FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------- ------
Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification No.
- ----------- ---------------------------------- ------------------
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 34-0150020
ILLUMINATING COMPANY
(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
<PAGE>
Indicate by check mark whether each of the registrants
(1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date:
OUTSTANDING
CLASS AS OF NOVEMBER 13, 1998
----- -----------------------
FirstEnergy Corp., $.10 par value 237,069,087
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.
This combined Form 10-Q 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.
This Form 10-Q 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.
<PAGE>
TABLE OF CONTENTS
Pages
Part I. Financial Information
Notes to Financial Statements 1-4
FirstEnergy Corp.
Consolidated Statements of Income 5
Consolidated Balance Sheets 6-7
Consolidated Statements of Cash Flows 8
Report of Independent Public Accountants 9
Management's Discussion and Analysis of
Results of Operations and Financial Condition 10-14
Ohio Edison Company
Consolidated Statements of Income 15
Consolidated Balance Sheets 16-17
Consolidated Statements of Cash Flows 18
Report of Independent Public Accountants 19
Management's Discussion and Analysis of Results
of Operations and Financial Condition 20-23
The Cleveland Electric Illuminating Company
Consolidated Statements of Income 24
Consolidated Balance Sheets 25-26
Consolidated Statements of Cash Flows 27
Report of Independent Public Accountants 28
Management's Discussion and Analysis of Results
of Operations and Financial Condition 29-32
The Toledo Edison Company
Consolidated Statements of Income 33
Consolidated Balance Sheets 34-35
Consolidated Statements of Cash Flows 36
Report of Independent Public Accountants 37
Management's Discussion and Analysis of Results
of Operations and Financial Condition 38-41
Pennsylvania Power Company
Statements of Income 42
Balance Sheets 43-44
Statements of Cash Flows 45
Report of Independent Public Accountants 46
Management's Discussion and Analysis of Results
of Operations and Financial Condition 47-49
Part II. Other Information
<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------
FIRSTENERGY CORP. AND SUBSIDIARIES
OHIO EDISON COMPANY AND SUBSIDIARIES
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
PENNSYLVANIA POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1 - FINANCIAL STATEMENTS:
FirstEnergy Corp. (FirstEnergy) became a holding company
on November 8, 1997, in connection with the merger of Ohio Edison
Company (OE) and Centerior Energy Corporation (Centerior).
FirstEnergy'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), The Toledo Edison
Company (TE) and Pennsylvania Power Company (Penn). These utility
subsidiaries are referred to throughout as "Companies." Penn is a
wholly owned subsidiary of OE. Prior to the merger in November
1997, CEI and TE were the principal operating subsidiaries of
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 CEI's and
TE's financial statements 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 of CEI and TE (separated by a heavy black line) are
presented.
The condensed financial statements of FirstEnergy and
each of the Companies reflect all normal recurring adjustments
that, in the opinion of management, are necessary to fairly
present results of operations for the interim periods. These
statements should be read in connection with the financial
statements and notes included in the combined Annual Report on
Form 10-K for the year ended December 31, 1997 for FirstEnergy and
the Companies. The reported results of operations are not
indicative of results of operations for any future period.
The sole assets of the subsidiary trust that is the
obligor on the preferred securities included in FirstEnergy's and
OE's capitalization are $123,711,350 principal amount of 9% Junior
Subordinated Debentures of OE due December 31, 2025.
2 - COMMITMENTS, GUARANTEES AND CONTINGENCIES:
CAPITAL EXPENDITURES-
FirstEnergy's current forecast reflects expenditures of
approximately $1.2 billion (OE-$510 million, CEI-$430 million, TE-
$200 million and Penn-$90 million) for property additions and
improvements related to its regulated businesses from 1998-2002,
of which approximately $282 million (OE-$133 million, CEI-$89
million, TE-$43 million and Penn-$17 million) is applicable to
1998. Investments for additional nuclear fuel during the 1998-2002
period are estimated to be approximately $518 million (OE-$169
million, CEI-$172 million, TE-$140 million and Penn-$37 million),
of which approximately $85 million (OE-$24 million, CEI-$32
million, TE-$27 million and Penn-$2 million) applies to 1998.
FirstEnergy also expects to invest approximately $300 million
during 1998-2002 relating to various nonregulated business
ventures.
GUARANTEES-
The Companies and Duquesne Light Company have each
severally guaranteed certain debt and lease obligations in
connection with a coal supply contract for the Bruce Mansfield
Plant. As of September 30, 1998, the Companies' share of the
guarantees was $43.2 million (OE-$24.8 million, CEI-$9.3 million,
TE-$5.5 million and Penn-$3.6 million). The price under the coal
supply contract, which includes certain minimum payments, has
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<PAGE>
been determined to be sufficient to satisfy the debt and lease
obligations.
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 (OE-$25 million, CEI-$12 million, TE-$11 million and Penn-
$2 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. In September 1998, the Environmental Protection Agency
(EPA) finalized regulations requiring additional NOx reductions
from the Companies' Ohio and Pennsylvania facilities by May 2003.
The EPA`s NOx Transport Rule imposes uniform reductions of NOx
emissions across a region of twenty-two states and the District of
Columbia, including Ohio and Pennsylvania, based on a conclusion
that such NOx emissions are contributing significantly to ozone
pollution in the eastern United States. By September 1999, each of
the twenty-two states are required to submit revised State
Implementation Plans (SIP) which comply with individual state NOx
budgets established by the EPA. These state NOx budgets
contemplate an 85% reduction in utility plant NOx emissions from
1990 emissions. A proposed Federal Implementation Plan accompanied
the NOx Transport Rule and may be implemented by the EPA in states
which fail to revise their SIP. In another 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. The EPA suggests that the Section 126
petitions will be adequately addressed by the NOx Transport
Program, but a September 1998 proposed rulemaking established an
alternative program which would require nearly identical 85% NOx
reductions at the Companies' Ohio and Pennsylvania plants by May
2003 in the event implementation of the NOx Transport Rule is
delayed. The Companies continue to evaluate their compliance plans
and other compliance options and currently estimate the additional
capital expenditures for NOx reductions may reach $500 million.
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.
In July 1997, the 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.
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 of $4.8 million and $1.0 million,
respectively, as of September 30, 1998, 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.
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
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<PAGE>
required increase in operating costs, would ultimately be
recovered from their customers.
PENDING EXCHANGE OF ASSETS-
As discussed under "Item 5. Other Events" in the
combined Current Report on Form 8-K dated October 15, 1998,
FirstEnergy announced that it has signed an agreement in principle
with Duquesne Light Company (Duquesne) that would result in the
transfer of 1,436 megawatts owned by Duquesne at eight generating
units in exchange for 1,298 megawatts at three power plants owned
by the Companies. A definitive agreement on the exchange of
assets, which will be structured as a tax-free transaction to the
extent possible, is expected by the end of 1998. Duquesne will
fund decommissioning costs equal to its percentage interest in the
three nuclear generating units to be transferred. The asset
transfer is expected to take twelve to eighteen months to close.
3 - REGULATORY ACCOUNTING:
In June 1998, the Pennsylvania Public Utility Commission
(PPUC) authorized a rate restructuring plan for Penn, which
essentially resulted in the deregulation of Penn's generation
business. Accordingly, Penn discontinued the application of
Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS
71), for its generation business as of June 30, 1998. In
accordance with SFAS 101, "Regulated Enterprises - Accounting for
the Discontinuation of Application of SFAS 71," Penn was required
to remove from its balance sheet all regulatory assets and
liabilities related to its generation business for which SFAS 71
was discontinued and assess all other assets for impairment.
The Securities and Exchange Commission (SEC) recently
issued interpretive guidance regarding asset impairment
measurement when a regulated enterprise such as an electric
utility discontinues SFAS 71 for separable portions of its
operations and assets. That guidance concludes that any
supplemental regulated cash flows such as a competitive transition
charge (CTC) should be excluded from the cash flows of assets in a
portion of the business not subject to regulatory accounting
practices. If such assets are impaired, a regulatory asset should
be established if such costs are recoverable through regulatory
cash flows. Consistent with the SEC guidance, Penn reduced its
nuclear generating unit investments by approximately $305 million,
of which approximately $227 million was recognized as a regulatory
asset to be recovered through a CTC over a seven-year transition
period. The charge of $51.7 million ($30.5 million after income
taxes) for discontinuing the application of SFAS 71 to Penn's
generation business was recorded as an extraordinary item on
FirstEnergy's and OE's respective Consolidated Statements of
Income and Penn's Statements of Income.
Based on the current regulatory environment and the
Companies' respective regulatory plans, the Companies believe they
will continue to be able to bill and collect cost-based rates
relating to all of OE's operations, CEI's and TE's nonnuclear
operations, and Penn's nongeneration operations; accordingly, it
is appropriate that the Companies continue the application of SFAS
71 to those respective operations.
4 - PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME:
The following pro forma statements of income for
FirstEnergy, CEI and TE for the three months and nine months
ended September 30, 1997, give effect to the OE-Centerior merger
as if it had been consummated on January 1, 1997, with the
purchase accounting adjustments actually recognized in the
business combination.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
FE CEI TE
-- --- --
(In millions, except per share amounts)
<S> <C> <C> <C>
Three Months Ended September 30, 1997
-------------------------------------
Operating Revenues $1,350 $ 499 $241
Operating Expenses and Taxes 1,022 365 188
------ ------ ----
Operating Income 328 134 53
Other Income 21 10 6
Net Interest Charges 170 68 26
------ ------ ----
Net Income $ 179 $ 76 $ 33
====== ====== ====
Earnings per Share of Common Stock $ .81
======
Nine Months Ended September 30, 1997
------------------------------------
Operating Revenues $3,760 $1,359 $680
Operating Expenses and Taxes 2,942 1,063 552
------ ------ ----
Operating Income 818 296 128
Other Income 47 8 9
Net Interest Charges 478 177 69
------ ------ ----
Net Income $ 387 $ 127 $ 68
====== ====== ====
Earnings per Share of Common Stock $ 1.74
======
<FN>
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) the effect of discontinuing SFAS 71 for
CEI's and TE's nuclear operations; (3) amortization of the fair value adjustment for long-term debt;
(4) goodwill recognized representing the excess of CEI's and TE's portion of the purchase price over
the respective company's adjusted net assets; (5) the elimination of merger costs; and (6)
adjustments for estimated tax effects of the above adjustments.
</TABLE>
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<PAGE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1998 1997 1998 1997
---------- -------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES $1,416,741 $652,660 $3,893,795 $1,850,684
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 291,228 111,724 833,412 321,514
Nuclear operating costs 124,508 66,990 365,858 202,833
Other operating costs 225,809 101,937 664,171 297,006
---------- -------- ---------- ----------
Total operation and maintenance expenses 641,545 280,651 1,863,441 821,353
Provision for depreciation and amortization 162,478 106,402 496,375 292,975
Amortization of net regulatory assets 28,702 11,288 73,079 26,129
General taxes 138,471 58,986 409,953 175,959
Income taxes 125,080 54,277 263,863 140,909
---------- -------- ---------- ----------
Total operating expenses and taxes 1,096,276 511,604 3,106,711 1,457,325
---------- -------- ---------- ----------
OPERATING INCOME 320,465 141,056 787,084 393,359
OTHER INCOME (EXPENSE) (5,275) 12,035 9,961 39,605
---------- -------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 315,190 153,091 797,045 432,964
---------- -------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 128,479 50,799 390,810 155,137
Allowance for borrowed funds used during
construction and capitalized interest (2,461) (1,056) (5,129) (1,817)
Other interest expense 6,513 7,669 17,308 23,342
Subsidiaries' preferred stock dividend requirements 19,568 6,981 47,359 20,943
---------- -------- ---------- ----------
Net interest charges 152,099 64,393 450,348 197,605
---------- -------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 163,091 88,698 346,697 235,359
EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 3) - - (30,522) -
---------- -------- ---------- ----------
NET INCOME $ 163,091 $ 88,698 $ 316,175 $ 235,359
========== ======== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 229,482 144,586 225,292 144,466
========== ======== ========== ==========
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK:
Income before extraordinary item $ .71 $ .61 $ 1.54 $ 1.63
Extraordinary item (Net of income taxes) (Note 3) - - (.14) -
----- ----- ------ ------
Net income $ .71 $ .61 $ 1.40 $ 1.63
===== ===== ====== ======
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $.375 $.375 $1.125 $1.125
===== ===== ====== ======
<FN>
The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral part
of these statements.
</TABLE>
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<PAGE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In thousands)
ASSETS
------
<S> <C> <C>
UTILITY PLANT:
In service $14,528,550 $15,008,448
Less--Accumulated provision for depreciation 5,738,191 5,635,900
----------- -----------
8,790,359 9,372,548
----------- -----------
Construction work in progress-
Electric plant 254,835 165,837
Nuclear fuel 32,358 34,825
----------- -----------
287,193 200,662
----------- -----------
9,077,552 9,573,210
----------- -----------
OTHER PROPERTY AND INVESTMENTS:
Capital trust investments 1,331,843 1,370,177
Nuclear plant decommissioning trusts 323,252 301,173
Letter of credit collateralization 277,763 277,763
Other 634,662 357,989
----------- -----------
2,567,520 2,307,102
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents 117,671 98,237
Receivables-
Customers (less accumulated provisions of
$6,273,000 and $5,618,000, respectively,
for uncollectible accounts) 266,487 284,162
Other (less accumulated provisions of $49,204,000
and $4,026,000,respectively, for
uncollectible accounts) 407,389 219,106
Materials and supplies, at average cost-
Owned 125,840 154,961
Under consignment 104,811 82,839
Prepayments and other 152,705 163,686
----------- -----------
1,174,903 1,002,991
----------- -----------
DEFERRED CHARGES:
Regulatory assets 2,736,580 2,624,144
Goodwill 2,194,940 2,107,795
Property taxes 270,888 270,585
Other 200,668 194,968
----------- -----------
5,403,076 5,197,492
----------- -----------
$18,223,051 $18,080,795
=========== ===========
</TABLE>
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<PAGE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
<S> <C> <C>
CAPITALIZATION:
Common stockholders' equity-
Common stock, $.10 par value, authorized
300,000,000 shares - 237,069,087 and
230,207,141 shares outstanding, respectively $ 23,707 $ 23,021
Other paid-in capital 3,843,946 3,636,908
Retained earnings 709,804 646,646
Unallocated employee stock ownership plan common
stock - 7,533,164 and 7,829,538 shares,
respectively (141,413) (146,977)
---------- ----------
Total common stockholders' equity 4,436,044 4,159,598
Preferred stock of consolidated subsidiaries-
Not subject to mandatory redemption 660,195 660,195
Subject to mandatory redemption 193,460 214,864
OE obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely OE
subordinated debentures 120,000 120,000
Long-term debt 6,606,324 6,969,835
----------- -----------
12,016,023 12,124,492
----------- -----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 602,926 470,436
Short-term borrowings 348,450 302,229
Accounts payable 262,197 312,690
Accrued taxes 460,008 381,937
Accrued interest 148,336 147,694
Other 258,186 193,850
----------- -----------
2,080,103 1,808,836
----------- -----------
DEFERRED CREDITS:
Accumulated deferred income taxes 2,265,548 2,304,305
Accumulated deferred investment tax credits 291,044 324,200
Pensions and other postretirement benefits 518,588 492,425
Other 1,051,745 1,026,537
----------- -----------
4,126,925 4,147,467
----------- -----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ----------- -----------
$18,223,051 $18,080,795
=========== ===========
<FN>
The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral part
of these balance sheets.
