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 June 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 AUGUST 12, 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 1-3
FirstEnergy Corp.
Consolidated Statements of Income 4
Consolidated Balance Sheets 5-6
Consolidated Statements of Cash Flows 7
Report of Independent Public Accountants 8
Management's Discussion and Analysis of
Results of Operations and Financial Condition 9-11
Ohio Edison Company
Consolidated Statements of Income 12
Consolidated Balance Sheets 13-14
Consolidated Statements of Cash Flows 15
Report of Independent Public Accountants 16
Management's Discussion and Analysis of
Results of Operations and Financial Condition 17-18
The Cleveland Electric Illuminating Company
Consolidated Statements of Income 19
Consolidated Balance Sheets 20-21
Consolidated Statements of Cash Flows 22
Report of Independent Public Accountants 23
Management's Discussion and Analysis of
Results of Operations and Financial Condition 24-25
The Toledo Edison Company
Consolidated Statements of Income 26
Consolidated Balance Sheets 27-28
Consolidated Statements of Cash Flows 29
Report of Independent Public Accountants 30
Management's Discussion and Analysis of
Results of Operations and Financial Condition 31-32
Pennsylvania Power Company
Statements of Income 33
Balance Sheets 34-35
Statements of Cash Flows 36
Report of Independent Public Accountants 37
Management's Discussion and Analysis of
Results of Operations and Financial Condition 38-39
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 $281 million (OE-$134 million, CEI-
$87million, TE-$42 million and Penn-$18 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 June 30, 1998, the Companies' share of the
guarantees was $46.6 million (OE-$26.9 million, CEI-$10.0
million, TE-$5.8 million and Penn-$3.9 million). The price under
the coal supply contract, which includes certain minimum
payments, has been determined to be sufficient to satisfy the
debt and lease obligations.
- 1 -
<PAGE>
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. The Environmental Protection Agency (EPA) is conducting
additional studies which could indicate the need for additional
NOx reductions from the Companies' Pennsylvania facilities by the
year 2003. In addition, the EPA is also considering the need for
additional NOx reductions from the Companies' Ohio facilities. On
November 7, 1997, the EPA proposed uniform reductions of NOx
emissions across a region of twenty-two states, including Ohio and
the District of Columbia (NOx Transport Rule) after determining
that such NOx emissions are contributing significantly to ozone
pollution in the eastern United States. In a separate but related
action, eight states filed petitions with the EPA under Section
126 of the Clean Air Act seeking reductions of NOx emissions which
are alleged to contribute to ozone pollution in the eight
petitioning states. A December 1997 EPA Memorandum of Agreement
proposes to finalize the NOx Transport Rule by September 30, 1998
and establishes a schedule for EPA action on the Section 126
petitions. The cost of NOx reductions, if required, may be
substantial. The Companies continue to evaluate their compliance
plans and other compliance options.
The Companies are required to meet federally approved SO2
regulations. Violations of such regulations can result in shutdown
of the generating unit involved and/or civil or criminal penalties
of up to $25,000 for each day the unit is in violation. The EPA
has an interim enforcement policy for SO2 regulations in Ohio that
allows for compliance based on a 30-day averaging period. The
Companies cannot predict what action the EPA may take in the
future with respect to the interim enforcement policy.
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
June 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
required increase in operating costs, would ultimately be
recovered from their customers.
3. REGULATORY ACCOUNTING-
On June 18, 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
- 2 -
<PAGE>
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 the
Consolidated Statement 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 six months ended
June 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.
<TABLE>
<CAPTION>
FE CEI TE
-- --- --
(In millions, except per share amounts)
<S> <C> <C> <C>
Three Months Ended June 30, 1997
-------------------------------
Operating Revenues $1,200 $428 $222
Operating Expenses and Taxes 955 348 183
------ ---- ----
Operating Income 245 80 39
Other Income (Expense) 13 (3) 2
Net Interest Charges 155 55 22
------ ---- ----
Net Income $ 103 $ 22 $ 19
====== ==== ====
Earnings per Share of Common Stock $ .47
======
Six Months Ended June 30, 1997
------------------------------
Operating Revenues $2,410 $860 $439
Operating Expenses and Taxes 1,920 698 364
------ ---- ----
Operating Income 490 162 75
Other Income (Expense) 26 (3) 3
Net Interest Charges 308 108 44
------ ---- ----
Net Income $ 208 $ 51 $ 34
====== ==== ====
Earnings per Share of Common Stock $ .94
======
</TABLE>
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.
- 3 -
<PAGE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES $1,277,061 $ 593,250 $2,477,054 $1,198,024
---------- --------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 323,399 100,689 533,092 209,790
Nuclear operating costs 117,050 67,320 247,112 135,843
Other operating costs 229,872 107,079 441,692 195,069
---------- --------- ---------- ----------
Total operation and maintenance expenses 670,321 275,088 1,221,896 540,702
Provision for depreciation and amortization 166,324 86,615 333,897 186,573
Amortization of net regulatory assets 22,520 7,421 44,377 14,841
General taxes 135,108 55,436 271,482 116,973
Income taxes 61,892 42,736 138,783 86,632
---------- --------- ---------- ----------
Total operating expenses and taxes 1,056,165 467,296 2,010,435 945,721
---------- --------- ---------- ----------
OPERATING INCOME 220,896 125,954 466,619 252,303
OTHER INCOME (EXPENSE) (6,327) 14,075 15,236 27,570
---------- --------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 214,569 140,029 481,855 279,873
---------- --------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 132,717 51,713 262,331 104,338
Allowance for borrowed funds used during
construction and capitalized interest (1,187) (381) (2,668) (761)
Other interest expense 4,622 7,955 10,795 15,673
Subsidiaries' preferred stock dividend
requirements 18,463 6,981 27,791 13,962
---------- --------- ---------- ----------
Net interest charges 154,615 66,268 298,249 133,212
---------- --------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 59,954 73,761 183,606 146,661
EXTRAORDINARY ITEM (NET OF INCOME TAXES)
(Note 3) (30,522) - (30,522) -
---------- --------- ---------- ----------
NET INCOME $ 29,432 $ 73,761 $ 153,084 $ 146,661
========== ========= ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 223,987 144,468 223,197 144,406
======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK:
Before extraordinary item $ .27 $ .51 $ .83 $1.02
Extraordinary item (Net of income taxes)
(Note 3) (.14) - (.14) -
------ ------ ------ -----
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK $ .13 $ .51 $ .69 $1.02
====== ====== ====== =====
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ .375 $ .375 $ .75 $ .75
====== ====== ====== =====
<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>
June 30, December 31,
1998 1997
----------- -------------
(In thousands)
<S> <C> <C>
ASSETS
------
UTILITY PLANT:
In service $14,441,698 $15,008,448
Less--Accumulated provision for depreciation 5,549,051 5,635,900
----------- -----------
8,892,647 9,372,548
----------- -----------
Construction work in progress-
Electric plant 210,275 165,837
Nuclear fuel 31,712 34,825
----------- -----------
241,987 200,662
----------- -----------
9,134,634 9,573,210
----------- -----------
OTHER PROPERTY AND INVESTMENTS:
Capital trust investments 1,332,604 1,370,177
Nuclear plant decommissioning trusts 327,481 301,173
Letter of credit collateralization 277,763 277,763
Other. 594,995 357,989
----------- -----------
2,532,843 2,307,102
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents 70,965 98,237
Receivables-
Customers (less accumulated provisions of
$6,227,000 and $5,618,000, respectively,
for uncollectible accounts) 248,243 284,162
Other (less accumulated provisions of $36,932,000
and $4,026,000,respectively, for uncollectible
accounts) 378,723 219,106
Materials and supplies, at average cost-
Owned 139,558 154,961
Under consignment 112,386 82,839
Prepayments and other 201,418 163,686
----------- ----------
1,151,293 1,002,991
----------- ----------
DEFERRED CHARGES:
Regulatory assets 2,783,213 2,624,144
Goodwill 2,256,883 2,107,795
Property taxes 270,647 270,585
Other 206,176 194,968
----------- -----------
5,516,919 5,197,492
----------- -----------
$18,335,689 $18,080,795
=========== ===========
</TABLE>
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<PAGE>
<TABLE>
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 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 3,838,866 3,636,908
Retained earnings 632,753 646,646
Unallocated employee stock ownership plan
common stock - 7,663,745 and 7,829,538 shares,
respectively (143,864) (146,977)
----------- -----------
Total common stockholders' equity 4,351,462 4,159,598
Preferred stock of consolidated subsidiaries-
Not subject to mandatory redemption 660,195 660,195
Subject to mandatory redemption 199,460 214,864
OE obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely OE
subordinated debentures 120,000 120,000
Long-term debt 6,996,796 6,969,835
----------- -----------
12,327,913 12,124,492
----------- -----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 407,184 470,436
Short-term borrowings 202,738 302,229
Accounts payable 506,476 312,690
Accrued taxes 386,295 381,937
Accrued interest 144,767 147,694
Other 197,420 193,850
----------- -----------
1,844,880 1,808,836
----------- -----------
DEFERRED CREDITS:
