 2020 - | 100,000
9.000% due 2023 150,000 | 150,000
---------- |----------
Total first mortgage bonds 1,020,000 | 1,470,000
---------- |----------
|
Unsecured notes: |
5.500% due 1997 - | 110
6.700% due 2006 19,500 | 20,000
5.700% due 2008 7,300 | 7,600
6.700% due 2011 5,500 | 5,500
5.875% due 2012 14,300 | 14,300
---------- |----------
Total unsecured notes 46,600 | 47,510
---------- |----------
</TABLE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont.)
<CAPTION>
At December 31, 1997 1996
- ---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
LONG-TERM DEBT: (Cont.)
Secured notes:
9.450% due 1997 - | 43,000
8.150% due 1998 7,500 | 7,500
8.160% due 1998 5,000 | 5,000
8.170% due 1998 11,000 | 11,000
8.260% due 1998 2,500 | 2,500
8.330% due 1998 25,000 | 25,000
8.870% due 1998 10,000 | 10,000
9.000% due 1998 5,000 | 5,000
7.250% due 1999 12,000 | 12,000
7.670% due 1999 3,000 | 3,000
7.770% due 1999 17,000 | 17,000
7.850% due 1999 25,000 | 25,000
8.290% due 1999 10,000 | 10,000
9.250% due 1999 52,500 | 52,500
9.300% due 1999 25,000 | 25,000
7.190% due 2000 175,000 | -
7.420% due 2001 10,000 | 10,000
8.540% due 2001 3,000 | 3,000
8.550% due 2001 5,000 | 5,000
8.560% due 2001 3,500 | 3,500
8.680% due 2001 15,000 | 15,000
9.050% due 2001 5,000 | 5,000
9.200% due 2001 15,000 | 15,000
7.850% due 2002 5,000 | 5,000
8.130% due 2002 28,000 | 28,000
7.750% due 2003 15,000 | 15,000
7.670% due 2004 280,000 | -
7.000% due 2006-2009 1,910 | 64,500
7.130% due 2007 120,000 | -
7.430% due 2009 150,000 | -
6.000% due 2011* 5,650 | 5,650
6.000% due 2011* 1,700 | 1,700
6.200% due 2013 - | 47,500
8.000% due 2013 78,700 | 78,700
3.786% due 2015* 39,835 | 39,835
6.000% due 2017* 1,285 | 1,285
7.880% due 2017 300,000 | -
3.771% due 2018* 72,795 | 72,795
3.800% due 2020* 47,500 | -
6.000% due 2020* 40,900 | 40,900
6.000% due 2020* 9,100 | 9,100
6.000% due 2020 62,560 | -
6.100% due 2020 70,500 | -
9.520% due 2021 7,500 | 7,500
9.750% due 2022 - | 70,500
6.850% due 2023 30,000 | 30,000
8.000% due 2023 73,800 | 73,800
7.625% due 2025 53,900 | 53,900
7.700% due 2025 43,800 | 43,800
7.750% due 2025 45,150 | 45,150
---------- |----------
Total secured notes 2,026,585 | 1,044,615
---------- |----------
|
Capital lease obligations (Note 3) 98,504 | 133,407
---------- |----------
Net unamortized premium (discount) on debt 105,152 |
(5,750)
---------- |----------
Long-term debt due within one year (107,251)|
(166,752)
---------- |----------
Total long-term debt 3,189,590 | 2,523,030
---------- |----------
TOTAL CAPITALIZATION $4,561,993 |$3,991,756
========== |==========
<FN>
*Denotes variable rate issue with December 31, 1997 interest rate shown.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<CAPTION>
Nov. 8 - | Jan. 1 - For the Years Ended December 31,
| --------------------------------
Dec. 31, 1997 | Nov. 7, 1997 1996 1995
- -----------------------------------------------------|----------------------------------------------
| (In thousands)
<S> <C> | <C> <C> <C>
Balance at beginning of period $ - | $(276,458) $(193,146) $(261,521)
Net income (loss) 19,290 | (229,247) 116,553 183,719
------- | --------- --------- ---------
19,290 | (505,705) (76,593) (77,802)
- -----------------------------------------------------|--------------------------------------------
Cash dividends on preferred stock - | 35,848 38,734 40,694
Cash dividends on common stock - | 123,602 160,816 74,213
Purchase accounting fair value |
adjustment - | (665,387) - -
Other, primarily preferred stock |
redemption expenses - | 232 315 437
------- | --------- --------- ---------
- | (505,705) 199,865 115,344
------- | --------- --------- ---------
Balance at end of period (Note 4A) $19,290 | $ - $(276,458) $(193,146)
=================================================================================================
CONSOLIDATED STATEMENTS OF CAPITAL STOCK AND OTHER PAID-IN CAPITAL
Preferred Stock
------------------------------------------
Not Subject to Subject to
Common Stock Mandatory Redemption Mandatory Redemption
------------------------------ -------------------- ---------------------
Other
Number Carrying Paid-In Number Carrying Number Carrying
of Shares Value Capital of Shares Value of Shares Value
--------- -------- ------- --------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 79,590,689 $1,241,087 $78,624 1,650,000 $240,871 868,766 $281,562
Redemptions--
$ 7.35 Series C (10,000) (1,000)
$ 88.00 Series E (3,000) (3,000)
Adjustable Series M (100,000) (9,800)
$ 9.125 Series N 35 (110,766) (10,924)
$ 91.50 Series Q 51 (10,714) (10,714)
$ 90.00 Series S 111 (1,000) (990)
- ---------------------------------------------------------------------------------------------------
Balance, December 31, 1995 79,590,689 1,241,284 78,624 1,650,000 240,871 633,286 245,134
Reclassification of
$90.00 Series S Gain (111) 111
Unrealized loss on
securities (6)
Redemptions--
Adjustable Series L 7 725 (26,000) (2,546)
$ 7.35 Series C (10,000) (1,000)
$ 88.00 Series E (3,000) (3,000)
$ 9.125 Series N 25 (150,000) (14,794)
$ 91.50 Series Q 82 (10,714) (10,714)
Balance, December 31, 1996 79,590,689 1,241,287 79,454 1,624,000 238,325 459,572 215,626
Equity contributions
from parent 4,500
Redemptions--
$ 7.35 Series C (10,000) (1,000)
$ 88.00 Series E (3,000) (3,000)
$ 9.125 Series N 25 (150,000) (14,794)
$ 91.50 Series Q (10,714) (10,714)
____________________________________________________________________________________________________
Purchase accounting
fair value adjustments--
Common Stock (309,698) (83,954)
$ 7.35 Series C 110
$ 88.00 Series R 5,000
$ 90.00 Series S 6,660
- ---------------------------------------------------------------------------------------------------
Balance, December 31, 1997 79,590,689 $ 931,614 $ - 1,624,000 $238,325 285,858 $197,888
===================================================================================================
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nov. 8 - | Jan. 1 - For the Years Ended December 31,
| --------------------------------
Dec. 31, 1997 | Nov. 7, 1997 1996 1995
- -----------------------------------------------------|----------------------------------------------
| (In thousands)
<S> <C> | <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net Income (Loss) $ 19,290 | $(229,247) $116,553 $183,719
Adjustments to reconcile net income to net |
cash from operating activities: |
Provision for depreciation and |
amortization 28,111 | 189,937 218,539 208,812
Nuclear fuel and lease amortization 7,393 | 42,577 45,987 70,745
Other amortization, net 3,867 | 21,890 26,076 (64,641)
Deferred income taxes, net 7,723 | (126,693) 24,973 56,063
Investment tax credits, net (822)| (6,670) (7,992) (12,566)
Allowance for equity funds used |
during construction (140)| (1,647) (2,014) (2,173)
Extraordinary loss - | 499,135 - -
Receivables 51,213 | (3,974) 586 (12,927)
Net proceeds from accounts |
receivable securitization - | - 64,891 -
Materials and supplies (3,922)| 6,363 25,589 9,818
Accounts payable (777)| (7,938) (6,344) 1,084
Other 18,839 | (2,566) 10,992 (7,996)
-------- | -------- -------- --------
Net cash provided from operating |
activities 130,775 | 381,167 517,836 429,938
-------- | -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES: |
New Financing-- |
Long-term debt - | 1,176,781 (307) 432,052
Short-term borrowings, net 703 | - 106,618 -
Redemptions and Repayments-- |
Preferred stock - | 29,714 31,528 36,670
Long-term debt 43,500 | 701,843 310,177 481,426
Short-term borrowings, net - | 55,519 - 53,100
Dividend Payments-- |
Common stock 34,785 | 88,816 160,816 74,213
Preferred stock 7,191 | 29,311 39,325 42,951
-------- | --------- -------- --------
Net cash provided from (used for)
financing activities (84,773)| 271,578 (435,535) (256,308)
-------- | --------- -------- --------
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Property additions 17,943 | 104,230 105,588 151,038
Capital trust investments 16,248 | 558,836 - -
Other (4,288)| 2,276 16,210 18,465
-------- | --------- -------- --------
Net cash used for investing activities 29,903 | 665,342 121,798 169,503
-------- | --------- -------- --------
Net increase (decrease) in cash and cash |
equivalents 16,099 | (12,597) (39,497) 4,127
Cash and cash equivalents at beginning |
of period 17,676 | 30,273 69,770 65,643
-------- | --------- -------- --------
Cash and cash equivalents at end of |
period $ 33,775 | $ 17,676 $ 30,273 $ 69,770
======== | ========= ======== ========
|
SUPPLEMENTAL CASH FLOWS INFORMATION: |
Cash Paid During the Period-- |
Interest (net of amounts capitalized) $ 36,000 | $ 188,000 $237,000 $214,000
======== | ========= ======== ========
Income taxes $ 9,000 | $ 26,300 $ 29,732 $ 65,900
======== | ========= ======== ========
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF TAXES
<CAPTION>
Nov. 8 - | Jan. 1 - For the Years Ended December 31,
| --------------------------------
Dec. 31, 1997 | Nov. 7, 1997 1996 1995
- -----------------------------------------------------|----------------------------------------------
| (In thousands)
<S> <S> | <S> <S> <S>
GENERAL TAXES: |
Real and personal property $ 17,707 | $ 114,393 $ 132,582 $ 134,346
State gross receipts 13,302 | 65,966 78,109 76,806
Social security and unemployment 1,548 | 6,296 9,127 9,145
Other 1,355 | 7,745 10,038 9,665
-------- | --------- ---------- ----------
Total general taxes $ 33,912 | $ 194,400 $ 229,856 $ 229,962
======== | ========= ========== ==========
PROVISION FOR INCOME TAXES: |
Currently payable- |
Federal $ 6,969 | $ 37,605 $ 44,147 $ 39,499
State (1) 159 | - - -
-------- | --------- ---------- ----------
7,128 | 37,605 44,147 39,499
-------- | --------- ---------- ----------
Deferred, net- |
Federal 7,617 | (126,693) 24,973 56,063
State (1) 106 | - - -
-------- | --------- ---------- ----------
7,723 | (126,693) 24,973 56,063
-------- | --------- ---------- ----------
Investment tax credit amortization (822) | (6,670) (7,992) (12,566)
-------- | --------- ---------- ----------
Total provision for income taxes $ 14,029 | $ (95,758) $ 61,128 $ 82,996
======== | ========= ========== ==========
INCOME STATEMENT CLASSIFICATION |
OF PROVISION FOR INCOME TAXES: |
Operating income $ 10,689 | $ 75,621 $ 67,235 $ 81,310
Other income 3,340 | 3,318 (6,107) 1,686
Extraordinary item - | (174,697) - -
--------- | --------- ---------- ----------
Total provision for income taxes $ 14,029 | $ (95,758) $ 61,128 $ 82,996
========= | ========= ========== ==========
|
RECONCILIATION OF FEDERAL INCOME TAX |
EXPENSE AT STATUTORY RATE TO TOTAL |
PROVISION FOR INCOME TAXES: |
Book income before provision for |
income taxes $ 33,319 | $(325,005) $ 177,681 $ 266,715
========= | ========= ========== ==========
Federal income tax expense at |
statutory rate $ 11,662 | $(113,752) $ 62,188 $ 93,350
Increases (reductions) in taxes |
resulting from- |
Amortization of investment tax credits (822) | (6,670) (7,992) (12,566)
Depreciation - | 14,780 7,853 7,915
Other, net 3,189 | 9,884 (921) (5,703)
--------- | --------- ---------- ----------
Total provision for income taxes $ 14,029 | $ (95,758) $ 61,128 $ 82,996
========= | ========= ========== ==========
ACCUMULATED DEFERRED INCOME TAXES AT |
DECEMBER 31: |
Property basis differences $ 676,853 | $1,482,000 $1,468,000
Deferred nuclear expense 133,281 | 134,000 139,000
Deferred sale and leaseback costs (118,611) | (121,000) (123,000)
Unamortized investment tax credits (42,743) | (95,000) (99,000)
Unused alternative minimum tax credits (133,442) | (173,733) (132,647)
Other (18,901) | 79,334 45,907
--------- | ---------- ----------
Net deferred income tax liability $ 496,437 | $1,305,601 $1,298,260
========= | ========== ==========
|
<FN>
(1) For periods prior to November 8, 1997, state income taxes
are included in the General Taxes section above. These amounts are
not material and no restatement was made.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements include The
Cleveland Electric Illuminating Company (Company) and its wholly
owned subsidiary, Centerior Funding Corporation (Centerior
Funding). The subsidiary was formed in 1995 to serve as the
transferor in connection with an accounts receivable
securitization completed in 1996. All significant intercompany
transactions have been eliminated. The Company is a wholly owned
subsidiary of FirstEnergy Corp. (FirstEnergy). Prior to the
merger in November 1997 (see Note 2), the Company and The Toledo
Edison Company (TE) were the principal operating subsidiaries of
Centerior Energy Corporation (Centerior). The 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 pre-merger period and post-merger
period financial results (separated by a heavy black line) are
presented. The Company follows the accounting policies and
practices prescribed by The Public Utilities Commission of Ohio
(PUCO) and the Federal Energy Regulatory Commission (FERC). The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
periodic estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Certain
prior year amounts have been reclassified to conform with the
current year presentation.
REVENUES-
The Company's principal business is providing electric
service to customers in northeastern Ohio. The Company's retail
customers are metered on a cycle basis. Revenue is recognized
for unbilled electric service through the end of the year.
Receivables from customers include sales to
residential, commercial and industrial customers located in the
Company's service area and sales to wholesale customers. There
was no material concentration of receivables at December 31, 1997
or 1996, with respect to any particular segment of the Company's
customers.
In May 1996, the Company and TE began to sell on a
daily basis substantially all of their retail customer accounts
receivable to Centerior Funding under an asset-backed
securitization agreement which expires in 2001. In July 1996,
Centerior Funding completed a public sale of $150 million of
receivables-backed investor certificates in a transaction that
qualified for sale accounting treatment.
REGULATORY PLAN-
FirstEnergy's Rate Reduction and Economic Development
Plan for the Company was approved in January 1997, to become
effective upon consummation of the merger. The regulatory plan
initially maintains current base electric rates for the Company
through December 31, 2005. At the end of the regulatory plan
period, the Company's base rates will be reduced by $217 million
(approximately 15 percent below current levels). The regulatory
plan also revised the Company's fuel cost recovery method. The
Company formerly recovered fuel-related costs not otherwise
included in base rates from retail customers through a separate
energy rate. In accordance with the regulatory plan, the
Company's fuel rate will be frozen through the regulatory plan
period, subject to limited periodic adjustments. As part of the
regulatory plan, transition rate credits were implemented for
customers, which are expected to reduce operating revenues for
the Company by approximately $280 million during the regulatory
plan period.
All of the Company's regulatory assets related to its
nonnuclear operations are being recovered under provisions of the
regulatory plan (see Regulatory Assets). The Company recognized a
fair value purchase accounting adjustment to reduce nuclear plant
by $1.71 billion in connection with the FirstEnergy merger (see
Note 2); that fair value adjustment recognized for financial
reporting purposes will ultimately satisfy the $1.4 billion asset
reduction commitment contained in the regulatory plan. For
regulatory purposes, the Company will recognize the $1.4 billion
of accelerated amortization over the rate plan period.
UTILITY PLANT AND DEPRECIATION-
Utility plant reflects the original cost of
construction (except for the Company's nuclear generating units
which were adjusted to fair value in 1997), including payroll and
related costs such as taxes, employee benefits, administrative
and general costs and financing costs (including allowance for
funds used during construction).
The Company provides for depreciation on a straight-
line basis at various rates over the estimated lives of property
included in plant in service. In its April 1996 rate order, the
PUCO approved depreciation rates for the Company of 2.88% for
nuclear property and 3.23 % for nonnuclear property. The
annualized composite rate was approximately 2.8% for the post-
merger period.
Annual depreciation expense includes approximately
$11.7 million for future decommissioning costs applicable to the
Company's ownership interests in three nuclear generating units.
The Company's share of the future obligation to decommission
these units is approximately $406 million in current dollars and
(using a 3.5% escalation rate) approximately $985 million in
future dollars. The estimated obligation and the escalation rate
were developed based on site-specific studies. Payments for
decommissioning are expected to begin in 2016, when actual
decommissioning work begins. The Company has recovered
approximately $99 million for decommissioning through its
electric rates from customers through December 31, 1997. If the
actual costs of decommissioning the units exceed the funds
accumulated from investing amounts recovered from customers, the
Company expects that additional amount to be recoverable from its
customers. The Company has approximately $105.3 million invested
in external decommissioning trust funds as of December 31, 1997.
Earnings on these funds are reinvested with a corresponding
increase to the decommissioning liability. The Company has also
recognized an estimated liability of approximately $11.2 million
at December 31, 1997 related to decontamination and
decommissioning of nuclear enrichment facilities operated by the
United States Department of Energy (DOE), as required by the
Energy Policy Act of 1992.
The Financial Accounting Standards Board (FASB) issued
a proposed accounting standard for nuclear decommissioning trusts
in February 1996. If the standard is adopted as proposed: (1)
annual provisions for decommissioning could increase; (2) the net
present value of estimated decommissioning costs could be
recorded as a liability; and (3) income from the external
decommissioning trusts could be reported as investment income.
The FASB indicated in October 1997 that it plans to continue work
on the proposal in 1998.
COMMON OWNERSHIP OF GENERATING FACILITIES-
The Company, TE, Duquesne Light Company, Ohio Edison
Company (OE) and its wholly owned subsidiary, Pennsylvania Power
Company (Penn), constitute the Central Area Power Coordination
Group (CAPCO). The CAPCO Companies own and/or lease, as tenants
in common, various power generating facilities. Each of the
companies is obligated to pay a share of the costs associated
with any jointly owned facility in the same proportion as its
interest. The Company's portion of operating expenses associated
with jointly owned facilities is included in the corresponding
operating expenses on the Consolidated Statements of Income. The
amounts reflected on the Consolidated Balance Sheet under utility
plant at December 31, 1997 include the following:
Utility Accumulated Construction Ownership/
Plant Provision for Work in Leasehold
Generating Units in Service Depreciation Progress Interest
- -----------------------------------------------------------------
(In millions)
Bruce Mansfield
Units 1, 2,
and 3 $ 62.0 $ 18.1 $ .6 19.92%
Beaver Valley
Unit 2 342.4 3.5 1.2 24.47%
Davis-Besse 200.1 - 3.6 51.38%
Perry 521.6 - 3.3 31.11%
Eastlake Unit 5 159.9 94.6 .3 68.80%
Seneca 64.9 24.3 .1 80.00%
- ----------------------------------------------------------------
Total $1,350.9 $140.5 9.1
================================================================
The Bruce Mansfield Plant is being leased through a
sale and leaseback transaction (see Note 3) and the above related
amounts represent construction expenditures subsequent to the
transaction. The Seneca Unit is jointly owned by the Company and
a non-CAPCO company.
NUCLEAR FUEL-
The Company leases its nuclear fuel and pays for the
fuel as it is consumed (see Note 3). The Company amortizes the
cost of nuclear fuel based on the rate of consumption. The
Company's electric rates include amounts for the future disposal
of spent nuclear fuel based upon the payments to the DOE.
INCOME TAXES-
Details of the total provision for income taxes are
shown on the Consolidated Statements of Taxes. Deferred income
taxes result from timing differences in the recognition of
revenues and expenses for tax and accounting purposes. Investment
tax credits, which were deferred when utilized, are being
amortized over the recovery period of the related property. The
liability method is used to account for deferred income taxes.
Deferred income tax liabilities related to tax and accounting
basis differences are recognized at the statutory income tax
rates in effect when the liabilities are expected to be paid.
Alternative minimum tax credits of $133 million, which may be
carried forward indefinitely, are available to reduce future
federal income taxes.
RETIREMENT BENEFITS-
Centerior had sponsored jointly with the Company, TE
and Centerior Service Company (Service Company) a noncontributing
pension plan (Centerior Pension Plan) which covered all employee
groups. Upon retirement, employees receive a monthly pension
generally based on the length of service. Under certain
circumstances, benefits can begin as early as age 55. The funding
policy was to comply with the Employee Retirement Income Security
Act of 1974 guidelines. In December 1997, the Centerior Pension
Plan was merged into the FirstEnergy pension plans. In connection
with the merger, the Company recorded fair value purchase
accounting adjustments to recognize the net gain, prior service
cost, and net transition asset (obligation) associated with the
pension and post retirement benefit plans.
The following sets forth the funded status of the
former Centerior Pension Plan. The Company's share of the former
Centerior Pension Plan's total projected benefit obligation
approximates 70% at December 31, 1997.
At December 31, 1997 1996
- ---------------------------------------------------------------
(In millions)
Actuarial present value of benefit |
obligations: |
Vested benefits $418.9 | $325.8
Nonvested benefits 30.5 | 15.8
- -----------------------------------------------------|--------
Accumulated benefit obligation $449.4 | $341.6
=====================================================|========
Plan assets at fair value $461.9 | $420.8
Actuarial present value of |
projected benefit obligation 533.4 | 395.0
- -----------------------------------------------------|--------
Projected benefit obligation in excess of |
plan assets 71.5 | (25.8)
Unrecognized net gain (loss) (3.0)| 55.0
Unrecognized prior service cost - | (14.2)
Unrecognized net transition asset - | 32.3
- -----------------------------------------------------|--------
Net pension liability $ 68.5 | $ 47.3
==============================================================
The assets of the Centerior Pension Plan consisted
primarily of investments in common stock, bonds, guaranteed
investment contracts, cash equivalent securities and real estate.
Net pension costs for the three years ended December 31, 1997
were computed as follows:
<TABLE>
<CAPTION>
Nov. 8 - | Jan. 1 -
Dec. 31, 1997 | Nov. 7, 1997 1996 1995
- ----------------------------------------------------|-----------------------------------
| (In millions)
<S> <C> | <C> <C> <C>
Service cost-benefits earned |
during the period $ 2.3 | $ 11.1 $ 12.6 $ 9.8
Interest on projected benefit |
obligation 6.1 | 25.4 27.9 25.8
Return on plan assets (7.7) | (38.0) (49.7) (52.8)
Net deferral (amortization) - | (2.4) 1.8 9.2
Voluntary early retirement |
program expense 23.0 | 4.8 - -
- ----------------------------------------------------|----------------------------------
Net pension cost $ 23.7 | $ 0.9 $ (7.4) $ (8.0)
====================================================|==================================
Company's share, including pro |
rata share of the Service |
Company's costs $ 16.5 | $ (2.5) $ (5.0) $ (5.2)
- ---------------------------------------------------------------------------------------
</TABLE>
A September 30 measurement date was used for 1996
reporting. The assumed discount rates used in determining the
actuarial present value of the projected benefit obligation were
7.25% in 1997, 7.75% in 1996 and 8.0% in 1995. The assumed rate
of increase in future compensation levels used to measure this
obligation was 4.0% in 1997. The rate of annual compensation
increase assumption in 1996 was 3.5% for 1997 and 4.0%
thereafter. The rate of annual compensation increase assumption
in 1995 was 3.5% for 1996 and 1997 and 4.0% thereafter. Expected
long-term rates of return on plan assets were assumed to be 10%
in 1997 and 11% in 1996 and 1995. At December 31, 1997, the
Company's net pension liability included in Pensions and Other
Postretirement Benefits on the Consolidated Balance Sheet was
$49.2 million. At December 31, 1996, the Company's net prepaid
pension cost included in Deferred Charges -- Other on the
Consolidated Balance Sheet was $15.4 million (see Note 2).
Centerior had sponsored jointly with its former
subsidiaries a postretirement benefit plan which provided all
employee groups certain health care, death and other
postretirement benefits other than pensions. The plan was
contributory, with retiree contributions adjusted annually. The
plan was not funded.
The accumulated postretirement benefit obligation and
accrued postretirement benefit cost for the Centerior
postretirement benefit plan are as follows:
At December 31, 1997 1996
- --------------------------------------------------------------
(In millions)
|
Accumulated postretirement benefit |
obligation allocation: |
Retirees $209.8 | $ 177.1
Fully eligible active plan participants 9.8 | 3.9
Other active plan participants 46.9 | 30.9
- ----------------------------------------------------|---------
Accumulated postretirement benefit |
obligation 266.5 | 211.9
Unrecognized transition obligation - | (120.1)
Unrecognized net gain - | 44.4
- ----------------------------------------------------|---------
Net postretirement benefit liability $266.5 | $ 136.2
Net periodic postretirement benefit costs for the three
years ended December 31, 1997 were computed as follows:
<TABLE>
<CAPTION>
Nov. 8 - | Jan. 1 -
Dec. 31, 1997 | Nov. 7, 1997 1996 1995
- ---------------------------------------------------------|-----------------------------------
| (In millions)
<S> <C> | <C> <C>
Service cost-benefits |
attributed to the period $0.5 | $ 1.8 $ 2.1 $ 1.7
Interest cost on accumulated |
benefit obligation 2.8 | 13.5 17.8 17.9
Amortization of transition obligation - | 6.4 7.5 7.5
Amortization of gain - | (0.9) - (0.6)
- ---------------------------------------------------------|----------------------------------
Net periodic postretirement |
benefit cost $3.3 | $20.8 $27.4 $26.5
=========================================================|==================================
Company's share, including pro rata |
share of the Service Company's costs $2.6 | $11.4 $18.4 $16.0
- ---------------------------------------------------------------------------------------------
</TABLE>
The Consolidated Balance Sheet classification of
Pensions and Other Postretirement Benefits at December 31, 1997
and 1996 includes the Company's share of the accrued
postretirement benefit liability of $149.5 million and $72.8
million, respectively (see Note 2).
The health care trend rate assumption is approximately
6.0% in the first year gradually decreasing to approximately 4.0%
for the year 2008 and later. The discount rates used to compute
the accumulated postretirement benefit obligation were 7.25% in
1997, 7.75% in 1996 and 8.0% in 1995. An increase in the health
care trend rate assumption by one percentage point in all years
would increase the accumulated postretirement benefit obligation
by approximately $7.7 million and the aggregate annual service
and interest costs by approximately $0.5 million. A September 30
measurement date was used for 1996 reporting.
TRANSACTIONS WITH AFFILIATED COMPANIES-
Operating revenues, operating expenses and interest
charges include amounts for transactions with affiliated
companies in the ordinary course of business operations.
The Company's transactions with TE and the other
FirstEnergy operating subsidiaries (OE and Penn) from the
November 8, 1997 merger date are primarily for firm power,
interchange power, transmission line rentals and jointly owned
power plant operations and construction. (See Note 2.) Beginning
in May 1996, Centerior Funding began serving as the transferor in
connection with the accounts receivable securitization for the
Company and TE.
The Service Company (formerly a wholly owned subsidiary
of Centerior and now a wholly owned subsidiary of FirstEnergy)
provides support services at cost to the Company and other
affiliated companies. The Service Company billed the Company
$34.1 million, $130.8 million, $148.6 million and $141.1 million
in the November 8-December 31, 1997, the January 1-November 7,
1997 period, 1996 and 1995, respectively, for such services.
Fuel and purchased power expenses on the Consolidated
Statements of Income include the cost of power purchased from TE
of $17.7 million, $98.5 million, $105.0 million and $102.1
million in the November 8-December 31, 1997 period, the January
1-November 7, 1997 period, 1996 and 1995, respectively.
SUPPLEMENTAL CASH FLOWS INFORMATION-
All temporary cash investments purchased with an
initial maturity of three months or less are reported as cash
equivalents on the Consolidated Balance Sheets. The Company
reflects temporary cash investments at cost, which approximates
their market value. Noncash financing and investing activities
included capital lease transactions amounting to $16 million, $37
million and $19 million for the years 1997, 1996 and 1995,
respectively.
All borrowings with initial maturities of less than one
year are defined as financial instruments under generally
accepted accounting principles and are reported on the
Consolidated Balance Sheets at cost, which approximates their
fair market value. The following sets forth the approximate fair
value and related carrying amounts of all other long-term debt,
preferred stock subject to mandatory redemption and investments
other than cash and cash equivalents as of December 31:
1997 1996
-------------- ---------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------
(In Millions)
Long-term debt $3,198 $3,238|$2,562 $2,630
Preferred stock $ 198 $ 198|$ 216 $ 220
Investments other than cash |
and cash equivalents: |
Debt securities |
- (Maturing in more than |
10 years) $ 547 $ 553|$ - $ -
All other 105 104| 75 75
- ----------------------------------------------|--------------
$ 652 $ 657|$ 75 $ 75
=============================================================
The carrying values of long-term debt and preferred
stock subject to mandatory redemption were adjusted to fair value
in connection with the merger and reflect the present value of
the cash outflows relating to those securities based on the
current call price, the yield to maturity or the yield to call,
as deemed appropriate at the end of each respective year. The
yields assumed were based on securities with similar
characteristics offered by a corporation with credit ratings
similar to the Company's ratings.
The fair value of investments other than cash and cash
equivalents represent cost (which approximates fair value) or the
present value of the cash inflows based on the yield to maturity.
The yields assumed were based on financial instruments with
similar characteristics and terms. Investments other than cash
and cash equivalents include decommissioning trusts investments.
