-----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, ROPwY/jy5KQo40CmO8TkRWVGCB0zjWjFwzsvfnVrrr9cB3Dnyf//3h+A/AY94DW8 VVV6R0brLLHIBsayru+v5w== 0001031296-98-000017.txt : 19980515 0001031296-98-000017.hdr.sgml : 19980515 ACCESSION NUMBER: 0001031296-98-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: AMEX SROS: CSX SROS: NYSE SROS: PHLX FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTENERGY CORP CENTRAL INDEX KEY: 0001031296 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 341843785 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-21011 FILM NUMBER: 98620068 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN ST CITY: AKRON STATE: OH ZIP: 44308-1890 BUSINESS PHONE: 8007363402 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-Q SEC ACT: SEC FILE NUMBER: 001-02323 FILM NUMBER: 98620069 BUSINESS ADDRESS: STREET 1: 55 PUBLIC SQ STREET 2: PO BOX 5000 CITY: CLEVELAND STATE: OH ZIP: 44101 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-Q SEC ACT: SEC FILE NUMBER: 001-02578 FILM NUMBER: 98620070 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-Q SEC ACT: SEC FILE NUMBER: 001-03491 FILM NUMBER: 98620071 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-Q SEC ACT: SEC FILE NUMBER: 001-03583 FILM NUMBER: 98620072 BUSINESS ADDRESS: STREET 1: 300 MADISON AVE CITY: TOLEDO STATE: OH ZIP: 43652 BUSINESS PHONE: 2166229800 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 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. File Number Address; and Telephone Number Employer Identification No. - ----------- ---------------------------------- -------------- 333-21011 FIRSTENERGY CORP. 34-1843785 (An Ohio Corporation) 76 South Main Street Akron, Ohio 44308 Telephone (800)736-3402 1-2578 OHIO EDISON COMPANY 34-0437786 (An Ohio Corporation) 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-2323 THE CLEVELAND ELECTRIC 34-0150020 ILLUMINATING COMPANY (An Ohio Corporation) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-3583 THE TOLEDO EDISON COMPANY 34-4375005 (An Ohio Corporation) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-3491 PENNSYLVANIA POWER COMPANY 25-0718810 (A Pennsylvania Corporation) 1 East Washington Street P. O. Box 891 New Castle, Pennsylvania 16103 Telephone (412)652-5531 Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: OUTSTANDING CLASS AS OF MAY 13, 1998 ----- ------------------ FirstEnergy Corp., $.10 par value 230,625,566 Ohio Edison Company, $9 par value 100 The Cleveland Electric Illuminating Company, no par value 79,590,689 The Toledo Edison Company, $5 par value 39,133,887 Pennsylvania Power Company, $30 par value 6,290,000 FirstEnergy Corp. is the sole holder of Ohio Edison Company, The Cleveland Electric Illuminating Company and The Toledo Edison Company common stock; Ohio Edison Company is the sole holder of Pennsylvania Power Company common stock. This combined Form 10-Q is separately filed by FirstEnergy Corp., Ohio Edison Company, Pennsylvania Power Company, The Cleveland Electric Illuminating Company and The Toledo Edison Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to any other registrant, except that information relating to any of the four FirstEnergy subsidiaries is also attributed to FirstEnergy. This Form 10-Q includes forward looking statements based on information currently available to management. Such statements are subject to certain risks and uncertainties. These statements typically contain, but are not limited to, the terms "anticipate", "potential", "expect", "believe", "estimate" and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy market prices, legislative and regulatory changes (including revised environmental requirements), availability and cost of capital and other similar factors. TABLE OF CONTENTS Pages Part I. Financial Information Notes to Financial Statements (Unaudited) 1-3 FirstEnergy Corp. Consolidated Statements of Income 4 Consolidated Balance Sheets 5-6 Consolidated Statements of Cash Flows 7 Report of Independent Public Accountants 8 Management's Discussion and Analysis of Results of Operations and Financial Condition 9-11 Ohio Edison Company Consolidated Statements of Income 12 Consolidated Balance Sheets 13-14 Consolidated Statements of Cash Flows 15 Report of Independent Public Accountants 16 Management's Discussion and Analysis of Results of Operations and Financial Condition 17-18 The Cleveland Electric Illuminating Company Consolidated Statements of Income 19 Consolidated Balance Sheets 20-21 Consolidated Statements of Cash Flows 22 Report of Independent Public Accountants 23 Management's Discussion and Analysis of Results of Operations and Financial Condition 24-25 The Toledo Edison Company Consolidated Statements of Income 26 Consolidated Balance Sheets 27-28 Consolidated Statements of Cash Flows 29 Report of Independent Public Accountants 30 Management's Discussion and Analysis of Results of Operations and Financial Condition 31-32 Pennsylvania Power Company Statements of Income 33 Balance Sheets 34-45 Statements of Cash Flows 36 Report of Independent Public Accountants 37 Management's Discussion and Analysis of Results of Operations and Financial Condition 38 Part II. Other Information PART I. FINANCIAL INFORMATION - ------------------------------ FIRSTENERGY CORP. AND SUBSIDIARIES OHIO EDISON COMPANY AND SUBSIDIARIES THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY THE TOLEDO EDISON COMPANY AND SUBSIDIARY PENNSYLVANIA POWER COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) 1 - FINANCIAL STATEMENTS: FirstEnergy Corp. (FirstEnergy) became a holding company on November 8, 1997, in connection with the merger of Ohio Edison Company (OE) and Centerior Energy Corporation (Centerior). FirstEnergy's principal business is the holding, directly or indirectly, of all of the outstanding common stock of its four principal electric utility operating subsidiaries, OE, The Cleveland Electric Illuminating Company (CEI), The Toledo Edison Company (TE) and Pennsylvania Power Company (Penn). These utility subsidiaries are referred to throughout as "Companies." Penn is a wholly owned subsidiary of OE. Prior to the merger in November 1997, CEI and TE were the principal operating subsidiaries of Centerior. The merger was accounted for using the purchase method of accounting in accordance with generally accepted accounting principles, and the applicable effects were reflected on CEI's and TE's financial statements as of the merger date. Accordingly, the post-merger financial statements reflect a new basis of accounting, and pre-merger period and post-merger period financial results of CEI and TE (separated by a heavy black line) are presented. The condensed financial statements of FirstEnergy and each of the Companies reflect all normal recurring adjustments that, in the opinion of management, are necessary to fairly present results of operations for the interim periods. These statements should be read in connection with the financial statements and notes included in the combined Annual Report on Form 10-K for the year ended December 31, 1997 for FirstEnergy and the Companies. The reported results of operations are not indicative of results of operations for any future period. The sole assets of the subsidiary trust that is the obligor on the preferred securities included in FirstEnergy's and OE's capitalization are $123,711,350 principal amount of 9% Junior Subordinated Debentures of OE due December 31, 2025. 2 - COMMITMENTS, GUARANTEES AND CONTINGENCIES: CAPITAL EXPENDITURES- FirstEnergy's current forecast reflects expenditures of approximately $1.2 billion (OE-$510 million, CEI-$430 million, TE-$200 million and Penn-$90 million) for property additions and improvements related to its regulated businesses from 1998-2002, of which approximately $320 million (OE-$147 million, CEI-$105 million, TE-$50 million and Penn-$18 million) is applicable to 1998. Investments for additional nuclear fuel during the 1998- 2002 period are estimated to be approximately $518 million (OE- $169 million, CEI-$172 million, TE-$140 million and Penn-$37 million), of which approximately $85 million (OE-$24 million, CEI-$32 million, TE-$27 million and Penn-$2 million) applies to 1998. FirstEnergy also expects to invest approximately $300 million during 1998-2002 relating to various nonregulated business ventures. - 1 - GUARANTEES- The Companies and Duquesne Light Company have each severally guaranteed certain debt and lease obligations in connection with a coal supply contract for the Bruce Mansfield Plant. As of March 31, 1998, the Companies' share of the guarantees was $46.6 million (OE-$26.9 million, CEI-$10.0 million, TE-$5.8 million and Penn-$3.9 million). The price under the coal supply contract, which includes certain minimum payments, has been determined to be sufficient to satisfy the debt and lease obligations. ENVIRONMENTAL MATTERS- Various federal, state and local authorities regulate the Companies with regard to air and water quality and other environmental matters. The Companies estimate additional capital expenditures for environmental compliance of approximately $50 million (OE-$25 million, CEI-$12 million, TE-$11 million and Penn-$2 million), which is included in the construction forecast for their regulated businesses provided under "Capital Expenditures" for 1998 through 2002. The Companies are in compliance with the current sulfur dioxide (SO2) and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions through the year 1999 will be achieved by burning lower-sulfur fuel, generating more electricity from lower-emitting plants, and/or purchasing emission allowances. Plans