Accumulated deferred income taxes 2,286,385 2,304,305
Accumulated deferred investment tax credits 296,886 324,200
Pensions and other postretirement benefits 509,850 492,425
Other 1,069,775 1,026,537
----------- -----------
4,162,896 4,147,467
----------- -----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ----------- -----------
$18,335,689 $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 Six Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,432 $ 73,761 $ 153,084 $146,661
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and amortization 166,324 86,615 333,897 186,573
Nuclear fuel and lease amortization 16,319 14,297 40,632 28,642
Other amortization, net 12,838 7,119 34,423 14,229
Deferred income taxes, net (24,953) (8,255) (15,251) (16,696)
Investment tax credits, net (5,568) (3,338) (11,339) (7,164)
Extraordinary item 51,730 - 51,730 -
Receivables 48,421 6,612 88,486 23,964
Materials and supplies 197 (10,613) (9,797) (9,561)
Accounts payable 1,526 9,176 (35,149) 5,312
Other (17,520) (16,075) (98,458) 1,134
--------- --------- --------- --------
Net cash provided from operating activities 278,746 159,299 532,258 373,094
--------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Common stock 203,855 - 203,855 -
Long-term debt 114,286 41,318 262,405 70,523
Ohio Schools Council Prepayment Program 116,598 - 116,598 -
Redemptions and Repayments-
Preferred stock 15,379 - 15,379 -
Long-term debt 189,930 104,056 349,911 216,543
Short-term borrowings, net 87,599 13,996 108,443 43,503
Common stock dividend payments 83,586 56,419 166,977 109,960
--------- --------- --------- --------
Net cash provided from (used for) financing
activities 58,245 (133,153) (57,852) (299,483)
--------- --------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 307,120 29,196 371,224 63,577
Cash investments 66 - 111,610 -
Other 7,685 1,748 18,844 4,798
--------- --------- --------- --------
Net cash used for investing activities 314,871 30,944 501,678 68,375
--------- --------- --------- --------
Net increase (decrease) in cash and cash
equivalents 22,120 (4,798) (27,272) 5,236
Cash and cash equivalents at beginning of period 48,845 15,287 98,237 5,253
--------- --------- --------- --------
Cash and cash equivalents at end of period $ 70,965 $ 10,489 $ 70,965 $ 10,489
========= ========= ========= ========
<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>
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
June 30, 1998, and the related consolidated statements of income
and cash flows for the three-month and six-month periods ended
June 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, 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
August 12, 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. Financial results in the second quarter of 1998 were
adversely affected by a combination of these factors as described
below. Expenses in the third quarter of 1998 are expected to be
adversely affected, to a lesser extent, from trading losses due to the
continuing price volatility in the regional power market.
Results of Operations
Basic and diluted earnings on common stock decreased to
$.69 per share for the six-month period ended June 30, 1998,
compared to $1.02 per share for the same period last year. For
the second quarter of 1998, earnings decreased to $.13 per share,
compared to $.51 per share for the second 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 second quarter and year-to-date 1998 results.
The 1997 second quarter and six-month results are
for OE and Penn only (OE companies). Also, 1998 second quarter
and six-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, 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
net income by approximately $50 million, or $.22 per common
share. Finally, the unprecedented market prices for electricity
in June 1998, contributed to a credit loss of $25 million after
taxes or $.11 per common share. One power marketer with which the
Company's FirstEnergy Trading and Power Marketing Corp.
subsidiary had transactions under contract defaulted, and others
may be unable to perform as a result of June's price movements.
Operating revenues increased $1.279 billion during the
six-month period ending June 30, 1998, compared to the same
period of 1997, and increased $684 million in the second quarter
of 1998 compared to the second quarter of 1997. Excluding the
contribution of the former Centerior companies, operating
revenues were 4.3% higher during the quarter and 1.5% 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 decreased 0.2%, with a 3.2% increase in commercial sales
offset 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 facility, industrial sales increased 0.2%
and retail sales were 0.8% higher. Residential sales were down
slightly in the year-to-date period ending June 30, 1998, with a
0.4% decrease from last year. Sales to wholesale customers
increased 7.8% compared to the first half of 1997. This increase
contributed to the 1.1% increase in total kilowatt-hour sales
during the period.
Retail kilowatt-hour sales in the second quarter of 1998
for the OE companies increased 2.4% with residential and
commercial sales being 4.0% and 8.5% 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 2.4% during the second
quarter of 1998 compared to the same period of 1997. However,
removing the impact of the electric arc furnace closure,
industrial sales were slightly higher. Sales to wholesale
customers increased 16.4% in the second quarter compared to the
same period last year contributing to the increase in total sales
of 4.6%.
- 9 -
<PAGE>
All operation and maintenance expense categories increased
substantially in the first half 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
$67.5 million in the first half of 1998 compared to the first six
months of 1997. Most of the increase for the OE companies
resulted from purchased power expenses which were up $57.7
million in the first half of 1998 from the same period in 1997.
That increase was the result of 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, the Beaver Valley Plant remained out
of service and the Company's Davis-Besse Nuclear Power Station
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 the increase
in purchased power costs. Excluding last year's credits from
emission allowance sales, other operation and maintenance
expenses were down in the first six months of 1998 from the same
period in 1997.
Inclusion of the former Centerior companies also increased
other operating expenses. Excluding those companies' 1998 costs, the
provision for depreciation and amortization increased $9.9
million or 5.3% for the six-month period ending June 30, 1998
compared to the first half of 1997. Of that increase, $9.1
million occurred in the second quarter of 1998 resulting
principally from accelerated depreciation under OE's regulatory
plan. Amortization of net regulatory assets also increased in the
first half of 1998 from the comparable 1997 period due to the
absence in 1998 of certain regulatory credits which were fully
amortized in 1997.
Other income (expense) in the second quarter of 1998
included the $25 million after-tax reserve for credit losses
discussed above. For the OE companies, other income was down
slightly in the first half of 1998 and the second quarter of 1998
compared to the same periods of 1997, due principally to reduced
investment income.
Interest expenses increased due to the inclusion of the
former Centerior companies for both the six-month period ended
June 30, 1998 and the second quarter of 1998, from the
corresponding periods in 1997. Excluding the impact of the
merger, interest on long-term debt decreased due to redemptions
of long-term debt totaling $333.9 million since July 1997.
Other interest expense increased as a result of increased short-
term borrowing levels in 1998.
Capital Resources and Liquidity
The Companies have continuing cash requirements for
planned capital expenditures and debt maturities. During the last
half of 1998, capital requirements for property additions and
capital leases for the utility operating companies are expected
to be about $181 million, including $19 million for nuclear fuel.
The Companies have additional cash requirements of approximately
$85.6 million to meet sinking fund requirements for preferred
stock and 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 June 30, 1998, the Companies had about $71.0 million
of cash and temporary investments and $202.7 million of short-
term indebtedness. The Companies' unused borrowing capability
included $235 million under revolving lines of credit and $15
million of bank facilities that provide for borrowings on a
short-term basis at the banks' discretion.
On July 3, 1998, CEI optionally redeemed $150 million
principal amount of first mortgage bonds having a weighted
average interest rate of 8.56%. TE completed an optional
redemption of a $26 million, 7.5% first mortgage bond on the same
date.
- 10 -
<PAGE>
Under the Company's "Energy for Education" program,
eligible public schools in CEI's service area entered into a
special eight-year contract to receive a 10% base rate reduction
and a discount for prepaying their estimated electric bills
through the year 2005. In April 1998, CEI received a $116.6
million prepayment under this program.
CEI and TE residential customers received a $3 reduction
in their monthly bills beginning June 5, 1998, as part of the
Rate Reduction and Economic Development Plan approved last year
by the PUCO. This reduction will reduce annual revenues by
approximately $34 million (approximately $19 million in 1998).
The Companies issued $25 million of 5.375% tax exempt
bonds in the second quarter of 1998 to fund construction of an
oxidation plant which will convert non-hazardous waste from the
Bruce Mansfield Plant environmental system to gypsum. The gypsum
will be sold to a plant owned by National Gypsum Co. for use in
the production of wallboard.
On June 8, 1998, the Company completed its acquisition of
Marbel Energy Corp., a fully integrated natural gas company.
