ML20207E560

Annual Rept 1998 for Pennpower

ML20207E560
Person / Time
Site:	Beaver Valley
Issue date:	12/31/1998
From:	PENNSYLVANIA POWER CO.
To:
Shared Package
ML20207E531	List: L-99-089, Forwards Annual Financial Repts,Including Certified Financial Statements,Of Dqe,Firstenergy Corp,Ohio Edison Co,Pennsylvania Power Co,Cleveland Electric Illuminating Co & Toledo Edison Co,Iaw 10CFR50.71(b) ML20207E552 ML20207E560 ML20207E576 ML20207E586 ML20207E590
References
NUDOCS 9906070077
Download: ML20207E560 (24)

Text

{{#Wiki_filter:ANNUAL REPORT 1998 1 ~~ J DR A K 05 34 I PDR c

E i l PENNSYLVANIA POWER COMPANY 1998 ANNUAL REPORT TO STOCKHOLDERS l i Pennsylvania Power Company, an electric utility operating company of FirstEnergy Corp. and a wholly owned subsidiary of Ohio Edison Cortpany, provides service to more than 147,000 customers in westem Pennsylvania. The Company fumishes electric service in 139 communities, as well as rural areas, and also sells electric energy at wholesale to three municipalities. The Comoany also sells through its subsidiary, Penn Power Energy, Inc., energy outside its franchised service area through the Pennsylvania Customers Choice Pilot. Contenta Eage Selected Financial Data.......................... 1 Management's Discussion and Analysis............... 2-6 Statements of income.................. 7 Balance Sheets.......................................................... 8 Statements of Capitalization....................................................................... 9 Statements of Common Stockholder's Equity.................................. 10 Statements of Preferred Stock.... 10 Statements of Cash Flows............................................................................ 11 Statements of Taxes............................................................................. 12 Notes to Financial Statements................................................................... 13-21 Report of independent Public Accountants...................... 22 l l

PENNSYLVANIA POWER COMPANY SELECTED FINANCIAL DATA 1ses iner 1ess ines see4 (DoEars An thoue anale) Opereeng Rowenues L]33,ZE N N L 2inME L.301.EE t i Operaung income M N $__$2.32E 8 87 317 l_.31000 Income Before Extraortenaryitem La924R W L-- 40.5BI L 2LEQ W Notincome W L,2,gG $_.40.58I L.,JR Rig L.22E Eemm9e on Common Seck L iam L a n*e L JLRR1 L JLIE L 2s m l Retum on Avere9e Common Equity ja% gj% 23,g% 33,g% gg,g% Ceeh oevMende on Common Sex

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L2JIt L 21JIt L-.21.ana LJ1Jg1 L_2Laan Total Assete m 11.936AE LM M Li.isI.aQ2 CAMTALIZATION: i Common Stodchoidere Equity $275.281 8 291,977 8 286,504 5 271.920 8 258.973 l Preferred Stock-Not Subject to Mendolary Redempton 50.905 50.905 50.905 50.905 50.905 Subject to Mendolory Redemnton 15.000 15.000 15.000 15.000 15.000 Lon9. Term Debt _ 287.889 289.305 310.996 338.670 424.457 Total Capitetneton_ 132LEZE M $_ggL. QE 1,,gg,ggg $_Z49.335 q l CAPf7ALIZATION RATIOS: Ccmmon Stockholders EquMy 43.8% 45.1 % 43.2 % 40.2% 34.6% Preferred Stock. l Not Subjectto Mandstry Redempton _ 8.1 7.9 7.7 7.5 6.8 Subject to Mandatory Redempton 2.4 2.3 2.2 2.2 2.0 Lon9. Term Debt _.43,I _.dLZ _(0.9 _.3Q,1 30.6 To r = rem-non aggj% 23J% agga% jEJ% agLg% IGLOWATT. HOUR SALES (tdillione): Residental 1.278 1.238 1.254 1,195 1,178 Commerdel 1.090 1.013 996 938 891 Industrial._ 1,436 1,650 1,693 1,558 1,293 Omer 8 _,_,3 _j .,,_.g 8 l l Tote!RetoG 3.810 3.916 3.949 3.097 3.368 l TotalWholesale _.301 jQ1 1 100 103 10Z1 l Tolel 3,gg g, gig ),gg g g,ggi CUSTORIERS SERVED Roaldental 129.452 129.316 127.936 126.480 124.951 Commercial 17.296 16.738 16.531 16.317 15.906 Ir*=*'a' 250 241 225 223 219 Other _ __191 97 _,E of E Tomi 21Z.15 atBJBI 2dLIE1 213.12I 211221 Average Annuel ResidentalkWh Use9e 9.913 9.6M 9.886 9.505 9.501 l Costof Fuel per Milton 8ts 81.15 81.10 $1.00 81.12 81.20 Peak Load Me9ewette. 918 836 792 836 710 Generann9 Capsbety-Coal 72.1 % 72.1 % 72.1 % 72.1 % 72.1 % 08 3.0 3.0 3.0 3.0 3.0 o Nudeer _2i9 .2LE _219 2iE 2iE Totel 2994 % .13hg% ,1gLg% .100.2 % 2994 % SOURCES OF ELECTRIC GENERATION: 1 Cosi 76.9% 73.8 % 67.e% 65.6 % e9.6% Nudear _211 20.2 _a2d _aL4 _aQd Tomi 1922 % 1EL2% 152% 2002 % 2922 % NUMBER OF EMPLOYEES RE E 2212 M LEE 1

PENNSYLVANIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This discussen 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 an6chate, poesntiel, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competiton and deregulation in the electric utility industry, economic or weather conditions affectmg 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. flesults of Operations We contmuod to take steps in 1998 to better positen our Company as competiton continues to expand ' in the electric utluty industry. Investments were made in new information systems with enhanced functionality which also address Year 2000 application deficencies. We also contributed to 1998 cash savings of FirstEnergy Corp. (FirstEnergy) totaling $173 millon which were captured from initiatives implemented during the year in connection with the November 1997 merger of our parent company, Ohio Edison Company and Centerior Energy Corporaten to form FirstEnergy. Esmings on common stock of $4.6 minion in 1998 declined from $26.8 million in 1997. Results for 1998 were adversely affected by a one-time, extraordinary charge of $30.5 minion after taxes, related to our discontinued appbcaten of Statement of Financial Accounting Standards No. 71 (SFAS 71)," Accounting for the Effects of Certain Types of Regulaton," to our generation business, as discussed later in this report. AdditionaHy, 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, combmed with an unscheduled generanng unit outage, resulted in spot market purchases of power at prices which substantially exceeded amounts recovered from retail customers. Esmings on common stock in 1997 were adversely affected by nonrocumng charges resulting from merger-related staffing reduchons, charges for uncollectible customer accounts and an increase in accelerated depreciation and amortizaten of nuclear and regulatory assets under our rate plan. Operating revenues were slightly higher in 1998 compared to the prior year. This was the third consecutnre year of record operating revenues. The foHowing table summarizes the sources of increases in operating revenues for 1998 and 1997 as compared to the previous year: 1318 jaRZ (arrmasens) 8 (7.6) $ (1.7) Domesse in retel kuonou.hourseios changeineveraosrolesprios _ (1.1) 3.7 whoissaisseles 1.3 (3.2) Olhar.. 7.8 2.0 Nat :(-_ 1 OA 10.s Our retsu customer base continued to grow with over 700 new customers added in 1998, after gaining approximately 1,600 customers the previous year. Although residential and commercial kilowatt-hour sales increased 3.3% ared 7.5%, respectively from 1997, the increases were more than offset by a 13.4% decrease in industrial sales. Closure of an electnc arc fumace at Caparo Steel Company (Caparo) in August 1997 and a general dochne in . electncity demand by steel manufacturers due to intense foreign wir-;N-7. contributed to lower industrial kilowatt-hour sales. Excluding sales to Caparo, industrial sales declined 1.7% from 1997. Despite a 7.1% increase in kilowatt-hour sales to wholesale customers, total kilowatt-hour sales decreased slightly from 1997 due to the lower industrial - sales. Without the closure of the Caparo facility, total sales would have increased 3.4% from the previous year. In 1997, residential and industrial kilowatt-hour sales decreased 1.3% and 2.0%, respectively, compared to 1996. Kilowatt-hour sales to commercial customers increased 1.8% from the prior year. Expiration of a one-year contract with another utility to supply 33 megawatts of power contributed to a 18.6% decline in 1997 kilowatt-hour sales to n wholesale customers from the previous year and contributed to a 4.7% decrease in total 1997 kilowatt-hour sales from 1996. 2