</TABLE>
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<PAGE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1998 1997 1998 1997
---------- -------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 163,091 $ 88,698 $ 316,175 $ 235,359
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and amortization 162,478 106,402 496,375 292,975
Nuclear fuel and lease amortization 21,974 12,040 62,606 40,682
Other amortization, net 28,214 10,996 62,637 25,225
Deferred income taxes, net 8,395 (14,796) (6,856) (31,492)
Investment tax credits, net (5,841) (4,058) (17,180) (11,222)
Extraordinary item - - 51,730 -
Receivables (192,236) (3,405) (103,750) 20,559
Materials and supplies 21,275 (135) 11,478 (9,696)
Accounts payable (97,985) (9,219) (133,134) (3,907)
Accrued liabilities 171,765 25,702 82,871 75,731
Other (15,648) 20,132 (25,212) (28,763)
--------- -------- --------- --------
Net cash provided from operating activities 265,482 232,357 797,740 605,451
--------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Common stock - - 203,855 -
Long-term debt 10,151 9,694 272,556 80,217
Ohio Schools Council Prepayment Program - - 116,598 -
Short-term borrowings, net 145,612 - 37,169 -
Redemptions and Repayments-
Preferred stock 6,000 5,000 21,379 5,000
Long-term debt 209,963 121,163 559,874 337,706
Short-term borrowings, net - 10,303 - 53,806
Common stock dividend payments 86,040 53,109 253,017 163,069
--------- -------- --------- --------
Net cash used for financing activities 146,240 179,881 204,092 479,364
--------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 76,614 52,147 447,838 115,724
Cash investments (205) - 111,405 -
Other (3,873) 2,374 14,971 7,172
--------- -------- --------- ---------
Net cash used for investing activities 72,536 54,521 574,214 122,896
--------- -------- --------- ---------
Net increase (decrease) in cash and cash equivalents 46,706 (2,045) 19,434 3,191
Cash and cash equivalents at beginning of period 70,965 10,489 98,237 5,253
--------- -------- --------- --------
Cash and cash equivalents at end of period $ 117,671 $ 8,444 $ 117,671 $ 8,444
========= ======== ========= ========
<FN>
The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral part
of these statements.
</TABLE>
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FirstEnergy Corp.:
We have reviewed the accompanying consolidated balance sheet of
FirstEnergy Corp. (an Ohio corporation) and subsidiaries as of
September 30, 1998, and the related consolidated statements of
income and cash flows for the three-month and nine-month periods
ended September 30, 1998 and 1997. These financial statements are
the responsibility of the company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of FirstEnergy
Corp. and subsidiaries as of December 31, 1997 (not presented
herein), and, in our report dated February 13, 1998, we expressed
an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying consolidated balance
sheet as of December 31, 1997, is fairly stated, in all material
respects, in relation to the balance sheet from which it has been
derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
November 13, 1998
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<PAGE>
FIRSTENERGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company, as a producer and trader of electricity,
has certain financial risks inherent in its business activities.
With respect to its trading operations, the Company uses
principally over-the-counter contracts for the purchase and sale
of electricity. These contracts expose the Company to commodity
price fluctuations. Market risk represents the risk of loss that
may impact financial position, results of operations or cash flow
due to either changes in the commodity market prices for
electricity or the failure of contract counterparties to perform.
Various policies and procedures have been established to manage
market risk exposure based on measures of historical market
volatility. However, electricity is subject to unpredictable
price fluctuations due to changing economic and weather
conditions and constraints which arise from time to time in
availability of supply. Financial results in the third quarter
and year-to-date periods of 1998 were adversely affected by a
combination of these factors as described below.
Results of Operations
Basic and diluted earnings per share of common stock
decreased to $1.40 for the nine-month period ended September 30,
1998, compared to $1.63 per share for the same period last year.
For the third quarter of 1998, net income increased to $.71 per
share, compared to $.61 per share for the third quarter of 1997.
Financial results reflect several factors including the merger of
OE and Centerior, which was effective November 8, 1997. The
former Centerior companies, which include CEI and TE, have been
included in the third quarter and year-to-date 1998 results. The
1997 third quarter and nine-month results are for OE and Penn
only (OE companies). Also, 1998 nine-month results include an
extraordinary charge of $30.5 million after taxes, or $.14 per
common share, resulting from Penn's discontinued application of
SFAS 71 to its generation business (see Note 3). Sharp increases
in the spot market price for electricity occasioned by
constrained power supply conditions and heavy customer demand in
the latter part of June 1998, combined with unscheduled outages
at certain FirstEnergy generating units, resulted in spot market
purchases of power at prices which substantially exceeded amounts
recovered from retail customers. The recovery shortfall reduced
year-to-date net income by approximately $50 million or $.22 per
common share. Finally, unprecedented market prices for
electricity in June 1998 contributed to credit losses totaling
$28 million after taxes or $.12 per common share. Four power
marketers with which the Company's FirstEnergy Trading and Power
Marketing Corp. subsidiary had transactions under contract
defaulted as a result of June's price movements.
Operating revenues increased $2.043 billion during the
nine-month period ending September 30, 1998, compared to the same
period of 1997, and increased $764 million in the third quarter
of 1998 compared to the third quarter of 1997. Excluding the
contribution of the former Centerior companies, operating
revenues were 6.7% higher during the quarter and 3.4% higher in
the year-to-date period compared to the corresponding periods of
1997. For the OE companies, year-to-date retail kilowatt-hour
sales increased 1.7%, with a 4.1% increase in residential sales
and a 4.7% increase in commercial sales offset, in part, by a
2.1% decrease in industrial sales. Industrial sales for 1998 were
affected by the August 1997 closure of a major customer's
electric arc furnace in the Penn service area. Excluding sales to
that customer, industrial sales increased 0.1% and retail sales
were 2.6% higher. Sales to wholesale customers increased 7.8%
compared to the first nine months of 1997. This increase
contributed to the 2.7% increase in total kilowatt-hour sales
during the period.
Retail kilowatt-hour sales in the third quarter of 1998
for the OE companies increased 5.4% with residential and
commercial sales being 13.1% and 7.5% higher, respectively.
Residential sales benefited from higher air-conditioning loads
due to hotter weather and commercial sales benefited from
continued growth in the service sector of the area economy during
the period. Industrial sales decreased 2.0% during the third
quarter of 1998 compared to the same period of 1997; removing the
impact of the electric arc furnace closure, industrial sales were
relatively flat. A general decline in electricity demand by
primary metal manufacturers and the General Motors strike also
dampened industrial sales in the third quarter of 1998. Sales to
- 10 -
<PAGE>
FIRSTENERGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
wholesale customers increased 7.8% in the third quarter compared
to the same period last year, contributing to the increase in
total kilowatt-hour sales of 5.8%.
All operation and maintenance expense categories
increased substantially for the first nine months of 1998,
compared to the same period of last year, due principally to the
inclusion of the former Centerior companies. Excluding the 1998
costs of the former Centerior companies, operation and
maintenance expenses increased $116.6 million for the first nine
months of 1998 compared to the first nine months of 1997. Most of
the increase for the OE companies resulted from purchased power
expenses which were up $82.1 million in the first nine months of
1998 from the same period in 1997. Most of the increase occurred
in the second quarter and resulted from a combination of
factors. In late June 1998, the midwestern and southern regions
of the United States experienced electricity shortages caused
mainly by record temperatures and humidity and unscheduled
generating unit outages. During that period, the Beaver Valley
Plant was out of service and the Davis-Besse Plant was removed
from service as a result of damage to transmission facilities
caused by a tornado. Also, Avon Lake Unit 9 experienced an
unscheduled outage during the period due to lightning-related
transformer damage. As a result, the Companies purchased
significant amounts of power on the spot market at unusually high
prices (as discussed above), causing an increase in purchased
power costs. Temperatures continued above last year's levels
throughout the third quarter as well and the Beaver Valley Plant
remained out of service for most of that period.
Nuclear operating costs were higher in the first nine
months of 1998 than the same period last year for the OE
Companies due to higher costs at the Beaver Valley Plant, which
were offset in part by lower costs at the Perry Plant. Reduced
emission allowance sales in the year-to-date 1998 period and
higher third quarter and year-to-date 1998 costs at the Sammis
Plant compared to the corresponding periods of 1997 contributed
to the increase in other operation and maintenance expenses.
Inclusion of the former Centerior companies also
increased other operating expenses. Excluding those companies'
1998 costs, the provision for depreciation and amortization
decreased $13.4 million in the third quarter of 1998 from the
same period in 1997 due primarily to the net effect of the OE and
Penn rate plans. The rate restructuring plan authorized by the
PPUC for Penn in the second quarter caused the reduction in
depreciation expense in the third quarter due to the reduction of
nuclear generating unit investment resulting from the
discontinued application of SFAS 71. Penn's rate restructuring
plan also resulted in a reclassification of accelerated Perry
Plant depreciation in the third quarter to amortization of net
regulatory assets, further reducing reported depreciation
expense. The reclassification of depreciation resulted in a
corresponding increase in the amortization of net regulatory
assets in both the first nine months of 1998 and in the third
quarter of 1998 compared to the same periods of 1997. Also
contributing to the increase in year-to-date 1998 amortization
was the absence in 1998 of certain regulatory credits which were
fully amortized by the end of the second quarter of 1997.
Other income (expense) for the year-to-date period
ending September 30, 1998 reflects the $28 million after-tax
reserve for credit losses discussed above. Also included in the
third quarter of 1998 were after tax losses of $26 million
resulting from purchases of energy to replace scheduled third
quarter deliveries from a power marketer which defaulted on its
power contracts to FirstEnergy Trading and Power Marketing Corp.
due to the unprecedented June 1998 price fluctuations.
Interest expenses increased due to the inclusion of the
former Centerior companies for both the nine-month period ended
September 30, 1998 and the third quarter of 1998, from the
corresponding periods in 1997. Excluding the impact of the
merger, interest on long-term debt for the OE companies decreased
due to redemptions of long-term debt totaling $273.8 million
since October 1997. Other interest expense increased as a result
of increased short-term borrowing levels in 1998.
- 11 -
<PAGE
FIRSTENERGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
Capital Resources and Liquidity
The Companies have continuing cash requirements for
planned capital expenditures and debt maturities. During the
fourth quarter of 1998, capital requirements for property
additions and capital leases for the utility operating companies
are expected to be about $115 million, including $20 million for
nuclear fuel. The Companies have additional cash requirements of
approximately $66.6 million to meet sinking fund requirements for
maturing long-term debt during the remainder of 1998. These cash
requirements are expected to be satisfied with internal cash
and/or short-term credit arrangements.
As of September 30, 1998, the Companies had about
$117.7 million of cash and temporary investments and $348.5
million of short-term indebtedness. The Companies' unused
borrowing capability included $115 million under revolving lines
of credit and $22 million of bank facilities that provide for
borrowings on a short-term basis at the banks' discretion.
The Company recently acquired three new mechanical
contractors. On September 30, 1998, the Company acquired The
Hattenbach Company, a specialty mechanical contractor
headquartered in Cleveland, Ohio. Hattenbach recorded
approximately $15 million in sales in 1997 and has 65 employees.
In October 1998, the Company acquired two additional mechanical
contractors, Ancoma, Inc. and Spectrum Control Systems. Ancoma,
Inc. is a full-service mechanical contractor headquartered in
Rochester, New York with 275 employees and sales in 1997 of
approximately $36 million. Spectrum Control Systems is a
specialty mechanical contractor based in Cincinnati, Ohio.
Spectrum posted approximately $3.5 million in sales in 1997 and
has 25 employees. The Company has acquired eight mechanical
construction and contracting companies in the last 12 months with
approximately $350 million in annual revenues and more than 2,500
employees.
The Company signed an agreement in principle with
Duquesne Light Company that would result in the transfer of 1,436
megawatts owned by Duquesne at five generating plants in exchange
for 1,298 megawatts at three plants owned by the Company's
electric utility operating companies (see "Pending Exchange of
Assets" in Note 2). A final agreement on the exchange of assets,
which will be structured as a tax-free transaction to the extent
possible, is expected to be reached by the end of the year. The
transaction benefits the Company by providing it with exclusive
ownership and operating control of all the generating assets that
are now jointly owned and operated under the Central Area Power
Coordination Group agreement.
The Company formed a new wholly owned subsidiary,
FirstEnergy Fuel Marketing Company, to provide products and
services to electricity generators and industrial fuel users. The
Company's Warrenton River Terminal, a coal-blending facility in
Warrenton, Ohio, will be operated and marketed by the new
company. The subsidiary will provide a number of products and
services including fuel supply, logistics services, contract
administration, inventory management and fuel blending. The
Company believes there will be increased need for such services
as the industry moves toward deregulation.
In a venture to convert nonhazardous waste by-products
into new products, the Company joined with Crown Coal and Coke
Company and Canyon Resources, Inc. to form Carbon Plus, LLC. The
new company will produce and market nationally, high-grade carbon
and low-carbon fly ash products used in the steel, foundry and
cement industries. The venture will use the Company's patented
carbon extraction process to recover carbon particles for use in
chemical additives in metallurgical processes. The new company is
expected to produce approximately $4 million in annual revenues.
In a final step to achieve complete ownership and
operating control of its power plants, the Company announced on
November 9, 1998, that it had signed an agreement to purchase
- 12 -
<PAGE>
FIRSTENERGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
from General Public Utilities 87 megawatts of capacity at the
Seneca Pumped-Storage Hydroelectric Plant. The added
hydroelectric plant capacity will enhance the Company's ability
to meet demand during peak periods.
Regulatory Matters
On September 16, 1998, the Company, together with
representatives of the three other Ohio investor-owned utilities,
presented proposed legislation for restructuring the electric
utility industry in Ohio to a private working group formed by the
leadership of the Ohio General Assembly. The working group, which
includes numerous interested parties, will consider the utility
proposal -- a proposal that represents a balanced approach for
bringing choice to Ohio's electric consumers -- as well as other
restructuring proposals. Passage of a restructuring bill appears
unlikely in 1998.
On September 24, 1998, the Federal Environmental
Protection Agency issued a final rule establishing tighter
nitrogen oxide emission ceilings for Ohio, Pennsylvania and 20
other Eastern states and the District of Columbia (see
"Environmental Matters" in Note 2). Controls must be in place by
May 2003, with required reductions achieved during the five-month
summer ozone season (May through September). The new rule is
expected to increase the cost of producing electricity; however,
the Company believes that it is in a better position than a
number of other utilities in achieving compliance due to its
nuclear and hydroelectric generation capability.