During the second quarter of 1998, the Company made three
additional acquisitions which increased the mechanical
construction and energy services portion of its business:
Colonial Mechanical Corp., based in Richmond, Virginia; Elliott-
Lewis Corp. headquartered in Philadelphia, Pennsylvania; and
Edwards Electrical & Mechanical, Inc. based in Indianapolis,
Indiana. In combination with two previous acquisitions, the
Company now anticipates approximately $300 million in annual
revenues from the mechanical construction and energy management
portion of its business.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 133 (SFAS
133), Accounting for Derivative Instruments and Hedging
Activities. The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes
in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in
the income statement. SFAS 133 is effective for fiscal years
beginning after June 15, 1999. A company may implement the
Statement for any fiscal quarter beginning after June 16, 1998.
The Company has not yet quantified the impacts of adopting SFAS
133 on its financial statements and has not determined the timing
or method of its adoption.
- 11 -
<PAGE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $618,598 $593,250 $1,216,463 $1,198,024
-------- -------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 153,133 100,689 267,048 209,790
Nuclear operating costs 69,222 67,320 140,988 135,843
Other operating costs 107,912 107,079 200,185 195,069
-------- -------- ---------- ----------
Total operation and maintenance expenses 330,267 275,088 608,221 540,702
Provision for depreciation 95,676 86,615 196,519 186,573
Amortization of net regulatory assets 11,288 7,421 22,575 14,841
General taxes 58,969 55,436 118,494 116,973
Income taxes 28,750 42,736 65,873 86,632
-------- -------- ---------- ----------
Total operating expenses and taxes 524,950 467,296 1,011,682 945,721
-------- -------- ---------- ----------
OPERATING INCOME 93,648 125,954 204,781 252,303
OTHER INCOME 11,766 14,075 24,268 27,570
-------- -------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 105,414 140,029 229,049 279,873
-------- -------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 46,329 51,713 92,997 104,338
Allowance for borrowed funds used during
construction and capitalized interest (469) (381) (1,129) (761)
Other interest expense 9,391 7,955 18,885 15,673
Subsidiaries' preferred stock dividend
requirements 3,856 3,856 7,713 7,713
-------- -------- ---------- ----------
Net interest charges 59,107 63,143 118,466 126,963
-------- -------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 46,307 76,886 110,583 152,910
EXTRAORDINARY ITEM (NET OF INCOME TAXES)
(Note 3) (30,522) - (30,522) -
-------- -------- ---------- ----------
NET INCOME 15,785 76,886 80,061 152,910
PREFERRED STOCK DIVIDEND REQUIREMENTS 3,018 3,125 6,037 6,249
-------- -------- ---------- ----------
EARNINGS ON COMMON STOCK $ 12,767 $ 73,761 $ 74,024 $ 146,661
======== ======== ========== ==========
<FN>
The preceding Notes to Financial Statements as they relate to Ohio Edison Company are
an integral part of these statements.
</TABLE>
- 12 -
<PAGE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1998 1997
------------ -------------
(In thousands)
ASSETS
------
<S> <C> <C>
UTILITY PLANT:
In service, at original cost $8,143,187 $8,666,272
Less--Accumulated provision for depreciation 3,457,929 3,546,594
---------- ----------
4,685,258 5,119,678
---------- ----------
Construction work in progress-
Electric plant 118,161 99,158
Nuclear fuel 13,897 21,360
---------- ----------
132,058 120,518
---------- ----------
4,817,316 5,240,196
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
PNBV Capital Trust 478,542 482,220
Nuclear plant decommissioning trusts 123,817 109,883
Letter of credit collateralization 277,763 277,763
Other. 305,197 419,525
---------- ----------
1,185,319 1,289,391
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 33,046 4,680
Receivables-
Customers (less accumulated provisions of $6,227,000
and $5,618,000, respectively, for uncollectible
accounts) 223,839 235,332
Associated companies 263,400 25,348
Other 48,559 87,566
Materials and supplies, at average cost-
Owned 68,151 75,580
Under consignment 50,739 47,890
Prepayments and other 99,750 78,348
---------- ----------
787,484 554,744
---------- ----------
DEFERRED CHARGES:
Regulatory assets 1,788,746 1,601,709
Property taxes 100,878 100,043
Unamortized sale and leaseback costs 92,597 95,096
Other 58,150 96,276
---------- ----------
2,040,371 1,893,124
---------- ----------
$8,830,490 $8,977,455
========== ==========
</TABLE>
- 13 -
<PAGE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 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 2,105,240 2,102,644
Retained earnings 486,377 621,674
---------- ----------
Total common stockholder's equity 2,591,618 2,724,319
Preferred stock-
Not subject to mandatory redemption 160,965 160,965
Subject to mandatory redemption 15,000 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 2,605,526 2,569,802
---------- ----------
5,559,014 5,655,991
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and
preferred stock 70,254 278,492
Short-term borrowings-
Associated companies 192,040 -
Other 193,726 302,229
Accounts payable-
Associated companies 126,037 -
Other 94,529 115,836
Accrued taxes 205,402 157,095
Accrued interest 45,087 53,165
Other 109,031 115,256
---------- ----------
1,036,106 1,022,073
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 1,627,189 1,698,354
Accumulated deferred investment tax credits 161,379 184,804
Postretirement benefits 168,202 158,038
Other 278,600 258,195
---------- ----------
2,235,370 2,299,391
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$8,830,490 $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>
- 14 -
<PAGE>
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,785 $ 76,886 $ 80,061 $152,910
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation 95,676 86,615 196,519 186,573
Nuclear fuel and lease amortization 6,563 14,297 13,346 28,642
Other amortization, net 11,023 7,119 22,038 14,229
Deferred income taxes, net (37,613) (8,255) (51,526) (16,696)
Investment tax credits, net (3,622) (3,338) (7,448) (7,164)
Extraordinary item 51,730 - 51,730 -
Receivables (73,744) 6,612 (41,876) 23,964
Materials and supplies 4,755 (10,613) 4,580 (9,561)
Accounts payable 92,415 9,176 109,590 5,312
Other (3,781) (16,143) 46,123 1,038
-------- -------- -------- --------
Net cash provided from operating
activities 159,187 162,356 423,137 379,247
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 104,822 41,318 107,460 70,523
Short-term borrowings, net - - 83,537 -
Redemptions and Repayments-
Long-term debt 141,774 104,056 281,635 216,543
Short-term borrowings, net 15,619 13,996 - 43,503
Dividend Payments-
Common stock 39,884 56,419 209,782 109,960
Preferred stock 2,834 3,057 5,859 6,153
-------- -------- -------- --------
Net cash used for financing activities 95,289 136,210 306,279 305,636
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 47,354 29,196 88,370 63,577
Other (4,847) 1,748 122 4,798
-------- -------- -------- --------
Net cash used for investing activities 42,507 30,944 88,492 68,375
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents 21,391 (4,798) 28,366 5,236
Cash and cash equivalents at beginning of period 11,655 15,287 4,680 5,253
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 33,046 $ 10,489 $ 33,046 $ 10,489
======== ======== ======== ========
<FN>
The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral
part of these statements.
</TABLE>
- 15 -
<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 June 30,
1998, and the related consolidated statements of income and cash
flows for the three-month and six-month periods ended June 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, 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
August 12, 1998
- 16 -
<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 six-month period
ended June 30, 1998, and in the second quarter of 1998 compared
to the same periods of 1997 by an extraordinary item resulting
from deregulation of Penn's generation business and the
corresponding discontinuation of SFAS 71 with respect to its
generation 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 $104.5 million in the first half of
1998 compared to $146.7 million in the same period last year; for
the second quarter of 1998, earnings on common stock were $43.3
million compared to $73.8 million in the second quarter 1997.
Results for the six-month and second quarter periods of 1998 were
affected by a sharp increase in purchased power costs which was
offset in part by higher operating revenues.
Operating revenues increased $18.4 million during the
first half of 1998, compared to the same period of 1997, and
increased $25.3 million in the second quarter of 1998 compared to
the second quarter of 1997. Year-to-date retail kilowatt-hour
sales decreased 0.2%, with a 3.2% increase in commercial sales
offset 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 facility, industrial sales increased 0.2%
and retail sales were 0.8% higher. Residential sales were down
slightly in the year-to-date period ending June 30, 1998, with a
0.4% decrease from last year. Sales to wholesale customers
increased 7.8% compared to the first half of 1997. This increase
contributed to the 1.1% increase in total kilowatt-hour sales
during the period.
Retail kilowatt-hour sales in the second quarter of 1998
increased 2.4% with residential and commercial sales being 4.0%
and 8.5% 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 2.4% during the second quarter of 1998 compared to the
same period of 1997. However, removing the impact of the electric
arc furnace closure, industrial sales were slightly higher. Sales
to wholesale customers increased 16.4% in the second quarter
compared to the same period last year contributing to the
increase in total kilowatt-hour sales which were 4.6% higher.