Total operation and maintenance expenses in 1998 decreased from the prior year with higher fuel and purchased power costs more then offset by lower nucisar operating costs and other operating costs. Most of the incrosse in fuel and purchased power occurred in the second quarter and twsulted from a combination of factors. In late June 1998, the midwestem and southom regions of the United States exponenced electricity shortages caused mainly by record temperatures and humidity and unscheduled generating unit outages. Due in part to an unscheduled outage at Beaver Valley Unit 1 at that time, our producten capabilities were reduced to the point that we purchased significant amounts of power, at unusually high spot market prices, causing the increase in purchased power costs. Because of the decrease in kilowatt-hour sales in 1997, we spent less on fuel and purchased power during 1997, s corrpared to 1996. Nuclear operatmg costs were lower in 1998, compared to 1997, due primarily to lower refueling outage cost levels. Increased operating costs at Beaver Valley Unit 1 resulted in higher nuclear operating costs in 1997 compared to the previous year. Two items in 1997, a $3 mulion charge for uncollectible customer acx:ounts and a fourth quarter charge of approximately $5.4 miluon for a voluntary retirement program, contributed to the increase in other operating costs in 1997 from the previous year and to the enhaaPant reducten in other operating costs in .1998. In addition, continuing improvements in operating ofReiency, evidenced by a reduction in the number of our employees over the last five years, contributed to the reduction in other operstmg costs in 1998. Depreciation and amortization decrossed in 1998 compared to the prior year due primerHy to the effect of our rate restructuring plan. The Pennsylvania Public Utgity Commission's (PPUC) authortzstion of our rate restructuring plan in the second quarter led to discontinued application of certain regulatory accounting procedures (i.e. SFAS 71) to our generation business, resuRing in a wetto down of our nuclear generating unit investment and the recognition of a portion of such investment, recoverable twough future customer rates, as a regulatory asset. The decrease in nuclear depreciation resulting from the writo down was the primary cause of the total decrease. In 1997, the increase in the provision for depreciabon and amortization of not reguistory assets from the previous year renected accelerated depreciation and amortizagon of nuclear and regulatory assets under our rate plan. The decrease in general taxes in 1997 was due principepy to an adjustment, which reduced our liability for gross receipts taxes. The downward trend of not interest charges continued in 1998. Interest on long-term debt decreased in both 1998 and 1997 from the previous year due to our economic refinancings and redemption of higher-cost debt totaling w,MT - ; $6.1 rmulon in 1998 and $39.4 muBon in 1997. Capital flesources and I.iquidity We have significan0y improved our financial posibon over the past five years as evidenced by our enhanced fixed charge coverage ratios and percentage of common equity to total capitaRzation. Our SEC ratio of eamings to Axed charges improved to 4.14 at the end of 1998 from 2.16 at the end of 1993. Our indenture ratio, which is used to determme our abiHty to issue first mortgage bonds, increased from 2.99 at the end of 1993 to 4.92 at the end of 1998. Over the same period, the charter rabo, a measure of our abNity to issue preferred stock, improved from 1.61 to 2.33 and our common stockhoider's equity percentage of capitauzation rose from w,Mi fi 33% st { the end of 1993 to almost 44% at the end of 1998. Our improving financial positen reflects ongoing eNorts to increase j w,T-; "";r:: We continue to streamune our operations, as evidenced by a 50% increase in FirstEnergy's customer / employee ratio, which has increased from 165 at the end of 1993 to 247 as of December 31,1998. Merger-reisted savings through coneoudenon of acevities have conerttsted to these resuns. Also, not debt redemptions and refinancin0s have lowered our average cost of long-term debt over the last five years from 8.36% in 1993 to 7.70% at i the end of 1998. AH cash regul'ements for the year, including debt repayments, were met with intemeBy generated funds. Our cash requirements for 1999 for operating expenses, construcIlon expenditures and scheduled debt maturlues are expected to be met without issuing additional escurities. Cash requirements of,,f4MT--- i $69 muuon for the 1999-2003 period to meet scheduled maturities of long-term debt and preferred stock are also expected to be funded intemony. We had about $57.5 miluon of cash and temporary investments and no short-term indebtedness as of December 31,1996. We also had a $2 mRNon bank facGity that provides for borrowings on a short-term basis at the bank's discretion. During 1998, our capital spending (excluding nuclear fuel) totaled approximately $16 miluon. Our capital 4 spending for the period 1999-2003 is expected to be about $187 milNon (excluding nuclear fuel), of which approximately $28 mHlion apphes to 1999. Investments for additional nuclear fuel during the 1999-2003 period are estimated to be approximately $28 million, of which about $3 million apphes to 1999. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $29 million and $6 million, respecovely, as the nuclear fuelis consumed. 3

FirstEnergy signed an agreement in principle with Duquesne Light Company (Duquesne) that would result in the transfer of 1,436 megewees owned by Duquesne at 9ve generating plants in exchange for 1,328 megawatts at three plants owned by FirstEnergy's electric utHity operating companies (see " Common Ownership of Generating FacMilles"in Note 1). A final agreement on the exchange of assets, which wiR be structured as a tax-free transaction to the extent possible is being negotiated; The transaction benefits FirstEnergy's utiuty operstmg companies by providing exclusive omership and operating control of au generating assets that are now jointly owned and operated under the Central Area Power Coordmation Group agreement. Interest Rate Risk Our exposure to fluctuations in market interest rates is mitigated since a significant portion of our debt has fixed interest rates, as no6ed in the table below. We are subject to the inherent interest rate risks related to refinancing maturing debt by lesuing new debt securliies. Changes in the market value of our nuclear decommesioning trust funds are remonimd by making a corresponding change to the decomrmssioning liabisty, as described in Note 1. The table below presents principal amounts and related weighted average interest rates by year of matudty for our investment portiono, debt obligations and preferred stock wnh mandatory redemption provisions. Tliero-Fair 1999 2000 2001 2002 2003 sher Total Value 7." - h- -1 Irweetments other Stan Cash and Cash Equhelents. Fixed income-8 9 5 9 8 9 Averman internet rata. 5.1% 5.1% l.ong-term Debt-Fixed role 81 8 24 51 81 $41 $200 $268 $284 Average interest rate 9.7% 6.2% 9.7% 0.7% 7.6% 7.0% 7.0% Vertebio rate $ 10 8 10 $ 10 ^ =--internet rata.. 4.2% 4.2% Preferred Stock 81 81 8 13 5 15 $ 16 Awarana dMdand rata. 7.8% 7.8% 7.8% 7.8% Outlook We face many w,7-;_ ': chouenges in the years ahead as the electric utluty industry urulergoes significant changes, including cfienging regulation and the entrance of more energy suppliers into the marketpiece RoteH wheeling, which has begun in our service area, aHows retou customers to purchese electricity from other energy producers. Our reguistory plan provided a solid foundation to poeillon us to meet the challenges we are now facing by facetaling the reduction ofIbad costs. Application of SFAS 71 was discontinued for the generation portion of our business in June 1998 following PPUC approval of the rate restructuring plan. Customer choice wlN be phased in over two years with 66% of each customer cises able to choose allemadve suppliers of generstion on January 2,1999, and au remaining customers having choice as of January 2,2000. Under the plan, we cordinue to deRver power to homes and businesses through our transmission and distribution system, which remains regulated However, our rates have been restructured to estabush separate charges for tronomission and distribution; generation, which is subject to { w..- 5,, and stranded cost recovery. in the event customers obtain power from an allemative souros, the genersuon portion of our rates wHl be excluded from their blE and our customers wiu receive a generation charge from the enemouve suppner. The stranded cost recovery portion of rates provides for recovery of certain amounts not otherwise considered recoverable in a compouthe generadon merket, including regulatory assets. We are entitled to recover $234 miulon of stranded costs through a -,7-; ' transition charge that starts in 1999 and ends in 2005. The Cloen Air Act Amendments of 1990, discussed in Note 5, require additionel emission reductions by 2000. We are pursuing cost.effecove compuance stnstegies 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 utgity boilers in Pennsylvania, Ohio and twenty other 6 l eastom states, including the District of Columble (see " Environmental Matters" in Note 5). Controls must be in place I 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 nurnber of other utiHbes to achieve compliance due to our nuclear generation capacity. 4

