ML20207E552

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Annual Rept 1998 for Ohio Edison
ML20207E552
Person / Time
Site: Beaver Valley
Issue date: 12/31/1998
From:
OHIO EDISON CO.
To:
Shared Package
ML20207E531 List:
References
NUDOCS 9906070076
Download: ML20207E552 (27)
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Text

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ANNUAL REPORT 1998 onc51w A&mEmyCawy 7 ,

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OHIO EDISON COMPANY i

1998 ANNUAL REPORT TO STOCKHOLDERS Ohio Edison Company is a wholly owned electric utility operating subsidiary of a

FirstEnergy Corp. Ohio Edison provides electric services to communities in an area of 7,500 square miles in central and northeastem Ohio, it also provides transmission services and electric energy for resale to certain municipalities in its service area and transmission services to certain rural cooperatives. It also engages in the sale, purchase and 1 interchange of electric energy with other electric companies.

Contents East Selected Financial Data.. . .. . . . . . . . . . . . . . . . . 1 Price Range of Common Stock.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Management's Discussion and Analysis.. . . . . . . . . . . . . . . . . . . . . 2-6 Consolidated Statements of income . ..... .... ... .... . . . .. . . .. 7 Consolidated Balance Sheets.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 )

Consolidated Statements of Capitalization .. .. . ... .. . . . . . . . . . . . . . 9 10 Consolidated Statements of Common Stockholders' Equity.. . . . . . . . . . . 11 Consolidated Statements of Preferred Stock....... .. .... . . . . . . . . 11 Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . 12 Consolidated Statements of Taxes.. . .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Notes to Consolidated Financial Statements. .. . . .. . . . . . . . . . . . . . . . . . . . . . 14-24 Report of Independent Public Accountants.. ... . . .. . . . . . . . . . . . . . 25  ;

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OHIO EDISON COMPANY SELECTED FINANCIAL DATA 1998 1997 1998 1995 1994 (in thousencis)

  • Operating Revenues - -

$ 2.519.662 S 2.473.582 S 2.469.785 $ 2.465.846 $ 2.368.191 Operating income $ 486 920 $ 488.568 $ 530.069 $ 566.618 $ 557.254 Income Before Extraordinary itern . . ... 5 301.320 s 293.194 s 315.170 s 317.241 s 303.531 Not income. .

5 270.798 5 293.194 $ 315.170 $ 317.241 5 303.531 Eamings on Common Stock $ 258 828 s 280.802 s 302.673 s 294.747 $ 281.852 Total Assets. . I 8.733.151 5 8.977.455 5 9.054 457 $ 8 892.088 $ 9.045.255 Capitahzation at December 31:

Common Stockholders' Equity . -

$ 2.681,873 $ 2.724,319 $ 2.503.359 $ 2,407,871 $ 2,317,197 Preferred Stocle Not Subject to Mandatory Redemption 211.870 211,870 211,870 211,870 328.240 Subject to Mandatory Redemption. .. . 145.000 150.000 155,000 160.000 40.000 Long. Term Debt ... ....... . ... 2.215.042 2.569.802 2.712.760 2.786.256 3.166.593 Total Capitalization. S 5.253 785 5 5.655 991 5 5.582.989 $ 5.565.997 5 5.852 030 Capitalization Ratios:

Common Stockholders' Equity. 51.0 % 48.2 % 44.8 % 43.3 % 39.8 %

Preferred Stock:

Not Subject to Mandatory Redemption 4.0 3.7 3.8 3.8 5.6 Subject to Mandatory Redemption. 2.8 2.7 2.8 2.9 0.7 Long. Term Debt . ,. 42.2 45.4 48 6 50.0 54.1 Total Capitalization 100.0 % 100 0% 100 0% 100 0% 100 0%

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Kilowatt. Hour Sales (Millions):

Residential .

8.773 8,831 8.704 8.546 8.201 I

Commercial . . . . . . . . 7,590 7.335 7,246 7,151 6,885 industnal. ... - 10,803 11,202 11,089 10.513 9,841 Other. .. . ..... . 150 150 147 146 144 Total Retail 27,316 27,318 27,186 26,356 25.071 TotalWholesale. .. . 5.708 5.241 7.078 8/220 5.879 Total. . . ... . ... . 33 022 32.559 34.262 33.276 30 950 Customers Served Residential. 1,004.552 995.605 988.179 978,118 968.483 Commercial . . 113.820 111.189 113,795 111,978 109,832 Industria! . 4.598 4,568 4.590 4,268 3,786 Other s . 1.476 1.415 1.331 1.308 1.226 Total.. . . 1.124.446 1.112.777 1.107.895 1.095.672 1.083.327 Average Annual Residential kWh usage 8.780 8.720 8,861 8,787 8.524 )

Cost of Fuel per Million Stu . . $1.15 $3.10 $1.13 $1.18 $1.21 Peak Load-Megawatts... . . . 6,840 6.225 6,027 6.332 5.744 Number of Ernployees . 1,944 4.215 4,273 4,812 5.186 PRICE RANGE OF COMMON STOCK The Company's Common Stock became wholly owned by FirstEnergy Corp effective with the November 8,1997

! merger date. Prices shown below are for the period through November 7,1997.

i 1997 First Quarter H6gh. Low 23-7/8 20 7/8 l 22 j Second Quarter H6gh-Low 1 9-114 r Third Quarter High-Low .. ~ . 23 5/8 21 3/4 Fourth Quarter High-Low - -

Yearly Hioh-Low.. - -

j Prices are based on reports published in The Wall Street Joumal'or New York Stock Exct.ange Compostte Transactions.

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r OHIO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This discussion includes forward-looking statements based on information currently available to ,

management that are subject to certain risks and uncertainties. These statements typically contain, but are not limited to, the terms anticipate, potential, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy market prices, legislative and regulatory changes, and the availability and cost of capital and other similar factors.

Results of Operations We continued to take steps in 1998 to better pcsition our Company as competition continues to expand in the electric utility industry. Investments were made in new information systems with enhanced functionality which also address Year 2000 application deficiencies. We also contributed to 1998 cash savings of FirstEnergy Corp.

(FirstEnergy) totaling $173 million which were captured from initiatives implemented during the year in connection with our November 1997 merger with Centerior Energy Corporation to form FirstEnergy.

Eamings on common stock were $258.8 million in 1998 compared to $280.8 million in 1997. Results for 1998 were adversely affect by a one-time, extraordinary charge of $30.5 million after taxes, related to Penn's discontinued application of Statement of Financial Accounting Standards No. 71 (SFAS 71). " Accounting for the Effects of Certain Types of Regulation", to its generation business, as discussed later in this report. Additionally, sharp increases in the spot market price for electricity occasioned by a constrained power supply and heavy customer demand in the latter part of June 1998, combined with unscheduled generating unit outages, resulted in spot market purchases of power at prices which substantially exceeded amounts recovered from retail customers. Eamings on common stock for 1997 were affected by net nonrecurring charges, resulting from merger-related staffing reductions, amounting to

$26.4 million, and an increase in accelerated depreciation and amortization of nuclear and regulatory assets under our rate plans, totaling $20 million after taxes.

For the fourth consecutive year, we achieved record operatinr1 revenues. The following table summarizes the sources of increases in operating revenues for 1998 and 1997 as compared to the previous year:

itH 1HZ (In millions) increase in average retail price.- $27.0 $ 13.3 Change in retail kilowatt-hour sales. (0.1) 7.8 Wholesale sales 13.3 (27.3)

Other . 5.9 10 0 Net Increase . 546.1 $ 38 Retail kilewatt-hour sales were approximately the same as the previous year at 27.3 billion kilowatt-hours after setting a new record in 1997. Residential and commercial kilowatt-hour sales increased 1.7% and 3.5%,

respectively from 1997, offset by a 3.6% decrease in industrial sales. Residential and commercial kilowatt-hour sales benefited from runtinued growth in the retail customer base, with over 11,000 new retail customers added in 1998 compared to opproximately 4,900 new retail customers in 1997. The closure of an electric are fumace oy a large steel customer in the latter part of 1997 and a general decline in electricity demand by steel manufacturers due to intense foreign competition contributed to the lower industrial sales. Sales to wholesale customers increased 8.9%

contributing to an increase in total kilowatt-hour sales of 1.4%. In 1997, commercial and industrial kilowatt-hour sales -

increased 1.2% and 1.0%, respectively, from 1996, partially offset by an 0.8% decrease in residential sales resulting in a 0.5% increase in retail kilowatt-hout sales. A decrease in kilowatt-hour sales to wholesale customers contributed to a 5.0% decline in total kilowatt-hour sales in 1997 compared to 1996. .

Operation and maintenance expenses increased in 1998 compared to the prior year due to increased fuel and purchased power costs. Most of the increase occurred in the second quarter and resulted from a combination of factors, in late June 1998, the midwestem and southem regions of the United States experienced 2

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electricity shortages caused mainly by record temperatures and humidity and unscheduled generating unit outages. j Due in part to unscheduled outages at the Beaver Vaney Plant at that time, our production capabinties were reduced to the point that we purchased signincent amounts of power at unusually high spot market prices, causing the increase in purchased power costs. In 1997, fuel and purchased power costs were down from the previous year due

' to lower total kilowatt-hour sales. Nuclear operating costs increased in 1998 and in 1997 renecting higher costs at the Beaver Valley Plant. Other operating costs decreased in 1998 from the previous year due primarily to the absence of expenses related to a 1997 voluntary retirement program and estimated severance costs which j increased other operating costs for that year.

Depreciation and amortization decreased in 1998 compared to the prior year due primarily to the not effect of our rate plans. Total accelerated depreciation and amostization of our nuclear and regulatory assets under our rate plans was $173 miHion in 1998; down from $190 million the previous year. In 1997, the increase in depreciation and amortization resulted from accelerations under the regulatory plans. General taxes increased in 1998 compared to 1997 in part because of gross receipts taxes on increased operating revenue. This followed a decrease in 1997 due to lower property taxes and an adjustment in the second quarter of that year which reduced the liabilities for gross receipts taxes.

I interest on long-term debt continued to trend downward due to rennancings and redemptions of long- I term debt. Other interest expense increased as a result of increased short-term borrowings.