In connection with the regulatory plans for its utility
operating companies to reduce fixed costs and lower rates, the
Company continued to take steps to restructure its operations for
improved efficiency and effectiveness in the changing electric
utility industry. The Company announced plans to transfer its
transmission assets into a new subsidiary, American Transmission
Systems, Inc. (ATS), with the transfer expected to be finalized
by early 1999. The new subsidiary represents a first step toward
the Company's goal of establishing or becoming part of a larger
independent transmission company (TransCo). FirstEnergy believes
that a TransCo better addresses the Federal Energy Regulatory
Commission's (FERC) stated transmission objectives of providing
non-discriminatory service, while providing for streamlined and
cost-efficient operation. In working toward the goal of forming a
larger regional transmission entity, the Company, American
Electric Power and Virginia Power announced on November 6, 1998,
that they would prepare a FERC filing during the first quarter of
1999 for such a regional transmission entity. The entity would be
designed to meet the goals of reducing transmission costs that
result when transferring power over several transmission systems,
ensuring transmission reliability and providing non-
discriminatory access to the transmission grid.
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 the Company's programs that have date-
sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000.
The Company has developed a multi-phase program for
Year 2000 compliance that consists of: (i) assessment of the
corporate systems and operations of the Company that could be
affected by the Year 2000 problem; (ii) remediation or
replacement of noncompliant systems and components; and (iii)
testing of systems and components following such remediation or
replacement. The Company has focused its Year 2000 review on
three areas: centralized system applications, noncentralized
systems and relationships with third parties (including suppliers
as well as end-use customers).
The Company currently believes that with modifications
to existing software and conversions to new software, the Year
2000 issue will pose no significant operational problems for its
computer systems. Most of the Company's Year 2000 problems will
be resolved through system replacement. Of the Company's major
- 13 -
<PAGE>
FIRSTENERGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
centralized systems, the general ledger system and inventory
management and procurement accounts payable system will be
replaced by the end of 1998. The Company's payroll system was
enhanced to be Year 2000 compliant in July 1998; all employees
will be converted to the new system by January 1999. The customer
service system is due to be replaced in mid-1999.
The Company has categorized its noncentralized systems
into sixteen separate areas, and has already determined that five
of such areas pose no material Year 2000 problem. The Company has
identified certain Year 2000 issues in nine areas and is in the
process of remediating them. The Company has plans to complete
the assessment of the final two areas by the end of 1998. The
Company plans to complete the entire Year 2000 project by
September 1999. If the already identified modifications and
conversions are not made or are not completed on a timely basis,
or if the Company identifies material additional modifications
which are not completed on a timely basis, the Year 2000 issue
would have a material adverse impact on operations.
The Company has initiated formal communications with
many of its major suppliers to determine the extent to which it
is vulnerable to those third parties' failure to resolve their
own Year 2000 problems and is still in the assessment phase as to
whether and to what extent such third parties have a Year 2000
issue. There can be no guarantee that the failure of other
companies to resolve their own Year 2000 issue will not have a
material adverse effect on the Company's business, financial
condition and results of operations.
The Company is utilizing both internal and external
resources to reprogram and/or replace and test the Company's
software for Year 2000 modifications. Of the $111 million total
project cost, approximately $90 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 benefits resulting from the system
replacements). The remaining $21 million will be expensed as
incurred. As of September 30, 1998, the Company had expended a
total of $43 million for Year 2000 capital projects and had
expensed approximately $6 million for Year 2000 related
maintenance activities. The Company's total Year 2000 project
cost, as well as its estimates of the time needed to complete
remedial efforts, are based on currently available information
and do not include the estimated costs and time associated with
the impact of third party Year 2000 issues.
The Company believes the most reasonably likely worst
case scenario from the Year 2000 issue to be disruption in power
plant monitoring systems, thereby producing inaccurate data and
potential failures in electronic switching mechanisms at
transmission junctions. This would prolong localized outages, as
technicians would have to manually activate switches. Such an
event could have a material, but presently undeterminable, effect
on the Company's financial results. The Company has not yet
developed a contingency plan to address the effects of any delay
in becoming Year 2000 compliant but currently expects to have a
contingency plan by the spring of 1999.
The costs of the project and the dates on which the
Company plans to complete the Year 2000 modifications are based
on management's best estimates, which were derived from numerous
assumptions of future events including the continued availability
of certain resources, and other factors. However, there can be no
guarantee that this project will be completed as planned and
actual results could differ materially from the estimates.
Specific factors that might cause material differences include,
but are not limited to, the availability and cost of trained
personnel, the ability to locate and correct all relevant
computer code, and similar uncertainties.
- 14 -
<PAGE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1998 1997 1998 1997
---------- -------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $696,226 $652,660 $1,912,689 $1,850,684
-------- -------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 146,194 111,724 413,242 321,514
Nuclear operating costs 69,336 66,990 210,324 202,833
Other operating costs 114,156 101,937 314,341 297,006
-------- -------- ---------- ----------
Total operation and maintenance expenses 329,686 280,651 937,907 821,353
Provision for depreciation 93,005 106,402 289,524 292,975
Amortization of net regulatory assets 17,849 11,288 40,424 26,129
General taxes 59,714 58,986 178,208 175,959
Income taxes 55,288 54,277 121,161 140,909
-------- -------- ---------- ----------
Total operating expenses and taxes 555,542 511,604 1,567,224 1,457,325
-------- -------- ---------- ----------
OPERATING INCOME 140,684 141,056 345,465 393,359
OTHER INCOME 12,589 12,035 36,857 39,605
-------- -------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 153,273 153,091 382,322 432,964
-------- -------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 47,258 50,799 140,255 155,137
Allowance for borrowed funds used during
construction and capitalized interest (363) (1,056) (1,492) (1,817)
Other interest expense 7,811 7,669 26,696 23,342
Subsidiaries' preferred stock dividend
requirements 3,857 3,857 11,570 11,570
-------- -------- ---------- ----------
Net interest charges 58,563 61,269 177,029 188,232
-------- -------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 94,710 91,822 205,293 244,732
EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 3) - - (30,522) -
-------- -------- ---------- ----------
NET INCOME 94,710 91,822 174,771 244,732
PREFERRED STOCK DIVIDEND REQUIREMENTS 3,020 3,124 9,057 9,373
-------- -------- ---------- ----------
EARNINGS ON COMMON STOCK $ 91,690 $ 88,698 $ 165,714 $ 235,359
======== ======== ========== ==========
<FN>
The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral
part of these statements.
</TABLE>
- 15 -
<PAGE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
------------- -------------
(In thousands)
ASSETS
------
<S> <C> <C>
UTILITY PLANT:
In service, at original cost $8,159,009 $8,666,272
Less--Accumulated provision for depreciation 3,542,085 3,546,594
---------- ----------
4,616,924 5,119,678
---------- ----------
Construction work in progress-
Electric plant 125,512 99,158
Nuclear fuel 14,129 21,360
---------- ----------
139,641 120,518
---------- ----------
4,756,565 5,240,196
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
PNBV Capital Trust 477,986 482,220
Nuclear plant decommissioning trusts 114,496 109,883
Letter of credit collateralization 277,763 277,763
Other 314,740 419,525
---------- ----------
1,184,985 1,289,391
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 43,338 4,680
Receivables-
Customers (less accumulated provisions of
$6,273,000 and $5,618,000, respectively,
for uncollectible accounts) 240,035 235,332
Associated companies 407,922 25,348
Other 54,347 87,566
Materials and supplies, at average cost-
Owned 67,245 75,580
Under consignment 45,133 47,890
Prepayments and other 74,995 78,348
---------- ----------
933,015 554,744
---------- ----------
DEFERRED CHARGES:
Regulatory assets 1,753,528 1,601,709
Property taxes 101,119 100,043
Unamortized sale and leaseback costs 91,348 95,096
Other 55,646 96,276
---------- ----------
2,001,641 1,893,124
---------- ----------
$8,876,206 $8,977,455
========== ==========
</TABLE>
- 16 -
<PAGE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
<S> <C> <C>
CAPITALIZATION:
Common stockholder's equity-
Common stock, $9 par value, authorized 175,000,000
shares - 100 shares outstanding $ 1 $ 1
Other paid-in capital 2,098,114 2,102,644
Retained earnings 533,398 621,674
---------- ----------
Total common stockholder's equity 2,631,513 2,724,319
Preferred stock-
Not subject to mandatory redemption 160,965 160,965
Subject to mandatory redemption 10,000 15,000
Preferred stock of consolidated subsidiary-
Not subject to mandatory redemption 50,905 50,905
Subject to mandatory redemption 15,000 15,000
OE obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely OE
subordinated debentures 120,000 120,000
Long-term debt 2,405,875 2,569,802
---------- ----------
5,394,258 5,655,991
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 276,337 278,492
Short-term borrowings-
Associated companies 45,385 -
Other 260,800 302,229
Accounts payable-
Associated companies 212,470 1,751
Other 84,139 114,085
Accrued taxes 206,478 157,095
Accrued interest 46,573 53,165
Other 158,088 115,256
---------- ----------
1,290,270 1,022,073
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 1,602,443 1,698,354
Accumulated deferred investment tax credits 157,483 184,804
Postretirement benefits 173,136 158,038
Other 258,616 258,195
---------- ----------
2,191,678 2,299,391
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$8,876,206 $8,977,455
========== ==========
<FN>
The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral
part of these balance sheets.
</TABLE>
- 17 -
<PAGE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 94,710 $ 91,822 $ 174,771 $244,732
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation 93,005 106,402 289,524 292,975
Nuclear fuel and lease amortization 8,244 12,040 21,590 40,682
Other amortization, net 17,954 10,996 39,992 25,225
Deferred income taxes, net (14,837) (14,796) (66,363) (31,492)
Investment tax credits, net (3,897) (4,058) (11,345) (11,222)
Extraordinary item - - 51,730 -
Receivables (166,506) (3,405) (208,382) 20,559
Materials and supplies 6,512 (135) 11,092 (9,696)
Accounts payable 76,043 (9,219) 185,633 (3,907)
Other 60,844 46,527 106,967 47,565
--------- -------- ---------- --------
Net cash provided from operating activities 172,072 236,174 595,209 615,421
--------- -------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 10,039 9,694 117,499 80,217
Short-term borrowings, net - - 3,956 -
Redemptions and Repayments-
Preferred stock 5,000 5,000 5,000 5,000
Long-term debt 4,522 121,163 286,157 337,706
Short-term borrowings, net 79,581 10,303 - 53,806
Dividend Payments-
Common stock 44,597 53,109 254,379 163,069
Preferred stock 3,093 3,817 8,952 9,970
--------- -------- ---------- --------
Net cash used for financing activities 126,754 183,698 433,033 489,334
--------- -------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 36,793 52,147 125,163 115,724
Other (1,767) 2,374 (1,645) 7,172
--------- -------- --------- --------
Net cash used for investing activities 35,026 54,521 123,518 122,896
--------- -------- --------- --------
Net increase (decrease) in cash and cash equivalents 10,292 (2,045) 38,658 3,191
Cash and cash equivalents at beginning of period 33,046 10,489 4,680 5,253
--------- -------- --------- --------
Cash and cash equivalents at end of period $ 43,338 $ 8,444 $ 43,338 $ 8,444
========= ======== ========= ========
<FN>
The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral
part of these statements.
</TABLE>
- 18 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ohio Edison Company:
We have reviewed the accompanying consolidated balance sheet of
Ohio Edison Company (an Ohio corporation and wholly owned
subsidiary of FirstEnergy Corp.) and subsidiaries as of September
30, 1998, and the related consolidated statements of income and
cash flows for the three-month and nine-month periods ended
September 30, 1998 and 1997. These financial statements are the
responsibility of the company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Ohio Edison
Company and subsidiaries as of December 31, 1997 (not presented
herein), and, in our report dated February 13, 1998, we expressed
an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying consolidated balance
sheet as of December 31, 1997, is fairly stated, in all material
respects, in relation to the balance sheet from which it has been
derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
November 13, 1998
- 19 -
<PAGE>
OHIO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Earnings were adversely affected in the nine-month
period ended September 30, 1998, compared to the same period of
1997 by an extraordinary item resulting from deregulation of
Penn's generation business and the corresponding discontinuation
of SFAS 71 with respect to that business. This action was taken
following the June 18, 1998, authorization by the PPUC of a
restructuring plan for Penn (see below and Note 3). Excluding the
extraordinary item, earnings on common stock were $196.2 million
in the first nine months of 1998 compared to $235.4 million in
the same period last year; for the third quarter of 1998,
earnings on common stock were $91.7 million compared to $88.7
million in the third quarter of 1997. Earnings were also
adversely affected in the nine-month period by increased
purchased power costs in 1998 occasioned by unprecedented market
prices for electricity and unscheduled generating unit outages.
This increase in purchased power costs more than offset an
increase in operating revenues.
Operating revenues increased $62.0 million during the
first nine months of 1998, compared to the same period of 1997,
and increased $43.6 million in the third quarter of 1998 compared
to the third quarter of 1997. Year-to-date retail kilowatt-hour
sales increased 1.7%, with a 4.1% increase in residential sales
and a 4.7% increase in commercial sales offset, in part, by a
2.1% decrease in industrial sales. Industrial sales for 1998 were
affected by the August 1997 closure of a major customer's
electric arc furnace in the Penn service area. Excluding sales to
that customer, industrial sales increased 0.1% and retail sales
were 2.6% higher. Sales to wholesale customers increased 7.8%
compared to the first nine months of 1997. This increase
contributed to the 2.7% increase in total kilowatt-hour sales
during the period.
Retail kilowatt-hour sales in the third quarter of 1998
increased 5.4% with residential and commercial sales being 13.1%
and 7.5% higher, respectively. Residential sales benefited from
higher air-conditioning loads due to hotter weather and
commercial sales benefited from continued growth in the service
sector of the area economy during the period. Industrial sales
decreased 2.0% during the third quarter of 1998 compared to the
same period of 1997; removing the impact of the electric arc
furnace closure, industrial sales were relatively flat. A general
decline in energy use by primary metal manufacturers and the
General Motors strike also dampened industrial sales in the third
quarter of 1998. Sales to wholesale customers increased 7.8% in
the third quarter compared to the same period last year,
contributing to the increase in total kilowatt-hour sales of
5.8%.
Operation and maintenance expenses increased $116.6
million for the first nine months of 1998 compared to the first
nine months of 1997. Most of the increase resulted from purchased
power expenses which were up $82.1 million in the first nine
months of 1998 from the same period in 1997. Most of the increase
occurred in the second quarter and resulted from a combination of
factors. In late June 1998, the midwestern and southern regions
of the United States experienced electricity shortages caused
mainly by record temperatures and humidity and unscheduled
generating unit outages. Due in part to unscheduled outages at
the Beaver Valley Plant, the OE companies' production
capabilities were reduced to the point that they purchased
significant amounts of power during this period. Temperatures
continued above last year's levels in the third quarter of 1998
as well and the Beaver Valley Plant remained out of service for
most of that period. As a result, OE purchased significant
amounts of power at unusually high spot market prices, causing
the increase in purchased power costs.
