SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) February 13, 1998
OHIO EDISON COMPANY
(Exact name of Registrant as specified in its charter)
Ohio 1-2578 34-0437786
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation) File Number) Identification No.)
76 South Main Street, Akron, Ohio 44308
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (800)736-3402
Item 5. Other Events
Ohio Edison Company reports audited consolidated
financial statements for the year ended December 31, 1997 and
related matters. Such financial statements and related matters
consist of the following:
1) Consolidated Statements of Income
2) Consolidated Balance Sheets
3) Consolidated Statements of Capitalization
4) Consolidated Statements of Retained Earnings
5) Consolidated Statements of Capital Stock and Other Paid-In
Capital
6) Consolidated Statements of Cash Flows
7) Consolidated Statements of Taxes
8) Notes to Consolidated Financial Statements
9) Report of Independent Public Accountants
10) Management's Discussion and Analysis of Results of
Operations and Financial Condition
11) Consent of Independent Public Accountants
Item 7. Exhibits
Exhibit
Number
- -------
24 Consent of Independent Public Accountants.
- 1 -
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
OPERATING REVENUES $2,473,582 $2,469,785 $2,465,846
---------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 437,223 456,629 465,483
Nuclear operating costs 267,681 247,708 289,717
Other operating costs 446,778 420,523 446,967
---------- ---------- ----------
Total operation and maintenance expenses 1,151,682 1,124,860 1,202,167
Provision for depreciation 392,525 355,780 256,085
Amortization of net regulatory assets 37,416 27,661 5,825
General taxes 234,964 241,998 243,179
Income taxes 168,427 189,417 191,972
---------- ---------- ----------
Total operating expenses and taxes 1,985,014 1,939,716 1,899,228
---------- ---------- ----------
OPERATING INCOME 488,568 530,069 566,618
OTHER INCOME 52,847 37,537 14,424
---------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 541,415 567,606 581,042
---------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 204,285 211,935 243,570
Deferred nuclear unit interest - - (4,250)
Allowance for borrowed funds used during
construction and capitalized interest (2,699) (3,136) (5,668)
Other interest expense 31,209 28,211 22,944
Subsidiaries' preferred stock dividend requirements 15,426 15,426 7,205
---------- ---------- ----------
Net interest charges 248,221 252,436 263,801
---------- ---------- ----------
NET INCOME $293,194 $315,170 $317,241
PREFERRED STOCK DIVIDEND REQUIREMENTS 12,392 12,497 22,494
-------- -------- --------
EARNINGS ON COMMON STOCK $280,802 $302,673 $294,747
======== ======== ========
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
- 2 -
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
At December 31, 1997 1996
- -----------------------------------------------------------------------------------------
(In thousands)
ASSETS
<S> <C> <C>
UTILITY PLANT:
In service, at original cost $8,666,272 $8,634,030
Less--Accumulated provision for depreciation 3,546,594 3,226,259
---------- ----------
5,119,678 5,407,771
---------- ----------
Construction work in progress--
Electric plant 99,158 93,413
Nuclear fuel 21,360 5,786
---------- ----------
120,518 99,199
---------- ----------
5,240,196 5,506,970
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
PNBV Capital Trust (Note 3) 482,220 487,979
Letter of credit collateralization (Note 3) 277,763 277,763
Other (Note 4B) 529,408 323,316
---------- ----------
1,289,391 1,089,058
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 4,680 5,253
Receivables--
Customers (less accumulated provisions of
$5,618,000 and $2,306,000, respectively,
for uncollectible accounts) 235,332 247,027
Associated companies 25,348 -
Other 87,566 58,327
Materials and supplies, at average cost--
Owned 75,580 66,177
Under consignment 47,890 44,468
Prepayments and other 78,348 75,681
---------- ----------
554,744 496,933
---------- ----------
DEFERRED CHARGES:
Regulatory assets 1,601,709 1,703,111
Unamortized sale and leaseback costs 95,096 100,066
Property taxes 100,043 100,802
Other 96,276 57,517
---------- ----------
1,893,124 1,961,496
---------- ----------
$8,977,455 $9,054,457
========== ==========
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (See Consolidated Statements
of Capitalization):
Common stockholders' equity $2,724,319 $2,503,359
Preferred stock --
Not subject to mandatory redemption 160,965 160,965
Subject to mandatory redemption 15,000 20,000
Preferred stock of consolidated subsidiaries--
Not subject to mandatory redemption 50,905 50,905
Subject to mandatory redemption 15,000 15,000
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely Company
subordinated debentures 120,000 120,000
Long-term debt 2,569,802 2,712,760
---------- ----------
5,655,991 5,582,989
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 278,492 333,667
Short-term borrowings (Note 5) 302,229 349,480
Accounts payable 115,836 93,509
Accrued taxes 157,095 142,909
Accrued interest 53,165 52,855
Other 115,256 131,275
---------- ----------
1,022,073 1,103,695
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 1,698,354 1,777,086
Accumulated deferred investment tax credits 184,804 199,835
Pensions and other postretirement benefits 158,038 123,446
Other 258,195 267,406
---------- ----------
2,299,391 2,367,773
---------- ----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES
(Notes 3 and 6 ) $8,977,455 $9,054,457
========== ==========
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these balance sheets.
</TABLE>
- 3 -
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<CAPTION>
At December 31, 1997 1996
- ----------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
COMMON STOCKHOLDERS' EQUITY:
Common stock, $9 par value, authorized 175,000,000 shares-100 shares
and 152,569,437 shares outstanding, respectively $ 1 $1,373,125
Other paid-in capital 2,102,644 727,602
Retained earnings (Note 4A) 621,674 557,642
Unallocated employee stock ownership plan common stock-
8,259,053 shares (Note 4B) - (155,010)
---------- ----------
Total common stockholders' equity 2,724,319 2,503,359
---------- ----------
Number of Shares Optional
Outstanding Redemption Price
------------------ --------------------
1997 1996 Per Share Aggregate
<S> <C> <C> <C> <C>
PREFERRED STOCK (Note 4C):
Cumulative, $100 par value-
Authorized 6,000,000 shares
Not Subject to Mandatory
Redemption:
3.90% 152,510 152,510 $103.63 $15,804 15,251 15,251
4.40% 176,280 176,280 108.00 19,038 17,628 17,628
4.44% 136,560 136,560 103.50 14,134 13,656 13,656
4.56% 144,300 144,300 103.38 14,917 14,430 14,430
---------- ---------- ------- ---------- ----------
609,650 609,650 63,893 60,965 60,965
Cumulative, $25 par value-
Authorized 8,000,000 shares
Not Subject to Mandatory
Redemption:
7.75% 4,000,000 4,000,000 100,000 100,000
---------- ---------- ------- ---------- ----------
Total not subject to
mandatory redemption 4,609,650 4,609,650 $63,893 160,965 160,965
========== ========== ======= ---------- ----------
Cumulative, $100 par value-
Subject to Mandatory
Redemption (Note 4D):
8.45% 200,000 250,000 20,000 25,000
Redemption within
one year (5,000) (5,000)
---------- ---------- --------- ----------
Total subject to
mandatory redemption 200,000 250,000 15,000 20,000
========== ========== --------- ----------
PREFERRED STOCK OF
CONSOLIDATED SUBSIDIARY
(Note 4C):
Pennsylvania Power Company
Cumulative, $100 par value-
Authorized 1,200,000 shares
Not Subject to Mandatory
Redemption:
4.24% 40,000 40,000 $103.13 $ 4,125 4,000 4,000
4.25% 41,049 41,049 105.00 4,310 4,105 4,105
4.64% 60,000 60,000 102.98 6,179 6,000 6,000
7.64% 60,000 60,000 101.42 6,085 6,000 6,000
7.75% 250,000 250,000 - - 25,000 25,000
8.00% 58,000 58,000 102.07 5,920 5,800 5,800
---------- ---------- ------- --------- ----------
Total not subject to
mandatory redemption 509,049 509,049 $26,619 50,905 50,905
========== ========== ======= --------- ----------
Subject to Mandatory
Redemption (Note 4D):
7.625% 150,000 150,000 107.63 $16,145 15,000 15,000
========== ========== ---------- ----------
COMPANY OBLIGATED MANDATOR-
ILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY
TRUSTHOLDING SOLELY COMPANY
SUBORDINATED DEBENTURES
(Note 4E):
Cumulative, $25 par value-
Authorized 4,800,000 shares
Subject to Mandatory
Redemption:
9.00% 4,800,000 4,800,000 120,000 120,000
========= ========= ---------- ----------
</TABLE>
- 4 -
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont.)
