-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, USIJyXJ9aHFqHrKxls++Tf/HTNcbELAEu4nMbXfDWEO3I+9iNpSgb1Rexnhejlej 6mAjMO9DEjDBa+ikSVU/lw== 0001031296-99-000005.txt : 19990330 0001031296-99-000005.hdr.sgml : 19990330 ACCESSION NUMBER: 0001031296-99-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 29 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTENERGY CORP CENTRAL INDEX KEY: 0001031296 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 341843785 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-21011 FILM NUMBER: 99575519 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN ST CITY: AKRON STATE: OH ZIP: 44308-1890 BUSINESS PHONE: 3303845100 MAIL ADDRESS: STREET 1: 76 SOUTH MAIN ST CITY: AKRON STATE: OH ZIP: 44308-1890 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLEVELAND ELECTRIC ILLUMINATING CO CENTRAL INDEX KEY: 0000020947 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 340150020 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-02323 FILM NUMBER: 99575520 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN STREET STREET 2: C/O FIRSTENERGY CORP CITY: AKRON STATE: OH ZIP: 44308 BUSINESS PHONE: 2166229800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO EDISON CO CENTRAL INDEX KEY: 0000073960 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 340437786 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-02578 FILM NUMBER: 99575521 BUSINESS ADDRESS: STREET 1: 76 S MAIN ST CITY: AKRON STATE: OH ZIP: 44308 BUSINESS PHONE: 2163845100 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNSYLVANIA POWER CO CENTRAL INDEX KEY: 0000077278 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 250718810 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03491 FILM NUMBER: 99575522 BUSINESS ADDRESS: STREET 1: 1 E WASHINGTON ST STREET 2: P O BOX 891 CITY: NEW CASTLE STATE: PA ZIP: 16103-0891 BUSINESS PHONE: 4126525531 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOLEDO EDISON CO CENTRAL INDEX KEY: 0000352049 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 344375005 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03583 FILM NUMBER: 99575523 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN STREET CITY: AKRON STATE: OH ZIP: 43308 BUSINESS PHONE: 2166229800 10-K 1 1998 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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, OH 44308 Telephone (800)736-3402 1-2578 OHIO EDISON COMPANY 34-0437786 (An Ohio Corporation) 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-2323 THE CLEVELAND ELECTRIC ILLUMINATING 34-0150020 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, PA 16103 Telephone (412)652-5531 SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. (X) --- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes (X) No ( ) --- --- State the aggregate market value of the voting stock held by non-affiliates of the registrant: $7,197,332,945 as of March 17, 1999. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: OUTSTANDING CLASS AT MARCH 23, 1999 ----- ----------------- FirstEnergy Corp., $.10 par value 236,008,687 Ohio Edison Company, $9 par value 100 The Cleveland Electric Illuminating Company, no par value 79,590,689 The Toledo Edison Company, $5 par value 39,133,887 Pennsylvania Power Company, $30 par value 6,290,000 FirstEnergy Corp. is the sole holder of Ohio Edison Company, The Cleveland Electric Illuminating Company and The Toledo Edison Company common stock; Ohio Edison Company is the sole holder of Pennsylvania Power Company common stock. Documents incorporated by reference (to the extent indicated herein): PART OF FORM 10-K INTO WHICH DOCUMENT DOCUMENT IS INCORPORTED -------- ----------------------------- FirstEnergy Corp. Annual Report to Stockholders for the fiscal year ended December 31, 1998 (Pages 16-40) Part II Proxy Statement for 1998 Annual Meeting of Stockholders to be held April 29, 1999 Part III SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Name of Each Exchange Registrant Title of Each Class on Which Registered ---------- -------------------------- ---------------------- FirstEnergy Corp. Common Stock, $.10 par value New York Stock Exchange Ohio Edison Cumulative Preferred Stock, Company $100 par value 3.90% Series All series registered 4.40% Series on New York Stock 4.44% Series Exchange and Chicago 4.56% Series Stock Exchange Cumulative Preferred Stock, Registered on New $25 par value York Stock Exchange and 7.75% Series Chicago Stock Exchange The Cleveland Cumulative Serial Preferred Electric Illumin- Stock, without par value: ating Company $7.40 Series A All series registered $7.56 Series B on New York Stock Adjustable Rate, Series L Exchange Depository Shares: 1993 Series A, each New York Stock share representing 1/20 Exchange of a share of Serial Preferred Stock, $42.40 Series T (without par value) First Mortgage Bonds: 8-3/4% Series due 2005 New York Stock Exchange 8-3/8% Series due 2011 New York Stock Exchange 8-3/8% Series due 2012 New York Stock Exchange The Toledo Edison Cumulative Preferred Stock, Company par value $100 per share: 4-1/4% Series All series registered 8.32% Series on American Stock 7.76% Series Exchange 10% Series Cumulative Preferred Stock, par value $25 per share: 8.84% Series All series registered $2.365 Series on New York Stock Adjustable Rate, Series A Exchange Adjustable Rate, Series B First Mortgage Bonds: 8% Series due 2003 All series registered on New York Stock Exchange Pennsylvania Cumulative Preferred Stock, Power Company $100 par value: 4.24% Series All series registered 4.25% Series on Philadelphia Stock 4.64% Series Exchange, Inc. 7.64% Series 8.00% Series This combined Form 10-K is separately filed by FirstEnergy Corp., Ohio Edison Company, Pennsylvania Power Company, The Cleveland Electric Illuminating Company and The Toledo Edison Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to any other registrant, except that information relating to any of the four FirstEnergy subsidiaries is also attributed to FirstEnergy. FORM 10-K TABLE OF CONTENTS Page ---- Part I Item 1. Business 1 The Company 1 Utility Regulation 1 PUCO Rate Matters 2 PPUC Rate Matters 2 FERC Rate Matters 3 Fuel Recovery Procedures 3 Capital Requirements 4 Central Area Power Coordination Group 5 Nuclear Regulation 6 Nuclear Insurance 6 Environmental Matters 7 Air Regulation 7 Water Regulation 8 Waste Disposal 8 Summary 9 Fuel Supply 9 System Capacity and Reserves 10 Regional Reliability 10 Competition 10 Research and Development 11 Executive Officers 11 Item 2. Properties 13 Item 3. Legal Proceedings 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 14 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 Item 8. Financial Statements and Supplementary Data 15 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 15 Part III Item 10. Directors and Executive Officers of the Registrant 15 Item 11. Executive Compensation 15 Item 12. Security Ownership of Certain Beneficial Owners and Management 15 Item 13. Certain Relationships and Related Transactions 15 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 16 PART I ITEM 1. BUSINESS The Company FirstEnergy Corp. (Company) was organized under the laws of the State of Ohio in 1996 and became a holding company on November 8, 1997 in connection with the merger of Ohio Edison Company (OE) and Centerior Energy Corporation (Centerior). The Company's principal business is the holding, directly or indirectly, of all of the outstanding common stock of its four principal electric utility operating subsidiaries, OE, The Cleveland Electric Illuminating Company (CEI), Pennsylvania Power Company (Penn) and The Toledo Edison Company (TE). These utility subsidiaries are referred to throughout as "Companies." The Company's consolidated revenues are primarily derived from electric service provided by its utility operating subsidiaries and the revenues of its other principal subsidiaries: FirstEnergy Facilities Services Group, Inc. (FE Facilities); FirstEnergy Trading & Power Marketing, Inc. (FETPM), and MARBEL Energy Corporation (MARBEL). In addition, the Company holds all of the outstanding common stock of six other direct subsidiaries: FirstEnergy Services Corp. (FE Services), FirstEnergy Properties Inc., FirstEnergy Ventures, Corp., FirstEnergy Nuclear Operating Co. (FENOC), American Transmission Systems, Inc., and FirstEnergy Securities Transfer Company. The Companies' combined service areas encompass approximately 13,200 square miles in central and northern Ohio and western Pennsylvania. The areas they serve have combined populations of approximately 5,548,000. OE was organized under the laws of the State of Ohio in 1930 and owns property and does business as an electric public utility in that state. OE also has ownership interests in certain generating facilities located in the Commonwealth of Pennsylvania. OE furnishes electric service to communities in a 7,500 square mile area of central and northeastern Ohio. It also provides transmission services and electric energy for resale to certain municipalities in OE's service area and transmission services to certain rural cooperatives. OE also engages in the sale, purchase and interchange of electric energy with other electric companies. The area it serves has a population of approximately 2,474,000. OE owns all of the outstanding common stock of Penn, a Pennsylvania corporation, which furnishes electric service to communities in a 1,500 square mile area of western Pennsylvania. Penn also provides transmission services and electric energy for resale to certain municipalities in Pennsylvania. The area served by Penn has a population of approximately 377,000. CEI was organized under the laws of the State of Ohio in 1892 and does business as an electric public utility in that state. It also has ownership interests in certain generating facilities in Pennsylvania. CEI furnishes electric service in an area of approximately 1,700 square miles in northeastern Ohio, including the City of Cleveland. The area CEI serves has a population of approximately 2,011,000. TE was organized under the laws of the State of Ohio in 1901 and does business as an electric public utility in that state. It also has ownership interests in certain generating facilities in Pennsylvania. TE furnishes electric service in an area of approximately 2,500 square miles in northwestern Ohio, including the City of Toledo. The area TE serves has a population of approximately 686,000. FE Facilities is the parent company of several heating, ventilating, air conditioning and energy management companies. FETPM, which was organized as a corporation in Delaware in 1995, markets and trades electricity in nonregulated markets. MARBEL, which was acquired by the Company in June 1998, is a fully integrated natural gas company. Utility Regulation The Companies are subject to broad regulation as to rates and other matters by the Public Utilities Commission of Ohio (PUCO) and the Pennsylvania Public Utility Commission (PPUC). With respect to their wholesale and interstate electric operations and rates, the Companies are subject to regulation, including regulation of their accounting policies and practices, by the Federal Energy Regulatory Commission (FERC). Under Ohio law, municipalities may regulate rates, subject to appeal to the PUCO if not acceptable to the utility. In 1986, a law was passed which extended the jurisdiction of the PUCO to nonutility affiliates of holding companies exempt under Section 3(a)(1) and 3(a)(2) of the Public Utility Holding Company Act of 1935 (1935 Act) to the extent that the activities of such affiliates affect or relate to the cost of providing electric utility service in Ohio. The law, among other things, requires PUCO approval of investments in, or the transfer of assets to, nonutility affiliates. Investments in such affiliates are limited to 15% of the aggregate capitalization of the holding company on a consolidated basis. The Company is an exempt holding company under Section 3(a)(1) of the 1935 Act, but the law has not had any effect on its operations as they are currently conducted. The Energy Policy Act of 1992 (1992 Act) amended portions of the 1935 Act, providing independent power producers and other nonregulated generating facilities easier entry into electric generation markets. The 1992 Act also amended portions of the Federal Power Act, authorizing the FERC, under certain circumstances, to mandate access to utility-owned transmission facilities. Following the enactment of the 1992 Act, the FERC has ordered all utilities to file open access tariffs applicable to transmission facilities, including provisions which require utilities to offer comparable services on a nondiscriminatory basis. The FirstEnergy system has such an open access tariff in effect (see "FERC Rate Matters"). PUCO Rate Matters The PUCO approved OE's Rate Reduction and Economic Development Plan in 1995 and a Rate Reduction and Economic Development Plan for CEI and TE in January 1997. These plans are designed to enhance and accelerate economic development within the Companies' Ohio service areas and to assure the Companies' customers in those service areas of long-term competitive pricing for energy services. These plans initially maintain current base electric rates for OE, CEI and TE through December 31, 2005, unless additional revenues are needed to recover the costs of changes in environmental, regulatory or tax laws or regulations. At the end of the plan periods, OE base rates will be reduced by $300 million (approximately 20 percent below current levels) and CEI and TE base rates will be reduced by a combined $310 million (approximately 15 percent below current levels). As part of these plans, transition rate credits were implemented for customers, which are expected to reduce operating revenues for OE by approximately $600 million and CEI and TE by approximately $391 million during the plan period. The plans also established revised fuel recovery rate formulas which eliminated the automatic pass-through of fuel costs to their retail customers (see "Fuel Recovery Procedures"). All of OE's regulatory assets and CEI's and TE's regulatory assets related to their nonnuclear operations are being recovered under provisions of these plans. In addition, the PUCO has authorized OE to recognize additional capital recovery related to its generating assets (which is reflected as additional depreciation expense) and additional amortization of regulatory assets during the plan period of at least $2 billion more than the amount that would have been recognized if OE's plan were not in effect. These additional amounts are being recovered through current rates. CEI and TE recognized fair value purchase accounting adjustments to reduce nuclear plant by $1.71 billion and $.84 billion, respectively, in connection with the FirstEnergy merger. These fair value adjustments recognized for financial reporting purposes will ultimately satisfy the asset reduction commitments of at least $1.4 billion for CEI and $0.6 billion for TE contained in the CEI and TE plan. For regulatory purposes, CEI and TE will recognize accelerated amortization over the plan period. Based on the Ohio plans, at this time, OE, CEI and TE believe they will continue to be able to bill and collect cost-based rates (with the exception of CEI's and TE's nuclear operations); accordingly, it is appropriate that they continue the application of Statement of Financial Accounting Standards (SFAS) No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). However, as discussed under "Competition" below, changes in the regulatory environment are on the horizon in Ohio. The Companies believe that changes in Ohio regulation are possible in 1999 but cannot assess what the ultimate impact may be. CEI's and TE's plan does not provide for full recovery of their nuclear operations. As a result, in October 1997 CEI and TE discontinued application of SFAS 71 for their nuclear operations and decreased their regulatory assets of customer receivables for future income taxes related to the nuclear assets by $499 million and $295 million, respectively, in addition to the fair value adjustments referred to above. PPUC Rate Matters In December 1996, Pennsylvania enacted "The Electricity Generation Customer Choice and Competition Act," which permitted customers, including Penn's customers, to choose their electric generation supplier, while transmission and distribution services will continue to be supplied by their current providers. In June 1998, the PPUC authorized a rate-restructuring plan for Penn in accordance with this law, which superseded the regulatory plan which had been in place for Penn since 1996 and essentially resulted in the deregulation of Penn's generation business as of June 30, 1998. Penn was required to remove from its balance sheet all regulatory assets and liabilities related to its generation business and assess all other assets for impairment. The Securities and Exchange Commission (SEC) issued interpretive guidance regarding asset impairment measurement which concluded 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 those assets are impaired, a regulatory asset should be established if the 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 remaining net amount of $78 million was written off. 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 Company's, OE's and Penn's respective Statement of Income. Customer choice will be phased in over two years with 66% of each customer class able to choose alternative suppliers of generation on January 2, 1999, and all remaining customers having choice as of January 2, 2000. Under the plan, Penn continues to deliver power to homes and businesses through its transmission and distribution system, which remains regulated by the PPUC. Penn is also selling electricity and energy-related services in its own territory and throughout Pennsylvania as an alternative supplier through its nonregulated subsidiary, Penn Power Energy, Inc. Penn's rates have been restructured to establish separate charges for transmission and distribution; generation, which is subject to competition; and stranded cost recovery. In the event customers obtain power from an alternative source, the generation portion of Penn's rates 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, including regulatory assets. Penn is entitled to recover $234 million of stranded costs through a competitive transition charge that starts in 1999 and ends in 2005. FERC Rate Matters Rates for wholesale customers are regulated by the FERC. The FirstEnergy merger was approved by the FERC on October 29, 1997, and the Companies have operated as a single utility system since December 1997. An open access transmission tariff and joint dispatch agreement for the FirstEnergy system are currently in effect, subject to refund, pending the outcome of hearings before the FERC. A decision is expected on this proceeding in early 1999. In October 1998, the Company announced plans to transfer the Companies' transmission assets into a new subsidiary, American Transmission Systems, Inc., with the transfer expected to be finalized in 1999. The new subsidiary represents a first step toward the goal of establishing or becoming part of a larger independent transmission company (TransCo). The Company believes that a TransCo better addresses the FERC's stated transmission objectives of providing non-discriminatory service, while providing for streamlined and cost-efficient operation. In working toward the goal of forming a larger regional transmission entity, the Company, American Electric Power, Virginia Power and Consumers Energy announced in November 1998 that they would prepare a FERC filing during the first part of 1999 for such a regional transmission entity. The entity would be designed to meet the goals of reducing transmission costs that result when transferring power over several transmission systems, ensuring transmission reliability and providing non-discriminatory access to the transmission grid. Fuel Recovery Procedures In accordance with their respective plans, OE's, CEI's and TE's fuel recovery rates have been frozen, subject only to limited periodic adjustments. The respective rates are adjusted annually based on changes in the GDP Implicit Price Deflator, unless significant changes in environmental, regulatory or tax laws or regulations increase or decrease the cost of fuel. Such changes in laws, regulations and/or taxes would require PUCO approval in order to be reflected as an adjustment to the Electric Fuel Component (EFC) rate. Furthermore, for the period through June 30, 2000, the OE EFC rate will be limited to the average fuel cost rate of certain utilities within the state. Commencing July 1, 2000, the OE EFC rate will be limited to between 97% to 99% of the average fuel cost rate of three of these companies. The average fuel cost rate for these three utilities may be adjusted by the PUCO to reflect any significant changes in the Phase II environmental compliance plans of such companies involving capital additions or equipment utilization. On March 1, 2000, the respective EFC rates in effect for CEI and TE will be reduced to reflect the elimination of annual fixed charges related to a Bruce Mansfield Plant coal supply contract (see "Fuel Supply"), which amounts to $13.96 million for CEI and $8.74 million for TE. The resulting reduced EFC rates would be used as the basis for the annual GDP adjustment, but, in no event, would either company's annual EFC rate exceed 1.465 cents per kWh during the plan period. Under its 1996 plan, Penn eliminated its energy cost rate for the recovery of fuel and net purchased power costs as a separate component of customer charges. Energy costs were rolled into Penn's base electric rates at their projected 1996-1997 level. Capital Requirements The Company and the Companies' respective capital expenditures for the years 1998 through 2003, excluding nuclear fuel, are shown on the following table. Such costs included expenditures for the betterment of existing facilities and for the construction of transmission lines, distribution lines, substations and other additions. See "Environmental Matters" below with regard to possible environment-related expenditures not included in the forecast. OE $150 $141 $ 715 $ 856 Penn 16 28 139 167 CEI 72 150 551 701 TE 46 58 199 257 Company 64 179 84 263 ---- ---- ------ ------ Total $348 $556 $1,688 $2,244
During the 1999-2003 period, maturities of, and sinking fund requirements for, long-term debt and preferred stock of the Companies and the Company's other subsidiaries are:
Preferred Stock and Long-Term Debt 1999-2003 Redemption Schedule --------------------------------------- 1999 2000-2003 Total ---- --------- ----- (In millions) OE $418 $ 730 $1,148 Penn 1 68 69 CEI 178 708 886 TE 106 369 475 Other subsidiaries 9 20 29 ---- ------ ------ Total $712 $1,895 $2,607
OE's and Penn's nuclear fuel purchases are financed through OES Fuel (a wholly owned subsidiary of OE) commercial paper and loans, both of which are supported by a $180.5 million long-term bank credit agreement. CEI and TE severally lease their respective portions of nuclear fuel and pay for the fuel as it is consumed. The Companies' respective investments for additional nuclear fuel, and nuclear fuel investment reductions as the fuel is consumed, during the 1999-2003 period are represented in the following table. The table also shows the Companies' operating lease commitments, net of capital trust cash receipts for the 1999-2003 period. The Companies recover the cost of nuclear fuel consumed and operating leases through their electric rates.
Other Net Nuclear Fuel 1999-2003 Forecasts Operating Lease Commitments ------------------------------------------ New Investments Fuel Burn 1999-2003 Schedule ------------------------- ---------------------- --------------------------- 1999 2000-2003 Total 1999 2000-2003 Total 1999 2000-2003 Total ---- --------- ----- ---- --------- ----- ---- --------- ----- (In millions) OE $20 $119 $139 $29 $111 $140 $ 82 $282 $364 Penn 3 25 28 6 23 29 -- 1 1 CEI 14 116 130 32 117 149 7 33 40 TE 9 93 102 26 94 120 70 290 360 --- ---- ---- --- ---- ---- ---- ---- ---- Total $46 $353 $399 $93 $345 $438 $159 $606 $765
Short-term borrowings outstanding at December 31, 1998, consisted of $134.5 million of bank borrowings (OE-$129.5 and FE Facilities - $5.0) and $120.0 million of OES Capital, Incorporated commercial paper. OES Capital is a wholly owned subsidiary of OE whose borrowings are secured by customer accounts receivable. OES Capital can borrow up to $120 million under a receivables financing agreement at rates based on certain bank commercial paper. The Company and its utility operating subsidiaries also had $147 million (Company-$100 million and OE-$47 million) available under revolving lines of credit as of December 31, 1998. The Company plans to transfer any of its borrowings under its $100 million line of credit to CEI and/or TE. In addition, Penn had a $2 million bank facility available that provides for borrowings on a short-term basis at the bank's discretion. Based on their present plans, the Companies could provide for their cash requirements in 1999 from the following sources: funds to be received from operations; available cash and temporary cash investments (approximate amounts as of December 31, 1998: Company's nonutility subsidiaries-$25 million, OE-$22 million, Penn-$7 million, CEI-$20 million and TE-$4 million); the issuance of long-term debt (for refunding purposes) and funds available under revolving credit arrangements. The extent and type of future financings will depend on the need for external funds as well as market conditions, the maintenance of an appropriate capital structure and the ability of the Companies to comply with coverage requirements in order to issue first mortgage bonds and preferred stock. The Companies will continue to monitor financial market conditions and, where appropriate, may take advantage of economic opportunities to refund debt and preferred stock to the extent that their financial resources permit. The coverage requirements contained in the first mortgage indentures under which the Companies issue first mortgage bonds provide that, except for certain refunding purposes, the Companies may not issue first mortgage bonds unless applicable net earnings (before income taxes), calculated as provided in the indentures, for any period of twelve consecutive months within the fifteen calendar months preceding the month in which such additional bonds are issued, are at least twice annual interest requirements on outstanding first mortgage bonds, including those being issued. Under OE's first mortgage indenture, the availability of property additions is more restrictive than the earnings test at the present time and would limit the amount of first mortgage bonds issuable against property additions to $377 million. OE is currently able to issue $857 million principal amount of first mortgage bonds against previously retired bonds without the need to meet the above restrictions. Under Penn's first mortgage indenture, other requirements also apply and are more restrictive than the earnings test at the present time. Penn is currently able to issue $255 million principal amount of first mortgage bonds, with up to $120 million of such amount issuable against property additions; the remainder could be issued against previously retired bonds. Purchase accounting revaluation applied to CEI's and TE's net assets under the merger reduced CEI's and TE's available bondable property so that first mortgage bonds cannot currently be issued against property additions. CEI and TE can issue $156 million and $117 million, respectively, principal amount of first mortgage bonds against previously retired bonds. OE's, Penn's and TE's respective articles of incorporation prohibit the sale of preferred stock unless applicable gross income, calculated as provided in the articles of incorporation, is equal to at least 1-1/2 times the aggregate of the annual interest requirements on indebtedness and annual dividend requirements on preferred stock outstanding immediately thereafter. Based upon earnings for 1998 and an assumed dividend rate of 8.25%, OE and Penn would be permitted, under the earnings coverage test contained in their respective charters, to issue at least $1.6 billion and $175 million of preferred stock, respectively. Based on its 1998 earnings, TE could issue $296 million of additional preferred stock. There are no restrictions on CEI's ability to issue preferred stock. To the extent that coverage requirements or market conditions restrict the Companies' abilities to issue desired amounts of first mortgage bonds or preferred stock, the Companies may seek other methods of financing. Such financings could include the sale of preferred and/or preference stock or of such other types of securities as might be authorized by applicable regulatory authorities which would not otherwise be sold and could result in annual interest charges and/or dividend requirements in excess of those that would otherwise be incurred. Central Area Power Coordination Group (CAPCO) In September 1967, the CAPCO companies, which consists of the Companies and Duquesne Light Company (Duquesne), announced a program for joint development of power generation and transmission facilities. Included in the program are Unit 7 at the W. H. Sammis Plant, Unit 5 at the Eastlake Plant, Units 1, 2 and 3 at the Bruce Mansfield Plant, Units 1 and 2 at the Beaver Valley Power Station, the Perry Nuclear Power Plant and the Davis-Besse Nuclear Power Station, each now in service. The present CAPCO Basic Operating Agreement provides, among other things, for coordinated maintenance responsibilities among the CAPCO companies, a limited and qualified mutual backup arrangement in the event of outage of CAPCO units and certain capacity and energy transactions among the CAPCO companies. The agreements among the CAPCO companies generally treat OE and Penn as a single system as between them and the other three CAPCO companies, but, in agreements between the CAPCO companies and others, all five companies are treated as separate entities. Subject to any rights that might arise among the CAPCO companies as such, each member company, severally and not jointly, is obligated to pay only its proportionate share of the costs associated with the facilities and the cost of required fuel. The CAPCO companies have agreed that any modification of their arrangements or of their agreed-upon programs requires their unanimous consent. Should any member become unable to continue to pay its share of the costs associated with a CAPCO facility, each of the other CAPCO companies could be adversely affected in varying degrees because it may become necessary for the remaining members to assume such costs for the account of the defaulting member. Under the agreements governing the construction and operation of CAPCO generating units, the responsibility is assigned to a specific CAPCO company. FENOC has such responsibilities for Perry and Davis-Besse, CEI for Eastlake Unit 5, Duquesne is responsible for Beaver Valley Units 1 and 2, OE for Sammis Unit 7 and Penn for Bruce Mansfield Units 1, 2 and 3. The Companies monitor activities in connection with Beaver Valley Units 1 and 2 but must rely to a significant degree on Duquesne for necessary information. The Companies in their oversight role as a practical matter cannot be privy to every detail; it is Duquesne that must directly supervise activities and then exercise its reporting responsibilities to the co-owners. The Companies critically review the information given to it by Duquesne, but they cannot be absolutely certain that things they would have considered significant have been reported or that they always would have reached exactly the same conclusion about matters that are reported. In addition, the time that is necessarily part of the compiling and analyzing process creates a lag between the occurrence of events and the time the Companies become aware of their significance. On October 15, 1998, the Company announced that it signed an agreement in principle with Duquesne that would result in the transfer of 1,436 megawatts owned by Duquesne at eight CAPCO generating units in exchange for 1,328 megawatts at three non-CAPCO power plants owned by the Companies. A definitive agreement on the exchange of assets, which will be structured as a tax-free transaction to the extent possible, will provide the Companies with exclusive ownership and operating control of all CAPCO generating units. Duquesne will fund decommissioning costs equal to its percentage interest in the three nuclear generating units to be transferred. The asset transfer is expected to take twelve to eighteen months to close. Under the agreement in principle, the CAPCO arrangement discussed above will terminate upon transfer of the assets. Nuclear Regulation The construction and operation of nuclear generating units are subject to the regulatory jurisdiction of the Nuclear Regulatory Commission (NRC) including the issuance by it of construction permits and operating licenses. The NRC's procedures with respect to application for construction permits and operating licenses afford opportunities for interested parties to request public hearings on health, safety, environmental and antitrust issues. In this connection, the NRC may require substantial changes in operation or the installation of additional equipment to meet safety or environmental standards with resulting delay and added costs. The possibility also exists for modification, denial or revocation of licenses or permits. Davis-Besse was placed in commercial operation in 1977, and its operating license expires in 2017. Beaver Valley Unit 1 was placed in commercial operation in 1976, and its operating license expires in 2016. Perry Unit 1 and Beaver Valley Unit 2 were placed in commercial operation in 1987, and their operating licenses expire in 2026 and 2027, respectively. The NRC has promulgated and continues to promulgate regulations related to the safe operation of nuclear power plants. The Companies cannot predict what additional regulations will be promulgated or design changes required or the effect that any such regulations or design changes, or the consideration thereof, may have upon Beaver Valley, Davis-Besse and Perry. Although the Companies have no reason to anticipate an accident at any nuclear plant in which they have an interest, if such an accident did happen, it could have a material but currently undeterminable adverse effect on the Company's consolidated financial position. In addition, such an accident at any operating nuclear plant, whether or not owned by the Companies, could result in regulations or requirements that could affect the operation or licensing of plants that the Companies do own with a consequent but currently undeterminable adverse impact, and could affect the Companies' abilities to raise funds in the capital markets. Nuclear Insurance The Price-Anderson Act limits the public liability which can be assessed with respect to a nuclear power plant to $9.7 billion (assuming 108 units licensed to operate) for a single nuclear incident, which amount is covered by: (i) private insurance amounting to $200 million; and (ii) $9.5 billion provided by an industry retrospective rating plan required by the NRC pursuant thereto. Under such retrospective rating plan, in the event of a nuclear incident at any unit in the United States resulting in losses in excess of private insurance, up to $88.1 million (but not more than $10 million per unit per year in the event of more than one incident) must be contributed for each nuclear unit licensed to operate in the country by the licensees thereof to cover liabilities arising out of the incident. Based on their present ownership and leasehold interests in Beaver Valley, Perry and Davis-Besse, the Companies' maximum potential assessment under these provisions (assuming Duquesne were to contribute its proportionate share of any assessments under the retrospective rating plan) would be $286.3 million (OE-$94.2 million, Penn-$20.0 million, CEI-$94.2 million and TE-$77.9 million) per incident but not more than $32.5 million (OE-$10.7 million, Penn- $2.3 million, CEI-$10.7 million and TE-$8.8 million) in any one year for each incident. In addition to the public liability insurance provided pursuant to the Price-Anderson Act, the Companies have also obtained insurance coverage in limited amounts for economic loss and property damage arising out of nuclear incidents. The Companies are members of Nuclear Electric Insurance Limited (NEIL) which provides coverage (NEIL I) for the extra expense of replacement power incurred due to prolonged accidental outages of nuclear units. Under NEIL I, the Companies have policies, renewable yearly, corresponding to their respective interests in Beaver Valley, Perry and Davis-Besse, which provide an aggregate indemnity of up to approximately $1.22 billion (OE-$239 million, Penn-$69 million, CEI-$558 million and TE- $354 million) for replacement power costs incurred during an outage after an initial 17-week waiting period. Members of NEIL I pay annual premiums and are subject to assessments if losses exceed the accumulated funds available to the insurer. The Companies' present maximum aggregate assessment for incidents at any covered nuclear facility occurring during a policy year would be approximately $8.4 million (OE-$1.7 million, Penn-$.5 million, CEI-$3.8 million and TE-$2.4 million). The Companies are insured as to their respective interests in Beaver Valley, Perry and Davis-Besse under property damage insurance provided by NEIL to the operating company for each plant. Under these arrangements, $2.75 billion of coverage for decontamination costs, decommissioning costs, debris removal and repair and/or replacement of property is provided for Beaver Valley, Perry and Davis-Besse. The Companies pay annual premiums for this coverage and are liable for retrospective assessments of up to approximately $31.5 million (OE-$10.9 million, Penn-$2.2 million, CEI-$10.3 million and TE-$8.1 million) during a policy year. The Companies intend to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at any of the Companies' plants exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Companies' insurance policies, or to the extent such insurance becomes unavailable in the future, the Companies would remain at risk for such costs. The NRC requires nuclear power plant licensees to obtain minimum property insurance coverage of $1.06 billion or the amount generally available from private sources, whichever is less. The proceeds of this insurance are required to be used first to ensure that the licensed reactor is in a safe and stable condition and can be maintained in that condition so as to prevent any significant risk to the public health and safety. Within 30 days of stabilization, the licensee is required to prepare and submit to the NRC a cleanup plan for approval. The plan is required to identify all cleanup operations necessary to decontaminate the reactor sufficiently to permit the resumption of operations or to commence decommissioning. Any property insurance proceeds not already expended to place the reactor in a safe and stable condition must be used first to complete those decontamination operations that are ordered by the NRC. The Companies are unable to predict what effect these requirements may have on the availability of insurance proceeds to the Companies for the Companies' bondholders. Environmental Matters Various federal, state and local authorities regulate the Companies with regard to air and water quality and other environmental matters. The Companies have estimated capital expenditures for environmental compliance of approximately $400 million, which is included in the construction estimate given under "Capital Requirements" for 1999 through 2003. Air Regulation Under the provisions of the Clean Air Act of 1970, both the State of Ohio and the Commonwealth of Pennsylvania adopted ambient air quality standards, and related emission limits, including limits for sulfur dioxide (SO2) and particulates. In addition, the U.S. Environmental Protection Agency (EPA) promulgated an SO2 regulatory plan for Ohio which became effective for OE's, CEI's and TE's plants in 1977. Generating plants to be constructed in the future and some future modifications of existing facilities will be covered not only by the applicable state standards but also by EPA emission performance standards for new sources. In both Ohio and Pennsylvania the construction or modification of emission sources requires approval from appropriate environmental authorities, and the facilities involved may not be operated unless a permit or variance to do so has been issued by those same authorities. The Companies are in compliance with the current SO2 and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions in 1999 will be achieved by burning lower-sulfur fuel, generating more electricity from lower- emitting plants, and/or purchasing emission allowances. Plans for complying with reductions required for the year 2000 and thereafter have not been finalized. In September 1998, the EPA finalized regulations requiring additional NOx reductions from the Companies' Ohio and Pennsylvania facilities by May 2003. The EPA's NOx Transport Rule imposes uniform reductions of NOx emissions across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. By September 1999, each of the twenty-two states are required to submit revised State Implementation Plans (SIP) which comply with individual state NOx budgets established by the EPA. These state NOx budgets contemplate an 85% reduction in utility plant NOx emissions from 1990 emissions. A proposed Federal Implementation Plan accompanied the NOx Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In 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. The EPA suggests that the Section 126 petitions will be adequately addressed by the NOx Transport Program, but a September 1998 proposed rulemaking established an alternative program which would require nearly identical 85% NOx reductions at the Companies' Ohio and Pennsylvania plants by May 2003 in the event implementation of the NOx Transport Rule is delayed. The Companies continue to evaluate their compliance plans and other compliance options and currently estimate the additional capital expenditures for NOx reductions may reach $500 million. The Companies are required to meet federally approved SO2 regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $25,000 for each day the unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Companies cannot predict what action the EPA may take in the future with respect to proposed regulations or the interim enforcement policy. In July 1997, EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. The cost of compliance with these regulations may be substantial and depends on the manner in which they are implemented by the states in which the Companies operate affected facilities. Water Regulation Various water quality regulations, the majority of which are the result of the federal Clean Water Act and its amendments, apply to the Companies' plants. In addition, Ohio and Pennsylvania have water quality standards applicable to the Companies' operations. As provided in the Clean Water Act, authority to grant federal National Pollutant Discharge Elimination System (NPDES) water discharge permits can be assumed by a state. Ohio and Pennsylvania have assumed such authority. Waste Disposal As a result of the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act of 1976, federal and state hazardous waste regulations have been promulgated. Certain fossil-fuel combustion waste products, such as coal ash, were exempted from hazardous waste disposal requirements pending EPA's evaluation of the need for future regulation. EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. 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. Federal law provides that all PRPs for a particular site be held liable on a joint and several basis. CEI and TE have accrued a liability totaling $5.8 million at December 31, 1998 based on estimates of the costs of cleanup and the proportionate responsibility of other PRPs for such costs. CEI and TE believe that waste disposal costs will not have a material adverse effect on their financial condition, cash flows or results of operations. In 1980, Congress passed the Low-Level Radioactive Waste Policy Act which provides that the disposal of low-level radioactive waste is the responsibility of the state where such waste is generated. The Act encourages states to form compacts among themselves to develop regional disposal facilities. Failure by a state or compact to begin implementation of a program could result in access denial to the two facilities currently accepting low-level radioactive waste. Ohio is part of the Midwest Compact and has responsibility for siting and constructing a disposal facility. On June 26, 1997, the Midwest Compact Commission (Compact) voted to cease all siting activities in the host state of Ohio and to dismantle the Ohio Low-Level Radioactive Waste Facility Development Authority, the statutory agency charged with siting and constructing the low-level radioactive waste disposal facility. While the Compact remains intact, it has no plans to site or construct a low-level radioactive waste disposal facility in the Midwest. The Companies continue to ship low-level radioactive waste from their nuclear facilities to the Barnwell, South Carolina waste disposal facility. Summary Environmental controls are still in the process of development and require, in many instances, balancing the needs for additional quantities of energy in future years and the need to protect the environment. As a result, the Companies cannot now estimate the precise effect of existing and potential regulations and legislation upon any of their existing and proposed facilities and operations or upon their ability to issue additional first mortgage bonds under their respective mortgages. These mortgages contain covenants by the Companies to observe and conform to all valid governmental requirements at the time applicable unless in course of contest, and provisions which, in effect, prevent the issuance of additional bonds if there is a completed default under the mortgage. The provisions of each of the mortgages, in effect, also require, in the opinion of counsel for the respective Companies, that certification of property additions as the basis for the issuance of bonds or other action under the mortgages be accompanied by an opinion of counsel that the company certifying such property additions has all governmental permissions at the time necessary for its then current ownership and operation of such property additions. The Companies intend to contest any requirements they deem unreasonable or impossible for compliance or otherwise contrary to the public interest. Developments in these and other areas of regulation may require the Companies to modify, supplement or replace equipment and facilities, and may delay or impede the construction and operation of new facilities, at costs which could be substantial. Fuel Supply The Companies' sources of generation during 1998 were:
Coal Nuclear ---- ------- OE 81.9% 18.1% Penn 76.9% 23.1% CEI 65.3% 34.7% TE 47.9% 52.1%
The Companies have long-term coal contracts providing for annual tons of approximately: OE - 6,008,000; Penn - 1,241,000; CEI - 4,146,000; and TE - 623,000. These contracts include the Companies' portion of the coal purchase contract relating to the Bruce Mansfield Plant discussed below. This contract coal is produced primarily from mines located in Ohio, Pennsylvania, Kentucky, Wyoming and West Virginia; the contracts expire at various times through December 31, 2003. The Companies estimate their 1999 coal requirements to be approximately 17,005,000 tons (including their respective shares of the coal requirements of CAPCO's Eastlake Unit 5, Sammis Unit 7 and the Bruce Mansfield Plant). See "Environmental Matters" for factors pertaining to meeting environmental regulations affecting coal-fired generating units. The Companies have each severally guaranteed (OE's, CEI's, TE's and Penn's composite percentages being approximately 46.8%, 17.6%, 10.3% and 6.7%, respectively) certain debt and lease obligations in connection with a coal supply contract for the Bruce Mansfield Plant (see "Commitments, Guarantees and Contingencies" notes to the respective financial statements). As of December 31, 1998, the Companies' shares of the guarantees were $43.2 million. The price under the coal supply contract, which includes certain minimum payments, has been determined to be sufficient to satisfy the debt and lease obligations. This contract expires December 31, 1999. The Companies' fuel costs (excluding disposal costs) for each of the five years ended December 31, 1998, were as follows:
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- Cost of fuel consumed per million BTUs: Coal: OE $1.33 $1.31 $1.33 $1.37 $1.36 Penn 1.35 1.27 1.31 1.30 1.34 CEI 1.50 1.41 1.50 1.56 1.50 TE 1.46 1.54 1.79 1.86 1.76 Nuclear: OE $ .55 $ .58 $ .66 $ .79 $ .94 Penn .54 .61 .64 .77 .88 CEI .63 .76 .84 .98 .98 TE .54 .66 .74 .91 .92 Average fuel cost per kilowatt-hour generated (cents): OE 1.19 1.17 1.20 1.27 1.31 Penn 1.16 1.17 1.15 1.20 1.29 CEI 1.20 1.23 1.35 1.42 1.35 TE 1.03 1.06 1.26 1.32 1.35
OES Fuel is the sole lessor for OE's and Penn's nuclear fuel requirements (see "Capital Requirements" and Note 3G of Notes to OE's Consolidated Financial Statements). Nuclear fuel is currently financed for CEI and TE through leases with a special-purpose corporation. The Company has contracts for uranium material through 2000 and conversion services through 2001. The enrichment services are contracted for the majority of the enrichment requirements for nuclear fuel through 2005. Fabrication services for fuel assemblies are contracted for the next four reloads for Beaver Valley Unit 1, three reloads for Beaver Valley Unit 2 (through approximately 2005 and 2006, respectively), the next four reloads for Davis-Besse (through approximately 2004) and through the life of the plant for Perry (through approximately 2026). In addition to the existing commitments, the Company intends to make additional arrangements for the supply of uranium and for the subsequent conversion, enrichment, fabrication, and waste disposal services. Due to the present lack of availability of domestic reprocessing services, to the continuing absence of any program to begin development of such reprocessing capability and questions as to the economics of reprocessing, nuclear fuel costs are calculated based on the assumption that spent fuel will not be reprocessed. On- site spent fuel storage facilities are expected to be adequate for Perry through 2010; facilities at Beaver Valley Units 1 and 2 are expected to be adequate through 2016 and 2012, respectively. After scheduled plant modifications are completed in 2002, Davis-Besse will have adequate storage through 2020. After on-site storage capacity is exhausted, additional storage capacity will have to be obtained which could result in significant additional costs unless reprocessing services, interim off-site disposal, or permanent waste disposal facilities become available. The Federal Nuclear Waste Policy Act of 1982 provides for the construction of facilities for the disposal of high-level nuclear wastes, including spent fuel from nuclear power plants operated by electric utilities; however, the selection of a suitable site has become embroiled in the political process. Duquesne and the Company have contracts with the U.S. Department of Energy (DOE) for the disposal of spent fuel from Beaver Valley, Perry and Davis-Besse. On December 17, 1996, the DOE notified the Companies that it would be unable to begin acceptance of spent fuel for disposal by January 31, 1998 as mandated by Section 302(a)(5)(B) of the Nuclear Waste Policy Act (NPA). The permanent disposal facility is currently projected to start receiving spent fuel in 2010. The Companies along with over 40 other nuclear utilities and more than 50 state agencies have asked for federal court approval to stop payments into the Nuclear Waste Fund and for an order requiring DOE to take immediate action to accept delivery of spent nuclear fuel. System Capacity and Reserves The respective 1998 net maximum hourly demand on each of the Companies was OE-6,130,000 kilowatts (kW) (including 387,000 kW of firm power sales which extend through 2005 as discussed under "Competition") on June 24, 1998; Penn-918,000 kW on June 22, 1998; CEI-4,248,000 kW (including 12,000 kW of firm power sales which extend through 2005 as discussed under "Competition") on July 21, 1998; and TE-1,978,000 kW on July 21, 1998. Based on existing capacity plans, the load forecast made in December 1998 and anticipated term power sales to other utilities, the capacity margins during the 1999-2003 period are expected to range from about 10% to 12% for the FirstEnergy system. Regional Reliability The Companies participate with 24 other electric companies operating in nine states in the East Central Area Reliability Coordination Agreement (ECAR), which was organized for the purpose of furthering the reliability of bulk power supply in the area through coordination of the planning and operation by the ECAR members of their bulk power supply facilities. The ECAR members have established principles and procedures regarding matters affecting the reliability of the bulk power supply within the ECAR region. Procedures have been adopted regarding: i) the evaluation and simulated testing of systems' performance; ii) the establishment of minimum levels of daily operating reserves; iii) the development of a program regarding emergency procedures during conditions of declining system frequency; and iv) the basis for uniform rating of generating equipment. Competition The Companies compete with other utilities for intersystem bulk power sales and for sales to municipalities and cooperatives. The Companies compete with suppliers of natural gas and other forms of energy in connection with their industrial and commercial sales and in the home climate control market, both with respect to new customers and conversions, and with all other suppliers of electricity. To date, there has been no substantial cogeneration by the Companies' customers. Technological advances and regulatory changes are driving forces toward increasing competition in the energy market. Pennsylvania legislation, which phases in customer choice for their electricity generation supplier to 66% of Pennsylvania's residents in January 1999 and the remaining customers in January 2000 (see "Utility Regulation--PPUC Rate Matters") is one such regulatory change. In addition, many large electricity users continue to push for some form of retail wheeling, which would enable retail customers to purchase electricity from producers other than the local utility. In February 1996, the PUCO approved a change allowing large industrial customers that have interruptible service contracts to buy their power from other sources when they have been advised by their local utility that service will be interrupted. In early 1998, a proposal for the deregulation of Ohio's investor-owned electric utility industry was introduced, leading to the creation of a working group to recommend legislation. As requested by state legislative leadership, investor-owned utilities introduced a deregulation plan with objectives to (1) treat all major stakeholders in Ohio's electric system fairly; (2) protect public schools and local governments from revenue loss; and (3) allow utilities an opportunity to recover costs of government-mandated investments. The utilities have submitted proposals which incorporate these objectives and also recognize the complexity of restructuring the industry. Currently, the working group, comprised of legislative leaders, representatives of the electric utility companies and other interested stakeholders are meeting to discuss and mold these proposals. Most recently, placeholder bills containing statements of principle (that will be replaced by specific proposals as they are agreed upon) have been introduced. Legislative leaders have placed a high priority on enacting a deregulation bill by mid-year 1999. In an effort to more fully utilize their facilities and hold down rates to their other customers, OE and Penn have entered into a long-term power sales agreement with another utility. Currently, OE and Penn are selling 450,000 kW annually under this contract through December 31, 2005. OE and Penn have the option to reduce this commitment by 150,000 kW, with three years' advance notice. In addition, CEI has entered into a long-term power sales contract with another utility and is currently selling up to 20,000 kW under this contract through December 31, 2002. Research and Development The Companies participate in funding the Electric Power Research Institute (EPRI), which was formed for the purpose of expanding electric research and development under the voluntary sponsorship of the nation's electric utility industry -- public, private and cooperative. Its goal is to mutually benefit utilities and their customers by promoting the development of new and improved technologies to help the utility industry meet present and future electric energy needs in environmentally and economically acceptable ways. EPRI conducts research on all aspects of electric power production and use, including fuels, generating, delivery, energy management and conservation, environmental effects and energy analysis. The major portion of EPRI research and development projects is directed toward practical solutions and their applications to problems currently facing the electric utility industry. In 1998, approximately 72% of the Companies' research and development expenditures were related to EPRI. Executive Officers The executive officers are elected at the annual organization meeting of the Board of Directors, held immediately after the annual meeting of stockholders, and hold office until the next such organization meeting, unless the Board of Directors shall otherwise determine, or unless a resignation is submitted.
Position Held During Name Age Past Five Years Dates - --------------- --- ---------------------------------------------------- ----------- W. R. Holland 62 Chairman of the Board and Chief Executive Officer 1997-present Chairman of the Board and Chief Executive Officer-OE 1996-1997 President and Chief Executive Officer-OE *-1996 H. P. Burg 52 President and Chief Operating Officer 1998-present President and Chief Financial Officer 1997-1998 President, Chief Operating Officer and Chief Financial Officer-OE 1996-1997 Senior Vice President and Chief Financial Officer-OE *-1996 A. J. Alexander 47 Executive Vice President and General Counsel 1997-present Executive Vice President and General Counsel-OE 1997-1996 Senior Vice President and General Counsel-OE *-1996 E. T. Carey 56 Vice President - Distribution 1997-present Vice President--Regional Operations and Customer Service-OE 1995-1997 Vice President--Marketing and Customer Service Support-OE 1994-1995 Manager, Performance Initiatives-OE *-1994 M. B. Carroll 47 Vice President - Corporate Affairs 1997-present Manager - Sandusky Area-OE 1994-1997 Director, Communications and Mission Services - Providence Hospital *-1994 K. W. Dindo 49 Vice President - Energy Services 1998-present Vice President and Controller - Caliber-System Inc. 1994-1998 Partner - Ernst & Young LLP *-1994 D. S. Elliott 44 Vice President - Sales and Marketing 1997-present Manager - FirstEnergy Services - OE 1997 Manager - Eastern Division - OE 1996-1997 Manager - Youngstown Division - OE *-1996 A. R. Garfield 60 Vice President - Business Development 1997-present Vice President - System Operations - OE *-1997 J. A. Gill 62 Senior Vice President - Administrative Services 1998-present Vice President - Administrative Services 1997-1998 Vice President - Administration - OE *-1997 R. H. Marsh 48 Vice President and Chief Financial Officer 1998-present Vice President - Finance 1997-1998 Treasurer - OE *-1997 G. L. Pipitone 49 Vice President - Fossil Production 1997-present Vice President - Generation and Transmission - OE 1996-1997 Manager - Akron Division - OE *-1996 S. F. Szwed 46 Vice President - Transmission 1997-present Vice President - Engineering & Planning - CSC 1995-1997 Director - System Planning & Operations - CSC *-1995 N. C. Ashcom 51 Corporate Secretary 1997-present Secretary - OE 1994-1997 Assistant Secretary - OE *-1994 T. C. Navin 41 Treasurer 1998-present Assistant Treasurer 1998-1998 Director, Treasury Services 1998-1998 Director, Asset Strategy 1997-1998 Staff Business Analyst 1997-1997 Senior Business Analyst 1995-1997 Senior Planning Analyst *-1995 H. L. Wagner 46 Controller 1997-present Comptroller - OE *-1997 Except for W. R. Holland, M. B. Carroll, K. W. Dindo and D. S. Elliott, the officers above hold the same offices for FirstEnergy, OE, CEI and TE. Except for R. Joseph Hrach, A. J. Alexander, J. A. Gill and H. L. Wagner holding the offices of President, Vice President and General Counsel, Vice President and Comptroller, respectively, and except for H. P. Burg, M. B. Carroll, K. W. Dindo and D. S. Elliott, the officers above hold the same offices for Penn. *Indicates position held at least since January 1, 1994.
At December 31, 1998, the Company's nonutility subsidiaries and the Companies had a total of 11,918 employees consisting of the following: Company - 1,604, OE - 1,944, CEI - 1,798, TE - 997, Penn - 888, FE Services - 375, FENOC - 1,159, FE Facilities - 3,012 and MARBEL - 141 employees. ITEM 2. PROPERTIES The Companies' respective first mortgage indentures constitute, in the opinion of the Companies' counsel, direct first liens on substantially all of the respective Companies' physical property, subject only to excepted encumbrances, as defined in the indentures. See "Leases" and "Capitalization" notes to the respective financial statements for information concerning leases and financing encumbrances affecting certain of the Companies' properties. The Companies own, individually or together with other companies as tenants in common, and/or lease, the generating units in service as of March 1, 1999, shown on the table below.
Net Demonstrated Capacity (MW) -------------------- Companies' OE Penn CEI TE ----------- ----------- ---------------- --------------- Unit Total Entitlement % MW % MW % MW % MW ---- ----- ----------- - -- - -- - -- - -- Plant - Location - ---------------- Coal-Fired Units - ---------------- Ashtabula- 5,8,9 332 332 -- -- -- -- 100.00% 332 -- -- Ashtabula, OH Avon Lake- 6,7,9 717 717 -- -- -- -- 100.00% 717 -- -- Avon Lake, OH (d) Bay Shore- 1-4 631 631 -- -- -- -- -- -- 100.00% 631 Toledo, OH R. E. Burger- 3-5 406 406 100.00% 406 -- -- -- -- -- -- Shadyside, OH Eastlake-Eastlake, OH (e) 1-4 636 636 -- -- -- -- 100.00% 636 -- -- 5 597 411 -- -- -- -- 68.80% 411 -- -- Lakeshore- 18 245 245 -- -- -- -- 100.00% 245 -- -- Cleveland, OH B. Mansfield- 1 780 552 60.00% 468 4.20% 33 6.50%(b) 51 -- -- Shippingport, PA (e) 2 780 718 39.30% 307 6.80% 53 28.60%(b) 223 17.30%(b) 135 3 800 690 35.60% 285 6.28% 50 24.47%(b) 196 19.91%(b) 159 New Castle- 3-5 333 333 -- -- 100.00% 333 -- -- -- -- W. Pittsburg, PA (d) Niles-Niles, OH (d) 1-2 216 216 100.00% 216 -- -- -- -- -- -- W.H. Sammis- 1-6 1,620 1,620 100.00% 1,620 -- -- -- -- -- -- Stratton, OH (e) 7 600 413 48.00% 288 20.80% 125 -- -- -- -- ----- ----- --- ----- --- Total 7,920 3,590 594 2,811 925 ----- ----- --- ----- --- Nuclear Units - ------------- Beaver Valley- 1 810 425 35.00% 283 17.50% 142 -- -- -- -- Shippingport, PA (e) 2 820 707 41.88%(a) 343 -- -- 24.47% 201 19.91%(c) 163 Davis-Besse- 1 883 883 -- -- -- -- 51.38% 454 48.62% 429 Oak Harbor, OH Perry- 1 1,194 1,030 30.00%(a) 358 5.24% 63 31.11% 371 19.91% 238 N. Perry Village, OH (e) ----- --- --- ----- --- Total 3,045 984 205 1,026 830 ----- --- --- ----- --- Oil/Gas-Fired/ Pumped Storage Units Edgewater-Lorain, OH 4 100 100 100.00% 100 -- -- -- -- -- -- Seneca-Warren, PA 439 351 -- -- -- -- 80.00% 351 -- -- West Lorain- Lorain, OH 1 120 120 100.00% 120 -- -- -- -- -- -- Other (d) 303 303 139 25 62 77 ------ ------ --- ----- ----- Total 874 359 25 413 77 ------ ------ --- ----- ----- Total 11,839 4,933 824 4,250 1,832 ====== ====== === ===== ===== Notes: (a) OE's interests consist of 20.22% owned and 21.66% leased for Beaver Valley Unit 2; and 17.42% owned (representing portion leased from a wholly owned subsidiary of OE) and 12.58% leased for Perry. (b) CEI's and TE's Bruce Mansfield interests are leased. (c) TE's interests consist of 1.65% owned and 18.26% leased. (d) Companies' interests in these plants and oil/gas-fired units at those plants to be transferred to Duquesne (see "Central Area Power Coordination Group"). (e) Duquesne's interests in these plants will be acquired by the Companies (see "Central Area Power Coordination Group").
Prolonged outages of existing generating units might make it necessary for the Companies, depending upon the demand for electric service upon their system, to use to a greater extent than otherwise, less efficient and less economic generating units, or purchased power, and in some cases may require the reduction of load during peak periods under the Companies' interruptible programs, all to an extent not presently determinable. The Companies' generating plants and load centers are connected by a transmission system consisting of elements having various voltage ratings ranging from 23 kilovolts (kV) to 345 kV. The Companies' overhead and underground transmission lines aggregate 8,691 miles. The Companies' electric distribution systems include 55,591 miles of overhead pole line and underground conduit carrying primary, secondary and street lighting circuits. They own, individually or together with one or more of the other CAPCO companies as tenants in common, substations with a total installed transformer capacity of 49,387,086 kilovolt-amperes. The Companies' transmission lines also interconnect with those of AEP, The Dayton Power and Light Company, Duquesne, Monongahela Power Company, West Penn Power Company, Detroit Edison Company and Pennsylvania Electric Company. These interconnections make possible utilization by the Companies of generating capacity constructed as a part of the CAPCO program, as well as providing opportunities for the sale of power to other utilities.
Substation Distribution Transmission Transformer Lines Lines Capacity ------------ ------------ ----------- (Miles) (kV-amperes) OE 26,475 4,019 20,603,056 Penn 5,105 608 3,792,250 CEI 23,505 3,016 17,228,300 TE 506 1,048 7,763,480 ------ ----- ---------- Total 55,591 8,691 49,387,086
MARBEL is a fully integrated natural gas company. MARBEL owns interests in more than 1,800 gas and oil wells and holds interests in more than 200,000 undeveloped acres in eastern and central Ohio. MARBEL's subsidiaries include MB Operating Company, Inc., a natural gas exploration and production company which has the subsidiaries J. R. Nominee Corp., J. R. Nominee Corp. II and Natural Gas Brokerage Corporation and Northeast Ohio Operating Companies, Inc. which has the subsidiaries Gas Transport, Inc., NEO Construction Company, Ohio Intrastate Gas Transmission Company and Northeast Ohio Gas Marketing, Inc. FE Facilities is the parent company of ten direct subsidiaries which are heating, ventilating, air conditioning and energy management companies. The Facility Services companies own or lease various offices, shops, maintenance and warehouse facilities, equipment and vehicles. ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required for this item for FirstEnergy and OE (through November 7, 1997) is included on page 17 of FirstEnergy's 1998 Annual Report to Stockholders (Exhibit 13). The information required for OE (subsequent to November 7, 1997), CEI, TE and Penn is not applicable because they are wholly owned subsidiaries. ITEM 6. SELECTED FINANCIAL DATA ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information called for by Items 6 through 8 is incorporated herein by reference to Selected Financial Data, Management's Discussion and Analysis of Results of Operations and Financial Condition, and Financial Statements included on the pages shown in the following table in the respective company's 1998 Annual Report to Stockholders (Exhibit 13).
Item 6 Item 7 Item 8 ------ ------ ------ FirstEnergy 17 18-23 24-40 OE 1 2-6 7-25 Penn 1 2-6 7-22 CEI 1 2-7 8-27 TE 1 2-6 7-26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT FirstEnergy ----------- The information required by Item 10, with respect to Identification of FirstEnergy's Directors and with respect to reports required to be filed under Section 16 of the Securities Exchange Act of 1934, is incorporated herein by reference to the Company's 1999 Proxy Statement filed with the Securities and Exchange Commission (SEC) pursuant to Regulation 14A and, with respect to Identification of Executive Officers, to "Part I, Item 1. Business - Executive Officers" herein. OE, Penn, CEI and TE -------------------- W. R. Holland, H. P. Burg and A. J. Alexander are the Directors of OE, Penn, CEI, and TE. Information concerning these individuals is shown in the "Executive Officers" section of Item 1. ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS FirstEnergy, OE, CEI, TE and Penn - The information required by Items 11, 12 and 13 is incorporated herein by reference to the Company's 1999 Proxy Statement filed with the SEC pursuant to Regulation 14A. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. Financial Statements Included in Part II of this report and incorporated herein by reference to the respective company's 1998 Annual Report to Stockholders (Exhibit 13 below) at the pages indicated.
FE OE Penn CEI TE -- -- ---- --- -- Report of Independent Public Accountants. 16 25 22 27 26 Statements of Income--Three Years Ended December 31, 1998 24 7 7 8 7 Balance Sheets--December 31, 1998 and 1997 25 8 8 9 8 Statements of Capitalization- December 31, 1998 and 1997 26-28 9-10 9 10-11 9-10 Statements of Common Stockholders' Equity--Three Years Ended December 31, 1998 29 11 10 12 11 Statements of Preferred Stock-Three Years Ended December 31, 1998 29 11 10 12 11 Statements of Cash Flows--Three Years Ended December 31, 1998 30 12 11 13 12 Statements of Taxes--Three Years Ended December 31, 1998 31 13 12 14 13 Notes to Financial Statements 32-40 14 13 15 14
2. Financial Statement Schedules Included in Part IV of this report:
FE OE Penn CEI TE -- -- ---- --- -- Report of Independent Public Accountants 44 45 48 46 47 Schedule - Three Years Ended December 31, 1998: II -- Consolidated Valuation and Qualifying Accounts 49 50 53 51 52
Schedules other than the schedule listed above are omitted for the reason that they are not required or are not applicable, or the required information is shown in the financial statements or notes thereto. 3. Exhibits - FirstEnergy Exhibit Number - ------- 3-1 - Articles of Incorporation constituting FirstEnergy Corp's Articles of Incorporation, dated September 17, 1996. (September 17, 1996 Form 8-K, Exhibit C) 3-1(a) - Amended Articles of Incorporation of FirstEnergy Corp. (Registration No. 333-21011, Exhibit (3)-1.) 3-2 - Regulations of FirstEnergy Corp. (September 17, 1996 Form 8-K, Exhibit D) 3-2(a) - FirstEnergy Corp. Amended Code of Regulations. (Registration No. 333-21011, Exhibit (3)-2.) 4-1 - Rights Agreement (December 1, 1997 Form 8-K, Exhibit 4.1) (A)10-1 - FirstEnergy Corp. Executive and Director Incentive Compensation Plan. (A)10-2 - Amended FirstEnergy Corp. Deferred Compensation Plan for Directors, amended February 15, 1999. (A)13 - 1998 Annual Report to Stockholders. (Only those portions expressly incorporated by reference in this Form 10-K are to be deemed "filed" with the SEC.) (A)21 - List of Subsidiaries of the Registrant at December 31, 1998. (A)23 - Consent of Independent Public Accountants. (A)27 - Financial Data Schedule. (A)Provided herein in electronic format as an exhibit. 3. Exhibits - Ohio Edison 2-1 - Agreement and Plan of Merger, dated as of September 13, 1996, between Ohio Edison Company (OE) and Centerior Energy Corporation. (September 17, 1996 Form 8-K, Exhibit 2-1.) 3-1 - Amended Articles of Incorporation, Effective June 21, 1994, constituting OE's Articles of Incorporation. (1994 Form 10-K, Exhibit 3-1.) 3-2 - Code of Regulations of OE as amended April 24, 1986. (Registration No. 33-5081, Exhibit (4)(d).) (B) 4-1 - Indenture dated as of August 1, 1930 between OE and Bankers Trust Company, (now the Bank of New York), as Trustee, as amended and supplemented by Supplemental Indentures:
Dated as of File Reference Exhibit No. ----------- --------------------------- ----------- March 3, 1931 2-1725 B-1,B-1(a),B-1(b) November 1, 1935 2-2721 B-4 January 1, 1937 2-3402 B-5 September 1, 1937 Form 8-A B-6 June 13, 1939 2-5462 7(a)-7 August 1, 1974 Form 8-A, August 28, 1974 2(b) July 1, 1976 Form 8-A, July 28, 1976 2(b) December 1, 1976 Form 8-A, December 15, 1976 2(b) June 15, 1977 Form 8-A, June 27, 1977 2(b) Supplemental Indentures: September 1, 1944 2-61146 2(b)(2) April 1, 1945 2-61146 2(b)(2) September 1, 1948 2-61146 2(b)(2) May 1, 1950 2-61146 2(b)(2) January 1, 1954 2-61146 2(b)(2) May 1, 1955 2-61146 2(b)(2) August 1, 1956 2-61146 2(b)(2) March 1, 1958 2-61146 2(b)(2) April 1, 1959 2-61146 2(b)(2) June 1, 1961 2-61146 2(b)(2) September 1, 1969 2-34351 2(b)(2) May 1, 1970 2-37146 2(b)(2) September 1, 1970 2-38172 2(b)(2) June 1, 1971 2-40379 2(b)(2) August 1, 1972 2-44803 2(b)(2) September 1, 1973 2-48867 2(b)(2) May 15, 1978 2-66957 2(b)(4) February 1, 1980 2-66957 2(b)(5) April 15, 1980 2-66957 2(b)(6) June 15, 1980 2-68023 (b)(4)(b)(5) October 1, 1981 2-74059 (4)(d) October 15, 1981 2-75917 (4)(e) February 15, 1982 2-75917 (4)(e) Dated as of File Reference Exhibit No. ----------- --------------------------- ----------- July 1, 1982 2-89360 (4)(d) March 1, 1983 2-89360 (4)(e) March 1, 1984 2-89360 (4)(f) September 15, 1984 2-92918 (4)(d) September 27, 1984 33-2576 (4)(d) November 8, 1984 33-2576 (4)(d) December 1, 1984 33-2576 (4)(d) December 5, 1984 33-2576 (4)(e) January 30, 1985 33-2576 (4)(e) February 25, 1985 33-2576 (4)(e) July 1, 1985 33-2576 (4)(e) October 1, 1985 33-2576 (4)(e) January 15, 1986 33-8791 (4)(d) May 20, 1986 33-8791 (4)(d) June 3, 1986 33-8791 (4)(e) October 1, 1986 33-29827 (4)(d) August 25, 1989 33-34663 (4)(d) February 15, 1991 33-39713 (4)(d) May 1, 1991 33-45751 (4)(d) May 15, 1991 33-45751 (4)(d) September 15, 1991 33-45751 (4)(d) April 1, 1992 33-48931 (4)(d) June 15, 1992 33-48931 (4)(d) September 15, 1992 33-48931 (4)(e) April 1, 1993 33-51139 (4)(d) June 15, 1993 33-51139 (4)(d) September 15, 1993 33-51139 (4)(d) November 15, 1993 1-2578 (4)(2) April 1, 1995 1-2578 (4)(2) May 1, 1995 1-2578 (4)(2) July 1, 1995 1-2578 (4)(2) June 1, 1997 (A) (4)(2) April 1, 1998 (A) (4)(2) June 1, 1998 (A) (4)(2)
(B) 4-2 - General Mortgage Indenture and Deed of Trust dated as of January 1, 1998 between OE and the Bank of New York, as Trustee. (Registration No. 333-05277, Exhibit 4(g).) 10-1 - Administration Agreement between the CAPCO Group dated as of September 14, 1967. (Registration No. 2-43102, Exhibit 5(c)(2).) 10-2 - Amendment No. 1 dated January 4, 1974 to Administration Agreement between the CAPCO Group dated as of September 14, 1967. (Registration No. 2-68906, Exhibit 5(c)(3).) 10-3 - Transmission Facilities Agreement between the CAPCO Group dated as of September 14, 1967. (Registration No. 2-43102, Exhibit 5(c)(3).) 10-4 - Amendment No. 1 dated as of January 1, 1993 to Transmission Facilities Agreement between the CAPCO Group dated as of September 14, 1967. (1993 Form 10-K, Exhibit 10-4.) 10-5 - Agreement for the Termination or Construction of Certain Agreements effective September 1, 1980 among the CAPCO Group. (Registration No. 2-68906, Exhibit 10- 4.) 10-6 - Amendment dated as of December 23, 1993 to Agreement for the Termination or Construction of Certain Agreements effective September 1, 1980 among the CAPCO Group. (1993 Form 10-K, Exhibit 10-6.) 10-7 - CAPCO Basic Operating Agreement, as amended September 1, 1980. (Registration No. 2-68906, Exhibit 10-5.) 10-8 - Amendment No. 1 dated August 1, 1981, and Amendment No. 2 dated September 1, 1982 to CAPCO Basic Operating Agreement, as amended September 1, 1980. (September 30, 1981 Form 10-Q, Exhibit 20-1 and 1982 Form 10-K, Exhibit 19-3, respectively.) 10-9 - Amendment No. 3 dated July 1, 1984 to CAPCO Basic Operating Agreement, as amended September 1, 1980. (1985 Form 10-K, Exhibit 10-7.) 10-10 - Basic Operating Agreement between the CAPCO Companies as amended October 1, 1991. (1991 Form 10-K, Exhibit 10-8.) 10-11 - Basic Operating Agreement between the CAPCO Companies as amended January 1, 1993. (1993 Form 10-K, Exhibit 10-11.) 10-12 - Memorandum of Agreement effective as of September 1, 1980 among the CAPCO Group. (1982 Form 10-K, Exhibit 19-2.) 10-13 - Operating Agreement for Beaver Valley Power Station Units Nos. 1 and 2 as Amended and Restated September 15, 1987, by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 10-15.) 10-14 - Construction Agreement with respect to Perry Plant between the CAPCO Group dated as of July 22, 1974. (Registration No. 2-52251 of Toledo Edison Company, Exhibit 5(yy).) 10-15 - Participation Agreement No. 1 relating to the financing of the development of certain coal mines, dated as of October 1, 1973, among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (Registration No. 2-61146, Exhibit 5(e)(1).) 10-16 - Amendment No. 1 dated as of September 15, 1978 to Participation Agreement No. 1 dated as of October 1, 1973 among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland as Owner Trustee, National City Bank as Loan Trustee and National City Bank as Bond Trustee. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibit 5(e)(2).) 10-17 - Participation Agreement No. 2 relating to the financing of the development of certain coal mines, dated as of August 1, 1974, among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (Registration No. 2-53059, Exhibit 5(h)(2).) 10-18 - Amendment No. 1 dated as of September 15, 1978 to Participation Agreement No. 2 dated as of August 1, 1974 among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland as Owner Trustee, National City Bank as Loan Trustee and National City Bank as Bond Trustee. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibit 5(e)(4).) 10-19 - Participation Agreement No. 3 dated as of September 15, 1978 among Quarto Mining Company, the CAPCO Companies, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland as Owner Trustee, and National City Bank as Loan Trustee and Bond Trustee. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibit 5(e)(5).) 10-20 - Participation Agreement No. 4 dated as of October 31, 1980 among Quarto Mining Company, the CAPCO Group, the Loan Participants listed in Schedule A thereto and National City Bank as Bond Trustee. (Registration No. 2- 68906 of Pennsylvania Power Company, Exhibit 10- 16.) 10-21 - Participation Agreement dated as of May 1, 1986, among Quarto Mining Company, the CAPCO Companies, the Loan Participants thereto, and National City Bank as Bond Trustee. (1986 Form 10-K, Exhibit 10-22.) 10-22 - Participation Agreement No. 6 dated as of December 1, 1991 among Quarto Mining Company, The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company, the Toledo Edison Company, the Loan Participants listed in Schedule A thereto, National City Bank, as Mortgage Bond Trustee and National City Bank, as Refunding Bond Trustee. (1991 Form 10-K, Exhibit 10-19.) 10-23 - Agreement entered into as of October 20, 1981 among the CAPCO Companies regarding the use of Quarto coal at Mansfield Units 1, 2 and 3. (1981 Form 10-K, Exhibit 20-1.) 10-24 - Restated Option Agreement dated as of May 1, 1983 by and between the North American Coal Corporation and the CAPCO Companies. (1983 Form 10-K, Exhibit 19-1.) 10-25 - Trust Indenture and Mortgage dated as of October 1, 1973 between Quarto Mining Company and National City Bank, as Bond Trustee, together with Guaranty dated as of October 1, 1973 with respect thereto by the CAPCO Group. (Registration No. 2-61146, Exhibit 5(e)(5).) 10-26 - Amendment No. 1 dated August 1, 1974 to Trust Indenture and Mortgage dated as of October 1, 1973 between Quarto Mining Company and National City Bank, as Bond Trustee, together with Amendment No. 1 dated August 1, 1974 to Guaranty dated as of October 1, 1973 with respect thereto by the CAPCO Group. (Registration No. 2-53059, Exhibit 5(h)(2).) 10-27 - Amendment No. 2 dated as of September 15, 1978 to the Trust Indenture and Mortgage dated as of October 1, 1973, as amended, between Quarto Mining Company and National City Bank, as Bond Trustee, together with Amendment No. 2 dated as of September 15, 1978 to Guaranty dated as of October 1, 1973 with respect to the CAPCO Group. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibits 5(e)(11) and 5(e)(12).) 10-28 - Amendment No. 3 dated as of October 31, 1980, to Trust Indenture and Mortgage dated as of October 1, 1973, as amended between Quarto Mining Company and National City Bank as Bond Trustee. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibit 10-16.) 10-29 - Amendment No. 4 dated as of July 1, 1985 to the Trust Indenture and Mortgage dated as of October 1, 1973, as amended between Quarto Mining Company and National City Bank as Bond Trustee. (1985 Form 10-K, Exhibit 10-28.) 10-30 - Amendment No. 5 dated as of May 1, 1986, to the Trust Indenture and Mortgage between Quarto and National City Bank as Bond Trustee. (1986 Form 10-K, Exhibit 10-30.) 10-31 - Amendment No. 6 dated as of December 1, 1991, to the Trust Indenture and Mortgage dated as of October 1, 1973, between Quarto Mining Company and National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-28.) 10-32 - Trust Indenture dated as of December 1, 1991, between Quarto Mining Company and National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-29.) 10-33 - Amendment No. 3 dated as of October 31, 1980 to the Bond Guaranty dated as of October 1, 1973, as amended, with respect to the CAPCO Group. (Registration No. 2- 68906 of Pennsylvania Power Company, Exhibit 10-16.) 10-34 - Amendment No. 4 dated as of July 1, 1985 to the Bond Guaranty dated as of October 1, 1973, as amended, by the CAPCO Companies to National City Bank as Bond Trustee. (1985 Form 10-K, Exhibit 10-30.) 10-35 - Amendment No. 5 dated as of May 1, 1986, to the Bond Guaranty by the CAPCO Companies to National City Bank as Bond Trustee. (1986 Form 10-K, Exhibit 10-33.) 10-36 - Amendment No. 6A dated as of December 1, 1991, to the Bond Guaranty dated as of October 1, 1973, by The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company, the Toledo Edison Company to National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-33.) 10-37 - Amendment No. 6B dated as of December 30, 1991, to the Bond Guaranty dated as of October 1, 1973 by The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company, the Toledo Edison Company to National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-34.) 10-38 - Bond Guaranty dated as of December 1, 1991, by The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company, the Toledo Edison Company to National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-35.) 10-39 - Open end Mortgage dated as of October 1, 1973 between Quarto Mining Company and the CAPCO Companies and Amendment No. 1 thereto, dated as of September 15, 1978. (Registration No. 2-68906 of Pennsylvania Power Company, Exhibit 10-23.) 10-40 - Repayment and Security Agreement and Assignment of Lease dated as of October 1, 1973 between Quarto Mining Company and Ohio Edison Company as Agent for the CAPCO Companies and Amendment No. 1 thereto, dated as of September 15, 1978. (1980 Form 10-K, Exhibit 20-2.) 10-41 - Restructuring Agreement dated as of April 1, 1985 among Quarto Mining Company, the Company and the other CAPCO Companies, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants signatories thereto, Central National Bank of Cleveland, as Owner Trustee and National City Bank as Loan Trustee and Bond Trustee. (1985 Form 10-K, Exhibit 10-33.) 10-42 - Unsecured Note Guaranty dated as of July 1, 1985 by the CAPCO Companies to General Electric Credit Corporation. (1985 Form 10-K, Exhibit 10-34.) 10-43 - Memorandum of Understanding dated March 31, 1985 among the CAPCO Companies. (1985 Form 10-K, Exhibit 10-35.) (C) 10-44 - Ohio Edison System Executive Supplemental Life Insurance Plan. (1995 Form 10-K, Exhibit 10-44.) (C) 10-45 - Ohio Edison System Executive Incentive Compensation Plan. (1995 Form 10-K, Exhibit 10-45.) (C) 10-46 - Ohio Edison System Restated and Amended Executive Deferred Compensation Plan. (1995 Form 10-K, Exhibit 10-46.) (C) 10-47 - Ohio Edison System Restated and Amended Supplemental Executive Retirement Plan. (1995 Form 10-K, Exhibit 10- 47.) (C) 10-48 - Severance pay agreement between Ohio Edison Company and W. R. Holland. (1995 Form 10-K, Exhibit 10-48.) (C) 10-49 - Severance pay agreement between Ohio Edison Company and H. P. Burg. (1995 Form 10-K, Exhibit 10-49.) (C) 10-50 - Severance pay agreement between Ohio Edison Company and A. J. Alexander. (1995 Form 10-K, Exhibit 10-50.) (C) 10-51 - Severance pay agreement between Ohio Edison Company and J. A. Gill. (1995 Form 10-K, Exhibit 10-51.) (D) 10-52 - Participation Agreement dated as of March 16, 1987 among Perry One Alpha Limited Partnership, as Owner Participant, the Original Loan Participants listed in Schedule 1 Hereto, as Original Loan Participants, PNPP Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1986 Form 10-K, Exhibit 28-1.) (D) 10-53 - Amendment No. 1 dated as of September 1, 1987 to Participation Agreement dated as of March 16, 1987 among Perry One Alpha Limited Partnership, as Owner Participant, the Original Loan Participants listed in Schedule 1 thereto, as Original Loan Participants, PNPP Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company (now The Bank of New York), as Indenture Trustee, and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-46.) (D) 10-54 - Amendment No. 3 dated as of May 16, 1988 to Participation Agreement dated as of March 16, 1987, as amended among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-47.) (D) 10-55 - Amendment No. 4 dated as of November 1, 1991 to Participation Agreement dated as of March 16, 1987 among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-47.) (D) 10-56 - Amendment No. 5 dated as of November 24, 1992 to Participation Agreement dated as of March 16, 1987, as amended, among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPPII Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company as Lessee. (1992 Form 10-K, Exhibit 10-49.) (D) 10-57 - Amendment No. 6 dated as of January 12, 1993 to Participation Agreement dated as of March 16, 1987 among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-50.) (D) 10-58 - Amendment No. 7 dated as of October 12, 1994 to Participation Agreement dated as of March 16, 1987 as amended, among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-54.) (D) 10-59 - Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee, with Perry One Alpha Limited Partnership, Lessor, and Ohio Edison Company, Lessee. (1986 Form 10-K, Exhibit 28-2.) (D) 10-60 - Amendment No. 1 dated as of September 1, 1987 to Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee, Lessor and Ohio Edison Company, Lessee. (1991 Form 10-K, Exhibit 10-49.) (D) 10-61 - Amendment No. 2 dated as of November 1, 1991, to Facility Lease dated as of March 16, 1987, between The First National Bank of Boston, as Owner Trustee, Lessor and Ohio Edison Company, Lessee. (1991 Form 10-K, Exhibit 10-50.) (D) 10-62 - Amendment No. 3 dated as of November 24, 1992 to Facility Lease dated as of March 16, 1987, as amended, between The First National Bank of Boston, as Owner Trustee, with Perry One Alpha Limited Partnership, as Owner Participant and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-54.) (D) 10-63 - Amendment No. 4 dated as of January 12, 1993 to Facility Lease dated as of March 16, 1987 as amended, between, The First National Bank of Boston, as Owner Trustee, with Perry One Alpha Limited Partnership, as Owner Participant, and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-59.) (D) 10-64 - Amendment No. 5 dated as of October 12, 1994 to Facility Lease dated as of March 16, 1987 as amended, between, The First National Bank of Boston, as Owner Trustee, with Perry One Alpha Limited Partnership, as Owner Participant, and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-60.) (D) 10-65 - Letter Agreement dated as of March 19, 1987 between Ohio Edison Company, Lessee, and The First National Bank of Boston, as Owner Trustee under a Trust dated March 16, 1987 with Chase Manhattan Realty Leasing Corporation, required by Section 3(d) of the Facility Lease. (1986 Form 10-K, Exhibit 28-3.) (D) 10-66 - Ground Lease dated as of March 16, 1987 between Ohio Edison Company, Ground Lessor, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with the Owner Participant, Tenant. (1986 Form 10-K, Exhibit 28-4.) (D) 10-67 - Trust Agreement dated as of March 16, 1987 between Perry One Alpha Limited Partnership, as Owner Participant, and The First National Bank of Boston. (1986 Form 10-K, Exhibit 28-5.) (D) 10-68 - Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of March 16, 1987 with Perry One Alpha Limited Partnership, and Irving Trust Company, as Indenture Trustee. (1986 Form 10-K, Exhibit 28-6.) (D) 10-69 - Supplemental Indenture No. 1 dated as of September 1, 1987 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston as Owner Trustee and Irving Trust Company (now The Bank of New York), as Indenture Trustee. (1991 Form 10-K, Exhibit 10-55.) (D) 10-70 - Supplemental Indenture No. 2 dated as of November 1, 1991 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee and The Bank of New York, as Indenture Trustee. (1991 Form 10-K, Exhibit 10-56.) (D) 10-71 - Tax Indemnification Agreement dated as of March 16, 1987 between Perry One, Inc. and PARock Limited Partnership as General Partners and Ohio Edison Company, as Lessee. (1986 Form 10-K, Exhibit 28-7.) (D) 10-72 - Amendment No. 1 dated as of November 1, 1991 to Tax Indemnification Agreement dated as of March 16, 1987 between Perry One, Inc. and Parock Limited Partnership and Ohio Edison Company. (1991 Form 10-K, Exhibit 10- 58.) (D) 10-73 - Amendment No. 2 dated as of January 12, 1993 to Tax Indemnification Agreement dated as of March 16, 1987 between Perry One, Inc. and Parock Limited Partnership and Ohio Edison Company. (1994 Form 10-K, Exhibit 10- 69.) (D) 10-74 - Amendment No. 3 dated as of October 12, 1994 to Tax Indemnification Agreement dated as of March 16, 1987 between Perry One, Inc. and Parock Limited Partnership and Ohio Edison Company. (1994 Form 10-K, Exhibit 10- 70.) (D) 10-75 - Partial Mortgage Release dated as of March 19, 1987 under the Indenture between Ohio Edison Company and Bankers Trust Company, as Trustee, dated as of the 1st day of August, 1930. (1986 Form 10-K, Exhibit 28-8.) (D) 10-76 - Assignment, Assumption and Further Agreement dated as of March 16, 1987 among The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Perry One Alpha Limited Partnership, The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company and Toledo Edison Company. (1986 Form 10-K, Exhibit 28-9.) (D) 10-77 - Additional Support Agreement dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Perry One Alpha Limited Partnership, and Ohio Edison Company. (1986 Form 10-K, Exhibit 28-10.) (D) 10-78 - Bill of Sale, Instrument of Transfer and Severance Agreement dated as of March 19, 1987 between Ohio Edison Company, Seller, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Perry One Alpha Limited Partnership. (1986 Form 10-K, Exhibit 28- 11.) (D) 10-79 - Easement dated as of March 16, 1987 from Ohio Edison Company, Grantor, to The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Perry One Alpha Limited Partnership, Grantee. (1986 Form 10-K, File Exhibit 28-12.) 10-80 - Participation Agreement dated as of March 16, 1987 among Security Pacific Capital Leasing Corporation, as Owner Participant, the Original Loan Participants listed in Schedule 1 Hereto, as Original Loan Participants, PNPP Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1986 Form 10-K, as Exhibit 28-13.) 10-81 - Amendment No. 1 dated as of September 1, 1987 to Participation Agreement dated as of March 16, 1987 among Security Pacific Capital Leasing Corporation, as Owner Participant, The Original Loan Participants Listed in Schedule 1 thereto, as Original Loan Participants, PNPP Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-65.) 10-82 - Amendment No. 4 dated as of November 1, 1991, to Participation Agreement dated as of March 16, 1987 among Security Pacific Capital Leasing Corporation, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-66.) 10-83 - Amendment No. 5 dated as of November 24, 1992 to Participation Agreement dated as of March 16, 1987 as amended among Security Pacific Capital Leasing Corporation, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-71.) 10-84 - Amendment No. 6 dated as of January 12, 1993 to Participation Agreement dated as of March 16, 1987 as amended among Security Pacific Capital Leasing Corporation, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-80.) 10-85 - Amendment No. 7 dated as of October 12, 1994 to Participation Agreement dated as of March 16, 1987 as amended among Security Pacific Capital Leasing Corporation, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-81.) 10-86 - Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee, with Security Pacific Capital Leasing Corporation, Lessor, and Ohio Edison Company, as Lessee. (1986 Form 10-K, Exhibit 28-14.) 10-87 - Amendment No. 1 dated as of September 1, 1987 to Facility Lease dated as of March 16, 1987 between The First National Bank of Boston as Owner Trustee, Lessor and Ohio Edison Company, Lessee. (1991 Form 10-K, Exhibit 10-68.) 10-88 - Amendment No. 2 dated as of November 1, 1991 to Facility Lease dated as of March 16, 1987 between The First National Bank of Boston as Owner Trustee, Lessor and Ohio Edison Company, Lessee. (1991 Form 10-K, Exhibit 10-69.) 10-89 - Amendment No. 3 dated as of November 24, 1992 to Facility Lease dated as of March 16, 1987, as amended, between, The First National Bank of Boston, as Owner Trustee, with Security Pacific Capital Leasing Corporation, as Owner Participant and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-75.) 10-90 - Amendment No. 4 dated as of January 12, 1993 to Facility Lease dated as of March 16, 1987 as amended between, The First National Bank of Boston, as Owner Trustee, with Security Pacific Capital Leasing Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-76.) 10-91 - Amendment No. 5 dated as of October 12, 1994 to Facility Lease dated as of March 16, 1987 as amended between, The First National Bank of Boston, as Owner Trustee, with Security Pacific Capital Leasing Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-87.) 10-92 - Letter Agreement dated as of March 19, 1987 between Ohio Edison Company, as Lessee, and The First National Bank of Boston, as Owner Trustee under a Trust, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, required by Section 3(d) of the Facility Lease. (1986 Form 10-K, Exhibit 28-15.) 10-93 - Ground Lease dated as of March 16, 1987 between Ohio Edison Company, Ground Lessor, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Perry One Alpha Limited Partnership, Tenant. (1986 Form 10-K, Exhibit 28-16.) 10-94 - Trust Agreement dated as of March 16, 1987 between Security Pacific Capital Leasing Corporation, as Owner Participant, and The First National Bank of Boston. (1986 Form 10-K, Exhibit 28-17.) 10-95 - Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, and Irving Trust Company, as Indenture Trustee. (1986 Form 10-K, Exhibit 28-18.) 10-96 - Supplemental Indenture No. 1 dated as of September 1, 1987 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee and Irving Trust Company (now The Bank of New York), as Indenture Trustee. (1991 Form 10-K, Exhibit 10-74.) 10-97 - Supplemental Indenture No. 2 dated as of November 1, 1991 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee and The Bank of New York, as Indenture Trustee. (1991 Form 10-K, Exhibit 10-75.) 10-98 - Tax Indemnification Agreement dated as of March 16, 1987 between Security Pacific Capital Leasing Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1986 Form 10-K, Exhibit 28-19.) 10-99 - Amendment No. 1 dated as of November 1, 1991 to Tax Indemnification Agreement dated as of March 16, 1987 between Security Pacific Capital Leasing Corporation and Ohio Edison Company. (1991 Form 10-K, Exhibit 10- 77.) 10-100- Amendment No. 2 dated as of January 12, 1993 to Tax Indemnification Agreement dated as of March 16, 1987 between Security Pacific Capital Leasing Corporation and Ohio Edison Company. (1994 Form 10-K, Exhibit 10- 96.) 10-101- Amendment No. 3 dated as of October 12, 1994 to Tax Indemnification Agreement dated as of March 16, 1987 between Security Pacific Capital Leasing Corporation and Ohio Edison Company. (1994 Form 10-K, Exhibit 10- 97.) 10-102- Assignment, Assumption and Further Agreement dated as of March 16, 1987 among The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company and Toledo Edison Company. (1986 Form 10-K, Exhibit 28-20.) 10-103- Additional Support Agreement dated as of March 16, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, and Ohio Edison Company. (1986 Form 10-K, Exhibit 28-21.) 10-104- Bill of Sale, Instrument of Transfer and Severance Agreement dated as of March 19, 1987 between Ohio Edison Company, Seller, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, Buyer. (1986 Form 10-K, Exhibit 28-22.) 10-105- Easement dated as of March 16, 1987 from Ohio Edison Company, Grantor, to The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of March 16, 1987, with Security Pacific Capital Leasing Corporation, Grantee. (1986 Form 10-K, Exhibit 28-23.) 10-106- Refinancing Agreement dated as of November 1, 1991 among Perry One Alpha Limited Partnership, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee, The Bank of New York, as Collateral Trust Trustee, The Bank of New York, as New Collateral Trust Trustee and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-82.) 10-107- Refinancing Agreement dated as of November 1, 1991 among Security Pacific Leasing Corporation, as Owner Participant, PNPP Funding Corporation, as Funding Corporation, PNPP II Funding Corporation, as New Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee, The Bank of New York, as Collateral Trust Trustee, The Bank of New York, as New Collateral Trust Trustee and Ohio Edison Company, as Lessee. (1991 Form 10-K, Exhibit 10-83.) 10-108- Ohio Edison Company Master Decommissioning Trust Agreement for Perry Nuclear Power Plant Unit One, Perry Nuclear Power Plant Unit Two, Beaver Valley Power Station Unit One and Beaver Valley Power Station Unit Two dated July 1, 1993. (1993 Form 10-K, Exhibit 10-94.) 10-109- Nuclear Fuel Lease dated as of March 31, 1989, between OES Fuel, Incorporated, as Lessor, and Ohio Edison Company, as Lessee. (1989 Form 10-K, Exhibit 10-62.) 10-110- Receivables Purchase Agreement dated as November 28, 1989, as amended and restated as of April 23, 1993, between OES Capital, Incorporated, Corporate Asset Funding Company, Inc. and Citicorp North America, Inc. (1994 Form 10-K, Exhibit 10-106.) 10-111- Guarantee Agreement entered into by Ohio Edison Company dated as of January 17, 1991. (1990 Form 10-K, Exhibit 10-64). 10-112- Transfer and Assignment Agreement among Ohio Edison Company and Chemical Bank, as trustee under the OE Power Contract Trust. (1990 Form 10-K, Exhibit 10-65). 10-113- Renunciation of Payments and Assignment among Ohio Edison Company, Monongahela Power Company, West Penn Power Company, and the Potomac Edison Company dated as of January 4, 1991. (1990 Form 10-K, Exhibit 10-66). 10-114- Transfer and Assignment Agreement dated May 20, 1994 among Ohio Edison Company and Chemical Bank, as trustee under the OE Power Contract Trust. (1994 Form 10-K, Exhibit 10-110.) 10-115- Renunciation of Payments and Assignment among Ohio Edison Company, Monongahela Power Company, West Penn Power Company, and the Potomac Edison Company dated as of May 20, 1994. (1994 Form 10-K, Exhibit 10-111.) 10-116- Transfer and Assignment Agreement dated October 12, 1994 among Ohio Edison Company and Chemical Bank, as trustee under the OE Power Contract Trust. (1994 Form 10-K, Exhibit 10-112.) 10-117- Renunciation of Payments and Assignment among Ohio Edison Company, Monongahela Power Company, West Penn Power Company, and the Potomac Edison Company dated as of October 12, 1994. (1994 Form 10-K, Exhibit 10-113.) (E) 10-118- Participation Agreement dated as of September 15, 1987, among Beaver Valley Two Pi Limited Partnership, as Owner Participant, the Original Loan Participants listed in Schedule 1 Thereto, as Original Loan Participants, BVPS Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-1.) (E) 10-119- Amendment No. 1 dated as of February 1, 1988, to Participation Agreement dated as of September 15, 1987, among Beaver Valley Two Pi Limited Partnership, as Owner Participant, the Original Loan Participants listed in Schedule 1 Thereto, as Original Loan Participants, BVPS Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-2.) (E) 10-120- Amendment No. 3 dated as of March 16, 1988 to Participation Agreement dated as of September 15, 1987, as amended, among Beaver Valley Two Pi Limited Partnership, as Owner Participant, BVPS Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-99.) (E) 10-121- Amendment No. 4 dated as of November 5, 1992 to Participation Agreement dated as of September 15, 1987, as amended, among Beaver Valley Two Pi Limited Partnership, as Owner Participant, BVPS Funding Corporation, BVPS II Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-100.) (E) 10-122- Amendment No. 5 dated as of September 30, 1994 to Participation Agreement dated as of September 15, 1987, as amended, among Beaver Valley Two Pi Limited Partnership, as Owner Participant, BVPS Funding Corporation, BVPS II Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-118.) (E) 10-123- Facility Lease dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee, with Beaver Valley Two Pi Limited Partnership, Lessor, and Ohio Edison Company, Lessee. (1987 Form 10-K, Exhibit 28-3.) (E) 10-124- Amendment No. 1 dated as of February 1, 1988, to Facility Lease dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee, with Beaver Valley Two Pi Limited Partnership, Lessor, and Ohio Edison Company, Lessee. (1987 Form 10-K, Exhibit 28-4.) (E) 10-125- Amendment No. 2 dated as of November 5, 1992 to Facility Lease dated as of September 15, 1987, as amended, between The First National Bank of Boston, as Owner Trustee, with Beaver Valley Two Pi Limited Partnership, as Owner Participant, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-103.) (E) 10-126- Amendment No. 3 dated as of September 30, 1994 to Facility Lease dated as of September 15, 1987, as amended, between The First National Bank of Boston, as Owner Trustee, with Beaver Valley Two Pi Limited Partnership, as Owner Participant, and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-122.) (E) 10-127- Ground Lease and Easement Agreement dated as of September 15, 1987, between Ohio Edison Company, Ground Lessor, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Beaver Valley Two Pi Limited Partnership, Tenant. (1987 Form 10-K, Exhibit 28- 5.) (E) 10-128- Trust Agreement dated as of September 15, 1987, between Beaver Valley Two Pi Limited Partnership, as Owner Participant, and The First National Bank of Boston. (1987 Form 10-K, Exhibit 28-6.) (E) 10-129- Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987, with Beaver Valley Two Pi Limited Partnership, and Irving Trust Company, as Indenture Trustee. (1987 Form 10-K, Exhibit 28-7.) (E) 10-130- Supplemental Indenture No. 1 dated as of February 1, 1988 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of September 15, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with Beaver Valley Two Pi Limited Partnership and Irving Trust Company, as Indenture Trustee. (1987 Form 10-K, Exhibit 28-8.) (E) 10-131- Tax Indemnification Agreement dated as of September 15, 1987, between Beaver Valley Two Pi Inc. and PARock Limited Partnership as General Partners and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-9.) (E) 10-132- Amendment No. 1 dated as of November 5, 1992 to Tax Indemnification Agreement dated as of September 15, 1987, between Beaver Valley Two Pi Inc. and PARock Limited Partnership as General Partners and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-128.) (E) 10-133- Amendment No. 2 dated as of September 30, 1994 to Tax Indemnification Agreement dated as of September 15, 1987, between Beaver Valley Two Pi Inc. and PARock Limited Partnership as General Partners and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-129.) (E) 10-134- Tax Indemnification Agreement dated as of September 15, 1987, between HG Power Plant, Inc., as Limited Partner and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-10.) (E) 10-135- Amendment No. 1 dated as of November 5, 1992 to Tax Indemnification Agreement dated as of September 15, 1987, between HG Power Plant, Inc., as Limited Partner and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-131.) (E) 10-136- Amendment No. 2 dated as of September 30, 1994 to Tax Indemnification Agreement dated as of September 15, 1987, between HG Power Plant, Inc., as Limited Partner and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-132.) (E) 10-137- Assignment, Assumption and Further Agreement dated as of September 15, 1987, among The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Beaver Valley Two Pi Limited Partnership, The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company and Toledo Edison Company. (1987 Form 10-K, Exhibit 28-11.) (E) 10-138- Additional Support Agreement dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Beaver Valley Two Pi Limited Partnership, and Ohio Edison Company. (1987 Form 10-K, Exhibit 28-12.) (F) 10-139- Participation Agreement dated as of September 15, 1987, among Chrysler Consortium Corporation, as Owner Participant, the Original Loan Participants listed in Schedule 1 Thereto, as Original Loan Participants, BVPS Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-13.) (F) 10-140- Amendment No. 1 dated as of February 1, 1988, to Participation Agreement dated as of September 15, 1987, among Chrysler Consortium Corporation, as Owner Participant, the Original Loan Participants listed in Schedule I Thereto, as Original Loan Participants, BVPS Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee, and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-14.) (F) 10-141- Amendment No. 3 dated as of March 16, 1988 to Participation Agreement dated as of September 15, 1987, as amended, among Chrysler Consortium Corporation, as Owner Participant, BVPS Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-114.) (F) 10-142- Amendment No. 4 dated as of November 5, 1992 to Participation Agreement dated as of September 15, 1987, as amended, among Chrysler Consortium Corporation, as Owner Participant, BVPS Funding Corporation, BVPS II Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-115.) (F) 10-143- Amendment No. 5 dated as of January 12, 1993 to Participation Agreement dated as of September 15, 1987, as amended, among Chrysler Consortium Corporation, as Owner Participant, BVPS Funding Corporation, BVPS II Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-139.) (F) 10-144- Amendment No. 6 dated as of September 30, 1994 to Participation Agreement dated as of September 15, 1987, as amended, among Chrysler Consortium Corporation, as Owner Participant, BVPS Funding Corporation, BVPS II Funding Corporation, The First National Bank of Boston, as Owner Trustee, The Bank of New York, as Indenture Trustee and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-140.) (F) 10-145- Facility Lease dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee, with Chrysler Consortium Corporation, Lessor, and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28- 15.) (F) 10-146- Amendment No. 1 dated as of February 1, 1988, to Facility Lease dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee, with Chrysler Consortium Corporation, Lessor, and Ohio Edison Company, Lessee. (1987 Form 10-K, Exhibit 28- 16.) (F) 10-147- Amendment No. 2 dated as of November 5, 1992 to Facility Lease dated as of September 15, 1987, as amended, between The First National Bank of Boston, as Owner Trustee, with Chrysler Consortium Corporation, as Owner Participant and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 118.) (F) 10-148- Amendment No. 3 dated as of January 12, 1993 to Facility Lease dated as of September 15, 1987, as amended, between The First National Bank of Boston, as Owner Trustee, with Chrysler Consortium Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1992 Form 10-K, Exhibit 10-119.) (F) 10-149- Amendment No. 4 dated as of September 30, 1994 to Facility Lease dated as of September 15, 1987, as amended, between The First National Bank of Boston, as Owner Trustee, with Chrysler Consortium Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-145.) (F) 10-150- Ground Lease and Easement Agreement dated as of September 15, 1987, between Ohio Edison Company, Ground Lessor, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Chrysler Consortium Corporation, Tenant. (1987 Form 10-K, Exhibit 28-17.) (F) 10-151- Trust Agreement dated as of September 15, 1987, between Chrysler Consortium Corporation, as Owner Participant, and The First National Bank of Boston. (1987 Form 10-K, Exhibit 28-18.) (F) 10-152- Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of September 15, 1987, between the First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Chrysler Consortium Corporation and Irving Trust Company, as Indenture Trustee. (1987 Form 10-K, Exhibit 28-19.) (F) 10-153- Supplemental Indenture No. 1 dated as of February 1, 1988 to Trust Indenture, Mortgage, Security Agreement and Assignment of Facility Lease dated as of September 15, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with Chrysler Consortium Corporation and Irving Trust Company, as Indenture Trustee. (1987 Form 10-K, Exhibit 28-20.) (F) 10-154- Tax Indemnification Agreement dated as of September 15, 1987, between Chrysler Consortium Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1987 Form 10-K, Exhibit 28-21.) (F) 10-155- Amendment No. 1 dated as of November 5, 1992 to Tax Indemnification Agreement dated as of September 15, 1987, between Chrysler Consortium Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-151.) (F) 10-156- Amendment No. 2 dated as of January 12, 1993 to Tax Indemnification Agreement dated as of September 15, 1987, between Chrysler Consortium Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-152.) (F) 10-157- Amendment No. 3 dated as of September 30, 1994 to Tax Indemnification Agreement dated as of September 15, 1987, between Chrysler Consortium Corporation, as Owner Participant, and Ohio Edison Company, as Lessee. (1994 Form 10-K, Exhibit 10-153.) (F) 10-158- Assignment, Assumption and Further Agreement dated as of September 15, 1987, among The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Chrysler Consortium Corporation, The Cleveland Electric Illuminating Company, Duquesne Light Company, Ohio Edison Company, Pennsylvania Power Company, and Toledo Edison Company. (1987 Form 10-K, Exhibit 28-22.) (F) 10-159- Additional Support Agreement dated as of September 15, 1987, between The First National Bank of Boston, as Owner Trustee under a Trust Agreement, dated as of September 15, 1987, with Chrysler Consortium Corporation, and Ohio Edison Company. (1987 Form 10-K, Exhibit 28-23.) 10-160- Operating Agreement dated March 10, 1987 with respect to Perry Unit No. 1 between the CAPCO Companies. (1987 Form 10-K, Exhibit 28-24.) 10-161- Operating Agreement for Bruce Mansfield Units Nos. 1, 2 and 3 dated as of June 1, 1976, and executed on September 15, 1987, by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 28-25.) 10-162- Operating Agreement for W. H. Sammis Unit No. 7 dated as of September 1, 1971 by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 28-26.) 10-163- OE-APS Power Interchange Agreement dated March 18, 1987, by and among Ohio Edison Company and Pennsylvania Power Company, and Monongahela Power Company and West Penn Power Company and The Potomac Edison Company. (1987 Form 10-K, Exhibit 28-27.) 10-164- OE-PEPCO Power Supply Agreement dated March 18, 1987, by and among Ohio Edison Company and Pennsylvania Power Company and Potomac Electric Power Company. (1987 Form 10-K, Exhibit 28-28.) 10-165- Supplement No. 1 dated as of April 28, 1987, to the OE- PEPCO Power Supply Agreement dated March 18, 1987, by and among Ohio Edison Company, Pennsylvania Power Company, and Potomac Electric Power Company. (1987 Form 10-K, Exhibit 28-29.) 