Nuclear operating costs were higher in the first nine
months of 1998 than the same period last year due to higher costs
at the Beaver Valley Plant which were offset in part by lower
costs at the Perry Plant. Reduced emission allowance sales in the
year-to-date 1998 period and higher third quarter and year-to-
- 20 -
<PAGE>
OHIO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
date 1998 costs at the Sammis Plant compared to the corresponding
periods of 1997 contributed to the increase in other operation
and maintenance expenses.
The provision for depreciation and amortization
decreased $13.4 million in the third quarter of 1998 from the
same period in 1997 due primarily to the net effect of the OE and
Penn rate plans. The rate restructuring plan authorized by the
PPUC for Penn in the second quarter caused the reduction in
depreciation expense in the third quarter due to the reduction of
nuclear generating unit investment resulting from the
discontinued application of SFAS 71. Penn's rate restructuring
plan also resulted in a reclassification of accelerated Perry
Plant depreciation in the third quarter to amortization of net
regulatory assets, further reducing reported depreciation
expense. The reclassification of depreciation resulted in a
corresponding increase in the amortization of net regulatory
assets in both the first nine months of 1998 and in the third
quarter of 1998 compared to the same periods of 1997. Also
contributing to the increase in year-to-date 1998 amortization
was the absence in 1998 of certain regulatory credits which were
fully amortized by the end of the second quarter 1997.
Interest on long-term debt decreased due to redemptions
of long-term debt totaling $273.8 million since October 1997.
Other interest expense increased as a result of increased short-
term borrowing levels in 1998.
Capital Resources and Liquidity
The OE companies have continuing cash requirements for
planned capital expenditures and debt maturities. During the
fourth quarter of 1998, capital requirements for property
additions and capital leases are expected to be about $57
million, including $13 million for nuclear fuel. The OE companies
have additional cash requirements of approximately $2.7 million
to meet sinking fund requirements for maturing long-term debt
during the remainder of 1998. These cash requirements are
expected to be satisfied with internal cash and/or short-term
credit arrangements.
As of September 30, 1998, the OE companies had about
$43.3 million of cash and temporary investments and $306.2
million of short-term indebtedness. In addition, the OE
companies' unused borrowing capability included $100 million
under revolving lines of credit and $22 million of bank
facilities that provide for borrowings on a short-term basis at
the banks' discretion.
FirstEnergy signed an agreement in principle with
Duquesne Light Company that would result in the transfer of 1,436
megawatts owned by Duquesne at five generating plants in exchange
for 1,298 megawatts at three plants owned by FirstEnergy's
electric utility operating companies (see "Pending Exchange of
Assets" in Note 2), including the OE companies. A final agreement
on the exchange of assets, which will be structured as a tax-free
transaction to the extent possible, is expected to be reached by
the end of the year. The transaction benefits the Companies by
providing them with exclusive ownership and operating control of
all the generating assets that are now jointly owned and operated
under the Central Area Power Coordination Group agreement.
Regulatory Matters
On September 16, 1998, FirstEnergy, together with
representatives of the three other Ohio investor-owned utilities,
presented proposed legislation for restructuring the electric
utility industry in Ohio to a private working group formed by the
leadership of the Ohio General Assembly. The working group, which
includes numerous interested parties, will consider the utility
proposal -- a proposal that represents a balanced approach for
bringing choice to Ohio's electric consumers -- as well as other
restructuring proposals. Passage of a restructuring bill appears
unlikely in 1998.
- 21 -
<PAGE>
OHIO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
On September 24, 1998, the Federal Environmental
Protection Agency issued a final rule establishing tighter
nitrogen oxide emission ceilings for Ohio, Pennsylvania and 20
other Eastern states and the District of Columbia (see
"Environmental Matters" in Note 2). Controls must be in place by
May 2003, with required reductions achieved during the five-month
summer ozone season (May through September). The new rule is
expected to increase the cost of producing electricity; however,
the OE companies believe that they are in a better position than
a number of other utilities in achieving compliance due to their
nuclear generation capability.
In connection with the regulatory plans for its utility
operating companies to reduce fixed costs and lower rates,
FirstEnergy continued to take steps to restructure its operations
for improved efficiency and effectiveness in the changing
electric utility industry. FirstEnergy announced plans to
transfer its transmission assets (including the OE companies'
assets) into a new subsidiary, American Transmission Systems,
Inc. (ATS), with the transfer expected to be finalized by early
1999. The new subsidiary represents a first step toward
FirstEnergy's goal of establishing or becoming part of a larger
independent transmission company (TransCo). FirstEnergy believes
that a TransCo better addresses the Federal Energy Regulatory
Commission's (FERC) stated transmission objectives of providing
non-discriminatory service, while providing for streamlined and
cost-efficient operation. In working toward the goal of forming a
larger regional transmission entity, FirstEnergy, American
Electric Power and Virginia Power announced on November 6, 1998,
that they would prepare a FERC filing during the first quarter of
1999 for such a regional transmission entity. The entity would be
designed to meet the goals of reducing transmission costs that
result when transferring power over several transmission systems,
ensuring transmission reliability and providing non-
discriminatory access to the transmission grid.
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 the OE companies' programs that have
date-sensitive software may recognize a date using "00" as the
year 1900 rather than the year 2000.
The OE companies have developed a multi-phase program
for Year 2000 compliance that consists of: (i) assessment of the
corporate systems and operations of the OE companies that could
be affected by the Year 2000 problem; (ii) remediation or
replacement of non-compliant systems and components; and (iii)
testing of systems and components following such remediation or
replacement. The OE companies have focused their Year 2000 review
on three areas: centralized system applications, non-centralized
systems and relationships with third parties (including suppliers
as well as end-use customers).
The OE companies currently believe that with
modifications to existing software and conversions to new
software, the Year 2000 issue will pose no significant
operational problems for their computer systems. Most of the OE
companies' Year 2000 problems will be resolved through system
replacement. Of the OE companies' major centralized systems, the
general ledger system and inventory management and procurement
accounts payable system will be replaced by the end of 1998. The
OE companies' payroll system was enhanced to be Year 2000
compliant in July 1998. The customer service system is due to be
replaced in mid-1999.
The OE companies have categorized their non-centralized
systems into sixteen separate areas, and have already determined
that five of such areas pose no material Year 2000 problem. The
OE companies have identified certain Year 2000 issues in nine of
such areas and are in the process of remediating them. The OE
companies have plans to complete the assessment of the final two
areas by the end of 1998. The OE companies plan to complete the
entire Year 2000 project by September 1999. If the already
identified modifications and conversions are not made or are not
completed on a timely basis, or if the OE companies identify
- 22 -
<PAGE>
OHIO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
material additional modifications which are not completed on a
timely basis, the Year 2000 issue would have a material adverse
impact on operations.
The OE companies have initiated formal communications
with many of their major suppliers to determine the extent to
which they are vulnerable to those third parties' failure to
resolve their own Year 2000 problems and are still in the
assessment phase as to whether and to what extent such third
parties have a Year 2000 issue. There can be no guarantee that
the failure of other companies to resolve their own Year 2000
issue will not have a material adverse effect on the OE
companies' business, financial condition and results of
operations.
The OE companies are utilizing both internal and
external resources to reprogram and/or replace and test the OE
companies' software for Year 2000 modifications. Of the $53
million total project cost, approximately $43 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 benefits resulting from
the system replacements). The remaining $10 million will be
expensed as incurred. As of September 30, 1998, the OE companies
have expended a total of $20 million for Year 2000 capital
projects and have expensed approximately $3 million for Year 2000
related maintenance activities. The OE companies' total Year 2000
project cost, as well as their estimates of time needed to
complete remedial efforts, are based on currently available
information and do not include the estimated costs and time
associated with the impact of third party Year 2000 issues.
The OE companies believe the most reasonably likely
worst case scenario from the Year 2000 issue to be disruption in
power plant monitoring systems, thereby producing inaccurate data
and potential failures in electronic switching mechanisms at
transmission junctions. This would prolong localized outages, as
technicians would have to manually activate switches. Such an
event could have a material, but presently undeterminable, effect
on the OE companies' financial results. The OE companies have not
yet developed a contingency plan to address the effects of any
delay in becoming Year 2000 compliant but currently expect to
have a contingency plan by the spring of 1999.
The costs of the project and the dates on which the OE
companies 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.
- 23 -
<PAGE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
September 30, 1998 September 30, 1997
----------------------- ---------------------
Three Nine Three Nine
Months Months Months Months
Ended Ended Ended Ended
---------- ----------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $512,616 $1,392,868 | $499,468 $1,359,341
-------- ---------- | -------- ----------
OPERATING EXPENSES AND TAXES: |
Fuel and purchased power 127,342 358,704 | 111,095 329,347
Nuclear operating costs 19,836 55,335 | 23,617 65,029
Other operating costs 82,272 249,774 | 77,407 251,002
-------- ---------- | -------- ----------
Total operation and maintenance expenses 229,450 663,813 | 212,119 645,378
Provision for depreciation and amortization 50,002 148,557 | 55,611 166,134
Amortization of net regulatory assets 6,567 19,701 | 6,567 19,701
General taxes 55,356 163,730 | 56,864 170,824
Income taxes 48,077 95,752 | 36,836 68,390
-------- ---------- | -------- ----------
Total operating expenses and taxes 389,452 1,091,553 | 367,997 1,070,427
-------- ---------- | -------- ----------
OPERATING INCOME 123,164 301,315 | 131,471 288,914
|
OTHER INCOME (EXPENSE) 8,166 21,616 | 7,544 (1,341)
-------- ---------- | -------- ----------
INCOME BEFORE NET INTEREST CHARGES 131,330 322,931 | 139,015 287,573
-------- ---------- | -------- ----------
NET INTEREST CHARGES: |
Interest on long-term debt 57,072 177,883 | 66,901 174,451
Allowance for borrowed funds used during |
construction (664) (1,620)| (729) (1,440)
Other interest expense (credit) (95) (2,821)| 5,101 12,620
-------- ---------- | -------- ----------
Net interest charges 56,313 173,442 | 71,273 185,631
-------- ---------- | -------- ----------
NET INCOME 75,017 149,489 | 67,742 101,942
|
PREFERRED STOCK DIVIDEND REQUIREMENTS 8,547 17,053 | 8,876 27,287
-------- ---------- | -------- ----------
EARNINGS ON COMMON STOCK $ 66,470 $ 132,436 | $ 58,866 $ 74,655
======== ========== | ======== ==========
<FN>
The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating
Company are an integral part of these statements.
</TABLE>
- 24 -
<PAGE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In thousands)
<S> <C> <C>
ASSETS
------
UTILITY PLANT:
In service $4,626,360 $4,578,649
Less--Accumulated provision for depreciation 1,589,311 1,470,084
---------- ----------
3,037,049 3,108,565
---------- ----------
Construction work in progress-
Electric plant 45,947 41,261
Nuclear fuel 10,115 6,833
---------- ----------
56,062 48,094
---------- ----------
3,093,111 3,156,659
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 543,161 575,084
Nuclear plant decommissioning trusts 114,265 105,334
Other. 18,223 21,482
---------- ----------
675,649 701,900
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 27,776 33,775
Receivables-
Customers 17,427 29,759
Associated companies 9,945 8,695
Other 241,175 98,077
Notes receivable from associated companies 26,628 -
Materials and supplies, at average cost-
Owned 29,483 47,489
Under consignment 40,455 25,411
Prepayments and other 52,068 57,763
---------- ----------
444,957 300,969
---------- ----------
DEFERRED CHARGES:
Regulatory assets 559,453 579,711
Goodwill 1,511,635 1,552,483
Property taxes 126,414 125,204
Other 15,627 23,358
---------- ----------
2,213,129 2,280,756
---------- ----------
$6,426,846 $6,440,284
========== ==========
</TABLE>
- 25 -
<PAGE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
<S> <C> <C>
CAPITALIZATION:
Common stockholder's equity-
Common stock, without par value, authorized
105,000,000 shares - 79,590,689 shares
outstanding $ 931,312 $ 931,614
Retained earnings 101,251 19,290
---------- ----------
Total common stockholder's equity 1,032,563 950,904
Preferred stock-
Not subject to mandatory redemption 238,325 238,325
Subject to mandatory redemption 168,460 183,174
Long-term debt 2,956,689 3,189,590
---------- ----------
4,396,037 4,561,993
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred
stock 181,476 121,965
Accounts payable-
Associated companies 51,831 56,109
Other 58,332 90,737
Notes payable to associated companies 60,838 56,802
Accrued taxes 238,418 194,394
Accrued interest 70,078 67,896
Other 43,068 52,297
---------- ----------
704,041 640,200
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 533,755 496,437
Accumulated deferred investment tax credits 92,242 96,131
Pensions and other postretirement benefits 204,152 198,642
Other 496,619 446,881
---------- ----------
1,326,768 1,238,091
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$6,426,846 $6,440,284
========== ==========
<FN>
The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating
Company are an integral part of these balance sheets.
</TABLE>
- 26 -
<PAGE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
September 30, 1998 September 30, 1997
---------------------- ---------------------
Three Nine Three Nine
Months Months Months Months
Ended Ended Ended Ended
---------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 75,017 $ 149,489 | $ 67,742 $101,942
Adjustments to reconcile net income to net |
cash from operating activities- |
Provision for depreciation and amortization 50,002 148,557 | 55,611 166,134
Nuclear fuel and lease amortization 8,154 24,510 | 12,924 38,110
Other amortization 5,974 9,691 | 6,567 19,701
Deferred income taxes, net 4,229 35,020 | 12,057 34,254
Investment tax credits, net (1,296) (3,889)| (2,001) (6,003)
Allowance for equity funds used during |
construction - - | (465) (1,190)
Receivables (44,448) (132,016)| (8,096) 6,869
Materials and supplies 13,684 2,962 | 2,465 (1,675)
Accounts payable (69,068) (36,683)| (15,214) (26,535)
Accrued taxes 76,357 44,024 | 8,379 (14,060)
Other 4,771 (31,535)| 42,415 27,285
--------- ---------- | -------- --------
Net cash provided from operating activities 123,376 210,130 | 182,384 344,832
--------- ---------- | -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES: |
New Financing- |
Equity contributions from parent - - | 4,500 4,500
Long-term debt - 5,822 | 168,118 743,065
Short-term borrowings, net 30,528 4,036 | - -
Ohio Schools Council Prepayment Program - 116,598 | - -
Redemptions and Repayments- |
Preferred stock 1,000 14,714 | 1,000 29,714
Long-term debt 172,192 198,773 | 192,475 218,636
Short-term borrowings, net - - | 37,651 8,618
Dividend Payments- |
Common stock 28,653 54,122 | 29,606 88,816
Preferred stock 8,559 26,300 | 8,889 27,631
--------- --------- | -------- --------
Net cash provided from (used for) financing |
activities (179,876) (167,453)| (97,003) 374,150
--------- --------- | -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES: |
Property additions 16,327 43,741 | 31,733 86,705
Loans to associated companies - 26,628 | - -
Loan payments from associated companies (110,272) - | - -
Capital trust investments 35 (31,923)| (10,576) 558,813
Other 24,183 10,230 | (673) 16,714
--------- --------- | --------- ---------
Net cash used for (provided from) |
investing activities (69,727) 48,676 | 20,484 662,232
--------- --------- | --------- ---------
Net increase (decrease) in cash and cash equivalents 13,227 (5,999)| 64,897 56,750
Cash and cash equivalents at beginning of period 14,549 33,775 | 22,126 30,273
--------- --------- | --------- ---------
Cash and cash equivalents at end of period $ 27,776 $ 27,776 | $ 87,023 $ 87,023
========= ========= | ========= =========
<FN>
The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating
Company are an integral part of these statements.