for complying with reductions required for the year 2000 and thereafter have not been finalized. The Environmental Protection Agency (EPA) is conducting additional studies which could indicate the need for additional NOx reductions from the Companies' Pennsylvania facilities by the year 2003. In addition, the EPA is also considering the need for additional NOx reductions from the Companies' Ohio facilities. On November 7, 1997, the EPA proposed uniform reductions of NOx emissions across a region of twenty-two states, including Ohio and the District of Columbia (NOx Transport Rule) after determining that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. In a separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NOx emissions which are alleged to contribute to ozone pollution in the eight petitioning states. A December 1997 EPA Memorandum of Agreement proposes to finalize the NOx Transport Rule by September 30, 1998 and establishes a schedule for EPA action on the Section 126 petitions. The cost of NOx reductions, if required, may be substantial. The Companies continue to evaluate their compliance plans and other compliance options. The Companies are required to meet federally approved SO2 regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $25,000 for each day the unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Companies cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. The cost of compliance with these regulations may be substantial and depends on the manner in which they are implemented by the states in which the Companies operate affected facilities. OE, CEI and TE have been named as "potentially responsible parties" (PRPs) at waste disposal sites which may require cleanup under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. Allegations that the Companies disposed of hazardous substances at historical sites and the liability involved, are often unsubstantiated and subject to dispute. Federal law provides that all PRPs for a particular site be held liable on a joint and several basis. CEI and TE have - 2 - accrued a liability of $4.8 million and $1.1 million, respectively, as of March 31, 1998, based on estimates of the costs of cleanup and the proportionate responsibility of other PRPs for such costs. OE, CEI and TE believe that waste disposal costs will not have a material adverse effect on their financial condition, cash flows or results of operations. Legislative, administrative and judicial actions will continue to change the way that the Companies must operate in order to comply with environmental laws and regulations. With respect to any such changes and to the environmental matters described above, the Companies expect that any resulting additional capital costs which may be required, as well as any required increase in operating costs, would ultimately be recovered from their customers. REGULATORY ACCOUNTING- Based on the current regulatory environment and the Companies' respective regulatory plans, the Companies believe they will continue to be able to bill and collect cost-based rates relating to CEI's and TE's nonnuclear operations and all of OE's and Penn's operations; accordingly, it is appropriate that the Companies continue the application of Statement of Financial Accounting Standards No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). With respect to the changing Pennsylvania regulatory environment, Penn is expected to discontinue its application of SFAS 71 for its generation operations, possibly as early as 1998. The impact of Penn discontinuing SFAS 71 is not expected to be material. 3. PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME: The following pro forma statements of income for FirstEnergy, CEI and TE for the three months ended March 31, 1997, give effect to the OE-Centerior merger as if it had been consummated on January 1, 1997, with the purchase accounting adjustments actually recognized in the business combination. FE CEI TE -- --- -- (In millions, except per share amounts) Operating Revenues $1,210 $ 432 $ 217 Operating Expenses and Taxes 966 349 181 ------ ----- ----- Operating Income 244 83 36 Other Income 14 (1) 1 Net Interest Charges 154 53 22 ------ ----- ----- Net Income $ 104 $ 29 $ 15 ====== ===== ===== Earnings per Share of Common Stock $ .47 ====== Pro forma adjustments reflected above include: (1) adjusting CEI and TE nuclear generating units to fair value based upon independent appraisals and estimated discounted future cash flows based on management's current view of cost recovery; (2) the effect of discontinuing SFAS 71 for CEI's and TE's nuclear operations; (3) amortization of the fair value adjustment for long-term debt; (4) goodwill recognized representing the excess of CEI's and TE's portion of the purchase price over the respective company's adjusted net assets; (5) the elimination of merger costs; and (6) adjustments for estimated tax effects of the above adjustments. - 3 - FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31, --------------------- 1998 1997 ---------- -------- (In thousands, except per share amounts) OPERATING REVENUES $1,199,993 $604,774 ---------- -------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 209,693 109,101 Nuclear operating costs 130,062 68,523 Other operating costs 211,820 87,990 ---------- -------- Total operation and maintenance expenses 551,575 265,614 Provision for depreciation and amortization 167,573 99,958 Amortization of net regulatory assets 21,857 7,420 General taxes 136,374 61,537 Income taxes 76,891 43,896 ---------- -------- Total operating expenses and taxes 954,270 478,425 ---------- -------- OPERATING INCOME 245,723 126,349 OTHER INCOME 21,563 13,495 ---------- -------- INCOME BEFORE NET INTEREST CHARGES 267,286 139,844 ---------- -------- NET INTEREST CHARGES: Interest on long-term debt 129,614 52,625 Allowance for borrowed funds used during construction and capitalized interest (1,481) (380) Other interest expense 6,173 7,718 Subsidiaries' preferred stock dividend requirements 9,328 6,981 ---------- -------- Net interest charges 143,634 66,944 ---------- -------- NET INCOME $ 123,652 $ 72,900 ========== ======== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 222,407 144,345 ========== ======== BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK $ .56 $ .51 ===== ===== DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $.375 $.375 ===== ===== The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral part of these statements.
- 4 - FIRSTENERGY CORP. CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 1998 1997 ----------- ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $14,950,675 $15,008,448 Less--Accumulated provision for depreciation 5,701,339 5,635,900 ----------- ----------- 9,249,336 9,372,548 ----------- ----------- Construction work in progress- Electric plant 191,326 165,837 Nuclear fuel 62,809 34,825 ----------- ----------- 254,135 200,662 ----------- ----------- 9,503,471 9,573,210 ----------- ----------- OTHER PROPERTY AND INVESTMENTS: Capital trust investments 1,335,489 1,370,177 Nuclear plant decommissioning trusts 317,596 301,173 Letter of credit collateralization 277,763 277,763 Other. 524,752 357,989 ----------- ----------- 2,455,600 2,307,102 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents 48,845 98,237 Receivables- Customers (less accumulated provisions of $5,941,000 and $5,618,000, respectively, for uncollectible accounts) 233,378 284,162 Other 229,825 219,106 Materials and supplies, at average cost- Owned 168,270 154,961 Under consignment 79,524 82,839 Prepayments and other 188,848 163,686 ----------- ----------- 948,690 1,002,991 ----------- ----------- DEFERRED CHARGES: Regulatory assets 2,583,661 2,624,144 Goodwill 2,095,217 2,107,795 Property taxes 270,230 270,585 Other 193,115 194,968 ----------- ----------- 5,142,223 5,197,492 ----------- ----------- $18,049,984 $18,080,795 =========== ===========
- 5 - FIRSTENERGY CORP. CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 1998 1997 ----------- ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholders' equity- Common stock, $.10 par value, authorized 300,000,000 shares - 230,207,141 shares outstanding $ 23,021 $ 23,021 Other paid-in capital 3,636,845 3,636,908 Retained earnings 686,907 646,646 Unallocated employee stock ownership plan common stock - 7,760,215 and 7,829,538 shares, respectively (145,675) (146,977) ----------- ----------- Total common stockholders' equity 4,201,098 4,159,598 Preferred stock of consolidated subsidiaries- Not subject to mandatory redemption 660,195 660,195 Subject to mandatory redemption 214,864 214,864 Ohio Edison obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Ohio Edison subordinated debentures 120,000 120,000 Long-term debt 7,148,956 6,969,835 ----------- ----------- 12,345,113 12,124,492 ----------- ----------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 319,208 470,436 Short-term borrowings 281,385 302,229 Accounts payable 271,866 312,690 Accrued taxes 391,864 381,937 Accrued interest 144,580 147,694 Other 192,003 193,850 ----------- ----------- 1,600,906 1,808,836 ----------- ----------- DEFERRED CREDITS: Accumulated deferred income taxes 2,298,655 2,304,305 Accumulated deferred investment tax credits 318,429 324,200 Pensions and other postretirement benefits 499,319 492,425 Other 987,562 1,026,537 ----------- ----------- 4,103,965 4,147,467 ----------- ----------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ----------- ----------- $18,049,984 $18,080,795 =========== =========== The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral part of these balance sheets.