<CAPTION>
At December 31, 1997 1996 1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT (Note 4F):
First mortgage bonds:
Ohio Edison Company-- Pennsylvania Power Company--
8.750% due 1998 150,000 150,000 9.740% due 1999-2019 20,000 20,000
6.875% due 1999 150,000 150,000 7.500% due 2003 40,000 40,000
6.375% due 2000 80,000 80,000 6.375% due 2004 20,500 37,000
7.375% due 2002 120,000 120,000 6.625% due 2004 14,000 20,000
7.500% due 2002 34,265 34,265 8.500% due 2022 27,250 27,250
8.250% due 2002 125,000 125,000 7.625% due 2023 6,500 6,500
------- -------
8.625% due 2003 150,000 150,000
6.875% due 2005 80,000 80,000
8.750% due 2022 50,960 50,960
7.625% due 2023 75,000 75,000
7.875% due 2023 100,000 100,000
--------- ---------
Total first mortgage
bonds. 1,115,225 1,115,225 128,250 150,750 1,243,475 1,265,975
--------- --------- ------- ------- ---------- ----------
Secured notes:
Ohio Edison Company-- Pennsylvania Power Company--
7.930% due 2002 50,646 60,467 4.750% due 1998 850 850
7.680% due 2005 200,000 200,000 6.080% due 2000 23,000 23,000
6.750% due 2015 40,000 40,000 5.400% due 2013 1,000 1,000
7.450% due 2016 47,725 47,725 5.400% due 2017 10,600 10,600
7.100% due 2018 26,000 26,000 7.150% due 2017 17,925 17,925
7.050% due 2020 60,000 60,000 5.900% due 2018 16,800 16,800
7.000% due 2021 69,500 69,500 8.100% due 2018 - 10,300
7.150% due 2021 443 443 8.100% due 2020 5,200 5,200
7.625% due 2023 50,000 50,000 7.150% due 2021 14,482 14,482
8.100% due 2023 30,000 30,000 6.150% due 2023 12,700 12,700
7.750% due 2024 108,000 108,000 3.900% due 2027 10,300 -
5.625% due 2029 50,000 50,000 6.450% due 2027 14,500 14,500
5.950% due 2029 56,212 56,212 5.450% due 2028 6,950 6,950
5.450% due 2033 14,800 14,800 6.000% due 2028 14,250 14,250
5.950% due 2029 238 238
--------- --------- ------- -------
803,326 813,147 148,795 148,795 952,121 961,942
--------- --------- ------- ------- ---------- ----------
OES Fuel--
5.86% weighted
average interest
rate 80,755 84,000
---------- ----------
Total secured notes 1,032,876 1,045,942
---------- ----------
Unsecured notes:
Ohio Edison Company--
7.430% due 1997 - 100,000
8.735% due 1997 - 50,000
6.088% due 1999 - 225,000
6.338% due 1999 40,000 -
6.400% due 1999 175,000 -
4.300% due 2012 50,000 50,000
4.350% due 2014 50,000 50,000
3.950% due 2015 50,000 50,000
4.100% due 2018 57,100 57,100
4.200% due 2018 56,000 56,000
4.050% due 2032 53,400 53,400
---------- ----------
Total unsecured notes 531,500 691,500
---------- ----------
Capital lease obligations (Note 3) 40,614 43,775
---------- ----------
Net unamortized discount on debt (5,171) (5,765)
---------- ----------
Long-term debt due within one year (273,492) (328,667)
---------- ----------
Total long-term debt 2,569,802 2,712,760
---------- ----------
TOTAL CAPITALIZATION $5,655,991 $5,582,989
========== ==========
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
- 5 -
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $557,642 $471,095 $389,600
Net income 293,194 315,170 317,241
-------- -------- --------
850,836 786,265 706,841
- --------------------------------------------------------------------------------
Cash dividends on preferred stock 12,392 12,497 20,234
Cash dividends on common stock 216,770 216,126 215,512
-------- -------- --------
229,162 228,623 235,746
-------- -------- --------
Balance at end of year (Note 4A) $621,674 $557,642 $471,095
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CAPITAL STOCK AND OTHER PAID-IN CAPITAL
<CAPTION>
Preferred Stock
-----------------------------------------
Unallo- Not Subject to Subject to
Common Stock cated Mandatory Redemption Mandatory Redemption
------------------------------ --------------------- --------------------
Other ESOP Par or Par or
Number Par Paid-In Common Number Stated Number Stated
of Shares Value Capital Stock of Shares Value of Shares Value
----------- ---------- -------- ---------- --------- -------- ------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995 152,569,437 $1,373,125 $ 724,848 $(170,376) 6,282,399 $328,240 400,000 $40,000
Minimum liability
for unfunded
retirement benefits 2,446
Allocation of ESOP
Shares 1,274 7,720
Sale of 9%
Preferred Stock 4,800,000 120,000
Redemptions--
7.24% Series (720) (363,700) (36,370)
7.36% Series (609) (350,000) (35,000)
8.20% Series (932) (450,000) (45,000)
- --------------------------------------------------------------------------------------------------------
Balance, December 31,
1995 152,569,437 1,373,125 726,307 (162,656) 5,118,699 211,870 5,200,000 160,000
Minimum liability
for unfunded
retirement benefits (51)
Allocation of ESOP
Shares 1,346 7,646
- --------------------------------------------------------------------------------------------------------
Balance, December 31,
1996 152,569,437 1,373,125 727,602 (155,010) 5,118,699 211,870 5,200,000 160,000
FirstEnergy merger(152,569,337)(1,373,124) 1,373,124 146,977
Minimum liability
for unfunded
retirement benefits 44
Allocation of
ESOP Shares 1,874 8,033
Redemptions--
8.45% Series (50,000) (5,000)
- --------------------------------------------------------------------------------------------------------
Balance, December 31,
1997 100 $ 1 $2,102,644 $ - 5,118,699 $211,870 5,150,000 $155,000
=========================================================================================================
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
- 6 -
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
- -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $293,194 $315,170 $317,241
Adjustments to reconcile net income to net
cash from operating activities:
Provision for depreciation 392,525 355,780 256,085
Nuclear fuel and lease amortization 49,251 52,784 70,849
Other amortization, net 36,229 25,961 5,885
Deferred income taxes, net (40,478) 41,365 53,395
Investment tax credits, net (15,031) (14,041) (9,951)
Receivables (23,887) 24,326 (20,452)
Materials and supplies (10,557) (736) 12,428
Accounts payable 32,531 962 3,545
Other 22,943 (41,254) 64,189
-------- -------- --------
Net cash provided from operating activities 736,720 760,317 753,214
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Preferred stock - - 120,000
Long-term debt 89,773 306,313 254,365
Short-term borrowings, net - 229,515 -
Redemptions and Repayments-
Preferred stock 5,000 1,016 117,528
Long-term debt 292,409 438,916 499,276
Short-term borrowings, net 47,251 - 54,677
Dividend Payments-
Common stock 237,848 218,656 217,192
Preferred stock 12,559 12,560 20,623
-------- -------- --------
Net cash used for financing activities 505,294 135,320 534,931
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 179,328 148,189 198,103
PNBV capital trust investment - 487,979 -
Other 52,671 13,406 13,641
-------- -------- --------
Net cash used for investing activities 231,999 649,574 211,744
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (573) (24,577) 6,539
Cash and cash equivalents at beginning of year 5,253 29,830 23,291
-------- -------- --------
Cash and cash equivalents at end of year $ 4,680 $ 5,253 $ 29,830
======== ======== ========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash Paid During the Year-
Interest (net of amounts capitalized) $212,987 $224,541 $254,789
======== ======== ========
Income taxes $228,399 $157,477 $178,643
======== ======== ========
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
</TABLE>
- 7 -
<TABLE>
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF TAXES
<CAPTION>
For the Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
GENERAL TAXES:
Real and personal property $ 114,111 $ 115,443 $ 118,707
State gross receipts 99,262 104,158 100,591
Social security and unemployment 14,113 14,602 15,787
Other 7,478 7,795 8,094
---------- ---------- ----------
Total general taxes $ 234,964 $ 241,998 $ 243,179
========== ========== ==========
PROVISION FOR INCOME TAXES:
Currently payable-
Federal $ 225,529 $ 164,132 $ 145,511
State 17,784 9,839 10,352
---------- ---------- ----------
243,313 173,971 155,863
---------- ---------- ----------
Deferred, net-
Federal (34,429) 37,277 50,631
State (6,048) 4,088 2,764
---------- ---------- ----------
(40,477) 41,365 53,395
---------- ---------- ----------
Investment tax credit amortization (15,031) (14,041) (9,951)
---------- ---------- ----------
Total provision for income taxes $ 187,805 $ 201,295 $ 199,307
========== ========== ==========
INCOME STATEMENT CLASSIFICATION
OF PROVISION FOR INCOME TAXES:
Operating income $ 168,427 $ 189,417 $ 191,972
Other income 19,378 11,878 7,335
---------- ---------- ----------
Total provision for income taxes $ 187,805 $ 201,295 $ 199,307
========== ========== ==========
RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT
STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES:
Book income before provision for income taxes $ 480,999 $ 516,465 $ 516,548
========== ========== ==========
Federal income tax expense at statutory rate $ 168,350 $ 180,763 $ 180,792
Increases (reductions) in taxes resulting from-
Amortization of investment tax credits (15,031) (14,041) (9,951)
State income taxes net of federal income tax benefit 7,628 9,053 8,525
Amortization of tax regulatory assets 28,277 26,945 19,690
Other, net (1,419) (1,425) 251
---------- ---------- -----------
Total provision for income taxes $ 187,805 $ 201,295 $ 199,307
========== ========== ==========
ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31:
Property basis differences $1,019,952 $1,086,533 $1,047,387
Allowance for equity funds used during construction 210,136 233,345 263,465
Deferred nuclear expense 252,946 262,123 271,114
Customer receivables for future income taxes 177,578 191,537 204,978
Deferred sale and leaseback costs 74,861 78,607 82,381
Unamortized investment tax credits (67,208) (72,663) (77,777)
Other 30,089 (2,396) (19,114)
---------- ---------- ----------
Net deferred income tax liability $1,698,354 $1,777,086 $1,772,434
========== ========== ==========
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
</TABLE>
- 8 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements include Ohio
Edison Company (Company), and its wholly owned subsidiaries.