Operation and maintenance expenses increased $67.5 million
in the first half of 1998 compared to the first six months of
1997. Most of the increase resulted from purchased power expenses
which were up $57.7 million in the first half of 1998 from the
same period in 1997. That increase was the result of 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 Beaver Valley Units 1 and 2 which continued through
the second quarter of 1998, OE companies' production capabilities were
reduced to the point that they purchased significant amounts of
power on the spot market at unusually high prices, causing the
increase in purchased power expense. Excluding last year's
credits from emission allowance sales, other operation and
maintenance expenses were down in the first six months of 1998
from the same period in 1997.
The provision for depreciation and amortization increased
$9.9 million or 5.3% for the six-month period ending June 30,
1998 compared to the first half of 1997. Of that increase, $9.1
million occurred in the second quarter of 1998 resulting
principally from accelerated depreciation under OE's regulatory
plan. Amortization of net regulatory assets also increased in the
first half of 1998 from the comparable 1997 period due to the
absence in 1998 of certain regulatory credits which were fully
amortized in 1997.
- 17 -
<PAGE>
Interest expenses decreased for both the six-month period
ended June 30, 1998 and the second quarter of 1998 from
corresponding periods in 1997. Interest on long- term debt
decreased due to redemption of long-term debt totaling $333.9
million since July 1997, while other interest expense increased
as a result of increased short-term borrowing levels in 1998.
Capital Resources and Liquidity
OE and Penn (OE companies) have continuing cash
requirements for planned capital expenditures and debt
maturities. During the last two quarters of 1998, capital
requirements for property additions and capital leases are
expected to be about $92 million, including $12 million for
nuclear fuel. The OE companies have additional cash requirements
of approximately $10.4 million to meet sinking fund requirements
for preferred stock and 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 June 30, 1998, the OE companies had about $33.0
million of cash and temporary investments. The OE companies also
had $385.8 million of short-term indebtedness. In addition, the
OE companies' unused borrowing capability included $135 million
under revolving lines of credit and $15 million of bank
facilities that provide for borrowings on a short-term basis at
the banks' discretion.
Transition to Retail Competition
On June 18, 1998, the PPUC authorized a plan which will
restructure Penn's rates and provide customers with direct access
to alternative electricity suppliers. Customer choice will be
phased in over two years with 66% of each customer class having
direct access to alternative suppliers of generation by January
2, 1999, and all remaining customers having access as of January
2, 2000. Under the plan, Penn will continue to deliver power to
homes and businesses through its transmission and distribution
system, which will remain regulated. However, Penn's rates have
been restructured to establish separate charges for transmission
and distribution; generation, which will be subject to
competition; and stranded cost recovery. The generation portion
of the unbundled rates represents a "shopping credit." In the
event customers obtain power from an alternative source, the
generation portion of Penn's rate will be excluded from their
bill and the customers will receive a generation charge from the
alternative supplier. The stranded cost recovery portion of rates
provides for recovery of certain amounts not otherwise considered
recoverable in a competitive generation market. Penn will recover
$234 million of stranded costs through a competitive transition
charge starting in 1999 and ending in 2005.
- 18 -
<PAGE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
June 30, 1998 June 30, 1997
----------------------- ---------------------
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
--------- -------- -------- --------
(In thousands)
<S> <C> <C> | <C> <C>
OPERATING REVENUES $465,225 $880,252 | $428,246 $859,873
-------- -------- | -------- --------
OPERATING EXPENSES AND TAXES: |
Fuel and purchased power 137,569 226,546 | 102,090 212,620
Nuclear operating costs 16,320 38,405 | 23,888 44,984
Other operating costs 89,826 169,412 | 91,412 175,655
-------- -------- | -------- --------
Total operation and maintenance expenses 243,715 434,363 | 217,390 433,259
Provision for depreciation and amortization 50,372 98,555 | 55,225 110,523
Amortization of net regulatory assets 6,567 13,134 | 6,567 13,134
General taxes 53,863 108,374 | 57,274 113,960
Income taxes 23,253 47,675 | 14,352 31,554
-------- -------- | -------- --------
Total operating expenses and taxes 377,770 702,101 | 350,808 702,430
-------- -------- | -------- --------
OPERATING INCOME 87,455 178,151 | 77,438 157,443
|
OTHER INCOME (EXPENSE) 5,857 13,450 | (5,221) (8,885)
-------- -------- | -------- --------
INCOME BEFORE NET INTEREST CHARGES 93,312 191,601 | 72,217 148,558
-------- -------- | -------- --------
NET INTEREST CHARGES: |
Interest on long-term debt 60,751 120,811 | 54,669 107,550
Allowance for borrowed funds used during |
construction (404) (956) | (252) (711)
Other interest expense (credit) (1,882) (2,726) | 3,830 7,519
-------- -------- | -------- --------
Net interest charges 58,465 117,129 | 58,247 114,358
-------- -------- | -------- --------
NET INCOME 34,847 74,472 | 13,970 34,200
|
PREFERRED STOCK DIVIDEND REQUIREMENTS 7,438 8,506 | 9,096 18,411
-------- -------- | ------- --------
EARNINGS ON COMMON STOCK $ 27,409 $ 65,966 | $ 4,874 $ 15,789
======== ======== | ======= ========
<FN>
The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating
Company are an integral part of these statements.
</TABLE>
- 19 -
<PAGE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1998 1997
---------- ------------
(In thousands)
ASSETS
------
<S> <C> <C>
UTILITY PLANT:
In service $4,568,827 $4,578,649
Less--Accumulated provision for depreciation 1,501,881 1,470,084
---------- ----------
3,066,946 3,108,565
---------- ----------
Construction work in progress-
Electric plant 45,213 41,261
Nuclear fuel 9,886 6,833
---------- ----------
55,099 48,094
---------- ----------
3,122,045 3,156,659
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 543,126 575,084
Nuclear plant decommissioning trusts 111,337 105,334
Other. 20,886 21,482
---------- ----------
675,349 701,900
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 14,549 33,775
Receivables-
Customers 16,373 29,759
Associated companies 5,244 8,695
Other 199,031 98,077
Notes receivable from associated companies 136,900 -
Materials and supplies, at average cost-
Owned 40,807 47,489
Under consignment 42,815 25,411
Prepayments and other 68,263 57,763
---------- ----------
523,982 300,969
---------- ----------
DEFERRED CHARGES:
Regulatory assets 564,699 579,711
Goodwill 1,521,613 1,552,483
Property taxes 126,414 125,204
Other 12,872 23,358
---------- ----------
2,225,598 2,280,756
---------- ----------
$6,546,974 $6,440,284
========== ==========
</TABLE>
- 20 -
<PAGE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 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 $ 931,614 $ 931,614
Retained earnings 63,446 19,290
---------- ----------
Total common stockholder's equity 995,060 950,904
Preferred stock-
Not subject to mandatory redemption 238,325 238,325
Subject to mandatory redemption 169,460 183,174
Long-term debt 3,046,213 3,189,590
---------- ----------
4,449,058 4,561,993
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 265,099 121,965
Accounts payable-
Associated companies 85,662 56,109
Other 123,122 90,737
Notes payable to associated companies 30,310 56,802
Accrued taxes 162,061 194,394
Accrued interest 68,809 67,896
Other 42,791 52,297
---------- ----------
777,854 640,200
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 532,276 496,437
Accumulated deferred investment tax credits 93,538 96,131
Pensions and other postretirement benefits 202,202 198,642
Other 492,046 446,881
---------- ----------
1,320,062 1,238,091
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$6,546,974 $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>
- 21 -
<PAGE>
<TABLE>
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
June 30, 1998 June 30, 1997
--------------------- -------------------
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
--------- -------- -------- --------
(In thousands)
<S> <C> <C> | <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net income $ 34,847 $ 74,472 | $ 13,970 $ 34,200
Adjustments to reconcile net income to net |
cash from operating activities- |
Provision for depreciation and amortization 50,372 98,555 | 55,225 110,523
Nuclear fuel and lease amortization 6,127 16,356 | 11,775 25,186
Other amortization (2,850) 3,717 | 6,567 13,134
Deferred income taxes, net 16,576 30,791 | 11,461 22,197
Investment tax credits, net (1,297) (2,593)| (2,001) (4,002)
Allowance for equity funds used during |
construction - - | (398) (725)
Receivables (77,237) (87,568)| (28,395) 14,965
Materials and supplies (6,374) (10,722)| (5,207) (4,140)
Accounts payable 63,340 32,385 | 14,281 (11,321)
Other (42,710) (68,639)| (20,312) (37,569)
-------- -------- | -------- --------
Net cash provided from operating activities 40,794 86,754 | 56,966 162,448
-------- -------- | -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES: |
New Financing- |
Long-term debt 5,822 5,822 | 574,947 574,947
Short-term borrowings, net - - | 26,252 29,033
Ohio Schools Council Prepayment Program 116,598 116,598 | - -
Redemptions and Repayments- |
Preferred stock 13,714 13,714 | 13,714 28,714
Long-term debt 15,029 26,581 | 13,711 26,161
Short-term borrowings, net 45,290 26,492 | - -
Dividend Payments- |
Common stock 25,469 25,469 | 29,605 59,210
Preferred stock 8,870 17,741 | 9,206 18,742
-------- -------- | -------- --------
Net cash provided from financing activities 14,048 12,423 | 534,963 471,153
-------- -------- | -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES: |
Property additions 12,080 27,414 | 21,701 54,972
Loans to associated companies 59,900 136,900 | - -
Capital trust investments - (31,958)| 569,389 569,389
Other (18,137) (13,953)| 5,411 17,387
-------- -------- | -------- --------
Net cash used for investing activities 53,843 118,403 | 596,501 641,748
-------- -------- | -------- --------
Net increase (decrease) in cash and cash equivalents 999 (19,226)| (4,572) (8,147)
Cash and cash equivalents at beginning of period 13,550 33,775 | 26,698 30,273
-------- -------- | -------- --------
Cash and cash equivalents at end of period $ 14,549 $ 14,549 | $ 22,126 $ 22,126
======== ======== | ======== ========
<FN>
The preceding Notes to Financial Statements as they relate to The Cleveland Electric
Illuminating Company are an integral part of these statements.