Unrealized gains and losses applicable to the decommissioning
trusts have been recognized in the trust investments with a
corresponding change to the decommissioning liability. In 1996,
the Company and TE transferred most of their investment assets in
existing trusts into Centerior pooled trust funds for the two
companies. The amounts in the table represent the Company's pro
rata share of the fair value of such noncash investments. The
debt securities referred to above are in the held-to-maturity
category. The Company has no securities held for trading
purposes.
REGULATORY ASSETS-
The Company recognizes, as regulatory assets, costs
which the FERC and PUCO have authorized for recovery from
customers in future periods. Without such authorization, the
costs would have been charged to income as incurred. All
regulatory assets related to nonnuclear operations are being
recovered from customers under the Company's regulatory plan.
Based on the regulatory plan, at this time, the Company believes
it will continue to be able to bill and collect cost-based rates
(with the exception of the Company's nuclear operations as
discussed below); accordingly, it is appropriate that the Company
continue the application of SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation" (SFAS 71), in the
foreseeable future for its nonnuclear operations.
The Company discontinued the application of SFAS 71 for
its nuclear operations in October 1997 when implementation of the
regulatory plan became probable. The regulatory plan does not
provide for full recovery of the Company's nuclear operations. In
accordance with SFAS No. 101, "Regulated Enterprises --
Accounting for the Discontinuation of Application of SFAS 71,"
the Company was required to remove from its balance sheet all
regulatory assets and liabilities related to the portion of its
business for which SFAS 71 was discontinued and to assess all
other assets for impairment. Regulatory assets attributable to
nuclear operations of $499.1 million ($324.4 million after taxes)
were written off as an extraordinary item in October 1997. The
regulatory assets attributable to nuclear operations written off
represent the net amounts due from customers for future federal
income taxes when the taxes become payable, which, under the
regulatory plan, are no longer recoverable from customers. The
remainder of the Company's business continues to comply with the
provisions of SFAS 71. All remaining regulatory assets of the
Company will continue to be recovered through rates set for the
nonnuclear portion of its business. For financial reporting
purposes, the net book value of the nuclear generating units was
not impaired as a result of the regulatory plan.
Net regulatory assets on the Consolidated Balance Sheets
are comprised of the following:
At December 31, 1997 1996
- --------------------------------------------------------------
(In millions)
Nuclear unit expenses $ 309.0 $ 320.0
Customer receivables for future
income taxes 143.0 633.6
Rate stabilization program deferrals 288.1 300.3
Gain from Bruce Mansfield Plant sale* (274.4) -
Loss on reacquired debt 80.9 57.8
Other 33.1 38.0
- --------------------------------------------------------------
Total $ 579.7 $1,349.7
===============================================================
* The Gain from the Bruce Mansfield Plant sale was reclassified
as a regulatory liability in connection with the purchase
accounting adjustments, consistent with the ratemaking treatment.
2. OHIO EDISON-CENTERIOR MERGER:
FirstEnergy was formed on November 8, 1997 by the
merger of OE and Centerior. FirstEnergy holds directly all of the
issued and outstanding common shares of OE and all of the issued
and outstanding common shares of Centerior's former direct
subsidiaries, which include, among others, the Company and TE. As
a result of the merger, the former common shareholders of OE and
Centerior now own all of the outstanding shares of FirstEnergy
Common Stock. All other classes of capital stock of OE and its
subsidiaries and of the subsidiaries of Centerior are unaffected
by the Merger and remain outstanding.
The merger was accounted for as a purchase of
Centerior's net assets with 77,637,704 shares of FirstEnergy
Common Stock through the conversion of each outstanding Centerior
Common Stock share into 0.525 of a share of FirstEnergy Common
Stock (fractional shares were paid in cash). Based on an imputed
value of $20.125 per share, the purchase price was approximately
$1.582 billion which also included approximately $20 million of
merger related costs. Goodwill of approximately $2.1 billion was
recognized by FirstEnergy (to be amortized on a straight-line
basis over forty years), which represented the excess of the
purchase price over Centerior's net assets after fair value
adjustments. Such amount may be adjusted if additional
information produces changed assumptions over the twelve months
following the merger as FirstEnergy continues to integrate
operations and evaluate options with respect to its generation
portfolio.
The Company's merger purchase accounting adjustments,
which were recorded in the records of Centerior's direct
subsidiaries, primarily consist of (1) revaluation of the
Company's nuclear generating units to fair value ($1.0 billion),
based upon the results of an independent appraisal and estimated
discounted future cash flows expected to be generated by its
nuclear generating units (the estimated cash flows are based upon
management's current view of the likely cost recovery associated
with the nuclear units); (2) adjusting by $119 million its
preferred stock subject to mandatory redemption and long-term
debt to estimated fair value; (3) recognizing additional
obligations related to retirement benefits (pension liability -
$50 million and postretirement obligation - $71 million); (4)
recognizing the Company's estimated severance and other
compensation liabilities ($56 million); and (5) adjusting the
Company's common equity by $272 million. The nuclear assets
revaluation does not include decommissioning since that
obligation is expected to be recovered with the cash flows
provided by the regulated portion of the business. Other assets
and liabilities were not adjusted since they remain subject to
rate regulation on a historical cost basis. See Note 8.
3. LEASES:
The Company leases certain generating facilities,
nuclear fuel, certain transmission facilities, office space and
other property and equipment under cancelable and noncancelable
leases.
The Company and TE sold their ownership interests in
Bruce Mansfield Units 1, 2 and 3 and TE sold a portion of its
ownership interest in Beaver Valley Unit 2. In connection with
these sales, which were completed in 1987, the Company and TE
entered into operating leases for lease terms of approximately 30
years as co-lessees. During the terms of the leases, the Company
and TE continue to be responsible, to the extent of their
combined ownership and leasehold interest, for costs associated
with the units including construction expenditures, operation and
maintenance expenses, insurance, nuclear fuel, property taxes and
decommissioning. The Company and TE have the right, at the end of
the respective basic lease terms, to renew the leases. The
Company and TE also have the right to purchase the facilities at
the expiration of the basic lease term or renewal term (if
elected) at a price equal to the fair market value of the
facilities.
As co-lessee with TE, the Company is also obligated for
TE's lease payments. If TE is unable to make its payments under
the Beaver Valley Unit 2 and Bruce Mansfield Plant leases, the
Company would be obligated to make such payments. No such
payments have been made on behalf of TE. (TE's minimum lease
payments as of December 31, 1997 were $1.7 billion).
The Company is buying 150 megawatts of TE's Beaver
Valley Unit 2 leased capacity entitlement. Purchased power
expense for this transaction was $16.8 million, $87.4 million,
$99.4 million and $97.6 million in the November 8-December 31,
1997, the January 1-November 7, 1997 period, 1996 and 1995,
respectively. This purchase is expected to continue through the
end of the lease period. The future minimum lease payments
through 2017 associated with Beaver Valley Unit 2 are
approximately $1.2 billion.
Nuclear fuel is currently financed for the Company and
TE through leases with a special-purpose corporation. As of
December 31, 1997, $157 million of nuclear fuel ($93 million for
the Company) was financed under a lease financing arrangement
totaling $190 million ($90 million of intermediate-term notes and
$100 million from bank credit arrangements). The notes mature
from 1998 through 2000 and the bank credit arrangements expire in
October 1998. Lease rates are based on intermediate-term note
rates, bank rates and commercial paper rates.
Consistent with the regulatory treatment, the rentals
for capital and operating leases are charged to operating
expenses on the Consolidated Statements of Income. Such costs for
the three years ended December 31, 1997 are summarized as
follows:
<TABLE>
<CAPTION>
Nov. 8 - | Jan. 1 -
Dec. 31, 1997 | Nov. 7, 1997 1996 1995
- ----------------------------------------------------|------------------------------------
| (In millions)
<S> <C> | <C> <C> <C>
Operating leases |
Interest element $10.6 | $ 56.0 $ 58.1 $ 58.1
Other 8.4 | 18.3 4.8 4.8
Capital leases |
Interest element 1.5 | 8.5 10.1 10.7
Other 7.5 | 43.4 51.7 58.4
- ----------------------------------------------------|------------------------------------
Total rentals $28.0 | $126.2 $124.7 $132.0
=========================================================================================
The future minimum lease payments as of December 31, 1997 are:
Capital
Capital Operating Trust
Leases Leases Income Net
- --------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
1998 $ 47.0 $ 65.3 $ 40.1 $ 25.2
1999 33.4 69.3 38.2 31.1
2000 18.9 66.6 36.3 30.3
2001 8.5 71.7 35.0 36.7
2002 4.1 76.4 32.9 43.5
Years thereafter 10.8 853.7 227.7 626.0
- ---------------------------------------------------------------------------------
Total minimum lease payments 122.7 $1,203.0 $410.2 $792.8
======== ====== ======
Interest portion 24.2
- ----------------------------------------------
Present value of net minimum
lease payments 98.5
Less current portion 40.4
- ----------------------------------------------
Noncurrent portion $ 58.1
- -----------------------------------------------
</TABLE>
The Company and TE refinanced high-cost fixed
obligations related to their 1987 sale and leaseback transaction
for the Bruce Mansfield Plant through a lower cost transaction in
June and July 1997. In a June 1997 offering (Offering), the two
companies pledged $720 million aggregate principal amount ($575
million for the Company and $145 million for TE) of first
mortgage bonds due in 2000, 2004 and 2007 to a trust as security
for the issuance of a like principal amount of secured notes due
in 2000, 2004 and 2007. The obligations of the two companies
under these secured notes are joint and several. Using available
cash, short-term borrowings and the net proceeds from the
Offering, the two companies invested $906.5 million ($569.4
million for the Company and $337.1 million for TE) in a business
trust, in June 1997. The trust used these funds in July 1997 to
purchase lease notes and redeem all $873.2 million aggregate
principal amount of 10-1/4% and 11-1/8% secured lease obligation
bonds (SLOBs) due 2003 and 2016. The SLOBs were issued by a
special-purpose funding corporation in 1988 on behalf of lessors
in the two companies' 1987 sale and leaseback transaction. As
noted in the table above, the trust income, which is included in
Other Income in the Consolidated Statements of Income,
effectively reduce lease costs related to that transaction.
4. CAPITALIZATION:
(A) RETAINED EARNINGS-
There are no restrictions on retained earnings for
payment of cash dividends on the Company's common stock. The
merger purchase accounting adjustments included resetting the
retained earnings balance at zero at the November 8, 1997 merger
date.
(B) PREFERRED AND PREFERENCE STOCK-
The Company's $42.40 Series T and $88.00 Series R
preferred stock are not redeemable before June 1998 and December
2001, respectively, and its $90.00 Series S has no optional
redemption provision. All other preferred stock may be redeemed
by the Company in whole, or in part, with 30-90 days' notice.
The preferred dividend rate on the Company's Series L
fluctuates based on prevailing interest rates and market
conditions. The dividend rate for this issue was 7% in 1997.
Preference stock authorized for the Company is
3,000,000 shares without par value. No preference shares are
currently outstanding.
A liability of $14 million was included in the
Company's net assets as of the merger date for preferred
dividends declared attributable to the post-merger period.
Accordingly, no accrual for preferred stock dividend requirements
is included on the Company's November 8, 1997 to December 31,
1997 Consolidated Statement of Income.
(C) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION-
Annual sinking fund provisions for preferred stock are
as follows:
Redemption
Price Per
Series Shares Share Date Beginning
- -----------------------------------------------
$ 7.35 C 10,000 $ 100 (i)
88.00 E 3,000 1,000 (i)
91.50 Q 10,714 1,000 (i)
90.00 S 18,750 1,000 November 1 1999
88.00 R 50,000 1,000 December 1 2001
- -----------------------------------------------
i) Sinking fund provisions are in effect.
Annual sinking fund requirements for the next five
years are $14.7 million in 1998, $33.5 million in each year 1999
and 2000, $80.5 million in 2001 and $18.8 million in 2002.
(D) LONG-TERM DEBT-
The first mortgage indenture and its supplements, which
secure all of the Company's first mortgage bonds, serve as direct
first mortgage liens on substantially all property and
franchises, other than specifically excepted property, owned by
the Company.
Sinking fund requirements for first mortgage bonds and
maturing long-term debt (excluding capital leases) for the next
five years are:
(In millions)
- --------------------------------------------------------------
1998 $ 66.8
1999 145.5
2000 176.0
2001 57.5
2002 229.3
- --------------------------------------------------------------
The Company's obligations to repay certain pollution
control revenue bonds are secured by several series of first
mortgage bonds. One pollution control revenue bond issue is
entitled to the benefit of an irrevocable bank letter of credit
of $48.1 million. To the extent that drawings are made under this
letter of credit to pay principal of, or interest on, the
pollution control revenue bonds, the Company is entitled to a
credit against its obligation to repay those bonds. The Company
pays an annual fee of 1.1% of the amount of the letter of credit
to the issuing bank and is obligated to reimburse the bank for
any drawings thereunder.
The Company and TE have letters of credit of
approximately $225 million in connection with the sale and
leaseback of Beaver Valley Unit 2 that expire in June 1999. The
letters of credit are secured by first mortgage bonds of the
Company and TE in the proportion of 40% and 60%, respectively
(see Note 3).
5. SHORT-TERM BORROWINGS:
FirstEnergy has a $125 million revolving credit
facility that expires in May 1998. FirstEnergy and the Service
Company may borrow under the facility, with all borrowings
jointly and severally guaranteed by the Company and TE.
FirstEnergy plans to transfer any of its borrowed funds to the
Company and TE. The credit agreement is secured with first
mortgage bonds of the Company and TE in the proportion of 40% and
60%, respectively. The credit agreement also provides the
participating banks with a subordinate mortgage security interest
on the properties of the Company and TE. The banks' fee is 0.625%
per annum payable quarterly in addition to interest on any
borrowings. There were no borrowings under the facility at
December 31, 1997. Also, the Company may borrow from its
affiliates on a short-term basis. At December 31, 1997, the
Company had total short-term borrowings of $56.8 million from its
affiliates with a weighted average interest rate of approximately
6%.
6. COMMITMENTS, GUARANTEES AND CONTINGENCIES:
CAPITAL EXPENDITURES-
The Company's current forecast reflects expenditures of
approximately $430 million for property additions and
improvements from 1998-2002, of which approximately $105 million
is applicable to 1998. Investments for additional nuclear fuel
during the 1998-2002 period are estimated to be approximately
$172 million, of which approximately $32 million applies to 1998.
During the same periods, the Company's nuclear fuel investments
are expected to be reduced by approximately $113 million and $42
million, respectively, as the nuclear fuel is consumed.
NUCLEAR INSURANCE-
The Price-Anderson Act limits the public liability
relative to a single incident at a nuclear power plant to $8.92
billion. The amount is covered by a combination of private
insurance and an industry retrospective rating plan. Based on its
present ownership and leasehold interests in Beaver Valley Unit
2, the Davis-Besse Nuclear Power Station (Davis-Besse) and the
Perry Nuclear Power Plant (Perry), the Company's maximum
potential assessment under the industry retrospective rating plan
(assuming the other CAPCO companies were to contribute their
proportionate share of any assessments under the retrospective
rating plan) would be $84 million per incident but not more than
$10.7 million in any one year for each incident.
The Company is also insured as to its respective
interests in Beaver Valley Unit 2, Davis-Besse and Perry under
policies issued to the operating company for each plant. Under
these policies, up to $2.75 billion is provided for property
damage and decontamination and decommissioning costs. The Company
has also obtained approximately $316 million of insurance
coverage for replacement power costs for its respective interests
in Beaver Valley Unit 2, Davis-Besse and Perry. Under these
policies, the Company can be assessed a maximum of approximately
$13 million for incidents at any covered nuclear facility
occurring during a policy year which are in excess of accumulated
funds available to the insurer for paying losses.
The Company intends to maintain insurance against nuclear risks
as described above as long as it is available. To the extent that
replacement power, property damage, decontamination,
decommissioning, repair and replacement costs and other such
costs arising from a nuclear incident at any of the Company's
plants exceed the policy limits of the insurance in effect with
respect to that plant, to the extent a nuclear incident is
determined not to be covered by the Company's insurance policies,
or to the extent such insurance becomes unavailable in the
future, the Company would remain at risk for such costs.
GUARANTEE-
The Company, together with the other CAPCO companies,
has severally guaranteed certain debt and lease obligations in
connection with a coal supply contract for the Bruce Mansfield
Plant. As of December 31, 1997, the Company's share of the
guarantee (which approximates fair market value) was $14.3
million. The price under the coal supply contract, which includes
certain minimum payments, has been determined to be sufficient to
satisfy the debt and lease obligations. The Company's total
payments under the coal supply contract were $51.2 million, $47.0
million and $38.6 million during 1997, 1996 and 1995,
respectively. The Company's minimum annual payments are
approximately $14 million under the contract, which expires
December 31, 1999.
ENVIRONMENTAL MATTERS-
Various federal, state and local authorities regulate
the Company with regard to air and water quality and other
environmental matters. The Company has estimated additional
capital expenditures for environmental compliance of
approximately $12 million, which is included in the construction
forecast provided under "Capital Expenditures" for 1998 through
2002.
The Company is in compliance with the current sulfur
dioxide (SO2) and nitrogen oxides (NOX) reduction requirements
under the Clean Air Act Amendments of 1990. SO2 reductions
through the year 1999 will be achieved by burning lower-sulfur
fuel, generating more electricity from lower-emitting plants,
and/or purchasing emission allowances. Plans for complying with
reductions required for the year 2000 and thereafter have not
been finalized. The Environmental Protection Agency (EPA) is
conducting additional studies which could indicate the need for
additional NOX reductions from the Bruce Mansfield Plant by the
year 2003. In addition, the EPA is also considering the need for
additional NOX reductions from the Company's Ohio facilities. On
November 7, 1997, the EPA proposed uniform reductions of NOX
emissions across a region of twenty-two states, including Ohio
and the District of Columbia (NOX Transport Rule) after
determining that such NOX emissions are contributing
significantly to ozone pollution in the eastern United States. In
a separate but related action, eight states filed petitions with
the EPA under Section 126 of the Clean Air Act seeking reductions
of NOX emissions which are alleged to contribute to ozone
pollution in the eight petitioning states. A December 1997 EPA
Memorandum of Agreement proposes to finalize the NOX Transport
Rule by September 30, 1998 and establishes a schedule for EPA
action on the Section 126 petitions. The cost of NOX reductions,
if required, may be substantial. The Company continues to
evaluate its compliance plans and other compliance options.
The Company is required to meet federally approved SO2
regulations. Violations of such regulations can result in
shutdown of the generating unit involved and/or civil or criminal
penalties of up to $25,000 for each day the unit is in violation.
The EPA has an interim enforcement policy for SO2 regulations in
Ohio that allows for compliance based on a 30-day averaging
period. The Company cannot predict what action the EPA may take
in the future with respect to proposed regulations or the interim
enforcement policy.
The Company is aware of its potential involvement in
the cleanup of three hazardous waste disposal sites listed on the
Superfund National Priorities List and several other sites. The
Company has accrued a liability totaling $4.8 million at December
31, 1997 based on estimates of the costs of cleanup and its
proportionate responsibility for such costs. The Company believes
that the ultimate outcome of these matters will not have a
material adverse effect on the its financial condition, cash
flows or results of operations.
Legislative, administrative and judicial actions will
continue to change the way that the Company must operate in order
to comply with environmental laws and regulations. With respect
to any such changes and to the environmental matters described
above, the Company expects that any resulting additional capital
costs which may be required, as well as any required increase in
operating costs, would ultimately be recovered from its
customers.
7. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED):
The following summarizes certain consolidated operating
results by quarter for 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
Mar. 31, June 30, Sept. 30, Oct. 1 - | Nov. 8 -
1997 1997 1997 Nov. 7, 1997 | Dec. 31, 1997
- ----------------------------------------------------------------------------------|---------------
(In millions) |
<S> <C> <C> <C> <C> | <C>
Operating Revenues $431.6 $428.2 $499.5 $169.7 | $254.0
Operating Expenses and Taxes 351.6 350.8 368.0 151.3 | 204.5
- ----------------------------------------------------------------------------------|------------
Operating Income 80.0 77.4 131.5 18.4 | 49.5
Other Income (Loss) (3.7) (5.2) 7.5 (1.2) | 4.6
Net Interest Charges 56.1 58.2 71.3 24.0 | 34.8
- ----------------------------------------------------------------------------------|------------
Income (Loss) Before |
Extraordinary Item 20.2 14.0 67.7 (6.8) | 19.3
Extraordinary Item (Net |
of Income Taxes) (Note 1) - - - (324.4) | -
- ----------------------------------------------------------------------------------|------------
Net Income (Loss) $ 20.2 $ 14.0 $ 67.7 $(331.2) | $ 19.3
- ----------------------------------------------------------------------------------|------------
Earnings (Loss) on Common Stock $ 10.9 $ 4.9 $ 58.9 $(348.9) | $ 19.3
- ----------------------------------------------------------------------------------|------------
<CAPTION>
March 31, June 30, September 30, December 31,
Three Months Ended 1996 1996 1996 1996
- -------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Operating Revenues $427.5 $434.0 $506.5 $421.9
Operating Expenses
and Taxes 351.7 348.1 385.8 345.7
- ----------------------------------------------------------------------------
Operating Income 75.8 85.9 120.7 76.2
Other Income (Loss) 1.3 .7 (2.7) (1.4)
Net Interest Charges 60.3 61.4 59.3 59.0
- ----------------------------------------------------------------------------
Net Income $ 16.8 $ 25.2 $ 58.7 $ 15.8
- ----------------------------------------------------------------------------
Earnings on Common Stock $ 6.8 $ 15.3 $ 49.2 $ 6.5
- ----------------------------------------------------------------------------
</TABLE>
Earnings for the quarter ended September 30, 1996 were
decreased by $10.8 million as a result of a $16.6 million charge
for the disposition of materials and supplies inventory as part
of the reengineering of the supply chain process.
8. PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME UNAUDITED):
The following pro forma statements of income for the
Company give effect to the OE-Centerior merger as if it had been
consummated on January 1, 1996, with the purchase accounting
adjustments actually recognized in the business combination.
Year Ended December 31,
----------------------
1997 1996
- ----------------------------------------------------------------
(In millions)
Operating Revenues $1,783 $1,790
Operating Expenses and Taxes 1,418 1,423
------ ------
Operating Income 365 367
Other Income 15 2
Net Interest Charges 232 227
------ ------
Net Income $ 148 $ 142
=============================================================
Pro forma adjustments reflected above include: (1) adjusting the
Company's nuclear generating units to fair value based upon
independent appraisals and estimated discounted future cash flows
based on management's current view of cost recovery; (2) the
effect of discontinuing SFAS 71 for the Company's nuclear
operations; (3) amortization of the fair value adjustment for
long-term debt; (4) goodwill recognized representing the excess
of the Company's portion of the purchase price over the Company's
adjusted net assets; (4) the elimination of merger costs; and (5)
adjustments for estimated tax effects of the above adjustments.
See Note 2.
9. PENDING MERGER OF TE INTO THE COMPANY:
In March 1994, Centerior announced a plan to merge TE
into the Company. All necessary regulatory approvals have been
obtained, except the approval of the Nuclear Regulatory
Commission (NRC). This application was withdrawn at the NRC's
request pending the decision whether to complete this merger. No
final decision regarding the proposed merger has been reached.
In June 1995, TE's preferred stockholders approved the
merger and the Company's preferred stockholders approved the
authorization of additional shares of preferred stock. If and
when the merger becomes effective, TE's preferred stockholders
will exchange their shares for preferred stock shares of the
Company having substantially the same terms. Debt holders of the
merging companies will become debt holders of the Company.
For the merging companies, the combined pro forma
operating revenues were $2.527 billion, $2.554 billion and $2.516
billion and the combined pro forma net income was $220 million
(excluding the extraordinary item discussed in Note 1 and a
similar item for TE), $218 million and $281 million for the years
1997, 1996 and 1995, respectively. The pro forma data is based on
accounting for the merger of the Company and TE on a method
similar to a pooling of interests and for 1997 and 1996 includes
pro forma adjustments to reflect the effect of the OE and
Centerior merger (see Note 8). The pro forma data is not
necessarily indicative of the results of operations which would
have been reported had the merger been in effect during those
years or which may be reported in the future. The pro forma data
should be read in conjunction with the audited financial
statements of both the Company and TE.
Report of Independent Public Accountants
To the Stockholders and Board of Directors of The Cleveland
Electric Illuminating Company:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of The Cleveland
Electric Illuminating Company (an Ohio corporation and wholly
owned subsidiary of FirstEnergy Corp.) and subsidiary as of
December 31, 1997 (post-merger) and 1996 (pre-merger), and the
related consolidated statements of income, retained earnings,
capital stock and other paid-in capital, cash flows and taxes 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). These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of The Cleveland Electric Illuminating Company and subsidiary as
of December 31, 1997 (post-merger) and 1996 (pre-merger), and the
results of their operations and their cash flows 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), in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
February 13, 1998
EXHIBIT 21.2
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
LIST OF SUBSIDIARIES OF THE REGISTRANT
AT DECEMBER 31, 1997
Centerior Funding Corporation - Incorporated in Ohio
Statement of Differences
------------------------
Exhibit Number 21, List of Subsidiaries of the Registrant at
December 31, 1997, is not included in the printed document.
EXHIBIT 23.2
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to
the incorporation of our reports included or incorporated by
reference in this Form 10-K, into The Cleveland Electric
Illuminating Company's previously filed Registration Statements,
File No. 33-55513 and No. 333-47651.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RELATED
FORM 10-K FINANCIAL STATEMENTS FOR THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000020947
<NAME> THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,156,659
<OTHER-PROPERTY-AND-INVEST> 701,900
<TOTAL-CURRENT-ASSETS> 300,969
<TOTAL-DEFERRED-CHARGES> 2,280,756
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6,440,284
<COMMON> 931,614
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 19,290
<TOTAL-COMMON-STOCKHOLDERS-EQ> 950,904
183,174
238,325
<LONG-TERM-DEBT-NET> 3,189,590
<SHORT-TERM-NOTES> 56,802
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 66,830
14,714
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 40,421
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,699,425
<TOT-CAPITALIZATION-AND-LIAB> 6,440,284
<GROSS-OPERATING-REVENUE> 1,782,977
<INCOME-TAX-EXPENSE> 86,310
<OTHER-OPERATING-EXPENSES> 1,339,833
<TOTAL-OPERATING-EXPENSES> 1,426,143
<OPERATING-INCOME-LOSS> 356,834
<OTHER-INCOME-NET> 2,096
<INCOME-BEFORE-INTEREST-EXPEN> 358,930
<TOTAL-INTEREST-EXPENSE> 244,449
<NET-INCOME> (209,957)
45,029
<EARNINGS-AVAILABLE-FOR-COMM> (254,986)
<COMMON-STOCK-DIVIDENDS> 123,602
<TOTAL-INTEREST-ON-BONDS> 235,288
<CASH-FLOW-OPERATIONS> 511,942
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED FINANCIAL AND OPERATING STATISTICS
<CAPTION>
Nov. 8 - Jan. 1 -
Dec. 31, 1997| Nov. 7, 1997 1996 1995 1994 1993
- ----------------------------------------|------------------------------------------------------------
| (Dollars in thousands)
<S> <C> | <C> <C> <C> <C> <C>
|
GENERAL FINANCIAL INFORMATION |
|
Operating Revenues $ 122,669 | $ 772,707 $ 897,259 $ 873,657 $ 864,647 $ 870,841
========== | ========== ========== ========== ========== ==========
Operating Income $ 19,055 | $ 123,282 $ 156,815 $ 188,068 $ 179,499 $ 88,502
========== | ========== ========== ========== ========== ==========
Income (Loss) Before |
Extraordinary Item $ 7,616 | $ 41,769 $ 57,289 $ 96,762 $ 82,531 $ (289,275)
========== | ========== ========== ========== ========== ==========
Net Income (Loss) $ 7,616 | $ (150,132) $ 57,289 $ 96,762 $ 82,531 $ (289,275)
========== | ========== ========== ========== ========== ==========
Earnings (Loss) on Common |
Stock $ 7,616 | $ (169,567) $ 40,363 $ 78,510 $ 62,311 $ (311,757)
========== | ========== ========== ========== ========== ==========
Net Utility Plant $1,170,806 | $2,079,742 $2,122,266 $2,204,717 $2,262,407
========== | ========== ========== ========== ==========
Total Assets $2,758,152 | $3,428,175 $3,532,714 $3,546,628 $3,543,520
========== | ========== ========== ========== ==========
CAPITALIZATION: |
Common Stockholder's Equity $ 531,650 | $ 803,237 $ 762,877 $ 684,568 $ 622,375
Preferred Stock - |
Not Subject to Mandatory |
Redemption 210,000 | 210,000 210,000 210,000 210,000
Subject to Mandatory |
Redemption 1,690 | 3,355 5,020 6,685 28,350
Long-Term Debt 1,210,190 | 1,051,517 1,119,294 1,241,331 1,328,283
---------- | ---------- ---------- ---------- ----------
Total Capitalization $1,953,530 | $2,068,109 $2,097,191 $2,142,584 $2,189,008
========== | ========== ========== ========== ==========
CAPITALIZATION RATIOS: |
Common Stockholder's Equity 27.2%| 38.8% 36.4% 32.0% 28.4%
Preferred Stock - |
Not Subject to Mandatory |
Redemption 10.8 | 10.2 10.0 9.8 9.6
Subject to Mandatory |
Redemption .1 | .2 .2 .3 1.3
Long-Term Debt 61.9 | 50.8 53.4 57.9 60.7
----- | ----- ----- ----- -----
Total Capitalization 100.0%| 100.0% 100.0% 100.0% 100.0%
===== | ===== ===== ===== =====
KILOWATT-HOUR SALES (Millions): |
Residential 355 | 1,718 2,145 2,164 2,056 2,039
Commercial 284 | 1,498 1,790 1,748 1,711 1,672
Industrial 847 | 4,003 4,301 4,174 4,099 3,776
Other 79 | 413 488 500 499 490
---------- | ---------- ---------- ---------- --------- ----------
Total Retail 1,565 | 7,632 8,724 8,586 8,365 7,977
Total Wholesale 435 | 2,218 2,330 2,563 2,548 2,146
---------- | ---------- ---------- ---------- --------- ----------
Total 2,000 | 9,850 11,054 11,149 10,913 10,123
========== | ========== ========== ========== ========= ==========
CUSTOMERS SERVED (Year-End): |
Residential 262,501 | 261,541 260,007 256,998 255,109
Commercial 27,562 | 27,411 26,508 25,921 26,049
Industrial 1,835 | 1,839 1,846 1,839 1,761
Other 2,152 | 2,136 2,119 1,858 2,315
---------- | ---------- ---------- --------- ----------
Total 294,050 | 292,927 290,480 286,616 285,234
========== | ========== ========== ========= ==========
Average Annual Residential |
kWh Usage 7,937 | 8,284 8,384 8,044 7,997
Peak Load-Megawatts 1,813 | 1,758 1,738 1,620 1,568
Number of Employees (Year-End) 1,532 | 1,643 1,809 1,887 1,909
</TABLE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
This discussion includes forward looking statements based
on information currently available to management. Such statements
are subject to certain risks and uncertainties. These statements
typically contain, but are not limited to, the terms "anticipate",
"potential", "expect", "believe", "estimate" and similar words.