i l 1 in connecdon with FirstEnergy's reguietory plan 2 reduce fixed costs and lower rates, we continue to take steps to restructure our opersuons. FirstEnergy announced plans to trenefer our transmission assets into a new subsidlery, American Transmission Systems, Inc., wuh the transfer =W to be finanzed in 1999. The new =han=y represents a first step toward the posi of estabsehing or becoming part of a largw independent transmission company (Transco). We beneve that a TransCo beoor addresses the Federal Energy Regulatory Commission's (FERC) stated transmission objectives of providing non-discriminatory service, while providing for streamuned and cost efficient opwouon. In working toward the goal of forming a largw regional transmission ensty, FirstEnergy. American Electric Power, Virginia Power and Consumers Energy announced in November 1998 that they would propero a FERC filing dudng 1999 for such a regional transmisalon entity. The enety would be designed to meet the goals of reducing transmission costs that result when ^,,Ct%,, power over several transmission systems, ensuring transmission reliabuity and providing norHilscriminatory access to the transmission grid. Year 2000 Readiness The Year 2000 issue is the result of computer programs being wrtoon using two digits rather than four to idongfy the aryllenhl= year. Any of our programs that have dete-eensitive 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 proth auch as r,1.,.2 computer failures and miscalculeWorts, 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 ellected by the Year 2000 problem; remediation or replacement of noncompilant systems and components; and testing of systems and components following such remediation or repiscoment. We have focused our Year 2000 review on three areas: controtzed system applications, noncentrsHzed systems and ruledonships with third parties (including suppliers as well as end-use customers). Our review of system readiness extends to systems involving customw envice, safety, sharehoidw needs and regulatory obligenons. We are committed to taking appropriate actions to eliminate or lessen negative eflects of the Year 2000 issue on our operatione. We have completed an inventory of aR computer systems and hardware including equipment with embedded computer chips and have determined which systems need to be converted or replaced to become l Year 2004 ready and are in the process of remediagng them. Based on our timetable, we expect to have an identified { repairs, replacements and upgrades ssei'E j to achieve Year 2000 readiness by September 1999. Most of our Year 2000 issues wlN be reached through system repiscement. Of our major centreRzed systems, tw general lodger system and inventory management, procurement and accounts payable systems were replaced at the end of 1998. Our payrou system was enhanced to be Year 2000 compNant in July 1996. The customer service system is due to be replaced in mid-1999. We have cs.,i'":1 formel communications with most of our key suppliers to determine the extent to which we are vulnerable to thoes third parties' failure to resolve their own Year 2000 problems. For suppliers having potential compliance problems, we are developing allemale sources and services in the event such noncomptance occurs. We are also identWying areas requiring highw inventory levels based on complierxw uncertainues. There can be no guerentee that the failure of companies to resolve their own Year 2000 issue wHi not have a materlei adverse effect on our business, financial condition and results of operations. We are using both intomal and extemel resources to reprogram and/or replace and test our software for Year 2000 modificonons. Of the $6 miBion total project cost, approximately $5 muuon wlN be capitaRzed since thoes costs are attributable to the purchase of new software for total system repiscoments because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $1 miulon will be expensed as incurred. As of December 31,1998, we have opent $3 migion for Year 2000 capital projects and had expensed approximately $600,000 for Year 2000-related meintenance acevNies. Our total Year 2000 project cost, as wen as our estimates of the Mme needed to complete remedlei efforts, are beood on curroney avaliable information and do not include the seemsted costs and time===aei= tad witi the impact of third party Year 2000 lesues. We believe we are managing the Year 2000 issue in such a way that our customers wlH not experience any interruption of service. We believe the most Hkely worst-coes scenario from the Year 2000 issue wHl be disruption in power plant monitoring systems, thereby producing inaccurate data and potential failures in electronic switching 3 mechanisms at transmission juncuons. This would prolong locenzed outages, as technicians would have to manually activate switches. Such an event could have a material, but currently undeterminable, offed on our financial results. We are developmg contingency plans to address the effects of any delay in becoming Year 2000 compliant and expect to have contingency plans wnV': z 1 by June 1999. 5

1 The costs of the project and the deles on which we plan to complete the Year 2000 modlAcetions are bened on monopement's best estimates, which were derived from numerous assumptions of future events includmg the con 6nued availability of certain resources, and other factors However, there con be no guarantee that this project wit be completed as planned and actual results could differ meterially from the estimates Specinc factors that rnight cause mannetal deerences include but are not umited to, the availabaty and cost of treined personnel, the abety to locate and correct au relevant computer oode, and similar uncertain 6es. 1, O t '6

PENNSYLVANIA POWER COMPANY STATEMENTS OF INCOME For the Years Ended December 31. 1998 1997 1996 (in thousands) OPERATING REVENUES $323.756 1323.381 8322.625 OPERATING EXPENSES AND TAXES: Fueland purchased power 76,801 67.345 67,443 Nudeeroperaun0 costs 22.968 26,220 22.064 Orier operaung costs . 52.348 66.518 59.753 Total operaton and maintenance exponess 152.117 160,083 149.260 Provieson for depredaton and amortzedon 50,264 64,628 57,114 General taxes 22.540 22.379 24,015 income taxes . 31.794 2L1GQ 29.907 l Total operahng expenses and taxes 265.715 272.645 .23L290 i OPERATINGINCOME _ 58.041 50.736 62,329 OTHERINCOME 2300 2.700 __iZgQ INCOME BEFORE NETINTEREST CHARGES 60.526 _.jadag 68.089 NETINTEREST CHARGES Interestonlong term debt 19,255 20,458 25,715 Interest on nudeer fuelobhgellons. 28 276 219 Agowance for barmwed funds used dunng cuanotucson (294) (414) (387) Otherinterest expense 1.789 _ tIQi 1.955 4 Notinterest charges . 20.778 _.22,021 ZZ.gG2 DICOldE BEFORE EXTRAORDINARYITEM 30,748 31,472 40.587 j EXTRAORDINARY ITEM (NET OF INCORAE TAXES) (Note 1) _fE 322) NETINCORAE 9.226 31,472 40,587 PREFERRED STOCK DMDEND REQUIRE 30ENTS-1 020 1920 1 920 EARNINGS ON COMMON STOCK L,,Lgl2 L20E0 L1lJO,1 i The accompanying Notes to Frunnetal Statements are an integral part of these statements. 7

PENNSYLVANIA POWER COMPANY BALANCE SHEETS At Danamber 31. 1998 1997 (in" ~ - ^ -) UTILITY PLANT: In service 5886.771 31.237.582 g g - - io,.ep,s n_._ Conotucilon workin pro 9ress-Eiscetcplant 17.187 7.427 8.788 Nucteerfuel-14215 2 742.796 OTHER PROPERTY AND WWESTMENTS _2L1.E 26.157 CURRENTASSETS: Cash and cash equkalents 7.485 600 Notes receivable trorn perent company (Note 4) 50,000 17.500 Receivables-Customers (less accumulated provisions of 53.599,000 and 53.600.000 respescevely, for urvedareita accounts) 34.737 33.934 W compenses 34.430 ' 12.599 Oster 12.472 14.426 Meterleis and supphes, at avera9e cost 15.515 14.973 Propeyments 't.707 e5.79e DEFERRED CHARGES: Regulatory assets 371.027 162.966 Oswr CAPITAUZATION AND WASEJTIES CAPITAUZATION (See Statements of Capitenzaton)- Common stockholder's equity 3275.281 5 291.977 Prefened stock-Not to subjoot to mandatory redempeari 50.905 50.905 Subjectmandstory redempton 15.000 15.000 Lo'ilPtemi debe-Am compenses 6.617 9.231 Outer 1 280.074 647.157 CURRENT LIABlWTIES: Currently payable lone. term debt-a==rmaari compones 5,557 6.956 Olhor 964 1.443 Accounts payabio. A compenas 9,676 6.788 Other 23.156 22.751 Accrued taxes 12.849 12.332 Accrued;f _ ^ 6.519 6.588 71.8.6 14.74 Other 6 D-RRED CREDfr8 Accumulated deferred income taxes 212.427 239.952 7.787 26,052 Ac. cumulated deferred hvestment tam credits _g gg 0.,_ COsastTMENTS, GUARANTEES AND CONTINGENCIES (Notes 2 and 5) The acx:ompanying Notes to Finanolal Statements are an integral part of tese balance sheets, g 8-

