-----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, QCd/Df4SWmz1kvvj2bTWUoNZ7zzsycQR2WJ2tP5ASdsDKorv6UzdWsYWnbDiUInT aXBVOB3v9szkHa6tk9lSJA== 0001031296-98-000024.txt : 19980813 0001031296-98-000024.hdr.sgml : 19980813 ACCESSION NUMBER: 0001031296-98-000024 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 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: 98683003 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: 98683004 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN STREET STREET 2: C/O FIRSTENERGY CORP CITY: AKRON STATE: OH ZIP: 44308 BUSINESS PHONE: 2166229800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO EDISON CO CENTRAL INDEX KEY: 0000073960 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 340437786 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02578 FILM NUMBER: 98683005 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: 98683006 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: 98683007 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN STREET CITY: AKRON STATE: OH ZIP: 43308 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 June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____to ____ Commission Registrant; State of Incorporation; I.R.S. Employer File Number Address; and Telephone Number Identification No. - ----------- ----------------------------------- ------------------ 333-21011 FIRSTENERGY CORP. 34-1843785 (An Ohio Corporation) 76 South Main Street Akron, Ohio 44308 Telephone (800)736-3402 1-2578 OHIO EDISON COMPANY 34-0437786 (An Ohio Corporation) 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-2323 THE CLEVELAND ELECTRIC 34-0150020 ILLUMINATING COMPANY (An Ohio Corporation) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-3583 THE TOLEDO EDISON COMPANY 34-4375005 (An Ohio Corporation) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-3491 PENNSYLVANIA POWER COMPANY 25-0718810 (A Pennsylvania Corporation) 1 East Washington Street P. O. Box 891 New Castle, Pennsylvania 16103 Telephone (412)652-5531 Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: OUTSTANDING CLASS AS OF AUGUST 12, 1998 ----- --------------------- FirstEnergy Corp., $.10 par value 237,069,087 Ohio Edison Company, $9 par value 100 The Cleveland Electric Illuminating Company, no par value 79,590,689 The Toledo Edison Company, $5 par value 39,133,887 Pennsylvania Power Company, $30 par value 6,290,000 FirstEnergy Corp. is the sole holder of Ohio Edison Company, The Cleveland Electric Illuminating Company and The Toledo Edison Company common stock; Ohio Edison Company is the sole holder of Pennsylvania Power Company common stock. This combined Form 10-Q is separately filed by FirstEnergy Corp., Ohio Edison Company, Pennsylvania Power Company, The Cleveland Electric Illuminating Company and The Toledo Edison Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to any other registrant, except that information relating to any of the four FirstEnergy subsidiaries is also attributed to FirstEnergy. This Form 10-Q includes forward looking statements based on information currently available to management. Such statements are subject to certain risks and uncertainties. These statements typically contain, but are not limited to, the terms "anticipate", "potential", "expect", "believe", "estimate" and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy market prices, legislative and regulatory changes (including revised environmental requirements), availability and cost of capital and other similar factors TABLE OF CONTENTS Pages Part I. Financial Information Notes to Financial Statements 1-3 FirstEnergy Corp. Consolidated Statements of Income 4 Consolidated Balance Sheets 5-6 Consolidated Statements of Cash Flows 7 Report of Independent Public Accountants 8 Management's Discussion and Analysis of Results of Operations and Financial Condition 9-11 Ohio Edison Company Consolidated Statements of Income 12 Consolidated Balance Sheets 13-14 Consolidated Statements of Cash Flows 15 Report of Independent Public Accountants 16 Management's Discussion and Analysis of Results of Operations and Financial Condition 17-18 The Cleveland Electric Illuminating Company Consolidated Statements of Income 19 Consolidated Balance Sheets 20-21 Consolidated Statements of Cash Flows 22 Report of Independent Public Accountants 23 Management's Discussion and Analysis of Results of Operations and Financial Condition 24-25 The Toledo Edison Company Consolidated Statements of Income 26 Consolidated Balance Sheets 27-28 Consolidated Statements of Cash Flows 29 Report of Independent Public Accountants 30 Management's Discussion and Analysis of Results of Operations and Financial Condition 31-32 Pennsylvania Power Company Statements of Income 33 Balance Sheets 34-35 Statements of Cash Flows 36 Report of Independent Public Accountants 37 Management's Discussion and Analysis of Results of Operations and Financial Condition 38-39 Part II. Other Information PART I. FINANCIAL INFORMATION - ------------------------------ FIRSTENERGY CORP. AND SUBSIDIARIES OHIO EDISON COMPANY AND SUBSIDIARIES THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY THE TOLEDO EDISON COMPANY AND SUBSIDIARY PENNSYLVANIA POWER COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) 1 - FINANCIAL STATEMENTS: FirstEnergy Corp. (FirstEnergy) became a holding company on November 8, 1997, in connection with the merger of Ohio Edison Company (OE) and Centerior Energy Corporation (Centerior). FirstEnergy's principal business is the holding, directly or indirectly, of all of the outstanding common stock of its four principal electric utility operating subsidiaries, OE, The Cleveland Electric Illuminating Company (CEI), The Toledo Edison Company (TE) and Pennsylvania Power Company (Penn). These utility subsidiaries are referred to throughout as "Companies." Penn is a wholly owned subsidiary of OE. Prior to the merger in November 1997, CEI and TE were the principal operating subsidiaries of Centerior. The merger was accounted for using the purchase method of accounting in accordance with generally accepted accounting principles, and the applicable effects were reflected on CEI's and TE's financial statements as of the merger date. Accordingly, the post-merger financial statements reflect a new basis of accounting, and pre-merger period and post-merger period financial results of CEI and TE (separated by a heavy black line) are presented. The condensed financial statements of FirstEnergy and each of the Companies reflect all normal recurring adjustments that, in the opinion of management, are necessary to fairly present results of operations for the interim periods. These statements should be read in connection with the financial statements and notes included in the combined Annual Report on Form 10-K for the year ended December 31, 1997 for FirstEnergy and the Companies. The reported results of operations are not indicative of results of operations for any future period. The sole assets of the subsidiary trust that is the obligor on the preferred securities included in FirstEnergy's and OE's capitalization are $123,711,350 principal amount of 9% Junior Subordinated Debentures of OE due December 31, 2025. 2 - COMMITMENTS, GUARANTEES AND CONTINGENCIES: CAPITAL EXPENDITURES- FirstEnergy's current forecast reflects expenditures of approximately $1.2 billion (OE-$510 million, CEI-$430 million, TE- $200 million and Penn-$90 million) for property additions and improvements related to its regulated businesses from 1998-2002, of which approximately $281 million (OE-$134 million, CEI- $87million, TE-$42 million and Penn-$18 million) is applicable to 1998. Investments for additional nuclear fuel during the 1998-2002 period are estimated to be approximately $518 million (OE-$169 million, CEI-$172 million, TE-$140 million and Penn-$37 million), of which approximately $85 million (OE-$24 million, CEI-$32 million, TE-$27 million and Penn-$2 million) applies to 1998. FirstEnergy also expects to invest approximately $300 million during 1998-2002 relating to various nonregulated business ventures. GUARANTEES- The Companies and Duquesne Light Company have each severally guaranteed certain debt and lease obligations in connection with a coal supply contract for the Bruce Mansfield Plant. As of June 30, 1998, the Companies' share of the guarantees was $46.6 million (OE-$26.9 million, CEI-$10.0 million, TE-$5.8 million and Penn-$3.9 million). The price under the coal supply contract, which includes certain minimum payments, has been determined to be sufficient to satisfy the debt and lease obligations. - 1 - ENVIRONMENTAL MATTERS- Various federal, state and local authorities regulate the Companies with regard to air and water quality and other environmental matters. The Companies estimate additional capital expenditures for environmental compliance of approximately $50 million (OE-$25 million, CEI-$12 million, TE-$11 million and Penn- $2 million), which is included in the construction forecast for their regulated businesses provided under "Capital Expenditures" for 1998 through 2002. The Companies are in compliance with the current sulfur dioxide (SO2) and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions through the year 1999 will be achieved by burning lower-sulfur fuel, generating more electricity from lower-emitting plants, and/or purchasing emission allowances. Plans for complying with reductions required for the year 2000 and thereafter have not been finalized. The Environmental Protection Agency (EPA) is conducting additional studies which could indicate the need for additional NOx reductions from the Companies' Pennsylvania facilities by the year 2003. In addition, the EPA is also considering the need for additional NOx reductions from the Companies' Ohio facilities. On November 7, 1997, the EPA proposed uniform reductions of NOx emissions across a region of twenty-two states, including Ohio and the District of Columbia (NOx Transport Rule) after determining that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. In a separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NOx emissions which are alleged to contribute to ozone pollution in the eight petitioning states. A December 1997 EPA Memorandum of Agreement proposes to finalize the NOx Transport Rule by September 30, 1998 and establishes a schedule for EPA action on the Section 126 petitions. The cost of NOx reductions, if required, may be substantial. The Companies continue to evaluate their compliance plans and other compliance options. The Companies are required to meet federally approved SO2 regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $25,000 for each day the unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Companies cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. The cost of compliance with these regulations may be substantial and depends on the manner in which they are implemented by the states in which the Companies operate affected facilities. OE, CEI and TE have been named as "potentially responsible parties" (PRPs) at waste disposal sites which may require cleanup under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. Allegations that the Companies disposed of hazardous substances at historical sites and the liability involved, are often unsubstantiated and subject to dispute. Federal law provides that all PRPs for a particular site be held liable on a joint and several basis. CEI and TE have accrued a liability of $4.8 million and $1.0 million, respectively, as of June 30, 1998, based on estimates of the costs of cleanup and the proportionate responsibility of other PRPs for such costs. OE, CEI and TE believe that waste disposal costs will not have a material adverse effect on their financial condition, cash flows or results of operations. Legislative, administrative and judicial actions will continue to change the way that the Companies must operate in order to comply with environmental laws and regulations. With respect to any such changes and to the environmental matters described above, the Companies expect that any resulting additional capital costs which may be required, as well as any required increase in operating costs, would ultimately be recovered from their customers. 3. REGULATORY ACCOUNTING- On June 18, 1998, the Pennsylvania Public Utility Commission (PPUC) authorized a rate restructuring plan for Penn, which essentially resulted in the deregulation of Penn's generation business. Accordingly, Penn discontinued the application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation (SFAS 71), for its generation business as of June 30, 1998. In - 2 - accordance with SFAS 101, "Regulated Enterprises - Accounting for the Discontinuation of Application of SFAS 71, " Penn was required to remove from its balance sheet all regulatory assets and liabilities related to its generation business for which SFAS 71 was discontinued and assess all other assets for impairment. The Securities and Exchange Commission (SEC) recently issued interpretive guidance regarding asset impairment measurement when a regulated enterprise such as an electric utility discontinues SFAS 71 for separable portions of its operations and assets. That guidance concludes that any supplemental regulated cash flows such as a competitive transition charge (CTC) should be excluded from the cash flows of assets in a portion of the business not subject to regulatory accounting practices. If such assets are impaired, a regulatory asset should be established if such costs are recoverable through regulatory cash flows. Consistent with the SEC guidance, Penn reduced its nuclear generating unit investments by approximately $305 million, of which approximately $227 million was recognized as a regulatory asset to be recovered through a CTC over a seven-year transition period. The charge of $51.7 million ($30.5 million after income taxes) for discontinuing the application of SFAS 71 to Penn's generation business was recorded as an extraordinary item on the Consolidated Statement of Income. Based on the current regulatory environment and the Companies' respective regulatory plans, the Companies believe they will continue to be able to bill and collect cost-based rates relating to all of OE's operations, CEI's and TE's nonnuclear operations, and Penn's nongeneration operations; accordingly, it is appropriate that the Companies continue the application of SFAS 71 to those respective operations. 4. PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME: The following pro forma statements of income for FirstEnergy, CEI and TE for the three months and six months ended June 30, 1997, give effect to the OE-Centerior merger as if it had been consummated on January 1, 1997, with the purchase accounting adjustments actually recognized in the business combination.