10-166- APS-PEPCO Power Resale Agreement dated March 18, 1987, by and among Monongahela Power Company, West Penn Power Company, and The Potomac Edison Company and Potomac Electric Power Company. (1987 Form 10-K, Exhibit 28- 30.) (A) 12.1 - Consolidated fixed charge ratios. (A) 13.1 - 1998 Annual Report to Stockholders. (Only those portions expressly incorporated by reference in this Form 10-K are to be deemed "filed" with the SEC.) (A) 21.1 - List of Subsidiaries of the Registrant at December 31, 1998. (A) 23.1 - Consent of Independent Public Accountants. (A) 27.1 - Financial Data Schedule. (A) Provided herein in electronic format as an exhibit. (B) Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, OE has not filed as an exhibit to this Form 10-K any instrument with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of OE and its subsidiaries on a consolidated basis, but hereby agrees to furnish to the SEC on request any such instruments. (C) Management contract or compensatory plan contract or arrangement filed pursuant to Item 601 of Regulation S-K. (D) Substantially similar documents have been entered into relating to three additional Owner Participants. (E) Substantially similar documents have been entered into relating to five additional Owner Participants. (F) Substantially similar documents have been entered into relating to two additional Owner Participants. Note: Reports of OE on Forms 10-Q and 10-K are on file with the SEC under number 1-2578. Pursuant to Rule 14a - 3 (10) of the Securities Exchange Act of 1934, the Company will furnish any exhibit in this Report upon the payment of the Company's expenses in furnishing such exhibit. 3. Exhibits - Penn 3-1 - Agreement of Merger and Consolidation dated April 1, 1929, among Pennsylvania Power Company (Penn), Harmony Electric Company and Peoples Power Company (consummated May 31, 1930), copies of Letters Patent issued thereon, together with the Election Return and Treasurer's Return, relative to decrease of capital stock; Election Return authorizing change of capital stock and increase of indebtedness; Election Return authorizing change of capital stock; Election Return authorizing increase of capital stock; Election Return establishing 4.24% Preferred Stock; Certificate with respect to the establishment of the 4.64% Preferred Stock; Election Returns and Certificates of Actual Sale in connection with the purchase by Penn Power of all the property of Pine-Mercer Electric Company, Industry Borough Electric Company, Ohio Township Electric Company, and Shippingport Borough Electric Company; Certificate of Change of Location of Penn Power's principal office; Certificate of Consent authorizing increase in authorized Common Stock; Certificate of Consent with respect to the removal of limitations on the authorized amount of indebtedness of Penn Power; Election Returns and Certificates of Actual Sale in connection with the purchase by Penn Power of all the property of Borolak Public Service Company, Eastfax Public Service Company, Norango Public Service Company, Sadwick Public Service Company, Sosango Public Service Company, Surrick Public Service Company, Wesango Public Service Company, and Westfax Public Service Company; Certificate of Change of Location of Penn Power's principal office; Amendment to the Charter extending the territory in which Penn Power may operate in the Borough of Shippingport, Beaver County, Pennsylvania; Certificate of Consent authorizing increase in authorized Common Stock; Certificate with respect to the establishment of the 8% Preferred Stock; Certificate accepting Business Corporation Law of Pennsylvania for government and regulation of affairs of Penn Power; Articles of Amendment incorporating certain protective provisions relating to Preferred Stock, increasing amount of authorized Preferred Stock and authorizing future increases in amounts of authorized Preferred Stock without a vote of the holders of Preferred Stock; Articles of Amendment increasing the authorized number of shares of Common Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 7.64% Preferred Stock; Articles of Amendment increasing the authorized number of shares of Common Stock; Articles of Amendment increasing the number of authorized shares of Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 8.48% Preferred Stock; Articles of Amendment authorizing sinking fund requirements for Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 11% Preferred Stock; Articles of Amendment increasing the authorized number of shares of Common Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 9.16% Preferred Stock; Articles of Amendment increasing authorized number of shares of Common Stock; Articles of Amendment increasing authorized number of shares of Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 8.24% Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 10.50% Preferred Stock; Articles of Amendment increasing authorized number of shares of Common Stock; Articles of Amendment increasing authorized number of shares of Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 15.00% Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 11.50% Preferred Stock; Articles of Amendment increasing authorized number of shares of Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 13.00% Preferred Stock; Statement Affecting Class or Series of Shares with respect to the establishment of the 11.50% Preferred Stock, Series B; Articles of Amendment effective April 2, 1987, adding a standard of care for, and limiting the personal liability of, officers and directors; Articles of Amendment effective April 1, 1992, setting forth corporate purposes of the Company; Statement With Respect to Shares with respect to the establishment of the 7.625% Preferred Stock and Statement with Respect to Shares with respect to the establishment of the 7.75% Preferred Stock.(Physically filed and designated respectively, as follows: in Form A-2, Registration No. 2-3889, as Exhibit A-1; in Form 1-MD for 1938, File No.2-3889, as Exhibit (a)-1; in Form 1-MD for 1945, File No. 2-3889, as Exhibit A; in Form U-1, File No. 70-2310, as Exhibit A-3 (d); in Form 8-K for March 1951, File No. 1-3491, as Exhibit B; in Form 8-K for June 1958, File No. 1-3491B, as Exhibit 1; in Form 10-K for 1959 as Exhibits 1, 2, 3 and 4; in Form 8-K for March 1960, File No. 1-3491B as Exhibit A; in Form U-1, File No. 70-3971, as Exhibit A-2; in Form U-1, File No. 70-4055, as Exhibit A-2; as Exhibits 1 through 8 in Form 8-K for January 1962, File No. 1- 3491; as Exhibit A in Form 8-K for August 1963, File No. 1-3491; as Exhibits A and B in Form 8-K for September 1969, File No. 1-3491; as Exhibit B in Form 8-K for April 1971, File No. 1-3491; as Exhibit B in Form 8-K for September 1971, File No. 1-3491; in Form Form 8-K for September 1972, File No. 1-3491; as Exhibit A in Form 8-K for December 1972, File No. 1- 3491; as Exhibit A in Form 8-K for March 1973, File No. 1-3491; as Exhibit A in Form 8-K for December 1973, File No. 1-3491; as Exhibits A and C in Form 8-K for February 1974, File No. 1-3491; as Exhibits A and B in Form 8-K for January 1975, File No. 1-3491; as Exhibit F in Form 8-K for May 1975, File No. 1-3491; as Exhibit A in Form 8-K for April 1976, File No. 1-3491; as Exhibit G in Form 10-Q for quarter ended June 30, 1977, File No. 1-3491; as Exhibit C in Form 10-K for 1977, File No. 1-3491; as Exhibit A in Form 10-K for 1977, File No. 1-3491; as Exhibit D in Form 10-Q for quarter ended June 30, 1980, File No. 1-3491; as Exhibit (4) in Form 10-Q for quarter ended June 30, 1981, File No. 1- 3491; as Exhibit 4 in Form 10-Q for quarter ended June 30, 1982, File No. 1-3491; as Exhibit 4 in Form 10-Q for quarter ended September 30, 1982, File No. 1- 3491; as Exhibit 4 in Form 10-Q for quarter ended September 30, 1983, File No. 1-3491; as Exhibit 4 in Form 10-Q for quarter ended March 31, 1984, File No. 1- 3491; as Exhibit 4 in Form 10-Q for quarter ended June 30, 1984, File No. 1-3491; as Exhibit 4 in Form 10-Q for quarter ended September 30, 1985, File No. 1- 3491; as Exhibit 3-2 in Form 10-K for 1987 File No. 1- 3491; as Exhibit 3-2 in Form 10-K for 1992 File No. 1-3491; as Exhibit 19-2 in Form 10-K for 1992 File No. 1-3491; and as Exhibit 3-2 in Form 10-K for 1993 File No. 1-3491.) 3-2 - By-Laws of Penn as amended March 25, 1992. (1992 Form 10-K, Exhibit 3-3, File No. 1-3491.) 4-1* - Indenture dated as of November 1, 1945, between Penn and The First National Bank of the City of New York (now Citibank, N.A.), as Trustee, as supplemented and amended by Supplemental Indentures dated as of May 1, 1948, March 1, 1950, February 1, 1952, October 1, 1957, September 1, 1962, June 1, 1963, June 1, 1969, May 1, 1970, April 1, 1971, October 1, 1971, May 1, 1972, December 1, 1974, October 1, 1975, September 1, 1976, April 15, 1978, June 28, 1979, January 1, 1980, June 1, 1981, January 14, 1982, August 1, 1982, December 15, 1982, December 1, 1983, September 6, 1984, December 1, 1984, May 30, 1985, October 29, 1985, August 1, 1987, May 1, 1988, November 1, 1989, December 1, 1990, September 1, 1991, May 1, 1992, July 15, 1992, August 1, 1992, and May 1, 1993, July 1, 1993, August 31, 1993, September 1, 1993, September 15, 1993, October 1, 1993, November 1, 1993 and August 1, 1994. (Physically filed and designated as Exhibits 2(b) (1)-1 through 2(b) (l)-15 in Registration Statement File No. 2-60837; as Exhibits 2(b) (2), 2(b) (3), and 2 (b) (4 in Registration Statement File No. 2-68906; as Exhibit 4-2 in Form 10-K for 1981 File No. 1-3491; as Exhibit 19-1 in Form 10-K for 1982 File No. 1-3491; as Exhibit 19-1 in Form 10-K for 1983 File No. 1-3491; as Exhibit 19-1 in Form 10-K for 1984 File No. 1-3491; as Exhibit 19-1 in Form 10-K for 1985 File No. 1-3491; as Exhibit 19-1 in Form 10-K for 1987 File No. 1-3491; as Exhibit 19-1 in Form 10-K for 1988 File No. 1-3491; as Exhibit 19 in Form 10-K for 1989 File No. 1-3491; as Exhibit 19 in Form 10-K for 1990 File No. 1-3491; as Exhibit 19 in Form 10-K for 1991 File No. 1-3491; as Exhibit 19-1 in Form 10-K for 1992 File No. 1-3491; as Exhibit 4-2 in Form 10-K for 1993 File No. 1-3491; and as Exhibit 4-2 in Form 10-K for 1994 File No. 1-3491.) 4-2 - Supplemental Indenture dated as of September 1, 1995, between Penn and Citibank, N.A., as Trustee. (1995 Form 10-K, Exhibit 4-2.) 4-3 - Supplemental Indenture dated as of June 1, 1997, between Penn and Citibank, N.A., as Trustee. (1997 Form 10-K, Exhibit 4-3.) - ---------------- * Pursuant to paragraph (b) (4) (iii) (A) of Item 601 of Regulation S-K, Penn has not filed as an exhibit to this Form 10-K any instrument with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of Penn, but hereby agrees to furnish to the Commission on request any such instruments. (A) 4-4 - Supplemental Indenture dated as of June 1, 1998, between Penn and Citibank, N.A., as Trustee. 10-1 - Administration Agreement between the CAPCO Group dated as of September 14, 1967. (Registration Statement of Ohio Edison Company, File No. 2-43102, Exhibit 5 (c) (2).) 10-2 - Amendment No. 1 dated January 4, 1974 to Administration Agreement between the CAPCO Group dated as of September 14, 1967. (Registration Statement No. 2- 68906, Exhibit 5 (c) (3).) 10-3 - Transmission Facilities Agreement between the CAPCO Group dated as of September 14, 1967. (Registration Statement of Ohio Edison Company, File No. 2-43102, Exhibit 5 (c) (3).) 10-4 - Amendment No. 1 dated as of January 1, 1993 to Transmission Facilities Agreement between the CAPCO Group dated as of September 14, 1967. (1993 Form 10-K, Exhibit 10-4, Ohio Edison Company.) 10-5 - Agreement for the Termination or Construction of Certain Agreements effective September 1, 1980 among the CAPCO Group. (Registration Statement No. 2-68906, Exhibit 10-4.) 10-6 - Amendment dated as of December 23, 1993 to Agreement for the Termination or Construction of Certain Agreements effective September 1, 1980 among the CAPCO Group. (1993 Form 10-K, Exhibit 10-6, Ohio Edison Company.) 10-7 - CAPCO Basic Operating Agreement, as amended September 1, 1980. (Registration Statement No. 2-68906, as Exhibit 10-5.) 10-8 - Amendment No. 1 dated August 1, 1981 and Amendment No. 2 dated September 1, 1982, to CAPCO Basic Operating Agreement as amended September 1, 1980. (September 30, 1981 Form 10-Q, Exhibit 20-1, and 1982 Form 10-K, Exhibit 19-3, File No. 1-2578, of Ohio Edison Company.) 10-9 - Amendment No. 3 dated as of July 1, 1984, to CAPCO Basic Operating Agreement as amended September 1, 1980. (1985 Form 10-K, Exhibit 10-7, File No. 1-2578, of Ohio Edison Company.) 10-10 - Basic Operating Agreement between the CAPCO Companies as amended October 1, 1991. (1991 Form 10-K, Exhibit 10-8, File No. 1-2578, of Ohio Edison Company.) 10-11 - Basic Operating Agreement between the CAPCO Companies, as amended January 1, 1993. (1993 Form 10-K, Exhibit 10-11, Ohio Edison Company.) 10-12 - Memorandum of Agreement effective as of September 1, 1980, among the CAPCO Group. (1991 Form 10-K, Exhibit 19-2, Ohio Edison Company.) 10-13 - Operating Agreement for Beaver Valley Power Station Units Nos. 1 and 2 as Amended and Restated September 15, 1987, by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 10-15, File No. 1-2578, of Ohio Edison Company.) 10-14 - Construction Agreement with respect to Perry Plant between the CAPCO Group dated as of July 22, 1974. (Registration Statement of Toledo Edison Company, File No. 2-52251, as Exhibit 5 (yy).) 10-15 - Participation Agreement No. 1 relating to the financing of the development of certain coal mines, dated as of October 1, 1973, among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (Registration Statement of Ohio Edison Company, File No. 2-61146, Exhibit 5 (e) (1).) 10-16 - Amendment No. 1 dated as of September 15, 1978, to Participation Agreement No. 1 dated as of October 1, 1973, among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (Registration Statement No. 2-68906, Exhibit 5 (e) (2).) 10-17 - Participation Agreement No. 2 relating to the financing of the development of certain coal mines, dated as of August 1, 1974, among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (Ohio Edison Company, File No. 2-53059, Exhibit 5 (h) (2).) 10-18 - Amendment No. 1 dated as of September 15, 1978, to Participation Agreement No. 2 dated as of August 1, 1974, among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (Registration Statement No. 2-68906, Exhibit 5 (e) (4).) 10-19 - Participation Agreement No. 3 relating to the financing of the development of certain coal mines, dated as of September 15, 1978, among Quarto Mining Company, the CAPCO Group, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in Schedules A and B thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (Registration Statement No. 2-68906, Exhibit 5 (e) (5).) 10-20 - Participation Agreement No. 4 relating to the financing of the development of certain coal mines, dated as of October 31, 1980, among Quarto Mining Company, the CAPCO Group, the Loan Participants listed in Schedule A thereto and National City Bank, as Bond Trustee. (Registration Statement No. 2-68906, Exhibit 10-16.) 10-21 - Participation Agreement No. 5 dated as of May 1, 1986, among Quarto Mining Company, the CAPCO Companies, the Loan Participants listed in Schedule A thereto, and National City Bank, as Bond Trustee. (1986 Form 10-K, Exhibit 10-22, File No. 1-2578, Ohio Edison Company.) 10-22 - Participation Agreement No. 6 dated as of December 1, 1991, among Quarto Mining Company, the CAPCO Companies, the Loan Participants listed in Schedule A thereto, National City Bank, as Mortgage Bond Trustee, and National City Bank, as Refunding Bond Trustee. (1991 Form 10-K, Exhibit 10-19, File No. 1-2578, Ohio Edison Company.) 10-23 - Agreement entered into as of October 20, 1981, among the CAPCO Companies regarding the use of Quarto Coal at Mansfield Units Nos. 1, 2 and 3. (1981 Form 10-K, Exhibit 20-1, File No. 1-2578, Ohio Edison Company.) 10-24 - Restated Option Agreement dated as of May 1, 1983, by and between The North American Coal Corporation and the CAPCO Companies. (1983 Form 10-K, Exhibit 19-1, File No. 1-2578, Ohio Edison Company.) 10-25 - Trust Indenture and Mortgage dated as of October 1, 1973, between Quarto Mining Company and National City Bank, as Bond Trustee, together with Guaranty, dated as of October 1, 1973, with respect thereto by the CAPCO Group. (Registration Statement of Ohio Edison Company, File No. 2-61146, Exhibit 5 (e) (5).) 10-26 - Amendment No. 1 dated August 1, 1974, to Trust Indenture and Mortgage dated as of October 1, 1973, between Quarto Mining Company and National City Bank, as Bond Trustee, together with Amendment No. 1 dated August 1, 1974, to Guaranty dated as of October 1, 1973, with respect thereto by the CAPCO Group. (Registration Statement of Ohio Edison Company, File No. 2-53059, Exhibit 5 (h) (2).) 10-27 - Amendment No. 2 dated as of September 15, 1978, to Trust Indenture and Mortgage dated as of October 1, 1973, as amended, between Quarto Mining Company and National City Bank, as Bond Trustee, together with Amendment No. 2 dated as of September 15, 1978, to Bond Guaranty dated as of October 1, 1973, as amended, between the CAPCO Group and National City Bank, as Bond Trustee. (Registration Statement No. 2-68906, Exhibits 5 (e) (11) and 5 (e) (12).) 10-28 - Amendment No. 3 dated as of October 31, 1980, to Trust Indenture and Mortgage dated as of October 1, 1973, as amended, between Quarto Mining Company and National City Bank, as Bond Trustee. (Registration Statement No. 2-68906, Exhibit 10-16.) 10-29 - Amendment No. 4 dated as of July 1, 1985, to Trust Indenture and Mortgage dated as of October 1, 1973, as amended, between Quarto Mining Company and National City Bank, as Bond Trustee. (1985 Form 10-K, Exhibit 10-28, File No. 1-2578, Ohio Edison Company.) 10-30 - Amendment No. 5 dated as of May 1, 1986, to Trust Indenture and Mortgage dated as of October 1, 1973, as amended, between Quarto Mining Company and National City Bank, as Bond Trustee. (1986 Form 10-K, Exhibit 10-30, File No. 1-2578, Ohio Edison Company.) 10-31 - Amendment No. 6 dated as of December 1, 1991, to Trust Indenture and Mortgage dated as of October 1, 1973, as amended, between Quarto Mining Company and National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-28, File No. 1-2578, Ohio Edison Company.) 10-32 - Trust Indenture dated as of December 1, 1991, between Quarto Mining Company and National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-29, File No. 1- 2578, Ohio Edison Company.) 10-33 - Amendment No. 3 dated as of October 31, 1980, to the Bond Guaranty dated as of October 1, 1973, as amended, with respect to the CAPCO Group. (Registration Statement No. 2-68906, Exhibit 10-16.) 10-34 - Amendment No. 4 dated as of July 1, 1985, to the Bond Guaranty dated as of October 1, 1973, as amended, by the CAPCO Companies to National City Bank, as Bond Trustee. (1985 Form 10-K, Exhibit 10-30 , File No. 1- 2578, Ohio Edison Company.) 10-35 - Amendment No. 5 dated as of May 1, 1986, to the Bond Guaranty dated as of October 1, 1973, as amended, by the CAPCO Companies to National City Bank, as Bond Trustee. (1986 Form 10-K, Exhibit 10-33, File No. 1- 2578, Ohio Edison Company.) 10-36 - Amendment No. 6A dated as of December 1, 1991, to the Bond Guaranty dated as of October 1, 1973, as amended, by the CAPCO Companies to National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-33, File No. 1- 2578, Ohio Edison Company.) 10-37 - Amendment No. 6B dated as of December 30, 1991, to the Bond Guaranty dated as of October 1, 1973, as amended, by the CAPCO Companies to National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-34, File No. 1- 2578, Ohio Edison Company.) 10-38 - Bond Guaranty dated as of December 1, 1991, by the CAPCO Companies to National City Bank, as Bond Trustee. (1991 Form 10-K, Exhibit 10-35, File No. 1-2578, Ohio Edison Company.) 10-39 - Open End Mortgage dated as of October 1, 1973, between Quarto Mining Company and the CAPCO Companies and Amendment No. 1 thereto dated as of September 15, 1978. (Registration Statement No. 2-68906, Exhibit 10-23.) 10-40 - Restructuring Agreement dated as of April 1, 1985, among Quarto Mining Company, the CAPCO Companies, Energy Properties, Inc., General Electric Credit Corporation, the Loan Participants listed in schedules thereto, Central National Bank of Cleveland, as Owner Trustee, National City Bank, as Loan Trustee, and National City Bank, as Bond Trustee. (1985 Form 10-K, Exhibit 10-33, File No. 1-2578, Ohio Edison Company.) 10-41 - Unsecured Note Guaranty dated as of July 1, 1985, by the CAPCO Companies to General Electric Credit Corporation. (1985 Form 10-K, Exhibit 10-34, File No. 1-2578, Ohio Edison Company.) 10-42 - Memorandum of Understanding dated as of March 31, 1985, among the CAPCO Companies. (1985 Form 10-K, Exhibit 10- 35, File No. 1-2578, Ohio Edison Company.) (B) 10-43 - Ohio Edison System Executive Supplemental Life Insurance Plan. (1995 Form 10-K, Exhibit 10-44, File No. 1-2578, Ohio Edison Company.) (B) 10-44 - Ohio Edison System Executive Incentive Compensation Plan. (1995 Form 10-K, Exhibit 10-45, File No. 1-2578, Ohio Edison Company.) (B) 10-45 - Ohio Edison System Restated and Amended Executive Deferred Compensation Plan. (1995 Form 10-K, Exhibit 10-46, File No. 1-2578, Ohio Edison Company.) (B) 10-46 - Ohio Edison System Restated and Amended Supplemental Executive Retirement Plan. (1995 Form 10-K, Exhibit 10- 47, File No. 1-2578, Ohio Edison Company.) 10-47 - Operating Agreement for Perry Unit No. 1 dated March 10, 1987, by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 28-24, File No. 1-2578, Ohio Edison Company.) 10-48 - Operating Agreement for Bruce Mansfield Units Nos. 1, 2 and 3 dated as of June 1, 1976, and executed on September 15, 1987, by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 28-25, File No. 1-2578, Ohio Edison Company.) 10-49 - Operating Agreement for W. H. Sammis Unit No. 7 dated as of September 1, 1971, by and between the CAPCO Companies. (1987 Form 10-K, Exhibit 28-26, File No. 1- 2578, Ohio Edison Company.) 10-50 - OE-APS Power Interchange Agreement dated March 18, 1987, by and among Ohio Edison Company and Pennsylvania Power Company, and Monongahela Power Company and West Penn Power Company and The Potomac Edison Company. (1987 Form 10-K, Exhibit 28-27, File No. 1-2578, of Ohio Edison Company.) 10-51 - OE-PEPCO Power Supply Agreement dated March 18, 1987, by and among Ohio Edison Company and Pennsylvania Power Company and Potomac Electric Power Company. (1987 Form 10-K, Exhibit 28-28, File No. 1-2578, of Ohio Edison Company.) 10-52 - Supplement No. 1 dated as of April 28, 1987, to the OE- PEPCO Power Supply Agreement dated March 18, 1987, by and among Ohio Edison Company, Pennsylvania Power Company and Potomac Electric Power Company. (1987 Form 10-K, Exhibit 28-29, File No. 1-2578, of Ohio Edison Company.) 10-53 - APS-PEPCO Power Resale Agreement dated March 18, 1987, by and among Monongahela Power Company, West Penn Power Company, and The Potomac Edison Company and Potomac Electric Power Company. (1987 Form 10-K, Exhibit 28-30, File No. 1-2578, of Ohio Edison Company.) 10-54 - Pennsylvania Power Company Master Decommissioning Trust Agreement for Beaver Valley Power Station and Perry Nuclear Power Plant dated as of April 21, 1995. (Quarter ended June 30, 1995 Form 10-Q, Exhibit 10, File No. 1-3491.) 10-55 - Nuclear Fuel Lease dated as of March 31, 1989, between OES Fuel, Incorporated, as Lessor, and Pennsylvania Power Company, as Lessee. (1989 Form 10-K, Exhibit 10- 39, File No. 1-3491.) (A) 12.2 - Fixed Charge Ratios (A) 13.4 - 1998 Annual Report to Stockholders. (Only those portions expressly incorporated by reference in this Form 10-K are to be deemed "filed" with the Securities and Exchange Commission.) (A) 23.3 - Consent of Independent Public Accountants. (A) 27.4 - Financial Data Schedule (A) Provided herein in electronic format as an exhibit. (B) Management contract or compensatory plan contract or arrangement filed pursuant to Item 601 of Regulation S-K. Pursuant to Rule 14a - 3(10) of the Securities Exchange Act of 1934, the Company will furnish any exhibit in this Report upon the payment of the Company's expenses in furnishing such exhibit. 3. Exhibits -Common Exhibits to CEI and TE Exhibit Number - ------- 2(a) - Agreement and Plan of Merger between Ohio Edison and Centerior Energy dated as of September 13, 1996 (Exhibit (2)-1, Form S-4 File No. 333-21011, filed by FirstEnergy). 2(b) - Merger Agreement by and among Centerior Acquisition Corp., FirstEnergy and Centerior (Exhibit (2)-3, Form S-4 File No. 333-21011, filed by FirstEnergy. 4(a) - Rights Agreement (Exhibit 4, June 25, 1996 Form 8-K, File Nos. 1-9130, 1-2323 and 1-3583). 4(b)(1) - Form of Note Indenture between Cleveland Electric, Toledo Edison and The Chase Manhattan Bank, as Trustee dated as of June 13, 1997 (Exhibit 4(c), Form S-4 File No. 333- 35931, filed by Cleveland Electric and Toledo Edison). 4(b)(2) - Form of First Supplemental Note Indenture between Cleveland Electric, Toledo Edison and The Chase Manhattan Bank, as Trustee dated as of June 13, 1997 (Exhibit 4(d), Form S-4 File No. 333-35931, filed by Cleveland Electric and Toledo Edison). 10b(1)(a)- CAPCO Administration Agreement dated November 1, 1971, as of September 14, 1967, among the CAPCO Group members regarding the organization and procedures for implementing the objectives of the CAPCO Group (Exhibit 5(p), Amendment No. 1, File No. 2-42230, filed by Cleveland Electric). 10b(1)(b)- Amendment No. 1, dated January 4, 1974, to CAPCO Administration Agreement among the CAPCO Group members (Exhibit 5(c)(3), File No. 2-68906, filed by Ohio Edison). 10b(2) - CAPCO Transmission Facilities Agreement dated November 1, 1971, as of September 14, 1967, among the CAPCO Group members regarding the installation, operation and maintenance of transmission facilities to carry out the objectives of the CAPCO Group (Exhibit 5(q), Amendment No. 1, File No. 2-42230, filed by Cleveland Electric). 10b(2)(1)- Amendment No. 1 to CAPCO Transmission Facilities Agreement, dated December 23, 1993 and effective as of January 1, 1993, among the CAPCO Group members regarding requirements for payment of invoices at specified times, for payment of interest on non-timely paid invoices, for restricting adjustment of invoices after a four-year period, and for revising the method for computing the Investment Responsibility charge for use of a member's transmission facilities (Exhibit 10b(2)(1), 1993 Form 10- K, File Nos. 1-9130, 1-2323 and 1-3583). 10b(3) - CAPCO Basic Operating Agreement As Amended January 1, 1993 among the CAPCO Group members regarding coordinated operation of the members' systems (Exhibit 10b(3), 1993 Form 10-K, File Nos. 1-9130, 1-2323 and 1-3583). 10b(4) - Agreement for the Termination or Construction of Certain Agreement By and Among the CAPCO Group members, dated December 23, 1993 and effective as of September 1, 1980 (Exhibit 10b(4), 1993 Form 10-K, File Nos. 1-9130, 1-2323 and 1-3583). 10b(5) - Construction Agreement, dated July 22, 1974, among the CAPCO Group members and relating to the Perry Nuclear Plant (Exhibit 5 (yy), File No. 2-52251, filed by Toledo Edison). 10b(6) - Contract, dated as of December 5, 1975, among the CAPCO Group members for the construction of Beaver Valley Unit No. 2 (Exhibit 5 (g), File No. 2-52996, filed by Cleveland Electric). 10b(7) - Amendment No. 1, dated May 1, 1977, to Contract, dated as of December 5, 1975, among the CAPCO Group members for the construction of Beaver Valley Unit No. 2 (Exhibit 5(d)(4), File No. 2-60109, filed by Ohio Edison). 10d(1)(a)- Form of Collateral Trust Indenture among CTC Beaver Valley Funding Corporation, Cleveland Electric, Toledo Edison and Irving Trust Company, as Trustee (Exhibit 4(a), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(1)(b)- Form of Supplemental Indenture to Collateral Trust Indenture constituting Exhibit 10d(1)(a) above, including form of Secured Lease Obligation Bond (Exhibit 4(b), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(1)(c)- Form of Collateral Trust Indenture among Beaver Valley II Funding Corporation, The Cleveland Electric Illuminating Company and The Toledo Edison Company and The Bank of New York, as Trustee (Exhibit (4) (a), File No. 33-46665, filed by Cleveland Electric and Toledo Edison). 10d(1)(d)- Form of Supplemental Indenture to Collateral Trust Indenture constituting Exhibit 10d(1)(c) above, including form of Secured Lease Obligation Bond (Exhibit (4) (b), File No. 33-46665, filed by Cleveland Electric and Toledo Edison). 10d(2)(a)- Form of Collateral Trust Indenture among CTC Mansfield Funding Corporation, Cleveland Electric, Toledo Edison and IBJ Schroder Bank & Trust Company, as Trustee (Exhibit 4(a), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(2)(b)- Form of Supplemental Indenture to Collateral Trust Indenture constituting Exhibit 10d(2)(a) above, including forms of Secured Lease Obligation Bonds (Exhibit 4(b), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(3)(a)- Form of Facility Lease dated as of September 15, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with the limited partnership Owner Participant named therein, Lessor, and Cleveland Electric and Toledo Edison, Lessees (Exhibit 4(c), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(3)(b)- Form of Amendment No. 1 to Facility Lease constituting Exhibit 10d(3)(a) above (Exhibit 4(e), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(4)(a)- Form of Facility Lease dated as of September 15, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with the corporate Owner Participant named therein, Lessor, and Cleveland Electric and Toledo Edison, Lessees (Exhibit 4(d), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(4)(b)- Form of Amendment No. 1 to Facility Lease constituting Exhibit 10d(4)(a) above (Exhibit 4(f), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(5)(a)- Form of Facility Lease dated as of September 30, 1987 between Meridian Trust Company, as Owner Trustee under a Trust Agreement dated as of September 30, 1987 with the Owner Participant named therein, Lessor, and Cleveland Electric and Toledo Edison, Lessees (Exhibit 4(c), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(5)(b)- Form of Amendment No. 1 to the Facility Lease constituting Exhibit 10d(5)(a) above (Exhibit 4(f), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(6)(a)- Form of Participation Agreement dated as of September 15, 1987 among the limited partnership Owner participant named therein, the Original Loan Participants listed in Schedule 1 thereto, as Original Loan Participants, CTC Beaver Valley Fund Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee, and Cleveland Electric and Toledo Edison, as Lessees (Exhibit 28(a), File No. 33- 18755, filed by Cleveland Electric and Toledo Edison). 10d(6)(b)- Form of Amendment No. 1 to Participation Agreement constituting Exhibit 10d(6) (a) above (Exhibit 28(c), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(7)(a)- Form of Participation Agreement dated as of September 15, 1987 among the corporate Owner Participant named therein, the Original Loan Participants listed in Schedule 1 thereto, as Owner Loan Participants, CTC Beaver Valley Funding Corporation, as Funding Corporation, The First National Bank of Boston, as Owner Trustee, Irving Trust Company, as Indenture Trustee, and Cleveland Electric and Toledo Edison, as Lessees (Exhibit 28(b), File No. 33- 18755, filed by Cleveland Electric and Toledo Edison). 10d(7)(b)- Form of Amendment No. 1 to Participation Agreement constituting Exhibit 10d(7) (a) above (Exhibit 28(d), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(8)(a)- Form of Participation Agreement dated as of September 30, 1987 among the Owner Participant named therein, the Original Loan Participants listed in Schedule II thereto, as Owner Loan Participants, CTC Mansfield Funding Corporation, Meridian Trust Company, as Owner Trustee, IBJ Schroder Bank & Trust Company, as Indenture Trustee, and Cleveland Electric and Toledo Edison, as Lessees (Exhibit 28(a), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(8)(b)- Form of Amendment No. 1 to the Participation Agreement constituting Exhibit 10d(8) (a) above (Exhibit 28(b), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(9) - Form of Ground Lease dated as of September 15, 1987 between Toledo Edison, Ground Lessor, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with the Owner Participant named therein, Tenant (Exhibit 28(e), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(10) - Form of Site Lease dated as of September 30, 1987 between Toledo Edison, Lessor, and Meridian Trust Company, as Owner Trustee under a Trust Agreement dated as of September 30, 1987 with the Owner Participant named therein, Tenant (Exhibit 28(c), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(11) - Form of Site Lease dated as of September 30, 1987 between Cleveland Electric, Lessor, and Meridian Trust Company, as Owner Trustee under a Trust Agreement dated as of September 30, 1987 with the Owner Participant named therein, Tenant (Exhibit 28(d), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(12) - Form of Amendment No. 1 to the Site Leases constituting Exhibits 10d(10) and 10d(11) above (Exhibit 4 (f), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(13) - Form of Assignment, Assumption and Further Agreement dated as of September 15, 1987 among The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with the Owner Participant named therein, Cleveland Electric, Duquesne, Ohio Edison, Pennsylvania Power and Toledo Edison (Exhibit 28(f), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(14) - Form of Additional Support Agreement dated as of September 15, 1987 between The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with the Owner Participant named therein, and Toledo Edison (Exhibit 28(g), File No. 33- 18755, filed by Cleveland Electric and Toledo Edison). 10d(15) - Form of Support Agreement dated as of September 30, 1987 between Meridian Trust Company, as Owner Trustee under a Trust Agreement dated as of September 30, 1987 with the Owner Participant named therein, Toledo Edison, Cleveland Electric, Duquesne, Ohio Edison and Pennsylvania Power (Exhibit 28(e), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(16) - Form of Indenture, Bill of Sale, Instrument of Transfer and Severance Agreement dated as of September 30, 1987 between Toledo Edison, Seller, and The First National Bank of Boston, as Owner Trustee under a Trust Agreement dated as of September 15, 1987 with the Owner Participant named therein, Buyer (Exhibit 28 (h), File No. 33-18755, filed by Cleveland Electric and Toledo Edison). 10d(17) - Form of Bill of Sale, Instrument of Transfer and Severance Agreement dated as of September 30, 1987 between Toledo Edison, Seller, and Meridian Trust Company, as Owner Trustee under a Trust Agreement dated as of September 30, 1987 with the Owner Participant named therein, Buyer (Exhibit 28(f), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(18) - Form of Bill of Sale, Instrument of Transfer and Severance Agreement dated as of September 30, 1987 between Cleveland Electric, Seller, and Meridian Trust Company, as Owner Trustee under a Trust Agreement dated as of September 30, 1987 with the Owner Participant named therein, Buyer (Exhibit 28(g), File No. 33-20128, filed by Cleveland Electric and Toledo Edison). 10d(19) - Forms of Refinancing Agreement, including exhibits thereto, among the Owner Participant named therein, as Owner Participant, CTC Beaver Valley Funding Corporation, as Funding Corporation, Beaver Valley II Funding Corporation, as New Funding Corporation, The Bank of New York, as Indenture Trustee, The Bank of New York, as New Collateral Trust Trustee, and The Cleveland Electric Illuminating Company and The Toledo Edison Company, as Lessees (Exhibit (28) (e) (i), File No. 33-46665, filed by Cleveland Electric and Toledo Edison). 10d(20)(a)-Form of Amendment No. 2 to Facility Lease among Citicorp Lescaman, Inc., Cleveland Electric and Toledo Edison (Exhibit 10(a), Form S-4 File No. 333-47651, filed by Cleveland Electric). 10d(20)(b)-Form of Amendment No. 3 to Facility Lease among Citicorp Lescaman, Inc., Cleveland Electric and Toledo Edison (Exhibit 10(b), Form S-4 File No. 333-47651, filed by Cleveland Electric). 10d(21)(a)-Form of Amendment No. 2 to Facility Lease among US West Financial Services, Inc., Cleveland Electric and Toledo Edison (Exhibit 10(c), Form S-4 File No. 333-47651, filed by Cleveland Electric). 10d(21)(b)-Form of Amendment No. 3 to Facility Lease among US West Financial Services, Inc., Cleveland Electric and Toledo Edison (Exhibit 10(d), Form S-4 File No. 333-47651, filed by Cleveland Electric). 10d(22) - Form of Amendment No. 2 to Facility Lease among Midwest Power Company, Cleveland Electric and Toledo Edison (Exhibit 10(e), Form S-4 File No. 333-47651, filed by Cleveland Electric). 10e(1) - Centerior Energy Corporation Equity Compensation Plan (Exhibit 99, Form S-8, File No. 33-59635). 3. Exhibits - Cleveland Electric Illuminating (CEI) 3a - Amended Articles of Incorporation of CEI, as amended, effective May 28, 1993 (Exhibit 3a, 1993 Form 10-K, File No. 1-2323). 3b - Regulations of CEI, dated April 29, 1981, as amended effective October 1, 1988 and April 24, 1990 (Exhibit 3b, 1990 Form 10-K, File No. 1-2323). (B)4b(1)- Mortgage and Deed of Trust between CEI and Guaranty Trust Company of New York (now The Chase Manhattan Bank (National Association)), as Trustee, dated July 1, 1940 (Exhibit 7(a), File No. 2-4450). Supplemental Indentures between CEI and the Trustee, supplemental to Exhibit 4b(1), dated as follows: 4b(2) - July 1, 1940 (Exhibit 7(b), File No. 2-4450). 4b(3) - August 18, 1944 (Exhibit 4(c), File No. 2-9887). 4b(4) - December 1, 1947 (Exhibit 7(d), File No. 2-7306). 4b(5) - September 1, 1950 (Exhibit 7(c), File No. 2-8587). 4b(6) - June 1, 1951 (Exhibit 7(f), File No. 2-8994). 4b(7) - May 1, 1954 (Exhibit 4(d), File No. 2-10830). 4b(8) - March 1, 1958 (Exhibit 2(a)(4), File No. 2-13839). 4b(9) - April 1, 1959 (Exhibit 2(a)(4), File No. 2-14753). 4b(10) - December 20, 1967 (Exhibit 2(a)(4), File No. 2-30759). 4b(11) - January 15, 1969 (Exhibit 2(a)(5), File No. 2-30759). 4b(12) - November 1, 1969 (Exhibit 2(a)(4), File No. 2-35008). 4b(13) - June 1, 1970 (Exhibit 2(a)(4), File No. 2-37235). 4b(14) - November 15, 1970 (Exhibit 2(a)(4), File No. 2-38460). 4b(15) - May 1, 1974 (Exhibit 2(a)(4), File No. 2-50537). 4b(16) - April 15, 1975 (Exhibit 2(a)(4), File No. 2-52995). 4b(17) - April 16, 1975 (Exhibit 2(a)(4), File No. 2-53309). 4b(18) - May 28, 1975 (Exhibit 2(c), June 5, 1975 Form 8-A, File No. 1-2323). 4b(19) - February 1, 1976 (Exhibit 3(d)(6), 1975 Form 10-K, File No. 1-2323). 4b(20) - November 23, 1976 (Exhibit 2(a)(4), File No. 2-57375). 4b(21) - July 26, 1977 (Exhibit 2(a)(4), File No. 2-59401). 4b(22) - September 27, 1977 (Exhibit 2(a)(5), File No. 2-67221). 4b(23) - May 1, 1978 (Exhibit 2(b), June 30, 1978 Form 10-Q, File No. 1-2323). 4b(24) - September 1, 1979 (Exhibit 2(a), September 30, 1979 Form 10-Q, File No. 1-2323). 4b(25) - April 1, 1980 (Exhibit 4(a)(2), September 30, 1980 Form 10-Q, File No. 1-2323). 4b(26) - April 15, 1980 (Exhibit 4(b), September 30, 1980 Form 10- Q, File No. 1-2323). 4b(27) - May 28, 1980 (Exhibit 2(a)(4), Amendment No. 1, File No. 2-67221). 4b(28) - June 9, 1980 (Exhibit 4(d), September 30, 1980 Form 10-Q, File No. 1-2323). 4b(29) - December 1, 1980 (Exhibit 4(b) (29), 1980 Form 10-K, File No. 1-2323). 4b(30) - July 28, 1981 (Exhibit 4(a), September 30, 1981, Form 10- Q, File No. 1-2323). 4b(31) - August 1, 1981 (Exhibit 4(b), September 30, 1981, Form 10- Q, File No. 1-2323). 4b(32) - March 1, 1982 (Exhibit 4(b)(3), Amendment No. 1, File No. 2-76029). 4b(33) - July 15, 1982 (Exhibit 4(a), September 30, 1982 Form 10-Q, File No. 1-2323). 4b(34) - September 1, 1982 (Exhibit 4(a)(1), September 30, 1982 Form 10-Q, File No. 1-2323). 4b(35) - November 1, 1982 (Exhibit 4(a)(2), September 30, 1982 Form 10-Q, File No. 1-2323). 4b(36) - November 15, 1982 (Exhibit 4(b)(36), 1982 Form 10-K, File No. 1-2323). 4b(37) - May 24, 1983 (Exhibit 4(a), June 30, 1983 Form 10-Q, File No. 1-2323). 4b(38) - May 1, 1984 (Exhibit 4, June 30, 1984 Form 10-Q, File No. 1-2323). 4b(39) - May 23, 1984 (Exhibit 4, May 22, 1984 Form 8-K, File No. 1-2323). 4b(40) - June 27, 1984 (Exhibit 4, June 11, 1984 Form 8-K, File No. 1-2323). 4b(41) - September 4, 1984 (Exhibit 4b(41), 1984 Form 10-K, File No. 1-2323). 4b(42) - November 14, 1984 (Exhibit 4b(42), 1984 Form 10-K, File No. 1-2323). 4b(43) - November 15, 1984 (Exhibit 4b(43), 1984 Form 10-K, File No. 1-2323). 4b(44) - April 15, 1985 (Exhibit 4(a), May 8, 1985 Form 8-K, File No. 1-2323). 4b(45) - May 28, 1985 (Exhibit 4(b), May 8, 1985 Form 8-K, File No. 1-2323). 4b(46) - August 1, 1985 (Exhibit 4, September 30, 1985 Form 10-Q, File No. 1-2323). 4b(47) - September 1, 1985 (Exhibit 4, September 30, 1985 form 8-K, File No. 1-2323). 4b(48) - November 1, 1985 (Exhibit 4, January 31, 1986 Form 8-K, File No. 1-2323). 4b(49) - April 15, 19 86 (Exhibit 4, March 31, 1986 Form 10-Q, File No. 1-2323). 4b(50) - May 14, 1986 (Exhibit 4(a), June 30, 1986 Form 10-Q, File No. 1-2323). 4b(51) - May 15, 1986 (Exhibit 4(b), June 30, 1986 Form 10-Q, File No. 1-2323). 4b(52) - February 25, 1987 (Exhibit 4b(52), 1986 Form 10-K, File No. 1-2323). 4b(53) - October 15, 1987 (Exhibit 4, September 30, 1987 Form 10-Q, File No. 1-2323). 4b(54) - February 24, 1988 (Exhibit 4b(54), 1987 Form 10-K, File No. 1-2323). 4b(55) - September 15, 1988 (Exhibit 4b(55), 1988 Form 10-K, File No. 1-2323). 4b(56) - May 15, 1989 (Exhibit 4(a)(2)(i), File No. 33-32724). 4b(57) - June 13, 1989 (Exhibit 4(a)(2)(ii), File No. 33-32724). 4b(58) - October 15, 1989 (Exhibit 4(a)(2)(iii), File No. 33- 32724). 4b(59) - January 1, 1990 (Exhibit 4b(59), 1989 Form 10-K, File No. 1-2323). 4b(60) - June 1, 1990 (Exhibit 4(a), September 30, 1990 Form 10-Q, File No. 1-2323). 4b(61) - August 1, 1990 (Exhibit 4(b), September 30, 1990 Form 10- Q, File No. 1-2323). 4b(62) - May 1, 1991 (Exhibit 4(a), June 30, 1991 Form 10-Q, File No. 4b(63) - May 1, 1992 (Exhibit 4(a)(3), File No. 33-48845). 4b(64) - July 31, 1992 (Exhibit 4(a)(3), File No. 33-57292). 4b(65) - January 1, 1993 (Exhibit 4b(65), 1992 Form 10-K, File No. 1-2323). 4b(66) - February 1, 1993 (Exhibit 4b(66), 1992 Form 10-K, File No. 1-2323). 4b(67) - May 20, 1993 (Exhibit 4(a), July 14, 1993 Form 8-K, File No. 1-2323). 4b(68) - June 1, 1993 (Exhibit 4(b), July 14, 1993 Form 8-K, File No. 1-2323). 4b(69) - September 15, 1994 (Exhibit 4(a), September 30, 1994 Form 10-Q, File No. 1-2323). 4b(70) - May 1, 1995 (Exhibit 4(a), September 30, 1995 Form 10-Q, File No. 1-2323). 4b(71) - May 2, 1995 (Exhibit 4(b), September 30, 1995 Form 10-Q, File No. 1-2323). 4b(72) - June 1, 1995 (Exhibit 4(c), September 30, 1995 Form 10-Q, File No. 1-2323). 4b(73) - July 15, 1995 (Exhibit 4b(73), 1995 Form 10-K, File No. 1- 2323). 4b(74) - August 1, 1995 (Exhibit 4b(74), 1995 Form 10-K, File No. 1-2323). 4b(75) - June 15, 1997 (Exhibit 4(a), Form S-4 File No. 333-35931, filed by Cleveland Electric and Toledo Edison). 4b(76) - October 15, 1997 (Exhibit 4(a), Form S-4 File No. 333- 47651, filed by Cleveland Electric). 4b(77) - June 1, 1998 (Exhibit 4b(77), Form S-4 File No. 333- 72891). 4b(78) - October 1, 1998 (Exhibit 4b(78), Form S-4 File No. 333- 72891). 4b(79) - October 1, 1998 (Exhibit 4b(79), Form S-4 File No. 333- 72891). 4b(80) - February 24, 1999 (Exhibit 4b(80), Form S-4 File No. 333- 72891). 4c - Open-End Subordinate Indenture of Mortgage between The Cleveland Electric Illuminating Company and Bank One, Columbus, N.A., as Trustee, Dated as of June 1, 1994 (Exhibit 4(a), August 26, 1994 Form 8-K, File No. 1-2323). 4d - Form of Note Indenture between Cleveland Electric and The Chase Manhattan Bank, as Trustee dated as of October 24, 1997 (Exhibit 4(b), Form S-4 File No. 333-47651, filed by Cleveland Electric). 4d(1) - Form of Supplemental Note Indenture between Cleveland Electric and The Chase Manhattan Bank, as Trustee dated as of October 24, 1997 (Exhibit 4(c), Form S-4 File No. 333- 47651, filed by Cleveland Electric). 10-1 - Administration Agreement between the CAPCO Group dated as of September 14, 1967. (Registration No. 2-43102, Exhibit 5(c)(2).) 10-2 - Amendment No. 1 dated January 4, 1974 to Administration Agreement between the CAPCO Group dated as of September 14, 1967. (Registration No. 2-68906, Exhibit 5(c)(3).) 10-3 - Transmission Facilities Agreement between the CAPCO Group dated as of September 14, 1967. (Registration No. 2-43102, Exhibit 5(c)(3).) 10-4 - Amendment No. 1 dated as of January 1, 1993 to Transmission Facilities Agreement between the CAPCO Group dated as of September 14, 1967. (1993 Form 10-K, Exhibit 10-4.) 10-5 - Agreement for the Termination or Construction of Certain Agreements effective September 1, 1980 October 15, 1997 (Exhibit 4(a), Form S-4 File No. 333-47651, filed by Cleveland Electric). (A)13.2 - 1998 Annual Report to Stockholders. (only those portions expressly incorporated by reference in this Form 10-K are to be deemed "filed" with the SEC.) (A)21.2 - List of Subsidiaries of the Registrant at December 31, 1998. (A)23.2 - Consent of Independent Public Accountants. (A)27.2 - Financial Data Schedule. (A) - Provided herein in electronic format as an exhibit. (B) - Pursuant to paragraph (b) (4) (iii) (A) of Item 601 of Regulation S-K, CEI has not filed as an exhibit to this Form 10-K any instrument with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of the CEI, but hereby agrees to furnish to the Commission on request any such instruments. 3. Exhibits -Toledo Edison (TE) Exhibit Number - ------- 3a - Amended Articles of Incorporation of TE, as amended effective October 2, 1992 (Exhibit 3a, 1992 Form 10-K, File No. 1-3583). 3b - Code of Regulations of TE dated January 28, 1987, as amended effective July 1 and October 1, 1988 and April 24, 1990 (Exhibit 3b, 1990 Form 10-K, File No. 1-3583). (B)4b(1)- Indenture, dated as of April 1, 1947, between TE and The Chase National Bank of the City of New York (now The Manhattan Bank (National Association)) (Exhibit 2(b), File No. 2-26908). Supplemental Indentures between TE and the Trustee, Supplemental to Exhibit 4b(1), dated as follows: 4b(2) - September 1, 1948 (Exhibit 2(d), File No. 2-26908). 4b(3) - April 1, 1949 (Exhibit 2(e), File No. 2-26908). 4b(4) - December 1, 1950 (Exhibit 2(f), File No. 2-26908). 4b(5) - March 1, 1954 (Exhibit 2(g), File No. 2-26908). 4b(6) - February 1, 1956 (Exhibit 2(h), File No. 2-26908). 4b(7) - May 1, 1958 (Exhibit 5(g), File No. 2-59794). 4b(8) - August 1, 1967 (Exhibit 2(c), File No. 2-26908). 4b(9) - November 1, 1970 (Exhibit 2(c), File No. 2-38569). 4b(10) - August 1, 1972 (Exhibit 2(c), File No. 2-44873). 4b(11) - November 1, 1973 (Exhibit 2(c), File No. 2-49428). 4b(12) - July 1, 1974 (Exhibit 2(c), File No. 2-51429). 4b(13) - October 1, 1975 (Exhibit 2(c), File No. 2-54627). 4b(14) - June 1, 1976 (Exhibit 2(c), File No. 2-56396). 4b(15) - October 1, 1978 (Exhibit 2(c), File No. 2-62568). 4b(16) - September 1, 1979 (Exhibit 2(c), File No. 2-65350). 4b(17) - September 1, 1980 (Exhibit 4(s), File No. 2-69190). 4b(18) - October 1, 1980 (Exhibit 4(c), File No. 2-69190). 4b(19) - April 1, 1981 (Exhibit 4(c), File No. 2-71580). 4b(20) - November 1, 1981 (Exhibit 4(c), File No. 2-74485). 4b(21) - June 1, 1982 (Exhibit 4(c), File No. 2-77763). 4b(22) - September 1, 1982 (Exhibit 4(x), File No. 2-87323). 4b(23) - April 1, 1983 (Exhibit 4(c), March 31, 1983 Form 10-Q, File No. 1-3583). 4b(24) - December 1, 1983 (Exhibit 4(x), 1983 Form 10-K, File No. 1-3583). 4b(25) - April 1, 1984 (Exhibit 4(c), File No. 2-90059). 4b(26) - October 15, 1984 (Exhibit 4(z), 1984 Form 10-K, File No. 1-3583). 4b(27) - October 15, 1984 (Exhibit 4(aa), 1984 Form 10-K, File No. 1-3583). 4b(28) - August 1, 1985 (Exhibit 4(dd), File No. 33-1689). 4b(29) - August 1, 1985 (Exhibit 4(ee), File No. 33-1689). 4b(30) - December 1, 1985 (Exhibit 4(c), File No. 33-1689). 4b(31) - March 1, 1986 (Exhibit 4b(31), 1986 Form 10-K, File No. 1- 3583). 4b(32) - October 15, 1987 (Exhibit 4, September 30, 1987 Form 10-Q, File No. 1-3583). 4b(33) - September 15, 1988 (Exhibit 4b(33), 1988 Form 10-K, File No. 1-3583). 4b(34) - June 15, 1989 (Exhibit 4b(34), 1989 Form 10-K, File No. 1- 3583). 4b(35) - October 15, 1989 (Exhibit 4b(35), 1989 Form 10-K, File No. 1-3583). 4b(36) - May 15, 1990 (Exhibit 4, June 30, 1990 Form 10-Q, File No. 1-3583). 4b(37) - March 1, 1991 (Exhibit 4(b), June 30, 1991 Form 10-Q, File No. 1-3583). 4b(38) - May 1, 1992 (Exhibit 4(a)(3), File No. 33-48844). 4b(39) - August 1, 1992 (Exhibit 4b(39), 1992 Form 10-K, File No. 1-3583). 4b(40) - October 1, 1992 (Exhibit 4b(40), 1992 Form 10-K, File No. 1-3583). 4b(41) - January 1, 1993 (Exhibit 4b(41), 1992 Form 10-K, File No. 1-3583). 4b(42) - September 15, 1994 (Exhibit 4(b), September 30, 1994 Form 10-Q, File No. 1-3583). 4b(43) - May 1, 1995 (Exhibit 4(d), September 30, 1995 Form 10-Q, File No. 1-3583). 4b(44) - June 1, 1995 (Exhibit 4(e), September 30, 1995 Form 10-Q, File No. 1-3583). 4b(45) - July 14, 1995 (Exhibit 4(f), September 30, 1995 Form 10-Q, File No. 1-3583). 4b(46) - July 15, 1995 (Exhibit 4(g), September 30, 1995 Form 10-Q, File No. 1-3583). (A)4b(47)- August 1, 1997 (A)4b(48)- June 1, 1998 4c - Open-End Subordinate Indenture of Mortgage between The Toledo Edison Company and Bank One, Columbus, N.A., as Trustee, dated as of June 1, 1994 (Exhibit 4(b), August 26, 1994 Form 8-K, File No. 1-3583). (A) 13.3- 1998 Annual Report to Stockholders. (Only those portions expressly incorporated by reference in this Form 10-K are to be deemed "filed" with the SEC.) (A)21.3 - List of Subsidiaries of the Registrant at December 31, 1998. (A)27.3 - Financial Data Schedule. (A) Provided herein in electronic format as an exhibit. (B) Pursuant to paragraph (b) (4) (iii) (A) of Item 601 of Regulation S-K, TE has not filed as an exhibit to this Form 10-K any instrument with respect to long-term debt if the total amount of securities authorized thereunder does not exceed 10% of the total assets of TE, but hereby agrees to furnish to the Commission on request any such instruments. (b) Reports on Form 8-K FirstEnergy, OE, CEI, TE, Penn- ------------------------------- One combined report on Form 8-K was filed since September 30, 1998. A report dated October 15, 1998 reported that FirstEnergy will transfer its transmission assets into a new subsidiary and has signed an agreement in principle with Duquesne Light Company (Duquesne) that would result in an exchange of certain generating assets between FirstEnergy's operating subsidiaries and Duquesne. FirstEnergy- ----------- The Company filed two reports on Form 8-K since September 30, 1998. A report dated November 9, 1998 reported a Company common stock repurchase program and a report dated December 17, 1998, reported estimated adverse effects on fourth quarter 1998 earnings. OE, CEI, TE and Penn -------------------- None REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of FirstEnergy Corp.: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in FirstEnergy Corp.'s Annual Report to Stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated February 12, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule of consolidated valuation and qualifying accounts listed in Item 14 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Cleveland, Ohio February 12, 1999 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Ohio Edison Company: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in Ohio Edison Company's Annual Report to Stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated February 12, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule of consolidated valuation and qualifying accounts listed in Item 14 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Cleveland, Ohio February 12, 1999 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of The Cleveland Electric Illuminating Company: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in The Cleveland Electric Illuminating Company's Annual Report to Stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated February 12, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule of consolidated valuation and qualifying accounts listed in Item 14 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Cleveland, Ohio February 12, 1999 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of The Toledo Edison Company: We have audited, in accordance with generally accepted auditing standards, the consolidated financial statements included in The Toledo Edison Company's Annual Report to Stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated February 12, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule of consolidated valuation and qualifying accounts listed in Item 14 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Cleveland, Ohio February 12, 1999 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of Pennsylvania Power Company: We have audited, in accordance with generally accepted auditing standards, the financial statements included in Pennsylvania Power Company's Annual Report to Stockholders incorporated by reference in this Form 10-K and have issued our report thereon dated February 12, 1999. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule of valuation and qualifying accounts listed in Item 14 is the responsibility of the Company's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Cleveland, Ohio February 12, 1999 SCHEDULE II FIRSTENERGY CORP. CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Additions -------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- ---------- ------- (In Thousands) Year Ended December 31, 1998: Accumulated provision for uncollectible accounts - customers $5,618 $28,984 $2,290 (a) $30,495 (b) $ 6,397 ====== ======= ====== ======= ======= - other $4,026 $45,836 $ 42 (a) $ 3,653 (b) $46,251 ====== ======= ====== ======= ======= Year Ended December 31, 1997: Accumulated provision for uncollectible accounts - customers $2,306 $13,565 $2,277 (a) $12,530 (b) $ 5,618 ====== ======= ====== ======= ======= - other $ -- $ 941 $4,808 (c) $ 1,723 $ 4,026 ====== ======= ====== ======= ======= Year Ended December 31, 1996: Accumulated provision for uncollectible accounts - $2,528 $6,949 $2,008 (a) $ 9,179 (b) $ 2,306 ====== ====== ====== ======= ======= - ------------------- (a) Represents recoveries and reinstatements of accounts previously written off. (b) Represents the write-off of accounts considered to be uncollectible. (c) Includes the $4,026,000 effect of the FirstEnergy merger on November 8, 1997.
SCHEDULE II OHIO EDISON COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Additions -------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- ---------- ------- (In Thousands) Year Ended December 31, 1998: Accumulated provision for uncollectible accounts $5,618 $ 7,933 $2,290 (a) $9,444 (b) $6,397 ====== ======= ====== ====== ====== Year Ended December 31, 1997: Accumulated provision for uncollectible accounts $2,306 $10,979 $2,277 (a) $9,944 (b) $5,618 ====== ======= ====== ====== ====== Year Ended December 31, 1996: Accumulated provision for uncollectible accounts $2,528 $ 6,949 $2,008 (a) $9,179 (b) $2,306 ====== ======= ====== ====== ====== - ------------------- (a) Represents recoveries and reinstatements of accounts previously written off. (b) Represents the write-off of accounts considered to be uncollectible.
SCHEDULE II THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Additions -------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- ---------- ------- (In Thousands) Year Ended December 31, 1998: Accumulated provision for uncollectible accounts $1,226 $ (16) $ 42 (a) $ 761 (b) $ 491 ====== ======= ====== ======= ====== Year Ended December 31, 1997: Accumulated provision for uncollectible accounts: Nov. 8 - Dec. 31, 1997 $1,226 $ 2,331 $ 216 (a) $ 2,547 (b) $1,226 ====== ======= ====== ======= ====== - ------------------------------------------------------------------------------------------------------- Jan. 1 - Nov. 7, 1997 $ 58 $12,853 $1,366 (a) $13,051 (b) $1,226 ====== ======= ====== ======= ====== Year Ended December 31, 1996: Accumulated provision for uncollectible accounts $2,326 $14,872 $1,353 (a) $18,493 (b)(c) $ 58 ====== ======= ====== ======= ====== - ------------------- (a) Represents recoveries and reinstatements of accounts previously written off. (b) Represents the write-off of accounts considered to be uncollectible. (c) Sale of retail customer accounts receivable net of Accumulated Provision for Uncollectible Accounts.
SCHEDULE II THE TOLEDO EDISON COMPANY CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Additions -------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- ---------- ------- (In Thousands) Year Ended December 31, 1998: Accumulated provision for uncollectible accounts $2,800 $ 192 $ -- $2,892 (b) $ 100 ====== ====== ====== ====== ====== Year Ended December 31, 1997: Accumulated provision for uncollectible accounts: Nov. 8 - Dec. 31, 1997 $2,800 $1,196 $ 566 (a) $1,762 (b) $2,800 ====== ====== ====== ======= ====== - ---------------------------------------------------------------------------------------------------- Jan. 1 - Nov. 7, 1997 $ 100 $9,367 $1,797 (a) $8,464 (b) $2,800 ====== ====== ====== ======= ====== Year Ended December 31, 1996: Accumulated provision for uncollectible accounts $1,046 $6,223 $1,879 (a) $ 9,048 (b)(c) $ 100 ====== ====== ====== ======= ====== - ------------------- (a) Represents recoveries and reinstatements of accounts previously written off. (b) Represents the write-off of accounts considered to be uncollectible. (c) Sale of retail customer accounts receivable net of Accumulated Provision for Uncollectible Accounts.
SCHEDULE II PENNSYLVANIA POWER COMPANY VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Additions -------------------- Charged Beginning Charged to Other Ending Description Balance to Income Accounts Deductions Balance ----------- --------- --------- -------- ---------- ------- (In Thousands) Year Ended December 31, 1998: Accumulated provision for uncollectible accounts $3,609 $1,242 $409 (a) $1,661 (b) $3,599 ====== ====== ==== ====== ====== Year Ended December 31, 1997: Accumulated provision for uncollectible accounts $ 569 $4,409 $397 (a) $1,766 (b) $3,609 ====== ====== ==== ====== ====== Year Ended December 31, 1996: Accumulated provision for uncollectible accounts $ 563 $1,308 $362 (a) $1,664 (b) $ 569 ====== ====== ==== ====== ====== - ------------------- (a) Represents recoveries and reinstatements of accounts previously written off. (b) Represents the write-off of accounts considered to be uncollectible.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRSTENERGY CORP. BY /s/ W. R. Holland -------------------------- W. R. Holland Chairman of the Board and Chief Executive Officer Date: March 16, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: /s/ W. R. Holland /s/ H. P. Burg - ------------------------------ ---------------------------------- W. R. Holland H. P. Burg Chairman of the Board President and Chief Operating and Chief Executive Officer Officer and Director and Director (Principal Executive Officer) /s/ Richard H. Marsh /s/ Harvey L. Wagner - --------------------------------- ---------------------------------- Richard H. Marsh Harvey L. Wagner Vice President and Chief Controller Financial Officer (Principal Accounting Officer) (Principal Financial Officer) /s/ Glenn H. Meadows - --------------------------------- ---------------------------------- Carol A. Cartwright Glenn H. Meadows Director Director /s/ William F. Conway /s/ Paul J. Powers - --------------------------------- ---------------------------------- William F. Conway Paul J. Powers Director Director /s/ Robert B. Heisler, Jr. /s/ Robert C. Savage - --------------------------------- ---------------------------------- Robert B. Heisler, Jr. Robert C. Savage Director Director /s/ Robert L. Loughhead /s/ George M. Smart - --------------------------------- ---------------------------------- Robert L. Loughhead George M. Smart Director Director /s/ Russell W. Maier /s/ Jesse T. Williams, Sr. - --------------------------------- ---------------------------------- Russell W. Maier Jesse T. Williams, Sr. Director Director Date: March 16, 1999 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OHIO EDISON COMPANY BY /s/ H. P. Burg --------------------------------- H. P. Burg President Date: March 16, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: /s/ H. P. Burg /s/ R. H. Marsh - --------------------------------- ---------------------------------- H. P. Burg R. H. Marsh President and Director Vice President (Principal Executive Officer) (Principal Financial Officer) /s/ Harvey L. Wagner /s/ W. R. Holland - --------------------------------- ---------------------------------- Harvey L. Wagner W. R. Holland Controller Director (Principal Accounting Officer) /s/ Anthony J. Alexander - --------------------------------- Anthony J. Alexander Director Date: March 16, 1999 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE CLEVELAND ELECTRIC ILLUMINATING COMPANY BY /s/ H. P. Burg --------------------------------- H. P. Burg President Date: March 16, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: /s/ H. P. Burg /s/ R. H. Marsh - --------------------------------- ---------------------------------- H. P. Burg R. H. Marsh President and Director Vice President (Principal Executive Officer) (Principal Financial Officer) /s/ Harvey L. Wagner /s/ W. R. Holland - --------------------------------- ---------------------------------- Harvey L. Wagner W. R. Holland Controller Director (Principal Accounting Officer) /s/ Anthony J. Alexander - --------------------------------- Anthony J. Alexander Director Date: March 16, 1999 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE TOLEDO EDISON COMPANY BY /s/ H. P. Burg ---------------------------------- H. P. Burg President Date: March 16, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: /s/ H. P. Burg /s/ R. H. Marsh - --------------------------------- ---------------------------------- H. P. Burg R. H. Marsh President and Director Vice President (Principal Executive Officer) (Principal Financial Officer) /s/ Harvey L. Wagner /s/ W. R. Holland - --------------------------------- ---------------------------------- Harvey L. Wagner W. R. Holland Controller Director (Principal Accounting Officer) /s/ Anthony J. Alexander - --------------------------------- Anthony J. Alexander Director Date: March 16, 1999 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PENNSYLVANIA POWER COMPANY BY /s/ Willard R. Holland ------------------------------------ Willard R. Holland Chairman of the Board and Chief Executive Officer Date: March 16, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated: /s/ Willard R. Holland /s/ Richard H. Marsh - --------------------------------- ---------------------------------- Willard R. Holland Richard H. Marsh Chairman of the Board and Vice President Chief Executive Officer (Principal Financial Officer) (Principal Executive Officer) /s/ Harvey L. Wagner /s/ H. Peter Burg - --------------------------------- ---------------------------------- Harvey L. Wagner H. Peter Burg Comptroller Director (Principal Accounting Officer) /s/ Anthony J. Alexander - --------------------------------- Anthony J. Alexander Director Date: March 16, 1999 EX-10.1 2 FIRSTENERGY CORP. EXECUTIVE AND DIRECTOR INCENTIVE COMPENSATION PLAN FE Plan effective May 1, 1998 Revised November 16, 1998 Table of Contents Page ---- Article 1 Establishment, Purpose, and Duration 1 1.1 Establishment of the Plan 1 1.2 Purpose of the Plan 1 1.3 Duration of the Plan 1 Article 2 Definitions and Construction 1 2.1 Definitions 2.1.1 Award 1 2.1.2 Beneficial Owner 1 2.1.3 Black-Scholes Value 1 2.1.4 Board or Board of Directors 1 2.1.5 Cash Award 1 2.1.6 Cause 1 2.1.7 Change in Control 2 2.1.8 Code 4 2.1.9 Committee 4 2.1.10 Company 4 2.1.11 Covered Employee 4 2.1.12 Directors' Award 4 2.1.13 Exchange Act 4 2.1.14 Fair Market Value 4 2.1.15 Incentive Stock Option or ISO 4 2.1.16 Key Employee 4 2.1.17 Nonqualified Stock Option or NSO 4 2.1.18 Option 4 2.1.19 Outside Director 4 2.1.20 Participant 4 2.1.21 Performance Share 5 2.1.22 Period of Restriction 5 2.1.23 Person 5 2.1.24 Plan 5 2.1.25 Restricted Stock 5 2.1.26 Subsidiary 5 2.1.27 Standard Rate 5 2.1.28 Stock 5 2.1.29 Stock Appreciation Right or SAR 5 2.1.30 Voting Stock 5 2.2 Gender and Number 5 2.3 Severability 5 Table of Contents Article 3 Administration 3.1 The Committee 5 3.2 Authority of the Committee 5 3.3 Selection of Participants 6 3.4 Decisions Binding 6 3.5 Delegation of Certain Responsibilities 6 3.6 Procedures of the Committee 6 3.7 Award Agreements 7 3.8 Conditions on Awards 7 3.9 Saturdays, Sundays, and Holidays 7 Article 4 Stock Subject to the Plan 4.1 Number of Shares 7 4.2 Lapsed Awards 8 4.3 Adjustments in Authorized Shares 8 Article 5 Eligibility and Participation 5.1 Eligibility 8 5.2 Actual Participation 8 Article 6 Stock Options 6.1 Grant of Options 8 6.2 Option Agreement 9 6.3 Option Price 9 6.4 Duration of Options 9 6.5 Exercise of Options 9 6.6 Payment 9 6.7 Restrictions on Stock Transferability 10 6.8 Termination of Employment Due to Death, 10 Disability, or Retirement 6.9 Termination of Employment for 10 Other Reasons 6.10 Nontransferability of Options 10 Table of Contents Article 7 Stock Appreciation Rights 7.1 Grant of Stock Appreciation Rights 11 7.2 Exercise of SARS in Lieu of Options 11 7.3 Exercise of SARS in Addition to Options 11 7.4 Exercise of SARS Independent of Options 11 7.5 Payment of SAR Amount 12 7.6 Form and Timing of Payment 12 7.7 Term of SAR 12 7.8 Termination of Employment 12 7.9 Nontransferability of SARs 12 Article 8 Restricted Stock 8.1 Grant of Restricted Stock 12 8.2 Restricted Stock Agreement 12 8.3 Transferability 12 8.4 Other Restrictions 13 8.5 Certificate Legend 13 8.6 Removal of Restrictions 13 8.7 Voting Rights 13 8.8 Dividends and Other Distributions 13 8.9 Termination of Employment Due 13 to Retirement 8.10 Termination of Employment Due to Death 14 or Disability 8.11 Termination of Employment for 14 Other Reasons Article 9 Performance Shares 9.1 Grant of Performance Shares 14 9.2 Value of Performance Shares 14 9.3 Payment of Performance Shares 15 9.4 Committee Discretion to Adjust Awards 15 9.5 Form and Timing of Payment 15 9.6 Termination of Employment Due to Death, 15 Disability, or Retirement 9.7 Termination of Employment for 15 Other Reasons 9.8 Nontransferability 16 Article 10 Cash Awards 10.1 Grant of Cash Award 16 10.2 Cash Award Performance Criteria 16 10.3 Payout of Cash awards 16 10.4 Conversion of Cash Award Payout 16 Restricted Stock Table of Contents Article 11 Directors' Awards 11.1 Grant of Director's Awards 17 11.2 Conversion of Retainer to Stock 17 11.3 Conversion of Retainer to Restricted Stock 17 11.4 Conversion of Retainer to Stock Options 17 Article 12 Beneficiary Designation 17 Article 13 Rights of Employees 13.1 Employment 18 13.2 Participation 18 13.3 No Implied Rights; Rights on Termination 18 of Service 13.4 No Right to Company Assets 18 Article 14 Change in Control 14.1 Stock Based Awards 18 14.2 All Awards Other than Stock Based Awards 18 Article 15 Amendment, Modification, and Termination 15.1 Amendment, Modification, and Termination 19 15.2 Awards Previously Granted 19 15.3 Deferral of Payments and Distributions 19 Article 16 Withholding and Deferral 16.1 Tax Withholding 19 16.2 Stock Delivery or Withholding 19 Article 17 Successors 20 Article 18 Requirements of Law 18.1 Requirements of Law 20 18.2 Governing Law 20 ARTICLE 1 ESTABLISHMENT, PURPOSE, AND DURATION ------------------------------------ 1.1 ESTABLISHMENT OF THE PLAN. FirstEnergy Corp. (hereinafter referred to as "FirstEnergy"), established, effective May 1, 1998, an incentive compensation plan known as the "Executive and Director Incentive Compensation Plan" (hereinafter referred to as the "Plan"), which permits the grant of Incentive Stock Options, Non-qualified Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares, Cash Awards and Directors' Awards. 1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to promote the success of the Company and its Subsidiaries by providing incentives to Key Employees and Directors that will link their personal interests to the long-term financial success of the Company and its Subsidiaries, and to growth in shareholder value. The Plan is designed to provide flexibility to the Company and its Subsidiaries in their ability to motivate, attract, and retain the services of Key Employees upon whose judgment, interest, and special effort the successful conduct of their operations is largely dependent. The Plan is intended to preserve maximum deductibility of all awards made under the plan within the structure of Section 162(m) of the Internal Revenue Code of 1986 as amended "the Code". 1.3 DURATION OF THE PLAN. The Plan will commence on May 1, 1998, as described in Section 1.1 herein. The Plan shall remain in effect, subject to the right of the Board of Directors to terminate the Plan at any time, until all Shares subject to it shall have been purchased or acquired according to the provisions herein. ARTICLE 2 DEFINITIONS AND CONSTRUCTION ---------------------------- 2.1. DEFINITIONS. Whenever used in the Plan, the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized: 2.1.1 "Award" means, individually or collectively, a grant under this Plan of Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares, Cash Awards or Directors' Awards. 2.1.2 "Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. 2.1.3 "Black-Scholes Value" means the value of one stock option as calculated by the Black-Scholes Valuation Model as prescribed under Financial Accounting Standard 123. 2.1.4 "Board" or "Board of Directors" means the Board of Directors of the Company. 2.1.5 "Cash Award" means an award in the form of cash that is a bonus made pursuant to the terms of Article 10. 2.1.6 "Cause" shall mean the occurrence of any one of the following: (i) the willful and continued failure by a Participant to substantially perform his/her duties (other than any such failure resulting from the Participant's disability), after a written demand for substantial performance is delivered to the Participant that specifically identifies the manner in which the Company or any of its Subsidiaries, as the case may be, believes that the Participant has not substantially performed his/her duties, and the Participant has failed to remedy the situation within ten (10) business days of receiving such notice; or (ii) the Participant's conviction for committing a felony or a crime involving an act of moral turpitude, dishonesty or misfeasance; or (iii) the willful engaging by the Participant in gross misconduct materially and demonstrably injurious to the Company or any of its Subsidiaries. However, no act, or failure to act, on the Participant's part shall be considered "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that his/her action or omission was in the best interest of the Company or any of its Subsidiaries. 2.1.7 "Change in Control" shall mean: (i) The acquisition by Person of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% (25%if such Person proposes any individual for election to the Board or any member of the Board is the representative of such Person) or more of either (a) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (b) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control: (1) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege), (2) any acquisition by the Company, (3) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (4) any acquisition by any corporation pursuant to a reorganization, merger or consolidation, if, following such reorganization, merger or consolidation, the conditions described in clauses (a), (b) and (c) of subsection (iii) of this subsection 2.1.7 are satisfied; or (ii) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of the Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) Approval by the shareholders of the Company of a reorganization, merger or consolidation, in each case, unless, following such reorganization, merger or consolidation, (a) more than 75% of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such reorganization, merger or consolidation in substantially the same proportions as their ownership, immediately prior to such reorganization, merger or consolidation, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (b) no Person (excluding the Company, an employee benefit plan (or related trust) of the Company or such corporation resulting from such reorganization, merger or consolidation and any Person beneficially owning, immediately prior to such reorganization, merger or consolidation, directly or indirectly, 25% or more of the Outstanding Company Common Stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such reorganization, merger or consolidation or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (c) at least a majority of the members of the board of directors of the corporation resulting from such reorganization, merger or consolidation were members of the Incumbent Board at the time of the execution of the initial agreement providing for such reorganization, merger or consolidation; or (iv) Approval by the shareholders of the Company of (a) a complete liquidation or dissolution of the Company or (b) the sale or other disposition of all or substantially all of the assets of the Company, other than to a corporation, with respect to which following such sale or other disposition (1) more than 75% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding the Company and any employee benefit plan (or related trust) of the Company or such corporation and any Person beneficially owning, immediately prior to such sale or other disposition, directly or indirectly, 25% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities, as the case may be) beneficially owns, directly or indirectly, 25% or more of, respectively, the then outstanding share of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors and (3) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or action of the Board providing for such sale or other disposition of assets of the Company. However, in no event shall a Change in Control be deemed to have occurred, with respect to a Participant, if the Participant is part of a purchasing group, which consummates the Change in Control transaction. The Participant shall be deemed "part of a purchasing group. . . " for purposes of the preceding sentence if the Participant is an equity participant or has agreed to become an equity participant in the purchasing company or group (except for (i) passive ownership of less than 5% of the voting securities of the purchasing company or (ii) ownership of equity participation in the purchasing company or group which is otherwise not deemed to be significant, as determined prior to the Change in Control by a majority of the non-employee continuing members of the Board). 2.1.8 "Code" means the Internal Revenue Code of 1986, as amended from time to time. 2.1.9 "Committee" means the Compensation Committee of the Board. 2.1.10 "Company" means FirstEnergy Corp., an Ohio corporation, or any successor thereto as provided in Article 17 herein. 2.1.11 "Covered Employee" means any Participant designated prior to the grant of Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares or Cash Award by the Committee who is or may be a "covered employee" within the meaning of Section 162(m)(3) of the Code in the year in which such Stock Options, Stock Appreciation Rights, Restricted Stock, Performance Shares or Cash Award are taxable to such Participant. 2.1.12 "Directors' Award" means an Award made pursuant to Article 11 of this Plan. 2.1.13 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time. 2.1.14 "Fair Market Value" means the average of the closing prices for the 20 trading days preceding the relevant date, as reported on the composite tape of the New York Stock Exchange. 2.1.15 "Incentive Stock Option" or "ISO" means an option to purchase Stock, granted under Article 6 herein, which is designated as an incentive stock option and is intended to meet the requirements of Section 422 of the Code. 2.1.16 "Key Employee" means an employee of the Company or any of its Subsidiaries, including an employee who is an officer or a director of the Company or any of its Subsidiaries, who, in the opinion of the Committee, can contribute significantly to the growth and profitability of the Company and its Subsidiaries. "Key Employee" also may include any other employee, identified by the Committee, in special situations involving extraordinary performance, promotion, retention, or recruitment. The granting of an Award under this Plan shall be deemed a determination by the Committee that such employee is a Key Employee, but shall not create a right to remain a Key Employee. 2.1.17 "Nonqualified Stock Option" or "NSO" means an option to purchase Stock, granted under Article 6 herein, which is not intended to be an Incentive Stock Option. 2.1.18 "Option" means an Incentive Stock Option or a Nonqualified Stock Option. 2.1.19 "Outside Director" means any director who qualifies as an "outside director" as that term is defined in Code Section 162(m) and the regulations issued thereunder. 2.1.20 "Participant" means a Key Employee or Director who has been granted an Award under the Plan. 2.1.21 "Performance Share" means an Award, designated as a performance share, granted to a Participant pursuant to Article 9 herein. 2.1.22 "Period of Restriction" means the period during which the transfer or sale of Shares of Restricted Stock by the participant is restricted. 2.1.23 "Person" shall have the meaning ascribed to such term in Section 3(a)(9) of the Exchange Act and used in Sections 13(d) and 14(d) thereof, including a "group" as defined in Section 13(d) thereof. 2.1.24 "Plan" means this Executive and Director Incentive Compensation Plan of FirstEnergy Corp., as herein described and as hereafter from time to time amended. 2.1.25 "Restricted Stock" means an Award of Stock granted to a Participant pursuant to Article 8 herein. 2.1.26 "Subsidiary" shall mean any corporation of which more than 50% (by number of votes) of the Voting Stock at the time outstanding is owned, directly or indirectly, by the Company. 2.1.27 "Standard Rate" means the electric utility median base salary level for a given position as determined in the judgment of the Committee. 2.1.28 "Stock" or "Shares" means the common stock with a 10 cent par value of the Company. 2.1.29 "Stock Appreciation Right" or "SAR" means an Award, designated as a Stock Appreciation Right, granted to a Participant pursuant to Article 7 herein. 2.1.30 "Voting Stock" shall mean securities of any class or classes of stock of a corporation, the holders of which are ordinarily, in the absence of contingencies, entitled to elect a majority of the corporate directors. 2.2 GENDER AND NUMBER. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine, the plural shall include the singular, and the singular shall include the plural. 2.3. SEVERABILITY. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. ARTICLE 3 ADMINISTRATION -------------- 3.1 THE COMMITTEE. The Plan shall be administered by the Committee, which consists of not less than three Directors who shall be appointed from time to time by, and shall serve at the discretion of, the Board of Directors. To the extent required to comply with Rule 16b-3 under the Exchange Act, each member of the Committee shall qualify as a "Non-Employee Director" as defined in Rule 16b-3 or any successor definition adopted by the Securities and Exchange Commission. To the extent required to comply with Code Section 162(m), each member of the Committee shall also be an Outside Director. 3.2 AUTHORITY OF THE COMMITTEE. Subject to the provisions of the Plan, the Committee shall have full power to construe and interpret the Plan; to establish, amend or waive rules and regulations for its administration; to accelerate the exercisability of any Award or the end of a performance period or the termination of any Period of Restriction or any award agreement, or any other instrument relating to an Award under the Plan; and (subject to the provisions of Article 15 herein) to amend the terms and conditions of any outstanding Option, Stock Appreciation Right or other Award to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan. Notwithstanding the foregoing, the Committee shall have no authority to adjust upwards the amount payable to a Covered Employee with respect to a particular Award, to take any of the foregoing actions, or to take any other action to the extent that such action or the Committee's ability to take such action would cause any Award under the Plan to any Covered Employee to fail to qualify as "performance-based compensation" within the meaning of Code Section 162(m)(4) and the regulations issued thereunder. Subject to section 4.3, in no event shall the Committee have the right to i) cancel outstanding Options or SARs for the purpose of replacing or regranting such Options or SARs with an exercise price that is less than the original exercise price of the Option or SAR, or ii) change the Option Price of an Option or SAR to an exercise price that is less than the original Option or SAR exercise price, without first obtaining the approval of shareholders. Also notwithstanding the foregoing, no action of the Committee (other than pursuant to Section 4.3 hereof or Section 9.4 hereof) may, without the consent of the person or persons entitled to exercise any outstanding Option or Stock Appreciation Right or to receive payment of any other outstanding Award, adversely affect the rights of such person or persons. 3.3 SELECTION OF PARTICIPANTS. The Committee shall have the authority to grant Awards under the Plan, from time to time, to such Key Employees and Directors as may be selected by it. The Committee shall select Participants from among those who they have identified as being Key Employees or Directors. 3.4 DECISIONS BINDING. All determinations and decisions made by the Committee pursuant to the provisions of the Plan and all related orders or resolutions of the Board of Directors shall be final, conclusive and binding on all persons, including the Company and its Subsidiaries, its stockholders, employees, and Participants and their estates and beneficiaries, and such determinations and decisions shall not be reviewable. 3.5 DELEGATION OF CERTAIN RESPONSIBILITIES. The Committee may, in its sole discretion, delegate to an officer or officers of the Company the administration of the Plan under this Article 3; provided, however, that no such delegation by the Committee shall be made with respect to the administration of the Plan as it affects Directors of the Company or Covered Employees and provided further that the Committee may not delegate its authority to correct errors, omissions or inconsistencies in the Plan. The Committee may delegate to the Chief Executive Officer of the Company its authority under this Article 3 to grant Awards to Key Employees who are not Covered Employees. All authority delegated by the Committee under this Section 3.5 shall be exercised in accordance with the provisions of the Plan and any guidelines for the exercise of such authority that may from time to time be established by the Committee. 3.6 PROCEDURES OF THE COMMITTEE. All determinations of the Committee shall be made by not less than a majority of its members present at the meeting (in person or otherwise) at which a quorum is present. A majority of the entire Committee shall constitute a quorum for the transaction of business. Any action required or permitted to be taken at a meeting of the Committee may be taken without a meeting if a unanimous written consent, which sets forth the action, is signed by each member of the Committee and filed with the minutes for proceedings of the Committee. Service on the Committee shall constitute service as a director of the Company so that members of the Committee shall be entitled to indemnification, limitation of liability and reimbursement of expenses with respect to their services as members of the Committee to the same extent that they are entitled under the Company's Articles of Incorporation and Ohio law for their services as directors of the Company. 3.7 AWARD AGREEMENTS. Stock-based Awards under the Plan shall be evidenced by an award agreement, which shall be signed by an authorized officer of the Company or delegate and by the Participant, and shall contain such terms and conditions as may be approved by the Committee. Such terms and conditions need not be the same in all cases. 3.8 CONDITIONS ON AWARDS. Notwithstanding any other provision of the Plan, the Board or the Committee may impose such conditions on any Award (including, without limitation, the right of the Board or the Committee to limit the time of exercise to specified periods). Notwithstanding any other provisions of the Plan, all Awards under this Plan shall be subject to the following conditions: (i) Except in the case of death, no SAR, ISO, NSO or other option granted pursuant to Article 6 shall be exercisable for at least six months after its grant; and (ii) Except in the case of death, no Restricted Stock or Performance Share (or a Share issued in payment thereof) shall be sold for at least six months after its grant. 3.9 SATURDAYS, SUNDAYS AND HOLIDAYS. When a date referenced in an award Agreement falls on a Saturday, Sunday or other day when the FirstEnergy General Office is closed, the date reference will revert back to the day prior to such date. ARTICLE 4 STOCK SUBJECT TO THE PLAN ------------------------- 4.1 NUMBER OF SHARES. Subject to adjustment as provided in Section 4.3 herein, the aggregate number of Shares that may be delivered under the Plan at any time shall not exceed 7,500,000 Shares of common stock of the Company. No more than three- quarters of such aggregate number of such Shares shall be issued as Restricted Stock under Article 8 of the Plan or as Performance Shares under Article 9. Stock delivered under the Plan may consist, in whole or in part, of authorized and unissued shares, treasury shares or shares purchased on the open market. The exercise of a Stock Appreciation Right, whether paid in cash or Stock, shall be deemed to be an issuance of Stock under the Plan. 4.2 LAPSED AWARDS. If any Award granted under this Plan terminates, expires, or lapses for any reason, any Stock subject to such Award again shall be available for the grant of an Award under the Plan, subject to Section 7.2 herein. If the value of any Performance Shares issued under Article 9 are paid in cash after a Performance Period has ended, such stock subject to such award shall again be available for the grant of an award under the Plan. 4.3 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, share combination, or other change in the corporate structure of the Company affecting the Stock, such adjustment shall be made in the number and class of shares which may be delivered under the Plan, and in the number and class of and/or price of shares subject to outstanding Options, Stock Appreciation Rights, Restricted Stock Awards and Performance Shares, granted under the Plan, as may be determined to be appropriate and equitable by the Committee, in its sole discretion, to prevent dilution or enlargement of rights; and provided that the number of shares subject to any Award shall always be a whole number. Any adjustment of an Incentive Stock Option under this paragraph shall be made in such a manner so as not to constitute a modification within the meaning of Section 425(h)(3) of the Code. ARTICLE 5 ELIGIBILITY AND PARTICIPATION ----------------------------- 5.1 ELIGIBILITY. Persons eligible to receive Awards under all Articles of this Plan except Article 11 include all employees of the Company and its Subsidiaries who, in the opinion of the Committee, are Key Employees. Key Employees may include employees who are members of the Board, but may not include Directors who are not employees. Directors who are not employees may receive Awards under this Plan exclusively under Articles 6 and 8, subject to Article 11. 5.2 ACTUAL PARTICIPATION. Subject to the provisions of the Plan, the Committee may from time to time select those Key Employees to whom Awards shall be granted and determine the nature and amount of each Award. No employee shall have any right to be granted an Award under this Plan even if previously granted an Award. ARTICLE 6 STOCK OPTIONS ------------- 6.1 GRANT OF OPTIONS. Subject to the terms and provisions of the Plan, Options may be granted to Participants at any time and from time to time as shall be determined by the Committee. The maximum number of Shares subject to Options granted to any individual Participant in any calendar year shall be two hundred thousand (200,000) Shares. The Committee shall have the sole discretion, subject to the requirements of the Plan, to determine the actual number of Shares subject to Options granted to any Participant. The Committee may grant any type of Option to purchase Stock that is permitted by law at the time of grant, including, but not limited to, ISO's and NSO's. However, no employee may receive an Award of Incentive Stock Options that are first exercisable during any calendar year to the extent that the aggregate Fair Market Value of the Stock (determined at the time the options are granted) exceeds $100,000. Nothing in this Article 6 shall be deemed to prevent the grant of NSO's in excess of the maximum established by Section 422 of the Code. Unless otherwise expressly provided at the time of grant, Options granted under the Plan will be NSO's. Notwithstanding any other provision of the Plan, no ISO shall be granted after May 1, 2008. 6.2 OPTION AGREEMENT. Each Option grant shall be evidenced by an Option agreement that shall specify the type of Option granted, the Option price, the duration of the Option, the number of Shares to which the Option pertains, and such other provisions as the Committee shall determine. The Option agreement shall specify whether the Option is intended to be an Incentive Stock Option within the meaning of Section 422 of the Code, or a Nonqualified Stock Option whose grant is not intended to be subject to the provisions of Code Section 422. 6.3 OPTION PRICE. The purchase price per share of Stock covered by an Option shall be determined by the Committee but shall not be less than 100% of the Fair Market Value of such Stock on the date the Option is granted. An Incentive Stock Option granted to an Employee who, at the time of grant, owns (within the meaning of Section 425(d) of the Code) Stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, shall have an exercise price which is at least 110% of the Fair Market Value of the Stock subject to the Option. 6.4 DURATION OF OPTIONS. Each Option shall expire at such time as the Committee shall determine at the time of grant; provided, however, that no Option shall be exercisable later than the tenth (10th) anniversary date of its grant. 6.5 EXERCISE OF OPTIONS. Subject to Section 3.8 herein, Options granted under the Plan shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall in each instance approve, which need not be the same for all Participants. All options within a single grant need not be exercised at one time. 6.6 PAYMENT. Options shall be exercised by the delivery of a written notice to the Company setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The Option price upon exercise of any Option shall be payable to the Company in full either: (a) in cash or its equivalent; (b) by tendering Shares of previously acquired Stock having a Fair Market Value at the time of exercise equal to the total Option price, (c) by foregoing compensation under rules established by the Committee, (d) by delivery by the Participant of irrevocable instructions to an approved broker to promptly deliver to the Company the amount of the sale or loan proceeds to pay the exercise price, or (e) such other consideration as the Committee may deem appropriate. The proceeds from such a payment shall be added to the general funds of the Company and shall be used for general corporate purposes. As soon as practicable, after the Company's receipt of written notification and payment, the Participant shall receive either: (i) stock certificates in an appropriate amount based upon the number of Options exercised, issued in the Participant's name: (ii) cash in an amount equal to the difference between the sale price of such Shares and the Option price less taxes and administrative expenses; or (iii) a combination of the foregoing. 6.7 RESTRICTIONS ON STOCK TRANSFERABILITY. The Committee shall impose such restrictions on any Shares acquired pursuant to the exercise of an Option under the Plan as it may deem advisable, including, without limitation, restrictions under applicable Federal securities law, under the requirements of any stock exchange upon which such Shares are then listed and under any blue sky or state securities laws applicable to such Shares. 6.8 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. In the event the employment of a Participant is terminated by reason of death, any of such Participant's outstanding Options shall become immediately exercisable at any time prior to the expiration date of the Options or within one year after such date of termination of employment, whichever period is shorter, by such person or persons as shall have acquired the Participant's rights under the Option pursuant to Article 12 hereof or by will or by the laws of descent and distribution. In the event the employment of a Participant is terminated by reason of disability or retirement (as defined under the then established rules of the Company or any of its Subsidiaries, as the case may be), any of such Participant's outstanding Options shall become immediately exercisable, at any time prior to the expiration date of the Options or within one year after such date of termination of employment, whichever period is shorter. Notwithstanding the foregoing to the contrary, the Committee may, in its sole discretion, lengthen the exercise period up to the expiration date for an individual participant if it deems this is in the best interest of the Company. In the case of Incentive Stock Options, the favorable tax treatment prescribed under Section 422 of the Internal Revenue Code of l986, as amended, may not be available if the Options are not exercised within the Code Section 422 prescribed time period after termination of employment for death, disability, or retirement. 6.9 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. If the employment of a Participant shall terminate for any reason other than death, disability, retirement or for Cause, the Participant shall have the right to exercise such Participant's outstanding Options within 90 days after the date of his termination, but in no event beyond the expiration of the term of the Options and only to the extent that the Participant was entitled to exercise the Options at the date of his termination of employment. In its sole discretion, the Committee may extend the 90 days to up to one year but, however, in no event beyond the expiration date of the Option. If the employment of the Participant shall terminate for Cause, all of the Participant's outstanding Options shall be immediately forfeited back to the Company. 6.10 NONTRANSFERABILITY OF OPTIONS. No Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, otherwise than by will or by the laws of descent and distribution. Further, all Options granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant. ARTICLE 7 STOCK APPRECIATION RIGHTS ------------------------- 7.1 GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and conditions of the Plan, Stock Appreciation Rights may be granted to Participants, at the discretion of the Committee, in any of the following forms: (a) in lieu of Options; (b) in addition to Options; (c) independent of Options; or (d) in any combination of (a), (b), or (c). The maximum numbers of Shares subject to SARs granted to any individual Participant in any calendar year shall be two hundred thousand (200,000) Shares. Subject to the immediately preceding sentence, the Committee shall have the sole discretion, subject to the requirements of the Plan, to determine the actual number of Shares subject to SARs granted to any Participant. 7.2 EXERCISE OF SARS IN LIEU OF OPTIONS. SARs granted in lieu of Options may be exercised for all or part of the Shares subject to the related Option upon the surrender of the related Options representing the right to purchase an equivalent number of Shares. The SAR may be exercised only with respect to the Shares of Stock for which its related Option is then exercisable. Option Stock with respect to which the SAR shall have been exercised may not be subject again to an Award under the Plan. Notwithstanding any other provision of the Plan to the contrary, with respect to a SAR granted in lieu of an Incentive Stock Option: (i) the SAR will expire no later than the expiration of the underlying Incentive Stock Option; (ii) the SAR amount may be for no more than one hundred percent (100%) of the difference between the exercise price of the underlying Incentive Stock Option and the Fair Market Value of the Stock subject to the underlying Incentive Stock Option at the time the SAR is exercised; and (iii) the SAR may be exercised only when the Fair Market Value of the Stock subject to the Incentive Stock Option exceeds the exercise price of the Incentive Stock Option. 7.3 EXERCISE OF SARS IN ADDITION TO OPTIONS. SARs granted in addition to Options shall be deemed to be exercised upon the exercise of the related Options. The deemed exercise of SARs granted in addition to Options shall not necessitate a reduction in the number of related Options. 7.4 EXERCISE OF SARS INDEPENDENT OF OPTIONS. Subject to Section 3.8 herein and Section 7.5 herein, SARs granted independently of Options may be exercised upon whatever terms and conditions the Committee, in its sole discretion, imposes upon the SARs, including, but not limited to, a corresponding proportional reduction in previously granted Options. 7.5 PAYMENT OF SAR AMOUNT. Upon exercise of the SAR, the holder shall be entitled to receive payment of an amount determined by multiplying: (a) The difference between the market price of a Share on the date of exercise over the price fixed by the Committee at the date of grant (which price shall not be less than 100% of the market price of a Share on the date of grant) (the Exercise Price); by (b) The number of Shares with respect to which the SAR is exercised. 7.6 FORM AND TIMING OF PAYMENT. Payment to a Participant, upon SAR exercise, will be made in cash or stock, at the discretion of the Committee, as soon as administratively possible after exercise. 7.7 TERM OF SAR. The term of an SAR granted under the Plan shall not exceed ten years. 7.8 TERMINATION OF EMPLOYMENT. In the event the employment of a Participant is terminated by reason of death, disability, retirement, or any other reason, the exercisability of any outstanding SAR granted in lieu of or in addition to an Option shall terminate in the same manner as its related Option as specified under Sections 6.8 and 6.9 herein. The exercisability of any outstanding SARs granted independent of Options also shall terminate in the manner provided under Sections 6.8 and 6.9 hereof. 7.9 NONTRANSFERABILITY OF SARS. No SAR granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, all SARs granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant. ARTICLE 8 RESTRICTED STOCK ---------------- 8.1 GRANT OF RESTRICTED STOCK. Subject to the terms and provisions of the Plan, the Committee, at any time and from time to time, may grant Shares of Restricted Stock under the Plan to such Participants and in such amounts, as it shall determine. The Committee may condition the vesting or lapse of the Period of Restriction established pursuant to Section 8.3 upon the attainment of one or more of the performance goals utilized for purposes of Performance Shares pursuant to Article 9 hereof. As required for valuation of grants under the Plan, Restricted Stock will be valued at its Fair Market Value. The maximum number of Shares subject to issuance as Restricted Stock granted to any individual Participant in any calendar year is one hundred thousand (100,000) Shares. 8.2 RESTRICTED STOCK AGREEMENT. Each Restricted Stock grant shall be evidenced by a Restricted Stock agreement that shall specify the Period of Restriction, or periods, the number of Shares of Restricted Stock granted, and such other provisions as the Committee shall determine. 8.3 TRANSFERABILITY. Except as provided in this Article 8 or in Section 3.8 herein, the Shares of Restricted Stock granted hereunder may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated until the termination of the applicable Period of Restriction or for such period of time as shall be established by the Committee and as shall be specified in the Restricted Stock agreement, or upon earlier satisfaction of other conditions (including any performance goals) as specified by the Committee in its sole discretion and set forth in the Restricted Stock agreement. All rights with respect to the Restricted Stock granted to a Participant under the Plan shall be exercisable during his lifetime only by such Participant. 8.4 OTHER RESTRICTIONS. The Committee shall impose such other restrictions on any Shares of Restricted Stock granted pursuant to the Plan as it may deem advisable including, without limitation, restrictions under applicable Federal or state securities laws, and the Committee may legend certificates representing Restricted Stock to give appropriate notice of such restrictions. 8.5 CERTIFICATE LEGEND. In addition to any legends placed on certificates pursuant to Section 8.4 herein, each certificate representing Shares of Restricted Stock granted pursuant to the Plan shall bear the following legend: "The sale or other transfer of the shares of stock represented by this certificate, whether voluntary, involuntary, or by operation of law, is subject to certain restrictions on transfer set forth in the Executive and Director Incentive Compensation Plan of FirstEnergy Corp., in the rules and administrative procedures adopted pursuant to such Plan, and in a Restricted Stock Agreement dated __________. A copy of the Plan, such rules and procedures, and such Restricted Stock agreement may be obtained from the Secretary of FirstEnergy Corp." 8.6 REMOVAL OF RESTRICTIONS. Except as otherwise provided in this Article, Shares of Restricted Stock covered by each Restricted Stock grant made under the Plan shall become freely transferable by the Participant after the last day of the Period of Restriction. Once the Shares are released from the restrictions, the Participant shall be entitled to have the legend required by Section 8.5 removed from his Stock certificate. 8.7 VOTING RIGHTS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder may exercise full voting rights with respect to those Shares. 8.8 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of Restriction, Participants holding Shares of Restricted Stock granted hereunder shall be entitled to receive all dividends and other distributions paid with respect to those Shares while they are so held. If any such dividends or distributions are paid in Shares, the Shares shall be subject to the same restrictions on transferability as the Shares of Restricted Stock with respect to which they were paid. 8.9 TERMINATION OF EMPLOYMENT DUE TO RETIREMENT. In the event that a Participant terminates his employment with the Company or any of its Subsidiaries because of retirement (as defined under the then established rules of the Company or any of its Subsidiaries, as the case may be), the Committee in its sole discretion (subject to Section 3.8 herein) may waive or modify the restrictions remaining on any or all Shares of Restricted Stock as it deems appropriate. 8.10 TERMINATION OF EMPLOYMENT DUE TO DEATH OR DISABILITY. In the event a Participant's employment is terminated because of death or disability (as defined under the then established rules of the Company or any of its Subsidiaries, as the case may be) during the Period of Restriction, any remaining Period of Restriction applicable to the Restricted Stock shall automatically terminate and, except as otherwise provided in Section 8.4. herein, the Shares of Restricted Stock shall thereby be free of restrictions and be fully transferable. 8.11 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that a Participant terminates his employment with the Company or any of its Subsidiaries for any reason other than for death, disability, or retirement, as set forth in Sections 8.9 and 8.10 herein, during the Period of Restriction, then any Shares of Restricted Stock still subject to restrictions as of the date of such termination shall automatically be forfeited and returned to the Company; provided, however, that in the event of a termination of the employment of a Participant by the Company or any of its Subsidiaries other than for Cause, the Committee, in its sole discretion (subject to Section 3.8 herein), may waive or modify the automatic forfeiture of any or all such Shares as it deems appropriate. ARTICLE 9 PERFORMANCE SHARES ------------------ 9.1 GRANT OF PERFORMANCE SHARES. Subject to the terms and provisions of the Plan, Performance Shares may be granted to Participants at any time and from time to time as shall be determined by the Committee. The maximum number of Shares that may be issued to any Participant in a calendar year shall not exceed one hundred thousand (100,000), subject to adjustment as provided in Section 4.3. 9.2 VALUE OF PERFORMANCE SHARES. The Committee shall set performance goals over certain periods to be determined in advance by the Committee ("Performance Periods"). Prior to each grant of Performance Shares, the Committee shall establish an initial number of Shares for each Performance Share granted to each Participant for that Performance Period. Prior to each grant of Performance Shares, the Committee also shall set the performance goals that will be used to determine the extent to which the Participant receives a payment of the number of Shares for the Performance Shares awarded for such Performance Period. These goals will be based on the attainment by the Company or its Subsidiaries of certain objective performance measures, which may include, but are not limited to one or more of the following: total shareholder return, return on equity, return on capital, earnings per share, market share, stock price, sales, costs, net income, cash flow, retained earnings, results of customer satisfaction surveys, aggregate product price and other product price measures, safety record, service reliability, demand-side management (including conservation and load management), operating and maintenance cost management, and energy production availability performance measures. Such performance goals also may be based upon the attainment of specified levels of performance of the Company or one or more Subsidiaries under one or more of the measures described above, relative to the performance of other corporations. The Committee may provide for the crediting of dividend equivalents during the performance period. With respect to each such performance measure utilized during a Performance Period, the Committee shall assign percentages to various levels of performance which shall be applied to determine the extent to which the Participant shall receive a payout of the number of Performance Shares awarded. With respect to Covered Employees, all performance goals shall be objective performance goals satisfying the requirements for "performance-based compensation" within the meaning of Section 162(m)(4) of the Code, and shall be set by the Committee within the time period prescribed by Section 162(m) of the Code and related regulations. 9.3 PAYMENT OF PERFORMANCE SHARES. After a Performance Period has ended, the holder of a Performance Share shall be entitled to receive the value thereof as determined by the Committee. The Committee shall make this determination by first determining the extent to which the performance goals set pursuant to Section 9.2 have been met. It will then determine the applicable percentage (which may exceed 100%) to be applied to, and will apply such percentage to, the number of Performance Shares to determine the payout to be received by the Participant. In addition, with respect to Performance Shares granted to any Covered Employee, no payout shall be made hereunder except upon written certification by the Committee that the applicable performance goal or goals have been satisfied to a particular extent. The amount payable in cash in a calendar year to any Participant with respect to any Performance Period pursuant to any Performance Share award shall not exceed $1,000,000. 9.4 COMMITTEE DISCRETION TO ADJUST AWARDS. Subject to Section 3.2 regarding Awards to Covered Employees, the Committee shall have the authority to modify, amend or adjust the terms and conditions of any Performance Share award, at any time or from time to time, including but not limited to the performance goals. 9.5 FORM AND TIMING OF PAYMENT. The payment described in Section 9.3 herein shall be made in cash, Stock, or a combination thereof as determined by the Committee. Payment may be made in a lump sum or installments as prescribed by the Committee. If any payment is to be made on a deferred basis, the Committee may provide for the payment of dividend equivalents or interest during the deferral period. Any stock issued in payment of a Performance Share shall be subject to the restrictions on transfer in Section 3.8 herein. 9.6 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY, OR RETIREMENT. In the case of death, disability, or retirement (each of disability and retirement as defined under the established rules of the Company or any of its Subsidiaries, as the case may be), the holder of a Performance Share shall receive a prorated payment based on the Participant's number of full months of service during the Performance Period, further adjusted based on the achievement of the performance goals, as computed by the Committee. The Committee may require that a Participant have a minimum number of full months of service during the Performance Period to qualify for an Award payout. 9.7 TERMINATION OF EMPLOYMENT FOR OTHER REASONS. In the event that a Participant terminates employment with the Company or any of its Subsidiaries for any reason other than death, disability, or retirement, all Performance Shares shall be forfeited; provided, however, that in the event of a termination of the employment of the Participant by the Company or any of its Subsidiaries other than for Cause, the Committee in its sole discretion may waive the automatic forfeiture provisions. 9.8 NONTRANSFERABILITY. No Performance Shares granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution until the termination of the applicable Performance Period. All rights with respect to Performance Shares granted to a Participant under the Plan shall be exercisable during his/her lifetime only by such Participant. ARTICLE 10 CASH AWARDS ----------- 10.1 GRANT OF CASH AWARD. Subject to the terms of this Plan, Cash Awards may be made to Participants at any time and from time to time as shall be determined by the Committee. The Committee shall have complete discretion in the determining the form of the Cash Awards granted to Participants 10.2 CASH AWARD PERFORMANCE CRITERIA. All Cash Awards made under this Plan shall be subject to pre-established, objective, business-related Performance Measures. The performance measures shall be approved for use by the Committee and the Committee shall certify their attainment and the resulting payout of Cash Awards. Performance Measures for Cash Awards may be measurable for periods of one year to five years (allowing for prorated periods for new Participants). The Performance Measures may include, but shall not be limited to: operational measures (e.g. attaining merger milestones, customer satisfaction, service reliability, safety and tactical objectives), financial measures (e.g. expense control, revenue, margins and shareholder value added levels "SVA") and individual measures. Performance Measures can be made on overlapping cycles, (i.e. one-year cycles could emphasize operational measures and three-year cycles could emphasize SVA Performance Measures.) Each cycle of Performance Measures could have a distinct Cash Award associated with it. 10.3 PAYOUT OF CASH AWARDS. Payouts of Cash Awards are made in relationship to a target payout level determined prior to each cycle on a per Participant basis. Target levels under multiple cycles will be calibrated to provide, in total, an annualized level of incentives consistent with the Company's compensation philosophy as set by the Committee. Actual payouts of Cash Awards will vary with performance results as follows: actual payouts based upon operational or individual Performance Measures will vary from 50% (if threshold performance is attained) to 150% of the target level; actual payouts based upon Company SVA and other corporate financial measures will vary from 50% (if threshold performance is attained) up to 200% of the target level. The maximum Cash Award payable in a calendar year to any Participant with respect to any Performance Period shall not exceed $1,000,000. 