Capital Resources and Liquidity We have signincantly improved our financial position over the past five years. Excluding nonrecurring charges, our fixed charge coverage ratios continue to improve. Our corporate indenture ratio, which is used to measure our ability to issue first mortgage bonds, improved from 4.13 at the end of 1993 to 6.17 at the end of 1998.

Over the same period, our charter ratio, a measure of our abuity to issue preferred stock, improved from 2.02 to 2.49 and our common stockholders' equity percentage of capitalization rose from approximately 40% at the end of 1993 to 51% at the end of 1998. Our improving financial position reRects ongcing efforts to increase competitiveness. We continue to streamline our operations as evidenced by the 50% increase in FirstEnergy's customer / employee ratio, which has increased from 165 at the end of 1993 to 247 as of December 31,1998. Merger-related savings achieved through consolidation of activities have contributed to these results. Also, not debt redemptions and refinancings

' have lowered our average cost of long-term debt over the last five years from 8.27% in 1993 to 7.55% at the end of 1998.

We had about $33.2 million of cash and temporary investments and $338.2 million of short-term indebtedness as of December 31,1998. Our unused borrowmg capability included $46.5 million under revolving lines of credit and a $2.0 million bank facinty that provides for borrowings on a short-term basis at the bank's discretion Our cash requirements in 1999 for operating expenses, construction expenditures and scheduled debt maturttles are expected to be met without issuing new securttles During 1998, we reduced our total debt by approximately $69 mulion. We have cash requirements of approximately $1.2 billion for the 1999-2003 period to meet scheduled maturities of long-term debt and preferred stock. Of that amount, approximately $417 million applies to 1999.

Our capital spending for the period 1999-2003 is expected to be about $1.0 billion (excluding nucisar fuel), of which approximately $169 mHlion applies to 1999. Investments for additional nuclear fuel during the 1999-2003 penod are estimated to be approximately $167 mulion, of which about $23 mulion applies to 1999. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $169 million and $35 miton, respectively, as the nuclear fuel is consumed. Also, we have operating lease commitments, not of PNBV Capital Trust cash receipts, of approximately $365 mulion for the 1999-2003 period, of which approximately $82 mimon relates to 1999.

,. FirstEnergy signed an agreement in principle with' Duquesne Light Company (Duquesne) that would result in the transfer of 1,a36 megawatts owned by Duquesne at five generating plants in exchange for 1,328 megawatts at three plants owned by FirstEnergy's electric utility operating companies (see " Common Ownership of Generating Facilities"in Note 1). A final agreement on the exchange of assets, which wHl be structured as a tax-free

/ transaction to the extent possible, is being negotiated. The transaction benents the FirstEnergy's utility operating companies by providing exclusive ownership and operating control of all generating assets that are now jointly owned and operated under the Central Area Power Coordination Group agreement.

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interest Rate Risk Our exposure to fluctuations in market interest rates is mitigated since a significant portion of our debt has fixed interest rates, as noted in the table below. We are subject to the inherent interest rate risks related to refinancing maturing debt by issuing now debt securities. As discussed in Note 2, our investment in the PNBV N Capital Trust effectively reduces future lease obligations, also reducing interest rate risk. Changes in the market value of our nuclear decommissioning trust funds are recognized by making a corresponding change to the decommissioning liability, as described in Note 1, .

Tho' table below presents principal amounts and related weighted everage interest rates by year of maturity for our investment portfolio, debt obligations and preferred stock with mandatory redemption provisions.

There- Fair 1999 2000 2001 2002 2003 after Total Value y _ _; g - _a investmente other than Cash and Cash Equivoients.

Fixed income.. . $6 8 17 523 $ 26 $ 30 5 724 8 826 8 912 Awarana internet rata.. 5.5% 7.3% 7.7% 7.8% - 7.9% 7.9% 7.9%

Long-term Dett

- Fixed rate .. $164 $118 817 . 8326 8246 $1,179 $2.050 82.196 Average interest rate ... 7.0% 6.5% 8.0% 7.8% 8.2% 7.2% 7.4%

Variaties rate . . 8250- 5 327 8 577 8 579 Average interest rate.. .- 6.0% 4.1% 4.9%

Short-term Bonoungs. . .. . . $338 $ 338 8 338 Averana interent rata.. 5.8% 5.8%

Preferred Stock- . .-, $5 8 5 85 8 1 51 5 133 $ 150 $ 155 Awarana dhmiand rate . 85% ' 8.5% B.5% 7.8% 7.8% 8.9% 8.8% -

Outlook We face many competitive challenges in the years ahead as the electric utility industry undergoes significant changes, including chenping regulation and the entrance of more energy suppliers into the marketplace.

Retail wheeling, which has begun in our Pennsylvania service area, allows retail customers to purchase electricity from other energy producers. Our regulatory plans have provided a solid foundation to position us to meet the challenges we are facing by significantly reducing fixed costs and lowering rates to a more competitive level.

Our Rate Reduction and Economic Development Plan was approved by the Public Utilities Commission of Ohio (PUCO) in 1995. This plan maintains our base electric rates through December 31,2005 and revises our fuel cost recovery method. Penn's Rate Stability and Economic Development Plan, which was approved by the PPUC in the second quarter of 1996, ended in 1998 with the PPUC's authorization of Penn's rate restructuring plan.

As part of our regulatory plan, transition rate credits were implemented for customers, which are expected to reduce operating revenues by approximately $600 million during the regulatory plan period, which is to be followed by a base rate reduction of approximately $300 million in 2006.

The PUCO has authorized additional capital recovery related to our generating assets (which is reflected as additional depreciation expense) and additional amortization of regulatory assets during the regulatory

. plan period of at least $2 billion more than the amount that would have been recognized if the regulatory plan was not in effect. This additional amount is being recovered through current rates.

Based on the current regulatory environment and our regulatory plan, we believe we will continue to be able to bill and collect cost-based rates. As a result, we will continue the application of SFAS 71. However, changes in the regulatory environment appear to be on the horizon for electric utilities in Ohio. As further discussed below, the .,

Ohio legislature is in the discussion stages of restructuring the State's electric utility industry. Although we believe that regulatory changes are possible .in 1999, we cannot currently estimate the ultimate impact For Penn, application of SFAS 71 was discontinued for the generation portion of its business in June 1 1998 following PPUC approval of the rate restructuring plan. Customer choice will be phased in over two years with 66% of each customer class able to choose attemative suppliers of generation on January 2,1999, and all remaining customers having choice as of January 2,2000. Under the plan, Penn continues to deliver power to homes and

' businesses through its transmission and distribution system, which remains regulated. However, Penn's rates have t 4

been restructured to establish separate charges for transmission and distribution; generation, which is subject to competition; and stranded cost recovery, in the event customers obtain power from an altemative source, the generation portion of Penn's rates will be excluded from their bill and the customers will receive a generation charge from the altemative supplier. The stranded cost recovery portion of rates provides for recovery of certain amounts

    • not otherwise considered recoverable in a competitive generation market, including regulatory assets. Penn is entitled to recover $234 million of stranded costs through a competitive transition charge that starts in 1999 and ends in 2005.

We continue to actively pursue the enactment of fair legislation calling for deregulation of Ohio's investor-owned electric utility industry. In early 1998, a deregulation proposal was introduced, leading to the creation of a working group to recommend legislation. As requested by legislative leadership, investor-owned utilities introduced a deregulation plan with objectives to (1) treat all major stakeholders in Ohio's electric system fairty; (2) protect public schools and local govemments from revenue loss; and (3) allow utilities an opportunity to recover costs of govemment-mandated investments. The utilities have submitted proposals which incorporate these objectives and also recognize the complexity of restructuring the industry. The overlying objective is to do the job right the first time. Currently, the working group, comprised of legislative leaders, representatives of the electric utility companies and other interested stakeholders are meeting to discuss and mold these proposals. Most recently, placeholder bills containing statements of principle (that will be replaced by specific proposals as they are agreed upon) have been introduced. Legislative leaders have placed a high priority on enactmg a deregulation bill by mid-year. -

The Clean Air Act Amendments of 1990, discussed in Note 5, require additional emission reductions by 2000. We are pursuing cost-effective compliance rtrategies for meeting these reduction requirements.

On September 24,1998, the Federal Environmental Protection Agency issued a final rule establishing tighter nitrogen oxide emission requirements for fossil fuel-fired utility boilers in Ohio, Pennsylvania and twenty other eastem states, including the District of Columbia (see

  • Environmental Matters" in Note 5). Controls must be in place by May 2003, with required reductions achieved during the five-month summer ozone season (May through '

September). The new rule is expected to increase the cost of producing electricity; however, we believe that we are in a better position than a number of other utilities to achieve compliance due to our nuclear generation capacity.

In connection with our regulatory plans to reduce fixed costs and lower rates, we continue to take steps j to restructure our operations. FirstEnergy announced plans to transfer the Companies' transmission assets into a i new subsidiary, American Transmission Systems, Inc., with the transfer expected to be finalized in 1999. The new subsidiary represents a first step toward the goal of establishing or becoming part of a larger independent transmission company (TransCo). We believe that a TransCo better addresses the Federal Energy Regulatory Commission's (FERC) stated transmission objectives of providing non-discriminatory service, while providing for streamlined and cost-efficient operation. In working toward the goal of forming a larger regiona' transmission entity, FirstEnergy, American Electric Power, Virginia Power and Consumers Energy announced in blovember 1998 that they would prepare a FERC filing during 1999 for such a regional transmission entity. The entity would be designed to meet the goals of reducing transmission costs that result when transferring power over seceral transmission '

systems, ensuring transmission reliability and providing non-discriminatory access to the transmissior grid.

Year 2000 Readiness The Year 2000 issue is the result of computer programs being written using two digits rather than four to identify the applicable year. Any of our programs that have date-sensitive software may recognize a date using

  • 00" as the year 1900 rather than the year 2000. Because so many of our computer functions are date sensitive, this could cause far-reaching problems, such as system-wide computer failures and miscalculations, if no remedial action is taken.

We have developed a multi-phase program for Year 2000 compliance that consists of an assessment of our systems and operations that could be affected by the Year 2000 problem; remediation or replacement of noncompliant systems and components; and testing of systems and components following such remediation or

  • replacement. We have focused our Year 2000 review on three areas: centralized system applications, noncentralized systems and relationships with third parties (including suppliers as well as end-use customers). Our review of system readiness extends to systems involving customer service, safety, shareholder needs and regulatory obligations.