Actual results may differ materially due to the speed and nature of
increased competition and deregulation in the electric utility
industry, economic or weather conditions affecting future sales and
margins, changes in markets for energy services, changing energy
market prices, legislative and regulatory changes (including
revised environmental requirements), availability and cost of
capital and other similar factors.
RESULTS OF OPERATIONS
We continued to make significant progress in 1997 as we
prepare for a more competitive environment in the electric utility
industry.
The most significant event during the year was the
approval by the Federal Energy Regulatory Commission (FERC) of the
merger of our former parent company, Centerior Energy Corporation,
with Ohio Edison Company to form FirstEnergy Corp., which came into
existence on November 8, 1997. We expect the merger to produce a
minimum of $1 billion in savings for FirstEnergy Corp. during the
first ten years of joint operations through the elimination of
duplicative activities, improved operating efficiencies, lower
capital expenditures, accelerated debt reduction, the coordination
of the companies' work forces and enhanced purchasing power.
The merger was accounted for using the purchase method of
accounting in accordance with generally accepted accounting
principles (see Note 2), and the applicable effects were "pushed
down," or reflected on the separate financial statements of
Centerior's direct subsidiaries as of the merger date. As a result,
we recorded purchase accounting fair value adjustments to: (1)
revalue our nuclear generating units to fair value, (2) adjust
long-term debt to fair value, (3) adjust our retirement and
severance benefit liabilities, and (4) record goodwill.
Accordingly, the post-merger financial statements reflect a new
basis of accounting, and separate financial statements are
presented for the pre-merger and post-merger periods. For the
remainder of this discussion, for categories substantially
unaffected by the merger and with no significant pre-merger or
post-merger accounting events, we have combined the 1997 pre-merger
and post-merger periods and have compared the total to 1996.
Earnings on common stock in the 1997 pre-merger period
were adversely affected by an extraordinary item resulting from the
October 1997 write-off of certain regulatory assets discussed
below. Excluding this write-off, pre-merger 1997 earnings on common
stock were $22.3 million. Earnings on common stock for the 1997
post-merger period were $7.6 million. In 1996, earnings on common
stock were $40.4 million which was lower than 1995 due primarily to
the delay in implementing our 1996 rate increase and the end of
certain regulatory accounting deferrals in November 1995.
Operating revenues were down $1.9 million in 1997 from
1996 levels following a $23.6 million increase in 1996 compared to
1995. A factor contributing to the lower operating revenues in 1997
was a reduction in average retail prices due in part to contract
renegotiations with certain large industrial customers. The
following table summarizes the sources of changes in operating
revenues for 1997 and 1996 as compared to the previous year:
1997 1996
---- ----
(In millions)
Increased retail kilowatt-hour sales $ 14.4 $19.2
Change in average retail price (23.4) 3.4
Sales to utilities 7.8 3.2
Other (0.7) (2.2)
------ -----
Net Change $ (1.9) $23.6
====== =====
Total kilowatt-hour sales were at a new high with 11.9
billion kilowatt-hours sold. Retail sales totaled 9.2 billion
kilowatt-hours, a 5.4% increase from the prior year level.
Residential sales decreased 3.3% in 1997 following a 0.9% decline
the previous year. Commercial sales were down 0.5% after a 2.4%
increase in 1996. Industrial sales increased 12.8% in the current
year following a 3.0% increase in 1996. Excluding sales to the
North Star BHP Steel facility which began operations in late 1996,
industrial sales increased 4.6% in 1997. Sales to other utilities
increased 11.6%, compared to an 8.5% decrease in 1996. Overall,
there was a 7.2% increase in 1997 total kilowatt-hour sales based
on the strength of industrial sales following a 0.9% decrease in
1996 compared to 1995.
We spent more for fuel and purchased power during 1997
and 1996 compared to 1996 and 1995, respectively, due to higher
purchased power costs. In 1997, the increase was partially offset
by lower fuel expense. An increase in the mix of nuclear generation
to coal-fired generation contributed to the lower fuel costs.
Nuclear expenses in 1997 were relatively unchanged from 1996 as
increased operating costs at the Beaver Valley Plant were
substantially offset by lower operating costs at the Perry and
Davis-Besse Plants. Nuclear expenses in 1996 increased from 1995
due principally to higher operating costs at Davis-Besse resulting
from its refueling outage. Other operating costs in the pre-merger
period of 1997 included a $9.3 million charge for severance and
early retirement benefits. In 1996, other operating costs decreased
compared to 1995 reflecting the Company's cost reduction program.
Depreciation and amortization increased in the 1997 pre-
merger period and in 1996 principally due to changes in
depreciation rates approved in the April 1996 Public Utilities
Commission of Ohio (PUCO) rate order. In the post-merger period
depreciation and amortization was lower due to a fair value
adjustment which was recorded in connection with accounting for the
merger, which was partially offset by amortization of goodwill.
Amortization of regulatory assets remained nearly unchanged in 1997
after a large increase in 1996 following cessation of the Rate
Stabilization Program deferrals and initiation of their
amortization. Income taxes increased in 1997, compared to 1996, as
a function of taxable income, following a decrease in 1996 from the
prior year due to lower pretax operating income.
Other income increased in the 1997 pre-merger and post-
merger periods reflecting interest income on trust notes acquired
in connection with the Bruce Mansfield Plant lease refinancing (see
Note 3). The increase in income in the pre-merger period was offset
in part by merger-related expenses. A write-down of two inactive
production facilities totaling $11 million and our share of merger-
related expenses were the primary causes of the decrease in other
income in 1996, compared to 1995. Interest costs were higher
overall in 1997 because new secured notes and short-term borrowings
for the Bruce Mansfield Plant lease refinancing exceeded the
expense reduction from the redemption and refinancing of debt
securities in 1997 and 1996.
CAPITAL RESOURCES AND LIQUIDITY
Our financial position has improved over the past five
years. Cash generated from operations was 27% higher in 1997 than
it was in 1992 due to higher revenues and aggressive cost controls.
At the end of 1997 we had 890 fewer employees than five years ago
as a result of our focus on becoming more competitive. The
availability of additional cash generated from operations increased
the Company's ability to redeem higher cost debt and preferred
stock. We have also actively pursued refinancing activities which
replace higher cost debt and preferred stock with lower cost
issues. The merger has resulted in improved credit ratings which
have lowered the cost of new issues. The following table summarizes
changes in credit ratings resulting from the merger.
<TABLE>
<CAPTION>
Pre-Merger Post-Merger
--------------------------- --------------------------
Standard Moody's Standard Moody's
& Poor's Investors & Poor's Investors
Corporation Service, Inc. Corporation Service, Inc.
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
First mortgage bonds BB Ba2 BB+ Ba1
Subordinated debt B+ B1 BB- Ba3
Preferred Stock B b2 BB- b1
</TABLE>
Excluding the effect of the Bruce Mansfield Plant lease
refinancing described below, interest costs and preferred dividends
have been reduced by approximately $2.8 million from 1996 levels.
Through economic refinancings and redemption of higher cost debt we
have reduced the average cost of outstanding debt from 9.4% in 1992
to 8.25% in 1997. The Bruce Mansfield Plant lease refinancing is
expected to provide an average annual after tax savings of about
$10 million resulting from an increase in interest income and a
decrease in rent expense offset in part by increased interest
expense on secured notes issued as part of the transaction.
Our cash requirements in 1998 for operating expenses,
construction expenditures and scheduled debt maturities are
expected to be met without issuing additional securities. We have
cash requirements of approximately $442.6 million for the 1998-2002
period to meet scheduled maturities of long-term debt and preferred
stock. Of that amount, approximately $40.6 million applies to 1998.
We had about $22.2 million of cash and temporary
investments and no short-term indebtedness on December 31, 1997.
Upon completion of the merger, application of purchase accounting
reduced bondable property such that we are not currently able to
issue additional first mortgage bonds, except in connection with
refinancings. Together with CEI, as of December 31, 1997, we had
unused borrowing capability of $125 million under a revolving line
of credit.
Our capital spending for the period 1998-2002 is expected
to be about $200 million (excluding nuclear fuel), of which
approximately $50 million applies to 1998. This spending level is
about $30 million lower than actual capital outlays over the past
five years. Investments for additional nuclear fuel during the
1998-2002 period are estimated to be approximately $140 million, of
which about $27 million applies to 1998. During the same periods,
our nuclear fuel investments are expected to be reduced by
approximately $85 million and $30 million, respectively, as the
nuclear fuel is consumed. Also, we have operating lease commitments
net of trust income of approximately $432 million for the 1998-2002
period, of which approximately $81 million relates to 1998. We
recover the cost of nuclear fuel consumed and operating leases
through our electric rates.
OUTLOOK
We face many competitive challenges in the years ahead as
the electric utility industry undergoes significant changes,
including changing regulation and the entrance of more energy
suppliers into the marketplace. Retail wheeling, which would allow
retail customers to purchase electricity from other energy
producers, will be one of those challenges. The FirstEnergy Rate
Reduction and Economic Development Plan provides the foundation to
position us to meet the challenges we are facing by significantly
reducing fixed costs and lowering rates to a more competitive
level. The plan was approved by the PUCO in January 1997, and
initially maintains current base electric rates through December
31, 2005. The plan also revised our fuel recovery methods.
As part of the regulatory plan, interim reductions
beginning in June 1998 of $3 per month will increase to $5 per
month per residential customer by July 1, 2001 followed by a $93
million base rate reduction in 2006. Total savings of $111 million
are anticipated over the term of the plan for our customers. We
have also committed $35 million for economic development and energy
efficiency programs.
We have been authorized by the PUCO to recognize
additional depreciation related to our generating assets and
additional amortization of regulatory assets during the regulatory
plan period of at least $647 million more than the amounts that
would have been recognized if the regulatory plans were not in
effect. For regulatory purposes these additional charges will be
reflected over the rate plan period. Our regulatory plan does not
provide for full recovery of nuclear operations. Accordingly,
regulatory assets representing customer receivables for future
income taxes related to nuclear assets of $295 million were written
off ($192 million net of tax impact) prior to consummation of the
merger since we ceased application of Statement of Financial
Accounting Standards No. 71 "Accounting for the Effects of Certain
Types of Regulation" (SFAS 71) for our nuclear operations when
implementation of the FirstEnergy regulatory plan became probable.
Based on the regulatory environment we operate in today
and our regulatory plan, we believe we will continue to be able to
bill and collect cost-based rates relating to our nonnuclear
operations; accordingly, it is appropriate that we continue the
application of SFAS 71 for those operations. However, as discussed
below, changes in the regulatory environment are on the horizon.
The Ohio legislature is in the discussion stages of restructuring
the electric utility industry within the State. We do not expect
any changes in regulation to be effective within the next two years
and we cannot assess what the ultimate impact may be.
At the consummation of the merger in November 1997, we
recognized a fair value purchase accounting adjustment which
decreased the carrying value of our nuclear assets by approximately
$842 million based upon cash flow models. The fair value adjustment
to nuclear plant recognized for financial reporting purposes will
ultimately satisfy the asset reduction commitment contained in our
regulatory plan over the regulatory plan period.
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. We cannot predict when or if this legislation
will be introduced and if it will be passed into law. We continue
to study the potential effects that such legislation would have on
our financial position and results of operations.
The Financial Accounting Standards Board (FASB) issued a
proposed accounting standard for nuclear decommissioning costs in
February 1996. If the standard is adopted as proposed: (1) annual
provisions for decommissioning could increase; (2) the net present
value of estimated decommissioning costs could be recorded as a
liability; and (3) income from the external decommissioning trusts
could be reported as investment income. The FASB reported in
October 1997 that it plans to continue working on the proposal in
1998.
The Clean Air Act Amendments of 1990, discussed in Note
6, require additional emission reductions by 2000. We are pursuing
cost-effective compliance strategies for meeting the reduction
requirements that begin in 2000.
We are aware of our potential involvement in the cleanup
of several sites containing hazardous waste. Although these sites
are not on the Superfund National Priorities List, they are
generally being administered by various governmental entities in
the same manner as they would be administered if they were on such
list. Allegations that we disposed of hazardous waste at these
sites, and the amount involved are often unsubstantiated and
subject to dispute. Federal law provides that all "potentially
responsible parties" for a particular site be held liable on a
joint and several basis. If we were held liable for 100% of the
cleanup costs of all the sites referred to above, the cost could be
as high as $100 million. However, we believe that the actual
cleanup costs will be substantially lower than $100 million, that
our share of any cleanup costs will be substantially less than 100%
and that most of the other parties involved are financially able to
contribute their share. We have accrued a $1.1 million liability as
of December 31, 1997, based on estimates of the costs of cleanup
and our proportionate responsibility for such cost. We believe
that the ultimate outcome of these matters will not have a material
adverse effect on our financial condition, cash flows or results of
operations.
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.
We are utilizing both internal and external resources to
reprogram and/or replace and test the 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 $10 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 $1 million
will be expensed as incurred over the next two years. To date, we
have incurred approximately $150,000 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.
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Nov. 8 - | Jan. 1 - For the Years Ended December 31,
| --------------------------------
Dec. 31, 1997 | Nov. 7, 1997 1996 1995
- ----------------------------------------------------|-------------------------------------------------
| (In thousands)
<S> <C> | <C> <C> <C>
OPERATING REVENUES (1) $122,669 | $ 772,707 $897,259 $873,657
-------- | --------- -------- --------
OPERATING EXPENSES AND TAXES: |
Fuel and purchased power 21,261 | 149,890 168,909 156,874
Nuclear operating costs 28,977 | 132,931 161,321 145,836
Other operating costs 22,668 | 158,939 173,530 182,838
-------- | --------- -------- ---------
Total operation and |
maintenance expenses 72,906 | 441,760 503,760 485,548
Provision for depreciation |
and amortization 10,795 | 84,682 98,042 92,911
Amortization (deferral) of net |
regulatory assets 2,338 | 14,304 17,041 (16,799)
General taxes 13,126 | 77,426 89,647 91,042
Income taxes 4,449 | 31,253 31,954 32,887
-------- | --------- -------- --------
Total operating expenses and taxes 103,614 | 649,425 740,444 685,589
-------- | --------- -------- --------
|
OPERATING INCOME 19,055 | 123,282 156,815 188,068
|
OTHER INCOME (LOSS) 2,153 | 2,153 (4,585) 18,835
-------- | --------- -------- --------
|
INCOME BEFORE NET INTEREST CHARGES 21,208 | 125,435 152,230 206,903
-------- | --------- -------- --------
NET INTEREST CHARGES: |
Interest on long-term debt 13,689 | 74,264 85,535 98,550
Allowance for borrowed funds |
used during construction (138) | (259) (827) (674)
Other interest expense 41 | 9,661 10,233 12,265
-------- | --------- -------- --------
Net interest 13,592 | 83,666 94,941 110,141
-------- | --------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 7,616 | 41,769 57,289 96,762
|
EXTRAORDINARY ITEM (NET OF INCOME |
TAXES) (Note 1) - | (191,901) - -
-------- | --------- -------- --------
|
NET INCOME (LOSS) 7,616 | (150,132) 57,289 96,762
|
PREFERRED STOCK DIVIDEND |
REQUIREMENTS - | 19,435 16,926 18,252
-------- | --------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $ 7,616 | $(169,567) $ 40,363 $ 78,510
======== | ========= ======== ========
<FN>
(1) Includes electric sales to The Cleveland Electric Illuminating
Company of $17.7 million, $98.5 million, $105.0 million and $102.1
million in the November 8-December 31, 1997 period, the January 1-
November 7, 1997 period, 1996 and 1995, respectively.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
At December 31, 1997 1996
- ---------------------------------------------------------------------------------------------
(In thousands)
ASSETS |
<S> <C> | <C>
UTILITY PLANT: |
In service $1,763,495 | $3,138,344
Less--Accumulated provision for depreciation 619,222 | 1,084,933
---------- | ----------
1,144,273 | 2,053,411
---------- | ----------
Construction work in progress-- |
Electric plant 19,901 | 21,479
Nuclear fuel 6,632 | 4,852
---------- | ----------
26,533 | 26,331
---------- | ----------
1,170,806 | 2,079,742
---------- | ----------
OTHER PROPERTY AND INVESTMENTS: |
Shippingport Capital Trust (Note 3) 312,873 | -
Nuclear plant decommissioning trusts 85,956 | 64,093
Other 3,164 | 6,281
---------- | ----------
401,993 | 70,374
---------- | ----------
CURRENT ASSETS: |
Cash and cash equivalents 22,170 | 81,454
Receivables-- |
Customers 19,071 | 18,337
Associated companies 15,199 | 13,519
Other 2,593 | 5,567
Notes receivable from associated companies 40,802 | 81,817
Materials and supplies, at average cost-- |
Owned 31,892 | 33,160
Under consignment 9,538 | 10,383
Prepayments and other 26,437 | 26,206
---------- | ----------
167,702 | 270,443
---------- | ----------
DEFERRED CHARGES: |
Regulatory assets 442,724 | 927,629
Goodwill 514,462 | -
Property taxes 45,338 | 45,625
Other 15,127 | 34,362
---------- | ----------
1,017,651 | 1,007,616
---------- | ----------
$2,758,152 | $3,428,175
========== | ==========
CAPITALIZATION AND LIABILITIES |
|
CAPITALIZATION (See Consolidated Statements of Capitalization): |
Common stockholder's equity $ 531,650 | $ 803,237
Preferred stock-- |
Not subject to mandatory redemption 210,000 | 210,000
Subject to mandatory redemption 1,690 | 3,355
Long-term debt 1,210,190 | 1,051,517
---------- | ----------
1,953,530 | 2,068,109
---------- | ----------
CURRENT LIABILITIES: |
Currently payable long-term debt and preferred stock 69,979 | 87,609
Accounts payable-- |
Associated companies 21,173 | 30,016
Other 60,756 | 46,496
Accrued taxes 34,441 | 24,829
Accrued interest 26,633 | 22,348
Other 22,603 | 18,722
---------- | ----------
235,585 | 230,020
---------- | ----------
DEFERRED CREDITS: |
Accumulated deferred income taxes 104,543 | 565,600
Accumulated deferred investment tax credits 43,265 | 80,884
Pensions and postretirement benefits 113,254 | 102,214
Other 307,975 | 381,348
---------- | ----------
569,037 | 1,130,046
---------- | ----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES |
(Notes 3 and 6) |
---------- | ----------
$2,758,152 | $3,428,175
========== | ==========
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these balance sheets.
</TABLE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<CAPTION>
At December 31, 1997 | 1996
- --------------------------------------------------------------------------------------------|-----------
(Dollars in thousands, except per share amounts) |
<S> <C> | <C>
COMMON STOCKHOLDER'S EQUITY: |
Common stock, $5 par value, authorized 60,000,000 shares - |
39,133,887 shares outstanding $ 195,670 | $ 195,687
Premium on capital stock 328,364 | 481,057
Other paid-in capital - | 121,056
Retained earnings (Note 4A) 7,616 | 5,437
---------- | ----------
Total common stockholder's equity 531,650 | 803,237
---------- | ----------
Number of Shares Optional |
Outstanding Redemption Price |
----------------- -------------------- |
1997 1996 Per Share Aggregate |
---- ---- --------- --------- |
<S> <C> <C> <C> <C> |
PREFERRED STOCK (Note 4B): |
$100 par value, authorized |
3,000,000 shares;$25 par value, |
authorized 12,000,000 shares |
Not Subject to Mandatory |
Redemption: |
$ 100 par $ 4.25 160,000 160,000 $104.63 $ 16,740 16,000 | 16,000
$ 4.56 50,000 50,000 101.00 5,050 5,000 | 5,000
$ 4.25 100,000 100,000 102.00 10,200 10,000 | 10,000
$ 8.32 100,000 100,000 102.46 10,246 10,000 | 10,000
$ 7.76 150,000 150,000 102.44 15,366 15,000 | 15,000
$ 7.80 150,000 150,000 101.65 15,248 15,000 | 15,000
$10.00 190,000 190,000 101.00 19,190 19,000 | 19,000
$ 25 par $ 2.21 1,000,000 1,000,000 25.25 25,250 25,000 | 25,000
$ 2.365 1,400,000 1,400,000 27.75 38,850 35,000 | 35,000
Series A Adjustable 1,200,000 1,200,000 25.00 30,000 30,000 | 30,000
Series B Adjustable 1,200,000 1,200,000 25.00 30,000 30,000 | 30,000
--------- --------- -------- ---------- | ----------
5,700,000 5,700,000 $216,140 210,000 | 210,000
========= ========= ======== ---------- | ----------
Subject to Mandatory Redemption |
(Note 4C): |
$ 100 par $ 9.375 33,550 50,200 $100.49 $ 3,371 3,355 | 5,020
Redemption within one year (1,665)|
(1,665)
--------- --------- -------- ----------- | ---------
33,550 50,200 $ 3,371 1,690 | 3,355
========= ========= ======== ----------- | ---------
LONG-TERM DEBT (Note 4D): |
First mortgage bonds: |
6.125% due 1997 - | 31,400
7.250% due 1999 85,000 | 85,000
7.500% due 2002 26,000 | 26,000
8.000% due 2003 35,725 | 35,725
7.875% due 2004 145,000 | 145,000
----------- | ----------
Total first |
mortgage bonds 291,725 | 323,125
----------- | ---------
- -
Unsecured notes: |
5.750% due 2003 3,900 | 4,100
10.000% due 2010 1,000 | 1,000
----------- | ---------
Total unsecured notes 4,900 | 5,100
----------- | ---------
Notes secured by subordinate mortgage: |
8.750% due 1997 - | 8,000
----------- | ---------
</TABLE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont.)
<CAPTION>
At December 31, 1997 1996
- -------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> | <C>
LONG-TERM DEBT (Cont.): |
Secured notes: |
7.940% due 1998 5,000 | 5,000
8.000% due 1998 7,000 | 7,000
9.300% due 1998 26,000 | 26,000
10.000% due 1998 650 | 650
7.720% due 1999 15,000 | 15,000
8.470% due 1999 3,500 | 3,500
7.190% due 2000 45,000 | -
7.380% due 2000 14,000 | 14,000
7.460% due 2000 16,500 | 16,500
7.500% due 2000 100 | 100
8.500% due 2001 8,000 | 8,000
9.500% due 2001 21,000 | 21,000
8.180% due 2002 17,000 | 17,000
8.620% due 2002 7,000 | 7,000
8.650% due 2002 5,000 | 5,000
7.760% due 2003 5,000 | 5,000
7.780% due 2003 1,000 | 1,000
7.820% due 2003 38,400 | 38,400
7.850% due 2003 15,000 | 15,000
7.910% due 2003 3,000 | 3,000
7.670% due 2004 70,000 | -
7.130% due 2007 30,000 | -
3.800% due 2011* 31,250 | 31,250
8.000% due 2019 67,300 | 67,300
7.625% due 2020 45,000 | 45,000
7.750% due 2020 54,000 | 54,000
9.220% due 2021 15,000 | 15,000
10.000% due 2021 15,000 | 15,000
7.400% due 2022 30,900 | 30,900
9.875% due 2022 - | 10,100
6.875% due 2023 20,200 | 20,200
7.550% due 2023 37,300 | 37,300
8.000% due 2023 49,300 | 49,300
6.100% due 2027 10,100 | -
---------- | ---------
Total secured notes 728,500 | 583,500
---------- | ---------
Debentures: |
8.700% due 2002 135,000 | 135,000
---------- | ---------
Nuclear fuel lease obligations (Note 3) 64,843 | 84,735
---------- | ---------
Net unamortized premium (discount) on debt (Note 2) 53,536 | (1,999)
---------- | ---------
Long-term debt due within one year (68,314)| (85,944)
---------- | ---------
Total long-term debt 1,210,190 | 1,051,517
---------- |----------
TOTAL CAPITALIZATION $1,953,530 |$2,068,109
========== |==========
<FN>
*Denotes variable rate issue with December 31, 1997 interest rate shown.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<CAPTION>
Nov. 8 - | Jan. 1 - For the Years Ended December 31,
| -------------------------------
Dec. 31, 1997 | Nov. 7, 1997 1996 1995
- --------------------------------------------------|------------------------------------------------------
| (In thousands)
<S> <C> | <C> <C> <C>
Balance at beginning of period $ - | $ 5,437 $(34,926) $(113,235)
Net income (loss) 7,616 | (150,132) 57,289 96,762
------ | -------- -------- ---------
7,616 | (144,695) 22,363 (16,473)
- --------------------------------------------------|----------------------------------------------------
Cash dividends on preferred |
stock - | 20,973 16,926 18,454
Purchase accounting fair |
value adjustment - | (165,668) - -
Other - | - - (1)
------ | -------- -------- ---------
- | (144,695) 16,926 18,453
------ | -------- -------- ---------
Balance at end of period (Note 4A) $7,616 | $ - $ 5,437 $ (34,926)
======================================================================================================
</TABLE>
<TABLE>
CONSOLIDATED STATEMENTS OF CAPITAL STOCK AND OTHER PAID-IN CAPITAL
<CAPTION>
Preferred Stock
------------------------------------------
Not Subject to Subject to
Common Stock Mandatory Redemption Mandatory Redemption
------------------------------------------- -------------------- --------------------
Premium Other
Number Par on Capital Paid-In Number Par Number Par
of Shares Value Stock Capital of Shares Value of Shares Value
--------- --------- ---------- -------- ---------- -------- --------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 39,133,887 $195,687 $481,057 $121,059 5,700,000 $210,000 483,500 $18,350
Redemptions--
$100 par $9.375 (16,650) (1,665)
$ 25 par $2.81 (400,000) (10,000)
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 39,133,887 195,687 481,057 121,059 5,700,000 210,000 66,850 6,685
Unrealized loss on
securities (3)
Redemptions--
$100 par $9.375 (16,650) (1,665)
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 39,133,887 195,687 481,057 121,056 5,700,000 210,000 50,200 5,020
Redemptions--
$100 par $9.375 (16,650) (1,665)
- ----------------------------------------------------------------------------------------------------------------------
Purchase accounting
fair value adjustment (17) (152,693) (121,056)
- ----------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 39,133,887 $195,670 $328,364 $ - 5,700,000 $210,000 33,550 $ 3,355
=======================================================================================================================
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nov. 8 - Jan. 1 - For the Years Ended December 31,
| --------------------------------
Dec. 31, 1997 | Nov. 7, 1997 1996 1995
- ------------------------------------------------------|------------------------------------------------
| (In thousands)
<S> <C> | <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net Income (Loss) $ 7,616 | $ (150,132) $ 57,289 $ 96,762
Adjustments to reconcile net income |
to net cash from operating activities: |
Provision for depreciation |
and amortization 10,795 | 84,682 98,042 92,911
Nuclear fuel and lease amortization 5,316 | 30,354 33,294 54,099
Other amortization, net 2,338 | 14,304 17,041 (30,817)
Deferred income taxes, net 3,113 | (121,002) 17,919 16,316
Investment tax credits, net (400) | (3,601) (4,321) (8,641)
Allowance for equity funds used |
during construction (61) | (776) (1,045) (874)
Extraordinary item - | 295,233 - -
Receivables 1,923 | 317 (9,610) (6,283)
Net proceeds from accounts |
receivable securitization - | - 78,461 -
Materials and supplies (4,430) | 6,543 5,697 7,988
Accounts payable (12,989) | 18,679 (9,737) 8,043
Other (29,443) | 55,233 (1,509) 9,419
-------- | -------- -------- --------
Net cash provided from (used for) |
operating activities (16,222) | 229,834 281,521 238,923
-------- | -------- -------- --------
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
New Financing-- |
Long-term debt - | 149,804 (260) 92,439
Short-term borrowings, net - | - - 20,950
Redemptions and Repayments-- |
Preferred stock - | 1,665 1,665 11,665
Long-term debt - | 85,419 110,108 246,714
Short-term borrowings, net - | - 20,950 -
Dividend Payments-- |
Preferred stock 4,156 | 12,589 16,926 18,454
------- | --------- -------- --------
Net cash provided from (used for) |
financing activities (4,156) | 50,131 (149,909) (163,444)
------- | --------- -------- --------
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Property additions 6,568 | 36,680 47,961 53,492
Loans to associated companies - | - 81,817 -
Loan payments from associated companies (15,297) | (25,718) - -
Capital trust investments (7,314) | 320,187 - -
Other (6,585) | 10,350 14,049 16,118
------- | --------- --------- ---------
Net cash used for (provided from) |
investing activities (22,628) | 341,499 143,827 69,610
------- | --------- --------- ---------
Net increase (decrease) in cash and |
cash equivalents 2,250 | (61,534) (12,215) 5,869
Cash and cash equivalents at beginning |
of period 19,920 | 81,454 93,669 87,800
------- | --------- --------- ---------
Cash and cash equivalents at end |
of period $22,170 | $ 19,920 $ 81,454 $ 93,669
======= | ========= ========= =========
SUPPLEMENTAL CASH FLOWS INFORMATION: |
Cash Paid During the Period-- |
Interest (net of amounts capitalized) $16,000 | $ 73,000 $ 92,000 $ 93,000
======= | ========= ========= =========
Income taxes $28,000 | $ 25,300 $ 15,950 $ 22,500
======= | ========= ========= =========
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF TAXES
<CAPTION>
Nov. 8- Jan. 1 - For the Years Ended December 31,
| -------------------------------
Dec. 31, 1997 | Nov. 7, 1997 1996 1995
- --------------------------------------------------|-----------------------------------------------------
| (In thousands)
<S> <C> | <C> <C> <C>
GENERAL TAXES: |
Real and personal property $ 5,998 | $ 40,495 $ 45,446 $ 47,100
State gross receipts 5,826 | 28,590 33,793 33,149
Social security and unemployment 818 | 4,444 5,689 5,684
Other 484 | 3,897 4,719 5,109
-------- | --------- --------- ---------
Total general taxes $ 13,126 | $ 77,426 $ 89,647 $ 91,042
======== | ========= ========= =========
|
PROVISION FOR INCOME TAXES: |
Currently payable-- |
Federal $ 2,859 | $ 55,192 $ 13,582 $ 27,512
State (1) 209 | - - -
-------- | --------- --------- ---------
3,068 | 55,192 13,582 27,512
-------- | --------- --------- ---------
Deferred, net-- |
Federal 3,096 | (121,002) 17,919 16,316
State (1) 17 | - - -
-------- | --------- --------- ---------
3,113 | (121,002) 17,919 16,316
-------- | --------- --------- ---------
Investment tax credit amortization (400) | (3,601) (4,321) (8,641)
-------- | --------- --------- ---------
Total provision for income taxes $ 5,781 | $ (69,411) $ 27,180 $ 35,187
======== | ========= ========= =========
INCOME STATEMENT CLASSIFICATION |
OF PROVISION FOR INCOME TAXES: |
Operating income $ 4,449 | $ 31,253 $ 31,954 $ 32,887
Other income 1,332 | 2,667 (4,774) 2,300
Extraordinary item - | (103,331) - -
-------- | --------- --------- ---------
Total provision for income taxes $ 5,781 | $ (69,411) $ 27,180 $ 35,187
======== | ========= ========= =========
RECONCILIATION OF FEDERAL INCOME |
TAX EXPENSE AT STATUTORY RATE TO |
TOTAL PROVISION FOR INCOME TAXES: |
Book income before provision for |
income taxes $ 13,397 | $(219,543) $ 84,469 $ 131,949
======== | ========= ========= =========
Federal income tax expense at |
statutory rate $ 4,689 | $ (76,840) $ 29,564 $ 46,182
Increases (reductions) in taxes |
resulting from-- |
Amortization of investment tax |
credits (400) | (3,601) (4,321) (8,641)
Depreciation - | 3,428 (3,742) (1,259)
Other, net 1,492 | 7,602 5,679 (1,095)
-------- | --------- --------- ---------
Total provision for income |
taxes $ 5,781 | $ (69,411) $ 27,180 $ 35,187
======== | ========= ========= =========
ACCUMULATED DEFERRED INCOME TAXES |
AT DECEMBER 31: |
Property basis differences $190,636 | $ 612,000 $ 627,000
Deferred nuclear expense 83,052 | 84,000 85,000
Deferred sale and leaseback costs (17,431) | - (4,000)
Unamortized investment tax credits (20,960) | (44,000) (46,000)
Unused alternative minimum tax |
credits (108,156) | (99,837) (80,396)
Other (22,598) | 13,437 (8,569)
-------- | --------- ---------
Net deferred income tax liability $104,543 | $ 565,600 $ 573,035
======== | ========= =========
<FN>
(1) For periods prior to November 8, 1997, state income taxes are
included in the General Taxes section above. These amounts are
not material and no restatement was made.