</TABLE>
- 27 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Cleveland Electric Illuminating Company:
We have reviewed the accompanying consolidated balance sheet of
The Cleveland Electric Illuminating Company (an Ohio corporation
and wholly owned subsidiary of FirstEnergy Corp.) and subsidiary
as of September 30, 1998, and the related consolidated statements
of income and cash flows for the three-month and nine-month
periods ended September 30, 1998 and 1997. These financial
statements are the responsibility of the company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of The
Cleveland Electric Illuminating Company and subsidiary as of
December 31, 1997 (not presented herein), and, in our report dated
February 13, 1998, we expressed an unqualified opinion on that
statement. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1997,
is fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
November 13, 1998
- 28 -
<PAGE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Financial results reflect the application of purchase
accounting to the merger of CEI's former parent company,
Centerior, with OE to form FirstEnergy on November 8, 1997. The
application of this accounting resulted in fair value adjustments
which were "pushed down" or reflected on the separate financial
statements of Centerior's direct subsidiaries as of the merger
date, including CEI's financial statements. Accordingly, the
post-merger financial statements for the first nine months and
third quarter of 1998 and the December 31, 1997 Consolidated
Balance Sheet reflect a new basis of accounting. Material effects
of this new basis of accounting are identified below.
Earnings on common stock increased to $132.4 million
for the nine-month period ended September 30, 1998, from $74.7
million in the same period last year. For the third quarter of
1998, earnings increased to $66.5 million, compared to $58.9
million in the third quarter of 1997. The increases reflect
increased operating revenues, benefits provided by the Bruce
Mansfield Plant lease refinancing and net reductions in the
provision for depreciation and amortization resulting from the
fair value adjustment of nuclear plant in connection with the
merger. The above factors were offset in part by an increase in
purchased power costs.
Operating revenues increased $33.5 million during the
nine-month period ended September 30, 1998, compared to the same
period of 1997 and increased $13.1 million in the third quarter
of 1998 from the corresponding 1997 period. Operating revenues in
the year-to-date 1998 period included $9.2 million received as a
termination charge for a canceled power supply contract. Year-to-
date retail kilowatt-hour sales increased 1.9% from the same
period of 1997, with residential, commercial and industrial
customers all contributing to the increase with increases of
2.4%, 1.9% and 1.6%, respectively. Sales to wholesale customers
decreased 50.6% compared to the first nine months of 1997 due in
part to unplanned generating unit outages which reduced available
energy for sale to other utilities. This resulted in a 4.9%
decrease in total kilowatt-hour sales during the nine-month
period compared to 1997.
Retail kilowatt-hour sales in the third quarter of 1998
increased 4.5% from the third quarter of 1997. Residential sales
benefited from higher air-conditioning loads due to hotter
weather in 1998, increasing 15.0%. The large increase in
residential sales was offset in part by a 1.0% decline in
commercial sales reflecting a softening in the service sector.
However, sales to industrial customers increased 3.0%. Sales to
wholesale customers decreased 48.1% in the third quarter of 1998
compared to the same period in 1997. Overall, reduced off-system
sales more than offset the increase in retail sales leading to a
decline in total kilowatt-hour sales of 3.0% for the third
quarter of 1998 compared to the third quarter of 1997.
Fuel and purchased power expenses increased in both the
first nine months of 1998 and the third quarter of 1998 compared
to the same periods of 1997. The increases resulted from higher
purchased power costs, which were due to a combination of
factors. In late June 1998, the midwestern and southern regions
of the United States experienced electricity shortages caused
mainly by record temperatures and humidity and unscheduled
generating unit outages. During this period, Beaver Valley Unit 2
was out of service and the Davis-Besse Plant was removed from
service as a result of damage to transmission facilities caused
by a tornado. Also, Avon Lake Unit 9 experienced an unscheduled
outage during the period due to lightning-related transformer
damage. Temperatures continued above last year's levels
throughout the third quarter of 1998 as well and Beaver Valley
Unit 2 remained out of service for most of that period. As a
result, CEI purchased significant amounts of power on the spot
market at unusually high prices, causing the increase in
purchased power costs. On a net basis, nuclear operating costs
were lower for the year-to-date and third quarter periods of 1998
compared to 1997, offsetting part of the increase in fuel and
purchased power expense discussed above.
- 29 -
<PAGE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
Lower depreciable asset balances resulting from the
purchase accounting adjustment reduced the provision for
depreciation in the first nine months of 1998 compared to the
same period last year and for the third quarter of 1998 compared
to the third quarter of 1997. These reductions were partially
offset by the amortization of goodwill recognized with the
application of purchase accounting.
Interest income from investments related to the
refinancing of the Mansfield Plant lease increased other income
in the first nine months of 1998 compared to the same period of
1997. Interest expense decreased $15 million in the third quarter
of 1998 compared to the same period of 1997 due to refinancings
and redemptions completed in the last twelve months and the
amortization of premiums associated with the revaluation of long-
term debt in connection with the merger.
Capital Resources and Liquidity
CEI has continuing cash requirements for planned
capital expenditures and debt maturities. During the fourth
quarter of 1998, capital requirements for property additions and
capital leases are expected to be about $45 million, including $4
million for nuclear fuel. CEI has additional cash requirements of
approximately $51.5 million to meet sinking fund requirements for
maturing long-term debt during the remainder of 1998. These cash
requirements are expected to be satisfied with internal cash
and/or short-term credit arrangements.
As of September 30, 1998, CEI had approximately $54.4
million of cash and temporary investments and $60.8 million of
short-term indebtedness to an associated company. Upon completion
of the merger, application of purchase accounting reduced
bondable property such that CEI is not currently able to issue
additional first mortgage bonds, except against retired bonds.
FirstEnergy signed an agreement in principle with
Duquesne Light Company that would result in the transfer of 1,436
megawatts owned by Duquesne at five generating plants in exchange
for 1,298 megawatts at three plants owned by FirstEnergy's
electric utility operating companies (see "Pending Exchange of
Assets" in Note 2), including CEI. A final agreement on the
exchange of assets, which will be structured as a tax-free
transaction to the extent possible, is expected to be reached by
the end of the year. The transaction benefits the Companies by
providing them with exclusive ownership and operating control of
all the generating assets that are now jointly owned and operated
under the Central Area Power Coordination Group agreement.
Regulatory Matters
On September 16, 1998, FirstEnergy, together with
representatives of the three other Ohio investor-owned utilities,
presented proposed legislation for restructuring the electric
utility industry in Ohio to a private working group formed by the
leadership of the Ohio General Assembly. The working group, which
includes numerous interested parties, will consider the utility
proposal -- a proposal that represents a balanced approach for
bringing choice to Ohio's electric consumers -- as well as other
restructuring proposals. Passage of a restructuring bill appears
unlikely in 1998.
On September 24, 1998, the Federal Environmental
Protection Agency issued a final rule establishing tighter
nitrogen oxide emission ceilings for Ohio, Pennsylvania and 20
other Eastern states and the District of Columbia (see
"Environmental Matters" in Note 2). Controls must be in place by
May 2003, with required reductions achieved during the five-month
summer ozone season (May through September). The new rule is
expected to increase the cost of producing electricity; however,
CEI believes that it is in a better position than a number of
other utilities in achieving compliance due to its nuclear and
hydroelectric generation capability.
- 30 -
<PAGE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS (Cont.)
In connection with the regulatory plans for its utility
operating companies to reduce fixed costs and lower rates,
FirstEnergy continued to take steps to restructure its operations
for improved efficiency and effectiveness in the changing
electric utility industry. FirstEnergy announced plans to
transfer its transmission assets (including CEI's assets) into a
new subsidiary, American Transmission Systems, Inc. (ATS), with
the transfer expected to be finalized by early 1999. The new
subsidiary represents a first step toward FirstEnergy's goal of
establishing or becoming part of a larger independent
transmission company (TransCo). FirstEnergy believes that a
TransCo better addresses the Federal Energy Regulatory
Commission's (FERC) stated transmission objectives of providing
non-discriminatory service, while providing for streamlined and
cost-efficient operation. In working toward the goal of forming a
larger regional transmission entity, FirstEnergy, American
Electric Power and Virginia Power announced on November 6, 1998,
that they would prepare a FERC filing during the first quarter of
1999 for such a regional transmission entity. The entity would be
designed to meet the goals of reducing transmission costs that
result when transferring power over several transmission systems,
ensuring transmission reliability and providing non-
discriminatory access to the transmission grid.
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 CEI's programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather
than the year 2000.
CEI has developed a multi-phase program for Year 2000
compliance that consists of: (i) assessment of the corporate
systems and operations of CEI that could be affected by the Year
2000 problem; (ii) remediation or replacement of noncompliant
systems and components; and (iii) testing of systems and
components following such remediation or replacement. CEI has
focused its Year 2000 review on three areas: centralized system
applications, noncentralized systems and relationships with third
parties (including suppliers as well as end-use customers).
CEI currently believes that, with modifications to
existing software and conversions to new software, the Year 2000
issue will pose no significant operational problems for its
computer systems. Most of CEI's Year 2000 problems will be
resolved through system replacement. Of CEI's major centralized
systems, the general ledger system and inventory management and
procurement accounts payable system will be replaced by the end
of 1998. CEI's payroll system was enhanced to be Year 2000
compliant in July 1998; all employees will be converted to the
new system by January 1999. The customer service system is due to
be replaced in mid-1999.
CEI has categorized its noncentralized systems into
sixteen separate areas, and has already determined that five of
such areas pose no material Year 2000 problem. CEI has identified
certain Year 2000 issues in nine of such areas and is in the
process of remediating them. CEI has plans to complete the
assessment of the final two areas by the end of 1998. CEI plans
to complete the entire Year 2000 project by September 1999. If
the already identified modifications and conversions are not made
or are not completed on a timely basis, or if CEI identifies
material additional modifications which are not completed on a
timely basis, the Year 2000 issue would have a material adverse
impact on operations.
CEI has initiated formal communications with many of
its major suppliers to determine the extent to which it is
vulnerable to those third parties' failure to resolve their own
Year 2000 problems and is still in the assessment phase as to
whether and to what extent such third parties have a Year 2000
issue. There can be no guarantee that the failure of other
companies to resolve their own Year 2000 issue will not have a
material adverse effect on CEI's business, financial condition
and results of operations.
- 31 -
<PAGE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS (Cont.)
CEI is utilizing both internal and external resources
to reprogram and/or replace and test CEI's software for Year 2000
modifications. Of the $38 million total project cost,
approximately $31 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 benefits resulting from the system replacements).
The remaining $7 million will be expensed as incurred. As of
September 30,1998, CEI has expended a total of $15 million for
Year 2000 capital projects and had expensed approximately $2
million for Year 2000 related maintenance activities. CEI's total
Year 2000 project cost, as well as its estimates of time needed
to complete remedial efforts, are based on currently available
information and do not include the estimated costs and time
associated with the impact of third party Year 2000 issues.
CEI believes the most reasonably likely worst case
scenario from the Year 2000 issue to be disruption in power plant
monitoring systems, thereby producing inaccurate data and
potential failures in electronic switching mechanisms at
transmission junctions. This would prolong localized outages, as
technicians would have to manually activate switches. Such an
event could have a material, but presently undeterminable, effect
on CEI's financial results. CEI has not yet developed a
contingency plan to address the effects of any delay in becoming
Year 2000 compliant but currently expects to have a contingency
plan by the spring of 1999.
The costs of the project and the dates on which CEI
plans 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.
- 32 -
<PAGE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
September 30, 1998 September 30, 1997
---------------------- ---------------------
Three Nine Three Nine
Months Months Months Months
Ended Ended Ended Ended
---------- ----------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $253,282 $714,116 | $241,282 $680,486
-------- -------- | -------- --------
OPERATING EXPENSES AND TAXES: |
Fuel and purchased power 56,708 164,049 | 47,976 140,792
Nuclear operating costs 37,681 106,912 | 38,027 113,854
Other operating costs 42,680 115,515 | 40,214 123,042
-------- -------- | -------- --------
Total operation and maintenance expenses 137,069 386,476 | 126,217 377,688
Provision for depreciation and amortization 19,472 58,295 | 24,542 74,032
Amortization of net regulatory assets 4,286 12,954 | 4,291 12,873
General taxes 21,435 63,393 | 22,729 68,124
Income taxes 19,817 51,985 | 14,132 29,964
-------- -------- | -------- --------
Total operating expenses and taxes 202,079 573,103 | 191,911 562,681
-------- -------- | -------- --------
OPERATING INCOME 51,203 141,013 | 49,371 117,805
|
OTHER INCOME 2,674 9,573 | 5,058 5,091
-------- -------- | -------- --------
INCOME BEFORE NET INTEREST CHARGES 53,877 150,586 | 54,429 122,896
-------- -------- | -------- --------
NET INTEREST CHARGES: |
Interest on long-term debt 21,524 66,780 | 23,388 64,970
Allowance for borrowed funds used during |
construction (344) (927) | (124) (239)
Other interest expense (credit) 10 (1,089) | 3,946 8,990
-------- -------- | -------- --------
Net interest charges 21,190 64,764 | 27,210 73,721
-------- -------- | -------- --------
NET INCOME 32,687 85,822 | 27,219 49,175
|
PREFERRED STOCK DIVIDEND REQUIREMENTS 4,145 9,680 | 4,185 12,590
-------- -------- | -------- --------
EARNINGS ON COMMON STOCK $ 28,542 $ 76,142 | $ 23,034 $ 36,585
======== ======== | ======== ========
<FN>
The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an
integral part of these statements.