1 PENNSYLVANIA POWER COMPANY STATEMENTS OF CAPITALIZATION At Danamhar 31. 1998 1997 (Donere in thousands, except per ehere amounts) g CORAGAON STOCKHOLDER'S EQUITY. Common stock 530 per value,6.500.000 shares authortred,6.290,000 shares outetendirm 5186.700 $186.700 OtherpekNn capHel (310) (310) Accumulated other comprehensive income (Note 38) _ (90) Roteined semings (Note 3A)_ 30 3.1 103.677 Total otmmon stockholder's equity 275.281 2RtgII Number of Sherse Opuonal Oiantendinn Redemotion Price .3aII-itIZ_ Per share Annrensis PREFERRED STOCK (Note 3C): Cumuleeve. $100 per valuw-Aulhortred 1.200.000 shares Not Sutgect to Mendetary Redemptort 4.24 % 40,000 40.000 5103.13 8 4.125 4.000 4.000 4.25% 41.049 41.049 105.00 4.310 4.105 4.105 4.64% 80.000 80.000 102.96 6.179 6.000 6.000 7.64 % 80.000 80.000 101.42 6.085 6.000 6.000 7.75 % 250.000 250.000 25.000 25.000 6.00% 30.QE 58.000 102.07 5.920 _ 530 _.5.000 Total not sutgect to mandatory redemption - M M ingg 2035 20.905 Subject to Mandatory Redempton (Note 30)* 7.625 % M M 106.86 gggg _ 15.000 15.000 LONG TERRE DEST (Note 3E): Fret mortgage bonde. 9.740% due 1999 2019 20.000 20.000 7.500% dus 2003 40.000 40.000 6.375% dus 2004 20.500 20.500 6.625% due 2004 14.000 14.000 6.500% dus 2022 27,250 27.250 7.625% dus 2023-6.500 $.300 Total Aretmortgagebonds_. 328.2 3 128.250 Secured notes-850 4.750% dus 1996 23.000 23.000 6.000% dus 2000 5.400% due 2013 1.000 1.000 5.400% dus 2017 10.800 10.000 7.150% dus 2017 17,925 17,925 5.900% dus 2018-16.800 16.800 8.100% dus 2020 5.200 5.200 7.150% dus2021 14,462 14.462 j 6.150% dus 2023 12.700 12.700 '4.150% dus 2027 10.300 10.300 6.450% dus 2027 14.500 14.500 5.375% dus 2026 1.734 5.450% dus 2028 6.950 6.950 6.000% dus 2028 14.250 14.250 5.950% dus 2029 238 238 Total secured notes 149.679 .148 ZE Other obilostens. 1 Nuclear fuel 12.174 16,180 l CapHallesses(Note 2) , f.$35 __g,Q32 Totalotherobliptlons ,,,10.00E 21211 Notunemortzed decount on debt (508) . (550) Long.torm debt due wHhin one year (6.541) (8.401) Totallon0-term debt _ 287.689 269.305 TOTALCAPITAUZATION - jggggg jg4Mg!

• Denotes verleble rate leeue with December 31,1998 interest rate shown.

The socompanying Notes to Finandel Statements are en integral part of siene statements. 9

PENNSYLVANIA POWER COMPANY i STATEMENTS OF COMMON STOCKHOLDElVS EQUITY l Accumulated j Other i I Comprehensive Other C : ;-C_ _. Income Number Per PakHn income Roteined fNain 381 ofSheme Vaha Canital INais381 Eemines (Donenks Ngounentie) Bolence, January 1,1996 6,290,000 $188,700 $(310) 8(112) $ 83,842 Notincome $ 40,587 40,587 henimum Habulty for unfunded retirement beneAle, not of $7,000 of income taxes 9 9 LgJg Conpohensive income I Ceeh aSudende on common elock (21,386) t'mah N an nrminned me~* (4.82_8) Balance, December 31,1996 6,290,000 188.700 (310) (103) 98.217 Notincome - 8 31,472 31,472 Minimum tablity for unfunded regrement hensele, not of $9,000 of income tones-J 13 Compshensive income 3,2Ltg Cash dividende on common olex* (21,386) t'm=h N an oraterred e - (4 a2s) Balance, December 31,1997. 6,290,000 188,700 (310) (99) 103,677 Notincome 8 9,226 9.226 Transfer of minimum liebsity for unfunded merament beneme to FirstEnergy 30 90 Campshensiveinoame_ L,g;yg Ceeh dlwdende on common stock (21.388) Caah N on u__..J ae=*.. (4.826) n=a=nen % 31. iggs.. a 9en.000 1188.700 Sf310) S - S 88.891 STATEMENTS OF PREFERRED STOCK Not Subbet to Sut$oct to neandatorv nedemonon maandatorv nedemetion Number Per Number Per of Sheme h of Sheme Value (Do8ers he shousangde) n=aanon.lanuarv 1.1998-. Eno 049 $ An GoM 150.000 $ 15.000 % r % 31.1996-8100 049 50.905 180 000 15.000 R=n=nen r W 31.1997.. 500.049 Mo 008 150_000 15.000 % f% 31.1998.- 8100 649 1 50.905 150.000 $15_000 3 4 The scoompanying Notse to Financial Statemente are en integral part of these statemente. i 10

( PENNSYLVANIA POWER COMPANY STATEMENTS OF CASH FLOWS Forthe Years Ended December 31. 1998 1997 1996 (en nousands) l I CASH FLOWS FROM OPERATING ACTMTES: 5 40,567 j Notincome 5 0,226 5 31.472 Aquelments to recondio not income to not cash from operanno acevites. Provision for depredabon and amorttradon _ 59.264 64.628 57.114 Nudeer fuel and lease amortanton-- 5.418 7,172 8.893 Otheramortzamon,not (330) (1,187) (1,700) Delened income taxes.not (20.007) (6.631) 396 inveelmont tax credits, not. (2.289) (2.331) (2,138) Delerred fuel costs, not _ 3.220 Extraordinaryitem 51,730 Recorvables (20.000) 6.515 (1,193) Malerleis and suppEss (542) (704) 1,319 Accountspayable 3.293 (4,476) (2.472) Other. 3.148 (5.707) (12.087) Not cash provided from operaung edivilles _,,08,231 88.751 21Z22 1 CASH FLOWS FROM FINANCING ACTMTES. New Financing-Long term debt 1.563 9.942 Redempeans and Repeymore. l.ong.termdebt - 6.088 39,464 84.347 DMdend Payments. Common stocic 21.386 21,386 21,386 Preferred etodt - -- 1 526 1 926 ~.626 4 Not cash used for Snandng adMbes 31331 . X ias UL3GE CASH FLOWS FROM INVESTING ACTMTES. Property addisons 16.495 14,5*3 20,361 Loan to parer

• 32,500 15.or4 Loen payment from parent (10,500) 01her 1.874 4 431 J

Not cash used forinvasang adMuss . 50.889 33.944 _SZZ Not increase (decrosse) in cash and cash equivalents 6,825 (727) (19.507) Cash and cash equhelents at beginnin0 of year 880 1.387 _.21901 Cash and cash equivalents at and of year L.Idat 1.,, Jgg L_L3EI SUPPLEMENTAL CASH FLOWS INFORMATION: Cash paid during the year-1,. - Notes to - State,non s are -,.ri of - 1 1 11 i