10.4 CONVERSION OF CASH AWARD PAYOUT TO RESTRICTED STOCK. At the request of the Participant, but subject to the discretion of the Committee, any Cash Award payout may be converted to Restricted Stock at a discount. The conversion to Restricted Stock will occur by multiplying the Cash Award by a premium, but in no event more than 120% and dividing the product by the Fair Market Value of the Restricted Stock on the date of conversion, which shall be chosen by the Committee at least 10 days in advance, to determine the number of shares of Restricted Stock that will be provided as full settlement of the Cash Award. The shares of Restricted Stock provided to Participants in settlement of Cash Awards shall be Restricted Stock subject to Article 8. ARTICLE 11 DIRECTORS' AWARDS ----------------- 11.1 GRANT OF DIRECTORS' AWARDS. In lieu of a portion of their retainer, Directors' Awards can be made in the form of Stock Options or Restricted Stock under Articles 6 and 8 respectively. No other Awards may be made to Directors under the Plan. 11.2 CONVERSION OF RETAINER TO STOCK. At the request of a Director but subject to the election of the Committee, a Director may convert any retainer otherwise due to be paid by the Company in cash to an aggregate equivalent value of either Stock Options, Restricted Stock or both. 11.3 CONVERSION OF RETAINER TO RESTRICTED STOCK. Retainer, otherwise payable in cash may be converted to Restricted Stock under Article 8. The conversion to Restricted Stock will occur by multiplying the retainer by a premium, but in no event more than 120% and dividing the product by the Fair Market Value of the Restricted Stock on the date of conversion, which shall be chosen by the Committee at least 10 days in advance, into the amount of the retainer to determine the number of shares of Restricted Stock that will be provided as full settlement of the retainer. 11.4 CONVERSION OF RETAINER TO STOCK OPTIONS. Retainer otherwise due to be paid in cash may be converted to Stock Options under Article 6 at the request of the Participant but subject to the election of the Committee. Retainer shall be converted by multiplying the retainer by a premium, but in no event more than 120% and dividing the product by the amount equal to the Black-Scholes Value of the Stock Option on the date of conversion. The quotient of which is the number of Stock Options that shall be awarded. ARTICLE 12 BENEFICIARY DESIGNATION ----------------------- Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively and who may include a trustee under a will or living trust) to whom any benefit under the Plan is to be paid in case of his/her death before he receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during his lifetime. In the absence of any such designation or if all designated beneficiaries predecease the Participant, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. ARTICLE 13 RIGHTS OF EMPLOYEES ------------------- 13.1 EMPLOYMENT. Nothing in the Plan shall interfere with or limit in any way the right of the Company or any of its Subsidiaries to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or any of its Subsidiaries. 13.2 PARTICIPATION. No employee shall have a right to be selected as a Participant, or, having been so selected, to be selected again as a Participant. 13.3 NO IMPLIED RIGHTS; RIGHTS ON TERMINATION OF SERVICE. Neither the establishment of the Plan nor any amendment thereof shall be construed as giving any Participant, beneficiary, or any other person any legal or equitable right unless such right shall be specifically provided for in the Plan or conferred by specific action of the Committee in accordance with the terms and provisions of the Plan. Except as expressly provided in this Plan, neither the Company nor any of its Subsidiaries shall be required or be liable to make any payment under the Plan. 13.4 NO RIGHT TO COMPANY ASSETS. Neither the Participant nor any other person shall acquire, by reason of the Plan, any right in or title to any assets, funds or property of the Company or any of its Subsidiaries whatsoever including, without limiting the generality of the foregoing, any specific funds, assets, or other property which the Company or any of its Subsidiaries, in its sole discretion, may set aside in anticipation of a liability hereunder. Any benefits which become payable hereunder shall be paid from the general assets of the Company or the applicable subsidiary. The Participant shall have only a contractual right to the amounts, if any, payable hereunder unsecured by any asset of the Company or any of its Subsidiaries. Nothing contained in the Plan constitutes a guarantee by the Company or any of its Subsidiaries that the assets of the Company or the applicable subsidiary shall be sufficient to pay any benefit to any person. ARTICLE 14 CHANGE IN CONTROL ----------------- 14.1 STOCK BASED AWARDS. Notwithstanding any other provisions of the Plan, in the event of a Change in Control, all Stock based awards granted under this Plan shall immediately vest 100% in each Participant (subject to Section 3.8 herein), including Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, and Restricted Stock. 14.2 ALL AWARDS OTHER THAN STOCK BASED AWARDS. Notwithstanding any other provisions of the Plan, in the event of a Change in Control, all Awards other than Stock Based Awards granted under this Plan shall be immediately paid out in cash, including Performance Shares. The amount of the payout shall be based on the higher of: (i) the extent, as determined by the Committee, to which performance goals, established for the Performance Period then in progress have been met up through and including the effective date of the Change in Control or (ii) 100% of the value on the date of grant of the number of Performance Shares. ARTICLE 15 AMENDMENT, MODIFICATION, AND TERMINATION ---------------------------------------- 15.1 AMENDMENT, MODIFICATION, AND TERMINATION. At any time and from time to time, the Board or Committee may terminate, amend, or modify the Plan. However, without the approval of the stockholders of the Company if required by the Code, by the insider trading rules of Section 16 of the Exchange Act, by any national securities exchange or system on which the Stock is then listed or reported, or by any regulatory body having jurisdiction with respect hereto, no such termination, amendment, or modification may: (a) Increase the total amount of Stock which may be issued under this Plan, except as provided in Section 4.3 herein; or (b) Change the class of Employees eligible to participate in the Plan; (c) Materially increase the cost of the Plan or materially increase the benefits to Participants; or (d) Extend the maximum period after the date of grant during which Options or Stock Appreciation Rights may be exercised. 15.2 AWARDS PREVIOUSLY GRANTED. No termination, amendment or modification of the Plan other than pursuant to Section 4.3 hereof shall in any manner adversely affect any Award theretofore granted under the Plan, without the written consent of the Participant. 15.3 DEFERRAL OF PAYMENTS AND DISTRIBUTIONS. Cash Awards pursuant to Article 10 may be eligible for deferral by any plan(s) offered by the company, subject to the approval of the Committee and any administrative requirements imposed by the Committee. ARTICLE 16 WITHHOLDING AND DEFERRAL ------------------------ 16.1 TAX WITHHOLDING. The Company and any of its Subsidiaries shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company or any of its Subsidiaries, an amount sufficient to satisfy Federal, state and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any grant, exercise, or payment made under or as a result of this Plan. 16.2 STOCK DELIVERY OR WITHHOLDING. With respect to withholding required upon the exercise of Stock Options, or upon the lapse of restrictions on Restricted Stock, participants may elect, subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by tendering to the Company Shares of previously acquired Stock or by having the Company withhold Shares of Stock, in each such case in an amount having a Fair Market Value equal to the amount required to be withheld to satisfy the tax withholding obligations described in Section 16.1. The value of the Shares to be tendered or withheld is to be based on the Fair Market Value of the Stock on the date that the amount of tax to be withheld is to be determined. All Stock withholding elections shall be irrevocable and made in writing, signed by the Participant on forms approved by the Committee in advance of the day that the transaction becomes taxable. Stock withholding elections made by Participants who are subject to the short-swing profit restrictions of Section 16 of the Exchange Act must comply with the additional restrictions of Section 16 and Rule 16b-3 in making their elections. ARTICLE 17 SUCCESSORS ---------- All obligations of the Company under the Plan, with respect to Awards granted hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company. ARTICLE 18 REQUIREMENTS OF LAW ------------------- 18.1 REQUIREMENTS OF LAW. The granting of Awards and the issuance of Shares of Stock under this Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 18.2 GOVERNING LAW. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Ohio without giving effect to the principles of the conflicts of laws. EX-10.2 3 AMENDED FIRSTENERGY CORP. DEFERRED COMPENSATION PLAN FOR DIRECTORS -------------------------- ARTICLE I --------- Director Election ----------------- Any member of the Board of Directors ("Director") of FirstEnergy Corp. (the "Company") may elect from time to time, by written notice to the Company given on or before December 31 of any year, to defer receipt of all or any specified part of his or her fees (cash or stock) for services as a Director during succeeding calendar years, including retainer fees, fees for attending meetings of the Board of Directors and its Committees and fees for serving as Chairman or other official of the Board or a Committee (collectively "Director's fees"). Any person elected to the Board who was not a Director on the preceding December 31 may elect, by written notice to the Company given within thirty (30) days after becoming a Director, to defer receipt of all or any specified part of his or her Director's fees during the balance of the calendar year following his or her becoming a Director and succeeding calendar years. With respect to the calendar year in which this Plan is adopted by the Board of Directors of the Company, any Director may elect, by written notice to the Company given within thirty (30) days after the date on which this Plan is adopted or, if later, within thirty (30) days after first becoming a Director, to defer receipt of all or any specified part of his or her Director's fees during the balance of that calendar year and succeeding calendar years. An election to defer Director's fees shall be irrevocable and shall continue from year to year unless the Director terminates it by written notice to the Company on or before December 31 of the year preceding the year to which the termination applies. ARTICLE II ---------- Deferred Fee Account--Balances ------------------------------ Any deferred Director's fees shall be credited by the Company to the Director's deferred fee account to be maintained by the Company as of the date the fees would otherwise be payable. Adjustments to the balance in the account for deemed interest or deemed investment gains and losses shall be made from time to time, as determined by the Compensation Committee of the Board of Directors of FirstEnergy Corp. (the "Committee"), but at least annually. The Committee, in its sole discretion shall determine whether adjustments to the account shall be made based upon deemed interest or deemed investment earnings. If deemed interest is selected by the Committee, the deemed interest rate shall be the "prime rate" then in effect at The Chase Manhattan Bank, N.A., of New York City, New York, or at another bank as the Committee may from time to time designate. If the Committee elects to make adjustments to the accounts in accordance with deemed investment gains and losses, the Committee, in its sole discretion, shall determine the investment vehicles to be used. In its the sole discretion, the Committee may permit the Director to designate that the balance of his or her account be invested in one or more investment vehicles selected by the Committee, and adjusted accordingly. The Company shall provide an annual statement to each Director who has elected to defer fees. One of the investment options for stock and cash retainer fees shall be an account whose value will be adjusted as if the deferred fees were invested in FirstEnergy Common Stock. This account shall be called the Deferred Stock Account (DSA). At the time cash retainer fees are designated for investment into this account, the initial account value shall be increased by 20 percent. If a Director separates from the Board for any reason other than death, retirement, or disability as defined by Section 22(e)(3) of the Internal Revenue Code and such retainer fees are not kept in this account for a minimum of three years from January 1 of the year of deferral, the Director shall forfeit the 20 percent bonus on such retainer fees and any earnings associated with it. A Director shall be immediately entitled to the 20 percent bonus and all associated earnings if a Change in Control occurs as defined in Article IX. Initial unit valuation for cash deferrals into this account shall be based on the Fair Market Value which is the average of the closing price of FirstEnergy Common Stock for the previous 20 business days prior to when payment would otherwise be received. Stock deferred into this account shall be valued at the actual purchase price, including any commissions. ARTICLE III ----------- Payment to Director ------------------- Amounts credited to a Director's deferred fee account, including deemed interest and earnings shall be paid to the Director in cash, either in a lump sum or in annual installments over a period not to exceed 10 years. For this purpose, a designation by a Director of the form of payment will be effective only if it is made at the time of his or her election to defer Director's fees; provided, however, that if a Director makes a designation, he or she may change that designation by filing a new superseding designation with the Company during the period beginning 120 days prior and ending on the day prior to the day on which the Director ceases to be a Director. Payment(s) shall be made on or commencing with the January 1 next following the day the Director ceases to be a Director unless during the foregoing 120 day election period, the Director designates a later payment or commencement date (not later than the January 1 next following the day he or she attains age 72). Payment of the balance of the DSA to the Director will be in the form of FirstEnergy Common Stock and will be paid out when a Director ceases to be a Director unless a separate election for the DSA is made. The election options are the same as described in the paragraph above. If a Director requests any change in the date of the pay-out of his DSA, the request must be approved by the Compensation Committee of the Board of Directors of the Company. A Director may at any time request an accelerated distribution of his or her account balances, subject to a 10 percent penalty and, if applicable, forfeiture of the 20 percent bonus and associated earnings described above if the three-year criterion is not met. Such a request must be made in writing, in a form and manner specified by the Committee. The Company will distribute to the Director the balance of his or her account minus any forfeitures and the 10 percent penalty as a lump sum within 90 days after the end of the month in which the Committee receives the request. Such distribution shall completely discharge the Company from all liability with respect to the Director's account. If the Director is an active Director, the Director may not resume any further deferrals into the Plan until January 1 of the second calendar year following the calendar year in which the Director receives such distribution. If a Director requests an accelerated distribution of his DSA, the request must be approved by the Compensation Committee of the Board of Directors of the Company. A Director who is an active Director and who has been a Plan Participant for at least five calendar years may request to withdraw a portion of his or her deferred fees and associated earnings. All deferred cash fees must be disbursed prior to the disbursement of any deferred stock fees. Such request must be made in writing in a form and manner specified by the Committee and must specify the amount to be withdrawn and the future date or dates to be paid. The date(s) must be the first of a month in the second calendar year following the calendar year in which the request was made. The request will be irrevocable after December 31 of the calendar in which it is made unless, prior to payment, the Director separates from the Board or a Change in Control occurs as defined in Article IX. In these instances, the request will become null and void and the account balances will be paid as elected by the Director or as in the paragraph below. In the instance of a Change in Control as defined in Article IX, all cash account balances will be paid out immediately as a lump sum and the DSA in stock as soon as practicable. ARTICLE IV ---------- Payment to Beneficiary ---------------------- Upon the death of a Director or a former Director prior to the distribution of the entire balance in the Director's or former Director's deferred fee account, the balance including interest, shall be paid to the beneficiary or beneficiaries designated by the Director or former Director in writing filed with the Company, or in the absence of a designation, paid to his or her estate, in a lump sum as soon as practicable, but no later than January 1 of the year following the year in which the death occurred. ARTICLE V --------- Assignment ---------- Except to the extent that a Director or former Director may designate a beneficiary to receive any payment to be made following his or her death and except by will or the laws of descent and distribution, no rights under this Plan shall be assignable or transferable, or subject to encumbrance or charge of any nature. ARTICLE VI ---------- Administration -------------- This Plan shall be administered by the Committee as defined in Article II. Except as otherwise provided by action of the Board of Directors of the Company or the terms of the Plan: (a) a majority of the members of the Committee shall constitute a quorum for the transaction of business, and (b) all resolutions or other actions taken by the Committee at a meeting shall be by the vote of the majority of the committee members present, or, without a meeting, by an instrument in writing signed by all members of the Committee. The powers of the Committee shall include the power to construe, interpret, and apply this Plan, and to render nondiscriminatory rulings or determinations. Constructions, interpretations, and decisions of the committee shall be conclusive and binding on all persons. ARTICLE VII ----------- Amendment and Termination ------------------------- The Board of Directors of the Company may from time to time amend, suspend, terminate or reinstate any or all of the provisions of this Plan, except that no amendment, suspension, termination or reinstatement shall adversely affect the deferred fee account of any Director, former Director or beneficiary (collectively, "Eligible Persons") as it existed immediately before the amendment, suspension, termination or reinstatement or the manner of payments, unless the Eligible Person shall have consented in writing. The Board of Directors of the Company may at any time terminate its participation in this Plan and/or transfer its liabilities under this Plan to a similar plan established by the Committee. Upon the termination of its participation in this Plan, amounts credited to deferred fee accounts of Eligible Persons shall continue to be payable to those Eligible Persons in accordance with the terms of this Plan. Upon termination of the participation of the Company in this Plan, if the Board of Directors of the Company should transfer its liabilities to another plan, such transfer of liabilities shall not adversely affect the deferred fee account of any Eligible Person as it existed immediately prior to that transfer or the manner of payments, unless the Eligible Person shall have consented in writing. All liabilities of the Ohio Edison Company Deferred Compensation Plan for Directors shall be transferred to this Plan; and this Plan shall be an amendment, restatement and continuation of that Plan. If any deferred fee account is in pay status or is otherwise payable to an Eligible Person, it shall continue to be payable to that person under the same terms and conditions as were provided under the Plan. The balance in any deferred fee account under that Plan maintained with respect to an individual who is a Director of FirstEnergy Corp. at the time of the amendment or restatement of this Plan shall become payable under the terms and conditions of this Plan; provided, however, that the Director's deferral elections, commencement date elections, and beneficiary elections made under the Prior Plan shall continue to be effective under this Plan unless amended or changed under the terms of this Plan. Notwithstanding any other provisions of the Plan, if the Plan is terminated and the liabilities of this Plan are not transferred to another plan, no subsequent Director's fees may be deferred under this Plan, the balance in a Director's deferred account shall continue to be credited with deemed interest or earnings in a manner similar to that described in Article II, and the entire balance in the account (including interest) shall become payable to the Director (or his or her beneficiary) in accordance with the provisions of this Plan in effect at the date of termination. ARTICLE VIII ------------ Unfunded Plan ------------- Deferred fee accounts maintained for purposes of this Plan shall constitute bookkeeping records of the Company and shall not constitute any allocation of any assets of the Company or be deemed to create any trust or special deposit with respect to any of the assets of the Company. The Company shall not be under any obligation to any Director, former Director or beneficiary to acquire, segregate or reserve any funds or other assets for purposes relating to this Plan. No Eligible Person shall have any rights whatsoever in or with respect to any funds or other assets owned or held by the Company; the rights of an Eligible Person under this Plan are solely those of a general creditor of the Company to the extent of the amount credited to his or her deferred fee account with the Company. The Company may, at its discretion, establish one or more trusts, purchase one or more insurance contracts or otherwise invest or segregate funds for purposes relating to this Plan, but the assets of such trusts, rights and assets of such insurance contracts or otherwise invested or segregated funds shall at all times remain subject to the claims of the general creditors of the Company except to the extent and at the time any payment is made to an Eligible Person under this Plan; and no Eligible Person shall have any rights whatsoever in or with respect to any trust, insurance contract or other investment or fund, or their assets. ARTICLE IX ---------- Change In Control For purposes of the Plan, a "Change in Control" means any of the following: 1. An acquisition by any person or entity of at least 50% (25% if the acquiring person or entity proposes any individual for election to the Board of Directors or is represented by any member of the Board) of either the Company's outstanding common stock ("Outstanding Common Stock") or the combined voting power of the Company's outstanding voting securities ("Outstanding Voting Securities"). The following acquisitions will not constitute a Change in Control: a) any acquisition directly from the Company (excluding an acquisition by virtue of the exercise of a conversion privilege); b) any acquisition by the Company; c) any acquisition by an employee benefit plan sponsored by the Company or one of its affiliates (e.g., the FirstEnergy Corp. Savings Plan); d) any acquisition pursuant to a merger or other form of reorganization or consolidation where the requirements of paragraph 3 below are satisfied. 2. The current members of the Company's Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board. For this purpose, any individual whose election or nomination to the Board was approved by at least a majority of the Directors then comprising the Incumbent Board shall be considered as though he or she were a member of the Incumbent board, unless the individual first assumed office as a result of an actual or threatened proxy or election contest. 3. Approval by the Company's shareholders of a reorganization, merger or consolidation, or of a sale or other disposition of all or substantially all of the assets of the Company, unless after the transaction each of the following requirements are satisfied: a) all or substantially all of the holders of the Company's Outstanding Common Stock and Outstanding Voting Securities immediately prior the transaction, continue to hold at least 75% of the outstanding common stock and the combined voting power of outstanding voting securities of the corporation resulting from the reorganization, merger or consolidation (or of the corporation that purchased the assets of the Company, as the case may be) in the same proportions as they held the Company's Outstanding Common Stock and Outstanding Voting Securities immediately before the transaction. b) no person or entity owns 25% or more of the outstanding common stock or the combined voting power of outstanding voting securities of the corporation resulting from the reorganization, merger or consolidation (or of the corporation that purchased the assets of the Company, as the case may be). This 25% limitation does not apply to the Company, any employee benefit plan sponsored by the Company or such other corporation, or any person or entity who owned at least 25% of the Company's Outstanding Common Stock or Outstanding Voting Securities immediately prior to the transaction; and c) at least a majority of the members of the Board of Directors of the corporation resulting from the reorganization, merger or consolidation (or of the corporation that purchased the assets of the Company, as the case may be), were members of the Incumbent Board of the Company at the time of the initial agreement providing for the reorganization, merger, consolidation or sale or other disposition of all or substantially all of the assets of the Company. 4. Approval by the Company's shareholders of the complete liquidation or dissolution of the Company. However in no event will a Change in Control be deemed to have occurred, with respect to a Director, if the Director is part of a purchasing group which consummates the Change in Control transaction. The Director will be deemed "part of a purchasing group" for purposes of the preceding sentence if the Director is an equity participant or has agreed to become an equity participant in the purchasing company or group (excluding passive ownership of less than 5% of the voting securities of the purchasing company or ownership of equity participation in the purchasing company or group which is otherwise not deemed to be significant, as determined prior to the Change in Control by a majority of the nonemployee, continuing members of the Board of Directors). ARTICLE X --------- Miscellaneous ------------- The invalidity or unenforceability of any particular provision of this Plan shall not affect any other provision, and the Plan shall be construed in all respects as if invalid or unenforceable provisions were omitted. This Plan shall be construed and governed in accordance with the laws of the State of Ohio without giving effect to principles of conflicts of laws. EX-13 4 FIRSTENERGY CORP. SELECTED FINANCIAL DATA
For the Years Ended December 31, 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) Revenues $ 5,861,285 $ 2,960,196 $2,521,788 $2,500,770 $2,390,957 -------------------------------------------------------------------- Income Before Extraordinary Item $ 441,396 $ 305,774 $ 302,673 $ 294,747 $ 281,852 -------------------------------------------------------------------- Net Income $ 410,874 $ 305,774 $ 302,673 $ 294,747 $ 281,852 -------------------------------------------------------------------- Earnings per Share of Common Stock: Before Extraordinary Item $1.95 $1.94 $2.10 $2.05 $1.97 After Extraordinary Item $1.82 $1.94 $2.10 $2.05 $1.97 -------------------------------------------------------------------- Dividends Declared per Share of Common Stock $1.50 $1.50 $1.50 $1.50 $1.50 -------------------------------------------------------------------- Total Assets $18,063,507 $18,080,795 $9,054,457 $8,892,088 $9,045,255 -------------------------------------------------------------------- Capitalization at December 31: Common Stockholders' Equity $ 4,449,158 $ 4,159,598 $2,503,359 $2,407,871 $2,317,197 Preferred Stock: Not Subject to Mandatory Redemption 660,195 660,195 211,870 211,870 328,240 Subject to Mandatory Redemption 294,710 334,864 155,000 160,000 40,000 Long-Term Debt 6,352,359 6,969,835 2,712,760 2,786,256 3,166,593 -------------------------------------------------------------------- Total Capitalization $11,756,422 $12,124,492 $5,582,989 $5,565,997 $5,852,030 ==================================================================== PRICE RANGE OF COMMON STOCK FirstEnergy Corp.'s Common Stock is listed on the New York Stock Exchange and is traded on other registered exchanges. Trading of the common stock began on November 10, 1997. Prices represent Ohio Edison Company Common Stock before November 10, 1997 and FirstEnergy Corp. Common Stock beginning November 10, 1997. 1998 1997 - -------------------------------------------------------------------------- First Quarter High-Low 31-5/8 27-7/8 23-7/8 20-7/8 Second Quarter High-Low 31-7/8 28-1/2 22 19-1/4 Third Quarter High-Low 31-5/16 27-1/16 23-5/8 21-3/4 Fourth Quarter High-Low 34-1/16 29-3/16 29 22-13/16 Yearly High-Low 34-1/16 27-1/16 29 19-1/4 Prices are based on reports published in The Wall Street Journal for New York Stock Exchange Composite Transactions.
HOLDERS OF COMMON STOCK As of December 31, 1998 and January 31, 1999, there were 197,741 and 196,337 holders, respectively, of the 237,069,087 shares of the Company's Common Stock. Information regarding retained earnings available for payment of cash dividends is given in Note 3A. FirstEnergy Corp. 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 that 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, and the availability and cost of capital and other similar factors. Results of Operations FirstEnergy Corp. (Company) was formed when the merger of Ohio Edison Company (OE) and Centerior Energy Corporation (Centerior) became effective on November 8, 1997. The merger has been accounted for by using purchase accounting under the guidelines of Accounting Principles Board Opinion No. 16, "Business Combinations." Under purchase accounting, the results of operations for the combined entity are reported from the point of consummation forward. As a result, our financial statements for 1997 reflect twelve months of operations for OE and its wholly owned subsidiary, Pennsylvania Power Company (Penn), but include only seven weeks (November 8, to December 31, 1997) for the former Centerior companies, which include The Cleveland Electric Illuminating Company (CEI) and The Toledo Edison Company (TE). Results for 1998 include operations for the entire year for OE and Penn (OE companies), CEI and TE. On June 8, 1998, we acquired MARBEL Energy Corporation (MARBEL), an integrated natural gas company. Also, during 1998, FirstEnergy Facilities Services Group, Inc. (FE Facilities), a wholly owned subsidiary of the Company, acquired eight companies which principally provide heating, ventilating and air-conditioning services. See Note 1 for additional information. All acquisitions in 1998 were accounted for using purchase accounting and are included in our consolidated results from their respective acquisition dates. We continued to take steps in 1998 to better position FirstEnergy as competition continues to expand in the electric utility industry. The acquisitions completed in 1998 reflect our strategy to provide customers an expanded portfolio of energy-related products and services. We also invested in new information systems with enhanced functionality which also address Year 2000 application deficiencies. Cash savings of $173 million were captured in 1998 from initiatives implemented during the year in connection with our merger. About one- half of that amount resulted from staffing reductions. Basic and diluted earnings per share of common stock were $1.82 for 1998 compared to $1.94 for 1997. Results for 1998 were adversely affected by a one-time, extraordinary charge of $30.5 million after taxes, or $.13 per common share, related to Penn's discontinued application of Statement of Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation", to its generation business, as discussed later in this report. Additionally, sharp increases in the spot market price for electricity occasioned by a constrained power supply and heavy customer demand in the latter part of June 1998, combined with unscheduled generating unit outages, resulted in spot market purchases of power at prices which substantially exceeded amounts recovered from retail customers. The recovery shortfall reduced 1998 net income by approximately $50 million or $.22 per common share. Finally, unprecedented market prices for electricity in June 1998 contributed to credit losses totaling $27 million after taxes or $.12 per common share. Four power marketers with which the Company's FirstEnergy Trading & Power Marketing, Inc. (FETPM) subsidiary had transactions under contract defaulted as a result of June's price movements. Earnings for 1997 were also affected by nonrecurring charges, primarily resulting from merger-related staffing reductions, which decreased basic and diluted earnings by $.22 per common share. Revenue in 1998 increased by $2.9 billion over the previous year, primarily reflecting a full twelve months of results for the former Centerior companies in the Electric Utility Operating Companies (EUOC) business segment compared to seven weeks in 1997. The EUOCs represent our vertically integrated electric utility operations. As discussed later, we anticipate future changes to our business segments to align with our strategy as the electric utility industry restructures. The sources of the increases in revenue during 1998 and 1997 are summarized in the following table.
1998 1997 - ----------------------------------------------------------------------- (In millions) Electric sales OE companies -- Increase in average retail prices $ 27.0 $ 13.3 Change in retail kilowatt-hour sales (0.1) 7.8 Wholesale 13.3 (27.5) - ----------------------------------------------------------------------- Net OE companies 40.2 (6.4) Centerior acquisition 2,196.4 350.6 Intercompany sales (31.9) (3.8) - ----------------------------------------------------------------------- Total electric sales 2,204.7 340.4 Other electric utility revenues 102.3 54.6 - ----------------------------------------------------------------------- Electric utility operating companies 2,307.0 395.0 FETPM 367.6 43.1 Other business acquisitions 226.5 0.3 - ----------------------------------------------------------------------- Net Revenue Increase $2,901.1 $438.4 =======================================================================
Retail kilowatt-hour sales for the OE companies in 1998 were approximately the same as the previous year at 27.3 billion kilowatt- hours after setting a new record in 1997. Residential and commercial kilowatt-hour sales increased 1.7% and 3.5%, respectively, from 1997, offset by a 3.6% decrease in industrial sales. Residential and commercial kilowatt-hour sales benefited from continued growth in the retail customer base, with over 11,000 new retail customers added in 1998 compared to approximately 4,900 new retail customers in 1997. The closure of an electric arc furnace by a large steel customer in the latter part of 1997 and a general decline in electricity demand by steel manufacturers due to intense foreign competition contributed to the lower industrial sales. Sales to wholesale customers by the OE companies increased 8.9% contributing to an increase in total kilowatt- hour sales of 1.4%. In 1997, commercial and industrial kilowatt-hour sales increased 1.2% and 1.0%, respectively, from 1996, partially offset by a 0.8% decrease in residential sales resulting in a 0.5% increase in retail kilowatt-hour sales. A decrease in kilowatt-hour sales to wholesale customers contributed to a 5.0% decline in total kilowatt-hour sales in 1997 compared to 1996. Total expenses increased $2.4 billion in 1998 compared to the prior year primarily due to the inclusion of a full twelve months of expenses for the former Centerior companies compared to seven weeks of expense in the 1997 results. Fuel and purchased power costs were up $497.5 million in 1998 compared to 1997. Excluding the former Centerior companies, fuel and purchased power costs for the OE companies increased $74.4 million. Most of the increase occurred in the second quarter and resulted from a combination of factors. In late June 1998, the midwestern and southern regions of the United States experienced electricity shortages caused mainly by record temperatures and humidity and unscheduled generating unit outages. During that period, the Beaver Valley Plant was out of service and the Davis-Besse Plant was removed from service as a result of damage to transmission facilities caused by a tornado. Also, Avon Lake Unit 9 experienced an unscheduled outage during the period due to lightning-related transformer damage. As a result, the EUOCs purchased significant amounts of power on the spot market at unusually high prices, causing an increase in purchased power costs. In 1997, excluding the results for the former Centerior companies, fuel and purchased power costs were down $19.4 million from the previous year due to lower total kilowatt-hour sales. Other expenses for the EUOCs increased in 1998 and 1997 as a result of the inclusion of the Centerior results. Excluding the former Centerior companies, 1998 nonnuclear costs decreased $34.8 million from the previous year due primarily to the absence of expenses related to a 1997 voluntary retirement program and estimated severance costs which increased other expenses for that year. For the OE companies, nuclear costs increased $12.2 million in 1998 and $20.0 million in 1997 reflecting higher costs at the Beaver Valley Plant. Expenses for the facilities services companies in 1998 reflect costs incurred from their respective acquisition dates. Other expenses for electric trading and power marketing activities increased in 1998 compared to 1997 due to a substantial expansion of activity at FETPM. Depreciation and amortization increased compared to the prior year in both 1998 and 1997. Excluding the effect of the former Centerior companies, depreciation and amortization in 1998 decreased $14.2 million from the prior year due primarily to the net effect of the OE and Penn rate plans. The Pennsylvania Public Utility Commission's (PPUC) authorization of Penn's rate restructuring plan in the second quarter led to discontinued application of certain regulatory accounting procedures (i.e. SFAS 71) to Penn's generation business, resulting in a write down of its nuclear generating unit investment and the recognition of a portion of such investment, recoverable through future customer rates, as a regulatory asset. Net of the Centerior contribution to results in 1997, the increase in depreciation and amortization resulted from accelerations under the regulatory plans. General taxes increased for the OE companies in 1998 compared to 1997 in part because of gross receipts taxes on increased electric sales revenue. This followed a decrease in 1997 due to lower property taxes and an adjustment in the second quarter of that year which reduced the OE companies' liabilities for gross receipt taxes. Interest expenses increased due to the inclusion of the former Centerior companies for both 1998 and 1997. Excluding the impact of the merger, interest on long-term debt for the OE companies continued to trend downward due to refinancings and redemptions of long-term debt. Other interest expense increased as a result of increased short-term borrowings. Capital Resources and Liquidity Savings from improved efficiency helped to fund the strategic investments we made in 1998 while strengthening our financial position. We continue to streamline our electric utility operations, as evidenced by the 50% increase in our customer/employee ratio over the past five years, from 165 at the end of 1993 to 247 as of December 31, 1998. We also continued to reduce our capital costs. During 1998, net redemptions of long-term debt and preferred stock totaled $430 million, including $176 million of optional redemptions. In addition, we completed $230 million of refinancings. Combined, these actions will produce annualized savings of $42 million. The average cost of long- term debt was reduced to 7.83% in 1998 from 8.02% at the end of 1997. In the first quarter of 1998, we formed an alliance with British Petroleum (BP) to help ensure the long-term viability of BP's refinery operation in the TE service area while also generating additional revenue for our Company. Bay Shore Power Company, a FirstEnergy subsidiary, will build a new state-of-the-art steam- generating plant fueled by a waste by-product from a new lower-cost refinery process at BP's Oregon, Ohio facility. Steam from the plant will supply both the refinery and a Bay Shore generating unit. To fund the project, Bay Shore Power issued $147.5 million of solid waste- disposal revenue bonds during the first quarter of 1998. As of December 31, 1998, approximately $88 million of the funds from the revenue bonds were invested for financing future construction. We had about $77.8 million of cash and temporary investments and $254.5 million of short-term indebtedness on December 31, 1998. Our unused borrowing capability included $146.5 million under revolving lines of credit and a $2.0 million bank facility that provide for borrowings on a short-term basis at the bank's discretion. Our cash requirements in 1999 for operating expenses, construction expenditures and scheduled debt maturities are expected to be met without issuing new securities. During 1998, we reduced our total debt by approximately $278 million. We have cash requirements of approximately $2.6 billion for the 1999-2003 period to meet scheduled maturities of long-term debt and preferred stock. Of that amount, approximately $712 million applies to 1999. On November 17, 1998, we announced our intention to repurchase up to 15 million shares of the Company's common stock over a three-year period beginning in 1999. Our capital spending for the period 1999-2003 is expected to be about $2.2 billion (excluding nuclear fuel), of which approximately $556 million applies to 1999. Investments for additional nuclear fuel during the 1999-2003 period are estimated to be approximately $399 million, of which about $46 million applies to 1999. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $438 million and $93 million, respectively, as the nuclear fuel is consumed. Also, we have operating lease commitments, net of trust cash receipts, of approximately $765 million for the 1999- 2003 period, of which approximately $159 million relates to 1999. Nine acquisitions were completed during 1998, representing strategic investments designed to expand our portfolio of energy- related products and services. The acquisition of MARBEL, a fully integrated natural gas company based in Canton, Ohio, was completed in June 1998. FE Facilities also acquired eight additional facilities services companies during the year bringing the total number of facilities services acquisitions to ten companies by the end of 1998. For 1998, our facilities services companies provided revenue of $198 million with more than 3,000 employees. During 1998, we established a national sales group within FirstEnergy Services Corp. to pursue sales in the unregulated electric utility market. The national sales group began selling in the Pennsylvania market following the restructuring which opened the generation business to increased competition. FirstEnergy signed an agreement in principle with Duquesne Light Company (Duquesne) that would result in the transfer of 1,436 megawatts owned by Duquesne at five generating plants in exchange for 1,328 megawatts at three plants owned by our EUOCs (see "Common Ownership of Generating Facilities" in Note 1). Final agreements relating to the exchange of assets, which will be structured as a tax- free transaction to the extent possible, are being negotiated. The transaction benefits the Company by providing exclusive ownership and operating control of all generating assets that are now jointly owned and operated under the Central Area Power Coordination Group agreement. In a final step to achieve complete ownership and operating control over our power plants, we signed an agreement to purchase from GPU, Inc. its 20 percent interest in the Seneca Pumped-Storage Hydroelectric Plant (87 megawatts). The added capacity will enhance our ability to meet our customers' demand for electricity during peak periods. Interest Rate Risk Our exposure to fluctuations in market interest rates is mitigated since 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 2, our investments in capital trusts effectively reduce future lease obligations, also reducing interest rate risk. Changes in the market value of our nuclear decommissioning trust funds are recognized by making a corresponding change to the decommissioning liability, as described in Note 1. 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.
- --------------------------------------------------------------------------------------- There- Fair 1999 2000 2001 2002 2003 after Total Value (Dollars in millions) - --------------------------------------------------------------------------------------- Investments other than Cash and Cash Equivalents Fixed Income $ 98 $ 91 $ 55 $ 84 $ 97 $1,406 $1,831 $1,942 Average interest rate 6.9% 5.1% 7.7% 7.7% 7.7% 7.7% 7.5% - --------------------------------------------------------------------------------------- Liabilities - --------------------------------------------------------------------------------------- Long-term Debt Fixed rate $420 $373 $105 $724 $459 $3,921 $6,002 $6,464 Average interest rate 7.6% 7.0% 8.7% 7.9% 8.0% 7.6% 7.6% Variable rate $252 $ 4 $ 3 $ 2 $ 1 $ 519 $ 781 $ 783 Average interest rate 6.0% 6.3% 6.3% 6.2% 6.3% 3.8% 4.6% Short-term Borrowings $254 $ 254 $ 254 Average interest rate 5.7% 5.7% - --------------------------------------------------------------------------------------- Preferred Stock $ 40 $ 38 $ 85 $ 20 $ 2 $ 139 $ 324 $ 340 Average dividend rate 8.9% 8.9% 8.9% 8.9% 7.5% 8.8% 8.8% - ---------------------------------------------------------------------------------------
Market Risk - Commodity Prices We are exposed to market risk due to fluctuations in electricity and natural gas prices. To manage the volatility relating to these exposures, we use a variety of derivative instruments, including forward contracts, options and futures contracts. These derivatives are used principally for hedging purposes and to a lesser extent, for trading purposes. A sensitivity analysis has been prepared to estimate our exposure to the market risk of our commodity position. A hypothetical 10 percent adverse shift in quoted market prices in the near term on both our trading and non-trading instruments would not have had a material effect on our consolidated financial position, results of operations or cash flows as of or for the year ended December 31, 1998. 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 has begun in our Pennsylvania service area, allows retail customers to purchase electricity from other energy producers. Our regulatory plans have provided a solid foundation to position us to meet the challenges we are facing by significantly reducing fixed costs and lowering rates to a more competitive level. OE's Rate Reduction and Economic Development Plan was approved by the Public Utilities Commission of Ohio (PUCO) in 1995 and FirstEnergy's Rate Reduction and Economic Development Plan for CEI and TE was approved in January 1997. These regulatory plans maintain base electric rates for OE, CEI and TE through December 31, 2005. The plans also revised the OE, CEI and TE fuel cost recovery methods. Penn's Rate Stability and Economic Development Plan, which was approved by the PPUC in the second quarter of 1996, ended in 1998 with the PPUC's authorization of Penn's rate restructuring plan. As part of OE's regulatory plan, transition rate credits were implemented for customers, which are expected to reduce electric operating revenues by approximately $600 million during the regulatory plan period, which is to be followed by a base rate reduction of approximately $300 million in 2006. The base rate freeze for CEI and TE is to be followed by a $310 million base rate reduction in 2006; interim reductions which began in June 1998 of $3 per month will increase to $5 per month per residential customer by July 1, 2001. Total savings of $391 million are anticipated over the term of the plan for CEI's and TE's customers. CEI and TE have also committed $105 million for economic development and energy efficiency programs. The PUCO has authorized OE to recognize additional capital recovery related to its generating assets (which is reflected as additional depreciation expense) and additional amortization of regulatory assets during the regulatory plan period of at least $2 billion more than the amount that would have been recognized if the regulatory plan was not in effect. This additional amount is being recovered through current rates. In the regulatory plan for CEI and TE, the PUCO authorized for regulatory accounting purposes, additional capital recovery related to CEI's and TE's generating assets and additional amortization of regulatory assets during the regulatory plan period of at least $2 billion more than the amounts that would have been recognized if these regulatory plans were not in effect. These additional regulatory charges will be recognized over the rate plan period. The FirstEnergy regulatory plan does not provide for full recovery of CEI's and TE's nuclear operations. Accordingly, regulatory assets representing customer receivables for future income taxes related to nuclear assets of $794 million were written off prior to consummation of the merger in 1997 since CEI and TE ceased application of SFAS 71 for their nuclear operations when implementation of the FirstEnergy regulatory plan became probable. At the consummation of the merger in November 1997, CEI and TE recognized a fair value purchase accounting adjustment, which decreased the carrying value of their nuclear assets by approximately $2.55 billion. The fair value adjustment recognized for financial reporting purposes will ultimately satisfy the $2 billion asset reduction commitment contained in the CEI and TE regulatory plan. Based on the current regulatory environment and our regulatory plans, we believe we will continue to be able to bill and collect cost-based rates relating to CEI's and TE's nonnuclear operations and all of OE's operations. As a result, we will continue the application of SFAS 71. However, changes in the regulatory environment appear to be on the horizon for electric utilities in Ohio. As further discussed below, the Ohio legislature is in the discussion stages of restructuring the State's electric utility industry. Although we believe that regulatory changes are possible in 1999, we cannot currently estimate the ultimate impact. For Penn, application of SFAS 71 was discontinued for the generation portion of its business in June 1998 following PPUC approval of the rate-restructuring plan. Customer choice will be phased in over two years with 66% of each customer class able to choose alternative suppliers of generation on January 2, 1999, and all remaining customers having choice as of January 2, 2000. Under the plan, Penn continues to deliver power to homes and businesses through its transmission and distribution system, which remains regulated. However, Penn's rates have been restructured to establish separate charges for transmission and distribution; generation, which is subject to competition; and stranded cost recovery. In the event customers obtain power from an alternative source, the generation portion of Penn's rates 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, including regulatory assets. Penn is entitled to recover $234 million of stranded costs through a competitive transition charge that starts in 1999 and ends in 2005. We continue to actively pursue the enactment of fair legislation calling for deregulation of Ohio's investor-owned electric utility industry. In early 1998, a deregulation proposal was introduced, leading to the creation of a working group to recommend legislation. As requested by legislative leadership, investor-owned utilities introduced a deregulation plan with objectives to (1) treat all major stakeholders in Ohio's electric system fairly; (2) protect public schools and local governments from revenue loss; and (3) allow utilities an opportunity to recover costs of government-mandated investments. The utilities have submitted proposals which incorporate these objectives and also recognize the complexity of restructuring the industry. The overlying objective is to do the job right the first time. Currently, the working group, comprised of legislative leaders, representatives of the electric utility companies and other interested stakeholders are meeting to discuss and mold these proposals. Most recently, placeholder bills containing statements of principle (that will be replaced by specific proposals as they are agreed upon) have been introduced. Legislative leaders have placed a high priority on enacting a deregulation bill by mid-year. The Clean Air Act Amendments of 1990, discussed in Note 5, require additional emission reductions by 2000. We are pursuing cost- effective compliance strategies for meeting these reduction requirements. On September 24, 1998, the Federal Environmental Protection Agency issued a final rule establishing tighter nitrogen oxide emission requirements for fossil fuel-fired utility boilers in Ohio, Pennsylvania and twenty other eastern states, including the District of Columbia (see "Environmental Matters" in Note 5). Controls must be in place by May 2003, with required reductions achieved during the five- month summer ozone season (May through September). The new rule is expected to increase the cost of producing electricity; however, we believe that we are in a better position than a number of other utilities to achieve compliance due to our diversified nuclear and hydroelectric generation capacity. CEI and TE have been named as "potentially responsible parties" (PRPs) for three sites listed on the Superfund National Priorities List and are aware of their potential involvement in the cleanup of several other sites. Allegations that CEI and TE disposed of hazardous waste at these sites, and the amount involved are often unsubstantiated and subject to dispute. Federal law provides that all PRPs for a particular site be held liable on a joint and several basis. If CEI and TE were held liable for 100% of the cleanup costs of all the sites referred to above, the cost could be as high as $313 million. However, we believe that the actual cleanup costs will be substantially lower than $313 million, that CEI's and TE's share of any cleanup costs will be substantially less than 100% and that most of the other PRPs are financially able to contribute their share. CEI and TE have accrued a $5.8 million liability as of December 31, 1998, based on estimates of the costs of cleanup and their proportionate responsibility for such costs. We believe that the ultimate outcome of these matters will not have a material adverse effect on our financial condition, cash flows or results of operations. In connection with the regulatory plans of our electric utility operating companies to reduce fixed costs and lower rates, we continue to take steps to restructure our operations. We announced plans to transfer our transmission assets into a new subsidiary, American Transmission Systems, Inc., with the transfer expected to be finalized in 1999. The new subsidiary represents a first step toward the goal of establishing or becoming part of a larger independent transmission company (TransCo). We believe that a TransCo better addresses the Federal Energy Regulatory Commission's (FERC) stated transmission objectives of providing non-discriminatory service, while providing for streamlined and cost-efficient operation. In working toward the goal of forming a larger regional transmission entity, FirstEnergy, American Electric Power, Virginia Power and Consumers Energy announced in November 1998 that they would prepare a FERC filing during the first quarter of 1999 for such a regional transmission entity. The entity would be designed to meet the goals of reducing transmission costs that result when transferring power over several transmission systems, ensuring transmission reliability and providing non-discriminatory access to the transmission grid. 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. We have not yet quantified the impacts of adopting SFAS 133 on our financial statements or determined the method of its adoption. We anticipate adopting the new Statement effective January 1, 2000. Year 2000 Readiness 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. Because so many of our computer functions are date sensitive, this could cause far-reaching problems, such as system-wide computer failures and miscalculations, if no remedial action is taken. We have developed a multi-phase program for Year 2000 compliance that consists of an assessment of our systems and operations that could be affected by the Year 2000 problem; remediation or replacement of noncompliant systems and components; and testing of systems and components following such remediation or replacement. We have focused our Year 2000 review on three areas: centralized system applications, noncentralized systems and relationships with third parties (including suppliers as well as end-use customers). Our review of system readiness extends to systems involving customer service, safety, shareholder needs and regulatory obligations. We are committed to taking appropriate actions to eliminate or lessen negative effects of the Year 2000 issue on our operations. We have completed an inventory of all computer systems and hardware including equipment with embedded computer chips and have determined which systems need to be converted or replaced to become Year 2000- ready and are in the process of remediating them. Based on our timetable, we expect to have all identified repairs, replacements and upgrades completed to achieve Year 2000 readiness by September 1999. Most of our Year 2000 issues will be resolved through system replacement. Of our major centralized systems, the general ledger system and inventory management, procurement and accounts payable systems were replaced at the end of 1998. Our payroll system was enhanced to be Year 2000 compliant in July 1998; all employees have been converted to the new system. The customer service system is due to be replaced in mid-1999. We have completed formal communications with most of our key suppliers to determine the extent to which we are vulnerable to those third parties' failure to resolve their own Year 2000 problems. For suppliers having potential compliance problems, we are developing alternate sources and services in the event such noncompliance occurs. We are also identifying areas requiring higher inventory levels based on compliance uncertainties. There can be no guarantee that the failure of companies to resolve their own Year 2000 issue will not have a material adverse effect on our business, financial condition and results of operations. We are using both internal and external resources to reprogram and/or replace and test our software for Year 2000 modifications. Of the $92 million total project cost, approximately $74 million will be capitalized since those costs are attributable to the purchase of new software for total system replacements because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $18 million will be expensed as incurred. As of December 31, 1998, we have spent $54 million for Year 2000 capital projects and had expensed approximately $9 million for Year 2000-related maintenance activities. Our total Year 2000 project cost, as well as our estimates of the time needed to complete remedial efforts, are based on currently available information and do not include the estimated costs and time associated with the impact of third party Year 2000 issues. We believe we are managing the Year 2000 issue in such a way that our customers will not experience any interruption of service. We believe the most likely worst-case scenario from the Year 2000 issue will be disruption in power plant monitoring systems, thereby producing inaccurate data and potential failures in electronic switching mechanisms at transmission junctions. This would prolong localized outages, as technicians would have to manually activate switches. Such an event could have a material, but currently undeterminable, effect on our financial results. We are developing contingency plans to address the effects of any delay in becoming Year 2000 compliant and expect to have contingency plans completed by June 1999. The costs of the project and the dates 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. FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) REVENUES Electric sales $4,979,718 $2,774,996 $2,434,633 Other - electric utilities 244,129 141,813 87,155 Facilities services 198,336 -- -- Electric trading and power marketing 410,728 43,145 -- Other 28,374 242 -- ---------- ---------- ---------- Total revenues 5,861,285 2,960,196 2,521,788 ---------- ---------- ---------- EXPENSES Fuel and purchased power 983,735 486,267 456,629 Other expenses: Electric utilities 1,478,840 850,217 670,819 Facilities services 184,440 -- -- Electric trading and power marketing 517,001 44,032 -- Other 41,337 -- -- Provision for depreciation and amortization 740,953 475,228 383,441 General taxes 550,908 282,163 241,998 ---------- ---------- ---------- Total expenses 4,497,214 2,137,907 1,752,887 ---------- ---------- ---------- INCOME BEFORE INTEREST AND INCOME TAXES 1,364,071 822,289 768,901 ---------- ---------- ---------- NET INTEREST CHARGES: Interest expense 542,819 284,180 240,146 Allowance for borrowed funds used during construction and capitalized interest (7,642) (3,469) (3,136) Subsidiaries' preferred stock dividends 65,799 27,818 27,923 ---------- ---------- --------- Net interest charges 600,976 308,529 264,933 ---------- ---------- ---------- INCOME TAXES 321,699 207,986 201,295 ---------- ---------- ---------- INCOME BEFORE EXTRAORDINARY ITEM 441,396 305,774 302,673 EXTRAORDINARY ITEM (NET OF INCOME TAX BENEFIT OF $21,208,000) (Note 1) (30,522) -- -- ---------- ---------- ---------- NET INCOME $ 410,874 $ 305,774 $ 302,673 ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 226,373 157,464 144,095 ========== ========== ========== BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK (Note 3C): Income before extraordinary item $1.95 $1.94 $2.10 Extraordinary item (Net of income taxes) (Note 1) (.13) -- -- ----- ----- ----- Net income $1.82 $1.94 $2.10 ===== ===== ===== DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $1.50 $1.50 $1.50 ===== ===== ===== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
FIRSTENERGY CORP. CONSOLIDATED BALANCE SHEETS
At December 31, 1998 1997 - ----------------------------------------------------------------------------------------- (In thousands) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 77,798 $ 98,237 Receivables-- Customers (less accumulated provisions of $6,397,000 and $5,618,000,respectively, for uncollectible accounts) 239,183 284,162 Other (less accumulated provisions of $46,251,000 and $4,026,000,respectively, for uncollectible accounts) 322,186 219,106 Materials and supplies, at average cost-- Owned 145,926 154,961 Under consignment 110,109 82,839 Prepayments and other 171,931 163,686 ----------- ----------- 1,067,133 1,002,991 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT: In service 14,961,664 15,104,327 Less--Accumulated provision for depreciation 6,012,761 5,668,997 ----------- ----------- 8,948,903 9,435,330 Construction work in progress 293,671 200,662 ----------- ----------- 9,242,574 9,635,992 ----------- ----------- INVESTMENTS: Capital trust investments (Note 2) 1,329,010 1,370,177 Letter of credit collateralization (Note 2) 277,763 277,763 Other 812,231 596,380 ----------- ----------- 2,419,004 2,244,320 ----------- ----------- DEFERRED CHARGES: Regulatory assets 2,696,762 2,624,144 Goodwill 2,167,968 2,107,795 Other 470,066 465,553 ----------- ----------- 5,334,796 5,197,492 ----------- ----------- $18,063,507 $18,080,795 =========== =========== LIABILITIES AND CAPITALIZATION CURRENT LIABILITIES: Currently payable long-term debt and preferred stock $ 876,470 $ 470,436 Short-term borrowings (Note 4) 254,470 302,229 Accounts payable 305,326 312,690 Accrued taxes 401,688 381,937 Accrued interest 141,575 147,694 Other 203,460 193,850 ----------- ----------- 2,182,989 1,808,836 ----------- ----------- CAPITALIZATION (See Consolidated Statements of Capitalization): Common stockholders' equity 4,449,158 4,159,598 Preferred stock of consolidated subsidiaries-- Not subject to mandatory redemption 660,195 660,195 Subject to mandatory redemption 174,710 214,864 Ohio Edison obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Ohio Edison subordinated debentures 120,000 120,000 Long-term debt 6,352,359 6,969,835 ----------- ----------- 11,756,422 12,124,492 ----------- ----------- DEFERRED CREDITS: Accumulated deferred income taxes 2,282,864 2,304,305 Accumulated deferred investment tax credits 286,154 324,200 Pensions and other postretirement benefits 525,647 492,425 Other 1,029,431 1,026,537 ----------- ----------- 4,124,096 4,147,467 ----------- ----------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 2 and 5) ----------- ----------- $18,063,507 $18,080,795 =========== =========== The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) 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 3,846,513 3,637,522 Accumulated other comprehensive income (Note 3D) (439) (614) Retained earnings (Note 3A) 718,409 646,646 Unallocated employee stock ownership plan common stock- 7,406,332 and 7,829,538 shares, respectively (Note 3B) (139,032) (146,977) ---------- ---------- Total common stockholders' equity 4,449,158 4,159,598 ---------- ---------- Number of Shares Optional Outstanding Redemption Price ---------------- ------------------------ 1998 1997 Per Share Aggregate ---- ---- --------- --------- PREFERRED STOCK OF CONSOLIDATED SUBSIDIARIES (Note 3E) Ohio Edison Company (OE) Cumulative, $100 par value- Authorized 6,000,000 shares Not Subject to Mandatory Redemption: 3.90% 152,510 152,510 $103.63 $15,804 15,251 15,251 4.40% 176,280 176,280 108.00 19,038 17,628 17,628 4.44% 136,560 136,560 103.50 14,134 13,656 13,656 4.56% 144,300 144,300 103.38 14,917 14,430 14,430 --------- --------- ------- ---------- ---------- 609,650 609,650 63,893 60,965 60,965 Cumulative, $25 par value- Authorized 8,000,000 shares Not Subject to Mandatory Redemption: 7.75% 4,000,000 4,000,000 100,000 100,000 --------- --------- ------- ---------- ---------- Total not subject to mandatory redemption 4,609,650 4,609,650 $63,893 160,965 160,965 ========= ========= ======= ---------- ---------- Cumulative, $100 par value- Subject to Mandatory Redemption (Note 3F): 8.45% 150,000 200,000 15,000 20,000 Redemption within one year (5,000) (5,000) --------- --------- --------- ---------- 150,000 200,000 10,000 15,000 ========= ========= --------- ---------- Pennsylvania Power Company Cumulative, $100 par value- Authorized 1,200,000 shares Not Subject to Mandatory Redemption: 4.24% 40,000 40,000 103.13 $ 4,125 4,000 4,000 4.25% 41,049 41,049 105.00 4,310 4,105 4,105 4.64% 60,000 60,000 102.98 6,179 6,000 6,000 7.64% 60,000 60,000 101.42 6,085 6,000 6,000 7.75% 250,000 250,000 -- -- 25,000 25,000 8.00% 58,000 58,000 102.07 5,920 5,800 5,800 --------- --------- -------- ---------- ---------- Total not subject to mandatory redemption 509,049 509,049 $ 26,619 50,905 50,905 ========= ========= ======== ---------- ---------- Subject to Mandatory Redemption (Note 3F): 7.625% 150,000 150,000 106.86 $ 16,029 15,000 15,000 ========= ========= ======== ---------- ---------- OE OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY OE SUBORDINATED DEBENTURES (Note 3G): 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 ========= ========= ---------- ---------- FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont'd) At December 31, 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) Number of Shares Optional Outstanding Redemption Price ---------------- ------------------------ 1998 1997 Per Share Aggregate ---- ---- --------- --------- PREFERRED STOCK OF CONSOLIDATED SUBSIDIARIES (Cont'd) Cleveland Electric Illuminating Company Cumulative, Without Par Value-- Authorized 4,000,000 shares Not Subject to Mandatory Redemption: $ 7.40 Series A 500,000 500,000 $ 101.00 $ 50,500 $ 50,000 $ 50,000 $ 7.56 Series B 450,000 450,000 102.26 46,017 45,071 45,071 Adjustable Series L 474,000 474,000 100.00 47,400 46,404 46,404 $ 42.40 Series T 200,000 200,000 500.00 100,000 96,850 96,850 --------- --------- -------- ---------- ---------- Total Not Subject to Mandatory Redemption 1,624,000 1,624,000 $243,917 238,325 238,325 ========= ========= ======== ---------- ---------- Subject to Mandatory Redemption: $ 7.35 Series C 100,000 110,000 101.00 $ 10,100 10,110 11,110 $ 88.00 Series E 6,000 9,000 1,003.83 6,023 6,000 9,000 $ 91.50 Series Q 32,144 42,858 1,000.00 32,144 32,144 42,858 $ 88.00 Series R 50,000 50,000 -- -- 55,000 55,000 $ 90.00 Series S 74,000 74,000 -- -- 79,920 79,920 --------- --------- -------- ---------- ---------- 262,144 285,858 48,267 183,174 197,888 Redemption Within One Year (33,464) (14,714) --------- --------- -------- ---------- ---------- Total Subject to Mandatory Redemption 262,144 285,858 $ 48,267 149,710 183,174 ========= ========= ======== ---------- ---------- Toledo Edison Company Cumulative, $100 Par Value- Authorized 3,000,000 shares Not Subject to Mandatory Redemption: $ 4.25 160,000 160,000 104.63 $ 16,740 16,000 16,000 $ 4.56 50,000 50,000 101.00 5,050 5,000 5,000 $ 4.25 100,000 100,000 102.00 10,200 10,000 10,000 $ 8.32 100,000 100,000 102.46 10,246 10,000 10,000 $ 7.76 150,000 150,000 102.44 15,366 15,000 15,000 $ 7.80 150,000 150,000 101.65 15,248 15,000 15,000 $ 10.00 190,000 190,000 101.00 19,190 19,000 19,000 --------- --------- -------- ---------- ---------- 900,000 900,000 92,040 90,000 90,000 --------- --------- -------- ---------- ---------- Cumulative, $25 Par Value- Authorized 12,000,000 shares Not Subject to Mandatory Redemption: $ 2.21 1,000,000 1,000,000 25.25 25,250 25,000 25,000 $ 2.365 1,400,000 1,400,000 27.75 38,850 35,000 35,000 Adjustable Series A 1,200,000 1,200,000 25.00 30,000 30,000 30,000 Adjustable Series B 1,200,000 1,200,000 25.00 30,000 30,000 30,000 --------- --------- -------- ---------- ---------- 4,800,000 4,800,000 124,100 120,000 120,000 --------- --------- -------- ---------- ---------- Total Not Subject to Mandatory Redemption 5,700,000 5,700,000 $216,140 210,000 210,000 ========= ========= ======== ---------- ---------- Cumulative, $100 par value- Subject to Mandatory Redemption: $ 9.375 16,900 33,550 100.00 $ 1,690 1,690 3,355 Redemption Within One Year (1,690) (1,665) --------- --------- -------- ---------- ---------- Total Subject to Mandatory Redemption 16,900 33,550 $ 1,690 -- 1,690 ========= ========= ======== ---------- ---------- FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont'd) LONG-TERM DEBT (Note 3H) (Interest rates reflect weighted average rates) (In thousands) - ------------------------------------------------------------------------------------------------------------------------------ FIRST MORTGAGE BONDS SECURED NOTES UNSECURED NOTES TOTAL - ------------------------------------------------------------------------------------------------------------------------------ At December 31, 1998 1997 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ---- ---- ---- ---- Ohio Edison Co. - Due 1998-2003 7.60% $ 659,265 $ 809,265 7.52% $ 144,261 $ 146,201 5.34% $566,500 $531,500 Due 2004-2008 6.88% 80,000 80,000 7.68% 106,995 104,445 -- -- -- Due 2009-2013 -- -- -- -- -- -- -- -- -- Due 2014-2018 -- -- -- 7.12% 113,725 113,725 -- -- -- Due 2019-2023 7.99% 225,960 225,960 7.32% 209,943 209,943 -- -- -- Due 2024-2028 -- -- -- 7.49% 121,522 108,000 -- -- -- Due 2029-2033 -- -- -- 5.75% 121,012 121,012 -- -- -- ---------- ---------- ---------- ---------- -------- -------- ----------- ----------- Total-Ohio Edison 965,225 1,115,225 817,458 803,326 566,500 531,500 $ 2,349,183 $ 2,450,051 ---------- ---------- ---------- ---------- -------- -------- ----------- ----------- Cleveland Electric Illuminating Co. - Due 1998-2003 7.54% 295,000 295,000 7.94% 424,150 490,180 -- -- 6,600 Due 2004-2008 8.72% 425,000 375,000 7.51% 400,150 400,150 -- -- 23,000 Due 2009-2013 -- -- 200,000 7.62% 230,280 237,630 -- -- 17,000 Due 2014-2018 -- -- -- 6.59% 412,630 413,915 -- -- -- Due 2019-2023 9.00% 150,000 150,000 6.58% 291,860 341,860 -- -- -- Due 2024-2028 -- -- -- 7.59% 148,843 142,850 -- -- -- Due 2029-2033 -- -- -- 4.56% 104,895 -- -- -- -- ---------- ---------- ---------- ---------- -------- -------- ----------- ----------- Total-Cleveland Electric 870,000 1,020,000 2,012,808 2,026,585 -- -- 46,600 2,882,808 3,093,185 ---------- ---------- ---------- ---------- -------- -------- ----------- ----------- Toledo Edison Co. - Due 1998-2003 7.47% 120,325 146,725 7.90% 214,500 253,150 8.62% 138,720 139,020 Due 2004-2008 7.88% 145,000 145,000 7.51% 100,000 100,000 10.00% 150 150 Due 2009-2013 -- -- -- 4.98% 31,250 31,250 10.00% 730 730 Due 2014-2018 -- -- -- -- -- -- -- -- -- Due 2019-2023 -- -- -- 7.88% 334,000 334,000 -- -- -- Due 2024-2028 -- -- -- 5.90% 13,851 10,100 -- -- -- Due 2029-2033 -- -- -- -- -- -- -- -- -- ---------- ---------- ---------- ---------- -------- -------- ----------- ----------- Total-Toledo Edison 265,325 291,725 693,601 728,500 139,600 139,900 1,098,526 1,160,125 ---------- ---------- ---------- ---------- -------- -------- ----------- ----------- Pennsylvania Power Co. - Due 1998-2003 7.72% 44,383 44,383 6.08% 23,000 23,850 -- -- -- Due 2004-2008 6.88% 39,370 39,370 -- -- -- -- -- -- Due 2009-2013 9.74% 4,870 4,870 5.40% 1,000 1,000 -- -- -- Due 2014-2018 9.74% 4,870 4,870 6.28% 45,325 45,325 -- -- -- Due 2019-2023 8.37% 34,757 34,757 6.91% 32,382 32,382 -- -- -- Due 2024-2028 -- -- -- 5.63% 47,734 46,000 -- -- -- Due 2029-2033 -- -- -- 5.95% 238 238 -- -- -- ---------- ---------- ---------- ---------- -------- -------- ----------- ----------- Total-Penn Power 128,250 128,250 149,679 148,795 -- -- 277,929 277,045 ---------- ---------- ---------- ---------- -------- -------- ----------- ----------- OES Fuel 5.97% 79,524 80,755 79,524 80,755 Bay Shore Power 7.12% 147,500 -- 147,500 -- MARBEL Energy Corp. 6.40% 12,418 -- 12,418 -- Facilities Services Group 7.38% 10,237 -- 8.52% 3,917 -- 14,154 -- ---------- ---------- ---------- ---------- -------- -------- ----------- ----------- Total 2,228,800 2,555,200 3,923,225 3,787,961 710,017 718,000 6,862,042 7,061,161 ========== ========== ========== ========== ======== ======== ----------- ----------- Capital lease obligations 199,491 204,213 ----------- ----------- Net unamortized premium on debt 127,142 153,518 ----------- ----------- Long-term debt due within one year (836,316) (449,057) ----------- ----------- Total long-term debt 6,352,359 6,969,835 ----------- ----------- TOTAL CAPITALIZATION $11,756,422 $12,124,492 - ------------------------------------------------------------------------------------------------------------------------------- The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Accumulated Other Unallocated Comprehensive Other Comprehensive ESOP Income- Number Par Paid-In Income- Retained Common Note 3D of Shares Value Capital Note 3D Earnings Stock ------------- --------- ----------- --------- ------------- -------- ----------- (Dollars in thousands) Balance, January 1, 1996 152,569,437 $ 1,373,125 $ 726,915 $(608) $ 471,095 $(162,656) Net income $302,673 302,673 Minimum liability for unfunded retirement benefits, net of $27,000 of income taxes (51) (51) -------- Comprehensive income $302,622 ======== Allocation of ESOP Shares 1,346 7,646 Cash dividends on common stock (216,126) - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 152,569,437 1,373,125 728,261 (659) 557,642 (155,010) Net income $305,774 305,774 Minimum liability for unfunded retirement benefits, net of $26,000 of income taxes 45 45 -------- Comprehensive income $305,819 ======== Centerior acquisition 77,637,704 (1,350,104) 2,907,387 Allocation of ESOP Shares 1,874 8,033 Cash dividends on common stock (216,770) - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 230,207,141 23,021 3,637,522 (614) 646,646 (146,977) Net income $410,874 410,874 Minimum liability for unfunded retirement benefits, net of $53,000 of income taxes 175 175 -------- Comprehensive income $411,049 ======== Business acquisitions 6,861,946 686 203,496 Allocation of ESOP Shares 5,495 7,945 Cash dividends on common stock (339,111) - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 237,069,087 $ 23,707 $3,846,513 $(439) $ 718,409 $(139,032) ============================================================================================================================= CONSOLIDATED STATEMENTS OF PREFERRED STOCK Not Subject to Subject to Mandatory Redemption Mandatory Redemption -------------------- -------------------- Par or Par or Number Stated Number Stated of Shares Value of Shares Value --------- ------ --------- ------ (Dollars in thousands) Balance, January 1, 1996 5,118,699 $211,870 5,200,000 $160,000 ---------------------------------------------------------------------------------------- Balance, December 31, 1996 5,118,699 211,870 5,200,000 160,000 Centerior acquisition 7,324,000 448,325 319,408 201,243 Redemptions- 8.45% Series (50,000) (5,000) ------------------------------------------------------------------------------------------ Balance, December 31, 1997 12,442,699 660,195 5,469,408 356,243 Redemptions- 8.45% Series (50,000) (5,000) $ 7.35 Series C (10,000) (1,000) $88.00 Series E (3,000) (3,000) $91.50 Series Q (10,714) (10,714) $9.375 Series (16,650) (1,665) ------------------------------------------------------------------------------------------ Balance, December 31, 1998 12,442,699 $660,195 5,379,044 $334,864 ======================================================================================== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 1997 1996 - --------------------------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 410,874 $ 305,774 $ 302,673 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation and amortization 740,953 475,228 383,441 Nuclear fuel and lease amortization 94,348 61,960 52,784 Other amortization, net (13,007) (1,187) (1,700) Deferred income taxes, net (5,851) (29,642) 41,365 Investment tax credits, net (22,070) (16,252) (14,041) Allowance for equity funds used during construction -- (201) -- Extraordinary item 51,730 -- -- Receivables 35,515 21,846 24,326 Materials and supplies (14,235) (18,909) (736) Accounts payable (73,205) 57,087 962 Other (49,727) 733 (41,317) ---------- ---------- --------- Net cash provided from operating activities 1,155,325 856,437 747,757 ---------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Common stock 204,182 1,558,237 -- Long-term debt 499,975 89,773 306,313 Ohio Schools Council prepayment program 116,598 -- -- Short-term borrowings, net -- -- 229,515 Redemptions and Repayments- Preferred stock 21,379 5,000 1,016 Long-term debt 804,780 335,909 438,916 Short-term borrowings, net 48,354 47,251 -- Common Stock Dividend Payments 339,111 237,848 218,656 ---------- ---------- --------- Net cash provided from (used for) financing activities (392,869) 1,022,002 (122,760) ---------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Centerior acquisition -- 1,582,459 -- Property additions 652,852 203,839 148,189 Cash investments 47,804 8,934 487,979 Other 82,239 62,237 13,406 ---------- ---------- --------- Net cash used for investing activities 782,895 1,857,469 649,574 ---------- ---------- --------- Net increase (decrease) in cash and cash equivalents (20,439) 20,970 (24,577) Cash and cash equivalents at beginning of period* 98,237 77,267 29,830 ---------- ---------- --------- Cash and cash equivalents at end of year $ 77,798 $ 98,237 $ 5,253 ========== ========== ========= SUPPLEMENTAL CASH FLOWS INFORMATION: Cash Paid During the Year- Interest (net of amounts capitalized) $ 536,064 $ 281,670 $ 224,541 Income taxes $ 326,268 $ 265,615 $ 157,477 * 1997 beginning balance includes Centerior cash and cash equivalents as of the November 8, 1997 acquisition date. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF TAXES
For the Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------------- (In thousands) GENERAL TAXES: Real and personal property $ 292,503 $ 137,816 $ 115,443 State gross receipts 217,633 118,390 104,158 Social security and unemployment 27,363 16,551 14,602 Other 13,409 9,406 7,795 ---------- ---------- ---------- Total general taxes $ 550,908 $ 282,163 $ 241,998 ========== ========== ========== PROVISION FOR INCOME TAXES: Currently payable- Federal $ 313,960 $ 235,728 $ 164,132 State 14,452 18,152 9,839 ---------- ---------- ---------- 328,412 253,880 173,971 ---------- ---------- ---------- Deferred, net- Federal 3,356 (23,716) 37,277 State (9,207) (5,926) 4,088 ---------- ---------- ---------- (5,851) (29,642) 41,365 ---------- ---------- ---------- Investment tax credit amortization (22,070) (16,252) (14,041) ---------- ---------- ---------- Total provision for income taxes $ 300,491 $ 207,986 $ 201,295 ========== ========== ========== RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES: Book income before provision for income taxes $ 711,365 $ 513,760 $ 503,968 ========== ========== ========== Federal income tax expense at statutory rate $ 248,978 $ 179,816 $ 176,389 Increases (reductions) in taxes resulting from- Amortization of investment tax credits (22,070) (16,252) (14,041) State income taxes net of federal income tax benefit 3,409 7,947 9,053 Amortization of tax regulatory assets 40,365 30,402 26,945 Amortization of goodwill 17,868 2,685 -- Preferred stock dividends 19,250 5,956 5,993 Other, net (7,309) (2,568) (3,044) ---------- ---------- ---------- Total provision for income taxes $ 300,491 $ 207,986 $ 201,295 ========== ========== ========== ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31: Property basis differences $1,938,735 $2,091,207 $1,319,878 Deferred nuclear expense 436,601 454,902 262,123 Customer receivables for future income taxes 159,526 262,428 191,537 Competitive transition charge 135,730 -- -- Deferred sale and leaseback costs (61,506) (121,974) 78,607 Unamortized investment tax credits (102,085) (116,593) (72,663) Unused alternative minimum tax credits (190,781) (243,039) -- Other (33,356) (22,626) (2,396) ---------- ---------- ---------- Net deferred income tax liability $2,282,864 $2,304,305 $1,777,086 ========== ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements include FirstEnergy Corp. (Company) and its principal electric utility operating subsidiaries, Ohio Edison Company (OE), The Cleveland Electric Illuminating Company (CEI), Pennsylvania Power Company (Penn) and The Toledo Edison Company (TE). The Company and its utility subsidiaries are referred to throughout as "Companies." The Company's 1997 results of operations include the results of CEI and TE for the period November 8, 1997 through December 31, 1997. The consolidated financial statements also include the Company's other principal subsidiaries: FirstEnergy Facilities Services Group, Inc. (FE Facilities); FirstEnergy Trading & Power Marketing, Inc. (FETPM); and MARBEL Energy Corporation. FE Facilities is the parent company of several heating, ventilating, air conditioning and energy management companies. FETPM markets and trades electricity in nonregulated markets. MARBEL is a fully integrated natural gas company. Significant intercompany transactions have been eliminated. The Companies follow the accounting policies and practices prescribed by the Public Utilities Commission of Ohio (PUCO), the Pennsylvania Public Utility Commission (PPUC) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Certain prior year amounts have been reclassified to conform with the current year presentation. REVENUES- The Companies' principal business is providing electric service to customers in central and northern Ohio and western Pennsylvania. The Companies' retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service through the end of the year. Receivables from customers include sales to residential, commercial and industrial customers located in the Companies' service area and sales to wholesale customers. There was no material concentration of receivables at December 31, 1998 or 1997, with respect to any particular segment of the Companies' customers. CEI and TE sell substantially all of their retail customer accounts receivable to Centerior Funding Corp. under an asset-backed securitization agreement which expires in 2001. Centerior Funding completed a public sale of $150 million of receivables-backed investor certificates in a transaction that qualified for sale accounting treatment. REGULATORY PLANS- The PUCO approved OE's Rate Reduction and Economic Development Plan in 1995 and FirstEnergy's Rate Reduction and Economic Development Plan for CEI and TE in January 1997. These regulatory plans initially maintain current base electric rates for OE, CEI and TE through December 31, 2005. At the end of the regulatory plan periods, OE base rates will be reduced by $300 million (approximately 20 percent below current levels) and CEI and TE base rates will be reduced by a combined $310 million (approximately 15 percent below current levels). The plans also revised the Companies' fuel cost recovery methods. The Companies formerly recovered fuel-related costs not otherwise included in base rates from retail customers through separate energy rates. In accordance with the respective regulatory plans, OE's, CEI's and TE's fuel rates will be frozen through the regulatory plan period, subject to limited periodic adjustments. As part of OE's and FirstEnergy's regulatory plans, transition rate credits were implemented for customers, which are expected to reduce operating revenues for OE by approximately $600 million and CEI and TE by approximately $391 million during the regulatory plan period. In June 1998, the PPUC authorized a rate restructuring plan for Penn, which superseded the regulatory plan which had been in place for Penn since 1996 and essentially resulted in the deregulation of Penn's generation business as of June 30, 1998. Penn was required to remove from its balance sheet all regulatory assets and liabilities related to its generation business and assess all other assets for impairment. The Securities and Exchange Commission (SEC) issued interpretive guidance regarding asset impairment measurement which concluded 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 those assets are impaired, a regulatory asset should be established if the 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 remaining net amount of $78 million was written off. The charge of $51.7 million ($30.5 million after income taxes) for discontinuing the application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), to Penn's generation business was recorded as an extraordinary item on the Consolidated Statement of Income. All of the Companies' regulatory assets are being recovered under provisions of the regulatory plans. In addition, the PUCO has authorized OE to recognize additional capital recovery related to its generating assets (which is reflected as additional depreciation expense) and additional amortization of regulatory assets during the regulatory plan period of at least $2 billion, and the PPUC had authorized Penn to accelerate at least $358 million, more than the amounts that would have been recognized if the regulatory plans were not in effect. These additional amounts are being recovered through current rates. As of December 31, 1998, OE's and Penn's cumulative additional capital recovery and regulatory asset amortization amounted to $696 million (including Penn's impairment discussed above). CEI and TE recognized a fair value purchase accounting adjustment of $2.55 billion in connection with the FirstEnergy merger; that fair value adjustment recognized for financial reporting purposes will ultimately satisfy the $2 billion asset reduction commitment contained in the CEI and TE regulatory plan. For regulatory purposes, CEI and TE will recognize the accelerated amortization over the rate plan period. Application of SFAS 71 was discontinued in 1997 with respect to CEI's and TE's nuclear operations (see "Regulatory Assets" below) and in 1998 with respect to Penn's generation operations (as described above). The following summarizes net assets included in property, plant and equipment relating to operations for which the application of SFAS 71 was discontinued, compared with the respective company's total assets at December 31, 1998.
SFAS 71 Discontinued Net Assets Total Assets ------------ ------------ (In millions) CEI $1,064 $6,318 TE 579 2,739 Penn 146 978
PROPERTY, PLANT AND EQUIPMENT- Property, plant and equipment reflects original cost (except for CEI's, TE's and Penn's nuclear generating units which were adjusted to fair value), including payroll and related costs such as taxes, employee benefits, administrative and general costs, and interest costs. The Companies provide for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The annual composite rate for OE's and Penn's electric plant was approximately 3.0% in 1998, 1997 and 1996. CEI's and TE's composite rates were both approximately 3.4% in 1998. In addition to the straight-line depreciation recognized in 1998, 1997 and 1996, OE and Penn recognized additional capital recovery of $141 million (excluding Penn's impairment), $172 million and $144 million, respectively, as additional depreciation expense in accordance with their regulatory plans. Such additional charges in the accumulated provision for depreciation were $422 million and $343 million as of December 31, 1998 and 1997, respectively. Annual depreciation expense includes approximately $30.9 million for future decommissioning costs applicable to the Companies' ownership and leasehold interests in four nuclear generating units. The Companies' share of the future obligation to decommission these units is approximately $1.3 billion in current dollars and (using a 4.0% escalation rate) approximately $3.4 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 $284 million for decommissioning through their electric rates from customers through December 31, 1998. 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 $358.4 million invested in external decommissioning trust funds as of December 31, 1998. Earnings on these funds are reinvested with a corresponding increase to the decommissioning liability. The Companies have also recognized an estimated liability of approximately $32.5 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 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 subsequently expanded the scope of the proposed standard to include other closure and removal obligations related to long-lived assets. A revised proposal may be issued by the FASB in 1999. COMMON OWNERSHIP OF GENERATING FACILITIES- The Companies and Duquesne Light Company (Duquesne) constitute the Central Area Power Coordination Group (CAPCO). The CAPCO companies own and/or lease, as tenants in common, various power generating facilities. Each of the companies is obligated to pay a share of the costs associated with any jointly owned facility in the same proportion as its interest. The Companies' portions of operating expenses associated with jointly owned facilities are included in the corresponding operating expenses on the Consolidated Statements of Income. The amounts reflected on the Consolidated Balance Sheet under property, plant and equipment at December 31, 1998, include the following:
Companies' Accumulated Construction Ownership/ Provision for Work in Leasehold Generating Units In Service Depreciation Progress Interest - ------------------------------------------------------------------------------------------- (In millions) W.H. Sammis #7 $ 303.3 $ 101.3 $ 2.0 68.80% Bruce Mansfield #1, #2 and #3 895.1 433.9 11.2 83.01% Beaver Valley #1 and #2 2,052.3 619.6 11.8 69.46% Davis-Besse 404.4 4.8 10.3 100.00% Perry 2,174.7 790.2 19.1 86.26% Eastlake # 5 160.5 116.8 0.7 68.80% Seneca 64.3 25.4 0.1 80.00% - ------------------------------------------------------------------------------------------- Total $6,054.6 $2,092.0 $ 55.2 ===========================================================================================
The Seneca Unit is currently jointly owned by CEI and a non-CAPCO company. The Company has agreed to purchase the remaining 20% share in 1999. On October 15, 1998, the Company announced that it signed an agreement in principle with Duquesne that would result in the transfer of 1,436 megawatts owned by Duquesne at eight CAPCO generating units in exchange for 1,328 megawatts at three non-CAPCO power plants owned by the Companies. A definitive agreement on the exchange of assets, which will be structured as a tax-free transaction to the extent possible, will provide the Companies with exclusive ownership and operating control of all CAPCO generating units. Duquesne will fund decommissioning costs equal to its percentage interest in the three nuclear generating units to be transferred. The asset transfer is expected to take twelve to eighteen months to close. NUCLEAR FUEL- OE's and Penn's nuclear fuel is recorded at original cost, which includes material, enrichment, fabrication and interest costs incurred prior to reactor load. CEI and TE severally lease their respective portions of nuclear fuel and pay for the fuel as it is consumed (see Note 2). The Companies amortize the cost of nuclear fuel based on the rate of consumption. The Companies' electric rates include amounts for the future disposal of spent nuclear fuel based upon the formula used to compute payments to the DOE. INCOME TAXES- Details of the total provision for income taxes are shown on the Consolidated Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. The liability method is used to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. Alternative minimum tax credits of $191 million, which may be carried forward indefinitely, are available to reduce future federal income taxes. RETIREMENT BENEFITS- The Companies' trusteed, noncontributory defined benefit pension plans cover almost all full-time employees. Upon retirement, employees receive a monthly pension based on length of service and compensation. In 1998, the Centerior Energy Corporation (Centerior) pension plan was merged into the FirstEnergy pension plans. 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, 1998. The assets of the pension plans consist primarily of common stocks, United States government bonds and corporate bonds. 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. The following sets forth the funded status of the plans and amounts recognized on the Consolidated Balance Sheets as of December 31:
Other Pension Benefits Postretirement Benefits ---------------- ------------------------ 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1 $1,327.5 $ 688.5 $ 534.1 $ 241.1 Service Cost 25.0 15.2 7.5 4.6 Interest cost 92.5 55.9 37.6 20.4 Plan amendments 44.3 3.0 40.1 -- Early retirement program expense -- 54.5 -- 1.9 Actuarial loss 101.6 63.3 10.7 17.0 Centerior acquisition -- 508.9 -- 265.9 Benefits paid (90.8) (61.8) (28.7) (16.8) - ------------------------------------------------------------------------------------------- Benefit obligation as of December 31 1,500.1 1,327.5 601.3 534.1 - ------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets as of January 1 1,542.5 946.3 2.8 2.0 Actual return on plan assets 231.3 194.0 0.7 0.5 Company contribution -- -- 0.4 0.3 Centerior acquisition -- 464.0 -- -- Benefits paid (90.8) (61.8) -- -- - -------------------------------------------------------------------------------------------- Fair value of plan assets as of December 31 1,683.0 1,542.5 3.9 2.8 - -------------------------------------------------------------------------------------------- Funded status of plan 182.9 215.0 (597.4) (531.3) Unrecognized actuarial loss (gain) (110.8) (136.5) 30.6 24.0 Unrecognized prior service cost 63.0 21.0 27.4 (13.8) Unrecognized net transition obligation (asset) (18.0) (25.9) 129.3 138.9 - -------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 117.1 $ 73.6 $(410.1) $(382.2) ============================================================================================= Assumptions used as of December 31: Discount rate 7.00% 7.25% 7.00% 7.25% Expected long-term return on plan assets 10.25% 10.00% 10.25% 10.00% Rate of compensation increase 4.00% 4.00% 4.00% 4.00%
Net pension and other postretirement benefit costs for the three years ended December 31, 1998 were computed as follows:
Other Pension Benefits Postretirement Benefits ---------------------- ----------------------- 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------- (In millions) Service cost $ 25.0 $ 15.2 $ 14.2 $ 7.5 $ 4.6 $ 4.3 Interest cost 92.5 55.9 49.3 37.6 20.4 17.4 Expected return on plan assets (152.7) (99.7) (83.2) (0.3) (0.2) (0.1) Amortization of transition obligation (asset) (8.0) (8.0) (8.0) 9.2 8.2 10.1 Amortization of prior service cost 2.3 2.1 2.3 (0.8) 0.3 (1.2) Recognized net actuarial loss (gain) (2.6) (0.9) -- -- -- 0.1 Voluntary early retirement program expense -- 54.5 12.5 -- 1.9 0.5 Plan curtailment loss (gain) -- -- (12.8) -- -- 13.1 - ------------------------------------------------------------------------------------------------- Net benefit cost $ (43.5) $ 19.1 $ (25.7) $53.2 $35.2 $44.2 ==================================================================================================
In accordance with SFAS 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," the 1996 net pension costs and postretirement benefit costs shown above included curtailment effects (significant changes in projected plan assumptions) relating to the pension and postretirement benefit plans. The employee terminations reflected in OE's and Penn's 1996 voluntary early retirement program represented a plan curtailment that significantly reduced the expected future employee service years and the related accrual of defined pension and postretirement benefits. In the pension plan, the reduction in the benefit obligation increased the net pension asset and was shown as a plan curtailment gain. In the postretirement benefit plan, the unrecognized prior service cost associated with service years no longer expected to be rendered as a result of the terminations was shown as a plan curtailment loss. The health care trend rate assumption is 5.5% in the first year gradually decreasing to 4.0% for the year 2008 and later. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. An increase in the health care trend rate assumption by one percentage point would increase the total service and interest cost components by $4.0 million and the postretirement benefit obligation by $68.1 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $3.2 million and the postretirement benefit obligation by $55.2 million. SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets. The Companies reflect temporary cash investments at cost, which approximates their market value. Noncash financing and investing activities included capital lease transactions amounting to $61.8 million, $3.0 million and $2.0 million for the years 1998, 1997 and 1996, respectively. Commercial paper transactions of OES Fuel, Incorporated (OES Fuel) (a wholly owned subsidiary of OE) that have initial maturity periods of three months or less are reported net within financing activities under long-term debt and are reflected as long-term debt on the Consolidated Balance Sheets (see Note 3H). 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:
1998 1997 - ------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------- (In millions) Long-term debt $6,783 $7,247 $6,980 $7,334 Preferred stock $ 335 $ 340 $ 356 $ 362 Investments other than cash and cash equivalents: Debt securities - Maturity (5-10 years) $ 481 $ 520 $ 487 $ 512 - Maturity (more than 10 years) 1,109 1,139 1,134 1,149 Equity securities 17 17 24 24 All other 520 533 336 337 - --------------------------------------------------------------------- $2,127 $2,209 $1,981 $2,022 ======================================================================
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 debt and equity securities referred to above are in the held-to-maturity category. The Companies have no securities held for trading purposes. Effective December 31, 1998, the Company began accounting for its commodity price derivatives, entered into specifically for trading purposes, on a marked-to-market basis in accordance with Emerging Issues Task Force Issue 98-10, "Accounting for Energy Trading and Risk Management Activities," with gains and losses recognized currently in the Consolidated Statements of Income. The contracts that were marked to market are included in the 1998 Consolidated Balance Sheets as Deferred Charges and Deferred Credits at their fair values. The impact on the consolidated financial statements was immaterial. REGULATORY ASSETS- The Companies recognize, as regulatory assets, costs which the FERC, PUCO and PPUC have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets are being recovered from customers under the Companies' respective regulatory plans. Based on those regulatory plans, at this time, the Companies believe they will continue to be able to bill and collect cost-based rates 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. OE and Penn recognized additional cost recovery of $50 million, $39 million and $34 million in 1998, 1997 and 1996, respectively, as additional regulatory asset amortization in accordance with their regulatory plans. FirstEnergy's regulatory plan does not provide for full recovery of CEI's and TE's nuclear operations. As a result, in October 1997 CEI and TE discontinued application of SFAS 71 for their nuclear operations and decreased their regulatory assets of customer receivables for future income taxes related to the nuclear assets by $794 million. Net regulatory assets on the Consolidated Balance Sheets are comprised of the following:
1998 1997 - ---------------------------------------------------------------------- (In millions) Nuclear unit expenses $1,164.8 $1,224.2 Customer receivables for future income taxes 444.0 558.7 Rate stabilization program deferrals 440.1 460.2 Sale and leaseback costs 28.1 24.4 Competitive transition charge 331.0 -- Loss on reacquired debt 183.5 191.1 Employee postretirement benefit costs 28.9 25.9 Uncollectible customer accounts 6.8 18.9 Perry Unit 2 termination -- 36.7 DOE decommissioning and decontamination costs 32.9 39.3 Other 36.7 44.7 - ----------------------------------------------------------------------- Total $2,696.8 $2,624.1 =======================================================================
2. LEASES: The Companies lease certain generating facilities, nuclear fuel, certain transmission facilities, office space and other property and equipment under cancelable and noncancelable leases. OE sold portions of its ownership interests in Perry Unit 1 and Beaver Valley Unit 2 and entered into operating leases on the portions sold for basic lease terms of approximately 29 years. CEI and TE also sold portions of their ownership interests in Beaver Valley Unit 2 and Bruce Mansfield Units 1, 2 and 3 and entered into similar operating leases for lease terms of approximately 30 years. During the terms of their respective leases, OE, CEI and TE continue to be responsible, to the extent of their individual combined ownership and leasehold interests, for costs associated with the units including construction expenditures, operation and maintenance expenses, insurance, nuclear fuel, property taxes and decommissioning. They have the right, at the end of the respective basic lease terms, to renew their respective leases. They also have the right to purchase the facilities at the expiration of the basic lease term or renewal term (if elected) at a price equal to the fair market value of the facilities. The basic rental payments are adjusted when applicable federal tax law changes. OES Finance, Incorporated (OES Finance), a wholly owned subsidiary of OE, maintains deposits pledged as collateral to secure reimbursement obligations relating to certain letters of credit supporting OE's obligations to lessors under the Beaver Valley Unit 2 sale and leaseback arrangements. The deposits pledged to the financial institution providing those letters of credit are the sole property of OES Finance. In the event of liquidation, OES Finance, as a separate corporate entity, would have to satisfy its obligations to creditors before any of its assets could be made available to OE as sole owner of OES Finance common stock. Nuclear fuel is currently financed for CEI and TE through leases with a special-purpose corporation. As of December 31, 1998, $156 million of nuclear fuel was financed under a lease financing arrangement totaling $175 million ($60 million of intermediate-term notes and $115 million from bank credit arrangements). The notes mature from 1999 through 2000 and the bank credit arrangements expire in September 2000. Lease rates are based on intermediate-term note rates, bank rates and commercial paper rates. Consistent with the regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Consolidated Statements of Income. Such costs for the three years ended December 31, 1998, are summarized as follows:
1998 1997 1996 - ------------------------------------------------------------- (In millions) Operating leases Interest element $201.2 $149.9 $107.6 Other 147.8 45.2 18.3 Capital leases Interest element 17.6 6.1 6.5 Other 66.3 6.0 6.3 - -------------------------------------------------------------- Total rentals $432.9 $207.2 $138.7 ==============================================================
The future minimum lease payments as of December 31, 1998, are:
Operating Leases ----------------------------- Capital Lease Capital Leases Payments Trusts Net - ----------------------------------------------------------------------- (In millions) 1999 $ 76.6 $ 301.6 $ 143.1 $ 158.5 2000 55.3 296.4 150.5 145.9 2001 37.3 307.3 146.0 161.3 2002 22.8 318.3 169.5 148.8 2003 13.9 326.6 176.5 150.1 Years thereafter 81.6 3,936.8 1,475.1 2,461.7 - ------------------------------------------------------------------------ Total minimum lease payments 287.5 $5,487.0 $2,260.7 $3,226.3 ======= ======== ======== Executory costs 29.5 - -------------------------------------- Net minimum lease payments 258.0 Interest portion 76.9 - -------------------------------------- Present value of net minimum lease payments 181.1 Less current portion 58.6 - -------------------------------------- Noncurrent portion $122.5 ======================================
OE invested in the PNBV Capital Trust , which was established to purchase a portion of the lease obligation bonds issued on behalf of lessors in OE's Perry Unit 1 and Beaver Valley Unit 2 sale and leaseback transactions. CEI and TE established the Shippingport Capital Trust in the fourth quarter of 1997 to purchase the lease obligation bonds issued on behalf of lessors in their Bruce Mansfield Units 1, 2 and 3 sale and leaseback transactions. The PNBV and Shippingport capital trust arrangements effectively reduce lease costs related to those transactions. 3. CAPITALIZATION: (A) RETAINED EARNINGS- There are no restrictions on retained earnings for payment of cash dividends on the Company's common stock. (B) EMPLOYEE STOCK OWNERSHIP PLAN- The Companies fund the matching contribution for their 401(k) savings plan through an ESOP Trust. All full-time employees eligible for participation in the 401(k) savings plan are covered by the ESOP. The ESOP borrowed $200 million from OE and acquired 10,654,114 shares of OE's common stock through market purchases; the shares were converted into the Company's common stock in connection with the merger. Dividends on ESOP shares are used to service the debt. Shares are released from the ESOP on a pro rata basis as debt service payments are made. In 1998, 1997 and 1996, 423,206 shares, 429,515 shares and 404,522 shares, respectively, were allocated to employees with the corresponding expense recognized based on the shares allocated method. The fair value of 7,406,332 shares unallocated as of December 31, 1998, was approximately $241.2 million. Total ESOP-related compensation expense was calculated as follows:
- ----------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------- (In millions) Base compensation $13.5 $ 9.9 $ 9.0 Dividends on common stock held by the ESOP and used to service debt (3.9) (3.4) (2.9) - ----------------------------------------------------------------- Net expense $ 9.6 $ 6.5 $ 6.1 =================================================================
(C) STOCK COMPENSATION PLANS- Under a Centerior Equity Compensation Plan (Centerior Plan) adopted in 1994, restricted stock and common stock options were granted to management employees. Upon consummation of the merger, outstanding options became exercisable for the Company's common stock with option prices and the number of shares adjusted to reflect the merger conversion ratio. A total of 329,493 options for the Company's common stock were exercised in 1998 and 222,023 options were exercised in 1997. Unexercised options totaling 117,004 shares were outstanding as of December 31, 1998 and at year end 1997, unexercised options totaled 517,388 shares. The plan ends when all outstanding options are exercised or when all options lapse by February 25, 2007. There will be no additional grants under the Centerior Plan. On April 30, 1998, the Company adopted the Executive and Director Incentive Compensation Plan (FE Plan). The FE Plan permits awards to be made to key employees in the form of restricted stock, stock options, stock appreciation rights, performance shares or cash. A total of 189,491 options for the Company's common stock and 20,000 shares of restricted stock were granted during 1998. Options granted in 1998 are exercisable in four years and expire after 10 years. Restrictions on restricted stock lapse in 25% annual increments beginning in the fourth year. During 1998, options on 7,535 shares were forfeited under the FE Plan leaving 181,956 options outstanding as of December 31, 1998. No shares of restricted stock were forfeited. Computing compensation costs for options consistent with SFAS 123, "Accounting for Stock-Based Compensation," would not have materially affected net income in 1998 and basic and diluted earnings per share are the same. (D) COMPREHENSIVE INCOME- In 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income", and applied the standard to all periods presented in the Consolidated Statements of Common Stockholders' Equity. Comprehensive income includes net income as reported on the Consolidated Statements of Income and all other changes in common stockholders' equity except those resulting from transactions with common stockholders. (E) PREFERRED AND PREFERENCE STOCK- Penn's 7.75% series of preferred stock has a restriction which prevents early redemption prior to July 2003. OE's 8.45% series of preferred stock has no optional redemption provision. CEI's $88.00 series of preferred stock is not redeemable before December 2001 and its $90.00 series has no optional redemption provision. All other preferred stock may be redeemed by the Companies in whole, or in part, with 30-90 days' notice. Preference stock authorized for the Companies are 8 million shares without par value for OE; 3 million shares without par value for CEI; and 5 million shares, $25 par value for TE. No preference shares are currently outstanding. (F) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- Annual sinking fund provisions for the Companies' preferred stock are as follows:
Redemption Price Per Series Shares Share Date Beginning - ------------------------------------------------------------------------------------------- OE 8.45% 50,000 $ 100 (i) CEI $ 7.35 C 10,000 100 (i) 88.00 E 3,000 1,000 (i) 91.50 Q 10,714 1,000 (i) 90.00 S 18,750 1,000 November 1 1999 88.00 R 50,000 1,000 December 1 2001 TE $9.375 16,900 100 (i) Penn 7.625% 7,500 100 October 1 2002 - ------------------------------------------------------------------------------------------- (i) Sinking fund provisions are in effect.
