ML20248K599

Firstenergy 1997 Annual Rept & Financial Repts

ML20248K599
Person / Time
Site:	Beaver Valley
Issue date:	12/31/1997
From:	Burg H, Holland W CENTERIOR ENERGY
To:
Shared Package
ML20248K502	List: L-98-113, Forwards Annual Financial Repts,Including Certified Financial Statements of Dqe,Firstenergy Corp,Oh Co,Il Co & Toledo Edison Co ML20248K542 ML20248K599
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NUDOCS 9806100184
Download: ML20248K599 (142)

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9 g ,9 7 A N N U A L R E P O R T FrstEne Growing markets, opportunities and shareholder value l

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Q Q Operating Performance (Combined Ohio Edison and Centerior Energy) firstEnergy Corp. 55,810 55,276 Retail Kilowatt. Hour Sales (Millions) 1 FirstEnergy Corp., a diversified eneigy Customers Served 2,159,636 2,141,829 j services holding company headquartered Numberof Employees 10,020 10,477 in Akron, Ohio, was formed by the Customers Ibr Employee 216 204 1997 merger of Ohio Edison Company and Center;or Ercrgy Corpi ration.

Combining the resources of four utility Einancial Perfonnance*

operating companies- Ohio Edison, Eamings IVr Conunon Share and its subsidiary,Ibnnsylvania Ibwer, Before Nonmcurring Charges $2.16 $2.10 j After Nonmcurring Charges $1.94 $2.10 The Illuminating Company and Toledo Edison - FirstEn :rgy comprises the Dividends Itr Common Share $1.50 $1.50 l nation's 12th largest investor-owned Ik>ok Value Ibr Common Share $18.71 $17.35 electric system. The company serves D vidend Payout Ratio 2.2 million customers within Before Nonrecurring Charges 69 % 71 %

13,200 squan miles of northern and After Nonrecurring Charges 77 % 71 %

central Ohio and western Ibnnsylvania, Market Price Ibr Common Share $29.00 $22.75 1 generates approximately $5 billion in annmi revenues and owns more than

• Financial performance includes n sults for The Illuminating Company and Tokdo idison from the Nosember 8,1997, acquisition date,

$18 bilh.on m assets, m.cludm.g through December 31,1997.

ownen, hip in 18 power plants.

FirstEnergy Services Corp. is an umbrella organization offering a wide range of energy-related products and services to o ]i companies nationally. The subsidiary g g.

companies include Roth Bros., Inc.,

and RPC Mechanical,Inc. Based in '

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Youngstown and Cincinnati, Ohio, respectively, they are among the nation's g j largest providers of engineered heating, 8 l ventilation and air-conditioning equipment, and energy management and control systems.

i 94 95 96 97 94 95 96 97 EARNINGS PER SHARE BEFORE RETAIL KILOWATT-HOUR SALES NONRECURRING CHARGES (DOLLARS) (MILUONS) 1 I

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assets by $427 million since 1995. We'll more than double that figum - to $1 billion - over the next three years.

Q@Q To make that possible, we need to continue taking advantage of opportunities to lower to s holders memamatewe-plesmesaegs

. 1997 was a year of dramatic growth. And, we achieved last year:

i as we enter our first full year of operations . $70 million in operating costs at our as FirstEnergy, we have even better prospects nuclear plants for growing markets, opportunities and

. $55 million from refinancing and shareholder value.

redeeming securities Earnings on common stock, before nonrecur-

. $39 million through improved ring charges, grew to $2.16 per share in 1997 perfonnance of our fossil-fuel plants from $2.10 in 1996. This includes the effects of charges for accelerated depwciation and amor- While this is a stmng beginning, we must tization of nudear and regulatory assets relat- do more, and we will. We intend to capture ed to the Ohio Edison and Pennsylvania nearly $150 million in meger-related savings Ibwer rate plans and the impact of mild in 1998, and significantly increase annual weather on electricity use for heating and air savings over the next two years. To keep conditioning. After adjusting earnings to focused on achieving this key goal, we've include one-time charges for merger- tied our results to incenth e compensation related staffing reductions, whi3 will for executives.

produce annual savings of approximately GrowingNew Markets

$90 million, eamings were $1.94 per share.

Growing new markets is a key strategy Increasing Shareholder Falue for improving our financial performance.

In addition to our earnings results, the We are doing that by continuing to excel at increase in market value of our common our core business, and by expanding our stockis a good example of benefits portfolio of energy-related services for realized from the creation of FirstEnergy. customers. We took a big step in that Driven by Wall Street's positive msponse, direction with the purchase of Roth Bros.,

our stock price has grown 40 percent since Inc., and RPC Mechanical,Inc. These the merger was announced. Last year alone, companies, with combined 1997 revenues the increase approached 30 perent, which, of approximately $95 million, are among the combined with the reinvestment of annual nation's largest providers of engineered dividends, produced a total shareholder heating, ventilation and air-conditioning retum of nearly 36 percent - topping both equipment, and enemy management and Standard & lbor's 500 Index, and the Edison contml systems. We also entered the rapidly Electric Institute Utility Index. growing telecommunications market Beyond the growth made possible by our through our partnership with AT&T Wireless, Cleveland, which offers such merger - nearly doubling our customer base, revenues and cash flow - we combined the digital cellular services as e-mail, voice mail and Intemet access.

knowledge of four utility operating companies and their collecth'e experience in our core In addition to our traditional whoksale business This is enabling us to achieve power business, last year we entenxi the synegies that am increasing productivity, unregulated wholesale power market with reducing costs and growing revenues. the creation of FirstEnemy Trading & Ibwer Marketing, a licensed marketer that already To improve our competitive position, we've has conducted $80 million in transactions.

accelerated depreciation and amortization of 2'

I And, we are retaining and expanding our the continuing development of wholesale customer base through targeted incentive power market competition and access U pricing contracts and other economic utility transmission systems To address this development assistance. Major successes in aspect of deregulation, we are exploring a 1997 included our work with Chrysler and number of options, induding the treation of local officials to keep that company's Jeep an independent, regional transmission entity manufacturing facility, along with 5,000 jobs, that could ultimately manage and own the in Toledo, Ohio, and our partnering with transmission systems of 11 investor-owned British Ibtroleum to expand its refinery utility companies in our region. This entity in Oregon, Ohia would be designed to provide nondisennuna-Improving Our Prospects tory access while eliminating duplication of

, chieving related cost savings, and These and other efforts am improving maintammg the transmission system's lonb-our prospects for future success, as is our term reliability and security' ongoing work to n'present shareholder interests regarding deregulation issues. We have developed solid strategies for The retail wheeling issue is a case in point. dealing with these and other issues facing Retail wheeling legislation, if adopted in ur Company and industry. With your Ohio, would allow customen to puchase continued support, and the dedication and electricity from any supplier while using innovation of our employees, we will compete local utility lines to delive *he power. arid win in the energy marketplace.

Recently, the co chairs of a joint committee of theOhioGeneral Assemblyissued preliminary findings on demgula-tion. One of the key elements of these findings dealt with transition .

costs, which are associated with #

moving from a regulated industry ,

to a competitive one. -

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While their recommendations -

recognized the need for utilities -

to recover transition costs, much still needs to be done. We are work-ing to ensure that investor-owned j electric companies have a reason- Wh M M'* "

able opportunity to recover costs

, '[r C n n "n mandated by the government, Chief Executive Officer and that all energy suppliers will be treated equally by any law that hd ,

may be enacted. k M

H. hter Burg President and As theissueis unfoldingin OhiaL Chief Financial Officer we're gaining valuable experience through oer participation in

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, March 2,1998 l Ibnnsylvania's customer choice pilot program. We are successfully competing for customers through i our unnyulated subsidiary, Itnn Ibwer Energy. ,

At the federallevel, regulators are w focusing on, among other things, .

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strengthening our posi . tion... In the marketplac The cwation of FirstEnergy, the nation's earnings were $1.94 per share. Earnings 12th largest investor-owned electric system, also mflect the effects of increased was a significant first step in making us a amortization and depreciation of assets, stronger competitor in the energy market- totaling $211 million under rate plans place. Although our holding company is in Ohio and Ibnnsylvania. Similar new, our utility operating companies - acceleraL2 expense reductions in 1996 Ohio Edison and its subsidiary, amounted to $178 million.

Ibnnsylvania Pbwer, The Illuminating For the year, the combined operating Company and Toledo Edison -have companies' retail electric sales were up been in the electric business since before one percent - the fifth consecutive year of the turn of the century. As a result, nereased sales. Continued improvement we've combined not only our resources, in the area's economy pushed industrial but our collective expertise and energies and commercial sales up 2.9 percent and to become a more aggnssive and 0.4 percent, mspectively. Residential scles successful enterprise. were off 1.6 percent due to the effect of Our efforts to enhance FirstEnergy's milder weather on heating and air-competitive position focus on thme conditioning use. Total kilowatt-hour sales primary strategies: were down 1.8 percent because of lower

• Increasing sales in traditional markets, sales to other utilities.

as well as pursuing new ventures in FirstEnergy's 1997 earnings r flect Ohio energy-related businesses

• Forging strategne alliances with mirrs la! rrrmb Mt@)tri The Illutninating Conquny and Toledo Edison customers and communities in our fmin Norrrnter 8 - thejirst day of the rnerger -

service ama and throughout the region to Decernber 31. Forjinancial n porting

• Improving customer service by purposes, FirstEnergys residts are being operating more etfsciently and offering cornpared teith Ohio Edison' s jinancial more innovative products and services p,j,,.,y,,gg,,.riorpars, at competitive prices Throughout this report, we offer examples of initiatives that have already occurred or 2 am under way to carry out these strategies. E ,

Earnings and Retail Sales Incnase ;g t

We enter our first full year as FirstEnergy encouraged by improvements in both earnings and retail sales in 1997. ,

Our 1997 carnings before nonrecurring charges were $339.8 million, or $2.16 per sham, compared with Ohio Edison's 1996 camings of $302.7 million, or $2.10 per share. Adjusted to include the effect of ,

nonrecurring, merger-related staffing 94 95 ge 97 reductions - expected to produce savings E of about $90 million annually - 1997 Pen tuntover) 4 1

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lensCrafte , NASA, Disney Stoms, had, Pursuin Business GTE, General Motors, LCl International and PPorWh.es charmacia & upjohn inc.

For years, ekctric utihties consisted primar- Partnering With AT&T Wirclcss ily of power plants, wires and meters, and Our skills and knowledge related to they provided electric service to customers telwonununications, coupled with the within a specific service area. In the com-f ct that we own properties that can petitive marketplace of the future, however, acc mm date communication towers our customers may be kicated virtually nd other transmitting equipment, made anywhere, and basic electric service is entering telecommunications a logical likely to be only c,ne of their many energy-extension of our traditional busmess.

related needs. As a result, we are strategi-Last year, our partner, AT&T Wireless, cally broadening our portfolio of pmducts Cleveland, launched its AT&T Digital and services.

PCS (Ibrsonal Communications Service)

Acquisitions Enhance covering northern Ohio and westem Our Capabilities Ibnnsylvania. AT&T Wireless offen many services, such as e-mail, voice mail and in December 1997, we completed the Internet access through digital phones, accjuisition of Roth Bros.,Inc., and RPC Mechanical., Inc., which together are as well as one rate wherever digital sen ice among the nation's largest providers is available in the United States.

of engineered heating, ventilation and FirstEnergy launches Power air-conditioning equipment. Based in Marketing Subsidiary Youngstewn and Cincinnati, Ohio, FirstEnergy Trading & Power Marketing, n spectively, the companies have some a licensed wholesale power marketer, 600 employees and combined 1997 annual launched in 1997, arranged for unregulated revenues of approximately $95 million.

wholesale transactions worth $80 million This acquisition will enable us to offer during the year. The company generates energy management and control systems, additional revenue for FirstEnergy through building facilities services, roofing, lighting, out-of-territory power marketing.

pmcess piping and refrigeration sen ices. .

Economic Developtnent The companies sell their services and SPurs Growth products in all 50 states to major customen; such as JCibnney, OfficeMax, CVS, A robust economy is as important to FirstEnergy as it is to our customers and g communities. It not only increases electric

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@ T strengthens communities through new jobs and additional tax revenues. And it creates a multiplier effect: increased personal income grows retail sales and non-manufacturing employment, housing construction and demand for community and leisure services.

In 1997, our economic development incentive rate and other community support programs helped encourage business expansions, and the attraction of

{[5]j, amqmbgmMWmhMmm toouAns) of more than 52 billion in new facilities, 6

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and created more than 3,000 jobs. Just as Enemy for Education helps us Notable among them: achieve long-term sales goals while pr viding assistance to education,

. LTV Corporation's $66-million tube the Ohio Edison iblymer Growth Fund plant expansion in Marion, Ohio, shows our commitment to kical economies will employ 144 people and produce and to a developing industry. The fund more than 146,000 tons of the new fferS emeGi n8 P Iymer companies grants lightweight steels required by f UP to 10 percent of their annual electrici-automotive companies. LTV facilities in ty payments for energy-efficiency and Yotmgstown, Cleveland and Elyria are Productivity projects that ultimately also served by FirstEnergy companies.

produce more sales opportunities. We also

. Alpha Tube Corp., one of the top five provide consulting services and financing mechanical-tube producers in North for approved electrical-equipment projects.

America, is building a 330,000-square- Although the program was introduced foot manufacturing facility in Walbridge, only last year, about one-quarter of the Ohio, near Toleda The facility will qualifying polymer companies in our employ about 200 people and process service area have already enrolled, placing nearly 10,000 tons of welded-steel about 30 percent of the electric sales tubing for the appliance, automotive revenue from that group under long-and construction industries. term contract.

. International Paper is building an Innovative Partnership Helps

$80-million manufacturing and British Petrolesun conversion facility - the largest single A creative partnership with British businessinvestmentin Ashtabula 1 troleum (BP) helped keep its refinery County's history.

open in Oregon, Ohia The alliance resulted in a $235-million expansion project that Strategic Partnerships wiii save sp as much as S400,000 a day in and Alliances raw material costs To help the project succeed, we will build and operate a state-The marketplace of tomorrow will bring of-the-art boiler at our nearby Bay Shore new challenges and opportunities, Ibwer Plant that will be primarily fueled requiring a new way oflooking at the by petroleum coke, a by-product of the world.This means strengthening old refinery. The refinery, generating nearly mlationships and forging new ones. We $16 million in annual electricity revenues, are doing that by becoming a partner with is our second-largest customer in north-the customers and communities we serve, west Ohia and a valued consultant for those needing lonproving Relations With Wholesale energy-related products and services.

Custorners and Cornrnunities Partnerships Prornote Growth .

Signaling the begu.unng of a new, coopera-More than 90 schools have enrolled in tive relationship, FirstEnergy reached an our new Energy for Education Program. agmement with the City of Cleveland to The program reduces base electricity prices enhance service and economic opportuni-by 10 percent for participating public and ties in the city. A similar agreement was private, primary and secondary schools reached with American Municipal Ptnver-that sign long-term supply contracts. We're Ohio (AMP-Ohio), an omanization that encouraging participating schools to apply purchases electricity on behalf of its the savings to pmgrams that develop the member municipal electric systems skills and work ethic students will need to throughout Ohia qualify for good-paying jobs.

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Similarly, partnering with cities in our In addition to our companies, others in service area to foster economic develop- the alliance are Consumers Energy, Detroit ment is another priority. Through an agree- Edison, Duquesne Light, Virginia Ibwer ment with the City of Toledo, we provided and the Allegheny Ibwer companies-a $3-million loan, energy-consulting Monongahela Ibwer, Ibtomac Edison and assistance and an economic development West Iban Ibwer. The companies sen e incentive rate to help ensure the continued 26 million people in a 108,500-squam-operation of Chrysler's Jeep plant in Toleda mile service area, including lower Chrysler will spend $1.2 billion, including Michigan, northern and central Ohio, building a $600-million assembly plant, western Itansylvania, most of West that will keep 5,000, manufacturing jobs Virginia, and parts of Maryland, in our area. Virginia and North Carolina.

Exploring Regional Transmission Options Reducing Costs We are also forming relationships with We am working hard to improve perform-other utilities to help resolve common ance, reduce expenses and accelerate debt issues, such as the continuing development reduction while helping our customers of the wholesale power market and access I wer their energy costs. As a result of the to utility transmission systems.

rate plans for our utility operating compa-FiniEnergy's utility operating companies. nies, we're cutting customer prices by more along with seven other utility companies, than $1 billion. And, the rate plans enable are exploring the creation of an indepen- the companies to reduce assets by $4.4 bil-dent, regional transmission entity. Such lion more than they otherwise would have an organization could ultimately own and through 2005, which will increase our long-manage the . nsmission systems of all the term competitiveness. Here are a few of the companies. Our goals include balancing ways we achieved savings last year.

the interests of energy suppliers, customers ,

Cutting tire Cost of Producing and shareholders; avoiding duplication of costs and achieving transmission cost sav-Pown ings; and maintaining long-term reliability Our fossil-fuel plants continued cutting and security of our interconnected operating and maintenance costs in 1997.

transmission systems. We saved an additional $39 million thmugh streamlining the organization, upgrading equipment, and improving the heat-rate

$ performance of our generating units.

8 a Savings included $100,000 in annual g waste disposal costs achieved by g# U upgrading environmental equipment g at our Niles Plant. We achieved similar savings by using fly ash in a mine g reclamation project and by selling fly t: ash for highway anti-skid material.

Initiatives started at The Illuminating Company and Toledo Edison in 1995 have cut fossil-fuel generation costs by 20 percent, and earmarked another 1 20 percent in reductions by 2000. Ibr 94 95 96 97 m , we're saving $700,000 a year by CUSTOMERS SERVED Closing the WestWood fly ash repository 10

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! near Cleveland and depositing the fly ash 92.9 percent were both above industry we can't sell in abandoned coal mines in averages for pressurbed water reacton.

southeaster Ohio. Other savings have Last year also marked Davis-Besse's come from closing older generating units, 20th year of operation and Ibrry's 10th.

cutting taxes by reducing coal and matenal Since they started commercial operation, inventory, and revampmg our procedures the 925-megawatt Davis-Besse plant has for fuel supply and transportation. generated more than 90 million megawatt.

At the Davis-Besse Nuclear Ibwer Station hours of electricity, and Ibrry has generated and the Ibrry Nuclear Ibwer Plant, our more than 73 million.

cost-reduction efforts pmduced more These plants also help us meet air-quality than $70 million in savings.

standards: Their collective generation At Ibrry, we achieved a one-time savings of eliminated the creation of more than approximately $20 million due to the short- 37 million metric tons of carbon emissions est refueling time in the plant's history - that would have come from coal-fired 41 days - 33 days better than our previous generation, or 33 million metric tons of record. While increasing plant availability, carbon emissions from oil-fired plants.

this reduced expenses for work crews and Reducing Debt Through replacement power. The 1,250-megawatt p,7fyyy,fygg plant was available 93.6 percent of the 18-month cycle, well above the national Debt reduction is key to FirstEnergy's average for this type of plant. success. Continuing improvement in our financial and credit strength and favorable Over the next five years, our business plan securities markets enabled us to redeem calls for $23 million in savings in overall or refinance more than $1.8 billion of fuel costs and another $20-million reduc-securities in 1997, cutting annual costs by tion m capital expenditures.

about $55 million.

While we cut operating and maintenance Resourte Management Through expenses at Davns-Besse, we maintamed Sy ,,,ygyg,,y,gu,_ ,,g,,

the plant's safety standards and its posi tion Afeasurements as one of the best-run plants m the world.

Davis-Besse's 1997 availability factor of Becoming more competitive means making 93.4 percent and capacity factor of timely, cost-effective decisions and being accountable for the value of all resources.

Using rigorous analytical tools and processes such as Shareholder Value Added, we measure the return on an g

e investment in a project or activity versus U the cost of capital and other resources.

t Strict accountability and a better under-r g 3tanding of customers, markets and the

$ true costs of doing business will enable us to maximize our financial performance.

R y Consolidating Merger-Related Operations Cuts Costs y Consolidating the dispatch function for

' j, generation and transmission at Ohio y

j, Edison's System Control Center will 94 95 96 97 increase operating flexibility, improve oeuo colsE'c7eE*c'ousinco pm dMW W We ab h a uwons) about $10 million annually. Likewise, 12

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consolidation of the information We have achieved our safety results by technology of both companies to meet creating and maintaining safety awareness FirstEnergy's needs will save more than programs that are among the best in

$15 million a year compared with what the the nation, requiring accountability and companies 'vould have spent separately. responsibility throughout the organization f r safe w rk practices, and nnvarding Savings Through Safety employee safety efforts through matching Employee safety remains a top priority for contributions in the 401(k) employee FirstEnergy. Our safety programs are savings plan and with other incentive designed to reduce accidents, improve compensation.

employee morale and productivity, and cut inedical and insurance costs.

Ohio Edison - historically an industry leader in safety - ranked first nationally in the Edison Electric Institute 1996 Survey f

of the Occupational Safety and Health ky Administration Recordable Incident Rate.

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Ohio Edison's rate of injuries and illnesses per 100 employees was 67 percent below the electric utility industry average, and the rate for its System Transmission &

Distribution Department was approx-imately 70 percent lower. In 1997, employees recorded significant safety milestones for working without a lost-time accident:23 million hours worked in cur Eastern Region;2 million at the 94 95 9e 97 RK P CE Buq;er Plant; 1 million at the Niles Plant; y,E and 1 million at Ibnn Ibwer. pouAns)

Positioned w. m,mg _ m __,_ _

merger provided to improve our comperi-

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tive edge by pursuing new ventun s, l Creating FirstEnergy was an important forging new alliances and operating more l step toward meeting the challenges new efficiently. FirstEnergy is entering 1998 competition brings. As this report shows, better positioned for success.

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l M::nogsmsnt Ripsrt Rapsrt of Ind:psndant Public Accountants .

The consolidated financial statements were prepared To the Stockholders and Board of Directors of l

l by the management of FirstEnergy Corp., w!;o takes FirstEnergy Corp.:

responsibility for their integrity and objectivity. The state- We have audited the accompanying consolidated balance ments were prepared in conformity with generally accepted sheets and consolidated statements of capitalization of accounting principles and are consistent with other financial FirstEnergy Corp. (an Ohio corporation) and subsidiaries as information appearing elsewhere in this report. Arthur of December 31,1997 and 1996, and the related consoli-Andersen LLP, independent public accountants, have dated statements of income, retained earnings capital stock expressed an opinion on the Company's consolidated finan' and other paid-in capital, cash flows and taxes for each of cial statements. the three years in the period ended December 31,1997.

The Company's internal auditors, w ho are responsible Lese financial statements are the responsibility of the to the Audit Committee of the Board of Directors, review Company's management. Our responsibility is to express an the results and performance of operating units within the opinion on these financial statements based on our audits.

Company for adequacy, effectiveness and reliability of We conducted our audits in accordance with generally accounting and reporting systems, as well as managenal accepted auditing standards. Those standards require that and operating controls. we plan and perform the audit to obtain reasonable assur-The Audit Committee consists of five nonemployee ance about whether the financial statements are free of directors whose duties include: consideration of the material misstatement. An audit includes examining, on a adequacy of the internal controls of the Company and the test basis, evidence supporting the amounts and disclosures objectivity of financial reporting; inquiry into the number, in the financial statements. An audit also includes extent, adequacy and validity of regular and special audits assessing the accounting principles used and significant conducted by independent public accountants and the estimates made by management, as well as evaluating the intemal auditors; recommendation to the Board of Directors overall financial statement presentation. We believe that of independent accountants to conduct the normal annual our audits provide a reasonable basis for our opinion.

audit and special purpose audits as may be required; In our opinion, the financial statements referred to and reporting to the Board of Directors the Committee's above present fairly, in all material respects, the financial findings and any recommendation for changes in scope, position of FirstEnergy Corp. and subsidiaries as of methods or procedures of the auditing functions. The December 31,1997 and 1996, and the results of their Committee also reviews the results of management's operations and their cash flows for each of the three years program to monitor compliance with the Company's in the period ended December 31,1997, in conformity policies on business ethics and conduct. The Ohio Edison with generally accepted accounting principles.

Audit Committee held three meetings in 1997 and the FirstEnergy Audit Committee held one meeting in 1997 after the consummation of the merger.

A L-ARTIIUR ANDERSEN LLP IL Peter Burg Cleveland, Ohio Pmsident February 13,1998 Chief Fmancial Officer liarvey L. Wagner Controller Chief Accounting Officer 16

. Galsetsd Finencini Data FIRSTENERGY CORl!

Iln thou.wnds, e.tcept per . share amounM 1997 1996 1995 I994 1993 Operating Revenues $ 2,821,435 $2,469,785 $2,465,846 $2,368,191 $2,369,940 Net income $ 305,774 $ 302,673 $ 294,747 $ 281,852 $ 59,017 Earnings per Share of Common Stock $1.94 $2.10 $2.05 $1.97 $0.39 Dividends Declared per Share of Common Stock $1.50 $1.50 $1.50 $1.50 $1.50 Total Assets $18,080,795 $9,054,457 $8,892,088 $ 9,045,255 $8,964,841 Capitalization at December 31:

Common Stockholders' Equity $ 4,159,598 $2,503,359 $2,407,871 $2,317,197 $2,243,292 Preferred Stock:

Not Subject to Mandatory Redemption 660,195 211,870 ?11,870 328,240 328,240 Subject to Mandatory Redemption 334,864 155,000 160,000 40,000 45,500 Long-Term Debt 6,969,835 2,712,760 2,786,256 3,166,593 3,039,263 Total Capitalization $12,124,492 $5,582,989 $5,565,997 $5,852,030 $5,656,295 Prics Range of Common Stock FirstEnergy Corp.'s Common Stock is listed on the New York Stock Exchange and is traded on other registered exchanges. Trading of the common stock began on November 10,1997. Prices represent Ohio Edison Company Common Stock before November 10,1997 and FirstEnergy Corp. Common Stock beginning November 10,1997.

1997 1996 First Quarter fligh-Low 23-7/8 20-7/8 24-7/8 21 7/8 Second Quarter liigh-Low 22 19-1/4 23 20-1/4 Third Quaner fligh-Low 23-5/8 21-3/4 22-1/4 19-1/4 Iburth Quarter High-Low 29 22-13/16 23-1/4 19-3/8 Vearly High-Low 29 19-1/4 24-7/8 19-1/4 Prices are based on reports published in The %ll Streer J<mrnal for New York Stock Exchange Composite Transactions.

Claselfication of Holders of Common Stock as of December 31,1997 lloiders of Record Shares Held Number  % Number 4 Individuals 179,862 82.41 61,232,003 26.60 Fiduciaries 36,439 16.69 12,348,785 5.36 Nominees 60 0.02 155,109.173 67.38 All Others 1,928 0.88 1,517,180 0.66 Total 218,289 100.00 230,207,141 100.00 As of January 31,1998, there were 217.565 holders of 230,207.141 shares of the Company's Common Stock. Information regarding retained earnings available for payment of cash dividends is given in Note 4A.

17

Min:csmant's Discuscien cnd Anitycis cf share. Excluding these charges,1997 earnings per share were Recults of Operations and Fintnciti Canditlan $2.16, compared to $2.10 in 1996. The 1997 results it!1ect -

accelerated depreciation and amortization of nuclear and This discussion includes forward looking statements regul tory assets totaling approximately $211 million under based on information currently available to management. OE s Rate Reduction and Economic Development Plan and Such statements are subject to certain risks and uncertain-nn s ate Stability and Economic Development Plan; ties. These statements typically contain, but are not limited ""

• I ' * ".ded approximately $178 milh,on of to, the terms " anticipate," " potential," " expect," "believe," ccelerated depreciation and amortization. The 1996 results

" estimate" and similar words. Actual results may differ compared favorably to earnings of $2.05 per share m 1995.

materially due to the speed and nature of increased competi-Operating revenues were up $351.7 million in 1997, tion and deregulation in the electric utility industry, eco.

nomic or weather conditions affecting future sales and mar. compared to 1996. Excluding the seven weeks of former Centerior results, we achieved record operating revenues for gins, changes in markets for energy services, changing the third consecutive year with an increase of $3.8 million energy market prices, legislative and regulatory changes over 1996. The OE companies also achieved record retail (including revised environmental requirements), availability sales for the fifth consecutive year. The following table and cost of capital and other similar factors.

summarizes the sources of changes in operating revenues Rseults of Operations for the OE companies for 1997 and 1996 as compared to the FirstEnergy Corp. was fonned when the merger of Ohio previous year:

Edison Company (OE) and Centerior Energy Corporation 1997 1996 (Centerior) became effective on November 8,1997. The (In millions)

Federal Energy Regulatory Commission (FERC) approved increased retail kilowatt-hour sales $ 7.8 $ 58.1 our merger on Oct ber 29,1997, and the Securities and Cnange in average retail prices 13.3 (46.1)

Exchange Commission followed with their approval on Sales to utilities (25.8) (4.5)

Other 8.5 (3.6)

November 5,1997. The merger of the companies has been Net increase $ 3.8 $ 3.9 accounted for by using purchase accounting under the guidelines of Accounting Principles Board Opinion No.16, An improving local economy helped the OE companies

" Business Combinations." Under purchase accounting, the achieve record retail sales of 27.3 billion kilowatt-hours. Our results of operations for the combined entity are reported customer base continues to grow with approximately 4,900 from the point of consummation forward. As a result, new retail customers added in 1997, after gaining more than FirstEnergy financial statements for 1997 reflect twelve 12,200 customers the previous year. Residential sales months of operations for OE and its wholly owned sub- decreased 0.8% in 1997, following a 1.8% gain the previous sidiary, Pennsylvania Power Company (Penn), but include year. Commercial sales rose 1.2% and 1.3% in 1997 and -

only seven weeks (November 8,1997 to December 31, 1996, respectively. Increased demand by rubber and plastics 1997) for the former Centerior companies, which include and primary metal manufacturers contributed to a 1.0% rise The Cleveland Electric illuminating Company (CEI) and in industrial sales during 1997, following a 5.5% increase The Toledo Edison Company (TE). Results reported for the previous year. Sales to other utilities fell 26.4% in 1997 prior periods are for OE and Penn only (OE companies). as a result of the December 31,1996 expiration of a one-year We continued to make significant progtess in 1997 as contract with another utility to supply 250 megawatts of our companies prepare for a more competitive environment power. This follows a 2.7% increase the previous year. As a result of the above factors, total kilowatt.laur sales for in the electric utility industry. The most significant event the OE companies dropped 5.0%, compared with sales in during the year was the consummation of our merger. We 1996, which were up 3.0% from 1995.

expect the merger to produce a minimum of $1 billion in savings during the first ten yer.rs ofjoint operations through Fuel and purchased power expenses increased $29.6 the elimination of duplicative activities, improved operating million in 1997. Excluding the seven weeks of former efficiencies, lower capital expenditures, accelerated debt Centerior results, fuel and purchased power costs were down reduction, the coordination of the Companies' work forces $19.4 million. Because oflower total kilowatt-hour sales, and enhanced purchasing opportunities. the OE companies spent less for fuel and purchased power During 1997, we reviewed every facet of our operations during 1997, compared to 1996 costs. which were also dowr to determine best practices and opportunities for increasing compared to 1995. Higher nuclear expenses in 1997 reflect efficiency and reducing costs. On .lanuary 29,1998, our increased operating costs at the Beaver Valley Plant and the seven weeks of former Centerior results. Excluding the workforce was reduced by 310 employees to eliminate dupli.

Centerior costs,1997 nuclear expenses increased $20 cative activities resulting from the merger. Total merger-related staffing reductions to date are 1,336, including 582 million compared to 1996. Nuclear operating costs were lower in 1996, compared to 1995, due primarily to lower employees who recently accepted voluntary n tirement refueling outage cost levels. Other operating costs in 1997 l programs and 444 employees who left the Companies in 1997 and were not replaced. These reductions are expected were $105.6 million higher than in 1996. The seven weeks to produce approximately $90 million in annual savings. of Centerior results contributed $81 million to the increase.

for the OE companies, the increase in other operating ecsts Earnings per share of $1.94 for 1997 were adversely in 1997 reflects a fourth quarter charge of approximately affected by net nonrecurring charges, primarily related to the $41.5 million for the voluntary retirement program l staffing reductions discussed above, amounting to $.22 per 18

mentioned above and estimated severance expenses. These Excluding the nonrecurring charges mentioned above, our

. cost increases were partially offset by gains on the sale of fixed charge coverage ratios continue to improve. The inden-emission allowances during the year. The decrease in other ture ratio, which is used to determine OE's ability to issue operating costs in 1996, compared to 1995, reDects lower first mortgage bonds, improved from 4.34 at the end of 1992 maintenance costs at our fossil-fuel generating units. to 6.21 at the end of 1997. Over the same period, the chaner The changes in depreciation and regulatory asset amor- ratio--.a measure of our ability to issue preferred stock-tization in 1997 and 1996 reflect accelerations under the impr ved from 1.89 to 2.35.

l regulatory plans discussed above. The changes between 1997 At the end of 1997, FirstEnergy's common equity as a l

and 1996 also include $31.2 million of former Centerior percentage of capitalization stood at 34% compared to 40%

depreciation, $6.2 million of former Centerior regulatory at the end of 1992 for OE. This decrease occurred due to the asset amonizatica and $7.7 million of goodwill amortization. addition of $4.4 billion of debt, $633.2 million of preferred General taxes wen: up $40.2 million in 1997, compared to stock and $1.6 billion of equity to our capital skucture as a 1996. Excluding the former Centerior's results for the seven result of the merger.

weeks ended December 31,1997, general taxes were down Our cash requirements in 1998 for operating expenses,

$7 million, compared to last year. The deen ase in 1997 was construction expenditures and scheduled debt maturities are due to lower property taxes and an adjustment in the second expected to be met without issuing additional securities, quarter of 1997 which reduced the OE companies' liabilities During 1997, the OE companies reduced their total debt by for gross receipts taxes.

approximately $245 million. FirstEnergy has cash require-Other income rose $20.8 million in 1997.The fonner ments of approximately $2.4 billion for the 1998-2002 Centerior's seven-week results contributed $5.6 million of period to meet schedukd maturities of long-term debt and the increase. For the OE companies, the increases in other preferred stock. Of that amount, approximately $288 million income in 1997 and 1996 were principally due to higher applies to 1998.

investment isome-primarily through our PNBV Capital We had about $98.2 million of cash and temporary Trust investment, which was effective in the third quarter of 1996. Excluding the seven-week results for the former investmerns and $302.2 million of shon-term indebtedness on December 31,1997. As of December 31,1997, we had Centerior, overall inten st costs continue to trend downward.

the capability to borrow $61 million through unused OES For the OE companies, total interest costs were $4.2 million Fuel credit facilities. In addition, our unused borrowing lower in 1997 than in 1996. Interest on long-term debt capability included $162 million under revolving lines of decreased due to our economic refinaricings and redemption credit and $26 million of bank facilities that provide for of higher-cost debt totaling approximately $282 million that borrowings on a short-term basis at the banks' discretion.

had been outstanding as of December 31,1996. Other interest expense increased compared to 1996 due mainly to Our capital spending for the period 1998-2002 is expected higher levels of short-term borrowing. We also discontinued to be about $1.5 billion (excluding nuclear fuel), of which deferring nuclear unit interest in the second half of 1995, approximately $385 million applies to 1998. These spending consistent with OE's regulatory plan. plans melude investing approximately $300 million during the five-year period ($65 million in 1998) in nonregulated Capitel Resources and Liquidity business vee'ures. Investments for additional nuclear fuel We have significantly improved our financial position during the 1998-2002 period are estimated to be approxi-over the past five years. For the OE companies, cash gener- m tely $518 million, of which about $85 million applies to ated from operations was nearly 25% higher in 1997 than M8. Dunng the same periods, our nuclear fuel investments it was in 1992 due to higher revenues and aggressive cost are expected to be reduced by approximately $380 million controis. At the same time, return on common equity and $112 milhon, respectively, as the nuclear fuel is con-improved from 10.8% in 1992 to 12.1% in 1997, excluding sumed. Mso, we have operating lease commitments (net of the net nonrecurring charges discussed above. By the end of related trust income) of approximately $1.0 billion for the 1997, the OE companies were serving about 57,0% more 1998-2002 period, of which approximately $189 milhon customers than they were five years ago, with approximately relates to 1998. We recover the cost of nuclear fuel consumed 2,000 fewer employees. As a result, our customer / employee and operating leases through our electric rates.

ratio has increased by 56% over the past five years, standing Interest Rate Risk at 264 customers per employee at the end of 1997, compared with 169 at the end of 1992. In addition, capital expenditures Our exposure to fluctuations in market interest rates is for the OE companies have dropped substantially during that mitigated by the fact that a significant portion of our debt has period. Expenditures in 1997 were approximately 37% lower fixed interest rates, as noted in the following table. The than they were in 1992 and annual depreciation charges have Companies are subject to the inherent interest rate risks exceeded property additions since the end of 1987. related to refinancing maturing debt by issuing new debt securities. As discussed in Note 3, our investments in capital Over the past five years, the OE companies have aggres-trusts effectively reduce future lease obligations, also sively taken advantage of opportunities in the financial reducing interest rate risk. As discussed in Note 1, changes markets to reduce our average capital costs. Through reib in the market value of our decommissioning trust funds are nancing activities, we have reduced the average cost of debt recognized with a corresponding change to the decommis-from 8.53% at the end of 1992 to 7.77% at the end of 1997.

sioning liability.

19

The table below presents principal amounts and related weighted average interest rates by year of maturity for our invest.

ment portfolio, debt obligations and preferred stock with mandatory redemption provisions: ,

1998 1999 2000 2001 2002 Thereafter Total Fair Value (Dolk,rs in Millions)

Investments other than Cash and Cash Equivalents -

Fixed Income $ 39 $ 45 $ 56 $ 55 $ 83 $1,443 $1,721 $1,796 Average interest rate 7.3% 7.4% 7.5% 7.7% 7.7% 6.2% f,.4%

Liabilities -

Long-term Debt Fixed rate $267 $411 $369 $102 $745 $4,294 $6,188 $6,548 Average interest rate 8.6% 7.6% 7.0% 8.7% 7.9% 7.8% 7.8%

variable rate $215 $ 577 $ 792 $ 743 Average interest rate 6.4% 4.2% 4.8%

Short-term Borrowings $302 $ 302 $ 302 Average interest rate 6.0% 6.0%

Preferred Stock $ 21 $ 40 $ 39 $ 85 $ 19 $ 140 $ 344 $ 362 Ave age dividend rate 7.4% 8.9% 8.9% 8.9% 8.9% 8.8% 8.7%

Cutlook We face many competitive challenges in the years ahead (which is reflected as additional depreciation expense) and as the electric utility industry undergoes significant changes, additional amortization of regulatory assets during the regula-including changing regulation and the entrance of more tory plan periods of at least $2 billion and $358 million, energy suppliers into the marketplace. Retail wheeling, which respectively, more than the amounts that would have been would allow retail customers to purchase electricity from recognized if the regulatory plans were not in effect.These __

other energy producers, will be one of those challenges. Our additional amounts are being recovered through current rates.

regulatory plans provide the foundation to position us to Based on the regulatory environment we operate in today -

meet the challenges we are facing by signiDeantly reducing and the regulatory plans, we believe we will continue to be fixed costs and lowering rates to a more competitive level. able to bill and collect cost-based rates relating to CEl's and OE's Rate Reduction and Economic Development Plan TE's nonnuclear operations and all of OE's and Penn's _

was approved by the Public Utilities Commission of Ohio operations; accordingly, it is appropriate that we continue _

(PUCO)in 1995; Penn's Rate Stability and Economic the application of Statement of Financial Accounting Development Plan was approved by the Pennsylvania Public Standards No. 71 " Accounting for the Effects of Certain Utility Commission (PPUC) in the second quarter of 1996 Types of Regulation"(SFAS 71). However, as discussed and FirstEnergy's Rate Reduction and Economic Develop- below, changes in the regulatory environment are on the ment Plan for CEI and TE was approved in January 1997. horizon. With respect to Penn, we expect to discontinue the These regulatory plans initially maintain current base application of SFAS 71 for the generation portion of that electric rates for OE, CEI and TE through December 31, business, possibly as early as 1998. We do not expect the 2005, and Penn through June 20,2006. The plans also impact of Penn discontinuing SFAS 71 to be material.

revised the Companies' fuel cost recovery methods. As further discussed below, the Ohio legislature is in the discussion stages of restructuring the electric utility industry As part of OE's regulatory plan transition rate credits were implemented for custon$ers, w,hich are expected to within the State. We do not expect any changes in regulathg t be effective within the next two years and we cannot reduce operating revenues by approximately $600 million assess what the ultimate impact may be.

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 CEI and TE to recognize -

i The base rate freeze for CEI and TE is to be followed by a additional capital recovery related to their generating assets

$310 million base rate reduction in 2006; interim reductions and additional amortization of regulatory assets during the beginning in June 1998 of $3 per month will incresse to $5 regulatory plan period of at least $2 billion more than the per moath per residential customer by July 1,2001. Total amounts that would have been recognized if the regulatory savings of $391 million are anticipated over the term of the plans were not in effect. For regulatory purposes, these additional charges will be reflected over the rate plars period.