Pennsylvania Power Company (Penn) is the Company's principal
operating subsidiary. All significant intercompany transactions
have been eliminated. The Company became a wholly owned
subsidiary of FirstEnergy Corp. on November 8, 1997. The Company
and Penn (Companies) follow the accounting policies and practices
prescribed by the Public Utilities Commission of Ohio (PUCO), the
Pennsylvania Public Utility Commission (PPUC) and the Federal
Energy Regulatory Commission (FERC). The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make periodic estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Certain prior year amounts
have been reclassified to conform with the current year
presentation.
REVENUES-
The Companies' principal business is providing electric
service to customers in central and northeastern Ohio and western
Pennsylvania. The Companies' retail customers are metered on a
cycle basis. Revenue is recognized for unbilled electric service
through the end of the year.
Receivables from customers include sales to
residential, commercial and industrial customers located in the
Companies' service area and sales to wholesale customers. There
was no material concentration of receivables at December 31, 1997
or 1996, with respect to any particular segment of the Companies'
customers.
REGULATORY PLANS-
The Company's Rate Reduction and Economic Development
Plan was approved by the PUCO in 1995 and Penn's Rate Stability
and Economic Development Plan was approved by the PPUC in the
second quarter of 1996. These regulatory plans initially maintain
current base electric rates for the Company and Penn through
December 31, 2005 and June 20, 2006, respectively. At the end of
the regulatory plan period, the Company's base rates will be
reduced by $300 million (approximately 20 percent below current
levels). The plans also revised the Companies' fuel cost recovery
methods. The Companies formerly recovered fuel-related costs not
otherwise included in base rates from retail customers through
separate energy rates. In accordance with the respective
regulatory plans, the Company's fuel rate will be frozen through
the regulatory plan period, subject to limited periodic
adjustments; Penn's plan provided for the roll-in to base rates
of its fuel rate. As part of the Company's regulatory plan,
transition rate credits were implemented for customers, which are
expected to reduce operating revenues for the Company by
approximately $600 million during the regulatory plan period.
All of the Companies' regulatory assets are being
recovered under provisions of the regulatory plans. In addition,
the PUCO has authorized the Company to recognize additional
capital recovery related to its generating assets (which is
reflected as additional depreciation expense) and additional
amortization of regulatory assets during the regulatory plan
period of at least $2 billion, and the PPUC has authorized Penn
to accelerate at least $358 million, more than the amounts that
- 9 -
would have been recognized if the regulatory plans were not in
effect. These additional amounts are being recovered through
current rates. As of December 31, 1997, the Companies' cumulative
additional capital recovery and regulatory asset amortization
amounted to $427 million.
UTILITY PLANT AND DEPRECIATION-
Utility plant reflects the original cost of
construction, including payroll and related costs such as taxes,
employee benefits, administrative and general costs and financing
costs (allowance for funds used during construction).
The Companies provide for depreciation on a straight-
line basis at various rates over the estimated lives of property
included in plant in service. The annual composite rate for
electric plant was approximately 3.0% in 1997, 1996, and 1995. In
addition to the straight-line depreciation recognized in 1997,
1996 and 1995, the Companies recognized additional capital
recovery of $172 million, $144 million and $27 million,
respectively, as additional depreciation expense in accordance
with their regulatory plans. Such additional charges in the
accumulated provision for depreciation were $343 million and $171
million as of December 31, 1997 and 1996, respectively.
Annual depreciation expense includes approximately $8.8
million for future decommissioning costs applicable to the
Companies' ownership and leasehold interests in three nuclear
generating units. The Companies' share of the future obligation
to decommission these units is approximately $481 million in
current dollars and (using a 3.5% escalation rate) approximately
$1.2 billion in future dollars. The estimated obligation and the
escalation rate were developed based on site specific studies.
Payments for decommissioning are expected to begin in 2016, when
actual decommissioning work begins. The Companies have recovered
approximately $72 million for decommissioning through their
electric rates from customers through December 31, 1997. If the
actual costs of decommissioning the units exceed the funds
accumulated from investing amounts recovered from customers, the
Companies expect that additional amount to be recoverable from
their customers. The Companies have approximately $109.9 million
invested in external decommissioning trust funds as of
December 31, 1997. Earnings on these funds are reinvested with a
corresponding increase to the decommissioning liability. The
Companies have also recognized an estimated liability of
approximately $15.2 million related to decontamination and
decommissioning of nuclear enrichment facilities operated by the
United States Department of Energy (DOE), as required by the
Energy Policy Act of 1992.
The Financial Accounting Standards Board (FASB) issued
a proposed accounting standard for nuclear decommissioning costs
in February 1996. If the standard is adopted as proposed: (1)
annual provisions for decommissioning could increase; (2) the net
present value of estimated decommissioning costs could be
recorded as a liability; and (3) income from the external
decommissioning trusts could be reported as investment income.
The FASB indicated in October 1997 that it plans to continue work
on the proposal.
COMMON OWNERSHIP OF GENERATING FACILITIES-
The Companies, together with the other FirstEnergy
Corp. (FirstEnergy) utilities, The Cleveland Electric
Illuminating Company (CEI) and The Toledo Edison Company (TE),
and Duquesne Light Company constitute the Central Area Power
Coordination Group (CAPCO). The CAPCO companies own and/or lease,
as tenants in common, various power generating facilities. Each
of the companies is obligated to pay a share of the costs
associated with any jointly owned facility in the same proportion
as its interest. The Companies' portions of operating expenses
- 10 -
associated with jointly owned facilities are included in the
corresponding operating expenses on the Consolidated Statements
of Income. The amounts reflected on the Consolidated Balance
Sheet under utility plant at December 31, 1997, include the
following:
Utility Accumulated Construction Ownership/
Plant Provision for Work in Leasehold
Generating Units in Service Depreciation Progress Interest
- ----------------------------------------------------------------------------
(In millions)
W.H. Sammis #7 $ 305.5 $ 100.8 $ .8 68.80%
Bruce Mansfield #1,
#2 and #3 786.3 380.3 2.1 50.68%
Beaver Valley
#1 and #2 1,900.0 651.7 3.9 47.11%
Perry 1,837.0 720.4 3.1 35.24%
- ----------------------------------------------------------------------------
Total $4,828.8 $1,853.2 $9.9
- ----------------------------------------------------------------------------
NUCLEAR FUEL-
Nuclear fuel is recorded at original cost, which
includes material, enrichment, fabrication and interest costs
incurred prior to reactor load. The Companies amortize the cost
of nuclear fuel based on the rate of consumption. The Companies'
electric rates include amounts for the future disposal of spent
nuclear fuel based upon the formula used to compute payments to
the DOE.
INCOME TAXES-
Details of the total provision for income taxes are
shown on the Consolidated Statements of Taxes. Deferred income
taxes result from timing differences in the recognition of
revenues and expenses for tax and accounting purposes. Investment
tax credits, which were deferred when utilized, are being
amortized over the recovery period of the related property. The
liability method is used to account for deferred income taxes.
Deferred income tax liabilities related to tax and accounting
basis differences are recognized at the statutory income tax
rates in effect when the liabilities are expected to be paid.
RETIREMENT BENEFITS-
The Companies' trusteed, noncontributory defined
benefit pension plans cover almost all full-time employees. Upon
retirement, employees receive a monthly pension based on length
of service and compensation. The Companies use the projected unit
credit method for funding purposes and were not required to make
pension contributions during the three years ended December 31,
1997.