PENNSYLVANIA POWER COMPANY STATEMENT OF TAXES For the Years Ended M 31. 1998 1997 1996 (in nousands) i GENERALTAXES: Stste yons receipts _ $ 10.830 $ 11.267 5 12.305 Realand personal property 6,893 6.060 6.178 State capitalstos 2.774 2.586 2.820 Somal securtly and unemployment 1.894 2.224 2.064 Other 149 262 648 Totei 9eneral taxes. LZL540 )ZLE9 f 24.,91E PROVISION FOR INCOME TAXES: Cunenty payabio. Federal $ 25.938 $ 27.580 $ 27,282 State 7.654 8.061 _,,_7.,301 33.592 ng21 _.2tJ.12 Delened, not. Federsi. (15.454) (5.096) 272 . State (4.553) . (1.535) 124 G0.007) ,, {g,311) _,_.190 invesenent tax credit amortizaton. G.289) (2.331) (2.138) g }_29.929 g Total provision for income taxes INCOGIE STATERIENT CLASSIFICATION OF PftOVISION FORINCORAE TAXES: Operegng expenses $ 31.794 5 25.555 8 29.907 Omerincome 710 1.104 3.514 Extaansneryitem (21.206) L1'JE M IJiME Toisiprovision forincome taxes RECONCILIATION OF FEDERAL INCORAE TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR BfCORAE TAXES: Book income before provision for income, taxes 11 74 Federsi income tax expense at statuemy rate Increases (reduchons)in taxes reeutung from: State income taxes. not of federal income tax beneet 2.016 4.242 5.203 Amortizaton of inveetnant tax credits (2.289) (2.331) (2.138) Amorttratlon of tax reguistory assets 4,745 4,554 4,423 Omer, not (359) (152) 30 Totalprovision forincome taxes )_1L230 f 20.gl2 1 ]L4.21 ACCURAULATED DEFERRED INCORAE TAXES AT DECERABER 31: Compeduve transinon charge $135,730 Property basis dillerances 89,867 172.004 178.886 Allowance for equity funds used dunng construction _., 7.219 29,875 33.677 7.163 8.031 Defened nudeer expense Customer receivables for future income taxes _ 9.890 37.954 40.901 Unamortizedinvesenent tax credits (3,193) (10.681) (11,635) Omer (6.886) 3.547 _,.,,2j10 Not defened income tax Babky M ).2Egil [gh7J The accompanyine Notes to Finandel Statements are an integral part of these statements. I \\ 12

NOTES TO FINANCIAL STATEMENTS 1. SUMhAARY OF SIGleFICANT ACCOUNTING POUCES: The Company, a wholly owned subsidiary of Ohio Edison Company (Edison), follows the accounting pohces and practices prescribed by the Perwwylvania Public Utility Commission (PPUC) and the Federal Energy Regulatory Commission (FERC). The properation of financial statements in conformity with generally accepted j accounting principles requires management to make periodic estimates and assumptions that affect the toported amounts of assets, habinties, revenues and expenses Certain prior year amounts have been rocissilled to mnform with the current year p, i,,. REVENUES-The Company's principal business is providing electric sonnce to customers in westem Pennsylvania. The Company's retsu customers are metered on a cycle basis. Revenue is recognized for unbmed electric sennce through the end of the year. 7teceivables from customers include sales to residendal, mmmercial and industrial customers located in the Company's service arus and sales to whotosele customers. There was no motorial concentration of receivables at December 31,1996 or 1997, with respect to kny particular segment of the Company's customers. REGUL.ATORY PLAN. In June 1996, the PPUC authortrod a rate restructuring plan for the Company, which superseded the regulatory plan which had been in place for the Company since 1996, and essentially resuHed in the deregulation of the Company's generation business as of June 30,1996. The Company was required to remove from its balance sheet all reguistory assets and llebHitica reisted to its generation business and assess aR other assets for impermont. The Securttles and Exchange Commission (SEC) issued interpretive guidance regarding asset impairment measurement which concluded that any supplemental regulated cash flows such as a compellove transition charge (CTC) should be aww from the cash flows of assels in a portion of the business not subject to reguistory accounting practices if those assets are impaired, a regulatory asset should be aatahE=hed if the costs are recoverable through regulatory cash flows. Consistent wth the SEC guidance, the Company reduced its nuclear genersung unitinvestments by approximainly $305 mHuon, of which approximately $227 malon was recognized as a regulatory asset to be recovered through a CTC over a seven-year transition period; the remaining not amount of $78 milbon was written off. The charge of $51.7 minon ($30.5 mulion after income taxes) for discontinuing the appucaton of Statement of Financial Accounung Standards (SFAS) No. 71," Accounting for the Effects of Certain Types of Reguiston* (SFAS 71), to the Company's generation business was recorded as an extraordinary item on the Statement of income. The Company's not assets included in uWity plant relating to the operations for which the j appbcation of SFAS 71 was discontinued were $146 mIHon as of Dommber 31,1996. AN of the Company's regulatory assets are being recovered under provisions of the regulatory plan. In j addibon, the PPUC had authorized the Company to accelerate at least $358 melon, more than the amounts that would have been recognized if the regulatory pian was not in eneet. These addWonal amounts are being recovered through current rates. As of December 31,1996, the Company's cumuleeve addWonal capital recovery and reguistory asset amortization amounted to $184 maion (including the impairment discussed above). l in December 1996, Pennsylvania enacted "The Electricity Generation Customer Choice and Compedtion Act," which permitted customers, including the Company's customers, to choose their electric generation supplier, while transmission and distribuBon services wW cononus to to suppued by their cunent providers. Customer choice we be phased in over two years wnh 66%.of each customer class able to choose anemethe suppners of generauon on January 2,1999, and aR remaining customers having choice as of January 2,2000. Under the rate restructuring plan, the Company condnues to douver power to homes and businesses through its transmission and distribution system, which remains reguleled by the PPUC. The Company's relas have been restructured to establish esperate charges for transmission and distribution; generation, which is subject to ww-E-,, and stranded cost recovery. In the event customers obtain power from an ahomedve source, the generanon portion of the Company's rates will be excluded from their bil and the customers wW receive a generation charge from the altemative suppEer, The stranded cost recovery portion of rates provides for recovery of certain amounts not otherwise considered recoverable in a ww-- ""; generation market, including reguistory assets. The Company is entitled to recover - $234 mBlon of stranded costs through a CTC that starts in 1999 and ends in 2005. 13