- 6 - FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, ------------------------- 1998 1997 ----------- ---------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 123,652 $ 72,900 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 167,573 99,958 Nuclear fuel and lease amortization 24,313 14,345 Other amortization, net 21,585 7,110 Deferred income taxes, net 9,702 (8,441) Investment tax credits, net (5,771) (3,826) Receivables 40,065 17,352 Materials and supplies (9,994) 1,052 Accounts payable (36,675) (3,864) Other (80,938) 17,209 -------- -------- Net cash provided from operating activities 253,512 213,795 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 148,119 29,205 Redemptions and Repayments- Long-term debt 159,981 112,487 Short-term borrowings, net 20,844 29,507 Common stock dividend payments 83,391 53,541 -------- -------- Net cash used for financing activities 116,097 166,330 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 64,104 34,381 Bay Shore investment 145,505 - Capital trust investments (33,961) - Other 11,159 3,050 -------- -------- Net cash used for investing activities 186,807 37,431 -------- -------- Net increase (decrease) in cash and cash equivalents (49,392) 10,034 Cash and cash equivalents at beginning of period 98,237 5,253 -------- -------- Cash and cash equivalents at end of period $ 48,845 $ 15,287 ======== ======== The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral part of these statements.
- 7 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To FirstEnergy Corp.: We have reviewed the accompanying consolidated balance sheet of FirstEnergy Corp. (an Ohio corporation) and subsidiaries as of March 31, 1998, and the related consolidated statements of income and cash flows for the three-month period then ended. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of FirstEnergy Corp. and subsidiaries as of December 31, 1997, and, in our report dated February 13, 1998, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio May 13, 1998 - 8 - FIRSTENERGY CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Earnings on common stock increased to $.56 per share in the first quarter of 1998 compared to $.51 per share for the same period last year. Current financial results reflect the merger of OE and Centerior, which was completed November 8, 1997. The former Centerior companies, which include CEI and TE, have been included in first quarter 1998 results. Results reported for the 1997 first quarter are for OE and Penn only (OE companies). Operating revenues were up $595.2 million in the first quarter of 1998, compared to the same period of 1997. Excluding the contribution of the former Centerior companies, operating revenues were down slightly due to mild weather conditions. For the OE companies, retail kilowatt-hour sales decreased 2.5% from 1997 levels. Contributing to the decline were reduced residential and commercial sales of 3.8% and 2.0%, respectively. First quarter industrial sales decreased 1.8% from comparable 1997 levels as a result of reduced sales to primary metal manufacturers. Sales to other utilities were down slightly. Overall, total kilowatt-hour sales for the first quarter of 1998 declined 2.3%, compared to the first quarter of 1997. Due to the inclusion of the former Centerior companies in 1998, all operation and maintenance expense categories increased substantially in the first quarter of 1998, compared to the same period last year. Including only the costs of OE companies in first quarter 1998 results yields the following expense comparisons. Fuel and purchased power expenses for the first quarter of 1998 were up $4.8 million due to an increase in purchased power costs resulting principally from unplanned outages at Beaver Valley Units 1 and 2. Nuclear operating costs increased $3.2 million for the first quarter of 1998, compared to the same period last year, due to increased outage-related costs at Beaver Valley Units 1 and 2 offset in part by reduced operating expenses at the Perry Plant. Other operating costs increased $4.3 million in the first quarter of 1998 over the same period of 1997; last year's costs included credits from the sale of emission allowances, resulting in the reported increase in 1998 costs compared to 1997. Due primarily to the inclusion of the former Centerior companies in 1998, first quarter 1998 cost comparisons with 1997 for the provision for depreciation and amortization, amortization of net regulatory assets and general taxes show increases. Other sources of differences are not material. Other income and net interest charges increased in the first quarter of 1998 from the same quarter of 1997. Excluding the impact of the merger, other income decreased slightly in the first quarter. For the OE companies, total interest costs were $4.2 million lower in the first quarter of 1998, than for the same period of 1997. Interest on long-term debt decreased due to redemptions of long-term debt totaling $249.8 million, since March 1997, while other interest expense increased as a result of increased short-term borrowing. - 9 - Capital Resources and Liquidity The Companies have continuing cash requirements for planned capital expenditures and debt maturities. During the last three quarters of 1998, capital requirements for property additions and capital leases are expected to be about $318 million, including $35 million for nuclear fuel. The Companies have additional cash requirements of approximately $135 million to meet sinking fund requirements for preferred stock and maturing long-term debt during the remainder of 1998. These cash requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. As of March 31, 1998, the Companies had about $48.8 million of cash and temporary investments. The Companies also had $281.4 million of short-term indebtedness. In addition, the Companies' unused borrowing capability included $202 million under revolving lines of credit and $50 million of bank facilities that provide for borrowings on a short-term basis at the banks' discretion. In May 1998, FirstEnergy arranged a $100 million revolving credit facility until May 6, 1999 to replace an expiring $125 million facility. Terms are similar to the previous agreement. FirstEnergy's borrowings under the facility will be jointly and severally guaranteed by CEI and TE. FirstEnergy plans to transfer any borrowed funds under this facility to CEI and TE based on their respective cash requirements. During the first quarter of 1998, the Bay Shore Power Company (a FirstEnergy subsidiary) issued $147.5 million of solid waste-disposal revenue bonds in conjunction with the Bay Shore Power Project. The project represents an alliance between FirstEnergy and British Petroleum (BP). Bay Shore Power 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 TE's Bay Shore Unit 1. The project is expected to ensure the long-term viability of BP's refinery. On March 5, 1998, NP Energy Inc. and Ohio National Energy LLC, a joint venture between FirstEnergy Ventures Corp., a wholly owned subsidiary of FirstEnergy, and National Power Partners, an independent power developer located in San Mateo, California, announced a 15-year marketing agreement for the output of a planned 280 megawatt merchant plant in Ohio. The contract is expected to provide $700 million or more in revenue over the 15-year period. The agreement represents an important milestone for this project; however, resolution of several other major factors are required before the project can go forward. The project will use clean coal technology to burn waste coal at OE's R. E. Burger Power Station. Ohio National Energy LLC will begin construction on the $230 million merchant plant in 1998 or in early 1999 if other factors resolve favorably. On March 19, 1998, FirstEnergy and Belden & Blake Corp. announced an agreement in principle to create a joint venture called FE Holdings, LLC, to acquire natural gas properties. Under the joint venture, Belden & Blake, an independent natural gas company based in North Canton, Ohio, would provide FE Holdings with its trading and operational expertise. Under the joint venture agreement, the Company will be the exclusive sales agent for FE Holdings, as well as for sales to end-use customers of Belden & Blake. Formation of the joint venture is subject to the negotiation and execution of a definitive joint venture - 10 - agreement. FE Holdings has entered into an agreement to purchase the privately held Marbel Energy Corporation, a fully integrated natural gas company. This acquisition, which is subject to regulatory approval and due diligence, is not contingent upon completion of the joint venture agreement with Belden & Blake. 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, and Northeast Ohio Operating Companies, Inc. (NOOC). NOOC owns and operates over 1,300 miles of gas gathering lines and natural gas pipeline companies which serve industrial customers in eastern and central Ohio. On April 30, 1998, FirstEnergy Services Corp., a wholly owned subsidiary of FirstEnergy, acquired Colonial Mechanical Corporation, a leading provider of commercial and industrial heating, ventilating, air conditioning, plumbing, and process piping construction and service. Colonial Mechanical Corporation, headquartered in Richmond, Virginia, is that state's largest mechanical supplier. In combination with FirstEnergy Services' subsidiaries Roth Bros., Inc. and RPC Mechanical, Inc., it becomes a part of one of the nation's largest providers of engineered heating, ventilating and air-conditioning equipment and energy-management systems. On March 26, 1998, Ohio legislation was introduced which is designed to bring competition to the State's retail electric industry. The legislation was introduced by the co- chairs of the Ohio General Assembly's Joint Select Committee and is consistent with recommendations contained in their draft report to the Select Committee. House and Senate hearings are expected to begin in May 1998; passage of any restructuring bill in 1998 appears unlikely. The Pennsylvania Public Utility Commission is expected to issue its final order for Penn's rate restructuring plan in July 1998. The plan, which Penn filed on September 30, 1997, calls for restructuring customer rates and providing customers with direct access to alternative energy suppliers. Customer choice is to be phased in over three years beginning January 1, 1999. - 11 - OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31, --------------------- 1998 1997 ---------- -------- (In thousands) OPERATING REVENUES $597,865 $604,774 -------- -------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 113,915 109,101 Nuclear operating costs 71,766 68,523 Other operating costs 92,273 87,990 -------- -------- Total operation and maintenance expenses 277,954 265,614 Provision for depreciation 100,843 99,958 Amortization of net regulatory assets 11,287 7,420 General taxes 59,525 61,537 Income taxes 37,123 43,896 -------- -------- Total operating expenses and taxes 486,732 478,425 -------- -------- OPERATING INCOME 111,133 126,349 OTHER INCOME 12,502 13,495 -------- -------- INCOME BEFORE NET INTEREST CHARGES 123,635 139,844 -------- -------- NET INTEREST CHARGES: Interest on long-term debt 46,668 52,625 Allowance for borrowed funds used during construction and capitalized interest (660) (380) Other interest expense 9,494 7,718 Subsidiaries' preferred stock dividend requirements 3,857 3,857 -------- -------- Net interest charges 59,359 63,820 -------- -------- NET INCOME 64,276 76,024 PREFERRED STOCK DIVIDEND REQUIREMENTS 3,019 3,124 -------- -------- EARNINGS ON COMMON STOCK $ 61,257 $ 72,900 ======== ======== The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral part of these statements.