• plan for CEI's and TE's customers. CE! and TE have also committed $105 million for economic development and The FirstEnergy regulatory plan does not provide for full _-

energy efficiency programs, recovery of CEl's and TE's nuclear operations. Accordingly. -

sq atory assets representing customer receivables for l All of the Companies' regulatory assets are being recov- ' -

future inc me t xes related to nuclear assets of $794 million ered under provisions of the regulatory plans. In addition, the were written off prior to consummation of the merger since PUCO and PPUC have authorized OE and Penn to recognize CEI and TE ceased application of SFAS 71 for their nuclear additional capital recovery related to their generating assets operations when implementation of the FirstEnergy regula-20 i

tory plan became probable. At the ccmsummation of the costs will be substantially lower than 5313 million, that CEI's

,, merget in November 1997, CEI and TE recognized a fair and TE's share of any cleanup costs will be substantially less value purchase accounting adjustment which decreased the than 100% and that most of the other PRPs are financially carrying value of their nuclear assets by approximately able to cont;ibute their share. CEI and TE have accrued a $5.9

$2.55 billion. The fair value adjustment recognized for million liability as of December 31,1997, based on estimates financial reporting purposes will ultimately satisfy the of the costs of cleanup and their proponionare responsibility

$2 billion asset reductmn commitment contained in the for such cost. We believe that the ultimate outcome of these CEI and TE regulatory plan over the regulatory plan period. matters will not have a matedal adverse effect on our financial On September 30, U397, Penn filed a structuring coniition, cash flows or results of operations.

plan with the PPUC. The plan describes how Penn will restructure its rates and provide customers with direct Impact of the Year 2000 Issue access to alternative electricity suppliers; customer choice is to be phased in over three years beginning in 1999 The Year 2000 Issue is the result of computer progrcms after completion of a two-year pilot program. Penn will being written using two digits rather than four to identify the continue to deliver power to homes and businesses through applicable year. Any of our programs that have date-sensitive its transmission and distribution system, which remins software may recognize a date using "00" as the year 1900 regulated by the PPUC. Penn also plans to sell electricity rather than the year 2000. This could result in system fail-and energy-reiated services in its own territory and ures or miscalculations.

throughout Pennsylve_nia as an alternative supplier through We currently believe that with modifications to existing its nonregulated subsidiary. Penn Power Energy. Through software and conversions to new software, the Year 2000 the restructuring plan, Penn is seeking recovery of $293 issue will pose no significant operational problems for eur million of stranded costs through a competitive transition computer systems as so modined and converted. If these charge starting in 1999 and ending in 2005, which is consis- modi 6 cations and conversions are not made, or are not com-tent t *h Penn's Rate Stability and Economic Development pleted on a timely basis, the Year 2000 Issue could have a Plan t.1cntly in effect. The PPUC plans to hold public material impact on our operations.

hearings on Penn's restructuring plan early in 1998. . .

We have . . .imt ated formal communications with many of On January 6,1998, the co-chairs of the Ohio General our major suppliers to determine the extent to which we are Assembly's Joint Select Committee on Electric Industry vulnerable to those third paties' failure to resolve their own Deregulation released their draft report of a plan which Year 2000 problems. Our total Year 2000 project cost and proposes to give customers a choice from whom they buy estimates to complete are based on currently available infor-electricity beginning January 1,2000. No consensus has mation and do not include the estimated costs and time asso-been reached by the full Committee; in the meantime. ciated with the impact of a third party's Year 2000 Issue.

legislation consistent with the co-chairs' draft report may be There can be no guarantee that the failure of other compa-introduced into the General Assembiy by one or both of the nies to resolve their own Year 2000 issues will not have a co-chairs. We cannot predict w hen or if this legislation will material adverse effect on us.

be introduced and if it will be passed into law. We continue to study the potential effects that such legislation would We are utih. .zmg both internal and external resources to have on our financial position and results of operations. reprogram and/or replace and test the software for Year 2000 modi 6 cations. Most of our Year 2000 problems w,ll i be The Financial Accounting Standards Board (FASB) rmlved through system replacements. The different phases of issued a proposed accounting standard for nuclear decommis our Year 2000 project wili be completed at various dates, sioning costs in February 1996. If the standard is adopted as most of which occur in 1999. We plan to complete the entire proposed: (1) annual provisions for decommissioning could Year 2000 project by mid-December 1999. Of the total project inemase;(2) the net present value of estimated decommis-cost, approximately $64 million will be capitalized since those sioning costs could be recorded as a liability; and (3) income costs are attributable to the purchase of new software for total from the external decommisdoning tmsts could be repuned system replacements (i.e., the Year 2000 solution comprises as imestment income. The FASB reported in October 1997 only a portion of the benefit resulting from the system that it plans to continue working on the proposal in 1998. replacements). The remaining $8 million will be expensed as The Clean Air Act Amendments of 1990, discussed in incurred over the next two years. To date, we have incurred Note 6. mquire additional emission reductions by 2000. We and expensed approximately $1 million related to the assess-are pursuing cost-effective compliance strategies for meeting ment of, and preliminary efforts in connection with, our Year the reduction requirements that begin in 2000. 2000 project and the development of a reme6ation plan.

CF.I and TE have been named as "potentially responsible The costs of the project and the date on wh% ".c pian to panies" (PRPs) for three sites listed on the Superfund complete the Year 2000 modi 6 cations are based on National Priorities List and are aware of their potential management's best estimates, which were derived from involvement in the cleanup of several other sites. Allegations numerous assumptions of future events including the con-that CEI and TE disposed of hazardous waste at these sites, tinued availa'oility of certain resources, and other factors.

and the amount involved are often unsubstantiated and However, there can he no guarantee that this project will be subject to dispute. Federal law provides that al! PRPs for a completed as planned and actual results could differ materially particular site be held liable on a joint and several basis. If from the estimates. Specine factors that might cause material CEI and TE were held liable for 100% of the cleanup costs of differences include, but are not limited to, the availability and all the sites referred to above, the cost could be as high as cost of trained personnel, ti e ability to kicate and correct all

$313 million. However, we believe that the actual cleanup relevant computer code, and similar uncertainties.

21

consolidated ttstsmsnts of incems FIRSTENERGY CORP.

(in thousands, except per share amounts)

• For the Years Ended December 31, 1997 1996 1995 OPERATING REVENUES $2,821,435 $2,469,785 $2,465,846 OPERATING EXPENSES AND TAXES:

Fuel and puretiased power 486,267 456,629 465,483 Nuclear operating costs 312,123 247,708 289,717 Other operating costs 526,072 420,523 446,967 .

'lotal operation and maintenance expenses 1,324,462 1,124,860 1,202,167 Provision for depreciation and amortization 431,431 355,780 256,085 Amortization of net regulatory assets 43,621 27,661 5,825 General taxes 282,163 241,998 243,179 '-

Incona taxes 183,798 189,417 191,972 Total operating expenses and taxes 2,265,475 1,939,716 1,899,228 OPERATING INCOME 555,960 530,069 566,618 OTilER INCOME 58,343 37,537 14,424 INCOME BEFORE NET INTEREST CllARGES 614,303 567,606 581,042 NET LNTEREST CilARGES:

Interest on long-term debt 252,815 211,935 243,570 Deferred nuclear unit interest - - (4,250)

Allowance foi borrowed funds used during construction and capitalized interest (3,469) (3,136) (5,668)

Othe-interest expense 31,365 28,211 22,944 Subsidiaries' preferred stock dividend requirements 27,818 27,923 29,699 Net interest charges 308,529 264,933 286,295 NET INCOME $ 305,774 $ 302,673 $ 294,747 WEIGilTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 157,464 144,095 143,692 EARNINGS PER SilARE OF COMMON STOCK (Note 4C) $1,94 $2.10 $2.05 DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $1.50 $1.50 $1.50 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

22

Censolknied Oclinco Chasts FIRsTENERcv CORP.

Iin thousand.O ht December 31, 199f ~ 1996 ASSETS UTILITY PLANT:

In service $ 15,008,448 $ 8,634,030 Less-Accumulated provision for depreciation 5,635,900 3,226,259 9,372,548 5,407.771 Construction work in progress-Electric plant 165,837 93,413 I

Nuclear fuel 34,825 5,786 200,662 99,199 9,573,210 5,506,970 OTilER PROPERTY AND INVESTMENTS:

Capital trust investments (Note 3) 1,370,177 487,979 Letter of credit collateralization (Note 3) 2T',763 277,763 .,

Other 659,162 323,316 2,307,102 1,089,058 CURRENT ASSETS:

Cash and cash equivalents 98,237 5,253 Receivables-Customers (less accumr'ated provisions of $5,618,0(X) and $2,306,000, respectively, for unco , tible accounts) 284,162 247,027 >,

Other 219,106 58,327 Materials and supplies, at average cost- (,

Owned 154,961 i 66,177 .

Under consignment 82,839 44,468 Prepayments and other 163,680 75,681 1,002,991 496,933 DEFERRED CHARGES:

Regulatory assets 2,624,144 1,703,111 Goodwill 2,107,795 -

Unamortized sale and leaseback costs 95,096 100,066 Property taxes 270,585 100,802 Other 99,872 57,517 5,197,492 1,961,496

$18,080,795 $ 9,054,457 .'

CAPITALIZATION AND LIABILITIES i k CAPITALIZATION (See Consolidated Statements of Capitalization):

Common stockholders' equity $ 4,159,598 $ 2,503,359 Prehrred stock of consolidated subsidiaries-Not subject to mandatory redemption 660,195 211,870 Subject to mandatory redemption 214,864 35,000 Ohio Edison obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Ohio Edison subordinated debentures 120,000 120,000 Long-term debt 6,969,835 2,712,760 12,124,492 5,582,989 CURRENT LI ABILITIES:

Currently payable long-term debt and preferred stock 470,436 333,667 Short-term inrrowings (Note 5) 302,229 349,480 -

Accounts payable 312,690 93.sn9 Accmed taxes 381,937 i42,909 Accmed interest 147,694 52,855 Other 193,850 131,275 1,808,936 1,103,695 DEFERRED CREDITS:

Accumulated deferred income taxes 2,304,305 1,777,086 Accumulated deferred investment tax en dits 324,200 199,835 Pensions and other postretirement benefits 492,425 123,446 Other 1,026,537 267,406 4,147,467 2,367,773 COMM;TMENTS, GUARANTEES AND CONTINGENCIES (Notes 3 and 6 ) $18,080,795 $ 9,054,457 '[.

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

23

Complicated Ctatements Of Capitalization FinsTEsEncy Conn -

(in thousaruh. acept per share amount.O At December 31, 1997 1996 COMMON S'IOCKHOLDERS' EQUITY:

Common r,tock, $.10 par value, and $9 par value, respectively -

authorized 300,000.0(K) shares-230.207,14I and 152,569,437 shares outstanding. respectively $ 23,021 $1,373,125 Odier paid.in capital 3,636,908 727,602 Retained earnings (Ncte 4A) 646,646 557,642 Unalkicated employee stock ou nership plan co tunon stock-7,829,538 and 8,259.053 shares, respet tisdy (Note 4B) (146,977) (155.010)

Total common stockholders

• equity 4,159,598 2,503,359 Number of Shares Optional Outstanding Redemption Price 1997 1996 Itr Share Aggregate PRFIERRED S'ItX'K OF CONSOLimTED SUllSIDIARIES (Note 4D)

Ohio Edison Company (OE)

Cumulative, $1(X) par value- 1 :

Authorized 6,(KX),(XX) shares Not Subject to Mandatory Redemption:

3.90 % 152.510 152,5'O $103.63 $15,804 15,251 15,251 4.40% 176,280 176.280 108.00 19,038 17,628 17,628 4.44 % 136,560 136,560 103.50 14,134 13,656 13156 4.56% 144,300 144,300 103.38 14,917 14,430 14,430 609,650 609,650 63.893 60,965 60,965 Cumulative,525 par value- -

Authori/cd H,(KX) 0(X) shares Not Subject to Mandatory Redemption:

7.75 % 4.000.000 4,000,000 100,000 100.000 Total not subject to mandatory redemption 4,609,650 4,609.650 $63,893 160,965 160,965 Cumulative, $100 par value-Subject to Mandatory Redemption (Note 4E):

8.45 9 200,000 250,000 20,000 25,000 Redemption within one year (5,000) (5,000) 200,000 250.000 15,000 20,000 l fYnnsylvania Fbwer Company Cumulative, $100 par mjue-Authorized 1,200,(XX) shares l 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 4MW 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 5,920 5,800 5.800 102.07 {

Total not subject to mandawry redemption 509,049 509,049 $26,619 50,905 50,905 Subject to Mandatory Redemption (Note 4E):

7.625 % 150.000 150,000 15,000 15.000 Gb OBl.lGATED MAhWAORll.Y REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST llOLDING SOLELY OE SUBORDINATED DEBENTU2tES (Note 4F):

Cumulative, $25 par value-Authorized 4,800,000 shares i Subject to Mandatory Redempion:  ?

9.(X)% 4. Q ,000 4,800.000 120,000 120,000 50 24

censelidated statemsnts of capitalization (cont.) FinsTENERGY CORit (In thousamh, ewept per share amounts)

At December 31. 1997 1996 Number of Shares Optional Outstanding Redemption Price 1997 1996 Itr Share Aggregate- - . - - -

PREIT.RRED STOCK OF CONSOLIDATED SUllSIDIARIES (Cont.)

Cleseland Electric illuminating Company Cumulative, Without Par Wlue-Authorized 4,00().000 shares Not Subject to Mandatory Re&mption:

$ 7.40 Series A 500,000 $ 101.00 $ 50,500 50,000

$ 7,56 Series !! 450,000 102.26 46,017 45,071 Adjustable Series L 474,000 100.00 47,400 46,404

$42.40 Series T 200,000 500.00 100,000 96,850 Total not subjen to mandatory redemption 1,624,000 $243,917 238,325 Subject to Manaatory Redemption-5 7.35 Series C 110,000 101.00 $ 11,110 11,110

$88.00 Snies E 9,000 1,007.65 9,069 9,000

$91.50 Series Q 42,858 1,000.00 42,858 42,858

$88.00 Series R 50,000 - - 55,000

$w.00 Series S 74,000 - -

79,920 285,858 63.037 197,888 ReJemption Within One Year (14,714)

Total subject to mandatory redemption 285.858 $ 63.037 183,174 Toledo Edison Company Cumulative, $100 Par Wlue-Authorized 3,000,000 shares Not Subject to Mandatory Redemption:

$ 4.25 160.000 104 63 $ 16,740 16,000

% 4.56 50,000 101.On 5,050 5,000

$ 4.25 100.000 102.00 10,200 10,000

$ 8.32 100,000 102.46 10,246 10,000

$ 7.76 150,000 102.44 15,366 15,000

$ 7.80 160,000 101.65 15,248 15,000

$10.00 C0,000 101.00 19,190 19,000 900,000 92,040 90,000 Cun. 'ive, $25 Par %Iue-Autir l ;2,000,000 shares

h. -ket to Mandatory Redemption:

$ 2.21 1,000,000 25.25 25,250 25,000

$ 2.365 1,400,000 27.75 38,850 35,000 Adjustable Seric6.A 1,200,000 25.00 30,000 30,000 Adjustable Series 1,200,000 25.00 30,000 3C,000 4.800.000 120,0M i 124.100 lotal not subject to mandatory redemption 5,700,000 $216,140 210,000 Cumulatit $100 par wdue-Subject to Mandatory Redemption:

$ 9.375 33,550 100.49 $ 3,371 3,355

_ Redemption Within One Year (1,665)

Total subject to mandatory redemption 33,550 $ 3,371 1,690 25 t') _ _ . .

Consolidated Ctatements Of Capitalization (Cont.) FinsTENERGY CORI!

1DNO-TERM DIEF (Note 4G) (Interest rates reflect weighted average rates) (In thousands)

FIRST MORTGAGE ilONDS SECURED NOTES UNSECURED NOTES TUIAL 19 % 1997 1996 At Dxemt:er 31 IM 1996 1997 1996 1997 Ohio Edison Cn -

Dw 1997-2002 7.63% $ 659.265 $ 659,265 7.45% $ 92,442 1102263 5.51 % $531.500 $6H500 l - - -

Dae 2003 200' 8.02 % 230.000 230,000 7.68 % 158.204 158.204 Du 2008 2017 7.13% 87,725 87,725 -

Due 20l3-2017 50.960 50.960 7.04 % 155.943 155,943 - - -

Dae 2018 2022 8 75 %

175.000 175.000 7.77 % 188.000 188,000 - - -

Due 2023 2027 7.77 %

- - 5.80% 106.212 106,212 - - -

Dw 2028-2032 Due 2033-2037 - - - 5.45 % 14.800 14.800 1,115.225 1,115.225 803.326 813,1 17 531.500 691.500 $2,450.051 $2,619.872 Total Ohio Edium Cleveland Electnc illuminating Cn -

7.63 % 195.000 8 01 % 475,150 6.24 % 5.050 Due 1997-2002 Dae 2003 2007 8.93 % 475.000 7.52% 415.150 6 46 % 22.550 200,000 7.36 % 158.960 6.10% 19,000 Due 20[12012 8.38%

Due 20112017 - -

7.51 % 419.820 Due 2018 2022 - - 5.25 % 310.855 Due 2023 2027 9.00 % 150.000 7.68 % 246.650 Due 2028 2032 Due 2033-2037 .-

Total Cleveland Electne 1,020.000 2.026.585 46.600 3.093.185 Toledo Edium Cn -

111.000 8.13 % ' 190,750 8.65 % 137,490 Dee 1997-2002 ' 7.31 %

7.90 % 180,725 7.63 % 162.400 6.14 % 1,650 Due 2003-2007 Due 2008-2012 - -

3.80% 31.250 10.00 % 760 Duc 2013-2017 Due 2018-2022 - -

S.00 % 227,200 - -

Due 20212027 - - 7.50% 116.900 Due 2028 2032 Due 2033-2037 Totui-Toledo Edium 291,725 728.500 139.900 1,160,125 hunsyksnia IWer Cn -

Due 1997-2002 9 74 % 3 409 3.409 6.03 % 23,850 23.850 - - -

Due 2003-2007 7.19% 79.370 101,870 - - - - -

Due 20t*2012 - 9.74 % 4.870 4,870 - - - - - -

Due 2013-2017 9.74 % 4.870 4,870 6.46 % 29.525 29.525 - - -

Due 2018 2022 8.58 % 29,231 29.231 6.71 % 36.482 46.782 - - -

Due 202L2027 7.63% 6,500 6,500 5.65 % 37,500 27,200 - - -

Due 2028-2032 5.82 % 21 438 21.438 Due 2033 2037 Total-hnn Power 128,250 150,750 148.795 148,795 - - 277,045 299,545 OES Fuel 6.19% 80.755 84.000 80,755 84.000 Total . 2,555,200 1,265,975 3,787,961 1.045,942 718.000 691,500 7.061,161 3.003.417 Capitallesw obligations 204,213 43.775 Net unarr.c.1aed premium (c=cantion debt 153.518 (5.765)

Lcag-term ebt due wittiin cae year (449,057) (328.667)

Totallong term debt 6,969.835 2,712,760 1UTALCAPITALIZATION $12.124,491 $5.582,989 26

. Consolidated Statement 3 Of Metzined Earning 3 FIRsTENERGY CORP.

Iin thousands)

Ibr the Years Ended December 31, 1997 1996 1995 Halance at beginning of year $557,642 $ 471,095 $ 389,600 Net income 305,774 302,673 294,747 863,416 773.768 684,347 Cash dividends on common stock 216,770 216,126 215,512 Preferred stock redemption adjustments - -

(2,260) i 216,770 216,126 213,252 )

Balance at end of year (Note 4A) $646,646 $ 557,642 $ 471,095 l

l Consolidated Statements Of Cag, ital Stock ane Other Paid in Capita:

Preferred Sh>ck l Not Subject to Subject to Common Stock Mandatory Redemption Mandatory Redemption Unallocated Other ESOP Par or Par or Par or Number Par Paid-in Common Number Stated Number Stated of Shares %Iue Capital Stock of Shares %lue of Shares %lue tDollars in thousands)

. Balance, January 1.1995 ;52.569.437 $1,373.125 $724,848 $(170.376) 6.282.399 $328.240 400,000 $ 40.000 Mmimum liability for unfunded retirement benefits 2,446 Allocation of ESOP Shares 1.274 7,72:

Sale of 9% Preferred Stock 4,800.000 120,000 Redemptioner-.

7.24% Series ' (720) (363,700) (36,370) 7.36% Series (609) (350,000) (35.000) 8.201 Series (932) (450,000) (45,000)

Balance, December 31, !)95 152,569,437 1,373,125 726,307 (162.656) 5,118,699 211,870 5,200,000 160,000 i Mmimum liability for unfunded retirement benefits (f1)

Allocation of ESOP Shares 1.346 7,646 Balance, December 31,1996 152,569,437- 1,373,125 777,602 (155,010) 5,118,699 211,870 5,200,000 160.000 Centerior acquisition 77.637,704 (1,350,104) 2,907,387 7,324,000 448,325 319,40R 201,243 Minimum liability for unfunded j retirement benefits 45 Allocation of ESOP Shares 1.874 8,033 Redemptions- )

845% Series (50,000) (5,000)

Balance, December 31,1997 230,207,141, $ 23,021 $3,636,908 $(146.977) 12,442,699 $660,195 5.469,408 $356,243 The accompanying Notes to Connalidated Financial Statements are an integral part of thche statemenit 27

Consolidated Statement 3 Of Cash Flows FIRsTENERGY CW. .

(In shouumds)

Ihr the Years Ended December 31, 1997 1996 1995 CASil FLOWS FROM OPERATING ACTIVITIES:

$ 305,774 $ 302.673 $ 294,747 Net income -

Adjustments to reconcile net income to net cash from operating activities:

Provision for depreciation and amortization 4'11,431 355,780 256,085 Nuclear fuel and lease amortization 61,960 52,784 70,849 Other amortization, net 42,434 25,961 ' 5,885 Deferred income taxes, net (29,642) 41,365 53,395 Investment tax credits, net (16,252) (14,041) (9,951)

Allowance for equity funds used during construction (201) -

Receivables . 21,846 24,326 (20,452)

Materials and supplies (18,909) (736) 12,428 Accounts payable 57,087 962 3,545 Other 909 (41,317) 66,060 Net cash provided from operating activities 856,437 747,757 732,591 CASH FLOWS FROM FINANCING ACTIVITIES:

New Financing-Common stock 1,558,237 - -

Preferred stock - - 120,000 Long-term debt 89,773 306,313 254,365 Short-term borrowings, net - 229,515 -

Redemptions and Repayments-Preferred stock 5,000 1,016 117,528 Long-term debt 335,909 438,916 499,276 Short-term borrowings, net 47,251 - 54,677 Common Stock Dividend Payments 237,848 218,656 217,192 Net cash provided from (used for) financing activities 1,022,002 (122,760) (514,308)

CASil FLOWS FROM INVESTING ACTIVITIES:

Centerior acquisition 1,582,459 - -

Property additions 203,839 148,18S 198,103 Capital trust investments 8,934 487,979 -

Other 62,237 13,406 13,641 Net cash used for investing activities 1,857,469 649,574 211,744 Net increase (decrease) in cash and cash equivalents 20,970 (24,577) 6.539 Cash and cash equivalents at beginning of period

• 77,267 29,830 23,291 Cash and cash equivalents at end of year $ 98,237 $ 5,253 $ 29.830 SUPPLEMENTAL CASH FLOWS INFORMATION:

. Cash Paid During the Year-Interest (net of amounts capitalized) $ 281,670 $ 224,541 $ 254,789 income taxes W 265,615 4 157,477 $ 78,643

• 199'r beginning balance includes Centerior cash and cash equivalents as of the November 8,1997 acquisition date.

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

28

. Consolidated Ctatements Of T xco FIRsTENERGY CORP, tin chamands)

Ibr the Years Ended December 31, 1997 1996 1995 GENERAL TAXES:

Real and personal property $ 137,816 $ 115,443 $ 118,707 State gross receipts 118,390 104,158 100,591

. Social security and unemployuant 16,551 14,602 15,787 Other 9,406 7,795 8,094 Total general taxes $ 282,163 $ 241,998 $ 243,179 PROVISION FOR INCOME TAXES:

Currently payable-Itderal $ 235,728 $ 164,132 $ 145,511 State 18,152 9,839 10,352 1 253,880 173,971 155,863 Deferred, net- I Frderal (23,716) 37,277 50,631 State (5,926) 4,088 2,764  ;

1 (29,642) 41,365 53,395 )

Investment tax credit amortization (16,152) (14,041) (9,951)

Total provision for income taxes $ 207,986 $ 201,295 $ 199,307 INCOME STATEMENT CLASSIFICATION

. OF PROVISION FOR INCOME TAXES:

Operating income $ 183,798 $ 189,417 $ 191,972 1

- Other income 24,188 11,878 7,335 i

' Total provision for income taxes $ 207,986 $ 201,295 $ 199,307 RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TUTAL PROVISION FOR INCOME TAXES:

Book income before provision for income taxes S 513,760 $ 503,968 $ 494,054 Itderal income tax expense at statutory rate $ 179,816 $ 176,389 $ 172,919 increases (reductions) in taxes resulting from- ,

Amortization of investment tax credits (16,252) (14,041) (9,951) 1 State income taxes net of federal income tax benefit 7,947 9,053 8,525  !

Amortization of tax regulatory assets 30,402 26,945 19.690 I Other, net 6,073 2,949 8.124 Total provision for income taxes $ 207,986 $ 201,295 $ 199,307 ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31:

l Property basis differences $2,091,207 $1,319,878 $1,310,852 l Deferred nuclear expense 454,902 262,123 271,114 Customer receivables for future income taxes 262,428 191,537 204,978 Deferred sale and leaseback costs (121,974) 78,607 82,381 Unamortized investment tax credits (116,593) (72,663) (77,777)

Unosed alternative minimum tax credits (243,039) - -

Other (22,626) (2,396) (19,114) l Net deferred income tax liability $2,304,305 $1,777,086 $1,7/2,434

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

l 29

Notes t2 Consolidated Financial Statement] . . .

1.

SUMMARY

OF SIGNIFICANT the respective regulatory plans, OE's, CEl's and TE's fuel ACCOUNTING POLICIES: rates will be frozen through the regulatory plan period, sub-

. . ject to limited periodic adjustments; Penn's plan provided The consolidated fmancial statements melude .

for the rol! in to base rates ofits fuel rate. As part of OE's FirstEnergy Corp. (Company) and its pnncipal electnc and FirstEnergy's regulatory plans, transition rate credits utility operating subsidianes, Ohio Edison Company (OE), were implemented for customers, which are expected to The Cleveland Electric illuminatmg Company (CEI), reduce operating revenues for OE by appmximately $600 Pennsylvania Power Company (Penn) and The Toled million and CEI and TE by approximately $391 million Edison Company (TE). The Company and its utility sub- during the regulatory plan period.

sidiaries are referred to throughout as "Comnam_es. The All of the Companies' regulatory assets are being recov-Company's 1997 results of operations include the results of CEI end TE for the period November 8,1997 through ered under provisions of the regulatory plans. In addition, the PUCO has authorized OE to recognize additional capital December 31,1997. All significant intercompany transac-tions have been eliminated. The Companies follow the recovery related to its generating assets (w hich is reflected accounting policies and practices prescribed by the Public as additional depreciation expense) and additional amortiza-Utilities Coramission of Ohio (PUCO), the Pennsylvania tion of regulatory assets during the regulatory plan period of at least $2 billion, and the PPUC has authorized Penn to Public Utility Commission (PPUC) and the Federal Energy accelerate at least $358 million, more than the amounts that Regulatory Commission (FERC). The preparation of finan-cial statements in conformity with generally accepted would have been recognized if the regulatory plans were not in effect. These additional amounts are being recovered accounting principles requires management to make periodic estimates and assumptions that affect the reported amounts through current rates. As of December 31,1997, OE's and of assets, liabilities, revenues and expenses. Certain prior Penn's cumulative additional capital recovery and regulatory year amounts have been reclassified to conform with the asset amortization amounted to $427 million. CEI and TE recognized a fair value purchase accounting adjustment of current year presentation.

$1.55 billion in connection with the FirstEnergy merger; that Revenues - The Companies' principal business is fair value adjustment recognized for financial reporting pur-providing electric service to customers in central and p ses will ultimately satisfy the $2 bilhon asset reduction northern Ohio and westem Pennsylvania. The Companies, commitment contained in the CEI and TE regulatory plan.

retail customers are metered on a cycle basis. Revenue is For regulatory purposes, CEI and TE will recognize the $2 recognized for unbilled electric service through the end .

mn acce er t am a on ver the rate plan period.

of the year.

. . Utility Plant and Depreciation - Utility Rece.ivables from customers melude sales to resident al, Pl ant reflects the on. .gmal cost of construction (except for commercial and industrial customers located in the CEI s and TE s nuclear generating units which were Companies' service area and sales to wholesale customers. ad,;usted to fair value), meluding paymil and related costs There was no material concentration of receivables at such as taxes, employee benefits, edmmistrative and general December 31,1997 or 1996, with respect to any particular c sts and financing costs (allowance for funds used during i segment of the Companies' customers.

construction).

CEI and TE sell substantially all of their retail customer .

The Companies pmvide for depreciation on a straight-accounts receivable to Centerior Funding Corp. under an.

line basis at various rates over the estimated lives of asset-backed securitization agreement which expires in pr perty included in plant in service. The annual composite 2001. Centerior Funding completed a public sale of $150 rate for OE s and Penn's electne plent was approximately million of receivables-backed 'nvestor certificates in a trans- 3.0% m 1997,1996, and 1995. CEI's and TE's composite action that qualified for sale accounting treatment. rates were both approximately 3.0% m 1997, in addition to Regulatory Plans - OE's Rate Reduction and the straight-line depreciatimi recognized i 1997,1996 and Economic Development Plan was approved by the PUCO 1995, OE and Penn recogmzed additional capital recovery in 1995; Penn's Rate Stability and Economic Development of $172 million, $144 million and $27 million, respectively, Plan was approved by the PPUC in the second quarter of as additional depreciation expense in accordance with their 1996 and FirstEnergy's Rate Reduction and Economic regulatory plans. Such additional charges in the accumulated

. Developmem Plan for CEI and TE was approved in January provision for depreciation were $343 million and $171 1997. These regulatory plans initially maintain current base million as of December 31,1997 and 1996, respectively.

electric rates for OE, CEI and TE through December 31, .

Annual depreciation expense includes approximately 2005, and Penn through June 20,2006. At the end of the

$

• or future decommissioning costs applicable to i

regulatory plan periods. OE base rates will be reduced by t Compam." es ', ownership and leasehold inter

$300 million (approximately 20 percent below current levels) and CEI and TE base rates will be reduced by a com- bh. "5n E#"#U"E gati to decomm.ission""Its.

The these Compames' umts share of is approximately bined $310 million (approximately 15 percent below current n n cunent dollars and (using a 3.5% escalation levels). The plans also revised the Companies' fuel cost rate) approximately $2.9 billion in future dollars. The esti-recovery methods. The Companies formerly recovered fuel-l related costs not otherwise included in base rates from retail customers through separate energy rates. In accordance with j 30 w____-_-____-___-____-____--_-_-_- _-

mated obligation and the escalation rate were developed Nuclear Fuel - OE's and Penn's nuclear fuel is

, based on site spe.:ific studies. Payments for decommis- recorded at original cost, which includes material, enrichment, sioning are expected to begin in 2016, when actual decom- fabrication and interest costs incurred prior to reactor load.

missioning work begins. The Companies have recovered CEI and TE severally lease their respective portions of approximately $252 million for decommissioning through nuclear fuel and pay for the fuel as it is consumed (see Note their electric rates from customers through December 31, 3). The Companies amortize the cost of nuclear fuel based on 1997. If the actual costs of decommissioning the units the rate of consumption. The Companies' electric rates exceed the funds accumulated from investing amounts include amounts for the future disposal of spent nuclear fuel recovered from customers, the Companies expect that addi. based upon the formula used to compute payments to the tional amount to be recoverable from their customers. The DOE.

Companies have approximately $301.2 million invested in external decommissioning trust funds as of December 31, income Taxes - Details of the total provision for 1997. Earnings on these funds are reinvested with a corre- income taxes are shown on the Consolidated Statements of Taxes. Deferred income taxes result from timing differences sponding increase to the decommissiomng liability. The in the recognition of revenues and expenses for tax and Companies have also recognized an estimated liability of accounting purposes. Investment tax credits, which were appmmimately $34.9 million related to decontamination and deferred when utilized, are being amonized over the recovery decommissioning of nuclear enrichment facilities operated period of the related property. The liability method is used by the United States Department of Energy (DOE), as required by the Energy Policy Act of 1992. to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are The Financial Accounting Standards Board (FASB) recognized at the statutory income tax rates in effect when issued a proposed accounting standard for nuclear decom- the liabilities are expected to be paid. Alternative minimum missioning costs in February 1996. If the standard is tax credits of $243 million, which may be carried forward adopted as proposed: (1) annual provisions for decommis- indefinitely, are available to reduce future federal income sioning could increase: (2) the net present value of estimated taxes, decommissioning costs could be recorded as a liability; and Retirement Benefits - The Companies' trusteed, (3) income from the external decommissioning trusts could noncontributory defined benefit pension plans cover almost be reported as investment income. The FASB indicated in all full-time employees. Upon retirement, employees receive a October 1997 that it plans to continue work on the proposal.

monthly pension based on length of service and compensa-Conwnon Ownership of Generating tion. The Companies use the projected unit credit method for ,

Facilities - The Companies and Duquesne Light funding purposes and were not required to make pension con-Company constitute the Central Area Power Coordination tributions during the three years ended December 31,1997.

Group (CAPCO). The CAPCO companies own and/or lease, The following sets fonh the funded status of the plans and as tenants in common, various power generating facilities.

amounts recognized on the Consolidated Balance Sheets as of Each of the companies is obligated to pay a share of the December 31:

costs associated with any jointly owned facility in the same proponion as its interest. The Companies' ponions of ovr-ating expenses associated with jointly owned facilities are 1997 1996 included in the corresponding opera'ing expenses on the (in mimons)

Consolidated Statements of Income. The amounts reflected Actuarial present value of benefit obligations:

on the Consolidated Balance Sheet under utility plant at Vested benefits $1.096.3 $562.0 Nonvested benefits 60.4 38.9 December 31,1997, include the following:

Companies. Accumulated benefit obligation $1,156.7 $600.9 Utility Accumulated Construction Ownership / -

Plan assets at fair value $1,542.5 $946.3 Generatmg Units in es D pre at on P o ess nter Actuarial present value of projected benefit obligation 1,327.5 688.5 pn milimns) Plan assets in excess of projected benefit obligation 215.0 257.8 Unrecognized net gain (136.5) (100.2)

W.H. Sammis #7 $ 305.5 $ 100.8 $ .8 68.80%

Bruce Ntansfield #1, Unrecognized prior service cost 21.0 20.1 Unrecognized net transition asset (25.9) (33.9)

1. 2 and #3 886.6 : 408.1 2.1 83.01 %

Beaver Valley Net pension asset $ 73.6 $137.8

1. 1 and #2 2,299.9 656.3 - 3.9 69.46%

Davls-Besse 400.9 ' - - 100.00 %

. ' Perry '. 2.674.6 720.3 3.1 86.26 %

l Eastlake #5 159.9 ' 94.6 -

68.80 %

Seneca 64.9 ' 24.3 -

80.00%

l l- Total $6.792.3 $2,004.4 $9 9 The Seneca Unit is jointly owned by CEI and a non-CAPCO company.

31 l

u___........ . .. - -.

i-The assets of the plans consist primarily of common The following sets forth the funded status of the plans. .

stocks, United States government bonds and corporate and amounts recognized on the Consolidated Balance Sheets bonds. Net pension costs for the three years ended as of December 31:

December 31,1997, were compu ed as fo!!ows: 1997 1996 1997 1996 1995 (In millions)

Accumulated postretirement benefit (in millions) obligation allocation; Service cost-benefits earned Retirees $384.8 $155.5 during the pened $ 15.2 $ 14.2 $ 12.8 Fully eligible active plan participants 25.5 10.1 Interest on projected benefit Other active plan participants 123.8 75.5 obligation 55.9 49.3 48.1 Return on plan assets (194.0) (141.6) (194.5t Accumulated postretirement benefit obligation 534.1 241.1 Net deferral 87.5 52.7 118.7 Plan assets at fair value 2.8 2.0 Voluntary early retirement Accumulated postretirement benefit program expense 54.5 12.5 -

obligation in excess of plan assets 531.3 239.1 Gain on plan curtailment -

(12.8) Unrecognized transition obligation (125.1) (133 5)

Net pension cost $ 19.1 $ (25.7) $ (14.9) Unrecognized net loss (24.0) (7.4)

Net postretirement benefit liability $382.2 $ 98.2 The assumed discount rates used in determining the actuarial present value of the projected benefit obligation Net periodic postretirement benefit costs for the three were 7.25% in 1997 and 7.5% in 1996 and 1995. The years ended December 31,1997, were computed as follows:

assumed rates of increase in future compensation levels used 1997 1996 1995 to measure this obligation were 4.0% in 1997 and 4.5% in (j, ,jj,j,,,;

1996 and 1995. Expected long-term rates of return on plan Service cost-benefits attributed assets were assumed to be 10% in 1997,1996 and 1995, to the penod $ 4.6 $ 4.3 $ 4.5 Interest cos na mutated The Companies provide a minimum amount of non-contributory life m, surance to retired employees m, addition Amortization of transition obligation 8.3 8.8 10.2 to optional contributory insurance. Health care benefits, Amortization of loss

- .1 .1 which include certain employee deductibles and copayments, Voluntary early retirement program expense 1.9 .5 Loss on plan curtailment - 13.1 are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Companies Net periodic postretirement benefit cost $35 2 $44.2 $35.9 pay insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid The health care trend rate assumption is 6.0% in the first by the Comp:mies. The Companies recognize the expected year gradually decreasing to 4.0% for the year 2008 and cost of providing other postretirement benefits to employees later. The discount rates used to compute the accumulated and their beneficiaries and covered dependents from the Postretirement benefit obligation were 7.25% in 1997 and time employees are hired until they become 7.5% in 1996 and 1995. An increase in the health care trend eligible to receive those benefits.

rate assumption by one percentage point in all years would In accordance with Statement of Financial Accounting nerease the accumulated postretirement benefit obligation Standards (SFAS) No. 88 " Employers' Accounting for by approximately $42.3 million and the aggregate annual Settlements and Curta!!ments of Defined Benefit pension service and interest costs by approximately $3.6 million.

plans and for Termination Benefits," the 1996 net pension costs shown above and the 1996 postretirement benefit costs St8PPlemental Cash Flows information -

All temporary cash investments purchased with an initial shown below included curtailment effects (significant maturity of three months or less are reported as cash equiva-changes in projected plan assumptions) relating to the pen _

lents on the Consolidated Balance Sheets. The Companies sion and postretirement benefit plans. The emph>yee termi-reflect temporary cash mvestments at cost, which approxi-nations reflected in OE's and Penn's 1996 voluntary early mates their market value. Noncash financing and investing retirement program represented a plan curtailment that sig, activities included capital lease transactions amounting to nificantly reduced the expected future employee service

$3.0 million, $2.0 million and $1.0 million for the years years and the related accrual of defined pension and postre.

1997,1996 and 1995, respectively. Commercial paper trans-tirement benefits. In the pension plan, the reduction in the actions of OES Fuel (a wholly owned subsidiary of OE) that benefit obligation increased the net pension asset and was have initial maturity periods of three months or less are shown as a plan curtailment gain, in the postretirement ben-rep rted net within financing activities under long-term debt efit plan, the unrecognized prior service cost associated with and are reflected as long-term debt on the Consolidated service years no longer expected to be rendered as a result of Balance Sucets (see Note 4G).

the terminations was shown as a pian enrtailment loss.

32

.. All borrowings with initial rnaturities of less than one expected to discontinue its application of SFAS 71 for its year are defined as financial instruments under generally generation operations, possibly as early as 1998. The . impact accepted accounting principles and are reported on the cf Penn discontinuing SFAS 71 is not expected to be mate-Consolidated Balance Sheets at cost, which approximates rial. OE and Penn recognized additional cost recovery of their fair market value. The following sets forth the approxi- $39 million, $34 million and $11 million in 1997,1996 and mate fair value and related carrying amounts of all other 1995, respectively, as additional regulatory asset amortiza-long-term debt, preferred stock subject to mandatory tion in accordance with theli regulatory plans. FirstEnergy's redemption and investments other than cash and cash regulatory plan does not provide for full recovery of CEl's equivalents as of December 31: and TE's nuclear operations. As a result, in October 1997 1997 1996 CEI and TE discontinued application of SFAS 7I for their Carrying Fair Carrying Fair nuclear operations and decreased their regulatory assets of Value Value Value Value customer receivables for future income taxes related to the (in millions; nuclear assets by $794 million.

Long-term debt $6.980 $7.334 $2,919 $2.963 Net regulatory assets on the Consolidated Balance Preferred stock $ 356 $ 362 $ 160 $ 160 Sheets are comprised of the following:

Investments other than cash and cash equivalents: 1997 1996 Debt securities (In millions)

- Matunty (5-10 years) $ 487 $ 512 $ 364 $ 364 Nuclear unit expenses $1.224.2 $ 733.4

- Maturity (more than Customer receivables for future income taxes 724.2 523.0 10 years) 1,134 1.149 387 390 Rate stabilization program deferrals 460 2 -

Equity secunties 24 24 14 14 Sale and leaseback costs . 220.8 (141.1)

All other 336 337 104 102 Loss on reacquired debt 191.1 95.8

$1,981 $2.022 $ 869 $ 870 Employee postretirement benefit costs 25.9 29.2 Uncollectible customer accounts 18.9 29.8 The fair values of long-term debt and preferred stock Perry Unit 2 termination 36.7 40.4 reflect the present value of the cash outflows relating to DOE decommissioning and those securities based on the current call price, the yield to decontamination costs 39.3 18.0 Other 44.7 12.7 maturity or the yield to call, as dee ned appropriate at the end of each respective year. The yields assumed were based Total - $2.624.1 $1.703.1 on securities with similar characteristics offered by a corpo-ration with credit ratings similar to the Companies' ratings.

2. MERGER Long-term debt and preferred stock subject to mandatory redemption of CEI and TE were recognized at fair value in The Company was formed on November 8,1997, by the

. connection with the merger. merger of OE and Centerior Energy Corporation (Centerior).