UTluTY PLANT AND DEPRECIATION- - Uluity plant renects the original cost of conutmetion (except for nucleet generating units which were adjusted to fair value as daenmaad above), including payrou and related costs such as taxes, employee benents, administrative and general costs, and interest costs. ' The Company provides for depreciodon on a straight-line basis at various rates over the estimated Hves of property included in plant in service. The annual compoelle rate for electric plant was approximately 3.0% in 1998 1 and 2.7% in 1997 and 1996. In addition to the straight-Ene depreciation recognized in 1998,19g7 and 1996, the Company also recognized addluonal capital recovery of $15 migion, $27 mIuon and $20 mHlion, respecevely, as additional depreciation expense in accordance with me regulatory plan. Annual depreciation expones includes approximately $3.1 muMon for future C+-.... :{as costs aft e=Na to the Company's ownership interest in two nucieer generaung units. The Company's share of the future 8 obilgation to decommiselon these units is py..a _ ; $88 mlBion in cunent doliers and (using a 4.0% aneatalian reto) pp.1c ,- $205 mIllon in future doliers. The estimated ob8gaton and the amealaelan rate were developed based on site specille studies. Payments for c'--:-: =,' "#- 4 are expected to begin in 2016, when actual C+ s._ ' ' -a., work begins. The Company has recovered approximately $12 melon for C+ e... J -- As through its electric rates from customers through December 31,1998 if the actuel costs of f+x-c.. '-{as the units exceed the funds accumuisted from irweeling amounts recovered from customers, the Company expects that addluonal amount to be recoverable from its customers. The Company has approximately $13.7 melon invested in extemel C+- ' =a., trust funds as of December 31,1998. Esmings on these funds are reinvested with a conceponding increses to the C+:9...' '=#., Babuity.The Company has also recognized an estimated Babuity of approximately $3.0 migion at December 31,1996 reisted to decontamination and f+x{c i' '=ks of nuclear enrichment fac81 ties operated by the United States Department of Energy (DOE), as required by the Energy Policy Act of 1992. The Financial Accounting Standards Board (FASB) issued a proposed accounting standard for nuclear C+:s-- i' ' =4.v costs in 1996. If the standard is adopted as proposed: (1) annual provisions for C+x-c.c_'_ ':-a., could incrosse; (2) the not present value of estimated decommissioning costs could be recorded as a liabiuty; and (3) income from the extemal C+:-;...! ^{#,, trusts could be reported as investment income. The FASB ="haaquantly expanded the scope of the proposed standard to include other closure and removal obligations related to long-lived assets. A revised proposal may be issued by the FASB in 199g. cot 0000N OWNERSHIP OF GENERATING FACluTIES-The Company and other Central Area Power Coordination Group (CAPCO) companies own, as tenants in common, various power generating facetes. Ese of the compones is obugeted to pay a share of the costs associated with any joindy owned faciuty in the same proportion as its interest. The Company's portion of operating expenses associated wan joiney owned facuines is included in the coneeponding operabne expenses on the Statements of income. The amounts renected on the Balance Sheet under utility plant at December 31,1998, include the sonowing-umr Aonumusened coneousson company's eenerating Pientin Provision for work in ownership r-r n __ __ inamenst Qrs mngene) W. H. Sommis #7 8 57.8 821.8 80.3 20.00 % Bruce Manelloid

1. 1, #2 and #3 98.9 47J 0.6 5.76 %

SeewerVesey #1 18.6 1.2 2.2 17.50 % Perrv e1 1.5 0.8 1.1 5.24 % Tal=L 1178.8 170.9 14_2 l On October 15,1998 FirstEnergy Corp. (F;i.OWvy) the parent company of Edison, announced that it signed an agreement in principle with Duquesne Light Company (Duquesne) that would result in the transfer of 1,436 megawatts owned by Duquesne at eight CAPCO generating units in exchange for 1,328 megawatts at three non. CAPCO power plants owned by the Company, Edison and The Cleveland Electric luuminating Company, an affiliate. As part of this exchange, the Company wig transfer its 339-megawatt New Castle Plant and its 4-megawatt interest in the Niles Plant to Duquesne. A definitive agreement on the exchange of assets, which will be structured as a tax-free transachon to the extent possible, wiH provide FirstEnergy's utNity operating companies with exclusive ownership :nd operating control of all CAPCO generating units. Duquesne wNI fund decommissioning costs equal to its percentage 14

interest in the three nuclear generating units to be transiemed. The asset transfer is expected to take twelve to eighteen months to close. NUCLEAR PUEL-i OES Fuel, incorporated (OES Fuel), a wholly owned subsidiary of Edison, is the sole lessor for the Company's nuclear fuel requirements. 1 Minimum lease payments during the next five years are estimated to be as follows: 1999 86.3 2000 - 3.6 2001 2.2 2002 1.2 orm - om The Company amortires the cost of nucieer fuel based on the rate of consumption. The Company's electric rates include amounts for the future disposal of spent nucieer fuel bened upon the formula used to compute payments to the DOE. INCOldE TAXES-Details of the total provision for income taxes are shown on the Statements of Taxes. Deferred income taxes result from timing daerences in the recognmon of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when ututted, are being amortized over the recovery period of the related property. The liability method is used to account for defened income taxes. Deferred income tax liabiglios reisted to tax and accounung basis daerences are recognized at the statutory income tax rates in effect when the liebthes are I avr=*=4 to be paid. Since Edloon become a who8y owned subsidiary of FWtEnergy on November 8,19g7, the Company is included in FirstEnergy's oorm federal income tax retum. The corimaM=t=4 tax llability is - on a stand-alone company beeis, wnh the Company recognizing any tax losses or credits it contributed to the conem retum. RETIRERIENT BENEFITS-The Company's trusteed, noncontributory denned beneAt pension plan covers almost au full-time

• ,4jm upon retirement, employees receive a monthly pension bened on length of savice and compensanon. In 19g6, the Company's, Edison's and Centerior Energy Corporation pension piens were merged into the O.0,.iiii pension piens. The Corrvunny uses the prosected unit credit method for funding purposes and was not required to make pension contributions during the three years ended December 31,1998. The assets of the pension plans consist primeruy of common stocks, United States govemment bonds and corporate bonds.

The company provides a miromum amount of noncontributory We insurance to roered employees in addmon to opuonal contributory insurance. HeeNh core benems, which include cortem employee heiam and copeyments, are also available to retired employees, meir dependents and, under certain circumstances, their l aurvivors. The Company pays insurance premiums to cover a portion of these beneAls in exceses of set umits; au amounts up to the limits are paid by the Company. The Company recognizes the expected cost of providing other postreprement benems to amployees and their bensAciertes and covwed dependents from the sme employees are hired una they become ensible to receive those benents. 1 h 15

The fonowing sets forth the funded status of the FiretEnergy plans in 1996 and the Compan/s plans in j 1997 and amounts recognized on the Belence Sheets as of December 31 (which includes the Cornpany's share of 2 1he FirstEnergy 1996 plans' not propsid pension cost and accrued other poetrobrement benents costs of $0.0 million and $26.4 mRhon, respecovely): 2 Pastratirement Benents 1 1 ' 1ees ine? I Change in henset atmoseon Bennet otegemon as of January 1* 51,327.5 8 122.8 5 534.1 8 43.7 Service cost 25.0 2.7 7.5 0.9 Inlemet onet - 92.5 8.9 37.6 3.2 Plan amenaments 44.3 0.5 40.1 0.3 ' 5.8 Early stemment program suponse _ Actuartellose 101.6 10.1 10.7 1.5 - ~* reo.8) (8.4) (28.7) f2.31 aaneet Ama="- as of h 31. 1 8100.1 142.4 801.3 47.3 Change in plan assets: Fair value of plan assets as of January 1* 1.542.5 150.5 2.8 0.2 Actuel meum on plan essets. 231J - 30.0 0.7 0.1 0.4 Company conlitbugon reo al fa.41 Fair -'" or nian as or r - ^- -31 1 nat n 172.1 3.9 0.3 Funded elslue of plan

• 182.9 29.7 (5g7.4)

(47.0) Unrecognised actuarial lose (goin) (110.8) (25.7) 30.6 4.3 63.0 4.2 27.4 (4.0) Unrecognised prior servios cost ^' (18.01 ts 31 190 1 21.4 i not ^-- '^' ^ ' - - " daa' mand) ^ t aa=*. S 117.1 S 2.9 $(41011 S ISA in Assumptone used as of December 31: Discount rate 7.00 % 7.25 % 7.00 % 7.25 % Expected long. term reksm on plan assets -._. 10.25 % 10.00 % 10.25% 10.00 % Rate of componeston increses-4.00 % 4.00 % 4.00% 4.00 %

• 1908 beginning betences reGeot 1998 merger of me Company's. Edloon's and Centerior piene into FireEnergy piene.