- 12 - OHIO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 1998 1997 ----------- ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service, at original cost $8,660,349 $8,666,272 Less--Accumulated provision for depreciation 3,614,777 3,546,594 ---------- ---------- 5,045,572 5,119,678 ---------- ---------- Construction work in progress- Electric plant 120,039 99,158 Nuclear fuel 7,175 21,360 ---------- ---------- 127,214 120,518 ---------- ---------- 5,172,786 5,240,196 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: PNBV Capital Trust 481,493 482,220 Nuclear plant decommissioning trusts 119,319 109,883 Letter of credit collateralization 277,763 277,763 Other. 299,485 419,525 ---------- ---------- 1,178,060 1,289,391 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 11,655 4,680 Receivables- Customers (less accumulated provisions of $5,941,000 and $5,618,000, respectively, for uncollectible accounts) 210,169 235,332 Associated companies 197,756 25,348 Other 54,129 87,566 Materials and supplies, at average cost- Owned 76,503 75,580 Under consignment 47,141 47,890 Prepayments and other 93,442 78,348 ---------- ---------- 690,795 554,744 ---------- ---------- DEFERRED CHARGES: Regulatory assets 1,574,546 1,601,709 Property taxes 100,461 100,043 Unamortized sale and leaseback costs 93,846 95,096 Other 54,374 96,276 ---------- ----------- 1,823,227 1,893,124 ---------- ---------- $8,864,868 $8,977,455 ========== ==========
- 13 - OHIO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 1998 1997 ----------- ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholder's equity- Common stock, $9 par value, authorized 175,000,000 shares - 100 shares outstanding $ 1 $ 1 Other paid-in capital 2,104,116 2,102,644 Retained earnings 513,310 621,674 ---------- ---------- Total common stockholder's equity 2,617,427 2,724,319 Preferred stock- Not subject to mandatory redemption 160,965 160,965 Subject to mandatory redemption 15,000 15,000 Preferred stock of consolidated subsidiary- Not subject to mandatory redemption 50,905 50,905 Subject to mandatory redemption 15,000 15,000 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company subordinated debentures 120,000 120,000 Long-term debt 2,584,091 2,569,802 ---------- ---------- 5,563,388 5,655,991 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 127,481 278,492 Short-term borrowings- Associated companies 120,000 - Other 281,385 302,229 Accounts payable- Associated companies 42,392 - Other 86,470 115,836 Accrued taxes 179,366 157,095 Accrued interest 43,644 53,165 Other 131,113 115,256 ---------- ---------- 1,011,851 1,022,073 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 1,674,359 1,698,354 Accumulated deferred investment tax credits 180,978 184,804 Pensions and other postretirement benefits 163,339 158,038 Other 270,953 258,195 ---------- ---------- 2,289,629 2,299,391 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $8,864,868 $8,977,455 ========== ========== The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral part of these balance sheets.
- 14 - OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, -------------------- 1998 1997 --------- --------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 64,276 $ 76,024 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation 100,843 99,958 Nuclear fuel and lease amortization 6,783 14,345 Other amortization, net 11,015 7,110 Deferred income taxes, net (13,913) (8,441) Investment tax credits, net (3,826) (3,826) Receivables 31,868 17,352 Materials and supplies (175) 1,052 Accounts payable 17,175 (3,864) Other 49,904 17,181 -------- -------- Net cash provided from operating activities 263,950 216,891 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 2,638 29,205 Short-term borrowings, net 99,156 - Redemptions and Repayments- Long-term debt 139,861 112,487 Short-term borrowings, net - 29,507 Dividend Payments- Common stock 169,898 53,541 Preferred stock 3,025 3,096 -------- -------- Net cash used for financing activities 210,990 169,426 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 41,016 34,381 Other 4,969 3,050 -------- -------- Net cash used for investing activities 45,985 37,431 -------- -------- Net increase in cash and cash equivalents 6,975 10,034 Cash and cash equivalents at beginning of period 4,680 5,253 -------- -------- Cash and cash equivalents at end of period $ 11,655 $ 15,287 ======== ======== The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral part of these statements.
- 15 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Ohio Edison Company: We have reviewed the accompanying consolidated balance sheet of Ohio Edison Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiaries as of March 31, 1998, and the related consolidated statements of income and cash flows for the three-month period then ended. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Ohio Edison Company and subsidiaries as of December 31, 1997, and, in our report dated February 13, 1998, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio May 13, 1998 - 16 - OHIO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Earnings on common stock decreased 16.0% in the first quarter of 1998, compared to the first quarter of 1997. The decrease reflects higher operation and maintenance expenses resulting from unplanned outages at Beaver Valley Units 1 and 2, and the absence in 1998 of substantial credits from the sale of emission allowances in 1997. Operating revenues were down slightly due to mild weather conditions. Retail kilowatt-hour sales decreased 2.5% from 1997 levels. Contributing to the decline were reduced residential and commercial sales of 3.8% and 2.0%, respectively. First quarter industrial sales decreased 1.8% from comparable 1997 levels as a result of reduced sales to primary metal manufacturers. Sales to other utilities were down slightly. Overall, total kilowatt-hour sales for the first quarter of 1998 declined 2.3%, compared to the first quarter of 1997. Fuel and purchased power expenses for the first quarter of 1998 were up $4.8 million due to an increase in purchased power costs resulting principally from unplanned outages at Beaver Valley Units 1 and 2. Nuclear operating costs increased $3.2 million for the first quarter of 1998, compared to the same period last year, due to increased outage-related costs at Beaver Valley Units 1 and 2 offset in part by reduced operating expenses at the Perry Plant. Other operating costs increased $4.3 million in the first quarter of 1998 over the same period of 1997; last year's costs included credits from the sale of emission allowances, resulting in the reported increase in 1998 costs compared to 1997. Total interest costs were $4.2 million lower in the first quarter of 1998, than for the same period of 1997. Interest on long-term debt decreased due to redemptions of long-term debt totaling $249.8 million since March 1997, while other interest expense increased as a result of increased short-term borrowing. Capital Resources and Liquidity Ohio Edison Company and its subsidiaries (OE companies) have continuing cash requirements for planned capital expenditures and debt maturities. During the last three quarters of 1998, capital requirements for property additions and capital leases are expected to be about $141 million, including $19 million for nuclear fuel. The OE companies have additional cash requirements of approximately $14 million to meet sinking fund requirements for preferred stock and maturing long-term debt during the remainder of 1998. These cash requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. As of March 31, 1998, the OE companies had about $11.7 million of cash and temporary investments. The OE companies also had $401.4 million of short-term indebtedness, of which $120 million was to associated companies. In addition, the OE companies' unused borrowing capability included $77 million under revolving lines of credit and $50 million of bank facilities that provide for borrowings on a short-term basis at the banks' discretion. - 17 - On March 26, 1998, Ohio legislation was introduced which is designed to bring competition to the State's retail electric industry. The legislation was introduced by the co- chairs of the Ohio General Assembly's Joint Select Committee and is consistent with recommendations contained in their draft report to the Select Committee. House and Senate hearings are expected to begin in May 1998; passage of a restructuring bill in 1998 appears unlikely. The Pennsylvania Public Utility Commission is expected to issue its final order for Penn's rate restructuring plan in July 1998. The plan, which Penn filed on September 30, 1997, calls for restructuring customer rates and providing customers with direct access to alternative energy suppliers. Customer choice is to be phased in over three years beginning January 1, 1999. - 18 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31, --------------------- 1998 1997 ---------- -------- (In thousands) OPERATING REVENUES $415,027 | $431,627 -------- | -------- | OPERATING EXPENSES AND TAXES: | Fuel and purchased power 88,977 | 110,530 Nuclear operating costs 22,085 | 21,096 Other operating costs 79,586 | 84,243 -------- | -------- Total operation and maintenance | expenses 190,648 | 215,869 Provision for depreciation and | amortization 48,183 | 55,298 Amortization of net regulatory assets 6,567 | 6,567 General taxes 54,511 | 56,686 Income taxes 24,422 | 17,202 -------- | -------- Total operating expenses and taxes 324,331 | 351,622 -------- | -------- | OPERATING INCOME 90,696 | 80,005 | OTHER INCOME (LOSS) 7,593 | (3,664) -------- | -------- | INCOME BEFORE NET INTEREST CHARGES 98,289 | 76,341 -------- | -------- | NET INTEREST CHARGES: | Interest on long-term debt 60,060 | 52,881 Allowance for borrowed funds used during | construction (552) | (459) Other interest expense (credit) (844) | 3,689 -------- | -------- Net interest charges 58,664 | 56,111 -------- | -------- | NET INCOME 39,625 | 20,230 | PREFERRED STOCK DIVIDEND REQUIREMENTS 1,068 | 9,315 -------- | -------- | EARNINGS ON COMMON STOCK $ 38,557 | $ 10,915 ======== | ======== The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating Company are an integral part of these statements.