Annual sinking fund requirements for the next five years are $40 million in 1999, $38 million in 2000, $85 million in 2001, $19 million in 2002 and $2 million in 2003. A liability of $19 million was included in the net assets acquired from CEI and TE for preferred dividends declared attributable to the post-merger period. Accordingly, no accruals for CEI and TE preferred dividends are included in the Company's Consolidated Statement of Income for the period November 8, 1997 through December 31, 1997. (G) OHIO EDISON OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY OHIO EDISON SUBORDINATED DEBENTURES- Ohio Edison Financing Trust, a wholly owned subsidiary of OE, has issued $120 million of 9% Cumulative Trust Preferred Capital Securities. OE purchased all of the Trust's Common Securities and simultaneously issued to the Trust $123.7 million principal amount of 9% Junior Subordinated Debentures due 2025 in exchange for the proceeds that the Trust received from its sale of Preferred and Common Securities. The sole assets of the Trust are the Subordinated Debentures whose interest and other payment dates coincide with the distribution and other payment dates on the Trust Securities. Under certain circumstances, the Subordinated Debentures could be distributed to the holders of the outstanding Trust Securities in the event the Trust is liquidated. The Subordinated Debentures may be optionally redeemed by OE beginning December 31, 2000, at a redemption price of $25 per Subordinated Debenture plus accrued interest, in which event the Trust Securities will be redeemed on a pro-rata basis at $25 per share plus accumulated distributions. OE's obligations under the Subordinated Debentures along with the related Indenture, amended and restated Trust Agreement, Guarantee Agreement and the Agreement for expenses and liabilities, constitute a full and unconditional guarantee by OE of payments due on the Preferred Securities. (H) 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 Trustees through December 31, 1998, OE's and TE's annual sinking and improvement fund requirements for all bonds issued under the mortgage amounts to $30 million. OE and TE expect to deposit funds in 1999 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) - ------------------------------------------ 1999 $777.7 2000 587.2 2001 187.8 2002 726.4 2003 459.5 - ------------------------------------------
The Companies' obligations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds and, in some cases, by subordinate liens on the related pollution control facilities. Certain pollution control revenue bonds are entitled to the benefit of irrevocable bank letters of credit of $419.0 million. To the extent that drawings are made under those letters of credit to pay principal of, or interest on, the pollution control revenue bonds, OE, CEI and/or TE are entitled to a credit against their obligation to repay those bonds. The Companies pay annual fees of 0.43% to 1.875% of the amounts of the letters of credit to the issuing banks and are obligated to reimburse the banks for any drawings thereunder. OE had unsecured borrowings of $250 million at December 31, 1998, supported by a $250 million long-term revolving credit facility agreement which expires December 30, 1999. OE must pay an annual facility fee of 0.20% on the total credit facility amount. In addition, the credit agreement provides that OE maintain unused first mortgage bond capability for the full credit agreement amount under OE's indenture as potential security for the unsecured borrowings. CEI and TE have letters of credit of approximately $225 million in connection with the sale and leaseback of Beaver Valley Unit 2 that expire in June 1999. The letters of credit are secured by first mortgage bonds of CEI and TE in the proportion of 40% and 60%, respectively (see Note 2). OE's and Penn's nuclear fuel purchases are financed through the issuance of OES Fuel commercial paper and loans, both of which are supported by a $180.5 million long-term bank credit agreement which expires March 31, 2001. 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 0.20% on the total line of credit and an annual commitment fee of 0.0625% on any unused amount. 4. SHORT-TERM BORROWINGS AND BANK LINES OF CREDIT: Short-term borrowings outstanding at December 31, 1998, consisted of $134.5 million of bank borrowings and $120.0 million of OES Capital, Incorporated (OES Capital) commercial paper. OES Capital is a wholly owned subsidiary of OE whose borrowings are secured by customer accounts receivable. OES Capital can borrow up to $120 million under a receivables financing agreement at rates based on certain bank commercial paper and is required to pay an annual fee of 0.26% on the amount of the entire finance limit. The receivables financing agreement expires in 1999. The Companies have various credit facilities with domestic banks that provide for borrowings of up to $175 million under various interest rate options. OE's short-term borrowings may be made under its line of credit on its unsecured notes. To assure the availability of these lines, the Companies are required to pay annual commitment fees that vary from 0.20% to 0.50%. These lines expire at various times during 1999. The weighted average interest rates on short-term borrowings outstanding at December 31, 1998 and 1997, were 5.67% and 6.02%, respectively. 5. COMMITMENTS, GUARANTEES AND CONTINGENCIES: CAPITAL EXPENDITURES- The Companies' current forecasts reflect expenditures of approximately $2.2 billion for property additions and improvements from 1999-2003, of which approximately $556 million is applicable to 1999. Investments for additional nuclear fuel during the 1999-2003 period are estimated to be approximately $399 million, of which approximately $46 million applies to 1999. During the same periods, the Companies' nuclear fuel investments are expected to be reduced by approximately $438 million and $93 million, respectively, as the nuclear fuel is consumed. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $9.7 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on their present ownership and leasehold interests in the Beaver Valley Station, Davis-Besse Plant and the Perry Plant, the Companies' maximum potential assessment under the industry retrospective rating plan (assuming the other co-owner contributes its proportionate share of any assessments under the retrospective rating plan) would be $286.3 million per incident but not more than $32.5 million in any one year for each incident. The Companies are also insured as to their respective interests in the Beaver Valley Station, Davis-Besse Plant and the Perry Plant under policies issued to the operating company for each plant. Under these policies, up to $2.75 billion is provided for property damage and decontamination and decommissioning costs. The Companies have also obtained approximately $1.22 billion of insurance coverage for replacement power costs for their respective interests in Perry, Davis-Besse and Beaver Valley. Under these policies, the Companies can be assessed a maximum of approximately $39.9 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, 1998, the Companies' shares of the guarantees (which approximate fair market value) were $43.2 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 $220.1 million, $135.3 million and $113.8 million during 1998, 1997 and 1996, respectively. The Companies' minimum payment for 1999 is approximately $58 million. The contract 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 $400 million, which is included in the construction forecast provided under "Capital Expenditures" for 1999 through 2003. 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 in 1999 will be achieved by burning lower-sulfur fuel, generating more electricity from lower-emitting plants, and/or purchasing emission allowances. Plans for complying with reductions required for the year 2000 and thereafter have not been finalized. In September 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions from the Companies' Ohio and Pennsylvania facilities by May 2003. The EPA`s NOx Transport Rule imposes uniform reductions of NOx emissions across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. By September 1999, each of the twenty-two states are required to submit revised State Implementation Plans (SIP) which comply with individual state NOx budgets established by the EPA. These state NOx budgets contemplate an 85% reduction in utility plant NOx emissions from 1990 emissions. A proposed Federal Implementation Plan accompanied the NOx Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In another separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NOx emissions which are alleged to contribute to ozone pollution in the eight petitioning states. The EPA suggests that the Section 126 petitions will be adequately addressed by the NOx Transport Program, but a September 1998 proposed rulemaking established an alternative program which would require nearly identical 85% NOx reductions at the Companies' Ohio and Pennsylvania plants by May 2003 in the event implementation of the NOx Transport Rule is delayed. The Companies continue to evaluate their compliance plans and other compliance options and currently estimate the additional capital expenditures for NOx reductions may reach $500 million. The Companies are required to meet federally approved SO2 regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $25,000 for each day the unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Companies cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. The cost of compliance with these regulations may be substantial and depends on the manner in which they are implemented by the states in which the Companies operate affected facilities. 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 CEI and TE disposed of hazardous substances at historical sites and the liability involved, are often unsubstantiated and subject to disputes. 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 $5.8 million as of December 31, 1998, based on estimates of the costs of cleanup and the proportionate responsibility of other PRPs for such costs. 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 while they remain regulated, 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. 6. SEGMENT INFORMATION: The Company adopted SFAS 131, "Disclosure About Segments of an Enterprise and Related Information," in 1998. The Company's primary segment is its Electric Utility Group which includes four regulated electric utility operating companies that provide electric service in Ohio and Pennsylvania. Its other material business segment is FETPM which markets and trades electricity in nonregulated markets. Financial data for these business segments and products and services are as follows: Segment Financial Information - -----------------------------
FE Trading Electric & Power All Reconciling Utilities Marketing Other Eliminations Totals --------- ---------- ----- ------------ ------ (In millions) 1998 ---- External revenues $ 5,201 $410 $ 250 $ -- $ 5,861 Intersegment revenues 32 27 96 (155) -- Total revenues 5,233 437 346 (155) 5,861 Depreciation and amortization 730 -- 11 -- 741 Net interest charges 590 2 69 (60) 601 Income taxes 337 (35) (2) -- 300 Extraordinary Item: Pennsylvania restructuring (31) -- -- -- (31) Net income/Earnings on common stock 478 (52) 1 (16) 411 Total assets 18,188 54 1,742 (1,920) 18,064 Property additions 304 -- 64 -- 368 Acquisitions -- -- 285 -- 285 1997 ---- External revenues $ 2,843 $ 43 $ 74 $ -- $ 2,960 Intersegment revenues 33 -- 106 (139) -- Total revenues 2,876 43 180 (139) 2,960 Depreciation and amortization 470 -- 5 -- 475 Net interest charges 300 -- 60 (51) 309 Income taxes 205 -- 3 -- 208 Net income/Earnings on common stock 335 (1) 4 (32) 306 Total assets 18,520 32 1,209 (1,680) 18,081 Property additions 166 -- 38 -- 204 Acquisitions -- -- 1,582 -- 1,582 1996 ---- External revenues $ 2,499 $ -- $ 23 $ -- $ 2,522 Intersegment revenues 33 -- 109 (142) -- Total revenues 2,532 -- 132 (142) 2,522 Depreciation and amortization 378 -- 5 -- 383 Net interest charges 256 -- 57 (48) 265 Income taxes 195 -- 6 -- 201 Net income/Earnings on common stock 337 -- 7 (41) 303 Total assets 9,406 -- 1,013 (1,365) 9,054 Property additions 124 -- 24 -- 148
Products and Services - ---------------------
Oil & Gas Energy Related Electricity Sales and Sales and Year Sales Production Services Other ---- ----------- ---------- -------------- ----- (In millions) 1998 $4,980 $26 $853 $ 2 1997 2,775 -- 185 -- 1996 2,435 -- 87 --
7. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain consolidated operating results by quarter for 1998 and 1997.
March 31, June 30, September 30, December 31, Three Months Ended 1998 1998 1998 1998 - -------------------------------------------------------------------------------------------- (In millions, except per share amounts) Revenues $1,344.2 $1,410.6 $1,633.6 $1,472.9 Expenses 988.3 1,140.9 1,203.3 1,164.7 - --------------------------------------------------------------------------------------------- Income Before Interest and Income Taxes 355.9 269.7 430.3 308.2 Net Interest Charges 143.6 154.6 152.1 150.7 Income Taxes 88.6 55.1 115.2 62.8 - --------------------------------------------------------------------------------------------- Income Before Extraordinary Item 123.7 60.0 163.0 94.7 Extraordinary Item (Net of Income Taxes)(Note 1) -- (30.5) -- -- - --------------------------------------------------------------------------------------------- Net Income $ 123.7 $ 29.5 $ 163.0 $ 94.7 ============================================================================================= Earnings per Share of Common Stock Before Extraordinary Item $ .56 $ .27 $ .71 $ .41 Extraordinary Item (Net of Income Taxes)(Note 1) -- (.14) -- -- - --------------------------------------------------------------------------------------------- Earnings per Share of Common Stock $ .56 $ .13 $ .71 $ .41 =============================================================================================
March 31, June 30, September 30, December 31, Three Months Ended 1997 1997 1997 1997 - -------------------------------------------------------------------------------------------- (In millions, except per share amounts) Revenues $626.2 $614.4 $671.2 $1,048.4 Expenses 436.9 425.4 459.5 816.1 - -------------------------------------------------------------------------------------------- Income Before Interest and Income Taxes 189.3 189.0 211.7 232.3 Net Interest Charges 67.0 66.2 64.4 110.9 Income Taxes 49.4 49.0 58.6 51.0 - --------------------------------------------------------------------------------------------- Net Income $ 72.9 $ 73.8 $ 88.7 $ 70.4 ============================================================================================= Earnings per Share of Common Stock $ .51 $ .51 $ .61 $ .36 ============================================================================================= Results for CEI and TE are included from the November 8, 1997 acquisition date through December 31, 1998.
8. PRO FORMA COMBINED CONDENSED FIRSTENERGY STATEMENTS OF INCOME (UNAUDITED): The Company was formed on November 8, 1997 by the merger of OE and Centerior. The merger was accounted for as a purchase of Centerior's net assets with 77,637,704 shares of FirstEnergy Common Stock through the conversion of each outstanding Centerior Common Stock share into 0.525 of a share of FirstEnergy Common Stock (fractional shares were paid in cash). Based on an imputed value of $20.125 per share, the purchase price was approximately $1.582 billion, which also included approximately $20 million of merger related costs. Goodwill of approximately $2.0 billion was recognized (to be amortized on a straight-line basis over forty years), which represented the excess of the purchase price over Centerior's net assets after fair value adjustments. Accumulated amortization of goodwill was approximately $59 million as of December 31, 1998. The merger purchase accounting adjustments, which were recorded in the records of Centerior's direct subsidiaries, included recognizing estimated severance and other compensation liabilities ($80 million). The amount charged against the liability in 1998 relating to the costs of involuntary employee separation was $41 million. In addition, the liability was reduced to approximately $9 million as of December 31, 1998 to represent potential costs associated with the separation of 493 CEI employees. The liability adjustment was offset by a corresponding reduction to goodwill recognized in connection with the Centerior acquisition. The following pro forma statements of income of FirstEnergy give effect to the OE/Centerior merger as if it had been consummated on January 1, 1996, with the purchase accounting adjustments actually recognized in the business combination.
Year Ended December 31, ----------------------- 1997 1996 - ------------------------------------------------------------------ (In millions, except per share amounts) Revenues $5,206 $5,089 Expenses 3,800 3,671 - ------------------------------------------------------------------ Income Before Interest and Income Taxes 1,406 1,418 Net Interest Charges 643 634 Income Taxes 336 316 - ------------------------------------------------------------------ Net Income $ 427 $ 468 ================================================================== Earnings per Share of Common Stock $ 1.92 $ 2.11 ===================================================================
Pro forma adjustments reflected above include: (1) adjusting CEI and TE nuclear generating units to fair value based upon independent appraisals and estimated discounted future cash flows based on management's estimate of cost recovery; (2) goodwill recognized representing the excess of the purchase price over Centerior's adjusted net assets; (3) elimination of revenue and expense transactions between OE and Centerior; (4) amortization of the fair value adjustment for long-term debt; and (5) adjustments for estimated tax effects of the above adjustments. Report of Independent Public Accountants To the Stockholders and Board of Directors of FirstEnergy Corp.: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of FirstEnergy Corp. (an Ohio corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, common stockholders' equity, preferred stock, cash flows and taxes for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of FirstEnergy Corp. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio February 12, 1999 1 EX-21 5 EXHIBIT 21 FIRSTENERGY CORP. LIST OF SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 1998 Ohio Edison Company - Incorporated in Ohio The Cleveland Electric Illuminating Company - Incorporated in Ohio The Toledo Edison Company - Incorporated in Ohio Centerior Service Company - Incorporated in Ohio FirstEnergy Properties Company - Incorporated in Ohio FirstEnergy Ventures Corporation - Incorporated in Ohio FirstEnergy Trading & Power Marketing, Inc. - Incorporated in Delaware FirstEnergy Facilities Services Group, Inc. - Incorporated in Ohio FirstEnergy Securities Transfer Company - Incorporated in Ohio FirstEnergy Services Corp. - Incorporated in Ohio MARBEL Energy Corporation - Incorporated in Ohio JR Operating Company - Incorporated in Ohio FirstEnergy Nuclear Operating Company - Incorporated in Ohio FirstEnergy Holdings, LLC - Incorporated in Ohio FE Acquisition Corp. - Incorporated in Ohio American Transmission Systems, Inc. - Incorporated in Ohio Statement of Differences ------------------------ Exhibit Number 21, List of Subsidiaries of the Registrant at December 31, 1998, is not included in the printed document. EX-23 6 EXHIBIT 23 FIRSTENERGY CORP. CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into FirstEnergy Corp.'s previously filed Registration Statements, File No. 333-40065, No. 333-48587, No. 333-48651, No. 333-58279 and No. 333-65409. ARTHUR ANDERSEN LLP Cleveland, Ohio March 29, 1999 EX-27 7
UT This schedule contains summary financial information extracted from the related Form 10-K 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 $(21,208,000) related to extraordinary item. 0001031296 FIRSTENERGY CORP. 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 DEC-31-1998 1 PER-BOOK 9,242,574 2,419,004 1,067,133 5,334,796 0 18,063,507 23,707 3,707,042 718,409 4,449,158 294,710 660,195 6,352,359 134,495 0 119,975 777,714 40,154 0 58,602 5,176,145 18,063,507 5,861,285 300,491 4,497,214 4,818,913 1,042,372 0 1,042,372 600,976 410,874 0 0 339,111 512,131 1,155,325 1.82 1.82
EX-4.1 8 EXECUTION COPY =============================================================== OHIO EDISON COMPANY with BANKERS TRUST COMPANY, As Trustee _______________ Sixty-Eighth Supplemental Indenture Providing among other things for First Mortgage Bonds Guarantee Series of 1997 due 2000 _______________ Dated as of June 1, 1997 ================================================================ SUPPLEMENTAL INDENTURE, dated as of June 1, 1997 between Ohio Edison Company, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the "Company"), party of the first part, and Bankers Trust Company, a corporation organized and existing under the laws of the State of New York, as Trustee under the Indenture hereinafter referred to, party of the second part. Whereas, the Company has heretofore executed and delivered to Bankers Trust Company, as Trustee (hereinafter called the "Trustee"), a certain Indenture of Mortgage and Deed of Trust, dated as of August 1, 1930, to secure an issue of bonds of the Company, issued and to be issued in series, from time to time, in the manner and subject to the conditions set forth in the said Indenture; and the said Indenture has been supplemented by supplemental indentures, dated as of August 1, 1930, March 3, 1931, as of November 1, 1935, as of January 1, 1937, as of September 1, 1937, as of June 13, 1939, as of September 1, 1944, as of April 1, 1945, as of September 1, 1948, as of May 1, 1950, as of January 1, 1954, as of May 1, 1955, as of August 1, 1956, as of March 1, 1958, as of April 1, 1959, as of June 1, 1961, as of September 1, 1969, as of May 1, 1970, as of September 1, 1970, as of June 1, 1971, as of August 1, 1972, as of September 1, 1973, as of August 1, 1974, as of July 1, 1976, as of December 1, 1976, as of June 15, 1977, as of May 15, 1978, as of February 1, 1980, as of April 15, 1980, as of June 15, 1980, as of October 1, 1981, as of October 15, 1981, as of February 15, 1982, as of July 1, 1982, as of March 1, 1983, as of March 1, 1984, as of September 15, 1984, as of September 27, 1984, as of November 8, 1984, as of December 1, 1984, as of December 5, 1984, as of January 1, 1985, as of January 30, 1985, as of February 25, 1985, as of July 1, 1985, as of October 1, 1985, as of January 15, 1986, as of May 20, 1986, as of June 3, 1986, as of October 1, 1986, as of July 15, 1989, as of August 25, 1989, as of February 15, 1991, as of May 1, 1991, as of May 15, 1991, as of September 15, 1991, as of April 1, 1992, as of June 15, 1992, as of September 15, 1992, as of April 1, 1993, as of June 15, 1993, as of September 15, 1993, as of November 15, 1993, as of April 1, 1995, as of May 1, 1995, and as of July 1, 1995, respectively, which Indenture as so supplemented and to be hereby supplemented is hereinafter referred to as the "Indenture"; and Whereas, the Indenture provides for the issuance of bonds thereunder in one or more series, the form of each series of bonds and of the coupons to be attached to the coupon bonds, if any, to be substantially in the forms set forth therein with such insertions, omissions and variations as the Board of Directors of the Company may determine; and Whereas, the Company, by appropriate corporate action in conformity with the terms of the Indenture, in accordance with the requirements of the Letter of Credit and Reimbursement Agreement dated as of June 30, 1997 among the Company, Deutsche Bank AG, New York Branch, as Agent (the "Agent") and Issuing Bank, and the Banks named therein (as the same may be amended from time to time, the "Reimbursement Agreement"), has duly determined to create a new series of bonds under the Indenture, consisting of f$54,375,000 in principal amount to be designated as "First Mortgage Bonds Guarantee Series of 1997 due 2000" (hereinafter sometimes referred to as the "bonds of Guarantee Series"), the bonds of which series are to bear interest (which for the purposes hereof shall also include commissions, fees and other amounts (other than amounts payable as principal) due and owing under the Reimbursement Agreement) at the same rates and on the same dates as the Reimbursement Agreement provides for the accrual and payment of interest, fees, commissions and such other amounts, are to mature on September 16, 2000, or, as provided herein, such later date as shall correspond to the latest Stated Termination Date (as defined in the Reimbursement Agreement) of the Letter of Credit (as defined in the Reimbursement Agreement) issued and outstanding under the Reimbursement Agreement, and are to be substantially in the following form: THIS BOND IS NOT TRANSFERABLE EXCEPT (X) TO A SUCCESSOR AGENT UNDER A LETTER OF CREDIT AND REIMBURSEMENT AGREEMENT, DATED AS OF JUNE 30, 1997, AMONG THE OHIO EDISON COMPANY, THE AGENT, THE ISSUING BANK AND THE BANKS NAMED THEREIN AS THE SAME MAY BE AMENDED FROM TIME TO TIME, OR (Y) IN CONNECTION WITH THE EXERCISE OF THE RIGHTS AND REMEDIES OF THE HOLDER HEREOF CONSEQUENT UPON AN "EVENT OF DEFAULT" AS DEFINED IN SUCH REIMBURSEMENT AGREEMENT. OHIO EDISON COMPANY First Mortgage Bond Guarantee Series of 1997 Due 2000 Due September 16, 2000 $ No. Ohio Edison Company, a corporation of the State of Ohio (hereinafter called the Company), for value received, hereby promises to pay to DEUTSCHE BANK AG, NEW YORK BRANCH, as Agent under the Reimbursement Agreement hereinafter described, or registered assigns, dollars at an office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio, on the dates and in the amounts set forth in the Reimbursement Agreement for the payment of the principal of demand loans and the reimbursement of drawings under the Letter of Credit (as defined in the Reimbursement Agreement) and to pay interest on said sum as described on the reverse hereof, in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts. Payments of principal of and interest on this bond shall be made at an office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio. The provisions of this bond are continued on the reverse hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. This bond shall not become obligatory until Bankers Trust Company, the Trustee under the Mortgage referred to on the reverse hereof, or its successor thereunder, shall have authenticated the form of certificate endorsed hereon. In witness whereof, Ohio Edison Company has caused this bond to be signed in its name by its President or a Vice President, by his signature or a facsimile thereof, and its corporate seal to be printed hereon, attested by its Secretary or an Assistant Secretary, by his or her signature or a facsimile thereof. Dated, June __, 1997 Ohio Edison Company By____________________ Title: President Attest: _________________________ Title: Secretary Trustee's Authentication Certificate This bond is one of the bonds of the series designated therein, described in the within-mentioned Mortgage. Bankers Trust Company, as Trustee, By_________________________ Authorized Officer OHIO EDISON COMPANY First Mortgage Bond Guarantee Series of 1997 Due 2000 This bond is one of an issue of bonds of the Company, issuable in series, and is one of a series known as its First Mortgage Bonds of the series designated in its title, all issued and to be issued under and equally secured (except as to any sinking fund established in accordance with the provisions of the Mortgage hereinafter mentioned for the bonds of any particular series) by an Indenture of Mortgage and Deed of Trust, dated as of August 1, 1930, executed by the Company to Bankers Trust Company, as Trustee, as amended and supplemented by indentures supplemental thereto, to which Indenture as so amended and supplemented (herein referred to as the "Mortgage") reference is made for a description of the property mortgaged and pledged, the nature and extent of the security, the rights of the holders of the bonds in respect thereof and the terms and conditions upon which the bonds are secured. The bonds of this Series have been issued to Deutsche Bank AG, New York Branch ("DBNY"), as Agent (including any successors as Agent under the Reimbursement Agreement, the "Agent") in connection with the execution and delivery by the Company of the Letter of Credit and Reimbursement Agreement dated as of June 30, 1997 among the Company, DBNY as Agent and Issuing Bank, and the Banks named therein (as the same may be amended from time to time, the "Reimbursement Agreement"). The principal amount of this bond shall equal $54,375,000. Except as hereinafter provided, interest (which for the purposes hereof shall also include commissions, fees and other amounts (other than amounts payable as principal) due and owing under the Reimbursement Agreement) on this bond accrues and is payable at the same rates and on the same dates as the Reimbursement Agreement provides for the accrual and payment of interest, fees, commissions and such other amounts. The obligation of the Company to make payments with respect to the principal and interest (calculated as set forth above) on the bonds of this Series whether at stated maturity, as a result of acceleration of maturity or upon mandatory redemption shall be fully or partially, as the case may be, satisfied and discharged to the extent that, at any time that any such payment shall become due, the Company shall have fully or partially paid the then due principal amount of any demand loans or any unreimbursed drawings under the Letter of Credit outstanding under the Reimbursement Agreement, or the then due interest on any thereof, or any fees, commissions or other amounts payable under the Reimbursement Agreement. The maturity date of bonds of this Series shall be extended automatically, without further written amendment or other action by either the Company or the Trustee, to correspond to the latest Stated Termination Date of the Letter of Credit, as the same may be extended pursuant to the Reimbursement Agreement, but in no event shall such maturity be extended beyond September 1, 2012. The bonds of this series shall be redeemed in whole, by payment of the principal amount thereof plus accrued interest (calculated as set forth above) thereon, if any, to the date fixed for redemption, upon receipt by the Trustee of a written advice from the Agent, stating that an Event of Default (as defined in the Reimbursement Agreement) has occurred pursuant to the provisions of Section 6.01 of the Reimbursement Agreement, specifying the date of the occurrence of such an Event of Default, stating such occurrence of an Event of Default has not been annulled and demanding payment of the principal amount hereof plus accrued interest (calculated as set forth above) hereon to the date fixed for such redemption. As provided in the supplemental indenture establishing the terms and provisions of the bonds of this series, the date fixed for such redemption shall be the date specified in the aforesaid written advice as the date of the occurrence of an Event of Default. As provided in said supplemental indenture, the aforementioned redemption shall become null and void for all purposes under said supplemental indenture and the Mortgage upon receipt by the Trustee of written notice from the Agent confirming that such Event of Default under the Reimbursement Agreement is no longer continuing prior to such redemption, and thereupon no redemption of the bonds of this series and no payment in respect thereof shall be effected or required. But no such rescission shall extend to any subsequent written advice from the Agent or impair any right consequent on such subsequent written advice. Bonds of this series are not otherwise redeemable prior to their maturity. As more fully described in the supplemental indenture establishing the terms and provisions of the bonds of this series (the "Indenture Supplement"), the Company reserves the right, without any consent or other action by holders of the bonds of this series, to amend the Mortgage to provide (a) that the Mortgage, the rights and obligations of the Company and the rights of the bondholders may be modified with the consent of the holders of not less than 60% in principal amount of the bonds adversely affected; provided, however, that no modification shall (1) extend the time, or reduce the amount, of any payment on any bond, without the consent of the holder of each bond so affected, (2) permit the creation of any lien, not otherwise permitted, prior to or on a parity with the lien of the Mortgage, without the consent of the holders of all bonds then outstanding, or (3) reduce the above percentage of the principal amount of bonds the holders of which are required to approve any such modification without the consent of the holders of all bonds then outstanding and (b) that (i) additional bonds may be issued against 70% of the value of the property which forms the basis for such issuance and (ii) the charge against property subject to a prior lien which is used to effectuate the release of property under the Mortgage be similarly based. The principal hereof may be declared or may become due on the conditions, in the manner and at the time set forth in the Mortgage, upon the occurrence of a completed default as in the Mortgage provided. No recourse shall be had for the payment of the principal of or interest (calculated as set forth above) on this bond against any incorporator or any past, present or future subscriber to the capital stock, stockholder, officer or director of the Company or of any predecessor or successor corporation, either directly or through the Company or any predecessor or successor corporation, under any rule of law, statute or constitution or by the enforcement of any assessment or otherwise, all such liability of incorporators, subscribers, stockholders, officers and directors being released by the registered owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Mortgage. The bonds of this series are issuable only as registered bonds without coupons in denominations of $1,000 and authorized multiples thereof. Subject to the restrictions contained in the Reimbursement Agreement, this bond is transferable as prescribed in the Mortgage by the registered owner hereof, and exchangeable as set forth in the next sentence, in person or by attorney duly authorized, at an office or agency of the Company, in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio, upon surrender and cancellation of this bond and thereupon a new registered bond or bonds of the same series for a like aggregate principal amount, in authorized denominations, will be issued to the transferee in exchange therefor, as provided in the Mortgage, and upon payment, if the Company shall require it, of the transfer charges therein prescribed. In the event the maturity of bonds of this Series is extended in accordance with the provisions hereof and of the Indenture Supplement, as a result of the extension of the Stated Termination Date of the Letter of Credit, as the same may be extended pursuant to the Reimbursement Agreement, the holder hereof shall be entitled to exchange this bond for a bond or bonds stating such new maturity date. The Company and the Trustee may deem and treat the person in whose name this bond is registered as the absolute owner for the purpose of receiving payment of or on account of the principal and interest due hereon and for all other purposes. Registered bonds of this series shall be exchangeable at said offices or agencies of the Company for registered bonds of other authorized denominations having the same aggregate principal amount, in the manner and upon the conditions prescribed in the Mortgage. Notwithstanding any provision of the Mortgage, (a) neither the Company nor the Trustee shall be required to make transfers or exchanges of bonds of this series during the period between any interest payment date for such series and the record date next preceding such interest payment date, and (b) no charge shall be made upon any transfer or exchange of bonds of this series other than for any tax or taxes or other governmental charge required to be paid by the Company. [END OF BOND OF GUARANTEE SERIES] and Whereas, Section 115 of the Indenture provides that the Company and the Trustee may, from time to time and at any time, enter into such indentures supplemental thereto as shall be deemed necessary or desirable for one or more purposes, including, among others, to describe and set forth the particular terms and the form of additional series of bonds to be issued under the Indenture, to add other limitations on the issue of bonds, withdrawal of cash or release of property, to add to the covenants and agreements of the Company for the protection of the holders of the bonds and of the mortgaged and pledged property, to supplement defective or inconsistent provisions contained in the Indenture, and for any other purpose not inconsistent with the terms of the Indenture; and Whereas, all things necessary to make the bonds of Guarantee Series when authenticated by the Trustee and issued as in the Indenture provided, the valid, binding and legal obligations of the Company, entitled in all respects to the security of the Indenture, have been done and performed, and the creation, execution and delivery of this Supplemental Indenture have in all respects been duly authorized; and Whereas, the Company and Trustee deem it advisable to enter into this Supplemental Indenture for the purposes of describing the bonds of Guarantee Series and of establishing the terms and provisions thereof, confirming the mortgaging under the Indenture of additional property for the equal and proportionate benefit and security of the holders of all bonds at any time issued thereunder, amplifying the description of the property mortgaged, adding other limitations to the Indenture on the issue of bonds, withdrawal of cash or release of property, and adding to the covenants and agreements of the Company for the protection of the holders of bonds and of mortgaged and pledged property; Now, therefore, this supplemental indenture witnesseth: That Ohio Edison Company, in consideration of the premises and of one dollar to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, and of the purchase and acceptance of the bonds issued or to be issued hereunder by the holders thereof, and in order to secure the payment both of the principal and interest of all bonds at any time issued and outstanding under the Indenture, according to their tenor and effect, and the performance of all the provisions of the Indenture and of said bonds, hath granted, bargained, sold, released, conveyed, assigned, transferred, pledged, set over and confirmed and by these presents doth grant, bargain, sell, release, convey, assign, transfer, pledge, set over and confirm unto Bankers Trust Company, as Trustee, and to its successor or successors in said trust, and to its and their assigns forever, all the properties of the Company described in Schedule A (which is identified by the signature of an officer of each party hereto at the end thereof) hereto annexed and hereby made a part hereof; Together with all and singular the tenements, hereditaments and appurtenances belonging or in any wise appertaining to the aforesaid property or any part thereof, with the reversion and reversions, remainder and remainders and (subject to the provisions of Article XI of the Indenture) the tolls, rents, revenues, issues, earnings, income, product and profits thereof, and all the estate, right, title and interest and claim whatsoever, at law as well as in equity, which the Company now has or may hereafter acquire in and to the aforesaid property and franchises and every part and parcel thereof. The Company does hereby agree and does hereby confirm and reaffirm the agreement made by it in the Indenture, dated as of August 1, 1930, that all the property, rights and franchises acquired by the Company after the date of the Indenture, dated as of August 1, 1930 (except any hereinafter expressly excepted), shall be as fully embraced within the lien of the Indenture as if such property had been owned by the Company on the date of the Indenture, dated as of August 1, 1930 and was specifically described therein and conveyed thereby and does hereby confirm that the Company will not cause or consent to a partition, whether voluntary or through legal proceedings, of property, whether herein described or heretofore or hereafter acquired, in which its ownership shall be as a tenant in common except as permitted by and in conformity with the provisions of the Indenture and particularly of Article XI thereof. Provided that the following are not and are not intended to be now or hereafter granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or confirmed hereunder and are hereby expressly excepted from the lien and operation of the Indenture, viz.: cash, shares of stock and obligations (including bonds, notes and other securities) not heretofore or hereafter specifically pledged, paid or deposited or delivered under the Indenture or covenanted so to be. To have and to hold all such properties, real, personal and mixed, mortgaged, pledged or conveyed by the Company as aforesaid, or intended so to be, unto the Trustee and its successors and assigns forever. In trust, nevertheless, upon the terms and trusts of the Indenture for those who shall hold the bonds and coupons issued and to be issued thereunder, or any of them, without preference, priority or distinction as to lien of any of said bonds and coupons over any others thereof by reason of priority in the time of the issue or negotiations thereof, or otherwise howsoever, subject, however, to the provisions in reference to extended, transferred or pledged coupons and claims for interest set forth in the Indenture (and subject to any sinking funds that may be hereafter created for the benefit of any particular series). Provided, however, and these presents are upon the condition that if the Company, its successors or assigns, shall pay or cause to be paid, the principal of and interest on said bonds, at the times and in the manner stipulated therein and herein, and shall keep, perform and observe all and singular the covenants and promises in said bonds and in the Indenture expressed to be kept, performed and observed by or on the part of the Company, then this Supplemental Indenture and the estate and rights hereby granted shall cease, determine and be void, otherwise to be and remain in full force and effect. It is hereby covenanted, declared and agreed, by the Company, that all such bonds and coupons are to be issued, authenticated and delivered, and that all property subject or to become subject hereto is to be held, subject to the further covenants, conditions, uses and trusts in the Indenture set forth, and the parties hereto mutually agree as follows: Section 1. Bonds of Guarantee Series shall mature on September 16, 2000, or such later date as shall correspond to the latest Stated Termination Date of the Letter of Credit, as the same may be extended pursuant to the Reimbursement Agreement, but in no event shall such maturity be extended beyond September 1, 2012, and shall be designated as the Company's "First Mortgage Bonds Guarantee Series of 1997 due 2000." The bonds of Guarantee Series shall bear interest (which for the purposes hereof shall also include commissions, fees and other amounts (other than amounts payable as principal) due and owing under the Reimbursement Agreement) at the same rates and on the same dates as the Reimbursement Agreement provides for the accrual and payment of interest, fees, commissions and such other amounts. Principal or redemption price of and interest on the bonds of Guarantee Series shall be payable in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts, at an office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio. Definitive bonds of Guarantee Series may be issued, originally or otherwise, only as registered bonds, substantially in the form of bond hereinbefore recited, and in the denominations of $1,000 and authorized multiples thereof. Delivery of a bond of Guarantee Series to the Trustee for authentication shall be conclusive evidence that its serial number has been duly approved by the Company. The bonds of Guarantee Series shall be redeemable pursuant to the requirements of this Sixty-Eighth Supplemental Indenture in whole, prior to maturity, upon receipt by the Trustee of a written advice from the Agent, stating that an Event of Default has occurred pursuant to the provisions of Section 6.01 of the Reimbursement Agreement, specifying the date of the occurrence of such an Event of Default, stating such occurrence of an Event of Default has not been annulled and demanding payment of the principal amount hereof plus accrued interest (calculated as set forth above) hereon to the date fixed for such redemption. The Trustee shall immediately upon receiving such written advice mail a copy thereof to the Company stamped or otherwise marked to indicate the date of receipt by the Trustee. The redemption date shall be the date specified in the aforesaid written advice as the date of such occurrence of an Event of Default under the Reimbursement Agreement. The terms "Agent" and "Reimbursement Agreement" shall have the meanings specified in the form of bond of Guarantee Series provided for herein. Redemption of the bonds of Guarantee Series shall be at the principal amount thereof, plus accrued interest thereon to the date fixed for redemption and such amount shall become due and payable on the date fixed for such redemption. Anything in this paragraph contained to the contrary notwithstanding, if prior to such redemption, the Trustee shall have been advised in writing by the Agent that such Event of Default under the Reimbursement Agreement is no longer continuing and that the aforesaid written advice has been rescinded, the aforesaid written advice shall thereupon, without further act of the Trustee or the Company, be rescinded and become null and void for all purposes hereunder and no redemption of the bonds of Guarantee Series and no payments in respect thereof shall be effected or required. But no such rescission shall extend to any subsequent written advice from the Agent or impair any right consequent on such subsequent written advice. Section 2. Bonds of Guarantee Series shall be deemed to be paid and no longer outstanding under the Indenture to the extent that the Company's obligations with respect to the principal, interest, commissions, fees and other amounts payable under or in connection with the Reimbursement Agreement which are due from time to time under the Reimbursement Agreement are, and the Letter of Credit issued pursuant thereto is, no longer outstanding and the Trustee has been notified to such effect by the Company. Section 3. Subject to the terms of the Reimbursement Agreement, bonds of Guarantee Series may be transferred by the registered owners thereof, and exchanged as set forth in the next sentence, in person or by attorney duly authorized, at an office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio but only in the manner and upon the conditions prescribed in the Indenture and in the form of bond hereinbefore recited. In the event the maturity of bonds of Guarantee Series is extended in accordance with the provisions hereof, as a result of the extension of the Stated Termination Date of the Letter of Credit, as the same may be extended pursuant to the Reimbursement Agreement, the holder hereof shall be entitled to exchange this bond for a bond or bonds stating such new maturity date. Bonds of Guarantee Series shall be exchangeable for other registered bonds of the same series, in the manner and upon the conditions prescribed in the Indenture, and in the form of bond hereinbefore recited, upon the surrender of such bonds at said offices or agencies of the Company. However, notwithstanding the provisions of Section 14 or 15 of the Indenture, no charge shall be made upon any transfer or exchange of bonds of said series other than for any tax or taxes or other governmental charge required to be paid by the Company. Section 4. Bonds of Guarantee Series shall be considered and deemed to be "outstanding" for all purposes under the Mortgage in the full principal amount thereof, until the maturity thereof, regardless of whether any amounts have accrued thereunder or are then due and owing thereunder. Section 5. The Company reserves the right, without any consent or other action by holders of the bonds of Guarantee Series, or any subsequent series of bonds, to amend the Indenture by inserting the following language as Section 115A immediately following current Section 115 of the Indenture: With the consent of the holders of not less than sixty per centum (60%) in principal amount of the bonds at the time outstanding or their attorneys-in-fact duly authorized, or, if the rights of the holders of one or more, but not all, series then outstanding are affected, the consent of the holders of not less than sixty per centum (60%) in aggregate principal amount of the bonds at the time outstanding of all affected series, taken together, and not any other series, the Company, when authorized by a resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or modifying the rights and obligations of the Company and the rights of the holders of any of the bonds and coupons; provided, however, that no such supplemental indenture shall (1) extend the maturity of any of the bonds or reduce the rate or extend the time of payment of interest thereon, or reduce the amount of the principal thereof, or reduce any premium, payable on the redemption thereof or change the coin or currency in which any bond or interest thereon is payable, without the consent of the holder of each bond so affected, or (2) permit the creation of any lien, not otherwise permitted, prior to or on a parity with the lien of this Indenture, without the consent of the holders of all of the bonds then outstanding, or (3) reduce the aforesaid percentage of the principal amount of bonds the holders of which are required to approve any such supplemental indenture, without the consent of the holders of all the bonds then outstanding. For the purposes of this Section, bonds shall be deemed to be affected by a supplemental indenture if such supplemental indenture adversely affects or diminishes the right of holders thereof against the Company or against its property. Upon the written request of the Company, accompanied by a resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of bondholders as aforesaid (the instrument or instruments evidencing such consent to be dated within one year of such request), the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion but shall not be obligated to enter into such supplemental indenture. The Trustee shall be entitled to receive and, subject to Section 102 of the Indenture and Article Five of the Seventh Supplemental Indenture, may rely upon an opinion of counsel as conclusive evidence that any such supplemental indenture is authorized or permitted by the provisions of this Section. It shall not be necessary for the consent of the bondholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. The Company and the Trustee, if they so elect, and either before or after such 60% or greater consent has been obtained, may require the holder of any bond consenting to the execution of any such supplemental indenture to submit his bond to the Trustee or to such bank, banker or trust company as may be designated by the Trustee for the purpose, for the notation thereon of the fact that the holder of such bond has consented to the execution of such supplemental indenture, and in such case such notation, in form satisfactory to the Trustee, shall be made upon all bonds so submitted, and such bonds bearing such notation shall forthwith be returned to the persons entitled thereto. All subsequent holders of bonds bearing such notation shall be deemed to have consented to the execution of such supplemental indenture, and consent, once given or deemed to be given, may not be withdrawn. Prior to the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Company shall publish a notice, setting forth in general terms the substance of such supplemental indenture, at least once in one daily newspaper of general circulation in each city in which the principal of any of the bonds shall be payable, or, if all bonds outstanding shall be registered bonds without coupons or coupon bonds registered as to principal, such notice shall be sufficiently given if mailed, first class, postage prepaid, and registered if the Company so elects, to each registered holder of bonds at the last address of such holder appearing on the registry books, such publication or mailing, as the case may be, to be made not less than thirty days prior to such execution. Any failure of the Company to give such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. Section 6. The Company reserves the right, without any consent or other action by the holders of the bonds of Guarantee Series, or any subsequent series of bonds, to amend the Indenture by deleting the phrase "sixty per centum (60%)" in Section 28 of the Indenture and substituting therefor the phrase "seventy per centum (70%)" and by deleting the phrase "One hundred sixty-six and two-thirds per cent. (166 2/3%)" in Sections 65 and 67 of the Indenture and substituting therefor the phrase "One hundred and forty-two and eighty-six hundredths per cent. (142.86%)". Section 7. Except as herein otherwise expressly provided, no duties, responsibilities or liabilities are assumed, or shall be construed to be assumed, by the Trustee by reason of this Supplemental Indenture; the Trustee shall not be responsible for the recitals herein or in the bonds (except the Trustee's authentication certificate), all of which are made by the Company solely; and this Supplemental Indenture is executed and accepted by the Trustee, subject to all the terms and conditions set forth in the Indenture, as fully to all intents and purposes as if the terms and conditions of the Indenture were herein set forth at length. Section 8. As supplemented by this Supplemental Indenture, the Indenture is in all respects ratified and confirmed, and the Indenture as herein defined, and this Supplemental Indenture, shall be read, taken and construed as one and the same instrument. Section 9. Nothing in this Supplemental Indenture contained shall or shall be construed to confer upon any person other than a holder of bonds issued under the Indenture, the Company and the Trustee any right or interest to avail himself of any benefit under any provision of the Indenture or of this Supplemental Indenture. Section 10. This Supplemental Indenture may be simultaneously executed in several counterparts and all such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. In witness whereof, Ohio Edison Company, party of the first part hereto, and Bankers Trust Company, party of the second part hereto, have caused these presents to be executed in their respective names by their respective Presidents or one of their Vice Presidents or Assistant Vice Presidents and their respective seals to be hereunto affixed and attested by their respective Secretaries or one of their Assistant Secretaries or Assistant Treasurers, all as of the day and year first above written. Ohio Edison Company [Seal] By: /S/ John A. Gill ---------------------- Title: Vice President Attest: /s/ Nancy C. Ashcom Title: Secretary Signed, Sealed and Acknowledged on behalf of Ohio Edison Company in the presence of: /s/ Cynthia A. LaFlame ------------------------ Cynthia A. Laflame /s/ Suzette H. Sharif ------------------------ Suzette H. Sharif Bankers Trust Company [Seal] By: /s/ Scott Thiel ----------------------------- Title: Assistant Vice President Attest: /s/ Paul Dispenza ------------------------------- Title: Assistant Vice President Signed, Sealed and Acknowledged on behalf of Bankers Trust Company in the presence of: /s/ Barbara Nastro ---------------------- Barbara Nastro /s/ William T. Jenkins, Jr. -------------------------------- William T. Jenkins, Jr. State of Ohio ) : ss.: County of Summit ) On the 26th day of June, 1997, personally appeared before me, a Notary Public in and for the said County and State aforesaid, John A. Gill, and Nancy C. Ashcom, to me known and known to me to be a Vice President and Secretary, respectively, of Ohio Edison Company, the corporation which executed the foregoing instrument, and who severally acknowledged that they did sign and seal such instrument as such Vice President and Secretary, respectively, of Ohio Edison Company, the same is their free act and deed and the free and corporate act and deed of said corporation. In witness whereof, I have hereunto set my hand and seal the 26th day of June, 1997. /s/ Debra L. Cordea ---------------------- Debra L. Cordea, Notary Public Residence - Summit County State Wide Jurisdiction, Ohio My Commission Expires Nov. 20, 1999 [Seal] State of Ohio ) : ss.: County of Summit ) On the 26th day of June, 1997, before me personally came John A. Gill, to me known, who, being by me duly sworn, did depose and say that he resides at 123 Meadow Lane, Peninsula, Ohio 44264; that he is a Vice President of Ohio Edison Company, one of the corporations described in and which executed the above instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. /s/ Debra L. Cordea ---------------------- Debra L. Cordea, Notary Public Residence - Summit County State Wide Jurisdiction, Ohio My Commission Expires Nov. 20, 1999 [Seal] State of New York ) : ss.: County of New York) On the 30th day of June, 1997, personally appeared before me, a Notary Public in and for the said County and State aforesaid, Scott Thiel and Paul Dispenza, to me known and known to me to be an Assistant Vice President and Assistant Vice President, respectively, of Bankers Trust Company, the corporation which executed the foregoing instrument, and who severally acknowledged that they did sign and seal such instrument as such Assistant Vice President and Assistant Vice President for and on behalf of said corporation and that the same is their free act and deed and the free and corporate act and deed of said corporation. In witness whereof, I have hereunto set my hand and seal the 30th day of June, 1997. /s/ Sharon v. Alston ------------------------ Sharon V. Alston Notary Public, State of New York No. 31-4966275 Qualified in New York County Commission Expires 5/7/98 [Seal] State of New York ) : ss.: County of New York ) On the 30th day of June, 1997, before me personally came Scott Thiel, to me known, who, being by me duly sworn, did depose and say that he resides at Stanhope, New Jersey 07874; that he is an Assistant Vice President of Bankers Trust Company, one of the parties described in and which executed the above instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like authority. /s/ Sharon V. Alston --------------------------- Sharon V. Alston Notary Public, State of New York No. 31-4966275 Qualified in New York County Commission Expires 5/7/98 [Seal] Bankers Trust Company hereby certifies that its precise name and address as Trustee hereunder are: Bankers Trust Company Four Albany Street Borough of Manhattan City, County and State of New York 10006 Bankers Trust Company By: /s/ Scott Thiel --------------------------------- Title: Assistant Vice President SCHEDULE A Detailed Description of Additional Properties A. OFFICE BUILDINGS, STORE HOUSES, ETC. The following offices, storerooms, warehouses, and other buildings of the Company, together with all land of the Company on which the same are situated, and all easements, rights of way and appurtenances of said lands, together with all furniture and fixtures located in said buildings: 1. Land and dwelling, 777 Mayfield Drive, Marion Township, Marion County, Ohio. 2. Land and dwelling, 4181 Autumn Creek Drive, German Township, Clark County, Ohio. 3. Land and dwelling, 3300 St. Clair Avenue, St. Clair Township, Columbiana County, Ohio. 4. Land and dwelling, 33925 S. Park Circle, St. Clair Township, Columbiana County, Ohio. 5. Land and dwelling, 3970 Walnut Wood Way, City of Green, Summit County, Ohio. 6. Land and dwelling, 699 E. Church Street, City of Marion, Marion County, Ohio. 7. Land and dwelling, 1124 Colonial Avenue, City of Marion, Marion County, Ohio. B. ELECTRIC TRANSMISSION LINES The following electric transmission lines of the Company, including the towers, poles, line poles, wire, switch racks, insulators and other appurtenances, and equipment owned by the Company, and all other property of the Company, with all the Company's rights of way, easements, permits, privileges and consents, licenses and rights over or relating to the construction, maintenance or operation thereof, through, over, under or upon any public streets or highways or other lands, public or private. 1. Seville Substation Loop: Double circuit wood pole construction extending from Pole #10189 on the existing Star-W. Medina Line, westerly to Seville Substation, a distance of 0.87 mile, being located in Guilford and Westfield Townships, Medina County, Ohio. 2. Blue Jacket-Kirby: New single circuit wood pole construction extending from Kirby Substation westerly and northerly to interconnect with D. P. & L. Company at Pole #11181, a distance of 6.32 miles, being located in Claibourne Township, Union County, Ohio. 3. Avery Substation Loop: Double circuit wood pole construction extending from Pole #8894 on the existing Greenfield-Shinrock Line northerly to Avery Substation, a distance of 0.08 mile, being located in Milan Township, Erie County, Ohio. 4. Nevada Tap: Single circuit wood pole construction extending from Tower #6589 southerly and westerly to Nevada Substation, a distance of 0.06 mile, being located in Boardman Township, Mahoning County, Ohio. 5. Lakemore Loop: Double circuit wood pole construction extending from Tower #7957 on the existing Gilchrist-South Akron Line northerly, northwesterly, and westerly to Lakemore Substation, a distance of 0.25 mile, all being located in Springfield Township, Summit County, Ohio. 6. Babb-Evans: Single circuit construction on existing steel towers, new wood poles, and new steel poles. Extending from Babb Substation southerly, easterly, northwesterly, and westerly to Evans Substation, a distance of 4.7 miles, all being located in the City of Akron, Summit County, Ohio. 7. Chamberlin Loop: Double circuit steel pole construction extending from steel tower #42839 and from steel pole #42845 in the existing Harding-Mansfield Line northerly and easterly to Chamberlin Substation, a distance of 0.79 mile, all being located in the City of Macedonia, Twinsburg Township, Summit County, Ohio. 8. Clark-Urbana: Single circuit wood pole construction extending from Clark Substation in a northerly direction to the D. P. & L. Company Interconnection at Pole A, a distance of 8.70 miles, being located in Mad River Township, Springfield Township and German Township in Clark County and Urbana Township in Champaign County, Ohio. Akron Division 9. Macedonia-W. Akron Relocate for Glencairn: Single circuit wood pole construction extending from Structure #31-N on the existing line easterly and southerly to Structure #57 on the existing line, an increased distance of 0.21 mile, all being located in Richfield Township, Summit County, State of Ohio. 10. Case Tap: Single and double wood pole construction extending from Structure #32 on the existing Aurora-Chamberlin Line at Highland Road southerly and westerly at Case Substation, a distance of 0.43 mile of single circuit construction and 0.27 mile of double circuit construction, all located in Twinsburg, Summit County, State of Ohio. 11. Aurora-Chamberlin: New single circuit wood pole construction extending from Chamberlin Substation easterly and southerly to Pole #63 south of the Conrail Railroad, a distance of 0.17 mile, being located in Summit County, Ohio. 12. Aurora-Chamberlin: New wood pole construction extending from Pole #63 to Pole #2 near Hadden Road, a distance of 1.16 miles, being located in the City of Twinsburg and Twinsburg Township, Summit County, Ohio. 13. Prospect Substation Tap: Single circuit wood pole construction extending from Pole #61 on the existing Ravenna- West Ravenna #2 Line easterly to Prospect Substation, a distance of 0.05 mile, being located in Rootstown Township, Portage County, Ohio. 14. Shiloh Tap: Single circuit wood pole construction extending from Pole #10 on the existing Abbe-Medina Line, westerly to Shiloh Substation, a distance of 0.02 mile, being located in Liverpool Township, Medina County, Ohio. 15. Seville Loop: Double circuit wood pole construction extending from Pole #74 on the existing Rittman Line northerly and northeasterly to Seville Substation, a distance of 0.75 mile, being located in Westfield Township, Medina County, Ohio. 16. Quarry Substation Loop: Single circuit wood pole construction extending from Pole #110 on the existing Avery- Greenfield Lone, easterly to Quarry Substation, a distance of 0.2 mile, being located in Perkins Township, Erie County, Ohio. 17. Bechtel McLaughlin Tap: Single circuit wood pole construction extending from Pole #20 on the existing Carriage- Greenfield Line, easterly to Bechtel McLaughlin Substation, a distance of 0.07 mile, being located in Perkins Township, Erie County, Ohio. 18. Avery Substation Loop: Double circuit wood pole construction extending from Pole #165 on the existing Carriage- Greenfield Line westerly to Avery Substation, a distance of 0.52 mile, being located in Milan Township, Erie County, Ohio. 19. Wellington Muni Tap: Single circuit wood pole construction extending from Pole #11A on the existing Carlisle-Wellington Line northerly to Wellington Muni Substation, a distance of 0.1 mile, being located in Wellington Township, Lorain County, Ohio. 20. Bellevue-Greenfield #2: Single circuit wood pole construction extending from Bellevue Substation northerly and northeasterly to Greenfield Substation, a distance of 14.40 miles, all being located in the city of Bellevue, Lyme Township, Huron County, Ohio, and in Groton Township, Margaretta Township, Village of Castalia, Perkins Township, Erie County, Ohio. 21. Dell Loop: Single circuit wood pole construction extending from Structure #35 on the existing Industrial Line northerly and westerly to Dell substation, a distance of 0.07 mile, and single circuit wood pole construction extending from Structure #37 on the existing Industrial Line northerly and westerly to Dell Substation, a distance of 0.13 mile, all being located in the City of Ashland, Montgomery Township, Ashland County, Ohio. 22. National Latex Company Tap: Single circuit wood pole construction extending from Structure #14B on the existing Industrial Line easterly to National Latex Company Substation, a distance of 0.01 mile, all being located in the City of Ashland, Ashland County, Ohio. Stark Division 23. Dale Loop: Double circuit wood pole construction extending from Structure #73 on the existing Hartville-Star Line southerly and westerly to Dale Substation, a distance of 3.04 miles, all being located in the City of Green, Summit County and in Jackson Township, Stark County, Ohio. 24. Knox Loop: Double circuit wood pole construction extending from Structure #102 on the existing Lynchburg Line westerly to Knox Substation, a distance of 1.33 miles, all being located in West Township, Columbiana County, Ohio. 25. Fleming Foods Tap: Single circuit wood pole construction extending from Structure #17 on the existing Richville Line easterly to Fleming Foods Substation, a distance of 0.01 mile, all being located in Perry Township, Stark County, Ohio. 26. Dale Strobel: Double circuit and single circuit wood pole construction extending from Dale Substation easterly, southerly, westerly, southerly, and westerly to Strobel Substation a distance of 3.43 miles, all being located in Jackson Township, Stark County, Ohio. Youngstown Division 27. Carriage Hill Foods Tap: Single circuit wood pole construction extending from Structure #12 on the existing Boardman-Pidgeon north line southwesterly and southerly to Carriage Hill Foods substation, a distance of 0.09 mile, all being located in Perry Township, City of Salem, Columbiana County, Ohio. Springfield Division 28. Villa Tap: single circuit wood pole construction extending from Structure #35 on the existing Broadview-East Springfield Line easterly 0.50 miles to Villa Substation. The line is located in Moorefield Township, Clark County, Ohio. 29. Tech II Tap: Single Circuit wood pole construction extending from structure #35 on the existing Broadview - Waterworks line westerly to Tech II Substation, a distance of 1.74 miles, all being located in Moorefield and German Township, Clark County and in Mad River Township, Champaign County, Ohio. C. ELECTRICAL SUBSTATIONS The following substations and substation sites and miscellaneous property of the Company, including all buildings structures, towers, poles, all equipment, appliances and devices for manufacturing, converting and distributing electric energy, owned by the Company, and all land of the Company on which the same are situated, and all of the Company's lands and easements, rights of way, rights, machinery, equipment, appliances, devices, licenses and supplies, forming a part of said substations or any of them or used or enjoyed or capable of being used to enjoyed in connection therewith: Western Division Akron Division Case Substation, structures and equipment only (land was reported previously), located at 2111 Case Parkway South in the City of Twinsburg, Summit County, Ohio. Chillicothe Substation site, land only, located on the west side of South Chillicothe Road approximately 1,800 feet south of its intersection with Lena Drive in the City of Aurora, Portage County, Ohio. Clayben Substation site, land only, located at 2175 Massillon Road in Springfield Township, Summit County, Ohio. Lakemore Substation, structures and equipment only (land was reported previously), located at 2862 Canton Road (across from its intersection with Jackson Boulevard) in the City of Uniontown, Summit County, Ohio. Prospect Substation, land, structures, and equipment, located at 5159 South Prospect Street, Village of Rootstown, Portage County, Ohio. Rosemont Substation site, land only, located at 660 Brunsdorf Drive (immediately south of Interstate No. 77) in the City of Fairlawn, Summit County, Ohio. Seville Substation, land, structures, and equipment, located at 5501 Greenwich Road, in Westfield Township, Medina County, Ohio. Treat Substation, land, structures, and equipment, located at 95 Treat Road, in the City of Aurora, Portage County, Ohio. Bay Area Avery Substation site, land only, located at 805 West Mason Road, in Milan Township, Erie County, Ohio. Quarry Substation, land, structures, and equipment, located on Bogart Road, across from its intersection with Galloway Road, in Perkins Township, Erie County, Ohio. Lake Erie Area Baumhart Substation, structures and equipment only (land was reported previously), located at 315 Helen Drive in the City of Vermillion, Lorain County, Ohio. Mansfield Area Dell Substation, structures and equipment only (land was reported previously), located at 200 Delafield Avenue in Montgomery Township, Ashland County, Ohio. Perrysville substation, structures and equipment only, located east of Route 39 approximately 0.5 miles north of its intersection with Route 95 in Green Township, Ashland County, Ohio. Marion Area Kirby Substation site, land only, located on Landon Road, approximately 0.3 miles east of its intersection with State Route No. 37 in Claibourne Township, Union County, Ohio. Stark Division Carmont Substation, land structures and equipment, located at 1336 Carmont Avenue (17th Street, S.W.) across from its intersection with Rondale Avenue in the City of Massillon, Stark County, Ohio. Fleming Foods, structure and equipment only, located on the east side of Erie Avenue, approximately 300 feet north of its intersection with Londcrest Street in the City of Massillon, Stark County, Ohio. Dale Substation, structures and equipment only (land was reported previously), located at 7181 Arlington Avenue, in Jackson Township, Stark County, Ohio. Springfield Division Villa Substation, structures and equipment only, located at 3039 Derr Road (near the intersection of Villa Road and Derr Road) in Moorefield Township, Clark County, Ohio. Youngstown Division Fresh Mark Substation, structures and equipment only, located on the west side of Lincoln Avenue (State Route No. 45) immediately south of its intersection with Snyder Road in the City of Salem, Columbiana County, Ohio. Lockwood Substation site, land only, located on the east side of Lockwood Boulevard approximately 100 feet north of its intersection with Shields Road in the Township of Austintown, Summit County, Ohio. Matthews Substation site, land only, located at 1971 Matthews Road (approximately 500 feet east of its intersection with Sheridan Road) in the City of Youngstown, Mahoning County, Ohio. /s/ Nancy C. Ashcom , -------------------------------- Nancy C. Ashcom, Secretary Ohio Edison Company /s/ Scott Thiel , --------------------------------- Scott Thiel, Assistant Vice President Bankers Trust Company EX-4.2 9 OHIO EDISON COMPANY with THE BANK OF NEW YORK, As Trustee --------------------- SIXTY-NINTH SUPPLEMENTAL INDENTURE Providing among other things for FIRST MORTGAGE BONDS Pledge Series of 1998 due 2006 ----------------------- Dated as of April 1, 1998 SUPPLEMENTAL INDENTURE, dated as of April 1, 1998 between Ohio Edison Company, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the "Company"), party of the first part, and The Bank of New York, a corporation organized and existing under the laws of the State of New York (hereinafter called the "Trustee"), as Trustee under the Indenture hereinafter referred to, party of the second part. Whereas, the Company has heretofore executed and delivered to Bankers trust company, as trustee (hereinafter called the "Old Trustee"), a certain Indenture of Mortgage and Deed of Trust, dated as of August 1, 1930, to secure an issue of bonds of the Company, issued and to be issued in series, from time to time, in the manner and subject to the conditions set forth in the said Indenture; and the said Indenture has been supplemented by sixty-eight supplemental indentures, which Indenture as so supplemented and to be hereby supplemented is hereinafter referred to as the "Indenture"; and WHEREAS, the Trustee has succeeded the Old Trustee as trustee under the Indenture pursuant to Article XVI thereof; and WHEREAS, the Indenture provides for the issuance of bonds thereunder in one or more series, the form of each series of bonds and of the coupons to be attached to the coupon bonds, if any, to be substantially in the forms set forth therein with such insertions, omissions and variations as the Board of Directors of the Company may determine; and Whereas, the Company, by appropriate corporate action in conformity with the terms of the Indenture, has duly determined to create a new series of bonds under the Indenture, consisting of $125,097,000 in principal amount to be designated as "First Mortgage Bonds Pledge Series of 1998 due 2006" (hereinafter sometimes referred to as the "bonds of First Pledge Series"), the bonds of which series are to bear interest at the rate of 6.38% per annum, are to mature April 15, 2006, and are to be substantially in the following form: [Form of Bond of First Pledge Series] This Bond is not transferable except to a successor trustee under the General Mortgage Indenture and Deed of Trust, dated as of January 1, 1998, between the Company and The Bank of New York, as Trustee, or in connection with the exercise of the rights and remedies of the holder hereof consequent upon a "default" as defined in the Mortgage referred to herein. OHIO EDISON COMPANY First Mortgage Bond Pledge Series of 1998 Due 2006 Due April 15, 2006 $ No. Ohio Edison Company, a corporation of the State of Ohio (hereinafter called the Company), for value received, hereby promises to pay to , or registered assigns, dollars at an office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio, on April 15, 2006 in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts, and to pay at said offices or agencies to the registered owner hereof, in like coin or currency, interest thereon from the Initial Interest Accrual Date (hereinbelow defined) at the rate of six and thirty-eight hundredths per centum per annum. Payments of principal of and interest on this bond shall be made at an office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio. Payment of principal of principal of, or premium or interest on, the Company's First Mortgage Bonds Guarantee Series of 1998 (the "General Mortgage Bonds") issued under the Company's General Mortgage Indenture and Deed of Trust to The Bank of New York, as Trustee, dated as of January 1, 1998, shall, to the extent thereof, be deemed to satisfy and discharge the obligation of the Company, if any, to make a payment of principal, premium or interest, as the case may be, in respect of this bond which is then due. The provisions of this bond are continued on the reverse hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. This bond shall not become obligatory until The Bank of New York, the Trustee under the Mortgage referred to on the reverse hereof, or its successor thereunder, shall have authenticated the form of certificate endorsed hereon. In witness whereof, Ohio Edison Company has caused this bond to be signed in its name by its President or a Vice President, by his signature or a facsimile thereof, and its corporate seal to be printed hereon, attested by its Secretary or an Assistant Secretary, by his signature or a facsimile thereof. Dated, , Ohio Edison Company, By: Title: Attest: Title: [Form of Trustee's Authentication Certificate] Trustee's Authentication Certificate This bond is one of the bonds of the series designated therein, described in the within-mentioned Mortgage. The Bank of New York, as Trustee, By: Authorized Officer [Form of Bond of First Pledge Series] [Reverse] OHIO EDISON COMPANY FIRST MORTGAGE BOND PLEDGE SERIES OF 1998 DUE 2006 This bond is one of an issue of bonds of the Company, issuable in series, and is one of a series known as its First Mortgage Bonds of the series designated in its title, all issued and to be issued under and equally secured (except as to any sinking fund established in accordance with the provisions of the Mortgage hereinafter mentioned for the bonds of any particular series) by an Indenture of Mortgage and Deed of Trust, dated as of August 1, 1930, executed by the Company to The Bank of New York, as Trustee, as amended and supplemented by indentures supplemental thereto, to which Indenture as so amended and supplemented (herein referred to as the "Mortgage") reference is made for a description of the property mortgaged and pledged, the nature and extent of the security, the rights of the holders of the bonds in respect thereof and the terms and conditions upon which the bonds are secured. Bonds of this series are not redeemable prior to their maturity. As a sinking fund, to the extent that the General Mortgage Bonds are called for redemption, a like principal amount of bonds of this series shall become due and payable on the redemption date that such General Mortgage Bonds are to be redeemed, together with accrued interest to such date. The Initial Interest Accrual Date for the bonds of this series shall be the date that interest begins to accrue on the General Mortgage Bonds. As more fully described in the supplemental indenture establishing the terms and provisions of the bonds of this series, the Company reserves the right, without any consent or other action by holders of the bonds of this series, to amend the Mortgage to provide (a) that the Mortgage, the rights and obligations of the Company and the rights of the bondholders may be modified with the consent of the holders of not less than 60% in principal amount of the bonds adversely affected; provided, however, that no modification shall (1) extend the time, or reduce the amount, of any payment on any bond, without the consent of the holder of each bond so affected, (2) permit the creation of any lien, not otherwise permitted, prior to or on a parity with the lien of the Mortgage, without the consent of the holders of all bonds then outstanding, or (3) reduce the above percentage of the principal amount of bonds the holders of which are required to approve any such modification without the consent of the holders of all bonds then outstanding and (b) that (i) additional bonds may be issued against 70% of the value of the property which forms the basis for such issuance and (ii) the charge against property subject to a prior lien which is used to effectuate the release of property under the Mortgage be similarly based. The principal hereof may be declared or may become due on the conditions, in the manner and at the time set forth in the Mortgage, upon the occurrence of a completed default as in the Mortgage provided. No recourse shall be had for the payment of the principal of or interest on this bond against any incorporator or any past, present or future subscriber to the capital stock, stockholder, officer or director of the Company or of any predecessor or successor corporation, either directly or through the Company or a predecessor or successor corporation, under any rule of law, statute or constitution or by the enforcement of any assessment or otherwise, all such liability of incorporators, subscribers, stockholders, officers and directors being released by the registered owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Mortgage. The bonds of this series are issuable only as registered bonds without coupons in denominations of $1,000 and authorized multiples thereof. The Company and the Trustee may deem and treat the person in whose name this bond is registered as the absolute owner for the purpose of receiving payment of or on account of the principal and interest due hereon and for all other purposes. Registered bonds of this series shall be exchangeable at said offices or agencies of the Company for registered bonds of other authorized denominations having the same aggregate principal amount, in the manner and upon the conditions prescribed in the Mortgage. Notwithstanding any provision of the Mortgage, (a) neither the Company nor the Trustee shall be required to make transfers or exchanges of bonds of this series during the period between any interest payment date for such series and the record date next preceding such interest payment date, and (b) no charge shall be made upon any transfer or exchange of bonds of this series other than for any tax or taxes or other governmental charge required to be paid by the Company. [END OF FORM OF BOND OF FIRST PLEDGE SERIES] and Whereas, Section 115 of the Indenture provides that the Company and the Trustee may, from time to time and at any time, enter into such indentures supplemental thereto as shall be deemed necessary or desirable for one or more purposes, including, among others, to describe and set forth the particular terms and the form of additional series of bonds to be issued under the Indenture, to add other limitations on the issue of bonds, withdrawal of cash or release of property, to add to the covenants and agreements of the Company for the protection of the holders of the bonds and of the mortgaged and pledged property, to supplement defective or inconsistent provisions contained in the Indenture, and for any other purpose not inconsistent with the terms of the Indenture; and Whereas, all things necessary to make the bonds of First Pledge Series when authenticated by the Trustee and issued as in the Indenture provided, the valid, binding and legal obligations of the Company, entitled in all respects to the security of the Indenture, have been done and performed, and the creation, execution and delivery of this Supplemental Indenture have in all respects been duly authorized; and Whereas, the Company and Trustee deem it advisable to enter into this Supplemental Indenture for the purposes of describing the bonds of First Pledge Series and of establishing the terms and provisions thereof, confirming the mortgaging under the Indenture of additional property for the equal and proportionate benefit and security of the holders of all bonds at any time issued thereunder, amplifying the description of the property mortgaged, adding other limitations to the Indenture on the issue of bonds, withdrawal of cash or release of property, and adding to the covenants and agreements of the Company for the protection of the holders of bonds and of mortgaged and pledged property; Now, therefore, this supplemental indenture witnessth: That Ohio Edison Company, in consideration of the premises and of one dollar to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, and of the purchase and acceptance of the bonds issued or to be issued hereunder by the holders thereof, and in order to secure the payment both of the principal and interest of all bonds at any time issued and outstanding under the Indenture, according to their tenor and effect, and the performance of all the provisions of the Indenture and of said bonds, hath granted, bargained, sold, released, conveyed, assigned, transferred, pledged, set over and confirmed and by these presents doth grant, bargain, sell, release, convey, assign, transfer, pledge, set over and confirm unto The Bank of New York, as Trustee, and to its successor or successors in said trust, and to its and their assigns forever, all the properties of the Company described in Schedule A (which is identified by the signature of an officer of each party hereto at the end thereof) hereto annexed and hereby made a part hereof; Together with all and singular the tenements, hereditaments and appurtenances belonging or in any wise appertaining to the aforesaid property or any part thereof, with the reversion and reversions, remainder and remainders and (subject to the provisions of Article XI of the Indenture) the tolls, rents, revenues, issues, earnings, income, product and profits thereof, and all the estate, right, title and interest and claim whatsoever, at law as well as in equity, which the Company now has or may hererafter acquire in and to the aforesaid property and franchises and every part and parcel thereof. The Company does hereby agree and does hereby confirm and reaffirm the agreement made by it in the Indenture, dated as of August 1, 1930, that all property, rights and franchises acquired by the Company after the date of the Indenture, dated as of August 1, 1930 (except any hereinafter expressly excepted), shall be as fully embraced within the lien of the Indenture as if such property had been owned by the Company on the date of the Indenture, dated as of August 1, 1930 and was specifically described therein and conveyed thereby and does hereby confirm that the Company will not cause or consent to a partition, whether voluntary or through legal proceedings, of property, whether herein described or heretofore or hereafter acquired, in which its ownership shall be as a tenant in common except as permitted by and in conformity with the provisions of the Indenture and particularly of Article XI thereof. Provided that the following are not and are not intended to be now or hereafter granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or confirmed hereunder and are hereby expressly excepted from the lien and operation of the Indenture, viz.: cash, shares of stock and obligations (including bonds, notes and other securities) not heretofore or hereafter specifically pledged, paid or deposited or delivered under the Indenture or covenanted so to be. To have and to hold all such properties, real, personal and mixed, mortgaged, pledged or conveyed by the Company as aforesaid, or intended so to be, unto the Trustee and its successors and assigns forever. In trust, nevertheless, upon the terms and trusts of the Indenture for those who shall hold the bonds and coupons issued and to be issued thereunder, or any of them, without preference, priority or distinction as to lien of any of said bonds and coupons over any others thereof by reason of priority in the time of the issue or negotiations thereof, or otherwise howsoever, subject, however, to the provisions in reference to extended, transferred or pledged coupons and claims for interest set forth in the Indenture (and subject to any sinking funds that may be hereafter created for the benefit of any particular series). Provided, however, and these presents are upon the condition that if the Company, its successors or assigns, shall pay or caused to be paid, the principal of and interest on said bonds, at the times and in the manner stipulated therein and herein, and shall keep, perform and observe all and singular the covenants and promises in said bonds and in the Indenture expressed to be kept, performed and observed by or on the part of the Company, then this Supplemental Indenture and the estate and rights hereby granted shall cease, determine and be void, otherwise to be and remain in full force and effect. It is hereby covenanted, declared and agreed, by the Company, that all such bonds and coupons are to be issued, authenticated and delivered, and that all property subject or to become subject hereto is to be held, subject to the further covenants, conditions, uses and trusts in the Indenture set forth, and the parties hereto mutually agree as follows: SECTION 1. Bonds of First Pledge Series shall mature on April 15, 2006, and shall be designated as the Company's "First Mortgage Bonds Pledge Series of 1998 due 2006." The bonds of First Pledge Series shall bear interest from the Initial Interest Accrual Date (as defined in the form of the bond hereinabove set forth) at the rate of six and thirty-eight hundredths per centum per annum. Principal or redemption price of and interest on the bonds of First Pledge Series shall be payable in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts, at an office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio. Definitive bonds of First Pledge Series may be issued, originally or otherwise, only as registered bonds, substantially in the form of bond hereinbefore recited, and in the denominations of $1,000 and authorized multiples thereof. Delivery of a bond of First Pledge Series to the Trustee for authentication shall be conclusive evidence that its serial number has been duly approved by the Company. The bonds of First Pledge Series shall not be redeemable prior to their maturity. As a sinking fund, to the extent that the General Mortgage Bonds (as defined in the form of bond hereinabove set forth) are called for redemption, a like principal amount of First Pledge Series shall become due and payable on the redemption date that such General Mortgage Bonds are to be redeemed, together with accrued interest to such date. SECTION 2. Bonds of First Pledge Series shall be deemed to be paid and no longer outstanding under the Indenture to the extent that General Mortgage Bonds (as defined in the form of bonds hereinabove set forth) which are outstanding from time to time under the Revenue Bond Indenture are paid or deemed to be paid and are no longer outstanding and the Trustee has been notified to such effect by the Company. SECTION 3. Bonds of First Pledge Series may be transferred by the registered owners thereof, in person or by attorney duly authorized, at an office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio but only in the manner and upon the conditions prescribed in the Indenture and in the form of bond hereinbefore recited. Bonds of First Pledge Series shall be exchangeable for other registered bonds of the same series, in the manner and upon the conditions prescribed in the Indenture, and in the form of bond hereinbefore recited, upon the surrender of such bonds at said offices or agencies of the Company. However, notwithstanding the provisions of Section 14 or 15 of the Indenture, no charge shall be made upon any transfer or exchange of bonds of said series other than for any tax or taxes or other governmental charge required to be paid by the Company. SECTION 4. The Company reserves the right, without any consent or other action by holders of the bonds of First Pledge Series, or any subsequent series of bonds, to amend the Indenture by inserting the following language as Section 115A immediately following current Section 115 of the Indenture. With the consent of the holders of not less than sixty per centum (60%) in principal amount of the bonds at the time outstanding or their attorneys-in-fact duly authorized, or, if the rights of the holders of one or more, but not all, series then outstanding are affected, the consent of the holders of not less than sixty per centum (60%) in aggregate principal amount of the bonds at the time outstanding of all affected series, taken together, and not any other series, the Company, when authorized by a resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or modifying the rights and obligations of the Company and the rights of the holders of any of the bonds and coupons; provided, however, that no such supplemental indenture shall (1) extend the maturity of any of the bonds or reduce the rate or extend the time of payment of interest thereon, or reduce the amount of the principal thereof, or reduce any premium, payable on the redemption thereof or change the coin or currency in which any bond or interest thereon is payable, without the consent of the holder of each bond so affected, or (2) permit the creation of any lien, not otherwise permitted, prior to or on a parity with the lien of this Indenture, without the consent of the holders of all of the bonds then outstanding, or (3) reduce the aforesaid percentage of the principal amount of bonds the holders of which are required to approve any such supplemental indenture, without the consent of the holders of all the bonds then outstanding. For the purposes of this Section, bonds shall be deemed to be affected by a supplemental indenture if such supplemental indenture adversely affects or diminishes the right of holders thereof against the Company or against its property. Upon the written request of the Company, accompanied by a resolution authorizing the execution of any such supplemental indenture, and upon the filling with the Trustee of evidence of the consent of bondholders as aforesaid (the instrument or instruments evidencing such consent to be dated within one year of such request), the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's owns rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion but shall not be obligated to enter into such supplemental indenture. The Trustee shall be entitled to receive and, subject to Section 102 of the Indenture and Article Five of the Seventh Supplemental Indenture, may rely upon an opinion of counsel as conclusive evidence that any such supplemental indenture is authorized or permitted by the provisions of this Section. It shall not be necessary for the consent of the bondholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. The Company and the Trustee, if they so elect, and either before or after such 60% or greater consent has been obtained, may require the holder of any bond consenting to the execution of any such supplemental indenture to submit his bond to the Trustee or to such bank, banker or trust company as may be designated by the Trustee for the purpose, for the notation thereon of the fact that the holder of such bond has consented to the execution of such supplemental indenture, and in such case such notation, in form satisfactory to the Trustee, shall be made upon all bonds so submitted, and such bonds bearing such notation shall forthwith be returned to the persons entitled thereto. All subsequent holders of bonds bearing such notation shall be deemed to have consented to the execution of such supplemental indenture, and consent, once given or deemed to be given, may not be withdrawn. Prior to the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Company shall publish a notice, setting forth in general terms the substance of such supplemental indenture, at least once in one daily newspaper of general circulation in each city in which the principal of any of the bonds shall be payable, or, if all bonds outstanding shall be registered bonds without coupons or coupon bonds registered as to principal, such notice shall be sufficiently given if mailed, first class, postage prepaid, and registered if the Company so elects, to each registered holder of bonds at the last address of such holder appearing on the registry books, such publication or mailing, as the case may be, to be made not less than thirty days prior to such execution. Any failure of the Company to give such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 5. The Company reserves the right, without any consent or other action by the holders of the bonds of First Pledge Series, or any subsequent series of bonds, to amend the Indenture by deleting the phrase "sixty per centum (60%)" in Section 28 of the Indenture and substituting therefor the phrase "seventy per centum (70%)" and by deleting the phrase "One hundred sixty-six and two-thirds per cent. (166 2/3%)" in Sections 65 and 67 of the Indenture and substituting therefor the phrase "One hundred and forty-two and eighty-six hundredths per cent. (142.86%)". SECTION 6. Except as herein otherwise expressly provided, no duties, responsibilities or liabilities are assumed, or shall be construed to be assumed, by the Trustee by reason of this Supplemental Indenture; the Trustee shall not be responsible for the recitals herein or in the bonds (except the Trustee's authentication certificate), all of which are made by the Company solely; and this Supplemental Indenture is executed and accepted by the Trustee, subject to all the terms and conditions set forth in the Indenture, as fully to all intents and purposes as if the terms and conditions of the Indenture were herein set forth at length. SECTION 7. As supplemented by this Supplemental Indenture, the Indenture is in all respects ratified and confirmed, and the Indenture as herein defined, and this Supplemental Indenture, shall be read, taken and construed as one and the same instrument. SECTION 8. Nothing in this Supplemental Indenture contained shall or shall be construed to confer upon any person other than a holder of bonds issued under the Indenture, the Company and the Trustee any right or interest to avail himself of any benefit under any provision of the Indenture or of this Supplemental Indenture. SECTION 9. This Supplemental Indenture may be simultaneously executed in several counterparts and all such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. In Witness Whereof, Ohio Edison Company and The Bank of New York have caused these presents to be executed in their respective names by their respective Presidents or one of their Vice Presidents or Assistant Vice Presidents and their respective seals to be hereunto affixed and attested by their respective Secretaries or one of their Assistant Secretaries or Assistant Treasurers, all as of the day and year first above written. Ohio Edison Company By: /s/ Richard H. Marsh ------------------------ Title: Vice President [Seal] Attest: /s/ Nancy C. Ashcom ------------------------ Title: Secretary Signed, Sealed and Acknowledged on behalf of Ohio Edison Company in the presence of: /s/ Cynthia A. LaFlame /s/ Suzette H. Sharif The Bank of New York By: /s/ Lucille Firrincieli -------------------------- Title: Vice President [Seal] Attest: /s/ Iliana Acevedo ------------------------- Title: Assistant Treasurer Signed, Sealed and Acknowledged on behalf of The Bank of New York in the presence of: - -------------------------------- - -------------------------------- STATE OF OHIO ) : ss.: COUNTY OF SUMMIT ) On the 9th day of April, 1998, personally appeared before me, a Notary Public in and for the said County and State aforesaid, Richard H. Marsh and Nancy C. Ashcom, to me known and known to me to be a Vice President and Corporate Secretary, respectively, of OHIO EDISON COMPANY, the corporation which executed the foregoing instrument, and who severally acknowledged that they did sign and seal such instrument as such Vice President and Corporate Secretary, respectively, of OHIO EDISON COMPANY, the same is their free act and deed and the free and corporate act and deed of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and seal the 9th day of April, 1998. /s/ Debra L. Cordea -------------------------- Debra L. Cordea, Notary Public Residence - Summit County State Wide Jurisdiction, Ohio My Commission Expires Nov. 20, 1999 [SEAL] STATE OF OHIO ) : ss.: COUNTY OF SUMMIT ) On the 9th day of April, 1998, before me personally came Richard H. Marsh, to me known, who, being by me duly sworn, did dispose and say that he resides at 1126 Woodhaven Boulevard, Fairlawn, Ohio 44333; that he is a Vice President of OHIO EDISON COMPANY, one of the corporations described in and which executed the above instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. /s/ Debra L. Cordea ------------------------------- Debra L. Cordea, Notary Public Residence - Summit County State Wide Jurisdiction, Ohio My Commission Expires Nov. 20, 1999 [SEAL] STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the 14th day of April, 1998, personally appeared before me, a Notary Public in and for the said County and State aforesaid, Lucille Firrincieli and Iliana Acevedo, to me known and known to me to be a VICE PRESIDENT and ASSISTANT TREASURER, respectively, of The Bank of New York, the corporation which executed the foregoing instrument, and who severally acknowledged that they did sign and seal such instrument as such VICE PRESIDENT and TREASURER for and on behalf of said corporation and that the same is their free act and deed and the free and corporation act and deed of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and seal the 14th day of April, 1998. /s/ William J. Cassels ------------------------------- William J. Cassels Notary Public, State of New York No.: 0ICA5027729 Qualified in Bronx County Certificate Filed in New York County Commission Expires May 16, 2000 [SEAL] STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the 14th day of April, 1998, before me personally came Lucille Firrincieli, to me known, who, being by me duly sworn, did dispose and say that she resides at 163-09 32nd Avenue, Flushing, New York 11358; that she is a Vice President of THE BANK OF NEW YORK, one of the parties described in and which executed the above instrument; that she knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that she signed her name thereto by like authority. /s/ William J. Cassels -------------------------------- William J. Cassels Notary Public, State of New York No.: 0ICA5027729 Qualified in Bronx County Certificate Filed in New York County Commission Expires May 16, 2000 [SEAL] The Bank of New York hereby certifies that its precise name and address as Trustee hereunder are: The Bank of New York 101 Barclay Street City, County and State of New York 10286 The Bank of New York By: /s/ Iliana Acevedo ---------------------- Title: Assistant Treasurer EX-4.3 10 - ---------------------------------------------------------------- OHIO EDISON COMPANY with THE BANK OF NEW YORK, As Trustee _______________________ SEVENTIETH SUPPLEMENTAL INDENTURE Providing among other things for FIRST MORTGAGE BONDS Pledge Series of 1998 due 2028 _________ Dated as of June 1, 1998 - -------------------------------------------------------------- SUPPLEMENTAL INDENTURE, dated as of June 1, 1998 between Ohio Edison Company, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the "Company"), party of the first part, and The Bank of New York, a banking corporation organized and existing under the laws of the State of New York, as Trustee under the Indenture hereinafter referred to, party of the second part. WHEREAS, the Company has heretofore executed and delivered to Bankers trust company (hereinafter called the "Old Trustee"), as trustee, a certain Indenture, dated as of August 1, 1930, to secure an issue of bonds of the Company, issued and to be issued in series, from time to time, in the manner and subject to the conditions set forth in the said Indenture; and the said Indenture has been supplemented by sixty-nine supplemental indentures, which Indenture as so supplemented and to be hereby supplemented is hereinafter referred to as the "Indenture"; and WHEREAS, The Bank of New York has succeeded the Old Trustee as trustee under the Indenture (hereinafter called the "Trustee") pursuant to Article XVI thereof; and WHEREAS, the Indenture provides for the issuance of bonds thereunder in one or more series, the form of each series of bonds and of the coupons to be attached to the coupon bonds, if any, to be substantially in the forms set forth therein with such insertions, omissions and variations as the Board of Directors of the Company may determine; and WHEREAS, the Company, by appropriate corporate action in conformity with the terms of the Indenture, has duly determined to create a new series of bonds under the Indenture, consisting of $13,521,974 in principal amount to be designated as "First Mortgage Bonds Pledge Series of 1998 due 2028" (hereinafter sometimes referred to as the "bonds of Second Pledge Series"), the bonds of which series are to bear interest from the Initial Interest Accrual Date (as defined in the form of bond hereinbelow set forth) at the rate of 5.375% per annum, are to mature June 1, 2028, and are to be substantially in the following form: [Form of Bond of Second Pledge Series] This Bond is not transferable except to a successor trustee under the General Mortgage Indenture and Deed of Trust, dated as of January 1, 1998, between the Company and The Bank of New York, as Trustee, or in connection with the exercise of the rights and remedies of the holder hereof consequent upon a "default" as defined in the Mortgage referred to herein. OHIO EDISON COMPANY First Mortgage Bond Pledge Series of 1998 due 2028 Due June 1, 2028 $ No. Ohio Edison Company, a corporation of the State of Ohio (hereinafter called the Company), for value received, hereby promises to pay to , or registered assigns, dollars at an office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio, on June 1, 2028 in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts, and to pay at said offices or agencies to the registered owner hereof, in like coin or currency, interest thereon from the Initial Interest Accrual Date (hereinbelow defined) at the rate of five and three-eighths per centum per annum on each June 1 and December 1. Payments of principal of and interest on this bond shall be made at an office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio. Payment of principal of, or premium or interest on, the Company's Mortgage Bonds Guarantee Series A of 1998 (the "General Mortgage Bonds") issued under the Company's General Mortgage Indenture and Deed of Trust to The Bank of New York, as Trustee, dated as of January 1, 1998, shall, to the extent thereof, be deemed to satisfy and discharge the obligation of the Company, if any, to make a payment of principal, premium or interest, as the case may be, in respect of this bond which is then due. The provisions of this bond are continued on the reverse hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. This bond shall not become obligatory until The Bank of New York, the Trustee under the Mortgage referred to on the reverse hereof, or its successor thereunder, shall have authenticated the form of certificate endorsed hereon. In witness whereof, Ohio Edison Company has caused this bond to be signed in its name by its President or a Vice President, by his signature or a facsimile thereof, and its corporate seal to be printed hereon, attested by its Secretary or an Assistant Secretary, by his signature or a facsimile thereof. Dated: Ohio Edison Company, By: --------------------------- Title: Attest: - --------------------------- Title: [Form of Trustee's Authentication Certificate] Trustee's Authentication Certificate This bond is one of the bonds of the series designated therein, described in the within-mentioned Mortgage. The Bank of New York, as Trustee, By: ----------------------------- Authorized Officer [Form of Bond of Second Pledge Series] [Reverse] OHIO EDISON COMPANY First Mortgage Bond Pledge Series of 1998 due 2028 This bond is one of an issue of bonds of the Company, issuable in series, and is one of a series known as its First Mortgage Bonds of the series designated in its title, all issued and to be issued under and equally secured (except as to any sinking fund established in accordance with the provisions of the Mortgage hereinafter mentioned for the bonds of any particular series) by an Indenture, dated as of August 1, 1930, executed by the Company to The Bank of New York, as Trustee, as amended and supplemented by indentures supplemental thereto, to which Indenture as so amended and supplemented (herein referred to as the "Mortgage") reference is made for a description of the property mortgaged and pledged, the nature and extent of the security, the rights of the holders of the bonds in respect thereof and the terms and conditions upon which the bonds are secured. Bonds of this series are not redeemable prior to their maturity. As a sinking fund, to the extent that the General Mortgage Bonds are called for redemption, a like principal amount of bonds of this series shall become due and payable on the redemption date that such General Mortgage Bonds are to be redeemed, together with accrued interest to such date. The Initial Interest Accrual Date for the bonds of this series shall be the date that interest begins to accrue on the General Mortgage Bonds. As more fully described in the supplemental indenture establishing the terms and provisions of the bonds of this series, the Company reserves the right, without any consent or other action by holders of the bonds of this series, to amend the Mortgage to provide (a) that the Mortgage, the rights and obligations of the Company and the rights of the bondholders may be modified with the consent of the holders of not less than 60% in principal amount of the bonds adversely affected; provided, however, that no modification shall (1) extend the time, or reduce the amount, of any payment on any bond, without the consent of the holder of each bond so affected, (2) permit the creation of any lien, not otherwise permitted, prior to or on a parity with the lien of the Mortgage, without the consent of the holders of all bonds then outstanding, or (3) reduce the above percentage of the principal amount of bonds the holders of which are required to approve any such modification without the consent of the holders of all bonds then outstanding and (b) that (i) additional bonds may be issued against 70% of the value of the property which forms the basis for such issuance and (ii) the charge against property subject to a prior lien which is used to effectuate the release of property under the Mortgage be similarly based. The principal hereof may be declared or may become due on the conditions, in the manner and at the time set forth in the Mortgage, upon the occurrence of a completed default as in the Mortgage provided. No recourse shall be had for the payment of the principal of or interest on this bond against any incorporator or any past, present or future subscriber to the capital stock, stockholder, officer or director of the Company or of any predecessor or successor corporation, either directly or through the Company or a predecessor or successor corporation, under any rule of law, statute or constitution or by the enforcement of any assessment or otherwise, all such liability of incorporators, subscribers, stockholders, officers and directors being released by the registered owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Mortgage. The bonds of this series are issuable only as registered bonds without coupons in denominations of $1,000 and, if higher, in multiples of $1.00. The Company and the Trustee may deem and treat the person in whose name this bond is registered as the absolute owner for the purpose of receiving payment of or on account of the principal and interest due hereon and for all other purposes. Registered bonds of this series shall be exchangeable at said offices or agencies of the Company for registered bonds of other authorized denominations having the same aggregate principal amount, in the manner and upon the conditions prescribed in the Mortgage. Notwithstanding any provision of the Mortgage, (a) neither the Company nor the Trustee shall be required to make transfers or exchanges of bonds of this series during the period between any interest payment date for such series and the record date next preceding such interest payment date, and (b) no charge shall be made upon any transfer or exchange of bonds of this series other than for any tax or taxes or other governmental charge required to be paid by the Company. [END OF FORM OF BOND OF SECOND PLEDGE SERIES] and Whereas, Section 115 of the Indenture provides that the Company and the Trustee may, from time to time and at any time, enter into such indentures supplemental thereto as shall be deemed necessary or desirable for one or more purposes, including, among others, to describe and set forth the particular terms and the form of additional series of bonds to be issued under the Indenture, to add other limitations on the issue of bonds, withdrawal of cash or release of property, to add to the covenants and agreements of the Company for the protection of the holders of the bonds and of the mortgaged and pledged property, to supplement defective or inconsistent provisions contained in the Indenture, and for any other purpose not inconsistent with the terms of the Indenture; and Whereas, all things necessary to make the bonds of Second Pledge Series when authenticated by the Trustee and issued as in the Indenture provided, the valid, binding and legal obligations of the Company, entitled in all respects to the security of the Indenture, have been done and performed, and the creation, execution and delivery of this Supplemental Indenture have in all respects been duly authorized; and Whereas, the Company and Trustee deem it advisable to enter into this Supplemental Indenture for the purposes of describing the bonds of Second Pledge Series and of establishing the terms and provisions thereof, confirming the mortgaging under the Indenture of additional property for the equal and proportionate benefit and security of the holders of all bonds at any time issued thereunder, amplifying the description of the property mortgaged, adding other limitations to the Indenture on the issue of bonds, withdrawal of cash or release of property, and adding to the covenants and agreements of the Company for the protection of the holders of bonds and of mortgaged and pledged property; Now, therefore, this supplemental indenture witnessth: That Ohio Edison Company, in consideration of the premises and of one dollar to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, and of the purchase and acceptance of the bonds issued or to be issued hereunder by the holders thereof, and in order to secure the payment both of the principal and interest of all bonds at any time issued and outstanding under the Indenture, according to their tenor and effect, and the performance of all the provisions of the Indenture and of said bonds, hath granted, bargained, sold, released, conveyed, assigned, transferred, pledged, set over and confirmed and by these presents doth grant, bargain, sell, release, convey, assign, transfer, pledge, set over and confirm unto The Bank of New York, as Trustee, and to its successor or successors in said trust, and to its and their assigns forever, all the properties of the Company described in Schedule A (which is identified by the signature of an officer of each party hereto at the end thereof) hereto annexed and hereby made a part hereof; Together with all and singular the tenements, hereditaments and appurtenances belonging or in any wise appertaining to the aforesaid property or any part thereof, with the reversion and reversions, remainder and remainders and (subject to the provisions of Article XI of the Indenture) the tolls, rents, revenues, issues, earnings, income, product and profits thereof, and all the estate, right, title and interest and claim whatsoever, at law as well as in equity, which the Company now has or may hereafter acquire in and to the aforesaid property and franchises and every part and parcel thereof. The Company does hereby agree and does hereby confirm and reaffirm the agreement made by it in the Indenture, dated as of August 1, 1930, that all property, rights and franchises acquired by the Company after the date of the Indenture, dated as of August 1, 1930 (except any hereinafter expressly excepted), shall be as fully embraced within the lien of the Indenture as if such property had been owned by the Company on the date of the Indenture, dated as of August 1, 1930 and was specifically described therein and conveyed thereby and does hereby confirm that the Company will not cause or consent to a partition, whether voluntary or through legal proceedings, of property, whether herein described or heretofore or hereafter acquired, in which its ownership shall be as a tenant in common except as permitted by and in conformity with the provisions of the Indenture and particularly of Article XI thereof. Provided that the following are not and are not intended to be now or hereafter granted, bargained, sold, released, conveyed, assigned, transferred, mortgaged, pledged, set over or confirmed hereunder and are hereby expressly excepted from the lien and operation of the Indenture, viz.: cash, shares of stock and obligations (including bonds, notes and other securities) not heretofore or hereafter specifically pledged, paid or deposited or delivered under the Indenture or covenanted so to be. To have and to hold all such properties, real, personal and mixed, mortgaged, pledged or conveyed by the Company as aforesaid, or intended so to be, unto the Trustee and its successors and assigns forever. In trust, nevertheless, upon the terms and trusts of the Indenture for those who shall hold the bonds and coupons issued and to be issued thereunder, or any of them, without preference, priority or distinction as to lien of any of said bonds and coupons over any others thereof by reason of priority in the time of the issue or negotiations thereof, or otherwise howsoever, subject, however, to the provisions in reference to extended, transferred or pledged coupons and claims for interest set forth in the Indenture (and subject to any sinking funds that may be hereafter created for the benefit of any particular series). Provided, however, and these presents are upon the condition that if the Company, its successors or assigns, shall pay or caused to be paid, the principal of and interest on said bonds, at the times and in the manner stipulated therein and herein, and shall keep, perform and observe all and singular the covenants and promises in said bonds and in the Indenture expressed to be kept, performed and observed by or on the part of the Company, then this Supplemental Indenture and the estate and rights hereby granted shall cease, determine and be void, otherwise to be and remain in full force and effect. It is hereby covenanted, declared and agreed, by the Company, that all such bonds and coupons are to be issued, authenticated and delivered, and that all property subject or to become subject hereto is to be held, subject to the further covenants, conditions, uses and trusts in the Indenture set forth, and the parties hereto mutually agree as follows: SECTION 1. Bonds of Second Pledge Series shall mature on June 1, 2028, and shall be designated as the Company's "First Mortgage Bonds Pledge Series of 1998 due 2028." The bonds of Second Pledge Series shall bear interest from the Initial Interest Accrual Date (as defined in the form of the bond hereinabove set forth) at the rate of five and three-eighths per centum per annum. Principal or redemption price of and interest on the bonds of Second Pledge Series shall be payable in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts, at an office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio. Definitive bonds of Second Pledge Series may be issued, originally or otherwise, only as registered bonds, substantially in the form of bond hereinbefore recited, and in the denominations of $1,000 and, if higher, in multiples of $1.00. Delivery of a bond of Second Pledge Series to the Trustee for authentication shall be conclusive evidence that its serial number has been duly approved by the Company. The bonds of Second Pledge Series shall not be redeemable prior to their maturity. As a sinking fund, to the extent that the General Mortgage Bonds (as defined in the form of bond hereinabove set forth) are called for redemption, a like principal amount of Second Pledge Series shall become due and payable on the redemption date that such General Mortgage Bonds are to be redeemed, together with accrued interest to such date. SECTION 2. Bonds of Second Pledge Series shall be deemed to be paid and no longer outstanding under the Indenture to the extent that General Mortgage Bonds (as defined in the form of bonds hereinabove set forth) to which they relate are paid or deemed to be paid and are no longer outstanding and the Trustee has been notified to such effect by the Company. SECTION 3. Bonds of Second Pledge Series may be transferred by the registered owners thereof, in person or by attorney duly authorized, at an office or agency of the Company in the Borough of Manhattan, The City of New York, N.Y. or in the City of Akron, Ohio but only in the manner and upon the conditions prescribed in the Indenture and in the form of bond hereinbefore recited. Bonds of Second Pledge Series shall be exchangeable for other registered bonds of the same series, in the manner and upon the conditions prescribed in the Indenture, and in the form of bond hereinbefore recited, upon the surrender of such bonds at said offices or agencies of the Company. However, notwithstanding the provisions of Section 14 or 15 of the Indenture, no charge shall be made upon any transfer or exchange of bonds of said series other than for any tax or taxes or other governmental charge required to be paid by the Company. SECTION 4. The Company reserves the right, without any consent or other action by holders of the bonds of Second Pledge Series, or any subsequent series of bonds, to amend the Indenture by inserting the following language as Section 115A immediately following current Section 115 of the Indenture. With the consent of the holders of not less than sixty per centum (60%) in principal amount of the bonds at the time outstanding or their attorneys-in-fact duly authorized, or, if the rights of the holders of one or more, but not all, series then outstanding are affected, the consent of the holders of not less than sixty per centum (60%) in aggregate principal amount of the bonds at the time outstanding of all affected series, taken together, and not any other series, the Company, when authorized by a resolution, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of any supplemental indenture or modifying the rights and obligations of the Company and the rights of the holders of any of the bonds and coupons; provided, however, that no such supplemental indenture shall (1) extend the maturity of any of the bonds or reduce the rate or extend the time of payment of interest thereon, or reduce the amount of the principal thereof, or reduce any premium, payable on the redemption thereof or change the coin or currency in which any bond or interest thereon is payable, without the consent of the holder of each bond so affected, or (2) permit the creation of any lien, not otherwise permitted, prior to or on a parity with the lien of this Indenture, without the consent of the holders of all of the bonds then outstanding, or (3) reduce the aforesaid percentage of the principal amount of bonds the holders of which are required to approve any such supplemental indenture, without the consent of the holders of all the bonds then outstanding. For the purposes of this Section, bonds shall be deemed to be affected by a supplemental indenture if such supplemental indenture adversely affects or diminishes the right of holders thereof against the Company or against its property. Upon the written request of the Company, accompanied by a resolution authorizing the execution of any such supplemental indenture, and upon the filling with the Trustee of evidence of the consent of bondholders as aforesaid (the instrument or instruments evidencing such consent to be dated within one year of such request), the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's owns rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion but shall not be obligated to enter into such supplemental indenture. The Trustee shall be entitled to receive and, subject to Section 102 of the Indenture and Article Five of the Seventh Supplemental Indenture, may rely upon an opinion of counsel as conclusive evidence that any such supplemental indenture is authorized or permitted by the provisions of this Section. It shall not be necessary for the consent of the bondholders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. The Company and the Trustee, if they so elect, and either before or after such 60% or greater consent has been obtained, may require the holder of any bond consenting to the execution of any such supplemental indenture to submit his bond to the Trustee or to such bank, banker or trust company as may be designated by the Trustee for the purpose, for the notation thereon of the fact that the holder of such bond has consented to the execution of such supplemental indenture, and in such case such notation, in form satisfactory to the Trustee, shall be made upon all bonds so submitted, and such bonds bearing such notation shall forthwith be returned to the persons entitled thereto. All subsequent holders of bonds bearing such notation shall be deemed to have consented to the execution of such supplemental indenture, and consent, once given or deemed to be given, may not be withdrawn. Prior to the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of this Section, the Company shall publish a notice, setting forth in general terms the substance of such supplemental indenture, at least once in one daily newspaper of general circulation in each city in which the principal of any of the bonds shall be payable, or, if all bonds outstanding shall be registered bonds without coupons or coupon bonds registered as to principal, such notice shall be sufficiently given if mailed, first class, postage prepaid, and registered if the Company so elects, to each registered holder of bonds at the last address of such holder appearing on the registry books, such publication or mailing, as the case may be, to be made not less than thirty days prior to such execution. Any failure of the Company to give such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such supplemental indenture. SECTION 5. The Company reserves the right, without any consent or other action by the holders of the bonds of Second Pledge Series, or any subsequent series of bonds, to amend the Indenture by deleting the phrase "sixty per centum (60%)" in Section 28 of the Indenture and substituting therefor the phrase "seventy per centum (70%)" and by deleting the phrase "One hundred sixty-six and two-thirds per cent. (166 2/3%)" in Sections 65 and 67 of the Indenture and substituting therefor the phrase "One hundred and forty-two and eighty-six hundredths per cent. (142.86%)". SECTION 6. Except as herein otherwise expressly provided, no duties, responsibilities or liabilities are assumed, or shall be construed to be assumed, by the Trustee by reason of this Supplemental Indenture; the Trustee shall not be responsible for the recitals herein or in the bonds (except the Trustee's authentication certificate), all of which are made by the Company solely; and this Supplemental Indenture is executed and accepted by the Trustee, subject to all the terms and conditions set forth in the Indenture, as fully to all intents and purposes as if the terms and conditions of the Indenture were herein set forth at length. SECTION 7. As supplemented by this Supplemental Indenture, the Indenture is in all respects ratified and confirmed, and the Indenture as herein defined, and this Supplemental Indenture, shall be read, taken and construed as one and the same instrument. SECTION 8. Nothing in this Supplemental Indenture contained shall or shall be construed to confer upon any person other than a holder of bonds issued under the Indenture, the Company and the Trustee any right or interest to avail himself of any benefit under any provision of the Indenture or of this Supplemental Indenture. SECTION 9. This Supplemental Indenture may be simultaneously executed in several counterparts and all such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. In Witness Whereof, Ohio Edison Company and The Bank of New York have caused these presents to be executed in their respective names by their respective Presidents or one of their Vice Presidents or Assistant Vice Presidents and their respective seals to be hereunto affixed and attested by their respective Secretaries or one of their Assistant Secretaries or Assistant Treasurers, all as of the day and year first above written. Ohio Edison Company By: /s/ Richard H. Marsh ------------------------- Richard H. Marsh, Vice President [Seal] Attest: /s/ Nancy C. Ashcom ------------------------------------ Nancy C. Ashcom, Corporate Secretary Signed, Sealed and Acknowledged on behalf of Ohio Edison Company in the presence of: /s/ Thomas C. Navin - --------------------------- Thomas C. Navin /s/ Cynthia A. LaFlame - ---------------------------- Cynthia A. LaFlame The Bank of New York By: /s/ Lucille Firrincieli ----------------------------------- Lucille Firrincieli, Vice President [Seal] Attest: /s/ Iliana Acevedo ---------------------------------- Iliana Acevedo, Assistant Treasurer Signed, Sealed and Acknowledged on behalf of The Bank of New York in the presence of: /s/ Paul J. Schmalzel - -------------------------------- Paul J. Schmalzel /s/ F.W. Clark - -------------------------------- F. W. Clark STATE OF OHIO ) : ss.: COUNTY OF SUMMIT ) On the 5th day of June, 1998, personally appeared before me, a Notary Public in and for the said County and State aforesaid, Richard H. Marsh and Nancy C. Ashcom, to me known and known to me to be a Vice President and Corporate Secretary, respectively, of OHIO EDISON COMPANY, the corporation which executed the foregoing instrument, and who severally acknowledged that they did sign and seal such instrument as such Vice President and Corporate Secretary, respectively, of OHIO EDISON COMPANY, the same is their free act and deed and the free and corporate act and deed of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and seal the 5th day of June, 1998. /s/ Debra L. Cordea -------------------------- Debra L. Cordea, Notary Public Residence - Summit County State Wide Jurisdiction, Ohio My Commission Expires Nov. 20, 1999 [SEAL] STATE OF OHIO ) : ss.: COUNTY OF SUMMIT ) On the 5th day of June, 1998, before me personally came Richard H. Marsh, to me known, who, being by me duly sworn, did dispose and say that he resides at 1126 Woodhaven Boulevard, Fairlawn, Ohio 44333; that he is a Vice President of OHIO EDISON COMPANY, one of the corporations described in and which executed the above instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like order. /s/ Debra L. Cordea ------------------------------- Debra L. Cordea, Notary Public Residence - Summit County State Wide Jurisdiction, Ohio My Commission Expires Nov. 20, 1999 [SEAL] STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the 4th day of June, 1998, personally appeared before me, a Notary Public in and for the said County and State aforesaid, Lucille Firrincieli and Iliana Acevedo, to me known and known to me to be a VICE PRESIDENT and ASSISTANT TREASURER, respectively, of The Bank of New York, the corporation which executed the foregoing instrument, and who severally acknowledged that they did sign and seal such instrument as such VICE PRESIDENT and TREASURER for and on behalf of said corporation and that the same is their free act and deed and the free and corporation act and deed of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and seal the 4th day of June, 1998. /s/ William J. Cassels ------------------------------- William J. Cassels Notary Public, State of New York No.: 0ICA5027729 Qualified in Bronx County Certificate Filed in New York County Commission Expires May 16, 2000 [SEAL] STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) On the 4th day of June, 1998, before me personally came Lucille Firrincieli, to me known, who, being by me duly sworn, did dispose and say that she resides at 163-09 32nd Avenue, Flushing, New York 11358; that she is a Vice President of THE BANK OF NEW YORK, one of the parties described in and which executed the above instrument; that she knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that she signed her name thereto by like authority. /s/ William J. Cassels -------------------------------- William J. Cassels Notary Public, State of New York No.: 0ICA5027729 Qualified in Bronx County Certificate Filed in New York County Commission Expires May 16, 2000 [SEAL] The Bank of New York hereby certifies that its precise name and address as Trustee hereunder are: The Bank of New York 101 Barclay Street City, County and State of New York 10286 The Bank of New York By: /s/ Iliana Acevedo ----------------------------------- Iliana Acevedo, Assistant Treasurer SCHEDULE A Detailed Description of Properties A. OFFICE BUILDINGS, STORE HOUSES, ETC. The following offices, storerooms, warehouses, and other buildings of the Company, together with all land of the Company on which the same are situated, and all easements, rights of way and appurtenances of said lands, together with all furniture and fixtures located in said buildings. 1. Land and dwelling, 167 Steeplechase Land, Munroe Falls, Summit County, Ohio. 2. Land and dwelling, 15 Patrician Drive, Norwalk, Huron County, Ohio 3. Land and dwelling, 4143 Firestone Lane, Vermillion, Erie County, Ohio 4. Land and dwelling, 2058 Greensburg Road, North Canton, Stark County, Ohio 5. Land and dwelling, 885 East Avenue, Tallmadge, Summit County, Ohio 6. Land and dwelling, 10 Kehner Road, Suffield, Portgage County, Ohio 7. Land and dwelling, 127 Stonyridge Drive #207, Sandusky, Erie County, Ohio 8. Land and dwelling, 22831 Laramie Drive, Rocky River, Cuyahoga County, Ohio. B. ELECTRICAL SUBSTATIONS The following substations and substation sites and miscellaneous property of the Company, including all buildings, structures, towers, poles, all equipment, appliances and devices for manufacturing, converting and distributing electric energy, owned by the Company, and all land of the Company on which the same are situated, and all of the Company's lands and easements, rights, machinery, equipment, appliances, devices, licenses and supplies, forming a part of said substation or any of them or used or enjoyed or capable of being used or enjoyed in connection therewith. MARION AREA Hamilton Substation Site, land only, located at 606 Likens Road, north of the City of Marion and east of State Route 4, Marion Township, Marion County, Ohio. Cardington Substation Site, land only, located at 2188 TR 151, Westfield Township, Cardington, Ohio. YOUNGSTOWN AREA Campbell-Struthers Substation, land only, located in the City of Youngstown, Mahoning County and further being described as City Lots 44733, 44732, 44731, 44730, part of 44729 and part of O.L. 1625 and 1632. KIRBY SUBSTATION Structures and equipment only (land was reported previously), located at Landon Road, approximately 0.3 miles east of its intersection with State Route No. 37 in Clairborne Township, Union County, Ohio AVERY SUBSTATION Structures and equipment only (land was reported previously), located at 805 W. Mason Road in Milan Township, Erie County, Ohio YUTAKA TECHNOLOGIES SUBSTATION (OE owned and leased to Customer), structures and equipment only, located at U.S. 42, Morrow County, Village of Cardington HAMILTON SUBSTATION SITE Land only, located at 1500 ft. East of Route 4 on Likens Road, Marion County, Marion Ohio STERLITE SUBSTATION (OE owned and leased to Customer), structures and equipment only, located at Navarre, Ohio CLAYBEN SUBSTATION Structures and equipment only (land was reported previously), located at 2175 Massillon Road in Springfield Township, Summit County, Ohio MATHEWS SUBSTATION Structures and equipment only (land was reported previously), located at 1971 Mathews Road (approximately 500 feet east of its intersection with Sheridan Road) in the City of Youngstown, Mahoning County, Ohio. /s/ Nancy C.Ashcom ------------------------------------ Nancy C. Ashcom, Corporate Secretary Ohio Edison Company /s/ Iliana Acevedo ------------------------------------ Iliana Acevedo, Assistant Treasurer The Bank of New York EX-12.1 11 EXHIBIT 12.1 Page 1 OHIO EDISON COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, --------------------------------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items $303,531 $317,241 $315,170 $293,194 $301,320 Interest and other charges, before reduction for amounts capitalized 283,849 273,719 255,572 250,920 235,317 Provision for income taxes 188,886 199,307 201,295 187,805 191,261 Interest element of rentals charged to income (a) 108,463 111,534 114,093 117,409 115,310 -------- -------- -------- -------- -------- Earnings as defined $884,729 $901,801 $886,130 $849,328 $843,208 ======== ======== ======== ======== ======== FIXED CHARGES AS DEFINED IN REGULATION S-K: Interest on long-term debt $259,554 $243,570 $211,935 $204,285 $173,781 Other interest expense 18,931 22,944 28,211 31,209 46,110 Subsidiaries' preferred stock dividend requirements 5,364 7,205 15,426 15,426 15,426 Adjustment to subsidiaries' preferred stock dividends to state on a pre-income tax basis 3,294 2,956 2,910 2,918 2,892 Interest element of rentals charged to income (a) 108,463 111,534 114,093 117,409 115,310 -------- -------- -------- -------- -------- Fixed charges as defined $395,606 $388,209 $372,575 $371,247 $353,519 ======== ======== ======== ======== ======== CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES (b) 2.24 2.32 2.38 2.29 2.39 ==== ==== ==== ==== ==== - ------------------- (a) Includes the interest element of rentals where determinable plus 1/3 of rental expense where no readily defined interest element can be determined. (b) These ratios exclude fixed charges applicable to the guarantee of the debt of a coal supplier aggregating $7,424,000, $6,315,000, $5,093,000, $3,828,000 and $2,209,000 for each of the five years ended December 31, 1998, respectively.