</TABLE>
- 33 -
<PAGE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In thousands)
<S> <C> <C>
ASSETS
------
UTILITY PLANT:
In service $1,741,913 $1,763,495
Less--Accumulated provision for depreciation 606,442 619,222
---------- ----------
1,135,471 1,144,273
---------- ----------
Construction work in progress-
Electric plant 23,885 19,901
Nuclear fuel 8,114 6,632
---------- ----------
31,999 26,533
---------- ----------
1,167,470 1,170,806
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 310,696 312,873
Nuclear plant decommissioning trusts 94,491 85,956
Other 3,719 3,164
---------- ----------
408,906 401,993
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 21,356 22,170
Receivables-
Associated companies 21,663 15,199
Other 10,501 21,664
Notes receivable from associated companies 79,595 40,802
Materials and supplies, at average cost-
Owned 24,136 31,892
Under consignment 19,223 9,538
Prepayments and other 22,211 26,437
---------- ----------
198,685 167,702
---------- ----------
DEFERRED CHARGES:
Regulatory assets 423,599 442,724
Goodwill 500,532 514,462
Property taxes 43,355 45,338
Other 5,127 15,127
---------- ----------
972,613 1,017,651
---------- ----------
$2,747,674 $2,758,152
========== ==========
</TABLE>
- 34 -
<PAGE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
<S> <C> <C>
CAPITALIZATION:
Common stockholder's equity-
Common stock, $5 par value, authorized
60,000,000 shares - 39,133,887 shares
outstanding $ 195,670 $ 195,670
Other paid-in capital 328,193 328,364
Retained earnings 48,470 7,616
---------- ----------
Total common stockholder's equity 572,333 531,650
Preferred stock-
Not subject to mandatory redemption 210,000 210,000
Subject to mandatory redemption - 1,690
Long-term debt 1,086,227 1,210,190
---------- ----------
1,868,560 1,953,530
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 142,492 69,979
Accounts payable-
Associated companies 24,676 21,173
Other 56,389 60,756
Accrued taxes 47,997 34,441
Accrued interest 24,806 26,633
Other 35,138 22,603
---------- ----------
331,498 235,585
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 125,061 104,543
Accumulated deferred investment tax credits 41,319 43,265
Pensions and other postretirement benefits 116,584 113,254
Other 264,652 307,975
---------- ----------
547,616 569,037
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$2,747,674 $2,758,152
========== ==========
<FN>
The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an
integral part of these balance sheets.
</TABLE>
- 35 -
<PAGE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
September 30, 1998 September 30, 1997
---------------------- --------------------
Three Nine Three Nine
Months Months Months Months
Ended Ended Ended Ended
---------- ---------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 32,687 $ 85,822 | $ 27,219 $ 49,175
Adjustments to reconcile net income to net |
cash from operating activities- |
Provision for depreciation and amortization 19,472 58,295 | 24,542 74,032
Nuclear fuel and lease amortization 5,576 16,506 | 9,264 26,898
Amortization of net regulatory assets 4,286 12,954 | 4,291 12,873
Deferred income taxes, net 3,954 24,971 | (3,336) (6,462)
Investment tax credits, net (648) (1,946) | (1,080) (3,240)
Allowance for equity funds used during |
construction - - | (291) (677)
Receivables 1,473 4,699 | (203) 1,569
Accounts payable (3,216) (864) | 2,774 852
Accrued taxes 7,083 13,556 | 2,503 10,977
Other 19,891 (15,265) | 17,370 20,951
-------- -------- | -------- --------
Net cash provided from operating activities 92,136 196,799 | 102,950 201,742
-------- -------- | -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES: |
New Financing- |
Long-term debt - 3,657 | 6,973 151,945
Short-term borrowings, net - - | - 24,500
Redemptions and Repayments- |
Preferred stock - 1,665 | - 1,665
Long-term debt 33,273 74,968 | 49,692 75,952
Short-term borrowings, net - - | 60,500 -
Dividend Payments- |
Common stock 15,654 36,786 | - -
Preferred stock 4,074 12,309 | 4,192 12,589
-------- -------- | -------- --------
Net cash provided from (used for) |
financing activities (53,001) (122,071) | (107,411) 86,239
-------- -------- | -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES: |
Property additions 14,518 29,165 | 8,761 33,880
Loans to associated companies - 38,793 | - -
Loan payments from associated companies (5,855) - | (27,651) (38,817)
Capital trust investments (240) (2,177) | (17,115) 319,984
Other 13,923 9,761 | 5,902 6,244
-------- -------- | -------- --------
Net cash used for (provided from) |
investing activities 22,346 75,542 | (30,103) 321,291
-------- -------- | -------- --------
Net increase (decrease) in cash and cash |
equivalents 16,789 (814) | 25,642 (33,310)
Cash and cash equivalents at beginning of period 4,567 22,170 | 22,502 81,454
-------- -------- | -------- --------
Cash and cash equivalents at end of period $ 21,356 $ 21,356 | $ 48,144 $ 48,144
======== ======== | ======== ========
<FN>
The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an
integral part of these statements.
</TABLE>
- 36 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Toledo Edison Company:
We have reviewed the accompanying consolidated balance sheet of
The Toledo Edison Company (an Ohio corporation and wholly owned
subsidiary of FirstEnergy Corp.) and subsidiary as of September
30, 1998, and the related consolidated statements of income and
cash flows for the three-month and nine-month periods ended
September 30, 1998 and 1997. These financial statements are the
responsibility of the company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of The Toledo
Edison Company and subsidiary as of December 31, 1997 (not
presented herein), and, in our report dated February 13, 1998, we
expressed an unqualified opinion on that statement. In our
opinion, the information set forth in the accompanying
consolidated balance sheet as of December 31, 1997, is fairly
stated, in all material respects, in relation to the balance sheet
from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
November 13, 1998
- 37 -
<PAGE>
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Financial results reflect the application of purchase
accounting to the merger of TE's former parent company,
Centerior, with OE to form FirstEnergy on November 8, 1997. The
application of this accounting resulted in fair value adjustments
which were "pushed down" or reflected on the separate financial
statements of Centerior's direct subsidiaries as of the merger
date, including TE's financial statements. Accordingly, the post-
merger financial statements for the first nine months and third
quarter of 1998 and the December 31, 1997 Consolidated Balance
Sheet reflect a new basis of accounting. Material effects of this
new basis of accounting are identified below.
Earnings on common stock increased to $76.1 million for
the nine-month period ended September 30, 1998, from $36.6
million in the same period last year. For the third quarter of
1998, earnings increased to $28.5 million, compared to $23.0
million in the third quarter of 1997. The increases reflect
increased operating revenues, benefits provided by the Bruce
Mansfield Plant lease refinancing and net reductions in the
provision for depreciation and amortization resulting from the
fair value adjustment of nuclear plant in connection with the
merger. The above factors were offset in part by an increase in
purchased power costs.
Operating revenues increased $33.6 million during the
nine-month period ended September 30, 1998 compared to the same
period of 1997 and increased $12.0 million in the third quarter
of 1998 from the corresponding period of 1997. Year-to-date
retail kilowatt-hour sales increased 8.0% from the same period
last year, with residential, commercial and industrial customers
all contributing to the increase with increases of 5.3%, 5.1%
and 10.5%, respectively. Expanded production at the North Star
BHP Steel (North Star) facility was the primary factor in the
increase in industrial sales in the first nine months of 1998
from last year's level. Excluding North Star, industrial sales
increased 0.2%. Sales to wholesale customers decreased 39.4%
compared to the first nine months of 1997 due in part to
unplanned generating unit outages which reduced available energy
for sale to other utilities. This resulted in a 2.1% decrease in
total kilowatt-hour sales during the nine-month period compared
to 1997.
Retail kilowatt-hour sales in the third quarter of 1998
increased 5.7% from the third quarter of 1997 with increased
demand from all customer groups. Residential sales benefited from
higher air-conditioning loads due to hotter weather, increasing
12.4% in the third quarter of 1998, compared to the same period
of 1997. Continued growth in the service sector of the area
economy during the period contributed to a 2.2% increase in
commercial sales in the third quarter of 1998 compared to the
third quarter of 1997. Expanded production at North Star remained
a major contributor to industrial sales in the period with sales
up 4.5% in the third quarter of 1998 from the same period last
year. Excluding sales to North Star, industrial sales decreased
4.7% in the third quarter of 1998 from the third quarter of 1997.
A general decline in energy use by primary metal manufacturers
and the General Motors strike dampened industrial sales in the
third quarter of 1998. Sales to wholesale customers decreased
15.3% in the third quarter of 1998 compared to the same period of
1997. Reduced off-system sales offset, in part, the increase in
retail sales resulting in a net increase in total sales of 1.8%
for the third quarter of 1998 compared to the third quarter of
1997.
Fuel and purchased power expenses increased in both the
first nine months of 1998 and the third quarter of 1998 compared
to the same periods of 1997. The increases resulted from higher
purchased power costs, which resulted from a combination of
factors. In late June 1998, the midwestern and southern regions
of the United States experienced electricity shortages caused
mainly by record temperatures and humidity and unscheduled
generating unit outages. During this period, Beaver Valley Unit 2
was out of service and the Davis-Besse Plant was removed from
service as a result of damage to transmission facilities caused
- 38 -
<PAGE>
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
by a tornado. Temperatures continued above last year's levels
throughout the third quarter of 1998 as well and Beaver Valley
Unit 2 remained out of service for most of that period. As a
result, TE purchased significant amounts of power on the spot
market at unusually high prices, causing the increase in
purchased power costs.
Reduced nuclear operating costs and other operating
costs combined to substantially offset the year-to-date 1998
increase in fuel and purchased power expense compared to the same
period last year. On a net basis nuclear operating costs were
down at the three nuclear plants. Other operating costs were
lower for the first nine months of 1998 compared to the same
period last year due to lower costs at the Bay Shore and
Mansfield plants. Lower rent expense resulting from the
refinancing of the Mansfield Plant lease and reduced employee
levels contributed to these reduced costs.
Lower depreciable asset balances resulting from the
purchase accounting adjustment reduced the provision for
depreciation in the first nine months of 1998 compared to the
same period last year and for the third quarter of 1998 compared
to the third quarter of 1997. These reductions were partially
offset by the amortization of goodwill recognized with the
application of purchase accounting.
Interest income from investments related to the
refinancing of the Mansfield Plant lease increased other income
in the first nine months of 1998 compared to same period of 1997.
Total interest charges decreased due in part to the amortization
of net premiums associated with the revaluation of long-term debt
in connection with the merger.
Capital Resources and Liquidity
TE has continuing cash requirements for planned capital
expenditures and debt maturities. During the fourth quarter of
1998, capital requirements for property additions and capital
leases are expected to be about $13 million, including $2 million
for nuclear fuel. TE has additional cash requirements of
approximately $12.4 million to meet sinking fund requirements for
maturing long-term debt during the remainder of 1998. These cash
requirements are expected to be satisfied with internal cash
and/or short-term credit arrangements.
As of September 30, 1998, TE had approximately $101.0
million of cash and temporary investments and no short-term
indebtedness. Upon completion of the merger, application of
purchase accounting reduced bondable property such that TE is not
currently able to issue additional first mortgage bonds, except
against retired bonds.
Regulatory Matters
On September 16, 1998, FirstEnergy, together with
representatives of the three other Ohio investor-owned utilities,
presented proposed legislation for restructuring the electric
utility industry in Ohio to a private working group formed by the
leadership of the Ohio General Assembly. The working group, which
includes numerous interested parties, will consider the utility
proposal -- a proposal that represents a balanced approach for
bringing choice to Ohio's electric consumers -- as well as other
restructuring proposals. Passage of a restructuring bill appears
unlikely in 1998.
On September 24, 1998, the Federal Environmental
Protection Agency issued a final rule establishing tighter
nitrogen oxide emission ceilings for Ohio, Pennsylvania and 20
other Eastern states and the District of Columbia (see
"Environmental Matters" in Note 2). Controls must be in place by
May 2003, with required reductions achieved during the five-month
summer ozone season (May through September). The new rule is
expected to increase the cost of producing electricity; however,
- 39 -
<PAGE>
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
TE believes that it is in a better position than a number of
other utilities in achieving compliance due to its nuclear
generation capability.
In connection with the regulatory plans for its utility
operating companies to reduce fixed costs and lower rates,
FirstEnergy continued to take steps to restructure its operations
for improved efficiency and effectiveness in the changing
electric utility industry. FirstEnergy announced plans to
transfer its transmission assets (including TE's assets) into a
new subsidiary, American Transmission Systems, Inc. (ATS), with
the transfer expected to be finalized by early 1999. The new
subsidiary represents a first step toward FirstEnergy's goal of
establishing or becoming part of a larger independent
transmission company (TransCo). FirstEnergy believes that a
TransCo better addresses the Federal Energy Regulatory
Commission's (FERC) stated transmission objectives of providing
non-discriminatory service, while providing for streamlined and
cost-efficient operation. In working toward the goal of forming a
larger regional transmission entity, FirstEnergy, American
Electric Power and Virginia Power announced on November 6, 1998,
that they would prepare a FERC filing during the first quarter of
1999 for such a regional transmission entity. The entity would be
designed to meet the goals of reducing transmission costs that
result when transferring power over several transmission systems,
ensuring transmission reliability and providing non-
discriminatory access to the transmission grid.
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 TE's programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather
than the year 2000.
TE has developed a multi-phase program for Year 2000
compliance that consists of: (i) assessment of the corporate
systems and operations of TE that could be affected by the Year
2000 problem; (ii) remediation or replacement of noncompliant
systems and components; and (iii) testing of systems and
components following such remediation or replacement. TE has
focused its Year 2000 review on three areas: centralized system
applications, noncentralized systems and relationships with third
parties (including suppliers as well as end-use customers).
TE currently believes that, with modifications to
existing software and conversions to new software, the Year 2000
issue will pose no significant operational problems for its
computer systems. Most of TE's Year 2000 problems will be
resolved through system replacement. Of TE's major centralized
systems, the general ledger system and inventory management and
procurement accounts payable system will be replaced by the end
of 1998. TE's payroll system was enhanced to be Year 2000
compliant in July 1998; all employees will be converted to the
new system by January 1999. The customer service system is due to
be replaced in mid-1999.
TE has categorized its noncentralized systems into
sixteen separate areas, and has already determined that five of
such areas pose no material Year 2000 problem. TE has identified
certain Year 2000 issues in nine of such areas and is in the
process of remediating them. TE has plans to complete the
assessment of the final two areas by the end of 1998. TE plans to
complete the entire Year 2000 project by September 1999. If the
already identified modifications and conversions are not made or
are not completed on a timely basis, or if TE identifies material
additional modifications which are not completed on a timely
basis, the Year 2000 issue would have a material adverse impact
on operations.
TE has initiated formal communications with many of its
major suppliers to determine the extent to which it is vulnerable
to those third parties' failure to resolve their own Year 2000
problems and is still in the assessment phase as to whether and
to what extent such third parties have a Year 2000 issue. There
- 40 -
<PAGE>
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
can be no guarantee that the failure of other companies to
resolve their own Year 2000 issue will not have a material
adverse effect on TE's business, financial condition and results
of operations.
TE is utilizing both internal and external resources to
reprogram and/or replace and test TE's software for Year 2000
modifications. Of the $16 million total project cost,
approximately $13 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 benefits resulting from the system replacements).
The remaining $3 million will be expensed as incurred. As of
September 30, 1998, TE has expended a total of $7 million for
Year 2000 capital projects and had expensed approximately $1
million for Year 2000 related maintenance activities. TE's total
Year 2000 project cost, as well as its estimates of time needed
to complete remedial efforts, are based on currently available
information and do not include the estimated costs and time
associated with the impact of third party Year 2000 issues.