We are committed to taking appropriate actions to eliminate or lessen negative effects of the Year 2000 issue on our operations. We have completed an inventory of all computer systems and hardware including equipment with embedded computer chips and have determined which systems need to be converted or replaced to 5

become Year 2000-ready and are in the process of remediating them. Based on our timetable, we expect to have aH identified repairs, replacements and upgrades completed to achieve Year 2000 readiness by September 1999.

Most of our Year 2000 issues will be. resolved through system replacement. Of our major contralized systems, the general ledger system and inventory management, procurement and accounts payable systems were N replaced at the end of 1998. Our payroll system was enhanced to be Year 2000 compliant in July 1998. The customer service system is due to be replaced in mid-1999.

We have completed formal communicatons with most of our key suppliers to determine the extent to which we are vulnerable to those third parties' failure to resolve their own Year 2000 problems. For suppliers hovmg potential compuence problems, we are developing allemate sources and sonnees in the event such noncompliance occurs. We are also idenufying areas requiring higher inventory levels based on compaance uncertaintes. There can be no guarantee that the faHure of comparues to resolve their own Year 2000 issue wHl not have a matonal adverse effect on our b9siness, financial condition and results of operations.

We are using both intomal and extemal resources to reprogram and/or replace and test our software for Year 2000 modifications. Of the $43 milhon total project cost, approximately $34 million will be capitalized since those costs are attributable to the purchase of new software for total system replacements because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $9 minion will be expensed as incurred. As of December 31,1998, we have spent $24 million for Year 2000 capital projects and had expensed approximately $4 million for Year 2000-related maintenance activities. Our total Year 2000 project cost, as well as our estimates of the time needed to complete remedial efforts, are based on currently available information and do not include the estimated costs and time associated with the impact of third party Year 2000 issues.

We beneve we are managing the Year 2000 issue in such a way that our customers will not experience any interruphon of service. We believe the most likely worst-case scenario from the Year 2000 issue will be disruption in power plant monitoring systems, thereby producing inaccurate data and potential failures in electronic switching mechanisms at transmission Junctions. This would prolong locauzad outages, as technicians would have to .

manually activate switches. Such an event could have a material, but currently undeterminable, effect on our financial results. We are developing contingency plans to address the effects of any delay in becoming Year 2000 compliant and expect to have contingency plans completed by June 1999.

The costs of the project and the dates on which we plan to complete the Year 2000 modifications are based on management's best estimates, which were derived from numerous assumphons of future events including the continued availabHity of certam resources, and other factors. However, there can be no guarantee that this project wiH be completed as planned and actual results could diller materia #y from the estimates. Specific factors that might cause material differences include but are not limited to, the avaHabiHty and cost of trained personnel, the abHity to locate and correct au relevant computer code, and similar uncertainties.

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OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31. 1998 1997 1996 (in thousands)

OPERATING REVENUES . ... $2.519.662 5 2.473.582 5 2.469.785 OPERATING EXPENSES AND TAXES:

Fuel and purchased power 511,645 437,223 456.629 Nuclear operabng costs . 279,917 267,681 247,708 Other operabng copts .. . 411.985 446.778 4'dQ.$23 Total operation and maintenance expenses 1,203,547 1,151,682 1,124,860 Provision for deprecation and arnortization 415,715 429,941 383,441 General taxes .... .. . . . -

242,524 234,964 241.998 income taxes .. . 170.956 168 427 189 417 Total operating expenses and taxes . 2.032.742 1.985.014 1.939.716 OPERATING INCOME... 486,920 488.568 530.069 OTHER INCOME 47.621 52 847 37.537 lNCOME BEFORE NET INTEREST CHARGES. . 534.541 541.415 567.606 i NET INTEREST CHARGES-interest on long. term debt. 173,781 204,285 211,935 Allowanos for bommed funds used during l

construction and capitalized interest (2.096) (2.699) (3,136)

Other intesest expense. .. ... 46,110 31.209 28,211 Subsidiaries' preferred atock dMdend requirements... . .

15.426 15.426 15.426 Netinterest che:ges . 233.221 248.221 252.436 INCOME BEFORE EXTRAORDINARY ITEM - - . 301,320 293,194 315.170 EXTRAORDINARY ITEM (NET OF INCOME TAXES)(Note 1) (30.522) - -

NETINCOME . . . . . 270,798 293,194 315,170 PREFERRED STOCK DMDEND REQUIREMENTS 11.970 12.392 12.497 EARNINGS ON COMMON STOCK N N $ 302.673 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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1 OHIO EDISON COMPANY l i

CONSOLIDATED BALANCE SHEETS

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At M=mber 31. 1998 1997 ,

(in thousands)

ASSETS UTILITY PLANT:

In service . . . . . . . ~ . . . ..

$ 8,158,763 $ 8.666.272 ',

Less-Accurnutated provision for depreciation 3.610.155 3.546.5M 4.548.608 5.119.678 Construction work in progress-Electric plant .. 174.418 99,158 Nuclear fuel - - 17.003 21.360 191.421 120.51E 4.740.029 5.240.190 OTHER PROPERTY AND INVESTMENTS:

PNBV CapitalTrust(Note 2) 475,087 482.220 Letter of credit collateralizat60n (Note 2) 277.763 277.763 Other (Note 38) . 538.411 529.408 1.291.261 1.289.391 CURRENT ASSETS:

Cash and cash equivalents ... .. . 33,213 4,680 Receivables-Customers (less accumulated provisions of $6,397,000 and $5.618.000, respectively, for uncollechble accounts). 215.257 235,332 Associated companies . 229.854 E.348 Other .. _ 47,684 87.566 Matenals and supplies, at average cost-Owned. ... . 76,756 75.580 Under -4ui.nt .. 48.341 47.890 Prepayments and other _ 78.618 78.348 729.723 554.744 DEFERRED CHARGES:

Regulatory assets. 1,723.133 1.601,709 Unamortized sale and leaseback costs .- 90,098 95,096 Property taxes 101.360 100,043 Other. . . 57.547 96.276 1.972.138 1.893.124 58 733.151 $ 8 977.455 CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Consolidated Statements of Capitalization):

Common stockholders' equity .. $2.681,873 $2,724.319 Preferred stock-Not subject to mandatory redemption 160,965 160.965 Subject to mandatory redernption 10,000 15,000 Preferred stock of consolidated subsidiary-Not subject to mandatory redemption 50.905 50,905 Subject to mandatoryredemption ..

15,000 15,000 Company obligated mandatority redeemable preferred secunties of subsidiary trust holding solety Company subordinated debentures ,

120.000 120.000 j Long-term debt.. .. . . . . . . 2 215.042 _2.569.802 5.253.785 5.655.991 CURRENT LIABluTIES:

Currently payable lon9-term debt and preferred stock . 528,792 278,492 Short-term buirewsp (Note 4)-

Associated companies - .. 88,732 -

Other . .

249,451 302.229 Accounts payable _ 99,659 115,836 Accrued taxes 188,295 157,095 Accrued interest .. _ 45.221 53,165 Other . 114.162 115.256

.1.314.312 1.022.0/3 DEFERRED CREDfTS:

Accumulated deferred income taxes 1,601,887 1,698.354 Accumulated deferred investment tax credits 154.538 184,804 Pensions and other postretirement benefits 136.856 158,038 Other - 271.773 258.195 2.165.054 2.299.391 COMMITMENTS, GUARANTEES AND CONTINGENCIES $

  • ~'~ ~

58.733.151 58.977.455 The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.

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l OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITAllZATION At December 31. 1998 1997 (Dollars in thousands, except per share amounts)

COMMON STOCKHOLDERS' EQUITY:

Common stock $9 par value, authorized 175,000,000 shares-100 shares outstanding $ 18 1 Other paid-in capital . . -

2,098,728 2,103.259 Accumutaled other comprehensive income (Note 3C) . -

(615) l Retained samings (Note 3A) - 583.144 621.674 Total common stockholders' equity . . 2 681.873 J.724.319 Number of Shares Optional OuiM.. .C ,e Redemotion Price j 1928 1HZ Per Share Anorecate PREFERRED STOCK (Note 3D):

Cumulative. $100 par value-Authorized 6,000,000 shares Not Subject to Mandatory Redemption: i 3.90% 152.510 152.510 $103.63 $15,804 15.251 15,251 i 4.40% .. -

176.280 176,280 108.00 19.038 17.628 17.628 4.44 % .

136,560 136.560 103.50 14.134 13,656 13,656  ;

4.56 % 144.300 144.300 103.38 14 917 14.430 14.430 l 609,650 609,650 63,893 60,965 60,965 Cumulative, $25 par value-Authorized 8,000,000 shares Not Subject to Mandatory Redemption:

7.75 % _

4.000.000 4.000.000 100.000 100.000 Total not subject to mandatory redemption ... g 3 4 16.3,32] 160.965 16025 Cumulative, $100 par value-Subject to Mandatory Redemption (Note 3E):

845% 150,000 200,000 15.000 20,000 Redemption within one year (5.000) f5.000)

Total subject to rnandatory redemption 150_000 g 10.000 15 000 PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY (Note 3D):

Pennsylvania Power Company-Cumulative. $100 par value-Authonzed 1.200,000 shares Not Subject to Mandatory Redemption:

4.24 % 40,000 40,000 $103.13 $ 4,125 4,000 4,000 4.25 % ,

. 41,049 41,049 105.00 4,310 4,105 4,105 4.64% . . 60,000 60,000 102.98 6,179 6,000 6,000 7.64 % . . . . . . . . 60,000 60.000 101.42 6,085 6,000 6.000 7.75 % . . . . . . 250,000 250.000 - - 25,000 25,000 8.00 % .. 58.000 58.000 102.07 5.920 5.800 5 800 Total not subject to mandatory redemption-- 3 3 120,$19 50.905 50.905 Subject to Mandatory Redemption (Note 3E):

7.625% ... . .

150.000 M 106.86 }.1f.023 15.000 15.000 1

COMPANY OBLIGATED MANDATORILY REDEEMASLE -

PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES (Note 3F): s Cumulative. $25 par value-Authortzed 4.800.000 shares Subject to Mandatory Redemption:

9.00 % , . . . . . . g g 120.000 120.000 l 9 L

OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont.)