EXHIBIT 12.1 Page 2 OHIO EDISON COMPANY CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED AND PREFERENCE STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS)
Year Ended December 31, ----------------------------------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items $303,531 $317,241 $315,170 $293,194 $301,320 Interest and other charges, before reduction for amounts capitalized 283,849 273,719 255,572 250,920 235,317 Provision for income taxes 188,886 199,307 201,295 187,805 191,261 Interest element of rentals charged to income (a) 108,463 111,534 114,093 117,409 115,310 -------- -------- -------- -------- -------- Earnings as defined $884,729 $901,801 $886,130 $849,328 $843,208 ======== ======== ======== ======== ======== FIXED CHARGES AS DEFINED IN REGULATION S-K PLUS PREFERRED AND PREFERENCE STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS): Interest on long-term debt $259,554 $243,570 $211,935 $204,285 $173,781 Other interest expense 18,931 22,944 28,211 31,209 46,110 Preferred and preference stock dividend requirements 27,043 29,699 27,923 27,817 27,395 Adjustment to preferred and preference stock dividends to state on a pre-income tax basis 16,444 16,745 10,542 10,503 10,140 Interest element of rentals charged to income (a) 108,463 111,534 114,093 117,409 115,310 -------- -------- -------- -------- -------- Fixed charges as defined plus preferred and preference stock dividend require- ments (pre-income tax basis) $430,435 $424,492 $392,704 $391,223 $372,736 ======== ======== ======== ======== ======== CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED AND PREFERENCE STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS) (b) 2.06 2.12 2.26 2.17 2.26 ==== ==== ==== === ==== - ------------------- (a) Includes the interest element of rentals where determinable plus 1/3 of rental expense where no readily defined interest element can be determined. (b) These ratios exclude fixed charges applicable to the guarantee of the debt of a coal supplier aggregating $7,424,000, $6,315,000, $5,093,000, $3,828,000 and $2,209,000 for each of the five years ended December 31, 1998, respectively.
EX-13.1 12 OHIO EDISON COMPANY SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------ (In thousands) Operating Revenues $2,519,662 $2,473,582 $2,469,785 $2,465,846 $2,368,191 ---------------------------------------------------------- Operating Income $ 486,920 $ 488,568 $ 530,069 $ 566,618 $ 557,254 ---------------------------------------------------------- Income Before Extraordinary Item $ 301,320 $ 293,194 $ 315,170 $ 317,241 $ 303,531 ---------------------------------------------------------- Net Income $ 270,798 $ 293,194 $ 315,170 $ 317,241 $ 303,531 ---------------------------------------------------------- Earnings on Common Stock $ 258,828 $ 280,802 $ 302,673 $ 294,747 $ 281,852 ---------------------------------------------------------- Total Assets $8,733,151 $8,977,455 $9,054,457 $8,892,088 $9,045,255 ---------------------------------------------------------- Capitalization at December 31: Common Stockholders' Equity $2,681,873 $2,724,319 $2,503,359 $2,407,871 $2,317,197 Preferred Stock: Not Subject to Mandatory Redemption 211,870 211,870 211,870 211,870 328,240 Subject to Mandatory Redemption 145,000 150,000 155,000 160,000 40,000 Long-Term Debt 2,215,042 2,569,802 2,712,760 2,786,256 3,166,593 ---------------------------------------------------------- Total Capitalization $5,253,785 $5,655,991 $5,582,989 $5,565,997 $5,852,030 ---------------------------------------------------------- Capitalization Ratios: Common Stockholders' Equity 51.0% 48.2% 44.8% 43.3% 39.6% Preferred Stock: Not Subject to Mandatory Redemption 4.0 3.7 3.8 3.8 5.6 Subject to Mandatory Redemption 2.8 2.7 2.8 2.9 0.7 Long-Term Debt 42.2 45.4 48.6 50.0 54.1 ---------------------------------------------------------- Total Capitalization 100.0% 100.0% 100.0% 100.0% 100.0% ---------------------------------------------------------- Kilowatt-Hour Sales (Millions): Residential 8,773 8,631 8,704 8,546 8,201 Commercial 7,590 7,335 7,246 7,151 6,885 Industrial 10,803 11,202 11,089 10,513 9,841 Other 150 150 147 146 144 ---------------------------------------------------------- Total Retail 27,316 27,318 27,186 26,356 25,071 Total Wholesale 5,706 5,241 7,076 6,920 5,879 ---------------------------------------------------------- Total 33,022 32,559 34,262 33,276 30,950 ---------------------------------------------------------- Customers Served: Residential 1,004,552 995,605 988,179 978,118 968,483 Commercial 113,820 111,189 113,795 111,978 109,832 Industrial 4,598 4,568 4,590 4,268 3,786 Other 1,476 1,415 1,331 1,308 1,226 ---------------------------------------------------------- Total 1,124,446 1,112,777 1,107,895 1,095,672 1,083,327 ---------------------------------------------------------- Average Annual Residential kWh Usage 8,780 8,720 8,861 8,787 8,524 Cost of Fuel per Million Btu $1.15 $1.10 $1.13 $1.18 $1.21 Peak Load-Megawatts 6,840 6,225 6,027 6,332 5,744 Number of Employees 1,944 4,215 4,273 4,812 5,166 PRICE RANGE OF COMMON STOCK The Company's Common Stock became wholly owned by FirstEnergy Corp. effective with the November 8, 1997 merger date. Prices shown below are for the period through November 7, 1997. 1997 ----------------------------------------------- First Quarter High-Low 23-7/8 20-7/8 --------------------- Second Quarter High-Low 22 19-1/4 --------------------- Third Quarter High-Low 23-5/8 21-3/4 --------------------- Fourth Quarter High-Low -- -- --------------------- Yearly High-Low -- -- --------------------- Prices are based on reports published in The Wall Street Journal for New York Stock Exchange Composite Transactions.
OHIO EDISON COMPANY 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 that 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, and the availability and cost of capital and other similar factors. Results of Operations We continued to take steps in 1998 to better position our Company as competition continues to expand in the electric utility industry. Investments were made in new information systems with enhanced functionality which also address Year 2000 application deficiencies. We also contributed to 1998 cash savings of FirstEnergy Corp. (FirstEnergy) totaling $173 million which were captured from initiatives implemented during the year in connection with our November 1997 merger with Centerior Energy Corporation to form FirstEnergy. Earnings on common stock were $258.8 million in 1998 compared to $280.8 million in 1997. Results for 1998 were adversely affect by a one-time, extraordinary charge of $30.5 million after taxes, related to Penn's discontinued application of Statement of Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation", to its generation business, as discussed later in this report. Additionally, sharp increases in the spot market price for electricity occasioned by a constrained power supply and heavy customer demand in the latter part of June 1998, combined with unscheduled generating unit outages, resulted in spot market purchases of power at prices which substantially exceeded amounts recovered from retail customers. Earnings on common stock for 1997 were affected by net nonrecurring charges, resulting from merger-related staffing reductions, amounting to $26.4 million, and an increase in accelerated depreciation and amortization of nuclear and regulatory assets under our rate plans, totaling $20 million after taxes. For the fourth consecutive year, we achieved record operating revenues. The following table summarizes the sources of increases in operating revenues for 1998 and 1997 as compared to the previous year:
1998 1997 ---- ---- (In millions) Increase in average retail price $27.0 $ 13.3 Change in retail kilowatt-hour sales (0.1) 7.8 Wholesale sales 13.3 (27.3) Other 5.9 10.0 - ----------------------------------------------------------- Net Increase $46.1 $ 3.8 ===========================================================
Retail kilowatt-hour sales were approximately the same as the previous year at 27.3 billion kilowatt-hours after setting a new record in 1997. Residential and commercial kilowatt-hour sales increased 1.7% and 3.5%, respectively from 1997, offset by a 3.6% decrease in industrial sales. Residential and commercial kilowatt-hour sales benefited from continued growth in the retail customer base, with over 11,000 new retail customers added in 1998 compared to approximately 4,900 new retail customers in 1997. The closure of an electric arc furnace by a large steel customer in the latter part of 1997 and a general decline in electricity demand by steel manufacturers due to intense foreign competition contributed to the lower industrial sales. Sales to wholesale customers increased 8.9% contributing to an increase in total kilowatt-hour sales of 1.4%. In 1997, commercial and industrial kilowatt-hour sales increased 1.2% and 1.0%, respectively, from 1996, partially offset by an 0.8% decrease in residential sales resulting in a 0.5% increase in retail kilowatt-hour sales. A decrease in kilowatt-hour sales to wholesale customers contributed to a 5.0% decline in total kilowatt-hour sales in 1997 compared to 1996. Operation and maintenance expenses increased in 1998 compared to the prior year due to increased fuel and purchased power costs. Most of the increase occurred in the second quarter and resulted from a combination of factors. In late June 1998, the midwestern and southern regions of the United States experienced electricity shortages caused mainly by record temperatures and humidity and unscheduled generating unit outages. Due in part to unscheduled outages at the Beaver Valley Plant at that time, our production capabilities were reduced to the point that we purchased significant amounts of power at unusually high spot market prices, causing the increase in purchased power costs. In 1997, fuel and purchased power costs were down from the previous year due to lower total kilowatt-hour sales. Nuclear operating costs increased in 1998 and in 1997 reflecting higher costs at the Beaver Valley Plant. Other operating costs decreased in 1998 from the previous year due primarily to the absence of expenses related to a 1997 voluntary retirement program and estimated severance costs which increased other operating costs for that year. Depreciation and amortization decreased in 1998 compared to the prior year due primarily to the net effect of our rate plans. Total accelerated depreciation and amortization of our nuclear and regulatory assets under our rate plans was $173 million in 1998; down from $190 million the previous year. In 1997, the increase in depreciation and amortization resulted from accelerations under the regulatory plans. General taxes increased in 1998 compared to 1997 in part because of gross receipts taxes on increased operating revenue. This followed a decrease in 1997 due to lower property taxes and an adjustment in the second quarter of that year which reduced the liabilities for gross receipts taxes. Interest on long-term debt continued to trend downward due to refinancings and redemptions of long-term debt. Other interest expense increased as a result of increased short-term borrowings. Capital Resources and Liquidity We have significantly improved our financial position over the past five years. Excluding nonrecurring charges, our fixed charge coverage ratios continue to improve. Our corporate indenture ratio, which is used to measure our ability to issue first mortgage bonds, improved from 4.13 at the end of 1993 to 6.17 at the end of 1998. Over the same period, our charter ratio, a measure of our ability to issue preferred stock, improved from 2.02 to 2.49 and our common stockholders' equity percentage of capitalization rose from approximately 40% at the end of 1993 to 51% at the end of 1998. Our improving financial position reflects ongoing efforts to increase competitiveness. We continue to streamline our operations as evidenced by the 50% increase in FirstEnergy's customer/employee ratio, which has increased from 165 at the end of 1993 to 247 as of December 31, 1998. Merger-related savings achieved through consolidation of activities have contributed to these results. Also, net debt redemptions and refinancings have lowered our average cost of long-term debt over the last five years from 8.27% in 1993 to 7.55% at the end of 1998. We had about $33.2 million of cash and temporary investments and $338.2 million of short-term indebtedness as of December 31, 1998. Our unused borrowing capability included $46.5 million under revolving lines of credit and a $2.0 million bank facility that provides for borrowings on a short-term basis at the bank's discretion. Our cash requirements in 1999 for operating expenses, construction expenditures and scheduled debt maturities are expected to be met without issuing new securities. During 1998, we reduced our total debt by approximately $69 million. We have cash requirements of approximately $1.2 billion for the 1999-2003 period to meet scheduled maturities of long-term debt and preferred stock. Of that amount, approximately $417 million applies to 1999. Our capital spending for the period 1999-2003 is expected to be about $1.0 billion (excluding nuclear fuel), of which approximately $169 million applies to 1999. Investments for additional nuclear fuel during the 1999-2003 period are estimated to be approximately $167 million, of which about $23 million applies to 1999. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $169 million and $35 million, respectively, as the nuclear fuel is consumed. Also, we have operating lease commitments, net of PNBV Capital Trust cash receipts, of approximately $365 million for the 1999-2003 period, of which approximately $82 million relates to 1999. FirstEnergy signed an agreement in principle with Duquesne Light Company (Duquesne) that would result in the transfer of 1,436 megawatts owned by Duquesne at five generating plants in exchange for 1,328 megawatts at three plants owned by FirstEnergy's electric utility operating companies (see "Common Ownership of Generating Facilities" in Note 1). A final agreement on the exchange of assets, which will be structured as a tax-free transaction to the extent possible, is being negotiated. The transaction benefits the FirstEnergy's utility operating companies by providing exclusive ownership and operating control of all generating assets that are now jointly owned and operated under the Central Area Power Coordination Group agreement. Interest Rate Risk Our exposure to fluctuations in market interest rates is mitigated since 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 2, our investment in the PNBV Capital Trust effectively reduces future lease obligations, also reducing interest rate risk. Changes in the market value of our nuclear decommissioning trust funds are recognized by making a corresponding change to the decommissioning liability, as described in Note 1. 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.
- --------------------------------------------------------------------------------------------- There- Fair 1999 2000 2001 2002 2003 after Total Value (Dollars in Millions) - --------------------------------------------------------------------------------------------- Investments other than Cash and Cash Equivalents: Fixed Income $ 6 $ 17 $23 $ 26 $ 30 $ 724 $ 826 $ 912 Average interest rate 5.5% 7.3% 7.7% 7.8% 7.9% 7.9% 7.9% - ---------------------------------------------------------------------------------------------- Liabilities - ---------------------------------------------------------------------------------------------- Long-term Debt: Fixed rate $164 $118 $17 $326 $246 $1,179 $2,050 $2,196 Average interest rate 7.0% 6.5% 8.0% 7.8% 8.2% 7.2% 7.4% Variable rate $250 $ 327 $ 577 $ 579 Average interest rate 6.0% 4.1% 4.9% Short-term Borrowings $338 $ 338 $ 338 Average interest rate 5.6% 5.6% - ---------------------------------------------------------------------------------------------- Preferred Stock $ 5 $ 5 $ 5 $ 1 $ 1 $ 133 $ 150 $ 155 Average dividend rate 8.5% 8.5% 8.5% 7.6% 7.6% 8.9% 8.8% - ----------------------------------------------------------------------------------------------
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 has begun in our Pennsylvania service area, allows retail customers to purchase electricity from other energy producers. Our regulatory plans have provided a solid foundation to position us to meet the challenges we are facing by significantly reducing fixed costs and lowering rates to a more competitive level. Our Rate Reduction and Economic Development Plan was approved by the Public Utilities Commission of Ohio (PUCO) in 1995. This plan maintains our base electric rates through December 31, 2005 and revises our fuel cost recovery method. Penn's Rate Stability and Economic Development Plan, which was approved by the PPUC in the second quarter of 1996, ended in 1998 with the PPUC's authorization of Penn's rate restructuring plan. As part of our 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 PUCO has authorized additional capital recovery related to our generating assets (which is reflected as additional depreciation expense) and additional amortization of regulatory assets during the regulatory plan period of at least $2 billion more than the amount that would have been recognized if the regulatory plan was not in effect. This additional amount is being recovered through current rates. Based on the current regulatory environment and our regulatory plan, we believe we will continue to be able to bill and collect cost-based rates. As a result, we will continue the application of SFAS 71. However, changes in the regulatory environment appear to be on the horizon for electric utilities in Ohio. As further discussed below, the Ohio legislature is in the discussion stages of restructuring the State's electric utility industry. Although we believe that regulatory changes are possible in 1999, we cannot currently estimate the ultimate impact. For Penn, application of SFAS 71 was discontinued for the generation portion of its business in June 1998 following PPUC approval of the rate restructuring plan. Customer choice will be phased in over two years with 66% of each customer class able to choose alternative suppliers of generation on January 2, 1999, and all remaining customers having choice as of January 2, 2000. Under the plan, Penn continues to deliver power to homes and businesses through its transmission and distribution system, which remains regulated. However, Penn's rates have been restructured to establish separate charges for transmission and distribution; generation, which is subject to competition; and stranded cost recovery. In the event customers obtain power from an alternative source, the generation portion of Penn's rates 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, including regulatory assets. Penn is entitled to recover $234 million of stranded costs through a competitive transition charge that starts in 1999 and ends in 2005. We continue to actively pursue the enactment of fair legislation calling for deregulation of Ohio's investor-owned electric utility industry. In early 1998, a deregulation proposal was introduced, leading to the creation of a working group to recommend legislation. As requested by legislative leadership, investor-owned utilities introduced a deregulation plan with objectives to (1) treat all major stakeholders in Ohio's electric system fairly; (2) protect public schools and local governments from revenue loss; and (3) allow utilities an opportunity to recover costs of government-mandated investments. The utilities have submitted proposals which incorporate these objectives and also recognize the complexity of restructuring the industry. The overlying objective is to do the job right the first time. Currently, the working group, comprised of legislative leaders, representatives of the electric utility companies and other interested stakeholders are meeting to discuss and mold these proposals. Most recently, placeholder bills containing statements of principle (that will be replaced by specific proposals as they are agreed upon) have been introduced. Legislative leaders have placed a high priority on enacting a deregulation bill by mid- year. The Clean Air Act Amendments of 1990, discussed in Note 5, require additional emission reductions by 2000. We are pursuing cost-effective compliance strategies for meeting these reduction requirements. On September 24, 1998, the Federal Environmental Protection Agency issued a final rule establishing tighter nitrogen oxide emission requirements for fossil fuel-fired utility boilers in Ohio, Pennsylvania and twenty other eastern states, including the District of Columbia (see "Environmental Matters" in Note 5). Controls must be in place by May 2003, with required reductions achieved during the five-month summer ozone season (May through September). The new rule is expected to increase the cost of producing electricity; however, we believe that we are in a better position than a number of other utilities to achieve compliance due to our nuclear generation capacity. In connection with our regulatory plans to reduce fixed costs and lower rates, we continue to take steps to restructure our operations. FirstEnergy announced plans to transfer the Companies' transmission assets into a new subsidiary, American Transmission Systems, Inc., with the transfer expected to be finalized in 1999. The new subsidiary represents a first step toward the goal of establishing or becoming part of a larger independent transmission company (TransCo). We believe that a TransCo better addresses the Federal Energy Regulatory Commission's (FERC) stated transmission objectives of providing non-discriminatory service, while providing for streamlined and cost-efficient operation. In working toward the goal of forming a larger regional transmission entity, FirstEnergy, American Electric Power, Virginia Power and Consumers Energy announced in November 1998 that they would prepare a FERC filing during 1999 for such a regional transmission entity. The entity would be designed to meet the goals of reducing transmission costs that result when transferring power over several transmission systems, ensuring transmission reliability and providing non- discriminatory access to the transmission grid. Year 2000 Readiness 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. Because so many of our computer functions are date sensitive, this could cause far-reaching problems, such as system-wide computer failures and miscalculations, if no remedial action is taken. We have developed a multi-phase program for Year 2000 compliance that consists of an assessment of our systems and operations that could be affected by the Year 2000 problem; remediation or replacement of noncompliant systems and components; and testing of systems and components following such remediation or replacement. We have focused our Year 2000 review on three areas: centralized system applications, noncentralized systems and relationships with third parties (including suppliers as well as end-use customers). Our review of system readiness extends to systems involving customer service, safety, shareholder needs and regulatory obligations. We are committed to taking appropriate actions to eliminate or lessen negative effects of the Year 2000 issue on our operations. We have completed an inventory of all computer systems and hardware including equipment with embedded computer chips and have determined which systems need to be converted or replaced to become Year 2000-ready and are in the process of remediating them. Based on our timetable, we expect to have all identified repairs, replacements and upgrades completed to achieve Year 2000 readiness by September 1999. Most of our Year 2000 issues will be resolved through system replacement. Of our major centralized systems, the general ledger system and inventory management, procurement and accounts payable systems were replaced at the end of 1998. Our payroll system was enhanced to be Year 2000 compliant in July 1998. The customer service system is due to be replaced in mid-1999. We have completed formal communications with most of our key suppliers to determine the extent to which we are vulnerable to those third parties' failure to resolve their own Year 2000 problems. For suppliers having potential compliance problems, we are developing alternate sources and services in the event such noncompliance occurs. We are also identifying areas requiring higher inventory levels based on compliance uncertainties. There can be no guarantee that the failure of companies to resolve their own Year 2000 issue will not have a material adverse effect on our business, financial condition and results of operations. We are using both internal and external resources to reprogram and/or replace and test our software for Year 2000 modifications. Of the $43 million total project cost, approximately $34 million will be capitalized since those costs are attributable to the purchase of new software for total system replacements because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $9 million will be expensed as incurred. As of December 31, 1998, we have spent $24 million for Year 2000 capital projects and had expensed approximately $4 million for Year 2000-related maintenance activities. Our total Year 2000 project cost, as well as our estimates of the time needed to complete remedial efforts, are based on currently available information and do not include the estimated costs and time associated with the impact of third party Year 2000 issues. We believe we are managing the Year 2000 issue in such a way that our customers will not experience any interruption of service. We believe the most likely worst-case scenario from the Year 2000 issue will be disruption in power plant monitoring systems, thereby producing inaccurate data and potential failures in electronic switching mechanisms at transmission junctions. This would prolong localized outages, as technicians would have to manually activate switches. Such an event could have a material, but currently undeterminable, effect on our financial results. We are developing contingency plans to address the effects of any delay in becoming Year 2000 compliant and expect to have contingency plans completed by June 1999. The costs of the project and the dates 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. OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------------- (In thousands) OPERATING REVENUES $2,519,662 $2,473,582 $2,469,785 ---------- ---------- ---------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 511,645 437,223 456,629 Nuclear operating costs 279,917 267,681 247,708 Other operating costs 411,985 446,778 420,523 ---------- ---------- ---------- Total operation and maintenance expenses 1,203,547 1,151,682 1,124,860 Provision for depreciation and amortization 415,715 429,941 383,441 General taxes 242,524 234,964 241,998 Income taxes 170,956 168,427 189,417 ---------- ---------- ---------- Total operating expenses and taxes 2,032,742 1,985,014 1,939,716 ---------- ---------- ---------- OPERATING INCOME 486,920 488,568 530,069 OTHER INCOME 47,621 52,847 37,537 ---------- ---------- ---------- INCOME BEFORE NET INTEREST CHARGES 534,541 541,415 567,606 ---------- ---------- ---------- NET INTEREST CHARGES: Interest on long-term debt 173,781 204,285 211,935 Allowance for borrowed funds used during construction and capitalized interest (2,096) (2,699) (3,136) Other interest expense 46,110 31,209 28,211 Subsidiaries' preferred stock dividend requirements 15,426 15,426 15,426 ---------- ---------- ---------- Net interest charges 233,221 248,221 252,436 ---------- ---------- ---------- INCOME BEFORE EXTRAORDINARY ITEM 301,320 293,194 315,170 EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 1) (30,522) -- -- ---------- ---------- ---------- NET INCOME 270,798 293,194 315,170 PREFERRED STOCK DIVIDEND REQUIREMENTS 11,970 12,392 12,497 ---------- ---------- ---------- EARNINGS ON COMMON STOCK $ 258,828 $ 280,802 $ 302,673 ========== ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
OHIO EDISON COMPANY CONSOLIDATED BALANCE SHEETS
At December 31, 1998 1997 - --------------------------------------------------------------------------------------------------- (In thousands) ASSETS UTILITY PLANT: In service $8,158,763 $8,666,272 Less--Accumulated provision for depreciation 3,610,155 3,546,594 ---------- ---------- 4,548,608 5,119,678 ---------- ---------- Construction work in progress-- Electric plant 174,418 99,158 Nuclear fuel 17,003 21,360 ---------- ---------- 191,421 120,518 ---------- ---------- 4,740,029 5,240,196 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: PNBV Capital Trust (Note 2) 475,087 482,220 Letter of credit collateralization (Note 2) 277,763 277,763 Other (Note 3B) 538,411 529,408 ---------- ---------- 1,291,261 1,289,391 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 33,213 4,680 Receivables-- Customers (less accumulated provisions of $6,397,000 and $5,618,000, respectively, for uncollectible accounts) 215,257 235,332 Associated companies 229,854 25,348 Other 47,684 87,566 Materials and supplies, at average cost-- Owned 76,756 75,580 Under consignment 48,341 47,890 Prepayments and other 78,618 78,348 ---------- ---------- 729,723 554,744 ---------- ---------- DEFERRED CHARGES: Regulatory assets 1,723,133 1,601,709 Unamortized sale and leaseback costs 90,098 95,096 Property taxes 101,360 100,043 Other 57,547 96,276 ---------- ---------- 1,972,138 1,893,124 ---------- ---------- $8,733,151 $8,977,455 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Consolidated Statements of Capitalization): Common stockholders' equity $2,681,873 $2,724,319 Preferred stock-- Not subject to mandatory redemption 160,965 160,965 Subject to mandatory redemption 10,000 15,000 Preferred stock of consolidated subsidiary-- Not subject to mandatory redemption 50,905 50,905 Subject to mandatory redemption 15,000 15,000 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company subordinated debentures 120,000 120,000 Long-term debt 2,215,042 2,569,802 ---------- ---------- 5,253,785 5,655,991 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 528,792 278,492 Short-term borrowings (Note 4)-- Associated companies 88,732 -- Other 249,451 302,229 Accounts payable 99,659 115,836 Accrued taxes 188,295 157,095 Accrued interest 45,221 53,165 Other 114,162 115,256 ---------- ---------- 1,314,312 1,022,073 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 1,601,887 1,698,354 Accumulated deferred investment tax credits 154,538 184,804 Pensions and other postretirement benefits 136,856 158,038 Other 271,773 258,195 ---------- ---------- 2,165,054 2,299,391 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 2 and 5 ) ---------- ---------- $8,733,151 $8,977,455 ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) COMMON STOCKHOLDERS' EQUITY: Common stock, $9 par value, authorized 175,000,000 shares-100 shares outstanding $ 1 $ 1 Other paid-in capital 2,098,728 2,103,259 Accumulated other comprehensive income (Note 3C) -- (615) Retained earnings (Note 3A) 583,144 621,674 ---------- ---------- Total common stockholders' equity 2,681,873 2,724,319 ---------- ---------- Number of Shares Optional Outstanding Redemption Price ---------------- --------------------- 1998 1997 Per Share Aggregate ---- ---- --------- --------- PREFERRED STOCK (Note 3D): 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 3E): 8.45% 150,000 200,000 15,000 20,000 Redemption within one year (5,000) (5,000) --------- --------- ---------- ---------- Total subject to mandatory redemption 150,000 200,000 10,000 15,000 ========= ========= ---------- ---------- PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY (Note 3D): 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 3E): 7.625% 150,000 150,000 106.86 $16,029 15,000 15,000 ========= ========= ======= ---------- ---------- COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES (Note 3F): 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 ========= ========= ---------- ----------
OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont.)
At December 31, 1998 1997 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- (In thousands) LONG-TERM DEBT (Note 3G): First mortgage bonds: Ohio Edison Company- Pennsylvania Power Company- 8.750% due 1998 -- 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 20,500 7.375% due 2002 120,000 120,000 6.625% due 2004 14,000 14,000 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. 965,225 1,115,225 128,250 128,250 1,093,475 1,243,475 ------- --------- ------- ------- ---------- ---------- Secured notes: Ohio Edison Company- Pennsylvania Power Company- 7.930% due 2002 39,936 50,646 4.750% due 1998 -- 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 2020 5,200 5,200 7.150% due 2021 443 443 7.150% due 2021 14,482 14,482 7.625% due 2023 50,000 50,000 6.150% due 2023 12,700 12,700 8.100% due 2023 30,000 30,000 *4.150% due 2027 10,300 10,300 7.750% due 2024 108,000 108,000 6.450% due 2027 14,500 14,500 5.375% due 2028 13,522 -- 5.375% due 2028 1,734 -- 5.625% due 2029 50,000 50,000 5.450% due 2028 6,950 6,950 5.950% due 2029 56,212 56,212 6.000% due 2028 14,250 14,250 5.450% due 2033 14,800 14,800 5.950% due 2029 238 238 ------- ------- Limited Partnerships- 7.87% weighted average interest rate due 1999-2007 11,320 -- ------- --------- 817,458 803,326 149,679 148,795 967,137 952,121 ------- --------- ------- ------- ---------- ---------- OES Fuel- 5.97% weighted average interest rate 79,524 80,755 ---------- ---------- Total secured notes 1,046,661 1,032,876 ---------- ---------- Unsecured notes: Ohio Edison Company- 5.963% due 1999 115,000 -- 6.025% due 1999 85,000 -- 6.088% due 1999 50,000 -- 6.338% due 1999 -- 40,000 6.400% due 1999 -- 175,000 *4.300% due 2012 50,000 50,000 *3.950% due 2014 50,000 50,000 *3.650% due 2015 50,000 50,000 *4.200% 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 566,500 531,500 ---------- ---------- Capital lease obligations (Note 2) 36,891 40,614 ---------- ---------- Net unamortized discount on debt (4,693) (5,171) ---------- ---------- Long-term debt due within one year (523,792) (273,492) ---------- ---------- Total long-term debt 2,215,042 2,569,802 ---------- ---------- TOTAL CAPITALIZATION $5,253,785 $5,655,991 ========== ========== * Denotes variable rate issue with December 31, 1998 interest rate shown. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Accumulated Other Unallocated Comprehensive Other Comprehensive ESOP Income Number Par Paid-In Income Retained Common (Note 3C) of Shares Value Capital (Note 3C) Earnings Stock -------------- --------- ---------- --------- -------------- -------- ------------ (Dollars in thousands) Balance, January 1, 1996 152,569,437 $ 1,373,125 $ 726,915 $(608) $ 471,095 $(162,656) Net income $315,170 315,170 Minimum liability for unfunded retirement benefits, net of $27,000 of income taxes (51) (51) -------- Comprehensive income $315,119 ======== Allocation of ESOP shares 1,346 7,646 Cash dividends on preferred stock (12,497) Cash dividends on common stock (216,126) - ------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1996 152,569,437 1,373,125 728,261 (659) 557,642 (155,010) Net income $293,194 293,194 Minimum liability for unfunded retirement benefits, net of $26,000 of income taxes 44 44 -------- Comprehensive income $293,238 ======== FirstEnergy merger (152,569,337) (1,373,124) 1,373,124 146,977 Allocation of ESOP shares 1,874 8,033 Cash dividends on preferred stock (12,392) Cash dividends on common stock (216,770) - ----------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 100 1 2,103,259 (615) 621,674 -- Net income $270,798 270,798 Transfer of minimum liability for unfunded retirement benefits to parent 615 615 -------- Comprehensive income $271,413 ======== Transfer of ESOP premium to parent (4,531) Cash dividends on preferred stock (11,952) Cash dividends on common stock (297,376) - ------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1998 100 $ 1 $2,098,728 $ -- $ 583,144 $ -- ================================================================================================================================= CONSOLIDATED STATEMENTS OF PREFERRED STOCK Not Subject to Subject to Mandatory Redemption Mandatory Redemption --------------------- -------------------- Par or Par or Number Stated Number Stated of Shares Value of Shares Value --------- ------- --------- ------- (Dollars in thousands) Balance, January 1, 1996 5,118,699 $211,870 5,200,000 $160,000 ------------------------------------------------------------------------------------- Balance, December 31, 1996 5,118,699 211,870 5,200,000 160,000 Redemptions-- 8.45% Series (50,000) (5,000) -------------------------------------------------------------------------------------- Balance, December 31, 1997 5,118,699 211,870 5,150,000 155,000 Redemptions-- 8.45% Series (50,000) (5,000) -------------------------------------------------------------------------------------- Balance, December 31, 1998 5,118,699 $211,870 5,100,000 $150,000 ====================================================================================== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $ 270,798 $293,194 $315,170 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation and amortization 415,715 429,941 383,441 Nuclear fuel and lease amortization 35,086 49,251 52,784 Deferred income taxes, net (59,553) (40,478) 41,365 Investment tax credits, net (14,290) (15,031) (14,041) Extraordinary item 51,730 -- -- Receivables (144,549) (23,887) 24,326 Materials and supplies (1,627) (10,557) (736) Accounts payable (8,455) 32,531 962 Other 64,552 21,756 (42,954) --------- -------- -------- Net cash provided from operating activities 609,407 736,720 760,317 --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 117,265 89,773 306,313 Short-term borrowings, net 35,954 -- 229,515 Redemptions and Repayments- Preferred stock 5,000 5,000 1,016 Long-term debt 225,241 292,409 438,916 Short-term borrowings, net -- 47,251 -- Dividend Payments- Common stock 297,746 237,848 218,656 Preferred stock 11,865 12,559 12,560 --------- -------- -------- Net cash used for financing activities 386,633 505,294 135,320 --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 186,139 179,328 148,189 PNBV capital trust investment -- -- 487,979 Other 8,102 52,671 13,406 --------- -------- -------- Net cash used for investing activities 194,241 231,999 649,574 --------- -------- -------- Net increase (decrease) in cash and cash equivalents 28,533 (573) (24,577) Cash and cash equivalents at beginning of year 4,680 5,253 29,830 --------- -------- -------- Cash and cash equivalents at end of year $ 33,213 $ 4,680 $ 5,253 ========= ======== ======== SUPPLEMENTAL CASH FLOWS INFORMATION: Cash Paid During the Year- Interest (net of amounts capitalized) $ 201,064 $212,987 $224,541 ========= ======== ======== Income taxes $ 219,226 $228,399 $157,477 ========= ======== ======== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF TAXES
For the Years Ended December 31, 1998 1997 1996 - --------------------------------------------------------------------------------------------------- (In thousands) GENERAL TAXES: Real and personal property $ 116,868 $ 114,111 $ 115,443 State gross receipts 104,175 99,262 104,158 Social security and unemployment 12,701 14,113 14,602 Other 8,780 7,478 7,795 ---------- ---------- ---------- Total general taxes $ 242,524 $ 234,964 $ 241,998 ========== ========== ========== PROVISION FOR INCOME TAXES: Currently payable- Federal $ 229,164 $ 225,529 $ 164,132 State 14,732 17,784 9,839 ---------- ---------- ---------- 243,896 243,313 173,971 ---------- ---------- ---------- Deferred, net- Federal (53,943) (34,429) 37,277 State (5,610) (6,048) 4,088 ---------- ---------- ---------- (59,553) (40,477) 41,365 ---------- ---------- ---------- Investment tax credit amortization (14,290) (15,031) (14,041) ---------- ---------- ---------- Total provision for income taxes $ 170,053 $ 187,805 $ 201,295 ========== ========== ========== INCOME STATEMENT CLASSIFICATION OF PROVISION FOR INCOME TAXES: Operating income $ 170,956 $ 168,427 $ 189,417 Other income 20,305 19,378 11,878 Extraordinary item (21,208) -- -- ---------- ---------- ---------- Total provision for income taxes $ 170,053 $ 187,805 $ 201,295 ========== ========== ========== RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES: Book income before provision for income taxes $ 440,851 $ 480,999 $ 516,465 ========== ========== ========== Federal income tax expense at statutory rate $ 154,298 $ 168,350 $ 180,763 Increases (reductions) in taxes resulting from- Amortization of investment tax credits (14,290) (15,031) (14,041) State income taxes net of federal income tax benefit 5,929 7,628 9,053 Amortization of tax regulatory assets 27,599 28,277 26,945 Other, net (3,483) (1,419) (1,425) ---------- ---------- ---------- Total provision for income taxes $ 170,053 $ 187,805 $ 201,295 ========== ========== ========== ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31: Property basis differences $ 880,645 $1,019,952 $1,086,533 Allowance for equity funds used during construction 169,780 210,136 233,345 Deferred nuclear expense 237,602 252,946 262,123 Competitive transition charge 135,730 -- -- Customer receivables for future income taxes 164,618 204,643 219,932 Deferred sale and leaseback costs 45,521 47,796 50,212 Unamortized investment tax credits (55,495) (67,208) (72,663) Other 23,486 30,089 (2,396) ---------- ---------- ---------- Net deferred income tax liability $1,601,887 $1,698,354 $1,777,086 ========== ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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. (FirstEnergy) on November 8, 1997. FirstEnergy was formed on that date 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, The Cleveland Electric Illuminating Company (CEI) and The Toledo Edison Company (TE). 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, 1998 or 1997, with respect to any particular segment of the Companies' customers. REGULATORY PLANS- The PUCO approved the Company's Rate Reduction and Economic Development Plan in 1995. This regulatory plan initially maintains current base electric rates for the Company through December 31, 2005. At the end of the regulatory plan period, the Company's base rates will be reduced by $300 million (approximately 20 percent below current levels).The plan also revised the Company's fuel cost recovery method. The Company formerly recovered fuel-related costs not otherwise included in base rates from retail customers through separate energy rates. In accordance with the regulatory plan, the Company's fuel rates will be frozen through the regulatory plan period, subject to limited periodic adjustments. 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. In June 1998, the PPUC authorized a rate restructuring plan for Penn, which superseded the regulatory plan which had been in place for Penn since 1996 and essentially resulted in the deregulation of Penn's generation business as of June 30, 1998. Penn was required to remove from its balance sheet all regulatory assets and liabilities related to its generation business and assess all other assets for impairment. The Securities and Exchange Commission (SEC) issued interpretive guidance regarding asset impairment measurement which concluded 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 those assets are impaired, a regulatory asset should be established if the 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 remaining net amount of $78 million was written off. The charge of $51.7 million ($30.5 million after income taxes) for discontinuing the application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), to Penn's generation business was recorded as an extraordinary item on the Consolidated Statement of Income. Penn's net assets included in utility plant relating to the operations for which the application of SFAS 71 was discontinued and Penn's total assets as of December 31, 1998 were $146 million and $978 million, respectively. 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 had authorized Penn to accelerate at least $358 million, more than the amounts that would have been recognized if the regulatory plans were not in effect. These additional amounts are being recovered through current rates. As of December 31, 1998, the Companies' cumulative additional capital recovery and regulatory asset amortization amounted to $696 million (including Penn's impairment discussed above). UTILITY PLANT AND DEPRECIATION- Utility plant reflects the original cost of construction, (except for Penn's nuclear generating units which were adjusted to fair value as discussed above), including payroll and related costs such as taxes, employee benefits, administrative and general costs, and interest costs. 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 1998, 1997, and 1996. In addition to the straight-line depreciation recognized in 1998, 1997 and 1996, the Companies recognized additional capital recovery of $141 million (excluding Penn's impairment), $172 million and $144 million, respectively, as additional depreciation expense in accordance with their regulatory plans. Such additional charges in the accumulated provision for depreciation were $422 million and $343 million as of December 31, 1998 and 1997, respectively. Annual depreciation expense includes approximately $9.4 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 $511 million in current dollars and (using a 4.0% escalation rate) approximately $1.4 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 $83 million for decommissioning through their electric rates from customers through December 31, 1998. 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 $130.6 million invested in external decommissioning trust funds as of December 31, 1998. Earnings on these funds are reinvested with a corresponding increase to the decommissioning liability. The Companies have also recognized an estimated liability of approximately $13.7 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 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 subsequently expanded the scope of the proposed standard to include other closure and removal obligations related to long-lived assets. A revised proposal may be issued by the FASB in 1999. COMMON OWNERSHIP OF GENERATING FACILITIES- The Companies, together with the other FirstEnergy utilities, CEI and TE, and Duquesne Light Company (Duquesne) constitute the Central Area Power Coordination Group (CAPCO). The CAPCO companies own and/or lease, as tenants in common, various power generating facilities. Each of the companies is obligated to pay a share of the costs associated with any jointly owned facility in the same proportion as its interest. The Companies' portions of operating expenses associated with jointly owned facilities are included in the corresponding operating expenses on the Consolidated Statements of Income. The amounts reflected on the Consolidated Balance Sheet under utility plant at December 31, 1998, include the following:
Companies' Utility Accumulated Construction Ownership/ Plant Provision for Work in Leasehold Generating Units in Service Depreciation Progress Interest - --------------------------------------------------------------------- (In millions) W.H. Sammis #7 $ 303.3 $ 101.3 $ 2.0 68.80% Bruce Mansfield #1, #2 and #3 791.9 399.7 8.3 50.68% Beaver Valley #1 and #2 1,653.0 599.9 10.1 47.11% Perry 1,295.4 748.8 7.5 35.24% - ------------------------------------------------------------------ Total $4,043.6 $1,849.7 $27.9 ===================================================================
On October 15, 1998, FirstEnergy announced that it signed an agreement in principle with Duquesne that would result in the transfer of 1,436 megawatts owned by Duquesne at eight CAPCO generating units in exchange for 1,328 megawatts at three non-CAPCO power plants owned by the Company, Penn and CEI. As part of this exchange, the Companies will transfer their 246-megawatt Niles Plant and 339-megawatt New Castle Plant to Duquesne. A definitive agreement on the exchange of assets, which will be structured as a tax-free transaction to the extent possible, will provide FirstEnergy's utility operating companies with exclusive ownership and operating control of all CAPCO generating units. Duquesne will fund decommissioning costs equal to its percentage interest in the three nuclear generating units to be transferred. The asset transfer is expected to take twelve to eighteen months to close. 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. Since November 8, 1997, the Companies are included in FirstEnergy's consolidated federal income tax return. The consolidated tax liability is allocated on a "stand-alone" company basis, with the Companies recognizing any tax losses or credits they contributed to the consolidated return. 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. In 1998, the Companies' pension plans and the Centerior pension plan were merged into the FirstEnergy pension plans. 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, 1998. The assets of the pension plans consist primarily of common stocks, United States government bonds and corporate bonds. 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. The following sets forth the funded status of the FirstEnergy plans in 1998 and the Companies' plans in 1997 on the Consolidated Balance Sheets as of December 31 (which includes the Companies' share of the FirstEnergy 1998 plans' net prepaid pension cost and accrued other postretirement benefits cost of $175.9 million and $132.8 million, respectively):
Net pension and other postretirement benefit costs for the three years ended December 31, 1998 (including the Companies' share of FirstEnergy plans' 1998 pension benefits costs and other postretirement benefit costs of $(39.7) million and $31.2 million, respectively) were computed as follows:
Other Pension Benefits Postretirement Benefits ---------------------- ----------------------- 1998 1997 1996 1998 1997 1996 - ------------------------------------------------------------------------------------------------ (In millions) Service cost $ 25.0 $ 12.9 $ 14.2 $ 7.5 $ 4.1 $ 4.3 Interest cost 92.5 49.8 49.3 37.6 17.6 17.4 Expected return on plan assets (152.7) (91.9) (83.2) (0.3) (0.2) (0.1) Amortization of transition obligation (asset) (8.0) (8.0) (8.0) 9.2 8.2 10.1 Amortization of prior service cost 2.3 2.1 2.3 (0.8) 0.3 (1.2) Recognized net actuarial loss (gain) (2.6) (0.9) -- -- -- 0.1 Voluntary early retirement program expense -- 31.5 12.5 -- 1.9 0.5 Plan curtailment loss (gain) -- -- (12.8) -- -- 13.1 - ----------------------------------------------------------------------------------------------- Net benefit cost $ (43.5) $ (4.5) $(25.7) $53.2 $31.9 $44.2 ===============================================================================================
In accordance with SFAS 88 "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," the 1996 net pension costs and postretirement benefit costs shown above included curtailment effects (significant changes in projected plan assumptions) relating to the pension and postretirement benefit plans. The employee terminations reflected in the Companies' 1996 voluntary early retirement program represented a plan curtailment that significantly reduced the expected future employee service years and the related accrual of defined pension and postretirement benefits. In the pension plan, the reduction in the benefit obligation increased the net pension asset and was shown as a plan curtailment gain. In the postretirement benefit plan, the unrecognized prior service cost associated with service years no longer expected to be rendered as a result of the terminations, was shown as a plan curtailment loss. The FirstEnergy's plans' health care trend rate assumption is 5.5% in the first year gradually decreasing to 4.0% for the year 2008 and later. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. An increase in the health care trend rate assumption by one percentage point would increase the total service and interest cost components by $4.0 million and the postretirement benefit obligation by $68.1 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $3.2 million and the postretirement benefit obligation by $55.2 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 Companies' transactions with CEI and TE from the merger date were primarily for electric sales. The amounts related to CEI and TE were $17.8 million and $12.7 million, respectively, for 1998 and $4.3 million and $0.4 million, respectively, for the November 8-December 31, 1997 period. 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 $1.6 million, $3.0 million and $2.0 million for the years 1998, 1997 and 1996, respectively. Commercial paper transactions of OES Fuel, Incorporated (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 3G). 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:
1998 1997 - -------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------- (In millions) Long-term debt $2,627 $2,775 $2,727 $2,835 Preferred stock $ 150 $ 155 $ 155 $ 161 Investments other than cash and cash equivalents: Debt securities - Maturity (5-10 years) $ 481 $ 520 $ 486 $ 512 - Maturity (more than 10 years) 258 305 259 294 Equity securities 14 14 14 14 All other 170 179 145 147 - --------------------------------------------------------------------- $ 923 $1,018 $ 904 $ 967 ======================================================================
The fair values of long-term debt and preferred stock reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by a corporation with credit ratings similar to the Companies' ratings. The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents include decommissioning trust investments. Unrealized gains and losses applicable to the decommissioning trust have been recognized in the trust investment with a corresponding change to the decommissioning liability. The other debt and equity securities referred to above are in the held-to-maturity category. The Companies have no securities held for trading purposes. REGULATORY ASSETS- The Companies recognize, as regulatory assets, costs which the FERC, PUCO and PPUC have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets are being recovered from customers under the Companies' respective regulatory plans. Based on those regulatory plans, at this time, the Companies believe they will continue to be able to bill and collect cost-based rates relating to all of the Company's operations and Penn's nongeneration operations; accordingly, it is appropriate that the Companies continue the application of SFAS 71 to these respective operations. The Companies also recognized additional cost recovery of $50 million, $39 million and $34 million in 1998, 1997 and 1996, respectively, as additional regulatory asset amortization in accordance with their regulatory plans. Regulatory assets on the Consolidated Balance Sheets are comprised of the following:
1998 1997 - ---------------------------------------------------------------------- (In millions) Nuclear unit expenses $ 666.7 $ 707.7 Customer receivables for future income taxes 458.3 560.7 Competitive transition charge 331.0 -- Sale and leaseback costs 127.7 134.3 Loss on reacquired debt 81.9 89.1 Employee postretirement benefit costs 28.9 25.9 Uncollectible customer accounts 6.8 18.9 Perry Unit 2 termination -- 36.7 DOE decommissioning and decontamination costs 12.2 16.5 Other 9.6 11.9 - --------------------------------------------------------------------- Total $1,723.1 $1,601.7 =====================================================================
2. LEASES: The Companies lease certain generating facilities, certain transmission facilities, office space and other property and equipment under cancelable and noncancelable leases. The Company sold portions of its ownership interests in Perry Unit 1 and Beaver Valley Unit 2 and entered into operating leases on the portions sold for basic lease terms of approximately 29 years. During the terms of the leases, the Company continues to be responsible, to the extent of its individual combined ownership and leasehold interests, for costs associated with the units including construction expenditures, operation and maintenance expenses, insurance, nuclear fuel, property taxes and decommissioning. The Company has the right, at the end of the respective basic lease terms, to renew the leases for up to two years. The Company also has the right to purchase the facilities at the expiration of the basic lease term or renewal term (if elected) at a price equal to the fair market value of the facilities. The basic rental payments are adjusted when applicable federal tax law changes. OES Finance, Incorporated (OES Finance), a wholly owned subsidiary of the Company, maintains deposits pledged as collateral to secure reimbursement obligations relating to certain letters of credit supporting the Company's obligations to lessors under the Beaver Valley Unit 2 sale and leaseback arrangements. The deposits pledged to the financial institution providing those letters of credit are the sole property of OES Finance. In the event of liquidation, OES Finance, as a separate corporate entity, would have to satisfy its obligations to creditors before any of its assets could be made available to the Company as sole owner of OES Finance common stock. Consistent with the regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Consolidated Statements of Income. Such costs for the three years ended December 31, 1998, are summarized as follows:
1998 1997 1996 - ------------------------------------------------------ (In millions) Operating leases Interest element $110.0 $111.3 $107.6 Other 28.9 23.2 18.3 Capital leases Interest element 5.3 6.1 6.5 Other 4.8 6.0 6.3 - ----------------------------------------------------- Total rentals $149.0 $146.6 $138.7 =====================================================
The future minimum lease payments as of December 31, 1998, are:
Operating Leases ---------------------------- Capital Lease PNBV Capital Leases Payments Trust Net - ------------------------------------------------------------------- (In millions) 1999 $ 12.0 $ 125.8 $ 44.0 $ 81.8 2000 10.4 125.0 54.6 70.4 2001 9.3 127.6 59.5 68.1 2002 8.8 130.8 61.0 69.8 2003 8.6 137.3 62.6 74.7 Years thereafter 69.8 1,842.4 589.2 1,253.2 - -------------------------------------------------------------------- Total minimum lease payments 118.9 $2,488.9 $870.9 $1,618.0 ======== ====== ======== Executory costs 29.5 - ----------------------------------- Net minimum lease payments 89.4 Interest portion 52.5 - ----------------------------------- Present value of net minimum lease payments 36.9 Less current portion 4.0 - ----------------------------------- Noncurrent portion $ 32.9 ===================================
The Company invested in the PNBV Capital Trust, which 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. The PNBV capital trust arrangement effectively reduces lease costs related to those transactions. 3. 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 $516.3 million at December 31, 1998. (B) EMPLOYEE STOCK OWNERSHIP PLAN- The Companies were funding 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 is included in Other Property and Investments on the Consolidated Balance Sheet as of December 31, 1998 and 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 and 1996, 429,515 and 404,522 shares, respectively, were allocated to the Companies' employees with the corresponding expense recognized based on the shares allocated method. Total ESOP-related compensation expense reflected on the 1997 and 1996 Consolidated Statements of Income was calculated as follows:
- -------------------------------------------------------- 1997 1996 - -------------------------------------------------------- (In millions) Base compensation $ 9.9 $ 9.0 Dividends on common stock held by the ESOP and used to service debt (3.4) (2.9) - --------------------------------------------------------- Net expense $ 6.5 $ 6.1 =========================================================
(C) COMPREHENSIVE INCOME- In 1998, the Companies adopted SFAS 130, "Reporting Comprehensive Income," and applied the standard to all periods presented in the Consolidated Statements of Common Stockholders' Equity. Comprehensive income includes net income as reported on the Consolidated Statements of Income and all other changes in common stockholders' equity except dividends to stockholders. (D) PREFERRED AND PREFERENCE 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. All other preferred stock may be redeemed by the Companies in whole, or in part, with 30-60 days' notice. Preference stock authorized for the Company is 8,000,000 shares without par value. No preference shares are currently outstanding. (E) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- The Company's 8.45% series of preferred stock has an annual sinking fund requirement for 50,000 shares that began on September 16, 1997. Penn's 7.625% series has an annual sinking fund requirement for 7,500 shares beginning on October 1, 2002. The Companies' preferred shares are retired at $100 per share plus accrued dividends. Annual sinking fund requirements are $5 million in each year 1999-2001 and $1 million in each year 2002-2003. (F) 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. (G) LONG-TERM DEBT- The first mortgage indentures and their supplements, which secure all of the Companies' first mortgage bonds, serve as direct first mortgage liens on substantially all property and franchises, other than specifically excepted property, owned by the Companies. Based on the amount of bonds authenticated by the Trustee through December 31, 1998, 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 1999 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) - -------------------------------- 1999 $519.8 2000 328.8 2001 96.0 2002 326.4 2003 246.0 - -------------------------------
The Companies' obligations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds and, in some cases, by subordinate liens on the related pollution control facilities. Certain pollution control revenue bonds are entitled to the benefit of irrevocable bank letters of credit of $338.8 million. To the extent that drawings are made under those letters of credit to pay principal of, or interest on, the pollution control revenue bonds, the Company is entitled to a credit against their obligation to repay those bonds. The Company pays annual fees of 0.43% to 0.75% 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 $250 million at December 31, 1998, 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 $180.5 million long-term bank credit agreement which expires March 31, 2001. 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 0.20% on the total line of credit and an annual commitment fee of 0.0625% on any unused amount. 4. SHORT-TERM BORROWINGS AND BANK LINES OF CREDIT: Short-term borrowings outstanding at December 31, 1998, consisted of $129.5 million of bank borrowings and $120.0 million of OES Capital, Incorporated (OES Capital) 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. At December 31, 1998, the Company also had total short-term borrowings of $88.7 million from its affiliates. The Company has a line of credit with a domestic bank that provides for borrowings of up to $75 million under various interest rate options. Short-term borrowings may be made under this line of credit on its unsecured notes. To assure the availability of this line, the Company is required to pay an annual commitment fee of 0.20%. This line expires in May 1999. The weighted average interest rates on short-term borrowings outstanding at December 31, 1998 and 1997, were 5.61% and 6.02%, respectively. 5. COMMITMENTS, GUARANTEES AND CONTINGENCIES: CAPITAL EXPENDITURES- The Companies' current forecasts reflect expenditures of approximately $1 billion for property additions and improvements from 1999-2003, of which approximately $169 million is applicable to 1999. Investments for additional nuclear fuel during the 1999-2003 period are estimated to be approximately $167 million, of which approximately $23 million applies to 1999. During the same periods, the Companies' nuclear fuel investments are expected to be reduced by approximately $169 million and $35 million, respectively, as the nuclear fuel is consumed. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $9.7 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 $114.2 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 $308.1 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 $15.4 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, 1998, the Companies' shares of the guarantees (which approximate fair market value) were $28.4 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 $134.7 million, $119.5 million and $113.8 million during 1998, 1997 and 1996, respectively. The Companies' minimum payment for 1999 is approximately $35 million. The contract 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 $260 million, which is included in the construction forecast provided under "Capital Expenditures" for 1999 through 2003. 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 in 1999 will be achieved by burning lower-sulfur fuel, generating more electricity from lower-emitting plants, and/or purchasing emission allowances. Plans for complying with reductions required for the year 2000 and thereafter have not been finalized. In September 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions from the Companies' Ohio and Pennsylvania facilities by May 2003. The EPA's NOx Transport Rule imposes uniform reductions of NOx emissions across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. By September 1999, each of the twenty-two states are required to submit revised State Implementation Plans (SIP) which comply with individual state NOx budgets established by the EPA. These state NOx budgets contemplate an 85% reduction in utility plant NOx emissions from 1990 emissions. A proposed Federal Implementation Plan accompanied the NOx Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In another separate but related action, eight states filed petitions with EPA under Section 126 of the Clean Air Act seeking reductions of NOx emissions which are alleged to contribute to ozone pollution in the eight petitioning states. The EPA suggests that the Section 126 petitions will be adequately addressed by the NOx Transport Program, but a September 1998 proposed rulemaking established an alternative program which would require nearly identical 85% NOx reductions at the Companies' Ohio and Pennsylvania plants by May 2003 in the event implementation of the NOx Transport Rule is delayed. FirstEnergy continues to evaluate its compliance plans and other compliance options and currently estimates its additional capital expenditures for NOx reductions may reach $500 million. The Companies are required to meet federally approved SO2 regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $25,000 for each day the unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Companies cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. The cost of compliance with these regulations may be substantial and depends on the manner in which they are implemented by the states in which the Companies operate affected facilities. 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 Company expects that while it remains regulated, any resulting additional capital costs which may be required, as well as any required increase in operating costs, would ultimately be recovered from its customers. 6. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain consolidated operating results by quarter for 1998 and 1997.
March 31, June 30, September 30, December 31, Three Months Ended 1998 1998 1998 1998 - -------------------------------------------------------------------------------------------- (In millions) Operating Revenues $597.8 $618.5 $696.2 $607.0 Operating Expenses and Taxes 486.7 524.9 555.5 465.5 - ------------------------------------------------------------------------------------------ Operating Income 111.1 93.6 140.7 141.5 Other Income 12.5 11.8 12.6 10.7 Net Interest Charges 59.3 59.1 58.6 56.2 - ------------------------------------------------------------------------------------------ Income Before Extraordinary Item 64.3 46.3 94.7 96.0 Extraordinary Item (Net of Income Taxes) (Note 1) -- (30.5) -- -- - ------------------------------------------------------------------------------------------ Net Income $ 64.3 $ 15.8 $ 94.7 $ 96.0 ========================================================================================== Earnings on Common Stock $ 61.3 $ 12.8 $ 91.7 $ 93.0 ==========================================================================================
March 31, June 30, September 30, December 31, Three Months Ended 1997 1997 1997 1997 - -------------------------------------------------------------------------------------------- (In millions) 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 ==========================================================================================
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, 1998 and 1997, and the related consolidated statements of income, common stockholders' equity, preferred stock, cash flows and taxes for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio February 12, 1999 EX-21.1 13 EXHIBIT 21.1 OHIO EDISON COMPANY LIST OF SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 1998 Pennsylvania Power Company - Incorporated in Pennsylvania OES Fuel, Incorporated - Incorporated in Ohio OES Ventures, Incorporated - Incorporated in Ohio OES Capital, Incorporated - Incorporated in Ohio OES Finance, Incorporated - Incorporated in Ohio OES Nuclear, Incorporated - Incorporated in Ohio Ohio Edison Financing Trust - Incorporated in Delaware Ohio Edison Financing Trust II - Incorporated in Delaware Statement of Differences ---------------------------- Exhibit Number 21, List of Subsidiaries of the Registrant at December 31, 1998, is not included in the printed document. EX-23.1 14 EXHIBIT 23.1 OHIO EDISON COMPANY CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into Ohio Edison Company's previously filed Registration Statements, File No. 33-49135, No. 33-49259, No. 33-49413, No. 33-51139, No. 333-01489 and No. 333-05277. ARTHUR ANDERSEN LLP Cleveland, Ohio March 29, 1999 EX-27.1 15
UT This schedule contains summary financial information extracted from the related Form 10-K 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 $20,305,000 related to other income and $(21,208,000) related to extraordinary item. 0000073960 OHIO EDISON COMPANY 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 DEC-31-1998 1 PER-BOOK 4,740,029 1,291,261 729,723 1,972,138 0 8,733,151 1 2,098,728 583,144 2,681,873 145,000 211,870 2,215,042 218,208 0 119,975 519,782 5,000 0 4,010 2,612,391 8,733,151 2,519,662 170,053 1,861,786 2,032,742 486,920 47,621 534,541 233,221 270,798 11,970 258,828 297,376 197,590 609,407 0 0
EX-13.2 16 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED FINANCIAL AND OPERATING STATISTICS
Nov. 8 - Jan. 1 - 1998 Dec. 31, 1997 Nov. 7, 1997 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) GENERAL FINANCIAL INFORMATION: | | Operating Revenues $1,782,376 $ 253,963 | $1,529,014 $1,789,961 $1,768,737 $1,698,021 ========== ========== | ========== ========== ========== ========== Operating Income $ 368,902 $ 49,502 | $ 307,332 $ 358,620 $ 397,899 $ 396,009 ========== ========== | ========== ========== ========== ========== Income Before Extraordinary Item $ 164,891 $ 19,290 | $ 95,191 $ 116,553 $ 183,719 $ 185,431 ========== ========== | ========== ========== ========== ========== Net Income (Loss) $ 164,891 $ 19,290 | $ (229,247) $ 116,553 $ 183,719 $ 185,431 ========== ========== | ========== ========== ========== ========== Earnings (Loss) on Common Stock $ 140,097 $ 19,290 | $ (274,276) $ 77,810 $ 141,275 $ 139,994 ========== ========== | ========== ========== ========== ========== Net Utility Plant $3,074,043 $3,156,659 | $4,983,219 $5,090,315 $5,191,628 ========== ========== | ========== ========== ========== Total Assets $6,318,183 $6,440,284 | $6,962,297 $7,222,416 $7,204,045 ========== ========== | ========== ========== ========== | CAPITALIZATION: | Common Stockholder's Equity $1,008,238 $ 950,904 | $1,044,283 $1,126,762 $1,058,190 Preferred Stock- | Not Subject to Mandatory Redemption 238,325 238,325 | 238,325 240,871 240,871 Subject to Mandatory Redemption 149,710 183,174 | 186,118 215,420 245,971 Long-Term Debt 2,888,202 3,189,590 | 2,523,030 2,759,492 2,683,207 ---------- ---------- | ---------- ---------- ---------- Total Capitalization $4,284,475 $4,561,993 | $3,991,756 $4,342,545 $4,228,239 ========== ========== | ========== ========== ========== CAPITALIZATION RATIOS: | Common Stockholder's Equity 23.5% 20.9%| 26.2% 25.9% 25.0% Preferred Stock- | Not Subject to Mandatory Redemption 5.6 5.2 | 6.0 5.6 5.7 Subject to Mandatory Redemption 3.5 4.0 | 4.6 5.0 5.8 Long-Term Debt 67.4 69.9 | 63.2 63.5 63.5 ----- ----- | ----- ----- ----- Total Capitalization 100.0% 100.0%| 100.0% 100.0% 100.0% ===== ===== | ===== ===== ===== KILOWATT-HOUR SALES (Millions): | Residential 4,949 790 | 4,062 4,958 5,063 4,924 Commercial 6,353 893 | 4,990 5,908 5,946 5,770 Industrial 8,024 1,285 | 6,710 7,977 7,994 7,970 Other 165 89 | 476 522 550 575 ---------- ---------- | ---------- ---------- ---------- ---------- Total Retail 19,491 3,057 | 16,238 19,365 19,553 19,239 Total Wholesale 1,275 575 | 2,408 2,155 1,694 1,073 ---------- ---------- | ---------- ---------- ---------- ---------- Total 20,766 3,632 | 18,646 21,520 21,247 20,312 ========== ========== | ========== ========== ========== ========== CUSTOMERS SERVED (Year-End): | Residential 668,470 671,265 | 663,130 669,725 668,346 Commercial 68,896 74,751 | 70,886 72,259 71,609 Industrial 5,336 6,515 | 6,545 6,649 6,993 Other 221 278 | 446 442 417 ---------- ---------- | ---------- ---------- ---------- Total 742,923 752,809 | 741,007 749,075 747,365 ========== ========== | ========== ========== ========== | Average Annual Residential kWh Usage 7,395 7,235 | 7,451 7,570 7,370 Peak Load-Megawatts 4,248 3,955 | 3,938 4,049 3,740 Number of Employees (Year-End) 1,798 3,162 | 3,282 3,636 3,547
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY 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 that 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, and the availability and cost of capital and other similar factors. Results of Operations We continued to take steps in 1998 to better position our Company as competition continues to expand in the electric utility industry. Investments were made in new information systems with enhanced functionality which also address Year 2000 application deficiencies. We also contributed to the 1998 cash savings of FirstEnergy Corp. (FirstEnergy) totaling $173 million. These savings were captured from initiatives implemented during the year in connection with merger-related economies made possible by FirstEnergy's formation through the merger of our former parent company, Centerior Energy Corporation, and Ohio Edison Company on November 8, 1997. Financial results reflect the application of purchase accounting to the merger. 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 our financial statements. As a result, we recorded purchase accounting fair value adjustments to: (1) revalue our nuclear generating units to fair value, (2) adjust long-term debt to fair value, (3) adjust our retirement and severance benefit liabilities, and (4) record goodwill. Accordingly, the post-merger financial statements reflect a new basis of accounting, and separate financial statements are presented for the pre-merger and post-merger periods. For the remainder of this discussion, for categories substantially unaffected by the merger and with no significant pre-merger or post-merger accounting events, we have combined the 1997 pre-merger and post-merger periods and have compared the total to 1998 and 1996. Earnings on common stock were $140.1 million in 1998. Results for 1998 were adversely affected by sharp increases in the spot market price for electricity occasioned by a constrained power supply and heavy customer demand in the latter part of June 1998, combined with unscheduled generating unit outages, which resulted in spot market purchases of power at prices which substantially exceeded amounts recovered from retail customers. Pre-merger earnings on common stock in 1997 included an October 1997 write-off of certain regulatory assets. Excluding this write-off, pre-merger earnings on common stock were $50.2 million. For the seven-week post-merger period, earnings on common stock were $19.3 million. Earnings on common stock were $77.8 million in 1996. Operating revenues decreased slightly in 1998 following a decline the previous year. The following table summarizes the sources of decreases in operating revenues for 1998 and 1997 as compared to the prior year:
1998 1997 ---- ---- (In millions) Change in retail kilowatt-hour sales $ 12.7 $ (9.8) Change in average retail price 5.9 (4.8) Wholesale sales (15.7) 18.6 Other (3.5) (11.0) - ----------------------------------------------------------------- Net Decrease $ (0.6) $ (7.0) =================================================================
Total kilowatt-hour sales were down in 1998 from the prior year after establishing a new record for kilowatt-hours sold in 1997. The decline was due to a 57.5% decrease in sales to wholesale customers. Several generating unit outages, described later in this report, reduced energy available for sale to the wholesale market. Retail sales were up in 1998, compared to 1997, with an increase of 0.5%. Kilowatt-hour sales to residential and commercial customers increased 1.5% and 0.3%, respectively, while industrial sales remained nearly unchanged from the previous year. In 1997, retail sales decreased 0.4% with a small increase in sales to industrial customers more than offset by a 2.2% decrease in residential kilowatt-hour sales and a 0.4% reduction in commercial kilowatt-hour sales from the previous year. However, overall there was a 3.5% increase in kilowatt-hour sales due to an increase in sales to wholesale customers. Operation and maintenance expenses were nearly unchanged in 1998, compared to the prior year, due to increased fuel and purchased power costs substantially offset by a decrease in nuclear operating costs and other operating costs. Most of the increase in fuel and purchased power occurred in the second quarter and resulted from a combination of factors. In late June 1998, the midwestern and southern regions of the United States experienced electricity shortages caused mainly by record temperatures and humidity and unscheduled generating unit outages. During this period, Beaver Valley Unit 2 was out of service and the Davis-Besse plant was removed from service as a result of damage to transmission facilities caused by a tornado. As a result, we purchased significant amounts of power on the spot market at unusually high prices, causing the increase in purchased power costs. An increase in purchased power costs also contributed to the 1997 increase in fuel and purchased power costs, compared to 1996, which was offset in part by lower fuel costs caused by an increase in the mix of nuclear generation to coal-fired generation. Nuclear operating costs were lower in 1998, compared to 1997, reflecting reduced costs at the Perry Plant partially offset by increased costs at the Beaver Valley and Davis-Besse plants. Lower nuclear operating costs in 1997 resulted from lower costs at the Perry and Davis-Besse plants offset in part by increased costs at the Beaver Valley Plant. Other operating costs in 1998 were lower partially due to the absence of a 1997 pre-merger charge for estimated severance costs totaling $9.9 million. In comparing other operating costs in 1997 and 1996, the effect of the 1997 charge was more than offset by an $11.9 million charge in 1996 for disposal of obsolete materials and supplies. Both 1998 and 1997 benefited from ongoing cost cutting and the effect of work force reductions. Lower depreciable asset balances, resulting from the purchase accounting adjustment, reduced depreciation and amortization in the 1998 and 1997 post-merger period. These reductions were partially offset by the amortization of goodwill recognized with the application of purchase accounting. Depreciation and amortization in the 1997 pre-merger period increased principally due to changes in depreciation rates approved in the April 1996 Public Utilities Commission of Ohio (PUCO) rate order. Interest income on trust notes acquired in connection with the Bruce Mansfield Plant lease refinancing (see Note 2), which began in June 1997, increased other income in 1998 and the 1997 post-merger period. In the pre-merger period of 1997, interest income on the trust notes was more than offset by merger-related expenses and costs associated with the accounts receivable securitization. Total interest charges decreased in 1998 principally due to the amortization of premiums associated with the revaluation of long-term debt in connection with the merger, which also contributed to the decrease in interest charges in the post-merger period of 1997. In the pre-merger period of 1997, interest charges were higher because interest on new secured notes and short-term borrowings for the Bruce Mansfield Plant lease refinancing exceeded the expense reduction from the redemption and refinancing of debt securities. Preferred stock dividend requirements in 1998 were reduced by $9 million and in 1997 were increased by $9 million due to the declaration of preferred dividends as of the merger date for dividends attributable to the post-merger period (see "Preferred and Preference Stock" in Note 3c). Capital Resources and Liquidity We continue to actively pursue economic refinancings and optional redemptions to reduce the cost of debt and preferred stock, and improve our financial position. A total of $230 million of long-term debt refinancing was completed during 1998. We completed $150 million of optional redemptions. During 1998, we reduced our total debt by approximately $210 million. Our common stockholder's equity percentage of capitalization increased to 24% at December 31, 1998 from 21% at the end of the previous year. The merger resulted in improved credit ratings in 1997, which have lowered the cost of new issues. The following table summarizes changes in credit ratings resulting from the merger:
Pre-Merger Post-Merger ------------------------- -------------------------- Standard Moody's Standard Moody's & Poor's Investors & Poor's Investors Corporation Service, Inc. Corporation Service, Inc. ----------- ------------- ----------- ------------- First mortgage bonds BB Ba2 BB+ Ba1 Subordinated debt B+ Ba3 BB- Ba3 Preferred Stock B b2 BB- b1
Excluding the effect of the Bruce Mansfield Plant lease refinancing, interest costs on long-term debt were reduced by approximately $18 million in 1998, compared to 1997. Through economic refinancings and redemptions of higher cost debt we have reduced the average cost of outstanding debt from 8.82% in 1993 to 8.15% in 1997 and 7.99% in 1998. We continue to streamline our operations, as evidenced by a 50% increase in FirstEnergy's customer/employee ratio, which has increased from 165 at the end of 1993 to 247 as of December 31, 1998. Merger-related savings through consolidation of activities have contributed to these results. Our cash requirements in 1999 for operating expenses, construction expenditures and scheduled debt maturities are expected to be met without issuing additional securities. We have cash requirements of approximately $885.6 million for the 1999-2003 period to meet scheduled maturities of long-term debt and preferred stock. Of that amount, approximately $178.0 million applies to 1999. We had about $73.0 million of cash and temporary investments and no short-term indebtedness on December 31, 1998. Upon completion of the merger, application of purchase accounting reduced bondable property such that we are not currently able to issue additional first mortgage bonds, except in connection with refinancing. Together with The Toledo Edison Company, as of December 31, 1998, we had unused borrowing capability of $100 million under a FirstEnergy revolving line of credit. Our capital spending for the period 1999-2003 is expected to be about $701 million (excluding nuclear fuel), of which approximately $150 million applies to 1999. Investments in additional nuclear fuel during the 1999-2003 period are estimated to be approximately $130 million, of which about $14 million applies to 1999. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $150 million and $32 million, respectively, as the nuclear fuel is consumed. Also, we have operating lease commitments net of trust cash receipts of approximately $39 million for the 1999- 2003 period, of which approximately $6 million relates to 1999. We recover the cost of nuclear fuel consumed and operating leases through our electric rates. FirstEnergy signed an agreement in principle with Duquesne Light Company (Duquesne) that would result in the transfer of 1,436 megawatts owned by Duquesne at five generating plants in exchange for 1,328 megawatts at three plants owned by its electric utility operating companies (see "Common Ownership of Generating Facilities" in Note 1), including the Company's 743-megawatt Avon Lake Plant. A final agreement on the exchange of assets, which will be structured as a tax-free transaction to the extent possible is being negotiated. The transaction benefits FirstEnergy's utility operating companies by providing exclusive ownership and operating control of all generating assets that are now jointly owned and operated under the Central Area Power Coordination Group agreement. Interest Rate Risk Our exposure to fluctuations in market interest rates is mitigated since 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 2, our investment in the Shippingport Capital Trust effectively reduces future lease obligations, also reducing interest rate risk. Changes in the market value of our nuclear decommissioning trust funds are recognized by making a corresponding change to the decommissioning liability, as described in Note 1. 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.