Not pension and ot)er poebetirement benent costs for the three years ended December 31,1996 (including the Company's share of T;..O, iw piens' 1996 pension benents costs and other postratirement beneAt mots of $(6.1) muBon and $5.4 minion,.--;+ "d )were computed as follows: i Other Pennlan Ransmo Pastradrement Banske seen iner Sees geen see7 ines (inadulone) Servioscost $ 25.0 $ 2.7 83.2 87.5 $0.9 81.1 interest cost 92.5 8.9 9.5 37.6 3.2 3.2 Expeoled renam on plan assets (152.7) (14.7) (12J) (0.3) Amortzemon of traneulon otegemon (seest) (8.0) ' (1.0) (1.c) 9.2 1.2 1.7 (0J) Amoreseson of prior servios cost 2.3 0.4 0.4 (0.8) Recogntuod not actuertelgain-(2.6) (0.4) 0.3 5.8 Voluntary early recrement progrr.n empense 3.s mien _.._.:iams #* f4.3) C._ aa e.. s (43.s) s 1.7 s (4.si an9 Ss.s s e.2 o in accordance wNh SFAS66

• Employers' Accounung for Setuements and CurtaRments of Denned Benent Pension Plans and for Termination Benents,' the 1996 not pension costs and pestratirement benent costs shown above included curtailment eNects (si0nl6 cont chanDes in projected plan assumptions) relaun0 to the pension and postratirement benent piens.The employee terminations renected in the Company's 1996 restructuring ac6vities represented a plan curtsument that signincently reduced the expected future employee service years and the reisted accruel of denned pension and postreerement benents. In the pension plan, the reduction in the beneRt obligation increased the not pension asset and was shown as a plan curtailment gain. In the postratirement benent plan, the 16

~.

unrecognized prior service cost===adated with service years no longer =Tae*=d to be rendered as a result of the terminations, was shown as a plan curtsument loss. The FiretEnergy piens' health core trend rate assumption is 5.5% in the first year graduaNy 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 heenh 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 mimon and the postratirement benent obligation by $68.1 muuon. A decrosse in the same assumption by one percentage point would decrease the total service and I interest cost components by $3.2 m8 Hon and he.= ^.1 ,w,; benent obligation by $55.2 minion. TRANSACTIONS WITH AFFILIATED cot 0PANIES-

Transacdons with afRiisted companies are included on the Statements of income as fotows.

~ l l 1een 1ee7 1ess theasnEens) l Operaung sevenues: Elearic sales S 9.8 86.1 83.6 Bruce Menensid Plant admmiserauwe end general charges to afRilstes 6.3 0.9 Deunt ^ ^' 0.7 0.4 0.4 81s.e 1 74 S 4.o Fuel and purtmaned power.' Purchased power $20.9 $12.7 813.2 M " -- fuel' - " frorn ofB Fuel-5.9 7.5 9.6 RSa a ssa 9 too a Omerop ., a Rental of trenomission Enos $ 1.3 $ 1.0 51.0 Date processing servions 2.8 2.9 2.5 Olhar ; 54 4.4 3.9 10.5 1 e.3 S 7.4 SUPPLERIENTAL CASH FLOWS INFORIAATION. AR temporary cash investments purchased wNh an intial maturity of three months or less are reported I as cash equivalents on the seience sheets. The Company reGects temporary cash investments at cost, which l approximates their market value. Noncash Anencing and investng acevtues included capital lesse transachons amounhng to $0.8 mHNon, $8.5 muuon and $4.1 mINon for the yones 1998,19g7 and 1996, respecovely. AN bonowings with initial maturtiles of less then one year are denned as financial instruments under generally accepted accounting pnnciples and are reported on the Bolence Sheets at cost, which approximates their fair market value. The fonowing sets forth the approximate fair value and related canying amounts of an other long-term debt, profened stock subject to mandatory redempeon and investments other than cash and cash =~C,;. as of December 31: eaan tee 7 Y far m-en. Lane. term debt 3278 8204 8277 8291 i Prolened elock 15 16 15 15 5_- .__ C-mien emah and emah

• 17 21 14 15 The fair values of long-term debt and profoned stock reflect the preservt value of the conh outRats reisung to those securnies bened on the cunent coR price, the yield to maturity or the yield to ceN, as doomed appropriate at the end of each respec0ve year. The yields assunm; were bened on securNies with simRar characteristics offered by a corporation wNh credit ratings simRer to the Company's ratings.

j The fair value of investments other then cash and cash equhrolords represent cost (which approximates fair value) or the present value of the cash inflows beood on the yield to maturity. The yields assumed were based on financialinstruments wNh similar characteristics and terms, investments other than cash and cash equivalents consist primerny of c+x,,,, -t-,;,,e trust investments. Unroeltzed gains and losses applicable to the decomreissioning trust have been recognized in the trust investment wNh a cormsponding change to the decommissioning RobiHty. The Company has no securtnes held for tredirig purposes 17

REGULATORY ASSETS-The Company recognizes, as regulatory assets, costs which the FERC and PPUC have authorized for recovery _from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets are being recovered from customers under the Company's regulatory plan. Based on the regulatory plan, at this time, the Company believes it will continue to be able to bill and collect cost-based rates relating to the Company's nongeneration operations; accordingly, it is appropriate that the Company continues the application of SFAS 71 relating to those operations. The Company recognized additional cost recovery of g $24 million, $11 million and $8 million in 1998,1997 and 1996, respectively, as additional regulatory asset amortization in accordance with its regulatory plan. Regulatory assets on the Balance Sheets are comprised of the following-1998 1997 (in mRRons) Cv..-; N transibon charge $331.0 Customar receivatnae for future income taxes 23.6 92.6 twdear unit exponess 17.5 36.7 Perry Unit 2 termination Loss on reacquired debt 8.2 9.2 DOE C,. 1.;..g and decontaminason coste 0.3 3.6 Employee postregrement beneet coste _. 6.2 Other._ 1.7 3.4 Total.. 1371.0 $163 0 2. LEASES The Company leases certain transmission facilities, office space and other property and equipment under cancelable and nonconcelable leases. Consistent with the regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Statements of income. Such costs for the three years ended December 31,1998, are summarized as follows: 19e8 1997 1998 (in mRNons) Operating leases interestelement $ 0.5 50.5 $0.5 Other., 1.3 1.5 1.3 Capitalleases interest element _ 0.6 0.7 0.7 other. 0.7 0.8 0.9 Total rental navmants.. S 3.1 $ 3.5 13.4 The future minimum lease payments as of December 31,1998, are: I Capital Operating I. manas tmanas (in mRRons) 1999 $ 1.3 $ 0.2 I 2000 _ 1.2 0.2 2001-1.0 0.2 2002 1.0 0.2 2003. 0.9 0.2 Yearn thermaner 9.6 3.0 Total menwnum tosee paymente 15.0 j,Lg bewy ca=*e.. 3.1 Not trunimum lease paymente 11.9 e interest nortion 7.3 Present value of not menemum lease paymente.... 4.6 J Lasa current nortion 0.5 Noncurrent oorson $ 4.1 1B j

7..-. 3. CAPITAUZATION: (A) RETAINED EARNINGS- \\ { l Under the Company's Charter, the Company's retained semings unrestricted for payment of cash 0 dividends on the Company's common stock were $75.3 mRiion at December 31,1998. (B) COGAPREHENSIVEINCORIE-in 1998, the Company adopted SFAS 130, " Reporting Comprehensive income,' and applied the standard to aN periods presented in the Stelements of Common Stockholder's Equity. Comprehensive income includes not income as reported on the Statements of income and aN other changes in common stockholder's equity except dividends to stockholders (C) PREFERRED STOCK. The Company's 7.75% series of prefened stock has restrictions which prevent early redemption prior to July 2003. AH other prelemed stock may be redeemed by the Company in whole, or in part, with 30-60 days' notice. (D) PREFERRED STOCK SUBJECT TO IAANDATORY REDERAPTION. The Company's 7.825% series has an annual sinidnD und requirement for 7,500 shares beginning on f October 1,2002. I (E) LONG-TERRIDEBT-The first mortDaBe indenture and he supplements, which secure al of the Company's first mortDage bonds, serve as a direct first mortgage lien on substantieuy su property and french %s, other then specMosNy

• P property, owned by the Company. Lone-term debt maturtiles (excluding capitel looses) during the next five years are 80.5 migion in 1999, $24.0 melon in 2000, $1.0 melon in 2001, $1.0 maion in 2002 and $41.0 millon in 2003.