At December 31. 1998 1997 1998 1997 1998 1997 (In housande)

  • LONG. TERM DEBT INote 3G):

. First mort bonde:

ONoE Company. Pennsylvania Power Company.

8.730% due 1998 .. 150.000 9.740% due 1999 2019.. 20.000 20.000 6.875% due 1999. . ... 150,000 150,000 7.500% due 2003 40.000 40.000 6.375% due 2000.. . 80.000 80.000 6.315% due 2004 20.500 20.500 7.375% due 2002 .. .. . 120.000 120,000 6.625% due2004 14.000 14.000 ,

7.500% due 2002. . . 34.265 34.265 8.500% due 2022 ... . 27,250 27.250 8.250% due 2002 .. 125.000 125.000 7.625% due 2023. . .. _f.500 ,0.500 8.625% due 2003.. ... ... .. 150.000 150.000 1 6.875% due 2005.. ..._... . . . 80,000 80.000 8.750% due 2022 ._ 50.960 50.960 ,

7.625% due 2023 .. 75,000 75.000 1 7.875% due 2023 .. .-. _ 100.000 100.000 Total Arzt mortgage bonds. .. 965.225 1.115.225 128.250 128.250 1.093.475 1.243.475 Secured notes:

ONo Edsson Company. Pennsylvania Power Company.

7.930% due 2002 39.936 50,646 4.750% due 1998- - 850 7.680% due 2005 - 200.000 200,000 6.080% due 2000 23,000 23.000 6.750% due 2015 40.000 40.000 5.400% due 2013 1.000 1.000 7.450% due 2016 47.725 47.725 5.400% due 2017 ., 10.600 10.600 7.100% due 2018. 26.000 26,000 7.150% due 2017... ., 17.925 17.925 7.050% due 2020 60,000 60.000 5.900% dos 2018 16,800 16,800 7.000% due2021 69,500 69.500 8.100% due2020 5,200 5.200 7.150% due 2021. 443 443 7.150% due 2021 14.482 14,482 7.625% due 2023 .~ -

50.000 50,000 6.150% due 2023: 12.700 12.700 8.100% due 2023 . - 30.000 30.000 '4.150% due 2027 _ . 10.300 10.300 '

7.750% due2024 108.000 108.000 6.450% due 2027. 14,500 14.500 5.375% due 2028 13.522 - 5.375% due 2028. .. 1,734 -

5.625% due 2029 ..... 50.000 50.000 5.450% dus 2028_ 6.950 6.950 5.950% dus 2029 _ 56.212 56,212 6.000% due2028 14.250 14.250 5.450% due 2033.. 14,800 14,800 5.950% due 2029.

Limited Partnersh6ps.

235 _238 ]

i 7.87% weighted average interest rate due 19942007 _ 11.320 -

817.458 803.326 149.679 348.795 967.137 952.121 i OES Fuel.

5.97% weighted average interest rate .~ _. . . . 79 524 80.755 Total secured notes . .... . . . . . . . - - . 1.046.661 1.032.876 Unsecured notes:

ONo Ed6 eon Company. i 5.963% due 1999 __ 115.000 - l 6.025% dus 1999 . 85.000 -

6.088% due 1999 . .. . . 50,000 - .

6.338% due 1999 . ..

- 40,000 l 6.400% due 1999. .... . . , . . . . . .. .. .

- 175.000

'4.300% due 2012 .. .. . .. 50,000 50.000

'3.950% due 2014 50.000 50.000 l

'3.650% due 2015 .

. 50.000 50.000 ,

  • 4.200% due 2018 _- . .- . 57,100 57.100 l

'4.200% due 2018 ... . -.. 56.000 56.000 i

.' '4.050% due 2032 .. .... . ._ . . . 53 400 53 400 Total unsecured notes _ .. 566.500 531.500

[ Capitallease obhgations (Note 2). . ._ . ... 36.891 40.614 j Net unamortized dismunt on debt.. .

(4.693) (5.171) i Lon9-term debt due within one year . . . . . .. (523.792) (273.4921 l Totallong.torm debt .. --  : ... .,

.2.212.Q4.2 2.569.802 I i

i TOTAL CAPITALIZATION. _ . 11.252115 {1 L % 221 l

  • Denotes variable rate issue with December 31,1998 interest rate shown.

10  !

The accompanym9 Notes to Coneohdated Financial Statements are an integral part of these statements.  !

I r

jl

OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY Accumulated Other un nocated .

Com % . .; Other Comprehensive ESOP

  • Income Number Par Paid.in income Retained Common (Note SC) of Shares Value Canital (Note SC) Eaminas Stock (DoNars in thousands)

Balance, January 1,1996 152.569,437 $ 1,373,125 5 726.915 S(608) $ 471,095 $(162.656)

Netincome . . 5315,170 315,170 lenimum hability for unfunded retirement benefits, not of $27.000 of income taxas . (51) (51)

Comprehensive income .. . .... . . g1l41g Allocation of ESOP shares .. 1,346 7.646 Cash dividends on preferred stock- (12.497)

Cash dividends on common stod .. (216.126)

Balance. December 31,1996. . 152.569,437 1,373,125 728.261 (659) 557.642 (155,010)

Notincome . . . . . 8293,194 293.194 Mirumum liability for unfunded retwoment benefits, not of $26,000 of income taxes . 44 44 Comprehensiveincome ... 1292.236 FistEnergy merger . (152,569.337) (1,373,124) 1,373,124 146.977 Allocation of ESOP shares . - 1,874 8,033 Cash dividends on preferred stock... (12.392)

Cash dividends on common stock .. (216.770)

Balance, December 31,1997. 100 1 2,103.259 (615) 621.674 -

Not inoome .. . .. . $270.796 270,796 Transfer of minimum Embility for unfunded retirement beneflts to parent 615 615 Comprehensrve inmme .. 1271E,2 Transfer of ESOP protruum to parent. (4,531)

Cash dividends on profor'ed stock (11.952)

Cash dividends on common =M .. (297.376)

Ratance fhrume 31.1998 . 100 1 1 1 2.098.728 1 - S 583 144 $ -

i CONSOLIDATED STATEMENTS OF PREFERRED STOCK i

Not Subject to Subject to l Mandatory Redemotion Mandatory Mademotion Par or Par or Number Staled Number Stated of Shares Yah8t. of Shares M8 hat (Douarsin thousands)

R= lance. January 1.1996.. 5.118 699 $211.870 5.200.000 $180.000 Balance, December 31,1996 .. 5,118.699 211,870 5,200,000 160,000 Redemp8ons-B 45% Series.. f50.000) f5.000)

Balance, December 31,1997 - 5,118.699 211.870 5,150,000 155.000 Redemptons-B 45% Series.. f50.000) (5.000) s Balance thr=mber 31.1998.. 5 118.699 1211.870 5 100.000 $150.000 s

, The accompanyin9 Notes to Consoudated Financial Statements are an integral part of these staterrants.

11 1

i 1-..,

i

OHlO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31. 1998 1997 1996 1 (in thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:

,' Not income . , .. $ 270,798 $293,194 $315.170 j Adjustments to recondle net income to not i cash from operatng activites:  ;

Provision for depredanon and amortization . 415,715 429.941 383.441 Nudear fuel and lease amortization -

35,086 49.251 52,784

, Deferred income taxes, net - (59,553) (40.478) 41,365 l Investment tax credits, not . (14,290) (15,031) (14,041)

Extraordinary item. - 51,730 - -

Receivables. (144.549) (23.887) 24,326 Matenals and supphes (1.627) (10.557) (736)

)

Accounts paysb4e .. . . . (8,455) 32,531 962 j Other .

. 64.552 _21.756 .(42.954) i Nut cash provided from operating scevites 609.407 736.720 760.317 l

l l

l CASH FLOWS FROM FINANCING ACTIVITIES: )

New Finandn9 Long. term debt... .. -.. .. 117,265 89,773 306.313 Short-term borrowings, net- . .. 35.954 - 229.515 Redempbons and Repayments- ,

Preferred stock . 5.000 5.000 1.016 Long term debt .. 225.241 292.409 438,916  ;

Short-term t,v,TO.W,y., not . . . .. -

47.251 - '

DMdend Payments.

Common stock. . .. . 297.746 237,848 218.656 Preferred stock . . . 11.865 12.559 . 12.560 Net cash used for finandag ac6vities. . .. 386.633 .505.294 135 320 CASH FLOWS FROM INVESTING ACTIVITIES:

Property addrhons 186,139 179.328 148.189 j PNBV capital trustinvestment. . .. - - 487,979 Other ._ . . . . . . . . 8.102 J2,011 13.406 Net cash used forinveseng acevities 194.241 231.999 649.574 Net increase (decrease)in cash and cash equivalents.... 28.533 (573) (24.577)

Cash and cash equivalents at beginning of year . 4.680 5.253 29.830 Cash and cash equivalents at end of year . . . . . 1 _ 32,21} 1 J.Lgg @

SUPPLEMENTAL CASH FLOWS INFORMATION:

Cash Paid During the Year.

Interest (not of amounts capitanzed) -

Inmme taxes. __

The acmmpanying Notes to Consolidated Financial Statements are an integral part of these statements.

l 0 s

12

OHIO EDISON COMPANY >

CONSOLIDATED STATEMENTS OF TAXES i

For the Years Ended % 31. 1998 1997 1996. I (in thousands) {

GENERAL TAXES:

  • Realand personal property ... $ 116.868 $ 114.111 5 115.443 State gross receipts.. . . _ 104.175 99.262 104,158 Sodal security and unemployment.. .. 12.701 14,113 14.602 Other. . 8.780 7.478 7.795 ,

Total 9eneral' ss $ 242 524 $_2}_4 Ed $ 241.998 PROVISION FOR INCOME TAXES:

Currently payable.

Federal .. .

$ 229,164 $ 225.529 $ 164.132 State _ . .

14.732 17.784 9.839 243.896 243.313 173.971 Deferred. net-Federal (53.943) (34.429) 37,277 State . .. (5.610) (6.048) 4.088 (59 553) (40 477) 41.365 Investment tax credit amortization. (14.290) (15.031) (14.041)

Total provision forincome taxes .