</TABLE>
- 22 -
<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 June 30, 1998, and the related consolidated statements of
income and cash flows for the three-month and six-month periods
ended June 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, 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
August 12, 1998
- 23 -
<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 half and second
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 $66.0 million for
the six-month period ended June 30, 1998, from $15.8 million in
the same period last year. For the second quarter of 1998,
earnings increased to $27.4 million, compared to $4.9 million in
the second quarter of 1997. The increases reflect increased
operating revenues, benefits provided by the Bruce Mansfield
Plant lease refinancing and lower operating expenses. The above
factors were offset in part by an increase in purchased power
costs in the second quarter of 1998.
Operating revenues increased $20.4 million during the six-
month period ended June 30, 1998 compared to the same period of
1997 and increased $37.0 million in the second quarter of 1998
from the corresponding 1997 period. Operating revenues in the
1998 periods included $9.2 million received as a termination
charge for a canceled power supply contract. Year-to-date retail
kilowatt-hour sales increased 0.5% with a 3.5% increase in
commercial sales partially offset by a 3.8% decrease in
residential sales. Residential sales were adversely affected by
unusually mild weather conditions in the first quarter of 1998.
Sales to industrial customers increased 0.9% in the first six
months of 1998 from the same period in 1997. Sales to wholesale
customers decreased 52.2% compared to the first half of 1997 due
in part to unplanned generating unit outages which reduced
available energy for sale to other utilities. This resulted in a
5.9% decrease in total kilowatt-hour sales during the six-month
period compared to 1997.
Retail kilowatt-hour sales in the second quarter of 1998
increased 3.6% from the second quarter of 1997 with residential,
commercial and industrial customers all contributing to the
increase. Residential sales benefited from higher air-
conditioning loads due to hotter weather, increasing 1.9%.
Commercial and industrial sales increased 6.5% and 2.4%,
respectively, benefiting from growth in the area economy. Sales
to wholesale customers decreased 40.7% in the second quarter of
1998 compared to the same period in 1997. Overall, reduced off-
system sales offset the increase in retail sales leading to a
decline in total kilowatt-hour sales of 0.3% for the second
quarter of 1998 compared to the second quarter of 1997.
Fuel and purchased power expenses increased in both the
first half of 1998 and the second quarter of 1998 compared to the
same periods of 1997. The increases resulted from higher
purchased power costs in the second quarter of 1998, 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 remained out of service and the
Davis-Besse Nuclear Power Station 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, CEI purchased significant amounts of power on the spot
market at unusually high prices, causing the increase in
purchased power expense. Nuclear operating costs were lower for
the year-to-date and second quarter periods of 1998 compared to
1997, offsetting part of the increase in fuel and purchased power
expense discussed above. Lower costs at the Perry and Beaver
Valley Plants contributed to the reduction.
- 24 -
<PAGE>
Lower depreciable asset balances resulting from the
purchase accounting adjustment reduced the provision for
depreciation in the first half of 1998 compared to the same
period last year and for the second quarter of 1998 compared to
the second 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 1998 compared to the first half and second quarter of 1997.
Total interest charges were also higher due to secured notes
issued in connection with the refinancing of the Mansfield Plant
lease. Partially offsetting the increased interest charges was
the amortization of net 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 last half of 1998,
capital requirements for property additions and capital leases
are expected to be about $62 million including $5 million for
nuclear fuel. CEI has additional cash requirements of
approximately $62.5 million to meet sinking fund requirements for
preferred stock and 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 June 30, 1998, CEI had approximately $151.4 million
of cash and temporary investments and $30.3 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.
On July 3, 1998, CEI optionally redeemed $150 million
principal amount of first mortgage bonds having a weighted
average interest rate of 8.56%.
Under FirstEnergy's "Energy for Education" program,
eligible public schools in CEI's service area entered into a
special eight-year contract to receive a 10% base rate reduction
and a discount for prepaying their estimated electric bills
through the year 2005. In April 1998, CEI received a $116.6
million prepayment under this program.
CEI's residential customers received a $3 reduction on
their monthly bills beginning June 5, 1998, as part of the Rate
Reduction and Economic Development Plan approved last year by the
PUCO. This reduction will reduce annual revenues by approximately
$24 million (approximately $14 million in 1998).
- 25 -
<PAGE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
June 30, 1998 June 30, 1997
----------------------- ---------------------
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
--------- -------- -------- --------
(In thousands)
<S> <C> <C> | <C> <C>
OPERATING REVENUES $239,731 $460,834 | $222,144 $439,204
-------- -------- | -------- --------
OPERATING EXPENSES AND TAXES: |
Fuel and purchased power 70,658 103,065 | 44,501 87,815
Nuclear operating costs 35,877 72,087 | 39,382 79,283
Other operating costs 37,263 74,255 | 41,996 84,373
-------- -------- | -------- --------
Total operation and maintenance expenses 143,798 249,407 | 125,879 251,471
Provision for depreciation and amortization 20,276 38,823 | 24,596 49,490
Amortization of net regulatory assets 4,665 8,668 | 4,291 8,582
General taxes 20,928 41,958 | 22,601 45,395
Income taxes 12,220 32,168 | 8,700 15,832
-------- -------- | -------- --------
Total operating expenses and taxes 201,887 371,024 | 186,067 370,770
-------- -------- | -------- --------
OPERATING INCOME 37,844 89,810 | 36,077 68,434
|
OTHER INCOME 3,057 6,899 | 353 33
-------- -------- | -------- --------
INCOME BEFORE NET INTEREST CHARGES 40,901 96,709 | 36,430 68,467
-------- -------- | -------- --------
NET INTEREST CHARGES: |
Interest on long-term debt 22,370 45,256 | 20,748 41,582
Allowance for borrowed funds used during |
construction (314) (583) | (11) (115)
Other interest expense (credit) (285) (1,099) | 2,577 5,044
-------- -------- | -------- --------
Net interest charges 21,771 43,574 | 23,314 46,511
-------- -------- | -------- --------
NET INCOME 19,130 53,135 | 13,116 21,956
|
PREFERRED STOCK DIVIDEND REQUIREMENTS 4,150 5,535 | 4,211 8,405
-------- -------- | ------- --------
EARNINGS ON COMMON STOCK $ 14,980 $ 47,600 | $ 8,905 $ 13,551
======== ======== | ======= ========
<FN>
The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an
integral part of these statements.