The fair value of investments other than cash and cash The Company holds directly all of the issued and outstanding equivalents represent cost (which approximates fair value) or common shares of OE and all of the issued and outstanding comm n shares of Centerior's former direct subsidiaries, the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instru- which include, among others, CEI and TE. As a result of the ments with similar characteristics and terms. Investments merger, the former common shareholders of OE and other than cash and cash equivalents include decommis- Centerior now own all of the outstanding shares of

.sioning trust investments. Unrealized gains and losses FirstEnergy Common Stock. All other classes of capital stock tpplicable to the decommissioning trust have been recog- of OE and its subsidiaries and of the subsidiaries of Centerior nized in the trust investment with a corresponding change to are unaffected by the Merger and remain outstanding.

the decommissioning liability. The debt and equity securities The merger was accounted for as a purchase of l referred to above are in the held-to-maturity category. The Centerior's net assets with 77,637,704 shares of FirstEnergy Companies have no securities held for trading purposes. Common Stock through the corwersion of each outstanding Regulatory Assets - The Companies recognize, as Centerior Common Stock share into 0.525 of a share of FirstEnergy Common Stock (fractional shares were paid m, regulatory assets, costs which the FERC, PUCO and PPUC have authorized for recovery from customers in future cash). Based on an imputed value of $20.125 per share, the periods. Without such authorization, the costs would have purchase price was approximately $1.582 billion, which also been charged to income as incurred. All regulatory assets included approximately $20 million of merger related costs.

are being recovered from customers under the Companies, Goodwill of approximately $2.1 billion was recognized (to respective regulatory plans. Based on those regulatory plans, be amortized on a straight-line basis over forty years), which  ;

i' at this time, the Companies believe they will continue to be chte to bill and collect cost-based rates (with the exception ,

of CEl's and TE's nuclear operations as discussed below); l accordingly, it is appropriate that the Companies continue j j the application of SFAS No. 71 " Accounting for the Effects  !

of Certain Types of Regulation" (SFAS 71). However, based on the regulatory environment in Pennsylvania, Penn is 33

under the Beaver Valley Unit 2 sale and leaseback arrange-

~

represented the excess of the purchase price over Centerior's

net assets after fair value adjustments. Such amount may be ments. The deposits pledged to the financial institution pm- .

, (adjusted if additional information produces changed assump- viding those letterr, of credit are the sole property of OES tions over the twelve months following the merger as the Finance. In the event ofliquidation, OES Finance, as a sepa-Company continues to integrate operations and evaluate rate corporate entity, would have to satisfy its obligations to options with respect to its generation portfolio. creditors before any of its assets could be made available to OE as sole owner of OES Finance common stock.

The merger purchase accounting adjustments, which were recorded in the records of Centerior's direct sub- Nuclear fuel is currently financed for CEI and TE

. sidiaries, primarily consist of: (1) revaluation of CEl's and through leases with a special-purpose corporation. As of TE's nuclear g:nerating units to fair value ($1.60 billion), December 31,1997, $157 million of nuclear fuel was

based upon the results of an. independent appraisal and esti . linanced under a lease financing arrangement totaling $190 mated discounted future cash flows expected to be generated million ($90 million of intermediate-term notes and $100 by their nuclear generating units (the estimated cash flows million from bank credit arrangements). The notes mature ,

are based upon management's current view of the likely cost from 1998 through 2000 and the bank credit arrangements ]

expire in October 1998. Lease rates are based on interme- I

recovery associated with the nuclear units); (2) adjusting

their preferred stock subject to mandatory redemption and diate-term note rates, bank rates and commercial paper rates.

long-term _ debt to estimated fair value; (3) recognizing addi- Consistent with the regulatory treatment, the rentals for i

. tional obligations related to setirement benefits; (4) recog- capital and operating leases are charged to operating I nizing estimated severance and other compensation liabili- expenses on the Consolidated Statements of Income. Such 1 ties ($80 million); and (5) adjustment of the Beaver Valley costs for the three years ended December 31,1997, are sum-

Unit 2 deferred rent liability to reflect remainmg payments marized as follows:

on a straight-line basis. The nuclear assets revaluation does

' not include decommissioning since that obligation is 1997 1996 1995

. expected to be recovered with the cash flows provided by the regulated portion of the business. Other assets and lia- (in millions) bilities were not adjusted since they remain subject to rate Operating leases Interest element $149.9 $107.6 $104.6

. regulation on a historical cost basis. 18.3 13.9 Other 45.2 Capitalleases Interest element 6.1 6.5 7.0 EEE Other 6.0 6.3 6.6 The Companies lease certain generating facilities, Total rentals $207.2 $138.7 $132.1 nuclear fuel, certain transmission facilities, office space and other property and equipment under cancelable and non-The future minimum lease payments as of December 31, cancelable leases.

1997, are:

- OE sold portions of its ownership intemsts in Perry Unit Operaungeases I and Beaver Valley Unit 2 and entered into operating leases Capital Lease CapitalTrusts

, . on the portions sold for basic lease terms of approximately Leases Payments income Net 29 years. CEI and TE also sold portions of their ownership (interests in Beaver Valley Unit 2 and Bruce Mansfield Units (In millions) )

8l

.1,4 and 3 and entered into similar operating leases for lease terms of approximately 30 years. During the terms of their 2000

'h 8 42.0 296 4 90 94.5 201.9 i respective leases OE, CEI and TE continue to be respon- 2001 24.3 307.3 90.6 216.7

. sible, to the extent of their individual combined ownership 2002 16.3 315.3 85.4 229.9 {

Years thereafter 93.6 4,263.3 607.4 3,655.9 and leasehold interests, for costs associated with the units ]

' including construction expenditures, operation and mainte. Total minimum lease payments 336.8 $5,774.0 $1,076.9 $4.697.1 nance expenses, insurance, nuclear fuel, property taxes and Executory costs 36.0

. decommissioning. They have the right, at the end of the Net minimum lease payments 300.8

respective basic lease terms, to renew their respective leases. Interest portion 96.6

]

They also have the right to purchase the facilities at the expi- Present value of net minimum ration of the basic lease term or renewal term (if elected) at - lease payments 204.2 a price equal to the fair market value of the facilities. The Less current portion 74.6

]

. basic rental payments are adjusted when applicable federal Noncurrent portion $129.6  !

tax law changes. -

]

OES Finance, incorporated (OES Finance), a wholly owned subsidiary of OE, maintains deposits pledged as

' ! collateral to secure reimbursement obligations relating to certain letters of credit supporting OE's obligations to lessors j 34

OE invested in the PNBV Capital Trust in the third (D) Pref:rred St:ck - Penn's 7.75% series of pre-

.quatertf 1996. The Trust was established :o purchase a por- ferred stock has a restriction which prevents early redemp-tion of the lease obligation bonds issued on behalf of lessors tion prior to July 2003. OE's 8.45% series of preferred stock in OE's Perry Unit I and Beaver Valley Unit 2 sale and lease- has no optional redemption provision, and its 7.75% series is back transactions. CEI and TE established the Shippinoport not redeemable before April 1998. CEl's $42.40 and $88.00 Capital Trust in the fourth quarter of 1997 to purchase the series of preferred stock are not redeemable before June lease obligation bonds issued on behalf of lessors in their 1998 and December 2001, respectively, and its $90.00 series Bruce Mansfield Units 1,2 and 3 sale and leaseback has no optional redemption provision. All other preferred transitions. As noted in the table on page 34, the PNBV and stock may be redeemed by the Companies in whole, or in

, Shippingport Capital Trusts' income, which is included in part, with 30-90 days' notice.

l other income in the Consolidated Statements of Income, effectively reduces lease costs related to those transactions. (E) Preferred Stock Subject To Mandatory Redemption - Annual sinking fund provisions for the Companies' preferred stock are as follows:

4. CAPITALIZATION: Redemption Price Per (A) Retained Earnings - There are no restrictions Series Shares Share Date Beginning on retained earnings for payment of cash dividends on the OE 8.45% 50.000 $100 (i)

Company's common stock- CEI $ 7.35 C 100 10.000 (i)

(~!) Employee Stock Ownership Plan -The 8 g ,

3 10 0 9

Companies fund the matching contribution for their 401(k) 90.00 S 18.750 1,000 November 1 1999 savings plan through an ESOP Trust. All full-time 50,000 88.00 R 1.000 December 1 2001 employees eligible for participation in the 401(k) savings TE $9.375 16.650 100 (i) plan are covered by the ESOP. The ESOP borrowed $200 Penn 7.625 % 7.500 100 October 1 2002 million from OE and acquired 10,654,114 shares of OE's (i) Sinking fund provisions are in effect.

common stock through market purchases; the shares were converted into the Company's common stock in connection g g g. g g with the merger. Dividends on ESOP shares are used t $21 million in 1998, $40 million in 1999, $38 million in 2000, $85 million in 2001 and $19 million in 2002. A lia-service the debt. Shares are released from the ESOP on a .

pro-rata basis as debt service payments are made. In 1997, bility of $19 milh.on was meluded in the net assets acquired 1996 and 1995,429,515 shares,404,522 shares and 412,914 from CEI and TE for preferred dividends declared attribut-shares, respectively, were allocated to OE and Penn able to the post-merger period. Accordingly, no accruals employees with the corresponding expense recognized based f r CEI and TE preferred dividends are meluded in the on the shares allocated method. The fair value of 7,829,538 Company's Statement of Consolidated Income for the shares unallocated as of December 31,1997, was approxi- peri d November 8,1997 through December 31,1997.

mately $227.1 million. Total ESOP-rela;ed compensation (F) Ohio Edison Obligated Mandatorily expense was calculated as follows: Redeemable Preferred Securities of 1997 1996 1995 Subsidiary Trus t Holding Solely Ohio Edison (in millions) Subordinated Debentures - Ohio Edison Financing Base compensation $ 9.9 $ 9.0 $ 9.0 Trust, a wholly owned subsidiary of OE, has issued $120 Dividends on common stock million of 9% Cumulative Trust Preferred Capital Securities.

held by the ESOP and OE purchased all of the Trust's Common Securities and used to service debt (3 4) (2.9) (2 5) s multaneously issued to the Trust $123.7 million principal Net expense $ 6.5 56.1 $ 6.5 amount of 9% Junior Subordinate Debentures due 2025 in exchange for the proceeds that the Trust received from its (C) Equity Compensation Plan Under an sale of Preferred and Common Securities. The sole assets of Equny Compensation Plan adopted by Center or m 1994, the Trust are the Subordinated Debentures whose interest and other payment dates coincide with the distribution and restricted common stock and common stock options were other payment dates on the Trust Securities. Under certain granted to management employees. Upon consummation of the merger, outstanding options became exercisable for circumstances the Subordinated Debentures could be distrib-

- FirstEnergy common stock with option prices and the uted to the holders of the outstanding Trust Securities in the

. event the Trust is liquidated. The Subordinated Debentures number of shares adjusted to reflect the merger conversion ratio. A total of 222,023 options for FirstEnergy common may be optionally redeemed by OE beginning December 31, 2000, at a redemption price of $25 per Subordinated stock were exercised and 68.592 shares of restricted stock Debenture plus accrued interest, in which event the Trust were distributed in 1997. Unexercised options totaling 517,388 shares were outstanding as of December 31,1997. Sdties will be redeemed on a pro-rata basis at $25 per Computing compensation costs for the options consistent share plus accumulated distributions. OE's obligations with SFAS No.123 " Accounting for Stock-Based Compensation" would not have materially affected net income in 1997 and basic and diluted earnings per common share are the same.

35

under the Subordinated Debentures along with the related OE's and Penn's nuclear fuel purchases are financed - ,

Indenture, amended and restated Trust Agreement, through the issuance of OES Fuel commercial paper and Ouarantee Agreement and the Agreement for expenses and loans, both of which are supported by a $225 million long-liabilities, constitute a full and unconditional guarantee by term bank credit agreement which expires March 31,1999.

OE of payments due on the Preferred Securities. Accordingly, the commercial paper and loans are reflected as l

I ng-term debt on the Consolidated Balance Sheets. OES (2) Long Term Delpt - The first mortgage Fuel must pay an annual facility fee of 0.1875% on the total indentures and their supplements, which secure all of the line of credit and an annual commitment fee of 0.0625% on Companies' first mortgage bonds, serve as direct first any unused amount.

mortgage liens on substantially all property and franchises, other than specifically excepted property, owned by the Companies. 5. SHORT TERM BORROWINGS AND BANK Based on the amount of bonds authenticated by the LINES OF CREDIT:

l Trustee through December 31,1997, OE's annual sinking, Short-term borrowings outstanding at December 31, end improvement fund requirement for all bonds issued 1997, consisted of $182.2 million of bank borrowings and under the mortgage amounts to $30 million. OE expects to $120.0 million of OES Capital, Incorporated commercial deposit funds m 1998 that will be withdrawa upon the sur- paper. OES Capital is a wholly owned subsidiary of OE render for cancellation of a like principal amount of bonds' whose borrowings are secured by customer accounts receiv-which are specifically authenticated for such purposes able. OES Capital can borrow up to $120 million under a against unfunded property additions or against previously ivables financing agreement at rates based on certain retired bonds. This method can result in minor increases in bank commercial paper and is required to pay an annual fee the amount of the annual sinking fund requirement.

of 0.26% on the amount of the entire finance limit. The Sinking fund requirements for first mortgage bonds and receivables financing agreement expires in 1999.

maturing long-term debt (excluding capital leases) for the The Companies have various credit facilities with next five years are: domestic banks that provide for borrowings of up to $202 pn nsono million under various interest rate options, including a $125 1998 $374.4 million revolving credit facility which expires in May 1998.

8 OE's and Penn's short-term borrowings may be made under 4

these lines of credit on their unsecured notes. To assure the 2001 101.6 2002 744 7 availability of these lines, the Companies are required to pay annual e mmitment fees that vary from 0.22% to 0.625%,

The Companies' obligations to repay certain po!!mion Tt ese lines expire at various times during 1998. The control revenue bonds are secured by several series of first weig e average mtemst rams on htum howings mortgage bonds and, in some cases, by subordinate liens on utstanding at December 31,1997 and 1996, were 6.02%

the related pollution control facilities. Certain pollution con-and 5.77%, respectively.

trol revenue bonds are entitled to the benefit of irrevocable bank letters of credit of $419.0 million. To the extent that drawings are made under those letters of credit to pay prin- 6. COMMITMENTS, GUARANTEES AND cipa! of, or interest on, the pollution control revenue bonds, CONTINGENCIES:

OE, CEI and/or TE are entitled to a credit against their Capital Expenditures - The Companies' current obligation to repay those bonds. The Companies pay annual forecasts reflect expenditures of approximately $1.2 billion l fees of 0.43% to 1.875% of the amounts of the letters of for property additions and improvements related to their regu-credit to the issuing banks and are obligated to reimburse I ted businesses from 1998-2002, of which approximately the banks for any drawings thereunder.

$320 million is applicable to 1998. Investments for additional OE had unsecured borrowings of $215 million at nuclear fuel during the 1998-2002 period are estimated to December 31,1997, which are supported by a $250 million be approximately $518 million, of which approximately long-term revolving credit facility agreement which expires $85 million applies to 1998. During the same periods, the December 30,1999. OE must pay an annual facility fee Companies' nuclear fuel investments are expected to be of 0.20% on the total credit facility amount. In addition, the reduced by approximately $380 million and $112 million, credit agreement provides that OE maintain unused first respectively, as the nuclear fuel is consumed. The Companies mortgage bond capability for the full credit agreement also expect to invest approximately $300 million during 1998-amount under OE's indenture as potential security for the 2002 ($65 million in 1998) relating to various nonregulated unsecured borrowings. business ventures.

t 36

. Nuclear insuranc3 - The Price-Anderson Act Environmental Matters - Various federal, state and limits the public liability relative to a single incident at a lo al authorities regulate the Companies with regard to air and nuclear power plant to $8.92 billion. The amount is covered water quality and other environmental matters. The Companies by a combination of private insurance and an industry retro- estimate additior I capital expenditures for environmental l spective rating plan. Based on their present ownership and compliance of approximately $50 million, which is included in j leasehold interests in the Beaver Valley Station, Davis-Besse the construction forecast for their regulated businesses pro- l Plant and the Perry Plant, the Companies' maximum poten- vided under " Capital Expenditures" for 1998 through 2002. l tial essessment under the industry retrospective rating plan The Companies are in compliance with the current sulfur (assuming the other co-owner contributes its proportionate dioxide (SO.) and nitrogen oxides (NOx) reduction require-share of any assessments under the retrospective rating plan) ments under the Clean Air Act Amendments of 1990. SO2 would be $257.7 million per incident but not more than reductions through the year 1999 will be achieved by

$32.5 million in any one year for each incident-burning lower-sulfur fuel, generating more electricity from I The Companies are also insured as to their respective lower-emitting plants, and/or purchasing emission i interests in the Beaver Valley Station, Davis-Besse Plant and allowances. Plans for complying with reductions required for the Perry Plant under policies issued to the operating com. the year 2000 and thereafter have not been finalized. The I pany for each plant. Under these policies, up to $2.75 billion Environmental Protection Agency (EPA) is conducting addi-is provided for property damage and decontamination and tional studies which could indicate the need for additional decommissioning costs. The Companies have also obtained NOx reductions from the Companies' Pennsylvania facilities approximately $809 million of insurance coverage for by the year 2003. In addition, the EPA is also considering ,

replacement power costs for their respective interests in the need for additional NOx reductions from the Companies' ]

Ptrry, Davis-Besse and Beaver Valley. Under these policies, Ohio facilities. On November 7,1997, the EPA proposed the Companies can be assessed a maximum of approxi. uniform reductions of NOx emissions across a region of mately $36.6 million for incidents at any covered nuclear twenty-two states, including Ohio and the District of facility occurring during a policy year which are in excess of Columbia (NOx Transport Rule) after determining that such accumulated funds available to the insurer for paying losses. NOx emissions are contributing significantly to ozone pollu-

.. . tion in the eastern United States. In a separate but related The Companies intend to maintam msurance agamst action, eight states filed petitions with the EPA under nuclear nsk.s as desenbed above as long as it is available. To Section 126 of the Clean Air Act seeking reductions of NOx the extent that replacement power, property damage, decon-emissions which are alleged to contribute to ozone pollution tamination, decommissioning, repair and replacement costs in the eight petitioning states. A December 1997 EPA and other such costs ansing from a nuclear meident at any Memorandum of Agreement proposes to finalize the NOx of the Compames' plants exceed the policy hmits of the Transport Rule by September 30,1998, and establishes a insurance in effect with respect to that plant, to the extent a schedule for EPA action on the Section 126 petitions. The nuclear meident is determmed not to be covered by the cost of NOx reductions, if required, may be substantial. The Companies insurance policies, or to the extent such msur-Companies continue to evaluate their comphance plans and ance becomes unavailable in the future, the Companies other compliance options.

would remain at risk for such costs.

The Companies are required to meet federally approved Guarantees - The CAPCO companies have each SO: regulations. Violations of such regulations can resuh in severally guaranteed certain debt and lease obligations in shutdown of the generating unit involved and/or civil or connection with a coal supply contract for the Bruce criminal penalties of up to $25,000 for each day the unit is in Mansfield Plant. As of December 31,1997, the Companies' violation. The EPA has an interim enforcement policy for shares of the guarantees (which appmximate fair market SO: regulations in Ohio that allows for compliance based on value) were $66.1 million. The price under the coal supply a 30-day averaging period. The Companies cannot predict contract, which includes certain minimum payments, has- what action the EPA may take in the future with respect to been determined to be sufficient to satisfy the debt and lease the interim enforcement policy.

obligations. The Companies' total payments under the coal supply contract were $135.3 million, $113.8 million and CEI and TE have been named as "potentially responsible

$120.0 million during 1997,1996 and 1995, respectively. parties" (PRPs) for three sites listed on the Federal The Companies' minimum annual payments are approxi- Superfund National Pnonties List and several other sites.

mately $58 million under the contract, which expires Federal environmental regulations provide that PRPs for spe-l December 31,1999' cific sites w uld be held liable on a jomt and several basis.

CEI and TE have accrued a liability of $5.9 million based on l

estimates of their share of potential cleanup costs.

t i

37 r

legislative, administrative and judicial actions will con- 8, PRD FORMA COMZINI3 CCNCENZE3 g , . . .

tinue to change the way that the Companies must operate in FIR 2TENE22Y CCNSOLl?ATED INCIME  !

order to comply with environmental laws and regulations. STATEMENTS (UNAUDITED): l With respect to any such hanges and to the environmental pr forma statements ofincome of FirstEnergy matters described above, the Companies expect that any .

give effect to the Merger as if it had been consummated on resulting additional capital vosts which may be required, as January 1,1996, with the purchase accounting adjustments

. well as any required increase in operating costs, would ulti-actually recognized in the business combmation. q mately be recovered from their customers.

Year Ended December 31, 1997 1996 I

7. CUMMARY OF QUARTERLY FINANCIAL DATA (in mimons. except per share amounts)

Operating revenues $4.975 $5.006 (UNAUDITED):

Operating expenses 3.966 3.941 The following summarizes certain consolidated Operating income 1.009 1,065 operating results by quarter for 1997 and 1996. Other income 61 37 Net interest 643 634 March 31 Jun 30, septemte 30. oecember 31, Net income $ 427 $ 468 D'" Moath5 L"**d '887 '887 1987 '887 Earnings per share of common stock $ 1.92 $ 2.11

('n mHhons, except per share amounts)

Pro forma adjustments reflected above include: (1)

Operating Revenues $604.8 $593.3 $652.7 $970.8 .

808.2 adjusting CEI and TE nuclear generating units to fair value Operating Expenses andlaxes 478.5 467.3 511.6 based upon independent appraisals and estimated discounted Operating income 126.3 126.0 141.1 162.6 future cash flows based on management's current view of Other income 13.5 14.1 12.0 18.7 Net Interest Charges 66.9 66.3 64.4 110.9 cost recovery; (2) goodwill recognized representing the excess of the purchase price over Centerior's adjusted net Net income $ 72.9 $ 73.8 $ 88.7 $ 70.4 Earnings per Share of -

between OE and Centerior;(4) amortization of the fair va>u:

Common Stock $.51 $ 51 $.61 $.36 adjustment of long-term debt; and (5) adjustments for March 31 June 30. September 3c. oecember 31, estimated tax effects of the above adjustments.

Three Months Ended 19 % 1996 1996 1996 (in mdhons. except per share amounts)

Operatmg Revenues $611.6 $599.3 $646.9 $611.9 Operating Expenses and Taxes 481.1 471.7 500.0 486.8 Operating incoma 130.5 127.6 146.9 125.1 Other income 7.0 10.7 7.1 12.7 Net interest Charges 67.2 64.8 64.6 68.3 Net income $ 70.3 $ 73.5 $ 89.4 $ 69.5 Earnings per Share of Common Stock $.49 $ 51 $.62 $.48 Results for CEI and TE are included from the Novem-ber 8,1997 acquisition date through December 31.1997.

38

Widated Financial And Pro Forma Combined Operating Ct ti;tica FIRSTENEncy Court 1997 1996 1995 1994 1993 1992 1987 RAL FINANCIAL INFORMATION liars in thousands) ting Revenues 8 2,821,435 $ 2.469,785 $ 2,465,646 $ 2,368,191 $ 2,369,940 $ 2,332,378 $ 1,785,2%

ting income $ 555,960 $ 530.069 $ 566.618 $ 557,254 $ 522,115 $ 397,468

$ 525.330

% Income $ 305,774 $ 302.673 $ 294,747 $ 281,852 $ 59.017 $ 253,060 $ 364,657 R Ratio of Earnings to Fixed Charges 2.18 2.38 2.31 2 24 1.12 2.01 2.30

$ Utility Plent $ 9,573,210 $ 5.506.970 $ 5,763.603 $ 5.886,194 $ 5.924,250 $ 5.979,538 $ 6,353.508

$ ital Expenditures $ 188,145 $ 145.005 $ 196.041 $ 258.642 $ 263,179 $ 252,592 $ 705,242 31 Capitalization $12,124,492 $ 5.582,989 $ 5,565,997 3 5,852,030 $ 5,656,295 $ 5.943,913 $ 6.533,774 vitalization Ratios:

Comnon Stockholders' Equity 34.3 % 44.8 % 43.3 % 39.6% 39.7 % 40.5 % 40.6 %

Preferred and Preference Stock:

Not Subject to Mandatory Redemption 5.5 3.8 3.8 5.6 5.8 6.0 6.2 Subject to Mandatory Redemption 2.7 2.8 2.9 0.7 0.8 1.0 2.2 Long-Term Debt 57.5 48.6 50.0 54.1 53.7 52.5 51.0 Tot 21 Capitalization 100.0 % 100.0 % 100.0 % 100 0 % 100.0 % 100.0 % 100.0 %

Grage Capital Costs:

Preferred end Preference Stock 8.02% 7.59 % 7.59% 7.15% 6.86 % 7.32 % 9.38 %

long-Term Debt 8.02% 7.76 % 8.00 % 8.17% 8.27% 8.53 % 10.22 %

EMMON STOCK DATA sings per Share * $2.16 $2.10 $2.05 $1.97 $1.82 $1.70 $2.62 Curn on Average Common Equity

• 12.2% 12.4% 12.5% 12.4 % 11.4 % 10.8% 15.0%

eidends Paid per Share $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.96 eidend Payout Ratio

• 69 % 71 % 73 % 76 % 82 % 88 % 75 %

eidend Yield - 5.2% 6.6% 6.4% 8.1% 6.6% 6.5% 9.7%

se/ Earnings Ratio

• 13.4 10.8 11.5 9.4 12.5 13.6 7.7 ah Value per Share $18.71 $17,35 $16.73 $16.15 $14.70 $ 15.78 $17.40 trLet Price per Share $29.00 $22.75 $23.50 $18.50 $22.75 $23.125 $20.13 30 of Market Price to Book Value 155 % 131 % 140 % 115 % 155 % 147% 116 %

abre net nonrecurring charges in 1997 and 1993.

DIURMA COMBINED OHIO EDISON SD CENTER 10R STATISTICS bwatt-Ikiur Sales (Millions):

Residential 15,556 15,807 15.773 15,181 15,211 14.351 13,958 Commercial 15,000 14,944 14.845 14.366 13,565 14.093 12,132 Industri21 24,047 23.367 22,681 21,910 21,561 21,301 21,052

@Jier 1,207 1,158 1,196 1.218 1,166 1,156 2,259 Total Retail 55,810 55,276 54,495 52.675 52,031 50,373 49,401 Total Wholesale 7,998 9.670 9,295 - 7,039 7,967 8,463 5.579 Tot:1 Sales 63,808 64,946 63,790 59,714 59.996 58.836 54.980 mmers Served:

Residential 1,929,371 1,912.850 1.907,850 1,893.827 1,870,026 1.882.094 1.805.831 Commercial 213,348 212.092 210,745 207,362 203,892 189,470 202.605 fndustrial 12,918 12,974 12.763 12,618 13.298 13,322 11.774 Other . 3,999 3,913 3.869 3,760 3.805 4,037 3,799 Total . 2,159,636 2,141,829 2,135.227 2,117,567 2.103,089 2,089,990 2,010.874 Eber of Employees 10,020 10,477 11.633 11,933 14,639 12.726 '16,157 39

Investor Services, Transfer Agent and Registrar instruction requesting that the Company hold the shares and stating whether future dividends for the shares FirstEnen;y Secun. ties Transfer Company, a subsidiary be.mg forwarded are to be reinvested or paid m. cash. 'Ihe of FirstEnergy, acts es the transfer egent and registrar for certificate (s) should not be endorsed, and registered mail all stock issues of FirstEne gy and its subsidianes. .

is suggested. Shares held m. safekeeping will be reported Shareholders wanting to transfer stock, or who need on dividend checks or Stock Investment Plan statements.

assistance or m. formation, can submit their stock or write to Investor Services, FirstEnergy Corp.,76 South Main Street, Duplicate Mailings of the Annual Report Akron, Ohio 44308-1890 Shareholders can also call the If you hold stock in more than one mgistration and do following toll-free telephone number, which is valid in the not wish to combine accounts, you can eliminate United States, Canada, Puerto Rico and the Virgin Islands: duplicate mailings of our annual report by writing to 1-800-736-3402. Investor Services requesting that we stop mailing an Stock Listings and Trading annual report to a particular account. De sure to pmvide the exact registration of the account for which you want Newspapers generally report FirstEnergy common stock under the abbreviation ISFENGY, although this can vary

• ^ N*#"U" depending upon tne newspaper. The common stock of Cornbining Stock Accounts FirstEnergy and prefern<l stocks of its subsidiaries are  ! Mve more than one stock account and want to listed on stock exchanges as follows: combine them, please write or call Investor Services and Company Stock Exchange Symbol specify the account that you would like to retain as well as the registration of each of your accounts.

FirstEnergy New Wrk FE The Illuminating Company New York CVX Tonn 10-K Annual Report Ohio Edison New York OEC Furm 10-K, the Annual Report to the Securities and

• *C' ' 58 Exchange Commission, will be sent without charge upon written request to Nancy C. Ashcom, Corporate Secretary, C""' FirstEnergy Corp.,76 South Main Stmet, Akron, Ohio 44308-1890.

Dividends InstitutionalInvestor and Proposed dates for the payment of FirstEnergy common Security Analyst Inquirics stock dividends in 1998 am as follows: Institutional investors and security analysts should direct Ex-Dividend Date Record Date Ibyment Date inquines to: Ronald E. Seeholzer, Manager, Investor Relations,330-384-5500.

February 4 February 6 March 1 May S May 7 June 1 AnnualMeeting of Shareholders August 5 August 7 September 1 We invite shareholders to attend the 1998 Annual Meeting November 4 November 6 December 1 of Shareholders on Thursday, April 30, at 10 a.m., at the Direct Dividend Deposit John S Knight Center in Akron, Ohin Registered holders of common stock not attending can vote on the items of Shareholders can have their dividends ehrtronically business by completing and retuming the proxy card that deposited into their bank account. To receive an authon.za-is mailed prior to the meeting. Shareholders whose shares tion form, contact Investor Services am held in the name of a broker can attend the meeting if  ;

Stock Investinent Plan they present a letter from the broker indicating ownership 4 f FirstEnergy common stock on the record date of The Company's Stock Investment Plan enables registered March 6, W98.

shareholders, as well as others, to purchase or sell shares of FirstEnergy common stock. Individuals who are not regis- Board of Dircctors

-tered shareholders can enroll with an initial cash invest i We are saddened to report the passing of Board Member ment of $250. Participants may mvest all or some of their Donald C. Blasius,68. Mt Blasius, wtired President of dividends or make optional cash payments of up to White Consolidated industries, Inc., Cleveland, Ohio, was

$100,000 annually. To receive an enrollment form, contact elected to the Ik>ard of Ohio Edison in 1981. Mr. Blasius was a trusted counselor, and his knowledge and good l SafcAceping of Shares judgment will be missed by the Ikiard.

l Tne Company will hold shares of common stock in safe- Charles W. Rainger,64, retired President of Sandusky keeping at a shareholder's request. To take advantage of this Intemational Inc., Sandusky, Ohio, who joined the lkiard service, shareholders should forward the commo" dock of Ohio Ixlison in 1987, elected to retim. The Board certificate (s) to the Company along with a signed Lter of appreciates 1.is years of dedication and service.

40 Pnnted on Recycled Paper

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Board ofDimcfors Russell W. Maier,61 George M. Smart,52 Nancy C. Ashcom H Peter Bu 51 ""#"" " ^" "#" * ^ "" 'I '"I" **'I Chief ExecutiveOfficerof President of Phoenix Packaging President an Chief Financial Theodore E Struck 11 Republic Engmeeral Steels, Corporation, North Canton, Otficer of FirstEnergy Corp ****'

Inc., Massillon, Ohia Member, Ohia Member, Audit and

• ' ' " " C rnmittee. Compensation and Nuclear Ohi Finance committees. Director Harvey L Wagner committees. Dimetor of Ohio of Ohio Edison Company since Controller Company since 1989 and a Edison Company since 1995 1988 and Director of FirstEnergy Director of FirstEnergy Corp " **"

and Director of FirstEnergy Corp since the merger.

since the merger. Assistant Controller Corp since the merger.

Robert M. Carter,47 Jess . ams, St,58 enn H. Randy Sdlla Partner, Carter & Associates, a m ,68 Mw MenM Human md, fuerly President Assistf.nt Treasurer and Cleveland, Ohia Member, Resources Iblicy, Empkiyment and Chief Executive Officer of Practices and Sptems of The Assistant Secniary Audit and Finance committees.

Director of Ohio Edison McNeilCorporation, Akron, Goodyearlire & Rubber Ohin Chairman, Audit Company, Akmn, Ohia Company since 1994 and ""

Committee; Member, Member, Audit and Director of FirstEnergy Corp Compensation and Nuclear Nominating committees Fmd J. Lange since the merger.

ommittees. Director of Ohio Director of Ohio Edison President, FirstEnergy Ventures

. Dc Cool A. Cartwright,56 Edison Company since 1981 Company since 1992 and President, Kent State and Director of FirstEnergy John P. Stetz Director of FirstEnergy Corp University, Kent, Oh,a i Corp since the merger. Senior Vice President-since the merger Chairman, Nominating FirstEnergy huclear Senices Paul J. Ibwers,63 Committee. Director of Ohio

• Chairman of the Board and .'I'"

Edison Company since 1992 and Dimctor of FirstEnergy Chief Executive Officer of " " D [N " " *

"' ## "I CommercialIntertech Corp, Willard R. Holland Corp since the merget ibungstown, Ohia Chairman, Chairman and John K. Wood William E Conway,67 Finance Committee; Member, Chief ExecutiveOfficer Vice President President of William E Conway Compensation Committee. "' "#- # ***

& Associates,Inc.,Scottsdale, H. Peter Burg Dimetor of Ohio Edison Arizona. Chairman, Nuclear President and Company since 1992 and Committee.Directorof the Chief FmancialOfficer Director of FirstEnergy Corp Regional Officers former Centerior Energy since the merget AnthonyJ. Alexander Corporation since 1994 and Lynn M. Cavalier Executive Vice President and Charles W. Rainger,64 Regional President-Eastern Director of FirstEnergy Corp """ ""*I

. Retired, formerly President of since the merger Sandusky International Inc., Earl T. Carey Willtrd R. Holland,61 Sandusky, Ohia Member, Vice President Re nal Pres ent-Southern Chairman of the Board Nominating and Nuclear R. Joseph Hrach Mary Beth Carroll ,

and Chief Executive Officer committees Director of Ohi President,Ibnnsyhania Ibwer of FirstEnergy Corp and Vi e PresidM Edison Company since 1987 Ibnnsylvania Ibwer and Directorof FinitEnergy Douglas S. Elliott Chade E. Jona Company Director of Ohio Corp since the merger. Vice President Nonal President-Northern Edison since 1991 and Director Stephen E. Morgan Robert C. Savage,60 Arthur R. Garfield ,

of FirstEnergy Corp since "" '" #

Pnsident and Chief Executive Vice President N*'"8** Officer of Savage & Associates * '""

John A. Gill ""'I Robert L Loughhead,68 Inc., Tol<xiaL Ohia Member, "" '" **

Vice President Retired, formerly Chairman of Finance and Nominating the Board, President and Chief committees.Directorof the John E. Paganie Richard H. Marsh Regional Vice President-

, Executive Officer of Weirton former Centerior Energy Vice President Western i Steel Corporation, Weirton, Corporation since 1990 and

! Gu L Pipitone West Virginia. Chairman, Director of FirstEnergy Corp # # #

l [CompensationCommittee; since the merger V[ President Regional Vice President-

[ Membec Audit Committee. Stanley E Szwed Northern

! Director of Ohio Edison Vice Pmsident l

Company since 1980 and Director of FirstEnergy Corp since the merget

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ANNUAL REPORT 1997 OhcEdmon

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OHIO EDISON COMPANY 1997 ANNUAL REPORT TO STOCKHOLDERS l

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Ohio Edison Company is a wholly owned electric utility operating subsidiary of FirstEnergy Corp. Ohio Edison i provides electric services to communities in an area of 7,500 square miles in central and northeastern 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 interchange of electric energy with other l electric companies.

. CONTENTS Pace Selected Financial Data 1 Price Range of Common Stock 1 i Management's Discussion and Analysis 2 Consolidated Statements ofIncome 8 Consolidated Balance Sheets 9 -

Consolidated Statements of Capitalization 10 - 11 Consolidated Statements of Retained Earnings 12 Consolidated Statements of Capital Stock and Other Paid-In Capital 12 Consolidated Statements of Cash Flows 13 l Consolidated Statements of Taxes 14 Notes to Consolidated Financial Statements 15 Report ofIndependent Public Accountants 29 l

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OHIO EDISON COMPANY SELECTED FINANCIAL DATA l

i l 1997 1996 1995 1994 1993 l (In thousands, except per share amounts)

Operating Revenues ... ..... .... . .. ....... . ... .. 5 2.473.582 5 2.469.785 5 2.465.846 5 2.368.191 5 2.369.940 N et income . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 293.194 5 315.170 5 317.241 5 303.531 5 82.724 Earnings on Common Stock.. .... ...... . ......... . 5 280.802 5 302.673 5 294.747 5 281.832 5 59.017 Total Assets . . . . .. ... ... . .. . . ... . ..... . . . .. ... .. .. . . . . 5 8.977.455 5 9.054.457 5 8.892.088 5 9.045.253 5 8.964.841 Capha6=8ta= at Decanher 31:

Common Stockholders

• Equity . . . ..... .... . ... $ 2,724,319 $ 2,503,359 $ 2,407.871 $ 2,317,197 $ 2,243,292 Preferred Stock:

Not Subject to Mandatory Redemption.. .. 211,870 211,870 211,870 328,240 328,240 Subject to Mandatory Redemption..... .... . 150,000 155,000 160,000 40,000 45,500 Long-Term Debt .......... . . . .. . . . . . . . . . . . . . 2.569.802 2.712.760 2.786.256 3.166.593 3.039.263 i Total Capitalization......... .. .... .. . ... ..... 5 5.655.991 5 5.582.989 5 5.565.997 5 5.852.030 5 5.656 22), {

l Capitalization Ratios:

l Common Stockholders' Equity ... ..... ... . .... 48.2 % 44.8 % 43.3 % 39.6 % 39.7 %

Prefened Stock:

l Not Subject to Mandatory Redemption......... 3.7 3.8 3.8 5.6 5.8 Subject to Mandatory Redemption . .. . ... . 2.7 2.8 2.9 0.7 0.8 Long-Term Debt . . . . ... . . ... . .... . .. .... ... . .. . 45.4 48.6 50.0 54.1 53.7 Total Capitalization .. .. .. . . . . . . . . 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

Kilowatt-Hour Sales (Milhons):

Residenti i.. . . . . . . . . . . . . . . . . . . . . . . . . 8,631 8,704 8,546 8,201 8,237 j Commercial .. . . . . . .. . . . . . .. .. . . . .. . . . . 7,335 7,246 7,151 6,885 6,787 )

Industria!. . . .. .. . . . . . . . ... . . . . ...... . . .. . . . .. 11,202 11,089 10,513 9,841 9,874 Other.................................... .. 150 147 146 144 144 l 26,356 Total Retail .. ..... ..... .. ..... . .. . ........ .. .. . .. . . . 27,318 27,186 25,071 25,042 Total Wholesale.. ..... .... ....... ... .. 5.241 7.076 6.920 5.879 7.162 Total.. . .. .... . . . . . . . . . . . . . . . . . . ... .. 32.559 34.262 33.276 30.950 32.204 Customers Served:

Res idential . . . . . . . . . . . . . . . . . . . . .. .. . . . . . . . . . . . . . . . . . . . . . 995,605 988,179 978,118 968,483 957,867 Commercial .. . . . . . . . . . . . . . . . . . 111,189 113,795 111,978 109,832 107,401 Industrial. .. . ... . . ......... . . . . .. .. . . . . . . 4,568 4,590 4,268 3,786 3,685 Other ... .... . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.415 1.331 1.308 1.226 1.199 Tota!.................................................. 1.112.777 1.107.895 1.095.672 1.083.327 1.070.152 8,720 B,787 8,524 8,660 l Average Annual Residential kWh Usage.. ..... 8,861 Cost of Fuel per Mi!! ion Btu . ............ ..... .. $1.10 $1.13 $1.18 $1.21 $1.26 Peak Load-Megawatts . . . . . . ... . 6.225 6,027 6,332 5,744 5,729 l Number of Employees.... . . . . . . . . . . . . . . . . . . 4.215 4,273 4,812 5,166 5,978 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.

l 1997 1996 First Quader High-Low .. . ......... .... ...... .. . ... . 23-7/8 20-7/8 24-7/8 21-7/8

, Second Quarter High-Low.. .. .. .... .. ...... . . . 22 19-1/4 23 20-1/4 Third Quarter Highs Low.......... . ... .... . .... .. ... . 23-5/8 21-3/4 22-1/4 19-1/4 Fourth Quarter High-Low ........... ..... ... ...... - - 23-1/4 19-3/8 Yearly High-Low . . . . .. .......... .... . . . . . . . . . - -

24-7/8 19-1/4 l

Prices are b. sed on reports published in The Wall Street Journal for New York Stock Exchange Composite Transactions.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESUL'IS OF OPERATIONS AND FINANCIAL CONDITION his discussion includes forward looking statements based on information currently available to management. Such statements are subject to certain risks and uncertainties. Itese statements typically contain, but are not limited to, the terms " anticipate", " potential", " expect", "believe",

" estimate" and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy market prices, legislative and regulatory changes (including revised environmental requirernents), availability and cost of capital and other similar factors.

RESUL'IS OF OPERATIONS We continued to make significant progress in 1997 as our companies prepare for a more competitive environment in the electric utility industry.

%e most significant event during the year was the approval by the Federal Energy Regulatory Commission (FERC) of our merger with Centerior Energy Corporation to form FirstEnergy Corp., which came into existence on November 8,1997. We expect the merger to produce a minimum of $1 billion in savings for FirstEnergy Corp. during the first ten years of joint operations through the elimination of duplicative activities, improved operating efficiencies, lower capital expenditures, accelerated debt reduction, the coordination of the companies' work forces and enhanced purchasing power.