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements include The
Toledo Edison Company (Company) and its 90% owned subsidiary, The
Toledo Edison Capital Corporation (TECC). The subsidiary was
formed in 1997 to make equity investments in a business trust in
connection with the financing transactions related to the Bruce
Mansfield Plant sale and leaseback (see Note 3). The Cleveland
Electric Illuminating Company (CEI), an affiliate, has a 10%
interest in TECC. All significant intercompany transactions have
been eliminated. The Company is a wholly owned subsidiary of
FirstEnergy Corp. (FirstEnergy). Prior to the merger in November
1997 (see Note 2), the Company and CEI were the principal
operating subsidiaries of Centerior Energy Corporation
(Centerior). The 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 pre-
merger period and post-merger period financial results (separated
by a heavy black line) are presented. The Company follows the
accounting policies and practices prescribed by The Public
Utilities Commission of Ohio (PUCO) and the Federal Energy
Regulatory Commission (FERC). The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make periodic estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Certain prior year amounts
have been reclassified to conform with the current year
presentation.
REVENUES-
The Company's principal business is providing electric
service to customers in northwestern Ohio. The Company's retail
customers are metered on a cycle basis. Revenue is recognized for
unbilled electric service through the end of the year.
Receivables from customers include sales to
residential, commercial and industrial customers located in the
Company's service area and sales to wholesale customers. There
was no material concentration of receivables at December 31, 1997
or 1996, with respect to any particular segment of the Company's
customers.
In May 1996, the Company and CEI began to sell on a
daily basis substantially all of their retail customer accounts
receivable to Centerior Funding Corporation (Centerior Funding),
a wholly owned subsidiary of CEI, under an asset-backed
securitization agreement which expires in 2001. In July 1996,
Centerior Funding completed a public sale of $150 million of
receivables-backed investor certificates in a transaction that
qualified for sale accounting treatment.
REGULATORY PLAN-
FirstEnergy's Rate Reduction and Economic Development
Plan for the Company was approved in January 1997, to be
effective upon consummation of the merger. The regulatory plan
initially maintains current base electric rates for the Company
through December 31, 2005. At the end of the regulatory plan
period, the Company's base rates will be reduced by $93 million
(approximately 15 percent below current levels). The regulatory
plan also revised the Company's fuel cost recovery method. The
Company formerly recovered fuel-related costs not otherwise
included in base rates from retail customers through a separate
energy rate. In accordance with the regulatory plan, the
Company's fuel rate will be frozen through the regulatory plan
period, subject to limited periodic adjustments. As part of the
regulatory plan, transition rate credits were implemented for
customers, which are expected to reduce operating revenues for
the Company by approximately $111 million during the regulatory
plan period.
All of the Company's regulatory assets related to its
nonnuclear operations are being recovered under provisions of the
regulatory plan (see Regulatory Assets). The Company recognized a
fair value purchase accounting adjustment to reduce nuclear plant
by $842 million in connection with the FirstEnergy merger (see
Note 2); that fair value adjustment recognized for financial
reporting purposes will ultimately satisfy the $647 million asset
reduction commitment contained in the regulatory plan. For
regulatory purposes, the Company will recognize the $647 million
of accelerated amortization over the regulatory plan period.
UTILITY PLANT AND DEPRECIATION-
Utility plant reflects the original cost of
construction (except for the Company's nuclear generating units
which were adjusted to fair value in 1997), including payroll and
related costs such as taxes, employee benefits, administrative
and general costs and financing costs (allowance for funds used
during construction).
The Company provides for depreciation on a straight-
line basis at various rates over the estimated lives of property
included in plant in service. In its April 1996 rate order, the
PUCO approved depreciation rates for the Company of 2.95% for
nuclear property and 3.13% for nonnuclear property. The
annualized composite rate was approximately 2.6% for the post-
merger period.
Annual depreciation expense includes approximately $9.8
million for future decommissioning costs applicable to the
Company's ownership interests in three nuclear generating units.
The Company's share of the future obligation to decommission
these units is approximately $327 million in current dollars and
(using a 3.5% escalation rate) approximately $774 million in
future dollars. The estimated obligation and the escalation rate
were developed based on site-specific studies. Payments for
decommissioning are expected to begin in 2016, when actual
decommissioning work begins. The Company has recovered
approximately $81 million for decommissioning through its
electric rates from customers through December 31, 1997. If the
actual costs of decommissioning the units exceed the funds
accumulated from investing amounts recovered from customers, the
Company expects that additional amount to be recoverable from its
customers. The Company has approximately $86.0 million invested
in external decommissioning trust funds as of December 31, 1997.
Earnings on these funds are reinvested with a corresponding
increase to the decommissioning liability. The Company has also
recognized an estimated liability of approximately $9.6 million
at December 31, 1997 related to decontamination and
decommissioning of nuclear enrichment facilities operated by the
United States Department of Energy (DOE), as required by the
Energy Policy Act of 1992.
The Financial Accounting Standards Board (FASB) issued
a proposed accounting standard for nuclear decommissioning costs
in February 1996. If the standard is adopted as proposed: (1)
annual provisions for decommissioning could increase; (2) the net
present value of estimated decommissioning costs could be
recorded as a liability; and (3) income from the external
decommissioning trusts could be reported as investment income.
The FASB indicated in October 1997 that it plans to continue work
on the proposal in 1998.
COMMON OWNERSHIP OF GENERATING FACILITIES-
The Company, CEI, Duquesne Light Company, Ohio Edison
Company (OE) and its wholly owned subsidiary, Pennsylvania Power
Company (Penn), constitute the Central Area Power Coordination
Group (CAPCO). The CAPCO companies own and/or lease, as tenants
in common, various power generating facilities. Each of the
companies is obligated to pay a share of the costs associated
with any jointly owned facility in the same proportion as its
interest. The Company's portion of operating expenses associated
with jointly owned facilities is included in the corresponding
operating expenses on the Consolidated Statements of Income. The
amounts reflected on the Consolidated Balance Sheet under utility
plant at December 31, 1997 include the following:
<TABLE>
<CAPTION>
Utility Accumulated Construction Ownership/
Plant Provision for Work in Leasehold
Generating Units in Service Depreciation Progress Interest
- ----------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Bruce Mansfield
Units 2 and 3 $ 38.3 $ 9.7 $ .4 18.61%
Beaver Valley Unit 2 57.5 1.0 3.1 19.91%
Davis-Besse 200.8 - 2.2 48.62%
Perry 315.9 - .7 19.91%
- --------------------------------------------------------------------------------
Total $612.5 $10.7 $6.4
=================================================================================
</TABLE>
The Bruce Mansfield Plant and Beaver Valley Unit 2 are
being leased through sale and leaseback transactions (see Note 3)
and the above related amounts represent construction expenditures
subsequent to the transaction.
NUCLEAR FUEL-
The Company leases its nuclear fuel and pays for the
fuel as it is consumed (see Note 3). The Company amortizes the
cost of nuclear fuel based on the rate of consumption. The
Company's electric rates include amounts for the future disposal
of spent nuclear fuel based upon the payments to the DOE.
INCOME TAXES-
Details of the total provision for income taxes are
shown on the Consolidated Statements of Taxes. Deferred income
taxes result from timing differences in the recognition of
revenues and expenses for tax and accounting purposes. Investment
tax credits, which were deferred when utilized, are being
amortized over the recovery period of the related property. The
liability method is used to account for deferred income taxes.
Deferred income tax liabilities related to tax and accounting
basis differences are recognized at the statutory income tax
rates in effect when the liabilities are expected to be paid.
Alternative minimum tax credits of $108 million, which may be
carried forward indefinitely, are available to reduce future
federal income taxes.
RETIREMENT BENEFITS-
Centerior had sponsored jointly with the Company, CEI
and Centerior Service Company (Service Company) a noncontributing
pension plan (Centerior Pension Plan) which covered all employee
groups. Upon retirement, employees receive a monthly pension
generally based on the length of service. Under certain
circumstances, benefits can begin as early as age 55. The funding
policy was to comply with the Employee Retirement Income Security
Act of 1974 guidelines. In December 1997, the Centerior Pension
Plan was merged into the FirstEnergy pension plans. In connection
with the Ohio Edison-Centerior merger, the Company recorded fair
value purchase accounting adjustments to recognize the net gain,
prior service cost and net transition asset (obligation)
associated with the pension and postretirement benefit plans (see
Note 2).
The following sets forth the funded status of the
former Centerior Pension Plan. The Company's share of the former
Centerior Pension Plan's total projected benefit obligation
approximates 30% at December 31, 1997.
At December 31, 1997 1996
- ----------------------------------------------------------------
(In millions)
Actuarial present value |
of benefit obligations: |
Vested benefits $418.9 | $325.8
Nonvested benefits 30.5 | 15.8
- --------------------------------------------------------|--------
Accumulated benefit obligation $449.4 | $341.6
========================================================|========
Plan assets at fair value $461.9 | $420.8
Actuarial present value of |
projected benefit obligation 533.4 | 395.0
- --------------------------------------------------------|--------
Projected benefit obligation in |
excess of plan assets 71.5 | (25.8)
Unrecognized net gain (loss) (3.0)| 55.0
Unrecognized prior service cost - | (14.2)
Unrecognized net transition asset - | 32.3
- --------------------------------------------------------|--------
Net pension liability $ 68.5 | $ 47.3
=================================================================
The assets of the Centerior Pension Plan consisted
primarily of investments in common stocks, bonds, guaranteed
investment contracts, cash equivalent securities and real estate.
Net pension costs for the three years ended December 31, 1997
were computed as follows:
<TABLE>
<CAPTION>
Nov. 8 - Jan. 1 -
Dec. 31, 1997 Nov. 7, 1997 1996 1995
- ---------------------------------------------------------------------------------
(In millions)
<S> <C> | <C> <C> <C>
Service cost-benefits earned |
during the period $ 2.3 | $ 11.1 $ 12.6 $ 9.8
Interest on projected benefit |
obligation 6.1 | 25.4 27.9 25.8
Return on plan assets (7.7) | (38.0) (49.7) (52.8)
Net deferral (amortization) - | (2.4) 1.8 9.2
Voluntary early retirement |
program expense 23.0 | 4.8 - -
- ----------------------------------------------|------------------------------------
Net pension cost $ 23.7 | $ 0.9 $ (7.4) $ (8.0)
==============================================|====================================
Company's share, including |
pro rata share of the Service |
Company's costs $ 5.7 | $ 3.5 $ (2.4) $ (2.7)
- -----------------------------------------------------------------------------------
</TABLE>
A September 30 measurement date was used for 1996
reporting. The assumed discount rates used in determining the
actuarial present value of the projected benefit obligation were
7.25% in 1997, 7.75% in 1996 and 8.0% in 1995. The assumed rate
of increase in future compensation levels used to measure this
obligation was 4.0% in 1997. The rate of annual compensation
increase assumption in 1996 was 3.5% for 1997 and 4.0%
thereafter. The rate of annual compensation increase assumption
in 1995 was 3.5% for 1996 and 1997 and 4.0% thereafter. Expected
long-term rates of return on plan assets were assumed to be 10%
in 1997 and 11% in 1996 and 1995. At December 31, 1997 and 1996,
the Company's net pension liability included in Pensions and
Other Postretirement Benefits on the Consolidated Balance Sheets
was $18.1 million and $61.9 million, respectively.
Centerior had sponsored jointly with its former
subsidiaries a postretirement benefit plan which provided all
employee groups certain health care, death and other
postretirement benefits other than pensions. The plan was
contributory, with retiree contributions adjusted annually. The
plan was not funded.
The accumulated postretirement benefit obligation and
accrued postretirement benefit cost for the Centerior
postretirement benefit plan are as follows:
At December 31, 1997 1996
- -----------------------------------------------------------------
(In millions)
Accumulated postretirement benefit |
obligation allocation: |
Retirees $209.8 | $ 177.1
Fully eligible active plan |
participants 9.8 | 3.9
Other active plan participants 46.9 | 30.9
- ------------------------------------------------------|---------
Accumulated postretirement benefit |
obligation 266.5 | 211.9
Unrecognized transition obligation - | (120.1)
Unrecognized net gain - | 44.4
- ------------------------------------------------------|---------
Net postretirement benefit liability $266.5 | $ 136.2
================================================================
Net periodic postretirement benefit costs for the three
years ended December 31, 1997 were computed as follows:
<TABLE>
<CAPTION>
Nov. 8 - Jan. 1 -
Dec. 31, 1997 Nov. 7, 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
| (In millions)
<S> <C> | <C> <C> <C>
Service cost-benefits attributed |
to the period $0.5 | $ 1.8 $ 2.1 $ 1.7
Interest cost on accumulated |
benefit obligation 2.8 | 13.5 17.8 17.9
Amortization of transition obligation - | 6.4 7.5 7.5
Amortization of gain - | (0.9) - (0.6)
- ---------------------------------------------------------|--------------------------------------------
Net periodic postretirement benefit cost $3.3 | $20.8 $27.4 $26.5
=========================================================|===========================================
Company's share, including pro rata |
share of the Service Company's costs $1.5 | $ 8.9 $ 9.0 $ 9.6
- -----------------------------------------------------------------------------------------------------
</TABLE>
The Consolidated Balance Sheet classification of
Pensions and Other Postretirement Benefits at December 31, 1997
and 1996 includes the Company's share of the accrued
postretirement benefit liability of $95.2 million and $40.3
million, respectively.
The health care trend rate assumption is approximately
6.0% in the first year gradually decreasing to approximately 4.0%
for the year 2008 and later. The discount rates used to compute
the accumulated postretirement benefit obligation were 7.25% in
1997, 7.75% in 1996 and 8.0% in 1995. An increase in the health
care trend rate assumption by one percentage point in all years
would increase the accumulated postretirement benefit obligation
by approximately $7.7 million and the aggregate annual service
and interest costs by approximately $0.5 million. A September 30
measurement date was used for 1996 reporting.
TRANSACTIONS WITH AFFILIATED COMPANIES-
Operating revenues, operating expenses and interest
charges include amounts for transactions with affiliated
companies in the ordinary course of business operations.
The Company's transactions with CEI and the other
FirstEnergy operating subsidiaries (OE and Penn) from the
November 8, 1997 merger date are primarily for firm power,
interchange power, transmission line rentals and jointly owned
power plant operations and construction (see Note 3). Beginning
in May 1996, Centerior Funding began serving as the transferor in
connection with the accounts receivable securitization for the
Company and CEI.
The Service Company (formerly a wholly owned subsidiary
of Centerior and now a wholly owned subsidiary of FirstEnergy)
provides support services at cost to the Company and other
affiliated companies. The Service Company billed the Company
$13.9 million, $51.5 million, $59.8 million and $66.7 million in
the November 8-December 31, 1997 period, the January 1-
November 7, 1997 period, 1996 and 1995, respectively, for such
services.
SUPPLEMENTAL CASH FLOWS INFORMATION-
All temporary cash investments purchased with an
initial maturity of three months or less are reported as cash
equivalents on the Consolidated Balance Sheets. The Company
reflects temporary cash investments at cost, which approximates
their fair market value. Noncash financing and investing
activities included capital lease transactions amounting to $2
million, $12 million, $32 million and $12 million in the November
8-December 31, 1997 period, the January 1-November 7, 1997
period, 1996 and 1995, respectively.
All borrowings with initial maturities of less than one
year are defined as financial instruments under generally
accepted accounting principles and are reported on the
Consolidated Balance Sheets at cost, which approximates their
fair market value. The following sets forth the approximate fair
value and related carrying amounts of all other long-term debt,
preferred stock subject to mandatory redemption and investments
other than cash and cash equivalents as of December 31:
1997 1996
---------------- ---------------
Carrying Fair Carrying Fair
Value Value Value Value
- ----------------------------------------------------------------
(In millions)
Long-term debt $1,214 $1,218 | $1,054 $1,086
Preferred stock $ 3 $ 3 | $ 5 $ 5
Investments other |
than cash and cash |
equivalents: |
Debt securities |
- (Maturing in more |
than 10 years) $ 295 $ 303 | $ - $ -
Equity securities 3 3 | - -
All other 86 85 | 52 52
- ----------------------------------------------|-----------------
$ 384 $ 391 | $ 52 $ 52
================================================================
The carrying value of long-term debt was adjusted to
fair value in connection with the merger and reflect the present
value of the cash outflows relating to those securities based on
the current call price, the yield to maturity or the yield to
call, as deemed appropriate at the end of each respective year.
The yields assumed were based on securities with similar
characteristics offered by a corporation with credit ratings
similar to the Company's ratings.
The fair value of investments other than cash and cash
equivalents represent cost (which approximates fair value) or the
present value of the cash inflows based on the yield to maturity.
The yields assumed were based on financial instruments with
similar characteristics and terms. Investments other than cash
and cash equivalents include decommissioning trusts investments.
Unrealized gains and losses applicable to the decommissioning
trusts have been recognized in the trust investments with a
corresponding change to the decommissioning liability. In 1996,
the Company and CEI transferred most of their investment assets
in existing trusts into Centerior pooled trust funds for the two
companies. The amounts in the table represent the Company's pro
rata share of the fair value of such noncash investments. The
other debt and equity securities referred to above are in the
held-to-maturity category. The Company has no securities held for
trading purposes.
REGULATORY ASSETS-
The Company recognizes, as regulatory assets, costs
which the FERC and PUCO have authorized for recovery from
customers in future periods. Without such authorization, the
costs would have been charged to income as incurred. All
regulatory assets related to nonnuclear operations are being
recovered from customers under the Company's regulatory plan.
Based on the regulatory plan, at this time, the Company believes
it will continue to be able to bill and collect cost-based rates
(with the exception of the Company's nuclear operations as
discussed below); accordingly, it is appropriate that the Company
continue the application of SFAS No. 71, "Accounting for the
Effects of Certain Types of Regulation" (SFAS 71), in the
foreseeable future for its nonnuclear operations.
The Company discontinued the application of SFAS 71 for
its nuclear operations in October 1997 when implementation of the
regulatory plan became probable. The regulatory plan does not
provide for full recovery of the Company's nuclear operations. In
accordance with SFAS No. 101, "Regulated Enterprises --
Accounting for the Discontinuation of Application of SFAS 71,"
the Company was required to remove from its balance sheet all
regulatory assets and liabilities related to the portion of its
business for which SFAS 71 was discontinued and to assess all
other assets for impairment. Regulatory assets attributable to
nuclear operations of $295.2 million ($191.9 million after taxes)
were written off as an extraordinary item in October 1997. The
regulatory assets attributable to nuclear operations written off
represent the net amounts due from customers for future federal
income taxes when the taxes become payable, which, under the
regulatory plan, are no longer recoverable from customers. The
remainder of the Company's business continues to comply with the
provisions of SFAS 71. All remaining regulatory assets of the
Company will continue to be recovered through rates set for the
nonnuclear portion of its business. For financial reporting
purposes, the net book value of the nuclear generating units was
not impaired as a result of the regulatory plan.
Net regulatory assets on the Consolidated Balance
Sheets are comprised of the following:
At December 31, 1997 1996
- ----------------------------------------------------------------
(In millions)
Nuclear unit expenses $207.4 | $214.8
Customer receivables for future income |
taxes 96.5 | 391.4
Rate stabilization program deferrals 172.0 | 179.8
Sale and leaseback costs * (76.9) | 91.7
Loss on reacquired debt 21.1 | 24.2
Other 22.6 | 25.7
- -------------------------------------------------------|---------
Total $442.7 | $927.6
================================================================
* Includes the gain from the Bruce Mansfield Plant sale which
was reclassified as a regulatory liability in connection with
the purchase accounting adjustments, consistent with the
ratemaking treatment.
2. OHIO EDISON-CENTERIOR MERGER:
FirstEnergy was formed on November 8, 1997 by the
merger of OE and Centerior. FirstEnergy holds directly all of the
issued and outstanding common shares of OE and all of the issued
and outstanding common shares of Centerior's former direct
subsidiaries, which include, among others, the Company and CEI.
As a result of the merger, the former common shareholders of OE
and Centerior now own all of the outstanding shares of
FirstEnergy Common Stock. All other classes of capital stock of
OE and its subsidiaries and of the subsidiaries of Centerior are
unaffected by the Merger and remain outstanding.
The merger was accounted for as a purchase of
Centerior's net assets with 77,637,704 shares of FirstEnergy
Common Stock through the conversion of each outstanding Centerior
Common Stock share into 0.525 of a share of FirstEnergy Common
Stock (fractional shares were paid in cash). Based on an imputed
value of $20.125 per share, the purchase price was approximately
$1.582 billion which also included approximately $20 million of
merger related costs. Goodwill of approximately $2.1 billion was
recognized by FirstEnergy (to be amortized on a straight-line
basis over forty years), which represented the excess of the
purchase price over Centerior's net assets after fair value
adjustments. Such amount may be adjusted if additional
information produces changed assumptions over the twelve months
following the merger as FirstEnergy continues to integrate
operations and evaluate options with respect to its generation
portfolio.
The Company's merger purchase accounting adjustments,
which were recognized in its accounting records, primarily
consist of (1) revaluation of the Company's nuclear generating
units to fair value ($561 million), based upon the results of
independent appraisals and estimated discounted future cash flows
expected to be generated by its nuclear generating units (the
estimated cash flows are based upon management's current view of
the likely cost recovery associated with the nuclear units); (2)
adjusting by $55 million its long-term debt to estimated fair
value; (3) adjusting its obligations related to retirement
benefits (pension liability - $53 million and postretirement
obligation - $51 million); (4) recognizing the Company's
estimated severance and other compensation liabilities ($24
million); (5) adjustment of the Beaver Valley Unit 2 deferred
rent liability by $57 million to reflect remaining payments on a
straight-line basis; and (6) adjusting the Company's common
equity by $108 million. The nuclear assets revaluation does not
include decommissioning since that obligation is expected to be
recovered with the cash flows provided by the regulated portion
of the business. Other assets and liabilities were not adjusted
since they remain subject to rate regulation on a historical cost
basis. See Note 8.
3. LEASES:
The Company leases certain generating facilities,
nuclear fuel, certain transmission facilities, office space and
other property and equipment under cancelable and noncancelable
leases.
The Company and CEI sold their ownership interests in
Bruce Mansfield Units 1, 2 and 3 and the Company sold a portion
of its ownership interest in Beaver Valley Unit 2. In connection
with these sales, which were completed in 1987, the Company and
CEI entered into operating leases for lease terms of
approximately 30 years as co-lessees. During the terms of the
leases, the Company and CEI continue to be responsible, to the
extent of their combined ownership and leasehold interest, for
costs associated with the units including construction
expenditures, operation and maintenance expenses, insurance,
nuclear fuel, property taxes and decommissioning. The Company and
CEI have the right, at the end of the respective basic lease
terms, to renew the leases. The Company and CEI also have the
right to purchase the facilities at the expiration of the basic
lease term or renewal term (if elected) at a price equal to the
fair market value of the facilities.
As co-lessee with CEI, the Company is also obligated
for CEI's lease payments. If CEI is unable to make its payments
under the Bruce Mansfield Plant lease, the Company would be
obligated to make such payments. No such payments have been made
on behalf of CEI. (CEI's minimum lease payments as of December
31, 1997 were $793 million.)
The Company is selling 150 megawatts of its Beaver
Valley Unit 2 leased capacity entitlement to CEI. Operating
revenues for this transaction were $16.8 million, $87.4 million,
$99.4 million and $97.6 million in the November 8-December 31,
1997 period, the January 1-November 7, 1997 period, 1996 and
1995, respectively. This sale is expected to continue through the
end of the lease period. The future minimum lease payments
through 2017 associated with Beaver Valley Unit 2 are
approximately $1.2 billion.
Nuclear fuel is currently financed for the Company and
CEI through leases with a special-purpose corporation. As of
December 31, 1997, $157 million of nuclear fuel ($64 million for
the Company) was financed under a lease financing arrangement
totaling $190 million ($90 million of intermediate-term notes and
$100 million from bank credit arrangements). The notes mature
from 1998 through 2000 and the bank credit arrangements expire in
October 1998. Lease rates are based on intermediate-term note
rates, bank rates and commercial paper rates.
Consistent with the regulatory treatment, the rentals
for capital and operating leases are charged to operating
expenses on the Consolidated Statements of Income. Such costs for
the three years ended December 31, 1997 are summarized as
follows:
Nov. 8 - Jan. 1 -
Dec. 31, 1997 | Nov. 7, 1997 1996 1995
- ---------------------------------|------------------------------
| (In millions)
Operating leases |
Interest element $28.0 | $ 57.4 $ 82.5 $ 85.0
Other 13.5 | 23.1 42.6 17.8
Capital leases |
Interest element 1.0 | 6.0 7.5 8.2
Other 5.3 | 30.4 38.6 43.6
- ---------------------------------|-----------------------------
Total rentals $47.8 | $116.9 $171.2 $154.6
==============================================================
The future minimum lease payments as of December 31, 1997 are:
Capital Operating Capital Trust
Leases Leases Income Net
- --------------------------------------------------------------
(In millions)
1998 $32.1 $ 103.9 $ 22.5 $ 81.4
1999 22.5 106.5 21.8 84.7
2000 12.8 104.8 20.6 84.2
2001 6.1 108.0 19.4 88.6
2002 3.0 111.1 18.0 93.1
Years thereafter 2.7 1,430.1 130.3 1,299.8
- --------------------------------------------------------------
Total minimum lease
payments 79.2 $1,964.4 $232.6 $1,731.8
======== ====== ========
Interest portion 14.4
- ------------------------------
Present value of net
minimum lease payments 64.8
Less current portion 29.4
- ------------------------------
Noncurrent portion $35.4
==============================
The Company and CEI refinanced high-cost fixed
obligations related to their 1987 sale and leaseback transaction
for the Bruce Mansfield Plant through a lower cost transaction in
June and July 1997. In a June 1997 offering (Offering), the two
companies pledged $720 million aggregate principal amount ($145
million for the Company and $575 million for CEI) of first
mortgage bonds due in 2000, 2004 and 2007 to a trust as security
for the issuance of a like principal amount of secured notes due
in 2000, 2004 and 2007. The obligations of the two companies
under these secured notes are joint and several. Using available
cash, short-term borrowings and the net proceeds from the
Offering, the two companies invested $906.5 million ($337.1
million for the Company and $569.4 million for CEI) in a business
trust, in June 1997. The trust used these funds in July 1997 to
purchase lease notes and redeem all $873.2 million aggregate
principal amount of 10-1/4% and 11-1/8% secured lease obligation
bonds (SLOBs) due 2003 and 2016. The SLOBs were issued by a
special-purpose funding corporation in 1988 on behalf of lessors
in the two companies' 1987 sale and leaseback transaction. As
noted in the table above, the trust income, which is included in
Other Income in the Consolidated Statements of Income,
effectively reduces lease costs related to that transaction.