- 19 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 1998 1997 ----------- ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $4,547,021 $4,578,649 Less--Accumulated provision for depreciation 1,471,114 1,470,084 ---------- ---------- 3,075,907 3,108,565 ---------- ---------- Construction work in progress- Electric plant 42,060 41,261 Nuclear fuel 28,905 6,833 ---------- ---------- 70,965 48,094 ---------- ---------- 3,146,872 3,156,659 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust 543,126 575,084 Nuclear plant decommissioning trusts 108,409 105,334 Other. 18,149 21,482 ---------- ---------- 669,684 701,900 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 13,550 33,775 Receivables- Customers 14,692 29,759 Associated companies 9,047 8,695 Other 123,475 98,077 Notes receivable from associated companies 77,000 - Materials and supplies, at average cost- Owned 53,086 47,489 Under consignment 24,162 25,411 Prepayments and other 63,480 57,763 ---------- ---------- 378,492 300,969 ---------- ---------- DEFERRED CHARGES: Regulatory assets 572,571 579,711 Goodwill 1,542,767 1,552,483 Property taxes 126,414 125,204 Other 11,946 23,358 ---------- ---------- 2,253,698 2,280,756 ---------- ---------- $6,448,746 $6,440,284 ========== ==========
- 20 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 1998 1997 ----------- ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholder's equity- Common stock, without par value, authorized 105,000,000 shares - 79,590,689 shares outstanding $ 931,614 $ 931,614 Retained earnings 58,915 19,290 ---------- ---------- Total common stockholder's equity 990,529 950,904 Preferred stock- Not subject to mandatory redemption 238,325 238,325 Subject to mandatory redemption 183,174 183,174 Long-term debt 3,196,328 3,189,590 ---------- ---------- 4,608,356 4,561,993 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 122,241 121,965 Accounts payable- Associated companies 68,261 56,109 Other 59,782 90,737 Notes payable to associated companies 75,600 56,802 Accrued taxes 185,148 194,394 Accrued interest 73,681 67,896 Other 38,448 52,297 ---------- ---------- 623,161 640,200 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 507,903 496,437 Accumulated deferred investment tax credits 94,835 96,131 Pensions and other postretirement benefits 199,617 198,642 Other 414,874 446,881 ---------- ---------- 1,217,229 1,238,091 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $6,448,746 $6,440,284 ========== ========== The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating Company are an integral part of these balance sheets.
- 21 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, -------------------- 1998 1997 --------- --------- (In thousands) | | CASH FLOWS FROM OPERATING ACTIVITIES: | Net income $ 39,625 | $ 20,230 Adjustments to reconcile net income | to net cash from operating activities- | Provision for depreciation and | amortization 48,183 | 55,298 Nuclear fuel and lease amortization 10,229 | 13,411 Amortization of net regulatory assets 6,567 | 6,567 Deferred income taxes, net 14,215 | 10,736 Investment tax credits, net (1,296) | (2,001) Allowance for equity funds used during | construction - | (327) Receivables (10,331) | 43,360 Materials and supplies (4,348) | 1,067 Accounts payable (30,955) | (25,602) Other (25,929) | (17,257) -------- | -------- Net cash provided from operating | activities 45,960 | 105,482 -------- | -------- CASH FLOWS FROM FINANCING ACTIVITIES: | New Financing- | Short-term borrowings, net 18,798 | 2,781 Redemptions and Repayments- | Preferred stock - | 15,000 Long-term debt 11,552 | 12,450 Dividend Payments- | Common stock - | 29,605 Preferred stock 8,871 | 9,536 -------- | -------- Net cash used for financing | activities 1,625 | 63,810 -------- | -------- CASH FLOWS FROM INVESTING ACTIVITIES: | Property additions 15,334 | 33,271 Loans to associated companies 77,000 | - Capital trust investments (31,958) | - Other 4,184 | 11,976 -------- | -------- Net cash used for investing | activities 64,560 | 45,247 -------- | -------- Net decrease in cash and cash equivalents (20,225) | (3,575) Cash and cash equivalents at beginning of | period 33,775 | 30,273 -------- | -------- Cash and cash equivalents at end of | period $ 13,550 | $ 26,698 ======== | ======== The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating Company are an integral part of these statements.
- 22 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Cleveland Electric Illuminating Company: We have reviewed the accompanying consolidated balance sheet of The Cleveland Electric Illuminating Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiary as of March 31, 1998, and the related consolidated statements of income and cash flows for the three-month period then ended. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of The Cleveland Electric Illuminating Company and subsidiary as of December 31, 1997, and, in our report dated February 13, 1998, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio May 13, 1998 - 23 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Financial results reflect the application of purchase accounting to the merger of CEI's former parent company, Centerior, with OE to form FirstEnergy on November 8, 1997. The application of this accounting resulted in fair value adjustments which were "pushed down" or reflected on the separate financial statements of Centerior's direct subsidiaries as of the merger date, including CEI's financial statements. Accordingly, the post-merger financial statements for the first quarter of 1998 and the December 31, 1997 Consolidated Balance Sheet reflect a new basis of accounting. Material effects of this new basis of accounting are identified below. Earnings on common stock increased to $38.6 million in the first quarter of 1998 from $10.9 million in the 1997 first quarter. The increase reflects benefits provided by the Bruce Mansfield Plant lease refinancing and lower operating expenses. Retail kilowatt-hour sales decreased 2.4% from 1997 levels due to weak residential sales. Residential sales decreased 8.2% in the first quarter of 1998 from the same quarter of 1997 due to milder weather conditions. Commercial sales in the first quarter of 1998 increased 0.5% from the same period last year. Sales to industrial customers declined 0.7% in the first quarter of 1998 compared to the same period of 1997. Sales to other utilities decreased 57.9%, due in part to an unplanned outage of the Beaver Valley Plant which reduced available energy for sale. Reduced sales to other utilities was the primary factor resulting in 10.8% lower total kilowatt-hour sales this year compared to the first quarter of 1997. Fuel and purchased power decreased in the first quarter of 1998 compared to the same period last year primarily due to the initiation of a revised fuel recovery method under the FirstEnergy Rate Reduction and Economic Development Plan. As a transition step, fuel revenues collected from customers in prior periods are being refunded in 1998, which effectively reduces reported fuel costs during the refund period. Fuel costs also decreased due to lower fuel prices and reduced consumption. Lower rent expense as a result of the refinancing of the Mansfield Plant lease contributed to a reduction in other operating costs for the first quarter of 1998. Lower depreciable asset balances resulting from the purchase accounting adjustments reduced the provision for depreciation in the first quarter of 1998 compared to the same quarter last year. This reduction was partially offset by the amortization of goodwill recognized with the application of purchase accounting. Interest income from investments related to the refinancing of the Mansfield Plant lease increased other income compared to the first quarter of 1997. Total interest charges were also higher due to secured notes issued in connection with the refinancing of the Mansfield Plant lease. Partially offsetting the increased interest charges was the amortization of net premiums associated with the revaluation of long-term debt in connection with the merger. - 24 - Capital Resources and Liquidity CEI has continuing cash requirements for planned capital expenditures and debt maturities. During the last three quarters of 1998, capital requirements for property additions and capital leases are expected to be about $90 million, including $10 million for nuclear fuel. CEI has additional cash requirements of approximately $81.5 million to meet sinking fund requirements for preferred stock and maturing long-term debt during the remainder of 1998. These cash requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. As of March 31, 1998, CEI had approximately $90.6 million of cash and temporary investments and $75.6 million of short-term indebtedness to an associated company. In May 1998, FirstEnergy arranged a $100 million revolving line of credit until May 6, 1999 to replace an expiring $125 million facility. FirstEnergy's borrowings under this facility will be jointly and severally guaranteed by CEI and TE. FirstEnergy plans to transfer any borrowed funds under this facility to CEI and TE based on their respective cash requirements. On March 26, 1998, Ohio legislation was introduced which is designed to bring competition to the State's retail electric industry. The legislation was introduced by the co- chairs of the Ohio General Assembly's Joint Select Committee and is consistent with their recommendations in response to the bipartisan committee's final report. House and Senate hearings are expected to begin in May 1998; passage of any restructuring bill in 1998 appears unlikely. - 25 - THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31, --------------------- 1998 1997 ---------- -------- (In thousands) OPERATING REVENUES $221,103 | $217,060 -------- | -------- OPERATING EXPENSES AND TAXES: | Fuel and purchased power 32,407 | 43,314 Nuclear operating costs 36,210 | 39,901 Other operating costs 36,992 | 42,377 -------- | -------- Total operation and maintenance | expenses 105,609 | 125,592 Provision for depreciation and | amortization 18,547 | 24,894 Amortization of net regulatory assets 4,003 | 4,291 General taxes 21,030 | 22,794 Income taxes 19,948 | 7,132 -------- | -------- Total operating expenses and taxes 169,137 | 184,703 -------- | -------- OPERATING INCOME 51,966 | 32,357 | OTHER INCOME (LOSS) 3,842 | (320) -------- | -------- INCOME BEFORE NET INTEREST CHARGES 55,808 | 32,037 -------- | -------- NET INTEREST CHARGES: | Interest on long-term debt 22,886 | 20,834 Allowance for borrowed funds used during | construction (269) | (104) Other interest expense (credit) (814) | 2,467 -------- | -------- Net interest charges 21,803 | 23,197 -------- | -------- NET INCOME 34,005 | 8,840 | PREFERRED STOCK DIVIDEND REQUIREMENTS 1,385 | 4,194 -------- | -------- EARNINGS ON COMMON STOCK $ 32,620 | $ 4,646 ======== | ======== The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an integral part of these statements.