- ---------------------------------------------------------------------------------------------------- There- Fair 1999 2000 2001 2002 2003 after Total Value (Dollars in Millions) - --------------------------------------------------------------------------------------------------- Investments other than Cash and Cash Equivalents: Fixed Income $ 25 $ 24 $15 $ 38 $ 48 $ 416 $ 566 $ 583 Average interest rate 7.7% 7.6% 7.8% 7.7% 7.6% 7.4% 7.5% - ---------------------------------------------------------------------------------------------------- Liabilities - ---------------------------------------------------------------------------------------------------- Long-term Debt: Fixed rate $145 $175 $57 $228 $115 $2,003 $2,723 $2,960 Average interest rate 8.6% 7.2% 8.6% 7.7% 7.4% 7.7% 7.7% Variable rate $ 160 $ 160 $ 160 Average interest rate 3.4% 3.4% Short-term Borrowings $ 81 $ 81 $ 81 Average interest rate 5.5% 5.5% - ---------------------------------------------------------------------------------------------------- Preferred Stock $ 33 $ 33 $81 $ 19 $ 1 $ 5 $ 172 $ 184 Average dividend rate 9.0% 9.0% 8.9% 8.9% 7.4% 7.4% 8.9% - ----------------------------------------------------------------------------------------------------
Outlook We face many competitive challenges in the years ahead as the electric utility industry undergoes significant changes, including regulation and the entrance of more energy suppliers into the marketplace. Retail wheeling, which would allow retail customers to purchase electricity from other energy producers, will be one of those challenges. The FirstEnergy Rate Reduction and Economic Development Plan provides the foundation to position us to meet the challenges we are facing by significantly reducing fixed costs and lowering rates to a more competitive level. The plan was approved by the PUCO in January 1997, and initially maintains current base electric rates through December 31, 2005. The plan also revised our fuel recovery method. As part of the regulatory plan, the base rate freeze is to be followed by a $217 million base rate reduction in 2006; interim reductions which began in June 1998 of $3 per month will increase to $5 per month per residential customer by July 1, 2001. Total savings of $280 million are anticipated over the term of the plan for our customers. We have committed $70 million for economic development and energy efficiency programs. We have been authorized by the PUCO, for regulatory accounting purposes, to recognize additional depreciation related to our generating assets and additional amortization of regulatory assets during the regulatory plan period of at least $1.4 billion more than the amounts that would have been recognized if the regulatory plans were not in effect. For regulatory purposes these additional charges will be reflected over the rate plan period. Our regulatory plan does not provide for full recovery of nuclear operations. Accordingly, regulatory assets representing customer receivables for future income taxes related to nuclear assets of $499 million were written off ($324 million net of income taxes) prior to consummation of the merger since we ceased application of Statement of Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation" for our nuclear operations when implementation of the FirstEnergy regulatory plan became probable. Based on the current regulatory environment and our regulatory plan, we believe we will continue to be able to bill and collect cost-based rates relating to our nonnuclear operations. As a result, we will continue the application of SFAS 71. However, changes in the regulatory environment appear to be on the horizon for electric utilities in Ohio. As further discussed below, the Ohio legislature is in the discussion stages of restructuring the State's electric utility industry. Although we believe that regulatory changes are possible in 1999, we cannot currently estimate the ultimate impact. At the consummation of the merger in November 1997, we recognized a fair value purchase accounting adjustment, which decreased the carrying value of our nuclear assets by approximately $1.7 billion based upon cash flow models. The fair value adjustment to nuclear plant recognized for financial reporting purposes will ultimately satisfy the asset reduction commitment contained in our regulatory plan. We continue to actively pursue the enactment of fair legislation calling for deregulation of Ohio's investor-owned electric utility industry. In early 1998, a deregulation proposal was introduced, leading to the creation of a working group to recommend legislation. As requested by legislative leadership, investor-owned utilities introduced a deregulation plan with objectives to (1) treat all major stakeholders in Ohio's electric system fairly; (2) protect public schools and local governments from revenue loss; and (3) allow utilities an opportunity to recover costs of government-mandated investments. The utilities have submitted proposals, which incorporate these objectives and also recognize the complexity of restructuring the industry. The overlying objective is to do the job right the first time. Currently, the working group, comprised of legislative leaders, representatives of the electric utility companies and other interested stakeholders are meeting to discuss and mold these proposals. Most recently, placeholder bills containing statements of principle (that will be replaced by specific proposals as they are agreed upon) have been introduced. Legislative leaders have placed a high priority on enacting a deregulation bill by mid-year. The Clean Air Act Amendments of 1990, discussed in Note 5, require additional emission reductions by 2000. We are pursuing cost- effective compliance strategies for meeting these reduction requirements. On September 24, 1998, the Federal Environmental Protection Agency issued a final rule establishing tighter nitrogen oxide emission requirements for fossil fuel-fired utility boilers in Ohio, Pennsylvania and twenty other eastern states, including the District of Columbia (see "Environmental Matters" in Note 5). Controls must be in place by May 2003, with required reductions achieved during the five-month summer ozone season (May through September). The new rule is expected to increase the cost of producing electricity; however, we believe that we are in a better position than a number of other utilities to achieve compliance due to our diversified nuclear and hydroelectric generation capacity. We have been named as a "potentially responsible party" (PRP) for three sites listed on the Superfund National Priorities List and are aware of our potential involvement in the cleanup of several other sites. Allegations that we disposed of hazardous waste at these sites, and the amount involved are often unsubstantiated and subject to dispute. Federal law provides that all PRPs for a particular site be held liable on a joint and several basis. If we were held liable for 100% of the cleanup costs of all the sites referred to above, the cost could be as high as $212 million. However, we believe that the actual cleanup costs will be substantially less than 100% and that most of the other parties involved are financially able to contribute their share. We have accrued a $4.7 million liability as of December 31, 1998, based on estimates of the costs of cleanup and our proportionate responsibility for such costs. We believe that the ultimate outcome of these matters will not have a material adverse effect on our financial condition, cash flows or results of operations. In connection with FirstEnergy's regulatory plan to reduce fixed costs and lower rates, we continue to take steps to restructure our operations. FirstEnergy announced plans to transfer our transmission assets into a new subsidiary, American Transmission Systems, Inc., with the transfer expected to be finalized in 1999. The new subsidiary represents a first step toward the goal of establishing or becoming part of a larger independent transmission company (TransCo). We believe that a TransCo better addresses the Federal Energy Regulatory Commission's (FERC) stated transmission objectives of providing non-discriminatory service, while providing for streamlined and cost-efficient operation. In working toward the goal of forming a larger regional transmission entity, FirstEnergy, American Electric Power, Virginia Power and Consumers Energy announced in November 1998 that they would prepare a FERC filing during 1999 for such a regional transmission entity. The entity would be designed to meet the goals of reducing transmission costs that result when transferring power over several transmission systems, ensuring transmission reliability and providing non-discriminatory access to the transmission grid. Year 2000 Readiness 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. Because so many of our computer functions are date sensitive, this could cause far-reaching problems, such as system- wide computer failures and miscalculations, if no remedial action is taken. We have developed a multi-phase program for Year 2000 compliance that consists of an assessment of our systems and operations that could be affected by the Year 2000 problem; remediation or replacement of noncompliant systems and components; and testing of systems and components following such remediation or replacement. We have focused our Year 2000 review on three areas: centralized system applications, noncentralized systems and relationships with third parties (including suppliers as well as end- use customers). Our review of system readiness extends to systems involving customer service, safety, shareholder needs and regulatory obligations. We are committed to taking appropriate actions to eliminate or lessen negative effects of the Year 2000 issue on our operations. We have completed an inventory of all computer systems and hardware including equipment with embedded computer chips and have determined which systems need to be converted or replaced to become Year 2000- ready and are in the process of remediating them. Based on our timetable, we expect to have all identified repairs, replacements and upgrades completed to achieve Year 2000 readiness by September 1999. Most of our Year 2000 issues will be resolved through system replacement. Of our major centralized systems, the general ledger system and inventory management, procurement and accounts payable systems were replaced at the end of 1998. Our payroll system was enhanced to be Year 2000 compliant in July 1998. The customer service system is due to be replaced in mid-1999. We have completed formal communications with most of our key suppliers to determine the extent to which we are vulnerable to those third parties' failure to resolve their own Year 2000 problems. For suppliers having potential compliance problems, we are developing alternate sources and services in the event such noncompliance occurs. We are also identifying areas requiring higher inventory levels based on compliance uncertainties. There can be no guarantee that the failure of companies to resolve their own Year 2000 issue will not have a material adverse effect on our business, financial condition and results of operations. We are using both internal and external resources to reprogram and/or replace and test our software for Year 2000 modifications. Of the $32 million total project cost, approximately $26 million will be capitalized since those costs are attributable to the purchase of new software for total system replacements because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $6 million will be expensed as incurred. As of December 31, 1998, we have spent $19 million for Year 2000 capital projects and had expensed approximately $3 million for Year 2000-related maintenance activities. Our total Year 2000 project cost, as well as our estimates of the time needed to complete remedial efforts, are based on currently available information and do not include the estimated costs and time associated with the impact of third party Year 2000 issues. We believe we are managing the Year 2000 issue in such a way that our customers will not experience any interruption of service. We believe the most likely worst-case scenario from the Year 2000 issue will be disruption in power plant monitoring systems, thereby producing inaccurate data and potential failures in electronic switching mechanisms at transmission junctions. This would prolong localized outages, as technicians would have to manually activate switches. Such an event could have a material, but currently undeterminable, effect on our financial results. We are developing contingency plans to address the effects of any delay in becoming Year 2000 compliant and expect to have contingency plans completed by June 1999. The costs of the project and the dates 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. THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF INCOME
For the Year For the Year Ended Ended December 31, Nov. 8 - Jan. 1 - December 31, 1998 Dec. 31, 1997 Nov. 7, 1997 1996 - -------------------------------------------------------------------------------------------------------- (In thousands) | OPERATING REVENUES $1,782,376 $253,963 | $1,529,014 $1,789,961 ---------- -------- | ---------- ---------- OPERATING EXPENSES AND TAXES: | Fuel and purchased power 435,752 53,239 | 368,243 418,145 Nuclear operating costs 97,914 16,791 | 85,207 89,514 Other operating costs 335,621 57,852 | 286,384 381,976 ---------- -------- | ---------- ---------- Total operation and maintenance expenses 869,287 127,882 | 739,834 889,635 Provision for depreciation and amortization 224,430 31,978 | 211,827 244,615 General taxes 221,077 33,912 | 194,400 229,856 Income taxes 98,680 10,689 | 75,621 67,235 ---------- -------- | ---------- ---------- Total operating expenses and taxes 1,413,474 204,461 | 1,221,682 1,431,341 ---------- -------- | ---------- ---------- OPERATING INCOME 368,902 49,502 | 307,332 358,620 | OTHER INCOME (EXPENSE) 25,393 4,572 | (2,476) (2,089) ---------- -------- | ---------- ---------- INCOME BEFORE NET INTEREST CHARGES 394,295 54,074 | 304,856 356,531 NET INTEREST CHARGES: ---------- -------- | ---------- ---------- Interest on long-term debt 234,795 35,300 | 197,323 229,491 Allowance for borrowed funds used during | construction (2,079) (631) | (1,928) (2,110) Other interest expense (3,312) 115 | 14,270 12,597 ---------- -------- | ---------- ---------- Net interest charges 229,404 34,784 | 209,665 239,978 ---------- -------- | ---------- ---------- INCOME BEFORE EXTRAORDINARY ITEM 164,891 19,290 | 95,191 116,553 EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 1) -- -- | (324,438) -- ---------- -------- | ---------- ---------- NET INCOME (LOSS) 164,891 19,290 | (229,247) 116,553 | PREFERRED STOCK DIVIDEND | REQUIREMENTS 24,794 -- | 45,029 38,743 ---------- -------- | ---------- ---------- EARNINGS (LOSS) ON COMMON STOCK $140,097 $ 19,290 | $ (274,276) $ 77,810 ========== ======== | ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED BALANCE SHEETS
At December 31, 1998 1997 - ------------------------------------------------------------------------------------------ (In thousands) ASSETS UTILITY PLANT: In service $4,648,725 $4,578,649 Less--Accumulated provision for depreciation 1,631,974 1,470,084 ---------- ---------- 3,016,751 3,108,565 ---------- ---------- Construction work in progress-- Electric plant 42,428 41,261 Nuclear fuel 14,864 6,833 ---------- ---------- 57,292 48,094 ---------- ---------- 3,074,043 3,156,659 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust (Note 2) 543,161 575,084 Nuclear plant decommissioning trusts 125,050 105,334 Other 21,059 21,482 ---------- ---------- 689,270 701,900 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 19,526 33,775 Receivables-- Customers 16,588 29,759 Associated companies 15,636 8,695 Other 142,834 98,077 Notes receivable from associated companies 53,509 -- Materials and supplies, at average cost-- Owned 38,213 47,489 Under consignment 43,620 25,411 Prepayments and other 58,342 57,763 ---------- ---------- 388,268 300,969 ---------- ---------- DEFERRED CHARGES: Regulatory assets 555,925 579,711 Goodwill 1,471,563 1,552,483 Property taxes 126,464 125,204 Other 12,650 23,358 ---------- ---------- 2,166,602 2,280,756 ---------- ---------- $6,318,183 $6,440,284 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Consolidated Statements of Capitalization): Common stockholder's equity $1,008,238 $ 950,904 Preferred stock-- Not subject to mandatory redemption 238,325 238,325 Subject to mandatory redemption 149,710 183,174 Long-term debt 2,888,202 3,189,590 ---------- ---------- 4,284,475 4,561,993 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 208,050 121,965 Accounts payable-- Associated companies 47,680 56,109 Other 92,976 90,737 Notes payable to associated companies 80,618 56,802 Accrued taxes 192,359 194,394 Accrued interest 66,685 67,896 Other 37,278 52,297 ---------- ---------- 725,646 640,200 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 524,285 496,437 Accumulated deferred investment tax credits 90,946 96,131 Pensions and other postretirement benefits 217,719 198,642 Other 475,112 446,881 ---------- ---------- 1,308,062 1,238,091 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 2 and 5) ---------- ---------- $6,318,183 $6,440,284 ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) COMMON STOCKHOLDER'S EQUITY: Common stock, without par value, authorized 105,000,000 shares-- 79,590,689 shares outstanding $ 931,962 $ 931,614 Retained earnings (Note 3A) 76,276 19,290 ---------- ---------- Total common stockholder's equity 1,008,238 950,904 ---------- ---------- Number of Shares Optional Outstanding Redemption Price ------------------ --------------------- 1998 1997 Per Share Aggregate ---- ---- --------- --------- PREFERRED STOCK (Note 3C): Cumulative, without par value- Authorized 4,000,000 shares Not Subject to Mandatory Redemption: $ 7.40 Series A 500,000 500,000 $ 101.00 $ 50,500 50,000 50,000 $ 7.56 Series B 450,000 450,000 102.26 46,017 45,071 45,071 Adjustable Series L 474,000 474,000 100.00 47,400 46,404 46,404 $42.40 Series T 200,000 200,000 500.00 100,000 96,850 96,850 --------- --------- -------- ---------- ---------- Total not subject to mandatory redemption 1,624,000 1,624,000 $243,917 238,325 238,325 ========= ========= ======== ---------- ---------- Subject to Mandatory Redemption (Note 3D): $7.35 Series C. 100,000 110,000 101.00 $ 10,100 10,110 11,110 $88.00 Series E 6,000 9,000 1,003.83 6,023 6,000 9,000 $91.50 Series Q 32,144 42,858 1,000.00 32,144 32,144 42,858 $88.00 Series R 50,000 50,000 -- -- 55,000 55,000 $90.00 Series S 74,000 74,000 -- -- 79,920 79,920 Redemption within one year (33,464) (14,714) --------- --------- -------- ---------- ---------- Total subject to mandatory redemption 262,144 285,858 $ 48,267 149,710 183,174 ========= ========= ======== ---------- ---------- LONG-TERM DEBT (Note 3E): First mortgage bonds: 7.625% due 2002 195,000 195,000 7.375% due 2003 100,000 100,000 8.750% due 2005 -- 75,000 9.500% due 2005 300,000 300,000 6.860% due 2008 125,000 -- 8.375% due 2011 -- 125,000 8.375% due 2012 -- 75,000 9.000% due 2023 150,000 150,000 ---------- ---------- Total first mortgage bonds 870,000 1,020,000 ---------- ---------- Unsecured notes: 6.700% due 2006 -- 19,500 5.700% due 2008 -- 7,300 6.700% due 2011 -- 5,500 5.875% due 2012 -- 14,300 ---------- ---------- Total unsecured notes -- 46,600 ---------- ---------- THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont.) At December 31, 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- (In thousands) LONG-TERM DEBT: (Cont.) Secured notes: 8.150% due 1998 -- 7,500 8.160% due 1998 -- 5,000 8.170% due 1998 -- 11,000 8.260% due 1998 -- 2,500 8.330% due 1998 -- 25,000 8.870% due 1998 -- 10,000 9.000% due 1998 -- 5,000 7.000% due 1999-2009 1,880 1,910 7.250% due 1999 12,000 12,000 7.670% due 1999 3,000 3,000 7.770% due 1999 17,000 17,000 7.850% due 1999 25,000 25,000 8.290% due 1999 10,000 10,000 9.250% due 1999 52,500 52,500 9.300% due 1999 25,000 25,000 7.190% due 2000 175,000 175,000 7.420% due 2001 10,000 10,000 8.540% due 2001 3,000 3,000 8.550% due 2001 5,000 5,000 8.560% due 2001 3,500 3,500 8.680% due 2001 15,000 15,000 9.050% due 2001 5,000 5,000 9.200% due 2001 15,000 15,000 7.850% due 2002 5,000 5,000 8.130% due 2002 28,000 28,000 7.750% due 2003 15,000 15,000 7.670% due 2004 280,000 280,000 7.130% due 2007 120,000 120,000 7.430% due 2009 150,000 150,000 6.000% due 2011* -- 5,650 6.000% due 2011* -- 1,700 8.000% due 2013 78,700 78,700 3.278% due 2015* 39,835 39,835 6.000% due 2017* -- 1,285 7.880% due 2017 300,000 300,000 3.060% due 2018* 72,795 72,795 4.100% due 2020* 47,500 47,500 6.000% due 2020* -- 40,900 6.000% due 2020* -- 9,100 6.000% due 2020 62,560 62,560 6.100% due 2020 70,500 70,500 9.520% due 2021 7,500 7,500 6.850% due 2023 30,000 30,000 8.000% due 2023 73,800 73,800 7.625% due 2025 53,900 53,900 7.700% due 2025 43,800 43,800 7.750% due 2025 45,150 45,150 5.375% due 2028 5,993 -- 4.400% due 2030 23,255 -- 4.600% due 2030 81,640 -- ---------- ---------- Total secured notes 2,012,808 2,026,585 ---------- ---------- Capital lease obligations (Note 2) 94,568 98,504 ---------- ---------- Net unamortized premium on debt 85,412 105,152 ---------- ---------- Long-term debt due within one year (174,586) (107,251) ---------- ---------- Total long-term debt 2,888,202 3,189,590 ---------- ---------- TOTAL CAPITALIZATION $4,284,475 $4,561,993 ========== ========== * Denotes variable rate issue with December 31, 1998 interest rate shown for December 31, 1998 balances and December 31, 1997 interest rate for issues with only December 31, 1997 balances. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
Comprehensive Other Retained Income (Loss) Number Carrying Paid-In Earnings (Note 3B) of Shares Value Capital (Deficit) -------------- --------- -------- -------- --------- (Dollars in thousands) Balance, January 1, 1996 79,590,689 $1,241,284 $ 78,624 $(193,146) Net income $ 116,553 116,553 ========= Reclassification of $90.00 Series S preferred stock redemption gain (111) 111 Unrealized loss on securities (6) Gain on redemption of Adjustable Series L preferred stock 725 Carrying value adjustments for preferred stock redemptions 114 Cash dividends on preferred stock (38,734) Cash dividends on common stock (160,816) Other, primarily preferred stock redemption expenses (315) - --------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 79,590,689 1,241,287 79,454 (276,458) Net (loss) $(229,247) (229,247) ========= Equity contributions from parent 4,500 Carrying value adjustments for preferred stock redemptions 25 Cash dividends on preferred stock (35,848) Cash dividends on common stock (123,602) Other, primarily preferred stock redemption expenses (232) - -------------------------------------------------------------------------------------------------------------- Purchase accounting fair value adjustment (309,698) (83,954) 665,387 Net income $ 19,290 19,290 ========= - -------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 79,590,689 931,614 -- 19,290 Purchase accounting fair value adjustment 348 Net income $ 164,891 164,891 ========= Cash dividends on preferred stock (21,947) Cash dividends on common stock (85,958) - -------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 79,590,689 $ 931,962 $ -- $ 76,276 ==============================================================================================================
CONSOLIDATED STATEMENTS OF PREFERRED STOCK
Not Subject to Subject to Mandatory Redemption Mandatory Redemption -------------------- -------------------- Number Carrying Number Carrying of Shares Value of Shares Value --------- --------- --------- --------- (Dollars in thousands) Balance, January 1, 1996 1,650,000 $240,871 633,286 $245,134 Redemptions- Adjustable Series L (26,000) (2,546) $ 7.35 Series C (10,000) (1,000) $88.00 Series E (3,000) (3,000) $9.125 Series N (150,000) (14,794) $91.50 Series Q (10,714) (10,714) - --------------------------------------------------------------------------------------------- Balance, December 31, 1996 1,624,000 238,325 459,572 215,626 Redemptions- $ 7.35 Series C (10,000) (1,000) $88.00 Series E (3,000) (3,000) $9.125 Series N (150,000) (14,794) $91.50 Series Q (10,714) (10,714) - --------------------------------------------------------------------------------------------- Purchase accounting fair value adjustment- $ 7.35 Series C 110 $88.00 Series R 5,000 $90.00 Series S 6,660 - --------------------------------------------------------------------------------------------- Balance, December 31, 1997 1,624,000 238,325 285,858 197,888 Redemptions- $ 7.35 Series C (10,000) (1,000) $88.00 Series E (3,000) (3,000) $91.50 Series Q (10,714) (10,714) - --------------------------------------------------------------------------------------------- Balance, December 31, 1998 1,624,000 $238,325 262,144 $183,174 ============================================================================================= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year For the Year Ended Ended December 31, Nov. 8 - Jan. 1 - December 31, 1998 Dec. 31, 1997 Nov. 7, 1997 1996 - ------------------------------------------------------------------------------------------------------ (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: | Net Income (Loss) $164,891 $ 19,290 | $ (229,247) $ 116,553 Adjustments to reconcile net income | to net cash from operating activities: | Provision for depreciation and | amortization 224,430 31,978 | 211,827 244,615 Nuclear fuel and lease amortization 35,361 7,393 | 42,577 45,987 Other amortization (12,677) -- | -- -- Deferred income taxes, net 22,949 7,723 | (126,693) 24,973 Investment tax credits, net (5,185) (822) | (6,670) (7,992) Allowance for equity funds used | during construction -- (140) | (1,647) (2,014) Extraordinary item -- -- | 499,135 -- Receivables (38,527) 51,213 | (3,974) 586 Net proceeds from accounts | receivable securitization -- -- | -- 64,891 Materials and supplies (8,933) (3,922) | 6,363 25,589 Accounts payable 20,180 (777) | (7,938) (6,344) Other (53,433) 18,839 | (2,566) 10,992 -------- -------- | ---------- --------- Net cash provided from operating | activities 349,056 130,775 | 381,167 517,836 -------- -------- | ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: | New Financing-- | Long-term debt 232,919 -- | 1,176,781 (307) Ohio Schools Council prepayment program 116,598 -- | -- -- Short-term borrowings, net 23,816 703 | -- 106,618 Redemptions and Repayments-- | Preferred stock 14,714 -- | 29,714 31,528 Long-term debt 488,610 43,500 | 701,843 310,177 Short-term borrowings, net -- -- | 55,519 -- Dividend Payments-- | Common stock 85,958 34,785 | 88,816 160,816 Preferred stock 34,841 7,191 | 29,311 39,325 -------- -------- | ---------- --------- Net cash provided from | (used for) financing activities (250,790) (84,773) | 271,578 (435,535) -------- -------- | ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: | Property additions 72,130 17,943 | 104,230 105,588 Loans to associated companies 53,509 -- | -- -- Capital trust investments (31,923) 16,248 | 558,836 -- Other 18,799 (4,288) | 2,276 16,210 -------- -------- | ---------- --------- Net cash used for investing | activities 112,515 29,903 | 665,342 121,798 -------- -------- | ---------- --------- Net increase (decrease) in cash and | cash equivalents (14,249) 16,099 | (12,597) (39,497) Cash and cash equivalents at beginning | of period 33,775 17,676 | 30,273 69,770 -------- -------- | ---------- --------- Cash and cash equivalents at end | of period $ 19,526 $ 33,775 | $ 17,676 $ 30,273 ======== ======== | ========== ========= SUPPLEMENTAL CASH FLOWS INFORMATION: | Cash Paid During the Period-- | Interest (net of amounts capitalized) $239,000 $ 36,000 | $ 188,000 $ 237,000 ======== ======== | ========== ========= Income taxes $100,107 $ 9,000 | $ 26,300 $ 29,732 ======== ======== | ========== ========= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF TAXES
For the Year For the Year Ended Ended December 31, Nov. 8 - Jan. 1 - December 31, 1998 Dec. 31, 1997 Nov. 7, 1997 1996 - --------------------------------------------------------------------------------------------------------- (In thousands) GENERAL TAXES: | Real and personal property $ 130,642 $ 17,707 | $ 114,393 $ 132,582 State gross receipts 78,344 13,302 | 65,966 78,109 Social security and unemployment 9,029 1,548 | 6,296 9,127 Other 3,062 1,355 | 7,745 10,038 --------- --------- | --------- ---------- Total general taxes $ 221,077 $ 33,912 | $ 194,400 $ 229,856 ========= ========= | ========= ========== PROVISION FOR INCOME TAXES: | Currently payable- | Federal $ 90,690 $ 6,969 | $ 37,605 $ 44,147 State * 2,158 159 | -- -- --------- --------- | --------- ---------- 92,848 7,128 | 37,605 44,147 --------- --------- | --------- ---------- Deferred, net- | Federal 22,743 7,617 | (126,693) 24,973 State * 206 106 | -- -- --------- --------- | --------- ---------- 22,949 7,723 | (126,693) 24,973 --------- --------- | --------- ---------- Investment tax credit amortization (5,185) (822) | (6,670) (7,992) --------- --------- | --------- ---------- Total provision for income taxes $ 110,612 $ 14,029 | $ (95,758) $ 61,128 ========= ========= | ========= ========== INCOME STATEMENT CLASSIFICATION | OF PROVISION FOR INCOME TAXES: | Operating income $ 98,680 $ 10,689 | $ 75,621 $ 67,235 Other income 11,932 3,340 | 3,318 (6,107) Extraordinary item -- -- | (174,697) -- --------- --------- | --------- ---------- Total provision for income taxes $ 110,612 $ 14,029 | $ (95,758) $ 61,128 ========= ========= | ========= ========== RECONCILIATION OF FEDERAL INCOME TAX | EXPENSE AT STATUTORY RATE TO TOTAL | PROVISION FOR INCOME TAXES: | Book income before provision for income | taxes $ 275,503 $ 33,319 | $(325,005) $ 177,681 ========= ========= | ========= ========== Federal income tax expense at statutory | rate $ 96,426 $ 11,662 | $(113,752) $ 62,188 Increases (reductions) in taxes resulting | from- | Amortization of investment tax credits (5,186) (822) | (6,670) (7,992) Depreciation -- -- | 14,780 7,853 Amortization of tax regulatory assets 7,038 1,170 | -- -- Amortization of goodwill 13,447 2,015 | -- -- Other, net (1,113) 4 | 9,884 (921) --------- --------- | --------- ---------- Total provision for income taxes $ 110,612 $ 14,029 | $ (95,758) $ 61,128 ========= ========= | ========= ========== ACCUMULATED DEFERRED INCOME TAXES AT | DECEMBER 31 : | Property basis differences $ 672,283 $ 676,853 | $1,482,000 Deferred nuclear expense 132,818 133,281 | 134,000 Deferred sale and leaseback costs (113,884) (118,611) | (121,000) Unamortized investment tax credits (40,241) (42,743) | (95,000) Unused alternative minimum tax credits (124,459) (133,442) | (173,733) Other (2,232) (18,901) | 79,334 --------- --------- | ---------- Net deferred income tax liability $ 524,285 $ 496,437 | $1,305,601 ========= ========= | ========== * For periods prior to November 8, 1997, state income taxes are included in the General Taxes section above. These amounts are not material and no restatement was made. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements include The Cleveland Electric Illuminating Company (Company) and its wholly owned subsidiary, Centerior Funding Corporation (Centerior Funding). The subsidiary was formed in 1995 to serve as the transferor in connection with an accounts receivable securitization completed in 1996. All significant intercompany transactions have been eliminated. The Company is a wholly owned subsidiary of FirstEnergy Corp. (FirstEnergy). Prior to the merger in November 1997 (see Note 7), the Company and The Toledo Edison Company (TE) were the principal operating subsidiaries of Centerior Energy Corporation (Centerior). The merger was accounted for using the purchase method of accounting in accordance with generally accepted accounting principles, and the applicable effects were reflected on the separate financial statements of Centerior's direct subsidiaries as of the merger date. Accordingly, the post-merger financial statements reflect a new basis of accounting and pre-merger period and post-merger period financial results (separated by a heavy black line) are presented. The Company follows the accounting policies and practices prescribed by the Public Utilities Commission of Ohio (PUCO) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Certain prior year amounts have been reclassified to conform with the current year presentation. REVENUES- The Company's principal business is providing electric service to customers in northeastern Ohio. The Company's retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service through the end of the year. Receivables from customers include sales to residential, commercial and industrial customers located in the Company's service area and sales to wholesale customers. There was no material concentration of receivables at December 31, 1998 or 1997, with respect to any particular segment of the Company's customers. In May 1996, the Company and TE began to sell on a daily basis substantially all of their retail customer accounts receivable to Centerior Funding under an asset-backed securitization agreement which expires in 2001. In July 1996, Centerior Funding completed a public sale of $150 million of receivables-backed investor certificates in a transaction that qualified for sale accounting treatment. REGULATORY PLAN- FirstEnergy's Rate Reduction and Economic Development Plan for the Company was approved in January 1997, to become effective upon consummation of the merger. The regulatory plan initially maintains current base electric rates for the Company through December 31, 2005. At the end of the regulatory plan period, the Company's base rates will be reduced by $217 million (approximately 15 percent below current levels). The regulatory plan also revised the Company's fuel cost recovery method. The Company formerly recovered fuel-related costs not otherwise included in base rates from retail customers through a separate energy rate. In accordance with the regulatory plan, the Company's fuel rate will be frozen through the regulatory plan period, subject to limited periodic adjustments. As part of the regulatory plan, transition rate credits were implemented for customers, which are expected to reduce operating revenues for the Company by approximately $280 million during the regulatory plan period. All of the Company's regulatory assets related to its nonnuclear operations are being recovered under provisions of the regulatory plan (see "Regulatory Assets"). The Company recognized a fair value purchase accounting adjustment to reduce nuclear plant by $1.71 billion in connection with the FirstEnergy merger (see Note 7); that fair value adjustment recognized for financial reporting purposes will ultimately satisfy the $1.4 billion asset reduction commitment contained in the regulatory plan. For regulatory purposes, the Company will recognize the $1.4 billion of accelerated amortization over the regulatory plan period. Application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), was discontinued in 1997 with respect to the Company's nuclear operations. The Company's net assets included in utility plant relating to the operations for which the application of SFAS 71 was discontinued were $1,064 million as of December 31, 1998. UTILITY PLANT AND DEPRECIATION- Utility plant reflects the original cost of construction (except for the Company's nuclear generating units which were adjusted to fair value in 1997), including payroll and related costs such as taxes, employee benefits, administrative and general costs, and interest costs. The Company provides for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The annualized composite rate was approximately 3.4% (reflecting the nuclear asset fair value adjustment discussed above) and 2.8% for 1998 and the post-merger 1997 period, respectively. In its April 1996 rate order, the PUCO approved depreciation rates for the Company of 2.88% for nuclear property and 3.23% for nonnuclear property. Annual depreciation expense includes approximately $11.7 million for future decommissioning costs applicable to the Company's ownership interests in three nuclear generating units. The Company's share of the future obligation to decommission these units is approximately $432 million in current dollars and (using a 4.0% escalation rate) approximately $1.1 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 Company has recovered approximately $110 million for decommissioning through its electric rates from customers through December 31, 1998. If the actual costs of decommissioning the units exceed the funds accumulated from investing amounts recovered from customers, the Company expects that additional amount to be recoverable from its customers. The Company has approximately $125.0 million invested in external decommissioning trust funds as of December 31, 1998. Earnings on these funds are reinvested with a corresponding increase to the decommissioning liability. The Company has also recognized an estimated liability of approximately $10.1 million at December 31, 1998 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 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 subsequently expanded the scope of the proposed standard to include other closure and removal obligations related to long-lived assets. A revised proposal may be issued by the FASB in 1999. COMMON OWNERSHIP OF GENERATING FACILITIES- The Company, TE, Duquesne Light Company (Duquesne), Ohio Edison Company (OE) and its wholly owned subsidiary, Pennsylvania Power Company (Penn), constitute the Central Area Power Coordination Group (CAPCO). The CAPCO Companies own and/or lease, as tenants in common, various power generating facilities. Each of the companies is obligated to pay a share of the costs associated with any jointly owned facility in the same proportion as its interest. The Company's portion of operating expenses associated with jointly owned facilities is included in the corresponding operating expenses on the Consolidated Statements of Income. The amounts reflected on the Consolidated Balance Sheet under utility plant at December 31, 1998 include the following:
Utility Accumulated Construction Ownership/ Plant Provision for Work in Leasehold Generating Units in Service Depreciation Progress Interest - --------------------------------------------------------------------------- (In millions) Bruce Mansfield Units 1, 2, and 3 $ 63.8 $ 23.1 $ 1.8 19.92% Beaver Valley Unit 2 341.5 16.5 1.0 24.47% Davis-Besse 201.9 -- 4.1 51.38% Perry 546.6 24.9 7.6 31.11% Eastlake Unit 5 160.5 116.8 0.7 68.80% Seneca 64.3 25.4 0.1 80.00% - ------------------------------------------------------------------------- Total $1,378.6 $206.7 $15.3 =========================================================================
The Bruce Mansfield Plant is being leased through a sale and leaseback transaction (see Note 2) and the above-related amounts represent construction expenditures subsequent to the transaction. The Seneca Unit is currently jointly owned by the Company and a non-CAPCO company. FirstEnergy has agreed to purchase the remaining 20% share in 1999. On October 15, 1998, FirstEnergy announced that it signed an agreement in principle with Duquesne that would result in the transfer of 1,436 megawatts owned by Duquesne at eight CAPCO generating units in exchange for 1,328 megawatts at three non-CAPCO power plants owned by the Company, OE and Penn. As part of this exchange, the Company will transfer the 743-megawatt Avon Lake Plant to Duquesne. A definitive agreement on the exchange of assets, which will be structured as a tax-free transaction to the extent possible, will provide FirstEnergy's utility operating companies with exclusive ownership and operating control of all CAPCO generating units. Duquesne will fund decommissioning costs equal to its percentage interest in the three nuclear generating units to be transferred. The asset transfer is expected to take twelve to eighteen months to close. NUCLEAR FUEL- The Company leases its nuclear fuel and pays for the fuel as it is consumed (see Note 2). The Company amortizes the cost of nuclear fuel based on the rate of consumption. The Company's electric rates include amounts for the future disposal of spent nuclear fuel based upon the payments to the DOE. INCOME TAXES- Details of the total provision for income taxes are shown on the Consolidated Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. The liability method is used to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. Alternative minimum tax credits of $124 million, which may be carried forward indefinitely, are available to reduce future federal income taxes. Since the Company became a wholly owned subsidiary of FirstEnergy on November 8, 1997, the Company is included in FirstEnergy's consolidated federal income tax return. The consolidated tax liability is allocated on a "stand-alone" company basis, with the Company recognizing any tax losses or credits it contributed to the consolidated return. RETIREMENT BENEFITS- Centerior had sponsored jointly with the Company, TE and Centerior Service Company (Service Company) a noncontributory pension plan (Centerior Pension Plan) which covered all employee groups. Upon retirement, employees receive a monthly pension generally based on the length of service. In 1998, the Centerior Pension Plan was merged into the FirstEnergy pension plans. In connection with the OE-Centerior merger, the Company recorded fair value purchase accounting adjustments to recognize the net gain, prior service, cost and net transition asset (obligation) associated with the pension and postretirement benefit plans. The assets of the pension plans consist primarily of common stocks, United States government bonds and corporate bonds. The Company provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Company pays insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Company. The Company recognizes the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the FirstEnergy plans in 1998 and the former Centerior plans in 1997 and amounts recognized on the Consolidated Balance Sheets as of December 31:
Other Pension Benefits Postretirement Benefits ---------------- ----------------------- 1998 1997 1998 1997 - ----------------------------------------------------------------------------------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1* $1,327.5 $395.0 $ 534.1 $ 211.9 Service cost 25.0 13.4 7.5 2.3 Interest cost 92.5 31.5 37.6 16.3 Plan amendments 44.3 7.1 40.1 -- Early retirement program expense -- 27.8 -- -- Actuarial loss 101.6 74.8 10.7 51.9 Benefits paid (90.8) (16.2) (28.7) (15.9) - ----------------------------------------------------------------------------------------------- Benefit obligation as of December 31 1,500.1 533.4 601.3 266.5 - ----------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets as of January 1* 1,542.5 420.8 2.8 -- Actual return on plan assets 231.3 57.3 0.7 -- Company contribution -- -- 0.4 -- Benefits paid (90.8) (16.2) -- -- - ----------------------------------------------------------------------------------------------- Fair value of plan assets as of December 31 1,683.0 461.9 3.9 -- - ----------------------------------------------------------------------------------------------- Funded status of plan* 182.9 (71.5) (597.4) (266.5) Unrecognized actuarial loss (gain) (110.8) 3.0 30.6 -- Unrecognized prior service cost 63.0 -- 27.4 -- Unrecognized net transition obligation (asset) (18.0) -- 129.3 -- - ----------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 117.1 $(68.5) $(410.1) $(266.5) =============================================================================================== Assumptions used as of December 31: Discount rate 7.00% 7.25% 7.00% 7.25% Expected long-term return on plan assets 10.25% 10.00% 10.25% 10.00% Rate of compensation increase 4.00% 4.00% 4.00% 4.00% * 1998 beginning balances represents 1998 merger of Centerior and OE plans into FirstEnergy plans.
The Consolidated Balance Sheet classification of Pensions and Other Postretirement Benefits at December 31, 1998 and 1997 includes the Company's share of the net pension liability of $47.7 million and $49.2 million, respectively; and the Company's share of the accrued postretirement liability of $170.0 million and $149.5 million, respectively. Net pension and other postretirement benefit costs for the three years ended December 31, 1998 (FirstEnergy plans in 1998 and Centerior plans in 1997 and 1996) were computed as follows:
Pension Benefits Other Postretirement Benefits ----------------------------- ----------------------------- 1997 1997 ---------------- ---------------- Nov. 8-| Jan. 1- Nov. 8-| Jan. 1- 1998 Dec. 31| Nov. 7 1996 1998 Dec. 31| Nov. 7 1996 - -----------------------------------------------|--------------------------------|------------- | (In millions) | | | | | Service cost $ 25.0 $ 2.3 | $ 11.1 $ 12.6 $ 7.5 $0.5 |$ 1.8 $ 2.1 Interest cost 92.5 6.1 | 25.4 27.9 37.6 2.8 | 13.5 17.8 Expected return on plan assets (152.7) (7.7)| (38.0) (43.0) (0.3) -- | -- -- Amortization of transition | | obligation (asset) (8.0) -- | (3.0) (3.5) 9.2 -- | 6.4 7.5 Amortization of prior service | | cost 2.3 -- | 1.1 1.3 (0.8) -- | -- -- Recognized net actuarial loss | | (gain) (2.6) -- | (0.5) (2.7) -- -- | (0.9) -- Voluntary early retirement | | program expense -- 23.0 | 4.8 -- -- -- | -- -- - -----------------------------------------------|--------------------------------|-------------- Net benefit cost $ (43.5) $23.7 | $ 0.9 $ (7.4) $53.2 $3.3 |$20.8 $27.4 ===============================================|================================|============== Company's share of total plan | | costs $ (2.7) $16.5 | $ (2.5) $ (5.0) $14.5 $2.6 |$11.4 $18.4 - -----------------------------------------------------------------------------------------------
The FirstEnergy plans' health care trend rate assumption is 5.5% in the first year gradually decreasing to 4.0% for the year 2008 and later. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. An increase in the health care trend rate assumption by one percentage point would increase the total service and interest cost components by $4.0 million and the postretirement benefit obligation by $68.1 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $3.2 million and the postretirement benefit obligation by $55.2 million. TRANSACTIONS WITH AFFILIATED COMPANIES- Operating revenues, operating expenses and interest charges include amounts for transactions with affiliated companies in the ordinary course of business operations. The Company's transactions with TE and the other FirstEnergy operating subsidiaries (OE and Penn) from the November 8, 1997 merger date are primarily for firm power, interchange power, transmission line rentals and jointly owned power plant operations and construction (see Note 7). Beginning in May 1996, Centerior Funding began serving as the transferor in connection with the accounts receivable securitization for the Company and TE. The Service Company (formerly a wholly owned subsidiary of Centerior and now a wholly owned subsidiary of FirstEnergy) provided support services at cost to the Company and other affiliated companies. The Service Company billed the Company $80.6 million, $34.1 million, $130.8 million and $148.6 million in 1998, the November 8-December 31, 1997 period, the January 1-November 7, 1997 period and 1996, respectively, for such services. Fuel and purchased power expenses on the Consolidated Statements of Income include the cost of power purchased from TE of $104.7 million, $17.7 million, $98.5 million and $105.0 million in 1998, the November 8-December 31, 1997 period, the January 1- November 7, 1997 period and 1996, respectively. SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets. The Company reflects temporary cash investments at cost, which approximates their fair market value. Noncash financing and investing activities included capital lease transactions amounting to $32 million, $3 million, $13 million and $37 million in 1998, the November 8-December 31, 1997 period, the January 1-November 7, 1997 period and 1996, respectively. All borrowings with initial maturities of less than one year are defined as financial instruments under generally accepted accounting principles and are reported on the Consolidated Balance Sheets at cost, which approximates their fair market value. The following sets forth the approximate fair value and related carrying amounts of all other long-term debt, preferred stock subject to mandatory redemption and investments other than cash and cash equivalents as of December 31:
1998 1997 - -------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - ------------------------------------------------------------------- (In millions) Long-term debt $2,883 $3,120 $3,093 $3,238 Preferred stock $ 183 $ 184 $ 198 $ 198 Investments other than cash and cash equivalents: Debt securities - (Maturing in more than 10 years) $ 543 $ 533 $ 547 $ 553 All other 135 136 105 104 - ------------------------------------------------------------------- $ 678 $ 669 $ 652 $ 657 ====================================================================
The carrying values of long-term debt and preferred stock subject to mandatory redemption were adjusted to fair value in connection with the OE-Centerior merger and reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by a corporation with credit ratings similar to the Company's ratings. The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents include decommissioning trusts investments. Unrealized gains and losses applicable to the decommissioning trusts have been recognized in the trust investments with a corresponding change to the decommissioning liability. The debt securities referred to above are in the held-to-maturity category. The Company has no securities held for trading purposes. REGULATORY ASSETS- The Company recognizes, as regulatory assets, costs which the FERC and PUCO have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets related to nonnuclear operations are being recovered from customers under the Company's regulatory plan. Based on the regulatory plan, at this time, the Company believes it will continue to be able to bill and collect cost-based rates (with the exception of the Company's nuclear operations as discussed below); accordingly, it is appropriate that the Company continues the application of SFAS 71 in the foreseeable future for its nonnuclear operations. The Company discontinued the application of SFAS 71 for its nuclear operations in October 1997 when implementation of the regulatory plan became probable. The regulatory plan does not provide for full recovery of the Company's nuclear operations. In accordance with SFAS No. 101, "Regulated Enterprises -- Accounting for the Discontinuation of Application of SFAS 71," the Company was required to remove from its balance sheet all regulatory assets and liabilities related to the portion of its business for which SFAS 71 was discontinued and to assess all other assets for impairment. Regulatory assets attributable to nuclear operations of $499.1 million ($324.4 million after taxes) were written off as an extraordinary item in October 1997. The regulatory assets attributable to nuclear operations written off represent the net amounts due from customers for future federal income taxes when the taxes become payable, which, under the regulatory plan, are no longer recoverable from customers. The remainder of the Company's business continues to comply with the provisions of SFAS 71. All remaining regulatory assets will continue to be recovered through rates set for the nonnuclear portion of the Company's business. For financial reporting purposes, the net book value of the nuclear generating units was not impaired as a result of the regulatory plan. Net regulatory assets on the Consolidated Balance Sheets are comprised of the following:
1998 1997 - ----------------------------------------------------------------- (In millions) Nuclear unit expenses $ 298.0 $ 309.0 Customer receivables for future income taxes 13.0 18.6 Rate stabilization program deferrals 276.0 288.1 Sale and leaseback costs (140.9) (150.0) Loss on reacquired debt 81.6 80.9 Other 28.2 33.1 - ------------------------------------------------------------------ Total $ 555.9 $ 579.7 ==================================================================
2. LEASES: The Company leases certain generating facilities, nuclear fuel, certain transmission facilities, office space and other property and equipment under cancelable and noncancelable leases. The Company and TE sold their ownership interests in Bruce Mansfield Units 1, 2 and 3 and TE sold a portion of its ownership interest in Beaver Valley Unit 2. In connection with these sales, which were completed in 1987, the Company and TE entered into operating leases for lease terms of approximately 30 years as co- lessees. During the terms of the leases, the Company and TE continue to be responsible, to the extent of their combined ownership and leasehold interest, for costs associated with the units including construction expenditures, operation and maintenance expenses, insurance, nuclear fuel, property taxes and decommissioning. The Company and TE have the right, at the end of the respective basic lease terms, to renew the leases. The Company and TE also have the right to purchase the facilities at the expiration of the basic lease term or renewal term (if elected) at a price equal to the fair market value of the facilities. As co-lessee with TE, the Company is also obligated for TE's lease payments. If TE is unable to make its payments under the Beaver Valley Unit 2 and Bruce Mansfield Plant leases, the Company would be obligated to make such payments. No such payments have been made on behalf of TE. (TE's future minimum lease payments as of December 31, 1998 were approximately $1.9 billion.) The Company is buying 150 megawatts of TE's Beaver Valley Unit 2 leased capacity entitlement. Purchased power expense for this transaction was $98.5 million, $16.8 million, $87.4 million and $99.4 million in 1998, the November 8-December 31, 1997 period, the January 1-November 7, 1997 period and 1996, respectively. This purchase is expected to continue through the end of the lease period. The future minimum lease payments through 2017 associated with Beaver Valley Unit 2 are approximately $1.1 billion. Nuclear fuel is currently financed for the Company and TE through leases with a special-purpose corporation. As of December 31, 1998, $156 million of nuclear fuel ($88 million for the Company) was financed under a lease financing arrangement totaling $175 million ($60 million of intermediate-term notes and $115 million from bank credit arrangements). The notes mature from 1999 through 2000 and the bank credit arrangements expire in September 2000. Lease rates are based on intermediate-term note rates, bank rates and commercial paper rates. Consistent with the regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Consolidated Statements of Income. Such costs for the three years ended December 31, 1998 are summarized as follows:
Nov. 8 - Jan. 1 - 1998 Dec. 31, 1997 Nov. 7, 1997 1996 - --------------------------------------------------------------------- (In millions) | Operating leases | Interest element $ 32.4 $10.6 | $ 56.0 $ 58.1 Other 74.4 8.4 | 18.3 4.8 Capital leases | Interest element 7.0 1.5 | 8.5 10.1 Other 36.1 7.5 | 43.4 51.7 - ----------------------------------------------|---------------------- Total rentals $149.9 $28.0 | $126.2 $124.7 ======================================================================
The future minimum lease payments as of December 31, 1998 are:
Operating Leases ---------------------------- Capital Lease Capital Leases Payments Trust Net - ------------------------------------------------------------------ (In millions) 1999 $35.9 $ 69.3 $ 62.9 $ 6.4 2000 25.5 66.6 60.5 6.1 2001 16.0 71.7 50.2 21.5 2002 8.2 76.4 70.6 5.8 2003 3.4 77.5 77.9 (0.4) Years thereafter 10.8 776.2 564.3 211.9 - ------------------------------------------------------------------- Total minimum lease payments 99.8 $1,137.7 $886.4 $251.3 ======== ====== ====== Interest portion 16.1 - ----------------------------------- Present value of net minimum lease payments 83.7 Less current portion 30.0 - ----------------------------------- Noncurrent portion $53.7 ===================================
The Company and TE refinanced high-cost fixed obligations related to their 1987 sale and leaseback transaction for the Bruce Mansfield Plant through a lower cost transaction in June and July 1997. In a June 1997 offering (Offering), the two companies pledged $720 million aggregate principal amount ($575 million for the Company and $145 million for TE) of first mortgage bonds due in 2000, 2004 and 2007 to a trust as security for the issuance of a like principal amount of secured notes due in 2000, 2004 and 2007. The obligations of the two companies under these secured notes are joint and several. Using available cash, short-term borrowings and the net proceeds from the Offering, the two companies invested $906.5 million ($569.4 million for the Company and $337.1 million for TE) in a business trust, in June 1997. The trust used these funds in July 1997 to purchase lease notes and redeem all $873.2 million aggregate principal amount of 10-1/4% and 11-1/8% secured lease obligation bonds (SLOBs) due 2003 and 2016. The SLOBs were issued by a special-purpose- funding corporation in 1988 on behalf of lessors in the two companies' 1987 sale and leaseback transaction. The Shippingport capital trust arrangement effectively reduces lease costs related to that transaction. 3. CAPITALIZATION: (A) RETAINED EARNINGS- There are no restrictions on retained earnings for payment of cash dividends on the Company's common stock. The merger purchase accounting adjustments included resetting the retained earnings balance to zero at the November 8, 1997 merger date. (B) COMPREHENSIVE INCOME- In 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income," and applied the standard to all periods presented in the Consolidated Statements of Common Stockholder's Equity. Comprehensive income includes net income as reported on the Consolidated Statements of Income and all other changes in common stockholder's equity except dividends to stockholders. Net income and comprehensive income are the same for each period presented. (C) PREFERRED AND PREFERENCE STOCK- The Company's $88.00 Series R preferred stock is not redeemable before December 2001 and its $90.00 Series S has no optional redemption provision. All other preferred stock may be redeemed by the Company in whole, or in part, with 30-90 days' notice. The preferred dividend rate on the Company's Series L fluctuates based on prevailing interest rates and market conditions. The dividend rate for this issue was 7% in 1998. Preference stock authorized for the Company is 3,000,000 shares without par value. No preference shares are currently outstanding. A liability of $14 million was included in the Company's net assets as of the merger date for preferred dividends declared attributable to the post-merger period. Accordingly, no accrual for preferred stock dividend requirements was included on the Company's November 8, 1997 to December 31, 1997 Consolidated Statement of Income. This liability was subsequently reduced to zero in 1998. (D) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- Annual sinking fund provisions for preferred stock are as follows:
Redemption Price Per Series Shares Share Date Beginning - ------------------------------------------------------------- $ 7.35 C 10,000 $ 100 (i) 88.00 E 3,000 1,000 (i) 91.50 Q 10,714 1,000 (i) 90.00 S 18,750 1,000 November 1 1999 88.00 R 50,000 1,000 December 1 2001 - ------------------------------------------------------------- (i) Sinking fund provisions are in effect.
Annual sinking fund requirements for the next five years are $33.5 million in each year 1999 and 2000, $80.5 million in 2001, $18.0 million in 2002 and $1.0 million in 2003. (E) LONG-TERM DEBT- The first mortgage indenture and its supplements, which secure all of the Company's first mortgage bonds, serve as direct first mortgage liens on substantially all property and franchises, other than specifically excepted property, owned by the Company. Sinking fund requirements for first mortgage bonds and maturing long-term debt (excluding capital leases) for the next five years are:
(In millions) - ---------------------------- 1999 $144.5 2000 175.0 2001 56.5 2002 228.0 2003 115.0 - ---------------------------
The Company's obligations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds. One pollution control revenue bond issue is entitled to the benefit of an irrevocable bank letter of credit of $48.1 million. To the extent that drawings are made under this letter of credit to pay principal of, or interest on, the pollution control revenue bonds, the Company is entitled to a credit against its obligation to repay those bonds. The Company pays an annual fee of 1.1% of the amount of the letter of credit to the issuing bank and is obligated to reimburse the bank for any drawings thereunder. The Company and TE have letters of credit of approximately $225 million in connection with the sale and leaseback of Beaver Valley Unit 2 that expire in June 1999. The letters of credit are secured by first mortgage bonds of the Company and TE in the proportion of 40% and 60%, respectively (see Note 2). 4. SHORT-TERM BORROWINGS: FirstEnergy has a $100 million revolving credit facility that expires in May 1999. FirstEnergy may borrow under the facility, with all borrowings jointly and severally guaranteed by the Company and TE. FirstEnergy plans to transfer any of its borrowed funds to the Company and TE. The credit agreement is secured with first mortgage bonds of the Company and TE in the proportion of 40% and 60%, respectively. The credit agreement also provides the participating banks with a subordinate mortgage security interest in the properties of the Company and TE. The banks' fee is 0.50% per annum payable quarterly in addition to interest on any borrowings. There were no borrowings under the facility at December 31, 1998. Also, the Company may borrow from its affiliates on a short-term basis. At December 31, 1998, the Company had total short-term borrowings of $80.6 million from its affiliates with a weighted average interest rate of approximately 5.5%. 5. COMMITMENTS, GUARANTEES AND CONTINGENCIES: CAPITAL EXPENDITURES- The Company's current forecast reflects expenditures of approximately $701 million for property additions and improvements from 1999-2003, of which approximately $150 million is applicable to 1999. Investments for additional nuclear fuel during the 1999-2003 period are estimated to be approximately $130 million, of which approximately $14 million applies to 1999. During the same periods, the Company's nuclear fuel investments are expected to be reduced by approximately $150 million and $32 million, respectively, as the nuclear fuel is consumed. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $9.7 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on its present ownership and leasehold interests in Beaver Valley Unit 2, the Davis-Besse Plant and the Perry Plant, the Company's 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 $94.2 million per incident but not more than $10.7 million in any one year for each incident. The Company is also insured as to its respective interests in Beaver Valley Unit 2, the Davis-Besse Plant and the Perry Plant under policies issued to the operating company for each plant. Under these policies, up to $2.75 billion is provided for property damage and decontamination and decommissioning costs. The Company has also obtained approximately $558 million of insurance coverage for replacement power costs for its respective interests in Beaver Valley Unit 2, Davis-Besse and Perry. Under these policies, the Company can be assessed a maximum of approximately $14.1 million for incidents at any covered nuclear facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses. The Company intends to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at any of the Company's plants exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Company's insurance policies, or to the extent such insurance becomes unavailable in the future, the Company would remain at risk for such costs. GUARANTEE- The Company, together with the other CAPCO companies, has severally guaranteed certain debt and lease obligations in connection with a coal supply contract for the Bruce Mansfield Plant. As of December 31, 1998, the Company's share of the guarantee (which approximates fair market value) was $9.4 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 Company's total payments under the coal supply contract were $52.5 million, $51.2 million and $47.0 million during 1998, 1997 and 1996, respectively. The Company's minimum payment for 1999 is approximately $14 million. The contract expires December 31, 1999. ENVIRONMENTAL MATTERS- Various federal, state and local authorities regulate the Company with regard to air and water quality and other environmental matters. The Company has estimated additional capital expenditures for environmental compliance of approximately $145 million, which is included in the construction forecast provided under "Capital Expenditures" for 1999 through 2003. The Company is in compliance with the current sulfur dioxide (SO2) and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions in 1999 will be achieved by burning lower-sulfur fuel, generating more electricity from lower- emitting plants, and/or purchasing emission allowances. Plans for complying with reductions required for the year 2000 and thereafter have not been finalized. In September 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions from the Company's Ohio and Pennsylvania facilities by May 2003. The EPA's NOx Transport Rule imposes uniform reductions of NOx emissions across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. By September 1999, each of the twenty- two states are required to submit revised State Implementation Plans (SIP) which comply with individual state NOx budgets established by the EPA. These state NOx budgets contemplate an 85% reduction in utility plant NOx emissions from 1990 emissions. A proposed Federal Implementation Plan accompanied the NOx Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In another separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NOx emissions which are alleged to contribute to ozone pollution in the eight petitioning states. The EPA suggests that the Section 126 petitions will be adequately addressed by the NOx Transport Program, but a September 1998 proposed rulemaking established an alternative program which would require nearly identical 85% NOx reductions at the Company's Ohio and Pennsylvania plants by May 2003 in the event implementation of the NOx Transport Rule is delayed. FirstEnergy continues to evaluate its compliance plans and other compliance options and currently estimates its additional capital expenditures for NOx reductions may reach $500 million. The Company is required to meet federally approved SO2 regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $25,000 for each day the unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Company cannot predict what action the EPA may take in the future with respect to 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 Company operates affected facilities. The Company has been named as a "potentially responsible party" (PRP) at waste disposal sites which may require cleanup under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. Allegations that the Company 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. The Company has accrued a liability of $4.7 million as of December 31, 1998, based on estimates of the costs of cleanup and the proportionate responsibility of other PRPs for such costs. The Company believes that waste disposal costs will not have a material adverse effect on its financial condition, cash flows or results of operations. Legislative, administrative and judicial actions will continue to change the way that the Company must operate in order to comply with environmental laws and regulations. With respect to any such changes and to the environmental matters described above, the Company expects that while it remains regulated, any resulting additional capital costs which may be required, as well as any required increase in operating costs, would ultimately be recovered from its customers. 6. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain consolidated operating results by quarter for 1998 and 1997.
March 31, June 30, September 30, December 31, Three Months Ended 1998 1998 1998 1998 - -------------------------------------------------------------------------------------------- (In millions) Operating Revenues $415.0 $465.2 $512.6 $389.5 Operating Expenses and Taxes 324.3 377.8 389.4 321.9 - ----------------------------------------------------------------------------------------------- Operating Income 90.7 87.4 123.2 67.6 Other Income 7.6 5.9 8.1 3.7 Net Interest Charges 58.7 58.5 56.3 55.9 - ----------------------------------------------------------------------------------------------- Net Income $ 39.6 $ 34.8 $ 75.0 $ 15.4 =============================================================================================== Earnings on Common Stock $ 38.6 $ 27.4 $ 66.5 $ 7.6 ===============================================================================================
Three Months Ended ---------------------------- Mar. 31, June 30, Sept. 30, Oct. 1 - Nov. 8 - 1997 1997 1997 Nov. 7, 1997 Dec. 31, 1997 - -------------------------------------------------------------------------------------------------- (In millions) | | Operating Revenues $431.6 $428.2 $499.5 $ 169.7 | $254.0 Operating Expenses and Taxes 351.6 350.8 368.0 151.3 | 204.5 - ----------------------------------------------------------------------------------|------------ Operating Income 80.0 77.4 131.5 18.4 | 49.5 Other Income (Expense) (3.7) (5.2) 7.5 (1.2) | 4.6 Net Interest Charges 56.1 58.2 71.3 24.0 | 34.8 - ----------------------------------------------------------------------------------|------------ Income (Loss) Before Extraordinary | Item 20.2 14.0 67.7 (6.8) | 19.3 Extraordinary Item (Net of | Income Taxes) (Note 1) -- -- -- (324.4) | -- - ----------------------------------------------------------------------------------|------------ Net Income (Loss) $ 20.2 $ 14.0 $ 67.7 $(331.2) | $ 19.3 ==================================================================================|============ Earnings (Loss) on Common Stock $ 10.9 $ 4.9 $ 58.9 $(348.9) | $ 19.3 ===============================================================================================
7. PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME (UNAUDITED): FirstEnergy was formed on November 8, 1997 by the merger of OE and Centerior. The merger was accounted for as a purchase of Centerior's net assets with 77,637,704 shares of FirstEnergy Common Stock through the conversion of each outstanding Centerior Common Stock share into 0.525 of a share of FirstEnergy Common Stock (fractional shares were paid in cash). Based on an imputed value of $20.125 per share, the purchase price was approximately $1.582 billion, which also included approximately $20 million of merger related costs. Goodwill of approximately $2.0 billion was recognized (to be amortized on a straight-line basis over forty years), which represented the excess of the purchase price over Centerior's net assets after fair value adjustments. Accumulated amortization of goodwill was approximately $44 million as of December 31, 1998. The merger purchase accounting adjustments included recognizing estimated severance and other compensation liabilities ($56 million). The amount charged against the liability in 1998 relating to the costs of involuntary employee separation was $30 million. The liability was subsequently reduced to approximately $9 million as of December 31, 1998 to represent potential costs associated with the separation of 493 Company employees. The liability adjustment was offset by a corresponding reduction to goodwill recognized in connection with the Centerior acquisition. The following pro forma statements of income for the Company give effect to the OE-Centerior merger as if it had been consummated on January 1, 1996, with the purchase accounting adjustments actually recognized in the business combination.
Year Ended December 31, ----------------------- 1997 1996 - --------------------------------------------------------------- (In millions) Operating Revenues $1,783 $1,790 Operating Expenses and Taxes 1,418 1,424 ------ ------ Operating Income 365 366 Other Income 15 2 Net Interest Charges 232 227 ------ ------ Net Income $ 148 $ 141 =============================================================
Pro forma adjustments reflected above include: (1) adjusting the Company's nuclear generating units to fair value based upon independent appraisals and estimated discounted future cash flows based on management's estimate of cost recovery; (2) the effect of discontinuing SFAS 71 for the Company's nuclear operations; (3) amortization of the fair value adjustment for long-term debt; (4) goodwill recognized representing the excess of the Company's portion of the purchase price over the Company's adjusted net assets; (5) the elimination of merger costs; and (6) adjustments for estimated tax effects of the above adjustments. 8. PENDING MERGER OF TE INTO THE COMPANY: In March 1994, Centerior announced a plan to merge TE into the Company. All necessary regulatory approvals have been obtained, except the approval of the Nuclear Regulatory Commission (NRC). This application was withdrawn at the NRC's request pending the decision whether to complete this merger. No final decision regarding the proposed merger has been reached. In June 1995, TE's preferred stockholders approved the merger and the Company's preferred stockholders approved the authorization of additional shares of preferred stock. If and when the merger becomes effective, TE's preferred stockholders will exchange their shares for preferred stock shares of the Company having substantially the same terms. Debt holders of the merging companies will become debt holders of the Company. For the merging companies, the combined pro forma operating revenues were $2.621 billion, $2.527 billion and $2.554 billion and the combined pro forma net income was $272 million, $220 million (excluding the extraordinary item discussed in Note 1 and a similar item for TE) and $218 million for the years 1998, 1997 and 1996, respectively. The pro forma data is based on accounting for the merger of the Company and TE on a method similar to a pooling of interests and for 1997 and 1996 includes pro forma adjustments to reflect the effect of the OE-Centerior merger. The pro forma data is not necessarily indicative of the results of operations which would have been reported had the merger been in effect during those years or which may be reported in the future. The pro forma data should be read in conjunction with the audited financial statements of both the Company and TE. Report of Independent Public Accountants To the Stockholders and Board of Directors of The Cleveland Electric Illuminating Company: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of The Cleveland Electric Illuminating Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income, common stockholder's equity, preferred stock, cash flows and taxes for the year ended December 31, 1996, the period from January 1, 1997 to November 7, 1997 (pre-merger), the period from November 8, 1997 to December 31, 1997 (post-merger), and the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Cleveland Electric Illuminating Company and subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for the year ended December 31, 1996, the period from January 1, 1997 to November 7, 1997 (pre-merger), the period from November 8, 1997 to December 31, 1997 (post-merger), and the year ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio February 12, 1999 EX-21.2 17 EXHIBIT 21.2 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY LIST OF SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 1998 Centerior Funding Corporation - Incorporated in Ohio Statement of Differences ------------------------- Exhibit Number 21, List of Subsidiaries of the Registrant at December 31, 1998, is not included in the printed document. EX-23.2 18 EXHIBIT 23.2 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into The Cleveland Electric Illuminating Company's previously filed Registration Statements, File No. 33-55513, No. 333-47651 and No. 333-72891. ARTHUR ANDERSEN LLP Cleveland, Ohio March 29, 1999 EX-27.2 19
UT This schedule contains summary financial information extracted from the related Form 10-K financial statements for The Cleveland Electric Illuminating Company and is qualified in its entirety by reference to such financial statements. Income tax expense includes $11,932,000 related to other income. 0000020947 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 DEC-31-1998 1 PER-BOOK 3,074,043 689,270 388,268 2,166,602 0 6,318,183 931,962 0 76,276 1,008,238 149,710 238,325 2,888,202 80,618 0 0 144,530 33,464 0 30,056 1,745,040 6,318,183 1,782,376 110,612 1,314,794 1,413,474 368,902 25,393 394,295 229,404 164,891 24,794 140,097 85,958 216,550 349,056 0 0
EX-4.4 20 =============================================================== THE TOLEDO EDISON COMPANY TO THE CHASE MANHATTAN BANK as Trustee. Forty-seventh Supplemental Indenture DATED AUGUST 1, 1997 (Supplemental to Indenture dated as of April 1, 1947) First Mortgage Bonds, 6.10% Series due 2027 ================================================================ THE TOLEDO EDISON COMPANY Forty-seventh Supplemental Indenture Dated August 1, 1997 TABLE OF CONTENTS Page ---- Parties 1 Recitals 1 Form of Bond of This Series 4 Granting Clauses 10 Article I -- Creation and Description of Bonds of This Series 11 Section 1 --Creation of Bonds of This Series, Limit on Amount Issuable 11 Section 2 --Interest Rates, Computation and Payment Dates 11 Section 3 --Place and Coin of Payment 11 Section 4 --Denominations 11 Section 5 --Transfer and Exchange 11 Section 6 --Record Date for Payment of Interest 12 Section 7 --Date of Bonds of This Series 12 Section 8 --Authentication of Bonds of This Series by Trustee 12 Article II -- Redemption of Bonds of This Series 13 Section 1 --Bonds of This Series Redeemable 13 Section 2 --Mandatory Redemption Provisions 13 Section 3 --Certain Provisions Of Original Indenture Applicable To Redemption Of Bonds Of This Series 14 Section 4 --Bondholder Agrees To Accept Payment Of Bonds Of This Series Redeemed Prior To Maturity 14 Article III -- Payment Deemed Made of Bonds of This Series 14 Section 1 --Upon Surrender Of Authority Bonds Purchased 14 Section 2 --Upon Payment Of Authority Bonds 15 Section 3 --Surrender And Cancellation Of Bonds Of This Series 15 Article IV -- The Trustee 16 Section 1 --The Trustee Accepts Trust Created By Forty-Seventh Supplemental Indenture 16 Section 2 --Agency Of The Company Other Than The Trustee 16 Section 3 --Trustee Advises Company Of Notations Provided For In Article III 16 Article V -- Miscellaneous Provisions 17 Section 1 --Ratification And Approval Of Original Indenture As Supplemented 17 Covenants Of Original Indenture, Except As Modified, Continue In Effect Section 2 --Forty-Seventh Supplemental Indenture May Be Executed In Counterparts 17 Testimonium Clause S-1 Signatures And Seals S-1 Acknowledgments S-1 Recording And Filing Data R-1 Forty-seventh Supplemental Indenture, dated August 1, 1997, made by and between THE TOLEDO EDISON Company, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the "Company"), and THE CHASE MANHATTAN BANK, a corporation organized and existing under the laws of the State of New York (the "Trustee"), as Trustee. RECITALS The Company has heretofore executed and delivered an Indenture of Mortgage and Deed of Trust dated as of April 1, 1947 (the "Original Indenture") to The Chase National Bank of the City of New York, predecessor Trustee, to secure an issue of First Mortgage Bonds of the Company, issuable in series, and created thereunder an initial series of bonds designated as First Mortgage Bonds, 2 7/8% Series due 1977, being the initial series of bonds issued under the Original Indenture; and The Company has heretofore executed and delivered to The Chase National Bank of the City of New York, predecessor Trustee, four Supplemental Indentures supplementing the Original Indenture dated, respectively, September 1, 1948, April 1, 1949, December 1, 1950 and March 1, 1954 and has heretofore executed and delivered to The Chase Manhattan Bank, which on March 31, 1955, became the Trustee under the Original Indenture by virtue of the merger of The Chase National Bank of the City of New York into President and Directors of The Manhattan Company under the name of The Chase Manhattan Bank, the Fifth and the Sixth Supplemental Indentures dated, respectively, February 1, 1956, and May 1, 1958, supplementing the Original Indenture; and The Chase Manhattan Bank was converted into a national banking association under the name The Chase Manhattan Bank (National Association), effective September 23, 1965; and by virtue of said conversion the continuity of the business of Chase Manhattan Bank, including its business of acting as corporate trustee, and its corporate existence, were not affected, so that Chase Manhattan Bank is vested with all the trusts, powers, discretion, immunities, privileges and all other matters as were vested in said Chase Manhattan Bank under the Indenture, with like effect as if originally named as Trustee therein; and The Company has heretofore executed and delivered to The Chase Manhattan Bank (National Association), predecessor Trustee, 38 Supplemental Indentures dated, respectively, as follows: Seventh, August 1, 1967, Eighth, November 1, 1970, Ninth, August 1, 1972, Tenth, November 1, 1973, Eleventh, August 15, 1974, Twelfth, October 1, 1975, Thirteenth, June 1, 1976, Fourteenth, October 1, 1978, Fifteenth, September 1, 1979, Sixteenth, September 1, 1980, Seventeenth, October 1, 1980, Eighteenth, April 1, 1981, Nineteenth, November 1, 1981, Twentieth, June 1, 1982, Twenty-first, September 1, 1982, Twenty- second, April 1, 1983, Twenty-third, December 1, 1983, Twenty- fourth, April 1, 1984, Twenty-fifth, October 15, 1984, Twenty- sixth, October 15, 1984, Twenty-seventh, August 1, 1985, Twenty- eighth, August 1, 1985, Twenty-ninth, December 1, 1985, Thirtieth, March 1, 1986, Thirty-first, October 15, 1987, Thirty-second, September 15, 1988, Thirty-third, June 15, 1989, Thirty-fourth, October 15, 1989, Thirty-fifth, May 15, 1990, Thirty-sixth, March 1, 1991, Thirty-seventh, May 1, 1992, Thirty-eighth, August 1, 1992, Thirty-ninth, October 1, 1992, Fortieth, January 1, 1993, Forty-first, September 15, 1994, Forty-second, May 1, 1995, Forty-third, June 1, 1995, Forty-fourth, August 15, 1995 and Forty-fifth, August 15, 1995, supplementing the Original Indenture; and The Chase Manhattan Bank (National Association), Successor Trustee, was merged on July 1, 1996, with and into Chemical Bank, a New York banking corporation, which changed its name to The Chase Manhattan Bank, and which became the Trustee under the Original Indenture by virtue of such merger; and The Company has heretofore executed and delivered to The Chase Manhattan Bank, Trustee, a Forty-sixth Supplemental Indenture dated June 15, 1997, supplementing the Original Indenture, and is executing and delivering to The Chase Manhattan Bank, Trustee, this Forty-seventh Supplemental Indenture, dated August 1, 1997, supplementing the Original Indenture (The Original Indenture, all the aforementioned Supplemental Indentures, this Forty-seventh Supplemental Indenture and any other indentures supplemental to the Original Indenture are herein collectively called the "Indenture" and this Forty-seventh Supplemental Indenture is hereinafter called "this Supplemental Indenture"); and Pursuant to the provisions of the Indenture, the Company has issued 55 series of bonds in the aggregate principal amount of $2,472,400,000, of which 30 series (including the Bonds of the 1977 Series issued pursuant to the Original Indenture) in the aggregate principal amount of $1,177,200,000 are no longer outstanding and of which additional portions, aggregating $95,775,000 in principal amount, of 5 other series have been retired; and The Company covenanted in and by the Original Indenture to execute and deliver such further instruments and do such further acts as may be necessary or proper to carry out more effectually the purposes of the Original Indenture and to make subject to the lien thereof property acquired after the execution and delivery of the Original Indenture; and Under Article 3 of the Original Indenture, the Company is authorized to issue additional bonds upon the terms and conditions expressed in the Original Indenture; and The Company proposes to create one new series of First Mortgage Bonds to be designated as First Mortgage Bonds, 6.10% Series due 2027 (hereinafter called the "Bonds of this Series"), such series with the denominations, rate of interest, date of maturity, redemption provisions and other provisions and agreements in respect thereof as in this Supplemental Indenture set forth; and The Bonds of this Series are to be issued by the Company to the Ohio Air Quality Development Authority (hereinafter called the "Air Authority"), and registered initially in the name of The Fifth Third Bank, Cincinnati, Ohio, Trustee (hereinafter called the "Air Bond Trustee") for the account of the Air Authority, to evidence and secure the obligations of the Company to repay a loan (hereinafter called the "Air Loan") made by the Air Authority to the Company pursuant to a certain loan agreement, dated as of August 1, 1997, between the Air Authority and the Company (hereinafter called the "Air Authority Loan Agreement") to assist the Company in refunding certain bonds which had been previously issued by the Air Authority, the proceeds of which had been loaned to the Company to assist in financing its portion of the cost of the acquisition, construction and installation of certain air pollution control facilities located at the Perry Nuclear Unit No. 1 in Lake County, Ohio. The Air Loan is to be funded with proceeds to be derived from the sale by the Air Authority of one series of State of Ohio Collateralized Pollution Control Revenue Refunding Bonds, Series 1997-A (The Toledo Edison Company Project) (hereinafter called the "Air Bonds") in the aggregate principal amount of $10,100,000, to be issued under a Trust Indenture, dated as of August 1, 1997 (hereinafter called the "Air Bond Indenture"), between the Air Bond Trustee and the Air Authority. All right, title and interest of the Air Authority in the Bonds of this Series are to be assigned and pledged by the Air Authority to the Air Bond Trustee as further security for the payment of the principal of, premium, if any, and interest on the Air Bonds; and The Company, by appropriate corporate action, has duly resolved and determined to execute this Supplemental Indenture for the purpose of providing for the creation of the Bonds of this Series and of specifying the form, provisions and particulars thereof as in said Original Indenture, as amended, provided or permitted, including the issuance only of fully registered Bonds of this Series, and of giving to the Bonds of this Series the protection and security of the Indenture; and The text of the Bonds of this Series is to be substantially in the form following: [Form of Bond of This Series] The Toledo Edison Company First Mortgage Bond, 6.10% Series Due 2027 Due August 1, 2027 No. $ The Toledo Edison Company, an Ohio corporation (hereinafter called the Company) for value received, hereby promises to pay to or registered assigns, the principal sum of Dollars or the aggregate unpaid principal amount hereof (as shown on the Schedule of Payments hereon), whichever is less, on August 1, 2027, at its office or agency in the Borough of Manhattan, The City of New York, or, so long as the registered owner of this Bond is the Air Bond Trustee (hereinafter defined), at the agency of the Company in the City of Cincinnati, State of Ohio, and semi- annually on the first day of August and the first day of February in each year, commencing February 1, 1998 (each such date hereinafter called an interest payment date), to pay interest on the unpaid principal amount hereof to the registered owner hereof at said office or agencies at the rate per annum specified in the title of this Bond, until maturity, or, if this Bond shall be duly called for redemption, until the redemption date, or, if the Company shall default in the payment of the principal amount of this Bond, until the Company's obligation with respect to the payment of such principal shall be discharged as provided in the Indenture (hereinafter defined). Except as hereinafter provided, this Bond shall bear interest from the interest payment date next preceding the date of this Bond to which interest has been paid, unless this Bond is dated on an interest payment date, in which case from the date hereof; or unless this Bond is dated prior to the first interest payment date in respect hereof, in which case from August 1, 1997, and except that if this Bond is delivered on a transfer or exchange of or in substitution for another Bond or Bonds it shall bear interest from the last preceding date to which interest shall have been paid on the Bond or Bonds in respect of which this Bond is delivered (except that if this Bond is dated between the record date (hereinafter defined) for any interest payment date and such interest payment date, then from such interest payment date, provided, however, that if the Company shall default in payment of the interest due on such interest payment date, then from the next preceding interest payment date to which interest has been paid on the Bond of this Series, or if such interest payment date is the first interest payment date for Bonds of this Series, then from August 1, 1997). The interest so payable on any interest payment date will, subject to certain exceptions provided in the Indenture, be paid to the person in whose name this Bond is registered at the close of business on the record date, which shall be the "Regular Record Date" as defined in the Air Bond Indenture (hereinafter defined), applicable to the regular interest payment date of any Bond of this Series, if it were an "Interest Payment Date" as defined in the Air Bond Indenture. Both the principal of and the interest on this Bond shall be payable in any coin or currency of the United States of America which at the time of payment shall be legal tender for the payment of public and private debts. This Bond is one of the Bonds of the Company, known as its First Mortgage Bonds, issued and to be issued in one or more series under and equally and ratably secured (except as any sinking, amortization, improvement or other fund, established in accordance with the provisions of the Indenture, may afford additional security for the Bonds of any particular series) by a certain Indenture of Mortgage and Deed of Trust, dated as of April 1, 1947 (hereinafter called the Original Indenture), made by the Company to The Chase National Bank of the City of New York, now succeeded by The Chase Manhattan Bank, as Trustee (hereinafter called the Trustee), and by certain indentures supplemental thereto, including the Forty-seventh Supplemental Indenture dated as of August 1, 1997 (the Original Indenture and said indentures supplemental thereto herein collectively called the Indenture and said Forty-seventh Supplemental Indenture hereinafter called the Supplemental Indenture), to which Indenture reference is hereby made for a description of the property mortgaged, the nature and extent of the security, the rights and limitations of rights of the Company, the Trustee and the holders of said Bonds and of the coupons appurtenant to coupon Bonds under the Indenture and the terms and conditions upon which said Bonds are and are to be issued and secured, to all of the provisions of which Indenture and of all such supplemental indentures in respect of such security, including the provisions of the Indenture permitting the issue of Bonds of any series for property which, under the restrictions and limitations therein specified, may be subject to liens prior to the lien of the Indenture, the holder, by accepting this Bond, assents. To the extent permitted by and as provided in the Indenture, the rights and obligations of the Company and of the holders of said Bonds and coupons (including those pertaining to any sinking or other fund) may be changed and modified, with the consent of the Company, by the holders of at least 75% in aggregate principal amount of the Bonds then outstanding, such percentage being determined as provided in the Indenture; provided, however, that in case such changes and modifications affect one or more but less than all series of Bonds then outstanding, they shall be required to be adopted only by the affirmative vote of the holders of at least 75% in aggregate principal amount of outstanding Bonds of such one or more series so affected; and further provided, that without the consent of the holder hereof no such change or modification shall be made which will extend the time of payment of the principal of, or of the interest or premium, if any, on this Bond or reduce the principal amount hereof or the rate of interest or the premium, if any, hereon, or affect any other modification of the terms of payment of such principal or interest, or premium, if any, or will permit the creation of any lien ranking prior to or on a parity with the lien of the Indenture on any of the mortgaged property, or will deprive the holder hereof of the benefit of a lien upon the mortgaged property for the security of this Bond, or will reduce the percentage of Bonds required for the adoption of changes or modifications as aforesaid. This Bond is one of a series of Bonds designated as First Mortgage Bonds, 6.10% Series due 2027, of the Company (herein called Bonds of this Series) limited, except as otherwise provided in the Indenture, in aggregate principal amount to $10,100,000 and issued under and secured by the Supplemental Indenture. The Bonds of this Series have been issued by the Company to the Ohio Air Quality Development Authority (hereinafter called the Air Authority) to evidence and secure the obligations of the Company to repay a loan (herein called the Air Authority Loan) made by the Air Authority to the Company pursuant to a certain loan agreement, dated as of August 1, 1997 (herein called the Air Authority Loan Agreement), between the Air Authority and the Company to assist the Company in refunding certain bonds which had been previously issued by the Air Authority, the proceeds of which had been loaned to the Company to assist in financing its portion of the cost of the acquisition, construction and installation of certain air pollution control facilities. The Air Authority Loan has been funded with proceeds derived from the sale by the Air Authority of one series of State of Ohio Collateralized Pollution Control Revenue Refunding Bonds, Series 1997-A (The Toledo Edison Company Project) (herein called the Air Bonds) in the aggregate principal amount of $10,100,000, issued under a Trust Indenture, dated as of August 1, 1997 (herein called the Air Bond Indenture), between The Fifth Third Bank, Cincinnati, Ohio, as trustee (herein called the Air Bond Trustee) and the Air Authority. All right, title and interest of the Air Authority in the Bonds of this Series have been assigned by the Air Authority to the Air Bond Trustee as security for the payment of the principal of and premium, if any, and interest on the Air Bonds; and the Bonds of this Series have been delivered to the Air Bond Trustee, as trustee, for the benefit of the holders of the Air Bonds. In the event any Air Bonds shall be surrendered to the Air Bond Trustee or other person for cancellation pursuant to the Air Bond Indenture (except upon exchange for other Air Bonds), Bonds of this Series equal in principal amount to such Air Bonds shall be deemed to have been paid, but only when and to the extent (a) so noted on the Schedule of Payments hereon by one of the agencies of the Company hereinabove specified and (if such agency is not the Trustee) written notice by such agency of such notation has been received by the Trustee or (b) such Bond is surrendered to and cancelled by the Trustee as provided in the next paragraph; and in the event and to the extent the principal of (or premium, if any) or interest on any Air Bonds shall be paid or deemed to be paid, an equal amount of principal (or premium, if any) or interest, as the case may be, payable with respect to an aggregate principal amount of Bonds of this Series equal to the aggregate principal amount of such Air Bonds shall be deemed to have been paid, but, in the case of such payment of principal, only when and to the extent (i) so noted on the Schedule of Payments hereon by one of the agencies of the Company hereinabove specified and (if such agency is not the Trustee) written notice by such agency of such notation has been received by the Trustee or (ii) this Bond is surrendered to and cancelled by the Trustee as provided in the next paragraph. When any such payment of principal of this Bond is made, this Bond shall be surrendered by the registered owner hereof to an agency of the Company for such notation and notification or to the Trustee for cancellation. In the event that this Bond shall be deemed to have been paid in full, this Bond shall be surrendered to the Trustee for cancellation. In the event that this Bond shall be deemed to have been paid in part, this Bond may, at the option of the registered owner, be surrendered to the Trustee for cancellation, in which event the Trustee shall cancel this Bond and the Company shall execute and the Trustee shall authenticate and deliver Bonds of this Series in authorized denominations in aggregate principal amount equal to the unpaid balance of the principal amount of this Bond. The Bonds of this Series are subject to mandatory redemption by the Company prior to maturity, upon not less than thirty days prior notice, in whole or in part at any time, all as more fully provided in Section 1 of Article II of the Supplemental Indenture, in the event the Company exercises its option to direct the redemption of Air Bonds, pursuant to Section 6.2 of the Air Authority Loan Agreement, and an equivalent principal amount of Air Bonds are being concurrently called for redemption, at a redemption price of 100% of the principal amount to be redeemed, plus accrued interest to the date fixed for redemption. The Bonds of this Series are also subject to mandatory redemption by the Company prior to maturity at any time (a) in whole upon notice of the occurrence of an event of default under the Air Bond Indenture and of the acceleration of the payment of the principal of the Air Bonds or (b) in whole or in part upon a final determination by any federal, judicial or administrative authority that interest on the Air Bonds is includable for federal income tax purposes in the gross income of the holders of the Air Bonds (other than because a holder is a "substantial user" of the Project being financed pursuant to the Air Authority Loan Agreement or a "related person" thereof, as those terms are used in Section 147(a) of the Internal Revenue Code of 1986, as amended) and an equivalent amount of Air Bonds are being concurrently called for redemption, in each case as provided in Section 2 of Article II of the Supplemental Indenture, at a redemption price of 100% of the principal amount to be redeemed, plus accrued interest to the date fixed for redemption. The Bonds of this Series are also subject to mandatory redemption by the Company prior to stated maturity, all as more fully provided in Section 1 of Article II of the Supplemental Indenture, in whole or in part, on any date on or after August 1, 2007 in the event that and to the extent that the Company exercises its option to direct the redemption of Air Bonds, pursuant to Section 6.1 of the Air Authority Loan Agreement, and an equivalent principal amount of Air Bonds are being concurrently called for redemption, at redemption prices, plus accrued and unpaid interest, if any, to the redemption date as follows: Redemption Price (Expressed as a Percentage of the Redemption Periods Principal Amount (dates inclusive) Being Redeemed) ------------------ ------------------------- August 1, 2007 through July 31, 2008 102% August 1, 2008 through July 31, 2009 101% August 1, 2009 and thereafter 100% Any redemption of the Bonds of this Series shall be made in accordance with the applicable provisions of Sections 5.02, 5.03, 5.04 and 5.05 of the Original Indenture, unless and to the extent waived in writing by the registered owner or owners of all Bonds of this Series and such waiver is filed with the Trustee. If this Bond shall be called for redemption and payment of the redemption price shall be duly provided by the Company as specified in the Indenture, interest shall cease to accrue hereof from and after the date of redemption fixed in the notice thereof. The principal of this Bond may be declared or may become due before the maturity hereof, on the conditions, in the manner and at the times set forth in the Indenture, upon the happening of a default as therein described. This Bond is transferable by the registered owner hereof in person or by his duly authorized attorney at the office or agency of the Company in the Borough of Manhattan, The City of New York, upon surrender and cancellation of this Bond, and thereupon a new fully registered Bond or Bonds of this Series and maturity, for the same aggregate principal amount, in authorized denominations, will be issued to the transferee in exchange therefor, as provided in the Indenture. The Company and the Trustee and any paying agent may deem and treat the person in whose name this Bond is registered as the absolute owner hereof for the purpose or receiving payment and for all other purposes. This Bond, alone or with other Bonds of this Series and maturity, may in like manner be exchanged at such office or agency for one or more new fully registered Bonds of this Series and maturity, in authorized denominations, of the same aggregate principal amount. Upon each such transfer, exchange and re-exchange the Company will not require the payment of any charges, other than for any tax or other governmental charge required to be paid by the Company in connection therewith. No recourse under or upon any covenant or obligation of the Indenture, or of any indenture supplemental thereto, or of this Bond, for the payment of the principal of or the interest on this Bond, or for any claim based thereon, or otherwise in any manner in respect thereof, shall be had against any incorporator, subscriber to the capital stock, stockholder, officer or director, as such, of the Company, whether former, present or future, either directly, or indirectly through the Company or any predecessor or successor corporation or the Trustee, by the enforcement of any subscription to capital stock, assessment or otherwise, or by any legal or equitable proceeding by virtue of any constitution, statute or otherwise (including, without limiting the generality of the foregoing, any proceeding to enforce any claimed liability of stockholders of the Company based upon any theory of disregarding the corporate entity of the Company or upon any theory that the Company was acting as the agent or instrumentality of the stockholders), any and all such liability of incorporators, stockholders, subscribers, officers and directors, as such, being released by the holder hereof, by the acceptance of this Bond, and being likewise waived and released by the terms of the Indenture. This Bond shall not be valid or become obligatory for any purpose until the certificate of authentication endorsed hereon shall have been signed by The Chase Manhattan Bank or its successor, as Trustee under the Indenture. In Witness Whereof, The Toledo Edison Company has caused this Bond to be signed in its name by its President or a Vice President, manually or in facsimile, and its corporate seal to be impressed or imprinted hereon and attested by a manual or facsimile signature of its Secretary or an Assistant. Dated: The Toledo Edison Company By ---------------------------------- President Attest: - ---------------------- Secretary [Form of Trustee's Certificate of Authentication] This Bond is one of the Bonds of the series designated and described in the within-mentioned Indenture and Supplemental Indenture. The Chase Manhattan Bank, as Trustee By ------------------------------ Authorized Officer [Form of Schedule of Payments] Schedule of Payments Agency of the Unpaid Company Principal Principal Premium Interest Making Authorized Date Payment Amount Payment Payment Notation Officer Title - ---- ------- ------ ------- ------- -------- ------- ----- [End of Form of Bond of This Series] All conditions and requirements necessary to make this Supplemental Indenture a valid, legal and binding instrument in accordance with its terms and to make the Bonds of this Series, when duly executed by the Company and authenticated and delivered by the Trustee, and duly issued, the valid, binding and legal obligations of the Company, have been done and performed, and the execution and delivery of this Supplemental Indenture have been in all respects duly authorized; Now, Therefore, This Supplemental Indenture Witnesseth: That The Toledo Edison Company, the Company herein named, in consideration of the premises and of One Dollar ($1.00) to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, does hereby covenant and agree to and with the Trustee and its successors in the trust under the Indenture, for the benefit of those who shall hold the bonds to be issued hereunder and thereunder, as hereinafter provided, as follows: ARTICLE I Creation and Description of Bonds of This Series Section 1. A new series of bonds to be issued under and secured by the Indenture is hereby created, to be designated as First Mortgage Bonds, 6.10% Series due 2027 (such bonds herein referred to as the "Bonds of this Series"). The Bonds of this Series shall be limited to an aggregate principal amount of $10,100,000, excluding any Bonds of this Series which may be authenticated in exchange for or in lieu of or in substitution for or on transfer of other Bonds of this Series pursuant to any provisions of the Original Indenture or of this Supplemental Indenture. The Bonds of this Series shall be substantially in the form hereinbefore recited. Section 2. All Bonds of this Series shall mature August 1, 2027 and shall bear interest from August 1, 1997 at the rate of 6.10% per annum payable semi-annually on August 1 and February 1 in each year, commencing February 1, 1998. Section 3. Both principal and interest shall be payable, so long as the registered owner of the Bonds of this Series is the Air Bond Trustee, at the agency of the Company in the City of Cincinnati, State of Ohio, but if and when the registered owner of the Bonds of this Series is not the Air Bond Trustee, shall be payable at the office or agency of the Company in the Borough of Manhattan, The City of New York; and both principal and interest shall be payable in any coin or currency of the United States of America which at the time of payment shall be legal tender for the payment of public and private debts. Section 4. The Bonds of this Series shall be issued only as fully registered Bonds in denominations of $5,000 and any integral multiple thereof. Section 5. Bonds of this Series shall be transferable and exchangeable for other Bonds of the same series at the office or agency of the Company in the Borough of Manhattan, The City of New York, in the manner and upon the terms set forth in Section 2.05 of the Original Indenture, but notwithstanding the provisions of Section 2.08 of the Original Indenture, no charge shall be made upon any transfer or exchange of Bonds of said series other than for any tax or taxes or other governmental charge required to be paid by the Company. Section 6. The person in whose name any Bond of this Series is registered at the close of business on any record date (as defined in the text of the Form of Bond of this Series set forth in this Supplemental Indenture) with respect to any interest payment date shall be entitled to receive the interest payable on such interest payment date notwithstanding the cancellation of such registered Bond upon any transfer or exchange thereof subsequent to the record date and prior to such interest payment date, except if and to the extent the Company shall default in the payment of the interest due on such interest payment date, in which case such defaulted interest shall be paid to the person in whose name such Bond (or any Bond or Bonds issued, directly or after intermediate transactions, upon transfer or exchange or in substitution thereof) is registered on the date of payment of such defaulted interest or on a subsequent record date for such payment if one shall have been established as hereinafter provided. A subsequent record date may be established by the Company by notice mailed to the holders of Bonds of this Series not less than 10 days preceding such record date, which record date shall be not more than 15 days prior to the subsequent interest payment date. Section 7. Except as provided in this Article I, every Bond of this Series shall be dated and shall bear interest as provided in Section 2.04 of the Original Indenture; provided, however, that, so long as there is no existing default in the payment of interest on said Bonds, the holder of any Bond of this Series authenticated by the Trustee between the record date for any interest payment date and such interest payment date shall not be entitled to the payment of the interest due on such interest payment date and shall have no claim against the Company with respect thereto; provided, further, that, if and to the extent the Company shall default in the payment of the interest due on such interest payment date, then any such Bond shall bear interest from the interest payment date next preceding the date of such Bond to which interest has been paid or, if the Company shall be in default with respect to the interest due on the first interest payment date of such Bond, then from August 1, 1997. Section 8. The Bonds of this Series may be executed by the Company and delivered to the Trustee and, upon compliance with all applicable provisions and requirements of the Original Indenture in respect thereof, shall be authenticated by the Trustee and delivered (without awaiting the filing or recording of this Supplemental Indenture) in accordance with the written order or orders of the Company. ARTICLE II Redemption of Bonds of This Series Section 1. The Bonds of this Series shall, in the manner provided in Article 5 of the Original Indenture, be subject to mandatory redemption by the Company prior to maturity, as follows: (a) In the event the Company exercises its option to direct the redemption of Air Bonds upon the occurrence of any of the events described in Section 6.2 of the Air Authority Loan Agreement, in whole or in part, in each case at a redemption price of 100% of the principal amount, plus accrued interest to the date fixed for redemption; or (b) In whole or in part on any date on or after August 1, 2007, in the event that and to the extent that the Company exercises its option to direct the redemption of Air Bonds pursuant to Section 6.1 of the Air Authority Loan Agreement, at redemption prices equal to the following percentages of the principal amount to be redeemed, plus accrued interest to the date fixed for redemption: Redemption Price (Expressed as a Percentage of the Redemption Periods Principal Amount (dates inclusive) Being Redeemed) ------------------ ------------------------- August 1, 2007 through July 31, 2008 102% August 1, 2008 through July 31, 2009 101% August 1, 2009 and thereafter 100% Any redemption under this Section 1 shall occur only upon receipt by the Trustee of a certificate of the Company to the effect that (i) the Company has given notice to the Air Bond Trustee that the Company is exercising its option to direct redemption of Air Bonds as provided in Section 6.1 or 6.2 of the Air Authority Loan Agreement and (ii) an equivalent principal amount of Air Bonds are currently being called for redemption. Such certificate shall specify the principal amount of the Bonds of this Series to be redeemed, shall have attached to it a copy of said notice to the Air Bond Trustee and shall specify the redemption date of such Bonds of this Series, which redemption date shall not be less than forty-five (45) days from the date of the Trustee's receipt of such certificate and shall be the same as the redemption date specified in the attached notice for the Air Bonds being concurrently redeemed. Section 2. (a) The Bonds of this Series shall be subject to mandatory redemption by the Company in whole at any time prior to maturity if the Trustee shall receive a written demand from the Air Bond Trustee for redemption of all Bonds of this Series held by the Air Bond Trustee, stating that an "event of default" under the Air Bond Indenture has occurred and is continuing and that payment of the principal of the Air Bonds has been accelerated; provided, however, that the Bonds of this Series shall not be redeemed under this Section 2(a) in the event that prior to the date fixed for redemption: (i) the Trustee shall have received a certificate of the Air Bond Trustee (a) stating that there has been a waiver of such acceleration or (b) withdrawing said written demand, or (ii) if an event of default under Section 9.01 of Article 9 of the Original Indenture shall have occurred and be continuing, there has been an acceleration of the principal of the Bonds of this Series. Any such redemption shall be made not more than 45 days after receipt of the written demand at a redemption price of 100% of the principal amount to be redeemed, plus accrued interest to the date fixed for redemption. (b) The Bonds of this Series shall also be subject to special mandatory redemption by the Company in whole or in part at any time at a redemption price of 100% of the principal amount thereof, plus accrued interest to the date fixed for redemption, at the earliest practicable date selected by the Air Bond Trustee, after consultation with the Company, but in any event no later than 180 days following the Air Bond Trustee's notification of a Determination of Taxability (as defined in the Air Bond Indenture). Any special mandatory redemption hereunder shall be made upon receipt by the Trustee of a certificate of the Company to the effect that the Company is delivering monies to redeem Bonds of this Series in order to provide the Air Bond Trustee with the monies needed to redeem Air Bonds in accordance with Section 6.3 of the Air Authority Loan Agreement and Section 4.01(b) of the Air Bond Indenture. Such certificate shall specify the principal amount of Air Bonds to be redeemed and the redemption date of the Bonds of this Series, which date shall be the same as the redemption date for the Air Bonds being concurrently redeemed. Section 3. The provisions of Sections 5.02, 5.03, 5.04 and 5.05 of the Original Indenture shall be applicable to Bonds of this Series, provided that upon deposit with the Trustee of money to redeem Bonds of this Series, such money shall be immediately available for payment. Section 4. The holder of each and every Bond of this Series issued hereunder hereby agrees to accept payment thereof prior to maturity on the terms and conditions provided for in this Article II. ARTICLE III Payment Deemed Made of Bonds of This Series Section 1. In the event any Air Bonds shall be purchased by the Company and surrendered by it to the Air Bond Trustee for cancellation or shall be otherwise surrendered to the Air Bond Trustee for cancellation pursuant to the Air Bond Indenture (except upon exchange for other Air Bonds), Bonds of this Series equal in principal amount and maturity to the Air Bonds so surrendered shall be deemed to have been paid, but only when and to the extent that (a) such payment of the principal amount of such Bonds of this Series shall be noted by an agency of the Company on the Schedule of Payments on such Bonds of this Series and (if such agency is not the Trustee) written notice by such agency of such notation shall have been received by the Trustee or (b) such Bonds of this Series shall have been surrendered to and cancelled by the Trustee as provided in Section 3 of this Article III. Section 2. In the event and to the extent the principal of or premium, if any, or interest on any Air Bonds shall be paid out of funds held by the Air Bond Trustee or out of any other funds or shall otherwise be deemed to be paid, an equal amount of principal of or premium, if any, or interest on, as the case may be, Bonds of this Series shall be deemed to have been paid, but in the case of such payments of principal on such Bonds of this Series, only when and to the extent that (a) such payment of the principal amount of such Bonds of this Series shall be noted by an agency of the Company on the Schedule of Payments on such Bonds of this Series and (if such agency is not the Trustee) written notice by such agency of such notation shall have been received by the Trustee or (b) such Bonds of this Series shall have been surrendered to and cancelled by the Trustee as provided in Section 3 of this Article III. Section 3. When payment of any principal amount of a Bond of this Series shall be deemed to have been made as provided in Section 1 or 2 of this Article III, the registered owner thereof shall surrender such Bond to an agency of the Company for notation and notification or to the Trustee for cancellation as provided in said Section. All Bonds of this Series which shall be deemed to have been paid in full as provided in said Section 1 or 2 shall be surrendered to the Trustee for cancellation and the Trustee shall forthwith cancel the same. In the event that part of a Bond of this Series shall be deemed to have been paid as provided in said Section 1 or 2, the registered owner may, at its option, surrender such Bond to the Trustee for cancellation, in which event the Trustee shall cancel such Bond and the Company shall execute and the Trustee shall authenticate and deliver, without charge to the registered owner, Bonds of this Series in such authorized denominations as shall be specified by the registered owner in an aggregate principal amount equal to the unpaid balance of the principal amount of such surrendered Bond. ARTICLE IV The Trustee Section 1. The Trustee accepts the trusts created by this Supplemental Indenture upon the terms and conditions in the Original Indenture and in this Supplemental Indenture set forth. The recitals in this Supplemental Indenture are made by the Company only and not by the Trustee. Each and every term and condition contained in Article 13 of the Original Indenture shall apply to this Supplemental Indenture with the same force and effect as if the same were herein set forth in full, with such omissions, variations and modifications thereof as may be appropriate to make the same conform to this Supplemental Indenture. Section 2. The Company shall cause any agency of the Company, other than the Trustee, which it may appoint from time to time to act as such agency in respect of the Bonds of this Series, to execute and deliver to the Trustee an instrument in which such agency shall: (a) Agree to keep and maintain, and furnish to the Trustee from time to time as reasonably requested by the Trustee, appropriate records of all transactions carried out by it as such agency and to furnish the Trustee such other information and reports as the Trustee may reasonably require; (b) Certify that it is eligible for appointment as such agency and agree to notify the Trustee promptly if it shall cease to be so eligible; and (c) Agree to indemnify the Trustee, in a manner satisfactory to the Trustee, against any loss, liability or expense incurred by, and defend any claim asserted against, the Trustee by reason of any act or failure to act as such agency, except for any liability resulting from any action taken by it at the specific direction of the Trustee; provided, however, that the Company, in lieu of causing any such agency to furnish such an instrument, may make such other arrangements with the Trustee in respect of any such agency as shall be satisfactory to the Trustee. Section 3. The Trustee shall advise the Company, promptly, in writing of the notation or receipt of written notice of notation on or cancellation of any Bond of this Series provided for in Articles I, II and III of this Supplemental Indenture. ARTICLE V Miscellaneous Provisions Section 1. The Original Indenture, as heretofore supplemented, is in all respects ratified and confirmed, and the Original Indenture, this Supplemental Indenture and all other indentures supplemental to the Original Indenture shall be read, taken and construed as one and the same instrument. Neither the execution of this Supplemental Indenture nor anything herein contained shall be construed to impair the lien of the Indenture on any of the property subject thereto, and such lien shall remain in full force and effect as security for all bonds now outstanding or hereafter issued under the Indenture. All covenants and provisions of the Original Indenture, except as modified by this Supplemental Indenture and all other indentures supplemental to the Original Indenture, shall continue in full force and effect for the respective periods of time therein specified, and this Supplemental Indenture shall form part of the Indenture. All terms defined in Article 1 of the Original Indenture shall, for all purposes of this Supplemental Indenture, have the meanings in said Article 1 specified, except as modified by this Supplemental Indenture and all other indentures supplemental to the Original Indenture and unless the context otherwise requires. Section 2. This Supplemental Indenture may be simultaneously executed in any number of counterparts, and all said counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. EXECUTION In Witness Whereof, The Toledo Edison Company has caused its corporate name to be hereunto affixed, this instrument to be signed by its President or a Vice President and its corporate seal to be hereunto affixed and attested by its Secretary or an Assistant Secretary for and in its behalf and The Chase Manhattan Bank, as Trustee, in evidence of its acceptance of the trust hereby created, has caused its corporate name to be hereunto affixed, this instrument to be signed by its President or a Vice President and its corporate seal to be hereunto affixed and attested by its Secretary, an Assistant Secretary or a Corporate Trust Officer, for and in its behalf, all as of the day and year first above written. The Toledo Edison Company By: /s/ Gary R. Leidich ---------------------------- Gary R. Leidich, Vice President Attest: /s/ Janis T. Percio - --------------------------- Janis T. Percio, Secretary Signed, sealed and acknowledged by The Toledo Edison Company in the presence of: /s/ T. Michele Lynch - --------------------------- T. Michele Lynch /s/ Carol L. Hebach - --------------------------- Carol L. Hebach As witnesses The Chase Manhattan Bank, as Trustee By: /s/ P.J. Gilkeson --------------------------- P.J. Gilkeson, Vice President Attest: /s/ R. Lorenzen - --------------------------------- R. Lorenzen, Senior Trust Officer Signed, sealed and acknowledged by The Chase Manhattan Bank in the presence of: /s/ B. Skiba - ----------------- B. Skiba /s/ James P. Freeman - ------------------------- James P. Freeman As witnesses State of Ohio SS: County of Cuyahoga On this 20th day of August, 1997, before me personally appeared Gary R. Leidich and Janis T. Percio to me personally known, who being by me severally duly sworn, did say that they are a Vice President and the Secretary, respectively, of The Toledo Edison Company, that the seal affixed to the foregoing instrument is the corporate seal of said corporation and that said instrument was signed and sealed in behalf of said corporation by authority of its Board of Directors; and said officers severally acknowledged said instrument to be the free act and deed of said corporation. /s/ Carol L. Hebach -------------------------- Notary Public Carol L. Hebach Notary Public, State of Ohio Recorded in Cuyahoga County My Commission expires January 19, 2000 State of New York SS: County of New York On this 21st day of August, 1997, before me personally appeared P.J.Gilkeson and R. Lorenzen to me personally known, who being by me severally duly sworn, did say that they are a Vice President and a Senior Trust Officer, respectively, of The Chase Manhattan Bank, that the seal affixed to the foregoing instrument is the corporate seal of said corporation and that said instrument was signed and sealed in behalf of said corporation by authority of its Board of Directors; and said officers severally acknowledged said instrument to be the free act and deed of said corporation. /s/ Emily Fayan ------------------------------ Notary Public Emily Fayan Notary Public, State of New York No. 24-4737006 Qualified in Kings County Certificate Filed in New York County Commission expires December 31, 1997 This Instrument Prepared By Paul N. Edwards, Attorney At Law. R-1 This page contains information as to recording and filing which was not set forth in this Supplemental Indenture at the time of execution. This page is not a part of this Supplemental Indenture. RECORDING AND FILING DATA This Supplemental Indenture was filed for record and recorded in the record of mortgages in the offices of the Recorders of the following Counties: County Volume Page Filed for Record ------ ------ ---- ---------------- Ohio Belmont Defiance Erie Fulton Henry Lake Monroe Ottawa Paulding August , 1997 Putnam Sandusky Seneca Williams Wood Pennsylvania Beaver Microfiche ---------- Lucas, Ohio August , 1997 An amendment to a previously filed financing statement and a counterpart of this Supplemental Indenture were filed in the office of the Secretary of the Commonwealth of Pennsylvania on August , 1997 under original or amendment file number 07851362, microfilm number 24581784, to comply with the filing requirements of the Pennsylvania enactment of the Uniform Commercial Code. Pursuant to Section 6.18 of a certain Trust Indenture, dated as of August 1, 1997, between the Ohio Air Quality Development Authority and The Fifth Third Bank, as Trustee, and a Letter Agreement, dated August 26, 1997, from said Trustee to The Toledo Edison Company, a copy of which is on file with said Trustee, this Bond may not be sold, assigned, pledged or transferred except as required to effect an assignment by said Trustee to a successor trustee under said Trust Indenture. The Toledo Edison Company First Mortgage Bond, 6.10% Series Due 2027 Due August 1, 2027 No. 1 $10,100,000 The Toledo Edison Company, an Ohio corporation (hereinafter called the Company) for value received, hereby promises to pay to The Fifth Third Bank, as trustee under the Air Bond Indenture (hereinafter defined) or registered assigns, the principal sum of Ten Million, One Hundred Thousand Dollars or the aggregate unpaid principal amount hereof (as shown on the Schedule of Payments hereon), whichever is less, on August 1, 2027, at its office or agency in the Borough of Manhattan, The City of New York, or, so long as the registered owner of this Bond is the Air Bond Trustee (hereinafter defined), at the agency of the Company in the City of Cincinnati, State of Ohio, and semi-annually on the first day of August and the first day of February in each year, commencing February 1, 1998 (each such date hereinafter called an interest payment date), to pay interest on the unpaid principal amount hereof to the registered owner hereof at said office or agencies at the rate per annum specified in the title of this Bond, until maturity, or, if this Bond shall be duly called for redemption, until the redemption date, or, if the Company shall default in the payment of the principal amount of this Bond, until the Company's obligation with respect to the payment of such principal shall be discharged as provided in the Indenture (hereinafter defined). Except as hereinafter provided, this Bond shall bear interest from the interest payment date next preceding the date of this Bond to which interest has been paid, unless this Bond is dated on an interest payment date, in which case from the date hereof; or unless this Bond is dated prior to the first interest payment date in respect hereof, in which case from August 1, 1997, and except that if this Bond is delivered on a transfer or exchange of or in substitution for another Bond or Bonds it shall bear interest from the last preceding date to which interest shall have been paid on the Bond or Bonds in respect of which this Bond is delivered (except that if this Bond is dated between the record date (hereinafter defined) for any interest payment date and such interest payment date, then from such interest payment date, provided, however, that if the Company shall default in payment of the interest due on such interest payment date, then from the next preceding interest payment date to which interest has been paid on the Bond of this Series, or if such interest payment date is the first interest payment date for Bonds of this Series, then from August 1, 1997). The interest so payable on any interest payment date will, subject to certain exceptions provided in the Indenture, be paid to the person in whose name this Bond is registered at the close of business on the record date, which shall be the "Regular Record Date" as defined in the Air Bond Indenture (hereinafter defined), applicable to the regular interest payment date of any Bond of this Series, if it were an "Interest Payment Date" as defined in the Air Bond Indenture. Both the principal of and the interest on this Bond shall be payable in any coin or currency of the United States of America which at the time of payment shall be legal tender for the payment of public and private debts. This