FE CEI TE -- --- -- (In millions, except per share amounts) Three Months Ended June 30, 1997 ------------------------------- Operating Revenues $1,200 $428 $222 Operating Expenses and Taxes 955 348 183 ------ ---- ---- Operating Income 245 80 39 Other Income (Expense) 13 (3) 2 Net Interest Charges 155 55 22 ------ ---- ---- Net Income $ 103 $ 22 $ 19 ====== ==== ==== Earnings per Share of Common Stock $ .47 ====== Six Months Ended June 30, 1997 ------------------------------ Operating Revenues $2,410 $860 $439 Operating Expenses and Taxes 1,920 698 364 ------ ---- ---- Operating Income 490 162 75 Other Income (Expense) 26 (3) 3 Net Interest Charges 308 108 44 ------ ---- ---- Net Income $ 208 $ 51 $ 34 ====== ==== ==== Earnings per Share of Common Stock $ .94 ======
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 Six Months Ended June 30, June 30, ---------------------- ---------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- (In thousands, except per share amounts) OPERATING REVENUES $1,277,061 $ 593,250 $2,477,054 $1,198,024 ---------- --------- ---------- ---------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 323,399 100,689 533,092 209,790 Nuclear operating costs 117,050 67,320 247,112 135,843 Other operating costs 229,872 107,079 441,692 195,069 ---------- --------- ---------- ---------- Total operation and maintenance expenses 670,321 275,088 1,221,896 540,702 Provision for depreciation and amortization 166,324 86,615 333,897 186,573 Amortization of net regulatory assets 22,520 7,421 44,377 14,841 General taxes 135,108 55,436 271,482 116,973 Income taxes 61,892 42,736 138,783 86,632 ---------- --------- ---------- ---------- Total operating expenses and taxes 1,056,165 467,296 2,010,435 945,721 ---------- --------- ---------- ---------- OPERATING INCOME 220,896 125,954 466,619 252,303 OTHER INCOME (EXPENSE) (6,327) 14,075 15,236 27,570 ---------- --------- ---------- ---------- INCOME BEFORE NET INTEREST CHARGES 214,569 140,029 481,855 279,873 ---------- --------- ---------- ---------- NET INTEREST CHARGES: Interest on long-term debt 132,717 51,713 262,331 104,338 Allowance for borrowed funds used during construction and capitalized interest (1,187) (381) (2,668) (761) Other interest expense 4,622 7,955 10,795 15,673 Subsidiaries' preferred stock dividend requirements 18,463 6,981 27,791 13,962 ---------- --------- ---------- ---------- Net interest charges 154,615 66,268 298,249 133,212 ---------- --------- ---------- ---------- INCOME BEFORE EXTRAORDINARY ITEM 59,954 73,761 183,606 146,661 EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 3) (30,522) - (30,522) - ---------- --------- ---------- ---------- NET INCOME $ 29,432 $ 73,761 $ 153,084 $ 146,661 ========== ========= ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 223,987 144,468 223,197 144,406 ======= ======= ======= ======= BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK: Before extraordinary item $ .27 $ .51 $ .83 $1.02 Extraordinary item (Net of income taxes) (Note 3) (.14) - (.14) - ------ ------ ------ ----- BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK $ .13 $ .51 $ .69 $1.02 ====== ====== ====== ===== DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $ .375 $ .375 $ .75 $ .75 ====== ====== ====== ===== 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)
June 30, December 31, 1998 1997 ----------- ------------- (In thousands) ASSETS ------ UTILITY PLANT: In service $14,441,698 $15,008,448 Less--Accumulated provision for depreciation 5,549,051 5,635,900 ----------- ----------- 8,892,647 9,372,548 ----------- ----------- Construction work in progress- Electric plant 210,275 165,837 Nuclear fuel 31,712 34,825 ----------- ----------- 241,987 200,662 ----------- ----------- 9,134,634 9,573,210 ----------- ----------- OTHER PROPERTY AND INVESTMENTS: Capital trust investments 1,332,604 1,370,177 Nuclear plant decommissioning trusts 327,481 301,173 Letter of credit collateralization 277,763 277,763 Other. 594,995 357,989 ----------- ----------- 2,532,843 2,307,102 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents 70,965 98,237 Receivables- Customers (less accumulated provisions of $6,227,000 and $5,618,000, respectively, for uncollectible accounts) 248,243 284,162 Other (less accumulated provisions of $36,932,000 and $4,026,000,respectively, for uncollectible accounts) 378,723 219,106 Materials and supplies, at average cost- Owned 139,558 154,961 Under consignment 112,386 82,839 Prepayments and other 201,418 163,686 ----------- ---------- 1,151,293 1,002,991 ----------- ---------- DEFERRED CHARGES: Regulatory assets 2,783,213 2,624,144 Goodwill 2,256,883 2,107,795 Property taxes 270,647 270,585 Other 206,176 194,968 ----------- ----------- 5,516,919 5,197,492 ----------- ----------- $18,335,689 $18,080,795 =========== ===========
- 5 - FIRSTENERGY CORP. CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 1998 1997 ----------- ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholders' equity- Common stock, $.10 par value, authorized 300,000,000 shares - 237,069,087 and 230,207,141 shares outstanding, respectively $ 23,707 $ 23,021 Other paid-in capital 3,838,866 3,636,908 Retained earnings 632,753 646,646 Unallocated employee stock ownership plan common stock - 7,663,745 and 7,829,538 shares, respectively (143,864) (146,977) ----------- ----------- Total common stockholders' equity 4,351,462 4,159,598 Preferred stock of consolidated subsidiaries- Not subject to mandatory redemption 660,195 660,195 Subject to mandatory redemption 199,460 214,864 OE obligated mandatorily redeemable preferred securities of subsidiary trust holding solely OE subordinated debentures 120,000 120,000 Long-term debt 6,996,796 6,969,835 ----------- ----------- 12,327,913 12,124,492 ----------- ----------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 407,184 470,436 Short-term borrowings 202,738 302,229 Accounts payable 506,476 312,690 Accrued taxes 386,295 381,937 Accrued interest 144,767 147,694 Other 197,420 193,850 ----------- ----------- 1,844,880 1,808,836 ----------- ----------- DEFERRED CREDITS: Accumulated deferred income taxes 2,286,385 2,304,305 Accumulated deferred investment tax credits 296,886 324,200 Pensions and other postretirement benefits 509,850 492,425 Other 1,069,775 1,026,537 ----------- ----------- 4,162,896 4,147,467 ----------- ----------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ----------- ----------- $18,335,689 $18,080,795 =========== =========== 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 Six Months Ended June 30, June 30, -------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 29,432 $ 73,761 $ 153,084 $146,661 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 166,324 86,615 333,897 186,573 Nuclear fuel and lease amortization 16,319 14,297 40,632 28,642 Other amortization, net 12,838 7,119 34,423 14,229 Deferred income taxes, net (24,953) (8,255) (15,251) (16,696) Investment tax credits, net (5,568) (3,338) (11,339) (7,164) Extraordinary item 51,730 - 51,730 - Receivables 48,421 6,612 88,486 23,964 Materials and supplies 197 (10,613) (9,797) (9,561) Accounts payable 1,526 9,176 (35,149) 5,312 Other (17,520) (16,075) (98,458) 1,134 --------- --------- --------- -------- Net cash provided from operating activities 278,746 159,299 532,258 373,094 --------- --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Common stock 203,855 - 203,855 - Long-term debt 114,286 41,318 262,405 70,523 Ohio Schools Council Prepayment Program 116,598 - 116,598 - Redemptions and Repayments- Preferred stock 15,379 - 15,379 - Long-term debt 189,930 104,056 349,911 216,543 Short-term borrowings, net 87,599 13,996 108,443 43,503 Common stock dividend payments 83,586 56,419 166,977 109,960 --------- --------- --------- -------- Net cash provided from (used for) financing activities 58,245 (133,153) (57,852) (299,483) --------- --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 307,120 29,196 371,224 63,577 Cash investments 66 - 111,610 - Other 7,685 1,748 18,844 4,798 --------- --------- --------- -------- Net cash used for investing activities 314,871 30,944 501,678 68,375 --------- --------- --------- -------- Net increase (decrease) in cash and cash equivalents 22,120 (4,798) (27,272) 5,236 Cash and cash equivalents at beginning of period 48,845 15,287 98,237 5,253 --------- --------- --------- -------- Cash and cash equivalents at end of period $ 70,965 $ 10,489 $ 70,965 $ 10,489 ========= ========= ========= ======== 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 June 30, 1998, and the related consolidated statements of income and cash flows for the three-month and six-month periods ended June 30, 1998 and 1997. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of FirstEnergy Corp. and subsidiaries as of December 31, 1997, and, in our report dated February 13, 1998, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio August 12, 1998 - 8 - FIRSTENERGY CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Company, as a producer and trader of electricity, has certain financial risks inherent in its business activities. With respect to its trading operations, the Company uses principally over-the-counter contracts for the purchase and sale of electricity. These contracts expose the Company to commodity price fluctuations. Market risk represents the risk of loss that may impact financial position, results of operations or cash flow due to either changes in the commodity market prices for electricity or the failure of contract counterparties to perform. Various policies and procedures have been established to manage market risk exposure based on measures of historical market volatility. However, electricity is subject to unpredictable price fluctuations due to changing economic and weather conditions. Financial results in the second quarter of 1998 were adversely affected by a combination of these factors as described below. Expenses in the third quarter of 1998 are expected to be adversely affected, to a lesser extent, from trading losses due to the continuing price volatility in the regional power market. Results of Operations Basic and diluted earnings on common stock decreased to $.69 per share for the six-month period ended June 30, 1998, compared to $1.02 per share for the same period last year. For the second quarter of 1998, earnings decreased to $.13 per share, compared to $.51 per share for the second quarter of 1997. Financial results reflect several factors including the merger of OE and Centerior, which was effective November 8, 1997. The former Centerior companies, which include CEI and TE have been included in the second quarter and year-to-date 1998 results. The 1997 second quarter and six-month results are for OE and Penn only (OE companies). Also, 1998 second quarter and six-month results include an extraordinary charge of $30.5 million after taxes, or $.14 per common share, resulting from Penn's discontinued application of SFAS 71 to its generation business (see Note 3). Sharp increases in the spot market price for electricity occasioned by constrained power supply conditions and heavy customer demand, combined with unscheduled outages at certain FirstEnergy generating units, resulted in spot market purchases of