- 26 - THE TOLEDO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 1998 1997 ----------- ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $1,743,265 $1,763,495 Less--Accumulated provision for depreciation 615,448 619,222 ---------- ---------- 1,127,817 1,144,273 ---------- ---------- Construction work in progress- Electric plant 22,510 19,901 Nuclear fuel 26,729 6,632 ---------- ---------- 49,239 26,533 ---------- ---------- 1,177,056 1,170,806 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust 310,870 312,873 Nuclear plant decommissioning trusts 89,868 85,956 Other. 3,684 3,164 ---------- ---------- 404,422 401,993 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 373 22,170 Receivables- Associated companies 16,366 15,199 Other 3,463 21,664 Notes receivable from associated companies 118,600 40,802 Materials and supplies, at average cost- Owned 36,189 31,892 Under consignment 8,221 9,538 Prepayments and other 28,682 26,437 ---------- ---------- 211,894 167,702 ---------- ---------- DEFERRED CHARGES: Regulatory assets 436,544 442,724 Goodwill 511,291 514,462 Property taxes 43,355 45,338 Other 7,226 15,127 ---------- ---------- 998,416 1,017,651 ---------- ---------- $2,791,788 $2,758,152 ========== ==========
- 27 - THE TOLEDO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, December 31, 1998 1997 ----------- ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholder's equity- Common stock, $5 par value, authorized 60,000,000 shares - 39,133,887 shares outstanding $ 195,670 $ 195,670 Other paid-in capital 328,364 328,364 Retained earnings 41,621 7,616 ---------- ---------- Total common stockholder's equity 565,655 531,650 Preferred stock- Not subject to mandatory redemption 210,000 210,000 Subject to mandatory redemption 1,690 1,690 Long-term debt 1,220,364 1,210,190 ---------- ---------- 1,997,709 1,953,530 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 69,486 69,979 Accounts payable- Associated companies 31,453 21,173 Other 64,437 60,756 Accrued taxes 34,795 34,441 Accrued interest 27,022 26,633 Other 14,884 22,603 ---------- ---------- 242,077 235,585 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 111,744 104,543 Accumulated deferred investment tax credits 42,616 43,265 Pensions and other postretirement benefits 113,731 113,254 Other 283,911 307,975 ---------- ---------- 552,002 569,037 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $2,791,788 $2,758,152 ========== ========== The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an integral part of these balance sheets.
- 28 - THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, -------------------- 1998 1997 --------- --------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 34,005 | $ 8,840 Adjustments to reconcile net income | to net cash from operating activities- | Provision for depreciation and | amortization 18,547 | 24,894 Nuclear fuel and lease amortization 7,301 | 9,442 Amortization of net regulatory assets 4,003 | 4,291 Deferred income taxes, net 9,453 | (269) Investment tax credits, net (649) | (1,080) Allowance for equity funds used during | construction - | (332) Receivables 18,201 | 360 Materials and supplies (2,980) | 422 Accounts payable 3,681 | 6,491 Other (13,584) | (7,935) -------- |-------- Net cash provided from operating | activities 77,978 | 45,124 -------- |-------- CASH FLOWS FROM FINANCING ACTIVITIES: | Redemptions and Repayments- | Long-term debt 8,568 | 16,617 Dividend Payments- | Preferred stock 4,127 | 4,193 -------- |-------- Net cash used for financing | activities 12,695 | 20,810 -------- |-------- CASH FLOWS FROM INVESTING ACTIVITIES: | Property additions 7,749 | 10,253 Loans to associated companies 77,798 | 32,582 Capital trust investments (2,003) | - Other 3,536 | (483) -------- |-------- Net cash used for investing | activities 87,080 | 42,352 -------- |-------- Net decrease in cash and cash equivalents (21,797) | (18,038) Cash and cash equivalents at beginning of | period 22,170 | 81,454 -------- |-------- Cash and cash equivalents at end of period $ 373 |$ 63,416 ======== |======== The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an integral part of these statements.
- 29 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Toledo Edison Company: We have reviewed the accompanying consolidated balance sheet of The Toledo Edison Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiary as of March 31, 1998, and the related consolidated statements of income and cash flows for the three-month period then ended. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of The Toledo Edison Company and subsidiary as of December 31, 1997, and, in our report dated February 13, 1998, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio May 13, 1998 - 30 - THE TOLEDO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Financial results reflect the application of purchase accounting to the merger of TE's former parent company, Centerior, with OE to form FirstEnergy on November 8, 1997. The application of this accounting resulted in fair value adjustments which were "pushed down" or reflected on the separate financial statements of Centerior's direct subsidiaries as of the merger date, including TE's financial statements. Accordingly, the post- merger financial statements for the first quarter of 1998 and the December 31, 1997 Consolidated Balance Sheet reflect a new basis of accounting. Material effects of this new basis of accounting are identified below. Earnings on common stock increased to $32.6 million in the first quarter of 1998 from $4.6 million in the 1997 first quarter. The increase reflects benefits provided by the Bruce Mansfield Plant lease refinancing and lower operating expenses. Retail kilowatt-hour sales increased 6.8% from 1997 levels due to strong industrial sales. Residential sales decreased 1.9% in the first quarter of 1998 from the same quarter of 1997 due to milder weather conditions. Commercial sales in the first quarter of 1998 increased 1.2% from the same period last year. Expanded production at the North Star BHP Steel facility was the primary factor in a 14.0% increase in industrial sales in the first quarter of 1998 from last year's level. Excluding North Star demand, industrial sales increased 3.4% from the first quarter of 1997. Sales to other utilities decreased 34.9%, due in part to an unplanned outage at the Beaver Valley Plant which reduced available energy for sale, resulting in a 6.9% reduction in total kilowatt-hour sales for the first quarter of 1998 compared to the first quarter of 1997. Fuel and purchased power decreased in the first quarter of 1998 compared to the same period last year primarily from the initiation of a revised fuel recovery method under the FirstEnergy Rate Reduction and Economic Development Plan. As a transition step, fuel revenues collected from customers in prior periods are being refunded in 1998, which effectively reduces reported fuel costs during the refund period. Nuclear operating costs were also lower in the current quarter than in the first quarter of 1997, with reduced costs at the Davis-Besse and Perry Plants partially offset by higher costs at Beaver Valley Unit 2. Lower rent expense as a result of the refinancing of the Mansfield Plant lease contributed to a reduction in other operating costs for the first quarter of 1998. Lower depreciable asset balances resulting from the purchase accounting adjustments reduced the provision for depreciation in the first quarter of 1998 compared to the same quarter last year. This reduction was partially offset by the amortization of goodwill recognized with the application of purchase accounting. Interest income from investments related to the refinancing of the Mansfield Plant lease increased other income compared to the first quarter of 1997. Total interest charges were also higher due to secured notes issued in connection with the refinancing of the Mansfield Plant lease. Partially offsetting the increased interest charges was the amortization of net premiums associated with the revaluation of long-term debt in connection with the merger. - 31 - Capital Resources and Liquidity TE has continuing cash requirements for planned capital expenditures and debt maturities. During the last three quarters of 1998, capital requirements for property additions and capital leases are expected to be about $44 million, including $7 million for nuclear fuel. TE has additional cash requirements of approximately $40.6 million to meet sinking fund requirements for preferred stock and maturing long-term debt during the remainder of 1998. These cash requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. As of March 31, 1998, TE had approximately $119.0 million of cash and temporary investments and no short-term indebtedness. In May 1998, FirstEnergy arranged a $100 million revolving line of credit until May 6, 1999 to replace an expiring $125 million facility. FirstEnergy's borrowings under this facility will be jointly and severally guaranteed by TE and CEI. FirstEnergy plans to transfer any borrowed funds under this facility to TE and CEI based on their respective cash requirements. On March 26, 1998, Ohio legislation was introduced which is designed to bring competition to the State's retail electric industry. The legislation was introduced by the co- chairs of the Ohio General Assembly's Joint Select Committee and is consistent with recommendations contained in their draft report to the Select Committee. House and Senate hearings are expected to begin in May 1998; passage of any restructuring bill in 1998 appears unlikely. - 32 - PENNSYLVANIA POWER COMPANY STATEMENTS OF INCOME (Unaudited)
Three Months Ended March 31, --------------------- 1998 1997 ---------- -------- (In thousands) OPERATING REVENUES $78,576 $78,977 ------- ------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 17,798 15,897 Nuclear operating costs 7,027 6,473 Other operating costs 12,269 13,588 ------- ------- Total operation and maintenance expenses 37,094 35,958 Provision for depreciation 14,653 14,291 Amortization of net regulatory assets 1,845 1,845 General taxes 5,779 6,299 Income taxes 6,566 6,951 ------- ------- Total operating expenses and taxes 65,937 65,344 ------- ------- OPERATING INCOME 12,639 13,633 OTHER INCOME 739 670 INCOME BEFORE NET INTEREST CHARGES 13,378 14,303 ------- ------- NET INTEREST CHARGES: Interest expense 5,494 5,756 Allowance for borrowed funds used during construction (82) (47) ------- ------- Net interest charges 5,412 5,709 ------- ------- NET INCOME 7,966 8,594 PREFERRED STOCK DIVIDEND REQUIREMENTS 1,157 1,157 ------- ------- EARNINGS ON COMMON STOCK $ 6,809 $ 7,437 ======= ======= The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company are an integral part of these statements.