The following sets forth the funded status of the plans
and amounts recognized on the Consolidated Balance Sheets as of
December 31:
- 11-
1997 1996
- -----------------------------------------------------------------
(In millions)
Actuarial present value of benefit
obligations:
Vested benefits $ 677.4 $ 562.0
Nonvested benefits 29.9 38.9
- ----------------------------------------------------------------
Accumulated benefit obligation $ 707.3 $ 600.9
================================================================
Plan assets at fair value $1,080.6 $ 946.3
Actuarial present value of projected
benefit obligation 794.1 688.5
- ----------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 286.5 257.8
Unrecognized net gain (139.5) (106.2)
Unrecognized prior service cost 21.0 20.1
Unrecognized net transition asset (25.9) (33.9)
- ----------------------------------------------------------------
Net pension asset $ 142.1 $ 137.8
================================================================
The assets of the plans consist primarily of common
stocks, United States government bonds and corporate bonds. Net
pension costs for the three years ended December 31, 1997, were
computed as follows:
1997 1996 1995
- ----------------------------------------------------------------
(In millions)
Service cost-benefits earned
during the period $ 12.9 $ 14.2 $ 12.8
Interest on projected benefit
obligation 49.8 49.3 48.1
Return on plan assets (188.8) (141.6) (194.5)
Net deferral 90.1 52.7 118.7
Voluntary early retirement
program expense 31.5 12.5 -
Gain on plan curtailment - (12.8) -
- ----------------------------------------------------------------
Net pension cost $ (4.5) $ (25.7) $ (14.9)
================================================================
The assumed discount rates used in determining the
actuarial present value of the projected benefit obligation were
7.25% in 1997 and 7.5% in 1996 and 1995. The assumed rates of
increase in future compensation levels used to measure this
obligation were 4.0% in 1997 and 4.5% in 1996 and 1995. Expected
long-term rates of return on plan assets were assumed to be 10%
in 1997, 1996 and 1995.
The Companies provide a minimum amount of
noncontributory life insurance to retired employees in addition
to optional contributory insurance. Health care benefits, which
include certain employee deductibles and copayments, are also
available to retired employees, their dependents and, under
certain circumstances, their survivors. The Companies pay
insurance premiums to cover a portion of these benefits in excess
of set limits; all amounts up to the limits are paid by the
Companies. The Companies recognize the expected cost of providing
other postretirement benefits to employees and their
beneficiaries and covered dependents from the time employees are
hired until they become eligible to receive those benefits.
In accordance with Statement of Financial Accounting
Standards (SFAS) No. 88 "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," the 1996 net pension costs shown above and
the 1996 postretirement benefit costs shown below included
curtailment effects (significant changes in projected plan
assumptions) relating to the pension and postretirement benefit
plans. The employee terminations reflected in the Companies' 1996
voluntary early retirement program represented a plan curtailment
that significantly reduced the expected future employee service
years and the related accrual of defined pension and
- 12 -
postretirement benefits. In the pension plan, the reduction in
the benefit obligation increased the net pension asset and was
shown as a plan curtailment gain. In the postretirement benefit
plan, the unrecognized prior service cost associated with service
years no longer expected to be rendered as a result of the
terminations, was shown as a plan curtailment loss.
The following sets forth the funded status of the plans
and amounts recognized on the Consolidated Balance Sheets as of
December 31:
1997 1996
- ----------------------------------------------------------------
(In millions)
Accumulated postretirement benefit
obligation allocation:
Retirees $174.9 $155.5
Fully eligible active plan participants 15.8 10.1
Other active plan participants 76.9 75.5
- ----------------------------------------------------------------
Accumulated postretirement benefit obligation 267.6 241.1
Plan assets at fair value 2.8 2.0
- ----------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets 264.8 239.1
Unrecognized transition obligation (125.1) (133.5)
Unrecognized net loss (24.0) (7.4)
- ----------------------------------------------------------------
Net postretirement benefit liability $115.7 $ 98.2
================================================================
Net periodic postretirement benefit costs for the three
years ended December 31, 1997, were computed as follows:
1997 1996 1995
- ----------------------------------------------------------------
(In millions)
Service cost-benefits attributed to
the period $ 4.1 $ 4.3 $ 4.5
Interest cost on accumulated
benefit obligation 17.6 17.4 21.1
Amortization of transition
obligation 8.3 8.8 10.2
Amortization of loss - .1 .1
Voluntary early retirement program
expense 1.9 .5 -
Loss on plan curtailment - 13.1 -
- -----------------------------------------------------------------
Net periodic postretirement
benefit cost $31.9 $44.2 $35.9
================================================================
The health care trend rate assumption is 6.0% in the
first year gradually decreasing to 4.0% for the year 2008 and
later. The discount rates used to compute the accumulated
postretirement benefit obligation were 7.25% in 1997 and 7.5% in
1996 and 1995. An increase in the health care trend rate
assumption by one percentage point in all years would increase
the accumulated postretirement benefit obligation by
approximately $34.6 million and the aggregate annual service and
interest costs by approximately $3.1 million.
TRANSACTIONS WITH AFFILIATED COMPANIES-
Operating revenues and operating expenses include
amounts for affiliated transactions with CEI and TE since the
November 8, 1997 merger date. The Company's transactions with CEI
and TE from the merger date were primarily for electric sales.
The amounts related to CEI and TE were $4.3 million and $0.4
million, respectively.
- 13 -
SUPPLEMENTAL CASH FLOWS INFORMATION-
All temporary cash investments purchased with an
initial maturity of three months or less are reported as cash
equivalents on the Consolidated Balance Sheets. The Companies
reflect temporary cash investments at cost, which approximates
their market value. Noncash financing and investing activities
included capital lease transactions amounting to $3.0 million,
$2.0 million and $1.0 million for the years 1997, 1996 and 1995,
respectively. Commercial paper transactions of OES Fuel (a wholly
owned subsidiary of the Company) that have initial maturity
periods of three months or less are reported net within financing
activities under long-term debt and are reflected as long-term
debt on the Consolidated Balance Sheets (see Note 4F).
All borrowings with initial maturities of less than one
year are defined as financial instruments under generally
accepted accounting principles and are reported on the
Consolidated Balance Sheets at cost, which approximates their
fair market value. The following sets forth the approximate fair
value and related carrying amounts of all other long-term debt,
preferred stock subject to mandatory redemption and investments
other than cash and cash equivalents as of December 31:
1997 1996
---------------- ---------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(In Millions)
Long-term debt $2,727 $2,835 $2,919 $2,963
Preferred stock $ 155 $ 161 $ 160 $ 160
Investments other than
cash and cash equivalents:
Debt securities
- Maturity (5-10 years) $ 486 $ 512 $ 364 $ 364
- Maturity (more than
10 years) 259 294 387 390
Equity securities 14 14 14 14
All other 145 147 104 102
------ ------ ------ ------
$ 904 $ 967 $ 869 $ 870
The fair values of long-term debt and preferred stock
reflect the present value of the cash outflows relating to those
securities based on the current call price, the yield to maturity
or the yield to call, as deemed appropriate at the end of each
respective year. The yields assumed were based on securities with
similar characteristics offered by a corporation with credit
ratings similar to the Companies' ratings.
The fair value of investments other than cash and cash
equivalents represent cost (which approximates fair value) or the
present value of the cash inflows based on the yield to maturity.
The yields assumed were based on financial instruments with
similar characteristics and terms. Investments other than cash
and cash equivalents include decommissioning trust investments.
Unrealized gains and losses applicable to the decommissioning
trust have been recognized in the trust investment with a
corresponding change to the decommissioning liability. The other
debt and equity securities referred to above are in the held-to-
maturity category. The Companies have no securities held for
trading purposes.
REGULATORY ASSETS-
The Companies recognize, as regulatory assets, costs
which the FERC, PUCO and PPUC have authorized for recovery from
customers in future periods. Without such authorization, the
- 14 -
costs would have been charged to income as incurred. All
regulatory assets are being recovered from customers under the
Companies' respective regulatory plans. Based on those regulatory
plans, at this time, the Companies believe they will continue to
be able to bill and collect cost-based rates; accordingly, it is
appropriate that the Companies continue the application of SFAS
No. 71 "Accounting for the Effects of Certain Types of
Regulation" (SFAS 71). However, based on the regulatory
environment in Pennsylvania, Penn is expected to discontinue its
application of SFAS 71 for its generation operations, possibly as
early as 1998. The impact of Penn discontinuing SFAS 71 is not
expected to be material. The Companies also recognized additional
cost recovery of $39 million, $34 million and $11 million in
1997, 1996 and 1995, respectively, as additional regulatory asset
amortization in accordance with their regulatory plans.
Regulatory assets on the Consolidated Balance Sheets
are comprised of the following:
1997 1996
- ---------------------------------------------------------------
(In millions)
Nuclear unit expenses $ 707.7 $ 733.4
Customer receivables for future
income taxes 484.7 523.0
Sale and leaseback costs 210.3 220.8
Loss on reacquired debt 89.1 95.8
Employee postretirement benefit costs 25.9 29.2
Uncollectible customer accounts 18.9 29.8
Perry Unit 2 termination 36.7 40.4
DOE decommissioning and
decontamination costs 16.5 18.0
Other 11.9 12.7
- ---------------------------------------------------------------
Total $1,601.7 $1,703.1
===============================================================
2. MERGER:
FirstEnergy was formed on November 8, 1997, by the
merger of the Company and Centerior Energy Corporation
(Centerior). FirstEnergy holds directly all of the issued and
outstanding common shares of the Company and all of the issued
and outstanding common shares of Centerior's former direct
subsidiaries, which include, among others, CEI and TE. As a
result of the merger, the former common shareholders of the
Company and Centerior now own all of the outstanding shares of
FirstEnergy Common Stock. All other classes of capital stock of
the Company and its subsidiaries and of the subsidiaries of
Centerior are unaffected by the Merger and remain outstanding.