power at prices which substantially exceeded amounts recovered from retail customers. The recovery shortfall reduced net income by approximately $50 million, or $.22 per common share. Finally, the unprecedented market prices for electricity in June 1998, contributed to a credit loss of $25 million after taxes or $.11 per common share. One power marketer with which the Company's FirstEnergy Trading and Power Marketing Corp. subsidiary had transactions under contract defaulted, and others may be unable to perform as a result of June's price movements. Operating revenues increased $1.279 billion during the six-month period ending June 30, 1998, compared to the same period of 1997, and increased $684 million in the second quarter of 1998 compared to the second quarter of 1997. Excluding the contribution of the former Centerior companies, operating revenues were 4.3% higher during the quarter and 1.5% higher in the year-to-date period compared to the corresponding periods of 1997. For the OE companies, year-to-date retail kilowatt-hour sales decreased 0.2%, with a 3.2% increase in commercial sales offset by a 2.1% decrease in industrial sales. Industrial sales for 1998 were affected by the August 1997 closure of a major customer's electric arc furnace in the Penn service area. Excluding sales to that facility, industrial sales increased 0.2% and retail sales were 0.8% higher. Residential sales were down slightly in the year-to-date period ending June 30, 1998, with a 0.4% decrease from last year. Sales to wholesale customers increased 7.8% compared to the first half of 1997. This increase contributed to the 1.1% increase in total kilowatt-hour sales during the period. Retail kilowatt-hour sales in the second quarter of 1998 for the OE companies increased 2.4% with residential and commercial sales being 4.0% and 8.5% higher, respectively. Residential sales benefited from higher air-conditioning loads due to hotter weather and commercial sales benefited from continued growth in the service sector of the area economy during the period. Industrial sales decreased 2.4% during the second quarter of 1998 compared to the same period of 1997. However, removing the impact of the electric arc furnace closure, industrial sales were slightly higher. Sales to wholesale customers increased 16.4% in the second quarter compared to the same period last year contributing to the increase in total sales of 4.6%. - 9 - All operation and maintenance expense categories increased substantially in the first half of 1998, compared to the same period of last year, due principally to the inclusion of the former Centerior companies. Excluding the 1998 costs of the former Centerior companies, operation and maintenance expenses increased $67.5 million in the first half of 1998 compared to the first six months of 1997. Most of the increase for the OE companies resulted from purchased power expenses which were up $57.7 million in the first half of 1998 from the same period in 1997. That increase was the result of a combination of factors. In late June 1998, the midwestern and southern regions of the United States experienced electricity shortages caused mainly by record temperatures and humidity and unscheduled generating unit outages. During this period, the Beaver Valley Plant remained out of service and the Company's Davis-Besse Nuclear Power Station was removed from service as a result of damage to transmission facilities caused by a tornado. Also, Avon Lake Unit 9 experienced an unscheduled outage during the period due to lightning-related transformer damage. As a result, the Companies purchased significant amounts of power on the spot market at unusually high prices (as discussed above), causing the increase in purchased power costs. Excluding last year's credits from emission allowance sales, other operation and maintenance expenses were down in the first six months of 1998 from the same period in 1997. Inclusion of the former Centerior companies also increased other operating expenses. Excluding those companies' 1998 costs, the provision for depreciation and amortization increased $9.9 million or 5.3% for the six-month period ending June 30, 1998 compared to the first half of 1997. Of that increase, $9.1 million occurred in the second quarter of 1998 resulting principally from accelerated depreciation under OE's regulatory plan. Amortization of net regulatory assets also increased in the first half of 1998 from the comparable 1997 period due to the absence in 1998 of certain regulatory credits which were fully amortized in 1997. Other income (expense) in the second quarter of 1998 included the $25 million after-tax reserve for credit losses discussed above. For the OE companies, other income was down slightly in the first half of 1998 and the second quarter of 1998 compared to the same periods of 1997, due principally to reduced investment income. Interest expenses increased due to the inclusion of the former Centerior companies for both the six-month period ended June 30, 1998 and the second quarter of 1998, from the corresponding periods in 1997. Excluding the impact of the merger, interest on long-term debt decreased due to redemptions of long-term debt totaling $333.9 million since July 1997. Other interest expense increased as a result of increased short- term borrowing levels in 1998. Capital Resources and Liquidity The Companies have continuing cash requirements for planned capital expenditures and debt maturities. During the last half of 1998, capital requirements for property additions and capital leases for the utility operating companies are expected to be about $181 million, including $19 million for nuclear fuel. The Companies have additional cash requirements of approximately $85.6 million to meet sinking fund requirements for preferred stock and maturing long-term debt during the remainder of 1998. These cash requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. As of June 30, 1998, the Companies had about $71.0 million of cash and temporary investments and $202.7 million of short- term indebtedness. The Companies' unused borrowing capability included $235 million under revolving lines of credit and $15 million of bank facilities that provide for borrowings on a short-term basis at the banks' discretion. On July 3, 1998, CEI optionally redeemed $150 million principal amount of first mortgage bonds having a weighted average interest rate of 8.56%. TE completed an optional redemption of a $26 million, 7.5% first mortgage bond on the same date. - 10 - Under the Company's "Energy for Education" program, eligible public schools in CEI's service area entered into a special eight-year contract to receive a 10% base rate reduction and a discount for prepaying their estimated electric bills through the year 2005. In April 1998, CEI received a $116.6 million prepayment under this program. CEI and TE residential customers received a $3 reduction in their monthly bills beginning June 5, 1998, as part of the Rate Reduction and Economic Development Plan approved last year by the PUCO. This reduction will reduce annual revenues by approximately $34 million (approximately $19 million in 1998). The Companies issued $25 million of 5.375% tax exempt bonds in the second quarter of 1998 to fund construction of an oxidation plant which will convert non-hazardous waste from the Bruce Mansfield Plant environmental system to gypsum. The gypsum will be sold to a plant owned by National Gypsum Co. for use in the production of wallboard. On June 8, 1998, the Company completed its acquisition of Marbel Energy Corp., a fully integrated natural gas company. During the second quarter of 1998, the Company made three additional acquisitions which increased the mechanical construction and energy services portion of its business: Colonial Mechanical Corp., based in Richmond, Virginia; Elliott- Lewis Corp. headquartered in Philadelphia, Pennsylvania; and Edwards Electrical & Mechanical, Inc. based in Indianapolis, Indiana. In combination with two previous acquisitions, the Company now anticipates approximately $300 million in annual revenues from the mechanical construction and energy management portion of its business. New Accounting Standard In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement. SFAS 133 is effective for fiscal years beginning after June 15, 1999. A company may implement the Statement for any fiscal quarter beginning after June 16, 1998. The Company has not yet quantified the impacts of adopting SFAS 133 on its financial statements and has not determined the timing or method of its adoption. - 11 - OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- (In thousands) OPERATING REVENUES $618,598 $593,250 $1,216,463 $1,198,024 -------- -------- ---------- ---------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 153,133 100,689 267,048 209,790 Nuclear operating costs 69,222 67,320 140,988 135,843 Other operating costs 107,912 107,079 200,185 195,069 -------- -------- ---------- ---------- Total operation and maintenance expenses 330,267 275,088 608,221 540,702 Provision for depreciation 95,676 86,615 196,519 186,573 Amortization of net regulatory assets 11,288 7,421 22,575 14,841 General taxes 58,969 55,436 118,494 116,973 Income taxes 28,750 42,736 65,873 86,632 -------- -------- ---------- ---------- Total operating expenses and taxes 524,950 467,296 1,011,682 945,721 -------- -------- ---------- ---------- OPERATING INCOME 93,648 125,954 204,781 252,303 OTHER INCOME 11,766 14,075 24,268 27,570 -------- -------- ---------- ---------- INCOME BEFORE NET INTEREST CHARGES 105,414 140,029 229,049 279,873 -------- -------- ---------- ---------- NET INTEREST CHARGES: Interest on long-term debt 46,329 51,713 92,997 104,338 Allowance for borrowed funds used during construction and capitalized interest (469) (381) (1,129) (761) Other interest expense 9,391 7,955 18,885 15,673 Subsidiaries' preferred stock dividend requirements 3,856 3,856 7,713 7,713 -------- -------- ---------- ---------- Net interest charges 59,107 63,143 118,466 126,963 -------- -------- ---------- ---------- INCOME BEFORE EXTRAORDINARY ITEM 46,307 76,886 110,583 152,910 EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 3) (30,522) - (30,522) - -------- -------- ---------- ---------- NET INCOME 15,785 76,886 80,061 152,910 PREFERRED STOCK DIVIDEND REQUIREMENTS 3,018 3,125 6,037 6,249 -------- -------- ---------- ---------- EARNINGS ON COMMON STOCK $ 12,767 $ 73,761 $ 74,024 $ 146,661 ======== ======== ========== ========== 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)