The Company's obligadons to repoy certain pollution control revenue bonds are secured by series of first mortDage bonds and, in some comes, by subordinale uene on the related poHunon control faciglies. 4. SHORT TERRA BORROWINGS: The Company has a credit agreement with Edison whereby either company can bormw funds imm the other by issuing unsecured notes at the provanno prime or simmer interest rate. Under the wrms of this agreement. the maximum bonowing is umiled only by the evensbety of funds; however, the Company's bcnowing under this agreement is cuneney ilmned by the PPUC to a heal of $50 mIBon. ENher company con terminate the aprooment wNh six months'noece.

s. COtsteTRIENTS, GUARANTEES AND ColmNGENCES:

CAPITAL EXPENDITURES-The Company's cunent forecent renects expendhures of approximately $167 mInen for property addmons and improvements from 1999 through 2003, of which approximately $28 melon is apw. to 1999. Investments for addmonal nuclear fuel during the 1999-2003 period are asumeted to be appro omstely $28 miBon, of which approximately $3 mimon app 5es to 1999. During the same periods, the Company's nucieer fuel investments I are expected e be reduced by approximately $29 melon and $6 melon, respecevely, as the nucieer fuel is consumed. o NUCLEAR INSURANCE. - The Price-Anderson Act Ilmits the pubic liebaty relative to a single incident at a nucieer power plant to $9.7 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on its present ownership interests in Beaver Valley Unit 1 and the Pony Plant, the Company's maximum potential assessment under the industry retrospective rating plan (assuming the other co owners contribute their proportionate shares of any assessments under the retrospective rating plan) would be $20 muhon per incident but not more than $2.3 milhon in any one year for each incident. 19

m The Company is also insured as to its interest in Beaver Valley Unit 1 and the Pony Plant under polices issued to the operating company for each plant. Under these policies, up to $2.75 bIlion is provided for property damage and decontamination and C+,.'--',;,4 costs. The Company has sino obtaked approximately $69.5 mikon of insurance coverage for replacement power costs for its interests in Pony and Beaver Vaney Unit 1. Under these policies, the Company can be assessed a maximum of approximately $2.8 milion for incidents at any covered nuclear facinty occurring during a poucy year which are in meman of accumulated funds available to the insurerfor paying losses I The Company intends to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontamination, d+:+.w'r'=,Vs, repair and replacement costs and other such costs arising from a nuclear incident at any of the Company's plants exceed the I policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Company's insurance policies, or to the extent such insurance becomes unavailable in the future, the Company would remain at risk for such costs. GUARANTEE-The Company, together with the other CAPCO comparues, has severaHy guaranteed certain debt and lease obhostions in connection with a coal supply contract for the Bruce Mans 5 eld Plant. As of December 31,1998, the Company's share of the guarantee (which wv4., - : fair market value) was $3.6 maion. The price under the cool supply contract, whid includes certain minimum payments, has been determined to be sufficient to satisfy the debt and lease abilgations. The Company's total payments under the coal supply contract were $15.0 miton, $13.3 milion and $11,1 mimon during 1998,1997, and 1996,.- +M;. The Company's minimum payment for 1999is m v4..-- - ; $4 mililon. The contract expwes December 31,1999. ENVIRONMENTAL MATTERS. Various federal, state and local authorities regulate the Company with regard to air and water quality and other environmental menors. The Company has asumeted addWonal capital expenditures for environmental compliance of.m,,v2. _ _ _ ; $47 minion, which is included in the construction forecast provided under

• Capital Expenditures
• for 1999 through 2003.

The Company is in compliance with the cummt sulfur dioxide (SO2) and nitrogen oxides (NOn) reduction requirements under the Clean Air Act Amendments of 1990. SO: reductions in 1999 win be achieved by bummg lower-suNur fuel, generating more electricity from lower-emitung plants, and/or purchasing emission snowances-j Plans for complying with reductions requred for the year 2000 and thersoner have not been Anauzod. In Septembw l 1998, the Environmental Protection A0ency (EPA) finalized reguissons requinng addmonal NO reductions from the Company's Pennsylvenia faciuties by May 2003. The EPA's NO Transport Rule imposes uniform rah *ns of NO emesions across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NO omissions are contributing signincantly to ozone poRunon in the eastem United States By September 1999, each of the twenty-two states are required to submit revised State implementauon Plans (SIP) which comply with individual state NO budgets established by the EPA. These state NO budgets contemplate an 85% reduchon in utsty plant NO enussions from 1990 emissions. A proposed Federal implementation Plan acmmpermed the NO Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In another separate but related action, eight states flied potWons with the EPA under Section 126 of the Clean Air Act seeking reduceons of NO emissions which are ausged to contribute to azone poNudon in the eight peduoning states. The EPA suggests that the Section 126 petWons wlN be ad=P*1y addressed by the NO Transport Program, but a September 1998 proposed rulemeldng established an allemative program which would require neerty identical 85% NO reducsons at the Company's Ohio and Pennsylvania plants by May 2003 in the event implementation of the NO Transport Rule is delayed. FirstEnergy continues to evaluate its compEence plans and other compuance options and cuneney esumetes its addWonal capital expenditures for NOx reducsons may reach $500 malon. The Company is required to meet fedwally appnmd SO: regulooons. Violations of such regulatons can result in shutdown of the generstmg unit involved and/or civu or criminal penalties of up to $25,000 for each day the unit is in violation. The EPA has en intenm enforcement policy for SO: reguistions in Ohio that aRows for e compuance based on a 30< lay averaging period. The Company cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. ~ In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. The cost of compliance with these regulations may be substantial and depends on the manner in which they are implemented by the states in which the Company operates affected facNities. 20

Legislative, admmistrative and judicial schons win continue to change the way that the Company must operate in order to comply with environrnental laws and regulations. With respect to any such changes and to the environmental rnatters described above, the Company expects that any resulting additional capital costs which may be required, as wel as any required increase in operating costs, would ultimately be reRected in its generation supply prices. a 6.

SUMMARY

OF QUARTERLY FINANCIAL DATA (UNAUDITED): f The following summertzes certain operating results by quarter for 1998 and 1997. Ihrch 31, June 30, September 30, December 31, Thms tenneha Ended 1988 1933 1993 1933 (he mRNons) Operating Revenues $78.5 5 80.3 $ 87.9 577.0 % praanama and T==aa - 85.9 70.3 71.5 58.0 Operaen0 income -. 12.6 10.0 16.4 19.0 4 Other income 0.7 0.6 0.6 0.6 Not intamat Charnas 5.4 5.2 5.2 5.1 income Before Extraordinary leem 7.9 5.4 11.8 14.5 Extraordinary item (Not of income Taxes) (Note 1) (30.5) i Not inenma (1 a==1.. S 7.9 1(25.11 $ ' 1.8 514.5 Emminos fi ama) on Common Wa'*.. 55.5 5(26.2) 5' O.7 513.3 tierch 31, June 30, September 30, December 31, Thran taansha Ended 1937 1997 1987 1987 gin mnNons) Operating Revenues $79.0 $79.2 $ 85.2 $79.9 rs.,anino E=aanama and T=- 65.4 88.2 89.8 71.4 Operamngincome 13.6 13.0 15.6 8.5 Otherincome 0.7 0.3 0.8 0.9 Not internet Charnas 5.7 5.5 5.5 5.2 Not income S 8.6 57.8 S10.9 5 4T Emmanos on Common Stadt. I 7.4 56.5 59.7 5 3/ 21

p ] Report of independent Public Accountants To the Stockholders and Board of Directors of Pennsylvania Power Company: We have audited the accompanying balance sheets and statements of capitalization of Pennsylvania Power Company (a Pennsylvania corporation and wholly owned subsidiary of Ohio Edison Company) as of December 31, 1998 and 1997, and the related statements of income, common stockholder's equity, preferred stock, cash flows and l taxes for each of the three years in the period ended December 31,1998. These financial statements are the { responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material { misstatement. An audit includes examinino, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes mana==ing the accounting principles used and significant estimates made l by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. 1 l in our opinion, the financial statements referred to above present fairty, in all material respects, the financial position - of Pennsylvania Power Company as of December 31,1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31,1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP l Cleveland, Ohio February 12,1999 l l l i l l l I 1 I j I I f r

P do FirstEnergy Con. - 76 South Main Street Akron, Ohio 44808 (800)786 8402 1998 AnnualReport i I 4 l 1 t-I 0 4}}