4. CAPITALIZATION:
(A) RETAINED EARNINGS-
The Company has a provision in its mortgage applicable
to approximately $62 million of outstanding first mortgage bonds
that requires common stock dividends to be paid out of its total
balance of retained earnings. The merger purchase accounting
adjustments included resetting the retained earnings balance to
zero at the November 8, 1997 merger date.
(B) PREFERRED AND PREFERENCE STOCK-
Preferred stock may be redeemed by the Company in
whole, or in part, with 30-90 days' notice.
The preferred dividend rates on the Company's Series A
and Series B fluctuate based on prevailing interest rates and
market conditions. The dividend rates for these issues averaged
7.03% and 7.71%, respectively, in 1997.
Preference stock authorized for the Company is
5,000,000 shares with a $25 par value. No preference shares are
currently outstanding.
A liability of $5 million was included in the Company's
net assets as of the merger date for preferred dividends declared
attributable to the post-merger period. Accordingly, no accrual
for preferred stock dividend requirements is included on the
Company's November 8, 1997 to December 31, 1997 Consolidated
Statement of Income.
(C) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION-
Annual sinking fund requirements for the next five years
are $1.7 million in each year 1998 and 1999.
(D) LONG-TERM DEBT-
The first mortgage indenture and its supplements, which
secure all of the Company's first mortgage bonds, serve as direct
first mortgage liens on substantially all property and
franchises, other than specifically excepted property, owned by
the Company.
Sinking fund requirements for first mortgage bonds and
maturing long-term debt (excluding capital leases) for the next
five years are:
(In millions)
- --------------------------------------------------------
1998 $ 39.0
1999 103.8
2000 75.9
2001 29.5
2002 191.0
- ---------------------------------------------------------
The Company's obligations to repay certain pollution
control revenue bonds are secured by several series of first
mortgage bonds. One pollution control revenue bond issue is
entitled to the benefit of an irrevocable bank letter of credit
of $31.3 million. To the extent that drawings are made under this
letter of credit to pay principal of, or interest on, the
pollution control revenue bonds, the Company is entitled to a
credit against its obligation to repay those bonds. The Company
pays an annual fee of 1.875% of the amount of the letter of
credit to the issuing bank and is obligated to reimburse the bank
for any drawings thereunder.
The Company and CEI have letters of credit of
approximately $225 million in connection with the sale and
leaseback of Beaver Valley Unit 2 that expire in June 1999. The
letters of credit are secured by first mortgage bonds of the
Company and CEI in the proportion of 60% and 40%, respectively
(see Note 3).
5. SHORT-TERM BORROWINGS:
FirstEnergy has a $125 million revolving credit
facility that expires in May 1998. FirstEnergy and the Service
Company may borrow under the facility, with all borrowings
jointly and severally guaranteed by the Company and CEI.
FirstEnergy plans to transfer any of its borrowed funds to the
Company and CEI. The credit agreement is secured with first
mortgage bonds of the Company and CEI in the proportion of 60%
and 40%, respectively. The credit agreement also provides the
participating banks with a subordinate mortgage security interest
in the properties of the Company and CEI. The banks' fee is
0.625% per annum payable quarterly in addition to interest on any
borrowings. There were no borrowings under the facility at
December 31, 1997. Also, the Company may borrow from its
affiliates on a short-term basis.
6. COMMITMENTS, GUARANTEES AND CONTINGENCIES:
CAPITAL EXPENDITURES-
The Company's current forecast reflects expenditures of
approximately $200 million for property additions and
improvements from 1998-2002, of which approximately $50 million
is applicable to 1998. Investments for additional nuclear fuel
during the 1998-2002 period are estimated to be approximately
$140 million, of which approximately $27 million applies to 1998.
During the same periods, the Company's nuclear fuel investments
are expected to be reduced by approximately $85 million and $30
million, respectively, as the nuclear fuel is consumed.
NUCLEAR INSURANCE-
The Price-Anderson Act limits the public liability
relative to a single incident at a nuclear power plant to $8.92
billion. The amount is covered by a combination of private
insurance and an industry retrospective rating plan. Based on its
present ownership and leasehold interests in Beaver Valley Unit
2, the Davis-Besse Nuclear Power Station (Davis-Besse) and the
Perry Nuclear Power Plant (Perry), the Company's maximum
potential assessment under the industry retrospective rating plan
(assuming the other CAPCO companies were to contribute their
proportionate share of any assessments under the retrospective
rating plan) would be $70 million per incident but not more than
$8.8 million in any one year for each incident.
The Company is also insured as to its respective
interests in Beaver Valley Unit 2, Davis-Besse and Perry under
policies issued to the operating company for each plant. Under
these policies, up to $2.75 billion is provided for property
damage and decontamination and decommissioning costs. The Company
has also obtained approximately $260 million of insurance
coverage for replacement power costs for its respective interests
in Beaver Valley Unit 2, Davis-Besse and Perry. Under these
policies, the Company can be assessed a maximum of approximately
$11 million for incidents at any covered nuclear facility
occurring during a policy year which are in excess of accumulated
funds available to the insurer for paying losses.
The Company intends to maintain insurance against
nuclear risks as described above as long as it is available. To
the extent that replacement power, property damage,
decontamination, decommissioning, repair and replacement costs
and other such costs arising from a nuclear incident at any of
the Company's plants exceed the policy limits of the insurance in
effect with respect to that plant, to the extent a nuclear
incident is determined not to be covered by the Company's
insurance policies, or to the extent such insurance becomes
unavailable in the future, the Company would remain at risk for
such costs.
GUARANTEE-
The Company, together with the other CAPCO companies,
has severally guaranteed certain debt and lease obligations in
connection with a coal supply contract for the Bruce Mansfield
Plant. As of December 31, 1997, the Company's share of the
guarantee (which approximates fair market value) was $8.3
million. The price under the coal supply contract, which includes
certain minimum payments, has been determined to be sufficient to
satisfy the debt and lease obligations. The Company's total
payments under the coal supply contract were $29.9 million, $31.4
million and $24.5 million during 1997, 1996 and 1995,
respectively. The Company's minimum annual payments are
approximately $9 million under the contract, which expires
December 31, 1999.
ENVIRONMENTAL MATTERS-
Various federal, state and local authorities regulate
the Company with regard to air and water quality and other
environmental matters. The Company has estimated additional
capital expenditures for environmental compliance of
approximately $11 million, which is included in the construction
forecast provided under "Capital Expenditures" for 1998 through
2002.
The Company is in compliance with the current sulfur
dioxide (SO2) and nitrogen oxides (NOX) reduction requirements
under the Clean Air Act Amendments of 1990. SO2 reductions
through the year 1999 will be achieved by burning lower-sulfur
fuel, generating more electricity from lower-emitting plants,
and/or purchasing emission allowances. Plans for complying with
reductions required for the year 2000 and thereafter have not
been finalized. The Environmental Protection Agency (EPA) is
conducting additional studies which could indicate the need for
additional NOX reductions from the Bruce Mansfield Plant by the
year 2003. In addition, the EPA is also considering the need for
additional NOX reductions from the Company's Ohio facilities. On
November 7, 1997, the EPA proposed uniform reductions of NOX
emissions across a region of twenty-two states, including Ohio
and the District of Columbia (NOX Transport Rule) after
determining that such NOX emissions are contributing
significantly to ozone pollution in the eastern United States. In
a separate but related action, eight states filed petitions with
the EPA under Section 126 of the Clean Air Act seeking reductions
of NOX emissions which are alleged to contribute to ozone
pollution in the eight petitioning states. A December 1997 EPA
Memorandum of Agreement proposes to finalize the NOX Transport
Rule by September 30, 1998 and establishes a schedule for EPA
action on the Section 126 petitions. The cost of NOX reductions,
if required, may be substantial. The Company continues to
evaluate its compliance plans and other compliance options.
The Company is required to meet federally approved SO2
regulations. Violations of such regulations can result in
shutdown of the generating unit involved and/or civil or criminal
penalties of up to $25,000 for each day the unit is in violation.
The EPA has an interim enforcement policy for SO2 regulations in
Ohio that allows for compliance based on a 30-day averaging
period. The Company cannot predict what action the EPA may take
in the future with respect to proposed regulations or the interim
enforcement policy.
The Company is aware of its potential involvement in
the cleanup of several hazardous waste disposal sites. The
Company has accrued a liability totaling $1.1 million at December
31, 1997 based on estimates of the costs of cleanup and its
proportionate responsibility for such costs. The Company believes
that the ultimate outcome of these matters will not have a
material adverse effect on its financial condition, cash flows or
results of operations.
Legislative, administrative and judicial actions will
continue to change the way that the Company must operate in order
to comply with environmental laws and regulations. With respect
to any such changes and to the environmental matters described
above, the Company expects that any resulting additional capital
costs which may be required, as well as any required increase in
operating costs, would ultimately be recovered from its
customers.
7. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED):
The following summarizes certain consolidated operating
results by quarter for 1997 and 1996.
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
Mar. 31, June 30, Sept. 30, Oct. 1 - Nov. 8 -
1997 1997 1997 Nov. 7, 1997 | Dec. 31, 1997
- ---------------------------------------------------------------------------|---------------
(In millions) |
<S> <C> <C> <C> <C> | <C>
Operating Revenues $217.1 $222.1 $241.3 $ 92.2 | $122.7
Operating Expenses |
and Taxes 184.7 186.1 191.9 86.7 | 103.6
- ---------------------------------------------------------------------------|------------
Operating Income 32.4 36.0 49.4 5.5 | 19.1
Other Income (Loss) (.4) .4 5.0 (2.9) | 2.1
Net Interest Charges 23.2 23.3 27.2 10.0 | 13.6
- ---------------------------------------------------------------------------|-----------
Income (Loss) Before |
Extraordinary Item 8.8 13.1 27.2 (7.4) | 7.6
Extraordinary Item |
(Net of Income Taxes) |
(Note 1) - - - (191.9) | -
- ---------------------------------------------------------------------------|-----------
Net Income (Loss) $ 8.8 $ 13.1 $ 27.2 $(199.3) | $ 7.6
- ---------------------------------------------------------------------------|-----------
Earnings (Loss) on Common |
Stock $ 4.6 $ 8.9 $ 23.0 $(206.2) | $ 7.6
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
1996 1996 1996 1996
- ------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Operating Revenues $210.8 $210.9 $252.2 $223.3
Operating Expenses and Taxes 177.9 180.3 200.5 181.7
- ------------------------------------------------------------------------------
Operating Income 32.9 30.6 51.7 41.6
Other Income (Loss) (5.5) .7 .3 -
Net Interest Charges 24.1 23.7 24.0 23.2
- ------------------------------------------------------------------------------
Net Income $ 3.3 $ 7.6 $ 28.0 $ 18.4
- ------------------------------------------------------------------------------
Earnings (Loss) on Common
Stock $ (.9) $ 3.4 $ 23.7 $ 14.2
- ------------------------------------------------------------------------------
</TABLE>
8. PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME (UNAUDITED):
The following pro forma statements of income for the Company give
effect to the OE-Centerior merger as if it had been consummated on January
1, 1996, with the purchase accounting adjustments actually recognized in
the business combination.
Year Ended December 31,
-----------------------
1997 1996
- --------------------------------------------------------
(In millions)
Operating Revenues $895 $897
Operating Expenses and Taxes 742 728
---- ----
Operating Income 153 169
Other Income (Loss) 10 (3)
Net Interest Charges 91 89
---- ----
Net Income $ 72 $ 77
===================================================
Pro forma adjustments reflected above include: (1) adjusting the
Company's nuclear generating units to fair value based upon independent
appraisals and estimated discounted future cash flows based on management's
current view of cost recovery; (2) the effect of discontinuing SFAS 71 for
the Company's nuclear operations; (3) amortization of the fair value
adjustment for long-term debt; (4) goodwill recognized representing the
excess of the Company's portion of the purchase price over the Company's
adjusted net assets; (4) the elimination of merger costs; and (5)
adjustments for estimated tax effects of the above adjustments. See Note 2.
9. PENDING MERGER OF THE COMPANY INTO CEI:
In March 1994, Centerior announced a plan to merge the Company
into CEI. All necessary regulatory approvals have been obtained, except the
approval of the Nuclear Regulatory Commission (NRC). This application was
withdrawn at the NRC's request pending the decision whether to complete
this merger. No final decision regarding the proposed merger has been
reached.
In June 1995, the Company's preferred stockholders approved the
merger and CEI's preferred stockholders approved the authorization of
additional shares of preferred stock. If and when the merger becomes
effective, the Company's preferred stockholders will exchange their shares
for preferred stock shares of CEI having substantially the same terms. Debt
holders of the merging companies will become debt holders of CEI.
For the merging companies, the combined pro forma operating
revenues were $2.527 billion, $2.554 billion and $2.516 billion and the
combined pro forma net income was $220 million (excluding the extraordinary
item discussed in Note 1 and a similar item for CEI), $218 million and $281
million for the years 1997, 1996 and 1995, respectively. The pro forma data
is based on accounting for the merger of the Company and CEI on a method
similar to a pooling of interests and for 1997 and 1996 includes pro forma
adjustments to reflect the effect of the OE and Centerior merger (see Note
8). The pro forma data is not necessarily indicative of the results of
operations which would have been reported had the merger been in effect
during those years or which may be reported in the future. The pro forma
data should be read in conjunction with the audited financial statements of
both the Company and CEI.
Report of Independent Public Accountants
To the Stockholders and Board of Directors of The Toledo Edison Company:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of The Toledo Edison Company (an
Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and
subsidiary as of December 31, 1997 (post-merger) and 1996 (pre-merger), and
the related consolidated statements of income, retained earnings, capital
stock and other paid-in capital, cash flows and taxes 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). These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of The Toledo Edison
Company and subsidiary as of December 31, 1997 (post-merger) and 1996 (pre-
merger), and the results of their operations and their cash flows 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), in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
February 13, 1998
EXHIBIT 21.3
THE TOLEDO EDISON COMPANY
LIST OF SUBSIDIARIES OF THE REGISTRANT
AT DECEMBER 31, 1997
The Toledo Edison Capital Corporation
Statement of Differences
------------------------
Exhibit Number 21, List of Subsidiaries of the Registrant at
December 31, 1997, is not included in the printed document.
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RELATED
FORM 10-K FINANCIAL STATEMENTS FOR THE TOLEDO EDISON COMPANY AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000352049
<NAME> THE TOLEDO EDISON COMPANY
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,170,806
<OTHER-PROPERTY-AND-INVEST> 401,993
<TOTAL-CURRENT-ASSETS> 167,702
<TOTAL-DEFERRED-CHARGES> 1,017,651
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,758,152
<COMMON> 195,670
<CAPITAL-SURPLUS-PAID-IN> 328,364
<RETAINED-EARNINGS> 7,616
<TOTAL-COMMON-STOCKHOLDERS-EQ> 531,650
1,690
210,000
<LONG-TERM-DEBT-NET> 1,210,190
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 38,950
1,665
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 29,364
<OTHER-ITEMS-CAPITAL-AND-LIAB> 734,643
<TOT-CAPITALIZATION-AND-LIAB> 2,758,152
<GROSS-OPERATING-REVENUE> 895,376
<INCOME-TAX-EXPENSE> 35,702
<OTHER-OPERATING-EXPENSES> 717,337
<TOTAL-OPERATING-EXPENSES> 753,039
<OPERATING-INCOME-LOSS> 142,337
<OTHER-INCOME-NET> 4,306
<INCOME-BEFORE-INTEREST-EXPEN> 146,643
<TOTAL-INTEREST-EXPENSE> 97,258
<NET-INCOME> (142,516)
19,435
<EARNINGS-AVAILABLE-FOR-COMM> (161,951)
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 78,406
<CASH-FLOW-OPERATIONS> 213,612
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
FORTY-FIFTH SUPPLEMENTAL INDENTURE, dated as of June 1,
1997, made and entered into by and between PENNSYLVANIA POWER
COMPANY, a corporation organized and existing under the laws of
the Commonwealth of Pennsylvania, with its principal place of
business in New Castle, Lawrence County, Pennsylvania
(hereinafter sometimes referred to as the "Company") and
CITIBANK, N.A., a national banking association incorporated and
existing under the laws of the United States of America, with its
principal office in the Borough of Manhattan, The City, County
and State of New York (hereinafter sometimes referred to as the
"Trustee"), as trustee under the Indenture dated as of
November 1, 1945 between the Company and CITIBANK, N.A.
(successor to The First National Bank of The City of New York),
as trustee, as supplemented and amended by Supplemental
Indentures between the Company and the Trustee, dated as of May
1, 1948, as of March 1, 1950, as of February 1, 1952, as of
October 1, 1957, as of September 1, 1962, as of June 1, 1963, as
of June 1, 1969, as of May 1, 1970, as of April 1, 1971, as of
October 1, 1971, as of May 1, 1972, as of December 1, 1974, as of
October 1, 1975, as of September 1, 1976, as of April 15, 1978,
as of June 28, 1979, as of January 1, 1980, as of June 1, 1981,
as of January 14, 1982, as of August 1, 1982, as of December 15,
1982, as of December 1, 1983, as of September 6, 1984, as of
December 1, 1984, as of May 30, 1985, as of October 29, 1985, as
of August 1, 1987, as of May 1, 1988, as of November 1, 1989, as
of December 1, 1990, as of September 1, 1991, as of May 1, 1992,
as of July 15, 1992, as of August 1, 1992, as of May 1, 1993, as
of July 1, 1993, as of August 31, 1993, as of September 1, 1993,
as of September 15, 1993, as of October 1, 1993, as of
November 1, 1993, as of August 1, 1994, and as of September 1,
1995 (said Indenture as so supplemented and amended, and as
hereby supplemented and amended, being hereinafter sometimes
referred to as the "Indenture");
WHEREAS, the Company and the Trustee have executed and
delivered the Indenture for the purpose of securing an issue of
bonds of the First Series described therein and such additional
bonds as may from time to time be issued under and in accordance
with the terms of the Indenture, the aggregate principal amount
of bonds to be secured thereby being not limited, and the
Indenture fully describes and sets forth the property conveyed
thereby and is filed with the Secretary of the Commonwealth of
Pennsylvania and the Secretary of State of the State of Ohio and
will be of record in the office of the recorder of deeds of each
county in the Commonwealth of Pennsylvania and the State of Ohio
in which this Forty-fifth Supplemental Indenture is to be
recorded and is on file at the corporate trust office of the
Trustee, above referred to; and
WHEREAS the Indenture provides for the issuance of
bonds thereunder in one or more series and the Company, by
appropriate corporate action in conformity with the terms of the
Indenture, has duly determined to create two such series of bonds
under the Indenture to be designated as "First Mortgage Bonds,
Guarantee Series A of 1997 due 2027" (hereinafter sometimes
referred to as the "bonds of the Guarantee Series A") and "First
Mortgage Bonds, Guarantee Series B of 1997 due 2027" (hereinafter
sometimes referred to as the "bonds of the Guarantee Series B")
(bonds of the Guarantee Series A and B collectively hereinafter
sometimes referred to as "bonds of the Guarantee Series"), the
bonds of which are to bear interest at the same rates as those of
the State of Ohio Pollution Control Revenue Refunding Bonds,
Series 1997 (Pennsylvania Power Company Project) referred to
herein, and are to mature on June 1, 2027;
AND WHEREAS each of the bonds of the Guarantee Series
and the Trustee's Authentication Certificate thereon are to be
substantially in the following form, to wit:
[FORM OF BOND OF THE GUARANTEE SERIES A]
[FACE]
This Bond is not transferable except (i) to a successor
trustee under the Trust Indenture, dated as of June 1, 1997,
between the Ohio Water Development Authority and PNC Bank,
National Association, as Trustee, (ii) to a Credit Facility
Issuer (the "Credit Facility Issuer") as provided in the Pledge
Agreement, dated as of June 1, 1997, between the Pennsylvania
Power Company and said Trustee, or (iii) in connection with the
exercise of the rights and remedies of the holder hereof
consequent upon a "default" as defined in the Indenture referred
to herein.
PENNSYLVANIA POWER COMPANY
First Mortgage Bond, Guarantee Series A of 1997 due 2027
$5,800,000 No. R-1
Pennsylvania Power Company, a Pennsylvania corporation
(hereinafter called the "Company"), for value received, hereby
promises to pay to , or registered
assigns, the principal sum of $5,800,000 on June 1, 2027, and to
pay the registered holder hereof interest on said sum from the
Initial Interest Accrual Date (hereinbelow defined) at the same
rates as those of the $5,800,000 State of Ohio Pollution Control
Revenue Refunding Bonds, Series 1997 (Pennsylvania Power Company
Project). The principal of and interest on this bond shall be
payable at the office or agency of the Company in the Borough of
Manhattan, The City, County and State of New York, designated for
that purpose, in any coin or currency of the United States of
America which at the time of payment is legal tender for public
and private debts.
The provisions of this bond are continued on the
reverse hereof and such continued provisions shall for all
purposes have the same effect as though fully set forth at this
place.
This bond shall not be valid or become obligatory for
any purpose unless and until it shall have been authenticated by
the execution by the Trustee or its successor in trust under the
Indenture of the certificate hereon.
IN WITNESS WHEREOF, PENNSYLVANIA POWER COMPANY has caused
this bond to be executed in its name by its President or one of
its Vice Presidents by his or her signature or a facsimile
thereof, and its corporate seal or a facsimile thereof to be
affixed hereto or imprinted hereon and attested by its Secretary
or one of its Assistant Secretaries by his or her signature or a
facsimile thereof.
Dated:
PENNSYLVANIA POWER COMPANY
By
----------------------
Vice President
Attest:
- ---------------------------
Assistant Secretary
[FORM OF TRUSTEE'S AUTHENTICATION CERTIFICATE]
TRUSTEE'S AUTHENTICATION CERTIFICATE
This bond is one of the bonds, of the series designated therein,
described in the within-mentioned Indenture.
CITIBANK, N.A.
AS TRUSTEE,
By
-----------------------
Authorized Officer
[FORM OF BOND OF THE GUARANTEE SERIES A]
[REVERSE]
PENNSYLVANIA POWER COMPANY
First Mortgage Bond, Guarantee Series A of 1997 due 2027
This bond is one of the bonds issued and to be issued
from time to time under and in accordance with and all secured by
an indenture of mortgage or deed of trust dated as of November 1,
1945, and indentures supplemental thereto, given by the Company
to Citibank, N.A. (successor to The First National Bank of The
City of New York), as trustee (hereinafter referred to as the
"Trustee"), to which indenture and indentures supplemental
thereto (hereinafter referred to collectively as the "Indenture")
reference is hereby made for a description of the property
mortgaged and pledged, the nature and extent of the security and
the rights, duties and immunities thereunder of the Trustee and
the rights of the holders of the bonds and coupons and of the
Trustee and of the Company in respect of such security, and the
limitations on such rights. By the terms of the Indenture, the
bonds to be secured thereby are issuable in series which may vary
as to date, amount, date of maturity, rate of interest, terms of
redemption and in other respects as in the Indenture provided.
The Indenture contains provisions permitting the
Company and the Trustee, with the consent of the holders of not
less than seventy-five per centum in principal amount of the
bonds (exclusive of bonds disqualified by reason of the Company's
interest therein) at the time outstanding, including, if more
than one series of bonds shall be at the time outstanding, not
less than sixty per centum in principal amount of each series
affected, to effect, by an indenture supplemental to the
Indenture, modifications or alterations of the Indenture and of
the rights and obligations of the Company and the rights of the
holders of the bonds and coupons; provided, however, that no such
modification or alteration shall be made without the written
approval or consent of the holder hereof which will (a) extend
the maturity of this bond or reduce the rate or extend the time
of payment of interest hereon or reduce the amount of the
principal hereof or reduce any premium payable on the redemption
hereof, or (b) permit the creation of any lien, not otherwise
permitted, prior to or on a parity with the lien of the
Indenture, or (c) reduce the percentage of the principal amount
of the bonds upon the approval or consent of the holders of which
modifications or alterations may be made as aforesaid.
The bonds of this series shall be redeemed in whole,
by payment of the principal amount thereof plus accrued interest
thereon, if any, to the date fixed for redemption, upon receipt
by the Trustee of a written advice from the trustee under the
Trust Indenture (the "Revenue Bond Indenture") dated as of
June 1, 1997, between the Ohio Water Development Authority and
PNC Bank, National Association, as trustee (such trustee and any
successor trustee being hereinafter referred to as the "Revenue
Bond Trustee"), securing $5,800,000 of State of Ohio Pollution
Control Revenue Refunding Bonds, Series 1997 (Pennsylvania Power
Company Project), or the Credit Facility Issuer, if any, as
assignee, stating that the principal amount of all the pollution
control revenue refunding bonds then outstanding under the
Revenue Bond Indenture has been declared due and payable pursuant
to the provisions of Section 11.02 of the Revenue Bond Indenture,
specifying the date of the accelerated maturity of such pollution
control revenue refunding bonds and the date from which interest
on the pollution control revenue refunding bonds issued under the
Revenue Bond Indenture has then accrued, stating such declaration
of maturity has not been annulled and demanding payment of the
principal amount hereof plus accrued interest hereon to the date
fixed for such redemption. As provided in the Supplemental
Indenture establishing the terms and provisions of the bonds of
this series, the date fixed for such redemption shall be not
earlier than the date specified in the aforesaid written advice
as the date of the accelerated maturity of the pollution control
revenue refunding bonds then outstanding under the Revenue Bond
Indenture and not later than the 45th day after the receipt by
the Trustee of such advice, unless such 45th day is earlier than
such date of accelerated maturity. The date fixed for such
redemption shall be specified in a notice of redemption to be
given not less than 30 days prior to the date so fixed for such
redemption. Upon mailing of such notice of redemption, the date
from which unpaid interest on the aforesaid pollution control
revenue refunding bonds has then accrued (as specified by the
Revenue Bond Trustee) shall become the initial interest accrual
date (the "Initial Interest Accrual Date") with respect to the
bonds of this series, and the date which is six months after the
Initial Interest Accrual Date shall be the first interest payment
date for the bonds of this series, provided, however, on any
demand for payment of the principal amount hereof at maturity as
a result of the principal of the aforesaid pollution control
revenue refunding bonds becoming due and payable on the maturity
date of the bonds of this series, the date from which unpaid
interest on the aforesaid pollution control revenue refunding
bonds has then accrued shall become the Initial Interest Accrual
Date with respect to the bonds of this series, such date to be as
stated in a written notice from the Revenue Bond Trustee to the
Trustee. As provided in said Supplemental Indenture, the
aforementioned notice of redemption shall become null and void
for all purposes under the Indenture (including the fixing of the
Initial Interest Accrual Date with respect to the bonds of this
series) upon receipt by the Trustee of written notice from the
Revenue Bond Trustee of the annulment of the acceleration of the
maturity of the pollution control revenue refunding bonds then
outstanding under the Revenue Bond Indenture and of the
rescission of the aforesaid written advice prior to the
redemption date specified in such notice of redemption, and
thereupon no redemption of the bonds of this series and no
payment in respect thereof as specified in such notice of
redemption shall be effected or required. But no such rescission
shall extend to any subsequent written advice from the Revenue
Bond Trustee or impair any right consequent on such subsequent
written notice.
Bonds of this series are not otherwise redeemable
prior to their maturity.
In case of certain defaults as specified in the
Indenture, the principal of this bond may be declared or may
become due and payable on the conditions, at the time, in the
manner and with the effect provided in the Indenture.
No recourse shall be had for the payment of the
principal of or interest on this bond, or for any claim based
hereon, or otherwise in respect hereof or of the Indenture, to or
against any incorporator, stockholder, director or officer, past,
present or future, as such, of the Company, or of any predecessor
or successor company, either directly or through the Company, or
such predecessor or successor company, or otherwise, under any
constitution or statute or rule of law, or by the enforcement of
any assessment or penalty, or otherwise, all such liability of
incorporators, stockholders, directors and officers, as such,
being waived and released by the holder and owner hereof by the
acceptance of this bond and being likewise waived and released by
the terms of the Indenture.
The bonds of this series are issuable only as
registered bonds without coupons in denominations of $1,000 and
authorized multiples thereof. Except as may be stated in any
legend written on the face of this bond, this bond is
transferable by the registered holder hereof, in person or by
attorney duly authorized, at the corporate trust office of the
Trustee, in the Borough of Manhattan, The City, County and State
of New York, or at such other place or places as the Company may
designate by resolution of the Board of Directors, but only in
the manner and upon the conditions prescribed in the Indenture,
upon the surrender and cancellation of this bond and the payment
of charges for transfer, and upon any such transfer a new
registered bond or bonds, without coupons, of the same series and
maturity date and for the same aggregate principal amount, in
authorized denominations, will be issued to the transferee in
exchange herefor. The Company, the Trustee and any agent
designated to make transfers or exchanges of bonds of this series
may deem and treat the person in whose name this bond is
registered as the absolute owner for all purposes including the
purpose of the receipt of payment. Registered bonds of this
series shall be exchangeable at said corporate trust office of
the Trustee, or at such other place or places as the Company may
designate by resolution of the Board of Directors, for registered
bonds of other authorized denominations having the same aggregate
principal amount, in the manner and upon the conditions
prescribed in the Indenture. Neither the Company nor the Trustee
nor any other agent designated for such purpose shall be required
to make transfers or exchanges of bonds of this series during the
period between any interest payment date for such series and the
record date next preceding such interest payment date.
Notwithstanding any provisions of the Indenture, no charge shall
be made upon any transfer or exchange of bonds of this series
other than for any tax or taxes or other governmental charge
required to be paid by the Company.
[END OF FORM OF BOND OF THE GUARANTEE SERIES A]
[FORM OF BOND OF THE GUARANTEE SERIES B]
[FACE]
This Bond is not transferable except (i) to a successor
trustee under the Trust Indenture, dated as of June 1, 1997,
between the Ohio Air Quality Development Authority and PNC Bank,
National Association, as Trustee, (ii) to a Credit Facility
Issuer (the "Credit Facility Issuer") as provided in the Pledge
Agreement, dated as of June 1, 1997, between the Pennsylvania
Power Company and said Trustee, or (iii) in connection with the
exercise of the rights and remedies of the holder hereof
consequent upon a "default" as defined in the Indenture referred
to herein.