June 30, December 31, 1998 1997 ------------ ------------- (In thousands) ASSETS ------ UTILITY PLANT: In service, at original cost $8,143,187 $8,666,272 Less--Accumulated provision for depreciation 3,457,929 3,546,594 ---------- ---------- 4,685,258 5,119,678 ---------- ---------- Construction work in progress- Electric plant 118,161 99,158 Nuclear fuel 13,897 21,360 ---------- ---------- 132,058 120,518 ---------- ---------- 4,817,316 5,240,196 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: PNBV Capital Trust 478,542 482,220 Nuclear plant decommissioning trusts 123,817 109,883 Letter of credit collateralization 277,763 277,763 Other. 305,197 419,525 ---------- ---------- 1,185,319 1,289,391 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 33,046 4,680 Receivables- Customers (less accumulated provisions of $6,227,000 and $5,618,000, respectively, for uncollectible accounts) 223,839 235,332 Associated companies 263,400 25,348 Other 48,559 87,566 Materials and supplies, at average cost- Owned 68,151 75,580 Under consignment 50,739 47,890 Prepayments and other 99,750 78,348 ---------- ---------- 787,484 554,744 ---------- ---------- DEFERRED CHARGES: Regulatory assets 1,788,746 1,601,709 Property taxes 100,878 100,043 Unamortized sale and leaseback costs 92,597 95,096 Other 58,150 96,276 ---------- ---------- 2,040,371 1,893,124 ---------- ---------- $8,830,490 $8,977,455 ========== ==========
- 13 - OHIO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, 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 2,105,240 2,102,644 Retained earnings 486,377 621,674 ---------- ---------- Total common stockholder's equity 2,591,618 2,724,319 Preferred stock- Not subject to mandatory redemption 160,965 160,965 Subject to mandatory redemption 15,000 15,000 Preferred stock of consolidated subsidiary- Not subject to mandatory redemption 50,905 50,905 Subject to mandatory redemption 15,000 15,000 OE obligated mandatorily redeemable preferred securities of subsidiary trust holding solely OE subordinated debentures 120,000 120,000 Long-term debt 2,605,526 2,569,802 ---------- ---------- 5,559,014 5,655,991 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 70,254 278,492 Short-term borrowings- Associated companies 192,040 - Other 193,726 302,229 Accounts payable- Associated companies 126,037 - Other 94,529 115,836 Accrued taxes 205,402 157,095 Accrued interest 45,087 53,165 Other 109,031 115,256 ---------- ---------- 1,036,106 1,022,073 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 1,627,189 1,698,354 Accumulated deferred investment tax credits 161,379 184,804 Postretirement benefits 168,202 158,038 Other 278,600 258,195 ---------- ---------- 2,235,370 2,299,391 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $8,830,490 $8,977,455 ========== ========== 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 Six Months Ended June 30, June 30, ---------------------- ---------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 15,785 $ 76,886 $ 80,061 $152,910 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation 95,676 86,615 196,519 186,573 Nuclear fuel and lease amortization 6,563 14,297 13,346 28,642 Other amortization, net 11,023 7,119 22,038 14,229 Deferred income taxes, net (37,613) (8,255) (51,526) (16,696) Investment tax credits, net (3,622) (3,338) (7,448) (7,164) Extraordinary item 51,730 - 51,730 - Receivables (73,744) 6,612 (41,876) 23,964 Materials and supplies 4,755 (10,613) 4,580 (9,561) Accounts payable 92,415 9,176 109,590 5,312 Other (3,781) (16,143) 46,123 1,038 -------- -------- -------- -------- Net cash provided from operating activities 159,187 162,356 423,137 379,247 -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 104,822 41,318 107,460 70,523 Short-term borrowings, net - - 83,537 - Redemptions and Repayments- Long-term debt 141,774 104,056 281,635 216,543 Short-term borrowings, net 15,619 13,996 - 43,503 Dividend Payments- Common stock 39,884 56,419 209,782 109,960 Preferred stock 2,834 3,057 5,859 6,153 -------- -------- -------- -------- Net cash used for financing activities 95,289 136,210 306,279 305,636 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 47,354 29,196 88,370 63,577 Other (4,847) 1,748 122 4,798 -------- -------- -------- -------- Net cash used for investing activities 42,507 30,944 88,492 68,375 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 21,391 (4,798) 28,366 5,236 Cash and cash equivalents at beginning of period 11,655 15,287 4,680 5,253 -------- -------- -------- -------- Cash and cash equivalents at end of period $ 33,046 $ 10,489 $ 33,046 $ 10,489 ======== ======== ======== ======== 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 June 30, 1998, and the related consolidated statements of income and cash flows for the three-month and six-month periods ended June 30, 1998 and 1997. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Ohio Edison Company and subsidiaries as of December 31, 1997, and, in our report dated February 13, 1998, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio August 12, 1998 - 16 - OHIO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Earnings were adversely affected in the six-month period ended June 30, 1998, and in the second quarter of 1998 compared to the same periods of 1997 by an extraordinary item resulting from deregulation of Penn's generation business and the corresponding discontinuation of SFAS 71 with respect to its generation business. This action was taken following the June 18, 1998, authorization by the PPUC of a restructuring plan for Penn (see below and Note 3). Excluding the extraordinary item, earnings on common stock were $104.5 million in the first half of 1998 compared to $146.7 million in the same period last year; for the second quarter of 1998, earnings on common stock were $43.3 million compared to $73.8 million in the second quarter 1997. Results for the six-month and second quarter periods of 1998 were affected by a sharp increase in purchased power costs which was offset in part by higher operating revenues. Operating revenues increased $18.4 million during the first half of 1998, compared to the same period of 1997, and increased $25.3 million in the second quarter of 1998 compared to the second quarter of 1997. Year-to-date retail kilowatt-hour sales decreased 0.2%, with a 3.2% increase in commercial sales offset by a 2.1% decrease in industrial sales. Industrial sales for 1998 were affected by the August 1997 closure of a major customer's electric arc furnace in the Penn service area. Excluding sales to that facility, industrial sales increased 0.2% and retail sales were 0.8% higher. Residential sales were down slightly in the year-to-date period ending June 30, 1998, with a 0.4% decrease from last year. Sales to wholesale customers increased 7.8% compared to the first half of 1997. This increase contributed to the 1.1% increase in total kilowatt-hour sales during the period. Retail kilowatt-hour sales in the second quarter of 1998 increased 2.4% with residential and commercial sales being 4.0% and 8.5% higher, respectively. Residential sales benefited from higher air-conditioning loads due to hotter weather and commercial sales benefited from continued growth in the service sector of the area economy during the period. Industrial sales decreased 2.4% during the second quarter of 1998 compared to the same period of 1997. However, removing the impact of the electric arc furnace closure, industrial sales were slightly higher. Sales to wholesale customers increased 16.4% in the second quarter compared to the same period last year contributing to the increase in total kilowatt-hour sales which were 4.6% higher. Operation and maintenance expenses increased $67.5 million in the first half of 1998 compared to the first six months of 1997. Most of the increase resulted from purchased power expenses which were up $57.7 million in the first half of 1998 from the same period in 1997. That increase was the result of a combination of factors. In late June 1998, the midwestern and southern regions of the United States experienced electricity shortages caused mainly by record temperatures and humidity and unscheduled generating unit outages. Due in part to unscheduled outages at Beaver Valley Units 1 and 2 which continued through the second quarter of 1998, OE companies' production capabilities were reduced to the point that they purchased significant amounts of power on the spot market at unusually high prices, causing the increase in purchased power expense. Excluding last year's credits from emission allowance sales, other operation and maintenance expenses were down in the first six months of 1998 from the same period in 1997. The provision for depreciation and amortization increased $9.9 million or 5.3% for the six-month period ending June 30, 1998 compared to the first half of 1997. Of that increase, $9.1 million occurred in the second quarter of 1998 resulting principally from accelerated depreciation under OE's regulatory plan. Amortization of net regulatory assets also increased in the first half of 1998 from the comparable 1997 period due to the absence in 1998 of certain regulatory credits which were fully amortized in 1997. - 17 - Interest expenses decreased for both the six-month period ended June 30, 1998 and the second quarter of 1998 from corresponding periods in 1997. Interest on long- term debt decreased due to redemption of long-term debt totaling $333.9 million since July 1997, while other interest expense increased as a result of increased short-term borrowing levels in 1998. Capital Resources and Liquidity OE and Penn (OE companies) have continuing cash requirements for planned capital expenditures and debt maturities. During the last two quarters of 1998, capital requirements for property additions and capital leases are expected to be about $92 million, including $12 million for nuclear fuel. The OE companies have additional cash requirements of approximately $10.4 million to meet sinking fund requirements for preferred stock and maturing long-term debt during the remainder of 1998. These cash requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. As of June 30, 1998, the OE companies had about $33.0 million of cash and temporary investments. The OE companies also had $385.8 million of short-term indebtedness. In addition, the OE companies' unused borrowing capability included $135 million under revolving lines of credit and $15 million of bank facilities that provide for borrowings on a short-term basis at the banks' discretion. Transition to Retail Competition On June 18, 1998, the PPUC authorized a plan which will restructure Penn's rates and provide customers with direct access to alternative electricity suppliers. Customer choice will be phased in over two years with 66% of each customer class having direct access to alternative suppliers of generation by January 2, 1999, and all remaining customers having access as of January 2, 2000. Under the plan, Penn will continue to deliver power to homes and businesses through its transmission and distribution system, which will remain regulated. However, Penn's rates have been restructured to establish separate charges for transmission and distribution; generation, which will be subject to competition; and stranded cost recovery. The generation portion of the unbundled rates represents a "shopping credit." In the event customers obtain power from an alternative source, the generation portion of Penn's rate will be excluded from their bill and the customers will receive a generation charge from the alternative supplier. The stranded cost recovery portion of rates provides for recovery of certain amounts not otherwise considered recoverable in a competitive generation market. Penn will recover $234 million of stranded costs through a competitive transition charge starting in 1999 and ending in 2005. - 18 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