</TABLE>
- 26 -
<PAGE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(In thousands)
<S> <C> <C>
ASSETS
------
UTILITY PLANT:
In service $1,728,365 $1,763,495
Less--Accumulated provision for depreciation 588,916 619,222
---------- ----------
1,139,449 1,144,273
---------- ----------
Construction work in progress-
Electric plant 23,577 19,901
Nuclear fuel 7,929 6,632
---------- ----------
31,506 26,533
---------- ----------
1,170,955 1,170,806
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 310,936 312,873
Nuclear plant decommissioning trusts 92,327 85,956
Other. 4,392 3,164
---------- ----------
407,655 401,993
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 4,567 22,170
Receivables-
Associated companies 20,114 15,199
Other 18,438 21,664
Notes receivable from associated companies 85,450 40,802
Materials and supplies, at average cost-
Owned 26,105 31,892
Under consignment 18,832 9,538
Prepayments and other 29,991 26,437
---------- ----------
203,497 167,702
---------- ----------
DEFERRED CHARGES:
Regulatory assets 429,768 442,724
Goodwill 503,911 514,462
Property taxes 43,355 45,338
Other 3,407 15,127
---------- ----------
980,441 1,017,651
---------- ----------
$2,762,548 $2,758,152
========== ==========
</TABLE>
- 27 -
<PAGE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 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 328,362 328,364
Retained earnings 35,510 7,616
---------- ----------
Total common stockholder's equity 559,542 531,650
Preferred stock-
Not subject to mandatory redemption 210,000 210,000
Subject to mandatory redemption - 1,690
Long-term debt 1,192,190 1,210,190
---------- ----------
1,961,732 1,953,530
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 71,156 69,979
Accounts payable-
Associated companies 37,519 21,173
Other 63,108 60,756
Accrued taxes 40,914 34,441
Accrued interest 26,520 26,633
Other 22,583 22,603
---------- ----------
261,800 235,585
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 123,357 104,543
Accumulated deferred investment tax credits 41,969 43,265
Pensions and other postretirement benefits 115,441 113,254
Other 258,249 307,975
---------- ----------
539,016 569,037
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$2,762,548 $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>
- 28 -
<PAGE>
<TABLE>
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
June 30, 1998 June 30, 1997
----------------------- ---------------------
Three Six Three Six
Months Months Months Months
Ended Ended Ended Ended
--------- -------- -------- --------
(In thousands)
<S> <C> <C> | <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: |
Net income $ 19,130 $ 53,135 | $ 13,116 $ 21,956
-------- -------- | -------- --------
Adjustments to reconcile net income to net |
cash from operating activities- |
Provision for depreciation and |
amortization 20,276 38,823 | 24,596 49,490
Nuclear fuel and lease amortization 3,629 10,930 | 8,192 17,634
Amortization of net regulatory assets 4,665 8,668 | 4,291 8,582
Deferred income taxes, net 11,564 21,017 | (2,857) (3,126)
Investment tax credits, net (649) (1,298) | (1,080) (2,160)
Allowance for equity funds used during |
construction - - | (54) (386)
Receivables (14,975) 3,226 | (5,463) (5,103)
Materials and supplies (527) (3,507) | 1,350 1,772
Accounts payable (1,329) 2,352 | (8,413) (1,922)
Other (15,099) (28,683) | 19,990 12,055
-------- -------- | -------- --------
Net cash provided from operating |
activities 26,685 104,663 | 53,668 98,792
-------- -------- | -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES: |
New Financing- |
Long-term debt 3,657 3,657 | 144,972 144,972
Short-term borrowings, net - - | 85,000 85,000
Redemptions and Repayments- |
Preferred stock 1,665 1,665 | 1,665 1,665
Long-term debt 33,127 41,695 | 9,643 26,260
Dividend Payments- |
Common stock 21,132 21,132 | - -
Preferred stock 4,108 8,235 | 4,204 8,397
-------- -------- | -------- --------
Net cash provided from (used for) |
financing activities (56,375) (69,070) | 214,460 193,650
-------- -------- | -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES: |
Property additions 6,898 14,647 | 14,866 25,119
Loans to associated companies - 44,648 | - -
Loan payments from associated companies (33,150) - | (43,748) (11,166)
Capital trust investments 66 (1,937) | 337,099 337,099
Other (7,698) (4,162) | 825 342
-------- -------- | -------- --------
Net cash used for (provided from) |
investing activities (33,884) 53,196 | 309,042 351,394
-------- -------- | -------- --------
Net increase (decrease) in cash and cash |
equivalents 4,194 (17,603) | (40,914) (58,952)
Cash and cash equivalents at beginning of |
period 373 22,170 | 63,416 81,454
-------- -------- | -------- --------
Cash and cash equivalents at end of period $ 4,567 $ 4,567 | $ 22,502 $ 22,502
======== ======== | ======== ========
<FN>
The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an
integral part of these statements.
</TABLE>
- 29 -
<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 June 30,
1998, and the related consolidated statements of income and cash
flows for the three-month and six-month periods ended June 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, 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
August 12, 1998
- 30 -
<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 half and the second
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 $47.6 million for
the six-month period ended June 30, 1998, from $13.6 million in
the same period last year. For the second quarter of 1998,
earnings increased to $15.0 million, compared to $8.9 million in
the second quarter of 1997. The increases reflect increased
operating revenues, benefits provided by the Bruce Mansfield
Plant lease refinancing and lower operating expenses. The above
factors were offset in part by an increase in purchased power
costs in the second quarter of 1998.
Operating revenues increased $21.6 million during the six-
month period ended June 30, 1998 compared to the same period in
1997 and increased $17.6 million in the second quarter of 1998
from the corresponding period of 1997. Year-to-date retail
kilowatt-hour sales increased 9.2% from same period last year,
with residential, commercial and industrial customers all
contributing to the increase. Residential sales benefited from
higher air-conditioning loads due to hotter weather, increasing
1.9%. Commercial and industrial sales increased 6.6% and 13.8%,
respectively. Commercial sales benefited from growth in the area
economy. Expanded production at the North Star BHP Steel (North
Star) facility was the primary factor in the 13.8% increase in
industrial sales in the first half of 1998 from last year's
level. Excluding North Star, industrial sales increased 2.8%
during that period. Sales to wholesale customers decreased 48.8%
compared to the first half of 1997 due in part to unplanned
generating unit outages which reduced available energy for sale
to other utilities. This resulted in a 4.1% decrease in total
kilowatt-hour sales during the six-month period compared to 1997.
Retail kilowatt-hour sales in the second quarter of 1998
increased 11.7% from the second quarter of 1997 with residential,
commercial and industrial customers all contributing to the
increase. Residential sales increased 6.7% benefiting from the
hotter weather in the second quarter of this year compared to the
same period of 1997. Commercial and industrial sales increased
12.1% and 13.5%, respectively. Commercial sales benefited from
growth in the service sector of the area economy. Expanded
production at the North Star facility was the primary factor
behind increased industrial sales during the second quarter of
1998. Excluding North Star, industrial sales increased 2.2%
during that period from the second quarter of 1997. Sales to
wholesale customers decreased 48.2% in the second quarter of 1998
compared to the same period in 1997. Overall, reduced off-system
sales offset the increase in retail sales leading to a decline in
total sales of 1.1% for the second quarter of 1998 compared to
the second quarter of 1997.
Fuel and purchased power expenses increased in both the
first half of 1998 and the second quarter of 1998 compared to the
same periods of 1997. The increases resulted from higher
purchased power costs in the second quarter of 1998, 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 remained out of service and the
Davis-Besse Nuclear Power Station was removed from service as a
- 31 -
<PAGE>
result of damage to transmission facilities caused by a tornado.
As a result, TE purchased significant amounts of power on the
spot market at unusually high prices, causing the increase in
purchased power expense.
Other operating costs were lower for the year-to-date and
second quarter periods of 1998 compared to 1997, substantially
offsetting the increase in fuel and purchased power expense
during the first half of 1998. Contributing to the reduction were
lower operating costs at the Bay Shore Plant, lower rent expense
as a result of the refinancing of the Mansfield Plant lease and
reduced employee levels.
Lower depreciable asset balances resulting from the
purchase accounting adjustment reduced the provision for
depreciation in the first half of 1998 compared to the same
period last year and for the second quarter of 1998 compared to
the second 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 1998 compared to the first half and second quarter 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 last half of 1998,
capital requirements for property additions and capital leases
are expected to be about $28 million, including $2 million for
nuclear fuel. TE has additional cash requirements of
approximately $12.7 million to meet sinking fund requirements for
preferred stock and 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 June 30, 1998, TE had approximately $90.0 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.
On July 3, 1998, TE completed an optional redemption of a $26
million, 7.5% first mortgage bond.
TE's residential customers received a $3 reduction on
their monthly bills beginning June 5, 1998, as part of the Rate
Reduction and Economic Development Plan approved last year by the
PUCO. This will reduce annual revenues by approximately $9
million (approximately $5 million in 1998).