Bond is one of the Bonds of the Company, known as its First Mortgage Bonds, issued and to be issued in one or more series under and equally and ratably secured (except as any sinking, amortization, improvement or other fund, established in accordance with the provisions of the Indenture, may afford additional security for the Bonds of any particular series) by a certain Indenture of Mortgage and Deed of Trust, dated as of April 1, 1947 (hereinafter called the Original Indenture), made by the Company to The Chase National Bank of the City of New York, now succeeded by The Chase Manhattan Bank, as Trustee (hereinafter called the Trustee), and by certain indentures supplemental thereto, including the Forty-seventh Supplemental Indenture dated as of August 1, 1997 (the Original Indenture and said indentures supplemental thereto herein collectively called the Indenture and said Forty-seventh Supplemental Indenture hereinafter called the Supplemental Indenture), to which Indenture reference is hereby made for a description of the property mortgaged, the nature and extent of the security, the rights and limitations of rights of the Company, the Trustee and the holders of said Bonds and of the coupons appurtenant to coupon Bonds under the Indenture and the terms and conditions upon which said Bonds are and are to be issued and secured, to all of the provisions of which Indenture and of all such supplemental indentures in respect of such security, including the provisions of the Indenture permitting the issue of Bonds of any series for property which, under the restrictions and limitations therein specified, may be subject to liens prior to the lien of the Indenture, the holder, by accepting this Bond, assents. To the extent permitted by and as provided in the Indenture, the rights and obligations of the Company and of the holders of said Bonds and coupons (including those pertaining to any sinking or other fund) may be changed and modified, with the consent of the Company, by the holders of at least 75% in aggregate principal amount of the Bonds then outstanding, such percentage being determined as provided in the Indenture; provided, however, that in case such changes and modifications affect one or more but less than all series of Bonds then outstanding, they shall be required to be adopted only by the affirmative vote of the holders of at least 75% in aggregate principal amount of outstanding Bonds of such one or more series so affected; and further provided, that without the consent of the holder hereof no such change or modification shall be made which will extend the time of payment of the principal of, or of the interest or premium, if any, on this Bond or reduce the principal amount hereof or the rate of interest or the premium, if any, hereon, or affect any other modification of the terms of payment of such principal or interest, or premium, if any, or will permit the creation of any lien ranking prior to or on a parity with the lien of the Indenture on any of the mortgaged property, or will deprive the holder hereof of the benefit of a lien upon the mortgaged property for the security of this Bond, or will reduce the percentage of Bonds required for the adoption of changes or modifications as aforesaid. This Bond is one of a series of Bonds designated as First Mortgage Bonds, 6.10% Series due 2027, of the Company (herein called Bonds of this Series) limited, except as otherwise provided in the Indenture, in aggregate principal amount to $10,100,000 and issued under and secured by the Supplemental Indenture. The Bonds of this Series have been issued by the Company to the Ohio Air Quality Development Authority (hereinafter called the Air Authority) to evidence and secure the obligations of the Company to repay a loan (herein called the Air Authority Loan) made by the Air Authority to the Company pursuant to a certain loan agreement, dated as of August 1, 1997 (herein called the Air Authority Loan Agreement), between the Air Authority and the Company to assist the Company in refunding certain bonds which had been previously issued by the Air Authority, the proceeds of which had been loaned to the Company to assist in financing its portion of the cost of the acquisition, construction and installation of certain air pollution control facilities. The Air Authority Loan has been funded with proceeds derived from the sale by the Air Authority of one series of State of Ohio Collateralized Pollution Control Revenue Refunding Bonds, Series 1997-A (The Toledo Edison Company Project) (herein called the Air Bonds) in the aggregate principal amount of $10,100,000, issued under a Trust Indenture, dated as of August 1, 1997 (herein called the Air Bond Indenture), between The Fifth Third Bank, Cincinnati, Ohio, as trustee (herein called the Air Bond Trustee) and the Air Authority. All right, title and interest of the Air Authority in the Bonds of this Series have been assigned by the Air Authority to the Air Bond Trustee as security for the payment of the principal of and premium, if any, and interest on the Air Bonds; and the Bonds of this Series have been delivered to the Air Bond Trustee, as trustee, for the benefit of the holders of the Air Bonds. In the event any Air Bonds shall be surrendered to the Air Bond Trustee or other person for cancellation pursuant to the Air Bond Indenture (except upon exchange for other Air Bonds), Bonds of this Series equal in principal amount to such Air Bonds shall be deemed to have been paid, but only when and to the extent (a) so noted on the Schedule of Payments hereon by one of the agencies of the Company hereinabove specified and (if such agency is not the Trustee) written notice by such agency of such notation has been received by the Trustee or (b) such Bond is surrendered to and cancelled by the Trustee as provided in the next paragraph; and in the event and to the extent the principal of (or premium, if any) or interest on any Air Bonds shall be paid or deemed to be paid, an equal amount of principal (or premium, if any) or interest, as the case may be, payable with respect to an aggregate principal amount of Bonds of this Series equal to the aggregate principal amount of such Air Bonds shall be deemed to have been paid, but, in the case of such payment of principal, only when and to the extent (i) so noted on the Schedule of Payments hereon by one of the agencies of the Company hereinabove specified and (if such agency is not the Trustee) written notice by such agency of such notation has been received by the Trustee or (ii) this Bond is surrendered to and cancelled by the Trustee as provided in the next paragraph. When any such payment of principal of this Bond is made, this Bond shall be surrendered by the registered owner hereof to an agency of the Company for such notation and notification or to the Trustee for cancellation. In the event that this Bond shall be deemed to have been paid in full, this Bond shall be surrendered to the Trustee for cancellation. In the event that this Bond shall be deemed to have been paid in part, this Bond may, at the option of the registered owner, be surrendered to the Trustee for cancellation, in which event the Trustee shall cancel this Bond and the Company shall execute and the Trustee shall authenticate and deliver Bonds of this Series in authorized denominations in aggregate principal amount equal to the unpaid balance of the principal amount of this Bond. The Bonds of this Series are subject to mandatory redemption by the Company prior to maturity, upon not less than thirty days prior notice, in whole or in part at any time, all as more fully provided in Section 1 of Article II of the Supplemental Indenture, in the event the Company exercises its option to direct the redemption of Air Bonds, pursuant to Section 6.2 of the Air Authority Loan Agreement, and an equivalent principal amount of Air Bonds are being concurrently called for redemption, at a redemption price of 100% of the principal amount to be redeemed, plus accrued interest to the date fixed for redemption. The Bonds of this Series are also subject to mandatory redemption by the Company prior to maturity at any time (a) in whole upon notice of the occurrence of an event of default under the Air Bond Indenture and of the acceleration of the payment of the principal of the Air Bonds or (b) in whole or in part upon a final determination by any federal, judicial or administrative authority that interest on the Air Bonds is includable for federal income tax purposes in the gross income of the holders of the Air Bonds (other than because a holder is a "substantial user" of the Project being financed pursuant to the Air Authority Loan Agreement or a "related person" thereof, as those terms are used in Section 147(a) of the Internal Revenue Code of 1986, as amended) and an equivalent amount of Air Bonds are being concurrently called for redemption, in each case as provided in Section 2 of Article II of the Supplemental Indenture, at a redemption price of 100% of the principal amount to be redeemed, plus accrued interest to the date fixed for redemption. The Bonds of this Series are also subject to mandatory redemption by the Company prior to stated maturity, all as more fully provided in Section 1 of Article II of the Supplemental Indenture, in whole or in part, on any date on or after August 1, 2007 in the event that and to the extent that the Company exercises its option to direct the redemption of Air Bonds, pursuant to Section 6.1 of the Air Authority Loan Agreement, and an equivalent principal amount of Air Bonds are being concurrently called for redemption, at redemption prices, plus accrued and unpaid interest, if any, to the redemption date as follows: Redemption Price (Expressed as a Percentage of Redemption Periods the Principal Amount (dates inclusive) Being Redeemed ------------------ ---------------------------- August 1, 2007 through July 31, 2008 102% August 1, 2008 through July 31, 2009 101% August 1, 2009 and thereafter 100% Any redemption of the Bonds of this Series shall be made in accordance with the applicable provisions of Sections 5.02, 5.03, 5.04 and 5.05 of the Original Indenture, unless and to the extent waived in writing by the registered owner or owners of all Bonds of this Series and such waiver is filed with the Trustee. If this Bond shall be called for redemption and payment of the redemption price shall be duly provided by the Company as specified in the Indenture, interest shall cease to accrue hereof from and after the date of redemption fixed in the notice thereof. The principal of this Bond may be declared or may become due before the maturity hereof, on the conditions, in the manner and at the times set forth in the Indenture, upon the happening of a default as therein described. This Bond is transferable by the registered owner hereof in person or by his duly authorized attorney at the office or agency of the Company in the Borough of Manhattan, The City of New York, upon surrender and cancellation of this Bond, and thereupon a new fully registered Bond or Bonds of this Series and maturity, for the same aggregate principal amount, in authorized denominations, will be issued to the transferee in exchange therefor, as provided in the Indenture. The Company and the Trustee and any paying agent may deem and treat the person in whose name this Bond is registered as the absolute owner hereof for the purpose or receiving payment and for all other purposes. This Bond, alone or with other Bonds of this Series and maturity, may in like manner be exchanged at such office or agency for one or more new fully registered Bonds of this Series and maturity, in authorized denominations, of the same aggregate principal amount. Upon each such transfer, exchange and re-exchange the Company will not require the payment of any charges, other than for any tax or other governmental charge required to be paid by the Company in connection therewith. No recourse under or upon any covenant or obligation of the Indenture, or of any indenture supplemental thereto, or of this Bond, for the payment of the principal of or the interest on this Bond, or for any claim based thereon, or otherwise in any manner in respect thereof, shall be had against any incorporator, subscriber to the capital stock, stockholder, officer or director, as such, of the Company, whether former, present or future, either directly, or indirectly through the Company or any predecessor or successor corporation or the Trustee, by the enforcement of any subscription to capital stock, assessment or otherwise, or by any legal or equitable proceeding by virtue of any constitution, statute or otherwise (including, without limiting the generality of the foregoing, any proceeding to enforce any claimed liability of stockholders of the Company based upon any theory of disregarding the corporate entity of the Company or upon any theory that the Company was acting as the agent or instrumentality of the stockholders), any and all such liability of incorporators, stockholders, subscribers, officers and directors, as such, being released by the holder hereof, by the acceptance of this Bond, and being likewise waived and released by the terms of the Indenture. This Bond shall not be valid or become obligatory for any purpose until the certificate of authentication endorsed hereon shall have been signed by The Chase Manhattan Bank or its successor, as Trustee under the Indenture. In Witness Whereof, The Toledo Edison Company has caused this Bond to be signed in its name by its President or a Vice President, manually or in facsimile, and its corporate seal to be impressed or imprinted hereon and attested by a manual or facsimile signature of its Secretary or an Assistant. Dated: The Toledo Edison Company By --------------------------- Vice President Attest: - --------------------------- Secretary This Bond is one of the Bonds of the series designated and described in the within-mentioned Indenture and Supplemental Indenture. The Chase Manhattan Bank, as Trustee By ------------------------------ - --- Authorized Officer Schedule of Payments Agency of the Unpaid Company Principal Principal Premium Interest Making Authorized Date Payment Amount Payment Payment Notation Officer Title - ---- ------- ------ ------- ------- -------- ------- ----- Pursuant to Section 6.18 of a certain Trust Indenture, dated as of August 1, 1997, between the Ohio Air Quality Development Authority and The Fifth Third Bank, as Trustee, and a Letter Agreement, dated August 26, 1997, from said Trustee to The Toledo Edison Company, a copy of which is on file with said Trustee, this Bond may not be sold, assigned, pledged or transferred except as required to effect an assignment by said Trustee to a successor trustee under said Trust Indenture. The Toledo Edison Company First Mortgage Bond, 6.10% Series Due 2027 Due August 1, 2027 No. $ The Toledo Edison Company, an Ohio corporation (hereinafter called the Company) for value received, hereby promises to pay to or registered assigns, the principal sum of Dollars or the aggregate unpaid principal amount hereof (as shown on the Schedule of Payments hereon), whichever is less, on August 1, 2027, at its office or agency in the Borough of Manhattan, The City of New York, or, so long as the registered owner of this Bond is the Air Bond Trustee (hereinafter defined), at the agency of the Company in the City of Cincinnati, State of Ohio, and semi-annually on the first day of August and the first day of February in each year, commencing February 1, 1998 (each such date hereinafter called an interest payment date), to pay interest on the unpaid principal amount hereof to the registered owner hereof at said office or agencies at the rate per annum specified in the title of this Bond, until maturity, or, if this Bond shall be duly called for redemption, until the redemption date, or, if the Company shall default in the payment of the principal amount of this Bond, until the Company's obligation with respect to the payment of such principal shall be discharged as provided in the Indenture (hereinafter defined). Except as hereinafter provided, this Bond shall bear interest from the interest payment date next preceding the date of this Bond to which interest has been paid, unless this Bond is dated on an interest payment date, in which case from the date hereof; or unless this Bond is dated prior to the first interest payment date in respect hereof, in which case from August 1, 1997, and except that if this Bond is delivered on a transfer or exchange of or in substitution for another Bond or Bonds it shall bear interest from the last preceding date to which interest shall have been paid on the Bond or Bonds in respect of which this Bond is delivered (except that if this Bond is dated between the record date EX-4.5 21 ========================================== THE TOLEDO EDISON COMPANY TO THE CHASE MANHATTAN BANK, as Trustee. ------------------- Forty-Eighth Supplemental Indenture DATED AS OF JUNE 1, 1998 (Supplemental to Indenture dated as of April 1, 1947) First Mortgage Bonds, 1998 Guaranty Series due 2028 ========================================== Forty-eighth Supplemental Indenture, dated as of June 1, l998, made by and between THE TOLEDO EDISON COMPANY, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the "Company"), and THE CHASE MANHATTAN BANK, a corporation organized and existing under the laws of the State of New York (the "Trustee"), as Trustee. RECITALS The Company has heretofore executed and delivered an Indenture of Mortgage and Deed of Trust dated as of April 1, 1947 (the "Original Indenture") to The Chase National Bank of the City of New York, predecessor Trustee, to secure an issue of First Mortgage Bonds of the Company, issuable in series, and created thereunder an initial series of bonds designated as First Mortgage Bonds, 27/8% Series due 1977, being the initial series of bonds issued under the Original Indenture; and The Company has heretofore executed and delivered to The Chase National Bank of the City of New York, predecessor Trustee, four Supplemental Indentures supplementing the Original Indenture dated, respectively, September 1, 1948, April 1, 1949, December 1, 1950 and March 1, 1995 and has heretofore executed and delivered to The Chase Manhattan Bank, which on March 31, 1955, became the Trustee under the Original Indenture by virtue of the merger of The Chase National Bank of the City of New York into President and Directors of The Manhattan Company under the name of The Chase Manhattan Bank, the Fifth and the Sixth Supplemental Indentures dated, respectively, February 1, 1956, and May 1, 1958, supplementing the Original Indenture; and The Chase Manhattan Bank was converted into a national banking association under the name of The Chase Manhattan Bank (National Association), effective September 23, 1965; and by virtue of said conversion the continuity of the business of The Chase Manhattan Bank, including its business of acting as corporate trustee, and its corporate existence, were not affected, so that The Chase Manhattan Bank is vested with all the trusts, powers, discretion, immunities, privileges and all other matters as were vested in said The Chase Manhattan Bank under the Indenture, with like effect as if originally named as Trustee therein; and The Company has heretofore executed and delivered to The Chase Manhattan Bank (National Association), predecessor Trustee, 38 Supplemental Indentures dated, respectively, as follows: Seventh, August 1, 1967, Eighth, November 1, 1970, Ninth, August 1, 1972, Tenth, November 1, 1973, Eleventh, July 1, 1974, Twelfth, October 1, 1975, Thirteenth, June 1, 1976, Fourteenth, October 1, 1978, Fifteenth, September 1, 1979, Sixteenth, September 1, 1980, Seventeenth, October 1, 1980, Eighteenth, April 1, 1981, Nineteenth, November 1, 1981, Twentieth, June 1, 1982, Twenty-first, September 1, 1982, Twenty-second, April 1, 1983, Twenty-third, December 1, 1983, Twenty-fourth, April 1, 1984, Twenty-fifth, October 15, 1984, Twenty-sixth, October 15, 1984, Twenty-seventh, August 1, 1985, Twenty-eighth, August 1, 1985, Twenty-ninth, December 1, 1985, Thirtieth, March 1, 1986, Thirty-first, October 15, 1987, Thirty-second, September 15, 1988, Thirty-third, June 15, 1989, Thirty-fourth, October 15, 1989, Thirty-fifth, May 15, 1990, Thirty-sixth, March 1, 1991, Thirty-seventh, May 1, 1992, Thirty-eighth, August 1, 1992, Thirty-ninth, October 1, 1992, Fortieth, January 1, 1993, Forty- first, September 15, 1994, Forty-second, May 1, 1995, Forty- third, June 1, 1995, Forty-fourth, July 14, 1995, Forty-fifth, July 15, 1995, Forty-sixth, June 15, 1997 and Forty-seventh, August 1, 1997 supplementing the Original Indenture; and The Chase Manhattan Bank (National Association), Successor Trustee, was merged on July 1, 1996, with and into Chemical Bank, a New York banking corporation, which changed its name to The Chase Manhattan Bank, and which became the Trustee under the Original Indenture by virtue of such merger; and The Company is executing and delivering to The Chase Manhattan Bank, Trustee, this Forty-eighth Supplemental Indenture, dated as of June 1, 1998, supplementing the Original Indenture (the Original Indenture, all the aforementioned Supplemental Indentures, this Forty-eighth Supplemental Indenture and any other indentures supplemental to the Original Indenture are herein collectively called the "Indenture" and this Forty- eighth Supplemental Indenture is hereinafter called "this Supplemental Indenture"); and The Company covenanted in and by the Original Indenture to execute and deliver such further instruments and do such further acts as may be necessary or proper to carry out more effectually the purposes of the Original Indenture and to make subject to the lien thereof property acquired after the execution and delivery of the Original Indenture; and Under Article 3 of the Original Indenture, the Company is authorized to issue additional bonds upon the terms and conditions expressed in the Original Indenture; and The Company has determined to create pursuant to the provisions of the Indenture a new series of first mortgage bonds (the "Pledge Bonds"), to be pledged as security for the payment of certain obligations undertaken by the Company in connection with the issuance by the Beaver County Industrial Development Authority (the "Authority") of $3,750,754 aggregate principal amount of the Authority's Exempt Facilities Revenue Bonds 5.375% 1998 Series A (Shippingport Project) on behalf of the Company (the "Revenue Bonds"), with such Pledge Bonds to have the denominations, rate of interest, date of maturity, redemption provisions and other provisions and agreements in respect thereof as in this Supplemental Indenture set forth; and The Pledge Bonds are to be limited in aggregate principal amount to $3,750,754, are to be delivered to Chase Manhattan Trust Company, National Association, as trustee (hereinafter called the "Revenue Bond Trustee"), under the Trust Indenture (the "Revenue Bond Indenture") dated as of June 1, 1998 between the Authority and the Revenue Bond Trustee; and The Company, by appropriate corporate action, has duly resolved and determined to execute this Supplemental Indenture for the purpose of providing for the creation of the Pledge Bonds and of specifying the form, provisions and particulars thereof as in said Original Indenture, as amended, provided or permitted, including the issuance only of fully registered Pledge Bonds, and of giving to the Pledge Bonds the protection and security of the Indenture; and All conditions and requirements necessary to make this Supplemental Indenture a valid, legal and binding instrument in accordance with its terms and to make the Pledge Bonds, when duly executed by the Company and authenticated and delivered by the Trustee, and duly issued, the valid, binding and legal obligations of the Company, have been done and performed, and the execution and delivery of this Supplemental Indenture have been in all respects duly authorized. NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH: That The Toledo Edison Company, the Company herein named, in consideration of the premises and of One Dollar ($1.00) to it duly paid by the Trustee at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, does hereby covenant and agree to and with the Trustee and its successors in the trust under the Indenture, for the benefit of those who shall hold the bonds to be issued hereunder and thereunder, as hereinafter provided, as follows: ARTICLE I CREATION, PROVISIONS, REDEMPTION, PRINCIPAL AMOUNT AND FORM OF BONDS OF PLEDGE SERIES SECTION 1. The Company hereby creates a new series of Bonds to be issued under and secured by the Indenture and to be designated as "First Mortgage Bonds, 1998 Guaranty Series due 2028" of the Company and hereinabove and hereinafter called the "Pledge Bonds." The Pledge Bonds shall be executed, authenticated and delivered in accordance with the provisions of, and shall in all respects be subject to, all of the terms, conditions and covenants of the Indenture. SECTION 2. The Pledge Bonds shall be issued as fully registered Bonds only, without coupons, in the denominations of $1,000 or any higher multiple of $1.00. SECTION 3. The Pledge Bonds shall be dated the date of authentication, shall mature June 1, 2028, and shall bear interest from the time hereinafter provided at such rate per annum as shall cause the rate of interest payable on such Pledge Bonds then outstanding to equal the rate of interest payable on the Revenue Bonds. The interest on the Pledge Bonds is payable on June 1 and December 1 in each year starting on the Interest Accrual Date (as defined below) (each such date hereinafter called an "interest payment date") on and until maturity, or, in the case of any such Pledge Bonds duly called for redemption, on and until the redemption date, or in the case of any default by the Company in the payment of the principal due on any such Pledge Bonds, until the Company's obligation with respect to the payment of the principal shall be discharged as provided in the Indenture. The Pledge Bonds shall be payable as to principal and interest at the office or agency of the Company in the City of Akron, State of Ohio, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts. Except as hereinafter provided, each Pledge Bond shall bear interest from the Interest Accrual Date (as defined below) until the principal of such Pledge Bond is paid or duly provided for. The interest payable on any interest payment date shall be paid to the respective persons in whose names the Pledge Bonds shall be registered at the close of business on the Record Date next preceding such interest payment date, notwithstanding the cancellation of any such Pledge Bond upon any transfer or exchange thereof subsequent to such Record Date and prior to such interest payment date; provided, however, that, if and to the extent the Company shall default in the payment of the interest due on such interest payment date (other than an interest payment date that is a redemption date or maturity date), such defaulted interest shall be paid to the respective persons in whose names such outstanding Pledge Bonds are registered at the close of business on a date (the "Subsequent Record Date") not less than 10 days nor more than 15 days next preceding the date of payment of such defaulted interest, such Subsequent Record Date to be established by the Company by notice given by mail by or on behalf of the Company to the registered owners of Pledge Bonds not less than 10 days next preceding such Subsequent Record Date. If any interest payment date should fall on a day which is not a business day, then such interest payment date shall be the next preceding business day. The interest rate on the Revenue Bonds, and therefore on the Pledge Bonds, is 5.375% per annum. SECTION 4. In the manner and subject to the limitations provided in the Indenture, Pledge Bonds may be exchanged for a like aggregate principal amount of Pledge Bonds of other authorized denominations, in either case without charge, except for any tax or taxes or other governmental charges incident to such exchange, at the office or agency of the Company in the Borough of Manhattan, The City of New York or the City of Akron, State of Ohio. Except as otherwise provided in Section 3 of this Article I with respect to the payment of interest, the Company, the agencies of the Company and the Trustee may deem and treat the person in whose name a Pledge Bond is registered as the absolute owner thereof for the purpose of receiving any payment and for all other purposes. SECTION 5. The Pledge Bonds shall be redeemable only to the extent provided in this Article I, subject to the provisions contained in Article V of the Indenture and the form of Pledge Bond. SECTION 6. Subject to the applicable provisions of the Indenture, written notice of redemption of Pledge Bonds pursuant to this Supplemental Indenture shall be given by the Trustee by mailing to each registered owner of such Pledge Bonds to be redeemed a notice of such redemption, first class postage prepaid, at its last address as it shall appear upon the books of the Company for the registration and transfer of such Pledge Bonds. Any notice of redemption shall be mailed at least 30 days, but no more than 60 days, prior to the redemption date. SECTION 7. If and when the principal of any Revenue Bonds shall be paid, then there shall be deemed to have been paid a principal amount of the Pledge Bonds then outstanding which bears the same ratio to the aggregate principal amount of Pledge Bonds then outstanding as the principal amount of the Revenue Bonds so paid bears to the aggregate principal amount of the Revenue Bonds outstanding immediately before such payment; provided, however, that such payment of Pledge Bonds shall be deemed to have been made only when and to the extent that notice of such purchase or payment of the principal amount of such Revenue Bonds shall have been given by the Company to the Trustee. The Trustee may rely upon any such notification by the Company that such payment of Revenue Bonds has been so made. SECTION 8. The Pledge Bonds shall be redeemed by the Company in whole at any time prior to maturity at a redemption price of 100% of the principal amount to be redeemed, plus accrued and unpaid interest to the redemption date, but only if the Trustee shall receive written advice from the Revenue Bond Trustee stating that the principal amount of all the Revenue Bonds then outstanding under the Revenue Bond Indenture has been declared due and payable pursuant to the provisions of Section 8.02 of the Revenue Bond Indenture, specifying the date of the accelerated maturity of such Revenue Bonds and the date from which interest on the Revenue Bonds issued under the Revenue Bond Indenture has then accrued and is unpaid, stating such declaration of maturity has not been annulled and demanding payment of the principal amount hereof plus accrued interest hereon to the date fixed for such redemption. The date fixed for such redemption shall be not earlier than the date specified in the aforesaid written advice as the date of the accelerated maturity of the Revenue Bonds then outstanding under the Revenue Bond Indenture. Upon mailing of notice of redemption, the date from which unpaid interest on the Revenue Bonds has then accrued (as specified by the Revenue Bond Trustee) shall become the initial interest accrual date (the "Initial Interest Accrual Date") with respect to the bonds of this series, provided, however, on any demand for payment of the principal amount hereof at maturity as a result of the principal of the Revenue Bonds becoming due and payable on the maturity date of the bonds of this series, the date from which unpaid interest on the Revenue Bonds has then accrued shall become the Initial Interest Accrual Date with respect to the bonds of this series, such date to be a stated in a written notice from Revenue Bond Trustee to the Trustee. The aforementioned notice of redemption shall become null and void for all purposes (including the fixing of the Initial Interest Accrual Date with respect to the bonds of this series) upon receipt by the Trustee of written notice from the Revenue Bond Trustee of the annulment of the acceleration of the maturity of the Revenue Bonds then outstanding under the Revenue Bond Indenture and of the rescission of the aforesaid written advice prior to the redemption of the bonds of this series and no payment in respect thereof as specified in such notice of redemption shall be effected or required. But no such rescission shall extend to any subsequent written advice from the Revenue Bond Trustee or impair any right consequent on such subsequent written advice. SECTION 9. Pledge Bonds shall not be transferable except to a successor trustee under the Revenue Bond Indenture or in connection with the exercise of the rights and remedies of the holder thereof consequent upon an event of default as defined in the Indenture. SECTION 10. The aggregate principal amount of Pledge Bonds which may be authenticated and delivered hereunder shall not exceed $3,750,754, except as otherwise provided in the Indenture. SECTION 11. The form of the fully registered Pledge Bonds, and of the Trustee's certificate of authentication thereon, shall be substantially as follows: [FORM OF FULLY REGISTERED BOND OF 1998 GUARANTY SERIES] THE TOLEDO EDISON COMPANY Incorporated under the laws of the State of Ohio FIRST MORTGAGE BOND, 1998 GUARANTY SERIES DUE 2028 Due June 1, 2028 No. $ THE TOLEDO EDISON COMPANY, a corporation organized and existing under the laws of the State of Ohio (hereinafter called the "Company," which term shall include any successor corporation as defined in the Indenture hereinafter referred to), for value received, hereby promises to pay to , or registered assigns, the sum of Dollars ($ ) or the aggregate unpaid principal amount hereof, whichever is less, on June 1, 2028, in any coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, and to pay interest on the unpaid principal amount hereof in like coin or currency from the time hereinafter provided, at the rate of five and three eighths per centum per annum. The interest on the Pledge Bonds is payable on June 1 and December 1 in each year starting on the Initial Interest Accrual Date (hereinafter defined) (each such date herein called an "interest payment date"), and on and until the date of maturity of this Bond, or, if this Bond shall be duly called for redemption, on and until the redemption date, or, if the Company shall default in the payment of the principal amount of this Bond, until the Company's obligation with respect to the payment of such principal shall be discharged as provided in said Indenture. Except as hereinafter provided, this Bond shall bear interest from the Initial Interest Accrual Date (hereinafter defined) until the principal of this Bond has been paid or duly provided for. Subject to certain exceptions provided in said Indenture, the interest payable on any interest payment date shall be paid to the person in whose name this Bond shall be registered at the close of business on the Record Date or, in the case of defaulted interest, on a day preceding the date of payment thereof established by notice to the registered owner of this Bond in the manner provided in the Supplemental Indenture (hereinafter defined). Principal of and interest on this Bond are payable at the office or agency of the Company in the City of Akron, State of Ohio. This Bond is one of the duly authorized Bonds of the Company (herein called the "Bonds"), all issued and to be issued under and equally secured by a Mortgage and Deed of Trust, dated as of April 1, 1947 (herein called the "Original Indenture"), executed by the Company to The Chase National Bank of the City of New York, now succeeded by The Chase Manhattan Bank as Trustee (herein called the "Trustee"), and all indentures supplemental thereto (said Mortgage as so supplemented herein called the "Indenture") to which reference is hereby made for a description of the properties mortgaged and pledged, the nature and extent of the security, the rights of the registered owner or owners of the Bonds and of the Trustee in respect thereof, and the terms and conditions upon which the Bonds are, and are to be, secured. The Bonds may be issued in series, for various principal sums, may mature at different times, may bear interest at different rates and may otherwise vary as in the Indenture provided. This Bond is one of a series designated as the First Mortgage Bonds, 1998 Guaranty Series due 2028 (herein called the "Pledge Bonds") limited, except as otherwise provided in the Indenture, in aggregate principal amount to $3,750,754, issued under and secured by the Indenture and described in the Forty-eighth Supplemental Indenture dated as of June 1, 1998, between the Company and the Trustee (herein called the "Supplemental Indenture"). The Pledge Bonds have been delivered by the Company to Chase Manhattan Trust Company, National Association, as trustee (hereinafter called the "Revenue Bond Trustee"), under the Trust Indenture (the "Revenue Bond Indenture") dated as of June 1, 1998 between The Beaver County Industrial Development Authority (the "Authority") and the Revenue Bond Trustee securing, among other bonds, $3,750,754 of the Authority's Exempt Facilities Revenue Bonds, 5.375% 1998 Series A (Shippingport Project) which have been issued on behalf of the Company (the "Revenue Bonds"). If and when the principal of any Revenue Bonds is paid, then there shall be deemed to be paid a principal amount of the Pledge Bonds then outstanding which bears the same ratio to the aggregate principal amount of Pledge Bonds outstanding immediately before such payment as the principal amount of the Revenue Bonds paid bears to the aggregate principal amount of the Revenue Bonds outstanding immediately before such payment; provided, however, that such payment of Pledge Bonds is deemed to be made only when and to the extent that notice of such payment is given by the Company to the Trustee. The Pledge Bonds shall be redeemed by the Company prior to maturity in whole at any time as provided in Section 8 of Article I of the Supplemental Indenture at a redemption price of 100% of the principal amount to be redeemed, plus accrued and unpaid interest to the redemption date. Any redemption of the Pledge Bonds shall be made in accordance with the applicable provisions of Sections 5.02, 5.03, 5.04 and 5.06 of the Original Indenture, unless and to the extent waived in writing by the registered owner or owners of all Pledge Bonds and such waiver is filed with the Trustee. To the extent permitted by and as provided in the Indenture, the rights and obligations of the Company and of the holders of said Bonds and coupons (including those pertaining to any sinking or other fund) may be changed and modified, with the consent of the Company by the holders of at least 75% in aggregate principal amount of the Bonds then outstanding, such percentage being determined as provided in the Indenture; provided, however, that in case such changes and modifications affect one or more but less than all series of Bonds then outstanding, they shall be required to be adopted only by the affirmative vote of the holders of at least 75% in aggregate principal amount of outstanding Bonds of such one or more series so affected; and further provided, that without the consent of the holder hereof no such change or modification shall be made which will extend the time of payment of the principal of or interest on this Bond or reduce the principal amount hereof or the rate of interest hereon, or affect any other modification of the terms of payment of such principal or interest or will permit the creation of any lien ranking prior to or on a party with the lien of the Indenture on any of the mortgaged property, or will deprive the holder hereof of the benefit of a lien upon the mortgaged property for the security of this Bond, or will reduce the percentage of Bonds required for the adoption of changes or modifications as aforesaid. If an event of default, as defined in the Indenture, shall occur, the principal of all the Bonds at any such time outstanding under the Indenture may be declared or may become due and payable, upon the conditions and in the manner and with the effect provided in the Indenture. The Indenture provides that such declaration may in certain events be waived by the holders of a majority in principal amount of the Bonds outstanding. Subject to the limitations provided in the Indenture and in Section 9 of Article I of the Supplemental Indenture, this Bond is transferable by the registered owner hereof, in person or by duly authorized attorney, on the books of the Company to be kept for that purpose at the office or agency of the Company in the Borough of Manhattan, The City of New York or the City of Akron, State of Ohio, upon surrender and cancellation of this Bond, and upon presentation of a duly executed written instrument of transfer, and thereupon a new fully registered bond or bonds of the same series, of the same aggregate principal amount and in authorized denominations will be issued to the transferee or transferees in exchange herefor; and this Bond, with or without others of the same series, may in like manner be exchanged for one or more new fully registered Pledge Bonds of other authorized denominations but of the same aggregate principal amount; all without charge except for any tax or taxes or other governmental charges incidental to such transfer or exchange and all subject to the terms and conditions set forth in the Indenture. No recourse shall be had for the payment of the principal of or the interest on this Bond, or for any claim based hereon or on the Indenture or any indenture supplemental thereto, against any incorporator, or against any stockholder, director or officer, past, present or future, of the Company, or of any predecessor or successor corporation, as such, either directly or through the Company or any such predecessor or successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise, all such liability, whether at common law, in equity, by any constitution or statute or otherwise, of incorporators, stockholders, directors or officers being released by every owner hereof by the acceptance of this Bond and as part of the consideration for the issue hereof, and being likewise released by the terms of the Indenture. This Bond shall not be entitled to any benefit under the Indenture or any indenture supplemental thereto, or become valid or obligatory for any purpose, until the Trustee under the Indenture, or a successor trustee thereto under the Indenture, shall have signed the form of certificate of authentication endorsed hereon. IN WITNESS WHEREOF, The Toledo Edison Company has caused this Bond to be signed in its name by its President or a Vice President (whose signature may be manual or a facsimile thereof) and its corporate seal (or a facsimile thereof) to be hereto affixed and attested by its Secretary or an Assistant Secretary (whose signature may be manual or a facsimile thereof). Dated: THE TOLEDO EDISON COMPANY By ----------------------- Attest: - --------------------------------- Secretary [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION] This Bond is one of the Bonds of the series designated and described in the within-mentioned Indenture and Supplemental Indenture. THE CHASE MANHATTAN BANK, TRUSTEE By ------------------------- Authorized Officer [END OF FORM OF FULLY REGISTERED BOND] ARTICLE II THE TRUSTEE ----------- SECTION 1. The Trustee accepts the trusts created by this Supplemental Indenture upon the terms and conditions in the Original Indenture and in this Supplemental Indenture set forth, The recitals in this Supplemental Indenture are made by the Company only and not by the Trustee. Each and every term and condition contained in Article 13 of the Original Indenture shall apply to this Supplemental Indenture with the same force and effect as if the same were herein set forth in fully, with such omissions, variations and modifications thereof as may be appropriate to make the same conform to this Supplemental Indenture. SECTION 2. The Company shall cause any agency of the Company, other than the Trustee, which it may appoint from time to time to act as such agency in respect of the Pledge Bonds, to execute and deliver to the Trustee an instrument in which such agency shall: (a) Agree to keep and maintain, and furnish to the Trustee from time to time as reasonably requested by the Trustee, appropriate records of all transactions carried out by it as such agency and to furnish the Trustee such other information and reports as the Trustee may reasonably require; (b) Certify that it is eligible for appointment as such agency and agree to notify the Trustee promptly if it shall cease to be so eligible; and (c) Agree to indemnify the Trustee, in a manner satisfactory to the Trustee, against any loss, liability or expense incurred by, and defend any claim asserted against, the Trustee by reason of any acts or failures to act as such agency, except for any liability resulting from any action taken by it at the specific direction of the Trustee; provided, however, that the Company, in lieu of causing any such agency to furnish such an instrument, may make such other arrangements with the Trustee in respect of any such agency as shall be satisfactory to the Trustee. SECTION 3. For purposes of the Original Indenture, this Supplemental Indenture and the Pledge Bonds, the Trustee is permitted to assume for all purposes that the rate of interest on the Pledge Bonds is the applicable initial interest rate expressed in this Supplemental Indenture. ARTICLE III MISCELLANEOUS PROVISIONS ------------------------ SECTION 1. The Original Indenture, as heretofore supplemented, is in all respects ratified and confirmed, and the Original Indenture, this Supplemental Indenture and all other indentures supplemental to the Original Indenture shall be read, taken and construed as one and the same instrument. Neither the execution of this Supplemental Indenture nor anything herein contained shall be construed to impair the lien of the Indenture on any of the property subject thereto, and such lien shall remain in full force and effect as security for all bonds now outstanding or hereafter issued under the Indenture. All covenants and provisions of the Original Indenture, except as modified by this Supplemental Indenture and all other indentures supplemental to the Original Indenture, shall continue in full force and effect for the respective periods of time therein specified, and this Supplemental Indenture shall form part of the Indenture. All terms defined in Article I of the Original Indenture shall, for all purposes of this Supplemental Indenture, have the meanings in said Article I specified, except as modified by this Supplemental Indenture and all other indentures Supplemental to the Original Indenture and unless the context otherwise requires. SECTION 2. This Supplemental Indenture may be simultaneously executed in any number of counterparts, and all said counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. EXECUTION IN WITNESS WHEREOF, The Toledo Edison Company has caused its corporate name to be hereunto affixed, this instrument to be signed by its President or a Vice President and its corporate seal to be hereunto affixed and attested by its Secretary or an Assistant Secretary for and in its behalf and The Chase Manhattan Bank, as Trustee, in evidence of its acceptance of the trust hereby created, has caused its corporate name to be hereunto affixed, this instrument to be signed by its President or a Vice President and its corporate seal to be hereunto affixed and attested by its Secretary, an Assistant Secretary or a Corporate Trust Officer, for and in its behalf, all as of the day and year first above written. THE TOLEDO EDISON COMPANY By: /s/ Richard H. Marsh -------------------------------- Richard H. Marsh, Vice President Attest /s/ Nancy C. Ashcom - -------------------------------------- Nancy C. Ashcom, Corporate Secretary Signed, sealed and acknowledged by The Toledo Edison Company in the presence of /s/ Thomas C. Navin - -------------------------------------- Thomas C. Navin /s/ Cynthia A. LaFlame - -------------------------------------- Cynthia A. LaFlame As witnesses THE CHASE MANHATTAN BANK, AS TRUSTEE By: /s/ P.J. Gilkeson -------------------- P.J. Gilkeson, Vice President Attest: /s/ R. Lorenzen - --------------------------------- R. Lorenzen, Senior Trust Officer Signed, sealed and acknowledged by The Chase Manhattan Bank in the presence of /s/ W. Keenan - ------------------------------- W. Keenan /s/ David Trakimowicz - ------------------------------- David Trakimowicz As witnesses STATE OF OHIO COUNTY OF SUMMIT On this 5th day of June, 1998, before me personally appeared Richard H. Marsh and Nancy C. Ashcom, to me personally known, who being by me severally duly sworn, did say that they are a Vice President and the Corporate Secretary, respectively, of The Toledo Edison Company, that the seal affixed to the foregoing instrument is the corporate seal of said corporation and that said instrument was signed and sealed in behalf of said corporation by authority of its Board of Directors; and said officers severally acknowledged said instrument to the free act and deed of said corporation. /s/ Susie M. Hoisten ------------------------------------- Notary Public Susie M. Hoisten Residence - Summit County State Wide Jurisdiction, Ohio My Commission expires November 19, 2001 STATE OF NEW YORK COUNTY OF NEW YORK On this 4th day of June, 1998, before me personally appeared P.J. Gilkeson and R. Lorenzen, to me personally known, who being by me severally duly sworn, did say that they are a Vice President and a Senior Trust Officer, respectively, of The Chase Manhattan Bank, that the seal affixed to the foregoing instrument is the corporate seal of said corporation and that said instrument was signed and sealed in behalf of said corporation by authority of its Board of Directors; and said officers severally acknowledged said instrument to the free act and deed of said corporation. /s/ Emily Fayan --------------------------------- Notary Public Emily Fayan Notary Public, State of New York No. 24-4737006 Qualified in Kings County Certificate Filed in New York County Commission expires December 31, 1999 EX-13.3 22 THE TOLEDO EDISON COMPANY CONSOLIDATED FINANCIAL AND OPERATING STATISTICS
Nov. 8 - Jan. 1 - 1998 Dec. 31, 1997 Nov. 7, 1997 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) GENERAL FINANCIAL INFORMATION: | | Operating Revenues $ 957,037 $ 122,669 | $ 772,707 $ 897,259 $ 873,657 $ 864,647 ========== ========== | ========== ========== ========== ========== Operating Income $ 180,261 $ 19,055 | $ 123,282 $ 156,815 $ 188,068 $ 179,499 ========== ========== | ========== ========== ========== ========== Income Before Extraordinary Item $ 106,582 $ 7,616 | $ 41,769 $ 57,289 $ 96,762 $ 82,531 ========== ========== | ========== ========== ========== ========== Net Income (Loss) $ 106,582 $ 7,616 | $ (150,132) $ 57,289 $ 96,762 $ 82,531 ========== ========== | ========== ========== ========== ========== Earnings (Loss) on Common Stock $ 92,972 $ 7,616 | $ (169,567) $ 40,363 $ 78,510 $ 62,311 ========== ========== | ========== ========== ========== ========== Net Utility Plant $1,168,216 $1,170,806 | $2,079,742 $2,122,266 $2,204,717 ========== ========== | ========== ========== ========== Total Assets $2,768,765 $2,758,152 | $3,428,175 $3,532,714 $3,546,628 ========== ========== | ========== ========== ========== | CAPITALIZATION: | Common Stockholder's Equity $ 575,692 $ 531,650 | $ 803,237 $ 762,877 $ 684,568 Preferred Stock- | Not Subject to Mandatory Redemption 210,000 210,000 | 210,000 210,000 210,000 Subject to Mandatory Redemption -- 1,690 | 3,355 5,020 6,685 Long-Term Debt 1,083,666 1,210,190 | 1,051,517 1,119,294 1,241,331 ---------- ---------- | ---------- ---------- ---------- Total Capitalization $1,869,358 $1,953,530 | $2,068,109 $2,097,191 $2,142,584 ========== ========== | ========== ========== ========== | CAPITALIZATION RATIOS: | Common Stockholder's Equity 30.8% 27.2% | 38.8% 36.4% 32.0% Preferred Stock- | Not Subject to Mandatory Redemption 11.2 10.8 | 10.2 10.0 9.8 Subject to Mandatory Redemption -- 0.1 | 0.2 0.2 0.3 Long-Term Debt 58.0 61.9 | 50.8 53.4 57.9 ----- ----- | ----- ----- ----- Total Capitalization 100.0% 100.0% | 100.0% 100.0% 100.0% ===== ===== | ===== ===== ===== | KILOWATT-HOUR SALES (Millions): | Residential 2,252 355 | 1,718 2,145 2,164 2,056 Commercial 2,425 284 | 1,498 1,790 1,748 1,711 Industrial 5,317 847 | 4,003 4,301 4,174 4,099 Other 63 79 | 413 488 500 499 ---------- ---------- | ---------- ---------- ---------- ---------- Total Retail 10,057 1,565 | 7,632 8,724 8,586 8,365 Total Wholesale 1,617 435 | 2,218 2,330 2,563 2,548 ---------- ---------- | ---------- ---------- ---------- ---------- Total 11,674 2,000 | 9,850 11,054 11,149 10,913 ========== ========== | ========== ========== ========== ========== CUSTOMERS SERVED (Year-End): | Residential 265,237 262,501 | 261,541 260,007 256,998 Commercial 31,982 29,367 | 27,411 26,508 25,921 Industrial 1,954 1,835 | 1,839 1,846 1,839 Other 359 347 | 2,136 2,119 1,858 ---------- ---------- | --------- ---------- ---------- Total 299,532 294,050 | 292,927 290,480 286,616 ========== ========== | ========= ========== ========== | Average Annual Residential kWh Usage 8,554 7,937 | 8,284 8,384 8,044 Peak Load-Megawatts 1,978 1,813 | 1,758 1,738 1,620 Number of Employees (Year-End) 997 1,532 | 1,643 1,809 1,887
THE TOLEDO EDISON COMPANY 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 that 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, and the availability and cost of capital and other similar factors. Results of Operations We continued to take steps in 1998 to better position our Company as competition continues to expand in the electric utility industry. Investments were made in new information systems with enhanced functionality which also address Year 2000 application deficiencies. We also contributed to the 1998 cash savings of FirstEnergy Corp. (FirstEnergy) totaling $173 million. These savings were captured from initiatives implemented during the year in connection with merger- related economies made possible by FirstEnergy's formation through the merger of our former parent company, Centerior Energy Corporation, and Ohio Edison Company on November 8, 1997. Financial results reflect the application of purchase accounting to the merger. 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 our financial statements. As a result, we recorded purchase accounting fair value adjustments to: (1) revalue our nuclear generating units to fair value, (2) adjust long-term debt to fair value, (3) adjust our retirement and severance benefit liabilities, and (4) record goodwill. Accordingly, the post-merger financial statements reflect a new basis of accounting, and separate financial statements are presented for the pre-merger and post-merger periods. For the remainder of this discussion, for categories substantially unaffected by the merger and with no significant pre- merger or post-merger accounting events, we have combined the 1997 pre- merger and post-merger periods and have compared the total for 1997 to 1998 and 1996. Earnings on common stock were $93.0 million in 1998. Results for 1998 were adversely affected by sharp increases in the spot market price for electricity occasioned by a constrained power supply and heavy customer demand in the latter part of June 1998, combined with unscheduled generating unit outages, which resulted in spot market purchases of power at prices which substantially exceeded amounts recovered from retail customers. Pre-merger earnings on common stock in 1997 included an October 1997 write-off of certain regulatory assets. Excluding this write-off, pre-merger earnings on common stock were $22.3 million. For the seven-week post-merger period, earnings on common stock were $7.6 million. Earnings on common stock were $40.4 million in 1996. After experiencing a decline in operating revenues in 1997, compared to the previous year, we achieved record operating revenues in 1998. The following table summarizes the sources of changes in operating revenues for 1998 and 1997 as compared to the prior year:
1998 1997 ---- ---- (In millions) Increase in retail kilowatt-hour sales $68.2 $ 14.4 Decrease in average retail price (8.8) (23.4) Wholesale sales (6.6) 7.8 Other 8.9 (0.7) - --------------------------------------------------------------- Net Change $61.7 $ (1.9) ===============================================================
Total kilowatt-hour sales were down in 1998 from the prior year after establishing a new record high in 1997. The decline was due to a 39.1% decrease in sales to wholesale customers. Several generating unit outages, described later in this report, reduced energy available for sale to the wholesale market. Retail sales were up for all customer groups; residential, commercial and industrial with increases of 8.6%, 9.5% and 9.6%, respectively, compared to 1997. Retail kilowatt-hour sales benefited from growth in the customer base, which added almost 5,500 new customers during the year. Expanded production at the new North Star BHP Steel (North Star) facility was a major contributor to the increase in industrial kilowatt-hour sales. In 1997, North Star was also a major contributor to industrial sales, which experienced a 12.8% increase, compared to 1996. This increase was offset in part by reduced kilowatt-hour sales to residential and commercial customers, which declined 3.3% and 0.5%, respectively. Operation and maintenance expenses increased in 1998 compared to the prior year due to increased fuel and purchased power costs, offset in part by a decrease in nuclear operating costs. Most of the increase in fuel and purchased power occurred in the second quarter and resulted from a combination of factors. In late June 1998, the midwestern and southern regions of the United States experienced electricity shortages caused mainly by record temperatures and humidity and unscheduled generating unit outages. During this period, Beaver Valley Unit 2 was out of service and the Davis-Besse Plant was removed from service as a result of damage to transmission facilities caused by a tornado. As a result, we purchased significant amounts of power on the spot market at unusually high prices, causing the increase in purchased power costs. An increase in purchased power costs also contributed to the 1997 increase in fuel and purchased power costs, compared to 1996, which was offset in part by lower fuel costs caused by an increase in the mix of nuclear generation to coal-fired generation. Nuclear operating costs were lower in 1998, compared to 1997, reflecting a decrease in costs at the Perry Plant offset in part by higher costs at the Beaver Valley and Davis-Besse plants. Nuclear operating costs in 1997 were relatively unchanged from 1996 with increased operating costs at the Beaver Valley Plant substantially offset by lower operating costs at the Perry and Davis-Besse plants. Other operating costs were higher in 1997 than the previous year principally due to a $9.3 million severance and early retirement charge in the 1997 pre-merger period. In 1998, other operating costs increased slightly, compared to 1997, despite the absence of the severance and early retirement charge recorded in 1997 primarily due to increased fossil plant costs. Lower depreciable asset balances resulting from the purchase accounting adjustment reduced depreciation in the 1998 and 1997 post- merger period. These reductions were partially offset by the amortization of goodwill recognized with the application of purchase accounting. Depreciation in the 1997 pre-merger period increased principally due to changes in depreciation rates approved in the April 1996 Public Utilities Commission of Ohio (PUCO) rate order. Interest income on trust notes acquired in connection with the Bruce Mansfield Plant lease refinancing (see Note 2), which began in June 1997, was the principal cause of an increase in other income in 1998 and the 1997 post-merger period. In the pre-merger period of 1997, interest income on the trust notes was substantially offset by merger- related expenses. Total interest charges decreased in 1998 principally due to the amortization of net premiums associated with the revaluation of long-term debt in connection with the merger, which also contributed to the decrease in interest charges in the post-merger period of 1997. In the pre-merger period of 1997, interest charges were higher because interest on new secured notes and short-term borrowings for the Bruce Mansfield Plant lease refinancing exceeded the expense reduction from the redemption and refinancing of debt securities. Preferred stock dividend requirements in 1998 were reduced by $3 million and in 1997 were increased by $3 million due to the declaration of preferred dividends as of the merger date for dividends attributable to the post-merger period (see Note 3c). Capital Resources and Liquidity We continue to actively pursue economic refinancings and optional redemptions to reduce the cost of debt and preferred stock, and improve our financial position. In 1998, we completed $26 million of optional redemptions. We reduced total debt by approximately $66 million during 1998. Our common stockholder's equity percentage of capitalization increased to 31% at December 31, 1998 from 27% at the end of the previous year. The merger resulted in improved credit ratings in 1997, which have lowered the cost of new issues. The following table summarizes changes in credit ratings resulting from the merger:
Pre-Merger Post-Merger ------------------------- -------------------------- Standard Moody's Standard Moody's & Poor's Investors & Poor's Investors Corporation Service, Inc. Corporation Service, Inc. ----------- ------------- ----------- ------------- First mortgage bonds BB Ba2 BB+ Ba1 Subordinated debt B+ B1 BB- Ba3 Preferred Stock B b2 BB- b1
Excluding the effect of the Bruce Mansfield Plant lease refinancing, interest costs on long-term debt were reduced by approximately $4 million in 1998, compared to 1997. Through economic refinancings and redemptions of higher cost debt we have reduced the average cost of outstanding debt from 9.19% in 1993 to 8.25% in 1997 and 8.08% in 1998. We continue to streamline our operations, as evidenced by a 50% increase in FirstEnergy's customer/employee ratio, which has increased from 165 at the end of 1993 to 247 as of December 31, 1998. Merger-related savings through consolidation of activities have contributed to these results. Our cash requirements in 1999 for operating expenses, construction expenditures and scheduled debt maturities are expected to be met without issuing additional securities. We have cash requirements of approximately $475.2 million for the 1999-2003 period to meet scheduled maturities of long-term debt and preferred stock. Of that amount, approximately $105.9 million applies to 1999. We had about $105.4 million of cash and temporary investments and no short-term indebtedness on December 31, 1998. Upon completion of the merger, application of purchase accounting reduced bondable property such that we are not currently able to issue additional first mortgage bonds, except in connection with refinancing. Together with The Cleveland Electric Illuminating Company, as of December 31, 1998, we had unused borrowing capability of $100 million under a FirstEnergy revolving line of credit. Our capital spending for the period 1999-2003 is expected to be about $257 million (excluding nuclear fuel), of which approximately $58 million applies to 1999. Investments in additional nuclear fuel during the 1999-2003 period are estimated to be approximately $102 million, of which about $9 million applies to 1999. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $120 million and $26 million, respectively, as the nuclear fuel is consumed. Also, we have operating lease commitments net of trust cash receipts of approximately $360 million for the 1999- 2003 period, of which approximately $70 million relates to 1999. We recover the cost of nuclear fuel consumed and operating leases through our electric rates. Interest Rate Risk Our exposure to fluctuations in market interest rates is mitigated since 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 2, our investment in the Shippingport Capital Trust effectively reduces future lease obligations, also reducing interest rate risk. Changes in the market value of our nuclear decommissioning trust funds are recognized by making a corresponding change to the decommissioning liability, as described in Note 1. 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.
- ---------------------------------------------------------------------------------------------------- There- Fair 1999 2000 2001 2002 2003 after Total Value (Dollars in Millions) - --------------------------------------------------------------------------------------------------- Investments other than Cash and Cash Equivalents: Fixed Income $ 15 $ 15 $17 $ 20 $19 $241 $ 327 $ 334 Average interest rate 7.6% 7.6% 7.6% 7.6% 7.6% 7.3% 7.4% - --------------------------------------------------------------------------------------------------- Liabilities - --------------------------------------------------------------------------------------------------- Long-term Debt: Fixed rate $104 $ 76 $30 $165 $98 $594 $1,067 $1,143 Average interest rate 7.4% 7.3% 9.2% 8.6% 7.9% 7.8% 7.9% Variable rate $ 31 $ 31 $ 31 Average interest rate 3.1% 3.1% - --------------------------------------------------------------------------------------------------- Preferred Stock $ 2 $ 2 $ 2 Average dividend rate 9.4% 9.4% - ---------------------------------------------------------------------------------------------------
Outlook We face many competitive challenges in the years ahead as the electric utility industry undergoes significant changes, including regulation and the entrance of more energy suppliers into the marketplace. Retail wheeling, which would allow retail customers to purchase electricity from other energy producers, will be one of those challenges. The FirstEnergy Rate Reduction and Economic Development Plan provides the foundation to position us to meet the challenges we are facing by significantly reducing fixed costs and lowering rates to a more competitive level. The plan was approved by the PUCO in January 1997, and initially maintains current base electric rates through December 31, 2005. The plan also revised our fuel recovery method. As part of the regulatory plan, the base rate freeze is to be followed by a $93 million base rate reduction in 2006; interim reductions which began in June 1998 of $3 per month will increase to $5 per month per residential customer by July 1, 2001. Total savings of $111 million are anticipated over the term of the plan for our customers. We have committed $35 million for economic development and energy efficiency programs. We have been authorized by the PUCO to recognize, for regulatory accounting purposes, additional depreciation related to our generating assets and additional amortization of regulatory assets during the regulatory plan period of at least $647 million more than the amounts that would have been recognized if the regulatory plans were not in effect. For regulatory purposes these additional charges will be reflected over the rate plan period. Our regulatory plan does not provide for full recovery of nuclear operations. Accordingly, regulatory assets representing customer receivables for future income taxes related to nuclear assets of $295 million were written off ($192 million net of income taxes) prior to consummation of the merger since we ceased application of Statement of Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation" for our nuclear operations when implementation of the FirstEnergy regulatory plan became probable. Based on the current regulatory environment and our regulatory plan, we believe we will continue to be able to bill and collect cost-based rates relating to our nonnuclear operations. As a result, we will continue the application of SFAS 71. However, changes in the regulatory environment appear to be on the horizon for electric utilities in Ohio. As further discussed below, the Ohio legislature is in the discussion stages of restructuring the State's electric utility industry. Although we believe that regulatory changes are possible in 1999, we cannot currently estimate the ultimate impact. At the consummation of the merger in November 1997, we recognized a fair value purchase accounting adjustment, which decreased the carrying value of our nuclear assets by approximately $842 million based upon cash flow models. The fair value adjustment to nuclear plant recognized for financial reporting purposes will ultimately satisfy the asset reduction commitment contained in our regulatory plan. We continue to actively pursue the enactment of fair legislation calling for deregulation of Ohio's investor-owned electric utility industry. In early 1998, a deregulation proposal was introduced, leading to the creation of a working group to recommend legislation. As requested by legislative leadership, investor-owned utilities introduced a deregulation plan with objectives to (1) treat all major stakeholders in Ohio's electric system fairly; (2) protect public schools and local governments from revenue loss; and (3) allow utilities an opportunity to recover costs of government-mandated investments. The utilities have submitted proposals, which incorporate these objectives and also recognize the complexity of restructuring the industry. The overlying objective is to do the job right the first time. Currently, the working group, comprised of legislative leaders, representatives of the electric utility companies and other interested stakeholders are meeting to discuss and mold these proposals. Most recently, placeholder bills containing statements of principle (that will be replaced by specific proposals as they are agreed upon) have been introduced. Legislative leaders have placed a high priority on enacting a deregulation bill by mid-year. The Clean Air Act Amendments of 1990, discussed in Note 5, require additional emission reductions by 2000. We are pursuing cost- effective compliance strategies for meeting these reduction requirements. On September 24, 1998, the Federal Environmental Protection Agency issued a final rule establishing tighter nitrogen oxide emission requirements for fossil fuel-fired utility boilers in Ohio, Pennsylvania and twenty other eastern states, including the District of Columbia (see "Environmental Matters" in Note 5). Controls must be in place by May 2003, with required reductions achieved during the five-month summer ozone season (May through September). The new rule is expected to increase the cost of producing electricity; however, we believe that we are in a better position than a number of other utilities to achieve compliance due to our nuclear generation capacity. We are aware of our potential involvement in the cleanup of several sites containing hazardous waste. Although these sites are not on the Superfund National Priorities List, they are generally being administered by various governmental entities in the same manner as they would be administered if they were on such a list. Allegations that we disposed of hazardous waste at these sites, and the amount involved are often unsubstantiated and subject to dispute. Federal law provides that all "potentially responsible parties" for a particular site be held liable on a joint and several basis. If we were held liable for 100% of the cleanup costs of all the sites referred to above, the cost could be as high as $101 million. However, we believe that the actual cleanup costs will be substantially less than 100% and that most of the other parties involved are financially able to contribute their share. We have accrued a $1.1 million liability as of December 31, 1998, based on estimates of the costs of cleanup and our proportionate responsibility for such costs. We believe that the ultimate outcome of these matters will not have a material adverse effect on our financial condition, cash flows or results of operations. In connection with FirstEnergy's regulatory plan to reduce fixed costs and lower rates, we continue to take steps to restructure our operations. FirstEnergy announced plans to transfer our transmission assets into a new subsidiary, American Transmission Systems, Inc., with the transfer expected to be finalized in 1999. The new subsidiary represents a first step toward the goal of establishing or becoming part of a larger independent transmission company (TransCo). We believe that a TransCo better addresses the Federal Energy Regulatory Commission's (FERC) stated transmission objectives of providing non-discriminatory service, while providing for streamlined and cost-efficient operation. In working toward the goal of forming a larger regional transmission entity, FirstEnergy, American Electric Power, Virginia Power and Consumers Energy announced in November 1998 that they would prepare a FERC filing during 1999 for such a regional transmission entity. The entity would be designed to meet the goals of reducing transmission costs that result when transferring power over several transmission systems, ensuring transmission reliability and providing non-discriminatory access to the transmission grid. Year 2000 Readiness 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. Because so many of our computer functions are date sensitive, this could cause far-reaching problems, such as system- wide computer failures and miscalculations, if no remedial action is taken. We have developed a multi-phase program for Year 2000 compliance that consists of an assessment of our systems and operations that could be affected by the Year 2000 problem; remediation or replacement of noncompliant systems and components; and testing of systems and components following such remediation or replacement. We have focused our Year 2000 review on three areas: centralized system applications, noncentralized systems and relationships with third parties (including suppliers as well as end- use customers). Our review of system readiness extends to systems involving customer service, safety, shareholder needs and regulatory obligations. We are committed to taking appropriate actions to eliminate or lessen negative effects of the Year 2000 issue on our operations. We have completed an inventory of all computer systems and hardware including equipment with embedded computer chips and have determined which systems need to be converted or replaced to become Year 2000-ready and are in the process of remediating them. Based on our timetable, we expect to have all identified repairs, replacements and upgrades completed to achieve Year 2000 readiness by September 1999. Most of our Year 2000 issues will be resolved through system replacement. Of our major centralized systems, the general ledger system and inventory management, procurement and accounts payable systems were replaced at the end of 1998. Our payroll system was enhanced to be Year 2000 compliant in July 1998. The customer service system is due to be replaced in mid-1999. We have completed formal communications with most of our key suppliers to determine the extent to which we are vulnerable to those third parties' failure to resolve their own Year 2000 problems. For suppliers having potential compliance problems, we are developing alternate sources and services in the event such noncompliance occurs. We are also identifying areas requiring higher inventory levels based on compliance uncertainties. There can be no guarantee that the failure of companies to resolve their own Year 2000 issue will not have a material adverse effect on our business, financial condition and results of operations. We are using both internal and external resources to reprogram and/or replace and test our software for Year 2000 modifications. Of the $17 million total project cost, approximately $14 million will be capitalized since those costs are attributable to the purchase of new software for total system replacements because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $3 million will be expensed as incurred. As of December 31, 1998, we have spent $11 million for Year 2000 capital projects and had expensed approximately $2 million for Year 2000-related maintenance activities. Our total Year 2000 project cost, as well as our estimates of the time needed to complete remedial efforts, are based on currently available information and do not include the estimated costs and time associated with the impact of third party Year 2000 issues. We believe we are managing the Year 2000 issue in such a way that our customers will not experience any interruption of service. We believe the most likely worst-case scenario from the Year 2000 issue will be disruption in power plant monitoring systems, thereby producing inaccurate data and potential failures in electronic switching mechanisms at transmission junctions. This would prolong localized outages, as technicians would have to manually activate switches. Such an event could have a material, but currently undeterminable, effect on our financial results. We are developing contingency plans to address the effects of any delay in becoming Year 2000 compliant and expect to have contingency plans completed by June 1999. The costs of the project and the dates 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. THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME
For the Year For the Year Ended Ended December 31, Nov. 8 - Jan. 1 - December 31, 1998 Dec. 31, 1997 Nov. 7, 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- (In thousands) | OPERATING REVENUES (1) $957,037 $122,669 | $ 772,707 $897,259 | OPERATING EXPENSES AND TAXES: | Fuel and purchased power 202,239 22,926 | 158,027 177,517 Nuclear operating costs 160,080 29,372 | 138,559 168,458 Other operating costs 166,935 20,608 | 145,174 157,785 -------- -------- | --------- -------- Total operation and maintenance expenses 529,254 72,906 | 441,760 503,760 Provision for depreciation and amortization 94,703 13,133 | 98,986 115,083 General taxes 86,661 13,126 | 77,426 89,647 Income taxes 66,158 4,449 | 31,253 31,954 -------- -------- | --------- -------- Total operating expenses and taxes 776,776 103,614 | 649,425 740,444 -------- -------- | --------- -------- OPERATING INCOME 180,261 19,055 | 123,282 156,815 | OTHER INCOME (EXPENSE) 12,225 2,153 | 2,153 (4,585) -------- -------- | --------- -------- INCOME BEFORE NET INTEREST CHARGES 192,486 21,208 | 125,435 152,230 -------- -------- | --------- -------- NET INTEREST CHARGES: | Interest on long-term debt 88,364 13,689 | 74,264 85,535 Allowance for borrowed funds used during | construction (1,273) (138) | (259) (827) Other interest expense (1,187) 41 | 9,661 10,233 -------- -------- | -------- -------- Net interest charges 85,904 13,592 | 83,666 94,941 -------- -------- | -------- -------- INCOME BEFORE EXTRAORDINARY ITEM 106,582 7,616 | 41,769 57,289 | EXTRAORDINARY ITEM (NET OF INCOME | TAXES) (Note 1) -- -- | (191,901) -- -------- -------- | --------- -------- NET INCOME (LOSS) 106,582 7,616 | (150,132) 57,289 | PREFERRED STOCK DIVIDEND | REQUIREMENTS 13,610 -- | 19,435 16,926 -------- -------- | --------- -------- EARNINGS (LOSS) ON COMMON STOCK $ 92,972 $ 7,616 | $(169,567) $ 40,363 ======== ======== | ========= ======== (1) Includes electric sales to associated companies of $123.6 million, $17.7 million, $98.5 million and $105.0 million in 1998, the November 8-December 31, 1997 period, the January 1-November 7, 1997 period and 1996, respectively. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE TOLEDO EDISON COMPANY CONSOLIDATED BALANCE SHEETS
At December 31, 1998 1997 - ------------------------------------------------------------------------------------ (In thousands) ASSETS UTILITY PLANT: In service $1,757,364 $1,763,495 Less--Accumulated provision for depreciation 626,942 619,222 ---------- ---------- 1,130,422 1,144,273 ---------- ---------- Construction work in progress-- Electric plant 26,603 19,901 Nuclear fuel 11,191 6,632 ---------- ---------- 37,794 26,533 ---------- ---------- 1,168,216 1,170,806 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust (Note 2) 310,762 312,873 Nuclear plant decommissioning trusts 102,749 85,956 Other 3,656 3,164 ---------- ---------- 417,167 401,993 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 4,140 22,170 Receivables-- Customers 36,710 19,071 Associated companies 30,006 15,199 Other 2,316 2,593 Notes receivable from associated companies 101,236 40,802 Materials and supplies, at average cost-- Owned 25,745 31,892 Under consignment 18,148 9,538 Prepayments and other 25,647 26,437 ---------- ---------- 243,948 167,702 ---------- ---------- DEFERRED CHARGES: Regulatory assets 417,704 442,724 Goodwill 474,593 514,462 Property taxes 42,842 45,338 Other 4,295 15,127 ---------- ---------- 939,434 1,017,651 ---------- ---------- $2,768,765 $2,758,152 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Consolidated Statements of Capitalization): Common stockholder's equity $ 575,692 $ 531,650 Preferred stock-- Not subject to mandatory redemption 210,000 210,000 Subject to mandatory redemption -- 1,690 Long-term debt 1,083,666 1,210,190 ---------- ---------- 1,869,358 1,953,530 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 130,426 69,979 Accounts payable-- Associated companies 34,260 21,173 Other 61,587 60,756 Accrued taxes 62,288 34,441 Accrued interest 24,965 26,633 Other 14,862 22,603 ---------- ---------- 328,388 235,585 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 151,321 104,543 Accumulated deferred investment tax credits 40,670 43,265 Pensions and other postretirement benefits 122,314 113,254 Other 256,714 307,975 ---------- ---------- 571,019 569,037 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 2 and 5) ---------- --------- $2,768,765 $2,758,152 ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) COMMON STOCKHOLDER'S EQUITY: Common stock, $5 par value, authorized 60,000,000 shares- 39,133,887 shares outstanding $ 195,670 $ 195,670 Premium on capital stock 328,559 328,364 Retained earnings (Note 3A) 51,463 7,616 ---------- ---------- Total common stockholder's equity 575,692 531,650 ---------- ---------- Number of Shares Optional Outstanding Redemption Price ------------------ ---------------------- 1998 1997 Per Share Aggregate ---- ---- --------- --------- PREFERRED STOCK (Note 3C): Cumulative, $100 par value- Authorized 3,000,000 shares Not Subject to Mandatory Redemption: $ 4.25 160,000 160,000 $104.63 $ 16,740 16,000 16,000 $ 4.56 50,000 50,000 101.00 5,050 5,000 5,000 $ 4.25 100,000 100,000 102.00 10,200 10,000 10,000 $ 8.32 100,000 100,000 102.46 10,246 10,000 10,000 $ 7.76 150,000 150,000 102.44 15,366 15,000 15,000 $ 7.80 150,000 150,000 101.65 15,248 15,000 15,000 $10.00 190,000 190,000 101.00 19,190 19,000 19,000 --------- --------- --------- ---------- ---------- 900,000 900,000 92,040 90,000 90,000 --------- --------- --------- ---------- ---------- Cumulative, $25 par value- Authorized 12,000,000 shares Not Subject to Mandatory Redemption: $ 2.21 1,000,000 1,000,000 25.25 25,250 25,000 25,000 $ 2.365 1,400,000 1,400,000 27.75 38,850 35,000 35,000 Adjustable Series A 1,200,000 1,200,000 25.00 30,000 30,000 30,000 Adjustable Series B 1,200,000 1,200,000 25.00 30,000 30,000 30,000 --------- --------- -------- ---------- ---------- 4,800,000 4,800,000 124,100 120,000 120,000 --------- --------- -------- ---------- ---------- Total not subject to mandatory redemption 5,700,000 5,700,000 $216,140 210,000 210,000 ========= ========= ======== ---------- ---------- Cumulative, $100 par value- Subject to Mandatory Redemption (Note 3D): $9.375. 16,900 33,550 100.00 $ 1,690 1,690 3,355 Redemption within one year (1,690) (1,665) --------- --------- -------- ---------- ---------- Total subject to mandatory redemption 16,900 33,550 $ 1,690 -- 1,690 ========= ========= ======== ---------- ---------- LONG-TERM DEBT (Note 3E): First mortgage bonds: 7.250% due 1999 85,000 85,000 7.500% due 2002 -- 26,000 8.000% due 2003 35,325 35,725 7.875% due 2004 145,000 145,000 ---------- ---------- Total first mortgage bonds 265,325 291,725 ---------- ---------- Unsecured notes and debentures: 5.750% due 1999-2003 3,600 3,900 10.000% due 2000-2010 1,000 1,000 8.700% due 2002 135,000 135,000 ---------- ---------- Total unsecured notes and debentures 139,600 139,900 ---------- ---------- THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont.) At December 31, 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- (In thousands) LONG-TERM DEBT (Cont.): Secured notes: 7.940% due 1998 -- 5,000 8.000% due 1998 -- 7,000 9.300% due 1998 -- 26,000 10.000% due 1998 -- 650 7.720% due 1999 15,000 15,000 8.470% due 1999 3,500 3,500 7.190% due 2000 45,000 45,000 7.380% due 2000 14,000 14,000 7.460% due 2000 16,500 16,500 7.500% due 2000 100 100 8.500% due 2001 8,000 8,000 9.500% due 2001 21,000 21,000 8.180% due 2002 17,000 17,000 8.620% due 2002 7,000 7,000 8.650% due 2002 5,000 5,000 7.760% due 2003 5,000 5,000 7.780% due 2003 1,000 1,000 7.820% due 2003 38,400 38,400 7.850% due 2003 15,000 15,000 7.910% due 2003 3,000 3,000 7.670% due 2004 70,000 70,000 7.130% due 2007 30,000 30,000 3.050% due 2011* 31,250 31,250 8.000% due 2019 67,300 67,300 7.625% due 2020 45,000 45,000 7.750% due 2020 54,000 54,000 9.220% due 2021 15,000 15,000 10.000% due 2021 15,000 15,000 7.400% due 2022 30,900 30,900 6.875% due 2023 20,200 20,200 7.550% due 2023 37,300 37,300 8.000% due 2023 49,300 49,300 6.100% due 2027 10,100 10,100 5.375% due 2028 3,751 -- ---------- ---------- Total secured notes 693,601 728,500 ---------- ---------- Capital lease obligations (Note 2) 67,453 64,843 ---------- ---------- Net unamortized premium on debt 46,423 53,536 ---------- ---------- Long-term debt due within one year (128,736) (68,314) ---------- ---------- Total long-term debt 1,083,666 1,210,190 ---------- ---------- TOTAL CAPITALIZATION $1,869,358 $1,953,530 ========== ========== *Denotes variable rate issue with December 31, 1998 interest rate shown. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
Comprehensive Premium Other Retained Income (Loss) Number Par on Capital Paid-In Earnings (Note 3B) of Shares Value Stock Capital (Deficit) ------------ --------- ------- ---------- -------- --------- (Dollars in thousands) Balance, January 1, 1996 39,133,887 $195,687 $ 481,057 $ 121,059 $ (34,926) Net income $ 57,289 57,289 ========= Unrealized loss on securities (3) Cash dividends on preferred stock (16,926) - --------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 39,133,887 195,687 481,057 121,056 5,437 Net (loss) $(150,132) (150,132) ========= Cash dividends on preferred stock (20,973) - --------------------------------------------------------------------------------------------------------------------------- Purchase accounting fair value adjustment (17) (152,693) (121,056) 165,668 Net income $ 7,616 7,616 ========= - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 39,133,887 195,670 328,364 -- 7,616 Purchase accounting fair value adjustment 195 Net income $ 106,582 106,582 ========= Cash dividends on preferred stock (12,252) Cash dividends on common stock (50,483) - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 39,133,887 $195,670 $ 328,559 $ -- $ 51,463 =============================================================================================================================
CONSOLIDATED STATEMENTS OF PREFERRED STOCK
Not Subject to Subject to Mandatory Redemption Mandatory Redemption -------------------- -------------------- Number Par Number Par of Shares Value of Shares Value --------- --------- ----------- ------- (Dollars in thousands) Balance, January 1, 1996 5,700,000 $210,000 66,850 $ 6,685 Redemptions- $100 par $9.375 (16,650) (1,665) --------------------------------------------------------------------------------------------- Balance, December 31, 1996 5,700,000 210,000 50,200 5,020 Redemptions- $100 par $9.375 (16,650) (1,665) --------------------------------------------------------------------------------------------- Balance, December 31, 1997 5,700,000 210,000 33,550 3,355 Redemptions- $100 par $9.375 (16,650) (1,665) --------------------------------------------------------------------------------------------- Balance, December 31, 1998 5,700,000 $210,000 16,900 $ 1,690 ============================================================================================= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year For the Year Ended Ended December 31, Nov. 8 - Jan. 1 - December 31, 1998 Dec. 31, 1997 Nov. 7, 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: | Net Income (Loss) $ 106,582 $ 7,616 | $(150,132) $ 57,289 Adjustments to reconcile net income to net | cash from operating activities: | Provision for depreciation and amortization 94,703 13,133 | 98,986 115,083 Nuclear fuel and lease amortization 24,071 5,316 | 30,354 33,294 Deferred income taxes, net 50,570 3,113 | (121,002) 17,919 Investment tax credits, net (2,595) (400) | (3,601) (4,321) Allowance for equity funds used during construction -- (61) | (776) (1,045) Extraordinary item -- -- | 295,233 -- Receivables (32,169) 1,923 | 317 (9,610) Net proceeds from accounts receivable securitization -- -- | -- 78,461 Materials and supplies (2,463) (4,430) | 6,543 5,697 Accounts payable 31,871 (12,989) | 18,679 (9,737) Other (8,140) (29,443) | 55,233 (1,509) --------- -------- | --------- --------- Net cash provided from (used for) operating | activities 262,430 (16,222) | 229,834 281,521 --------- -------- | --------- --------- | CASH FLOWS FROM FINANCING ACTIVITIES: | New Financing-- | Long-term debt 3,629 -- | 149,804 (260) Redemptions and Repayments-- | Preferred stock 1,665 -- | 1,665 1,665 Long-term debt 90,929 -- | 85,419 110,108 Short-term borrowings, net -- -- | -- 20,950 Dividend Payments-- | Common stock 50,483 -- | -- -- Preferred stock 16,378 4,156 | 12,589 16,926 --------- -------- | --------- --------- Net cash provided from (used for) financing | activities (155,826) (4,156) | 50,131 (149,909) --------- -------- | --------- --------- | CASH FLOWS FROM INVESTING ACTIVITIES: | Property additions 45,870 6,568 | 36,680 47,961 Loans to associated companies 60,434 -- | -- 81,817 Loan payments from associated companies -- (15,297) | (25,718) -- Capital trust investments (2,111) (7,314) | 320,187 -- Other 20,441 (6,585) | 10,350 14,049 --------- -------- | --------- --------- Net cash used for (provided from) investing | activities 124,634 (22,628) | 341,499 143,827 --------- -------- | --------- --------- Net increase (decrease) in cash and cash equivalents (18,030) 2,250 | (61,534) (12,215) Cash and cash equivalents at beginning of period 22,170 19,920 | 81,454 93,669 --------- -------- | --------- --------- Cash and cash equivalents at end of period $ 4,140 $ 22,170 | $ 19,920 $ 81,454 ========= ======== | ========= ========= | SUPPLEMENTAL CASH FLOWS INFORMATION: | Cash Paid During the Period-- | Interest (net of amounts capitalized) $ 94,000 $ 16,000 | $ 73,000 $ 92,000 ========= ======== | ========= ========= Income taxes $ 6,935 $ 28,000 | $ 25,300 $ 15,950 ========= ======== | ========= ========= The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF TAXES
For the Year For the Year Ended Ended December 31, Nov. 8 - Jan. 1 - December 31, 1998 Dec. 31, 1997 Nov. 7, 1997 1996 - -------------------------------------------------------------------------------------------------------- (In thousands) GENERAL TAXES: | Real and personal property $ 44,993 $ 5,998 | $ 40,495 $ 45,446 State gross receipts 35,114 5,826 | 28,590 33,793 Social security and unemployment 5,065 818 | 4,444 5,689 Other 1,489 484 | 3,897 4,719 -------- --------- | --------- -------- Total general taxes $ 86,661 $ 13,126 | $ 77,426 $ 89,647 ======== ========= | ========= ======== PROVISION FOR INCOME TAXES: | Currently payable-- | Federal $ 22,767 $ 2,859 | $ 55,192 $ 13,582 State * 1,954 209 | -- -- -------- --------- | --------- -------- 24,721 3,068 | 55,192 13,582 -------- --------- | --------- -------- Deferred, net-- | Federal 50,337 3,096 | (121,002) 17,919 State * 233 17 | -- -- -------- --------- | --------- -------- 50,570 3,113 | (121,002) 17,919 -------- --------- | --------- -------- Investment tax credit amortization (2,595) (400) | (3,601) (4,321) -------- --------- | --------- -------- Total provision for income taxes $ 72,696 $ 5,781 | $ (69,411) $ 27,180 ======== ========= | ========= ======== INCOME STATEMENT CLASSIFICATION | OF PROVISION FOR INCOME TAXES: | Operating income $ 66,158 $ 4,449 | $ 31,253 $ 31,954 Other income 6,538 1,332 | 2,667 (4,774) Extraordinary item -- -- | (103,331) -- -------- --------- | --------- -------- Total provision for income taxes $ 72,696 $ 5,781 | $ (69,411) $ 27,180 ======== ========= | ========= ======== RECONCILIATION OF FEDERAL INCOME TAX | EXPENSE AT STATUTORY RATE TO TOTAL | PROVISION FOR INCOME TAXES: | Book income before provision for income taxes $179,278 $ 13,397 | $(219,543) $ 84,469 ======== ========= | ========= ======== Federal income tax expense at statutory rate $ 62,747 $ 4,689 | $ (76,840) $ 29,564 Increases (reductions) in taxes resulting | from-- | Amortization of investment tax credits (2,595) (400) | (3,601) (4,321) Depreciation -- -- | 3,428 (3,742) Amortization of tax regulatory assets 5,728 955 | -- -- Amortization of goodwill 4,421 670 | -- -- Other, net 2,395 (133) | 7,602 5,679 -------- --------- | --------- -------- Total provision for income taxes $ 72,696 $ 5,781 | $ (69,411) $ 27,180 ======== ========= | ========= ======== ACCUMULATED DEFERRED INCOME TAXES | AT DECEMBER 31: | Property basis differences $195,948 $ 190,636 | $612,000 Deferred nuclear expense 79,355 83,052 | 84,000 Deferred sale and leaseback costs (20,623) (17,431) | -- Unamortized investment tax credits (19,515) (20,960) | (44,000) Unused alternative minimum tax credits (66,322) (108,156) | (99,837) Other (17,522) (22,598) | 13,437 -------- --------- | -------- Net deferred income tax liability $151,321 $ 104,543 | $565,600 ======== ========= | ======== * For periods prior to November 8, 1997, state income taxes are included in the General Taxes section above. These amounts are not material and no restatement was made. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements include The Toledo Edison Company (Company) and its 90% owned subsidiary, The Toledo Edison Capital Corporation (TECC). The subsidiary was formed in 1997 to make equity investments in a business trust in connection with the financing transactions related to the Bruce Mansfield Plant sale and leaseback (see Note 2). The Cleveland Electric Illuminating Company (CEI), an affiliate, has a 10% interest in TECC. All significant intercompany transactions have been eliminated. The Company is a wholly owned subsidiary of FirstEnergy Corp. (FirstEnergy). Prior to the merger in November 1997 (see Note 7), the Company and CEI were the principal operating subsidiaries of Centerior Energy Corporation (Centerior). The merger was accounted for using the purchase method of accounting in accordance with generally accepted accounting principles, and the applicable effects were reflected on the separate financial statements of Centerior's direct subsidiaries as of the merger date. Accordingly, the post-merger financial statements reflect a new basis of accounting and pre-merger period and post-merger period financial results (separated by a heavy black line) are presented. The Company follows the accounting policies and practices prescribed by the Public Utilities Commission of Ohio (PUCO) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Certain prior year amounts have been reclassified to conform with the current year presentation. REVENUES- The Company's principal business is providing electric service to customers in northwestern Ohio. The Company's retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service through the end of the year. Receivables from customers include sales to residential, commercial and industrial customers located in the Company's service area and sales to wholesale customers. There was no material concentration of receivables at December 31, 1998 or 1997, with respect to any particular segment of the Company's customers. In May 1996, the Company and CEI began to sell on a daily basis substantially all of their retail customer accounts receivable to Centerior Funding Corporation (Centerior Funding), a wholly owned subsidiary of CEI, under an asset-backed securitization agreement which expires in 2001. In July 1996, Centerior Funding completed a public sale of $150 million of receivables-backed investor certificates in a transaction that qualified for sale accounting treatment. REGULATORY PLAN- FirstEnergy's Rate Reduction and Economic Development Plan for the Company was approved in January 1997, to be effective upon consummation of the merger. The regulatory plan initially maintains current base electric rates for the Company through December 31, 2005. At the end of the regulatory plan period, the Company's base rates will be reduced by $93 million (approximately 15 percent below current levels). The regulatory plan also revised the Company's fuel cost recovery method. The Company formerly recovered fuel-related costs not otherwise included in base rates from retail customers through a separate energy rate. In accordance with the regulatory plan, the Company's fuel rate will be frozen through the regulatory plan period, subject to limited periodic adjustments. As part of the regulatory plan, transition rate credits were implemented for customers, which are expected to reduce operating revenues for the Company by approximately $111 million during the regulatory plan period. All of the Company's regulatory assets related to its nonnuclear operations are being recovered under provisions of the regulatory plan (see "Regulatory Assets"). The Company recognized a fair value purchase accounting adjustment to reduce nuclear plant by $842 million in connection with the FirstEnergy merger (see Note 7); that fair value adjustment recognized for financial reporting purposes will ultimately satisfy the $647 million asset reduction commitment contained in the regulatory plan. For regulatory purposes, the Company will recognize the $647 million of accelerated amortization over the regulatory plan period. Application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), was discontinued in 1997 with respect to the Company's nuclear operations. The Company's net assets included in utility plant relating to the operations for which the application of SFAS 71 was discontinued were $579 million as of December 31, 1998. UTILITY PLANT AND DEPRECIATION- Utility plant reflects the original cost of construction (except for the Company's nuclear generating units which were adjusted to fair value in 1997), including payroll and related costs such as taxes, employee benefits, administrative and general costs, and interest costs. The Company provides for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The annualized composite rate was approximately 3.4% (reflecting the nuclear asset fair value adjustment discussed above) and 2.6% in 1998 and the post-merger period in 1997, respectively. In its April 1996 rate order, the PUCO approved depreciation rates for the Company of 2.95% for nuclear property and 3.13% for nonnuclear property. Annual depreciation expense includes approximately $9.8 million for future decommissioning costs applicable to the Company's ownership interests in three nuclear generating units. The Company's share of the future obligation to decommission these units is approximately $348 million in current dollars and (using a 4.0% escalation rate) approximately $896 million in future dollars. The estimated obligation and the escalation rate were developed based on site specific studies. Payments for decommissioning are expected to begin in 2016, when actual decommissioning work begins. The Company has recovered approximately $91 million for decommissioning through its electric rates from customers through December 31, 1998. If the actual costs of decommissioning the units exceed the funds accumulated from investing amounts recovered from customers, the Company expects that additional amount to be recoverable from its customers. The Company has approximately $102.7 million invested in external decommissioning trust funds as of December 31, 1998. Earnings on these funds are reinvested with a corresponding increase to the decommissioning liability. The Company has also recognized an estimated liability of approximately $8.7 million at December 31, 1998 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 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 subsequently expanded the scope of the proposed standard to include other closure and removal obligations related to long-lived assets. A revised proposal may be issued by the FASB in 1999. COMMON OWNERSHIP OF GENERATING FACILITIES- The Company, CEI, Duquesne Light Company, Ohio Edison Company (OE) and its wholly owned subsidiary, Pennsylvania Power Company (Penn), constitute the Central Area Power Coordination Group (CAPCO). The CAPCO companies own and/or lease, as tenants in common, various power generating facilities. Each of the companies is obligated to pay a share of the costs associated with any jointly owned facility in the same proportion as its interest. The Company's portion of operating expenses associated with jointly owned facilities is included in the corresponding operating expenses on the Consolidated Statements of Income. The amounts reflected on the Consolidated Balance Sheet under utility plant at December 31, 1998 include the following:
Utility Accumulated Construction Ownership/ Plant Provision for Work in Leasehold Generating Units in Service Depreciation Progress Interest - --------------------------------------------------------------------------- (In millions) Bruce Mansfield Units 2 and 3 $ 39.4 $11.1 $ 1.1 18.61% Beaver Valley Unit 2 57.7 3.3 0.7 19.91% Davis-Besse 202.5 4.8 6.2 48.62% Perry 332.7 16.4 4.0 19.91% - ------------------------------------------------------------------------- Total $632.3 $35.6 $12.0 =========================================================================
The Bruce Mansfield Plant and Beaver Valley Unit 2 are being leased through sale and leaseback transactions (see Note 2) and the above-related amounts represent construction expenditures subsequent to the transaction. NUCLEAR FUEL- The Company leases its nuclear fuel and pays for the fuel as it is consumed (see Note 2). The Company amortizes the cost of nuclear fuel based on the rate of consumption. The Company's electric rates include amounts for the future disposal of spent nuclear fuel based upon the payments to the DOE. INCOME TAXES- Details of the total provision for income taxes are shown on the Consolidated Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. The liability method is used to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. Alternative minimum tax credits of $66 million, which may be carried forward indefinitely, are available to reduce future federal income taxes. Since the Company became a wholly owned subsidiary of FirstEnergy on November 8, 1997, the Company is included in FirstEnergy's consolidated federal income tax return. The consolidated tax liability is allocated on a "stand-alone" company basis, with the Company recognizing any tax losses or credits it contributed to the consolidated return. RETIREMENT BENEFITS- Centerior had sponsored jointly with the Company, CEI and Centerior Service Company (Service Company) a noncontributory pension plan (Centerior Pension Plan) which covered all employee groups. Upon retirement, employees receive a monthly pension generally based on the length of service. In 1998, the Centerior Pension Plan was merged into the FirstEnergy pension plans. In connection with the OE-Centerior merger, the Company recorded fair value purchase accounting adjustments to recognize the net gain, prior service cost, and net transition asset (obligation) associated with the pension and postretirement benefit plans. The assets of the pension plans consist primarily of common stocks, United States government bonds and corporate bonds. The Company provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Company pays insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Company. The Company recognizes the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the FirstEnergy plans in 1998 and the former Centerior plans in 1997 and amounts recognized on the Consolidated Balance Sheets as of December 31:
Other Pension Benefits Postretirement Benefits ---------------- ----------------------- 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1* $1,327.5 $395.0 $ 534.1 $ 211.9 Service cost 25.0 13.4 7.5 2.3 Interest cost 92.5 31.5 37.6 16.3 Plan amendments 44.3 7.1 40.1 -- Early retirement program expense -- 27.8 -- -- Actuarial loss 101.6 74.8 10.7 51.9 Benefits paid (90.8) (16.2) (28.7) (15.9) - ----------------------------------------------------------------------------------------------- Benefit obligation as of December 31 1,500.1 533.4 601.3 266.5 - ----------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets as of January 1* 1,542.5 420.8 2.8 -- Actual return on plan assets 231.3 57.3 0.7 -- Company contribution -- -- 0.4 -- Benefits paid (90.8) (16.2) -- -- - ----------------------------------------------------------------------------------------------- Fair value of plan assets as of December 31 1,683.0 461.9 3.9 -- - ----------------------------------------------------------------------------------------------- Funded status of plan* 182.9 (71.5) (597.4) (266.5) Unrecognized actuarial loss (gain) (110.8) 3.0 30.6 -- Unrecognized prior service cost 63.0 -- 27.4 -- Unrecognized net transition obligation (asset) (18.0) -- 129.3 -- - ----------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 117.1 $(68.5) $(410.1) $(266.5) =============================================================================================== Assumptions used as of December 31: Discount rate 7.00% 7.25% 7.00% 7.25% Expected long-term return on plan assets 10.25% 10.00% 10.25% 10.00% Rate of compensation increase 4.00% 4.00% 4.00% 4.00% * 1998 beginning balances represents 1998 merger of Centerior and OE plans into FirstEnergy plans.
The Consolidated Balance Sheet classification of Pensions and Other Postretirement Benefits at December 31, 1998 and 1997 includes the Company's share of the net pension liability of $17.3 million and $18.1 million, respectively; and the Company's share of the accrued postretirement benefit liability of $105.0 million and $95.2 million, respectively. Net pension and other postretirement benefit costs for the three years ended December 31, 1998 (FirstEnergy plans in 1998 and Centerior plans in 1997 and 1996) were computed as follows:
Pension Benefits Other Postretirement Benefits ----------------------------- ------------------------------ 1997 1997 ---------------- ---------------- Nov. 8- | Jan. 1- Nov. 8-| Jan. 1- 1998 Dec. 31 | Nov. 7 1996 1998 Dec. 31| Nov. 7 1996 - ------------------------------------------------|---------------------------------|------------- | (In millions) | | | Service cost $ 25.0 $ 2.3 | $ 11.1 $ 12.6 $ 7.5 $0.5 | $ 1.8 $ 2.1 Interest cost 92.5 6.1 | 25.4 27.9 37.6 2.8 | 13.5 17.8 Expected return on plan assets (152.7) (7.7) | (38.0) (43.0) (0.3) -- | -- -- Amortization of transition | | obligation (asset) (8.0) -- | (3.0) (3.5) 9.2 -- | 6.4 7.5 Amortization of prior service | | cost 2.3 -- | 1.1 1.3 (0.8) -- | -- -- Recognized net actuarial loss | | (gain) (2.6) -- | (0.5) (2.7) -- -- | (0.9) -- Voluntary early retirement | | program expense -- 23.0 | 4.8 -- -- -- | -- -- - ------------------------------------------------|---------------------------------|------------- Net benefit cost $ (43.5) $23.7 | $ 0.9 $ (7.4) $53.2 $3.3 | $20.8 $27.4 ================================================|=================================|============= Company's share of total plan | | costs $ (1.1) $ 5.7 | $ 3.5 $ (2.4) $ 7.5 $1.5 | $ 8.9 $ 9.0 - ------------------------------------------------------------------------------------------------
The FirstEnergy plans' health care trend rate assumption is 5.5% in the first year gradually decreasing to 4.0% for the year 2008 and later. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. An increase in the health care trend rate assumption by one percentage point would increase the total service and interest cost components by $4.0 million and the postretirement benefit obligation by $68.1 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $3.2 million and the postretirement benefit obligation by $55.2 million. TRANSACTIONS WITH AFFILIATED COMPANIES- Operating revenues, operating expenses and interest charges include amounts for transactions with affiliated companies in the ordinary course of business operations. The Company's transactions with CEI and the other FirstEnergy operating subsidiaries (OE and Penn) from the November 8, 1997 merger date are primarily for firm power, interchange power, transmission line rentals and jointly owned power plant operations and construction (see Note 7). Beginning in May 1996, Centerior Funding began serving as the transferor in connection with the accounts receivable securitization for the Company and CEI. The Service Company (formerly a wholly owned subsidiary of Centerior and now a wholly owned subsidiary of FirstEnergy) provided support services at cost to the Company and other affiliated companies. The Service Company billed the Company $39.0 million, $13.9 million, $51.5 million and $59.8 million in 1998, the November 8-December 31, 1997 period, the January 1-November 7, 1997 period and 1996, respectively, for such services. SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets. The Company reflects temporary cash investments at cost, which approximates their fair market value. Noncash financing and investing activities included capital lease transactions amounting to $28 million, $2 million, $12 million and $32 million in 1998, the November 8-December 31, 1997 period, the January 1-November 7, 1997 period and 1996, respectively. All borrowings with initial maturities of less than one year are defined as financial instruments under generally accepted accounting principles and are reported on the Consolidated Balance Sheets at cost, which approximates their fair market value. The following sets forth the approximate fair value and related carrying amounts of all other long-term debt, preferred stock subject to mandatory redemption and investments other than cash and cash equivalents as of December 31:
1998 1997 - -------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - ------------------------------------------------------------------- (In millions) Long-term debt $1,098 $1,174 $1,160 $1,218 Preferred stock $ 2 $ 2 $ 3 $ 3 Investments other than cash and cash equivalents: Debt securities -(Maturing in more than 10 years) $ 308 $ 301 $ 295 $ 303 Equity securities 3 3 3 3 All other 103 105 86 85 - ------------------------------------------------------------------- $ 414 $ 409 $ 384 $ 391 ====================================================================
The carrying value of long-term debt was adjusted to fair value in connection with the OE-Centerior merger and reflects the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by a corporation with credit ratings similar to the Company's ratings. The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents include decommissioning trusts investments. Unrealized gains and losses applicable to the decommissioning trusts have been recognized in the trust investments with a corresponding change to the decommissioning liability. The other debt and equity securities referred to above are in the held-to-maturity category. The Company has no securities held for trading purposes. REGULATORY ASSETS- The Company recognizes, as regulatory assets, costs which the FERC and PUCO have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets related to nonnuclear operations are being recovered from customers under the Company's regulatory plan. Based on the regulatory plan, at this time, the Company believes it will continue to be able to bill and collect cost-based rates (with the exception of the Company's nuclear operations as discussed below); accordingly, it is appropriate that the Company continues the application of SFAS 71 in the foreseeable future for its nonnuclear operations. The Company discontinued the application of SFAS 71 for its nuclear operations in October 1997 when implementation of the regulatory plan became probable. The regulatory plan does not provide for full recovery of the Company's nuclear operations. In accordance with SFAS No. 101, "Regulated Enterprises -- Accounting for the Discontinuation of Application of SFAS 71," the Company was required to remove from its balance sheet all regulatory assets and liabilities related to the portion of its business for which SFAS 71 was discontinued and to assess all other assets for impairment. Regulatory assets attributable to nuclear operations of $295.2 million ($191.9 million after taxes) were written off as an extraordinary item in October 1997. The regulatory assets attributable to nuclear operations written off represent the net amounts due from customers for future federal income taxes when the taxes become payable, which, under the regulatory plan, are no longer recoverable from customers. The remainder of the Company's business continues to comply with the provisions of SFAS 71. All remaining regulatory assets of the Company will continue to be recovered through rates set for the nonnuclear portion of its business. For financial reporting purposes, the net book value of the nuclear generating units was not impaired as a result of the regulatory plan. Net regulatory assets on the Consolidated Balance Sheets are comprised of the following:
1998 1997 - ---------------------------------------------------------- (In millions) Nuclear unit expenses $200.1 $207.4 Rate stabilization program deferrals 164.1 172.0 Sale and leaseback costs 41.3 40.2 Loss on reacquired debt 20.0 21.1 Other (7.8) 2.0 - ---------------------------------------------------------- Total $417.7 $442.7 ==========================================================
2. LEASES: The Company leases certain generating facilities, nuclear fuel, certain transmission facilities, office space and other property and equipment under cancelable and noncancelable leases. The Company and CEI sold their ownership interests in Bruce Mansfield Units 1, 2 and 3 and the Company sold a portion of its ownership interest in Beaver Valley Unit 2. In connection with these sales, which were completed in 1987, the Company and CEI entered into operating leases for lease terms of approximately 30 years as co- lessees. During the terms of the leases, the Company and CEI continue to be responsible, to the extent of their combined ownership and leasehold interest, for costs associated with the units including construction expenditures, operation and maintenance expenses, insurance, nuclear fuel, property taxes and decommissioning. The Company and CEI have the right, at the end of the respective basic lease terms, to renew the leases. The Company and CEI also have the right to purchase the facilities at the expiration of the basic lease term or renewal term (if elected) at a price equal to the fair market value of the facilities. As co-lessee with CEI, the Company is also obligated for CEI's lease payments. If CEI is unable to make its payments under the Bruce Mansfield Plant lease, the Company would be obligated to make such payments. No such payments have been made on behalf of CEI. (CEI's future minimum lease payments as of December 31, 1998 were approximately $1.1 billion.) The Company is selling 150 megawatts of its Beaver Valley Unit 2 leased capacity entitlement to CEI. Operating revenues for this transaction were $98.5 million, $16.8 million, $87.4 million and $99.4 million in 1998, the November 8-December 31, 1997 period, the January 1-November 7, 1997 period and 1996, respectively. This sale is expected to continue through the end of the lease period. The future minimum lease payments through 2017 associated with Beaver Valley Unit 2 are approximately $1.1 billion. Nuclear fuel is currently financed for the Company and CEI through leases with a special-purpose corporation. As of December 31, 1998, $156 million of nuclear fuel ($67 million for the Company) was financed under a lease financing arrangement totaling $175 million ($60 million of intermediate-term notes and $115 million from bank credit arrangements). The notes mature from 1999 through 2000 and the bank credit arrangements expire in September 2000. Lease rates are based on intermediate-term note rates, bank rates and commercial paper rates. Consistent with the regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Consolidated Statements of Income. Such costs for the three years ended December 31, 1998 are summarized as follows:
Nov. 8 - Jan. 1 - 1998 Dec. 31, 1997 Nov. 7, 1997 1996 - --------------------------------------------------------------------- (In millions) | Operating leases | Interest element $ 59.2 $28.0 | $ 57.4 $ 82.5 Other 44.9 13.5 | 23.1 42.6 Capital leases | Interest element 4.9 1.0 | 6.0 7.5 Other 25.1 5.3 | 30.4 38.6 - ----------------------------------------------|---------------------- Total rentals $134.1 $47.8 | $116.9 $171.2 =====================================================================
The future minimum lease payments as of December 31, 1998 are:
Operating Leases ---------------------------- Capital Lease Capital Leases Payments Trust Net - ------------------------------------------------------------------ (In millions) 1999 $28.7 $ 106.5 $ 36.3 $ 70.2 2000 19.4 104.8 35.4 69.4 2001 12.0 108.0 36.4 71.6 2002 5.8 111.0 37.9 73.1 2003 1.9 111.7 36.0 75.7 Years thereafter 0.4 1,318.4 321.4 997.0 - -------------------------------------------------------------------- Total minimum lease payments 68.2 $1,860.4 $503.4 $1,357.0 ======== ====== ======== Interest portion 8.3 - ----------------------------------- Present value of net minimum lease payments 59.9 Less current portion 24.5 - ----------------------------------- Noncurrent portion $35.4 ===================================
The Company and CEI refinanced high-cost fixed obligations related to their 1987 sale and leaseback transaction for the Bruce Mansfield Plant through a lower cost transaction in June and July 1997. In a June 1997 offering (Offering), the two companies pledged $720 million aggregate principal amount ($145 million for the Company and $575 million for CEI) of first mortgage bonds due in 2000, 2004 and 2007 to a trust as security for the issuance of a like principal amount of secured notes due in 2000, 2004 and 2007. The obligations of the two companies under these secured notes are joint and several. Using available cash, short-term borrowings and the net proceeds from the Offering, the two companies invested $906.5 million ($337.1 million for the Company and $569.4 million for CEI) in a business trust, in June 1997. The trust used these funds in July 1997 to purchase lease notes and redeem all $873.2 million aggregate principal amount of 10-1/4% and 11-1/8% secured lease obligation bonds (SLOBs) due 2003 and 2016. The SLOBs were issued by a special-purpose funding corporation in 1988 on behalf of lessors in the two companies' 1987 sale and leaseback transaction. The Shippingport capital trust arrangement effectively reduce lease costs related to that transaction. 3. CAPITALIZATION: (A) RETAINED EARNINGS- The Company has a provision in its mortgage applicable to $35.325 million of its 8.00% First Mortgage Bonds due 2003 that requires common stock dividends to be paid out of its total balance of retained earnings. The merger purchase accounting adjustments included resetting the retained earnings balance to zero at the November 8, 1997 merger date. (B) COMPREHENSIVE INCOME- In 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income," and applied the standard to all periods presented in the Consolidated Statements of Common Stockholder's Equity. Comprehensive income includes net income as reported on the Consolidated Statements of Income and all other changes in common stockholder's equity except dividends to stockholders. Net income and comprehensive income are the same for each period presented. (C) PREFERRED AND PREFERENCE STOCK- Preferred stock may be redeemed by the Company in whole, or in part, with 30-90 days' notice. The preferred dividend rates on the Company's Series A and Series B fluctuate based on prevailing interest rates and market conditions. The dividend rates for these issues averaged 7.00% and 7.07%, respectively, in 1998. Preference stock authorized for the Company is 5,000,000 shares with a $25 par value. No preference shares are currently outstanding. A liability of $5 million was included in the Company's net assets as of the merger date for preferred dividends declared attributable to the post-merger period. Accordingly, no accrual for preferred stock dividend requirements was included on the Company's November 8, 1997 to December 31, 1997 Consolidated Statement of Income. This liability was subsequently reduced to zero in 1998. (D) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- Annual sinking fund requirements for the next five years consist of $1.7 million in 1999. (E) LONG-TERM DEBT- The first mortgage indenture and its supplements, which secure all of the Company's first mortgage bonds, serve as direct first mortgage liens on substantially all property and franchises, other than specifically excepted property, owned by the Company. Based on the amount of bonds authenticated by the Trustees through December 31, 1998, TE's annual sinking and improvement fund requirements for all bonds issued under the mortgage amounts to $0.4 million. TE expects to deposit funds in 1999 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) - ------------------------------- 1999 $104.2 2000 76.3 2001 29.9 2002 165.4 2003 97.7 - -------------------------------
The Company's obligations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds. One pollution control revenue bond issue is entitled to the benefit of an irrevocable bank letter of credit of $32.1 million. To the extent that drawings are made under this letter of credit to pay principal of, or interest on, the pollution control revenue bonds, the Company is entitled to a credit against its obligation to repay those bonds. The Company pays an annual fee of 1.875% of the amount of the letter of credit to the issuing bank and is obligated to reimburse the bank for any drawings thereunder. The Company and CEI have letters of credit of approximately $225 million in connection with the sale and leaseback of Beaver Valley Unit 2 that expire in June 1999. The letters of credit are secured by first mortgage bonds of the Company and CEI in the proportion of 60% and 40%, respectively (see Note 2). 4. SHORT-TERM BORROWINGS: FirstEnergy has a $100 million revolving credit facility that expires in May 1999. FirstEnergy may borrow under the facility, with all borrowings jointly and severally guaranteed by the Company and CEI. FirstEnergy plans to transfer any of its borrowed funds to the Company and CEI. The credit agreement is secured with first mortgage bonds of the Company and CEI in the proportion of 60% and 40%, respectively. The credit agreement also provides the participating banks with a subordinate mortgage security interest in the properties of the Company and CEI. The banks' fee is 0.50% per annum payable quarterly in addition to interest on any borrowings. There were no borrowings under the facility at December 31, 1998. Also, the Company may borrow from its affiliates on a short-term basis. 5. COMMITMENTS, GUARANTEES AND CONTINGENCIES: CAPITAL EXPENDITURES- The Company's current forecast reflects expenditures of approximately $257 million for property additions and improvements from 1999-2003, of which approximately $58 million is applicable to 1999. Investments for additional nuclear fuel during the 1999-2003 period are estimated to be approximately $102 million, of which approximately $9 million applies to 1999. During the same periods, the Company's nuclear fuel investments are expected to be reduced by approximately $120 million and $26 million, respectively, as the nuclear fuel is consumed. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $9.7 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on its present ownership and leasehold interests in Beaver Valley Unit 2, the Davis-Besse Plant and the Perry Plant, the Company's maximum potential assessment under the industry retrospective rating plan (assuming the other co-owners contribute their proportionate share of any assessments under the retrospective rating plan) would be $77.9 million per incident but not more than $8.8 million in any one year for each incident. The Company is also insured as to its respective interests in Beaver Valley Unit 2, the Davis-Besse Plant and the Perry Plant under policies issued to the operating company for each plant. Under these policies, up to $2.75 billion is provided for property damage and decontamination and decommissioning costs. The Company has also obtained approximately $354 million of insurance coverage for replacement power costs for its respective interests in Beaver Valley Unit 2, Davis-Besse and Perry. Under these policies, the Company can be assessed a maximum of approximately $10.5 million for incidents at any covered nuclear facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses. The Company intends to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at any of the Company's plants exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Company's insurance policies, or to the extent such insurance becomes unavailable in the future, the Company would remain at risk for such costs. GUARANTEE- The Company, together with the other CAPCO companies, has severally guaranteed certain debt and lease obligations in connection with a coal supply contract for the Bruce Mansfield Plant. As of December 31, 1998, the Company's share of the guarantee (which approximates fair market value) was $5.5 million. The price under the coal supply contract, which includes certain minimum payments, has been determined to be sufficient to satisfy the debt and lease obligations. The Company's total payments under the coal supply contract were $32.9 million, $29.9 million and $31.4 million during 1998, 1997 and 1996, respectively. The Company's minimum payment for 1999 is approximately $9 million. The contract expires December 31, 1999. ENVIRONMENTAL MATTERS- Various federal, state and local authorities regulate the Company with regard to air and water quality and other environmental matters. The Company has estimated additional capital expenditures for environmental compliance of approximately $44 million, which is included in the construction forecast provided under "Capital Expenditures" for 1999 through 2003. The Company is in compliance with the current sulfur dioxide (SO2) and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions in 1999 will be achieved by burning lower-sulfur fuel, generating more electricity from lower- emitting plants, and/or purchasing emission allowances. Plans for complying with reductions required for the year 2000 and thereafter have not been finalized. In September 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions from the Company's Ohio and Pennsylvania facilities by May 2003. The EPA's NOx Transport Rule imposes uniform reductions of NOx emissions across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. By September 1999, each of the twenty- two states are required to submit revised State Implementation Plans (SIP) which comply with individual state NOx budgets established by the EPA. These state NOx budgets contemplate an 85% reduction in utility plant NOx emissions from 1990 emissions. A proposed Federal Implementation Plan accompanied the NOx Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In another separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NOx emissions which are alleged to contribute to ozone pollution in the eight petitioning states. The EPA suggests that the Section 126 petitions will be adequately addressed by the NOx Transport Program, but a September 1998 proposed rulemaking established an alternative program which would require nearly identical 85% NOx reductions at the Company's Ohio and Pennsylvania plants by May 2003 in the event implementation of the NOx Transport Rule is delayed. FirstEnergy continues to evaluate its compliance plans and other compliance options and currently estimates its additional capital expenditures for NOx reductions may reach $500 million. The Company is required to meet federally approved SO2 regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $25,000 for each day the unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Company cannot predict what action the EPA may take in the future with respect to 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 Company operates affected facilities. The Company has been named as a "potentially responsible party" (PRP) at waste disposal sites which may require cleanup under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. Allegations that the Company 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. The Company has accrued a liability of $1 million as of December 31, 1998, based on estimates of the costs of cleanup and the proportionate responsibility of other PRPs for such costs. The Company believes that waste disposal costs will not have a material adverse effect on its financial condition, cash flows or results of operations. Legislative, administrative and judicial actions will continue to change the way that the Company must operate in order to comply with environmental laws and regulations. With respect to any such changes and to the environmental matters described above, the Company expects that while it remains regulated, any resulting additional capital costs which may be required, as well as any required increase in operating costs, would ultimately be recovered from its customers. 6. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain consolidated operating results by quarter for 1998 and 1997.