- 33 - PENNSYLVANIA POWER COMPANY BALANCE SHEETS (Unaudited)
March 31, December 31, 1998 1997 ----------- ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service, at original cost $1,234,114 $1,237,562 Less--Accumulated provision for depreciation 511,863 508,981 ---------- ---------- 722,251 728,581 ---------- ---------- Construction work in progress- Electric plant 9,337 7,427 Nuclear fuel - 6,788 ---------- ---------- 9,337 14,215 ---------- ---------- 731,588 742,796 ---------- ---------- OTHER PROPERTY AND INVESTMENTS 29,468 26,157 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 3,197 660 Notes receivable from parent company 16,500 17,500 Receivables- Customers (less accumulated provisions of $3,672,000 and $3,609,000, respectively, for uncollectible accounts) 31,923 33,934 Associated companies 16,256 12,599 Other 11,818 14,426 Materials and supplies, at average cost 15,349 14,973 Prepayments 10,347 1,707 ---------- ---------- 105,390 95,799 ---------- ---------- DEFERRED CHARGES: Regulatory assets 159,795 162,966 Other 6,641 6,739 ---------- ---------- 166,436 169,705 ---------- ---------- $1,032,882 $1,034,457 ========== ==========
- 34 - PENNSYLVANIA POWER COMPANY BALANCE SHEETS (Unaudited)
March 31, December 31, 1998 1997 ----------- ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholder's equity- Common stock, $30 par value, authorized 6,500,000 shares - 6,290,000 shares outstanding $ 188,700 $ 188,700 Other paid-in capital (400) (400) Retained earnings 105,140 103,677 ---------- ---------- Total common stockholder's equity 293,440 291,977 Preferred stock- Not subject to mandatory redemption 50,905 50,905 Subject to mandatory redemption 15,000 15,000 Long-term debt- Associated companies 8,031 9,231 Other 280,037 280,074 ---------- ---------- 647,413 647,187 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt- Associated companies 7,470 6,958 Other 573 1,443 Accounts payable- Associated companies 6,471 6,788 Other 24,231 22,751 Accrued taxes 18,202 12,332 Accrued interest 3,856 6,588 Other 11,810 14,746 ---------- ---------- 72,613 71,606 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 235,245 239,952 Accumulated deferred investment tax credits 25,480 26,052 Other 52,131 49,660 ---------- ---------- 312,856 315,664 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $1,032,882 $1,034,457 ========== ========== The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company are an integral part of these balance sheets.
- 35 - PENNSYLVANIA POWER COMPANY STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended March 31, -------------------- 1998 1997 --------- --------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7,966 $ 8,594 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation 14,653 14,291 Nuclear fuel and lease amortization 940 2,489 Other amortization, net 1,572 1,535 Deferred income taxes, net (2,812) (3,141) Investment tax credits, net (572) (582) Receivables 962 486 Materials and supplies (376) (375) Accounts payable 1,164 (21) Other (9,601) (8,128) -------- -------- Net cash provided from operating activities 13,896 15,148 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Notes payable, net - 5,000 Redemptions and Repayments- Long-term debt 1,760 12,023 Dividend Payments- Common stock 5,346 5,346 Preferred stock 1,157 1,157 -------- -------- Net cash used for financing activities 8,263 13,526 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 3,284 3,331 Loan payment from parent (1,000) (2,500) Other 812 1,703 -------- -------- Net cash used for investing activities 3,096 2,534 -------- -------- Net increase (decrease) in cash and cash equivalents 2,537 (912) Cash and cash equivalents at beginning of period 660 1,387 -------- -------- Cash and cash equivalents at end of period $ 3,197 $ 475 ======== ======== The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company are an integral part of these statements.