- 32 -
<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
OPERATING REVENUES $ 80,271 $79,220 $158,847 $158,197
-------- ------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 23,089 15,215 40,887 31,112
Nuclear operating costs 6,769 6,661 13,796 13,134
Other operating costs 13,504 17,664 25,773 31,252
-------- ------- -------- --------
Total operation and maintenance expenses 43,362 39,540 80,456 75,498
Provision for depreciation 14,665 12,991 29,318 27,282
Amortization of net regulatory assets 1,845 1,845 3,690 3,690
General taxes 5,494 5,408 11,273 11,707
Income taxes 4,906 6,432 11,472 13,383
-------- ------- -------- --------
Total operating expenses and taxes 70,272 66,216 136,209 131,560
-------- ------- -------- --------
OPERATING INCOME 9,999 13,004 22,638 26,637
OTHER INCOME 634 324 1,373 994
-------- ------- -------- --------
INCOME BEFORE NET INTEREST CHARGES 10,633 13,328 24,011 27,631
-------- ------- -------- --------
NET INTEREST CHARGES:
Interest expense 5,223 5,641 10,717 11,397
Allowance for borrowed funds used during
construction (62) (89) (144) (136)
-------- ------- -------- --------
Net interest charges 5,161 5,552 10,573 11,261
-------- ------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 5,472 7,776 13,438 16,370
EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 3) (30,522) - (30,522) -
-------- ------- -------- --------
NET INCOME (LOSS) (25,050) 7,776 (17,084) 16,370
PREFERRED STOCK DIVIDEND REQUIREMENTS 1,156 1,156 2,313 2,313
-------- ------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $(26,206) $ 6,620 $(19,397) $ 14,057
======== ======= ======== ========
<FN>
The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company
are an integral part of these statements.
</TABLE>
- 33 -
<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, December 31,
1998 1997
------------ ------------
(In thousands)
ASSETS
------
<S> <C> <C>
UTILITY PLANT:
In service, at original cost $ 687,966 $1,237,562
Less--Accumulated provision for depreciation 281,175 508,981
--------- ----------
406,791 728,581
--------- ----------
Construction work in progress-
Electric plant 9,700 7,427
Nuclear fuel 23 6,788
--------- ----------
9,723 14,215
--------- ----------
416,514 742,796
--------- ----------
OTHER PROPERTY AND INVESTMENTS 31,397 26,157
--------- ----------
CURRENT ASSETS:
Cash and cash equivalents 6,087 660
Notes receivable from parent company 30,000 17,500
Receivables-
Customers (less accumulated provisions of
$3,585,000 and $3,609,000, respectively,
for uncollectible accounts) 34,556 33,934
Associated companies 15,110 12,599
Other 10,347 14,426
Materials and supplies, at average cost 15,146 14,973
Prepayments 8,050 1,707
--------- ---------
119,296 95,799
--------- ---------
DEFERRED CHARGES:
Regulatory assets 392,510 162,966
Other 5,068 6,739
--------- ----------
397,578 169,705
--------- ----------
$ 964,785 $1,034,457
========= ==========
</TABLE>
- 34 -
<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
<CAPTION>
June 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 73,662 103,677
--------- ----------
Total common stockholder's equity 261,962 291,977
Preferred stock-
Not subject to mandatory redemption 50,905 50,905
Subject to mandatory redemption 15,000 15,000
Long-term debt-
Associated companies 9,624 9,231
Other 281,675 280,074
--------- ----------
619,166 647,187
--------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 5,265 6,958
Other 493 1,443
Accounts payable-
Associated companies 11,013 6,788
Other 23,532 22,751
Accrued taxes 13,816 12,332
Accrued interest 6,619 6,588
Other 13,569 14,746
--------- ----------
74,307 71,606
--------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 209,172 239,952
Accumulated deferred investment tax credits 8,931 26,052
Other 53,209 49,660
--------- ----------
271,312 315,664
--------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) --------- ----------
$ 964,785 $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>
- 35 -
<PAGE>
<TABLE>
PENNSYLVANIA POWER COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1998 1997 1998 1997
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(25,050) $ 7,776 $(17,084) $16,370
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation 14,665 12,991 29,318 27,282
Nuclear fuel and lease amortization 852 2,320 1,792 4,809
Other amortization, net 1,581 1,543 3,153 3,078
Deferred income taxes, net (24,177) (3,466) (26,989) (6,607)
Investment tax credits, net (572) (537) (1,144) (1,119)
Extraordinary item 51,730 - 51,730 -
Receivables (16) 11,001 946 11,487
Materials and supplies 203 (553) (173) (928)
Accounts payable 3,842 (4,131) 5,006 (4,152)
Other 3,734 3,064 (5,867) (5,064)
-------- ------- -------- -------
Net cash provided from operating activities 26,792 30,008 40,688 45,156
-------- ------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 1,621 - 1,621 -
Redemptions and Repayments-
Long-term debt 791 2,289 2,551 14,312
Notes payable, net - 5,000 - -
Dividend Payments-
Common stock 5,347 5,347 10,693 10,693
Preferred stock 1,081 1,081 2,238 2,238
-------- ------- -------- -------
Net cash used for financing activities 5,598 13,717 13,861 27,243
-------- ------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 3,735 3,199 7,019 6,530
Loan to parent 13,500 13,000 12,500 10,500
Other 1,069 74 1,881 1,777
-------- ------- -------- -------
Net cash used for investing activities 18,304 16,273 21,400 18,807
-------- ------- -------- -------
Net increase (decrease) in cash and cash
equivalents 2,890 18 5,427 (894)
Cash and cash equivalents at beginning of period 3,197 475 660 1,387
-------- ------- -------- -------
Cash and cash equivalents at end of period $ 6,087 $ 493 $ 6,087 $ 493
======== ======= ======== =======
<FN>
The preceding Notes to Financial Statements as they relate to Pennsylvania
Power Company are an integral part of these statements.
</TABLE>
- 36 -
<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 June 30, 1998, and the related statements of income
and cash flows for the three-month and six-month periods ended June 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, 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
August 12, 1998
- 37 -
<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 six-month period
ended June 30, 1998, and in the second quarter of 1998 compared
to the same periods 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 its
generation 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 $11.1 million in the first half of
1998 compared to $14.1 million in the same period last year; for
the second quarter of 1998, earnings on common stock were $4.3
million compared to $6.6 million in the second quarter 1997.
Retail kilowatt-hour sales decreased 2.7% in the first six
months of 1998 and 2.5% in the second quarter of 1998 from the
same periods in 1997, due to a decline in industrial sales.
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 half of
1998 increased 3.6% and sales in the second quarter of 1998 were
up 2.5% from the corresponding periods last year. Residential
sales increased 3.4% during the first six months of 1998 compared
to the first half of 1997 and 4.6% in the second 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 six month and second quarter
periods of 1998 from the corresponding periods last year, by 6.3%
and 10.1%, respectively, reflecting continued growth in the
service sector economy. Sales to wholesale customers decreased
3.5% in the first six months of 1998 compared to the first half
of 1997 and were down 3.3% in the second quarter of 1998 compared
to the same period last year.
Fuel and purchased power expenses increased in both the
first half of 1998 and in the second quarter of 1998 compared to
the same periods of 1997. The increases resulted primarily from
higher purchased power costs 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 which continued
through the second quarter of 1998, Penn's production capability
was reduced to the point that Penn purchased significant amounts
of power on the spot market at unusually high prices, causing the
increase in purchased power expense.
Other operating costs decreased in the first six months of
1998 and in second quarter of 1998 compared to the same periods
of 1997 due to a $3 million charge for uncollectible accounts in
the second quarter of 1997. The increases in the provision for
depreciation and amortization during the six-month period and
second quarter of 1998 from the first half and second quarter of
1997, were due to higher levels of accelerated depreciation and
amortization in 1998 under Penn's Rate Stability and Economic
Development Plan.
Capital Resources and Liquidity
Penn has continuing cash requirements for planned capital
expenditures. During the last two quarters of 1998, capital
requirements for property additions and capital leases are
expected to be about $12 million, including $2 million for
nuclear fuel. These requirements are expected to be satisfied
with internal cash.
As of June 30, 1998, Penn had approximately $36.1 million
of cash and temporary investments and no short-term indebtedness.
Penn had $2 million of unused short-term bank lines of credit as
of June 30, 1998, and $7 million of bank facilities which may be
borrowed for up to several days at the banks' discretion.
- 38 -
<PAGE>
Transition to Retail Competition
On June 18, 1998, the PPUC authorized a plan which will
restructure Penn's rates and provide customers with direct access
to alternative electricity suppliers. Customer choice will be
phased in over two years with 66% of each customer class having
direct access to alternative suppliers of generation by January
2, 1999, and all remaining customers having access as of January
2, 2000. Under the plan, Penn will continue to deliver power to
homes and businesses through its transmission and distribution
system, which will remain regulated. However, Penn's rates have
been restructured to establish separate charges for transmission
and distribution; generation, which will be subject to
competition; and stranded cost recovery. The generation portion
of the unbundled rates represents a "shopping credit". In the
event customers obtain power from an alternative source, the
generation portion of Penn's rate will be excluded from their
bill and the customers will receive a generation charge from the
alternative supplier. The stranded cost recovery portion of rates
provides for recovery of certain amounts not otherwise considered
recoverable in a competitive generation market. Penn will recover
$234 million of stranded costs through a competitive transition
charge starting in 1999 and ending in 2005.