Earnmgs on common stock of $280.8 million were adversely affected by net non ecurnng charges amounting to $26.4 million relating to a voluntary retirement program and estimated severance expenses. Excluding these charges,1997 earrungs on common stock were $307.2 million, compared to

$302.7 million in 1996. De 1997 results reflect accelerated depreciation and amortization of nuclear and regulatory assets totaling approximately $211 million under our Rate Reduction and Economic Development Plan and Pennsylvania Power Company's (Penn's) Rate Stability and Economic Development Plan; results for 1996 included approximately $178 million of accelerated depreciation and amortization. De 1996 results compared favorably to earmngs on common stock of $294.7 million in 1995.

For the third consecutive year, we achieved record operating revenues and for the fifth consecutive year, we achieved record retail sales. De following table summarizes the sources of changes in operating revenues for 1997 and 1996 as compared to the previous year:

1921 LMf (In mdhons)

Inenamed atall kilowatt-hour sales................. ................... $ 7.8 $ 58.1 Change in average ndail price........................................... 13.3 (46.1) sales to utilities . ... . . . . . ... . . .. ... .. .. . .... . . . .. . .. . ... . . .. .. .. . . .. . . .. . . . (25.8) (4.5) other......................................................................., 8.5 0 6)

Net Incnase . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . W W 2

An improvirig local economy helped us achieve record retail sales of 27.3 billion kilowatt-hours. Our customer base continues to gmw with approximately 4,900 new retail customers added in 1997, aAer gaining more than 12,200 customers the previous year. Residential sales decreased 0.8% in 1997, following a 1.8% gain the previous year. Commercial sales rose 1.2% and 1.3% in 1997 and 1996, respectively. Increased demar.d by rubber and plastics and primary metal manufacturers contributed to a 1.0% rise in industrial sales during 1997, following a 5.5% increase the previous year.

Sales to other utilities fe'l 26.4% in 1997 as a result of the December 31,1996, expiration of a one-year contract with another utility to supply 250 megawatts of power. This reduction follows a 2.7% inemase l the previous year. As a result of the above factors, total kilowatt-hour sales dmypsi 5.0%, compared l with sales in 1996, which were up 3.0% from 1995.

1 Because oflower kilowatt-hour sales, the Companies spent less on fuel and purchased power during 1997, compared to 1996 costs, which were also down compared to 1995. Higher nuclear expenses in 1997 reflect increased operatmg costs at the Beaver Valley Plant. Nuclear operating costs were lower in 1996, compared to 1995, due primarily to lower refueling outage cost levels. 'Ihe increase I

in other operating costs in 1997 reflects a fourth quarter charge of approximately $41.5 million for a voluntary retirement program ani estimated severance expenses. These cost increases were partially .

i offset by gains on the sale of emission allowances during the year. The decrease in other operating costs in 1996, compared to 1995, reflects lower maintenance costs at our fossil-fuel generating units.

The changes in depreciation and regulatory asset amortization in 1997 and 1996 reflect l

accelerations under the regulatory plans discussed above. General taxes decreased in 1997, compared to i 1996, due to lower propesty taxes and an adjustment in the second quarter of 1997 which reduced the )

Companies' liabilities for gross receipts taxes.

The increases in other income in 1997 and 1996 were principally due to higher investment income-primarily through our PNBV Capital Trust investment, which was effective in the third quarter of 1996. Overall, interest costs continue to trend downward. Total interest costs were lower in 1997 than in 1996. Interest on long-term debt decreased due to our economic refinancing and redemption of higher-cost debt totaling approximately $282 million that had been outstanding as of December 31, 1996. Other interest expense increased compared to 1996 due mainly to higher levels of short-term borrowing. We also discontinued deferring nuclear unit interest in the second half of 1995, conristent with our regulatory plan.

j CAPITAL RESOURCES AND LIQUIDITY We have significantly improved our financial position over the past five years. Cash generated from operatons was nearly 25% higher in 1997 than it was in 1992 due to higher revenues and aggressive cost controls. At the same time, return on common equity improved from 10.8% in 1992 to 12.0% in 1997, excluding the net nonrecurrmg charges discussed above. By the end of 1997, we were l

serving about 57,000 more customers than we were five years ago, with approximately 2,000 fewer l- employees. As a result,' our customer / employee ratio has ircsesi by 56% over the past five years, l' standing at 264 customers per employee at the end of 1997, compared with 169 at the end of 1992. In addition, capital expenditures have dropped substantially during that period. Expenditures in 1997 were approximately 37% lower than they were in 1992, and annual depreciation charges have exceeded property additions since the end of 1987.

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Over the past five years, we have aggressively taken advantage of opportunities in the financial markets to reduce our average capital costs. 'Ihrough refinancing activities, we have reduced the average cost of outstanding debt from 8.53% at the end of 1992 to 7.77% at the end of 1997.

Excluding the nonrecurring charges mentioned above, our fixed charge coverage ratios continue to improve. Our indenture ratio, which is used to measure our ability to issue first mongage bonds, improved from 4.34 at the end of 1992 to 6.21 at the end of 1997. Over the same penod, our charter ratio-a measure of our ability to issue preferred stock-improved from 1.89 to 2.35. At the end of 1997, our common equity as a percentage of capitalization stood at 48% compared to 40% at the end of 1992.

Our cash requirements in 1998 for operating expenses, construction expenditures and scheduled debt maturities are =~*~i to be met without issuing additional secunties. Durirng 1997, we reduced our total debt by approximately $245 million. We also have cash requirements of approximately

$1,015 million for the 1998-2002 period to meet scheduled maturities of long-term debt and preferred stock. Of that amount, approximately $167 million applies to 1998.

We had about $4.7 million of cash and temporary investments and $302.2 million of short.

term indebtedness on Dade 31,1997. As of December 31,1997, we had the capability to borrow

$61 million through unused OES Fuel credit facilities. In addition, our unused borrowmj capability included $37 million under revolving lines of credit and $26 million of bank facilities that provide for borrowings on a short-term basis at the banks' discretion.

Our capital spending for the period 1998-2002 is expected to be about $600 million (excluding nuclear fuel), of which approximately $165 million applies to 1998. 'Ihis spending level is nearly $300 million lower than actual capital outlays over the past five years. Investments for additional nuclear fuel during the 1998-2002 period are estimated to be approximately $206 million, of which about $26 million applies to 1998. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $182 million and $41 million, respectively, as the nuclear fuel is consumed. Also, we have operatmg lease commitments (net of PNBV Capital Trust income) of approximately $442 million for the 1998-2002 period, of which approximately $83 million relates to 1998. We recover the cost of nuclear fuel consumed and operating leases through our electric rates.

Interest Rate Risk 1

Our exposure to fluctuations in market interest rates is mitigated by the fact that 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 matunng debt by issuing new debt secunties. As discussed in Note 3, our investment in the PNBV Capital Trust effectively reduces future lease obligations, also reducing interest rate risk. As discussed in Note 1, changes in the market value of our decommissioning i

trust funds are recognized with a corresponding change to the decommissioning liability.

1 The table below presents prircipal amounts and related weighted average interest rates by year of matunty for our investment portfolio, debt obligations and preferred stock with mandatory redemption provisions:

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Fair 19BE 1999 2AaB 2aa2 Teami Vahw ga h)

Invesessenes seher than Cash and Cash Equivalemes Fixed Income $7 56 5 17 $ 23 $ 26 5 738 $ 817 $ MQ A-- hea-r ruse 5.9% 5.5% 7.3% 7.7% 7.8% 7.8% 7.5%

l Imwerm o=ht Pined rate $162 $162 $116 $15 $324 $1,406 $2,185 $2,297  ;

r Avernaeinterest rute 8.7% 6.9% 6.5% 8.1% 7.8% 7.4% 7.5% i L Variable rose $215 $ 327 5 542 3 538 Avernaeinterest ruse 6.4% 4.1% 5.0% ,

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i Shorterm Borrowangs Am- k*==t rate 302 6.0%

$ 302 $ 302 6.0%

Preferred asocic 5 5 5 5 5 5 55 5 1 5 134 5 155 5 161 )

( Aw- W mie 8.5 % 8.5 %' 85% B.5% 7.6% B.9% R.8% I l-OUnDOK l

l We face many awr==*ive challenges in the years ahead as the electric utility industry 1 undergoes significant changes, including changing regulation and the entrance of more energy suppliers )

into the marketplace. Retail wheeling, which would allow retail customers to purchase electricity from other energy producers, will be one of those challenges. Our regulatory plans provide the foundation to

[ position us to meet the challenges we are facing by significar1tly reducing fixed costs and lowering rates to a more mmr=*ive level.

'Ihe Company's Rate Reduction and Economic Development Plan was appmved by the Public Utilities Commission of Ohio (PUCO) in 1995; Penn's Rate Stability and Economic Development Plan was approved by the Pennsylvania Public Utility Commission (PPUC) in the second quaner of 1996. 'Ihese regulatory plans initially maintain the Company's current base electric rates through December 31,2005, and Penn's through June 20,2006. '1he plans also revised the Companies' fuel cost recovery methods.

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

'Ihe Companies' regulatory assets are being recovered under provisions of the regulatory plans, in addition, we have been authorized by the PUCO and PPUC to rvi= additional capital recovery related to our generating assets (which is reflected as additional depreciation expense) and edditional amortization of regulatory assets during the regulatory plan periods of at least $2 billion for j the l'bmpany and $358 million for Penn, more than the amounts that would have been recognized if the regulatory plans were not in effect. 'Ihese additional amounts are being recovered through current rates.

Based on the regulatory environment we opeime in today and the regulatory plans, we believe j we will continue to be able to bill and collect cost-based rates for all of our operations; accordingly, it is 5

appropriate that we continue the application of Statement of Fmancial Accountmg Standards No. 71

" Accounting for the Effects of Certain Types of Regulation" (SFAS 71). However, as discussed below, changes in the regulatory environment are on the horizon. With respect to Penn, we expect to discontinue the application of SFAS 71 for the generation portion of that business, possibly as early as 1998. We do not expect the impact of Penn discontinuing SFAS 71 to be material. As further discussed below, the Ohio legislature is in the discussion stages of restmetunng the electric utility industry within the State. We do not expect any changes in Ohio regulation to be effective within the next two years and we cannot assess what the ultimate impact may be.

On September 30,1997, Penn filed a restmeturing plan with the PPUC. De plan describes how Penn will restructure its rates and provide customers with direct access to alternative electricity suppliers; customer choice is to be phased in over three years beginning in 1999, aAer completion of a two-year pilot program. Penn will continue to deliver power to homes and businesses through its transmission and distribution system, which remains regulated by the PPUC. Penn also plans to sell electricity and energy-related services in its own territory and throughout Pennsylvania as an alternative supplier through its nonregulated subsidiary, Penn Power Energy, nrough the restructuring plan, Penn is seeking recovery of $293 million of stranded costs through a competitive transition charge starting in 1999 and ending in 2005, which is consistent with Penn's Rate Stability and Economic Development Plan currently in effect. De PPUC plans to hold public hearings on Penn's restructuring plan early in 1998.

On January 6,1998, the co-chairs of the Ohio General Assembly's Joint Select Committee on Electric Industry Deregulation released their draR report of a plan which proposes to give customers a choice from whom they buy electricity beginning January 1,2000. No consensus has been reached by the full Committee; in the meantime, legislation consistent with the co-chairs' draR report may be introduced into the Gercral Assembly by one or both of the co-chairs. We cannot predict when or if this legislation will be introduced and if it will be passed into law. We continue to study the potential effects that such legislation would have on our financial position and results of operations.

De Financial Accounting Standards Board (FASB) issued a pmposed accounting standard for nuclear decommissioning costs in February 1996. If the standard is adopted as proposed: (1) annual provisions for decommissioning could increase; (2) the net present value of estimated decommissioning costs could be recorded as a liability; and (3) income from the external decommissioning trusts could be reported as invesunent income. De FASB reported in October 1997 that it plans to continue working on the proposalin 1998.

The Clean Air Act Amendments of 1990, discussed in Note 6, require additional emission reductions by 2000. We am pursuing cost <ffective compliance strategies for meeting the reduction  !

requirements that begin in 2000.

Impact of the Year 2000 Issue De 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 soRware may recognize a date using "00" as the year 1900 rather than the year 2000. His could result in system failures or miscalculations.

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, We currently believe tha with modifications to cxisung software and conversions to new l

software, the Year 2000 Issue will pose no significant operational problems for our computer systems as j so modified and converted. If these modifications and conversions are not made, or are not completed on a timely basis, the Year 2000 Issue could have a material impact on our operations.

We have initiated formal communicsions with many of our major suppliers to determine the

! extent to which we are vulnerable to those third parties' failure to resolve their own Year 2000 j problems. Our total Year 2000 project cost and estimates to complete are based on currently available information and do not include the estimated costs and time associated with the impact of a third party's,

! Year 2000 issue. There can be no guarantee that the failure of other companies to resolve their own l Year 2000 issues wil! not have a maerial adverse effect on us.

We are utilizing both internal and external resources to reprogram and/or replace and test the software for Year 2000 modifications. Most of our Year 2000 problems will be resolved through system replacements. The different phases of our Year 2000 project will be completed at various dates, most of which occur in 1999. We plan to complete the entire Year 2000 project by mid-December 1999. i Of the total project cost, approximately $30 million will be capitalized since those costs are attributable to the purchase of new software for total system replacements (i.e., the Year 2000 solution coraprises only a portion of the benefh resulting from the system replacements). 'Ihe remainistg $4 million will be  ;

expensed as incurred over the next two years. To date, we have incurred approximately $0.5 million 1

- relmed to the assessment of, and preliminary efforts in connection with, our Year 2000 project and the development of a remediation plan.

'Ihe costs of the project and the date on which we plan to complete the year 2000 modifications are based on management's best esumates, which were derived from numerous assump* ions of future events including the contmued availability of certain resources, and other factors.

However, there can be no guarantee that this project will be completed as planned and actual results could differ materially from the estimates. Specific factors that might cause material differences include, but are not limited to, the availability and cost of trained personnel, the ability to locae and correct all relevant computer code, and similar uncertainties. l ll I

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l OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME For the Years Ended Dgr ' -- 31. 1997 1996 1995 On nousands)

OPERATI NG REVENUES . . . ... . . .. .. . ..... . . .. .. . . . .. . . ... . . . . . . .u... .. 52.473.582 12.469.7f 5 S .465.846 OPERATING EXPENSEF AND TAXES:

Puel and purchased power.. ... .. ................... ...... ...... . ... ... 437,223 456,629 465,483 Nuclear operatang costs..................... .. ... . . . . . . . . . . . . . . . . . . . . . . . . 267,681 247,708 289,717 Other operatang costs. ... . . ..... ....... . .. . .. ... . . . ... . . . .. . . ... . . . . . . . . .. .. 446.778 420.523 446.967 Total operation and maintenance npenses....... ..... .. . .... ..... 1,151,682 1,124,860 1,202,167 Provision for depreciation........................ . . . . . . . . . . . . . . . . . . . . . 392,525 355,780 256.085 Amortization of net regulatory assets........ .. . ..... . ....... .... . . 37,416 27,661 5,825 General taxes . .. . . ... .. .... . ... . .. . . .. . . . . . . . . . . . . . . . . . . . . . . . . 234,964 241,996 243,179 Income taxes .. . .. . . .. . . . . . ... ... . . .. ... . .. .... .. . . . ................ .,_,1.(dt.4.22 189.412 191.972 Total operating expenses and taxes ... ......... ................. 1.985.014 1.939.716 1.899.228 OPERATING INCOME. .. ... ... ................... . . . . . . . . . . . . 488,568 530,069 566,618 O DI ER I NCOME . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52.847 37.53] 14.424 INCOME BEFORE NET INTEREST CHARGES ... ... . ..,. ... ..... 541.415 567.606 581.042 NET INTEREST CHARGES:

Interest on long-term debt.. .... ........... .. . ... . .. .. ... . . ... ... 204,285 211.935 243,570 Deferred nuclear unit interest .. ............ .. .. ......... . ...... . . ..... - - (4,250)

Allowance for borrowed funds used during construction and capitalized interest.. .. . . . . . . . . . . . . . . . . . (2,699) (3,136) (5,668)

Other interest expense . ................. .. ....... . . . . . . . . . . 31,209 24,211 22,944 Subsidiaries' preferred stock dividend requirements.. .. . ... . . . ... . 15.426 _ _ 15.426 7.205 Net interest charges . . ... . .. . .. . .. ... . ... . . . . . . . . . . . . . 248.221 252.436 263.801 NET I NCOME . . . .. . . . . .... ... . . .. . ... . .. .. . . . .. . .. .. $293,194 $315,170 $317,241 PREFERRED STOCK DIVIDEND REQUIREMENTS.... . . . . . . 12.392 12.497 22.494 EARNINGS ON COMMON STOCK........ ..... .. .. . . . . . . . . . . . 1282,322 g 5294.747 The accompanying Notes to Consolidated Financial Statements are an integral pert of these statements.

I f

I 8

4

I t

OHIO EDISON COMPANY 1

CONSOLIDATED BALANCE SHEETS At IW -% 31. 1997 1996 (in shousands)

UTILITY PLANT:

In service, at original cost ................... ... ... . .. ... . . .. . . . . . . . . . $8.666,272 $8,634,03C Less-Accumulated provision for depreciation.. .... . . . . . . . . . . . . . 3.546.594 3.226.259 5.119,678 5.407.771 Construction woA in progmes-Electric plara.. . . .. . .. .. ....... . . . . . . . . .. . . . . . . . . . . . 99,158 93,413 Nuclear fuel . . . . ... . . . .. . .. .. .. . . . .. . . . . . .. . . . . . . . . . . . . 21.360 5.786 120.518 99.199 OTHER PROPERTY AND INVESTMENTS:

PNBV Capital Trust (Note 3)................ . . . . . . . . . . . . . . . . . . . . . . . . 482,220 487,979 Letter of credit collateralization (Note 3).... . .. . . . . . . . . . . . . . . . 277,763 277,763 Other (Note 4B)... .......... ...... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 529.408 3233 %

f 1.289 391 1.089.058 CURRENT ASSETS: l j

Cash and cash equivalents............ . . . . . . . . . . . . . . . . . . . . . .. 4,680 5,253 J Receivables- l Customen (less accumulated provisions of $5.618,000 and $2,306,000, l

respectively, for uncollectible accounts) . . ........ . . . . . . . . 235,332 247,027 l Associated companies ........... .... ... . .. .. . . . . . . . . . . . . . . 25,348 -

Other. .. . . . . . . . . . .. .. , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,566 58,327 l Materials and supplies, At average cost-Owned . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 75,580 66,177 l

Under consignment .. .......... .... .. . . . . . . . . . . . . . . . . . 47,890 44,468 Prepayments and other . .... .... .. ... ... . .. . . . . . . . . . . . . . . . . . 78.348 75.681 554.744 49tn933 DEFERRED CIIARGES:

Regulatory assets .. ....... .......... ..... .. . . . . .. . . . . . . . . . .. 1,601,709 1,703,111 Unamortized salc (nd leaseback costs .... ... .. . . . . . . . . . . . . . . . . . . 95,096 100,066 Property taxes .. .. . . .. . .. .... . ... . . . . . . .... . . . . . . . . . . . . . . . . . . . . . . 100.043 100.802 Other. .............. .. ................ . . . . . . . . . . . . . . . . 96 276 57.51T 1.893.124 _1.961.4 %

$8.977.455 $9.054.457 CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Consolidated Statements of Capitalization):

Common stockholders' equity ... ... .. .. . . . . . . . . . . .. . $2,724,319 $2,503,359 Preferred stock - .

Not subject to mandatory redemption ... . . . . . . . . . . . . . . . . 160,965 160,965  ;

Subject to mandatory id nyGen ... .... . . . . . . . . . . . . . . . . . . . . 15,000 20,000 l Preferred stock of consolidated subsidiary-Not suFeet to mandatay redemption ...... . . . . . 50,903 50,905 Subject'to mandatory redemption ..................._. .. . . . . . . . 15.000 15,000 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company subordinated debentures... .. 120,000 120,000 Long-term debt.. .. . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . 2.569.802 2.712.760 5.655 391 5.5F2.989 CURRENT LIABILI'llES:

Currently payable long-term debt and preferred stock.. . . . . . . 278,492 333,667 i Short-term borrowings (Note 5),. . . . . . . . . . . . . . . . . . . . . . . 302,229 349,480 Accounts payable........... . . . . . . . . . . . . . . . . 115,836 93,'50)

Accrued taxes . . . . . ... .. .. . . . . . ... .. . . . . . . . . . . . .. 157.095 142,909 Accrued interest. ... ... . . ... . .... . ... . . . . .. . . .... . . . . . . . . . . . . 53,165 52,855 Other.................................... . . . . . . . . . . . . . . . . . . . 115.256 131.275 1.022.073 1.103.695 DEFERRED CREDITS:

Accumulated deferred b.come taxes...... .. .. . . ... . . . . . . .. . 1 398,354 1,777,086 AxumWated defermd investment tax credits . ... . . . . . . . .. . . . 484,804 199,835 Pensions and ather postrctirement benefits . .. . . . . . . . . . . . . . . . . . - . . . . 158,038 123,446 Other . .. ... .. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258.195 267.406 2.299.391 2.367.773 COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 3 and 6 ) . . . .. .. . .... . ... . . . . . . ..... . . . . . . . . . . . . . . . . . . . . . . . . 58.977.4 % $9.04 4.457 a

i The accompanying Notes to Consolidated Financial Statements are an integrp part of these balance sheets. I 9

OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION At r - - - 31. 1997 19m (In ab=====d=, estert per share amenna)

COMMON STOCEllOI.DERS' SQUITY:

Conunos asock, $9 per value, authoriend 175,000,000 shesse-100 abares and 152,569,437 shares a=an== diar, respectively .... . .. ..... ... .. ........................ . . . . . . . . . . $ 1 $1,373,125 2,102,644 727,602 Odwr paid-in caphat ........ ..... . ... ... ... ................ . . . . . . . . . . . . . . . .

621,674 557,642 Rossimed earnings (Noes 4A)- . ......................... .. . . . . . . . . . .

Unallocated employee stock ownerabsp plan comunon stock.

8,259,053 shares (Note 48)..... .... .. ..... .. . ...... . . . . . . .. . . . . . . . . .

- (f 55.010)

Total co===aa stockholders

• equity .. . . . . . . . . . . . . . . . . . . . 2.724.319 2.503.359 Nanber of %eres Openemal r -

Rademansa rnce 1221 M Per Share ABIEd8 FREFynern FTOCK (Note 4C):

Cummdatsve, $100 par value-Ausborised 6,000,000 shares Not Subject to **~y Redemption:

152,510 152,510 $15,804 15.151 15,251 3.905....................................................... $103.63 4.40 % .... ...... . . . . . . . . . . 176,280 176,280 108.00 19,038 17,628 17,628 4.44 5 .. ... . .. . ..... . . . . . . . . . . . . . . . . . . . . . . 136,560 136,560 103.50 14,134 13,656 13,656 4.56 5.. . . ..... . . . . ...... . . . . . . . . 144.300 _.}E).gg 103.38 14.917 14.430 14.430 609,650 609,650 63,893 60,965 60,965 Cunnslative, $25 per value-Ausbonzad 8,000,000 abases Not Subject to Mandatory C' _,

7.75 % .. ... . .... ... . . . . . . . . 4.000.000 4 000 0'vJ .. 100.000 100.000 Total not subject to mondesory

,as......................... g 4692.919 jd).J9), 160.965 160.%5 Cumulative, $100 per value-Subject tou.a.,y Redemption (Noes 4D):

8.45 5 x _

. . . . . . . . . . . . . . . . . . . . . . 200,000 250,000 20,000 25,000 Redonytson wiebia one year.......... ... ... (5.000) (5.000)

Toeal subject to amandesory 3 M 15.000 20.000 PREFFBkFn STOCK OF CONSOLIDATED SUBSIDIARY (Note 4C):

Psameyteemia Power Campmay Cumulative, $100 par value.

Ausbonaed 1,200,000 shasse Not subject to Mandstory Redemption:

4.245........................ 40,000 40,000 $103.13 $ 4,125 4,000 4,000 4.25 5 ._ .. . . . ... 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 5 .... .. ..... . .. . . . . . . 250,000 250,000 - - 25,000 25,000 8.00s................................................ 58.000 58.00v 102.07 _l,g2g 5.a00 5.800 Total not subject to mandatory sedemption .......... .. . .. . .. ... . . . . . . . . . 509.049 3 g 50.905 50.905 Subject to Mandstory Redemption (Note 4D):

7.6255............................... . . . . I50.000 3 15.000 15.000 COWANY OSIJG411D MANDATORR.Y mWMWMATIE FREFumm8m EBCLRmRW Olr summarM4RY TRt.WT IIO! MING SOtJLY COWANY SUBORDINATED DEBENTURE 5 (Nase AIDS Cumulative, $25 par value-Ausbonaed 4,800,000 shares subject to Maadstory * - , J :--

9.00% ; .. . . . . . . . . . . g 4.800.000 120.000 120.000 10

'1 OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont.)

At Derember 31. 1997 1996 1997 1996 1997 1996 (In thousands)

LONG. TERM DEBT (Note 4F):

First heads:

Ohio ~ Comapany - Pennsylvania Power C wapemy-8.750 % due 1998.. . . . .. 150,000 150,000 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 % d= 2000... . . . 80,000 80,000 6.375% due 2004.. 20,500 37,000 7.375 % due 2002= 120,000 120,000 6.625% due 2004.. ... 14,000 20,000 7.500 % due 2002... . ... . . 34,265 34,265 8.5005 due 2022.. . 27,250 27,250 8.250 % due 2002.. . . . . . . 125,000 125,000 7.625% due 2023 .. 6.500 _ M.QQ 8.625 % due 2003.. . ..... ... 150,000 150,000 6.875 % due 2005. .. . . 80,000 80,000 8.750 % due 2022 50,%0 50,960 7.625 % due 2023... . .. 75,000 75,000 7.875 % due 2023..... .. .. 100.000 100.000 Total first mortgage bonds. . . . . . . 1.115.225 1.115.225 128.250 150.750 1.243.475 1.265.975 Secured notes:

Ohio Fh Censpesy- Pennsylvemia Power Company-7.930 % due 2002.. . . 50,646 60,467 4.750% due 1998.. 850 850 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 l 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 % due2020... . . . 60,000 60,000 5.900% due 2018.. 16,800 16,800 7.000 % due 2021.. ... .. . 69,500 69,500 8.100% due 2018.. . - 10,300 7.150 % due 2021... 443 443 8.100% due 2020.... . . 5,200 5,200 7.625 % due 2023... . .- 50,000 50,000 7.150% due 2021. 14,482 14,482 8.100 % due 2023... . .. .... 30,000 30,000 6.150% dus 2023.... . 12,700 12,700 7.750 % due 2024... ... 108,000 108,000 3.900% due 2027.. . 10,300 -

5.625 % due 2029.. . . 50.000 50,000 6.450% due 2027.. . 14,500 14,500 5.950 % due 2029.. .. . . . . 56,212 56,212 5A50% due 2028. . . . . 6,950 6,950 5.450 % due 2033.. .. 14.800 14.800 6.000% dus 2028.. . 14,250 14,250 5.950%..due 2029 J 238 803.326 813.147 148.795 148.795 952.121 %1.942 OES1%el-5.86% weighted average interest rate .. . ... . . . . . .. .. . . .. 80.755 84.000 Total secured notes . . .. . . . .. . . . . . . . . . . 1.032.876 1.045.942 Umsernmd notes:

Obie Edisse Compemy.

7.430 % due 1997.. . .. ... . . . . . . .. . . . ... . . . - 100,000 8.735 % due 1997.. .. . . . . .. . . . - 50,000 6.088 % due 1999.... . . . . . . . .. . . . . . . . . - 225,000 6.338 % due 1999.. .. . . . . . . . . . . . . . . . . . . . . . . . 40,000 -

6.400 % due 1999.. . . . . . . .. . . . . . - . . . . . . .. 175,000 -

4.300 % due 2012.. ... . . . . . . . .. .. . . . . . . . . . . . . . . . 50,000 50.000 4.350 % due 2014... ... . . . . . . . ... ... .. . . .. . . . . . 50,000 50.000 3.950 % dus 2015 .. .. . . . . . . . . . 50,000 50,000 4.100 % du 2018.. .. . .. .. .. .. . . . . . . . .. 57,100 57,100 4.200 5 due 2018.. ..... . .. .. .. . . . ... . 56,000 56,000 4.050 % due 2032.. . . .. . .. 53.400 53.400 Total unsecered notes ....... ... . . . . . . . . . .. . . . . . . . .. . 531.500 691.500 Capital leans obligations (Note 3).. . . . . . .. ... . 40.614 43.775 Net unamortized discount on debt . . . . . .. . . . . . . . . . ... . . . . . . . . (5.171) (5.765)

I lengerm debt due within one year.. . . . . .. . . . . . . . . . . __ (273,492) G28.667) 2.712.7o0 Toiel longerm debt.. . .... . .. . .. . . . . . 2.se9.802 l

i TOTAL CAPITALIZATION . . .. . . . . . . . . . . , . . . . . . . . . $ 5.655.991 $ 5.582.089 s

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

\

11

OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF RETAINED EARNINGS 1997 1996 1995 For the Years F^j [k - ' r 3].

(in nassands)

$557,642 $471,095 $389,600 Balance at beginning of year... ... ... ... .. ...... ...... ..... .

Net income ..... .... . . . . . . . . . . . . . . . . ....... . .. . . . . . . . .

293.194 315.170 .).J.72 850.836 786.265 706.841 12,392 12,497 20,234 Cash dividends on preferred stock.. . ....... . .. . .... . . .. ... ..

..................... 216.770 216.126 215.512 Cash dividends on common stock..... .. .

229.162 228.623 235.746 5621.674 5557.642 5471.095 hiame at end of year (Note 4A) .

CONSOLIDATED STATEMENTS OF CAPITAL STOCK AND OTHER PAID-IN CAPITAL Preferred bck Not Subject to Subject to Common Stock Unallocated Mandatory Redemotion Mandatory Redemotaos Other ESOP Par or Par or Number Par Paid-In Common Number Stated Number Stated of Shares Value Caoital . Stock . of Shares Y. ale. of Shares Yalet (Dohars in thousands) 152,569,437 $1.373,125 $724,848 $(170,376) 6.282,399 $328,240 400.000 $40,000 ht ,Jaanary 1,1995 .

Minimum lialdlity for unfunded retiremens bemerns 2,446 Allocation of ESOP Shares .. 1,274 7,720 4,800,000 120,000 Sale of 9% Presenal Stock... ..

7.245 series (720) (363,700) (36.370) 7.365 Series (609) (350,000) (35,000) 8.20% Series .. (932) (450.000) (45.000)

Balance, December 31,1995.. 152.569,437 1,373,125 726.307 (162,656) 5,118,699 211,870 5,200,000 160,000 Minimum lialdtity for safunded rairemesa benefits. -... . (51)

A_"--- of ESOP "ha . 1.346 7.646 Batm, December 31,1996.. . 152.569,437 1,373,125 727,602 (155,010) 5,118,699 211,870 5,200.000 160.000 FirstEsergy merger .. (152,569,337) (1,373,124) 1.373,124 146,977 Minimum liability for unfunded rairement bese6 s : 44 Allocation of PSOP Shares... 1.874 8,033 It ' .

8.45% Series .. (50,000) (5.000)

C'-~.D-_-- -31. 1997.. 100 $ . 52.102.644 5 - 5.118.699 $211.870 5.150.000 $155.000 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

12 k -. . .

OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31 1997 1996 1995 (in thousandr)

CASH FLOWS FROM OPERATING ACTIVITIES:

Net Income....... .. .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 293,194 $ 315,170 5317,241 Adjustments to sconcile net income to net cash from operating activP.ies:

Provision for depmciation.... 392,525 355,780 256.085 Nuclear fuel and lease amortamtmn . ..... . ... .. .... . . . . . 49,251 52,784 70,849 Other amortaation, net . ... . ... . .. ...... ... .. .... ...... . ... 36,229 25,961 5,885 Deferred income taxes, net ........ ... ....... . . . . . . . . . . . . . (40,478) 41,365 53,395 Investment tax credits, net ............ .... . . . . . . . . . . . . (15,031) (14,041) (9,951)

Receivables..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,887) 24,326 (20,452)

Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . (10,557) (736) 12,428 Accounts payable . . .. . .... . . ..... . . .... . . . . . . . 32,531 962 3,545 Other.. . .. .. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.943 (41.254) 64.189 Net cash provided from operating activities.. . . . . . 736.720 760.317 753.214 CASH FLOWS FROM FINANCING ACTIVITIES:

New Financing-Preferred stock . . .. .. .... . . . . . . . . . . . . . ... - - 120,000 Long-term debt . ..... .......... . . . . . . . . . . . . . . . . . . . 89,773 306,313 254,365 Short-term borrowings, net ........... .... ..... ..... .. - 229,515 -

Redemptions and Repayments-Preferred stock .. ........ . ........... . . . . . . . . . . . . . . 5,000 1,016 117,528 Long-term debt . . . . . ... . . . . . ... . .. ... . . . . . .. . . .. . .... . 292,409 438,916 499,276 Short-term borrowings, net.. . .. . . . . . . . . . . . . . . . . 47,251 - 54,677 Dividend Payments-Common stock....... .. . .. . . . . . . . . . . . . . . . . 237,848 218,656 217,192 Prefermd stock . .. ... . ......... . . . . . . . . . . . . . 12.559 12.560 20.623 Net cash used for financing activities .......... .. .... .... . . 505.294 135.320 534.931 CASH FLOWS FPOM INVESTING ACTIVITIES:

Pmperty additions .. ... . ... .. . . . . . . . . . . . . . . . . . . . . . . . . . . 179,328 148,189 198,103 PNBV capital trust investment ....... .... .... ........ ... . ........ - 487,979 -

Other ... . ...... . .. . . . .. . . . . . . . . . . . . . . . . . . . . . . . 52.671 13.406 13.641 Net cash used for investing activities . . . . . . . . .. 231.999 649.574 211.744 Net increase (decrease) in cash and cash equivalents.. . . . . .. (573) (24,577) 6.539 Cash and cash equivalents at beginning of year . . ... .. . 5.253 29.830 23.291 Cash and cash equivalents at end of year ..... .. . . ...... .... 5 4.680 5 5.253 5 29.830 SUPPLEMENTAL CASH FLOWS INFORMATION:

Cash Paid During the Year-Interest (net of amounts capitalized).. . . . . . . . . . . . . . . . 5212.987 5 224.541 5 254.789 j income taxes..... ... . . . . . . . . . . . . . . . . . . . . . . . . 5228.399 5157.477 5178.643

'Ihe accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

l l

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l OHIO EDISON COMPANY l

CONSOLIDATED STATEMENTS OF TAXTS 1997 1996 1995 For the Years F*' lb_ " 31.

(in nomanh)

GENERAL TAXES:

$ 114,111 $ 115,443 $ 118,707 Real and personal property .. ....... .. .. . .. . ........... . . . . . ......... .

99,262 104,158 100,591 State gross receipts . ........... ...................................

14,113 14,602 15,787 Social security and unemployment.. .. ... . . ..... . . . . . . . . . . . . . . . .

. . . . . . 7.478 7.795 8.094 Other. . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total gencral taxes ............ . .. . .... ........ . . . . . . . . . . . . . . 1_2).454 N $_241179 PROVISION FOR INCOME TAXES:

Currently payable-

$ 225,529 $ 164,132 $ 145,511 Federal. . .. ..... . . . . . . . . . . . . . . . . . . . . . .... .. . . .

17.784 9.839 10.352 Sts.te .. . . . . . . . .. . . .. . . . . . . . . . . . . . . . . . . . . . . . . .

243.313 173.971 155.863 Deferred, net-(34,429) 37,277 50,631 Federal ...... ...............................................

(6.048) 4.031 2.764 State .. . . . . .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(40.477) 41.365 53.395 Investment tax credit amortization . .... ..... . ,.... .. ....... . . . . (15.031) (14.041) (9.951)

Total provision for income taxes.......... . . .. . . . . . . . . . . . . . . . . 1_1.37 30_1 5 201.295 g INCOME STATEMENT CLASSIFICATION OF PROVISION FOR INCOME TAXFE:

Operatag income .. . .. .. ....... .. . . ... . .. . ... . . .. . . . . . . . . . . . . . . . . . . . . $ 168,427 $ 189,417 $ 191,972 Other income .. . . . . . . . . . . .. . . . . . . .. .. . . . . . . .. . . .. . . . . .. . . .. . . . . . . . . . _ 19378 11.878 7.335 Total provision for income taxes.. . .... .. . . . . . . . . . . . 1_187El 5 201.295 g RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES:

Book income before provision for income taxes... ........ . . . . . . . . . . .

M

$ 168,350 M

$ 180,763 M

$ 180,792 Federal income tax expense at statutory rate.. .... . . . . . . . . . . . . . . .

increases (reductions) in taxes resuking from-Amortization ofinvestment tax credits.... .. . . . . . . . . . . . . . . . . . . . . . . . . (15,031) (14,041) (9,951)

State income taxes net of federal income tax benefit.... . . . . . . . . . . . 7,628 9,053 8,525 Amortization of tax regulatory assets............. . . . . . . . . . . . . . . . . . 28,277 26,945 19,690 Other, net . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.419) (1.425) 251 Total provision for income taxes..... . . . . . . . . . . . . . . . . . . . . .

M M M ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31:

Property basis differences . ........... . . . ... . . . . . . . . . . . . . . . . . . . . . . . . $1,019,952 $1,086,533 $1,047,387 Allowance for equity funds used during construction .. ...... . . . . . . . . . . . 210,136 233,345 263,465 Deferred nuelee ? expense .. ... . .. . ... .. . ... . . . . . .. . ... . ... . . . . . .. . .. . .. . . . . 252,946 262,123 271,114 Customer receivables for future income taxes . ...... ... ........... . .. 177,578 191,537 204,978 Deferred sale and leaseback costs .. . .. . ..... . ... . .. .... . . . . . . . . 74,861 78,607 82,381 Unamortized investment tax credits ... . .. ... . ..... ..... . .. ......... . (67,208) (72,663) (77,777)

Other................................ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.089 (2.396) _ , 19.114)

(

Net deferred income tax liability... ............ ... . . . . . . . . . . . . . 51.698.354 $1.777.086 51.772.434 The e wmpanying Notes to Consolated Financial Statements are an integral part of these statements.

14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES:

he consolidated financial statements include Ohio Edison Company (Company), and its wholly owned subsidiaries. Pennsylvania Power Company (Penn) is the Company's principal operating subsidiary. All significant intercompany transactions have been eliminated. The Company became a wholly owned subsidiary of FirstEnergy Corp. on November 8,1997. De Company and Penn (Companies) follow the accounting policies and practices prescribed by the Public Utilities Commission of Ohio (PUCO), the Pennsylvania Public Utility Commission (PPUC) and the Federal Energy Regulatory Commission (FERC). He preparation of financial statements in conformity with generally accepted accounting principles requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Certain prior year amounts have been reclassified to conform with the current year presentation.

REVENUES-The Companies' principal business is providing electric service to customers in central and northeastern Ohio and western Pennsylvania. The Companies' retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service through the end of the year.

Receivables from customers include sales to residential, commercial and industrial customers located in the Companies' senice area and sales to wholesale customers. There was no material concentration of receivables at December 31,1997 or 1996, with respect to any panicular segment of the Companies' customers.

REGULATORY PLANS-De Company's Rate Reduction and Economic Development Plan was approved by the PUCO in 1995 and Penn's Rate Stability and Economic Development Plan was approved by the PPUC in the second quaner of 1996. Dese regulatory plans initially maintain current base electric rates for the Company and Penn through December 31,2005 and June 20,2006, respectively. At the end of the regulatory plan period, the Company's base rates will be reduced by $300 million

'(approximately 20 percent below current levels). He plans also revised the Companies' fuel cost recovery methods. The Companies formerly recovered fuel-related costs not otherwise included in base rates from retail customers through separate energy rates. In accordance with the respective regulatory plans, the Company's fuel rate will be frozen through the regulatory plan period, subject to limited periodic adjustments; Penn's plan provided for the roll-in to base rates ofits fuel rate. As part of the Company's regulatory plan, transition rate credits were implemented for customers, which are expected to reduce operating revenues for the Company by approximately $600 million during the regulatory plan period.

All of the Companies' regulatory assets are being recovered under provisions of the regulatory plans. In addition, the PUCO has authorized the Company to recognize additional capital i

recovery related to its generating assets (which is reflected as additional depreciation expense) and additional amonization of regulatory assets during the regulatory plan period of at least $2 billion, and the PPUC has authorized Penn to accelerate at least $358 million, more than the amounts that would have been recognized if the regulatory plans were not in effect. These additional amounts 15 J

are being recovered through current rates. As of December 31,1997, the Companies' cumulative additional capital recovery and regulatory asset amortization amounted to $427 million.

UI'ILITY TLANT AND DEPRECIATION-Utility plant reflects the original cost of construction, including payroll and related costs such as taxes, employee benefits, administrative and general costs and financing costs (allowance for funds used during construction),

he Companies provide for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. De annual composite rate for electric plant was approximately 3.0% in 1997,1996, and 1995. In addition to the straight-line depreciation recognized in 1997,1996 and 1995, the Companies recognized additional capital recovery of $172 ,

million, $144 million and $27 million, respectively, as additional depreciation expense in accordance with their regulatory plans. Such additional charges in the accumulated provision for depreciation were $343 millbn and $171 million as of December 31,1997 and 1996, respectively.