- 36 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Pennsylvania Power Company: We have reviewed the accompanying balance sheet of Pennsylvania Power Company (a Pennsylvania corporation and a wholly owned subsidiary of Ohio Edison Company) as of March 31, 1998, and the related statements of income and cash flows for the three-month period then ended. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Pennsylvania Power Company as of December 31, 1997, and, in our report dated February 13, 1998, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio May 13, 1998 - 37 - PENNSYLVANIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Retail kilowatt-hour sales decreased 2.9% in the first quarter of 1998, compared with the first quarter of 1997, due to a decline in industrial sales. Closure of an electric arc facility at Caparo Steel Company in August 1997 was the cause of reduced industrial sales. Excluding sales to Caparo, industrial sales were up 6.2%. Despite mild weather conditions, residential sales increased 2.5% during the first quarter of 1998 from the same period of 1997 and commercial sales were also up 2.6% from last year. Sales to other utilities declined 3.1% in the first quarter from comparable 1997 levels, bringing the reduction in total kilowatt-hour sales to 3.1% in the first quarter of 1998, compared to the first quarter of 1997. Fuel and purchased power expenses were up in the first quarter of 1998, compared to last year, due to an increase in purchased power costs resulting from an extended refueling outage at Beaver Valley Unit 1 and the consequent loss of available Penn generation. The extended outage at Beaver Valley Unit 1 also contributed to higher nuclear operating costs in the first quarter of 1998, compared to last year, with that increase partially offset by lower costs at the Perry Plant. Other operating costs were lower this year primarily due to lower fossil-fueled plant outage expenses. Capital Resources and Liquidity Penn has continuing cash requirements for planned capital expenditures. During the last three quarters of 1998, capital requirements for property additions and capital leases are expected to be about $16 million, including $2 million for nuclear fuel. These requirements are expected to be satisfied with internal cash. As of March 31, 1998, Penn had approximately $19.7 million of cash and temporary investments and no short term indebtedness. Penn had $2 million of unused short-term bank lines of credit as of March 31, 1998, and $12 million of bank facilities which may be borrowed for up to several days at the banks' discretion. The Pennsylvania Public Utility Commission is expected to issue its final order for the Penn's rate restructuring plan in July 1998. The plan, which Penn filed on September 30, 1997, calls for restructuring customer rates and providing customers with direct access to alternative energy suppliers. Customer choice is to be phased in over three years beginning January 1, 1999. - 38 - PART II. OTHER INFORMATION - --------------------------- Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- (a) The annual meeting of FirstEnergy stockholders was held on April 30, 1998. (b) At this meeting the following persons were elected to FirstEnergy's Board of Directors: Number of Votes --------------------------------- For Withheld ----------- ---------- R. L. Loughhead 188,836,922 5,396,454 G. H. Meadows 188,920,676 5,312,700 R. C. Savage 189,069,213 5,164,163 (c) At this meeting the appointment of Arthur Andersen LLP, independent public accountants as auditors for the year 1998 was ratified: Number of Votes ------------------------------------------- For Against Abstentions ----------- ----------- ----------- 191,045,709 1,694,384 1,494,878 (d) At this meeting an Executive and Director Incentive Compensation Plan was ratified: Number of Votes ------------------------------------------- For Against Abstentions ----------- ----------- ----------- 166,915,328 22,899,159 4,420,484 (e) At this meeting a shareholder proposal to elect the entire Board of Directors each year with an independent lead director was rejected: Number of Votes ------------------------------------------------------ Broker For Against Abstentions Non-Votes ----------- --------- ------------- ---------- 53,678,284 111,750,272 6,723,901 22,082,514 Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits Exhibit Number --------- FirstEnergy, OE, CEI and Penn ----------------------------- 15 Letter from independent public accountants. - 39 - Item 6. Exhibits and Reports on Form 8-K (Cont.) ------------------------------- TE -- None Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, FirstEnergy, or, respectively, any of the Companies, has not filed as an exhibit to this Form 10-Q any instrument with respect to long-term debt if the respective total amount of securities authorized thereunder does not exceed 10% of the total assets of FirstEnergy and its subsidiaries on a consolidated basis, or respectively, any of the Companies, but hereby agrees to furnish to the Commission on request any such documents. (b) Reports on Form 8-K FirstEnergy - FirstEnergy filed one report on Form 8-K ----------- since December 31, 1997. A Form 8-K/A, dated January 22, 1998 reported an amendment to a Form 8-K which reported the merger of Ohio Edison Company and Centerior Energy Corporation to form FirstEnergy effective November 8, 1997. OE - OE filed one report on Form 8-K since December 31, -- 1997. A report dated March 23, 1998 reported audited consolidated financial statements for the year ended December 31, 1997, and related matters. CEI - CEI filed one report on Form 8-K since December 31, --- 1997. A report dated March 16, 1998 reported audited consolidated financial statements for the year ended December 31, 1997, and related matters. TE - None -- Penn - None ---- - 40 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. May 14, 1998 FIRSTENERGY CORP. ----------------- Registrant OHIO EDISON COMPANY ------------------- Registrant THE CLEVELAND ELECTRIC ILLUMINATING COMPANY ---------------------- Registrant THE TOLEDO EDISON COMPANY ------------------------- Registrant /s/ Harvey L. Wagner ------------------------ Harvey L. Wagner Controller Principal Accounting Officer PENNSYLVANIA POWER COMPANY -------------------------- Registrant /s/ Harvey L. Wagner ----------------------- Harvey L. Wagner Comptroller Principal Accounting Officer - 41 - EX-15 2 EXHIBIT 15 FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Gentlemen: We are aware that FirstEnergy Corp. has incorporated by reference in its Registration Statements No. 333-48587 and No. 333-48651 its Form 10-Q for the quarter ended March 31, 1998, which includes our report dated May 13, 1998 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP Cleveland, Ohio May 13, 1998 - 42 - EX-27 3
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RELATED FORM 10-Q FINANCIAL STATEMENTS FOR FIRSTENERGY CORP. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (AMOUNTS IN 1,000'S, EXCEPT EARNINGS PER SHARE). INCOME TAX EXPENSE INCLUDES $11,700,000 RELATED TO OTHER INCOME. 0001031296 FIRSTENERGY CORP. 1,000 U.S. DOLLARS 3-MOS DEC-31-1998 MAR-31-1998 1 PER-BOOK 9,503,471 2,455,600 948,690 5,142,223 0 18,049,984 23,021 3,491,170 686,907 4,201,098 334,864 660,195 7,148,956 161,420 0 119,965 223,765 21,379 0 74,064 5,104,278 18,049,984 1,199,993 88,591 877,379 954,270 245,723 21,563 267,286 143,634 123,652 0 0 83,391 535,665 253,512 .56 .56
EX-15 4 EXHIBIT 15 Ohio Edison Company 76 South Main Street Akron, OH 44308 Gentlemen: We are aware that Ohio Edison Company has incorporated by reference in its Registration Statements No. 33-49135, No. 33-49259, No. 33-49413, No. 33-51139, No. 333-01489 and No. 333-05277 its Form 10-Q for the quarter ended March 31, 1998, which includes our report dated May 13, 1998 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP Cleveland, Ohio May 13, 1998 - 44 - EX-27 5
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RELATED FORM 10-Q FINANCIAL STATEMENTS FOR OHIO EDISON COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (AMOUNTS IN 1,000'S). INCOME TAX EXPENSE INCLUDES $5,422,000 RELATED TO OTHER INCOME. 0000073960 OHIO EDISON COMPANY 1,000 U.S. DOLLARS 3-MOS DEC-31-1998 MAR-31-1998 1 PER-BOOK 5,172,786 1,178,060 690,795 1,823,227 0 8,864,868 1 2,104,116 513,310 2,617,427 150,000 211,870 2,584,091 281,420 0 119,965 117,985 5,000 0 4,496 2,772,614 8,864,868 597,865 42,545 449,609 486,732 111,133 12,502 123,635 59,359 64,276 3,019 61,257 169,528 195,781 263,950 0 0
EX-15 6 EXHIBIT 15 The Cleveland Electric Illuminating Company 76 South Main Street Akron, OH 44308 Gentlemen: We are aware that The Cleveland Electric Illuminating Company has incorporated by reference in its Registration Statements No. 33-55513 and No. 333-47651 its Form 10-Q for the quarter ended March 31, 1998, which includes our report dated May 13, 1998 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP Cleveland, Ohio May 13, 1998 - 46 - EX-27 7
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RELATED FORM 10-Q FINANCIAL STATEMENTS FOR THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. INCOME TAX EXPENSE INCLUDES $4,072,000 RELATED TO OTHER INCOME. 0000020947 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY 1,000 U.S. DOLLARS 3-MOS DEC-31-1998 MAR-31-1998 1 PER-BOOK 3,146,872 669,684 378,492 2,253,698 0 6,448,746 931,614 0 58,915 990,529 183,174 238,325 3,196,328 75,600 0 0 66,830 14,714 0 40,697 1,642,549 6,448,746 415,027 28,494 299,909 324,331 90,696 7,593 98,289 58,664 39,625 1,068 38,557 0 238,782 45,960 0 0
EX-27 8
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RELATED FORM 10-Q FINANCIAL STATEMENTS FOR THE TOLEDO EDISON COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (AMOUNTS IN 1,000'S). INCOME TAX EXPENSE INCLUDES $2,119,000 RELATED TO OTHER INCOME. 0000352049 THE TOLEDO EDISON COMPANY 1,000 U.S. DOLLARS 3-MOS DEC-31-1998 MAR-31-1998 1 PER-BOOK 1,177,056 404,422 211,894 998,416 0 2,791,788 195,670 328,364 41,621 565,655 1,690 210,000 1,220,364 0 0 0 38,950 1,665 0 28,871 724,593 2,791,788 221,103 22,067 149,189 169,137 51,966 3,842 55,808 21,803 34,005 1,385 32,620 0 90,600 77,978 0 0
EX-15 9 EXHIBIT 15 Pennsylvania Power Company 1 E. Washington Street P. O. Box 891 New Castle, PA 16103 Gentlemen: We are aware that Pennsylvania Power Company has incorporated by reference in its Registration Statements No. 33-47372, No. 33-62450 and No. 33-65156 its Form 10-Q for the quarter ended March 31, 1998, which includes our report dated May 13, 1998 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP Cleveland, Ohio May 13, 1998 - 49 - EX-27 10
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE RELATED FORM 10-Q FINANCIAL STATEMENTS FOR PENNSYLVANIA POWER COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (AMOUNTS IN 1,000'S). INCOME TAX EXPENSE INCLUDES $177,000 RELATED TO OTHER INCOME. 0000077278 PENNSYLVANIA POWER COMPANY 1,000 U.S. DOLLARS 3-MOS DEC-31-1998 MAR-31-1998 1 PER-BOOK 731,588 29,468 105,390 166,436 0 1,032,882 188,700 (400) 105,140 293,440 15,000 50,905 288,068 0 0 0 0 0 0 8,043 377,426 1,032,882 78,576 6,743 59,371 65,937 12,639 739 13,378 5,412 7,966 1,157 6,809 5,346 19,099 13,896 0 0
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