5 170.053 $ 187.805 @

INCOME STATEMENT Ct.ASSIFICATION OF PROVISION FOR INCOME TAXES:

Operatingincome , . $ 170.956 $ 168.427 5 189,417 Otherincome . . . . . 20.305 19.378 11.878 Extraordinaryitem. _ _ . . . . . (21.2081 - -

Total provision forincome taxes. . . . . . . . . 5 170.053 5 187.805 $_221225 RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES:

Book income before prevision for income taxes . $ 440.851 5 516 465 Federal income tax expense at statutory rate . .. 5 154.298 . 5 180.763 increases (reductons)in taxes resulting from.

Amortization ofinvestment tax credits. . . (14.290) (15.031) (14.041)

State income taxes not of federaliricome tax beno6t. .. 5.929 7,628 9.053 Amortization of tax regulatory assets 27,599 28,277 26.945 Other, not . . ..,_ .. (3.483) (1 419) (1.425)

Total provision for income taxes- . _ . . . $ 170 053 5 187.805 $__221.295 ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31:

Property basis differences . . . . 5 880.645 $1,019.952 $ 1,086.533 Allowance for equity funds used during construction . _ 169.780 210,136 233,345 Deferred nudear expense . 237,602 252.946 262.123 Competitive transition charge . 135.730 -

Customer receivables for future income taxes 164.618 204.643 219.932 Deferred sale arx! leaseback costs . . . .. . 45.521 47,796 50.212 Unamortzedinvestmenttax credits . (55.495) (67,208) (72.663)

Other. _ 23.488 30.089 (2.396)

Not deferred income tax liability ... gJggl 1.LQ20.}M $ 1.777.086 The accompanying Notes to Consolidated Finandal Statements are an integral part of these statements. ,

13

o NOTES TO CONSOUDATED FINANCIAL STATEMENTS 1, .

SUMMARY

OF SIGNIFICANT ACCOUNTING POUCES:

~#

The consolidated financial statements include Ohio Edison Company (Company), and its whony owned subsidiaries. Pennsylvania Power Company (Penn) is the Company's principal operstmg muhairmary. AH significant

, intercompany transactions have been euminated. The Company became a wholly owned ="8=reary of FirstEnergy Corp. (FirstEnergy) on November 8,1997. FirstEnergy was formed on that date by the merger of the Company and Centerior Energy Corporadon (Centerior). FirstEnergy holds directly aH of the issued and outstandmg common shares of the Company and ad of the issued and outstandmg common shares of Centerior's former direct subsidiaries, which include, among others, The Cleveland Electric IHummotmg Company (CEI) and The Toledo Edison Company (TE).The Company and Penn (Componies) foHow the accountmg policies and practices prescribed by the Public Utillnes Commission of Ohio (PUCO), the Pennsylvania Public Utility Commesion (PPUC) and the Federal Energy Regulatory .

Commission (FERC). The properation of financial statements in wh,y with generally accepted accounting principles requires management to make periodic esumelos and assumptions that affect the reported amounts of assets, Habstes, revenues and expenses Catain prior year amounts have been reclassNied to conform wHh the cunent year presentadon.

REVENUES -

The Companies' principal business is providing electric service to customers in contral and northeastem Ohio and westem Pennsylvania. The Compernes' reteH customers are malered on a cycle beeis. Revenue is recognized for unbined electric service through the end of the year, Receivables from customers include sales to resalential, commercial and industrial customers located in the Companies'sennce ama and seios e wholnale cusemers. There was no meterial concentration of receivables at December 31,1998 or 1997, with roepect to any particular segment of the Companies' customers REGULATORY Pl.ANS.

The PUCO approved the Company's Rate Reduction and Economic Development Plan in 1995. This riegulemry plan inineHy maintains cunent base elecinc rates for the Company through December 31,2005. At the end of en reouistory pien period, the Company's bene rates we be reduced by $300 mimoa (.pm,4, - ; 20 pacent below current levels).The plan also revised the Company's fuel cost recxwory method. The Company formerly recovered fuel-related costs not otherwise included in bene rates from relaN customers through separate energy rates. In accordance with the regulebry plan, the Company's fuel rates we be frozen through the regulehry plan period, subgect to limited periodic actustments. As part of the Company's reguistory plan, transiten rate credits were implemented for customms, which are avar*M to reduce operating revenues for the Company by approximately $800 mimon.

. . In June 1998, the PPUC authorized a rate restructuring plan for Penn, which superseded the regulatory plan which had been in place for Penn since 1996 and essentially resulted in the deregulation of Penn's genershon business as of June 30,1998. Penn was requwed to remove from its belance sheet au reguistory pseets and liabHibes related to its generation business and assoas ad other assets for impairment. The Securities and Exchange Commission (SEC) issued interpretive guidance regarding asset impairment measurement which concluded that any supplomontal regulated cash flows such as a competsve transWon charge (CTC) should be excluded from the cash flows of assets in a portion of the business not subject to regulatory accountng practices, if those assets are impelred, a reguistory asset should be established if the costs are recoverable through regulatory cash flows. Consistent wHh the SEC guulance, Penn reduced its nucieer generstmg unit investments by approximately $305 mHNon, of which approximately $227 midion was recognized as a regulatory asset to be recovered through a CTC over a seven-year transition period; the remaining not amount of $78 mulion was written off. The charge of $51.7 mimon ($30.5 mimon aner income taxes) for discontinuing the argenurwi of Stoloment of Financial Accounting Standards (SFAS) No. 71,' Accounting for the Effects of Certain Types of Regulation" (SFAS 71), to Penn's genershon business was recorded as an extraordinary Rom on the CoriarMahad Statement of income. Penn's not assets included in uguty plant reisting to the operations for which the i erf*=Hewi of SFAS 71 was discontinued and Penn's total assets as of December 31,1998 were $146 mHlion and $978 mubon,,- ,+2'di.

, - AH of the Companies' regulatory assets are being recovered under provisions of the regulatory plans. In

- addibon, the PUCO has authorizeo the Company to recognize addWonal capital recovery related to its generating assets

. (which is re8ected as additional depreciabon expense) and addibonal amortization of regulatory asedis during the reguistory plan period of at least $2 bullon, and the PPUC had authortzed Penn to accalerate at least $358 million, more then the amounts that would have been recognized if the mgulatory plans wme not in effect. Thue addibonel amounts l 14

c are being recovered throu0h cunent rates. As of December 31,1998, the Comparoes' cumuistive additional capdal recovery and regulatory asset amortization amounted to $696 millon (including Penn's impairment discussed above).

UTIUTY PLANT AND DEPRECIATION-Utgity plant reflects the original cost of construction, (except for Penn's nuclear generating units which were at$ueled to fair value as discussed above), includmg payron and reisted costs such as taxes, employee benefits, administrative and general costs, and interest costs. '.

The Companies provide for depreciation on a :traight-line basis at various rates over the estimated lives of property included in plant in service. The a nsel composite r de for electric plant was approximately 3.0% in 1998,1997, and 1996. In addition to the straight.4ine depreciation recogized in 1998,1997 and 1996, the Companies recognized addluonal capital recovery of $141 mithon (excluding Penn's k:" a6 ment), $172 mulion and $144 miuion, roepectively, as additional depreciation expense in accordance with their regulaeog plans. Such additional charges in the accumuleled provision for depreciation were $422 milion and $343 mHlion as of December 31,1998 and 1997, i- , =T/.

Annual depreciadon expense includes approximately $9.4 mukon for future (+,=... ' Es costs afW=Ma to the Companies' ownership and leasehold intemets in three nucieer genwedno units. The Companies' share of the future obilpadon to decommission thoes units is approximately $511 mulion in cunent dollars and iusing a 4.0% ecceletion rate) approximately $1.4 buuan in future donors. The eenmated obugation and the escalation rate were developed bened on alle specille ahrens Payments for de ... ' ' --As are expected to begin in 2016, when actual

' ' = '=#s work begins. The Campanies have recovered - =-l-. ^ ; $83 muuon for C+:-: ... ' e., through their electric rates imm customers through December 31,1998. If the actual costs of J+:s. . '=Js the units exceed the funds accumuleled imm investing amounts recovered from customers, the Compernes expect that additional amount to be recoverable from their customers. The Companies. Asve approximately $130.6 mHbon invested in extemal

(= . . . ~-e,y trust funds as of December 31,1998. Esmings on these funds are reinvested with a conosporaling ;

incrosse to the <+,1... %g liebHity. The Companies have also recognized an estimated liabNity of approximately

$13.7 mHuon related to decontamination and (= ... ': .;. of nuclear enrichment faciuties operated by the United States Department of Energy (DOE), as required by the Energy Policy Act of 1992.

The Financial Accounting Standards Board (FASB) issued a proposect accountmg standard for nuclear C+ - .-- '=us costs in 1996. If the elenderd is adafend as proposed: (1) annual provisions for C+--:- . '=#4 .

could increerke; @) the not present value of seemsted '= . . '--#s costs could be recorded as a liablRty; and (3) income from the extemel (= ... '=0., trusts could be reported as investment income. The FAS8 ="haarrardly expended the scope of the proposed standard to include other closure and removal obigadons related to long4tved assets. A revised propossi may be issued by the FASS in 1999.

COnAnAON OWNERSHIP OF GENERATING FACluTIES-

. The Companies, together wNh the other FirstEnergy uduties, CEI and TE, and Duquesne Light Company

-(Duquesne) consutule the Central Area Power Coordinadon Group (CAPCO). The CAPCO companies own and/or lease, as tenants in common, various power generating faciulles. Each of the companies is obliolled to pay a share of.

the costs **aamabad wNh any jointly owned faculty in the some proportion as its interest. The Companies' portions of opersens exponess associated wnh joiney owned fedenes are included in the corresponding opwedng expenses on the Coneoudeled Statements of Income. The amounts reRected on the Coneoudeled Balance Sheet under uduty plant at December 31,1996, include the following' componise-utsuty Acoumuissed construcsion Ownershipf Plant Provision for Workin Lassehold

_ (~ n -

tin m E ena)

W.H. Sammls #7 S 303.3 8 101.3' $ 2.0 68.80 %

Bruce Monsteld #1, j ttt and #3 '_ 791.9 300.7 8.3 50.08 % s BeaverVeBoy . .

  1. 1 and #2 ._ 1,653.0 500.9 10.1 47.11 %

Perry. 1 Sen a 748.8 7.5 3534%

127.9

  • Tasmi 14.043.6 11.849.7 f

i-15'

a l

L .. -- .. .