PENNSYLVANIA POWER COMPANY
First Mortgage Bond, Guarantee Series B of 1997 due 2027
$4,500,000 No. R-1
Pennsylvania Power Company, a Pennsylvania corporation
(hereinafter called the "Company"), for value received, hereby
promises to pay to , or registered
assigns, the principal sum of $4,500,000 on June 1, 2027, and to
pay the registered holder hereof interest on said sum from the
Initial Interest Accrual Date (hereinbelow defined) at the same
rates as those of the $4,500,000 State of Ohio Pollution Control
Revenue Refunding Bonds, Series 1997 (Pennsylvania Power Company
Project). The principal of and interest on this bond shall be
payable at the office or agency of the Company in the Borough of
Manhattan, The City, County and State of New York, designated for
that purpose, in any coin or currency of the United States of
America which at the time of payment is legal tender for public
and private debts.
The provisions of this bond are continued on the
reverse hereof and such continued provisions shall for all
purposes have the same effect as though fully set forth at this
place.
This bond shall not be valid or become obligatory for
any purpose unless and until it shall have been authenticated by
the execution by the Trustee or its successor in trust under the
Indenture of the certificate hereon.
IN WITNESS WHEREOF, PENNSYLVANIA POWER COMPANY has
caused this bond to be executed in its name by its President or
one of its Vice Presidents by his or her signature or a facsimile
thereof, and its corporate seal or a facsimile thereof to be
affixed hereto or imprinted hereon and attested by its Secretary
or one of its Assistant Secretaries by his or her signature or a
facsimile thereof.
Dated:
PENNSYLVANIA POWER COMPANY
By
---------------------
Vice President
Attest:
- ------------------------
Assistant Secretary
[FORM OF TRUSTEE'S AUTHENTICATION CERTIFICATE]
TRUSTEE'S AUTHENTICATION CERTIFICATE
This bond is one of the bonds, of the series designated therein,
described in the within-mentioned Indenture.
CITIBANK, N.A.
AS TRUSTEE,
By
--------------------------
Authorized Officer
[FORM OF BOND OF THE GUARANTEE SERIES B]
[REVERSE]
PENNSYLVANIA POWER COMPANY
First Mortgage Bond, Guarantee Series B of 1997 due 2027
This bond is one of the bonds issued and to be issued
from time to time under and in accordance with and all secured by
an indenture of mortgage or deed of trust dated as of November 1,
1945, and indentures supplemental thereto, given by the Company
to Citibank, N.A. (successor to The First National Bank of The
City of New York), as trustee (hereinafter referred to as the
"Trustee"), to which indenture and indentures supplemental
thereto (hereinafter referred to collectively as the "Indenture")
reference is hereby made for a description of the property
mortgaged and pledged, the nature and extent of the security and
the rights, duties and immunities thereunder of the Trustee and
the rights of the holders of the bonds and coupons and of the
Trustee and of the Company in respect of such security, and the
limitations on such rights. By the terms of the Indenture, the
bonds to be secured thereby are issuable in series which may vary
as to date, amount, date of maturity, rate of interest, terms of
redemption and in other respects as in the Indenture provided.
The Indenture contains provisions permitting the
Company and the Trustee, with the consent of the holders of not
less than seventy-five per centum in principal amount of the
bonds (exclusive of bonds disqualified by reason of the Company's
interest therein) at the time outstanding, including, if more
than one series of bonds shall be at the time outstanding, not
less than sixty per centum in principal amount of each series
affected, to effect, by an indenture supplemental to the
Indenture, modifications or alterations of the Indenture and of
the rights and obligations of the Company and the rights of the
holders of the bonds and coupons; provided, however, that no such
modification or alteration shall be made without the written
approval or consent of the holder hereof which will (a) extend
the maturity of this bond or reduce the rate or extend the time
of payment of interest hereon or reduce the amount of the
principal hereof or reduce any premium payable on the redemption
hereof, or (b) permit the creation of any lien, not otherwise
permitted, prior to or on a parity with the lien of the
Indenture, or (c) reduce the percentage of the principal amount
of the bonds upon the approval or consent of the holders of which
modifications or alterations may be made as aforesaid.
The bonds of this series shall be redeemed in whole, by
payment of the principal amount thereof plus accrued interest
thereon, if any, to the date fixed for redemption, upon receipt
by the Trustee of a written advice from the trustee under the
Trust Indenture (the "Revenue Bond Indenture") dated as of
June 1, 1997, between the Ohio Air Quality Development Authority
and PNC Bank, National Association, as trustee (such trustee and
any successor trustee being hereinafter referred to as the
"Revenue Bond Trustee"), securing $4,500,000 of State of Ohio
Pollution Control Revenue Refunding Bonds, Series 1997
(Pennsylvania Power Company Project), or the Credit Facility
Issuer, if any, as assignee, stating that the principal amount of
all the pollution control revenue refunding bonds then
outstanding under the Revenue Bond Indenture has been declared
due and payable pursuant to the provisions of Section 11.02 of
the Revenue Bond Indenture, specifying the date of the
accelerated maturity of such pollution control revenue refunding
bonds and the date from which interest on the pollution control
revenue refunding bonds issued under the Revenue Bond Indenture
has then accrued, stating such declaration of maturity has not
been annulled and demanding payment of the principal amount
hereof plus accrued interest hereon to the date fixed for such
redemption. As provided in the Supplemental Indenture
establishing the terms and provisions of the bonds of this
series, the date fixed for such redemption shall be not earlier
than the date specified in the aforesaid written advice as the
date of the accelerated maturity of the pollution control revenue
refunding bonds then outstanding under the Revenue Bond Indenture
and not later than the 45th day after the receipt by the Trustee
of such advice, unless such 45th day is earlier than such date of
accelerated maturity. The date fixed for such redemption shall
be specified in a notice of redemption to be given not less than
30 days prior to the date so fixed for such redemption. Upon
mailing of such notice of redemption, the date from which unpaid
interest on the aforesaid pollution control revenue refunding
bonds has then accrued (as specified by the Revenue Bond Trustee)
shall become the initial interest accrual date (the "Initial
Interest Accrual Date") with respect to the bonds of this series,
and the date which is six months after the Initial Interest
Accrual Date shall be the first interest payment date for the
bonds of this series, provided, however, on any demand for
payment of the principal amount hereof at maturity as a result of
the principal of the aforesaid pollution control revenue
refunding bonds becoming due and payable on the maturity date of
the bonds of this series, the date from which unpaid interest on
the aforesaid pollution control revenue refunding bonds has then
accrued shall become the Initial Interest Accrual Date with
respect to the bonds of this series, such date to be as stated in
a written notice from the Revenue Bond Trustee to the Trustee.
As provided in said Supplemental Indenture, the aforementioned
notice of redemption shall become null and void for all purposes
under the Indenture (including the fixing of the Initial Interest
Accrual Date with respect to the bonds of this series) upon
receipt by the Trustee of written notice from the Revenue Bond
Trustee of the annulment of the acceleration of the maturity of
the pollution control revenue refunding bonds then outstanding
under the Revenue Bond Indenture and of the rescission of the
aforesaid written advice prior to the redemption date specified
in such notice of redemption, and thereupon no redemption of the
bonds of this series and no payment in respect thereof as
specified in such notice of redemption shall be effected or
required. But no such rescission shall extend to any subsequent
written advice from the Revenue Bond Trustee or impair any right
consequent on such subsequent written notice.
Bonds of this series are not otherwise redeemable prior
to their maturity.
In case of certain defaults as specified in the
Indenture, the principal of this bond may be declared or may
become due and payable on the conditions, at the time, in the
manner and with the effect provided in the Indenture.
No recourse shall be had for the payment of the
principal of or interest on this bond, or for any claim based
hereon, or otherwise in respect hereof or of the Indenture, to or
against any incorporator, stockholder, director or officer, past,
present or future, as such, of the Company, or of any predecessor
or successor company, either directly or through the Company, or
such predecessor or successor company, or otherwise, under any
constitution or statute or rule of law, or by the enforcement of
any assessment or penalty, or otherwise, all such liability of
incorporators, stockholders, directors and officers, as such,
being waived and released by the holder and owner hereof by the
acceptance of this bond and being likewise waived and released by
the terms of the Indenture.
The bonds of this series are issuable only as
registered bonds without coupons in denominations of $1,000 and
authorized multiples thereof. Except as may be stated in any
legend written on the face of this bond, this bond is
transferable by the registered holder hereof, in person or by
attorney duly authorized, at the corporate trust office of the
Trustee, in the Borough of Manhattan, The City, County and State
of New York, or at such other place or places as the Company may
designate by resolution of the Board of Directors, but only in
the manner and upon the conditions prescribed in the Indenture,
upon the surrender and cancellation of this bond and the payment
of charges for transfer, and upon any such transfer a new
registered bond or bonds, without coupons, of the same series and
maturity date and for the same aggregate principal amount, in
authorized denominations, will be issued to the transferee in
exchange herefor. The Company, the Trustee and any agent
designated to make transfers or exchanges of bonds of this series
may deem and treat the person in whose name this bond is
registered as the absolute owner for all purposes including the
purpose of the receipt of payment. Registered bonds of this
series shall be exchangeable at said corporate trust office of
the Trustee, or at such other place or places as the Company may
designate by resolution of the Board of Directors, for registered
bonds of other authorized denominations having the same aggregate
principal amount, in the manner and upon the conditions
prescribed in the Indenture. Neither the Company nor the Trustee
nor any other agent designated for such purpose shall be required
to make transfers or exchanges of bonds of this series during the
period between any interest payment date for such series and the
record date next preceding such interest payment date.
Notwithstanding any provisions of the Indenture, no charge shall
be made upon any transfer or exchange of bonds of this series
other than for any tax or taxes or other governmental charge
required to be paid by the Company.
[END OF FORM OF BOND OF THE GUARANTEE SERIES B]
AND WHEREAS all acts and things necessary to make the
bonds of the Guarantee Series, when authenticated by the Trustee
and issued as in the Indenture provided, the valid, binding and
legal obligations of the Company, and to constitute the Indenture
a valid, binding and legal instrument for the security thereof,
have been done and performed, and the creation, execution and
delivery of the Indenture and the creation, execution and issue
of the bonds of the Guarantee Series subject to the terms hereof
and of the Indenture, have in all respects been duly authorized;
NOW THEREFORE, in consideration of the premises, and of
the acceptance and purchase by holders thereof of the bonds
issued and to be issued under the Indenture, and of the issuance
of the Letter of Credit under the Letter of Credit and
Reimbursement Agreement, dated as of June 1, 1997 (the
"Reimbursement Agreement"), among Pennsylvania Power Company, The
First National Bank of Chicago, as Credit Facility Issuer, and
the various Banks named therein, and the sum of One Dollar duly
paid by the Trustee to the Company, and of other good and
valuable considerations, the receipt of which is hereby
acknowledged, and for the purpose of securing the due and
punctual payment of the principal of and premium, if any, and
interest on all bonds now outstanding under the Indenture and the
$5,800,000 principal amount of bonds of the Guarantee Series A
and the $4,500,000 principal amount of bonds of the Guarantee
Series B proposed presently to be issued and all other bonds
which shall be issued under the Indenture, and for the purpose of
securing the faithful performance and observance of all covenants
and conditions therein and in any supplemental indenture set
forth, and for the purpose of securing the obligations owed to
the Credit Facility Issuer under the Reimbursement Agreement, the
Company has given, granted, bargained, sold, released,
transferred, assigned, hypothecated, pledged, mortgaged,
confirmed, created a security interest in, set over, warranted,
aliened and conveyed and by these presents does give, grant,
bargain, sell, release, transfer, assign, hypothecate, pledge,
mortgage, confirm, create a security interest in, set over,
warrant, alien and convey unto Citibank, N.A., as Trustee as
provided in the Indenture, and its successor or successors in the
trust thereby and hereby created and to its or their assigns
forever, all the right, title and interest of the Company in and
to the property described in Schedule A (which is identified by
the signature of an officer of each party hereto at the end
thereof) hereto annexed and made a part hereof, together (subject
to the provisions of Article X of the Indenture) with the tolls,
rents, revenues, issues, earnings, income, products and profits
thereof, and does hereby confirm that the Company will not cause
or consent to a partition, whether voluntary or through legal
proceedings, of property, whether herein described or heretofore
or hereafter acquired, in which its ownership shall be as a
tenant in common except as permitted by and in conformity with
the provisions of the Indenture and particularly of said Article
X thereof.
TOGETHER WITH all and singular the tenements,
hereditaments and appurtenances belonging or in any wise
appertaining to the premises, property, franchises and rights, or
any thereof, referred to in the Indenture (and not therein
expressly excepted) with the reversion and reversions, remainder
and remainders and (subject to the provisions of Article X of the
Indenture) the tolls, rents, revenues, issues, earnings, income,
products and profits thereof, and all the estate, right, title
and interest and claim whatsoever, at law as well as in equity,
which the Company now has or may hereafter acquire in and to such
premises, property, franchises and rights and every part and
parcel thereof described in the aforesaid Schedule A, subject to
"excepted encumbrances" of the original Indenture.
TO HAVE AND TO HOLD all said premises, property,
franchises and rights hereby conveyed, assigned, pledged, or
mortgaged, or intended so to be, unto the Trustee, its successor
or successors in trust, and their assigns forever.
BUT IN TRUST, NEVERTHELESS, with power of sale, for the
equal and proportionate benefit and security of the holders of
all bonds now or hereafter authenticated and delivered under the
Indenture, and interest coupons appurtenant thereto, pursuant to
the provisions thereof, and for the enforcement of the payment of
said bonds and coupons when payable and the performance of and
compliance with the covenants and conditions of the Indenture,
without any preference, distinction or priority as to lien or
otherwise of any bond or bonds over others by reason of the
difference in time of the actual authentication, delivery, issue,
sale or negotiation thereof or for any other reason whatsoever,
except as otherwise expressly provided in the Indenture; and so
that each and every bond now or hereafter authenticated and
delivered thereunder shall have the same lien, and so that the
principal of and premium, if any, and interest on every such
bond, shall, subject to the terms of the Indenture, be equally
and proportionately secured thereby and hereby, as if it had been
made, executed, authenticated, delivered, sold and negotiated
simultaneously with the execution and delivery of the Indenture.
AND IT IS EXPRESSLY DECLARED that all bonds
authenticated and delivered and secured thereunder and hereunder
are to be issued, authenticated and delivered, and all said
premises, property, franchises and rights hereby and by the
Indenture conveyed, assigned, pledged or mortgaged, or intended
so to be (including all the right, title and interest of the
Company in and to any and all premises, property, franchises and
rights of every kind and description, real, personal and mixed,
tangible and intangible, thereafter acquired by the Company and
whether or not specifically described in the Indenture, except
any therein expressly excepted), are to be dealt with and
disposed of, under, upon and subject to the terms, conditions,
stipulations, covenants, agreements, trusts, uses and purposes in
the Indenture expressed, and it is hereby agreed as follows:
Section 1. There is hereby created two series of bonds
designated Guarantee Series A of 1997 due 2027 and Guarantee
Series B of 1997 due 2027, each of which shall also bear the
descriptive title "First Mortgage Bond" (said bonds being
sometimes herein referred to, respectively, as the "bonds of the
Guarantee Series A" and the "bonds of the Guarantee Series B"
and, collectively, as the "bonds of the Guarantee Series") and
the form of each such series shall be substantially as
hereinbefore set forth. Bonds of the Guarantee Series shall
mature on June 1, 2027. The bonds of the Guarantee Series may be
issued only as registered bonds without coupons in denominations
of $1,000 or such multiples thereof as the Board of Directors
shall approve, and delivery to the Trustee for authentication
shall be conclusive evidence of such approval. The serial
numbers of bonds of the Guarantee Series shall be such as may be
approved by any officer of the Company, the execution thereof by
any such officer, by facsimile signature or otherwise, to be
conclusive evidence of such approval. Bonds of the Guarantee
Series shall bear interest from their respective Initial Interest
Accrual Dates (as defined in the respective forms of the bonds of
the Guarantee Series A and the Guarantee Series B hereinabove set
forth) at the same rates as those of the State of Ohio Pollution
Control Revenue Refunding Bonds, Series 1997 (Pennsylvania Power
Company Project) referred to in the respective forms of the bonds
of the Guarantee Series A and the Guarantee Series B hereinabove
set forth. Principal or redemption price of and interest on said
bonds shall be payable in any coin or currency of the United
States of America which at the time of payment is legal tender
for public and private debts at the office or agency of the
Company in the Borough of Manhattan, The City, County and State
of New York, designated for that purpose.
Bonds of the Guarantee Series shall be redeemable,
exchangeable and transferable as and to the extent set forth in
their respective forms thereof hereinbefore set forth.
The bonds of the Guarantee Series shall be redeemable
as set forth in their respective forms thereof hereinbefore set
forth in whole, prior to maturity, upon notice given by mailing
the same, postage pre-paid, at least thirty days and not more
than forty-five days prior to the date fixed for redemption to
each registered holder of a bond to be redeemed at the last
address of such holder appearing on the registry books. The
Trustee shall within five business days of receiving the written
advice specified in the form of bond of the Guarantee Series A
with respect to the bonds of the Guarantee Series A, or in the
form of bond of the Guarantee Series B with respect to the bonds
of the Guarantee Series B, provided for herein mail a copy
thereof to the Company stamped or otherwise marked to indicate
the date of receipt by the Trustee. The Company shall fix a
redemption date for the redemption so demanded and shall mail to
the Trustee notice of such date at least thirty-five days prior
thereto. Subject to the foregoing sentence, the redemption date
so fixed may be any day not earlier than the date specified in
the aforesaid written advice as the date of the accelerated
maturity of the pollution control revenue refunding bonds then
outstanding under the applicable Revenue Bond Indenture and not
later than the forty-fifth day after receipt by the Trustee of
such advice, unless such forty-fifth day is earlier than such
date of accelerated maturity. If the Trustee does not receive
such notice from the Company within thirteen days after receipt
by the Trustee of the aforesaid written advice, the redemption
date shall be deemed fixed as the forty-fifth day after such
receipt. The Trustee shall mail notice of the redemption date to
the applicable Revenue Bond Trustee not less than thirty days
prior to such redemption date, provided, however, that the
Trustee shall mail no such notice (and no redemption shall be
made) if prior to the mailing of such notice the Trustee shall
have received written notice from the applicable Revenue Bond
Trustee of the annulment of the acceleration of the maturity of
the pollution control revenue refunding bonds then outstanding
under the applicable Revenue Bond Indenture and of the rescission
of the aforesaid written advice. The terms "Revenue Bond
Trustee" and "Revenue Bond Indenture" as they relate to the bonds
of the Guarantee Series A and Guarantee Series B shall have the
meanings specified in the respective forms thereof hereinabove
set forth. Redemption of the bonds of the Guarantee Series shall
be at the principal amount thereof, plus accrued interest thereon
to the date fixed for redemption and such amount shall become due
and payable on the date fixed for such redemption. Anything in
this paragraph contained to the contrary notwithstanding, if,
after mailing notice of the date fixed for redemption but prior
to such date, the Trustee shall have been advised in writing by
the applicable Revenue Bond Trustee that the acceleration of the
maturity of the pollution control revenue refunding bonds then
outstanding under the applicable Revenue Bond Indenture has been
annulled and that the aforesaid written advice has been
rescinded, the aforesaid written advice shall thereupon, without
further act of the Trustee or the Company, be rescinded and
become null and void for all purposes hereunder (including the
fixing of the applicable Initial Interest Accrual Date as
provided in the respective forms of the bonds of the Guarantee
Series A and Guarantee Series B, as the case may be, provided for
herein) and no redemption of the bonds of the Guarantee Series A
or Guarantee Series B and no payments in respect thereof as
specified in the aforesaid written notice shall be effected or
required. But no such rescission shall extend to any subsequent
written advice from the applicable Revenue Bond Trustee or impair
any right consequent on such subsequent written advice.
SECTION 2. Bonds of the Guarantee Series shall be
deemed to be paid and no longer outstanding under the Indenture
to the extent that (i) pollution control revenue refunding bonds
which are outstanding from time to time under the applicable
Revenue Bond Indenture are paid or deemed to be paid and are no
longer outstanding and the Trustee has been notified to such
effect by the Company and (ii) all obligations secured by the
bonds of the Guarantee Series payable to the Credit Facility
Issuer under or in connection with the Reimbursement Agreement
are no longer outstanding and the Trustee has been notified to
such effect by the Company.
SECTION 3. The Company covenants and agrees that the
provisions of Section 3 of the Fifth Supplemental Indenture dated
as of September 1, 1962, which are to remain in effect so long as
any bonds of the Sixth Series shall be outstanding under the
Indenture, shall remain in full force and effect so long as any
bonds of the Guarantee Series shall be outstanding under the
Indenture.
SECTION 4. As supplemented and amended by this
Supplemental Indenture, the Indenture is in all respects ratified
and confirmed, and the Indenture and this Supplemental Indenture
shall be read, taken and construed as one and the same
instrument.
SECTION 5. Nothing in this Supplemental Indenture
contained shall, or shall be construed to, confer upon any person
other than a holder of bonds issued under the Indenture, the
Company and the Trustee any right or interest to avail himself of
any benefit under any provision of the Indenture or of this
Supplemental Indenture.
SECTION 6. The Trustee assumes no responsibility for
or in respect of the validity or sufficiency of this Supplemental
Indenture or the due execution hereof by the Company or for or in
respect of the recitals and statements contained herein, all of
which recitals and statements are made solely by the Company.
SECTION 7. This Supplemental Indenture may be executed
in several counterparts and all such counterparts executed and
delivered, each as an original, shall constitute but one and the
same instrument.
PENNSYLVANIA POWER COMPANY hereby constitutes and
appoints Robert P. Wushinske to be its attorney for it and in its
name as and for its corporate act and deed to acknowledge this
Supplemental Indenture before any person having authority to take
such acknowledgment, to the intent that the same may be duly
recorded.
CITIBANK, N.A. hereby constitutes and appoints
P. DeFelice to be its attorney for it and in its name as and for
its corporate act and deed to acknowledge this Supplemental
Indenture before any person having authority to take such
acknowledgment, to the intent that the same may be duly recorded.
IN WITNESS WHEREOF, PENNSYLVANIA POWER COMPANY has
caused its corporate name to be hereunto affixed, and this
instrument to be signed and sealed by its President or a Vice
President, and its corporate seal to be attested by its Secretary
or an Assistant Secretary for and on its behalf, in the city of
New Castle, County of Lawrence and Commonwealth of Pennsylvania
and CITIBANK, N.A., in token of its acceptance of the trust, has
caused its corporate name to be hereunto affixed, and this
instrument to be signed by a Vice President and its corporate
seal to be affixed and attested by one of its Vice Presidents in
the City of New York, County of New York and State of New York,
all as of the day and year first above written.
PENNSYLVANIA POWER COMPANY
By: Robert P. Wushinske
-------------------------
Robert P. Wushinske
Vice President
ATTEST:
By: Randy Scilla
---------------------------
Randy Scilla
Assistant Secretary
[Seal]
Signed, sealed and delivered by
PENNSYLVANIA POWER COMPANY
in the presence of:
Donna S. Mathieson
- -----------------------------
Donna S. Mathieson
R. Terry Conlin
- -----------------------------
R. Terry Conlin
CITIBANK, N.A.
as Trustee as aforesaid,
By: P. DeFelice
---------------------
P. DeFelice
Vice President
ATTEST:
By: Arthur W. Aslanian
---------------------------
Arthur W. Aslanian
Vice President
[Seal]
Signed, sealed and delivered by
CITIBANK, N.A.
in the presence of:
Rosemary Melendez
- ------------------------------
Rosemary Melendez
Kristine Prall
- ------------------------------
Kristine Prall
COMMONWEALTH OF PENNSYLVANIA )
: ss.:
COUNTY OF LAWRENCE )
BE IT REMEMBERED that, on the 26th day of June, 1997,
before me, the undersigned, a Notary Public in said County of
Lawrence, Commonwealth of Pennsylvania, personally appeared Randy
Scilla, who being duly sworn according to law, doth depose and
say that he was personally present and did see the common or
corporate seal of the above named PENNSYLVANIA POWER COMPANY
affixed to the foregoing Supplemental Indenture; that the seal so
affixed is the common or corporate seal of the said Pennsylvania
Power Company and was so affixed by the authority of the said
corporation as the act and deed thereof; that the above named
Robert P. Wushinske is a Vice President of said corporation and
did sign the said Supplemental Indenture as such in the presence
of this deponent; that this deponent is an Assistant Secretary of
Pennsylvania Power Company, and that the name of this deponent
above signed in attestation of the due execution of the said
Supplemental Indenture is in this deponent's own proper
handwriting.
Sworn to and subscribed before me this 26th day of
June, 1997.
Randy Scilla
-----------------------
[SEAL]
Sylvia M. Rashid
------------------------
NOTARIAL SEAL
SYLVIA M. RASHID, Notary Public
New Castle, Lawrence Co., PA
My Commission Expires March 11, 2001
COMMONWEALTH OF PENNSYLVANIA )
: ss.:
COUNTY OF LAWRENCE )
I HEREBY CERTIFY that, on this 26th day of June, 1997,
before me, the subscriber, a Notary Public in and for the State
and County aforesaid, personally appeared Robert P. Wushinske,
the attorney for PENNSYLVANIA POWER COMPANY, and the attorney
named in the foregoing Supplemental Indenture and, by virtue and
in pursuance of the authority therein conferred upon him,
acknowledged the said Supplemental Indenture to be the act and
deed of said Pennsylvania Power Company.
WITNESS my hand and notarial seal the day and year
aforesaid.
[SEAL]
Sylvia M. Rashid
------------------------
NOTARIAL SEAL
SYLVIA M. RASHID, Notary Public
New Castle, Lawrence Co., PA
My Commission Expires March 11, 2001
COMMONWEALTH OF PENNSYLVANIA )
: ss.:
COUNTY OF LAWRENCE )
On the 26th day of June, 1997, before me, personally
came Robert P. Wushinske, to me known, who, being by me duly
sworn, did depose and say that he resides at R.D. 2, Means Road,
New Wilmington, Pennsylvania 16142; that he is a Vice President
of PENNSYLVANIA POWER COMPANY, one of the corporations described
in and which executed the above instrument; that he knows the
seal of said corporation; that the seal affixed to said
instrument is such corporate seal; that it was affixed by order
of the Board of Directors of said corporation, and that he signed
his name thereto by like authority.
WITNESS my hand and notarial seal the day and year
aforesaid.
[SEAL]
Sylvia M. Rashid
-----------------------
NOTARIAL SEAL
SYLVIA M. RASHID, Notary Public
New Castle, Lawrence Co., PA
My Commission Expires March 11, 2001
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
BE IT REMEMBERED that, on the 30th day of June, 1997,
before me, the undersigned, a Notary Public in said County of New
York, State of New York, personally appeared Arthur W. Aslanian,
who being duly sworn according to law, doth depose and say that
he was personally present and did see the common or corporate
seal of the above named CITIBANK, N.A. affixed to the foregoing
Supplemental Indenture; that the seal so affixed is the common or
corporate seal of the said CITIBANK, N.A. and was so affixed by
the authority of the said association as the act and deed
thereof; that the above named P. DeFelice is one of the Vice
Presidents of said association and did sign the said Supplemental
Indenture as such in the presence of this deponent; that this
deponent is a Vice President of said CITIBANK, N.A., and that the
name of this deponent above signed in attestation of the due
execution of the said Supplemental Indenture is in this
deponent's own proper handwriting.
Sworn to and subscribed before me this 30th day of
June, 1997.
Arthur W. Aslanian
-------------------------
[SEAL]
Jeffry Berger
-------------------------
JEFFRY BERGER
Notary Public, State of New York
No. 01BE5015814
Qualified in Kings County
Commission Expires July 26, 1997
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
I HEREBY CERTIFY that, on this 30th day of June, 1997,
before me, the subscriber, a Notary Public in and for the State
and County aforesaid, personally appeared P. DeFelice, the
attorney for CITIBANK, N.A., and the attorney named in the
foregoing Supplemental Indenture and, by virtue and in pursuance
of the authority therein conferred upon him, acknowledged the
execution of said Supplemental Indenture to be the act and deed
of said CITIBANK, N.A.
WITNESS my hand and notarial seal the day and year
aforesaid.
Jeffry Berger
-------------------------
[SEAL]
JEFFRY BERGER
Notary Public, State of New York
No. 01BE5015814
Qualified in Kings County
Commission Expires July 26, 1997
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On the 30th day of June, 1997, before me, personally
came P. DeFelice, to me known, who being by me duly sworn, did
depose and say that he resides at 47-09 169th Street, Flushing,
New York; that he is a Vice President of CITIBANK, N.A., one of
the parties described in and which executed the above instrument;
that he knows the seal of said association; that the seal affixed
to said instrument is such corporate seal; that it was so affixed
by authority of the Board of Directors of said association, and
that he signed his name thereto by like authority.
WITNESS my hand and notarial seal the day and year
aforesaid.
Jeffry Berger
-----------------------
[SEAL]
JEFFRY BERGER
Notary Public, State of New York
No. 01BE5015814
Qualified in Kings County
Commission Expires July 26, 1997
Citibank, N.A. hereby certifies that its precise name
and address as Trustee hereunder are:
CITIBANK, N.A.
111 Wall Street
Borough of Manhattan
City, County and State
of New York 10043
CITIBANK, N.A.
By P. DeFelice
------------------------
P. DeFelice
Vice President
SCHEDULE A
Detailed Description of Additional Properties
STEAM PRODUCTION
Bruce Mansfield Generating Station - Unit No. 2 -
Pennsylvania Power Company's portion (6.8%) of low nox burners.
NUCLEAR PRODUCTION
Perry Nuclear Power Plant - Common Facility -
Pennsylvania Power Company's portion (5.24%) of shoreline
revetment.