- 39 -
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
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 - One combined report on
------------------------------
Form 8-K was filed since March 31, 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.
- 40 -
<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.
August 12, 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
- 41 -
<PAGE>
EXHIBIT 15
August 12, 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 and
No. 333-58279 its Form 10-Q for the quarter ended June 30, 1998,
which includes our report dated August 12, 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 $4,881,000 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 9,134,634
<OTHER-PROPERTY-AND-INVEST> 2,532,843
<TOTAL-CURRENT-ASSETS> 1,151,293
<TOTAL-DEFERRED-CHARGES> 5,516,919
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 18,335,689
<COMMON> 23,707
<CAPITAL-SURPLUS-PAID-IN> 3,695,002
<RETAINED-EARNINGS> 632,753
<TOTAL-COMMON-STOCKHOLDERS-EQ> 4,351,462
319,460
660,195
<LONG-TERM-DEBT-NET> 6,996,796
<SHORT-TERM-NOTES> 82,763
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 119,975
<LONG-TERM-DEBT-CURRENT-PORT> 316,257
21,404
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 69,523
<OTHER-ITEMS-CAPITAL-AND-LIAB> 5,397,854
<TOT-CAPITALIZATION-AND-LIAB> 18,335,689
<GROSS-OPERATING-REVENUE> 2,477,054
<INCOME-TAX-EXPENSE> 122,456
<OTHER-OPERATING-EXPENSES> 1,871,652
<TOTAL-OPERATING-EXPENSES> 2,010,435
<OPERATING-INCOME-LOSS> 466,619
<OTHER-INCOME-NET> 15,236
<INCOME-BEFORE-INTEREST-EXPEN> 481,855
<TOTAL-INTEREST-EXPENSE> 298,249
<NET-INCOME> 153,084
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 166,977
<TOTAL-INTEREST-ON-BONDS> 531,648
<CASH-FLOW-OPERATIONS> 532,258
<EPS-PRIMARY> .69
<EPS-DILUTED> .69
</TABLE>
EXHIBIT 15
August 12, 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 June 30, 1998, which includes
our report dated August 12, 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 $9,191,000 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,817,316
<OTHER-PROPERTY-AND-INVEST> 1,185,319
<TOTAL-CURRENT-ASSETS> 787,484
<TOTAL-DEFERRED-CHARGES> 2,040,371
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 8,830,490
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 2,105,240
<RETAINED-EARNINGS> 486,377
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,591,618
150,000
211,870
<LONG-TERM-DEBT-NET> 2,605,526
<SHORT-TERM-NOTES> 265,791
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 119,975
<LONG-TERM-DEBT-CURRENT-PORT> 61,102
5,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 4,152
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,815,456
<TOT-CAPITALIZATION-AND-LIAB> 8,830,490
<GROSS-OPERATING-REVENUE> 1,216,463
<INCOME-TAX-EXPENSE> 53,856
<OTHER-OPERATING-EXPENSES> 945,809
<TOTAL-OPERATING-EXPENSES> 1,011,682
<OPERATING-INCOME-LOSS> 204,781
<OTHER-INCOME-NET> 24,268
<INCOME-BEFORE-INTEREST-EXPEN> 229,049
<TOTAL-INTEREST-EXPENSE> 118,466
<NET-INCOME> 80,061
6,037
<EARNINGS-AVAILABLE-FOR-COMM> 74,024
<COMMON-STOCK-DIVIDENDS> 209,412
<TOTAL-INTEREST-ON-BONDS> 193,721
<CASH-FLOW-OPERATIONS> 423,137
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 15
August 12, 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 June
30, 1998, which includes our report dated August 12, 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 $6,606,000 RELATED TO OTHER INCOME.
</LEGEND>
<CIK> 0000020947
<NAME> THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,122,045
<OTHER-PROPERTY-AND-INVEST> 675,349
<TOTAL-CURRENT-ASSETS> 523,982
<TOTAL-DEFERRED-CHARGES> 2,225,598
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 6,546,974
<COMMON> 931,614
<CAPITAL-SURPLUS-PAID-IN> 0
<RETAINED-EARNINGS> 63,446
<TOTAL-COMMON-STOCKHOLDERS-EQ> 995,060
169,460
238,325
<LONG-TERM-DEBT-NET> 3,046,213
<SHORT-TERM-NOTES> 30,310
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 212,030
14,714
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 38,355
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,802,507
<TOT-CAPITALIZATION-AND-LIAB> 6,546,974
<GROSS-OPERATING-REVENUE> 880,252
<INCOME-TAX-EXPENSE> 54,281
<OTHER-OPERATING-EXPENSES> 654,426
<TOTAL-OPERATING-EXPENSES> 702,101
<OPERATING-INCOME-LOSS> 178,151
<OTHER-INCOME-NET> 13,450
<INCOME-BEFORE-INTEREST-EXPEN> 191,601
<TOTAL-INTEREST-EXPENSE> 117,129
<NET-INCOME> 74,472
8,506
<EARNINGS-AVAILABLE-FOR-COMM> 65,966
<COMMON-STOCK-DIVIDENDS> 25,469
<TOTAL-INTEREST-ON-BONDS> 238,628
<CASH-FLOW-OPERATIONS> 86,754
<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 $3,809,000 RELATED TO OTHER INCOME.
</LEGEND>
<CIK> 0000352049
<NAME> THE TOLEDO EDISON COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,170,955
<OTHER-PROPERTY-AND-INVEST> 407,655
<TOTAL-CURRENT-ASSETS> 203,497
<TOTAL-DEFERRED-CHARGES> 980,441
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,762,548
<COMMON> 195,670
<CAPITAL-SURPLUS-PAID-IN> 328,362
<RETAINED-EARNINGS> 35,510
<TOTAL-COMMON-STOCKHOLDERS-EQ> 559,542
0
210,000
<LONG-TERM-DEBT-NET> 1,192,190
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 42,450
1,690
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 27,016
<OTHER-ITEMS-CAPITAL-AND-LIAB> 729,660
<TOT-CAPITALIZATION-AND-LIAB> 2,762,548
<GROSS-OPERATING-REVENUE> 460,834
<INCOME-TAX-EXPENSE> 35,977
<OTHER-OPERATING-EXPENSES> 338,856
<TOTAL-OPERATING-EXPENSES> 371,024
<OPERATING-INCOME-LOSS> 89,810
<OTHER-INCOME-NET> 6,899
<INCOME-BEFORE-INTEREST-EXPEN> 96,709
<TOTAL-INTEREST-EXPENSE> 43,574
<NET-INCOME> 53,135
5,535
<EARNINGS-AVAILABLE-FOR-COMM> 47,600
<COMMON-STOCK-DIVIDENDS> 21,132
<TOTAL-INTEREST-ON-BONDS> 88,367
<CASH-FLOW-OPERATIONS> 104,663
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 15
August 12, 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 June
30, 1998, which includes our report dated August 12, 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 EXPENSE INCLUDES $305,000 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 416,514
<OTHER-PROPERTY-AND-INVEST> 31,397
<TOTAL-CURRENT-ASSETS> 119,296
<TOTAL-DEFERRED-CHARGES> 397,578
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 964,785
<COMMON> 188,700
<CAPITAL-SURPLUS-PAID-IN> (400)
<RETAINED-EARNINGS> 73,662
<TOTAL-COMMON-STOCKHOLDERS-EQ> 261,962
15,000
50,905
<LONG-TERM-DEBT-NET> 291,299
<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> 5,758
<OTHER-ITEMS-CAPITAL-AND-LIAB> 339,861
<TOT-CAPITALIZATION-AND-LIAB> 964,785
<GROSS-OPERATING-REVENUE> 158,847
<INCOME-TAX-EXPENSE> (9,431)
<OTHER-OPERATING-EXPENSES> 124,737
<TOTAL-OPERATING-EXPENSES> 136,209
<OPERATING-INCOME-LOSS> 22,638
<OTHER-INCOME-NET> 1,373
<INCOME-BEFORE-INTEREST-EXPEN> 24,011
<TOTAL-INTEREST-EXPENSE> 10,573
<NET-INCOME> (17,084)
2,313
<EARNINGS-AVAILABLE-FOR-COMM> (19,397)
<COMMON-STOCK-DIVIDENDS> 10,693
<TOTAL-INTEREST-ON-BONDS> 19,177
<CASH-FLOW-OPERATIONS> 40,688
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