.. On October 15,1998, FirstEnergy announced that it signed an agreement in pnnciple with Duquesne that would result in the transser of 1,436 megawans owned by Duquesne at eight CAPCO genwanng units in exchange for 1,328 rnageweils at three non-CAPCO power plants owned by the Company, Penn and CEl. As part of this exchange.

the Comparues wiu transler their 240,7;1:2 Niles Plant and 330,. _;: r_ New Casse Plant to Duquesne. A

'** definitive agreement on the exchange of assets, which win be structured as a tax-free transaction to the extent possible,

~

wiu provide FirstEnergy's utgity operating companies with exclusive ownership and operstmg control of all CAPCO generating units. Duquesne wiR fund C++,,,i "=,;,, costs equal to its percentage interest in the three nuclear

/ genwating units to be transioned. The asset transfer is expected to take twelve to eighteen months to close.

NUCt. EAR FUEL .  ;

Nucieer fuel is recorded at original cost, which includes material, enrichment, fabncation and interest costs ironred prior to reactor load. The Componiu amortire the cost of nuclear fuel based on the rate of consumpuon: The Companies' electric rates include amounts for the future disposal of spent nucieer fuel bened upon the formula used to compute payments to the DOE.

INCORAE TAXES-Detaus of the total provision for income taxes are shown on the Consolidated Statements of Taxes.

Delerred income taxes result from timing dillerances in the recognition of revenues and expenses for tax and accounting purposes investment tax credits, which were deferred when utuized, are being amortized over the recovery period of the related property. The liabiHty method is used to account for deferred income taxes. Defoned income tax liahinkian related to tax and accounting basis differences are recognized at the statutory income tax rates in eHoct when the liabilities are expected to be paid. Since November 8,1997, the Compamos are included in FirstEnergy's coneohdated federal income tax retum. The coneohdated tax lisbuity is anocated on a " stand-alone" company basis, with the Companies recognizing any tax losses or credhs they contributed to the consolidated retum.

RETNtERIENT SENEFITS-

- The Companies' trustood, rior.co..Lieutory defined benent pension plans cover almost all full-time employees. Upon retirement, employees receive a monthly pension band on length of swvice and compensation. In 1998, the Companies' pension plans and the Centerior pension plan were merged into the FirstEnergy pension plans. The Companies use the projected unit credit method for funding purposes and were not required to make pension contributions during the three years ended December 31,1998. The assets of the pension plans consist primarily of common stocks, United States govemment bonds and corporate bonds. ,

The Companies provide a minimum amount of riorw.,e vutory His insurance to retired employees in addition to optional cornetbutory insurance Heenh care beness, which include certain employee w and copeyments, are sino avaHable to retired wr.ipe.yees. their dependents and, under certain cucumstances, their survivors.

The Companies pay insurance premiums to cover a portion of these benents in excess of set Nmits; all amounts up to the limits are paid by the Companies. The Companies recognize the atactari cost of providing other postretroment benents to employees and their benenciertes and covered dependents from the time employees we hired untu they j become eligible to receive those benents. <

The following sets forth the funded status of the FirstEnergy plans in 1998 and the Compemes' plans in 1997 on the Consolidated Balance Sheets as of December 3', (which includes the Companies' share of the C,4Cr ivy  !

1998 plans' not propeut pension cost and accrued oemr postratirement benents cost of 5175.9 minion and $132.8 milhon, respectivelyh

.i

]

3 l

16

Other Pension Benefits Posimi;. c.at Benefits 1998 1997 1998 1997 (in millions)

~ Change in benefit obligation: ,

Benefit obligation as of January 1* - 51,327.5 5 688.5 5 534.1 5 241.1 Service cost... 25.0 12.9 7.5 4.1 Interest cost 92.5 49.8 37.6 17.6 Plan amendments. . 44.3 3.0 40.1 -

Early retirement program expense - 31.5 - 1.9 Actuartalloss 101.6 62.9 10.7 17.0 Benefits oaid.. f90.8) (54.5) (28.7) (14 1)

Benefit obhantion as of December 31.. 1.500.1 794.1 601.3 267.6 Change in plan assets:

Fair value of plan assets as of January 1' 1.542.5 946.3 2.8 2.0 Actual retum on plan assets 231.3 188.8 0.7 0.5 Company contribution - - 0.4 0.3 Benefits caid.. (90.8) (54 5) - -

Fair value of otan assets as of December 31. 1.683 0 1.080.6 3.9 2.8 Funded status of plan *.. 182.9 286.5 (597.4) (264.8)

Unrecognized actuarialloss (gain) . (110.8) (139.5) 30.6 24.0 Unrecognized prior service cost - 63.0 21.0 27.4 (13.5)

Urgesweed net transition oblication fasset).. (18 0) (25 9) 129.3 138 6 Preoaid f accrued) benefit cost . $ 117.1 $ 1421 $(410.1) $(115 7)

Assumptions used as of December 31:

Discount rate .. 7.00 % 7.25 % 7.00 % 7.25 %

Expected long-term retum on plan assets 10.25 % 10.00 % 10.25% 10.00 %

Rate of compensation increase 4,00 % 4.00 % 4.00 % 4.00 %

1998 beginning balances reflect 1993 merger of the Companies' and Centerior plans into FirstEnergy plans.

Net pension and other postretirement benefit costs for the three years ended December 31,1998 (including the Companies' share of FirstEnergy plans' 1998 pension benefits costs and other postretirement benefit costs of $(39.7) million and $31.2 million, respectively) were computed as follows:

Other Pension Benefits Postretirement Benefits 1998 1997 1996 1998 1997 1996 (In millions)

Service cost $ 25.0 5 12.9 $ 14.2 57.5 54.1 54.3 Interest cost . 92.5 49.8 49.3 37.6 17.6 17.4 Expected retum on plan assets. (152.7) (91.9) (83.2) (0.3) (0.2) (0.1)

Amortization of transition obligation (asset) (8.0) (8.0) (8.0) 9.2 8.2 10.1 Amortization of prior porvice crat.... 2.3 2.1 2.3 (0.8) 0.3 (1.2)

Recognized not ruuartalloss (gtin) (2.8) (0.9) - - - 0.1 Volunt.ary earty retirement program expense - 31.5 12.5 - 1.9 0.5 Plan curtailment loss foain).. - - (12 8) - - 13i Net benefit cost.. $ (43 5) $ (4 5) $(25 7) $53.2 $31.9 $44.2 in accordance with SFAS 88

  • Employers' Accounting for Settlements and Curtallments of Defined Benefit Pension Plans and for Termination Benefits,' the 1996 net pension costs and postretirement benefit costs shown above included curtailment effects (significant changes in projected plan assumptions) relating to the pension and postretirement benefit plans. The employee terminations reflected in the Companies' 1996 voluntary early retirement program represented a plan curtallment that significantly reduced the expected future employee service years and the
  • related accrual of defined pension and postretirement benefits, in the pension plan, the reduction in the benefit ,

obligation increased the net pension asset and was shown as a plan curtailment gain. In the postetirement benefit plan, the unrecogntzed prior service cost associated with service years no longer expected to be rendered as a result of the ,

I te;7ninations, was shown as a plan curtallment loss. .

The FirstEnergy's plans' health care trend rate assumption is 5.5% in the first year gradually decreasing to 4.0% for the year 2008 and later. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. An increase in the health care trend rate assumption by one percentage point would increase the total service and interest cost components by $4.0 million and the postretirement benefit obligation by 17

$68.1 mimon. A decrosse in the same assumption by one percentage point would decrease the total savice and interest

. cost components by $3.2 mimon and the postenrement benent obugemon by $55.2 mimon.

t TRANSACTIO8tB WITH AFFluATED COMPANIES- ~

c Operating revenues and operseng expenses include amounts for aMIhated transactions with CEI and TE eines the November 8,1997 merger dolo. The Compernes' transecdons with CEI and TE from the merger date were

../ primertly for electic sales. The amounts related to CEI and TE were $17.8 mulon and $12.7 milhon,;i-- =";d;, for 19g8 and $4.3 mWion and $0.4 mRNon, i--;="d;, for the November 8-December 31,1997 period.

SUPPLEMENTAL CASH FLOWS INFOft1AATION-Au temporary cash inveelments purchased wth an inmal maturity of three months or less are reported as cash equivalents on the Coneohdated Bolence Sheels. The Comperwes renect temporary cash investments at cost, .

which appedmelse their market value. Noncash Anoncing and inveseng acuvWes included capital lease transecuons amounting to $1.6 miBon, $3.0 mikon and $2.0 mHilon for the years 1998,19g7 and 1996, i-;="-dj. Commercial paper transacnons of OES Fuel, incorporated (OES Fuel) (a whouy owned enhaWim y of the Company) that have inWel maturity periods of three months or less are reported not within Anancing acevilles under long-term debt and are reRected as long-term debt on the Consondated Balance Sheels (see Note 3G).

AH honowings with inillel melurities of less than one year are deRned as financial instruments under j genensby accepted accouneng principles and are reported on the Coneoudated Bolence Sheels at cost, which approximates their fair merket value. The fotowing sets forth the approximate fair value and reisted carrying amounts of aR other long-term detA prelemed elock subject to mandatory redemption and investments other than cash and cash equivalents as of December 31:

1ess ine?

Canying Fair Canying

_ _ m _ _._ .Fa._ir thea m ena)

!.:nig.lerm debt -- 82,627 82,775 12.727 52.835 4 Palened stuk -

8 150 8 155 5 156 8 161 j inweelmente otertien cash and cash l I equhelents*  ;

j Debt securtBes

.Meksity(5-10yeare) . $ 481 8 520 $ 486 8 512 l

.Mehmtty (more than 10 yeare) . 258 305 250 294 l Equity securlues 14 14 14 14  !

AB ester.. 170 179 148 147 1 1 G23 11.018 s 904 S G87 The fair values of long-term debt and profoned stock reRect the present value of the cash oulAows reledng i to those securWes bened on the cupent caN price, the yield to maturtty or the yield to car, as deemed appropriale at the  !