3. LEASES:
The Companies lease certain generating facilities,
certain transmission facilities, office space and other property
and equipment under cancelable and noncancelable leases.
The Company sold portions of its ownership interests in
Perry Unit 1 and Beaver Valley Unit 2 and entered into operating
leases on the portions sold for basic lease terms of
approximately 29 years. During the terms of the leases the
Company continues to be responsible, to the extent of its
individual combined ownership and leasehold interests, for costs
associated with the units including construction expenditures,
operation and maintenance expenses, insurance, nuclear fuel,
property taxes and decommissioning. The Company has the right, at
- 15 -
the end of the respective basic lease terms, to renew the leases
for up to two years. The Company also has the right to purchase
the facilities at the expiration of the basic lease term or
renewal term (if elected) at a price equal to the fair market
value of the facilities. The basic rental payments are adjusted
when applicable federal tax law changes.
OES Finance, Incorporated (OES Finance), a wholly owned
subsidiary of the Company, maintains deposits pledged as
collateral to secure reimbursement obligations relating to
certain letters of credit supporting the Company's obligations to
lessors under the Beaver Valley Unit 2 sale and leaseback
arrangements. The deposits pledged to the financial institution
providing those letters of credit are the sole property of OES
Finance. In the event of liquidation, OES Finance, as a separate
corporate entity, would have to satisfy its obligations to
creditors before any of its assets could be made available to the
Company as sole owner of OES Finance common stock.
Consistent with the regulatory treatment, the rentals
for capital and operating leases are charged to operating
expenses on the Consolidated Statements of Income. Such costs for
the three years ended December 31, 1997, are summarized as
follows:
1997 1996 1995
- ------------------------------------------------------------
(In millions)
Operating leases
Interest element $111.3 $107.6 $104.6
Other 23.2 18.3 13.9
Capital leases
Interest element 6.1 6.5 7.0
Other 6.0 6.3 6.6
- -------------------------------------------------------------
Total rentals $146.6 $138.7 $132.1
=============================================================
The future minimum lease payments as of December 31,
1997, are:
Operating Leases
--------------------------------------
Capital Lease PNBV Capital
Leases Payments Trust Income Net
- --------------------------------------------------------------------------------
(In millions)
1998 $ 13.8 $ 120.9 $ 38.4 $ 82.5
1999 11.7 125.8 38.0 87.8
2000 10.3 125.0 37.6 87.4
2001 9.7 127.6 36.2 91.4
2002 9.2 127.8 34.5 93.3
Years thereafter 80.0 1,979.6 249.4 1,730.2
- -------------------------------------------------------------------------------
Total minimum lease payments 134.7 $2,606.7 $ 434.1 $2,172.6
======== ======= ========
Executory costs 36.0
- -------------------------------------
Net minimum lease payments 98.7
Interest portion 58.1
- -------------------------------------
Present value of net minimum
lease payments 40.6
Less current portion 4.9
- -------------------------------------
Noncurrent portion $ 35.7
=====================================
The Company invested in the PNBV Capital Trust in the
third quarter of 1996. The Trust was established to purchase a
portion of the lease obligation bonds issued on behalf of lessors
in the Company's Perry Unit 1 and Beaver Valley Unit 2 sale and
leaseback transactions. As noted in the table above, the PNBV
Capital Trust income, which is included in other income in the
Consolidated Statements of Income, effectively reduces lease
costs related to those transactions.
- 16 -
4. CAPITALIZATION:
(A) RETAINED EARNINGS-
Under the Company's first mortgage indenture, the
Company's consolidated retained earnings unrestricted for payment
of cash dividends on the Company's common stock were $554.9
million at December 31, 1997.
(B) EMPLOYEE STOCK OWNERSHIP PLAN-
The Companies fund the matching contribution for their
401(k) savings plan through an ESOP Trust. All full-time
employees eligible for participation in the 401(k) savings plan
are covered by the ESOP. The ESOP borrowed $200 million from the
Company and acquired 10,654,114 shares of the Company's common
stock through market purchases; the shares were converted into
FirstEnergy's common stock in connection with the merger. The
ESOP loan, which was shown as a reduction to common equity on the
Consolidated Balance Sheet as of December 31, 1996, is included
in Other Property and Investments on the Consolidated Balance
Sheet as of December 31, 1997 as an investment with FirstEnergy
related to the FirstEnergy savings plan. Dividends on ESOP shares
are used to service the debt. Shares are released from the ESOP
on a pro-rata basis as debt service payments are made. In 1997,
1996 and 1995, 429,515 shares, 404,522 shares and 412,914 shares,
respectively, were allocated to the Companies' employees with the
corresponding expense recognized based on the shares allocated
method. Total ESOP-related compensation expense was calculated as
follows:
- --------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------
(In millions)
Base compensation $ 9.9 $ 9.0 $ 9.0
Dividends on common stock
held by the ESOP and
used to service debt (3.4) (2.9) (2.5)
- ---------------------------------------------------------------
Net expense $ 6.5 $ 6.1 $ 6.5
===============================================================
(C) PREFERRED STOCK-
Penn's 7.75% series of preferred stock has a
restriction which prevents early redemption prior to July 2003.
The Company's 8.45% series of preferred stock has no optional
redemption provision, and its 7.75% series is not redeemable
before April 1998. All other preferred stock may be redeemed by
the Companies in whole, or in part, with 30-60 days' notice.
(D) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION-
The Company's 8.45% series of preferred stock has an
annual sinking fund requirement for 50,000 shares that began on
September 16, 1997. Penn's 7.625% series has an annual sinking
fund requirement for 7,500 shares beginning on October 1, 2002.
- 17 -
The Companies' preferred shares are retired at $100 per
share plus accrued dividends. Annual sinking fund requirements
are $5 million in each year 1998-2001 and $1 million in 2002.
(E) COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY
SUBORDINATED DEBENTURES-
Ohio Edison Financing Trust, a wholly owned subsidiary
of the Company, has issued $120 million of 9% Cumulative Trust
Preferred Capital Securities. The Company purchased all of the
Trust's Common Securities and simultaneously issued to the Trust
$123.7 million principal amount of 9% Junior Subordinated
Debentures due 2025 in exchange for the proceeds that the Trust
received from its sale of Preferred and Common Securities. The
sole assets of the Trust are the Subordinated Debentures whose
interest and other payment dates coincide with the distribution
and other payment dates on the Trust Securities. Under certain
circumstances the Subordinated Debentures could be distributed to
the holders of the outstanding Trust Securities in the event the
Trust is liquidated. The Subordinated Debentures may be
optionally redeemed by the Company beginning December 31, 2000,
at a redemption price of $25 per Subordinated Debenture plus
accrued interest, in which event the Trust Securities will be
redeemed on a pro-rata basis at $25 per share plus accumulated
distributions. The Company's obligations under the Subordinated
Debentures along with the related Indenture, amended and restated
Trust Agreement, Guarantee Agreement and the Agreement for
expenses and liabilities, constitute a full and unconditional
guarantee by the Company of payments due on the Preferred
Securities.
(F) LONG-TERM DEBT-
The first mortgage indentures and their supplements,
which secure all of the Companies' first mortgage bonds, serve as
direct first mortgage liens on substantially all property and
franchises, other than specifically excepted property, owned by
the Companies.
Based on the amount of bonds authenticated by the
Trustee through December 31, 1997, the Company's annual sinking
and improvement fund requirement for all bonds issued under the
mortgage amounts to $30 million. The Company expects to deposit
funds in 1998 that will be withdrawn upon the surrender for
cancellation of a like principal amount of bonds, which are
specifically authenticated for such purposes against unfunded
property additions or against previously retired bonds. This
method can result in minor increases in the amount of the annual
sinking fund requirement.
Sinking fund requirements for first mortgage bonds and
maturing long-term debt (excluding capital leases) for the next
five years are:
(In Millions)
- -------------------------------------------------------
1998 $268.6
1999 617.2
2000 166.5
2001 14.5
2002 324.4
- --------------------------------------------------------
The Companies' obligations to repay certain pollution
control revenue bonds are secured by several series of first
mortgage bonds and, in some cases, by subordinate liens on the
related pollution control facilities. Certain pollution control
revenue bonds are entitled to the benefit of irrevocable bank
- 18 -
letters of credit of $338.8 million. To the extent that drawings
are made under those letters of credit to pay principal of, or
interest on, the pollution control revenue bonds, the Company is
entitled to a credit against their obligation to repay those
bonds. The Company pays annual fees of 0.43% to 0.625% of the
amounts of the letters of credit to the issuing banks and are
obligated to reimburse the banks for any drawings thereunder.