TE believes the most reasonably likely worst case
scenario from the Year 2000 issue to be disruption in power plant
monitoring systems, thereby producing inaccurate data and
potential failures in electronic switching mechanisms at
transmission junctions. This would prolong localized outages, as
technicians would have to manually activate switches. Such an
event could have a material, but presently undeterminable, effect
on TE's financial results. TE has not yet developed a contingency
plan to address the effects of any delay in becoming Year 2000
compliant but currently expects to have a contingency plan by the
spring of 1999.
The costs of the project and the dates on which TE
plans 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.
- 41 -
<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1998 1997 1998 1997
---------- -------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $87,885 $85,239 $246,732 $243,436
------- ------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 21,948 17,299 62,835 48,411
Nuclear operating costs 6,720 6,407 20,516 19,541
Other operating costs 14,952 13,870 40,725 45,122
------- ------- -------- --------
Total operation and maintenance expenses 43,620 37,576 124,076 113,074
Provision for depreciation 4,719 15,621 34,037 42,903
Amortization of net regulatory assets 8,406 1,845 12,096 5,535
General taxes 5,335 5,913 16,608 17,620
Income taxes 9,375 8,649 20,847 22,032
------- ------- -------- --------
Total operating expenses and taxes 71,455 69,604 207,664 201,164
------- ------- -------- --------
OPERATING INCOME 16,430 15,635 39,068 42,272
OTHER INCOME 569 795 1,942 1,789
------- ------- -------- --------
INCOME BEFORE NET INTEREST CHARGES 16,999 16,430 41,010 44,061
------- ------- -------- --------
NET INTEREST CHARGES:
Interest expense 5,234 5,669 15,951 17,066
Allowance for borrowed funds used during
construction (52) (133) (196) (269)
------- ------- -------- -------
Net interest charges 5,182 5,536 15,755 16,797
------- ------- -------- -------
INCOME BEFORE EXTRAORDINARY ITEM 11,817 10,894 25,255 27,264
EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 3) - - (30,522) -
------- ------- -------- --------
NET INCOME (LOSS) 11,817 10,894 (5,267) 27,264
PREFERRED STOCK DIVIDEND REQUIREMENTS 1,157 1,157 3,470 3,470
------- ------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $10,660 $ 9,737 $ (8,737) $ 23,794
======= ======= ======== ========
<FN>
The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company are an
integral part of these statements.
</TABLE>
- 42 -
<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In thousands)
ASSETS
------
<S> <C> <C>
UTILITY PLANT:
In service, at original cost $689,654 $1,237,562
Less--Accumulated provision for depreciation 285,242 508,981
-------- ----------
404,412 728,581
-------- ----------
Construction work in progress-
Electric plant 10,977 7,427
Nuclear fuel 118 6,788
-------- ----------
11,095 14,215
-------- ----------
415,507 742,796
-------- ----------
OTHER PROPERTY AND INVESTMENTS 32,259 26,157
-------- ----------
CURRENT ASSETS:
Cash and cash equivalents 4,094 660
Notes receivable from parent company 34,400 17,500
Receivables-
Customers (less accumulated provisions
of $3,596,000 and $3,609,000,
respectively, for uncollectible accounts) 34,949 33,934
Associated companies 15,674 15,764
Other 8,509 11,261
Materials and supplies, at average cost 15,985 14,973
Prepayments 5,511 1,707
-------- ----------
119,122 95,799
-------- ----------
DEFERRED CHARGES:
Regulatory assets 381,758 162,966
Other 6,155 6,739
-------- ----------
387,913 169,705
-------- ----------
$954,801 $1,034,457
======== ==========
</TABLE>
- 43 -
<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
<S> <C> <C>
CAPITALIZATION:
Common stockholder's equity-
Common stock, $30 par value, authorized
6,500,000 shares - 6,290,000 shares
outstanding $188,700 $ 188,700
Other paid-in capital (400) (400)
Retained earnings 78,900 103,677
-------- ----------
Total common stockholder's equity 267,200 291,977
Preferred stock-
Not subject to mandatory redemption 50,905 50,905
Subject to mandatory redemption 15,000 15,000
Long-term debt-
Associated companies 7,785 9,231
Other 281,636 280,074
-------- ----------
622,526 647,187
-------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 5,960 6,958
Other 512 1,443
Accounts payable-
Associated companies 7,768 6,788
Other 14,284 22,751
Accrued taxes 12,155 12,332
Accrued interest 3,982 6,588
Other 16,450 14,746
-------- ----------
61,111 71,606
-------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 208,209 239,952
Accumulated deferred investment tax credits 8,359 26,052
Other 54,596 49,660
-------- ----------
271,164 315,664
-------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) -------- ----------
$954,801 $1,034,457
======== ==========
<FN>
The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company are an
integral part of these balance sheets.
</TABLE>
- 44 -
<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1998 1997 1998 1997
---------- --------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 11,817 $10,894 $ (5,267) $27,264
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation 4,719 15,621 34,037 42,903
Nuclear fuel and lease amortization 1,460 1,658 3,252 6,467
Other amortization, net 8,511 1,553 11,664 4,631
Deferred income taxes, net 931 (1,857) (26,058) (8,464)
Investment tax credits, net (573) (629) (1,717) (1,748)
Extraordinary item - - 51,730 -
Receivables 881 (122) 1,827 11,365
Materials and supplies (839) 328 (1,012) (600)
Accounts payable (12,493) (5,025) (7,487) (9,177)
Other (1,638) 2,013 (7,505) (3,051)
-------- ------- -------- -------
Net cash provided from operating activities 12,776 24,434 53,464 69,590
-------- ------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt - 10,007 1,621 10,007
Redemptions and Repayments-
Long-term debt 1,443 12,103 3,994 26,415
Dividend Payments-
Common stock 5,347 5,347 16,040 16,040
Preferred stock 1,232 1,232 3,470 3,470
-------- ------- -------- -------
Net cash used for financing activities 8,022 8,675 21,883 35,918
-------- ------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 4,541 3,529 11,560 10,059
Loan to parent 4,400 11,500 16,900 22,000
Other (2,194) 1,211 (313) 2,988
-------- ------- -------- -------
Net cash used for investing activities 6,747 16,240 28,147 35,047
-------- ------- -------- -------
Net increase (decrease) in cash and cash equivalents (1,993) (481) 3,434 (1,375)
Cash and cash equivalents at beginning of period 6,087 493 660 1,387
-------- ------- -------- -------
Cash and cash equivalents at end of period $ 4,094 $ 12 $ 4,094 $ 12
======== ======= ======== =======
<FN>
The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company are an
integral part of these statements.
</TABLE
- 45 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennsylvania Power Company:
We have reviewed the accompanying balance sheet of Pennsylvania
Power Company (a Pennsylvania corporation and a wholly owned
subsidiary of Ohio Edison Company) as of September 30, 1998, and
the related statements of income and cash flows for the three-
month and nine-month periods ended September 30, 1998 and 1997.
These financial statements are the responsibility of the company's
management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to the financial statements
referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of Pennsylvania Power
Company as of December 31, 1997 (not presented herein), and, in
our report dated February 13, 1998, we expressed an unqualified
opinion on that statement. In our opinion, the information set
forth in the accompanying balance sheet as of December 31, 1997,
is fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
November 13, 1998
- 46 -
<PAGE>
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Earnings were adversely affected in the nine-month
period ended September 30, 1998 compared to the same period of
1997, by an extraordinary item resulting from the deregulation of
Penn's generation business and the corresponding discontinuation
of SFAS 71 with respect to that business. This action was taken
following the June 18, 1998, authorization by the PPUC of a
restructuring plan for Penn (see below and Note 3). Excluding the
extraordinary item, earnings on common stock were $21.8 million
in the first nine months of 1998 compared to $23.8 million in the
same period last year; for the third quarter of 1998, earnings on
common stock were $10.7 million compared to $9.7 million in the
third quarter of 1997.
Retail kilowatt-hour sales decreased 1.7% in the first
nine months of 1998 and increased 0.4% in the third quarter of
1998 from the same periods in 1997. Year-to-date results reflect
a decline in industrial sales which was more than offset in the
third quarter by growth in the residential and commercial
sectors. Closure of an electric arc facility at Caparo Steel
Company in August 1997, caused the reduced industrial sales.
Excluding sales to Caparo, sales to industrial customers in the
first nine months of 1998 increased 2.7% and sales in the third
quarter of 1998 were up 0.9% from the corresponding periods last
year. A general decline in electricity demand by primary metal
manufacturers also dampened industrial sales in the third quarter
of 1998. Residential sales increased 5.1% during the first nine
months of 1998 compared to the first nine months of 1997 and 8.5%
in the third quarter of 1998 from the same period last year.
Residential sales benefited from higher air-conditioning loads
due to hotter weather. Commercial sales also increased in both
the nine month and third quarter periods of 1998 from the
corresponding periods last year, by 7.8% and 10.7%, respectively,
reflecting continued growth in the service sector economy. Sales
to wholesale customers increased 9.9% in the first nine months of
1998 compared to the first nine months of 1997 and were up 34.1%
in the third quarter of 1998 compared to the same period last
year due to increased generation availability.
Fuel and purchased power expenses increased in both the
first nine months of 1998 and in the third quarter of 1998
compared to the same periods of 1997. Most of the increase in
purchased power costs occurred in the second quarter of 1998,
resulting from a combination of factors. In late June 1998, the
midwestern and southern regions of the United States experienced
electricity shortages caused mainly by record temperatures and
humidity and unscheduled generating unit outages. Due in part to
an unscheduled outage at Beaver Valley Unit 1, Penn's production
capability was reduced to the point that Penn purchased
significant amounts of power during this period. Temperatures
continued above last year's levels in the third quarter of 1998
as well and Beaver Valley Unit 1 remained out of service for
approximately half of that period. As a result, Penn purchased
significant amounts of power at unusually high spot market
prices, causing the increase in purchased power costs.
Other operating costs decreased in the first nine
months of 1998 compared to the same period of 1997 due to a $3
million charge for uncollectible accounts in the second quarter
of 1997. The provision for depreciation and amortization
decreased $10.9 million in the third quarter of 1998 from the
same period of 1997 primarily due to the effects of Penn's rate
restructuring plan authorized by the PPUC in the second quarter.
The rate restructuring plan resulted in a reduction in nuclear
generating unit investment due to the discontinued application of
SFAS 71 with a corresponding reduction in reported depreciation
expense. Penn's rate restructuring plan also resulted in a
reclassification of accelerated Perry 1 depreciation in the third
quarter of 1998 to amortization of net regulatory assets, further
reducing depreciation. The reclassification of depreciation
resulted in an increase in the amortization of net regulatory
assets in the third quarter of 1998 compared to the third quarter
of 1997.
- 47 -
<PAGE>
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
Capital Resources and Liquidity
Penn has continuing cash requirements for planned
capital expenditures. During the fourth quarter of 1998, capital
requirements for property additions and capital leases are
expected to be about $8 million, including $2 million for nuclear
fuel. These requirements are expected to be satisfied with
internal cash.
As of September 30, 1998, Penn had approximately $38.5
million of cash and temporary investments and no short-term
indebtedness. Penn had $2 million of unused bank facilities as of
September 30, 1998, which may be borrowed for up to several days
at the banks' discretion.
In connection with the regulatory plans for its utility
operating companies to reduce fixed costs and lower rates,
FirstEnergy continued to take steps to restructure its operations
for improved efficiency and effectiveness in the changing
electric utility industry. FirstEnergy announced plans to
transfer its transmission assets (including Penn's assets) into a
new subsidiary, American Transmission Systems, Inc. (ATS), with
the transfer expected to be finalized by early 1999. The new
subsidiary represents a first step toward FirstEnergy's goal of
establishing or becoming part of a larger independent
transmission company (TransCo). FirstEnergy believes that a
TransCo better addresses the Federal Energy Regulatory
Commission's (FERC) stated transmission objectives of providing
non-discriminatory service, while providing for streamlined and
cost-efficient operation. In working toward the goal of forming a
larger regional transmission entity, FirstEnergy, American
Electric Power and Virginia Power announced on November 6, 1998,
that they would prepare a FERC filing during the first quarter of
1999 for such a regional transmission entity. The entity would be
designed to meet the goals of reducing transmission costs that
result when transferring power over several transmission systems,
ensuring transmission reliability and providing non-
discriminatory access to the transmission grid.
FirstEnergy signed an agreement in principle with
Duquesne Light Company that would result in the transfer of 1,436
megawatts owned by Duquesne at five generating plants in exchange
for 1,298 megawatts at three plants owned by FirstEnergy's
utility operating companies (see "Pending Exchange of Assets" in
Note 2) including Penn. A final agreement on the exchange of
assets, which will be structured as a tax-free transaction to the
extent possible, is expected to be reached by the end of the
year. The transaction benefits the Companies by providing them
with exclusive ownership and operating control of all the
generating assets that are now jointly owned and operated under
the Central Area Power Coordination Group agreement. Certain
details of the arrangement such as the specific allocation of
generation assets among the Companies remains to be determined.
On September 24, 1998, the Federal Environmental
Protection Agency issued a final rule establishing tighter
nitrogen oxide emission ceilings for Pennsylvania, Ohio and 20
other Eastern states and the District of Columbia (see
"Environmental Matters" in Note 2). Controls must be in place by
May 2003, with required reductions achieved during the five-month
summer ozone season (May through September). The new rule is
expected to increase the cost of producing electricity; however,
Penn believes that it is in a better position than a number of
other utilities in achieving compliance due to its nuclear
generation capability.
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 Penn's programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather
than the year 2000.
- 48 -
<PAGE>
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
Penn has developed a multi-phase program for Year 2000
compliance that consists of: (i) assessment of the corporate
systems and operations of Penn that could be affected by the Year
2000 problem; (ii) remediation or replacement of noncompliant
systems and components; and (iii) testing of systems and
components following such remediation or replacement. Penn has
focused its Year 2000 review on three areas: centralized system
applications, noncentralized systems and relationships with third
parties (including suppliers as well as end-use customers).
Penn currently believes that, with modifications to
existing software and conversions to new software, the Year 2000
issue will pose no significant operational problems for its
computer systems. Most of Penn's Year 2000 problems will be
resolved through system replacement. Of Penn's major centralized
systems, the general ledger system and inventory management and
procurement accounts payable system will be replaced by the end
of 1998. Penn's payroll system was enhanced to be Year 2000
compliant in July 1998. The customer service system is due to be
replaced in mid-1999.
Penn has categorized its noncentralized systems into
sixteen separate areas, and has already determined that five of
such areas pose no material Year 2000 problem. Penn has
identified certain Year 2000 issues in nine areas and is in the
process of remediating them. Penn has plans to complete the
assessment of the final two areas by the end of 1998. Penn plans
to complete the entire Year 2000 project by September 1999. If
the already identified modifications and conversions are not made
or are not completed on a timely basis, or if Penn identifies
material additional modifications which are not completed on a
timely basis, the Year 2000 issue would have a material adverse
impact on operations.