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and of each respecove year. The yields assumed wwe bened on securses wi:h simmer charactertence onored by a corporanon with credit reunes simmer to the Companies' reungs. j The fair value of investments other than cash and conh equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yloids assumed were bened on financial inseuments wth aimber charactorieucs and terms. Inveelments other than cash and cash equivalents include c+ ... J=,;,si trust inveelments. Unresured gains and losses =r@=hla k the ?= . . - %-,;i.ii trust have boon recogntred in the tuet inveelmont wNh a conceponding change to the C+:-: ,,,, '=,;i.e HabWty. The other debt and ,

equity securmes rufened to above are in the heihmeturtty category. The Companies have no securWes held for tading purposes.  ;

i' j ftEGut.ATORY ASSETS.

The Companies recognize, as regulatory aseels, cools which the FERC, PUCO and PPUC have j' e authortred for recovery from customers in future pwlods. WNhout such authortzation, the costs would have been charged to income as incuned. AR reguistory assels are teing recovmod from customers under the Compones' respecove reguistory piens. Bened on those reguistory plane, at this Sme, the Companies tekeve they wW conunue to to able to bE and conect cost.beoed rates reichng to aN of the Company's opwsuons and Penn's nongeneremon operamons; accordingly, it is appropriate that the Companies continue the appHcahon of SFAS 71 to these respective ,

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operations.The Comparues also recognized addibonal cost recovery of $50 million, $39 million and $34 million in 1998.

1997 and 1996, respectively, as additional regulatory asset amortization in accordance with their regulatory plans.

Regulatory assets on the Consohdated Balance Sheets are comprised of the following-1938 1es7 (in anons)

Nudear unit exponec.s . $ 666.7 5 707.7 ,

Cuesomer receivebies for future income taxes 458.3 ' 560.7 Composuve traneinon charge . ... ... . 331.0 ' -

sale and lesseback coels . 127.7. 134.3 Lees on resoquired debt - . - . 81.9 89.1 Employee poetrogroment benent cools - ._ _ . . 28.9 25.9 Ur-maemacuesomeraccounts _ .. 6.8 18.9 Pony Unit 2 temunamon . - 36.7 doe decommissioning and decontaminadon costs . _ 12.2 16.5 Other.. 9.6 11.9 Total .. 51.723.1 $ 1.801.7

2. LEASES:

The Companies lease certain generating facilibes, certain transmission facilities, office space and other property and equipment undsor cancelable and noncancelable leases.

The Company sold portions of its ownership interests in Perry Unit 1 and Beaver Valley Unit 2 and entered

. Into operating leases on the portions sold for basic lease terms of approximately 29 years. During the terms of the leases, the Company continues to be responsible, to the extent of its individual combined ownership and leasehold interests, for costs associated with the units including construction expenditures, opershon and maintenance expenses, insurance, nuclear fuel, property taxes and decommissioning. The Company has the right, at the end of the respecuve basic lease terms, to renew the leases for up to two years. The Company also has the right to purchase the facilities at the expiration of the basic lease term or renewal term (if alariad) at a price equal to the fair market value of the facilities.

The 'pasic rental payments are adjusted when applicable federal tax law changes OES Finance, incorporated (OES Finance), a whoHy owned =hahary of the Company, maintains -

deposits pledged as collateral to secure reimbursement obhgations relating to certain letters of credit supporting the Company's obugations to lessors under the Beaver VaRoy Unit 2 sale and leaseback arrangements. The deposits pledged to the financial institution providing those letters of credit are the sole property of OES Finance. in the event of liquidation, OES Finance, as a separate corporate entity, would have to satisfy its obligations to credNors before any of its assets could be made avaNable to the Company as sole owner of OES Firiance common stock.-

Consistent with the regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Consoudated Statements of income. Such costs for the three years ended December 31 1998,are summertzod as fonows:

1ess tear sees (in nsNone) operannoleases interest element

_ $ 110.0 . 5111.3 5 107.6 Other . 28.5 23.2 18.3 Capitsileseos interest siement 5.3 6.1 6.5 Olhar.. 4.8 8.o 6.3 Talal ransmia .. S 149.o S146.6 S 138.7 i

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The future minimum lease payments as of December 31,1998, are:

oneratina t eases Capital Laese PNBV Capital

.- I amams Pavments Trust Net 1 (in mRIlons) 1999 . $ 12.0 $ 125.8 $ 44.0 $ 81.8

, 2000 ....- 10.4 125.0 54.6 70.4

.o 2001 ... 9.3 127.6 59.5 68.1 2002 . 8.8 130.8 61.0 69.8 2003 .. 8.6 137.3 62.6 74.7 Years thereahar :. 69.8 1.842.4 589.2 1.253.2 Total mnmum lease payments Executory costs .

118.9 29.5 1.L4RD.2 M 1.191_Q Q Not mnmum lease payments . 89.4 Interest nortion .. 52.5 Present value of not minmum lease paymonts 36.9 t === aarrant nortion .. 4.0 Noncurrent oornon .. 5 32.9 The Company invested in the PNBV Capita! Trust, which was established to purchase a portion of the i lease obligation bonds issued on behalf of lessors in the Company's Perry Unit 1 and Beaver Valley Unit 2 sale and leaseback transactions. The PNBV capital trust arrangement effectively reduces lease costs related to those transactions.

3. CAPITALIZATION:

(A) RETAINED EARNINGS-Under the Company's first mortgage indenture, the Company's consolidated retained eamings unrestricted for payment of cash dividends on the Company's common stock were $516.3 million at December 31, ,

1998.

(B) EMPLOYEE STOCK OWNERSHIP PLAN.

The Companies were funding the matching contribution for their 401(k) savings plan through an ESOP Trust. All full-time employees eligible for participation in the 401(k) savings plan are covered by the ESOP. The ESOP borrowed $200 million from the Company and acquired 10,654,114 shares of the Company's common stock through rnarket purchases; the shares were converted into FirstEnergy's common stock in connection with the merger. The ESOP loan is included in Other Property and investments on the Consolidated Balance Sheet as of December 31,1998 and 1997 as an investment with FirstEnergy related to the FirstEnergy savings plan. Dividends on ESOP shares are used to serice the debt. Shares are released from the ESOP on a pro rata basis as debt service payments are made.

In 1997 and 1996,429,515 and 404,522 shares, respectively, were allocated to the Companies' employees with the corresponding expense recognized based on the shares allocated method. Total ESOP-related compensation expense reflected on the 1997 and 1996 Consolidated Statements of income was calculated as follows:

1997 199s (in mRibons)

Base mmpensation . . . $ 9.9 $ 9.0 '

Dividends on mmmon stock held by the ESOP and used to servim debt.. f3.4) (2.9)

Net exoense . 565 $ 81 (C) COMPREHENSIVEINCOME-I in 1998, the Companies adopted SFAS 130, " Reporting Comprehensive income," and applied the standard to all penods presented in the Consolidated Statements of Common Stockholders' Equity. Comprehensive income includes net income as reported on the Consolidated Statements of income and all other changes in common stockholders' equity except dividends to stockholders, i

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l (D) PREFERRED AND PREFERENCE STOCK-

. Penn's 7.75% series of preferred stock has a restnchon which prevents early redemption prior to July 2003. The Company's 8.45% series of preferred stock has no opbonal redemphon provision. AH other preferred stock

. may be redeemed by the Companies in whole, or in part, with 30-60 days' notice. **

Preference stock authorized for the Company is 8,000,000 shares without par value. No preference shares are currently outstanding. .',

(E) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION.

i The Company's 8.45% series of preferred stock has an annual sinking fund requirement for 50,000 shares J' that began on September 16,1997, Penn's 7.625% series has an annual sinking fund requirement for 7,500 shares beginning on October 1,2002.

The Companies' preferred shares are retired at $100 per share plus accrued dividends. Annual sinking fund requirements are $5 melhon in each year 1999-2001 and $1 million in each year 2002-2003.

(F) COMPANY OBLIGATED MANDATORILY REDFNm 8 PREFERRED

. SECURmES OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES-Ohio Edison Financing Trust, a whoHy owned anhamry of the Company, has issued $120 million of 9%

Cumulative Trust Preferred Capital Securities. The Company purchased all of the Trust's Common Securities and simultaneously issued to the Trust $123.7 miHion principal amount of 9% Junior Subordmated Debentures due 2025 in exchange for the proceeds that the Trust received from its saie of Preferred and Cornmon Securities. The sole assets of the Trust a's the Subordmated Debentures whose interest and other payment dates coincide with the distribution and other payment dates on the Trust Securities. Under certam circumstances the Subordmated Debentures could be destnbuted to the holders of the outstanding Trust Securities in the event the Trust is liquidated. The Subordinated Debentures may be optionaHy redeemed by the Company beginning December 31,2000, at a redemphon price of $25 per Subordinated Debenture plus accrued interest, in which event the Trust Securtbes will be redeemed on a pro rata basis at $25 per share plus accumulated distribubons. The Company's obligations under the Subordinated Debentures along with the related indenture, amended and restated Trust A0reement, Guarantee Agreement and the A0reement for expenses and liabilities, constitute a fuH and uncondibonal guarantee by the Company of payments due on the Preferred Securities.

(G) LONG TERM DEST-The first mortgage indentures and their supplements, which secure aH of the Companies' first mortgage bonds, serve as direct first morlGa0e liens on substanbaHy au property and franchises, other than spe4.slty excepted property, owned by the Compenses Based on the amount of bonds authenticated by the Trustee through December 31,1998, the Company's annual sinking and improvement fund requirement for all bonds issued under the mortgage amounts to $30 minion. The Company expects to deposit funds in 1999 that wiH be withdrawn upon the surrender for canceHation of a like pnncipal amount of bonds, which are specificaHy authentcated for such purposes a0amst unfunded property additions or against previously retired bonds. This method can result in minor increases in the amount of the annual sinking fund requirement.

Sinkirg fund requirements for first morl0 age bonds and maturing long-term debt (excluding capital leases) forthe next five years are:

as masons) 1999 6519.8 2000 328.8 '.