Annual depreciation expense includes approximately $8.8 million -for future decommissioning costs applicable to the Companies' ownership and leasehold interests in three nuclear generating units. De Companies' share of the future obligation to deco nmission these units is approximately $481 million in current dollars and (using a 3.5% escalation rate) approximately $1.2 billion in future dollars. The estimated obligation and the escalation rate were developed based on site specific studies. Payments for decommissioning are expected to begin in 2016, when actual decommissioning work begins. De Companies have recovered approximately

$72 million for decommissioning through their electric rates from customers through December 31, 1997. If the actual costs of decommissioning the units exceed the funds accumulated from investing amounts recovered from customers, the Companies expect that additional amount to be recoverable from their customers. De Companies have approximately $109.9 million invested in external decommissioning trust funds as of December 31,1997. Earnings on these funds are reinvested with a corresponding increase to the decommissioning liability. The Companies have also recognized an estimated liability of approximately $15.2 million related to decontamination and decommissioning of nuclear enrichment facilities operated by the United States Department of Energy (DOE), as required by the Energy Policy Act of 1992.

The Financial Accounting Standaro3 Board (FASB) issued a proposed accounting standard for nuclear decommissioning costs in February 1996. If the standard is adopted as proposed: (1) annual provisions for decommissioning could increase; (2) the net present value of estimated decommissioning costs could be recorded as a liability; and (3) income from the external decommissioning trusts could be reported as investment income. The FASB indicated in October 1997 that it plans to continue work on the proposal.

COMMON OWNERSHIP OF GENERATING FACILITIES-De Companies, together with the other FirstEnergy Corp. (FirstEnergy) utilities, The Cleveland Electric illuminating Company (CEI) and The Toledo Edison Company (TE), and Duquesne Light Company constitute the Central Area Power Coordination Group (CAPCO). He CAPCO companies own and/or lease, as tenants in common, various power generating facilities.

Each of the companies is obligated to pay a share of the costs associated with any jointly owned facility in the same proportion as its interest. The Companies' portions of operating expenses 16

associated with jointly owned facilities are included in the corresponding operating expenses on the Consolidated Statements of Income. De amounts reflected on the Consolidated Balance Sheet under utility phnt at December 31,1997, include the following:

Companies' Utility Accumulated Construction Ownership /

Plant Provision for Work in s hnha t'- ^'-U in L A r__-'^*-- L-

• a (in niulons)

W.H. h==c #7 $ 305.5 $ 100.8 $ .8 68.80 %

Bnace Mansfield #1,

1. 2 and #3 766.3 380.3 2.1 50.68 %

Beaver Valley

1. 1 and #2 1,900.0 651.7 3.9 47.11 %

, Perry 1.837.0 720.4 3.1 35.24 5 l Total $4.828.8 $1.853.2 89.9 NUCLEAR FUEL-Nuclear fuel is recorded at original cost, which includes material, enrichment, fabrication and interest costs incurred prior to reactor load. De Companies amortize the cost of nuclear fuel based on the rate of consumption. De Companies' electric rates include amounts for l the future disposal of spent nuclear fuel based upon the formula used to compute payments to the l

DOE.

INCOME TAXES-l Details of the total provision for income taxes are shown on the Consolidated Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. De liability method is used to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid.

RETIREMEPR BENEFITS-The Companies' trusteed, noncontributory defined benefit pension plans cover almost all full-time employees. Upon retirement, employees receive a monthly pension based on length of service and compensation. De Companies use the projected unit credit method for funding purposes and were not required to make pension contributions during the three years ended December 31,1997.

De following sets forth the funded status of the plans and amounts recognized on the Consolidated Balance Sheets as of December 31:

17 i

1997 ,

1996

f. dHons)

Actuanal present value of benefit obligations:

$ 677.4 $ 562.0 Vested benefits 29.9 38.9 N on v--* d F -Sts

$ 707.3 $ 600.9 3_.- - *

• u " St ohli==tian

$1,080.6 $ 946.3 Plan assets at fair value 688.5 AJ=-iel . ^ value of -M+j t---St obtientina 794.1 286.5 257.8 Plan assets in excess of projected benefit obligation Unrecosmzed net gain (139.5) (106.2) 21.0 20.1 Unrecognized prior service cost (25.9) (33.9)

U =--=!=1 net : iaa - --*

- - " $ 142.1 $ 137.8 Net - - "'a De assets of the plans consist primarily of common stocks, United State.s government bonds and corporate bonds. Net pension costs for the three years ended December 31,1997, were computed as follows:

1997 1996 1995 (in mUnons)

Service cost-benefits earned dunng the period $ 12.9 $ 14.2 $ 12.8 Interest on projected benefit obligation 49.8 49.3 48.1 Return on plan assets (188.8) (141.6) (194.5) 90.1 52.7 118.7 Not deferral Voluntary early retirement program expense 31.5 12.5 -

naia on nlan  :-:1-- '

- (12.8) -

Net -- "= cost $ (4.51 $ (25.7) $ (14.9L ne assumed discount rates used in determining the actuarial present value of the projected benefit obligation were 7.25 % in 1997 and 7.5% in 1996 and 1995. The assumed rates of increase in future compensation levels used to measure this obligation were 4.0% in 1997 and 4.5 % in 1996 and 1995. Expected long-term rates of return on plan assets were assumed to be 10%

in 1997,1996 and 1995.

ne Companies provide a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired env>loyces, their dependents and, under certain circumstances, their survivors. The Companies pay insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Companies. The Companies recognize the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 88

" Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," the 1996 net pension costs shown above and the 1996 postretirement benefit costs shown below included curtailment effects (significant changes in projected plan assumptions) relating to the pension and postretirement benefit plans ne employee terminations reflected in the Companies' 1996 voluntary early retirement program represented a plan curtailment that significantly reduced the expected future employee service years and the related 18

___________.________._____._________._________.__________m_ _ _ _ _ _ _ _ _ _ _ _ . _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ . _ _ _ _ _ _ _ _ _ . . _ _ _ _ _ _ _ _ _ _ _ _ _ _ . _ _ _ _ _ _ . _ _ _ _ _ _ _ _ _ _ _ _ _ _

I l accrual of defined pension and postretirement benefits. In the pension plan, the reduction in the benefit obligation irsreased the net pension asset and was shown as a plan curtailment gain. In the postretirement benefit plan, the unrecognized prior service cost associated with service years no longer expected to be rendered as a result of the terminations, was shown as a plan curtailment loss.

The following sets forth the funded status of the plans and amounts recognized on the Consolidated Balance Sheets as of December 31:

1997 1996 (In millwns)

Accumulated postretirement benefit obligation allocation:

Retirees $174.9 $155.5 Fully eligible active plan participants 15.8 10.1 Other active clan narticinants 76.9 75.5 Accumulated postretirement benefit obligation 267.6 241.1 Plan assets at fair value 2.8 2.0 Accumulated postretirement benefit obligation in excess of plan assets 264.8 239.1 Unrecognized transition obligatios (125.1) (133.5)

Unrecoenied net loss (24.0) (7.4)

Net r,ostretirement bgegi bility $115.7 $ 98.2 Net periodic postretirement benefit costs for the three years ended December 31,1997, were computed as folbws:

1997 1996 1995 (in m i k as)

Service cost-benefits attributed to the period $ 4.1 $ 4.3 $ 4.5 Interest cost on acenmuhted benefit obligation 17.6 17.4 21.1 Amortization of trrasitice obligation 8.3 E.8 10.2 Amortization of loss -

.1 .1 Voluntary early retirement program expense 1.9 .5 -

LoSF DRPl aa cu'tailment -

13.1 -

Agegjghg postretirement benefit cost _

$31.9 $44.2 $35.9 The health care trend rate assumption is 6.0% in the first year gradually decreasing to 4.0% for the year 2008 and later. The discount rates used to compute the accumulated postretirement benefit obligation were 7.25% in 1997 and 7.5% in 1996 and 1995. An increase in the health care trend rate assumption by one percentage point in all years would increase the accumulated postretirement benefit obligation by approximately $34.6 million and the aggregate annual service and interest costs by approximately $3.1 million.

TRANSACTIONS WITH AFFILIATED COMPANIES-Operating revenues and operating expenses include amounts for affiliated transactions with CEI and TE since the November 8,1997 merger date. The Company's transactions with CEI and TE from the merger date were primarily for electric sales. The amounts related to CEI and TE were $4.3 million and $0.4 million, respectively.

l 19

SUPPLEMENTAL CASH FLOWS INFORMATION-All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets. The Companies reflect temporary cash investments at cost, which approximates their market value. Noncash financing and investing activities included capital lease transactions amounting to $3.0 million, $2.0 million and

$1.0 million for the years 1997,1996 and 1995, respectively. Commercial paper transactions of OES Fuel (a wholly owned subsidiary of the Company) that have initial maturity periods of three months or less are reported net within financing activities under long-term debt and are refketed as long-term debt on the Consolidated Balance Sheets (see Note 4F).

All borrowings with initial maturities of less than one year are defined as fm' ancial instruments under geaerally accepted accounting principles and are reported on the Consolidated Balance Sheets at cost, which approximates their fair market value. The following sets forth the approximate fair value and related carrying amounts of all other long-term debt, preferred stock subject to mandatory redemption and investments other than cash and cash equivalents as of December 31:

1997 1996 Carrymg Fair Carrying Fair Value Value Value y313 (in Mimons)

Ieng-term debt $ 2,727 $ 2,835 $ 2,919 $ 2,%3 Prefened stock $ 155 $ 161 $ 160 $ 160 Investments other than cash and cash equivalents:

Debt securities

- Maturity (5-10 years) $ 486 $ 512 $ 364 $ 364

- Maturity (more than 10 years) 259 294 387 390 Equity securities 14 14 14 14 All other 145 147 104 102

$ 904 $ %7 $ 869 $ 870 The fair values of long-term debt and preferred stock reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. De yields assumed were based on securities with similar characteristics offered by a corporation with credit ratings similar to the Companies' ratings.

The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity.

'lhe yields assumed were based on financial instruments with similar characteristics and terms.

Investments other than . cash and cash equivalents include decommissioning trust investments.

Unrealized gains and losses applicable to the decommissioning trust have been recognized in the trust investment with a corresponding change to the decommissioning liability. 'Ihe other debt and equity securities referred to above are in the held-to-maturity category. The Companies have no securities held for trading purposes.

REGULATORY ASSETS-De Companies recognize, as regulatory assets, costs which the FERC, PUCO and

. PPUC have authorized for recovery from customers in future periods. Without such authorization, 20

the costs would have been charged to income as incurred. All regulat ry assets are being recovered from customers under the Companies' respective regulatory plans. Based on those regulatory plans, at this time, the Companies believe they will continue to be able to bill and collect cost-based rates; accordingly, it is appropriate that the Companies continue the application of SFAS No. 71

" Accounting for the Effects of Certain Types of Regulation" (SFAS 71). However, based on the regulatory environment in Pennsylvania, Penn is expected to discontinue its application of SFAS 71 for its generation operations, possibly as early as 1998. He impact of' Penn discontinuing SFAS 71 is not expected to be material. The Companies also recognized additional cost recovery of $39 million, $34 million and $11 million in 1997,1996 and 1995, respect;vely, as additional regulatory asset amortization in accordance with their regulatory plans.

Regulatory assets on the Consolidated Balance Sheets are romprised of the following:

1997 1996 (in millions)

Nuclear unit expenses $ 707.7 $ 733.4 Customer receivables for future income taxes 484,7 523.0 Sale and leaseback costs 210.3 220.8 Ioss on reacquired debt 89.1 95.8 Employee postretirement benefit costs 25.9 29.2 Uncollectible customer accounts 18.9 29.8 Perry Unit 2 termination 36.7 40.4 d DOE decommissioning and decontammation costs 16.5 18.0 l Other 11.9 12.7 Total $1.601.7 $1.703.1

2. MERGER:

FirstEnergy was formed on November 8,1997, by the merger of the Company and Centerior Energy Corporation (Centerior). FirstEnergy holds directly all of the issued and outstanding common shares of the Company and all of the issued and outstanding commen shares of Centerior's former direct subsidiaries, which include, among others, CEI and TE. As a result of the merger, the former common shareholders of the Company anti Centerior now own s'l of the -

outstanding shares of FirstEnergy Common Stock. All other classes of capital stock of the Company and its subsidiaries and of the subsidiaries of Centerior are unaffected by the Merger and remain outstanding.

3. LEASES:

i The Companies lease certain generating facilities, certain transmission facilities, office space and other property and equipment under cancelable and noncancellable leases. .

De Company sold portions of its ownership interests in Perry Unit I and Beaver Valley Unit 2 and entered into operating leases on the pcrtions eld for basic lease terms of approximately 29 years. During the terms of the leases the Compar y continues to be responsible, to the extent of its individual combined ownership and leasehold intemsts, for costs associated with the units including construction expenditures, operation arid maintmance expenses, insurance, nuclear fuel, property taxes and decommissioning. The Company hu the right, at the end of the respective basic lease terms, to renew the leases for up to two years. De Company also has the 1

f 21

right to purchase the facilities at the expiration of the basic lease term or renewal term (if elected) at a price equal to the fair market value of the facilities. De basic rental payments are ad.usted when applicable federal tax law changes.

OES Finance, Incorporated (OES Finance), a wholly owned subsidiary cf the Company, maintains deposits pledged as collateral to secure reimbursement obligations relating to certain letters of credit supporting the Company's obligations to lessors under the Beaver Valley Unit ? sale and leaseback arrangements. The deposits pledged to the financial institution pro riding those letters of credit are the sole property of OES Finance. In the event of liquidation. OES Finance, as a separate corporate entity, would have to satisfy its obligations to creditors befo re any ofits assets could be made available to the Company as sole owner of OES Finance common stock.

Consistent with the regulatory treatment, the rentals for capital and operating leales are charged to operating expenses on the Consolidated Statements of Income. Such costs for th three years ended December 31,1997, are summarized as follows:

1997 1996 1995 ,_ ,

(in munens)

Opentang leases Interest element $111.3 $107.6 $104.(

Other 23.2 18.3 13.! -

Capital leases Interest element 6.1 6.5 7.0 Other 60 6. 3 6.ti_,

Total rw I- $146.6 $138.7 $132. L The future minimum lease payments as of December 31,1997, are:

Onerafinin I =====

L Capital Lease PN9V Capital l

1 ,==== Pa. -

Trust 'r-- - -- - 1(gL_

(in m unons) 1998 $ 13.8 $ 120.9 $ 38.4 $ 82.5 1999 11.7 125.8 38.0 87.8 l 2000 10.3 125.0 37.6 87.4 2001 9.7 127.6 36.2 91.4 2002 9.2 127.8 34.5 93.3 Y.gan thereafter 80.0 1.979.6 249.4 1.730.2 Total minimum lease payments 134.7 12.jgM 19.M gM Executory costs 36.0 Net minimum lease payments 98.7 laggsst nortion 58.1 Present value of net minimum lease payments 40.6 lag.gurrent nortion 4.9 Noncurrent nortion $ 35.7 The Compary invested in the PNBV Capital Trust in the third quarter of IW6. The Trust was established to purchase a portion of the lease obligation bonds issued on behalf of lessors in the Company's Perry Unit 1 and Beaver Valley Unit 2 sale and leaseback transactions. As noted in the tab)e above, the PNBV Capital Trust income, which is included in Other Incorne in the Consolidated Statements of Income, effectively reduces lease costs related to those transactions.

32

4

4. CAPITALIZATION:

(A) RETAINED EARNINGS-Under the Company's first mortgage indenture, the Company's consolidated retained earnings unrestricted for payment of ca'sh dividends on the Company's common stock were $554.9 million at December 31,1997.

(B) EMPLOYEE STOCK OWNERSHIP PLAN-ne Companies fund the niatching 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. De ESOP borrowed $200 million from the Company and acquired 10,654,114 shares of the Company's common stock through market purchases; the shares were converted into FirstEnergy's common stock in connection with the merger. De ESOP loan, which '

was shown as a reduction to common equity on the Consolidated Balance Sheet as of December 31, 1996, is included in Other Property and Investments on the Consolidated Balance Sheet as of December 31, 1997 as an investment with FirstEnergy related to the FirstEnergy savings plan.

Dividends on ESOP shares are used to service the debt. Shares are released from the ESOP on a pro-rata basis as debt service payments are made. In 1997,1996 and 1995, 429,515 shares, 404,522 shares and 412,914 shares, respectively, were allocated to the Companies' employees with the corresponding expense recognized based on the shares allocated method. Total ESOP-related compensation expense was calculated as follows:

1997 1996 1995 (in millions)

Base compensation $9.9 $ 9.0 $9.0 Dividends on common stock held b) the ESOP and used to service debt (3.4) (2.9) (2.5)

Net exnense $ 6.5 $ 6.1 $6.5 (C) PREFERRED STOCK-Penn's 7.75% series. of preferred stock has a restriction which prevents early r redemption prior to July 2003. The Company's 8.45% series of preferred stock has no optional redemption provision, and its 7.75% series is not iedeemable before April 1998. All other preferred stock may be redeemed by the Companies in whole, or in part, with 30-60 days' notice.

(D) PREFERRED STOCK SUBJECT TO MANDATORY REDEMITION-The Company's 8 45% series of preferred stock has an annual sinking fund requirement for 50,000 shares that began on September 16,1997. Penn's 7.625% series has an annual sinking fund requirement for 7,500 shares beginning on October 1,2002.

He Companies' pr:ferred shares are retired at $100 per share plus accrued dividends.

Annual sinking fund requirements are $5 million in each year 1998-2001 and $1 millien in 2002.

23 l

(E) COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINA*IED DEBENTURES-Ohio Edison Financing Trust, a wholly owned subsidiary of the Company, has issued

$120 million of 9% Cumulative Trust Preferred Capital Securities. The Company purchased all of the Trust's Common Securities and simultaneously issued to the Trust $123.7 million principal annount of 9% Junior Subordinated Debentures due 2025 in exchange for the proceeds that the i

Trust received from its sale of Preferred and Common Securities. He ' sole assets of the Trust are the Subordinated Debentures whose interest and other payment dates coincide with the distrilmtion and other payment' dates on the Trust Securities. Under certain circumstances the Subordinated  ;

Debentures could be distributed to the holders of the outstanding Trust Securities in the event the

. Trust is liquidated. The Subordinated Debentures may be optionally redeemed by the Company beginning December 31, 2000, at a redemption price of $25 per Subordinated Debenture plus accrued interest, in which event the Trust Securities will be redeemed on a pro-rata basis at $25 per share plus accumulated distributions. The Company's obligations- under the Subordinated Detentures along with the related Indenture, amended and restated Trust Agreement, Guarantee Agreement and the Agreement for expenses and liabilities, constitute a full and unconditional guarantee by the Company of payments due on the Preferred Securitics.

(F) LONG-TERM DEBT-De first mortgage indentures and their supplements, which secure all of the Companies' first mortgage bonds, serve as direct first mortgage liens on substantially all property and franchises, other than specifically excepted property, owned by the Companies.

Based on the amount of bonds authenticated by the Trustee through December 31, 1997, the Company's annual sinking and improvement fund requirement for all bonds issued under the mortgage amounts to $30 nullion. He Company expects to deposit funds in 1998 that will be withdrawn upon the surrender for cancellation of a like principal amount of bonds, which are specifically authenticated for such purposes agains' t unfunded property additions or against previously retired bonds. His method can result in minor increases in the amount of the annual sinking fund requirement.

Sinking fund requirements for first mortgage bonds and maturing long-term debt (excluding capital leases) for the next five years are:

Un Mimons) 1998 $268.6 1999 617.2 2000 166.5 2001 14.5

_ 2002 324.4 he Companies' obligations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds and, in some cases, by subordinate liens on the related pollution control facilities. Certain pollution control revenue bonds are entitled to the benefit of irrevocable bank letters of credit of $338.8 million. To the extent that drawings are made under those letters of credit to pay principal of, or interest on, the pollution control revenue borids, the 24

Company is entitled to a credit against their obligation to repay those bonds. The Company pays annual fees of 0.43% to 0.625% of the amounts of the letters of credit to the issuing banks and are obligated to reimburse the banks for any drawings thereunder.

He Company had unsecured borrowings of $215 million at December 31,1997, which are supported by a $250 million long-term revolving credit facility agreement which expires December 30,1999. De Company must pay an annual facility fee of 0.20% on the total credit facility amount. In addition, the credit agreement provides that the Company maintain unused first mortgage bond capability for the full credit agreement amount under the Company's indenture as potential security for the unsecured borrowings. ,

Nuclear fuel purchases are financed through the issuance of OES Fuel commercial paper and loans, both of which are supported by a $225 million long-term bank credit agreement which expires March 31,1999. 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 0.1875% on the total line of credit and an annual commitment fee of 0.0625% on any unused amouta.

5. SHORT-TERM BORROWINGS AND BANK LINES OF CREDIT:

Short-term borrowings outstanding at December 31,1997, consisted of $182.2 million of bank borrowings and $120.0 million of OES Capital, Incorporated commercial paper. OES Capital is a wholly owned subsidiary of the Company whose borrowings are secured by customer accounts receivable. OES Capital can borrow up to $120 million unde a receivables financing agreement at rates based on certain bank commercial paper and is required to pay an annual fee of 0.26% on the amount of the entire finance limit. De receivables financing agreement expires in 1999.

He Companies have lines of credit with domestic banks that provide for borrowings of up to $77 million under various interest rate options. Short-term borrowings may be made under i these lines of credit on their unsecured notes. To assure the avaibbility of these lines, the Companies are required to pay annual commitment fees that vary from 0.22% to 0.50%. Rese  !

lines expire at various times during 1998. He weighted average interest rates on short-term borrowings outstanding at Dect.mber 31,1997 and 1996, were 6.02% and 5.77%, respectively.

6. COMMITMENTS, GUARANTEES AND CONTINGENCIES:  ;

CAPITAL EXPENDITURES- j De Companies' current forecasts reflect expenditures of approximately $600 million for property additions and improvements from 1998-2002, of which approximately $165 million is applicable to 1998. Investments for additional nuclear fuel during the 1998-2002 period are estimated to be approximately $206 million, of which approximately $26 million applies to 1998.

During the same periods, the Companies' nuclear fuel investments are expected to be reduced by approximately $182 million and $41 million, respectively, as the nuclear fuel is consumed.

25 l

t l

NUCLEAR INSURANCE-The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $8.92 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on their present ownership and leasehold interests in the Beaver Valley Station and the Perry Plant, the Companies' maximum potential assessment under the industry retrospective rating plan (assuming the other co-owners contribute their proportionate shares of any assessments under the retrospective rating plan) would be $102.8 million per incident but not more than $13 million in any one year for each incident.

The Companies are also insured as to their respective interests in the Beaver Valley Station and the Perry Plant under policies issued to the operating company for each plant. Under these policies, up to $2.75 billion is provided for property damage and decontamination and decommissioning costs. De Companies have also obtained approximately $232 million of insurance coverage for replacement power costs for their respective interests in Perry and Beaver Valley. Under these policies, the Companies can be assessed a maximum of approximately $13 ,

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

The Companies intend to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontam*mation, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at any of the Companies' plants exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Companies' insurance policies, or to the extent such insurance becomes unavailable in the future, the Companies would remain at risk for such costs.

GUARANTEES-ne CAPCO companies have each severally guaranteed certain debt and lease obligations in connection with a coal supply contract for the Bruce Mansfield Plant. As of December 31, 1997, the Companies' shares of the guarantees (which approximate fair market value) were $43.4 million. He price under the coal supply contract, which includes certain minimum payments, has been determined to be sufficient to satisfy the debt and lease obligations.

The Companies' total payments under the coal supply contract were $119.5 million, $113.8 million and $120.0 million during 1997,1996 and 1995, respectively. The Companies' minimum annual payments are approximately $35 million under the contract, which expires December 31,1999.

ENVIRONMENTAL MA'ITERS-Various federal, state and local authorities regulate the Companies with regard to air and water quality and other environmental matters. He Companies estimate additional capital expenditures for environmental compliance of approximately $27 million, which is included in the construction forecast provided under " Capital Expenditures" for 1998 through 2002.

The Companies are in compliance with the current sulfur dioxide (SO2 ) and nitrogen oxides (NOJ reductio.. requirements under the Clean Air Act Amendments of 1990. SO 2 reductions through the year 1999 will be achieved by burning lower-sulfur fuel, generating more electricity from lower-emitting plants, and/or purchasing emission allowances. Plans for complying 26

with reductions required for the year 2000 and thereafter have not been finalized. The Environmental Protection Agency (EPA) is conducting additional studies which could indicate the need for additional NO, reductions from the Companies' Pennsylvania facilities by the year 2003.

In addition, the EPA is also considering the need for additional NO, reductions from the Companies' Ohio facilities. On November 7,1997, the EPA proposed uniform reductions of NO, emissions across a region of twenty-two states, including Ohio and the District of Columbia (NO, Transport Rule) after determining that such NO, emissions are contributing significantly to ozone pollution in the eastern United States. In a separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NO, emissions which are alleged to contribute to ozone pollution in the eight petitioning states. A December 1997 EPA Memorandum of Agreement proposes to finalize the NO, Transport Rule by September 30,1998, and establishes a schedule for EPA action on the Section 126 petitions. De cost of NO, reductions, if required, may be substantial. De Companies continue to evaluate their compliance plans and other compliance options.

De Companies are required to meet federally approved SO 2 regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $25,000 for each day the unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Companies cannot predict what action the EPA may take in the future with respect to the interim enforcement policy.

Legislative, administrative and judicial actions will continue to change the way that the

! Companies must operate in order to comply with environmental laws and regulations. With respect

! to any such changes and to the environmental matters described above, the Companies expect that any resulting additional capital costs which may be required, as well as any required increase in operating costs, would ultimately be recovered from their customers.

7.

SUMMARY

OF QUARTERLY FINANCIAL DATA (UNAUDITED):

The following summarizes certain consolidated operating results by quarter for 1997 and 1996.

l l March 31, June 30, Septanber 30, December 31, TL a - t F ' ' 1997 1997 1997 1997 (in milhons)  ;

1 j Operstag Revenues $604.8 $593.3 $652.7 $622.9 i l

n-a =*ia Fu- and Taxes 478.5 467.3 511.6 527.7 Operaung Income 126.3 126.0 141.1 95.2 Other Income 13.5 14.1 12.0 13.3 Net T=*a est Charees 63.8 63.2 61.3 60.0 Net f_acaena $ 76.0 $ 76.9 $ 91.8 $ 48.5 Earaia-a on (% ~ Stark $ 72.9 $ 73.8 $ 88.7 $ 45.4 27

March 31, June 30, September 30, Deconber 31, 1996 19M 19M 1996

, Three Months FrA_o l

(in mWlons)

$611.6 $599.3 $646.9 $611.9 Operating Revenues 481.1 471.7 500.0 486.8 C-. d, Ar=-- and Taxes 130.5 127.6 146.9 125.1 Operating Income 7.0 10.7 7.1 12.7 Other Income 64.1 61.7 61.5 65.1 Net Int w Ch-ios

$ 73.4 $ 76.6 $ 92.5 $ 72.7 Net Len-

$ 70.3 $ 73.5 $ 89.4 $ 69.5 Emr=i==2 on Cv- --- -. Stock 28

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

We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization' of Ohio Edison Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiaries as of December 31,1997 and 1996, and the related consolidated statements of income, retained earnings, capital stock and other paid-in capital, cash flows and taxes for each of the three years in the period ended December 31,1997. 'Ihese 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.

'Ihose standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that cur j audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ohio Edison Company and subsidiaries as of December 31,1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31,1997, in ccaformity with generally accepted accounting principles.

~ LL 0 ARTHUR ANDERSEN LLP j l

Cleveland, Ohio February 13,1998 o

I i

L i i

29

.-______-___-m_m__.

___. _m__-______m._-_ ______-. ___--__-_m, m ________ _ __ _ _ _ ________m__. _

c/o FirstEnergy Corp.

76 South Main Street Akron, Ohio 44308 (800)736-3402 l

l 1997 Annual Report

3 ANNUAL REPORT 1997 1B,ws,g I

l

l THE CLEVELAND ELECTRIC ILLUMINATING COMPANY

( 1997 ANNUAL REPORT TO STOCKHOLDERS l

The Cleveland Electric Illuminating Company is a wholly owned electric utility operating subsidiary of FirstEnergy Corp. It provides electric services to communities in an area l of 1,700 square miles in northeastern Ohio., including the City of Cleveland. It also provides electric energy at wholesale to other electric companies and to certain municipalities in its service area.

l l CONTENTS Page Consolidated Financial and Operating Statistics 1 Management's Discussion and Analysis 2 Consolidated Statements ofIncome 8 l Consolidated Balance Sheets 9 Consolidated Statements of Capitalization 10 - 11 i Consolidated Statements of Retained Earnings 12 Consolidated Statements of Capital Stock and Other Paid-In Capital 12 Consolidated Statements of Cash Flows 13 l

Consolidated Statements of Taxes 14 Notes to Consolidated Financial Statements 15 Report ofIndependent Public Accountants 30 l

1 i

1 l

t ,

1 1

l THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED FINANCIAL AND OPERATING STATISTICS l l

Nov. s . Jan.I.

Dec. 31,1997 Nov.7.1997 1996 1995 1994 1993 (Douars in thousands)

GENERAL FINANCIAL INIVRMATION:

Operating Revenues .. . .. ..... . . .. .. . $ 253.963 $1.529.014 $1.789.961 $1.768.737 M $1.751.330 Operating Income .. .. .................$ 49.502 g $ 358.620 $ 397.899 $ 396.009 $ 222.941 Income (loss) Before Extraordinary item ..... $ 19.290 $ 95.191 $ 116.553 $ 183.719 $ 185.431 $ (587.1471 Not Income (Loss) .. ... ....... .....$ 19.290 $ f729.2471 M $ 183.719 $ 185.431 $ (587.147)

Earnings (Less) on Common Stock . .. . ...$ 19.290 $ (274.276) $ 77.810 $ 141.275 $ 139.994 $ (631.797)

Net Utility Plant.. .......... . .. .... . . .. . .. $3.156.652 $4.983.219 M 1.LL9L6.2,1 9 jL257Ajo Total Assets .. ..... .. . . . .. .. . . $6.440.284 $6.962.297 $7.222.416 $7.204.045 $7.199.763 l

CAPITALIZATION:

Common Stockholder's Equity . . . .. .... $ 950,904 $1,044,283 $1,126,762 $1,058,190 $1,039,947 Preferred Stock-Not Subject to Mandatory Redemption.. .. 238,325 238,325 240,871 240,871 240,871 Subject to Mandatory Redemption .... ... . 183,174 186,118 215,420 245,971 285,225 i long-Term Debt .... . . . . . . . . . . . . . . . 3.189.590 2.523.030 2.759.492 2.683.207 2.951.981 Total Capitalization.. . . . .. .. $4.561.993 $3.991.756 $4.342.545 $4.228.239 $4.518.024 CAPITALIZATION RATIOS:

Common Stockholder's Equity . . .. . . . . . 20.9 % 26.2 % 25.9 % 25.0 % 23.0 %

Preferred Stock-Not Subject to Mandatory Redemption.. .. . 5.2 6.0 5.6 5.7 5.3 Subject to Mandatory Redemption.. . . . 4.0 4.6 5.0 5.8 6.3 Long-Term Debt . . . . . . . . . . . . . 69.9 _6).J _6).J _6).J 65,4 Total Capitalization... .. . . . . . . . . . . . . . . ms mz es as as KILOWA'IT HOUR SALES (MilEoes):

Residential . . . . . . . . . . . . . . . . . . . . . 790 4,062 4,958 5,063 4,924 4,934 Commercial . ... . . . . . . . . . . . 893 4,990 5,908 5,946 5,770 5,634 Industrial . . .. . . . . . 1,285 6,710 7,977 7,994 7,970 7,911 Other .. . . .. .. . . . . . . . ... .. 89 476 522 550 575 $33 Total Retail . ... .. . . .. . . .. . .. 3,057 16,238 19,365 19,553 19,239 19,011 Total Wholesale . ... .. .. . . ... . . .. 575 2.408 2.155 1.694 1.073 2.290 Total . . . . . . .. . . . . . . . . . . . . .. . . . . 3.632 18.646 21.520 21.247 20.312 21.301 CUSTOMERS SERVED (Year-End):

Residential ... ... .. . . . . . . . . . . 671,265 663,130 669,725 668,346 669,118 Commercial . . . . . . . . . . . . . . . . . . 74,597 70,886 72,259 71,609 70,442 Industrial . ... .. . . . . . . . . . . . . . . 6,515 6,545 6,649 6,993 7,852 Other .... . . . . . . . . . . . . . . . . . . 432 446 442 417 297 Total . .. . . . . . . . . . . . . . . . . . . . . . . . 752.809 741.007 749.075 747.365 747.709 Average Annual Residential kWh Usage.. . . 7,235 7,451 7,570 7,370 7.373 Peak lead-Megawatts.. . .. . 3,955 3,938 4,049 3,740 3,862 Number of Employees (Year-End).. . . . . 3,162 3,282 3,636 3,547 3,606 1

MANAGFMENT'S DISCUSSION AND ANALYSIS OF RESUL'IS OF OPERATIONS AND FINANCIAL (X)NDITION

'Ihis discussion includes forward looking statements based on information currently available to r== ===. Such statements are subject to certain risks and uncertainties. 'Ihese statements typically contain, but are not ratised to, the terms " anticipate", " potential", " expect", "bel

" estimate" and similar words. Actual results may <liffer materially due to the speed and nature of increased enma**ian and der =d*ian in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy m prices, legislative and regulatory changes (irriuding revised environmental requirements), av and cost of capital and other similar factors.

RESULTS OF OPERATIONS We continued to make significant progrest in 1997 as we prepare for a more competitive environment in the electric utility industry, i

'The most significant event during the year wins the approval by the Federal Energy

' R=demy Commission (FERC) of the merger of our former parent company, Centerior Energy Corporation, with Ohio Edison Company to form FirstEnergy Corp., which came into existence on November 8,1997. We expect the merger to produce a minimum of $1 billion in savings for FirstEnergy Corp, during the first ten years of joint operations through the elimination of duplicative activities, improved operating efficiencies, lower capital expenditures, accelerated debt reduction, the coordination of the companies' work forces and enhanced purchasing power.

'Ihe merger was accounted for using the purchase method of accounting in accordance with generally r-M accounting principles (see Note 2), and the applicable effects were " pushed down,"

or reflected on the separate financial statements of Centerior's direct subsidiaries as of the merger date.

As a result, we recorded purchase accounting fair value adjustments to: (1) revalue our nuclear generating units to fair value, (2) adjust preferred stock and long-term debt to fair value, (3) recognize additional icetirement and severance benefit liabilides, and (4) record goodwill. Accordingly, the post-merger financial statements reflect a new basis of accounting, and separate financial statements are pa- e4 for the pre-merger and post-merger periods. For the remainder of this discussion, for categories substantially uru&md by the merger and with no significant pre-nwrger or post-merger accounting events, we have combined the 1997 pre-merger and post-merger periods and have compared the total to 1996.

Earnings on common stock in the 1997 pre-merger period were adversely affected by an extraordinary item resu' ting from the Octob:r 1997 write-off of certain regulatory assets discussed below. Excluding this write-off, pre. merger 1997 camings on common stock were $50.2 million.

Earnings on common stock for the 1997 post-merger period were $19.3 million. In 1996, earnings on common stock were $77.8 million which was lower than 1995 due primarily to the delay in implementing our 1996 rate increase and the end of certain regulatory accounting deferrals in November 1995.

Operatmg revenues were down $7.0 million in 1997 from 1996 levels following a $21.2 million increase in 1996 compared to 1995. A significant factor contributing to lower cpwgirg revenues os the cancellation of a generating plant lease agreement for which revenues were recorded in 1996; a 2

related refund was remgnized in the 1997 first quarter which reduced other operating revenue. The following table summarizes the sources of changes in operaung revenues for 1997 and 1996 as compared to the previous year:

lifl 1296 (In =imana)

Reduced retail kilowatt-hour sales.................. $ (9.8) $(40.7)

Change in average retail price ...................... (4.8) 42.2 L Sales to utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.6 14.6 Other..................................................... (11.0) jLL Net Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1H&) 12dl Total kilowatt-hour sales were at a new high for the second consecutive year with 22.3 billion kilowatt-hours sold. Sales to other utilities increased 38.4% in 1997. 'this folkmed a 27.2%

increase from the previous year resulting fmm greater availability of our generating units and an aggressive bulk power marketing effort. Retail sales totaled 19.3 billion kilowart-hours in 1997, a decline of 0.4% from the prior year level. Residential sales decreased 2.2% in 1997 followmg a 2.1%

decline the previous year. Commercial sales were down 0.4% and 0.6% in 1997 and 1996, respectively.

Industrial sales increased slightly in 1997, followmg a small decline the previous year. Ovecsil, there was a 3.5 % increase in total kilowatt-hour sales followicg a 1.3 % increase in 1996 imsed on the strength of wholesale sales.

We spent more on fuel and purchased power during 1997, as higher purchased power expense was partially offset by lower fuel expense. An increase in the mix of nuchar generation to coal-fired generation contributed to the her fuel costs. Imer nuclear expenses in 1997 resulted from lower operating costs at the Perry and Davis-Besse plants offset in part by increan.! operating costs at the Beaver Valley Plant. 'Ihe decrease in other opaaikg costs in 1997 resulted from ongoing cost cutting and the effect of work force reductions. Also, other operation and maintenance expenses in 1996 included aniH.9 million charge for the disposal of obsolete materials and supplies. 'Ihe 1997 decrease in other operating costs was offset in past by a fourth auarter, pre-merger charge for estimated severance expenses totaling $9.9 million.

Depreciation and amortization increased in the 1997 pre-merger pcriod and in 1996 principally due to changes in depreciation rates approved in the April 1996 Public Utilities Commission of Ohio (PUCO) rate order. In the post-merger period depreciation ard amortizatbn was lower due to a fair value adjustment which was recorded in connection with accounting for the merger. Amortization pf regulatory assets mieir.e4 nearly unchanged in 1997 after a larr,e increase in 1996 following cessation

' of the Rate Stabilization Program deferrals and initiation of their amortization. Inccme tanes increased in 1997, compared to 1996, as a function of taxable income. Incorne taxes decreased in 1996 from the prior year due to lower pretax operating income.

Other income drge xd in the 1997 pre-mriger period and in 1996 principally due to merger-related expenses and costs associated with the accounts receivable securitization. In the post-merger period, other income increased primarily becauto of interest income on trust notes acquired in connection with the Bruce Mansfield Plant lease refmancing. Interest costs were higher overall in 1997 h new secured notes and short-term borrowires for the Bruce Mansfield Plant lease refinancing exceeded the experue reduction from the redemption and refmancing of debt securities in 1997 and 1996.

3 J

CAPITAL RESOURCES AND LIQUIDirY Our fmancial position has improved over the past five years. Cash generated from operations wa 24% higher in 1997 than it was in 1992 due to higher revenues and aggressive cost controls. At the end of 1997 we had 1,300 fewer employees than five years ago as a result of our focus on becoming more competitive. De availability of additional cash generated from operations ir sesed the Company's ability to redeem higimr cost debt and preferred stock. We have also actively pursued refmancing activities which replace higher cost debt and preferred stock with lowu cost issues. He merger has resulted in improved credit ratings which has lowered the cost of new issues. De followmg table summarizes changes in credit ratings resulting from the merger.

LMw Post Y_ _

Standard Moody's Standard Moody's

& Poor's Investors & Poor's Investors Corporation Service. Inc. Corporation Service. Inc.

First mongage bonds BB Ba2 BB+ Bal Subordinated debt B+ Ba3 BB- Ba3 Preferred Stock B b2 BB- ti Excluding the offect of the Bruce Mansfield Plant lease refinancing described below, interest costs and preferred dividends have been reduced by approximately $22 million from 1996 levels. nrough economic refmancings and redemption of higher cost debt we have reduced the average cost of outstanding debt from 8.90% in 1992 to 8.15% in 1997. The Bruce Mansfeld Plant lease refmancing is expected b provide an annual after tax savings of about $13 million resuidng from an increase in interest income and a decrease in rent expense offset in part by increased interest expense on secured notes issued as part of the transaction.

Our cash requirements in 1998 for operating expenses, construction expenditures and scheduled debt maturities are expected to be met without issuing additional secunties. We have cash requirements of approximately $856.1 million for the 1998-2002 period to meet scheduled maturities of long-term debt and preferred stock. Of that amount, approximately $81.5 million applies to 1998.

We had about $33.8 million of cash and temporary investments and $56.8 million of short-

. term indebtedness to an associated company on December 31,1997. Upon completion of the merger,

' application of purchase accounting redsced bondable prcterty such that we are not currently able to issue additional first mortgage bonds, except in connection with refmancings. Together with Toledo Edison Company, as of December 31,1997, we had unused borrowing capability of $125 million under a revolving line of credit.

Our capital spending for the period 1998-2002 is expected to be about $430 million (excluding nuclear fuel), of which approximately $105 million applies to 1998. His spending level is over $300 million lower than actual capital outlays over the past five years. Investments for additional nuclear fuel during the 1998-2002 period are estimated to be approximately $172 million, of which about $32 million applies to 19981 During the same periods, our nuclear fuel investments are expected to be reduced by approximately $113 million and $42 million, respectively, as the nuclear fuel is consumed. Also, we have operating lease commitments net of trust income of approximately $167 million for the 1998-2002 period, of which approximately $25 million relates to 1998. We recover the cost of nuclear fuel consumed and operating leases titrough our electric rates.

4

~Olm h0K We face many wrapsuiive challenges in the years ahead as the electric utility industry undergoes significant changes, including changing regulation and the entrance of more energy suppliers into the ir koiplace. Raail wheeling, which would allow retail customers to purchase electricity from other energy producers, will be one of those challenges. 'Ihe FirstEnergy Rse Reduction and Econonuc Development Plan provides the foundation to position us to meet the challenges we am facing by signincantly rerScing fixed costs and lowering rates to a more wrpetitive level. 'Ihe p% was approved by the PUCO in January 1997, and imtially maintains current base electric rates through December 31, 2005. 'Ihe plan also revised our fuel recovery methods.