June 30, 1998 June 30, 1997 ----------------------- --------------------- Three Six Three Six Months Months Months Months Ended Ended Ended Ended --------- -------- -------- -------- (In thousands) | OPERATING REVENUES $465,225 $880,252 | $428,246 $859,873 -------- -------- | -------- -------- OPERATING EXPENSES AND TAXES: | Fuel and purchased power 137,569 226,546 | 102,090 212,620 Nuclear operating costs 16,320 38,405 | 23,888 44,984 Other operating costs 89,826 169,412 | 91,412 175,655 -------- -------- | -------- -------- Total operation and maintenance expenses 243,715 434,363 | 217,390 433,259 Provision for depreciation and amortization 50,372 98,555 | 55,225 110,523 Amortization of net regulatory assets 6,567 13,134 | 6,567 13,134 General taxes 53,863 108,374 | 57,274 113,960 Income taxes 23,253 47,675 | 14,352 31,554 -------- -------- | -------- -------- Total operating expenses and taxes 377,770 702,101 | 350,808 702,430 -------- -------- | -------- -------- OPERATING INCOME 87,455 178,151 | 77,438 157,443 | OTHER INCOME (EXPENSE) 5,857 13,450 | (5,221) (8,885) -------- -------- | -------- -------- INCOME BEFORE NET INTEREST CHARGES 93,312 191,601 | 72,217 148,558 -------- -------- | -------- -------- NET INTEREST CHARGES: | Interest on long-term debt 60,751 120,811 | 54,669 107,550 Allowance for borrowed funds used during | construction (404) (956) | (252) (711) Other interest expense (credit) (1,882) (2,726) | 3,830 7,519 -------- -------- | -------- -------- Net interest charges 58,465 117,129 | 58,247 114,358 -------- -------- | -------- -------- NET INCOME 34,847 74,472 | 13,970 34,200 | PREFERRED STOCK DIVIDEND REQUIREMENTS 7,438 8,506 | 9,096 18,411 -------- -------- | ------- -------- EARNINGS ON COMMON STOCK $ 27,409 $ 65,966 | $ 4,874 $ 15,789 ======== ======== | ======= ======== 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)
June 30, December 31, 1998 1997 ---------- ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $4,568,827 $4,578,649 Less--Accumulated provision for depreciation 1,501,881 1,470,084 ---------- ---------- 3,066,946 3,108,565 ---------- ---------- Construction work in progress- Electric plant 45,213 41,261 Nuclear fuel 9,886 6,833 ---------- ---------- 55,099 48,094 ---------- ---------- 3,122,045 3,156,659 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust 543,126 575,084 Nuclear plant decommissioning trusts 111,337 105,334 Other. 20,886 21,482 ---------- ---------- 675,349 701,900 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 14,549 33,775 Receivables- Customers 16,373 29,759 Associated companies 5,244 8,695 Other 199,031 98,077 Notes receivable from associated companies 136,900 - Materials and supplies, at average cost- Owned 40,807 47,489 Under consignment 42,815 25,411 Prepayments and other 68,263 57,763 ---------- ---------- 523,982 300,969 ---------- ---------- DEFERRED CHARGES: Regulatory assets 564,699 579,711 Goodwill 1,521,613 1,552,483 Property taxes 126,414 125,204 Other 12,872 23,358 ---------- ---------- 2,225,598 2,280,756 ---------- ---------- $6,546,974 $6,440,284 ========== ==========
- 20 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, 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 63,446 19,290 ---------- ---------- Total common stockholder's equity 995,060 950,904 Preferred stock- Not subject to mandatory redemption 238,325 238,325 Subject to mandatory redemption 169,460 183,174 Long-term debt 3,046,213 3,189,590 ---------- ---------- 4,449,058 4,561,993 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 265,099 121,965 Accounts payable- Associated companies 85,662 56,109 Other 123,122 90,737 Notes payable to associated companies 30,310 56,802 Accrued taxes 162,061 194,394 Accrued interest 68,809 67,896 Other 42,791 52,297 ---------- ---------- 777,854 640,200 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 532,276 496,437 Accumulated deferred investment tax credits 93,538 96,131 Pensions and other postretirement benefits 202,202 198,642 Other 492,046 446,881 ---------- ---------- 1,320,062 1,238,091 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $6,546,974 $6,440,284 ========== ========== 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)
June 30, 1998 June 30, 1997 --------------------- ------------------- Three Six Three Six Months Months Months Months Ended Ended Ended Ended --------- -------- -------- -------- (In thousands) | CASH FLOWS FROM OPERATING ACTIVITIES: | Net income $ 34,847 $ 74,472 | $ 13,970 $ 34,200 Adjustments to reconcile net income to net | cash from operating activities- | Provision for depreciation and amortization 50,372 98,555 | 55,225 110,523 Nuclear fuel and lease amortization 6,127 16,356 | 11,775 25,186 Other amortization (2,850) 3,717 | 6,567 13,134 Deferred income taxes, net 16,576 30,791 | 11,461 22,197 Investment tax credits, net (1,297) (2,593)| (2,001) (4,002) Allowance for equity funds used during | construction - - | (398) (725) Receivables (77,237) (87,568)| (28,395) 14,965 Materials and supplies (6,374) (10,722)| (5,207) (4,140) Accounts payable 63,340 32,385 | 14,281 (11,321) Other (42,710) (68,639)| (20,312) (37,569) -------- -------- | -------- -------- Net cash provided from operating activities 40,794 86,754 | 56,966 162,448 -------- -------- | -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: | New Financing- | Long-term debt 5,822 5,822 | 574,947 574,947 Short-term borrowings, net - - | 26,252 29,033 Ohio Schools Council Prepayment Program 116,598 116,598 | - - Redemptions and Repayments- | Preferred stock 13,714 13,714 | 13,714 28,714 Long-term debt 15,029 26,581 | 13,711 26,161 Short-term borrowings, net 45,290 26,492 | - - Dividend Payments- | Common stock 25,469 25,469 | 29,605 59,210 Preferred stock 8,870 17,741 | 9,206 18,742 -------- -------- | -------- -------- Net cash provided from financing activities 14,048 12,423 | 534,963 471,153 -------- -------- | -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: | Property additions 12,080 27,414 | 21,701 54,972 Loans to associated companies 59,900 136,900 | - - Capital trust investments - (31,958)| 569,389 569,389 Other (18,137) (13,953)| 5,411 17,387 -------- -------- | -------- -------- Net cash used for investing activities 53,843 118,403 | 596,501 641,748 -------- -------- | -------- -------- Net increase (decrease) in cash and cash equivalents 999 (19,226)| (4,572) (8,147) Cash and cash equivalents at beginning of period 13,550 33,775 | 26,698 30,273 -------- -------- | -------- -------- Cash and cash equivalents at end of period $ 14,549 $ 14,549 | $ 22,126 $ 22,126 ======== ======== | ======== ======== 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 June 30, 1998, and the related consolidated statements of income and cash flows for the three-month and six-month periods ended June 30, 1998 and 1997. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of The Cleveland Electric Illuminating Company and subsidiary as of December 31, 1997, and, in our report dated February 13, 1998, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio August 12, 1998 - 23 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Financial results reflect the application of purchase accounting to the merger of CEI's former parent company, Centerior, with OE to form FirstEnergy on November 8, 1997. The application of this accounting resulted in fair value adjustments which were "pushed down" or reflected on the separate financial statements of Centerior's direct subsidiaries as of the merger date, including CEI's financial statements. Accordingly, the post-merger financial statements for the first half and second quarter of 1998 and the December 31, 1997 Consolidated Balance Sheet reflect a new basis of accounting. Material effects of this new basis of accounting are identified below. Earnings on common stock increased to $66.0 million for the six-month period ended June 30, 1998, from $15.8 million in the same period last year. For the second quarter of 1998, earnings increased to $27.4 million, compared to $4.9 million in the second quarter of 1997. The increases reflect increased operating revenues, benefits provided by the Bruce Mansfield Plant lease refinancing and lower operating expenses. The above factors were offset in part by an increase in purchased power costs in the second quarter of 1998. Operating revenues increased $20.4 million during the six- month period ended June 30, 1998 compared to the same period of 1997 and increased $37.0 million in the second quarter of 1998 from the corresponding 1997 period. Operating revenues in the 1998 periods included $9.2 million received as a termination charge for a canceled power supply contract. Year-to-date retail kilowatt-hour sales increased 0.5% with a 3.5% increase in commercial sales partially offset by a 3.8% decrease in residential sales. Residential sales were adversely affected by unusually mild weather conditions in the first quarter of 1998. Sales to industrial customers increased 0.9% in the first six months of 1998 from the same period in 1997. Sales to wholesale customers decreased 52.2% compared to the first half of 1997 due in part to unplanned generating unit outages which reduced available energy for sale to other utilities. This resulted in a 5.9% decrease in total kilowatt-hour sales during the six-month period compared to 1997. Retail kilowatt-hour sales in the second quarter of 1998 increased 3.6% from the second quarter of 1997 with residential, commercial and industrial customers all contributing to the increase. Residential sales benefited from higher air- conditioning loads due to hotter weather, increasing 1.9%. Commercial and industrial sales increased 6.5% and 2.4%, respectively, benefiting from growth in the area economy. Sales to wholesale customers decreased 40.7% in the second quarter of 1998 compared to the same period in 1997. Overall, reduced off- system sales offset the increase in retail sales leading to a decline in total kilowatt-hour sales of 0.3% for the second quarter of 1998 compared to the second quarter of 1997. Fuel and purchased power expenses increased in both the first half of 1998 and the second quarter of 1998 compared to the same periods of 1997. The increases resulted from higher purchased power costs in the second quarter of 1998, which resulted from a combination of factors. In late June 1998, the midwestern and southern regions of the United States experienced electricity shortages caused mainly by record temperatures and humidity and unscheduled generating unit outages. During this period, Beaver Valley Unit 2 remained out of service and the Davis-Besse Nuclear Power Station was removed from service as a result of damage to transmission facilities caused by a tornado. Also, Avon Lake Unit 9 experienced an unscheduled outage during the period due to lightning-related transformer damage. As a result, CEI purchased significant amounts of power on the spot market at unusually high prices, causing the increase in purchased power expense. Nuclear operating costs were lower for the year-to-date and second quarter periods of 1998 compared to 1997, offsetting part of the increase in fuel and purchased power expense discussed above. Lower costs at the Perry and Beaver Valley