Penn has initiated formal communications with many of
its major suppliers to determine the extent to which it is
vulnerable to those third parties' failure to resolve their own
Year 2000 problems and is still in the assessment phase as to
whether and to what extent such third parties have a Year 2000
issue. There can be no guarantee that the failure of other
companies to resolve their own Year 2000 issue will not have a
material adverse effect on Penn's business, financial condition
and results of operations.
Penn is utilizing both internal and external resources
to reprogram and/or replace and test Penn's software for Year
2000 modifications. Of the $7 million total project cost,
approximately $6 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 benefits resulting from the system replacements).
The remaining $1 million will be expensed as incurred. As of
September 30, 1998, Penn had expended a total of $3 million for
Year 2000 capital projects and had expensed approximately
$400,000 for Year 2000 related maintenance activities. Penn's
total Year 2000 project cost, as well as its estimates of the
time needed to complete remedial efforts, are based on currently
available information and do not include the estimated costs and
time associated with the impact of third party Year 2000 issues.
Penn believes the most reasonably likely worst case
scenario from the Year 2000 issue to be disruption in power plant
monitoring systems, thereby producing inaccurate data and
potential failures in electronic switching mechanisms at
transmission junctions. This would prolong localized outages, as
technicians would have to manually activate switches. Such an
event could have a material, but presently undeterminable, effect
on Penn's financial results. Penn has not yet developed a
contingency plan to address the effects of any delay in becoming
Year 2000 compliant but currently expects to have a contingency
plan by the spring of 1999.
The costs of the project and the dates on which Penn
plans 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.
- 49 -
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 5. Other Information
-----------------
FirstEnergy's Code of Regulations requires a shareholder
to give appropriate notice to the Company before any
business requested to be brought before an annual meeting
of the Company's shareholders by that shareholder can be
considered at the meeting. Appropriate notice in this
case is notice to the Company's Corporate Secretary
received at least 60 days prior to the meeting. Business
that a shareholder requests be brought before the 1999
Annual Meeting as to which appropriate notice is given to
the Company on or before February 3, 1999, will be
referred to in the Company's proxy materials for that
meeting, but such business as to which the Company
receives notice after that date will not. In either case,
the rules contained in Regulation 14a-4(c) under the
Securities Exchange Act of 1934 relating to the
conferring of discretionary voting authority in a proxy
will apply.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number
-------
FirstEnergy, OE, CEI and Penn
-----------------------------
15 Letter from independent public accountants.
TE
--
None
Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of
Regulation S-K, FirstEnergy, or, respectively, any of
the Companies, has not filed as an exhibit to this Form
10-Q any instrument with respect to long-term debt if
the respective total amount of securities authorized
thereunder does not exceed 10% of the total assets of
FirstEnergy and its subsidiaries on a consolidated
basis, or respectively, any of the Companies, but hereby
agrees to furnish to the Commission on request any such
documents.
(b) Reports on Form 8-K
FirstEnergy, OE, CEI, TE, Penn - Two combined
------------------------------
reports on Form 8-K were filed since June 30, 1998.
A report dated July 6, 1998 reported events
affecting second quarter 1998 results of operations
for FirstEnergy and its four operating subsidiaries
including power supply transactions, power marketing
and trading transactions, and Penn's rate
restructuring plan. A report dated October 15, 1998
reported that FirstEnergy will transfer its
transmission assets into a new subsidiary and has
signed an agreement in principle with Duquesne
Light Company (Duquesne) that would result in an
exchange of certain generating assets between
FirstEnergy's operating subsidiaries and Duquesne.
- 50 -
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
November 13, 1998
FIRSTENERGY CORP.
-----------------
Registrant
OHIO EDISON COMPANY
-------------------
Registrant
THE CLEVELAND ELECTRIC
----------------------
ILLUMINATING COMPANY
--------------------
Registrant
THE TOLEDO EDISON COMPANY
-------------------------
Registrant
/s/ Harvey L. Wagner
---------------------------------
Harvey L. Wagner
Controller
Principal Accounting Officer
PENNSYLVANIA POWER COMPANY
--------------------------
Registrant
/s/ Harvey L. Wagner
---------------------------------
Harvey L. Wagner
Comptroller
Principal Accounting Officer
- 51 -
</TABLE>
EXHIBIT 15
November 13, 1998
FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Gentlemen:
We are aware that FirstEnergy Corp. has incorporated by reference
in its Registration Statements No. 333-48587, No. 333-48651, No.
333-58279 and No. 333-65409 its Form 10-Q for the quarter ended
September 30, 1998, which includes our report dated November 13,
1998 covering the unaudited interim financial information
contained therein. Pursuant to Regulation C of the Securities Act
of 1933, that report is not considered a part of the registration
statements prepared or certified by our firm or a report prepared
or certified by our firm within the meaning of Sections 7 and 11
of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the related
Form 10-Q financial statements for FirstEnergy Corp. and is qualified in its
entirety by reference to such financial statements. (Amounts in 1,000's, except
earnings per share). Income tax expense includes $(4,999,000) related to other
income and $(21,208,000) related to extraordinary item.
</LEGEND>
<CIK> 0001031296
<NAME> FIRSTENERGY CORP.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 9,077,552
<OTHER-PROPERTY-AND-INVEST> 2,567,520
<TOTAL-CURRENT-ASSETS> 1,174,903
<TOTAL-DEFERRED-CHARGES> 5,403,076
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 18,223,051
<COMMON> 23,707
<CAPITAL-SURPLUS-PAID-IN> 3,702,533
<RETAINED-EARNINGS> 709,804
<TOTAL-COMMON-STOCKHOLDERS-EQ> 4,436,044
313,460
660,195
<LONG-TERM-DEBT-NET> 6,606,324
<SHORT-TERM-NOTES> 228,470
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 119,980
<LONG-TERM-DEBT-CURRENT-PORT> 518,674
21,404
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 62,848
<OTHER-ITEMS-CAPITAL-AND-LIAB> 5,255,652
<TOT-CAPITALIZATION-AND-LIAB> 18,223,051
<GROSS-OPERATING-REVENUE> 3,893,795
<INCOME-TAX-EXPENSE> 237,656
<OTHER-OPERATING-EXPENSES> 2,842,848
<TOTAL-OPERATING-EXPENSES> 3,106,711
<OPERATING-INCOME-LOSS> 787,084
<OTHER-INCOME-NET> 9,961
<INCOME-BEFORE-INTEREST-EXPEN> 797,045
<TOTAL-INTEREST-EXPENSE> 450,348
<NET-INCOME> 316,175
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 253,017
<TOTAL-INTEREST-ON-BONDS> 515,805
<CASH-FLOW-OPERATIONS> 797,740
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.40
</TABLE>
EXHIBIT 15
November 13, 1998
Ohio Edison Company
76 South Main Street
Akron, OH 44308
Gentlemen:
We are aware that Ohio Edison Company has incorporated by
reference in its Registration Statements No. 33-49135, No. 33-
49259, No. 33-49413, No. 33-51139, No. 333-01489 and No. 333-05277
its Form 10-Q for the quarter ended September 30, 1998, which
includes our report dated November 13, 1998 covering the unaudited
interim financial information contained therein. Pursuant to
Regulation C of the Securities Act of 1933, that report is not
considered a part of the registration statements prepared or
certified by our firm or a report prepared or certified by our
firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the related
Form 10-Q financial statements for Ohio Edison Company and is qualified in its
entirety by reference to such financial statements. (Amounts in 1,000's).
Income tax expense includes $15,115,000 related to other income and
$(21,208,000) related to extraordinary item.
</LEGEND>
<CIK> 0000073960
<NAME> OHIO EDISON COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,756,565
<OTHER-PROPERTY-AND-INVEST> 1,184,985
<TOTAL-CURRENT-ASSETS> 933,015
<TOTAL-DEFERRED-CHARGES> 2,001,641
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 8,876,206
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 2,098,114
<RETAINED-EARNINGS> 533,398
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,631,513
145,000
211,870
<LONG-TERM-DEBT-NET> 2,405,875
<SHORT-TERM-NOTES> 186,205
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 119,980
<LONG-TERM-DEBT-CURRENT-PORT> 267,323
5,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 4,014
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,899,426
<TOT-CAPITALIZATION-AND-LIAB> 8,876,206
<GROSS-OPERATING-REVENUE> 1,912,689
<INCOME-TAX-EXPENSE> 115,068
<OTHER-OPERATING-EXPENSES> 1,446,063
<TOTAL-OPERATING-EXPENSES> 1,567,224
<OPERATING-INCOME-LOSS> 345,465
<OTHER-INCOME-NET> 36,857
<INCOME-BEFORE-INTEREST-EXPEN> 382,322
<TOTAL-INTEREST-EXPENSE> 177,029
<NET-INCOME> 174,771
9,057
<EARNINGS-AVAILABLE-FOR-COMM> 165,714
<COMMON-STOCK-DIVIDENDS> 254,007
<TOTAL-INTEREST-ON-BONDS> 193,116
<CASH-FLOW-OPERATIONS> 595,209
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 15
November 13, 1998
The Cleveland Electric
Illuminating Company
76 South Main Street
Akron, OH 44308
Gentlemen:
We are aware that The Cleveland Electric Illuminating Company has
incorporated by reference in its Registration Statements No. 33-
55513 and No. 333-47651 its Form 10-Q for the quarter ended
September 30, 1998, which includes our report dated November 13,
1998 covering the unaudited interim financial information
contained therein. Pursuant to Regulation C of the Securities Act
of 1933, that report is not considered a part of the registration
statements prepared or certified by our firm or a report prepared
or certified by our firm within the meaning of Sections 7 and 11
of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the related
Form 10-Q financial statements for The Cleveland Electric Illuminating Company
and is qualified in its entirety by reference to such financial statements.
Income tax expense includes $6,389,000 related to other income.
</LEGEND>
<CIK> 0000020947
<NAME> THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,093,111
<OTHER-PROPERTY-AND-INVEST> 675,649
<TOTAL-CURRENT-ASSETS> 444,957
<TOTAL-DEFERRED-CHARGES> 2,213,129
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6,426,846
<COMMON> 931,312
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 101,251
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,032,563
168,460
238,325
<LONG-TERM-DEBT-NET> 2,956,689
<SHORT-TERM-NOTES> 60,838
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 132,530
14,714
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 34,232
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,788,495
<TOT-CAPITALIZATION-AND-LIAB> 6,426,846
<GROSS-OPERATING-REVENUE> 1,392,868
<INCOME-TAX-EXPENSE> 102,141
<OTHER-OPERATING-EXPENSES> 995,801
<TOTAL-OPERATING-EXPENSES> 1,091,553
<OPERATING-INCOME-LOSS> 301,315
<OTHER-INCOME-NET> 21,616
<INCOME-BEFORE-INTEREST-EXPEN> 322,931
<TOTAL-INTEREST-EXPENSE> 173,442
<NET-INCOME> 149,489
17,053
<EARNINGS-AVAILABLE-FOR-COMM> 132,436
<COMMON-STOCK-DIVIDENDS> 54,122
<TOTAL-INTEREST-ON-BONDS> 224,406
<CASH-FLOW-OPERATIONS> 210,130
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the related
Form 10-Q financial statements for The Toledo Edison Company and is qualified in
its entirety by reference to such financial statements. (Amounts in 1,000's).
Income tax expense includes $5,277,000 related to other income.
</LEGEND>
<CIK> 0000352049
<NAME> THE TOLEDO EDISON COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,167,470
<OTHER-PROPERTY-AND-INVEST> 408,906
<TOTAL-CURRENT-ASSETS> 198,685
<TOTAL-DEFERRED-CHARGES> 972,613
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,747,674
<COMMON> 195,670
<CAPITAL-SURPLUS-PAID-IN> 328,193
<RETAINED-EARNINGS> 48,470
<TOTAL-COMMON-STOCKHOLDERS-EQ> 572,333
0
210,000
<LONG-TERM-DEBT-NET> 1,086,227
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 116,200
1,690
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 24,602
<OTHER-ITEMS-CAPITAL-AND-LIAB> 736,622
<TOT-CAPITALIZATION-AND-LIAB> 2,747,674
<GROSS-OPERATING-REVENUE> 714,116
<INCOME-TAX-EXPENSE> 57,262
<OTHER-OPERATING-EXPENSES> 521,118
<TOTAL-OPERATING-EXPENSES> 573,103
<OPERATING-INCOME-LOSS> 141,013
<OTHER-INCOME-NET> 9,573
<INCOME-BEFORE-INTEREST-EXPEN> 150,586
<TOTAL-INTEREST-EXPENSE> 64,764
<NET-INCOME> 85,822
9,680
<EARNINGS-AVAILABLE-FOR-COMM> 76,142
<COMMON-STOCK-DIVIDENDS> 36,786
<TOTAL-INTEREST-ON-BONDS> 86,829
<CASH-FLOW-OPERATIONS> 196,799
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 15
November 13, 1998
Pennsylvania Power Company
1 E. Washington Street
P. O. Box 891
New Castle, PA 16103
Gentlemen:
We are aware that Pennsylvania Power Company has incorporated by
reference in its Registration Statements No. 33-47372, No. 33-
62450 and No. 33-65156 its Form 10-Q for the quarter ended
September 30, 1998, which includes our report dated November 13,
1998 covering the unaudited interim financial information
contained therein. Pursuant to Regulation C of the Securities Act
of 1933, that report is not considered a part of the registration
statements prepared or certified by our firm or a report prepared
or certified by our firm within the meaning of Sections 7 and 11
of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the related
Form 10-Q financial statements for Pennsylvania Power Company and is qualified
in its entirety by reference to such financial statements. (Amounts in
1,000's). Income tax includes $466,000 related to other income and
$(21,208,000) related to extraordinary item.
</LEGEND>
<CIK> 0000077278
<NAME> PENNSYLVANIA POWER COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 415,507
<OTHER-PROPERTY-AND-INVEST> 32,259
<TOTAL-CURRENT-ASSETS> 119,122
<TOTAL-DEFERRED-CHARGES> 387,913
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 954,801
<COMMON> 188,700
<CAPITAL-SURPLUS-PAID-IN> (400)
<RETAINED-EARNINGS> 78,900
<TOTAL-COMMON-STOCKHOLDERS-EQ> 267,200
15,000
50,905
<LONG-TERM-DEBT-NET> 289,421
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 6,472
<OTHER-ITEMS-CAPITAL-AND-LIAB> 325,803
<TOT-CAPITALIZATION-AND-LIAB> 954,801
<GROSS-OPERATING-REVENUE> 246,732
<INCOME-TAX-EXPENSE> 105
<OTHER-OPERATING-EXPENSES> 186,817
<TOTAL-OPERATING-EXPENSES> 207,664
<OPERATING-INCOME-LOSS> 39,068
<OTHER-INCOME-NET> 1,942
<INCOME-BEFORE-INTEREST-EXPEN> 41,010
<TOTAL-INTEREST-EXPENSE> 15,755
<NET-INCOME> (5,267)
3,470
<EARNINGS-AVAILABLE-FOR-COMM> (8,737)
<COMMON-STOCK-DIVIDENDS> 16,040
<TOTAL-INTEREST-ON-BONDS> 19,192
<CASH-FLOW-OPERATIONS> 53,464
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