TRANSMISSION LINES
Y-196 Tap to Grant Street Substation - 69,000 volts -
.38 mile.
DISTRIBUTION SUBSTATION
Grant Street Substation - A 69,000/12,470 volt circuit
exit and associated equipment located in the City of New Castle,
Lawrence County, Pennsylvania.
OTHER REAL PROPERTY
An undivided 5.76% interest as tenant in common in a
parcel of land containing 97.821 acres, located in Greene
Township, Beaver County, Pennsylvania recorded in Beaver County
Deed Book 1658, Page 398, on July 12, 1995.
An undivided 5.76% interest as tenant in common in a
parcel of land containing 1.33 acres, located in Greene Township,
Beaver County, Pennsylvania, recorded in Beaver County Deed Book
1683, Page 842, on December 28, 1995.
Parcel of land containing 1.033 acres, located in
Springfield Township, Mercer County, Pennsylvania, recorded in
Mercer County Deed Book 96DR, Page 433, on January 3, 1996.
Parcel of land containing 1.5 acres, located in
Marshall Township, Allegheny County, Pennsylvania, recorded in
Allegheny County Deed Book 9639, Page 380, on May 8, 1995.
Parcel of land containing 1.43 acres, located in
Delaware Township, Mercer County, Pennsylvania, recorded in
Mercer County Deed Book 96DR, Page 1685, on August 28, 1996.
An undivided 5.76% interest as tenant in common in a
parcel of land containing .07 acres, located in Shippingport
Borough, Beaver County, Pennsylvania, recorded in Beaver County
Deed Book 1741, Page 622, on December 4, 1996.
An undivided 5.76% interest as tenant in common in a
parcel of land containing 64.698 acres, located in Greene
Township, Beaver County, Pennsylvania, recorded in Beaver County
Deed Book 1743, Page 97, on December 5, 1996.
An undivided 5.76% interest as tenant in common in a
parcel of land containing 147.98 acres, located in Greene
Township, Beaver County, Pennsylvania, recorded in Beaver County
Deed Book 1751, Page 626, on February 4, 1997.
An undivided 5.76% interest as tenant in common in a
parcel of land containing 0.43 acres, located in Shippingport
Borough, Beaver County, Pennsylvania, recorded in Beaver County
Deed Book 1757, Page 673, on March 31, 1997.
Signed for identification
Randy Scilla
--------------------------
Randy Scilla
Assistant Secretary
PENNSYLVANIA POWER COMPANY
P. DeFelice
---------------------------
P. DeFelice
Vice President
CITIBANK, N.A.
[CONFORMED WITH RECORDATION DATA]
PENNSYLVANIA POWER COMPANY
to
CITIBANK, N.A.,
As Trustee
Forty-fifth Supplemental
Indenture
Providing among other things for
FIRST MORTGAGE BONDS
Guarantee Series A 1997 due 2027
Guarantee Series B 1997 due 2027
Dated as of June 1, 1997
RECORDING AND FILING DATA
Forty-fifth Supplemental Indenture
Recorded in the Offices of the Recorders of Deeds as follows:
Mortgage Book
----------------------------
Name of County Date Volume No. Page No.
-------------- ---- ---------- --------
PENNSYLVANIA
Allegheny July 7, 1997 16752 199
Beaver July 7, 1997 1495 837
Butler July 7, 1997 2755 715
Crawford July 7, 1997 348 1158
Lawrence July 7, 1997 1360 406
Mercer July 7, 1997 97 MR 09134
Venango July 7, 1997 80 611
OHIO
Belmont July 10, 1997 677 719
Clark July 10, 1997 868 251
Jefferson July 11, 1997 237 666
Lake July 10, 1997 Instrument No. 970023744
Lorain July 10, 1997 Instrument No. 477631 Film No.1231
Monroe July 10, 1997 33 242
Trumbull July 10, 1997 1133 930
Filed with the Secretary of the Commonwealth of
Pennsylvania on July 3, 1997, as part of amendment to Financing
Statement--File No. 00900172.
Filed with the Secretary of the State of Ohio on July
10, 1997, as part of Financing Statement No. AN80555.
Filed in Belmont County, Ohio, on July 10, 1997, as
part of Financing Statement No. 9700096046.
Filed in Clark County, Ohio, on July 10, 1997, as part
of Financing Statement No. 9700002554.
Filed in Jefferson County, Ohio, on July 10, 1997, as
part of Financing Statement No. 83092.
Filed in Lake County, Ohio, on July 10, 1997, as part
of Financing Statement No. 97195196.
Filed in Lorain County, Ohio, on July 10, 1997, as part
of Financing Statement No. 477630.
Filed in Trumbull County, Ohio, on July 10, 1997, as
part of Financing Statement No. 970020409.
<TABLE>
EXHIBIT 12.2
Page 1
PENNSYLVANIA POWER COMPANY
RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Year Ended December 31,
---------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
EARNINGS AS DEFINED IN REGULATION S-K:
Income before extraordinary items $15,664 $31,260 $ 38,930 $40,587 $31,472
Interest before reduction for
amounts capitalized 35,262 34,947 31,350 27,889 22,438
Provision for income taxes 12,865 24,333 32,591 33,421 26,658
Interest element of rentals charged
to income (a) 1,662 1,652 1,865 1,868 1,750
------- ------- -------- -------- -------
Earnings as defined $65,453 $92,192 $104,736 $103,765 $82,318
======= ======= ======== ======== =======
FIXED CHARGES AS DEFINED IN
REGULATION S-K:
Interest on long-term debt $33,208 $32,130 $ 28,937 $25,715 $20,458
Interest on nuclear fuel
obligations 401 519 407 219 276
Other interest expense 1,653 2,298 2,006 1,955 1,704
Interest element of rentals
charged to income (a) 1,662 1,652 1,865 1,868 1,750
------- ------- -------- ------- -------
Fixed charges as defined $36,924 $36,599 $ 33,215 $29,757 $24,188
======= ======= ======== ======= =======
CONSOLIDATED RATIO OF EARNINGS TO FIXED
CHARGES (b) 1.77 2.52 3.15 3.49 3.40
==== ==== ==== ==== ====
<FN>
- -----------------
(a) Includes the interest element of rentals where determinable plus 1/3 of rental expense where no
readily defined interest element can be determined.
(b) These ratios exclude fixed charges applicable to the guarantee of the debt of a coal supplier
aggregating $1,078,000, $935,000, $795,000, $642,000 and $483,00 for each of the five years ended
December 31, 1997, respectively.
</TABLE>
<TABLE>
EXHIBIT 12.2
Page 2
PENNSYLVANIA POWER COMPANY
RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED
STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS)
<CAPTION>
Year Ended December 31,
---------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
EARNINGS AS DEFINED IN REGULATION S-K:
Income before extraordinary items $15,664 $31,260 $ 38,930 $ 40,587 $31,472
Interest before reduction for
amounts capitalized 35,262 34,947 31,350 27,889 22,438
Provision for income taxes 12,865 24,333 32,591 33,421 26,658
Interest element of rentals
charged to income (a) 1,662 1,652 1,865 1,868 1,750
------- ------- -------- -------- -------
Earnings as defined $65,453 $92,192 $104,736 $103,765 $82,318
======= ======= ======== ======== =======
FIXED CHARGES AS DEFINED IN
REGULATION S-K PLUS STOCK
DIVIDEND REQUIREMENTS
(PRE-INCOME TAX BASIS):
Interest on long-term debt $33,208 $32,130 $ 28,937 $ 25,715 $20,458
Interest on nuclear fuel obligations 401 519 407 219 276
Other interest expense 1,653 2,298 2,006 1,955 1,704
Preferred stock dividend requirements 5,863 5,364 4,775 4,626 4,626
Adjustment to preferred stock
dividends to state on a pre-income
tax basis 4,757 4,121 3,939 3,751 3,859
Interest element of rentals charged
to income (a) 1,662 1,652 1,865 1,868 1,750
------- ------- -------- -------- -------
Fixed charges as defined plus
preferred stock dividend
requirements(pre-income tax basis) $47,544 $46,084 $ 41,929 $ 38,134 $32,673
======= ======= ======== ======== =======
RATIO OF EARNINGS TO FIXED CHARGES PLUS
PREFERRED AND PREFERENCE STOCK DIVIDEND
REQUIREMENTS (PRE-INCOME TAX BASIS) (b) 1.38 2.00 2.50 2.72 $2.52
==== ==== ==== ==== =====
<FN>
- ---------------
(a) Includes the interest element of rentals where determinable
plus 1/3 of rental expense where no readily defined interest
element can be determined.
(b) These ratios exclude fixed charges applicable to the guarantee
of the debt of a coal supplier aggregating $1,078,000, $935,000,
$795,000, $642,000 and $483,000 for each of the five years ended
December 31, 1997, respectively.
</TABLE>
<TABLE>
SELECTED FINANCIAL DATA Pennsylvania Power Company
- -------------------------------------------------------------------------------------------------
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Operating Revenues $ 323,381 $ 322,625 $ 314,642 $ 301,965 $ 292,084
========== ========== ========= ========== ==========
Net Income $ 31,472 $ 40,587 $ 38,930 $ 31,260 $ 21,317
========== ========== ========= ========== ==========
Earnings on Common Stock $ 26,846 $ 35,961 $ 34,155 $ 25,896 $ 15,454
========== ========== ========= ========== ==========
Return on Average Common Equity 9.3% 12.8% 12.9% 10.0% 5.9%
=== ==== ==== ==== ===
Cash Dividends on Common Stock $ 21,386 $ 21,386 $ 21,386 $ 21,386 $ 21,386
========== ========== ========== ========== ==========
Total Assets $1,034,457 $1,074,578 $1,151,990 $1,197,302 $1,184,606
========== ========== ========== ========== ==========
CAPITALIZATION:
Common Stockholder's Equity $ 291,977 $ 286,504 $ 271,920 $ 258,973 $ 254,782
Preferred Stock-
Not Subject to Mandatory Redemption 50,905 50,905 50,905 50,905 50,905
Subject to Mandatory Redemption 15,000 15,000 15,000 15,000 20,500
Long-Term Debt 289,305 310,996 338,670 424,457 440,555
---------- ---------- ---------- ---------- ----------
Total Capitalization $ 647,187 $ 663,405 $ 676,495 $ 749,335 $ 766,742
========== ========== ========== ========== ==========
CAPITALIZATION RATIOS:
Common Stockholder's Equity 45.1% 43.2% 40.2% 34.6% 33.2%
Preferred Stock-
Not Subject to Mandatory Redemption 7.9 7.7 7.5 6.8 6.6
Subject to Mandatory Redemption 2.3 2.2 2.2 2.0 2.7
Long-Term Debt 44.7 46.9 50.1 56.6 57.5
----- ----- ----- ----- -----
Total Capitalization 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
KILOWATT-HOUR SALES (Millions):
Residential 1,238 1,254 1,195 1,178 1,105
Commercial 1,013 996 938 891 831
Industrial 1,659 1,693 1,558 1,293 1,212
Other 123 126 151 148 139
------- ------- ------- ------- -------
Subtotal 4,033 4,069 3,842 3,510 3,287
Parent Company 311 221 250 468 469
Other Utilities 473 765 685 466 748
------- ------- ------- ------- -------
Total 4,817 5,055 4,777 4,444 4,504
======= ======= ======= ======= =======
CUSTOMERS SERVED:
Residential 129,316 127,936 126,480 124,951 123,316
Commercial 16,738 16,531 16,317 15,966 15,593
Industrial 241 225 223 219 221
Other 97 99 97 98 97
------- ------- ------- ------- -------
Total 146,392 144,791 143,117 141,234 139,227
======= ======= ======= ======= =======
Average Annual Residential
Kilowatt-Hours Used 9,634 9,866 9,505 9,501 9,017
Cost of Fuel per Million Btu $1.10 $1.09 $1.12 $1.20 $1.28
Peak Load (Megawatts) 836 792 836 710 690
Generating Capability:
Coal 72.1% 72.1% 72.1% 72.1% 74.6%
Oil 3.0 3.0 3.0 3.0 2.8
Nuclear 24.9 24.9 24.9 24.9 22.6
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
SOURCES OF ELECTRIC GENERATION:
Coal 73.8% 67.6% 65.6% 69.6% 76.8%
Nuclear 26.2 32.4 34.4 30.4 23.2
----- ----- ----- ----- -----
Total 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
NUMBER OF EMPLOYEES 997 1,015 1,220 1,255 1,355
===== ===== ===== ===== =====
</TABLE>
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
This discussion includes forward looking statements based on
information currently available to management. Such statements are subject
to certain risks and uncertainties. These statements typically contain, but
are not limited to, the terms "anticipate," "potential," "expect,"
"believe," "estimate" and similar words. Actual results may differ
materially due to the speed and nature of increased competition and
deregulation in the electric utility industry, economic or weather
conditions affecting future sales and margins, changes in markets for
energy services, changing energy market prices, legislative and regulatory
changes (including revised environmental requirements), availability and
cost of capital and other similar factors.
RESULTS OF OPERATIONS--We continued to make significant progress in 1997 as
we prepare for a more competitive environment in the electric utility
industry.
The most significant event during the year was the approval by the
Federal Energy Regulatory Commission (FERC) of the merger of our parent
company, Ohio Edison Company, with Centerior Energy Corporation to form
FirstEnergy Corp., which came into existence on November 8, 1997. We expect
the merger to produce a minimum of $1 billion in savings for FirstEnergy
Corp. during the first ten years of joint operations through the
elimination of duplicative activities, improved operating efficiencies,
lower capital expenditures, accelerated debt reduction, the coordination of
the companies' work forces and enhanced purchasing power.
Earnings on common stock of $26.8 million in 1997 declined from
$36.0 million in 1996. Current year results were adversely affected by
charges for uncollectible customer accounts and a voluntary retirement
program discussed below. The 1997 results also reflect accelerated
depreciation and amortization of nuclear and regulatory assets totaling
approximately $38 million under our Rate Stability and Economic Development
Plan; results for 1996 included approximately $29 million of accelerated
depreciation and amortization. The 1996 results compared favorably to
earnings on common stock of $34.2 million in 1995.
For the second consecutive year, we achieved record operating revenues.
The following table summarizes the sources of changes in operating revenues
for 1997 and 1996 as compared to the previous year:
1997 1996
---- ----
(In millions)
Change in retail kilowatt-hour sales $(1.7) $16.5
Change in average retail price 3.7 0.3
Sales to utilities (2.4) (0.2)
Other 1.2 (8.6)
----- -----
Net Increase $ 0.8 $ 8.0
===== =====
Our customer base continues to grow with approximately 1,600 new
retail customers added in 1997, after gaining more than 1,600 customers the
previous year. Residential sales decreased 1.3% in 1997, following a 4.9%
gain the previous year. Commercial sales rose 1.8% and 6.1% in 1997 and
1996, respectively. Closure of electric arc facilities by Caparo Steel
Company in August 1997 contributed to a 2.0% decrease in industrial sales
for the year, following an 8.7% increase the previous year. Sales to other
utilities fell 20.5% in 1997 as a result of the December 31 1996,
expiration of a one-year contract with another utility to supply 33
megawatts of power. This follows a 5.5% increase the previous year. As a
result of the above factors, total kilowatt-hour sales dropped 4.7% in
1997, compared with sales in 1996, which were up 5.8% from 1995.
Because of lower kilowatt-hour sales, we spent less on fuel and
purchased power during 1997, compared to 1996 costs. More was spent in
1996, compared to 1995 costs, due to higher kilowatt-hour sales. Higher
nuclear expenses in 1997 reflect increased operating costs at the Beaver
Valley Plant. Nuclear operating costs were lower in 1996, compared to 1995,
due primarily to lower refueling outage cost levels. The increase in other
operating costs in 1997 reflects a $3 million second quarter charge for
uncollectible customer accounts and a fourth quarter charge of
approximately $5.4 million for a voluntary retirement program.
The changes in depreciation and regulatory asset amortization in
1997 and 1996 reflect accelerations under the regulatory plan discussed
above. General taxes decreased in 1997, due principally to a 1997
adjustment which reduced our liability for gross receipts tax.
The decrease in other income was due primarily to last year's
adjustment to recoverable costs related to Perry Unit 2 since recovery
began sooner than originally anticipated; that adjustment increased other
income in 1996.
Overall, interest costs continue to trend downward. Total
interest costs were lower in 1997 than in 1996. Interest on long-term debt
decreased due to our economic refinancings and redemption of higher-cost
debt totaling approximately $39.4 million that had been outstanding as of
December 31, 1996.
CAPITAL RESOURCES AND LIQUIDITY--We have significantly improved our
financial position over the past five years as evidenced by our enhanced
fixed charge coverage ratios and percentage of common equity to total
capitalization. Our SEC ratio of earnings to fixed charges improved to 3.54
at the end of 1997 from 2.33 at the end of 1992. The Company's indenture
ratio, which is used to determine our ability to issue first mortgage
bonds, increased from 3.12 at the end of 1992 to 4.24 at the end of 1997.
Over the same period, the charter ratio-a measure of our ability to issue
preferred stock-improved from 1.59 to 2.01 and our common equity percentage
of capitalization rose from approximately 36% at the end of 1992 to over
45% at the end of 1997. Our improving financial position reflects ongoing
efforts to increase competitiveness. At year end 1997, we were serving
about 8,800 more customers than we were five years ago, with 435 fewer
employees. As a result, our customer/employee ratio has increased by 53%
over the past five years, standing at 147 customers per employee at the end
of 1997, compared with 96 at the end of 1992.
All cash requirements for the year, including debt repayments,
were met with internally generated funds. Our cash requirements in 1998 for
operating expenses, construction expenditures and scheduled debt maturities
are expected to be met without issuing additional securities. Cash
requirements of approximately $28 million for the 1998-2002 period to meet
scheduled maturities of long term debt and preferred stock are also
expected to be funded internally.
We had about $18.2 million of cash and temporary investments and
no short-term indebtedness on December 31, 1997. We also had $2 million of
unused short-term bank lines of credit, and $12 million of bank facilities
that provide for borrowings on a short-term basis at the banks' discretion.
During 1997, our capital spending (excluding nuclear fuel)
totaled approximately $15 million. Our capital spending for the period
1998-2002 is expected to be about $90 million (excluding nuclear fuel), of
which approximately $18 million applies to 1998. This is about $30 million
lower than actual capital outlays over the past five years.
Investments for additional nuclear fuel during the 1998-2002
period are estimated to be approximately $37 million, of which about $2
million applies to 1998. During the same periods, our nuclear fuel
investments are expected to be reduced by approximately $32 million and $7
million, respectively, as the nuclear fuel is consumed.
OUTLOOK--On September 30, 1997, we filed a restructuring plan with the
Pennsylvania Public Utility Commission (PPUC). The plan describes how we
will restructure our rates and provide customers with direct access to
alternative electricity suppliers; customer choice is to be phased in over
three years beginning in 1999, after completion of a two-year pilot
program. We will continue to deliver power to homes and businesses through
our transmission and distribution system, which remains regulated by the
PPUC. We also plan to sell electricity and energy-related services in our
own territory and throughout Pennsylvania as an alternative supplier
through our nonregulated subsidiary, Penn Power Energy. Through the
restructuring plan, we are seeking recovery of $293 million of stranded
costs through a competitive transition charge starting in 1999 and ending
in 2005, which is consistent with our Rate Stability and Economic
Development Plan currently in effect. The PPUC plans to hold public
hearings on our restructuring plan early in 1998.
Our Rate Stability and Economic Development Plan was approved by
the PPUC in the second quarter of 1996. This regulatory plan initially
maintains our current base electric rates through June 20, 2006. The plan
also revised our fuel cost recovery methods.
All regulatory assets are being recovered under provisions of the
regulatory plan. In addition, we have been authorized by the PPUC to
recognize additional capital recovery related to our generating assets
(which is reflected as additional depreciation expense) and additional
amortization of regulatory assets during the regulatory plan period of at
least $358 million more than the amount that would have been recognized if
the regulatory plan was not in effect. This additional amount is being
recovered through current rates.
Based on the regulatory environment we operate in today and our
regulatory plan, we believe we will continue to be able to bill and collect
cost-based rates for all of our operations; accordingly, it is appropriate
that we continue the application of Statement of Financial Accounting
Standards No. 71 "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71). However, as discussed above, changes in the
regulatory environment are taking place in Pennsylvania. We expect to
discontinue the application of SFAS 71 for the generation portion of our
business, possibly as early as 1998. We do not expect the impact of
discontinuing SFAS 71 to have a material adverse effect.
The Financial Accounting Standards Board (FASB) issued a proposed
accounting standard for nuclear decommissioning costs in February 1996. If
the standard is adopted as proposed: (1) annual provisions for
decommissioning could increase; (2) the net present value of estimated
decommissioning costs could be recorded as a liability, and (3) income from
the external decommissioning trusts could be reported as investment income.
The FASB reported in October 1997 that it plans to continue working on the
proposal in 1998.
The Clean Air Act Amendments of 1990, discussed in Note 6,
require additional emission reductions by 2000. We are pursuing cost-
effective compliance strategies for meeting the reduction requirements that
begin in 2000.
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 material adverse effect on us.
We are utilizing both internal and external resources to
reprogram and/or replace and test the 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 $4 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 $0.5 million
will be expensed as incurred over the next two years. To date, we have
incurred approximately $70,000 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.
<TABLE>
STATEMENTS OF INCOME Pennsylvania Power Company
- --------------------------------------------------------------------------------------------------
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C>
OPERATING REVENUES $323,381 $322,625 $314,642
-------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 67,345 67,443 63,059
Nuclear operating costs 26,220 22,064 32,759
Other operating costs 66,518 59,753 58,959
-------- -------- --------
Total operation and maintenance expenses 160,083 149,260 154,777
Provision for depreciation 57,248 51,579 33,152
Amortization of net regulatory assets 7,380 5,535 -
General taxes 22,379 24,015 28,278
Income taxes 25,555 29,907 31,118
-------- -------- --------
Total operating expenses and taxes 272,645 260,296 247,325
-------- -------- --------
OPERATING INCOME 50,736 62,329 67,317
OTHER INCOME 2,760 5,760 2,213
-------- -------- --------
INCOME BEFORE NET INTEREST CHARGES 53,496 68,089 69,530
-------- -------- --------
NET INTEREST CHARGES:
Interest on long-term debt 20,458 25,715 28,937
Interest on nuclear fuel obligations 276 219 407
Allowance for borrowed funds used during construction (414) (387) (750)
Other interest expense 1,704 1,955 2,006
-------- -------- --------
Net interest charges 22,024 27,502 30,600
-------- -------- --------
NET INCOME 31,472 40,587 38,930
PREFERRED STOCK DIVIDEND REQUIREMENTS 4,626 4,626 4,775
--------- --------- ---------
EARNINGS ON COMMON STOCK $ 26,846 $ 35,961 $ 34,155
========= ========= ========
<FN>
The accompanying Notes to Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
BALANCE SHEETS Pennsylvania Power Company
- -------------------------------------------------------------------------------------------------
<CAPTION>
At December 31, 1997 1996
-------- --------
(In thousands)
ASSETS
<S> <C> <C>
UTILITY PLANT:
In service, at original cost $1,237,562 $1,228,618
Less-Accumulated provision for depreciation 508,981 456,320
---------- ----------
728,581 772,298
---------- ----------
Construction work in progress-
Electric plant 7,427 7,645
Nuclear fuel 6,788 1,803
---------- ----------
14,215 9,448
---------- ----------
742,796 781,746
---------- ----------
OTHER PROPERTY AND INVESTMENTS 26,157 21,131
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 660 1,387
Notes receivable from parent company (Note 4) 17,500 2,500
Accounts receivable-
Customers (less accumulated provisions of $3,609,000
and $569,000, respectively, for uncollectible accounts) 33,934 38,054
Parent company 12,599 14,450
Other 14,426 14,970
Materials and supplies, at average cost 14,973 14,269
Prepayments 1,707 1,576
---------- ----------
95,799 87,206
---------- ----------
DEFERRED CHARGES:
Regulatory assets 162,966 177,283
Other 6,739 7,212
---------- ----------
169,705 184,495
---------- ----------
$1,034,457 $1,074,578
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (See Statements of Capitalization):
Common stockholder's equity $ 291,977 $ 286,504
Preferred stock-
Not subject to mandatory redemption 50,905 50,905
Subject to mandatory redemption 15,000 15,000
Long-term debt-
Associated companies 9,231 7,245
Other 280,074 303,751
---------- ----------
647,187 663,405
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 6,958 6,784
Other 1,443 712
Accounts payable-
Associated companies 6,788 8,084
Other 22,751 25,686
Accrued taxes 12,332 14,823
Accrued interest 6,588 7,382
Other 14,746 21,199
---------- ---------
71,606 84,670
---------- ---------
DEFERRED CREDITS:
Accumulated deferred income taxes 239,952 253,776
Accumulated deferred investment tax credits 26,052 28,383
Other 49,660 44,344
---------- ----------
315,664 326,503
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 2 & 5)
---------- ----------
$1,034,457 $1,074,578
========== ==========
<FN>
The accompanying Notes to Financial Statements are an
integral part of these balance sheets.
</TABLE>
<TABLE>
STATEMENTS OF CAPITALIZATION Pennsylvania Power Company
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<CAPTION>
At December 31,
1997 1996
-------- --------
<S> <C> <C>
COMMON STOCKHOLDER'S EQUITY:
Common stock, $30 par value, 6,500,000 shares authorized,
6,290,000 shares outstanding $188,700 $188,700
Other paid-in capital (400) (413)
Retained earnings (Note 3a) 103,677 98,217
-------- --------
Total common stockholder's equity 291,977 286,504
-------- --------
Number of Shares Optional
Outstanding Redemption Price
1997 1996 Per Share Aggregate
-------- -------- ---------- ---------
<S> <C> <C> <C> <C>
PREFERRED STOCK (Note 3b):
Cumulative, $100 par value-
Authorized 1,200,000 shares
Not subject to mandatory
redemption:
4.24% 40,000 40,000 $ 103.13 $ 4,125 4,000 4,000
4.25% 41,049 41,049 105.00 4,310 4,105 4,105
4.64% 60,000 60,000 102.98 6,179 6,000 6,000
7.64% 60,000 60,000 101.42 6,085 6,000 6,000
7.75% 250,000 250,000 - - 25,000 25,000
8.00% 58,000 58,000 102.07 5,920 5,800 5,800
------- ------- ------- -------- --------
Total not subject to
mandatory redemption 509,049 509,049 $26,619 50,905 50,905
======= ======= ======= ======== ========
Subject to mandatory
redemption (Note 3c):
7.625% 150,000 150,000 107.63 $16,145 15,000 15,000
======= ======= ======= ======== ========
LONG-TERM DEBT (Note 3d):
First mortgage bonds-
9.740% due 1999-2019 20,000 20,000
7.500% due 2003 40,000 40,000
6.375% due 2004 20,500 37,000
6.625% due 2004 14,000 20,000
8.500% due 2022 27,250 27,250
7.625% due 2023 6,500 6,500
-------- --------
Total first mortgage bonds 128,250 150,750
-------- --------
Secured notes-
4.750% due 1998 850 850
6.080% due 2000 23,000 23,000
5.400% due 2013 1,000 1,000
5.400% due 2017 10,600 10,600
7.150% due 2017 17,925 17,925
5.900% due 2018 16,800 16,800
8.100% due 2018 - 10,300
8.100% due 2020 5,200 5,200
7.150% due 2021 14,482 14,482
6.150% due 2023 12,700 12,700
3.900% due 2027 10,300 -
6.450% due 2027 14,500 14,500
5.450% due 2028 6,950 6,950
6.000% due 2028 14,250 14,250
5.950% due 2029 238 238
-------- --------
Total secured notes 148,795 148,795
-------- --------
Other obligations-
Nuclear fuel 16,189 14,029
Capital leases (Note 2) 5,022 5,651
-------- --------
Total other obligations 21,211 19,680
-------- --------
Net unamortized discount on debt (550) (733)
-------- --------
Long-term debt due within one year (8,401) (7,496)
-------- --------
Total long-term debt 289,305 310,996
-------- --------
TOTAL CAPITALIZATION $647,187 $663,405
======== ========
<FN>
The accompanying Notes to Financial Statements are an integral
part of these statements.
</TABLE>
<TABLE>
STATEMENTS OF RETAINED EARNINGS Pennsylvania Power Company
- ----------------------------------------------------------------------------------------------------
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 98,217 $ 83,642 $ 70,873
Net income 31,472 40,587 38,930
--------- --------- ---------
129,689 124,229 109,803
--------- --------- ---------
Cash dividends on common stock 21,386 21,386 21,386
Cash dividends on preferred stock 4,626 4,626 4,775
-------- --------- ---------
26,012 26,012 26,161
-------- --------- ---------
Balance at end of year (Note 3a) $103,677 $ 98,217 $ 83,642
======== ========= =========
</TABLE>
<TABLE>
STATEMENTS OF CAPITAL STOCK AND OTHER PAID-IN CAPITAL
- ---------------------------------------------------------------------------------------------------
<CAPTION>
Preferred Stock
---------------------------------------------
Not Subject to Subject to
Common Stock Mandatory Redemption Mandatory Redemption
------------------------------ -------------------- --------------------
Other
Number Par Paid-In Number Par Number Par
of Shares Value Capital of Shares Value of Shares Value
----------- ---------- -------- --------- --------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995 6,290,000 $188,700 $(600) 509,049 $50,905 150,000 $15,000
Minimum liability
for unfunded re-
tirement benefits 178
---------- -------- ----- -------- ------- ------- -------
Balance, December 31,
1995 6,290,000 188,700 (422) 509,049 50,905 150,000 15,000
Minimum liability
for unfunded
retirement benefits 9
---------- -------- ---- -------- ------- ------- -------
Balance, December 31,
1996 6,290,000 188,700 (413) 509,049 50,905 150,000 15,000
Minimum liability
for unfunded
retirement benefits 13
--------- -------- ---- -------- ------- ------- -------
Balance, December 31,
1997 6,290,000 $188,700 $(400) 509,049 $50,905 150,000 $15,000
========= ======== ===== ======= ======= ======= =======
<FN>
The accompanying Notes to Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
STATEMENTS OF CASH FLOWS Pennsylvania Power Company
- ------------------------------------------------------------------------------------------------
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
------ ------ ------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 31,472 $ 40,587 $ 38,930
Adjustments to reconcile net income to net cash
from operating activities:
Provision for depreciation 57,248 51,579 33,152
Nuclear fuel and lease amortization 7,172 8,693 11,337
Amortization of net regulatory assets 6,193 5,535 -
Deferred income taxes, net (6,631) 396 8,144
Investment tax credits, net (2,331) (2,138) (1,688)
Deferred fuel costs, net - 3,220 155
Receivables 6,515 (1,193) 64
Materials and supplies (704) 1,319 1,451
Accounts payable (4,476) (2,472) 1,848
Other (5,707) (13,787) 11,003
-------- ------- --------
Net cash provided from operating activities 88,751 91,739 104,396
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 9,942 - 13,528
Redemptions and Repayments-
Long-term debt 39,464 84,347 67,337
Dividend Payments-
Common stock 21,386 21,386 21,386
Preferred stock 4,626 4,626 4,775
-------- ------- --------
Net cash used for financing activities 55,534 110,359 79,970
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 14,513 20,361 29,705
Loan to parent 15,000 - -
Loan payment from parent - (19,500) (3,000)
Sale of utility property to parent - - (4,249)
Other 4,431 116 (1,814)
--------- -------- --------
Net cash used for investing activities 33,944 977 20,642
--------- -------- --------
Net increase (decrease) in cash and cash equivalents (727) (19,597) 3,784
Cash and cash equivalents at beginning of year 1,387 20,984 17,200
--------- -------- --------
Cash and cash equivalents at end of year $ 660 $ 1,387 $ 20,984
========= ======== ========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash paid during the year-
Interest (net of amounts capitalized) $ 21,137 $ 26,653 $ 30,215
Income taxes $ 38,324 $ 36,815 $ 26,605
<FN>
The accompanying Notes to Financial Statements are an
integral part of these statements.