Plants contributed to the reduction. - 24 - Lower depreciable asset balances resulting from the purchase accounting adjustment reduced the provision for depreciation in the first half of 1998 compared to the same period last year and for the second quarter of 1998 compared to the second quarter of 1997. These reductions were partially offset by the amortization of goodwill recognized with the application of purchase accounting. Interest income from investments related to the refinancing of the Mansfield Plant lease increased other income in 1998 compared to the first half and second quarter of 1997. Total interest charges were also higher due to secured notes issued in connection with the refinancing of the Mansfield Plant lease. Partially offsetting the increased interest charges was the amortization of net premiums associated with the revaluation of long-term debt in connection with the merger. Capital Resources and Liquidity CEI has continuing cash requirements for planned capital expenditures and debt maturities. During the last half of 1998, capital requirements for property additions and capital leases are expected to be about $62 million including $5 million for nuclear fuel. CEI has additional cash requirements of approximately $62.5 million to meet sinking fund requirements for preferred stock and maturing long-term debt during the remainder of 1998. These cash requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. As of June 30, 1998, CEI had approximately $151.4 million of cash and temporary investments and $30.3 million of short-term indebtedness to an associated company. Upon completion of the merger, application of purchase accounting reduced bondable property such that CEI is not currently able to issue additional first mortgage bonds, except against retired bonds. On July 3, 1998, CEI optionally redeemed $150 million principal amount of first mortgage bonds having a weighted average interest rate of 8.56%. Under FirstEnergy's "Energy for Education" program, eligible public schools in CEI's service area entered into a special eight-year contract to receive a 10% base rate reduction and a discount for prepaying their estimated electric bills through the year 2005. In April 1998, CEI received a $116.6 million prepayment under this program. CEI's residential customers received a $3 reduction on their monthly bills beginning June 5, 1998, as part of the Rate Reduction and Economic Development Plan approved last year by the PUCO. This reduction will reduce annual revenues by approximately $24 million (approximately $14 million in 1998). - 25 - THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
June 30, 1998 June 30, 1997 ----------------------- --------------------- Three Six Three Six Months Months Months Months Ended Ended Ended Ended --------- -------- -------- -------- (In thousands) | OPERATING REVENUES $239,731 $460,834 | $222,144 $439,204 -------- -------- | -------- -------- OPERATING EXPENSES AND TAXES: | Fuel and purchased power 70,658 103,065 | 44,501 87,815 Nuclear operating costs 35,877 72,087 | 39,382 79,283 Other operating costs 37,263 74,255 | 41,996 84,373 -------- -------- | -------- -------- Total operation and maintenance expenses 143,798 249,407 | 125,879 251,471 Provision for depreciation and amortization 20,276 38,823 | 24,596 49,490 Amortization of net regulatory assets 4,665 8,668 | 4,291 8,582 General taxes 20,928 41,958 | 22,601 45,395 Income taxes 12,220 32,168 | 8,700 15,832 -------- -------- | -------- -------- Total operating expenses and taxes 201,887 371,024 | 186,067 370,770 -------- -------- | -------- -------- OPERATING INCOME 37,844 89,810 | 36,077 68,434 | OTHER INCOME 3,057 6,899 | 353 33 -------- -------- | -------- -------- INCOME BEFORE NET INTEREST CHARGES 40,901 96,709 | 36,430 68,467 -------- -------- | -------- -------- NET INTEREST CHARGES: | Interest on long-term debt 22,370 45,256 | 20,748 41,582 Allowance for borrowed funds used during | construction (314) (583) | (11) (115) Other interest expense (credit) (285) (1,099) | 2,577 5,044 -------- -------- | -------- -------- Net interest charges 21,771 43,574 | 23,314 46,511 -------- -------- | -------- -------- NET INCOME 19,130 53,135 | 13,116 21,956 | PREFERRED STOCK DIVIDEND REQUIREMENTS 4,150 5,535 | 4,211 8,405 -------- -------- | ------- -------- EARNINGS ON COMMON STOCK $ 14,980 $ 47,600 | $ 8,905 $ 13,551 ======== ======== | ======= ======== 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)
June 30, December 31, 1998 1997 ------------ ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $1,728,365 $1,763,495 Less--Accumulated provision for depreciation 588,916 619,222 ---------- ---------- 1,139,449 1,144,273 ---------- ---------- Construction work in progress- Electric plant 23,577 19,901 Nuclear fuel 7,929 6,632 ---------- ---------- 31,506 26,533 ---------- ---------- 1,170,955 1,170,806 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust 310,936 312,873 Nuclear plant decommissioning trusts 92,327 85,956 Other. 4,392 3,164 ---------- ---------- 407,655 401,993 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 4,567 22,170 Receivables- Associated companies 20,114 15,199 Other 18,438 21,664 Notes receivable from associated companies 85,450 40,802 Materials and supplies, at average cost- Owned 26,105 31,892 Under consignment 18,832 9,538 Prepayments and other 29,991 26,437 ---------- ---------- 203,497 167,702 ---------- ---------- DEFERRED CHARGES: Regulatory assets 429,768 442,724 Goodwill 503,911 514,462 Property taxes 43,355 45,338 Other 3,407 15,127 ---------- ---------- 980,441 1,017,651 ---------- ---------- $2,762,548 $2,758,152 ========== ==========
- 27 - THE TOLEDO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, 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 328,362 328,364 Retained earnings 35,510 7,616 ---------- ---------- Total common stockholder's equity 559,542 531,650 Preferred stock- Not subject to mandatory redemption 210,000 210,000 Subject to mandatory redemption - 1,690 Long-term debt 1,192,190 1,210,190 ---------- ---------- 1,961,732 1,953,530 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 71,156 69,979 Accounts payable- Associated companies 37,519 21,173 Other 63,108 60,756 Accrued taxes 40,914 34,441 Accrued interest 26,520 26,633 Other 22,583 22,603 ---------- ---------- 261,800 235,585 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 123,357 104,543 Accumulated deferred investment tax credits 41,969 43,265 Pensions and other postretirement benefits 115,441 113,254 Other 258,249 307,975 ---------- ---------- 539,016 569,037 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $2,762,548 $2,758,152 ========== ========== 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)
June 30, 1998 June 30, 1997 ----------------------- --------------------- Three Six Three Six Months Months Months Months Ended Ended Ended Ended --------- -------- -------- -------- (In thousands) | CASH FLOWS FROM OPERATING ACTIVITIES: | Net income $ 19,130 $ 53,135 | $ 13,116 $ 21,956 -------- -------- | -------- -------- Adjustments to reconcile net income to net | cash from operating activities- | Provision for depreciation and | amortization 20,276 38,823 | 24,596 49,490 Nuclear fuel and lease amortization 3,629 10,930 | 8,192 17,634 Amortization of net regulatory assets 4,665 8,668 | 4,291 8,582 Deferred income taxes, net 11,564 21,017 | (2,857) (3,126) Investment tax credits, net (649) (1,298) | (1,080) (2,160) Allowance for equity funds used during | construction - - | (54) (386) Receivables (14,975) 3,226 | (5,463) (5,103) Materials and supplies (527) (3,507) | 1,350 1,772 Accounts payable (1,329) 2,352 | (8,413) (1,922) Other (15,099) (28,683) | 19,990 12,055 -------- -------- | -------- -------- Net cash provided from operating | activities 26,685 104,663 | 53,668 98,792 -------- -------- | -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: | New Financing- | Long-term debt 3,657 3,657 | 144,972 144,972 Short-term borrowings, net - - | 85,000 85,000 Redemptions and Repayments- | Preferred stock 1,665 1,665 | 1,665 1,665 Long-term debt 33,127 41,695 | 9,643 26,260 Dividend Payments- | Common stock 21,132 21,132 | - - Preferred stock 4,108 8,235 | 4,204 8,397 -------- -------- | -------- -------- Net cash provided from (used for) | financing activities (56,375) (69,070) | 214,460 193,650 -------- -------- | -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: | Property additions 6,898 14,647 | 14,866 25,119 Loans to associated companies - 44,648 | - - Loan payments from associated companies (33,150) - | (43,748) (11,166) Capital trust investments 66 (1,937) | 337,099 337,099 Other (7,698) (4,162) | 825 342 -------- -------- | -------- -------- Net cash used for (provided from) | investing activities (33,884) 53,196 | 309,042 351,394 -------- -------- | -------- -------- Net increase (decrease) in cash and cash | equivalents 4,194 (17,603) | (40,914) (58,952) Cash and cash equivalents at beginning of | period 373 22,170 | 63,416 81,454 -------- -------- | -------- -------- Cash and cash equivalents at end of period $ 4,567 $ 4,567 | $ 22,502 $ 22,502 ======== ======== | ======== ======== 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 June 30, 1998, and the related consolidated statements of income and cash flows for the three-month and six-month periods ended June 30, 1998 and 1997. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of The Toledo Edison Company and subsidiary as of December 31, 1997, and, in our report dated February 13, 1998, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio August 12, 1998 - 30 - THE TOLEDO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Financial results reflect the application of purchase accounting to the merger of TE's former parent company, Centerior, with OE to form FirstEnergy on November 8, 1997. The application of this accounting resulted in fair value adjustments which were "pushed down" or reflected on the separate financial statements of Centerior's direct subsidiaries as of the merger date, including TE's financial statements. Accordingly, the post- merger financial statements for the first half and the second quarter of 1998 and the December 31, 1997 Consolidated Balance Sheet reflect a new basis of accounting. Material effects of this new basis of accounting are identified below. Earnings on common stock increased to $47.6 million for the six-month period ended June 30, 1998, from $13.6 million in the same period last year. For the second quarter of 1998, earnings increased to $15.0 million, compared to $8.9 million in the second quarter of 1997. The increases reflect increased operating revenues, benefits provided by the Bruce Mansfield Plant lease refinancing and lower operating expenses. The above factors were offset in part by an increase in purchased power costs in the second quarter of 1998. Operating revenues increased $21.6 million during the six- month period ended June 30, 1998 compared to the same period in 1997 and increased $17.6 million in the second quarter of 1998 from the corresponding period of 1997. Year-to-date retail kilowatt-hour sales increased 9.2% from same period last year, with residential, commercial and industrial customers all