As part of the regulsdry plan, the base rate fre: a is to be followed by a $217 million base rate reducoon in 2006; interim reductiors beginmng in June 1998 of $3 per month will increase to $5 per month per residential custorrer by July 1,2001. Total savings of $280 million are anticipated over the term of the plan for our customers. We have also committed $70 million for economic development and enere efficiency programs.

We have been authorized by the PUCO b recognize additional deprecision related to our generating assets and additional amortization of regulatory assets during the regulatory plan period of at least $1.4 billion more than die amounts that would have been ramed=d if the regTatory plan was not in effect. For reguisory purposes these additional charges will be rd'ected over the rate plan period.

Our regulatory plan doer, not provide for full recovery of mclur operations. AmmiLgly, regulatory assets ispiadhg custoner receivables for future income taxes related to nuclear assets of $499 million were written off ($324 act of tax impact) prior to consummation of the merger since we ceased

- application of Statement of Financial Accounting Standards No. 71 "Acceting for the Effects of Certain Types of Raan1*ian" (SFAS 71) for our nuclear operations when implementation of the FirstEnergy regulatcry plan became prooable.

Based on the regulatory cuironment we operate in today and our regulatory plan, we believe we will continue to be able to bill and collect cost-based rates relating to our nonnuclear operations; accordingly, it is appropriate that we continue the application of SFAS 71 for those operations. However, as diw=ad below, changes in the regulatory emranment are on the horizon.

'Ihe Ohio legislature is in the discussion stages of restrhturing the electric utility industry within the State. We do uc,t expect any changes in rectlation to be effective within the next two years and we cannot assess what the ultimate impact may be.

At the consummation of the merger in November 1997, we ramgmi=d a fair value purchase accounting adjustment which decreased the carrying value of our nuclear assets by approximately $1.7 billion based upon cash flow mLdels. 'Ihe fair vales adjustment to nuclear plant recognized for financial t reporting purposes will ultimately satisfy the asset reduction commitment contained in our regulatory plan over the regulatory plan period.

On January 6,1998, the co-chairs of tb Ohio General Assembly's Joint Select Committee on Electric Industry Deraanimian released their draR report of a plan which proposes to give customers a choice from whom they buy electricity beginning January 1,2000. No consensus has been reached by the full Committee; in the meantime, kgslaion consistent with the co-chairs' draR report may be introduced into the General Assembly by one or both of the co-chairs. We cannot predict when or if this legislation will be introduced and if it will be passed into law. We continue to study the potential effects that such legislation would have on our fmancial position and results of epoidiers.

5 a

'Ihe Financial Acmunting Standards Board (FASB) issued a proposed accounting s:andarti for nuciaar decommissioning costs in Febmary 1996. If the standard is adopted as proposed: (1) annual provisions for decommissioning could increase; (2) the not present value of estimated decommissioning costs could be recorded as a liabilky; and (3) income fmm the external decommissioning trusts could be reponed as investment income. The FASB reponed in October 1997 that it plans to continue working on the proposalin 1998.

'Ihe Clean Air Act Amendments of 1990, disena~i in Note 6, require additional emission rainctinns by 2000. We are pursuing cost-effective compliance strategies for meeting the reduction requirements that begin in 2000.

We have been named as a "potentially responsible pany" (PRP) for three sites listed on the Superfund National Priorities IJst and at aware of our potential involvement in the cleanup cf several other sites. Allegatiou dnat we disposed of hazardous waste at these dies, and the amount involved se often unsubstantiated' :al subject to dispute. Federal law provides that all PRPs for a particular site be held liable on ajoint and several basis. If we were held liable for 100% of the cleanup costs of all the sites referred to above, the cost could be as high as $212 million. However, we believe that the actual cleanup costs will be substantially lower than $212 million, that our share of any cleanup costs will be substantially less than 100% and that most of the other PRPs are financially able to contribute their 1 share. We have accrued a $4.8 million liability as of December 31,1997, based on estimates of the costs of cleanup and our proportionate responsibility for such cost. We believe that the ultimate outcome of these matters will not have a material adverse effect on our financial condition, cash flows or results of operations.

IMPACTOFTHE YEAR 2000 ISSUE 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. This could result in system failures or miscalculations.

We currently believe that with modifications to existing software and conversions to new software, the Year 2000 Issue will pose no significant operational problems for our computer systems as so modified and convened. If these modifications and conversions are not made, or are not completed on a timely basis, the Year 2000 Issue could have a material impact on our operations.

We have initiated formal communications with many of our mapr suppliers to determine the l extent to which we are vulnerable to those thirti parties' failure to resolve their own Year 2000 l

problems. Our total Year 2000 project cost and esumates to complete are based on currently available information and do not include the estimated costs and time associated with the impact of a third party's l

l Year 2000 issue. There can be no guarantee that the failure of other companies to resolve their own l Year 2000 issues will not have matenal adverse effect on us.

We are utilizing both internal and external resources to reprogram and/or replace and test tb software for Year 2000 modifications. Most of our Year 2000 problems will be resolved through system replacements. 'Ihe different phases of our Year 2000 project will be completed at various dates, most of which occur in 1999. We plan to complete the entire Year 2000 project by mid-December 1999.

Of the total project cost, approximately $22 million will be capitalized sina those costs are attributable to the purchase of new software for total system replacements (i.e., the Year 2000 solution comprises only a portion of the benefit resulting from the system replacements). The remaining $3 million will be 6

eq=nW as incurred over the next two years. To date, we have incurred approximately $350,000 related to the assessment of, and preliminary efforts in conneaion with, our Year 2000 project and the development of a remediauon plan.

The costs of the project and the date on which we plan to complete tlw year 2000 modifications are based on management's best estimates, which were derival from numerous assumptions of future events including the continued availability of certain resources, and other factors.

However, there can be no guarantee that this project will be completed as planned and actual results could differ materially from the estimates. Specific factors that might cause matenal differences include, but are not limited to, the availability and cost of trained personnel, the ability to locate and correct all relevant computer code, and similar uncertainties.

7

)

TIIE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF INCOME Nov. 8 - Jan.1- For the Years Endeu December 31.

Dec.31.1997 Nov.7.1997 1996 1995 (in thousands)

$253.963 $1.529.014 $1.789.%1 51.768.737 OPERATING REVENUES.... . . . . . . . . . . . . .

OPERATING EXPENSES AND TAXES:

51,381 359,048 407,632 413,391 Fuel and purchased power ...... . . . . . . .. .

15,465 77,228 96,150 95,791 Nuclear operating costs.. . . . ... ... . .. .

61.036 303.558 385.853 377.720 Other operating costs...... .. . . . . . . . . . . . . . .

127,882 739,834 889,635 886,902 Total operation and maintenance expenses . . . .

Provision for depreciation and amortization . . . . ... 28,111 189,937 218,539 208,812 Amortization (deferral) of net regulatory assets.. . . 3,867 21,890 26,076 (36,148) 33,912 194,400 229,856 229,962 General taxes ......... . .... .. . . . . .. .

10.689 75.621 67.235 81.310 Income taxes .. . . . ....... .. .. . . . . . . . . .

204.461 1.221.682 1.431.341 1.370.838 Total operating expenses and taxes.. .... .... . .

49,502 307,332 354,5.?9 397,899 OPERATING INCOME... . .. . . . . . . . . . . . .

4.572 _ (2.476) (2.089) 31.298 OTilER INCO.W. (LOSS)... ... . . . . .....

INCOME BEFORE NET INTEREST CIIARGES..... 54.074 304.856 356.531 429.197 NETINTEREST CilARGES:

Interest on long-term debt... . .. .. ... . 35,300 197,323 229,491 238,684 Allowance for borrowed funds used during construction .. . . . . . . . . . . . . . . . . . . . (631) (1,928) (2,110) (2,*/01) l Other interest expense.. . . . . . . . . .. . . . 115 14.270 12.597 9.495

{ Net interest ... . .. .. .. . . . . . . . . . . . 34.784 209.665 239.978 245.478 INCOME BEFORE EXTRAORDINARY ITEM., .. . 19,290 95,191 116,553 183,719 EXTRAORDINARY ITEM (NET OF INCOME TAXES)(Note 1).. . . . . .. .

(324.438) - -

NET INCOME (LOSS).. .. .. 19,290 (229,24' 116,553 183,719 PREFERRED STOCK DIVIDEND REQUIREMENTS.... .. .... .. . . . . .

- 45.029 38.743 42.44_4.,

EARNINGS (LOSS) ON COMMON STOCK. $ 19.290 $ (274.276) $ 77.810 $ 141.275 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

8

THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED BALANCE SHELTS Af DerW 31. 1997 1996 (in '.onsands)

UTILITY PLANT:

In service ... ............ . ............. . . . . . . . . . . . . . . . . . . . . . . . . $4.578,649 57,330.963 Less-Accumulated provision for depreciation . . . . . . . . . . . . . . . . . . 1.470.084 2.415.226 3.108.565 4.915.737 Construction work in progress-Electric plant.... .. . ... . . . . . . . . . . . . . . . . . . . . 41,261 56,853 Nuclear fuel...... . . . . . . . . . . . . .. . . . . . . .. . . . . . . . 6.833 10.629 48.094 67.482 3.156.659 .4.983.219 OTIIER PROPER'IY AND INVESTMENTS:

Shippingport Capital Trust (Note 3). .. . . . . . . . . . . . . . . . . . . . . . . . . . . 575.084 -

NucIcar plant decommissioning trusts.. .. . . . . . . . . . . . . . . . . . . . . . . . . . 105,334 75,573 Other . . . . . . . ..... . .... .. . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . .. 21.4.8_2 20.805 701.900 96.378 CURRENT ASSETS:

Cash and cash equivalents . . .. . . . . .. . . . . . . . . . . . . . . . . . . . . .... 33,775 30,273 Receivables -

Customers .. . . , . . . . . . . . . . . . . .. .. . . . . . . . . . . . 29,759 4,339 Associated companies ... .... . . . . . . . . . . ....... . . . . . . . 8,695 5.634 Other . . ... .. . . . . .. .. . . . . . . . . . . . . . . . . . . . . .... . .... . . . . . 98,077 170,736 Materials and supplies, at average cost-Owned... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,489 51,686 Under consignment....... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,411 23,655 Prepayments and other .. . . . . .. . . . . . . . . . . . . . . .... . . . . . . ........ 57.763 58.235 R 344.$58 DEFERRED CIIARGES:

Regulatory asects . . . . . . . . . . . . .. . . . . . . . ... . . . . . . . . . . . . . . . . . 579,711 1,349,694 Goodwill . ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,552,483 -

Prope.ity taxes ......... ..... . ..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,204 129,048 Other . . .. . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 23.358 59.400 2.280.756 1.538.142 56.440.284 $6.962.297 CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Consolidated Statements of Capitalization):

Comrron stockholder's equity ... ... . . . . . . .. . . . . . . . ... 5 950,904 51,044,283 Paferred stock-Not subject to mandatory redemption.. . . . .. . . . . . . . 238,325 23s,325 Subject to mandatory redemption . . . . . . . . . . . . .. . . . . . 183,174 186,118 Long-term debt.. .... ... .. . .. . . . . . . . . . . . . . . . . . 3.189.590 2.523.030 4.561.993 3.991.756 CURRENT LIABILITIES:

Currently payable long-term debt and preferred stock . .. . . . . . . . . . . .. . 121,965 1 % ,260 Accounts payable-Associated companics .. .. ... .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . 56,109 59,815 Other . . . . . . . . . . . . . . . . . . . . . . .. .. . . . . . . . . . . . 90,737 82,693 Notes psyable to associated companies . . ... . .. . . . . . . . . . . . . 56,802 111,618 Accrued taxes..... .. . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . .. 194,394 183,998 Accrued interest.. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67,896 52,487 Other .. ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... . 52.297 58.900 640.200 74M71 DEFERRED CREDITS:

Accumulated deferred income taxes. ........ . . . . . . . . . . .. . . . . . .. 496,437 1,305,601 Accumulated deferred investment tax credits... . . . .. . . . . . . . . 96,131 183,026 Pensions and other postrctirement benefits... . . . . . . . . . . . . . . . . . . . .. 198.642 72,843 Other . . . . . . .. . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . 446.881 663.300 1.238.0_91 2.224.770 COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 3 and 6 ). . . . . . . . . . . . . . . . . . . . . .

$6.440.284 56.962.297 The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.

9 I I

J

l TIIE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION I

l 1997 1996 At Decemher 31.

l (Doners be thousands, except per share amounts)

COMMON STOCKHOLDER'S EQUITY:

Common stock, without par value, authorized 105,000,000 shares-

$ 931,614 $1,241,287 79,590,689 shares outstanding .. . . . . . . . . . . . . . . . . . . . . .

- 79,454 Other paid-in capital., . . . . . . . . . . . . . . . . . . . . . . . . .

(276 458)

Retained earnings (deficit) (Note 4A) . .. .. .. . ... . . . . . . . . . . . . . . .. ... . 19.290

........... _ 950.904 1.044.283 Total common stockholder's equity . .. . .. . . . . . . . . . . . . .

Number of Shares Optional l Outstanding Redemotion Price 1222 ]j!!f Per Share Amarenate

}

PREFERRED STOCK (Note 4B):

Without par value, authorized 4,000,000 shares Not subject to Mandatory Redemption:

500,000 500,000 $ 101.00 $ 50,500 50,000 50,000

$ 7.40 Series A.... . . . . . . . . . . . . .

45,071 450,000 450,000 102.26 46,017 45,071

$ 7.56 Series B... . ... . . . . . . . .

46,404 474,000 474,000 100.00 47,4')0 46,404 Adjustable Series L.. . . . . . . . . .

200.000 200.000 500.00 100.000 96.850 96.850

$42.40 Series T.. . . . . . . . . . ...

$243.917 238.3'r5 238.325 3 0_00 1.624.000 Subject to Mandatory Redemption (Note 4C):

110,000 120,000 $ 101.00 $ 11,110 11,110 12,000

$ 7.35 Series C .. . . . . . . . . . . . . . . . 12,000 9,000 12,000 1,007.65 9,069 9,000

$88.00 Series E...... . . . . . . .

150,000 - 14,794

$ 9.125 Series N , .... .. . . . . .

42,858 53,572 1,000.00 42,858 42,858 53,572

$91.50 Series Q .. .... . . . . . . . . . . .

50,000 50,000 - - 55,000 50,000

$88.00 Series R.. . ... . . . . . . . .

74,000 74,000 - .- 79,920 73,260

$90.00 Series S .. .. . . . . . . . . . . .

(14.714) (29.508)

Redemption within one year.. . . . . . .

285.858 459.572 183.174 186.118

$ 63.C32 LONG TERM DEST (Note 4D):

First mortgage bonds:

195,000 195,000 7.625% duc 2002. .. .. . . . . . . . . . .. . ..... . . . . . . .

100,000 100,000 7.375 % due 2003 . . . . .. .. . .. .. . . .. . . . . . . ... .

75,000 75,000 8.750% duc 2005. . . . . . . .. .. . . . . . . . . . . . .

300,000 300,000 9.500% due 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

- 50,D00 9.250% due 2009.. . ... . . . . . . . . .. . . . . , . . . . . . .

125,000 125,000 8.375% due 2011.. ... . .. .. . . .. . . . . . ..

75,000 75,.000 8.375% due 2012.. .. . . . . . .. . . . . . . . . . . . . . . . . . .

- 300,000 9.375% due 2017. .. . . . . . .. . .. . . . . . . . .

- 100,000 10.000% dus 2020. . . .. . . . . . .. . . . . . . . .... ..

9.000% due 2023.. . . . . . . , . . . . . . . . . .. . , . _,J30.000 150.000 Total first mortgage borids . . . . . . .... . . . . . .. . . . . . . . . . ,,,1f@jgg 1.470.000 Unsecured notes:

5.500% due 199 / .. . .. . . . . . . . . . . .

- 110 6.700% due 2006. . .. . . . . ... .. .... . . . . . . . . . .. 19,500 20,000 5.700% due 2008. . . . . . . . . . . . . . . . . . . . . . . . 7,300 7,600 6.700% duc 2011. . .. . . . .. . . .. . . . . . . . . . . . . 5,500 5,500 5.875% duc 2012. .... . . . . . . . . . . . . . . . . . . . . . .. .. .. ..... _. 14.300 14.300 Total unaccured notes . .. . . . . . . . . . . . .. . .. . . . . .. 46.600 47.510 10

l l

THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont.) l 1

i At December 31. 1997 1996  !

(in t' ssands)

LONG-TERM DEBT: (Cont.)

Secured notes:

9.450% due 1997....... .. . . . . .. .. . . .. .. . . . . . . - 43,000 8.150% duc 1998... . .. . . .. . . . . . . . . . . . . . ....... 7,500 7,500 8.160% due 1998. . . ... . ....... .... .. .. . .. . . . . . . . . . .. 5,000 5,000 8.170% duc 1998... . . . . . . . . . . . . . . . . . . . . .. . . . . . 11,000 11,000 8.260% due 1998. .. . . . . . . . . . . . . . . . . . .. . . 2,500 2,500 l 8.330% duc 1998.. ... .. . . . . . . . .. . . . . . . . . . . . . 25,000 25,000 l 8.870% due 1998... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 10,000 9.000% due 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 5,000 7.250% due 1999. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 12,000 7.670% due 1999. .. .. . . . . . . . . . . . . . . . . . . . . . .. .. 3,000 3,000 -

7.770% due 1999. ... . . . . . .. ... . . . . . . . . . . . . . . . . . 17,000 17,000 I 7.850% due 1999. . . . . . . . . . . . . . . . . . . . . . . . . . .. 25,000 25,000 l

8.290% duc 1999. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 10,000 1 9.250% duc 1999. . . . . . . . . . . .. . . . . . . . . .. 52,500 52,500 9.300% duc 1999. . . . . . . . . . . . . . . . . . . . . . . .. 25,000 25,000 7.190% due 2000. . .. . . . . . . . . . . . . . . . . . . 175,000 -

7.420% due 2001.. .. ..... . . . . . . . . . . . . . . . . . . . . . . . 10,000 10,000 8.540% duc 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 3,000 8.550% due 2001. . .. . . . ... . . . . . . . . . . . .. . . . . . 5,000 5,000 8.560% due 2001. . . . . . . . . . . . . . . .. . .. . . . . . . . . . . . . . 3,500 3,500 {

8.680% due 2001.. . . . . . . . . . . . . . . . . . . . . ... . . . . . . . . . . 15,000 15,000 )

9.050% due 2001. ... .. .. .. . . . . . . . . 5,000 5,000 9.200% due 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 15,000 15,000 ]'

7.850% due 2002. .. .... .. . ... . .. . . . . . . . . . . . . . . 5,000 5,000 8.130% due 2002. ...... . . . . . . .. ... . . . . . . . . . . . . . 28,000 28,000 7.750% due 2003 ....... .... . . .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000 15,000 7.670 % due 2004 . . ..... ...... .. ... .. . .. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280,000 -

7.000% due 2006-2009..... ..... . .. .... . . . . . . . . . . . . . . . . . . . . . .. ... 1,910 64,500 7.130% due 2007. . .. . . . . . . . . . .... . . . . . . . . . . . . 120,000 -

7.430% due 2009..... . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000 ' -

6.000% due 2011*... ... . .. . . ... ... . . . . . . 5,650 5,650 6.000% due 2011*... . . . . . . . . .. .. . . . . . . . . . . .. . . . . 1,700 1,700 6.200% due 2013. . . . . . . . . . . . . . . . . . . . . . . . . . . ..... .. - 47,500 8.000% due 2013. . . . . .. . . . . . .. . . . . 78,700 78,700 3.786% due 2015*.... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,835 39,835 6.000% due 2017*... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,285 1,285 300,000 7.880% duc 2017. . ..... .. .. . . . .. -

3.771% due 2018*.... . . . .. ....... .. . . . . . . . . . . . . . . . . . 72,795 72,795 3.800% due 2020*... . . . . . . . . . . . . . .. .. . . . . .. 47,500 -

6.000% due 2020*.. . . .. . . .. . . . . . . . . 40.900 40,900 6.000% due 2020*.. ... ... .. . . . 9,100 9,100 6.000% duc 2020.. .. . . . . . . . .. . . . . . . . . ... . . . . . . . 62,560 -

6.100% duc 2020. .. . .. . . . . . . . . . 70,500 -

9.520% due 2021. . . . . . . . . . . . . . . .. .. . . .. .. 7,500 7,500 l 9.750% due 2022. ... .. . . . . . . . . . . . . . . . . .. .

- 70,500 '

6.850% due 2023.. . ... . . . . . . . . . . . . . . . . . . . . . . 33.000 30,000 8.000% duc 2023 . . .. . ... .. . ... . . . . . 73,800 73,800 7.625% due 7025..... . . . . . . . . . . . . . . . . . .. . . . . . 53,900 53,900 7.700% due 2025... .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,800 43,800 7.750% due 2025. .. .. . . . . . . . . . . . . . . . . . .. .

_ 45.150 45.150 l Total secured notes .. . .. . . .. .. . . . . . . . . . J.026.585 1.044.615 4

l r Capitallease obligations (Note 3) . . . . . . . . . . . . .. . . . . . . ... 98.504 133.407 l Net unamortized premium (discount) on debt . . . . . . . . . . .... . . . . . . . . . 105.152 (5.750) l 1eng-term debt due within one year.. . . . . .. . . . . . . . . ... .. . . (107.251) (166.752) i Total long-term debt .. -..... . .... .. .. . . . . . . . . . . . . . . . .. 3.189.590 2.523.030 TOTAL CAPITALIZATION... ... ..... . .. .. . .

147.*61.993 $3.991.756

• Denotes variable rate issue with December 31,1997 interest rate shown.

l The accompanying Notes to Consolidated Financial statements are an integral part of these statements.

l l

11 i

l l

I L_____.__.___.____.._

THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Nov. 8 - Jan.1 - For the Years F '_' k 4- 31.

Dec. 31.1997 Nov.7.1997 1996 1995 (in thousands)

$ $(276,458) $(193,146) $(261,521)

Balance at beginning of period. ... . . .. . .. ...

19.290 (229.247) 116.553 183.719 Net income (loss).... ... . . . . . . . . . . . . . . . . . . . . . . . .

19.290 (505.705) (76.593) (77.802) 35,848 38,734 40,694 Cash dividends on preferred stock..... . . . . . . . ....

- 123,602 160,816 74,213 Cash dividends on comrnon stock...... . . ... ...........

Purchase accounting fair value adjustment....... . ... - (665,387) - -

- 232 315 437 Other, primarily preferred stock redemption expenses ...

- (505.705) 199.865 115.344 519.290 $ - 5(276.458) $(193.146)

Balance at end of ccic.d (Note AA) .

CONSOLIDATED STATEMENTS OF CAPITAL STOCK AND OTHER PAID-IN CAPITAL Preferred usack Not Subject to Subject to C- Stock Plandatory Redsamenen hiandaterr Redensties Other Number Carrylag Paid.la Nummber Carrylag Number Carrylag of mar. Y. ale Cemital of 8harv Y.de ershare y.Sim GWlare in seemanada)

Raia 79,590,689 $1,241,087 $78,624 1.650.000 $240.871 864,766 $281,562

. January 1,1995 R' .-: (1,000)

$ 7.35 Series C_. (10,00u)

$ 84.00 Series E 0,000) 0.000)

Mjustable Series M - (100,000) (9,800)

$ 9.125 Series N .. 35 (110,766) (10.924)

$ 91.50 Series Q.. 51 (10,714) (10,714)

$ 90.00 Series S .. f11 (1.000) (990)

Balance, Deceseher 31,1995... .. . ... 79,590.689 1,241,284 78,624 1,650,000 240.871 633,286 245,134 Reclassificanos of

$90.00 Serice S Onia -- (111) 111 Unrealized loss on securines (6)

R' .h (26,000) (2,546)

Mjustable Series L... 7 725

$ 7.35 Series C-- (10,000) (1,000)

$ 88.00 Series E., .. 0,000) 0,000)

$ 9.125 Scrice N.. 25 (150.000) (14,794)

$ 91.50 Series O.. 82 (10.714) (10.714)

Balance, December 31,1996 - 79,590,689 1,241,287 79.454 1,624,0 % 238,125 459,572 215,626 Equity contributions free pareas .... 4,500 Redempuome-

$ 7.35 Series C (10,000) (1,000)

$ 88.00 Series E.. .. O,000) 0,000) j

$ 9.125 Series N 25 (150,000) (14,794) 1 5 91.50 Series O. (10.714) (10.714)

Purchase accountsag fair value l adjume-Comunon Stock . 0 09,698) (83,954)

$ 7.35 Series C-  !!0

$ 88.00 Series R 5,000 ,

19000 Series S . 6.660 1 Balance. December 31.1997.. 79.590.689 $ 931.614 $ -

1.674.000 $238.325 285.858 $197.888 l The accompanying Notes to Consolidated Financial Statements are an integral past of these statements. -

l l

1 I

i 12

THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS Nov. 8 - Jan.1 - For the Years Ended December 31.

Dec. 31.1997 A Nov.7.1997 1996 1995 (le thousands)

CASII FLOWS FROM OPERATING ACTIVITIES:

NQ income (Loss) .... . ... . .. . .. . . ... . ... . . . . $ 19,290 $ (229,247) $ 116,553 $ 183,719 Adjustments to reconcile net income to net cash from operating activities:

Provision for depreciation and amortmten.. .... .. . 28,111 189,937 218,539 208,812 Nuclear fuel and lease amortization ..... .... .. . . . . 7,393 42,577 45,987 70,745 Other amortization, net .. .... ... .. . . .. ..... . . . 3,867 21,890 26,076 (64,641)

Deferred income taxes, net..... . . . . . . . . . . . . . . . . . . 7,723 (126,693) 24,973 56,063 Inycatment tax credits, net.. . . . . . . .. . . (822) (6,670) (7,992) (12,566)

Allowance for equity funds used during construction ... (140) (1,647) (2,014) (2,173)

Extraordinary loss ...... . . . . .. .. . . . . . - 499,135 - -

Receivables ....... .. ... ... .. . . . . . . 51,213 (3,974) 586 (12,927)

Net proceeds from accounts receivable securitization.. - - 64,891 -

Materials and supplies. . . . . . . . . . . . . . . . . . (3,922) 6,363 25,589 9,818 Accounts payable ... .. .... ... ... . . . . . . . . . (777) (7,938) (6,344) 1,084 Other ...... . . . . . . . . . . . . . . . . . . . . . . . . . 18.839 (2.566) 10.992 (7.996)

Net cash provided from operating activities .. . . . . 130.775 E .167 517.836 429.938 CASil FLOWS FROM FINANCING ACTIVITIES: '

New Financing-Long-term debt . .. . . . . . . . . . . . . . . . . . . . . . . . - 1,176,781 (307) 432,052 Short4erm borrowings, net .... .. .... .. . . . . . . . . . . 703 - 106,618 -

Redemptions and Repayments-Preferred stock., .. . . . . . . . . . . . . . . - 29,714 31,528 36,670 Long-term debt . ... .. .. . . . .. . . 43,500 701,843 310,177 481,426 Short4erm borrowings, net ....... .. .. . . . . . . . . . - 55,519 - 53,100 Dividend Payments-Common stock.. . . . .. . . . . . . . . . . . . . . . . .. 34,785 88,816 160,816 74,213 Preferred stock.. . .. . . . . . . . . . . . . . . . . . . . . . . 7.191 29.311 39.325 42.951 Net cash provided from (used for) unancing activities (84.773) _,,EL5 tg (435.535) (256.308)

CAS11 FLOWS FROM INVESTING ACTIVITIES:

Property additions. .... .... .. . . . .. 17,943 104,230 105,588 151,038 Capital trust investments .. ..... ...... .. .. . . . . . . . . . .. 16,248 553,836 - -

Other..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4.288) 2.276 16.210 18.465 '

Net cash used for investing activities. . . . 29.903 665.342 121.798 169.503 NQ increase (decrease)in essh and cash equivalents.. 16,099 (12,597) (39,497) 4,127 Cash and cash equivalents at beginning of period . . . . . . . 17.676 30.273 69.770 65.643 Cash and cash equivalents at end of period..... .. . .. .. 5 33.775 5 17.676 5 30.273 5 69.770 SUPPLEMENTAL CASII FLOWS INM)RMATION: l Cash Paid During the Period-Interest (net of smounts capitalized) . .. . .. .. .. .. 5 36.000 j 3, 5 237.000 $ 214.000 Income taxes ... .. . .... . ... . . . . . . . . . . 5 9.000 1 26.300 5 29.732 5 65.900 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

I 13 t-__-------------------- --

j

THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF TAXES Nov. 8 - Jan.1- For the Ymrs Fadad Dec.31.

Dec.31.1997 Nov.7.1997 1996 1995 (in thousandr)

GENERAL TAXES: $ 134,346 Real and personal property ......... .. . .. .. . . . . $ 17,707 . $ 114,393 $ 132M82 13,302 65,966 78.109 76,806 State gross receipts.. ............ . . . . . . . . . . . . . . . . .

1,548 6,296 9,127 9,145 Social security and unemployment .. . . . . . . . . . . . .

Other . , . . . . . . . . . . . 1.355 7.74fi 10.0, 9.665 Total general taxes.. .. .. . . . . . . . . . . . . . . . . . . . . 5 33.912 5 194.40) }J9.856 5 229.962 PROVISION FOR INCOME TAXES: Curnatly payable-

                                                                                                                $ 6,969               5 37,(05          5 44,147       $ 39,499 Federal .. . . ... . .. . . . . . .. . . . . . .. .               . . . . . . . . . . .

State (1) ... . . . . .. . . . . . . . .. .. . . . . . . . ...... 159  : - 7.12$ - 37.M _ 44.147 3').499 Deferred, net-7,67.7 (126,693) 24,973 55,063 Federal.. . . . . . . . . . . . . . . . . . . . . . .. . . . State (1).. . . ... . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,qn - 7/g1 _02ff9).) 24.973_ 56.063 investment tax credit amortization... . ... .. .... .... . .. (m) (4.622) (7.992) _n2.sc) Total provision for income taxes . . . . . . . . Wg, WMgg) } 61.128 j,J3 INCOME STATEMENT CLASSIFICATION OF PROVISION FOR INCOME TAXES: Operating income . . . . . . . . . . .. . . . . . . . .. . . . . .. . . . . . $ 10,689 $ 75,621. $ 67,235 $ 31J10 Other income .. .. . .... ........ . . . . . . . . . . . . 3.,340 3,315 (6,107) 1,686 Extraordinary item.. .. .. . ... . . . . . . . . . . . . . J 174.697,) - - Total provision for income taxes . .. .... . . . . f, 14.029 1, (95.7Q) 5 61.128 },_8MJJ RECONCILI ATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES: Book income before provision for income taxes .. . . . .

                                                                                                                 ] 33.319              5 (325.005)       },gg           5 266 37L5 Federal income tax expense at statutory rate...                                       . . . . .          S 11,662              $ (112,752)        5 62,184      5 93,350 Increaser (reductions)in taxes resulting from-Amortization ofinvestment tax credits . . . ..                                                               (822)               (6,670)            (7,992)       (12.,566)

Depreciation . . ... . ... . . . . . . . . . . . . . . - 14,780 7,tS3 7,915 Other, net . . . . . . . . . . . . . . . . . . . .. 3.189 9.884 ('11D __,,(Myjj Total provision for income taxes . .. . . . . 5 14.029 . 5 (95.758) 5 61,tg 5 82.9'g I ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31 : Property basis differences. . . . . . . . .. 5 676,853 $1,482,000 $1,465,000 Deferred nuc! car expense .. . . . . . . . 133,281 114,000 139,000 Deferred sale and leaseback costs. . . . . f118,611) (121.000) (1 3,003) Unamortized investment tax credits.. . .. . . (42,743) (95,000) (99,000) Unused alternative minimum tax credits ... . . .. .. (133,442) (173,733) (132,647) Other.. . . .. .. ... . . . . .. . . . .. (18.901) 79.334 45.907 Net deferred income tax liability . . . . . . . . . . . 5 406.437 51.305.601 312.9, 88,,2f0 (1) For periods prior to November 8,1997, state income taxes are included :in the General Taxes section above. These amounts are not material and no restatement was made. l The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 14 (

l NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMAILY OF SIGNIFICANT ACCOUNTING POLICIES:

he consolidated financial statements include The Cleveland Electric Illuminating Company (Comptny) and its wholly owned subsidiary, Centerior Funding Corporat ion (Centerior Funding). ne subsidiary was formed in 1995 to serve as the transferor in connection with an I accounts receivable securitization completed in 1996. All significant intercompany transactions I have been eliminated. De Company is a wholly owned subsidiary of FirstEnergy Corp. I (FirstErergy). Prior to the merger in November 1997 (see Note 2), the Company and The Toledo Edison Company (TE) were the principal operating subsidiaries of Centerior Energy Corporation (Centerior). De merger was accounted for using the purchase method of accounting in accordance with generally accepted accounting principles, and the applicable effects were reflected on the separate financial statements of Centerior's direct subsidiaries as of the merger date. Accordingly, the post-merger financial statements reflect a new basis of accounting, and pre-merger period and post-merger period financial results (separated by a heavy black line) are presented. The Company l follows the accounting policies and practices prescribed by The Public Utilities Commission of Ohio (PUCO) and the Federal Energy Regulatory Commission (FERC). De preparation of j financial statements in conformity with generally accepted accounting principles requires  ! management to make periodic estimates and assumptions that affect the reported amounts of assets, I liabilities, revenues and expenses. Certain prior year amounts have been reclassified to conform with the current year presentation. I REVENUES- j l The Company's principal business is providing electric service to customers in j northeastern Ohio. De Company's retail customers are metered on a cycle basis. Revenue is j recognized for unbilled electric service through the end of the year. I l Receivables from customers include sales to residential, commercial and industrial customers located in the Company's service area and sales to wholesale customers. Here was no material concentration of receivables at December 31,1997 or 1996, with respect to any particular segment of the Compaay's customers. In May 1996, the Company and TE began to sell on a daily basis substantially all of their retail customer accounts receivable to Centerior Funding under an asset-backed securitization agreement which expires in 2001. In July 1996, Centerior Funding completed a public sale of $150 million of receivables-backed investor certificates in a transaction that qualified for sale account:ng treatment. REGULATORY PLAN-FirstEnergy's Rate Reduction and Economic Development Plan for the Company was 3 approved in January 1997, to become effective upon consummation of the merger. De regulatory plan initially maintains current base electric rates for the Company through December 31,2005. At the end of the regulatory plan period, the Company's base rates will be reduced by $217 million (approximately 15 percent below current levels). The regulatory plan also revised the Company's fuel cost recovery method. He Company formerly recovered fuel-related costs not otherwise included in base rates from retail customers through a separate energy rate; In accordance with the 15 _ - - _ 1

                                                                                          ~

T l l I I 1 regulatory plan, the Company's fuel rate will be frozen through the regulatory plan period, subject - to limited periodic adjustments. As part of the regulatory plan, transition rate credits were implemented for customers, which are expected to reduce operating revenues for the Company by ' approximately $280 million during the regulatory plan period. i All of the Company's regulatory assets related to its nonnuclear operations are be*mg recovered under provisions of the regulatory plan (see Regulatory Assets). He Company recognized a fair value purchase accounting adjustment to reduce nuclear plant by $1.71 billion in connectior, with the FirstEnergy merger (see Note 2); that fair value adjustment recognized for financial reporting purposes will ultimately satisfy the $1.4 billion asset reduction commitment contained in the regulatory plan. For regulatory purposes, the Company will recognize the $1.4 billion of accelerated amortization over the regulatory plan period. UTILITY PLANT AND DEPRECIATION-Utility plant reflects the original cost of construction (except for the Company's nuclear generating units which were adjusted to fair value in 1997), including payroll and related costs such as taxes, employee benefits, administrative and general costs and financing costs (including allowance for funds used during construction). De Company provides for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. In its April 1996 rate onier, the PUCO approved depreciation rates for the Company of 2.88% for nuclear property sad 3.23% for nonnuclear property. De annualized composite rate was approximately 2.8% for the post-merger period. Annual depreciation expense includes approximately .$11.7 million for future decommissioning costs applicable to the Company's ownership interests in three nuclear generating  ! units. De Corr.pany's share of the future obligation to decommission these units is approximately

     $406 million in current dollars and (using a 3.5% escalation rate) approximately $985 million in future dollars, ne estimated obligation and the escalation rate wem developed based on site-specific studies. Payments for decommissioning are expected to begin in 2016, when actual decommissioning work begins. The Company has recovered approximately $99 million for decommissioning through its electric rates from customers through December 31,1997. If the actual costs of decommissioning the units exceed the funds accumulated from investing amounts recovered from curtomers, the Company expects that additional amount to be recoverable from its customers. The Company has approximately $105.3 million invested in external decomrnissioning trust funds as of December 31,1997. Earnings on these funds are reinvested with a corresponding increase to the decommissioning liability. The Company has also recopized an estimated liability           ,

of approximately $11.2 million at Decemler 31, 1997 related to decontamination and decommissioning of nuclear enrichment facilities operated by the United States Department of Energy (DOE), as required by the Energy Policy Act of 1992. , 1 The Financial Accounting Standards Board (FASB) issued a propcsed acccunting standard for nuclear decommissioning costs in February 1996. If the standard is adopted as proposed: (1) annual provisions for decommissioning could increase; (2) the net present value of estimated decommissioning costs could be recorded as a liability; and (3) incorre from the external decommissioning trusts could be reported as investment income. De FASB indicated in October 1997 that it plans to continue work on the proposal in 1998. 16

s COMMON OWNERSIMP OF GENERATING FACl(LITIPS-ne Corspany, TE, Duquesne Light Company, Ohio Edison Company (OE) and itt wholly owned subsid!iry, Pennsylvania Ibwer Company (Penn), cc nstitute the Central Area Power Coordination Group (CAPCO). The CAPCO Companies own and/or lease, as tenants in common, t - variotu power generating facilities. Each of the companies is oblig med to pay a share of the costs l nssocitteil with any jointly owned facility in the same proportion an its interest. The Company's 1 portion of operating expenses associated with jointly owned facilities is includsd in the corresponding operating expenses on the Consolidated Statem:n s of Income. The amounts j reflected on the Consolidated Balance Sheet under utility plant at Decernber 31,1997 include the j following: Utilih Accsarmlated Construction Ownership / f 4 Plant Pmsion for Work in Lessehold k Gmeratine Unita_ __ in servia_.____.Depreditis _ Breress _InamL K (h mWims) i i Bruce Mansfield l) Units 1, 2, and 3 $ 61.0 $13.1 $ .6 19.9 2 % ) ' Beaver Vdley Unit 7 342.4 3.5 1.2 26.47 %  !! Dtvis-Besse 200.1 - 3.6 SL38% Perry 521.6 - 3.3 31.11 % Eastlake Unit 5 159.9 94.6 .3 " h t 8.80 % -

                     $reca               ,_                   64 3            74.3      ___
                                                                                                 .1    ___J 0.00 %               t Total                    s i .350.9         wo.5             J.L_,_
                                                                                                                             }

ne Brt ce Mansfield Plant is being leased through a sala and leasebut t ansaction (see I , Note 3) and the above related amounts represent construction openditures subsequent to the 1 transaction. The Seneca Unit isjointly owned by the Cornpany and maon-CAPCO company. I NUCLEAR FUEL- I ne Cornpany leises its nuclear :the! and pays for the fael as it is comumed (see Note l 3). He Company amortizes the cost of nuctear fuel based on the rate of consumption. The Company's ekscule rates indude amounts for the future disposal 00 spent nuclear fuel based upon the payrrents to the DOE. l INCOiME T AXES-I Details of the total provision for 'mcome tar s are shown on the Consolidated Statements of Taxes. Deferred income taxes result from timim- differences in the recognition of revenues and expmses for tax and accounting purposes. Ib..es" ment tax credits, which were deferred when utilized, are being arnortized over the recovery period of the reinted property. The liability method is used to account for deferred income taxes. Deferred income tax liabilities related  : to tax and accounting basis differences are recognized at the statutory income tax rates in effect (; when the liabilities are expected to be paid. Alternative minimum tax credits of $133 million, which . may be carried foruard indefinitely, are avaHable to reduce future federal income taxes. RETIRFMENT BENEFITS-l Centerior had sponsored jointly with the Company, TE and Centerior Service Company , l (Service Company) a noncontributing pension plan (Centerior Ponsion Plan) which covered all employee group:s. Upon retirement, employees receive a monthly pension generally based on the , length of service. Under certain circumstances, benefits can begin is early as age 55. ne funding 17 L______________-_________-______________________________________--______

policy was to comply with th: Employee Retirement Income Security Act of 1974 guidelines. In December 1997, the Centerior Pension Plan was merged into the FirstEnergy pension plans. In connection with the merger, the Company recorded fair value purchase accounting adjustments to reccgnize the net gain, prior service, cost and net transition asset (obligation) associated with the pension and post retirement bmefit plans. The following sets forth the funded status of the former Centerior Pension Ilan. The Company's share of the former Centerior Pension Plan's total projected benefit cbligation approximates 70% at Ikcember 31,1997. At D -- - *- 31. 1997 I! M _, (in millions) Actuarial present value of tunefit obligations: Vested benefits $418.9 $2 25.8 Nonvested benefits 30.5 .111 Ace-MMad benefit oblination $449.4 $54 . Plan assets at fair value 5461.9 54 . Actuarial present ve.lue of projected benefit oblication 533.4 '195 0 Projected benefit obligation in excess of plan assets 71.5 (25.8) Unrecognized net gain (loss) (3.0) 55.0 Unrecognized prior service cost - (14.2) Unrecognized net transition asset - J21 Net censiorg bility $ 68.5 $$ ne assets of the Centerior Pension Plan consisted primarily of investments ijl Common stocks, bonds, guaranteed investment contracts, cash equivalent securities and real estate. Net pension costs for the three years ended December 31,1997 were computed as follows: Nov. 8 - l Jan.1-Dec. 3L 1997 Nov.7.1997 1996 _Mi (lit millions) Service cost-benefits earned during the period $ 2.3 $ 11.1 $ 12.6 $ 9.8 Interest on projected benefit obligation 6.1 25.4 27.9 25.8 Return on plan assets (7.7) (38.0) (49.7) (52.8) Net deferral (amortization) - (2.4) 1.8 9.2 Voluntary early retirement procram exoense 23.0 4.8 - - Net cension cost $ 23.7 $ 0.9 $ (7.4) $ (8.0) Company's share, meludmg pro rata share of the Service Comoanv's costs $ 16.5 $ (2.5) $ (5.0) _ $15.2) A September 30 measurement date was used for 1996 reporting. He assum:d discount rates used in determining the actuarial present value of the projected benefit obligation were 7.25 % in 1997,7.75% in 1996 and 8.0% in 1995. He assumed rate of increase in future compensation levels used to measure this obligation was 4.0% in 1997. He rate of annual compensation increase assumption in 1996 was 3.5% for 1997 and 4.0% thereafter. The rate of annual compensation increase assumption in 1995 was 3.5 % for 1996 and 1997 and 4.0% thereafter. Expectei long-term

rates of return on pSn assets were assumed to be 10% in 1997 and 11% in 1996 and 1995. At l

December 31, 1997, the Compar3y's net pension liability included in Pensions and Other Postretirement Benefits on the Consolidated Balance Sheet was $49.2 million. At December 31, 1996, the Company's net prepaid pension cost included in Dcferred Charges - Oher on the Consolidated Balance Sheet was $15.4 million (see Note :2). l 18 l l [__

Centerior had sponsored jointly with its former subsidiaries a postretirement benefit ' plan which provided all employee groups certain health care, death and other postretirement benefits other than pensions. He plan was contributory, with retiree contributions adjusted annually. The plan was not funded. The accumulated postretirement benefit obligation and accrued postretirement benefit > cost for the Centerior postretirement benefit plan are as follows: At D-- - - ' 31. 1997 1996 (in ndluons) \ 1 Accumulated pcstretirement benefit l obligation allocation: Retirees $209.8 $ 177.1 Fr.lly eligible active plan participants 9.8 3.9 , Other active olan oarticiana'a 46.9 30.9 Accumulated postretirement benefit obligation 266.5 211.9 Unrecognized transition obligation - (120.1) Unrecoeni=d net emin - 44.4 Net nostretirement benefit liability $266.5 $ 136.2 l Net periodic postretirement benefit costs for the three years ended December 31,1997  ! were computed as fol!ows: Nov. 8 - Jan.1-Dec. 31.1997 Nov.7.1997 1996 1995 (In munons) Service cost-benefits attributed to the period $0.5 $1.8 $ 2.1 $1.7 Interest cost on accumstated benefit obligation 2.8 13.5 17.8 17.9 Amortization of transit.on obligation - 6.4 7.5 7.5 Amortintion of nia_ - (0.9) - 16.) Net nerioc ic nostretirannaa' benefit cost $3.3 $20.8 $27.4 $26.5 Conapany's s aare, mcludmg pro sta __.ahare of the Sgng Caranany's costs

                                                             $2.6                $11.4      $18.4      $16.0      1 The Consolidated Balance Sheet classification of Pensions and Other Postretirement Benefits at Decernber 31,1997 and 1996 includes the Company's share of the accrued postretirement beriefit liability of $149.5 million and $72.8 million, respectively (see Note 2).