2001 96.0 2002 . . 326.4 2003_ 246.0 The Companies' obugations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds and, in some cases, by subordinate liens on the related pollution control facilities. Certain pollution control revenue bonds are entitled to the benefit of irrevocable bank letters of credit of $338.8 miHion. To the 21-

extent that drawings are made under those letters of credit to pay principal of, or interest on, the pollution control revenue bonds, the Company is entitled to a credit against their obligation to repay those bonds. The Company pays annual fees of 0.43% to 0.75% of the amounts of the letters of credit to the issuing banks and are obligated to reimburse

(

l the banks for any drawings thereunder. -

The Company had unsecured borrowings of $250 milhon at December 31,1998, which are supported by a

$250 milhon long-term revolving credit facility agreement which expires December 30,1999. The Company must pay an f annual faciuty fee of 0.20% on the total credit facility amount. In addibon, the credit agreement provides that the Company maintain unused first mortgage bond capability for the full credit agreement amount under the Company's indenture as potenbal security for the unsecured borrowings Nuclear fuel purchases are financed through the issuance of OES Fuel commercial paper and loans, both of which are supported by a $180.5 miuion long-term bank credit agreement wnich expires March 31,2001. Accordingly, the commercial paper and loans are reflected as long-term debt on the Consolidated Balance Sheets. OES Fuel must pay an annual facility fee of 0.20% on the totalline of credit and an annual commitment fee of 0.0625% on any unused amount.

4. SHORT-TERRA BORROWINGS AND BANK LINES OF CREDIT:

Short-term borrowings outstanding at December 31,1998, consisted of $129.5 million of bank borrowings and $120.0 milhon of OES Capital, incorporated (OES Capital) commercial paper. OES Capital is a whony owned suhMary of the Company whose bonounngs are secured by customer accounts receivable. OES Capital can borrow up to $120 milhon under a receivables financing agreement at rates based on certain bank commercial paper and is required to pay an annual fee of 0.26% on the amount of the entire finance Hmit. The receivables financing agreement expires in 1999. At December 31,1998, the Company also had total short-term boiiM,iig of $88.7 million from its afflhates, i The Company has a line of credit with a domestic bank that provides for borrowings of up to $75 million under various interest rate opbons. Short-term borrowings may be made under this line of credit on its unsecured notes.

To assure the availabiHty of this line, the Company is required to pay an annual commitment fee of 0.20%. This une expires in May 1999. The weighted average interest rates on short-term borrowings outstanding at December 31,1998 and 1997, were 5.61% and 6.02%, respectively.

5. CORAGAITRIENTS, GUARANTEES AND CONTINGENCIES:

CAPITAL EXPENDIYURES-The Companies' current forecasts reflect expenditures of approximately $1 t:iHion for property additions and improvements from 1999-2003, of which approximately $169 million is opg*ahs= to 1999. Investments for additional nuclear fuel during the 1999-2003 period are eshmated to be approxrnately $167 miuion, of which approximately $23 miulon apphes to 1999. During the same penods, the Companies' nuclear fuel investments are l expected to be reduced by approximately $169 milhon and $35 raillon, respectively, as the nuclear fuel is consumed NUCLEAR INSURANCE- 1 The Pnce-Anderson Act limits the public BabHity relative to a single incident at a nuclear power plant to

$9.7 bHlion. The amount is covered by a combination of private insurance and an industry retrospective rating plan.

Based on their present ownership and leasehold interests in the Beaver Valley Station and the Perry Plant, the i Companies' maximum potenbal assessment under the industry retrospective rating plan (assuming the other co owners contribute their proportionate shares of any assessments under the retrospective rating plan) would be $114.2 million per incident but not more than $13 mHlion in any one year for each incident.

The Companies are also insured as to their sospective interests in the Beaver Valley Station and the

,, Perry Plant under policies issued to the operating company for each plant. Under these policies, up to $2.75 bHlion is provided for property damage and decontamination and decommissioning cose The Companies have also obtained approximately $308.1 million of insurance coverage for replacement power M s for their respective interests in Perry and Beaver Valley. Under these policies, the Companies can be assessoc e maximum of approximately $15.4

, million for incidents at any covered nucNr facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses.

The Companies intend to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontaminsbon, decommissioning, repair and 22

repiscoment costs and other such costs arising from a nuclear inodont at any of the Companies' plants exceed the policy limbs of the insurance in eWoct with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Compermes' insurance polices, or to the extent such insurance becomes unavailable in the future, the Companies would remain at risk for such costs.

GUARANTEES-The CAPCO companies have each severally guaranteed certem debt and lease obligations in connechon ,

with a coal supply contract for the Bruce Mansfield Plant. As of December 31,1998, the Companies' shares of the guerratoes (which approximens fair market value) were $28.4 million. The price under the coal supply contract, which includes certain minimum payments, has been detem*ied to be sumcient to satisfy the debt and lease obligations. The Companies' tots' payments under the coal supply contract were $134.7 mHhon, $119.5 miHion and $113.8 mHhon during 1998,1997 and 1996, respectively. The Companies' mmimum payment for 1999 is approximately $35 miluon. The contract expires December 31,1999.

ENVIRONMENTAL MATTERS-various federal, state and local authorses regulate the Companies wNh regard to air and water queNty and other environmental meters. The Companies asumste addWonal capital expendNures for environmental comphence of appn L  ; $260 mlNon, which is included in the construcuon forecast provided under Capital Expenditures" for

- 1999 through 2003.

The Companies are in compliance wNh tw cunent susur dioxide (SO ) and nitrogen oxides (NO,)

reduction requirements under the Clean Air Act Amendments of 1990. SO: reduchons in 1999 win be achieved by buming loww.eudur fuel, genuoung more elecWicity from loww-emming plants, and/or purchasmg emesion abowances Plans for cor@ lying wNh reduchone required for the year 2000 and thereener have not been finalized. in Septembw 1998, the Environmental Protection Agency (EPA) finalized regulations requinng addibonal NO, reductions from the Corapanies' Ohio and Pennsylvania faciutes by May 2003. The EPA's NO, Transport Rule imposes unelorm reduchons of NO, emesions across a region of twenty-two states and the Disbict of Columtxa, including Ohio and Pennsylvans, bened on a conclusion that such NO, emesions are contributing signiucently to ozone polluton in the eastem United States. By September 1999, each of the 12; M etenes are required to submit revised State ; nip; . * -i Plans (SIP) which comply with individual state NO, budgets established by the EPA. These state NO, budgets contemplete an 85% rMwewi in utgity plant NO, emissions from 1990 emissions. A proposed Federal implementation Ron 1ccompanied the NO, Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In another separate but related a-tion, eight states filed pondons wNh EPA under Section 126 of the Clean Air Act seeldng rMr*wis of NO, emesions which are alleged to contribute to ozone poHution in the eight pendoning states. The EPA suggests that the Sechon 126 peutions wig be aM*iy addressed by the NO, Transport Program, but a September 1996 proposed rulemaidng establehed an atemotive program which would require nearly identical 85% NO, reduchons at the Compones' Ohio and Pennsylvania plants by May 2003 in the event implementation of the NO, Transport Rule is delayed. FirstEnergy conunues to evaluate its compliance plans and other compilence options and cummtly estimates its additional capital expenditures for NO, rMr*wis rney reach $500 muuon.

The Companies are required to meet federoNy approved SO2 reguladons Violations of such reguisbons can result in shutdown of the genersung unit involved and/or civu or enminal penames of up to $25,000 for sech day the unit is in violadon. The EPA has an interim enforcement poucy for SO reguleuons in Ohio that aNows for compliance bened on a 30 day averaging period. The Companies cannot predict what acuon the EPA may take in the future with respect to the interim enforcement policy.

~

In July 1997, tw EPA promulgated dienges in the Neuonal Ambient Air QueNty Standard (NAAQS) for ozone and proposed a new NAAQS for AM unregulated uhrs Gne peruculah meter. The cost of compliance wNh these regulatons may be substanuel and depends on 9m manner in which they are implemented by the states in which tw Companies operate anected faccues Legisistive, administrative and judicial actions wHe continue to change the way that the Companies must opwone in ordw to comply wNh environmenisi inws and reguianons. WNh respect to any such changes and to the '.

environmental momers described above, the Company avre that whiW lt remains regulated, any resuWng addWonal

. capital costs which may be required, as wel as any required increase in operating costs, would ummately be recovuod from its customers.

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SUMMARY

OF QUARTERLY FINANCIAL DATA (UNAUDITED):

The fouowing summertzes certain consondated operating results by quarter for 1998 and 1997.

l March 31 June 30, September 30, December 31, i Thran Months Ended 1998 1998 1998 1998 (M mlMone)

! Opereeng Revenues 8597.8 5618.5 $696.2 5807.0 l Domranno Evannaam and Taxas .. 488.7 524.9 MMM M 485.5 Operatngincome._ __ 111.1 93.6 140.7 141.5 Olherinoame . 12.5 11.8 12.6 10.7 Not intamat Chamma 59.3 59.1 58.8 58 2 income Before Extraonsnery item __ 64.3 46.3 94.7 96.0 Eukaaninarv horn (Not of Inonma Taxes)(Note il - ' (30.5) - -

Not income $ 6h3 $ ' 5.8 $ 90 7 5 960 Eammon on Common Stoth.. 56' .3 5' 2.8 59' .7 5 93.0 March 31, June 30, September 30, December 31, Thram ""---L " " '

1997 1997 1997 1907 (M mMione)

Operedng Revenues _ ._ $604.8 $593.3 5652.7 $622.9 P- ;er---e and T- -

478.5 467.3 511.6 527.7 Opersang income - 126.3 126.0 141.1 95.2 01herineome _ _ 13.5 14.1 12.0 13.3 Nat Internet Chamma ,

63.8 63.2 81.3 80.0 Not inenma 1 76.0 $ 76.9 $ 91.8 5 48.5 Eammon on Corranon Stock.. 5 72.9 5 73.8 5 58.7 5 45.4

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i Report of independent Public Accountants To the Stockholders and Board of Directors of Ohio Edison Company:

We have audited the accompanying consolulated balance sheets and consolidated statements of capitalization of Ohio

    • Edison Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiaries as of December 31,1998 and 1997, and the related consolidated statements of income, common stockholders
  • equity, preferred stock, cash flows and taxes for each of the three years in the period ended December 31,1998. These

/ financel statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financel statements based on our audits.

J We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounbng pnnciples used and significant estimates made by management l as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairty, in all material respects, the financial position of Ohio Edison Company and subsidiaries as of December 31,1998 and 1997, and the results of their operations and their cash flows for each of the three years in the penod ended December 31,1998, in conformity with generally accepted accounting principles.

mp L Ll ARTHUR ANDERSEN LLP Cleveland, Ohio February 12,1999 -

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p ofo FirstEnergy Corp.

76 South Main Street --

Akron, Ohio 44808 (800)786-8402 1998 AnnualReport i

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