contributing to the increase. Residential sales benefited from higher air-conditioning loads due to hotter weather, increasing 1.9%. Commercial and industrial sales increased 6.6% and 13.8%, respectively. Commercial sales benefited from growth in the area economy. Expanded production at the North Star BHP Steel (North Star) facility was the primary factor in the 13.8% increase in industrial sales in the first half of 1998 from last year's level. Excluding North Star, industrial sales increased 2.8% during that period. Sales to wholesale customers decreased 48.8% compared to the first half of 1997 due in part to unplanned generating unit outages which reduced available energy for sale to other utilities. This resulted in a 4.1% decrease in total kilowatt-hour sales during the six-month period compared to 1997. Retail kilowatt-hour sales in the second quarter of 1998 increased 11.7% from the second quarter of 1997 with residential, commercial and industrial customers all contributing to the increase. Residential sales increased 6.7% benefiting from the hotter weather in the second quarter of this year compared to the same period of 1997. Commercial and industrial sales increased 12.1% and 13.5%, respectively. Commercial sales benefited from growth in the service sector of the area economy. Expanded production at the North Star facility was the primary factor behind increased industrial sales during the second quarter of 1998. Excluding North Star, industrial sales increased 2.2% during that period from the second quarter of 1997. Sales to wholesale customers decreased 48.2% in the second quarter of 1998 compared to the same period in 1997. Overall, reduced off-system sales offset the increase in retail sales leading to a decline in total sales of 1.1% for the second quarter of 1998 compared to the second quarter of 1997. Fuel and purchased power expenses increased in both the first half of 1998 and the second quarter of 1998 compared to the same periods of 1997. The increases resulted from higher purchased power costs in the second quarter of 1998, which resulted from a combination of factors. In late June 1998, the midwestern and southern regions of the United States experienced electricity shortages caused mainly by record temperatures and humidity and unscheduled generating unit outages. During this period, Beaver Valley Unit 2 remained out of service and the Davis-Besse Nuclear Power Station was removed from service as a - 31 - result of damage to transmission facilities caused by a tornado. As a result, TE purchased significant amounts of power on the spot market at unusually high prices, causing the increase in purchased power expense. Other operating costs were lower for the year-to-date and second quarter periods of 1998 compared to 1997, substantially offsetting the increase in fuel and purchased power expense during the first half of 1998. Contributing to the reduction were lower operating costs at the Bay Shore Plant, lower rent expense as a result of the refinancing of the Mansfield Plant lease and reduced employee levels. Lower depreciable asset balances resulting from the purchase accounting adjustment reduced the provision for depreciation in the first half of 1998 compared to the same period last year and for the second quarter of 1998 compared to the second quarter of 1997. These reductions were partially offset by the amortization of goodwill recognized with the application of purchase accounting. Interest income from investments related to the refinancing of the Mansfield Plant lease increased other income in 1998 compared to the first half and second quarter of 1997. Total interest charges decreased due in part to the amortization of net premiums associated with the revaluation of long-term debt in connection with the merger. Capital Resources and Liquidity TE has continuing cash requirements for planned capital expenditures and debt maturities. During the last half of 1998, capital requirements for property additions and capital leases are expected to be about $28 million, including $2 million for nuclear fuel. TE has additional cash requirements of approximately $12.7 million to meet sinking fund requirements for preferred stock and maturing long-term debt during the remainder of 1998. These cash requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. As of June 30, 1998, TE had approximately $90.0 million of cash and temporary investments and no short-term indebtedness. Upon completion of the merger, application of purchase accounting reduced bondable property such that TE is not currently able to issue additional first mortgage bonds, except against retired bonds. On July 3, 1998, TE completed an optional redemption of a $26 million, 7.5% first mortgage bond. TE's residential customers received a $3 reduction on their monthly bills beginning June 5, 1998, as part of the Rate Reduction and Economic Development Plan approved last year by the PUCO. This will reduce annual revenues by approximately $9 million (approximately $5 million in 1998). - 32 - PENNSYLVANIA POWER COMPANY STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------- ------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (In thousands) OPERATING REVENUES $ 80,271 $79,220 $158,847 $158,197 -------- ------- -------- -------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 23,089 15,215 40,887 31,112 Nuclear operating costs 6,769 6,661 13,796 13,134 Other operating costs 13,504 17,664 25,773 31,252 -------- ------- -------- -------- Total operation and maintenance expenses 43,362 39,540 80,456 75,498 Provision for depreciation 14,665 12,991 29,318 27,282 Amortization of net regulatory assets 1,845 1,845 3,690 3,690 General taxes 5,494 5,408 11,273 11,707 Income taxes 4,906 6,432 11,472 13,383 -------- ------- -------- -------- Total operating expenses and taxes 70,272 66,216 136,209 131,560 -------- ------- -------- -------- OPERATING INCOME 9,999 13,004 22,638 26,637 OTHER INCOME 634 324 1,373 994 -------- ------- -------- -------- INCOME BEFORE NET INTEREST CHARGES 10,633 13,328 24,011 27,631 -------- ------- -------- -------- NET INTEREST CHARGES: Interest expense 5,223 5,641 10,717 11,397 Allowance for borrowed funds used during construction (62) (89) (144) (136) -------- ------- -------- -------- Net interest charges 5,161 5,552 10,573 11,261 -------- ------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM 5,472 7,776 13,438 16,370 EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 3) (30,522) - (30,522) - -------- ------- -------- -------- NET INCOME (LOSS) (25,050) 7,776 (17,084) 16,370 PREFERRED STOCK DIVIDEND REQUIREMENTS 1,156 1,156 2,313 2,313 -------- ------- -------- -------- EARNINGS (LOSS) ON COMMON STOCK $(26,206) $ 6,620 $(19,397) $ 14,057 ======== ======= ======== ======== 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)
June 30, December 31, 1998 1997 ------------ ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service, at original cost $ 687,966 $1,237,562 Less--Accumulated provision for depreciation 281,175 508,981 --------- ---------- 406,791 728,581 --------- ---------- Construction work in progress- Electric plant 9,700 7,427 Nuclear fuel 23 6,788 --------- ---------- 9,723 14,215 --------- ---------- 416,514 742,796 --------- ---------- OTHER PROPERTY AND INVESTMENTS 31,397 26,157 --------- ---------- CURRENT ASSETS: Cash and cash equivalents 6,087 660 Notes receivable from parent company 30,000 17,500 Receivables- Customers (less accumulated provisions of $3,585,000 and $3,609,000, respectively, for uncollectible accounts) 34,556 33,934 Associated companies 15,110 12,599 Other 10,347 14,426 Materials and supplies, at average cost 15,146 14,973 Prepayments 8,050 1,707 --------- --------- 119,296 95,799 --------- --------- DEFERRED CHARGES: Regulatory assets 392,510 162,966 Other 5,068 6,739 --------- ---------- 397,578 169,705 --------- ---------- $ 964,785 $1,034,457 ========= ==========
- 34 - PENNSYLVANIA POWER COMPANY BALANCE SHEETS (Unaudited)
June 30, 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 73,662 103,677 --------- ---------- Total common stockholder's equity 261,962 291,977 Preferred stock- Not subject to mandatory redemption 50,905 50,905 Subject to mandatory redemption 15,000 15,000 Long-term debt- Associated companies 9,624 9,231 Other 281,675 280,074 --------- ---------- 619,166 647,187 --------- ---------- CURRENT LIABILITIES: Currently payable long-term debt- Associated companies 5,265 6,958 Other 493 1,443 Accounts payable- Associated companies 11,013 6,788 Other 23,532 22,751 Accrued taxes 13,816 12,332 Accrued interest 6,619 6,588 Other 13,569 14,746 --------- ---------- 74,307 71,606 --------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 209,172 239,952 Accumulated deferred investment tax credits 8,931 26,052 Other 53,209 49,660 --------- ---------- 271,312 315,664 --------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) --------- ---------- $ 964,785 $1,034,457 ========= ========== 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 Six Months Ended June 30, June 30, -------------------- ------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(25,050) $ 7,776 $(17,084) $16,370 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation 14,665 12,991 29,318 27,282 Nuclear fuel and lease amortization 852 2,320 1,792 4,809 Other amortization, net 1,581 1,543 3,153 3,078 Deferred income taxes, net (24,177) (3,466) (26,989) (6,607) Investment tax credits, net (572) (537) (1,144) (1,119) Extraordinary item 51,730 - 51,730 - Receivables (16) 11,001 946 11,487 Materials and supplies 203 (553) (173) (928) Accounts payable 3,842 (4,131) 5,006 (4,152) Other 3,734 3,064 (5,867) (5,064) -------- ------- -------- ------- Net cash provided from operating activities 26,792 30,008 40,688 45,156 -------- ------- -------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 1,621 - 1,621 - Redemptions and Repayments- Long-term debt 791 2,289 2,551 14,312 Notes payable, net - 5,000 - - Dividend Payments- Common stock 5,347 5,347 10,693 10,693 Preferred stock 1,081 1,081 2,238 2,238 -------- ------- -------- ------- Net cash used for financing activities 5,598 13,717 13,861 27,243 -------- ------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 3,735 3,199 7,019 6,530 Loan to parent 13,500 13,000 12,500 10,500 Other 1,069 74 1,881 1,777 -------- ------- -------- ------- Net cash used for investing activities 18,304 16,273 21,400 18,807 -------- ------- -------- ------- Net increase (decrease) in cash and cash equivalents 2,890 18 5,427 (894) Cash and cash equivalents at beginning of period 3,197 475 660 1,387 -------- ------- -------- ------- Cash and cash equivalents at end of period $ 6,087 $ 493 $ 6,087 $ 493 ======== ======= ======== ======= 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 June 30, 1998, and the related statements of income and cash flows for the three-month and six-month periods ended June 30, 1998 and 1997. These financial statements are the responsibility of the company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Pennsylvania Power Company as of December 31, 1997, and, in our report dated February 13, 1998, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 