The Company had unsecured borrowings of $215 million at
December 31, 1997, which are supported by a $250 million long-
term revolving credit facility agreement which expires
December 30, 1999. The Company must pay an annual facility fee of
0.20% on the total credit facility amount. In addition, the
credit agreement provides that the Company maintain unused first
mortgage bond capability for the full credit agreement amount
under the Company's indenture as potential security for the
unsecured borrowings.
Nuclear fuel purchases are financed through the
issuance of OES Fuel commercial paper and loans, both of which
are supported by a $225 million long-term bank credit agreement
which expires March 31, 1999. Accordingly, the commercial paper
and loans are reflected as long-term debt on the Consolidated
Balance Sheets. OES Fuel must pay an annual facility fee of
0.1875% on the total line of credit and an annual commitment fee
of 0.0625% on any unused amount.
5. SHORT-TERM BORROWINGS AND BANK LINES OF CREDIT:
Short-term borrowings outstanding at December 31, 1997,
consisted of $182.2 million of bank borrowings and $120.0 million
of OES Capital, Incorporated commercial paper. OES Capital is a
wholly owned subsidiary of the Company whose borrowings are
secured by customer accounts receivable. OES Capital can borrow
up to $120 million under a receivables financing agreement at
rates based on certain bank commercial paper and is required to
pay an annual fee of 0.26% on the amount of the entire finance
limit. The receivables financing agreement expires in 1999.
The Companies have lines of credit with domestic banks
that provide for borrowings of up to $77 million under various
interest rate options. Short-term borrowings may be made under
these lines of credit on their unsecured notes. To assure the
availability of these lines, the Companies are required to pay
annual commitment fees that vary from 0.22% to 0.50%. These lines
expire at various times during 1998. The weighted average
interest rates on short-term borrowings outstanding at December
31, 1997 and 1996, were 6.02% and 5.77%, respectively.
6. COMMITMENTS, GUARANTEES AND CONTINGENCIES:
CAPITAL EXPENDITURES-
The Companies' current forecasts reflect expenditures
of approximately $600 million for property additions and
improvements from 1998-2002, of which approximately $165 million
is applicable to 1998. Investments for additional nuclear fuel
during the 1998-2002 period are estimated to be approximately
$206 million, of which approximately $26 million applies to 1998.
During the same periods, the Companies' nuclear fuel investments
are expected to be reduced by approximately $182 million and $41
million, respectively, as the nuclear fuel is consumed.
- 19 -
NUCLEAR INSURANCE-
The Price-Anderson Act limits the public liability
relative to a single incident at a nuclear power plant to $8.92
billion. The amount is covered by a combination of private
insurance and an industry retrospective rating plan. Based on
their present ownership and leasehold interests in the Beaver
Valley Station and the Perry Plant, the Companies' maximum
potential assessment under the industry retrospective rating plan
(assuming the other co-owners contribute their proportionate
shares of any assessments under the retrospective rating plan)
would be $102.8 million per incident but not more than $13
million in any one year for each incident.
The Companies are also insured as to their respective
interests in the Beaver Valley Station and the Perry Plant under
policies issued to the operating company for each plant. Under
these policies, up to $2.75 billion is provided for property
damage and decontamination and decommissioning costs. The
Companies have also obtained approximately $232 million of
insurance coverage for replacement power costs for their
respective interests in Perry and Beaver Valley. Under these
policies, the Companies can be assessed a maximum of
approximately $13 million for incidents at any covered nuclear
facility occurring during a policy year which are in excess of
accumulated funds available to the insurer for paying losses.
The Companies intend to maintain insurance against
nuclear risks as described above as long as it is available. To
the extent that replacement power, property damage,
decontamination, decommissioning, repair and replacement costs
and other such costs arising from a nuclear incident at any of
the Companies' plants exceed the policy limits of the insurance
in effect with respect to that plant, to the extent a nuclear
incident is determined not to be covered by the Companies'
insurance policies, or to the extent such insurance becomes
unavailable in the future, the Companies would remain at risk for
such costs.
GUARANTEES-
The CAPCO companies have each severally guaranteed
certain debt and lease obligations in connection with a coal
supply contract for the Bruce Mansfield Plant. As of December 31,
1997, the Companies' shares of the guarantees (which approximate
fair market value) were $43.4 million. The price under the coal
supply contract, which includes certain minimum payments, has
been determined to be sufficient to satisfy the debt and lease
obligations. The Companies' total payments under the coal supply
contract were $119.5 million, $113.8 million and $120.0 million
during 1997, 1996 and 1995, respectively. The Companies' minimum
annual payments are approximately $35 million under the contract,
which expires December 31, 1999.
ENVIRONMENTAL MATTERS-
Various federal, state and local authorities regulate
the Companies with regard to air and water quality and other
environmental matters. The Companies estimate additional capital
expenditures for environmental compliance of approximately $27
million, which is included in the construction forecast provided
under "Capital Expenditures" for 1998 through 2002.
The Companies are in compliance with the current sulfur
dioxide (SO2) and nitrogen oxides (NOX) reduction requirements
under the Clean Air Act Amendments of 1990. SO2 reductions
through the year 1999 will be achieved by burning lower-sulfur
fuel, generating more electricity from lower-emitting plants,
and/or purchasing emission allowances. Plans for complying with
- 20 -
reductions required for the year 2000 and thereafter have not
been finalized. The Environmental Protection Agency (EPA) is
conducting additional studies which could indicate the need for
additional NOX reductions from the Companies' Pennsylvania
facilities by the year 2003. In addition, the EPA is also
considering the need for additional NOX reductions from the
Companies' Ohio facilities. On November 7, 1997, the EPA proposed
uniform reductions of NOX emissions across a region of twenty-two
states, including Ohio and the District of Columbia (NOX
Transport Rule) after determining that such NOX emissions are
contributing significantly to ozone pollution in the eastern
United States. In a separate but related action, eight states
filed petitions with the EPA under Section 126 of the Clean Air
Act seeking reductions of NOX emissions which are alleged to
contribute to ozone pollution in the eight petitioning states. A
December 1997 EPA Memorandum of Agreement proposes to finalize
the NOX Transport Rule by September 30, 1998, and establishes a
schedule for EPA action on the Section 126 petitions. The cost of
NOX reductions, if required, may be substantial. The Companies
continue to evaluate their compliance plans and other compliance
options.
The Companies are required to meet federally approved
SO2 regulations. Violations of such regulations can result in
shutdown of the generating unit involved and/or civil or criminal
penalties of up to $25,000 for each day the unit is in violation.
The EPA has an interim enforcement policy for SO2 regulations in
Ohio that allows for compliance based on a 30-day averaging
period. The Companies cannot predict what action the EPA may take
in the future with respect to the interim enforcement policy.
Legislative, administrative and judicial actions will
continue to change the way that the Companies must operate in
order to comply with environmental laws and regulations. With
respect to any such changes and to the environmental matters
described above, the Companies expect that any resulting
additional capital costs which may be required, as well as any
required increase in operating costs, would ultimately be
recovered from their customers.
7. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED):
The following summarizes certain consolidated operating
results by quarter for 1997 and 1996.
<TABLE>
<CAPTION>
March 31, June 30, September 30, December 31,
Three Months Ended 1997 1997 1997 1997
- ----------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Operating Revenues $604.8 $593.3 $652.7 $622.9
Operating Expenses and Taxes 478.5 467.3 511.6 527.7
- --------------------------------------------------------------------------------------------
Operating Income 126.3 126.0 141.1 95.2
Other Income 13.5 14.1 12.0 13.3
Net Interest Charges 63.8 63.2 61.3 60.0
- --------------------------------------------------------------------------------------------
Net Income $ 76.0 $ 76.9 $ 91.8 $ 48.5
- --------------------------------------------------------------------------------------------
Earnings on Common Stock $ 72.9 $ 73.8 $ 88.7 $ 45.4
- --------------------------------------------------------------------------------------------
- 21 -
<CAPTION>
March 31, June 30, September 30, December 31,
Three Months Ended 1996 1996 1996 1996
- ----------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C> <C>
Operating Revenues $611.6 $599.3 $646.9 $611.9
Operating Expenses and Taxes 481.1 471.7 500.0 486.8
- -------------------------------------------------------------------------------------------
Operating Income 130.5 127.6 146.9 125.1
Other Income 7.0 10.7 7.1 12.7
Net Interest Charges 64.1 61.7 61.5 65.1
- -------------------------------------------------------------------------------------------
Net Income $ 73.4 $ 76.6 $ 92.5 $ 72.7
- -------------------------------------------------------------------------------------------
Earnings on Common Stock $ 70.3 $ 73.5 $ 89.4 $ 69.5
- -------------------------------------------------------------------------------------------
</TABLE>
- 22 -
Report of Independent Public Accountants
To the Stockholders and Board of Directors of Ohio Edison
Company:
We have audited the accompanying consolidated balance
sheets and consolidated statements of capitalization of Ohio
Edison Company (an Ohio corporation and wholly owned subsidiary
of FirstEnergy Corp.) and subsidiaries as of December 31, 1997
and 1996, and the related consolidated statements of income,
retained earnings, capital stock and other paid-in capital, cash
flows and taxes for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that we plan
and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of Ohio Edison Company and subsidiaries as of December
31, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
February 13, 1998
- 23 -
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
This discussion includes forward looking statements based
on information currently available to management. Such statements
are subject to certain risks and uncertainties. These statements
typically contain, but are not limited to, the terms "anticipate",
"potential", "expect", "believe", "estimate" and similar words.