</TABLE>
<TABLE>
STATEMENTS OF TAXES Pennsylvania Power Company
- -------------------------------------------------------------------------------------------------------
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
GENERAL TAXES:
State gross receipts $ 11,267 $ 12,305 $ 11,680
Real and personal property 6,060 6,178 11,222
State capital stock 2,566 2,820 2,499
Social security and unemployment 2,224 2,064 2,440
Other 261 648 437
-------- -------- --------
Total general taxes $ 22,378 $ 24,015 $ 28,278
======== ======== ========
PROVISION FOR INCOME TAXES:
Currently payable-
Federal $ 27,560 $ 27,282 $ 20,352
State 8,061 7,881 5,783
-------- -------- --------
35,621 35,163 26,135
-------- -------- --------
Deferred, net-
Federal (5,096) 272 6,222
State (1,535) 124 1,922
-------- -------- --------
(6,631) 396 8,144
-------- -------- --------
Investment tax credit amortization (2,331) (2,138) (1,688)
-------- -------- --------
Total provision for income taxes $ 26,659 $ 33,421 $ 32,591
======== ======== ========
INCOME STATEMENT CLASSIFICATION OF
PROVISION FOR INCOME TAXES:
Operating expenses $ 25,555 $ 29,907 $ 31,118
Other income 1,104 3,514 1,473
-------- -------- --------
Total provision for income taxes $ 26,659 $ 33,421 $ 32,591
======== ======== ========
RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT
STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES:
Book income before provision for income taxes $ 58,131 $ 74,008 $ 71,521
======== ======== ========
Federal income tax expense at statutory rate $ 20,346 $ 25,903 $ 25,032
Increases (reductions) in taxes resulting from:
State income taxes, net of federal income tax benefit 4,242 5,203 5,008
Amortization of investment tax credits (2,331) (2,138) (1,688)
Amortization of tax regulatory assets 4,554 4,423 4,398
Other, net (152) 30 (159)
-------- -------- --------
Total provision for income taxes $ 26,659 $ 33,421 $ 32,591
======== ======== ========
ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31:
Property basis differences $172,094 $178,886 $178,589
Allowance for equity funds used during construction 29,875 33,677 38,894
Deferred nuclear expense 7,163 8,031 8,681
Customer receivables for future income taxes 37,954 40,901 43,801
Unamortized investment tax credits (10,681) (11,635) (12,510)
Other 3,547 3,916 3,003
-------- -------- --------
Net deferred income tax liability $239,952 $253,776 $260,458
======== ======== ========
<FN>
The accompanying Notes to Financial Statements are an
integral part of these statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company, a wholly owned subsidiary of Ohio Edison
Company (Edison), follows the accounting policies and practices
prescribed by the Pennsylvania Public Utility Commission (PPUC)
and the Federal Energy Regulatory Commission (FERC). The
preparation of financial statements in conformity with generally
accepted accounting principles requires management to make
periodic estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Certain
prior year amounts have been reclassified to conform with the
current year presentation.
REVENUES--The Company's principal business is providing electric
service to customers in western Pennsylvania. The Company's
retail customers are metered on a cycle basis. Revenue is
recognized for unbilled electric service through the end of the
year.
Receivables from customers include sales to
residential, commercial and industrial customers located in the
Company's service area and sales to wholesale customers. There
was no material concentration of receivables at December 31, 1997
or 1996, with respect to any particular segment of the Company's
customers.
REGULATORY PLAN- The Company's Rate Stability and Economic
Development Plan was approved by the PPUC in the second quarter
of 1996. The regulatory plan initially maintains current base
electric rates for the Company through June 20, 2006, and revised
the Company's fuel cost recovery method.
All of the Company's regulatory assets are being
recovered under provisions of the regulatory
plan. In addition, the PPUC has authorized the Company to
recognize additional capital recovery related to its generating
assets (which is reflected as additional depreciation expense)
and additional amortization of regulatory assets during the
regulatory plan period of at least $358 million more than the
amounts that would have been recognized if the regulatory plan
was not in effect. These additional amounts are being recovered
through current rates.
In December 1996, Pennsylvania enacted "The Electricity
Generation Customer Choice and Competition Act," which permitted
customers, including the Company's customers, to choose their
electric generation supplier, while transmission and distribution
services will continue to be supplied by their current providers.
On September 30, 1997, the Company filed a
restructuring plan with the PPUC. The plan describes how the
Company will restructure its rates and provide customers with
direct access to alternative electricity suppliers; customer
choice is to be phased in over three years beginning in 1999,
after completion of a two-year pilot program. The Company also
plans to sell electricity and energy-related services in its own
territory and throughout Pennsylvania as an alternative supplier
through its nonregulated subsidiary, Penn Power Energy. Through
the restructuring plan, the Company is seeking recovery of $293
million of stranded costs through a competitive transition charge
starting in 1999 and ending in 2005, which is consistent with the
regulatory plan. The PPUC plans to hold public hearings on the
Company's restructuring plan early in 1998.
UTILITY PLANT AND DEPRECIATION--Utility plant reflects the
original cost of construction, including payroll and related
costs such as taxes, employee benefits, administrative and
general costs and financing costs (allowance for funds used
during construction).
The Company provides for depreciation on a straight-
line basis at various rates over the estimated lives of property
included in plant in service. The annual composite rate for
electric plant was approximately 2.7% in 1997, 1996 and 1995. In
addition to the straight-line depreciation recognized in 1977 and
1996, the Company also recognized additional capital recovery of
$27 million and $20 million, respectively, as additional
depreciation expense in accordance with the regulatory plan.
Annual depreciation expense includes approximately $3.0
million for future decommissioning costs applicable to the
Company's ownership interest in two nuclear generating units. The
Company's share of the future obligation to decommission these
units is approximately $83 million in current dollars and (using
a 3.5% escalation rate) approximately $181 million in future
dollars. The estimated obligation and the escalation rate were
developed based on site specific studies. Payments for
decommissioning are expected to begin in 2016, when actual
decommissioning work begins. The Company has recovered
approximately $8 million for decommissioning through its electric
rates from customers through December 31, 1997. If the actual
costs of decommissioning the units exceed the funds accumulated
from investing amounts recovered from customers, the Company
expects that additional amount to be recoverable from its
customers. The Company has approximately $10.3 million invested
in external decommissioning trust funds as of December 31, 1997.
Earnings on these funds are reinvested with a corresponding
increase to the decommissioning liability. The Company has also
recognized an estimated liability of approximately $3.3 million
related to decontamination and decommissioning of nuclear
enrichment facilities operated by the United States Department of
Energy (DOE), as required by the Energy Policy Act of 1992.
The Financial Accounting Standards Board (FASB) issued
a proposed accounting standard for nuclear decommissioning costs
in February 1996. If the standard is adopted as proposed: (1)
annual provisions for decommissioning could increase; (2) the net
present value of estimated decommissioning costs could be
recorded as a liability; and (3) income from the external
decommissioning trusts could be reported as investment income.
The FASB indicated in October 1997 that it plans to continue work
on the proposal.
COMMON OWNERSHIP OF GENERATING FACILITIES--The Company and other
Central Area Power Coordination Group (CAPCO) companies own, as
tenants in common, various power generating facilities. Each of
the companies is obligated to pay a share of the costs associated
with any jointly owned facility in the same proportion as its
interest. The Company's portion of operating expenses associated
with jointly owned facilities is included in the corresponding
operating expenses on the Statements of Income. The amounts
reflected on the Balance Sheet under utility plant at
December 31, 1997, include the following:
Utility Accumulated Construc- Company's
Plant Provision tion Owner-
Generating in for Work in ship
Units Service Depreciation Progress Interest
- -----------------------------------------------------------------
(In millions)
W. H. Sammis #7 $ 57.6 $ 20.7 $ .2 20.80%
Bruce Mansfield
#1, #2 and #3 93.7 45.9 .5 5.76%
Beaver Valley #1 227.2 102.0 1.0 17.50%
Perry #1 341.4 124.8 - 5.24%
- ---------------------------------------------------------------
Total $719.9 $293.4 $1.7
- ---------------------------------------------------------------
NUCLEAR FUEL--OES Fuel, Incorporated (OES Fuel), a wholly owned
subsidiary of Edison, is the sole lessor for the Company's
nuclear fuel requirements.
Minimum lease payments during the next five years are
estimated to be as follows:
(In millions)
- ------------------------------------------------------------
1998 $7.0
1999 4.0
2000 3.0
2001 1.4
2002 0.5
- ------------------------------------------------------------
The Company amortizes the cost of nuclear fuel based on
the rate of consumption. The Company's electric rates include
amounts for the future disposal of spent nuclear fuel based upon
the formula used to compute payments to the DOE.
INCOME TAXES--Details of the total provision for income taxes are
shown on the Statements of Taxes. Deferred income taxes result
from timing differences in the recognition of revenues and
expenses for tax and accounting purposes. Investment tax credits,
which were deferred when utilized, are being amortized over the
recovery period of the related property. The liability method is
used to account for deferred income taxes. Deferred income tax
liabilities related to tax and accounting basis differences are
recognized at the statutory income tax rates in effect when the
liabilities are expected to be paid. The Company is included in
Edison's consolidated federal income tax return. The consolidated
tax liability is allocated on a "stand-alone" company basis, with
the Company recognizing any tax losses or credits it contributed
to the consolidated return.
RETIREMENT BENEFITS--The Company's trusteed, noncontributory
defined benefit pension plan covers almost all full-time
employees. Upon retirement, employees receive a monthly pension
based on length of service and compensation. The Company uses the
projected unit credit method for funding purposes and was not
required to make pension contributions during the three years
ended December 31, 1997.
The following sets forth the funded status of the plan
and amounts recognized on the Balance Sheets as of December 31:
1997 1996
- ---------------------------------------------------------------
(In millions)
Actuarial present value of benefit
obligations:
Vested benefits $115.2 $ 94.7
Nonvested benefits 6.8 8.2
- ---------------------------------------------------------------
Accumulated benefit obligation $122.0 $102.9
===============================================================
Plan assets at fair value $172.1 $150.5
Actuarial present value of projected
benefit obligation 142.4 122.8
- ---------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 29.7 27.7
Unrecognized net gain (25.7) (21.8)
Unrecognized prior service cost 4.2 4.1
Unrecognized net transition asset (5.3) (6.3)
- ---------------------------------------------------------------
Net pension asset $ 2.9 $ 3.7
===============================================================
The assets of the plan consist primarily of common
stocks, United States government bonds and corporate bonds. Net
pension costs for the three years ended December 31, 1997, were
computed as follows:
1997 1996 1995
- --------------------------------------------------------------
(In millions)
Service cost-benefits earned
during the period $ 2.7 $ 3.2 $ 2.9
Interest on projected benefit
obligation 8.9 9.5 8.8
Return on plan assets (30.0) (22.5) (31.0)
Net deferral 14.3 9.6 19.1
Voluntary early retirement
program expense 5.8 - -
Gain on plan curtailment - (4.3) -
- -------------------------------------------------------------
Net pension cost $ 1.7 $ (4.5) $ (.2)
=============================================================
The assumed discount rates used in determining the
actuarial present value of the projected benefit obligation were
7.25% in 1997 and 7.5% in 1996 and 1995. The assumed rates of
increase in future compensation levels used to measure this
obligation were 4.0% in 1997 and 4.5% in 1996 and 1995. Expected
long-term rates of return on plan assets were assumed to be 10%
in 1997, 1996 and 1995.
The Company provides a minimum amount of
noncontributory life insurance to retired employees in addition
to optional contributory insurance. Health care benefits, which
include certain employee deductibles and copayments, are also
available to retired employees, their dependents and, under
certain circumstances, their survivors. The Company pays
insurance premiums to cover a portion of these benefits in excess
of set limits; all amounts up to the limits are paid by the
Company. The Company recognizes the expected cost of providing
other postretirement benefits to employees and their
beneficiaries and covered dependents from the time employees are
hired until they become eligible to receive those benefits. In
accordance with Statement of Financial Accounting Standards
(SFAS) No. 88 "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination
Benefits," the 1996 net pension costs shown above and the 1996
postretirement benefit costs shown below included curtailment
effects (significant changes in projected plan assumptions)
relating to the pension and postretirement benefit plans. The
employee terminations in connection with the Company's 1996
restructuring activities represented a plan curtailment that
significantly reduced the expected future employee service years
and the related accrual of defined pension and postretirement
benefits. In the pension plan, the reduction in the benefit
obligation increased the net pension asset and was shown as a
plan curtailment gain. In the postretirement benefit plan, the
unrecognized prior service cost associated with service years no
longer expected to be rendered as a result of the terminations,
was shown as a plan curtailment loss.
The following sets forth the funded status of the plan
and amounts recognized on the Balance Sheets as of December 31:
1997 1996
- ------------------------------------------------------------
(In millions)
Accumulated postretirement benefit
obligation allocation:
Retirees $26.0 $24.4
Fully eligible active plan participants 3.8 2.2
Other active plan participants 17.5 17.1
- ------------------------------------------------------------
Accumulated postretirement benefit
obligation 47.3 43.7
Plan assets at fair value .3 .2
- ------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets 47.0 43.5
Unrecognized transition obligation (17.4) (18.5)
Unrecognized net loss (4.3) (3.0)
- ------------------------------------------------------------
Net postretirement benefit liability $25.3 $22.0
============================================================
Net periodic postretirement benefit costs for the three
years ended December 31, 1997 were computed as follows:
1997 1996 1995
- ----------------------------------------------------------------
(In millions)
Service cost-benefits attributed
to the period $0.9 $1.1 $1.1
Interest cost on accumulated
benefit obligation 3.2 3.2 4.0
Amortization of transition obligation 1.2 1.3 1.7
Amortization of loss - .1 .1
Voluntary early retirement
program expense 0.3 - -
Loss on plan curtailment - 3.5 -
- ----------------------------------------------------------------
Net periodic postretirement benefit cost $5.6 $9.2 $6.9
================================================================
The health care trend rate assumption is 6.0% in the
first year gradually decreasing to 4.0% for the year 2008 and
later. The discount rates used to compute the accumulated
postretirement benefit obligation were 7.25% in 1997 and 7.5% in
1996 and 1995. An increase in the health care trend rate
assumption by one percentage point in all years would increase
the accumulated postretirement benefit obligation by
approximately $7.0 million and the aggregate annual service and
interest costs by approximately $0.7 million.
TRANSACTIONS WITH AFFILIATED COMPANIES- Transactions with
affiliated companies are included on the Statements of Income as
follows:
1997 1996 1995
- --------------------------------------------------------------
(In millions)
Operating revenues:
Electric sales $ 6.1 $ 3.6 $ 4.4
Bruce Mansfield Plant
administrative and general
charges to affiliates .9 - 6.1
Other transactions .4 .4 .3
- --------------------------------------------------------------
$7.4 $ 4.0 $10.8
==============================================================
Fuel and purchased power:
Purchased power $12.7 $13.2 $15.1
Nuclear fuel leased from
OES Fuel 7.5 9.6 12.0
- --------------------------------------------------------------
$20.2 $22.8 $27.1
==============================================================
Other operating costs:
Rental of transmission
lines $1.0 $ 1.0 $ 1.0
Data processing services
from OE 2.9 2.5 2.6
Other transactions 4.4 3.9 4.0
- --------------------------------------------------------------
$ 8.3 $ 7.4 $ 7.6
==============================================================
SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash
investments purchased with an initial maturity of three months or
less are reported as cash equivalents on the Balance Sheets. The
Company reflects temporary cash investments at cost, which
approximates their market value. Noncash financing and investing
activities included capital lease transactions amounting to $8.5
million, $4.1 million and $3.7 million for the years 1997, 1996
and 1995, respectively.
All borrowings with initial maturities of less than one
year are defined as financial instruments under generally
accepted accounting principles and are reported on the Balance
Sheets at cost, which approximates their fair market value. The
following sets forth the approximate fair value and related
carrying amounts of all other long-term debt, preferred stock
subject to mandatory redemption and investments other than cash
and cash equivalents as of December 31:
1997 1996
- -------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(In millions)
Long-term debt $277 $291 $300 $302
- ------------------------------------------------------------
Preferred stock $ 15 $ 15 $ 15 $ 14
- ------------------------------------------------------------
Investments other than
cash and cash
equivalents $ 14 $ 15 $ 8 $ 9
- ------------------------------------------------------------
The fair values of long-term debt and preferred stock
reflect the present value of the cash outflows relating to those
securities based on the current call price, the yield to maturity
or the yield to call, as deemed appropriate at the end of each
respective year. The yields assumed were based on securities with
similar characteristics offered by a corporation with credit
ratings similar to the Company's ratings.
The fair value of investments other than cash and cash
equivalents represent cost (which approximates fair value) or the
present value of the cash inflows based on the yield to maturity.
The yields assumed were based on financial instruments with
similar characteristics and terms. Investments other than cash
and cash equivalents consist primarily of decommissioning trust
investments. Unrealized gains and losses applicable to the
decommissioning trust have been recognized in the trust
investment with a corresponding change to the decommissioning
liability. The Company has no securities held for trading
purposes.
REGULATORY ASSETS--The Company recognizes, as regulatory assets,
costs which the FERC and PPUC have authorized for recovery from
customers in future periods. Without such authorization, the
costs would have been charged to income as incurred. All
regulatory assets are being recovered from customers under the
Company's regulatory plan. Based on the regulatory plan, at this
time, the Company believes it will continue to be able to bill
and collect cost- based rates; accordingly, it is appropriate
that the Company continues application of SFAS No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS
71). However, based on the regulatory environment in
Pennsylvania, the Company is expected to discontinue its
application of SFAS 71 for its generation operations, possibly as
early as 1998. The impact of the Company discontinuing SFAS 71 is
not expected to be material. The Company recognized additional
cost recovery of $11 million and $8 million in 1997 and 1996,
respectively, as additional regulatory asset amortization in
accordance with its regulatory plan. Regulatory assets on the
Balance Sheets are comprised of the following:
1997 1996
- -------------------------------------------------------------
(In millions)
Customer receivables for
future income taxes $ 92.6 $ 99.8
Nuclear unit expenses 17.5 19.6
Perry Unit 2 termination 36.7 40.4
Loss on reacquired debt 9.2 9.8
DOE decommissioning and
decontamination costs 3.6 3.9
Deferred fuel costs 3.4 3.8
- -----------------------------------------------------------
Total $163.0 $177.3
===========================================================
2. LEASES:
The Company leases certain transmission facilities,
office space and other property and equipment under cancelable
and noncancelable leases. Consistent with the regulatory
treatment, the rental payments for capital and operating leases
are charged to operating expenses on the Statements of Income.
Such costs for the three years ended December 31, 1997, are
summarized as follows:
1997 1996 1995
- -----------------------------------------------------------
(In millions)
Operating leases
Interest element $ .5 $ .5 $ .3
Other 1.5 1.3 1.0
Capital leases
Interest element .7 .7 .8
Other .8 .9 1.3
- -----------------------------------------------------------
Total rental payments $3.5 $3.4 $3.4
===========================================================
The future minimum lease payments as of December 31, 1997, are:
Capital Operating
Leases Leases
- ------------------------------------------------------------
(In millions)
1998 $ 1.5 $ .2
1999 1.2 .2
2000 1.1 .2
2001 1.0 .2
2002 1.0 .2
Years thereafter 10.6 3.2
- ----------------------------------------------------------
Total minimum lease payments 16.4 $4.2
====
Executory costs 3.5
- ------------------------------------------------
Net minimum lease payments 12.9
Interest portion 7.9
- ------------------------------------------------
Present value of net minimum
lease payments 5.0
Less current portion .6
- ------------------------------------------------
Noncurrent portion $ 4.4
================================================
3. CAPITALIZATION:
a. RETAINED EARNINGS--Under the Company's Charter, the Company's
retained earnings unrestricted for payment of cash dividends
on the Company's common stock were $92.1 million at
December 31, 1997.
b. PREFERRED STOCK--The Company's 7.75% series of preferred stock
has restrictions which prevent early redemption prior to July
2003. All other preferred stock may be redeemed by the Company
in whole, or in part, with 30-60 days' notice.
c. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION--The Company's
7.625% series has an annual sinking fund requirement for 7,500
shares beginning on October 1, 2002.
d. LONG-TERM DEBT--The first mortgage indenture and its
supplements, which secure all of the Company's first mortgage
bonds, serves as a direct first mortgage lien on substantially
all property and franchises, other than specifically excepted
property, owned by the Company. Long-term debt maturities
(excluding capital leases) during the next five years are $0.9
million in 1998, $0.5 million in 1999, $24.0 million in 2000,
$1.0 million in 2001 and $1.0 million in 2002.
The Company's obligations to repay certain pollution
control revenue bonds are secured by series of first mortgage
bonds and, in some cases, by subordinate liens on the related
pollution control facilities.
4. SHORT-TERM FINANCING ARRANGEMENTS:
The Company has lines of credit with banks that provide
for borrowings of up to $2 million under various interest rate
options. Short-term borrowings may be made under these lines of
credit on the Company's unsecured notes. To assure the
availability of these lines, the Company is required to pay
annual commitment fees of 0.50%. These lines expire at various
times during 1998.
The Company also has a credit agreement with Edison
whereby either company can borrow funds from the other by issuing
unsecured notes at the prevailing prime or similar interest rate.
Under the terms of this agreement the maximum borrowing is
limited only by the availability of funds; however, the Company's
borrowing under this agreement is currently limited by the PPUC
to a total of $50 million. Either company can terminate the
agreement with six months' notice.
5. COMMITMENTS, GUARANTEES AND CONTINGENCIES:
CAPITAL EXPENDITURES--The Company's current forecast reflects
expenditures of approximately $90 million for property additions
and improvements from 1998 through 2002, of which approximately
$18 million is applicable to 1998. Investments for additional
nuclear fuel during the 1998-2002 period are estimated to be
approximately $37 million, of which approximately $2 million
applies to 1998. During the same periods, the Company's nuclear
fuel investments are expected to be reduced by approximately $32
million and $7 million, respectively, as the nuclear fuel is
consumed.
NUCLEAR INSURANCE--The Price-Anderson Act limits the public
liability relative to a single incident at a nuclear power plant
to $8.92 billion. The amount is covered by a combination of
private insurance and an industry retrospective rating plan.
Based on its present ownership interests in Beaver Valley Unit 1
and the Perry Plant, the Company's maximum potential assessment
under the industry retrospective rating plan (assuming the other
CAPCO companies were to contribute their proportionate share of
any assessments under the retrospective rating plan) would be $18
million per incident but not more than $2.3 million in any one
year for each incident.
The Company is also insured as to its interest in
Beaver Valley Unit 1 and the Perry Plant under policies issued to
the operating company for each plant. Under these policies, up to
$2.75 billion is provided for property damage and decontamination
and decommissioning costs. The Company has also obtained
approximately $53 million of insurance coverage for replacement
power costs for its interests in Perry and Beaver Valley Unit 1.
Under these policies, the Company can be assessed a maximum of
approximately $2.3 million for incidents at any covered nuclear
facility occurring during a policy year which are in excess of
accumulated funds available to the insurer for paying losses.
The Company intends to maintain insurance against
nuclear risks as described above so long as it is available. To
the extent that replacement power, property damage,
decontamination, decommissioning, repair and replacement costs
and other such costs arising from a nuclear incident at any of
the Company's plants exceed the policy limits of the insurance in
effect with respect to that plant, to the extent a nuclear
incident is determined not to be covered by the Company's
insurance policies, or to the extent such insurance becomes
unavailable in the future, the Company would remain at risk for
such costs.
GUARANTEES--The Company, together with the other CAPCO companies,
has severally guaranteed certain debt and lease obligations in
connection with a coal supply contract for the Bruce Mansfield
Plant. As of December 31, 1997, the Company's share of the
guarantee (which approximates fair market value) was $5.5
million. The price under the coal supply contract, which includes
certain minimum payments, has been determined to be sufficient to
satisfy the debt and lease obligations. The Company's total
payments under the coal supply contract amounted to $13.3
million, $11.1 million and $9.8 million during 1997, 1996, and
1995, respectively. The Company's minimum annual payments are
approximately $4 million under the contract, which expires
December 31, 1999.
ENVIRONMENTAL MATTERS- Various federal, state and local
authorities regulate the Company with regard to air and water
quality and other environmental matters. The Company has
estimated additional capital expenditures for environmental
compliance of approximately $2 million, which is included in the
construction forecast under "Construction Program" for 1998
through 2002.
The Company is in compliance with the current sulfur
dioxide (SO2) and nitrogen oxides (NOX) reduction requirements
under the Clean Air Act Amendments of 1990. SO2 reductions
through the year 1999 will be achieved by burning lower-sulfur
fuel, generating more electricity from lower-emitting plants,
and/or purchasing emission allowances. Plans for complying with
the reductions required for the year 2000 and thereafter have not
been finalized. The Environmental Protection Agency is conducting
additional studies which could indicate the need for additional
NOX reductions from the Company's Pennsylvania facilities by the
year 2003. In addition, the EPA is also considering the need for
additional NOX reductions from the Company's Ohio facilities. On
November 7, 1997, the EPA proposed uniform reductions of NOX
emissions across a region of twenty-two states, including Ohio
and the District of Columbia (NOX Transport Rule) after
determining that such NOX emissions are contributing
significantly to ozone pollution in the eastern United States. In
a separate but related action, eight states filed petitions with
the EPA under Section 126 of the Clear Air Act seeking reductions
of NOX emissions which are alleged to contribute to ozone
pollution in the eight petitioning states. A December 1997 EPA
Memorandum of Agreement proposes to finalize the NOX Transport
Rule by September 30, 1998 and establishes a schedule for EPA
action on the Section 126 petitions. The cost of NOX reductions,
if required, may be substantial. The Company continues to
evaluate its compliance plan and other compliance options.
Legislative, administrative and judicial actions will
continue to change the way that the Company must operate in order
to comply with environmental laws and regulations. With respect
to any such changes and to the environmental matters described
above, the Company expects that any resulting additional capital
costs which may be required, as well as any required increase in
operating costs, would ultimately be recovered from its
customers.
6. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED):
The following summarizes certain operating results by
quarter for 1997 and 1996.
March 31, June 30, Sept. 30, Dec. 31,
Three Months Ended 1997 1997 1997 1997
- -----------------------------------------------------------------
(In millions)
Operating Revenues $79.0 $79.2 $85.2 $79.9
Operating Expenses
and Taxes 65.4 66.2 69.6 71.4
- -----------------------------------------------------------------
Operating Income 13.6 13.0 15.6 8.5
Other Income .7 .3 .8 .9
Net Interest 5.7 5.5 5.5 5.2
- -----------------------------------------------------------------
Net Income $8.6 $7.8 $10.9 $ 4.2
=================================================================
Earnings on Common Stock $7.4 $6.6 $ 9.7 $ 3.1
=================================================================
March 31, June 30, Sept. 30, Dec. 31,
Three Months Ended 1996 1996 1996 1996
- -----------------------------------------------------------------
(In millions)
Operating Revenues $80.3 $81.3 $80.5 $80.5
Operating Expenses
and Taxes 60.4 66.3 66.4 67.2
- -----------------------------------------------------------------
Operating Income 19.9 15.0 14.1 13.3
Other Income .3 3.9 .9 .6
Net Interest 7.2 6.9 6.9 6.5
- -----------------------------------------------------------------
Net Income $13.0 $12.0 $ 8.1 $ 7.4
=================================================================
Earnings on Common Stock $11.9 $10.9 $ 7.0 $ 6.2
=================================================================
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Pennsylvania Power
Company:
We have audited the accompanying balance sheets and
statements of capitalization of Pennsylvania Power Company (a
Pennsylvania corporation and wholly owned subsidiary of Ohio
Edison Company) as of December 31, 1997 and 1996, and the related
statements of income, retained earnings, capital stock and other
paid-in capital, cash flows and taxes for each of the three years
in the period ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of Pennsylvania Power Company as of December 31, 1997
and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Cleveland, Ohio
February 13, 1998
EXHIBIT 23.3
PENNSYLVANIA POWER COMPANY
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to
the incorporation of our reports included or incorporated by
reference in this Form 10-K, into Pennsylvania Power Company's
previously filed Registration Statements, File No. 33-47372, No.
33-62450 and No. 33-65156.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
March 30, 1998
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