1997, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio August 12, 1998 - 37 - PENNSYLVANIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations Earnings were adversely affected in the six-month period ended June 30, 1998, and in the second quarter of 1998 compared to the same periods of 1997, by an extraordinary item resulting from the deregulation of Penn's generation business and the corresponding discontinuation of SFAS 71 with respect to its generation business. This action was taken following the June 18, 1998, authorization by the PPUC of a restructuring plan for Penn (see below and Note 3). Excluding the extraordinary item, earnings on common stock were $11.1 million in the first half of 1998 compared to $14.1 million in the same period last year; for the second quarter of 1998, earnings on common stock were $4.3 million compared to $6.6 million in the second quarter 1997. Retail kilowatt-hour sales decreased 2.7% in the first six months of 1998 and 2.5% in the second quarter of 1998 from the same periods in 1997, due to a decline in industrial sales. Closure of an electric arc facility at Caparo Steel Company in August 1997, caused the reduced industrial sales. Excluding sales to Caparo, sales to industrial customers in the first half of 1998 increased 3.6% and sales in the second quarter of 1998 were up 2.5% from the corresponding periods last year. Residential sales increased 3.4% during the first six months of 1998 compared to the first half of 1997 and 4.6% in the second quarter of 1998 from the same period last year. Residential sales benefited from higher air-conditioning loads due to hotter weather. Commercial sales also increased in both the six month and second quarter periods of 1998 from the corresponding periods last year, by 6.3% and 10.1%, respectively, reflecting continued growth in the service sector economy. Sales to wholesale customers decreased 3.5% in the first six months of 1998 compared to the first half of 1997 and were down 3.3% in the second quarter of 1998 compared to the same period last year. Fuel and purchased power expenses increased in both the first half of 1998 and in the second quarter of 1998 compared to the same periods of 1997. The increases resulted primarily from higher purchased power costs in the second quarter of 1998, resulting from a combination of factors. In late June 1998, the midwestern and southern regions of the United States experienced electricity shortages caused mainly by record temperatures and humidity and unscheduled generating unit outages. Due in part to an unscheduled outage at Beaver Valley Unit 1 which continued through the second quarter of 1998, Penn's production capability was reduced to the point that Penn purchased significant amounts of power on the spot market at unusually high prices, causing the increase in purchased power expense. Other operating costs decreased in the first six months of 1998 and in second quarter of 1998 compared to the same periods of 1997 due to a $3 million charge for uncollectible accounts in the second quarter of 1997. The increases in the provision for depreciation and amortization during the six-month period and second quarter of 1998 from the first half and second quarter of 1997, were due to higher levels of accelerated depreciation and amortization in 1998 under Penn's Rate Stability and Economic Development Plan. Capital Resources and Liquidity Penn has continuing cash requirements for planned capital expenditures. During the last two quarters of 1998, capital requirements for property additions and capital leases are expected to be about $12 million, including $2 million for nuclear fuel. These requirements are expected to be satisfied with internal cash. As of June 30, 1998, Penn had approximately $36.1 million of cash and temporary investments and no short-term indebtedness. Penn had $2 million of unused short-term bank lines of credit as of June 30, 1998, and $7 million of bank facilities which may be borrowed for up to several days at the banks' discretion. - 38 - Transition to Retail Competition On June 18, 1998, the PPUC authorized a plan which will restructure Penn's rates and provide customers with direct access to alternative electricity suppliers. Customer choice will be phased in over two years with 66% of each customer class having direct access to alternative suppliers of generation by January 2, 1999, and all remaining customers having access as of January 2, 2000. Under the plan, Penn will continue to deliver power to homes and businesses through its transmission and distribution system, which will remain regulated. However, Penn's rates have been restructured to establish separate charges for transmission and distribution; generation, which will be subject to competition; and stranded cost recovery. The generation portion of the unbundled rates represents a "shopping credit". In the event customers obtain power from an alternative source, the generation portion of Penn's rate will be excluded from their bill and the customers will receive a generation charge from the alternative supplier. The stranded cost recovery portion of rates provides for recovery of certain amounts not otherwise considered recoverable in a competitive generation market. Penn will recover $234 million of stranded costs through a competitive transition charge starting in 1999 and ending in 2005. - 39 - PART II. OTHER INFORMATION - --------------------------- Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits Exhibit Number ------ FirstEnergy, OE, CEI and Penn ----------------------------- 15 Letter from independent public accountants. TE -- None Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, FirstEnergy, or, respectively, any of the Companies, has not filed as an exhibit to this Form 10-Q any instrument with respect to long-term debt if the respective total amount of securities authorized thereunder does not exceed 10% of the total assets of FirstEnergy and its subsidiaries on a consolidated basis, or respectively, any of the Companies, but hereby agrees to furnish to the Commission on request any such documents. (b) Reports on Form 8-K FirstEnergy, OE, CEI, TE, Penn - One combined report on ------------------------------ Form 8-K was filed since March 31, 1998. A report dated July 6, 1998 reported events affecting second quarter 1998 results of operations for FirstEnergy and its four operating subsidiaries including power supply transactions, power marketing and trading transactions, and Penn's rate restructuring plan. - 40 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. August 12, 1998 FIRSTENERGY CORP. ---------------- Registrant OHIO EDISON COMPANY ------------------- Registrant THE CLEVELAND ELECTRIC ---------------------- ILLUMINATING COMPANY -------------------- Registrant THE TOLEDO EDISON COMPANY ------------------------- Registrant /s/ Harvey L. Wagner ------------------------------ Harvey L. Wagner Controller Principal Accounting Officer PENNSYLVANIA POWER COMPANY -------------------------- Registrant /s/ Harvey L. Wagner ------------------------------- Harvey L. Wagner Comptroller Principal Accounting Officer - 41 - EX-15 2 EXHIBIT 15 August 12, 1998 FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Gentlemen: We are aware that FirstEnergy Corp. has incorporated by reference in its Registration Statements No. 333-48587, No. 333-48651 and No. 333-58279 its Form 10-Q for the quarter ended June 30, 1998, which includes our report dated August 12, 1998 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP 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 $4,881,000 RELATED TO OTHER INCOME AND $(21,208,000) RELATED TO EXTRAORDINARY ITEM. 0001031296 FIRSTENERGY CORP. 1,000 U.S. DOLLARS 6-MOS DEC-31-1998 JUN-30-1998 1 PER-BOOK 9,134,634 2,532,843 1,151,293 5,516,919 0 18,335,689 23,707 3,695,002 632,753 4,351,462 319,460 660,195 6,996,796 82,763 0 119,975 316,257 21,404 0 69,523 5,397,854 18,335,689 2,477,054 122,456 1,871,652 2,010,435 466,619 15,236 481,855 298,249 153,084 0 0 166,977 531,648 532,258 .69 .69
EX-15 4 EXHIBIT 15 August 12, 1998 Ohio Edison Company 76 South Main Street Akron, OH 44308 Gentlemen: We are aware that Ohio Edison Company has incorporated by reference in its Registration Statements No. 33-49135, No. 33- 49259, No. 33-49413, No. 33-51139, No. 333-01489 and No. 333-05277 its Form 10-Q for the quarter ended June 30, 1998, which includes our report dated August 12, 1998 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP 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 $9,191,000 RELATED TO OTHER INCOME AND $(21,208,000) RELATED TO EXTRAORDINARY ITEM. 0000073960 OHIO EDISON COMPANY 1,000 U.S. DOLLARS 6-MOS DEC-31-1998 JUN-30-1998 1 PER-BOOK 4,817,316 1,185,319 787,484 2,040,371 0 8,830,490 1 2,105,240 486,377 2,591,618 150,000 211,870 2,605,526 265,791 0 119,975 61,102 5,000 0 4,152 2,815,456 8,830,490 1,216,463 53,856 945,809 1,011,682 204,781 24,268 229,049 118,466 80,061 6,037 74,024 209,412 193,721 423,137 0 0
EX-15 6 EXHIBIT 15 August 12, 1998 The Cleveland Electric Illuminating Company 76 South Main Street Akron, OH 44308 Gentlemen: We are aware that The Cleveland Electric Illuminating Company has incorporated by reference in its Registration Statements No. 33- 55513 and No. 333-47651 its Form 10-Q for the quarter ended June 30, 1998, which includes our report dated August 12, 1998 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP 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 $6,606,000 RELATED TO OTHER INCOME. 0000020947 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY 1,000 U.S. DOLLARS 6-MOS DEC-31-1998 JUN-30-1998 1 PER-BOOK 3,122,045 675,349 523,982 2,225,598 0 6,546,974 931,614 0 63,446 995,060 169,460 238,325 3,046,213 30,310 0 0 212,030 14,714 0 38,355 1,802,507 6,546,974 880,252 54,281 654,426 702,101 178,151 13,450 191,601 117,129 74,472 8,506 65,966 25,469 238,628 86,754 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 $3,809,000 RELATED TO OTHER INCOME. 0000352049 THE TOLEDO EDISON COMPANY 1,000 U.S. DOLLARS 6-MOS DEC-31-1998 JUN-30-1998 1 PER-BOOK 1,170,955 407,655 203,497 980,441 0 2,762,548 195,670 328,362 35,510 559,542 0 210,000 1,192,190 0 0 0 42,450 1,690 0 27,016 729,660 2,762,548 460,834 35,977 338,856 371,024 89,810 6,899 96,709 43,574 53,135 5,535 47,600 21,132 88,367 104,663 0 0
EX-15 9 EXHIBIT 15 August 12, 1998 Pennsylvania Power Company 1 E. Washington Street P. O. Box 891 New Castle, PA 16103 Gentlemen: We are aware that Pennsylvania Power Company has incorporated by reference in its Registration Statements No. 33-47372, No. 33- 62450 and No. 33-65156 its Form 10-Q for the quarter ended June 30, 1998, which includes our report dated August 12, 1998 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP 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 $305,000 RELATED TO OTHER INCOME AND $(21,208,000) RELATED TO EXTRAORDINARY ITEM. 0000077278 PENNSYLVANIA POWER COMPANY 1,000 U.S. DOLLARS 6-MOS DEC-31-1998 JUN-30-1998 1 PER-BOOK 416,514 31,397 119,296 397,578 0 964,785 188,700 (400) 73,662 261,962 15,000 50,905 291,299 0 0 0 0 0 0 5,758 339,861 964,785 158,847 (9,431) 124,737 136,209 22,638 1,373 24,011 10,573 (17,084) 2,313 (19,397) 10,693 19,177 40,688 0 0
-----END PRIVACY-ENHANCED MESSAGE-----