Actual results may differ materially due to the speed and nature of
increased competition and deregulation in the electric utility
industry, economic or weather conditions affecting future sales and
margins, changes in markets for energy services, changing energy
market prices, legislative and regulatory changes (including
revised environmental requirements), availability and cost of
capital and other similar factors.
RESULTS OF OPERATIONS
We continued to make significant progress in 1997 as our
companies prepare for a more competitive environment in the
electric utility industry.
The most significant event during the year was the
approval by the Federal Energy Regulatory Commission (FERC) of our
merger with Centerior Energy Corporation to form FirstEnergy Corp.,
which came into existence on November 8, 1997. We expect the merger
to produce a minimum of $1 billion in savings for FirstEnergy Corp.
during the first ten years of joint operations through the
elimination of duplicative activities, improved operating
efficiencies, lower capital expenditures, accelerated debt
reduction, the coordination of the companies' work forces and
enhanced purchasing power.
Earnings on common stock of $280.8 million were adversely
affected by net nonrecurring charges amounting to $26.4 million
relating to a voluntary retirement program and estimated severance
expenses. Excluding these charges, 1997 earnings on common stock
were $307.2 million, compared to $302.7 million in 1996. The 1997
results reflect accelerated depreciation and amortization of
nuclear and regulatory assets totaling approximately $211 million
under our Rate Reduction and Economic Development Plan and
Pennsylvania Power Company's (Penn's) Rate Stability and Economic
Development Plan; results for 1996 included approximately $178
million of accelerated depreciation and amortization. The 1996
results compared favorably to earnings on common stock of $294.7
million in 1995.
For the third consecutive year, we achieved record
operating revenues and for the fifth consecutive year, we achieved
record retail sales. The following table summarizes the sources of
changes in operating revenues for 1997 and 1996 as compared to the
previous year:
1997 1996
---- ----
(In millions)
Increased retail kilowatt-hour sales $ 7.8 $ 58.1
Change in average retail price 13.3 (46.1)
Sales to utilities (25.8) (4.5)
Other 8.5 (3.6)
------ ------
Net Increase $ 3.8 $ 3.9
====== ======
- 24 -
An improving local economy helped us achieve record
retail sales of 27.3 billion kilowatt-hours. Our customer base
continues to grow with approximately 4,900 new retail customers
added in 1997, after gaining more than 12,200 customers the
previous year. Residential sales decreased 0.8% in 1997, following
a 1.8% gain the previous year. Commercial sales rose 1.2% and 1.3%
in 1997 and 1996, respectively. Increased demand by rubber and
plastics and primary metal manufacturers contributed to a 1.0% rise
in industrial sales during 1997, following a 5.5% increase the
previous year. Sales to other utilities fell 26.4% in 1997 as a
result of the December 31, 1996, expiration of a one-year contract
with another utility to supply 250 megawatts of power. This
reduction follows a 2.7% increase the previous year. As a result of
the above factors, total kilowatt-hour sales dropped 5.0%, compared
with sales in 1996, which were up 3.0% from 1995.
Because of lower kilowatt-hour sales, the Companies spent
less on fuel and purchased power during 1997, compared to 1996
costs, which were also down compared to 1995. Higher nuclear
expenses in 1997 reflect increased operating costs at the Beaver
Valley Plant. Nuclear operating costs were lower in 1996, compared
to 1995, due primarily to lower refueling outage cost levels. The
increase in other operating costs in 1997 reflects a fourth quarter
charge of approximately $41.5 million for a voluntary retirement
program and estimated severance expenses. These cost increases were
partially offset by gains on the sale of emission allowances during
the year. The decrease in other operating costs in 1996, compared
to 1995, reflects lower maintenance costs at our fossil-fuel
generating units.
The changes in depreciation and regulatory asset
amortization in 1997 and 1996 reflect accelerations under the
regulatory plans discussed above. General taxes decreased in 1997,
compared to 1996, due to lower property taxes and an adjustment in
the second quarter of 1997 which reduced the Companies' liabilities
for gross receipts taxes.
The increases in other income in 1997 and 1996 were
principally due to higher investment income--primarily through our
PNBV Capital Trust investment, which was effective in the third
quarter of 1996. Overall, interest costs continue to trend
downward. Total interest costs were lower in 1997 than in 1996.
Interest on long-term debt decreased due to our economic
refinancings and redemption of higher-cost debt totaling
approximately $282 million that had been outstanding as of December
31, 1996. Other interest expense increased compared to 1996 due
mainly to higher levels of short-term borrowing. We also
discontinued deferring nuclear unit interest in the second half of
1995, consistent with our regulatory plan.
CAPITAL RESOURCES AND LIQUIDITY
We have significantly improved our financial position
over the past five years. Cash generated from operations was nearly
25% higher in 1997 than it was in 1992 due to higher revenues and
aggressive cost controls. At the same time, return on common equity
improved from 10.8% in 1992 to 12.0% in 1997, excluding the net
nonrecurring charges discussed above. By the end of 1997, we were
serving about 57,000 more customers than we were five years ago,
with approximately 2,000 fewer employees. As a result, our
customer/employee ratio has increased by 56% over the past five
years, standing at 264 customers per employee at the end of 1997,
compared with 169 at the end of 1992. In addition, capital
expenditures have dropped substantially during that period.
Expenditures in 1997 were approximately 37% lower than they were in
1992, and total depreciation charges have exceeded property
additions since the end of 1987.
- 25 -
Over the past five years, we have aggressively taken
advantage of opportunities in the financial markets to reduce our
average capital costs. Through refinancing activities, we have
reduced the average cost of outstanding debt from 8.53% at the end
of 1992 to 7.77% at the end of 1997. Excluding the nonrecurring
charges mentioned above, our fixed charge coverage ratios continue
to improve. Our indenture ratio, which is used to measure our
ability to issue first mortgage bonds, improved from 4.34 at the
end of 1992 to 6.21 at the end of 1997. Over the same period, our
charter ratio--a measure of our ability to issue preferred stock--
improved from 1.89 to 2.35. At the end of 1997, our common equity
as a percentage of capitalization stood at 48% compared to 40% at
the end of 1992.
Our cash requirements in 1998 for operating expenses,
construction expenditures and scheduled debt maturities are
expected to be met without issuing additional securities. During
1997, we reduced our total debt by approximately $245 million. We
also have cash requirements of approximately $1,015 million for the
1998-2002 period to meet scheduled maturities of long-term debt and
preferred stock. Of that amount, approximately $167 million applies
to 1998.
We had about $4.7 million of cash and temporary
investments and $302.2 million of short-term indebtedness on
December 31, 1997. As of December 31, 1997, we had the capability
to borrow $61 million through unused OES Fuel credit facilities. In
addition, our unused borrowing capability included $37 million
under revolving lines of credit and $26 million of bank facilities
that provide for borrowings on a short-term basis at the banks'
discretion.
Our capital spending for the period 1998-2002 is expected
to be about $600 million (excluding nuclear fuel), of which
approximately $165 million applies to 1998. This spending level is
nearly $300 million lower than actual capital outlays over the past
five years. Investments for additional nuclear fuel during the
1998-2002 period are estimated to be approximately $206 million, of
which about $26 million applies to 1998. During the same periods,
our nuclear fuel investments are expected to be reduced by
approximately $182 million and $41 million, respectively, as the
nuclear fuel is consumed. Also, we have operating lease commitments
(net of PNBV Capital Trust income) of approximately $442 million
for the 1998-2002 period, of which approximately $83 million
relates to 1998. We recover the cost of nuclear fuel consumed and
operating leases through our electric rates.
INTERST RATE RISK
Our exposure to fluctuations in market interest rates is
mitigated by the fact that a significant portion of our debt has
fixed interest rates, as noted in the table below. We are subject
to the inherent interest rate risks related to refinancing maturing
debt by issuing new debt securities. As discussed in Note 3, our
investment in the PNBV Capital Trust effectively reduces future
lease obligations, also reducing interest rate risk. As discussed
in Note 1, changes in the market value of our decommissioning trust
funds are recognized with a corresponding change to the
decommissioning liability.