The health care trend rate assumption is approximately 6.0% in the first year gradually decreasing to approximately 4.0% for the year 2008 and later. He discount rates used to compute ! the accumulated postretirement benefit obligation were 7.25 % in 1997,7.75 % in 1996 and 8.0% in 1995. An increate in the health care trend rate assumption by one percentage point in all years would increase the accumulated postretirement benefit obligation by approximately $7.7 million and the aggregate annual service and interest costs by approximately $0.5 million. A September 30 measurement dre w s used for 1996 reporting. TRANSACTIONS WITH AFFILIATED COMPANIES-Operating revenues, operating egenses and interest charges include amounts for transactions wit affiliated companies in the ordinary course of business operations. The Company's transt:tions with TE and the other FirstEnergy operating subsidiaries (OE and Penn) from the November 8,1997 merger date are primarily for firm power, interchange power, transmission line rentals and jointly owned power plant operations and construction. (See 19

Note 2.) Beginning in May 1996, Centerior Funding began serving as the transferor in connection with the accounts receivable securitization for the Company and TE. j De Service Company (formerly a wholly owned subsidiary of Centerior and now a - wholly owned subsidiary of FirstEnergy) provides support services at cost to the Company and other affiliated companies. The Service Company billed the Company $34.1 million, $130.8 i million, $148.6 million and $141.1 million in the November 8-December 31,1997, the January 1- , November 7,1997 period,1996 and 1995, respectively, for such services. Fuel and purchased power expenses on the Consolidated Statements of Income include the cost of power purchased from TE of $17.7 million, $98.5 million, $105.0 million and $102.1 million in the November 8-December 31,1997 period, the January 1-November 7,1997 period, 1996 and 1995, respectively. SUPPLEMENTAL CASH FLOWS INFORMATION-All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets. He Company reflects temporary cash investments at cost, which approximates their fair market value. Ncacash financing and investing activities included capital lease transactions amounting to $16 million, $37 million and $19 million for the years 1997,1996 and 1995, respectively. All borrowings with initial maturities of less than one year are dermed as fmancial instruments under generally accepted accounting principles and are reported on the Consolidated Balance Sheets at cost, which approximates their fair market value. The following sets forth the approximate fair value and related carrying amounts of all other long-term debt, preferred stock subject to mandatory redemption and investments other than cash and cash equivalents as of December 31: 1997 1996 Carrying Fair Carryms Fair Value, V"- V '-- V' (in Munons) Long-term debt $ 3,198 $ 3,238 $ 2,562 $ 2,630 ' Preferred stock $ 198 $ 198 $ 216 $ 220 Investments other than cash and cash equivalents: Debt securities

              -(Maturing in more than 10 years)        $ 547                  $ 553                                    $        -

All other 105 104 75 75

                                                       $ 652                  $ 657                                    $     75          $      75 The carrying values of long-term debt and preferred stock subject to mandatory redemption were adjusted to fair value in connection with the merger and reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by a corporation with credit ratings j     similar to the Company's ratings.

De fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity, he yields assumed were based on financial instruments with similar characteristics and terms. l Investments other than cash and cash equivalents include decommissi'aning trusts investments. Unrealized gains and losses applicable to the decommissioning trusts have been recognized in the 1 20 l l _- _ _ _ _ _ _ _ _______- _ ._ - _ _ - _ _ -____n

f

l. .

trust investments with a corresponding change to the decommissioning liability. In 1996, the Company and TE transferred most of their investment assets in existing trusts imo Centerior pooled trust funds for the two companies. The amounts in the table represent the Company's pro rata share of the fair value of such noncash investments. He debt securities referred to above are in the held-to-maturity category. De Company has no ' securities held for trading purposes. l REGULATORY ASSETS-l. De Company recognizes, as regulatory assets, costs which the FERC and PUCO have authorized for recovery from customers in future periods. Without such authorization, the costs ! would have been charged to income as incurred. All regulatory assets related to nonnuclear l operations are being recovered from customers under the Company's regulatory plan. Based on the l regulatory plan, at this tinae, the Company believes it will continue to be able to bill and collect cost-based rates (with the exception of the Company's nuclear operations as discussed below); accordingly, it is appropriate that the Company continue the application of SFAS No. 71,

                " Accounting for the Effects of Certain Types of Regulation" (SFAS 71), in the foreseeable future for its nonnuclear operations.

De Company discontinued the application of SFAS 71 for its nuclear operations in October 1997 when implementation of the regulatory plan became probable, ne regulatory plan

does not provid

for full recovery of the Company's nuclear operat. ions. In accordance with SFAS l

No.101, " Regulated Enterprises -- Accounting for the Discontinuation of Application of SFAS 71," the Company was required to remove from its balance sheet all regulatory assets and liabilities related to the portion of its business for which SFAS 71 was discontinued and to assess all other l assets for impairment. Regulatory assets attributable to nuclear operatiora of $499.1 million l ($324.4 million after taxes) were written off as an extraordinary item in October 1997. He regulatory assets attributable to nuclear operations written off represent the net amounts due from ! customers for future federal income taxes when the taxes become payable, which, under the regulatory plan, are no longer recoverable from customers. De remainder of the Company's business continues to ' comply with the provisions of SFAS 71. All remaining regulatory assets of the Company will continue to be recovered through rr.es set for the nonnuclear portion of its business. For financial reporting purposes, the net book value of the nuciear generating units was not impaired as a result of the regulatory plan. Net reguinory assets on the Consolidahl Balance Sheets are comprised of the following: At r---- - ' r 31. 1997 1996 (in nimons) Nuclear unit expensos 5 309.0 $ 320 0 Customer receivables for future income taxes 143.0 633.6 Rate stabilizatmo program deferrals 288.1 300.3 Gain from Bruce Mansfield Plant sale * (274.4) - loss on reauguired debt 80.9 57.8 Other 33.1 38.0 Total $ 579.7 $L349.7 I

• The Gain .from the Bruce Mansfield PI nt sale was reclassified as a regulatory liability in connection with the l

purchase accounting adjustasats, consistemt with :he ratemaking matment. 1-21

2.. OHIO EDISON-CENTERIOR MERGER: FirstEnergy was formed on November 8,1997 by the merger of OE and Centerior. FirstEnergy holds directly all of the issued and outstanding common shares of OE and all of the issued and outstanding common shares of Centerior's former direct subsidiaries, which include, among others, the Company and TE. As a result of the merger, the former common shareholders of OE and Centerior now own all of the outstanding shares of FirstEnergy Common Stock. All i other classes of capital stock of OE and its subsidiaries and of the subsidiaries of Centerior are unaffected by the Merger and remain outstanding. I ne merger was accounted for as a purchase of Centerior's net assets with 77,637,704 shares of FirstEnergy Common Stock through the conversion of each outstanding Centerior Common Stock share into 0.525 of a share of FirstEnergy Common Stock (fractional shares were paid in cash). Based on an imputed value of $20.125 per share, the purchase price was approximately $1.582 billion which also included approximately $20 million of merger related costs. Goodwill of approximately $2.1 billion was recognized by FirstEnergy (to be amortized on a straight-line basis over forty years), which represented the excess of the purchase price over Centerior's net assets after fair value adjustments. Such amount may be adjusted if additional information produces changed assumptions over the twelve months following the merger as FirstEnergy continues to integrate operations and evaluate options with respect to its generation portfolio. The Company's merger purchase accounting adjustments, which were recognized in its accounting records, primarily consist of(1) revaluation of the Company's nuclear generating units to fair value ($1.0 billion), based upon the results of independent appraisals and estimated discounted future cash flows expected to be generated by its nuclear generating units (the estimated cash flows are based upon management's current view of the likely cost recovery associated with the nuclear units); (2) adjusting by $119 million its preferred stock subject to mandatory redemption and long-term debt to estimated fair value; (3) recognizing additional obligations related to retirement benefits (pension liability - $50 million and postretirement obligation - $71 million); (4) recognizing the Company's estimated severance and other compensation liabilities ($56 million); and (5) adjusting the Company's common equity by $272 million. De nuclear assets revaluation does not include decommissioning since that obligation is expected to be recovered with the cash flows provided by the regulated portion of the business. Other assets and liabilities were not adjusted since they remain subject to rate regulation on a historical cost basis. See Note 8.

3. LEASES:

De Company leases certain generating facilities, nuclear fuel, certain transmission facilities, office space and other property and equipment under cancelable and noncancellable leases. De Company and TE sold their ownership interests in Bruce Mansfield Units 1,2 and 3 and TE sold a portion ofits ownership interest in Beaver Valley Unit 2. In connection with these sales, which were completed in 1987, the Company and TE entered into operating leases for lease terms of approximately 30 years as co-lessees. During the terms of the leases, the Company and TE continue to be responsible, to the extent of their combined ownership and leasehold interest, for ccsts associated with the units including construction expenditures, operation and maintenance 22

expenses, insurance, nuclear fuel, property taxes and decommissioning. The Company and TE have the right, at the end of the respective basic lease terms, to renew the leases. The Company and TE also have the right to purchase the facilities at the expiration of the basic lease term or renewal term (if elected) at a price equal to the fair market value of the facilities. l As co-lessee with TE, the Company is also obligated for TE's lease payments. If TE is unable to make its payments under the Beaver Valley Unit 2 and Bruce Mansfield Plant leases, the Company would be obligated to make such payments. No such payments have been made on behalf of TE. (TE's minimum lease payments as of December 31,1997 were $1.7 billion). He Company is buying 150 megawatts of TE's Beaver Valley Unit 2 leased capacity entitlement. Purchased power expense for this transaction was $16.8 million, $8'i.4 million, $99.4 million and $97.6 million in the November 8-December 31, 1997, the January 1-November 7, 1997 period,1996 and 1995, respectively. This purchase is expected to continue through the end of l the lease period. We future minimum lease payments through 2017 associatea with Beaver Valley Unit 2 are approximately $1.2 billion. Nuclear fuel is currently financed for the Company and TE through leases with a special-purpose corporation. As of December 31,1997, $157 million of nuclear fuel ($93 million for the Company) was financed under a lease financing arrangement totaling $190 million ($90 million of intermediate-term notes and $100 million from bank credit arrangements). The notes mature from 1998 through 2000 and the bank credit arrangements expire in October 1998. Iease I rates are based on intermediate-term note rates, bank rates and commercial paper rates. Consistent with the regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Consolidated Statements of Income. Such costs for the three years ended December 31,1997 are summarized as follows: l I Nov. 8 - Jan.1 - Dec. 31.1997 Nov.7.1997 1996 1995 (in millions) Operating leases Interest element $10.6 $ 56.0 $ 58.1 $ 58.1 < Other 8.4 18.3 4.8 4.8 Capital leases { < Interest element 1.5 8.5 10.1 10.7 Other 7.5 43.4 51.7 58.4 Total rentals $28.0 $126.2 $124.7 $132.0 The future minimum lease payments as of December 31,1997 are: Capital Operating Capital Trust Leases Leases Income Net (in millions) 1998 $ 47.0 $ 65.3 $ 40.1 $ 25.2 1999 33.4 69.3 38.2 31.1 2000 18.9 66.6 36.3 30.3 2001 8.5 71.7 35.0 36.7 2002 4.1 76.4 32.9 43.5 l Years thereafter 10.8 853.7 227.7 626.0 l Total minimum lease payments 122.7 $1.203.0 g 79 1792,,,$ Interest nortion 24.2 Present value of net minimum lease payments 98.5 Less current nortion 40.4  ; Noncurrent nortion $ 58.1 23

The Company and TE refinanced high-cost fixed obligations related to their 1987 sale and leaseback transaction for the Bruce Mansfield Plant through a lower cost transaction in June and July 1997. In a June 1997 offering (Offering), the two companies pledged $720 million aggregate principal amount ($575 million for the Company and $145 million for TE) of first mortgage bonds due in 2000,2004 and 2007 to a trust as security for the issuance of a like princ: pal amount of secured notes due in 2000, 2004 and 2007. The obligations of the two companies under these secured notes are joint and several. Using available cash, short-term ) borrowings and the net proceeds from the Offering, the two companies invested $906.5 million j ($569.4 million for the Company and $337.1 million for TE) in a business tmst, in June 1997. De trust used these funds in July 1997 to purchase lease notes and redeem all $873.2 million aggregate principal amount of 10-1/4% and 11-1/8% secured lease obligation bonds (SIDBs) due , 2003 and 2016. De SIDBs were issued by a special-purpose funding corporation in 1988 on behalf of lessors in the two companies' 1987 sale and leaseback transaction. As noted in the table above, the trust income, which is included in Other Income in the Consolidated Statements of Income, effectively reduce lease costs related to that transaction. i 4. CAPITALIZATION: (A) RETAINED EARNINGS-There are no restrictions on retained earnings for payment of cash dividends on the Company's common stock. De merger purchase accounting adjustments included resetting the retained earnings balance to zero at the November 8,1997 merger date. (B) PREFERRED AND PREFERENCE STOCK-The Company's $42.40 Series T and $88.00 Series R preferred stock are not redeemable before June 1998 and December 2001, respectively, and its $90.00 Series S has no l optional redemption provision. All other preferred stock may be redeemed by the Company in whole, or in part, with 30-90 days' notice. The preferred dividend rate on the Company's Series L fluctuates based on prevailing interest rates and market conditions. 7he dividend rate for this issue was 7% in 1997. Preference stock authorized for the Company is 3,000,000 shares without par value. No preference shares are currently outstanding. J A liability of $14 million was included in the Company's net assets as of the merger date for preferred dividends declared attributable to the post-merger period. Accordingly, no accrual for preferred stock dividend requirements is included on the Company's November 8,1997 to December 31,1997 Consolidated Statement of Income. 24

I i (C) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION-Annual sinking fund provisions for preferred stock are as follows: Redenption Price hr

• Ssh; Shares Share Dak he: -

                 $ 7.35 C               10,000            $ 100                                   (i) 88.00 E                3,000              1,000                                 (i) 91.50 Q               10,714              1,000                                 (i) 90.00 S               18,750              1,000        November 1              1999 88.00 R               50.000              1.000        December 1              2001 (i) Sinking fund provisions are in effect.

Annual sinking fund requirements for the next five years are $14.7 million in 1998,

     $33.5 million in each year 1999 and 2000, $80.5 million in 2001 and $18.8 million in 2002.

(D) LONG-TERM DEBT-

                  'Ihe first mortgage indenture and its supplements, which secure all of the Company's first mortgage bonds, serve as direct first mortgage liens on substantially all property and franchises, other than specifically excepted property, owned by the Company.

Sinking fund requirements for first mongage bonds and maturing long-term debt (excluding capital leases) for the next five years are: (In amons) \ 1998 $ 66.8 ) 1999 145.5 2000 176.0 2001 57.5 2002 229.3 The Company's obligations to repay certain pollution control revenue bonds are secured by several series of first mongage bonds. One pollution control revenue bond issue is entitled to the benefit of an irrevocable bank letter of credit of $48.1 million. To the extent that drawings are made under this letter of credit to pay principal of, or interest on, the pollution control revenue bonds, the Company is entitled to a credit against its obligation to repay those bonds. The Company pays an annual fee of 1.1 % of the amount of the letter of credit to the issuing bank and is obligated to reimburse the bank for any drawings thereunder. The Company and TE have letters of credit of approximately $225 million in connection with the sale and leaseback of Beaver Valley Unit 2 that expire in June 1999. The letters of credit are secured by first mongage bonds of the Company and TE in the proponion of 40% and 60%, respectively (see Note 3).

5. SHORT-TERM BORROWINGS: l l

FirstEnergy has a $125 million revolving credit facility that expires in May 1998. FirstEnergy and the Service Company may borrow under the facility, with all borrowings jointly i 25 J

and severally guaranteed by the Company and TE. FirstEnergy plans to transfer any of its { borrowed funds to the Company and TE. He credit agreement is secured with first mongage bonds of the Company and TE in the proportion of 40% and 60%, respectively. The credit agreement also provides the panicipating banks with a subordinate mongage security interest \ln the properties of the Company and TE. The banks' fee is 0.625% per annum payable quarterly in addition to interest on any borrowings. There were no borrowings under the facility at December 31,1997. Also, the Company may borrow from its affiliates on a short-term basis. At December 31,1997, the Company had total shon-term borrowings of $56.8 million from its affiliates with a weighted average interest rate of approximately 6%.

6. COMMITMENTS, GUARANTEES AND CONTINGENCIES:

CAPITAL EXPENDITURES-The Company's current forecast reflects expenditures of approximately $430 million for property additions and improvements from 1998-2002, of which approximately $105 million is f applicable to 1998. Investments for additional nuclear fuel during the 1998-2002 period are estimated to be approximately $172 million, of which approximately $32 million applies to 1998. During the same periods, the Company's nuclear fuel investments are expected to be reduced by approximately $113 million and $42 million, respectively, as the nuclear fuel is consumed. I NUCLEAR INSURANCE-De Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $8.92 billion. He amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on its present ownership and leasehold interests in Beaver Valley Unit 2, the Davis-Besse Nuclear Power Station (Davis-Besse) and the Perry Nuclear l Power Plant (Perry), the Company's maximum potential assessment under the industry l retrospective rating plan (assuming the other CAPCO companies were to contribute their proportionate share of any assessments under the retrospective rating plan) would be $84 million per incident but not more than $10.7 million in any one year for each incident. The Company is also insured as to its respective interests in Beaver Valley Unit 2, Davis-Besse and Perry under policies issued to the operating company for each plant. Under these policies, up to $2.75 billion is provided for property damage and decontamination and decommissioning costs. The Company has also obtained approx.imately $316 million of insurance coverage for replacement power costs for its respective interests in Beaver Valley Unit 2, Davis- , Besse and Perry. Under these policies, the Company can be assessed a maximum of approximately l $13 million for incidents at any covered nuclear facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses. He Company intends to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, propeny damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident l at any of the Company's plants exceed the policy limits of the insurance in effect with respect to , that plant, to the extent a nuclear incident is determined not to be covered by the Company's I i insurance policies, or to the extent such insurance becomes unavailable in tl~ future, the Company would remain at risk for such costs. j i 26 I

GUARANTEE-De Company, together with the other CAPCO companies, has severally guaranteed certain debt and lease obligations in connection with a coal supply contract for the Bruce Mansfield Plan +. As of December 31,1997, the Company's share of the guarantee (which approximates fair market value) was $14.3 million. De price under the coal supply contract, which includes certain l minimum payments, has been determined to be sufficient to satisfy the debt and lease obligations. De Company's total payments under the coal supply contract were $51.2 million, $47.0 million l and $38.6 million during 1997,1996 and 1995, respectively. The Company's minimum annual payments are approximately $14 million under the contract, which expires December 31,1999. ! ENVIRONMENTAL MATTERS-l Various federal, state and local authorities regulate the Company with regard to av and water quality and other environmental matters. The Company has estimated additional capital expenditures for environmental compliance of approximately $12 million, which is included in the construction forecast provided under " Capital Expenditures" for 1998 through 2002. De Company is in compliance with the current sulfur dioxide (SO 2) and nitrogen oxides (NO,) reduction requirements under the Clean Air Act Amendments of 1990. SO: reductions through the year 1999 will be achieved by burning lower-sulfur fuel, generating more electricity from lower-emitting plants, and/or purchasing emission allowances. Plans for complying with reductions required for the year 2000 and thereaner have not been finalized. De Environmental Protection Agency (EPA) is conducting additional studies which could indicate the need for additional NO, reductions from the Bruce Mansfield Plant by the year 2003. In addition, the EPA is also considering the need for additional NO, reductions from the Company's Ohio facilities. On November 7,1997, the EPA proposed uniform reductions of NO, emissions across a region of twenty-two states, including Ohio and the District of Columbia (NO, Transport Rule) aAer determining that such NO, emissions are contributing significantly to ozone pollution in the eastern United States. In a separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NO, emissions which are alleged to contribute to ozone pollution in the eight petitioning states. A December 1997 EPA Memorandum of Agreement proposes to finalize the NO, Transport Rule by September 30,1998 and establishes a j schedule for EPA action on the Section 126 petitions. The cost of NO, reductions, if required, may be substantial. He Company continues to evaluate its compliance plans and other compliance l options. j

                                                                                                             \

he Company is required to meet federally approved SO2 regulations. Violations of i l such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $25,000 for each day the unit is in violation. De EPA has an interim l enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day  ; averaging period. The Company cannot predict what action the EPA may take in the future with  ! respect to proposed regulations or the interim enforcement policy. De Company is aware of its potential involvement in the cleanup of three hazardous waste disposal sites listed on the Superfund National Priorities List and several other sites. De Company has accrued a liability totaling $4.8 million at December 31,1997 based on estimates of the costs of cleanup and its proponionate responsibility for such costs. De Company believes that

  -                                                                                                       27

i l 1 l the ultimate outcome of these matters will not have a material adverse effect on the its financial condition, cash flows or results of operations. Legislative, administrative and judicial actions will continue to change the way that the Company must operate in order to comply with environmental laws and regulations. With respect to any such changes and to the environmental matters described above, the Company expects that any resulting additional capital costs which may be required, as well as any required increase in operating costs, would ultimately be recovered from its customers.  ; I I

7.

SUMMARY

OF QUARTERLY FINA.NCIAL DATA (UNAUDITED):

                  'Ihe following summarizes certain consolidated operating results by quarter for 1997             1 and 1996.

nree w-*w F-a.d i Mar. 31, June 30, sept.30, Oct.1 - Nr. 8 - 1997 f997 , 1997 %v.7.1997 Dec. 31.1997 (in mulwns) Operating Revenues $431.6 $428.2 $499.5 $169.7 $254.0 Oper='ia Fr- and Taxes 351.6 350.8 368.0 151.3 204.5 Operstmg Income 80.0 77.4 131.5 18.4 49.5 l Other Income (Ims) (3.7) (5.2) 7.5 (1.2) 4.6 l Not Intemst Charees 56.1 58.2 71.3 24.0 34.8 Income (Ims) Before Extraordinary item 20.2 14.0 67.7 (6.8) 19.3 Extraordinary Item (Net of Income Taxes) (Note 1) - - - (324.4) - 1 Net income (I.oss) $ 20.2 $ 14.0 $ 67.7 $(331.2) $ 19.3 Earnines (Loss) on Comman Stock $ 10.9 $ 4.9 $ 58.9 $(348.9) $ 19.3 March 31, June 30, September 30, December 31, nree Waehe Fadad 1996 1996 1996 1996 (in mukons) Operatmg Revenues $427.5 $434.0 $506.5 $421.9 Oper='ine Ext = === and Taxes 351.7 348.1 385.8 345.7 Operatmg Income 75.8 85.9 120.7 76.2 Other Income (I.oss) 1.3 .7 (2.7) (1.4) Net Intenst Charmes 60.3 61.4 59.3 _E Net income $ 16.8 5 25.2 $ 58.7 M11 Earnines on Comman Stock $ 6.8 $ 15.3 $ 49.2 $ 6.5 Earnings for the quarter ended September 30,1996 were decreased by $10.8 million as I a result of a $16.6 million charge for the disposition of materials and supplies inventory as part of the reengineering of the supply chain process.

8. PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME (UNAUDITED):

The following pro forma statements of income for the Company give effect to the OE-Centerior merger as if it had been consummated on January 1,1996, with the purchase accounting adjustments actually recognized in the business combination. l l l 28

Year Ended Decninber 31. 1997 1996 (SR muka**) Operating Revenues ................. . ........ .. . . ...... ... . $1,783 $1,790 Operahng Expenses and Taxes ........................... _L(11 Id2d Operahng Income . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 365 366 Other Inconn . . . .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2 Net Interest diarges ......................... .......... . .. . . __232 227 Net Incomm . $ 148 $ 141 ' Pro fonna acUustments reflected above, include: (1) adjusting the Company's nuclear generating units to fair value based upon independent appraisals and estimated discounted future cash flows based on management's current view of cost recovery; (2) the effect of discontinuing SFAS 71 for the Company's nuclear operations; (3) amortization of the fair value adjustment for long-term debt; (4) goodwill recognized representing the excess of the Company's portion of the purchase price over the Company's adjusted net assets; (4) the elimination of merger costs; and (5) adjustments for estimated tax effects of the above adjustments. See Note 2.

9. PENDING MERGER OF TE INTO THE COMPANY:

In March 1994, Centerior announced a plan to merge TE into the Company. All necessary regulatory approvals have been obtained, except the approval of the Nuclear Regulatory Commission (MRC). His application was withdrawn at the NRC's request pending the decision whether to complete this merger. No final decision regarding the proposed merger has been reached. In June 1995, TE's preferred stockholders approved the merger and the Company's preferred stockholders approved the authorization of additional shares of preferred stock. If and when the merger becomes effective, TE's preferred stockholders will exchange their shares for preferred stock shares of the Company having substantially the same terms. Debt holders of the merging companies will become debt holders of the Company. For the merging companies, the combined pro forma operating revenues were $2.527 billion, $2.554 billion and $2.516 billion and the combined pro forma net income was $220 million / (excluding the extraordinary item discussed in Note 1 and a similar item for TE), $218 million and j

     $281 million for the years 1997,1996 and 1995, respectively. The pro forma data is based on f ec=> ming for the merger of the Company and TE on a method similar to a pooling of interests and for 1997 and 1996 includes pro forma adjustments to reflect the effect of the OE and Centerior merger (see Note 8). 'Ihe pro forma data is not necessarily indicative of the results of operations which would have been reported had the merger been in effect during those years or which may be                                               l reported in the future. De pro forma data should be read in conjunction with the audited financial statements of both the Company and TE.

29

Rrport ofIrdependent Public Accountants To the Stockholders and Board of Directors of he Cleveland Electric Illuminating Company: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalimion of The Cleveland Electric Illuminating Company (an Ohio corporation and wholly owned wosidiary of FirstEnergy Corp.) and subsidiary as of December 31,1997 (post-merger) and 1996 (pre-merger), and the related consolidated statements of income, retained earnings, capital stock and other paid-in capital, cash flows and taxes for the years ended December 31,1996 and 1995 and the period from January 1,1997 to November 7,1997 (pre-merger), and the period from November 8,1997 to December 31,1997 (post-merger). Rese fmancial 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. Rose 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 fmancial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide ;; reasonable basis for our opinion. In our opinion, the financial statements referred to ebove present fairly, in all material respects, the financial position of ne Cleveland Electric illuminating Company and subsidiary as of December 31,1997 (post-merger) and 1996 (pre-merger), and the results of their operations and their cash flows fo; the years ended December 31,1996 and 1995 and the period from January 1, 1997 to November 7,1997 (pre-merger), and the period from November 8,1997 to December 31, 1997 (post-merger), in conformity with generally accepted accounting principles, l4Q b ARTHUR ANDERSEN LLP Cleveland, Ohio February 13,1998 1 30

l c6 FirstEn:rgy Corp. , 76 South Main Street Akron, Ohio 44308 (800) 736-3402 l 1997 AnnualReport I

_ _ . _ _ _ _ _ _ _ _ - _ - - . _ - _ _ - . - - - - . - - - - - - - - - ~ " " ' O ANNUAL REPORT 1997 ToledoEdison A Fast &wgy Ccrrpeny 7

i l l l l THE TOLEDO EDISON COMPANY 1997 ANNUAL REPORT TO STOCKHOLDERS The Toledo Edison Company is a wholly owned electric utility operating subsidiary of FirstEnergy Corp. It provides electric service in an area of 2,500 square miles of northwestern l Ohio., including the City of Toledo. It also provides electric  ! energy at wholesale to other electric companies and to certain municipalities and a rural cooperative in its service area. i

                                                                                                            )

CONTENTS Page Consolidated Financial and Operating Statistics 1 Management's Discussion and Analysis 2 Consolidated Statements ofIncome 8 Consolidated Balance Sheets 9 Consolidated Statements of Capitalization 10 -11 ., Consolidated Statements of Retained Earnings 12 Consolidated Statements of Capital Stock and Other Paid-In Capital 12 Consolidated Statements of Cash Flows 13 Consolidated Statements of Taxes 14 Notes to Consolidated Financial Statements 15 Report ofIndependent Public Accountants 30 1 l

                                              .                                                           1

THE TOIJDO EDISON COMPANY CONSOLIDATED FINANCIAL AND OPERATING STATISTICS Nov.8- Jan.1-Dec. 31.1997 Nov.7.1997 1996 1995 1994 1993 (DoUnrs in thousands) GENERAL FINANCIAL INFORMATION: Operating Revenues ... ......... ....... ..... M $ 772.707 $ 897.259 Mg $ 864.647 $ 870.841 Operating income . ...... ......... . ........ .. $ 19.055 M M M $ 179.499 $ 88.502 Income (Loss) Before Extraordinary item . S 7.616 $ 41.769 $ 57.289 $ 96.762 $ 82.531 $ (289.275) Nct lacome (Ioss) ...... . . . . . . . . . . . . . S 7.616 g$ 57.289 $ 96.762 $ 82.531 $ (289.275) Earnings (Loss) on Common Stock ....... . $ 7 fin $ 78.510 M. $ 40.363 .t 62.311 $ (311.757) Net Utility Plant.. . . .... .... ...... . . . $ 1.170.806 $2.079.742 g $2.204.717 $2.262,407 Total Assets .. . . ... . . . ... . . . . . .. . . .. . .. $2.758.152 $3.428.175 $3.532.714 $3.546.628 $3.543.520 CAPITALIZATION: Common Stockholder's Equky . . ... . . $ 531,650 $ 803,237 5 762,877 $ 684,568 $ 622,375 Preferred Stock-Not Subject to Mandatory Redemption... 210,000 210,000 210,000 210.000 210,000

          '.ect to Mandatory Redemption ...... .                                    1,690                  3,355           5,020            6,685       28,350 long. Term Debt . . . . . . . . . . . . . . . . . . . . . .                  1.210.190              1.051.517      1.119.294        1.241.331     1.328.283 Total Capitalization.. .                   ..... . .....                   $ 1.953.530             g             $2.007.191      $2.142.584      $2.189.008 I

CAPITALIZATION RATIOS: Common Stockholder's Equity . .. . .. . 27.2s 38.8 % 36 4 % 32.0 % 28.4 % Preferred Stock-Not Subject to Mandatory Redemption.. 13.8 10.2 10.0 9.8 9.6 Subject to Mandatory Redemption . . . . .I .2 .2 .3 1.3 leng-Term Debt ..... .. .. . . . . . . . . . . . . 61.9 $0.8 53.4 57.9 60.7 j Total Captiszation . ... ... ..... ... . . . .. ms as as es es l l 13LOWATT-ilOUR SALES (Millions): Isaidential ..... . . . . . . . . . . . . . 355 1,718 2,145 2,164 2,056 2.039 C'ommercial . ...... . . . . . . . . . . . . . . . . . . 284 1,498 1,790 1,748 1,7II ',672 Industrial . . . . . . . . . . . . . . . . . . . . . 847 4,003 4,301 4,174 4,099 3,776 Cther . . . . . . . . . . . . . . . . . . . . . . . . 79 413 488 500 499 490 Total Raai! ... .. ... .. . . . . . . . . . . . . . 1,565 7,632 8,724 8,586 8,365 7,977 Total Wholesale .......... .. . ... .. .. . . .. 435 2.218 2.330 2.563 2.548 2.146 Total ... . . . . . . . . . . .4...... . . . . . . . 2.000 9.850 11.054 11.149 10.913 10.123 CUSTOMERS SERVED (Yer-End): Residential .. .. ............ . . . . 262,501 261,541 260,007 256.998 255,109 l l Commercial . . . . . . . . . . . . . . . . . . . . . . . . 27,562 27,411 26,508 25,921 26,049 Industrial ...... . .......... .. 1,834 1,839 1,846 1,839 1,761 Other . . . . . . . . . . ... . . . . . . . . . . . . . . . . . 2.152 2.136 2.119 1.858 2.315 Total .. . . . . . . .. . . . . .. . . . . . . . . . . . 294.050 292.927 290.480 286.616 285.234 Average Annual Residential kWh Usage... 7,937 8,284 8,384 8,044 7,997 Peak lead-Megawatts.... . . . . . . . . . . . 1,813 1,758 1,738 1,620 1.568 Number of Employees (Year-End). . . . 1,532 1,643 1,809 1,887 1,909 l l 1 1 J

MANAGEMENT'S DISCU,CSION AND ANALYSIS OF RESULTS OF OPERATIONS l l AND HNANCIAL CONDITION This discussion includes forward looking statements based on information currently available to management. Such statements re subject to certain risks and uncertamties. 'Ihese statemerns typicalle contain, but are not limited to, the terms " anticipate", " potential", " expect", "believe", "estianite" and similar words. Actual resuhs may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather cauditions affecting future sales and margins, changes in markets for energy services, changing energy market prices, legislative and regulatory changes (including revised environmental requirements), availability aryl cost of capital and other similar factors. RESULTS OF OPE", LTIONS We contmued to make significant progress in 1947 as we prepare for a more wipiive environment in the electric utility industry.

                      'Ihe most significant event during the year was the approval by the Federal Errrgy Regulatory Commission (FERC) of the merger of our former parent company, Centenor Encrgy Corporation, with Ohio Edison Company to form FirstEnergy Corp., which came into existence on Novemba 8,1997. We expect the merger to pmduce a minimum of $1 billion in savings for FirstEnergy Corp. during the first ten years of joint operations through the etunination of duplicative activities, improved opersting efficiencies, lower capital expenditmes, accelerated debt reduction, the coordination of the companies' work forces and enhanced purchasing power.

The merger was mW for using the purchase method of accounting in accordaace with generally accepted accounting principles (see Note 2), and the applicable effects are " pushed dawn," or reflected on tir, separate finarcial statements of Centerior's direct subsidiaries as of the metger da:e. As a result, we reccrded purchase accounting fair value adjustments to: (1) revalue our nuclear generating units to f.1r value, (2) adjust long-tenn debt to fair value, (3) adjust our retirement and severance benefit liabilities, and (4) record goodwill Accordingly, the post-merger finmcial statements reflect a new basis of accounting, and separate financial statements are presented for the pre-merger and post-merger periods. For the remamder of this' discussion, for categories substantially unaffected by tlw merger and with no significant pre-merger or post-merger accounting events, we have combined th: 1997 pre-merger and post-merger periods and have compared the total to 1996. Earnings on mmmon stock in the 1997 pre-merger period were adversely effected by an extraordinary hem resuking from the October 1997 write-off of certain regulatory assets discussed below. Excluding this write-off, pre-merger 1997 earnings on comraon stock were $22.3 million. Earnings on common stock for the 1997 post-merger period were $7.6 million. In 1996, earnings on common stock wre $40.4 million which was lower than 1995 due primarily to the delay in implementing our 1996 rare increase and the end of certain regulatory eccounting deferrals in November 1995. Operatirag revenues were down $1.9 million in 1997 from 1996 levels following a $23.6 million increase in 1996 compared to 1905. A factor contributing to the lower operating revenues in 1997 was a reduction in average ietail prica due in part to contract renegotiations with certain large industrial 2

f . customers. 'Ihe following table summarizes the sources of changes in operating revenues for 1997 and 1996 I as corupared to the previous year: IEEZ 12 Eft On sdaines) Imennsed reamil kilowast-hour sales.......................... $ 14.4 $19.2 Change in avwage retail pice................................ (23.4) 3.4 Sales to utilities . .. . . ..... ....... . .. .... .. .. . ...... ... . . ... . . . .. 7.8 3.2 Other.............................................................. ELZ) . '_2.,2) mecm.ge...................................................... m) gg Total kilowatt-hour sales were at a new high with 11.9 billion kilowatt-hours sold. Retail sales totaled 9.2 billion kilowatt-hours, a 5.4% increase from the prior year level. Residential sales decreased 3.3% in 1997 fol'owmg a 0.9% decline the previous year. Commercial sales were down 0.5% aAer a 2.4% increase in 1996. Industrial sales increased 12.8% in the current year following a 3.0% increase in 1996. Excluding sales to the North Star BHP Steel facility whidt began opersions in late 1996, industrial sales increased 4.6% in 1997. Sales to other uilities increased 11.6%, sgM to an 8.5% decrease in 1996. Overall, there was a 7.2% increase in 1997 total kilowatt-hour sales based on the strength of industnal sales following a 0.9% decrease in 1996 swM to 1995. We spent more for fuel and purchased power during 1997 and 1996 v s igm to 1996 and 1995, respectively, due to highs purchased power costs. In 1997, the increase was partially offset by lower fuel expense. An increase in the mix of nuclear generation to coal-fired generaion contributed to the lower fuel costs. Nuclear expenses in 1997 were relatively unchanged from 1996 as increased operating costs at the Beaver Valley Plant were substantially offset by lower operating costs at the Perry and Davis-Besse Plants. Nuclear expenses in 1996 increased from 1995 due principally to higher operating costs at Davis-Besse resulting from its refueling outage. Other operating costs in the pre-merger period of 1997 included a

   $9.3 million charge for severance and early retirement benefits. In 1996, other operating costs decreased s icMv to 1995 reflecting the Company's cost reduction program.

1 Deprecision and amortization increased in the 1997 pre-merger period and in 1996 principally due to changes in depreciation rates approved in the April 1996 Public Utilities Commission of Ohio (PUCO) rate order. In the post-merger period depreciation and amortization was lower due to a fair value adjustment which was resnde in connection with r.ccounting for the merger, which was partially offset by amortization of goodwill. Amortization of regulatory assets remained nearly unchanged in 1997 aAer a brge increase in 1996 following cesantnn of the Rate Stabilization Program deferrals and initiation of their amortization. Income taxes increased in 1997, compared to 1996, as a function of taxable income, following a decrease in 1996 fmm the prior year due to lower pretax operatmg income. Other income increased in the 1997 pre-merger and post-merger periods reflecting interest inmme on trust notes acquired in connection with the Bruce Mansfield Plant lease rt. financing (see Note 3). i

   'Ihe increase in income in the pre-merger period was offset in part by merger-related expenses. A wnte-down of two inactive production facilities totaling $11 million and our share of merger-related expenses were the primary causes of the decrease in wher income in 1996, corrgM to 1995. Interest costs were higher overall in 1997 because new secured notes and short-term borrowings for the Bruce Mansfield Piant lease refinancing excmiM the expense reduction from the redemption and refinancing of debt secuntnes in 1997 and 1996.