March 31, June 30, September 30, December 31, Three Months Ended 1998 1998 1998 1998 - ------------------------------------------------------------------------------------------- (In millions) Operating Revenues $221.1 $239.7 $253.3 $243.0 Operating Expenses and Taxes 169.1 201.9 202.1 203.7 - ---------------------------------------------------------------------------------------- Operating Income 52.0 37.8 51.2 39.3 Other Income 3.8 3.1 2.7 2.6 Net Interest Charges 21.8 21.8 21.2 21.1 - ---------------------------------------------------------------------------------------- Net Income $ 34.0 $ 19.1 $ 32.7 $ 20.8 ======================================================================================== Earnings on Common Stock $ 32.6 $ 15.0 $ 28.5 $ 16.9 ========================================================================================
Three Months Ended ---------------------------- Mar. 31, June 30, Sept. 30, Oct. 1 - Nov. 8 - 1997 1997 1997 Nov. 7, 1997 Dec. 31, 1997 - -------------------------------------------------------------------------------------------------- (In millions) | | Operating Revenues $217.1 $222.1 $241.3 $ 92.2 | $122.7 Operating Expenses and Taxes 184.7 186.1 191.9 86.7 | 103.6 - ----------------------------------------------------------------------------------|---------- Operating Income 32.4 36.0 49.4 5.5 | 19.1 Other Income (Expense) (0.4) 0.4 5.0 (2.9) | 2.1 Net Interest Charges 23.2 23.3 27.2 10.0 | 13.6 - ----------------------------------------------------------------------------------|---------- Income (Loss) Before Extraordinary | Item 8.8 13.1 27.2 (7.4) | 7.6 Extraordinary Item (Net of Income | Taxes) (Note 1) -- -- -- (191.9) | -- - ----------------------------------------------------------------------------------|---------- Net Income (Loss) $ 8.8 $ 13.1 $ 27.2 $(199.3) | $ 7.6 ==================================================================================|========== Earnings (Loss) on Common Stock $ 4.6 $ 8.9 $ 23.0 $(206.2) | $ 7.6 =============================================================================================
7. PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME (UNAUDITED): FirstEnergy was formed on November 8, 1997 by the merger of OE and Centerior. The merger was accounted for as a purchase of Centerior's net assets with 77,637,704 shares of FirstEnergy Common Stock through the conversion of each outstanding Centerior Common Stock share into 0.525 of a share of FirstEnergy Common Stock (fractional shares were paid in cash). Based on an imputed value of $20.125 per share, the purchase price was approximately $1.582 billion, which also included approximately $20 million of merger related costs. Goodwill of approximately $2.0 billion was recognized (to be amortized on a straight-line basis over forty years), which represented the excess of the purchase price over Centerior's net assets after fair value adjustments. Accumulated amortization of goodwill was approximately $15 million as of December 31, 1998. The merger purchase accounting adjustments included recognizing estimated severance and other compensation liabilities ($24 million). The amount charged against the liability in 1998 relating to the costs of involuntary employee separation was $11 million. The liability was subsequently reduced to zero as of December 31, 1998. The liability adjustment was offset by a corresponding reduction to goodwill recognized in connection with the Centerior acquisition. The following pro forma statements of income for the Company give effect to the OE-Centerior merger as if it had been consummated on January 1, 1996, with the purchase accounting adjustments actually recognized in the business combination.
Year Ended December 31, ----------------------- 1997 1996 - ---------------------------------------------------------- (In millions) Operating Revenues $895 $897 Operating Expenses and Taxes 742 728 ---- ---- Operating Income 153 169 Other Income (Expense) 10 (3) Net Interest Charges 91 89 ---- ---- Net Income $ 72 $ 77 ========================================================
Pro forma adjustments reflected above include: (1) adjusting the Company's nuclear generating units to fair value based upon independent appraisals and estimated discounted future cash flows based on management's estimate of cost recovery; (2) the effect of discontinuing SFAS 71 for the Company's nuclear operations; (3) amortization of the fair value adjustment for long-term debt; (4) goodwill recognized representing the excess of the Company's portion of the purchase price over the Company's adjusted net assets; (5) the elimination of merger costs; and (6) adjustments for estimated tax effects of the above adjustments. 8. PENDING MERGER OF THE COMPANY INTO CEI: In March 1994, Centerior announced a plan to merge the Company into CEI. All necessary regulatory approvals have been obtained, except the approval of the Nuclear Regulatory Commission (NRC). This application was withdrawn at the NRC's request pending the decision whether to complete this merger. No final decision regarding the proposed merger has been reached. In June 1995, the Company's preferred stockholders approved the merger and CEI's preferred stockholders approved the authorization of additional shares of preferred stock. If and when the merger becomes effective, the Company's preferred stockholders will exchange their shares for preferred stock shares of CEI having substantially the same terms. Debt holders of the merging companies will become debt holders of CEI. For the merging companies, the combined pro forma operating revenues were $2.621 billion, $2.527 billion and $2.554 billion and the combined pro forma net income was $272 million, $220 million (excluding the extraordinary item discussed in Note 1 and a similar item for CEI) and $218 million for the years 1998, 1997 and 1996, respectively. The pro forma data is based on accounting for the merger of the Company and CEI on a method similar to a pooling of interests and for 1997 and 1996 includes pro forma adjustments to reflect the effect of the OE -Centerior merger. The pro forma data is not necessarily indicative of the results of operations which would have been reported had the merger been in effect during those years or which may be reported in the future. The pro forma data should be read in conjunction with the audited financial statements of both the Company and CEI. Report of Independent Public Accountants To the Stockholders and Board of Directors of The Toledo Edison Company: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of The Toledo Edison Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income, common stockholder's equity, preferred stock, cash flows and taxes for the year ended December 31, 1996, the period from January 1, 1997 to November 7, 1997 (pre- merger), the period from November 8, 1997 to December 31, 1997 (post- merger), and the year ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Toledo Edison Company and subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for the year ended December 31, 1996, the period from January 1, 1997 to November 7, 1997 (pre-merger), the period from November 8, 1997 to December 31, 1997 (post-merger), and the year ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio February 12, 1999 EX-21.3 23 EXHIBIT 21.3 THE TOLEDO EDISON COMPANY LIST OF SUBSIDIARIES OF THE REGISTRANT AT DECEMBER 31, 1998 The Toledo Edison Capital Corporation Statement of Differences ------------------------ Exhibit Number 21, List of Subsidiaries of the Registrant at December 31, 1998, is not included in the printed document. EX-27.3 24
UT This schedule contains summary financial information extracted from the related Form 10-K financial statements for The Toledo Edison Company and is qualified in its entirety by reference to such financial statements. (Amounts in 1,000's). Income tax expense includes $6,538,000 related to other income. 0000352049 THE TOLEDO EDISON COMPANY 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 DEC-31-1998 1 PER-BOOK 1,168,216 417,167 243,948 939,434 0 2,768,765 195,670 328,559 51,463 575,692 0 210,000 1,083,666 0 0 0 104,200 1,690 0 24,536 768,981 2,768,765 957,037 72,696 710,618 776,776 180,261 12,225 192,486 85,904 106,582 13,610 92,972 50,483 85,606 262,430 0 0
EX-4.6 25 (CONFORMED WITH RECORDATION DATA) PENNSYLVANIA POWER COMPANY to CITIBANK, N.A., As Trustee Forty-sixth Supplemental Indenture Providing among other things for FIRST MORTGAGE BONDS Guarantee Series A of 1998 due 2028 Dated as of June 1, 1998 FORTY-SIXTH SUPPLEMENTAL INDENTURE, dated as of June 1, 1998, made and entered into by and between PENNSYLVANIA POWER COMPANY, a corporation organized and existing under the laws of the Commonwealth of Pennsylvania, with its principal place of business in New Castle, Lawrence County, Pennsylvania (hereinafter sometimes referred to as the "Company") and CITIBANK, N.A., a national banking association incorporated and existing under the laws of the United States of America, with its principal office in the Borough of Manhattan, The City, County and State of New York (hereinafter sometimes referred to as the "Trustee"), as trustee under the Indenture dated as of November 1, 1945 between the Company and CITIBANK, N.A. (successor to The First National Bank of The City of New York), as trustee, as supplemented and amended by Supplemental Indentures between the Company and the Trustee, dated as of May 1, 1948, as of March 1, 1950, as of February 1, 1952, as of October 1, 1957, as of September 1, 1962, as of June 1, 1963, as of June 1, 1969, as of May 1, 1970, as of April 1, 1971, as of October 1, 1971, as of May 1, 1972, as of December 1, 1974, as of October 1, 1975, as of September 1, 1976, as of April 15, 1978, as of June 28, 1979, as of January 1, 1980, as of June 1, 1981, as of January 14, 1982, as of August 1, 1982, as of December 15, 1982, as of December 1, 1983, as of September 6, 1984, as of December 1, 1984, as of May 30, 1985, as of October 29, 1985, as of August 1, 1987, as of May 1, 1988, as of November 1, 1989, as of December 1, 1990, as of September 1, 1991, as of May 1, 1992, as of July 15, 1992, as of August 1, 1992, as of May 1, 1993, as of July 1, 1993, as of August 31, 1993, as of September 1, 1993, as of September 15, 1993, as of October 1, 1993, as of November 1, 1993, as of August 1, 1994, as of September 1, 1995 and as of June 1, 1997 (said Indenture as so supplemented and amended, and as hereby supplemented and amended, being hereinafter sometimes referred to as the "Indenture"); WHEREAS, the Company and the Trustee have executed and delivered the Indenture for the purpose of securing an issue of bonds of the First Series described therein and such additional bonds as may from time to time be issued under and in accordance with the terms of the Indenture, the aggregate principal amount of bonds to be secured thereby being not limited, and the Indenture fully describes and sets forth the property conveyed thereby and is filed with the Secretary of the Commonwealth of Pennsylvania and the Secretary of State of the State of Ohio and will be of record in the office of the recorder of deeds of each county in the Commonwealth of Pennsylvania and the State of Ohio in which this Forty-Sixth Supplemental Indenture is to be recorded and is on file at the corporate trust office of the Trustee, above referred to; and WHEREAS the Indenture provides for the issuance of bonds thereunder in one or more series and the Company, by appropriate corporate action in conformity with the terms of the Indenture, has duly determined to create one such series of bonds under the Indenture to be designated as "First Mortgage Bonds, Guarantee Series A of 1998 due 2028" (hereinafter sometimes referred to as the "bonds of the 2028 Series"), the bonds of which are to bear interest at the same rate as that of the Beaver County Industrial Authority Exempt Facilities Revenue Bonds, 5.375% 1998 Series A (Shippingport Project) referred to herein, and are to mature on June 1, 2028. AND WHEREAS each of the bonds of the 2028 Series and the Trustee's Authentication Certificate thereon are to be substantially in the following form, to wit: [FORM OF BOND OF THE 2028 SERIES] [FACE] This Bond is not transferable except to a successor trustee under the Trust Indenture, dated as of June 1, 1998, between the Beaver County Industrial Development Authority and Chase Manhattan Trust Company, National Association, as Trustee, or in connection with the rights and remedies of the holder hereof consequent upon an "Event of Default" as defined in the Indenture referred to herein. PENNSYLVANIA POWER COMPANY First Mortgage Bond, Guarantee Series A of 1998 due 2028 $ No. Pennsylvania Power Company, a Pennsylvania corporation (hereinafter called the "Company"), for value received, hereby promises to pay to or registered assigns, the principal sum of $ on June 1, 2028, and to pay the registered holder hereof interest on said sum from the Initial Interest Accrual Date (hereinbelow defined) at the rate of five and three eighths per centum per annum. The principal of and interest on this bond shall be payable at the office or agency of the Company in the Borough of Manhattan, The City, County and State of New York, or in the City of Akron, State of Ohio, designated for that purpose, in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts. The provisions of this bond are continued on the reverse hereof and such continued provisions shall for all purposes have the same effect as though fully set forth at this place. This bond shall not be valid or become obligatory for any purpose unless and until it shall have been authenticated by the execution by the Trustee or its successor in trust under the Indenture of the certificate hereon. IN WITNESS WHEREOF, PENNSYLVANIA POWER COMPANY has caused this bond to be executed in its name by its President or one of its Vice Presidents by his or her signature or a facsimile thereof, and its corporate seal or a facsimile thereof to be affixed hereto or imprinted hereon and attested by its Secretary or one of its Assistant Secretaries by his or her signature or a facsimile thereof. Dated: PENNSYLVANIA POWER COMPANY By ................................ President Attest: ......................... Secretary [FORM OF TRUSTEE'S AUTHENTICATION CERTIFICATE] TRUSTEE'S AUTHENTICATION CERTIFICATE This bond is one of the bonds, of the series designated therein, described in the within-mentioned Indenture. CITIBANK, N.A. AS TRUSTEE, By ........... Authorized Officer [FORM OF BOND OF THE 2028 SERIES] [REVERSE] PENNSYLVANIA POWER COMPANY First Mortgage Bond, Guarantee Series A of 1998 due 2028 This bond is one of the bonds issued and to be issued from time to time under and in accordance with and all secured by an indenture of mortgage or deed of trust dated as of November 1, 1945, and indentures supplemental thereto, given by the Company to Citibank, N.A. (successor to The First National Bank of The City of New York), as trustee (hereinafter referred to as the "Trustee"), to which indenture and indentures supplemental thereto (hereinafter referred to collectively as the "Indenture") reference is hereby made for a description of the property mortgaged and pledged, the nature and extent of the security and the rights, duties and immunities thereunder of the Trustee and the rights of the holders of the bonds and coupons and of the Trustee and of the Company in respect of such security, and the limitations on such rights. By the terms of the Indenture, the bonds to be secured thereby are issuable in series which may vary as to date, amount, date of maturity, rate of interest, terms of redemption and in other respects as in the Indenture provided. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than seventy-five per centum in principal amount of the bonds (exclusive of bonds disqualified by reason of the Company's interest therein) at the time outstanding, including, if more than one series of bonds shall be at the time outstanding, not less than sixty per centum in principal amount of each series affected, to effect, by an indenture supplemental to the Indenture, modifications or alterations of the Indenture and of the rights and obligations of the Company and the rights of the holders of the bonds and coupons; provided, however, that no such modification or alteration shall be made without the written approval or consent of the holder hereof which will (a) extend the maturity of this bond or reduce the rate or extend the time of payment of interest hereon or reduce the amount of the principal hereof or reduce any premium payable on the redemption hereof, or (b) permit the creation of any lien, not otherwise permitted, prior to or on a parity with the lien of the Indenture, or (c) reduce the percentage of the principal amount of the bonds upon the approval or consent of the holders of which modifications or alterations may be made as aforesaid. The bonds of this series shall be redeemed in whole, by payment of the principal amount thereof plus accrued interest thereon, if any, to the date fixed for redemption, upon receipt by the Trustee of a written advice from the trustee under the Trust Indenture (the "Revenue Bond Indenture") dated as of June 1, 1998, between Beaver County Industrial Development Authority and Chase Manhattan Trust Company, National Association, as trustee (such trustee and any successor trustee being hereinafter referred to as the "Revenue Bond Trustee"), securing, among other bonds, $1,733,896 of Exempt Facilities Revenue Bonds, 5.375% 1998 Series A (Shippingport Project) which have been issued on behalf of the Company (the "Revenue Bonds"), stating that the principal amount of all the Revenue Bonds then outstanding under the Revenue Bond Indenture has been declared due and payable pursuant to the provisions of Section 8.02 of the Revenue Bond Indenture, specifying the date of the accelerated maturity of such Revenue Bonds and the date from which interest on the Revenue Bonds issued under the Revenue Bond Indenture has then accrued, stating such declaration of maturity has not been annulled and demanding payment of the principal amount hereof plus accrued interest hereon to the date fixed for such redemption. As provided in the Supplemental Indenture establishing the terms and provisions of the bonds of this series, the date fixed for such redemption shall be not earlier than the date specified in the aforesaid written advice as the date of the accelerated maturity of the Revenue Bonds then outstanding under the Revenue Bond Indenture and not later than the 45th day after the receipt by the Trustee of such advice, unless such 45th day is earlier than such date of accelerated maturity. The date fixed for such redemption shall be specified in a notice of redemption to be given not less than 30 days prior to the date so fixed for such redemption. Upon mailing of such notice of redemption, the date from which unpaid interest on the aforesaid Revenue Bonds has then accrued (as specified by the Revenue Bond Trustee) shall become the initial interest accrual date (the "Initial Interest Accrual Date") with respect to the bonds of this series, and the date which is six months after the Initial Interest Accrual Date shall be the first interest payment date for the bonds of this series, provided, however, on any demand for payment of the principal amount hereof at maturity as a result of the principal of the aforesaid Revenue Bonds becoming due and payable on the maturity date of the bonds of this series, the date from which unpaid interest on the aforesaid Revenue Bonds has then accrued shall become the Initial Interest Accrual Date with respect to the bonds of this series, such date to be as stated in a written notice from the Revenue Bond Trustee to the Trustee. As provided in said Supplemental Indenture, the aforementioned notice of redemption shall become null and void for all purposes under the Indenture (including the fixing of the Initial Interest Accrual Date with respect to the bonds of this series) upon receipt by the Trustee of written notice from the Revenue Bond Trustee of the annulment of the acceleration of the maturity of the Revenue Bonds then outstanding under the Revenue Bond Indenture and of the rescission of the aforesaid written advice prior to the redemption date specified in such notice of redemption, and thereupon no redemption of the bonds of this series and no payment in respect thereof as specified in such notice of redemption shall be effected or required. But no such rescission shall extend to any subsequent written advice from the Revenue Bond Trustee or impair any right consequent on such subsequent written notice. Bonds of this series are not otherwise redeemable prior to their maturity. In case of certain defaults as specified in the Indenture, the principal of this bond may be declared or may become due and payable on the conditions, at the time, in the manner and with the effect provided in the Indenture. No recourse shall be had for the payment of the principal of or interest on this bond, or for any claim based hereon, or otherwise in respect hereof or of the Indenture, to or against any incorporator, stockholder, director or officer, past, present or future, as such, of the Company, or of any predecessor or successor company, either directly or through the Company, or such predecessor or successor company, or otherwise, under any constitution or statute or rule of law, or by the enforcement of any assessment or penalty, or otherwise, all such liability of incorporators, stockholders, directors and officers, as such, being waived and released by the holder and owner hereof by the acceptance of this bond and being likewise waived and released by the terms of the Indenture. The bonds of this series are issuable only as registered bonds without coupons in denominations of $1,000 and, if higher, any authorized multiple of $1.00. Except as may be stated in any legend written on the face of this bond, this bond is transferable by the registered holder hereof, in person or by attorney duly authorized, at the corporate trust office of the Trustee, in the Borough of Manhattan, The City, County and State of New York, or at such other place or places as the Company may designate by resolution of the Board of Directors, but only in the manner and upon the conditions prescribed in the Indenture, upon the surrender and cancellation of this bond and the payment of charges for transfer, and upon any such transfer a new registered bond or bonds, without coupons, of the same series and maturity date and for the same aggregate principal amount, in authorized denominations, will be issued to the transferee in exchange herefor. The Company, the Trustee and any agent designated to make transfers or exchanges of bonds of this series may deem and treat the person in whose name this bond is registered as the absolute owner for all purposes including the purpose of the receipt of payment. Registered bonds of this series shall be exchangeable at said corporate trust office of the Trustee, or at such other place or places as the Company may designate by resolution of the Board of Directors, for registered bonds of other authorized denominations having the same aggregate principal amount, in the manner and upon the conditions prescribed in the Indenture. Neither the Company nor the Trustee nor any other agent designated for such purpose shall be required to make transfers or exchanges of bonds of this series during the period between any interest payment date for such series and the record date next preceding such interest payment date. Notwithstanding any provisions of the Indenture, no charge shall be made upon any transfer or exchange of bonds of this series other than for any tax or taxes or other governmental charge required to be paid by the Company. [END OF FORM OF BOND OF THE 2028 SERIES] AND WHEREAS all acts and things necessary to make the bonds, when authenticated by the Trustee and issued as in the Indenture provided, the valid, binding and legal obligations of the Company, and to constitute the Indenture a valid, binding and legal instrument for the security thereof, have been done and performed, and the creation, execution and delivery of the Indenture and the creation, execution and issue of the bonds subject to the terms hereof and of the Indenture, have in all respects been duly authorized; NOW THEREFORE, in consideration of the premises, and of the acceptance and purchase by holders thereof of the bonds issued and to be issued under the Indenture, and the sum of One Dollar duly paid by the Trustee to the Company, and of other good and valuable consideration, the receipt of which is hereby acknowledged, and for the purpose of securing the due and punctual payment of the principal of and premium, if any, and interest on all bonds now outstanding under the Indenture and the $1,733,896 principal amount of bonds of the 2028 Series proposed presently to be issued and all other bonds which shall be issued under the Indenture, and for the purpose of securing the faithful performance and observance of all covenants and conditions therein and in any supplemental indenture set forth, the Company has given, granted, bargained, sold, released, transferred, assigned, hypothecated, pledged, mortgaged, confirmed, created a security interest in, set over, warranted, aliened and conveyed and by these presents does give, grant, bargain, sell, release, transfer, assign, hypothecate, pledge, mortgage, confirm, create a security interest in, set over, warrant, alien and convey unto Citibank, N.A., as Trustee as provided in the Indenture, and its successor or successors in the trust thereby and hereby created and to its or their assigns forever, all the right, title and interest of the Company in and to the property described in the Indenture (and not therein expressly excepted), together (subject to the provisions of Article X of the Indenture) with the tolls, rents, revenues, issues, earnings, income, products and profits thereof, and does hereby confirm that the Company will not cause or consent to a partition, whether voluntary or through legal proceedings, of property, whether herein described or heretofore or hereafter acquired, in which its ownership shall be as a tenant in common except as permitted by and in conformity with the provisions of the Indenture and particularly of said Article X thereof. TOGETHER WITH all and singular the tenements, hereditaments and appurtenances belonging or in any wise appertaining to the premises, property, franchises and rights, or any thereof, referred to in the Indenture (and not therein expressly excepted) with the reversion and reversions, remainder and remainders and (subject to the provisions of Article X of the Indenture) the tolls, rents, revenues, issues, earnings, income, products and profits thereof, and all the estate, right, title and interest and claim whatsoever, at law as well as in equity, which the Company now has or may hereafter acquire in and to such premises, property, franchises and rights and every part and parcel thereof, subject to "excepted encumbrances" of the original Indenture. TO HAVE AND TO HOLD all said premises, property, franchises and rights hereby conveyed, assigned, pledged, or mortgaged, or intended so to be, unto the Trustee, its successor or successors in trust, and their assigns forever. BUT IN TRUST, NEVERTHELESS, with power of sale, for the equal and proportionate benefit and security of the holders of all bonds now or hereafter authenticated and delivered under the Indenture, and interest coupons appurtenant thereto, pursuant to the provisions thereof, and for the enforcement of the payment of said bonds and coupons when payable and the performance of and compliance with the covenants and conditions of the Indenture, without any preference, distinction or priority as to lien or otherwise of any bond or bonds over others by reason of the difference in time of the actual authentication, delivery, issue, sale or negotiation thereof or for any other reason whatsoever, except as otherwise expressly provided in the Indenture; and so that each and every bond now or hereafter authenticated and delivered thereunder shall have the same lien, and so that the principal of and premium, if any, and interest on every such bond shall, subject to the terms of the Indenture, be equally and proportionately secured thereby and hereby, as if it had been made, executed, authenticated, delivered, sold and negotiated simultaneously with the execution and delivery of the Indenture. AND IT IS EXPRESSLY DECLARED that all bonds authenticated and delivered and secured thereunder and hereunder are to be issued, authenticated and delivered, and all said premises, property, franchises and rights hereby and by the Indenture conveyed, assigned, pledged or mortgaged, or intended so to be (including all the right, title and interest of the Company in and to any and all premises, property, franchises and rights of every kind and description, real, personal and mixed, tangible and intangible, thereafter acquired by the Company and whether or not specifically described in the Indenture, except any therein expressly excepted), are to be dealt with and disposed of, under, upon and subject to the terms, conditions, stipulations, covenants, agreements, trusts, uses and purposes in the Indenture expressed, and it is hereby agreed as follows: Section 1. There is hereby created a series of bonds designated Guarantee Series A of 1998 due 2028, which shall also bear the descriptive title "First Mortgage Bond" and the form of such series shall be substantially as hereinbefore set forth. Bonds of the 2028 Series shall mature on June 1, 2028. The bonds of the 2028 Series may be issued only as registered bonds without coupons in denominations of $1,000 or, if higher, in such multiples of $1.00 as the Board of Directors shall approve, and delivery to the Trustee for authentication shall be conclusive evidence of such approval. The serial numbers of bonds of the 2028 Series shall be such as may be approved by any officer of the Company, the execution thereof by any such officer, by facsimile signature or otherwise, to be conclusive evidence of such approval. Bonds of the 2028 Series shall bear interest from the Initial Interest Accrual Date (as defined in the form of the bonds of the 2028 Series hereinabove set forth) at the rate of 5.375% per annum. Principal or redemption price of and interest on said bonds shall be payable in any coin or currency of the United States of America which at the time of payment is legal tender for public and private debts at the office or agency of the Company in the Borough of Manhattan, The City, County and State of New York, designated for that purpose. Bonds of the 2028 Series shall be exchangeable and transferable as and to the extent set forth in the form thereof hereinbefore set forth. The bonds of the 2028 Series shall be redeemable as set forth in the form thereof hereinbefore set forth in whole, prior to maturity, upon notice given by mailing the same, postage pre- paid, at least thirty days and not more than forty-five days prior to the date fixed for redemption to each registered holder of a bond to be redeemed at the last address of such holder appearing on the registry books. The Trustee shall within five business days of receiving the written advice specified in the form of bond of the 2028 Series provided for herein mail a copy thereof to the Company stamped or otherwise marked to indicate the date of receipt by the Trustee. The Company shall fix a redemption date for the redemption so demanded and shall mail to the Trustee notice of such date at least thirty-five days prior thereto. Subject to the foregoing sentence, the redemption date so fixed may be any day not earlier than the date specified in the aforesaid written advice as the date of the accelerated maturity of the Revenue Bonds then outstanding under the Revenue Bond Indenture and not later than the forty-fifth day after receipt by the Trustee of such advice, unless such forty-fifth day is earlier than such date of accelerated maturity. If the Trustee does not receive such notice from the Company within thirteen days after receipt by the Trustee of the aforesaid written advice, the redemption date shall be deemed fixed as the forty-fifth day after such receipt. The Trustee shall mail notice of the redemption date to the Revenue Bond Trustee not less than thirty days prior to such redemption date, provided, however, that the Trustee shall mail no such notice (and no redemption shall be made) if prior to the mailing of such notice the Trustee shall have received written notice from the Revenue Bond Trustee of the annulment of the acceleration of the maturity of the Revenue Bonds then outstanding under the Revenue Bond Indenture and of the rescission of the aforesaid written advice. The terms "Revenue Bond Trustee" and "Revenue Bond Indenture" as they relate to the bonds of the 2028 Series shall have the meanings specified in the form thereof hereinabove set forth. Redemption of the bonds of the 2028 Series shall be at the principal amount thereof, plus accrued interest thereon to the date fixed for redemption and such amount shall become due and payable on the date fixed for such redemption. Anything in this paragraph contained to the contrary notwithstanding, if, after mailing notice of the date fixed for redemption but prior to such date, the Trustee shall have been advised in writing by the Revenue Bond Trustee that the acceleration of the maturity of the Revenue Bonds then outstanding under the Revenue Bond Indenture has been annulled and that the aforesaid written advice has been rescinded, the aforesaid written advice shall thereupon, without further act of the Trustee or the Company, be rescinded and become null and void for all purposes hereunder (including the fixing of the Initial Interest Accrual Date as provided in the form of the bonds of the 2028 Series provided for herein) and no redemption of the bonds of the 2028 Series and no payments in respect thereof as specified in the aforesaid written notice shall be effected or required. But no such rescission shall extend to any subsequent written advice from the Revenue Bond Trustee or impair any right consequent on such subsequent written advice. SECTION 2. Bonds of the 2028 Series shall be deemed to be paid and no longer outstanding under the Indenture to the extent that Revenue Bonds which are outstanding from time to time under the Revenue Bond Indenture are paid or deemed to be paid and are no longer outstanding and the Trustee has been notified to such effect by the Company. SECTION 3. The Company covenants and agrees that the provisions of Section 3 of the Fifth Supplemental Indenture dated as of September 1, 1962, which are to remain in effect so long as any bonds of the Sixth Series shall be outstanding under the Indenture, shall remain in full force and effect so long as any bonds of the 2028 Series shall be outstanding under the Indenture. SECTION 4. As supplemented and amended by this Supplemental Indenture, the Indenture is in all respects ratified and confirmed, and the Indenture and this Supplemental Indenture shall be read, taken and construed as one and the same instrument. SECTION 5. Nothing in this Supplemental Indenture contained shall, or shall be construed to, confer upon any person other than a holder of bonds issued under the Indenture, the Company and the Trustee any right or interest to avail himself of any benefit under any provision of the Indenture or of this Supplemental Indenture. SECTION 6. The Trustee assumes no responsibility for or in respect of the validity or sufficiency of this Supplemental Indenture or the due execution hereof by the Company or for or in respect of the recitals and statements contained herein, all of which recitals and statements are made solely by the Company. SECTION 7. This Supplemental Indenture may be executed in several counterparts and all such counterparts executed and delivered, each as an original, shall constitute but one and the same instrument. PENNSYLVANIA POWER COMPANY hereby constitutes and appoints Jack E. Reed to be its attorney for it and in its name as and for its corporate act and deed to acknowledge this Supplemental Indenture before any person having authority to take such acknowledgment, to the intent that the same may be duly recorded. CITIBANK, N.A. hereby constitutes and appoints P. DeFelice to be its attorney for it and in its name as and for its corporate act and deed to acknowledge this Supplemental Indenture before any person having authority to take such acknowledgment, to the intent that the same may be duly recorded. IN WITNESS WHEREOF, PENNSYLVANIA POWER COMPANY has caused its corporate name to be hereunto affixed, and this instrument to be signed and sealed by its President or a Vice President, and its corporate seal to be attested by its Secretary or an Assistant Secretary for and on its behalf, in the city of New Castle, County of Lawrence and Commonwealth of Pennsylvania and CITIBANK, N.A., in token of its acceptance of the trust, has caused its corporate name to be hereunto affixed, and this instrument to be signed by a Vice President and its corporate seal to be affixed and attested by one of its Vice Presidents in the City of New York, County of New York and State of New York, all as of the day and year first above written. PENNSYLVANIA POWER COMPANY By: /s/ Jack E. Reed --------------------------- Jack E. Reed Vice President ATTEST: By: /s/ Robert P. Wushinske ------------------------------------ Robert P. Wushinske Secretary [Seal] Signed, sealed and delivered by PENNSYLVANIA POWER COMPANY in the presence of: /s/ Angeline Comparone - --------------------------------- Angeline Comparone /s/ Sylvia M. Rashid - --------------------------------- Sylvia M. Rashid CITIBANK, N.A. as Trustee as aforesaid, By: /s/ P. DeFelice --------------------------- P. DeFelice Vice President ATTEST: By: /s/ Carol Ng ------------------------- Carol Ng Vice President [Seal] Signed, sealed and delivered by CITIBANK, N.A. in the presence of: /s/ Nancy Forte - ---------------------------- Nancy Forte /s/ Wafaa Orfy - ---------------------------- Wafaa Orfy COMMONWEALTH OF PENNSYLVANIA ) : ss.: COUNTY OF LAWRENCE ) BE IT REMEMBERED that, on the 5th day of June, 1998, before me, the undersigned, a Notary Public in said County of Lawrence, Commonwealth of Pennsylvania, personally appeared Robert P. Wushinske, who being duly sworn according to law, doth depose and say that he was personally present and did see the common or corporate seal of the above named PENNSYLVANIA POWER COMPANY affixed to the foregoing Supplemental Indenture; that the seal so affixed is the common or corporate seal of the said Pennsylvania Power Company and was so affixed by the authority of the said corporation as the act and deed thereof; that the above named Jack E. Reed is a Vice President of said corporation and did sign the said Supplemental Indenture as such in the presence of this deponent; that this deponent is the Secretary of Pennsylvania Power Company, and that the name of this deponent above signed in attestation of the due execution of the said Supplemental Indenture is in this deponent's own proper handwriting. Sworn to and subscribed before me this 5th day of June, 1998. [SEAL] /s/ Robert P. Wushinske --------------------------------- Robert P. Wushinske, Secretary /s/ Donna S. Mathieson --------------------------------- Donna S. Mathieson, Notary Public NOTARIAL SEAL DONNA S. Mathieson, Notary Public New Castle, Lawrence Co., PA My Commission Expires Nov. 23, 1998 COMMONWEALTH OF PENNSYLVANIA ) : ss.: COUNTY OF LAWRENCE ) I HEREBY CERTIFY that, on this 5th day of June, 1998, before me, the subscriber, a Notary Public in and for the State and County aforesaid, personally appeared Jacke E. Reed, the attorney for PENNSYLVANIA POWER COMPANY, and the attorney named in the foregoing Supplemental Indenture and, by virtue and in pursuance of the authority therein conferred upon him, acknowledged the said Supplemental Indenture to be the act and deed of said Pennsylvania Power Company. WITNESS my hand and notarial seal the day and year aforesaid. [SEAL] /s/ Donna S. Mathieson ----------------------------------- Donna S. Mathieson, Notary Public NOTARIAL SEAL DONNA S. Mathieson, Notary Public New Castle, Lawrence Co., PA My Commission Expires Nov. 23, 1998 COMMONWEALTH OF PENNSYLVANIA ) : ss.: COUNTY OF LAWRENCE ) On the 5th day of June, 1998, before me, personally came Jack E. Reed, to me known, who, being by me duly sworn, did depose and say that he resides at 3487 Pheasant Chase, Hermitage, Pennsylvania 16148; that he is a Vice President of PENNSYLVANIA POWER COMPANY, one of the corporations described in and which executed the above instrument; that he knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was affixed by order of the Board of Directors of said corporation, and that he signed his name thereto by like authority. WITNESS my hand and notarial seal the day and year aforesaid. [SEAL] /s/ Donna S. Mathieson ---------------------------- Donna S. Mathieson, Notary Public NOTARIAL SEAL DONNA S. Mathieson, Notary Public New Castle, Lawrence Co., PA My Commission Expires Nov. 23, 1998 STATE OF NEW YORK ) : ss.: COUNTY OF NEW YORK ) BE IT REMEMBERED that, on the 4th day of June, 1998, before me, the undersigned, a Notary Public in said County of New York, State of New York, personally appeared Carol Ng, who being duly sworn according to law, doth depose and say that she was personally present and did see the common or corporate seal of the above named CITIBANK, N.A. affixed to the foregoing Supplemental Indenture; that the seal so affixed is the common or corporate seal of the said CITIBANK, N.A. and was so affixed by the authority of the said association as the act and deed thereof; that the above named P. DeFelice is one of the Vice Presidents of said association and did sign the said Supplemental Indenture as such in the presence of this deponent; that this deponent is a Vice President of said CITIBANK, N.A., and that the name of this deponent above signed in attestation of the due execution of the said Supplemental Indenture is in this deponent's own proper handwriting. Sworn to and subscribed before me this 4th day of June, 1998. /s/ Carol Ng ---------------------------- [SEAL] Carol Ng, Vice President /s/ Doris Ware ----------------------------- Doris Ware Notary Public, State of New York No. 01WA5017241 Qualified in Queens County Commission Expires September 7, 1999 STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) I HEREBY CERTIFY that, on this 4th day of June, 1998, before me, the subscriber, a Notary Public in and for the State and County aforesaid, personally appeared P. DeFelice, the attorney for CITIBANK, N.A., and the attorney named in the foregoing Supplemental Indenture and, by virtue and in pursuance of the authority therein conferred upon him, acknowledged the execution of said Supplemental Indenture to be the act and deed of said CITIBANK, N.A. WITNESS my hand and notarial seal the day and year aforesaid. /s/ Doris Ware --------------------------- Doris Ware Notary Public, State of New York No. 01WA5017241 Qualified in Queens County Commission Expires September 7, 1999 [SEAL] STATE OF NEW YORK ) ) ss.: COUNTY OF NEW YORK ) On the 4th day of June, 1998, before me, personally came P. DeFelice, to me known, who being by me duly sworn, did depose and say that he resides at 47-09 169th Street, Flushing, New York; that he is a Vice President of CITIBANK, N.A., one of the parties described in and which executed the above instrument; that he knows the seal of said association; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said association, and that he signed his name thereto by like authority. WITNESS my hand and notarial seal the day and year aforesaid. /s/ Doris Ware --------------------------- Doris Ware Notary Public, State of New York No. 01WA5017241 Qualified in Queens County Commission Expires September 7, 1999 [SEAL] Citibank, N.A. hereby certifies that its precise name and address as Trustee hereunder are: CITIBANK, N.A. 111 Wall Street Borough of Manhattan City, County and State of New York 10043 CITIBANK, N.A. By: /s/ P. DeFelice ------------------------ P. DeFelice Vice President (..continued) EX-12.2 26 EXHIBIT 12.2 Page 1 PENNSYLVANIA POWER COMPANY RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, --------------------------------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items $31,260 $38,930 $40,587 $31,472 $39,748 Interest before reduction for amounts capitalized 34,947 31,350 27,889 22,438 21,073 Provision for income taxes 24,333 32,591 33,421 26,658 32,504 Interest element of rentals charged to income (a) 1,652 1,865 1,868 1,750 1,920 ------- -------- -------- ------- ------- Earnings as defined $92,192 $104,736 $103,765 $82,318 $95,245 ======= ======== ======== ======= ======= FIXED CHARGES AS DEFINED IN REGULATION S-K: Interest on long-term debt $32,130 $28,937 $25,715 $20,458 $19,255 Interest on nuclear fuel obligations 519 407 219 276 28 Other interest expense 2,298 2,006 1,955 1,704 1,789 Interest element of rentals charged to income (a) 1,652 1,865 1,868 1,750 1,920 ------- ------- ------- ------- ------- Fixed charges as defined $36,599 $33,215 $29,757 $24,188 $22,992 ======= ======= ======= ======= ======= RATIO OF EARNINGS TO FIXED CHARGES (b) 2.52 3.15 3.49 3.40 4.14 ==== ==== ==== ==== ==== - ------------------- (a) Includes the interest element of rentals where determinable plus 1/3 of rental expense where no readily defined interest element can be determined. (b) These ratios exclude fixed charges applicable to the guarantee of the debt of a coal supplier aggregating $935,000, $795,000, $642,000, $483,000 and $273,000 for each of the five years ended December 31, 1998, respectively.
EXHIBIT 12.2 Page 2 PENNSYLVANIA POWER COMPANY RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS)
Year Ended December 31, --------------------------------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (Dollars in Thousands) EARNINGS AS DEFINED IN REGULATION S-K: Income before extraordinary items $31,260 $ 38,930 $ 40,587 $31,472 $39,748 Interest before reduction for amounts capitalized 34,947 31,350 27,889 22,438 21,073 Provision for income taxes 24,333 32,591 33,421 26,658 32,504 Interest element of rentals charged to income (a) 1,652 1,865 1,868 1,750 1,920 ------- -------- -------- ------- ------- Earnings as defined $92,192 $104,736 $103,765 $82,318 $95,245 ======= ======== ======== ======= ======= FIXED CHARGES AS DEFINED IN REGULATION S-K PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS): Interest on long-term debt $32,130 $ 28,937 $ 25,715 $20,458 $19,255 Interest on nuclear fuel obligations 519 407 219 276 28 Other interest expense 2,298 2,006 1,955 1,704 1,789 Preferred stock dividend requirements 5,364 4,775 4,626 4,626 4,626 Adjustment to preferred stock dividends to state on a pre-income tax basis 4,121 3,939 3,751 3,859 3,726 Interest element of rentals charged to income (a) 1,652 1,865 1,868 1,750 1,920 ------- -------- -------- ------- ------- Fixed charges as defined plus preferred stock dividend requirements (pre-income tax basis) $46,084 $ 41,929 $ 38,134 $32,673 $31,344 ======= ======== ======== ======= ======= RATIO OF EARNINGS TO FIXED CHARGES PLUS PREFERRED STOCK DIVIDEND REQUIREMENTS (PRE-INCOME TAX BASIS) (b) 2.00 2.50 2.72 2.52 3.04 ==== ==== ==== ==== ==== - ------------------- (a) Includes the interest element of rentals where determinable plus 1/3 of rental expense where no readily defined interest element can be determined. (b) These ratios exclude fixed charges applicable to the guarantee of the debt of a coal supplier aggregating $935,000, $795,000, $642,000, $483,000 and $273,000 for each of the five years ended December 31, 1998, respectively.
EX-13.4 27 PENNSYLVANIA POWER COMPANY SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994 -------- --------- --------- --------- --------- (Dollars in thousands) Operating Revenues $323,756 $ 323,381 $ 322,625 $ 314,642 $ 301,965 ======== ========== ========== ========== ========== Operating Income $ 58,041 $ 50,736 $ 62,329 $ 67,317 $ 63,668 ======== ========== ========== ========== ========== Income Before Extraordinary Item $ 39,748 $ 31,472 $ 40,587 $ 38,930 $ 31,260 ======== ========== ========== ========== ========== Net Income $ 9,226 $ 31,472 $ 40,587 $ 38,930 $ 31,260 ======== ========== ========== ========== ========== Earnings on Common Stock $ 4,600 $ 26,846 $ 35,961 $ 34,155 $ 25,896 ======== ========== ========== ========== ========== Return on Average Common Equity 1.6% 9.3% 12.8% 12.9% 10.0% === === ==== ==== ==== Cash Dividends on Common Stock $ 21,386 $ 21,386 $ 21,386 $ 21,386 $ 21,386 ======== ========== ========== ========== ========== Total Assets $977,772 $1,034,457 $1,074,578 $1,151,990 $1,197,302 ======== ========== ========== ========== ========== CAPITALIZATION: Common Stockholder's Equity $275,281 $ 291,977 $ 286,504 $ 271,920 $ 258,973 Preferred Stock- Not Subject to Mandatory Redemption 50,905 50,905 50,905 50,905 50,905 Subject to Mandatory Redemption 15,000 15,000 15,000 15,000 15,000 Long-Term Debt 287,689 289,305 310,996 338,670 424,457 -------- ---------- ---------- ---------- ---------- Total Capitalization $628,875 $ 647,187 $ 663,405 $ 676,495 $ 749,335 ======== ========== ========== ========== ========== CAPITALIZATION RATIOS: Common Stockholder's Equity 43.8% 45.1% 43.2% 40.2% 34.6% Preferred Stock- Not Subject to Mandatory Redemption 8.1 7.9 7.7 7.5 6.8 Subject to Mandatory Redemption 2.4 2.3 2.2 2.2 2.0 Long-Term Debt 45.7 44.7 46.9 50.1 56.6 ----- ----- ----- ----- ----- Total Capitalization 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== KILOWATT-HOUR SALES (Millions): Residential 1,278 1,238 1,254 1,195 1,178 Commercial 1,090 1,013 996 938 891 Industrial 1,436 1,659 1,693 1,558 1,293 Other 6 6 6 6 6 ----- ----- ----- ----- ----- Total Retail 3,810 3,916 3,949 3,697 3,368 Total Wholesale 964 901 1,106 1,080 1,076 ----- ----- ----- ----- ----- Total 4,774 4,817 5,055 4,777 4,444 ===== ===== ===== ===== ===== CUSTOMERS SERVED: Residential 129,452 129,316 127,936 126,480 124,951 Commercial 17,296 16,738 16,531 16,317 15,966 Industrial 250 241 225 223 219 Other 107 97 99 97 98 -------- ---------- ---------- ---------- ---------- Total 147,105 146,392 144,791 143,117 141,234 ======== ========== ========== ========== ========== Average Annual Residential kWh Usage 9,913 9,634 9,866 9,505 9,501 Cost of Fuel per Million Btu $1.15 $1.10 $1.09 $1.12 $1.20 Peak Load - Megawatts 918 836 792 836 710 Generating Capability: Coal 72.1% 72.1% 72.1% 72.1% 72.1% Oil 3.0 3.0 3.0 3.0 3.0 Nuclear 24.9 24.9 24.9 24.9 24.9 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== SOURCES OF ELECTRIC GENERATION: Coal 76.9% 73.8% 67.6% 65.6% 69.6% Nuclear 23.1 26.2 32.4 34.4 30.4 ----- ----- ----- ----- ----- Total 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== NUMBER OF EMPLOYEES 888 997 1,015 1,220 1,255 === === ===== ===== =====
PENNSYLVANIA POWER COMPANY 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 that 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, and the availability and cost of capital and other similar factors. Results of Operations We continued to take steps in 1998 to better position our Company as competition continues to expand in the electric utility industry. Investments were made in new information systems with enhanced functionality which also address Year 2000 application deficiencies. We also contributed to 1998 cash savings of FirstEnergy Corp. (FirstEnergy) totaling $173 million which were captured from initiatives implemented during the year in connection with the November 1997 merger of our parent company, Ohio Edison Company and Centerior Energy Corporation to form FirstEnergy. Earnings on common stock of $4.6 million in 1998 declined from $26.8 million in 1997. Results for 1998 were adversely affected by a one-time, extraordinary charge of $30.5 million after taxes, related to our discontinued application of Statement of Financial Accounting Standards No. 71 (SFAS 71), "Accounting for the Effects of Certain Types of Regulation," to our generation business, as discussed later in this report. Additionally, sharp increases in the spot market price for electricity occasioned by a constrained power supply and heavy customer demand in the latter part of June 1998, combined with an unscheduled generating unit outage, resulted in spot market purchases of power at prices which substantially exceeded amounts recovered from retail customers. Earnings on common stock in 1997 were adversely affected by nonrecurring charges resulting from merger-related staffing reductions, charges for uncollectible customer accounts and an increase in accelerated depreciation and amortization of nuclear and regulatory assets under our rate plan. Operating revenues were slightly higher in 1998 compared to the prior year. This was the third consecutive year of record operating revenues. The following table summarizes the sources of increases in operating revenues for 1998 and 1997 as compared to the previous year:
1998 1997 ---- ---- (In millions) Decrease in retail kilowatt-hour sales $(7.6) $(1.7) Change in average retail price (1.1) 3.7 Wholesale sales 1.3 (3.2) Other 7.8 2.0 - ----------------------------------------------------------- Net Increase $ 0.4 $ 0.8 ==========================================================
Our retail customer base continued to grow with over 700 new customers added in 1998, after gaining approximately 1,600 customers the previous year. Although residential and commercial kilowatt-hour sales increased 3.3% and 7.5%, respectively from 1997, the increases were more than offset by a 13.4% decrease in industrial sales. Closure of an electric arc furnace at Caparo Steel Company (Caparo) in August 1997 and a general decline in electricity demand by steel manufacturers due to intense foreign competition contributed to lower industrial kilowatt-hour sales. Excluding sales to Caparo, industrial sales declined 1.7% from 1997. Despite a 7.1% increase in kilowatt-hour sales to wholesale customers, total kilowatt-hour sales decreased slightly from 1997 due to the lower industrial sales. Without the closure of the Caparo facility, total sales would have increased 3.4% from the previous year. In 1997, residential and industrial kilowatt-hour sales decreased 1.3% and 2.0%, respectively, compared to 1996. Kilowatt-hour sales to commercial customers increased 1.8% from the prior year. Expiration of a one-year contract with another utility to supply 33 megawatts of power contributed to a 18.6% decline in 1997 kilowatt-hour sales to wholesale customers from the previous year and contributed to a 4.7% decrease in total 1997 kilowatt-hour sales from 1996. Total operation and maintenance expenses in 1998 decreased from the prior year with higher fuel and purchased power costs more than offset by lower nuclear operating costs and other operating costs. Most of the increase in fuel and purchased power occurred in the second quarter and resulted from a combination of factors. In late June 1998, the midwestern and southern regions of the United States experienced electricity shortages caused mainly by record temperatures and humidity and unscheduled generating unit outages. Due in part to an unscheduled outage at Beaver Valley Unit 1 at that time, our production capabilities were reduced to the point that we purchased significant amounts of power, at unusually high spot market prices, causing the increase in purchased power costs. Because of the decrease in kilowatt- hour sales in 1997, we spent less on fuel and purchased power during 1997, compared to 1996. Nuclear operating costs were lower in 1998, compared to 1997, due primarily to lower refueling outage cost levels. Increased operating costs at Beaver Valley Unit 1 resulted in higher nuclear operating costs in 1997 compared to the previous year. Two items in 1997, a $3 million charge for uncollectible customer accounts and a fourth quarter charge of approximately $5.4 million for a voluntary retirement program, contributed to the increase in other operating costs in 1997 from the previous year and to the subsequent reduction in other operating costs in 1998. In addition, continuing improvements in operating efficiency, evidenced by a reduction in the number of our employees over the last five years, contributed to the reduction in other operating costs in 1998. Depreciation and amortization decreased in 1998 compared to the prior year due primarily to the effect of our rate restructuring plan. The Pennsylvania Public Utility Commission's (PPUC) authorization of our rate restructuring plan in the second quarter led to discontinued application of certain regulatory accounting procedures (i.e. SFAS 71) to our generation business, resulting in a write down of our nuclear generating unit investment and the recognition of a portion of such investment, recoverable through future customer rates, as a regulatory asset. The decrease in nuclear depreciation resulting from the write down was the primary cause of the total decrease. In 1997, the increase in the provision for depreciation and amortization of net regulatory assets from the previous year reflected accelerated depreciation and amortization of nuclear and regulatory assets under our rate plan. The decrease in general taxes in 1997 was due principally to an adjustment, which reduced our liability for gross receipts taxes. The downward trend of net interest charges continued in 1998. Interest on long-term debt decreased in both 1998 and 1997 from the previous year due to our economic refinancings and redemption of higher-cost debt totaling approximately $6.1 million in 1998 and $39.4 million in 1997. Capital Resources and Liquidity We have significantly improved our financial position over the past five years as evidenced by our enhanced fixed charge coverage ratios and percentage of common stockholder's equity to total capitalization. Our SEC ratio of earnings to fixed charges improved to 4.14 at the end of 1998 from 2.16 at the end of 1993. Our indenture ratio, which is used to determine our ability to issue first mortgage bonds, increased from 2.99 at the end of 1993 to 4.92 at the end of 1998. Over the same period, the charter ratio, a measure of our ability to issue preferred stock, improved from 1.61 to 2.33 and our common stockholder's equity percentage of capitalization rose from approximately 33% at the end of 1993 to almost 44% at the end of 1998. Our improving financial position reflects ongoing efforts to increase competitiveness. We continue to streamline our operations, as evidenced by a 50% increase in FirstEnergy's customer/employee ratio, which has increased from 165 at the end of 1993 to 247 as of December 31, 1998. Merger-related savings through consolidation of activities have contributed to these results. Also, net debt redemptions and refinancings have lowered our average cost of long-term debt over the last five years from 8.36% in 1993 to 7.70% at the end of 1998. All cash requirements for the year, including debt repayments, were met with internally generated funds. Our cash requirements for 1999 for operating expenses, construction expenditures and scheduled debt maturities are expected to be met without issuing additional securities. Cash requirements of approximately $69 million for the 1999-2003 period to meet scheduled maturities of long-term debt and preferred stock are also expected to be funded internally. We had about $57.5 million of cash and temporary investments and no short-term indebtedness as of December 31, 1998. We also had a $2 million bank facility that provides for borrowings on a short-term basis at the bank's discretion. During 1998, our capital spending (excluding nuclear fuel) totaled approximately $16 million. Our capital spending for the period 1999-2003 is expected to be about $167 million (excluding nuclear fuel), of which approximately $28 million applies to 1999. Investments for additional nuclear fuel during the 1999-2003 period are estimated to be approximately $28 million, of which about $3 million applies to 1999. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $29 million and $6 million, respectively, as the nuclear fuel is consumed. FirstEnergy signed an agreement in principle with Duquesne Light Company (Duquesne) that would result in the transfer of 1,436 megawatts owned by Duquesne at five generating plants in exchange for 1,328 megawatts at three plants owned by FirstEnergy's electric utility operating companies (see "Common Ownership of Generating Facilities" in Note 1). A final agreement on the exchange of assets, which will be structured as a tax-free transaction to the extent possible is being negotiated. The transaction benefits FirstEnergy's utility operating companies by providing exclusive ownership and operating control of all generating assets that are now jointly owned and operated under the Central Area Power Coordination Group agreement. Interest Rate Risk Our exposure to fluctuations in market interest rates is mitigated since 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. Changes in the market value of our nuclear decommissioning trust funds are recognized by making a corresponding change to the decommissioning liability, as described in Note 1. 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.
- -------------------------------------------------------------------------------------------------- There- Fair 1999 2000 2001 2002 2003 after Total Value (Dollars in Millions) - -------------------------------------------------------------------------------------------------- Investments other than Cash and Cash Equivalents: Fixed Income $ 9 $ 9 $ 9 Average interest rate 5.1% 5.1% - ------------------------------------------------------------------------------------------------- Liabilities - ------------------------------------------------------------------------------------------------- Long-term Debt: Fixed rate $ 1 $24 $ 1 $ 1 $41 $200 $268 $284 Average interest rate 9.7% 6.2% 9.7% 9.7% 7.6% 7.0% 7.0% Variable rate $ 10 $ 10 $ 10 Average interest rate 4.2% 4.2% - ------------------------------------------------------------------------------------------------- Preferred Stock $ 1 $ 1 $ 13 $ 15 $ 16 Average dividend rate 7.6% 7.6% 7.6% 7.6% - -------------------------------------------------------------------------------------------------
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 has begun in our service area, allows retail customers to purchase electricity from other energy producers. Our regulatory plan provided a solid foundation to position us to meet the challenges we are now facing by facilitating the reduction of fixed costs. Application of SFAS 71 was discontinued for the generation portion of our business in June 1998 following PPUC approval of the rate restructuring plan. Customer choice will be phased in over two years with 66% of each customer class able to choose alternative suppliers of generation on January 2, 1999, and all remaining customers having choice as of January 2, 2000. Under the plan, we continue to deliver power to homes and businesses through our transmission and distribution system, which remains regulated. However, our rates have been restructured to establish separate charges for transmission and distribution; generation, which is subject to competition; and stranded cost recovery. In the event customers obtain power from an alternative source, the generation portion of our rates will be excluded from their bill and our 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, including regulatory assets. We are entitled to recover $234 million of stranded costs through a competitive transition charge that starts in 1999 and ends in 2005. The Clean Air Act Amendments of 1990, discussed in Note 5, require additional emission reductions by 2000. We are pursuing cost- effective compliance strategies for meeting these reduction requirements. On September 24, 1998, the Federal Environmental Protection Agency issued a final rule establishing tighter nitrogen oxide emission requirements for fossil fuel-fired utility boilers in Pennsylvania, Ohio and twenty other eastern states, including the District of Columbia (see "Environmental Matters" in Note 5). Controls must be in place by May 2003, with required reductions achieved during the five-month summer ozone season (May through September). The new rule is expected to increase the cost of producing electricity; however, we believe that we are in a better position than a number of other utilities to achieve compliance due to our nuclear generation capacity. In connection with FirstEnergy's regulatory plan to reduce fixed costs and lower rates, we continue to take steps to restructure our operations. FirstEnergy announced plans to transfer our transmission assets into a new subsidiary, American Transmission Systems, Inc., with the transfer expected to be finalized in 1999. The new subsidiary represents a first step toward the goal of establishing or becoming part of a larger independent transmission company (TransCo). We believe that a TransCo better addresses the Federal Energy Regulatory Commission's (FERC) stated transmission objectives of providing non-discriminatory service, while providing for streamlined and cost-efficient operation. In working toward the goal of forming a larger regional transmission entity, FirstEnergy, American Electric Power, Virginia Power and Consumers Energy announced in November 1998 that they would prepare a FERC filing during 1999 for such a regional transmission entity. The entity would be designed to meet the goals of reducing transmission costs that result when transferring power over several transmission systems, ensuring transmission reliability and providing non-discriminatory access to the transmission grid. Year 2000 Readiness 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. Because so many of our computer functions are date sensitive, this could cause far-reaching problems, such as system- wide computer failures and miscalculations, if no remedial action is taken. We have developed a multi-phase program for Year 2000 compliance that consists of an assessment of our systems and operations that could be affected by the Year 2000 problem; remediation or replacement of noncompliant systems and components; and testing of systems and components following such remediation or replacement. We have focused our Year 2000 review on three areas: centralized system applications, noncentralized systems and relationships with third parties (including suppliers as well as end- use customers). Our review of system readiness extends to systems involving customer service, safety, shareholder needs and regulatory obligations. We are committed to taking appropriate actions to eliminate or lessen negative effects of the Year 2000 issue on our operations. We have completed an inventory of all computer systems and hardware including equipment with embedded computer chips and have determined which systems need to be converted or replaced to become Year 2000- ready and are in the process of remediating them. Based on our timetable, we expect to have all identified repairs, replacements and upgrades completed to achieve Year 2000 readiness by September 1999. Most of our Year 2000 issues will be resolved through system replacement. Of our major centralized systems, the general ledger system and inventory management, procurement and accounts payable systems were replaced at the end of 1998. Our payroll system was enhanced to be Year 2000 compliant in July 1998. The customer service system is due to be replaced in mid-1999. We have completed formal communications with most of our key suppliers to determine the extent to which we are vulnerable to those third parties' failure to resolve their own Year 2000 problems. For suppliers having potential compliance problems, we are developing alternate sources and services in the event such noncompliance occurs. We are also identifying areas requiring higher inventory levels based on compliance uncertainties. There can be no guarantee that the failure of companies to resolve their own Year 2000 issue will not have a material adverse effect on our business, financial condition and results of operations. We are using both internal and external resources to reprogram and/or replace and test our software for Year 2000 modifications. Of the $6 million total project cost, approximately $5 million will be capitalized since those costs are attributable to the purchase of new software for total system replacements because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $1 million will be expensed as incurred. As of December 31, 1998, we have spent $3 million for Year 2000 capital projects and had expensed approximately $600,000 for Year 2000-related maintenance activities. Our total Year 2000 project cost, as well as our estimates of the time needed to complete remedial efforts, are based on currently available information and do not include the estimated costs and time associated with the impact of third party Year 2000 issues. We believe we are managing the Year 2000 issue in such a way that our customers will not experience any interruption of service. We believe the most likely worst-case scenario from the Year 2000 issue will be disruption in power plant monitoring systems, thereby producing inaccurate data and potential failures in electronic switching mechanisms at transmission junctions. This would prolong localized outages, as technicians would have to manually activate switches. Such an event could have a material, but currently undeterminable, effect on our financial results. We are developing contingency plans to address the effects of any delay in becoming Year 2000 compliant and expect to have contingency plans completed by June 1999. The costs of the project and the dates 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. PENNSYLVANIA POWER COMPANY STATEMENTS OF INCOME
For the Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------ (In thousands) OPERATING REVENUES $323,756 $323,381 $322,625 -------- -------- -------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 76,801 67,345 67,443 Nuclear operating costs 22,968 26,220 22,064 Other operating costs 52,348 66,518 59,753 -------- -------- -------- Total operation and maintenance expenses 152,117 160,083 149,260 Provision for depreciation and amortization 59,264 64,628 57,114 General taxes 22,540 22,379 24,015 Income taxes 31,794 25,555 29,907 -------- -------- -------- Total operating expenses and taxes 265,715 272,645 260,296 -------- -------- -------- OPERATING INCOME 58,041 50,736 62,329 OTHER INCOME 2,485 2,760 5,760 -------- -------- -------- INCOME BEFORE NET INTEREST CHARGES 60,526 53,496 68,089 -------- -------- -------- NET INTEREST CHARGES: Interest on long-term debt 19,255 20,458 25,715 Interest on nuclear fuel obligations 28 276 219 Allowance for borrowed funds used during construction (294) (414) (387) Other interest expense 1,789 1,704 1,955 -------- -------- -------- Net interest charges 20,778 22,024 27,502 -------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM 39,748 31,472 40,587 EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 1) (30,522) -- -- -------- -------- -------- NET INCOME 9,226 31,472 40,587 PREFERRED STOCK DIVIDEND REQUIREMENTS 4,626 4,626 4,626 -------- -------- -------- EARNINGS ON COMMON STOCK $ 4,600 $ 26,846 $ 35,961 ======== ======== ========
PENNSYLVANIA POWER COMPANY BALANCE SHEETS
At December 31, 1998 1997 - ---------------------------------------------------------------------------------------------------- (In thousands) ASSETS UTILITY PLANT: In service $686,771 $1,237,562 Less-Accumulated provision for depreciation 291,188 508,981 -------- ---------- 395,583 728,581 -------- ---------- Construction work in progress- Electric plant 17,187 7,427 Nuclear fuel 508 6,788 -------- ---------- 17,695 14,215 -------- ---------- 413,278 742,796 -------- ---------- OTHER PROPERTY AND INVESTMENTS 29,177 26,157 -------- ---------- CURRENT ASSETS: Cash and cash equivalents 7,485 660 Notes receivable from parent company (Note 4) 50,000 17,500 Receivables- Customers (less accumulated provisions of $3,599,000 and $3,609,000, respectively, for uncollectible accounts) 34,737 33,934 Associated companies 34,430 12,599 Other 12,472 14,426 Materials and supplies, at average cost 15,515 14,973 Prepayments 2,657 1,707 -------- ---------- 157,296 95,799 -------- ---------- DEFERRED CHARGES: Regulatory assets 371,027 162,966 Other 6,994 6,739 -------- ---------- 378,021 169,705 -------- ---------- $977,772 $1,034,457 ======== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Statements of Capitalization): Common stockholder's equity $275,281 $ 291,977 Preferred stock- Not to subject to mandatory redemption 50,905 50,905 Subject mandatory redemption 15,000 15,000 Long-term debt- Associated companies 6,617 9,231 Other 281,072 280,074 -------- ---------- 628,875 647,187 -------- ---------- CURRENT LIABILITIES: Currently payable long-term debt- Associated companies 5,557 6,958 Other 984 1,443 Accounts payable- Associated companies 9,676 6,788 Other 23,156 22,751 Accrued taxes 12,849 12,332 Accrued interest 6,519 6,588 Other 17,046 14,746 -------- ---------- 75,787 71,606 -------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 212,427 239,952 Accumulated deferred investment tax credits 7,787 26,052 Other 52,896 49,660 -------- ---------- 273,110 315,664 -------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 2 and 5) -------- ---------- $977,772 $1,034,457 ======== ========== The accompanying Notes to Financial Statements are an integral part of these balance sheets.
PENNSYLVANIA POWER COMPANY STATEMENTS OF CAPITALIZATION
At December 31, 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) COMMON STOCKHOLDER'S EQUITY: Common stock, $30 par value, 6,500,000 shares authorized, 6,290,000 shares outstanding $188,700 $188,700 Other paid-in capital (310) (310) Accumulated other comprehensive income (Note 3B) -- (90) Retained earnings (Note 3A) 86,891 103,677 -------- -------- Total common stockholder's equity 275,281 291,977 -------- -------- Number of Shares Optional Outstanding Redemption Price ----------------- ----------------------- 1998 1997 Per Share Aggregate ---- ---- --------- --------- PREFERRED STOCK (Note 3C): 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 3D): 7.625% 150,000 150,000 106.86 $16,029 15,000 15,000 ======= ======= ======= -------- -------- LONG-TERM DEBT (Note 3E): First mortgage bonds- 9.740% due 1999-2019 20,000 20,000 7.500% due 2003 40,000 40,000 6.375% due 2004 20,500 20,500 6.625% due 2004 14,000 14,000 8.500% due 2022 27,250 27,250 7.625% due 2023 6,500 6,500 -------- -------- Total first mortgage bonds 128,250 128,250 -------- -------- Secured notes- 4.750% due 1998 -- 850 6.080% due 2000 23,000 23,000 5.400% due 2013 1,000 1,000 5.400% due 2017 10,600 10,600 7.150% due 2017 17,925 17,925 5.900% due 2018 16,800 16,800 8.100% due 2020 5,200 5,200 7.150% due 2021 14,482 14,482 6.150% due 2023 12,700 12,700 *4.150% due 2027 10,300 10,300 6.450% due 2027 14,500 14,500 5.375% due 2028 1,734 -- 5.450% due 2028 6,950 6,950 6.000% due 2028 14,250 14,250 5.950% due 2029 238 238 -------- -------- Total secured notes 149,679 148,795 -------- -------- Other obligations- Nuclear fuel 12,174 16,189 Capital leases (Note 2) 4,635 5,022 -------- -------- Total other obligations 16,809 21,211 -------- -------- Net unamortized discount on debt (508) (550) -------- -------- Long-term debt due within one year (6,541) (8,401) -------- -------- Total long-term debt 287,689 289,305 -------- -------- TOTAL CAPITALIZATION $628,875 $647,187 ======== ======== * Denotes variable rate issue with December 31, 1998 interest rate shown. The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
Accumulated Other Comprehensive Other Comprehensive Income Number Par Paid-In Income Retained (Note 3B) of Shares Value Capital (Note 3B) Earnings ------------- ---------- ------- ------- -------------- --------- (Dollars in thousands) Balance, January 1, 1996 6,290,000 $188,700 $(310) $(112) $ 83,642 Net income $40,587 40,587 Minimum liability for unfunded retirement benefits, net of $7,000 of income taxes 9 9 ------- Comprehensive income $40,596 ======= Cash dividends on common stock (21,386) Cash dividends on preferred stock (4,626) - ----------------------------------------------------------------------------------------------------- Balance, December 31, 1996 6,290,000 188,700 (310) (103) 98,217 Net income $31,472 31,472 Minimum liability for unfunded retirement benefits, net of $9,000 of income taxes 13 13 ------- Comprehensive income $31,485 ======= Cash dividends on common stock (21,386) Cash dividends on preferred stock (4,626) - ------------------------------------------------------------------------------------------------------ Balance, December 31, 1997 6,290,000 188,700 (310) (90) 103,677 Net income $ 9,226 9,226 Transfer of minimum liability for unfunded retirement benefits to FirstEnergy 90 90 ------- Comprehensive income $ 9,316 ======= Cash dividends on common stock (21,386) Cash dividends on preferred stock (4,626) - ------------------------------------------------------------------------------------------------------ Balance, December 31, 1998 6,290,000 $188,700 $(310) $ -- $ 86,891 ======================================================================================================
STATEMENTS OF PREFERRED STOCK
Not Subject to Subject to Mandatory Redemption Mandatory Redemption -------------------- -------------------- Number Par Number Par of Shares Value of Shares Value --------- ------- ---------- ------- (Dollars in thousands) Balance, January 1, 1996 509,049 $50,905 150,000 $15,000 - ----------------------------------------------------------------------------- Balance, December 31, 1996 509,049 50,905 150,000 15,000 - ----------------------------------------------------------------------------- Balance, December 31, 1997 509,049 50,905 150,000 15,000 - ----------------------------------------------------------------------------- Balance, December 31, 1998 509,049 $50,905 150,000 $15,000 ============================================================================= The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------------------------ (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 9,226 $31,472 $ 40,587 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation and amortization 59,264 64,628 57,114 Nuclear fuel and lease amortization 5,418 7,172 8,693 Other amortization, net (330) (1,187) (1,700) Deferred income taxes, net (20,007) (6,631) 396 Investment tax credits, net (2,289) (2,331) (2,138) Deferred fuel costs, net -- -- 3,220 Extraordinary item 51,730 -- -- Receivables (20,680) 6,515 (1,193) Materials and supplies (542) (704) 1,319 Accounts payable 3,293 (4,476) (2,472) Other 3,148 (5,707) (12,087) -------- ------- -------- Net cash provided from operating activities 88,231 88,751 91,739 -------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 1,563 9,942 -- Redemptions and Repayments- Long-term debt 6,088 39,464 84,347 Dividend Payments- Common stock 21,386 21,386 21,386 Preferred stock 4,626 4,626 4,626 -------- ------- -------- Net cash used for financing activities 30,537 55,534 110,359 -------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 16,495 14,513 20,361 Loan to parent 32,500 15,000 -- Loan payment from parent -- -- (19,500) Other 1,874 4,431 116 -------- ------- -------- Net cash used for investing activities 50,869 33,944 977 -------- ------- -------- Net increase (decrease) in cash and cash equivalents 6,825 (727) (19,597) Cash and cash equivalents at beginning of year 660 1,387 20,984 -------- ------- -------- Cash and cash equivalents at end of year $ 7,485 $ 660 $ 1,387 ======== ======= ======== SUPPLEMENTAL CASH FLOWS INFORMATION: Cash paid during the year- Interest (net of amounts capitalized) $ 19,057 $21,137 $ 26,653 ======== ======= ======== Income taxes $ 32,290 $38,324 $ 36,815 ======== ======= ======== The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY STATEMENT OF TAXES
For the Years Ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------- (In thousands) GENERAL TAXES: State gross receipts $ 10,830 $ 11,267 $ 12,305 Real and personal property 6,893 6,060 6,178 State capital stock 2,774 2,566 2,820 Social security and unemployment 1,894 2,224 2,064 Other 149 262 648 -------- -------- -------- Total general taxes $ 22,540 $ 22,379 $ 24,015 ======== ======== ======== PROVISION FOR INCOME TAXES: Currently payable- Federal $ 25,938 $ 27,560 $ 27,282 State 7,654 8,061 7,881 -------- -------- -------- 33,592 35,621 35,163 -------- -------- -------- Deferred, net- Federal (15,454) (5,096) 272 State (4,553) (1,535) 124 -------- -------- -------- (20,007) (6,631) 396 -------- -------- -------- Investment tax credit amortization (2,289) (2,331) (2,138) -------- -------- -------- Total provision for income taxes $ 11,296 $ 26,659 $ 33,421 ======== ======== ======== INCOME STATEMENT CLASSIFICATION OF PROVISION FOR INCOME TAXES: Operating expenses $ 31,794 $ 25,555 $ 29,907 Other income 710 1,104 3,514 Extraordinary item (21,208) -- -- -------- -------- -------- Total provision for income taxes $ 11,296 $ 26,659 $ 33,421 ======== ======== ======== RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES: Book income before provision for income taxes $ 20,522 $ 58,131 $ 74,008 ======== ======== ======== Federal income tax expense at statutory rate $ 7,183 $ 20,346 $ 25,903 Increases (reductions) in taxes resulting from: State income taxes, net of federal income tax benefit 2,016 4,242 5,203 Amortization of investment tax credits (2,289) (2,331) (2,138) Amortization of tax regulatory assets 4,745 4,554 4,423 Other, net (359) (152) 30 -------- -------- -------- Total provision for income taxes $ 11,296 $ 26,659 $ 33,421 ======== ======== ======== ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31: Competitive transition charge $135,730 $ -- $ -- Property basis differences 69,867 172,094 178,886 Allowance for equity funds used during construction 7,219 29,875 33,677 Deferred nuclear expense -- 7,163 8,031 Customer receivables for future income taxes 9,690 37,954 40,901 Unamortized investment tax credits (3,193) (10,681) (11,635) Other (6,886) 3,547 3,916 -------- -------- -------- Net deferred income tax liability $212,427 $239,952 $253,776 ======== ======== ======== The accompanying Notes to Financial Statements are an integral part of these statements.
NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The Company, a wholly owned subsidiary of Ohio Edison Company (Edison), follows the accounting policies and practices prescribed by the Pennsylvania Public Utility Commission (PPUC) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Certain prior year amounts have been reclassified to conform with the current year presentation. REVENUES- The Company's principal business is providing electric service to customers in western Pennsylvania. The Company's retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service through the end of the year. Receivables from customers include sales to residential, commercial and industrial customers located in the Company's service area and sales to wholesale customers. There was no material concentration of receivables at December 31, 1998 or 1997, with respect to any particular segment of the Company's customers. REGULATORY PLAN- In June 1998, the PPUC authorized a rate restructuring plan for the Company, which superseded the regulatory plan which had been in place for the Company since 1996, and essentially resulted in the deregulation of the Company's generation business as of June 30, 1998. The Company was required to remove from its balance sheet all regulatory assets and liabilities related to its generation business and assess all other assets for impairment. The Securities and Exchange Commission (SEC) issued interpretive guidance regarding asset impairment measurement which concluded 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 those assets are impaired, a regulatory asset should be established if the costs are recoverable through regulatory cash flows. Consistent with the SEC guidance, the Company 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 remaining net amount of $78 million was written off. The charge of $51.7 million ($30.5 million after income taxes) for discontinuing the application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), to the Company's generation business was recorded as an extraordinary item on the Statement of Income. The Company's net assets included in utility plant relating to the operations for which the application of SFAS 71 was discontinued were $146 million as of December 31, 1998. All of the Company's regulatory assets are being recovered under provisions of the regulatory plan. In addition, the PPUC had authorized the Company to accelerate at least $358 million, more than the amounts that would have been recognized if the regulatory plan was not in effect. These additional amounts are being recovered through current rates. As of December 31, 1998, the Company's cumulative additional capital recovery and regulatory asset amortization amounted to $184 million (including the impairment discussed above). In December 1996, Pennsylvania enacted "The Electricity Generation Customer Choice and Competition Act," which permitted customers, including the Company's customers, to choose their electric generation supplier, while transmission and distribution services will continue to be supplied by their current providers. Customer choice will be phased in over two years with 66% of each customer class able to choose alternative suppliers of generation on January 2, 1999, and all remaining customers having choice as of January 2, 2000. Under the rate restructuring plan, the Company continues to deliver power to homes and businesses through its transmission and distribution system, which remains regulated by the PPUC. The Company's rates have been restructured to establish separate charges for transmission and distribution; generation, which is subject to competition; and stranded cost recovery. In the event customers obtain power from an alternative source, the generation portion of the Company's rates 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, including regulatory assets. The Company is entitled to recover $234 million of stranded costs through a CTC that starts in 1999 and ends in 2005. UTILITY PLANT AND DEPRECIATION- Utility plant reflects the original cost of construction (except for nuclear generating units which were adjusted to fair value as discussed above), including payroll and related costs such as taxes, employee benefits, administrative and general costs, and interest costs. The Company provides for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The annual composite rate for electric plant was approximately 3.0% in 1998 and 2.7% in 1997 and 1996. In addition to the straight-line depreciation recognized in 1998, 1997 and 1996, the Company also recognized additional capital recovery of $15 million, $27 million and $20 million, respectively, as additional depreciation expense in accordance with the regulatory plan. Annual depreciation expense includes approximately $3.1 million for future decommissioning costs applicable to the Company's ownership interest in two nuclear generating units. The Company's share of the future obligation to decommission these units is approximately $88 million in current dollars and (using a 4.0% escalation rate) approximately $205 million in future dollars. The estimated obligation and the escalation rate were developed based on site specific studies. Payments for decommissioning are expected to begin in 2016, when actual decommissioning work begins. The Company has recovered approximately $12 million for decommissioning through its electric rates from customers through December 31, 1998. If the actual costs of decommissioning the units exceed the funds accumulated from investing amounts recovered from customers, the Company expects that additional amount to be recoverable from its customers. The Company has approximately $13.7 million invested in external decommissioning trust funds as of December 31, 1998. Earnings on these funds are reinvested with a corresponding increase to the decommissioning liability. The Company has also recognized an estimated liability of approximately $3.0 million at December 31, 1998 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 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 subsequently expanded the scope of the proposed standard to include other closure and removal obligations related to long-lived assets. A revised proposal may be issued by the FASB in 1999. COMMON OWNERSHIP OF GENERATING FACILITIES- The Company and other Central Area Power Coordination Group (CAPCO) companies own, as tenants in common, various power generating facilities. Each of the companies is obligated to pay a share of the costs associated with any jointly owned facility in the same proportion as its interest. The Company's portion of operating expenses associated with jointly owned facilities is included in the corresponding operating expenses on the Statements of Income. The amounts reflected on the Balance Sheet under utility plant at December 31, 1998, include the following:
Utility Accumulated Construction Company's Generating Plant Provision for Work in Ownership Units in Service Depreciation Progress Interest - --------------------------------------------------------------------------- (In millions) W. H. Sammis #7 $ 57.8 $21.8 $0.3 20.80% Bruce Mansfield #1, #2 and #3 98.9 47.3 0.6 5.76% Beaver Valley #1 18.6 1.2 2.2 17.50% Perry #1 1.5 0.6 1.1 5.24% - -------------------------------------------------------------------------- Total $176.8 $70.9 $4.2 ==========================================================================
On October 15, 1998, FirstEnergy Corp. (FirstEnergy) the parent company of Edison, announced that it signed an agreement in principle with Duquesne Light Company (Duquesne) that would result in the transfer of 1,436 megawatts owned by Duquesne at eight CAPCO generating units in exchange for 1,328 megawatts at three non-CAPCO power plants owned by the Company, Edison and The Cleveland Electric Illuminating Company, an affiliate. As part of this exchange, the Company will transfer its 339-megawatt New Castle Plant and its 4- megawatt interest in the Niles Plant to Duquesne. A definitive agreement on the exchange of assets, which will be structured as a tax-free transaction to the extent possible, will provide FirstEnergy's utility operating companies with exclusive ownership and operating control of all CAPCO generating units. Duquesne will fund decommissioning costs equal to its percentage interest in the three nuclear generating units to be transferred. The asset transfer is expected to take twelve to eighteen months to close. NUCLEAR FUEL- OES Fuel, Incorporated (OES Fuel), a wholly owned subsidiary of Edison, is the sole lessor for the Company's nuclear fuel requirements. Minimum lease payments during the next five years are estimated to be as follows: (In millions) - ------------------------------- 1999 $6.3 2000 3.6 2001 2.2 2002 1.2 2003 0.2 - ------------------------------ The Company amortizes the cost of nuclear fuel based on the rate of consumption. The Company's electric rates include amounts for the future disposal of spent nuclear fuel based upon the formula used to compute payments to the DOE. INCOME TAXES- Details of the total provision for income taxes are shown on the Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. The liability method is used to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. Since Edison became a wholly owned subsidiary of FirstEnergy on November 8, 1997, the Company is included in FirstEnergy's consolidated federal income tax return. The consolidated tax liability is allocated on a "stand- alone" company basis, with the Company recognizing any tax losses or credits it contributed to the consolidated return. RETIREMENT BENEFITS- The Company's trusteed, noncontributory defined benefit pension plan covers almost all full-time employees. Upon retirement, employees receive a monthly pension based on length of service and compensation. In 1998, the Company's, Edison's and Centerior Energy Corporation pension plans were merged into the FirstEnergy pension plans. The Company uses the projected unit credit method for funding purposes and was not required to make pension contributions during the three years ended December 31, 1998. The assets of the pension plans consist primarily of common stocks, United States government bonds and corporate bonds. The Company provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Company pays insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Company. The Company recognizes the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the FirstEnergy plans in 1998 and the Company's plans in 1997 and amounts recognized on the Balance Sheets as of December 31 (which includes the Company's share of the FirstEnergy 1998 plans' net prepaid pension cost and accrued other postretirement benefits costs of $9.0 million and $28.4 million, respectively):
Other Pension Benefits Postretirement Benefits ---------------- ----------------------- 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1* $1,327.5 $122.8 $ 534.1 $ 43.7 Service cost 25.0 2.7 7.5 0.9 Interest cost 92.5 8.9 37.6 3.2 Plan amendments 44.3 0.5 40.1 -- Early retirement program expense -- 5.8 -- 0.3 Actuarial loss 101.6 10.1 10.7 1.5 Benefits paid (90.8) (8.4) (28.7) (2.3) - --------------------------------------------------------------------------------------------- Benefit obligation as of December 31 1,500.1 142.4 601.3 47.3 - --------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets as of January 1* 1,542.5 150.5 2.8 0.2 Actual return on plan assets 231.3 30.0 0.7 0.1 Company contribution -- -- 0.4 -- Benefits paid (90.8) (8.4) -- -- - --------------------------------------------------------------------------------------------- Fair value of plan assets as of December 31 1,683.0 172.1 3.9 0.3 - --------------------------------------------------------------------------------------------- Funded status of plan* 182.9 29.7 (597.4) (47.0) Unrecognized actuarial loss (gain) (110.8) (25.7) 30.6 4.3 Unrecognized prior service cost 63.0 4.2 27.4 (4.0) Unrecognized net transition obligation (asset) (18.0) (5.3) 129.3 21.4 - --------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 117.1 $ 2.9 $(410.1) $(25.3) ============================================================================================= Assumptions used as of December 31: Discount rate 7.00% 7.25% 7.00% 7.25% Expected long-term return on plan assets 10.25% 10.00% 10.25% 10.00% Rate of compensation increase 4.00% 4.00% 4.00% 4.00% * 1998 beginning balances reflect 1998 merger of the Company's, Edison's and Centerior plans into FirstEnergy plans.
Net pension and other postretirement benefit costs for the three years ended December 31, 1998 (including the Company's share of FirstEnergy plans' 1998 pension benefits costs and other postretirement benefit costs of $(6.1) million and $5.4 million, respectively) were computed as follows:
Other Pension Benefits Postretirement Benefits -------------------- ---------------------- 1998 1997 1996 1998 1997 1996 - --------------------------------------------------------------------------------------------- (In millions) Service cost $ 25.0 $ 2.7 $ 3.2 $ 7.5 $0.9 $ 1.1 Interest cost 92.5 8.9 9.5 37.6 3.2 3.2 Expected return on plan assets (152.7) (14.7) (12.3) (0.3) -- -- Amortization of transition obligation (asset) (8.0) (1.0) (1.0) 9.2 1.2 1.7 Amortization of prior service cost 2.3 0.4 0.4 (0.8) -- (0.3) Recognized net actuarial gain (2.6) (0.4) -- -- -- -- Voluntary early retirement program expense -- 5.8 -- -- 0.3 -- Plan curtailment loss (gain) -- -- (4.3) -- -- 3.5 - ------------------------------------------------------------------------------------------- Net benefit cost $ (43.5) $ 1.7 $ (4.5) $53.2 $5.6 $ 9.2 ============================================================================================
In accordance with SFAS 88 "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," the 1996 net pension costs and postretirement benefit costs shown above included curtailment effects (significant changes in projected plan assumptions) relating to the pension and postretirement benefit plans. The employee terminations reflected in the Company's 1996 restructuring activities represented a plan curtailment that significantly reduced the expected future employee service years and the related accrual of defined pension and postretirement benefits. In the pension plan, the reduction in the benefit obligation increased the net pension asset and was shown as a plan curtailment gain. In the postretirement benefit plan, the unrecognized prior service cost associated with service years no longer expected to be rendered as a result of the terminations, was shown as a plan curtailment loss. The FirstEnergy plans' health care trend rate assumption is 5.5% in the first year gradually decreasing to 4.0% for the year 2008 and later. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. An increase in the health care trend rate assumption by one percentage point would increase the total service and interest cost components by $4.0 million and the postretirement benefit obligation by $68.1 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $3.2 million and the postretirement benefit obligation by $55.2 million. TRANSACTIONS WITH AFFILIATED COMPANIES- Transactions with affiliated companies are included on the Statements of Income as follows:
1998 1997 1996 - ------------------------------------------------------------------- (In millions) Operating revenues: Electric sales $ 9.8 $ 6.1 $ 3.6 Bruce Mansfield Plant administrative and general charges to affiliates 6.3 0.9 -- Other transactions 0.7 0.4 0.4 - ------------------------------------------------------------------- $16.8 $ 7.4 $ 4.0 =================================================================== Fuel and purchased power: Purchased power $20.9 $12.7 $13.2 Nuclear fuel leased from OES Fuel 5.9 7.5 9.6 - ------------------------------------------------------------------- $26.8 $20.2 $22.8 =================================================================== Other operating costs: Rental of transmission lines $ 1.3 $ 1.0 $ 1.0 Data processing services 2.8 2.9 2.5 Other transactions 5.4 4.4 3.9 - ------------------------------------------------------------------- $ 9.5 $ 8.3 $ 7.4 ===================================================================
SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Balance Sheets. The Company reflects temporary cash investments at cost, which approximates their market value. Noncash financing and investing activities included capital lease transactions amounting to $0.8 million, $8.5 million and $4.1 million for the years 1998, 1997 and 1996, respectively. All borrowings with initial maturities of less than one year are defined as financial instruments under generally accepted accounting principles and are reported on the Balance Sheets at cost, which approximates their fair market value. The following sets forth the approximate fair value and related carrying amounts of all other long-term debt, preferred stock subject to mandatory redemption and investments other than cash and cash equivalents as of December 31:
1998 1997 - -------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value - -------------------------------------------------------------------- (In millions) Long-term debt $278 $294 $277 $291 Preferred stock 15 16 15 15 Investments other than cash and cash equivalents 17 21 14 15 - --------------------------------------------------------------------
The fair values of long-term debt and preferred stock reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by a corporation with credit ratings similar to the Company's ratings. The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents consist primarily of decommissioning trust investments. Unrealized gains and losses applicable to the decommissioning trust have been recognized in the trust investment with a corresponding change to the decommissioning liability. The Company has no securities held for trading purposes. REGULATORY ASSETS- The Company recognizes, as regulatory assets, costs which the FERC and PPUC have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets are being recovered from customers under the Company's regulatory plan. Based on the regulatory plan, at this time, the Company believes it will continue to be able to bill and collect cost-based rates relating to the Company's nongeneration operations; accordingly, it is appropriate that the Company continues the application of SFAS 71 relating to those operations. The Company recognized additional cost recovery of $24 million, $11 million and $8 million in 1998, 1997 and 1996, respectively, as additional regulatory asset amortization in accordance with its regulatory plan. Regulatory assets on the Balance Sheets are comprised of the following:
1998 1997 - ------------------------------------------------------------------- (In millions) Competitive transition charge $331.0 $ -- Customer receivables for future income taxes 23.6 92.6 Nuclear unit expenses -- 17.5 Perry Unit 2 termination -- 36.7 Loss on reacquired debt 8.2 9.2 DOE decommissioning and decontamination costs 0.3 3.6 Employee postretirement benefit costs 6.2 -- Other 1.7 3.4 - ------------------------------------------------------------------- Total $371.0 $163.0 ===================================================================
2. LEASES The Company leases certain transmission facilities, office space and other property and equipment under cancelable and noncancelable leases. Consistent with the regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Statements of Income. Such costs for the three years ended December 31, 1998, are summarized as follows:
1998 1997 1996 - ----------------------------------------------------- (In millions) Operating leases Interest element $0.5 $0.5 $0.5 Other 1.3 1.5 1.3 Capital leases Interest element 0.6 0.7 0.7 Other 0.7 0.8 0.9 - --------------------------------------------------- Total rental payments $3.1 $3.5 $3.4 ===================================================
The future minimum lease payments as of December 31, 1998, are:
Capital Operating Leases Leases - ------------------------------------------------------------------ (In millions) 1999 $ 1.3 $0.2 2000 1.2 0.2 2001 1.0 0.2 2002 1.0 0.2 2003 0.9 0.2 Years thereafter 9.6 3.0 - -------------------------------------------------------------- Total minimum lease payments 15.0 $4.0 ==== Executory costs 3.1 - ----------------------------------------------- Net minimum lease payments 11.9 Interest portion 7.3 - ----------------------------------------------- Present value of net minimum lease payments 4.6 Less current portion 0.5 - ----------------------------------------------- Noncurrent portion $ 4.1 ===============================================
3. CAPITALIZATION: (A) RETAINED EARNINGS- Under the Company's Charter, the Company's retained earnings unrestricted for payment of cash dividends on the Company's common stock were $75.3 million at December 31, 1998. (B) COMPREHENSIVE INCOME- In 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income," and applied the standard to all periods presented in the Statements of Common Stockholder's Equity. Comprehensive income includes net income as reported on the Statements of Income and all other changes in common stockholder's equity except dividends to stockholders. (C) PREFERRED STOCK- The Company's 7.75% series of preferred stock has restrictions which prevent early redemption prior to July 2003. All other preferred stock may be redeemed by the Company in whole, or in part, with 30-60 days' notice. (D) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- The Company's 7.625% series has an annual sinking fund requirement for 7,500 shares beginning on October 1, 2002. (E) LONG-TERM DEBT- The first mortgage indenture and its supplements, which secure all of the Company's first mortgage bonds, serve as a direct first mortgage lien on substantially all property and franchises, other than specifically excepted property, owned by the Company. Long-term debt maturities (excluding capital leases) during the next five years are $0.5 million in 1999, $24.0 million in 2000, $1.0 million in 2001, $1.0 million in 2002 and $41.0 million in 2003. The Company's obligations to repay certain pollution control revenue bonds are secured by series of first mortgage bonds and, in some cases, by subordinate liens on the related pollution control facilities. 4. SHORT-TERM BORROWINGS: The Company has a credit agreement with Edison whereby either company can borrow funds from the other by issuing unsecured notes at the prevailing prime or similar interest rate. Under the terms of this agreement, the maximum borrowing is limited only by the availability of funds; however, the Company's borrowing under this agreement is currently limited by the PPUC to a total of $50 million. Either company can terminate the agreement with six months' notice. 5. COMMITMENTS, GUARANTEES AND CONTINGENCIES: CAPITAL EXPENDITURES- The Company's current forecast reflects expenditures of approximately $167 million for property additions and improvements from 1999 through 2003, of which approximately $28 million is applicable to 1999. Investments for additional nuclear fuel during the 1999-2003 period are estimated to be approximately $28 million, of which approximately $3 million applies to 1999. During the same periods, the Company's nuclear fuel investments are expected to be reduced by approximately $29 million and $6 million, respectively, as the nuclear fuel is consumed. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $9.7 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on its present ownership interests in Beaver Valley Unit 1 and the Perry Plant, the Company's maximum potential assessment under the industry retrospective rating plan (assuming the other co-owners contribute their proportionate shares of any assessments under the retrospective rating plan) would be $20 million per incident but not more than $2.3 million in any one year for each incident. The Company is also insured as to its interest in Beaver Valley Unit 1 and the Perry Plant under policies issued to the operating company for each plant. Under these policies, up to $2.75 billion is provided for property damage and decontamination and decommissioning costs. The Company has also obtained approximately $69.5 million of insurance coverage for replacement power costs for its interests in Perry and Beaver Valley Unit 1. Under these policies, the Company can be assessed a maximum of approximately $2.8 million for incidents at any covered nuclear facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses. The Company intends to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at any of the Company's plants exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Company's insurance policies, or to the extent such insurance becomes unavailable in the future, the Company would remain at risk for such costs. GUARANTEE- The Company, together with the other CAPCO companies, has severally guaranteed certain debt and lease obligations in connection with a coal supply contract for the Bruce Mansfield Plant. As of December 31, 1998, the Company's share of the guarantee (which approximates fair market value) was $3.6 million. The price under the coal supply contract, which includes certain minimum payments, has been determined to be sufficient to satisfy the debt and lease obligations. The Company's total payments under the coal supply contract were $15.0 million, $13.3 million and $11.1 million during 1998, 1997, and 1996, respectively. The Company's minimum payment for 1999 is approximately $4 million. The contract expires December 31, 1999. ENVIRONMENTAL MATTERS- Various federal, state and local authorities regulate the Company with regard to air and water quality and other environmental matters. The Company has estimated additional capital expenditures for environmental compliance of approximately $47 million, which is included in the construction forecast provided under "Capital Expenditures" for 1999 through 2003. The Company is in compliance with the current sulfur dioxide (SO2) and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions in 1999 will be achieved by burning lower-sulfur fuel, generating more electricity from lower- emitting plants, and/or purchasing emission allowances. Plans for complying with reductions required for the year 2000 and thereafter have not been finalized. In September 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions from the Company's Pennsylvania facilities by May 2003. The EPA's NOx Transport Rule imposes uniform reductions of NOx emissions across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. By September 1999, each of the twenty-two states are required to submit revised State Implementation Plans (SIP) which comply with individual state NOx budgets established by the EPA. These state NOx budgets contemplate an 85% reduction in utility plant NOx emissions from 1990 emissions. A proposed Federal Implementation Plan accompanied the NOx Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In another separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NOx emissions which are alleged to contribute to ozone pollution in the eight petitioning states. The EPA suggests that the Section 126 petitions will be adequately addressed by the NOx Transport Program, but a September 1998 proposed rulemaking established an alternative program which would require nearly identical 85% NOx reductions at the Company's Ohio and Pennsylvania plants by May 2003 in the event implementation of the NOx Transport Rule is delayed. FirstEnergy continues to evaluate its compliance plans and other compliance options and currently estimates its additional capital expenditures for NOx reductions may reach $500 million. The Company is required to meet federally approved SO2 regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $25,000 for each day the unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Company cannot predict what action the EPA may take in the future with respect to 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 Company operates affected facilities. Legislative, administrative and judicial actions will continue to change the way that the Company must operate in order to comply with environmental laws and regulations. With respect to any such changes and to the environmental matters described above, the Company expects that any resulting additional capital costs which may be required, as well as any required increase in operating costs, would ultimately be reflected in its generation supply prices. 6. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain operating results by quarter for 1998 and 1997.
March 31, June 30, September 30, December 31, Three Months Ended 1998 1998 1998 1998 - ------------------------------------------------------------------------------------------- (In millions) Operating Revenues $78.5 $ 80.3 $87.9 $77.0 Operating Expenses and Taxes 65.9 70.3 71.5 58.0 - ---------------------------------------------------------------------------------------- Operating Income 12.6 10.0 16.4 19.0 Other Income 0.7 0.6 0.6 0.6 Net Interest Charges 5.4 5.2 5.2 5.1 - ---------------------------------------------------------------------------------------- Income Before Extraordinary Item 7.9 5.4 11.8 14.5 Extraordinary Item (Net of Income Taxes) (Note 1) -- (30.5) -- -- Net Income (Loss) $ 7.9 $(25.1) $11.8 $14.5 ======================================================================================== Earnings (Loss) on Common Stock $ 6.8 $(26.2) $10.7 $13.3 ========================================================================================
March 31, June 30, September 30, December 31, Three Months Ended 1997 1997 1997 1997 - -------------------------------------------------------------------------------------------- (In millions) Operating Revenues $79.0 $79.2 $85.2 $79.9 Operating Expenses and Taxes 65.4 66.2 69.6 71.4 - ---------------------------------------------------------------------------------------- Operating Income 13.6 13.0 15.6 8.5 Other Income 0.7 0.3 0.8 0.9 Net Interest Charges 5.7 5.5 5.5 5.2 - ---------------------------------------------------------------------------------------- Net Income $ 8.6 $ 7.8 $10.9 $ 4.2 ========================================================================================= Earnings on Common Stock $ 7.4 $ 6.6 $ 9.7 $ 3.1 =========================================================================================
Report of Independent Public Accountants To the Stockholders and Board of Directors of Pennsylvania Power Company: We have audited the accompanying balance sheets and statements of capitalization of Pennsylvania Power Company (a Pennsylvania corporation and wholly owned subsidiary of Ohio Edison Company) as of December 31, 1998 and 1997, and the related statements of income, common stockholder's equity, preferred stock, cash flows and taxes for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pennsylvania Power Company as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Cleveland, Ohio February 12, 1999 EX-23.3 28 EXHIBIT 23.3 PENNSYLVANIA POWER COMPANY CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into Pennsylvania Power Company's previously filed Registration Statements, File No. 33-47372, No. 33-62450 and No. 33-65156. ARTHUR ANDERSEN LLP Cleveland, Ohio March 29, 1999 EX-27.4 29
UT This schedule contains summary financial information extracted from the related Form 10-K financial statements for Pennsylvania Power Company and is qualified in its entirety by reference to such financial statements. (Amounts in 1,000's). Income tax includes $710,000 related to other income and $(21,208,000) related to extraordinary item. 0000077278 PENNSYLVANIA POWER COMPANY 1,000 U.S. DOLLARS 12-MOS DEC-31-1998 DEC-31-1998 1 PER-BOOK 413,278 29,177 157,296 378,021 0 977,772 188,700 (310) 86,891 275,281 15,000 50,905 287,689 0 0 0 487 0 0 6,054 342,356 977,772 323,756 11,296 233,921 265,715 58,041 2,485 60,526 20,778 9,226 4,626 4,600 21,386 19,233 88,231 0 0
-----END PRIVACY-ENHANCED MESSAGE-----