The table below presents principal amounts and related
weighted average interest rates by year of maturity for our
investment portfolio, debt obligations and preferred stock with
mandatory redemption provisions:
- 26 -
<TABLE>
<CAPTION>
There- Fair
1998 1999 2000 2001 2002 after Total Value
- -------------------------------------------------------------------------------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investments other than Cash
- ---------------------------
and Cash Equivalents
- --------------------
Fixed Income $ 7 $ 6 $ 17 $ 23 $ 26 $ 738 $ 817 $ 880
Average interest rate 5.9% 5.5% 7.3% 7.7% 7.8% 7.8% 7.8%
Liabilities
Long-term Debt
Fixed rate $162 $162 $116 $15 $324 $1,406 $2,185 $2,297
Average interest rate 8.7% 6.9% 6.5% 8.1% 7.8% 7.4% 7.5%
Variable rate 215 327 542 538
Average interest rate 6.4% 4.1% 5.0%
Short-term Borrowings 302 302 302
Average interest rate 6.0% 6.0%
Preferred Stock 5 5 5 5 134 155 161
Average dividend rate 8.5% 8.5% 8.5% 8.5% 7.6% 8.9% 8.8%
</TABLE>
OUTLOOK
We face many competitive challenges in the years ahead as
the electric utility industry undergoes significant changes,
including changing regulation and the entrance of more energy
suppliers into the marketplace. Retail wheeling, which would allow
retail customers to purchase electricity from other energy
producers, will be one of those challenges. Our regulatory plans
provide the foundation to position us to meet the challenges we are
facing by significantly reducing fixed costs and lowering rates to
a more competitive level.
The Company's Rate Reduction and Economic Development
Plan was approved by the Public Utilities Commission of Ohio (PUCO)
in 1995; Penn's Rate Stability and Economic Development Plan was
approved by the Pennsylvania Public Utility Commission (PPUC) in
the second quarter of 1996. These regulatory plans initially
maintain the Company's current base electric rates through December
31, 2005, and Penn's through June 20, 2006. The plans also revised
the Companies' fuel cost recovery methods.
As part of the Company's regulatory plan, transition rate
credits were implemented for customers, which are expected to
reduce operating revenues by approximately $600 million during the
regulatory plan period, which is to be followed by a base rate
reduction of approximately $300 million in 2006.
The Companies' regulatory assets are being recovered
under provisions of the regulatory plans. In addition, we have been
authorized by the PUCO and PPUC to recognize additional capital
recovery related to our generating assets (which is reflected as
additional depreciation expense) and additional amortization of
regulatory assets during the regulatory plan periods of at least $2
billion for the Company and $358 million for Penn, more than the
amounts that would have been recognized if the regulatory plans
were not in effect. These additional amounts are being recovered
through current rates.
Based on the regulatory environment we operate in today
and the regulatory plans, we believe we will continue to be able to
bill and collect cost-based rates for all of our operations;
- 27 -
accordingly, it is appropriate that we continue the application of
Statement of Financial Accounting Standards No. 71 "Accounting for
the Effects of Certain Types of Regulation" (SFAS 71). However, as
discussed below, changes in the regulatory environment are on the
horizon. With respect to Penn, we expect to discontinue the
application of SFAS 71 for the generation portion of that business,
possibly as early as 1998. We do not expect the impact of Penn
discontinuing SFAS 71 to be material. As further discussed below,
the Ohio legislature is in the discussion stages of restructuring
the electric utility industry within the State. We do not expect
any changes in Ohio regulation to be effective within the next two
years and we cannot assess what the ultimate impact may be.
On September 30, 1997, Penn filed a restructuring plan
with the PPUC. The plan describes how Penn will restructure its
rates and provide customers with direct access to alternative
electricity suppliers; customer choice is to be phased in over
three years beginning in 1999, after completion of a two-year pilot
program. Penn will continue to deliver power to homes and
businesses through its transmission and distribution system, which
remains regulated by the PPUC. Penn also plans to sell electricity
and energy-related services in its own territory and throughout
Pennsylvania as an alternative supplier through its nonregulated
subsidiary, Penn Power Energy. Through the restructuring plan, Penn
is seeking recovery of $293 million of stranded costs through a
competitive transition charge starting in 1999 and ending in 2005,
which is consistent with Penn's Rate Stability and Economic
Development Plan currently in effect. The PPUC plans to hold public
hearings on Penn's restructuring plan early in 1998.
On January 6, 1998, the co-chairs of the Ohio General
Assembly's Joint Select Committee on Electric Industry Deregulation
released their draft report of a plan which proposes to give
customers a choice from whom they buy electricity beginning January
1, 2000. No consensus has been reached by the full Committee; in
the meantime, legislation consistent with the co-chairs' draft
report may be introduced into the General Assembly by one or both
of the co-chairs. We cannot predict when or if this legislation
will be introduced and if it will be passed into law. We continue
to study the potential effects that such legislation would have on
our financial position and results of operations.
The Financial Accounting Standards Board (FASB) issued a
proposed accounting standard for nuclear decommissioning costs in
February 1996. If the standard is adopted as proposed: (1) annual
provisions for decommissioning could increase; (2) the net present
value of estimated decommissioning costs could be recorded as a
liability; and (3) income from the external decommissioning trusts
could be reported as investment income. The FASB reported in
October 1997 that it plans to continue working on the proposal in
1998.
The Clean Air Act Amendments of 1990, discussed in Note
6, require additional emission reductions by 2000. We are pursuing
cost-effective compliance strategies for meeting the reduction
requirements that begin in 2000.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs
being written using two digits rather than four to identify the
applicable year. Any of our programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or
miscalculations.
- 28 -
We currently believe that with modifications to existing
software and conversions to new software, the Year 2000 Issue will
pose no significant operational problems for our computer systems
as so modified and converted. If these modifications and
conversions are not made, or are not completed on a timely basis,
the Year 2000 Issue could have a material impact on our
operations.
We have initiated formal communications with many of our
major suppliers to determine the extent to which we are vulnerable
to those third parties' failure to resolve their own Year 2000
problems. Our total Year 2000 project cost and estimates to
complete are based on currently available information and do not
include the estimated costs and time associated with the impact of
a third party's Year 2000 issue. There can be no guarantee that the
failure of other companies to resolve their own Year 2000 issues
will not have a material adverse effect on us.
We are utilizing both internal and external resources to
reprogram and/or replace and test the software for Year 2000
modifications. Most of our Year 2000 problems will be resolved
through system replacements. The different phases of our Year 2000
project will be completed at various dates, most of which occur in
1999. We plan to complete the entire Year 2000 project by mid-
December 1999. Of the total project cost, approximately $30 million
will be capitalized since those costs are attributable to the
purchase of new software for total system replacements (i.e., the
Year 2000 solution comprises only a portion of the benefit
resulting from the system replacements). The remaining $4 million
will be expensed as incurred over the next two years. To date, we
have incurred approximately $0.5 million related to the assessment
of, and preliminary efforts in connection with, our Year 2000
project and the development of a remediation plan.
The costs of the project and the date on which we plan to
complete the year 2000 modifications are based on management's best
estimates, which were derived from numerous assumptions of future
events including the continued availability of certain resources,
and other factors. However, there can be no guarantee that this
project will be completed as planned and actual results could
differ materially from the estimates. Specific factors that might
cause material differences include, but are not limited to, the
availability and cost of trained personnel, the ability to locate
and correct all relevant computer code, and similar uncertainties.
- 29 -
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.
OHIO EDISON COMPANY
/s/ Harvey L. Wagner
-------------------------
Harvey L. Wagner
Controller
Dated: March 23, 1998
- 30 -
EXHIBIT 24
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our report on the consolidated financial
statements of Ohio Edison Company, dated February 13, 1998 and
included in this Form 8-K, into the Company's previously filed
Registration Statements, No. 33-49135, No. 33-49259, No. 33-
49413, No. 33-51139, No. 333-01489, No. 333-05277, and No. 333-
21011.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
March 23, 1998
- 31 -
<TABLE> <S> <C>
<ARTICLE> OPUR1
<LEGEND>
(Amounts in 1,000's, except per share)
Income tax expense inclues $19,378,000 related to other income.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 5,240,196
<OTHER-PROPERTY-AND-INVEST> 1,289,391
<TOTAL-CURRENT-ASSETS> 554,744
<TOTAL-DEFERRED-CHARGES> 1,893,124
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 8,977,455
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 2,102,644
<RETAINED-EARNINGS> 621,674
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,724,319
150,000
211,870
<LONG-TERM-DEBT-NET> 2,569,802
<SHORT-TERM-NOTES> 182,245
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 119,984
<LONG-TERM-DEBT-CURRENT-PORT> 268,621
5,000
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 4,871
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,740,743
<TOT-CAPITALIZATION-AND-LIAB> 8,977,455
<GROSS-OPERATING-REVENUE> 2,473,582
<INCOME-TAX-EXPENSE> 187,805
<OTHER-OPERATING-EXPENSES> 1,816,587
<TOTAL-OPERATING-EXPENSES> 1,985,014
<OPERATING-INCOME-LOSS> 488,568
<OTHER-INCOME-NET> 52,847
<INCOME-BEFORE-INTEREST-EXPEN> 541,415
<TOTAL-INTEREST-EXPENSE> 248,221
<NET-INCOME> 293,194
12,392
<EARNINGS-AVAILABLE-FOR-COMM> 280,802
<COMMON-STOCK-DIVIDENDS> 216,770
<TOTAL-INTEREST-ON-BONDS> 204,285
<CASH-FLOW-OPERATIONS> 736,720
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