3

CAPITAL RESOURCES AND LIQUIDfIY Our financial position has improved over the past five years. Cash generated from operations was 27% higher in 1997 than it was in 1992 due to higher revenues and aggressive cost controls. At the end of 1997 we had 890 fewer employees than five years ago as a result of our focus on becoming more ! competitive. De availability of additional cash generated from operations increased the Company's ability to redeem higher cost debt and preferred stock. We have also actively pursueu refmancing activities which replace higher cost debt and preferred stock with lower cost issues. De merter has resulted in improved credit ratings which have lowered the cost of new issues. De following table sununarizes changes in credit ratings resulting from the merger. Pre "_a Post-Merver Standard Moody's Standant Moody's

                                         & Puer's           Investors               & Phor's          Investors Corporation        Service. Inc.           Corporation      Sevice. Inc.

First mortgage bonds BB Ba2 BB+ Bal B+ B1 BB- Ba3 Subordinated debt Preferred Stock B b2 BB- bl Excluding the effect of the Bmce Mansfield Plant lease refmancing described below, interest costs and preferred dividends have been reduced by approximately $2.8 million from 1996 levels. nrough economic refmancir'gs and redemption of higher cost debt we have reduced the average cost of outstanding debt from 9.4% in 1992 to 8.25% in 1997. He Bmee Mansfield Plant lease refinancing is expected to provide an average annual after tax savings of about $10 million resulting from an increase in interest income and a decrease in rent expense offset in part by increased interest expense on ucured notes issued as pan of the transaction. Our cash requirements in 1998 for operating expenses, construction expenditures and scheduled debt maturities are expected to be met without issuing additional securities. We have cash requirements of approximately $442.6 million for the 1998-2002 period to meet scheduled maturities of long-term debt and preferred stock. Of that amount, approximately $40.6 million applies to 1998. We had about $22.2 million of cash and temporary investments and no short-term m ' debtedness on December 31,1997. Upon completion of the merger, application of purchase accounting reduced bondable property such that we are not currently able to issue additional first mongage bonds, except in connection with refinancing. Together with CEl, as of December 31,1997, we had unused borrowing capability of $125 million under a revolving line of credit. Our capital spending for the period 1998-2002 is expected to be about $200 million (exclud'mg nuclear fuel), of which approximately $50 million applies to 1998. His spending level is about $30 million lower than actual capital outlays over the past five years. Investments for additional nuclear fuel during the 1998-2002 period are estimated to be approximately $140 million, of which about $27 million applies to 1998. During the same periods, our nuclear fuel investments are expected to be reduced by approximately

    $85 million and $30 million, respectively, as the nuclear fuel is consumed. Also, we have operating lease commitments net of trust income of approximately $432 million for the 1998-2002 period, of which approximately $81 million relates to 1998. We recover the cost of nuclear fuel consumed and operating leases through our electric rates.

4

i OUTIAOK We face many competitive challenges in the years ahead as the electric utility industry undergoes significant changes, inclading changing regulation and the entrance of more energy suppliers into the ir laplace. Retail wheeling, which would allow retail customers to purchase electricity from other energy producers, will be one of those challenge's. 'Ihe FirstEnergy Rate Reduction and Economic Development Plan provides the foundation to pot.ition us to meet the challenges we are facing by sigdfn.dly reducing fixed costs and lowering rates to a more competitive level. The plan was approved by the PUCO in January 1997, and initially maintains (2irrent brse electric rates through Damh* 31, 2005.

      'Ihe plan also revised our fuel recovery methods.

As part of the regulatory plan, interim reductions l'eginning in June 1998 of $3 per month will increase to $5 per month per residential customer by July 1,2001 followed by a $93 million base rate reduction in 2006. Total savings of $111 million see anticipated over the term of the plan for our customers. We have abo committed $35 million for economic development and energy efficiency programs. We have been authorized by the PUCO to recognize additional depreciation related to our I generating assets and additional amortization of regulatory assets during the regulatory plan permd of at  ! least $647 million more than the amounts that would have been recognized if the regulatory plans were not . in effect. For regulatory purposes these additional charges will be reflected over the rate plan period. Our regulatory plan does not provide for full recovery of nuclear operations. Accordingly, regulatory assets represer. ting customer receivables for future income taxes related to nuclear assets of $295 million were l written off ($192 million net of tax impa:t) prior to consummation of the merger since we ceased { applica. ion of Statement of Financial Accounting Standards No. 71 " Accounting for the Effects of Certain { Types of Regula'. ion" (SFAS 71) for our nuclear operations when implementation of the FirstEnergy regulatory plan became probable. Based on the regulatory environment we operate in today and our regulatory plan, we believe we will contmue to be able to bili and collect cost-based rates relating to our nonnuclear operations; accr rdingly, it is appropriate that we continue the application of SFAS 71 for those operations. However, as

    ' discussed below, changes in the regulatory environment are on the horizon. 'Ihe unio legislature is in the discussion stages of restructuring the electric utility industry within the State. We do not expect any changes
   - in regulation to be effective within the next two years and we cannot assess what the ultimate impact may be.
                  , At the consummation of the merger in November 1997, we recognized a fair value purchase            '

accounting adjustment which decreased the carrying value of our nuclear assets by approximately $842 million based upon cash flow models. 'Ihe fair value adjustment to nuclear plant recognized for financial

reportmg purposes will ultimately satisfy the asset reduction commitment contained in our regulatory plan over the regulatory plan period.

l l On January 6,1998, the co-chairs of the Ohio General Assembly's Joint Select Committee on Ebetric Industry Dereguleian released their draft report of a plan which proposes to give customers a choice from whom they buy electricity beginning January 1,2000. No consensus has been reached by the full Comude; in the meantime, legislation consistent with the ccK: hairs' draft report may be introduced into the General Assembly by one or both of the co-chairs. We cannot predict when or if this legislation will be introduced and if it will be passed into law. We coutinue to study the potential effects that such legislation would have on our fmancial position and reschs of operations. Ihe Financial Ac=mting Standards Board (FASB) issued a proposed accounting standard for nuclear decommissioning costs in February 1996. If the standard is adopted as proposed: (1) annual 5

provisions for decommissioning could increase; (2) the net present value of estimated decommissioning costs could be recorded as a liability; and (3) income from the external decommissioning trusts could be [ l reported as investment income. The FASB reported in October 1997 that it plans to continue working on the proposalin 1998. De Clean Air Act Amendments of 1990, discussed in Note 6, require additional emission reductions by 2000. We are pursuing cost-effective compliance strategies for meetmg the reduction q requirements that begin in 2000. We are aware of our potential involvement in the cleanup of several sites containing hazardous waste. Although these sites are not on the Superfund National Priorities List, they are generally being administered by various governmental entities in the same manner as they would be administered if they were on such list. Allegations that we disposed of hazardous waste at these sites, and tne amount involved are often unsubstantiated and subject to dispute. Federal law provides that all "potentially responsible parties" for a particular site be held liable on a joint and several basis. If we were held liable for 100% of the cleanup costs of all the sites referred to above, the cost could be as high as $100 million. However, we believe that the acmal cleanup costs will be substantially lower than $100 million, that our share of any cleanup costs will be substantially less than 100% and that most of the other parties involved are financially able to contribute their share. We have accmed a $1.1 million liability as of December 31,1997, based on estimates of the costs of cleanup and our proportionate responsibility for such cost. We believe that the ultimate outcome of these matters will not have a material adverse effect on our financial condition, cash flows or results of operations. IMPACr OF THE YEAR 2000 ISSUE De 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. His could result in system failures or miscalculations. We currently believe that with modifications to existing software and conversions to new software, the Year 2000 Issue will pose no significant operational problems for our computer systems as so modified and converted. If these modifications and conversions are not made, or are not completed on a timely basis, the Year 2000 Issue could have a material impact on our operations. We have initiated formal communications with many of our major suppliers to determine the extent to which we are vulnerable to those third parties' failure to resolve their own Year 2000 problems. Our total Year 2000 project cost and estunates to complete are based on currently available information and do not include the estimated costs and time associated with the impact of a third party's Year 2000 issue. Dere can be no guarantee that the failure of other companies to resolve their own Year 2000 issues will not have a material adverse effect on us. We are utilizing both internal and external resources to reprogram and/or replace and test the software for Year 2000 modifications. Most of our Year 2000 problems will be resolved through system replacements. The different phases of our Year 2000 project will be completed at various dates, most of which occur in 1999. We plan to complete the entire Year 2000 project by mid-December 1999. Of the total project cost, approximately $10 million will be capitalized since those costs are attributable to the purchase of new software for total system replacements (i.e., the Year 2000 solution comprises only a portion of the benefit resulting from the system replacements). He remaining $1 million will be expensed 6 as incurred over the next two years. To date, we have incurred approximately $150,000 related to the

assessment of, and prelimmary effons in connecuon with, our Year 2000 project and the developrnent of a remediation plan.

             'Ihe costs of the project and the date on which we plan to complete the year 2000 modifications are based on management's best esumates, which were derived from numerous assumptions of future events irx:luding the continued availability of cenain resources, and other factors. However, there can be no guarantee that this project will be completed as planned and actual resuhs could differ materially from the estimates. Specific factors that might cause material differences include, but are not limited to, the availability and cost of trained personnel, the ability to locate and correct all relevant computer code, and similar uncertainties.

l 7

l l THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME Nov. 8 - Jan.1- For the Years Ended Decenaber 31. Dec. 31.1997 Nov.7.1997 1996 1995 (in thousands) OPERATING REVENUES (1)..... ... .... .. . . . . . . . U22.669 }772.707 $897.259 $873.657 OPERATING EXPENSES AND TAXES: Fuel and purchased power .. .. .... . .. .. ............. 21,261 149,890 168,909 156,874 Nuclear operating costs ................. ..... . .. . ... 28,977 132,931 161,321 145,836 Other operating costs .. .. . .. .. . ... .. .. 22.668 . 158.939 173.530 182.838 Total operation and maintenance expenses . ... ... 72,906 441,760 503,760 485,548 Provision for depreciation and amortization . . . . . . 10,795 84,682 98,042 92,911 Amortization (deferral) of net regulatory assets... . 2,338 14,304 17,041 (16,799) General taxes..... ... . . . . . . . . . . . . . . . . . . 13,126 77,426 89,647 91,042 income taxes .... . . . . . . . . . . . . . . . . . . . . 4.449 31.253 31.954 32.887 Total operating expenses and taxes....... .. .. . . 103.614 649.425 740.444 _685.589 OPERATING INCOME ... . ..... ..... .. . . .. 19,055 123,282 156,815 188,068 OTIIER INCOME (LOSS).... .. . . . . . . . .. _ 2.153 2.153 (4.585) 18.835 INCOME BEFORE NET INTEREST CilARGES.. . 21.208 125.435 152.230 206.903 NET INTEREST CIIARGF3: Interest on long-term debt... ..... .... . .. 13,689 74,264 85,535 98,550 Allowance for borrowod funds used during construction ..... . . . . . . . . . . . . . . . . . . . . . . . . . . . (138) (259) (827) (674) Other interest expense.. . . . . ................ .. 41 9.661 10.233 12.265 Net interest... . .. . . .... . . . . . . . . . . . 13.592 83.666 94.941 110.141 INCOME BEFORE EXTRAORDINARY ITEM.... . 7,616 41,769 57,289 96,762 EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 1) ..... .. . . . . . . . . . . . . . . . . - (191.9011 - - NET INCOME (LOSS)..... .. . . . . . . . 7,616 (150,132) 57,289  % ,762 PREFERRED STOCK DIVIDEND REQUIREMENTS.. .... . . . . . . . . . . .

                                                                                                                         -              19.435                 16.926                             18.252 EAR 91NGS (LOSS) ON COMMON STOCK .. .. ....                                             $ 7.616                                   5(169.567)             $ 40.363               5 78.510 (1) includes electric sales to The Cleveland Elcetric illuminating Company of $17.7 million,598.5 million, $105.0 mi!! ion and $102.1 million in the November 8-December 31,1997 period, the January 1-November 7,1997 period,1996 and 1995, respectively.

l The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 8

TIIE TOIIDO EDISON COMPANY CONSOLIDATED BALANCE SHEETS Af Deo^ 31. 1997 1996 (In thousands) ASSETS UTILITY PLANT: In service.............. .... . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . 51,763,495 53,138,344 Less-Accumulated provision for depreciation . . . . . . . . . . . 619.222 1.064.933 1.144.273 2.053.411 Construction work in progress-Electric plant........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,901 21,479 Nuclear fuel ....... ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.632 4.852 26.533 26.331 1.170.806 .2.079.742 OTHER PROPERTY AND INVESTMENTS: Shippingport Capits! Trust (Note 3) ..... ....... .

         ~
                                                                                                   . . . . . . . . . . . . . . . . . . . . . .                                                312,873                        -

NucIcar plant deconenissionin . . . . . . . . . . . . . . . . . .... 85,956 64,093 Other . ... . .. . ... . .... . . . .. .. .... .g trusts . . . . . ... .

                                                             . . . . . . . . . . . . . . . . . . . . .. ....                             . . . . . . .                                            3.164                  6.281 401.993                  70.374 CURRENT ASSETS:

Cash and cash equivalents . .. . . .. .. .. . . .. . . . . 22,170 81,454 Receivables-Customers . ..... . .... . . . . . . . . . . . . . . . . . . . . .. . 19,071 18,337 Associated com 15,199 13,519 Other. . . .. ......panies ....

                                               .....................                                  . . .                     . . . . . . . . . . .                                             2.593                  5,567 Notes receivable from associated companies ... . .                                            . . . . . . .                     . . ... ..                                                  40,802                 81,817 Materials and supplies, at average cost-Owned...............................                                             . . . . . .                        .... ..                         . . . . .                          31,892                  33,160 Under consignment.. . .. .... .. .....                            . . . . .         .         ..           ..          . . . .                 . . . .                                   9,538                 10,383 Prepayments and other... .......                                                                                                                                                            26.437
                                                              . . . . . . . . . . . . . . .                   . . . . . . . . . . . . . . .                                                                           26.206 167.702               270.443 DEFERRED CHARGES:

Regulatory assets.... .. .... .. . . . . . . . . . . . . .. ... .. 442,724 927,629 Goodwill . ... . ....... ......... ...... . ... ... .. . . . . . . 514,462 - Property taxca .. .. . .. . . ..... . . . ... .. . . .. . . . . . . . . . . . . . . . . . . 45,338 45,625 Other . . .. .. . . .. . 15.127

                                  . . . . . . . . ............. ..                      .. . . . . . . . . .                                ..                                      .                                 34.362
                                                                                                                                                                                          ,L O_}] &               1.007.616 52.758.152            53.428.175 CAPITALIZATION AND LIABILITIES CAPITALIZATION (Scc Consolidated Setements of Capitalizatica):                                                                                                                                                         -

Common stockholder's equity..... ... ... . .. . . . . . . . . . . . . . 5 531,650 $ 803,237 Preferred stock-Not subject to mandatory redemption .. .. . . ... . . . . . . . .. 210,000 210,000 Subject to mandatory redemption . .... .. ... . . . . . . . . . . . .. . . . . 1,690 3,355 1.ong-term debt ... . .. ...... . . . ..... 1.210.190

                                                                                           . . .            . . . .                      .. . . .                                                                1.051.517 1.953.530             2.068.109 CURRENT LIABILITIES:

Currently payable long-term debt and preferred stock .. . . . . . . . . . . 69,979 87,609 Accounts payable-Associated companies.. .... . . .... . . 1 . . . . . . . . . . . . . . . . .. . 21,173 30,016 Other.. .. ................................... 60,756 46.4 % Accrued taxes .... .. .. . . ... . . . . . . . . . . . . . . . . .. . . .. 34,441 24,829 Accrued interest .. .... .. . .. .............. . . . . . . . . . . . . . . . . . . . .. .. 26,633 22,348 Other .. . . .. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.603 18.722 _.,235.585 230.020 DEFERRED CREDITS: Accumulated deferred income taxes . ........ ...... . . . . . . . . . . . . . . . . 104,543 565,600 Accumulated deferred investment tax credits..... .. . . . . . . . . . ... ... 43.265 80,884 Pensions and postretirement benefits . ............................... . 113,254 102,214 Other ... .......... ................. . . . . . . . . . . . . 307.975 _ 381.348 569.037 ,,L120.046 COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 3 and 6) . .. ... .. . ..... . . . . . . . . . . . . . . . . . .. . . . . . . . 52.758.152 53.428.175 The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets. cy

e-______-____________________________ _ _ _ _ __ l l THE TOLEDO EDISON COMPANY < CONSOLIDATED STATEMENTS OF CAPITALIZATION At Deeember 31. 1997 1996 (DoGers he thousands, exceptper share amounts) COMMON STOCKHOLDER'S EQUITY: Common stock, $5 par value, authorized 60,000,000 sharcs-39,133,887 shares outsta-ding .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 195,670 $ 195,687 Premium on capital stock . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 328,364 481,057 Other paid-in capital.... . . . . . . . . . . . . .. . . . . . . . .. . . . . . . . . . .. .. .. - 121,056 Retained earnings (Note 4A) .... ..... . . . . . . . . . . ... . . . . . . . . . . . . . . . . . . . . 7.616 5.437 Total common stockholder's equity ...... .. . . . . . . . .. . . . . . . . . . . . . . 531.650 803.237 Humber of Shares Optaonal Outstandian Redemotica Price LE7 L95 Per Share Amarenate PREFERRED STOCK (Note 4B):

                         $100 par value, authorized 3,000,000 shares;
                         $25 par value, authorized 12,000,000 shares Not Subject to Mandatory Redemption:
                                     $100 par S 4.25 . . . . . .                                 ...             ..        160,000                    160,000                  $104.63                           $ 16,740                 16,000       16.000
                                                           $ 4.56 ... . . .                 . . . . . . . .                 50,000                      50,000                   101.00                              5,050                  5,000        5,000
                                                           $ 4.25. .... ..                           . . .                 100,000                    100,000                    102.00                             10,200                10,000       10,000
                                                           $ 8.3 2 . . . . . . . . . . . . . . . . . . . .                 100,000                    100 000                    102.46                             10,246                10,000       10,000
                                                           $ 7.76..                   . .   . . . . . . .                 150,000                     150,000                    102.44                             15,366                15,000       15,000
                                                           $ 7.80. . . . ....                . . .                .       150,000                     150,000                    101.65                             15,248                15,000       15,000 110.00 . . . . . . . . . . . .            . . . . .            190,000                     190,000                    101.00                             19,100                19,000       19,000
                                     $ 25 par $ 2.21... ..                                    .. . .. ... 1,000,000                               1,000,000                        25.25                           25,250                 25,000       25,000
                                                           $ 2.365 . .. . . . . . . . . . .                    .. 1,400,000                    1,400,000                       27.75                           38,850                 35,000       35,000 Series A Adjustable... . ...                               1,200,000                    1,200.000                       25.00                           30#30                  30,000       30,000 Series B Adjustable.. .. . .                               1.200.000                   1.200.000                        25.00                           3.r.000                30.000       30.000 5.700.000                   5.700.000                                                    $216.140                  210.000     210.000 Subject to Mandatory Redemption (Note 4C):
                                     $100 par $ 9.375. . .                                           . . .                 33,550                     50,200                  $100.49                          $ 3,371                      3,355        5,020 Redemption within one year.. .. ... . .                                                                                                                                                               (1.665)      (1.665) 33.550                      50.200                                                  $ 3.371                 JQ_99             3.355 LONG-TERM DEBT (Note 4D):

First mortgage bonds: 6.125% due 1997. . . . . . . . . . . . .. .. . . . . . . . . . . . .. - 31,400 7.250% due 1999. ................. .. . . . . . . . . . . . . . . . . . 85,000 85,000 7.500% due 2002. . . . . . . . .. . . . . . . . . . . . . . . . . . . 26,000 26,000 8.000% due 2003 . . ...... .. . . . . . . . .. . . . . . . . . . . . . . . . . .. .. 35,725 35,725 7.875% duc 2004.. ., . . . . . . . . . . . . . . 145.000 145.000 Total first mortgage bonds . . ........ ... . .. . . . . . . . . . . . . . . . . .. 291.725 323.125 Unsecured notes: 5.750% due 2003 ... ...... . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,900 4,100 10.000 % due 2010 .. ...... ..... ..... . .. . . . ... . . . . ... 1.000 1.000 Total unsecured notes .. ..... . .. . . . .. .. ... . . . . . .. 4.900 5.100 Notes secuicd by subordinate mortgage: 8.750% due 1997. . . . . . . . . . . . . . . . . . . 8.000 10

THE TOLEDO EDISON COMPANY I CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont.) 1 1 At Decemler 31. 1997 1996 (In thousands) i ONG-TERM DEBT (Cont.): Secured notes: 7.940% duc 1998. . . . . . . . . . . . . . .. . . . . ... . . . . . . . . 5,000 5,000 8.000% due 1998. . . . . . . . . . . . . .. .. . . . . . . . . . . . . . . . . . . . . . 7,000 7,000 9.300% due 1998.. ... . . . . . . . . . . . . . . . . . . . .. ... ... . .. 26,000 26,000 10.000 % di.e 1998 . . . . ... ......... . .. . ...... . .. . . . . . 650 650 7.720 % duc 1999 . ..... . ... .. ...... . . . . . . . .. . . 15,000 15,000 B.470 F iue 1999 .. . ......... . ....... . . . . . . . . . . . . . . . . . . . . . . . . .. 3,500 3,500 7.190% due 1000.... .. .... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000 - 7.380 % duc 2000 .. .. ...... .. . ...... . . . . . . . . . ... .. . . . . . . . . 14,000 14,000 7.460% due 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,500 16,500 7.500% due 2000........ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .... ... .... 100 100 8.500% due 2001. ....... .. .. ... . . . . . . . . . . . . . . . . . . . . . . .. .. 8,000 8,000 9.500% due 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000 21,000 8.180% duc 2002.. . .. . ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 17,000 17,000 8.620 % due 2002 ... . . .. ..... .. .. ... .. . . . . . . . . . . . . . . . . . . . . . . . .. . 7,000 7,000 8.650% due 2002.. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . 5,000 5,000 7.760% due 2003... ....... .. . . . ... . . . . . . . . . . 5,000 5,000 7.780% due 2003. . . . . . . . . . . . . . . ... . . . . . . . . . . . . . . . . 1,000 1,000 7.820% due 2003. ...... . . . . . . . . . . . .. .. . . . . . . .. 38,400 38,400 7.850% due 2003.. . . . . .. .. . .......... . . . . .. .. . . . 15,000 15,000 7.910% due 2003.. . . . . . . . . .. ... . . . . . . . . .. 3,000 3,000 7.670% due 2004 ... . .. . .. ... . . . . . . . . . . . . . . . . . . . 70,000 - 7.130% due 2007..... .. . . . . . . . ... . . . . . . . . ... . ........ .. 30,000 -. 3.800% due 2011*.. .. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 31,250 31,250 8.000 % due 2019 .. . . . . ........ . . .. . . . . . . . .. .. . . . . . . . . . . . . 67,300 67,300 7.625 % due 2020... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000 45,000 7.750 % due 2020 ... .. . .. .. ... . . . .. . . . . . . . . . . . . . . . . . . 54,000 54,000 9.220% due 2021. ... .. . ... .. .. . . . . . . . . . .. .. . . . . . . . . 15,000 15,000 10.000 % due 2021... ...... . . ..... . .. . . . . . . . . . . . . . . . . . . 15,000 15,000 7.400 % due 2022... . .... . . ..... . . . . . . . . . . . . .. .. . . . 30,900 30,900 9.875 % due 2022 .... . .... ....... . . . . . . . . . . . . . . . . . . . . . . . . . . - 10,100 6.875% due 2023.. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . 20,200 20,200 7.550 % due 2023 ... ... . . . ... . . . . . . . . . . . .. . .. . . . . . 37,300 37,300 8.000% due 2023.. ...... . . . . . . . . . . .. . .. . .. 49,300 49,300 6.100% due 2027. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.100 - Total secured notes .. .. .. . . , . . . .. .. . 728.500 583.500 Debentures: 8.700% due 2002. ..... .. .... . . . . . . . . . . .. .. _])J009 135.000 Nuclear fuel lease obligations (Note 3) ... ... . . . . . . . . . . . . . . . 64.843 84.735 Net unamortized premium (discent) on debt (Note 2)... . . . . 53.536 (1.999) Long-term debt due within one year..... .. . . . . . . . . . . . . . . . (68.314) (85.944) Total long-term debt .. . . . . . . . . . . . . . . . . . . .. .. 1.210.190 1.051.517 TOTAL CAPITALIZATION.. . . . . ... . . . . . . . . . . . .. . . . . . . . .. 51.953.530 $2.068.109

• Denotes variable rute issue with December 31,1997 interest rate shown.

 'the accompanying Notes to Consolidated Financial Staternents are an integral part of these statements.

11

I I

                                                                                ' THE TOLEDO EDISON COMPANY l

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Nov. 8 - Jan.1 - For the Years F 'J P__ - ' - 31. Dec. 31.1997 Nov.7.1997 1996 1995 (in thousands)

                                                                                                              $     -       $ 5,437                  $(34,926)         $(113,235)

Balance at beginning of period., ... .. ... . ....... .. 7.616 .J150.132) . 57.289 96.762 Net income (loss).... .. .. . . . . . . . . . . . . . . . . . . 22.363 (16.473) 7.616 (144.695)

                                                                                                                    -           20,973                  16,926             18,454 Cash dividends on preferred stock..... . . . .... . .. .

Purchase accounting fair value adjustment.. .. . . .. .... - (165,668) - -

                                                                                                                    -                 -                      -                   (1)

Other...... ........................... . . . . . . . . . . . . _

                                                                                                                            .f144.695)                  16.926             18.453 hha~ at end of r,cnad (Note 4A) .                                                      $7.616        $         -             S 5.437           $ (34.926)

CONSOLIDATED STATEMENTS OF CAPITAL STOCE AND OTHER PAID-IN CAPITAL Preferred M . Not Subject to Suldect to Common Stock Mandatory Redematma Mandatory Redemafkin Premium Othe-Number Par on Capital Paid-la Number Par Number Par of Shares Value Stock Emakil of Shares Y. shit of Sharen Y. shit (DoD ses hs housands) 39,133,887 $195,687 $481,057 $121,0!9 5,700,000 $210,000 483,500 $18,350 Balance, January 1,1995 .... ... Redemptions-

                             $100 par $9.375...... . ...                                                                                                         (16,650)      (1,66f)
                             $ 25 car T1.81.                                                                                                                    (400.000) (10.000)

Balance, December 31,1995.. 39,133,887 175,687 481,057 121,0f 9 5,700,000 210,000 66,850 6,685 Unrealized loss on securith:s . (3) Redemptions-(16.650) (1.66f) _$100 nar $9.375. 50,200 5,020 Balance, December 31,1996.. .. 39,133,887 195,687 481,057 121,0!6 5,700,000 210,000 Redemptions-

                             $100 par $9.375.                                                                                                                    (16.650)

(1.6(5.). Purchase accounting fair value adiustment.. (17) (152.693) (121.0(6) hhnee. D~cmber31.1997.. 39.133.887 $195.670 $328.364 5 - 5.700.000 $210.000 33.550 $ 3.3Q The accompanying Notes to Consolidated Financial Statements are an integral part c f these statements 12

THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS i Nov. 8 - Jan.1 - For the Years Ended Decembet.2L Dec. 31.19U Nov.7.1997 1996 '1995 (in thousands) CASil FLOWS FROM OPERATING ACTIVITIES: Net income (Loss) ... .. ... .. . . .... .... . .. . .. ...... . . .. ..... ...... $ 7,616 $(150,132) $ 57,289 $ 96,762 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation and amortization. . . . . . . . 10,795 84,682 98,042 92,911 Nuclear fuel and lease amortinten . . . .... .... ...... .. . 5,316 30,354 33,294 54,099 Other amortization, net.. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.331, 14,304 17,041 (30,817) Deferred income taxes, nct................. . ....... .. . ... 3,113 (121,002) 17,919 16.316 i Investment tax credits, net.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (400) (3,601) (4,321) (8,641) I Allowance for equity funds used during construction ... . (61) (776) (1,045) (874) Extraordinary item....... ........... . . . . . . . . . . . . . . . .

                                                                                                                                -    295,233                          -            -

Receivables..... .. . . . . . . . . . . . . . . . . . . . . . . . . . 1,923 317 (9,610) (6,283) Net proceeds from accounts receivable securitization... - - 78,461 - Materials and supplies .... ............. .... .. ... . . . . ... (4,410) 6,543 5,697 7,988 Accounts payable ................. . ..... . . . . . . . . . . . . . . . . . (12,91i9) 18,679 (9,737) 8,043 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RP.M) 55.233 (1.509) 9.419 Net cash provided from (used for) opending activities.. Ep.3) 229.834 281.521 238.923 CASli FLOWS FROM FINANCING ACTIVITIES: ' New Financing-teng-term debt ........ ....... .. . . . . . . . . . . . . . . . . . . . . .

                                                                                                                               -     149,804                       (260)     92,439 Short-term borrowmgs, net .......... .. .... .. .. . .                                        ....
                                                                                                                               -              -                        -     20,950 Redemptions and Repsyments-                                                                                                                                                            l Preferred stock .. .... . . . . .                    . . . . . . . . . . . . . . . . . .
                                                                                                                               -         1,665                    1,665       11,665 Long-term debt . . . .. . . . . .. . . .. . .. . . . .. . . .. . . . . .. . . . . . . ..                               -       85,419                 110,108       246,714 Short-term borrowings, net...                        . . . . . . . . . . . . . . . . . . . . . .
                                                                                                                               -               -                20,950              -

Dividend Payments-Preferred stock.. .... ... . ... ........ . ..... . .. .... _ 4J 16 12.589 16.926 18.454 Net cash provided from (used for) fuumcing activities.. (4 156) 50.131 (149.909) (163.444) CASil FLOWS FROM INVESTING ACTIVITIES: Property additions. .... ... . ... ..... . ..... .... . . . . . . 6,563 36,680 47,961 53,492 I I Loans to associated companies... ........ .... ...... . . .. - - 81,817 - Loan payments from associated corapanien... . .... . . . . . . (11,297) (25,718) - - Capital trust investments .... ... . . .. .... . . . . . . (7,314) 320,187 - - Other . . ... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _ 01,M) 10.350 14.049 16.118 Net cash used for (provided from) investing activities .. S'Lf21) 341.499 143.827 69.610 Net increase (decrease) in cash and cash equivalents.. . .. . :2,250 (61,534) (12,215) 5,869 Cash and cash equivalents at beginning of period . . . . . . . . _lL9.M 81.454 93.669 87.800 Cash and cash equivalents at end of period .. . . . . . . . . . . . MQ $ 19.920 $ 81.454 593 f 59 SUPPLEMENTAL CASil FLOWS INFORMATION: Cash Paid During the Period-  ! Irnerest (net of amounts capitalized). ..... .. . . . [ 6.000 $ 73.000 $ 92.000 $ 93.000 Income taxes . .... . ....... .. .. . . . . . . . . . . . . . . . . . . . [?8.000 $ 25.300 $ 15.950 $ 22.500

     'Ihe accompanying Notes to Consolidated Financial Statements are an integral past of these statements 13 I

i

                                                                                                                                                                                           )

THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF TAXES Nov.8 Jan.1 - For the Years Ended December 31. Dec. 31.1997 Nov.7.1997 1996 1995 (in thousmsds) GENERAL TAXFS:

                                                                                                   $ 5,998                                                         $ 40,495               $ 45,446          5 47,100 Real and pensonal property .. . . ....... .. . .. ..                                   ..

5,826 28,590 33,793 33,149 State gross racipts ........ ... .... . . . . . . . . 818 4,444 5,689 5,684 Social security and unemployment.. . .. ..... . ... 484 3.897 4.719 5.109 Other.................................. . 5 13.126 7 77.426 5 89.647 $ 91.042 Total general taxes..... . . . . . . . . . . . . . . . PROVISION FOR INCOME TAXES: Currently payable-

                                                                                                   $ 2,859                                                         $ 55,192               $ 13,582          5 27,512 Federat... ... . .       . . .. . . . . . . . .             .... . . . . .

state (' )... ..... . . . . . . .. . . . . . . . . . .. 209 - - - 3.068 55.192 13.582 27.512 Deferred, net-3,096 (121,002) 17,919 16,316 Federal.. . . . . . . . . . . . . . . . . . . . . . . . . .. 17 - - State (1).. . . . . . . . .. . . . . . . . . . . . . . . . . . . . . 3.113 (121.002) 17.919 16.316 (400) (3.601) (4.321) (8.641) Investment tax credit amortization . .. . . . . .

                                                                                                    $ 5.781                                                        5 (69.411)             5 27.180          5 35.187 Total provision for income taxes .. ......                      . . . . . . .

INCO'dE STATEMENT CLASSIFICATION OF PflOVISION FOR INCOME TAXES:

                                                                                                    $ 4,449                                                        $ 31,253               $ 31,954          5 32,887 Opers.ing income . . . . . . . . . . . . . . . . . . . . . . . .

1,332 2,667 (4,774) 2,300 Other income.. .. . .. . . . . . . . . . . . . . . . . . . Extraordinary item.. .. . . .. .. ... . . . . . . . . . . . . . . . . .

                                                                                                                 -                                                  (103.331)              _

5 5.781 $ (69.411) $ 27.180 $ 35.187 Total provision for income taxes ..... . . . . . . . .. RECONCILI ATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES: Boo's income before provision for incorne taxes.. .. .. $ 13.397 $(219.543) 5 84.469 $ 131.949

                                                                                                    $ 4,689                                                        5 (76,840)                $ 29,564        $ 46,182 Federalincome tax expense at statutory rate .                               . ....

incicases (reductions)in taxes resu':ing fr m-(400) (3,601) (4,321) (8,641) Amortization ofinvestment tax credits .. ... ... 3,428 (3,742) (1,259) f)cpreciation.. . .. . . . . . . . . . . . .. .. .. 1.492 7.602 5.t79 (1.095) Other, net . . . . . . . . . . . . .. . . . . . Total provision for income taxes., .. . . . . . . . S 5.781 $ (69.411) 5 27.1f0 5 35.187 ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31:

                                                                                                    $ 190,636                                                                                $ 612,000         $ 627,000 Froperty basis differences...                . . .          . .                    . . .

83,052 34,000 85,000 Deferred nuclear expense .. . . . . . . . . . . . . . . . . . (17,431) - (4,000) Deferred sale and leaseback costs... . . . . . . . (20,960) (44,000) (46,000)

  ' Unamortized investment tax credits..                    . . . . . . . . . . .              .

(108,156) (99,837) (80,396) Unused alternative minimum tax credits.. .... . ...

                                                                         ... ..                        (22.598)                                                                                  13.437              (8.569)

Other .. .... ................... .. Net deferred income tax liability... . . . . . . . . . $ 104.543 $ 565.600 5 573.035 (1) For periods prior to November 8,1997, state income taxes are included in the General Taxes section above. These menounts are not material and no restatement was made. The accompanying Notes to Consolidated I~marcial Statements are an integral part of these statements. 14

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES: ne consolidated financial statements include The Toledo Edison Company (Company) and its 90% owned subsidiary, ne Toledo Edison Capital Corporation (TECC). The subsidiary was formed in 1997 to make equity investments in a business trust in connection with the financing transactions related to the Bruce Mansfield Plant sale and leaseback (see Note 3). The Cleveland Electric Illuminating Company (CEI), an affiliate, has a 10% interest in TECC. All significant intercompany transactions have been eliminated. The Company is a wholly owned subsidiary of FirstEnergy Corp. (FirstEnergy). Prior to the merger in November 1997 (seu Note 2), the Company and CEI were the principal operating subsidiaries of Centerior Energy Corporation (Centerior). He merger was accounted for using the purchase method of accounting in accordance with generally accepted accounting principles, and the applicable effects were reflected on the separate financial statements of Cemerior's direct subsidiaries as of the merger date. Accordingly, the post-merger financial statements reflect a new basis of accounting, and pre-merger period and post-merger period financial results (separated by a heavy black line) are presented. The Company follows the accounting policies and practices prescribed by he Public Utilities Commission of Ohio (PUCO) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Certain prior year amounts have been reclassified to conform with the current year presentation. REVENUES-De Company's principal business is providing electric service to customers in nophwestern Ohio. He Company's retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service through the end of the year. Receivables from customers include sales to residential, commercial and industrial customers located in the Company's service ares and sales to wholesale customers. There was no mnterial concentrr. tion of receivables at December 31,1997 or 1996, with respect to any particular segment of the Company's customers. In May 1996, the Company and CEI began to sell on a daily basis substantially all of their retail customer accounts receivable to Centerior Funding Corporation (Centerior Funding), a wholly owned subsidiary of CEI, under an asset-backed securitization agreement which expires in 2001. In July 1996, Centerior Funding completed a public sale of $150 million of receivables-backed investor certificates in a transaction that qualified for sale accounting treatment. REGULATORY PLAN-FirstF2rgy's Rate Reduction and Economic Development Plan for the Company was approved in January 1997, to be effective upon consummation of the merger. De regulatory plan initially maintains current base electric rates for the Company through December 31,2005. At the end of the regulatory plan period, the Company's base rates will be reduced by $93 million (approximately 15 percent below current levels). The regulatory plan also revised the Company's fuel cost recovery method. The Company formerly recovered fuel-related costs not otherwise 15

included in base 4tes from retail customers through a separate energy rate. In accordance with the regulatory plan, the Coinpany's fuel rate will be frozen through the regulatory plan period. sub to limited periodic adjustments. As part of the regulatory plan, transition rate credits were implemented for customers, which are expected to reduce operating revenues for the Co'mpa approximately $111 million during the regulatory plan period. All of the Company's regulatory assets related to its nonnuclear operations are being recovered under provisions of the regulatory plan (see Regulatory Assets). The Company recognized a fair value purchase accounting adjustment to reduce nuclear plant by $842 mill connection with the FirstEnergy merger (see Note 2); that fair value adjustment recognized for financial reporting purposes will ultimately ssisfy the $647 million asset reduction commitment contained in the regulatory plan. For regulatorv purposes, the Company will recognize the $647 million of accelerated amortization over the regulatory plan period. UTILITY PLANI' AND DEPRECIATION-Utility plant reflects the original cost of construction (except for the Company's nucien generating units which were adjusted to fair value in 1997), including payroll exi related costs such i as taxes, employee benefits, administrative and general costs and financing costs (allowance for funds used during construction). De Company provides for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. In its April 1996 rate order, the PUCO approved depreciation rates for the Company of 2.95% for nuclear property and 3.13% for nonnuclear property. He annualized composite rate was approximately 2.6% for the post-merger period. Annual depreciation expense includes approximately $9.8 million for future decommissioning costs applicable to the Company's ownership interests in three nuclear generating units. De Company's share of the future obligation to decommission these units is approximately

  $327 million in current dollars and (using a 3.5% escalation rate) approximately $774 million in future dollars. He estimated obligation and the escalation rate were developed based on site-specific studies. Payments fer decommissioning are expected to begin in 2016, when actual decommissioning workbegins. The Company has recovered approximately $81 million for decommissioning through its electric rates from customers through December 31,1997. If the actual costs of decommissioning the units exceed the funds accumulated from investing amounts recovered from customers, the Comgy expects that additional amount to be recoverable from its customers. De Company has approximately $86.0 million invested in external decommissioning trust funds as of December 31,1997. Earnings on these funds are reinvested with a corresponding increase to the decommissioning liability. The Company has also recognized an estimated liability of approximately $9.6 million at December 31, 1997 related to decontamination and decommissioning of nuclear enrichment facilities operated by the United States Department of Energy (DOE), as required by the Energy Policy Act of 1992.

De Financial Accounting Standards Board (FASB) issued a proposed accounting standard for nuclear decommissioning costs in February 1996. If the standard is adopted as proposed: (1) annual provisions for decommissioning could increase; (2) the net present value of estimated decommissioning costs could be recorded as a liability; and (3) income from the external 16

decommissioning trusts could be reported as investment income. The FASB indicated in October 1997 that it plans to continue work on the proposal in 1998. COMMON OWNERSHIP OF GENERATING FACILITIES-De Company, CEI, Duquesne Light Company, Ohio Edison Company (OE) and its wholly owned subsidiary, Pennsylvania Power Company (Penn), constitute the Central Area Power Coordination Group (CAPCO). He CAPCO companies own and/or lease, as tenants in common, various power generating facilities. Each of the companies is obligaed to pay a share of the costs associated with any jointly owned facility in the same proportion as its interest. He Company's portion of operating expenses associated with jointly owned facilities is included in the corresponding operating expenses on the Consolidated Statements of Income. The amounts reflected on the Consolidated Balance Sheet under utility plant at December 31,1997 include the following: Utility Accumulated Construction Ownership / Plant Provision for Work in Leasehold Generatine Units in Service Depreciation Progress fabrest (in millions) Bruce Mansfield Units 2 and 3 $ 38.3 $ 9.7 $ .4 18.61 % Beaver Valley Unit 2 57.5 1.0 3.1 19.91 % Davis-Besse 200.8 - 2.2 48.62 % Perry 315.9 -

                                                                                                                           .7     19.91 %

Total $612.5 $10.7 $6.4 He Bruce Mansfield Plant and Beaver Valley Unit 2 are being leased through sale and leaseback transactions (see Note 3) and the above related amounts represent construction expenditures subsequent to the transaction. NUCLEAR FUEL-The Company leases its nuclear fuel and pays for the fuel as it is consumed (see Note 3). The Company amortizes the cost of nuclear fuel based on the rate of consumption. He Company's electric rates include amounts for the future disposal of spent nuclear fuel based upon the payments to the DOE. INCOME TAXES-Details of the total provision for income taxes are shown on the Consolidated Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. De liability method is used to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. Alternative minimum tax credits of $108 million, which may be carried forward indefinitely, are available to reduce future federal income taxes. 17

RETIREMENT BENEFITS-Centerior had sponsored jointly with the Company, CEI and Centerior Service Company (Service Company) a noncontributing pension plan (Centerior Pension Plan) which covered all employee groups. Upon retirement, employees receive a monthly pension generally based on the length of service. Under certain circumstances, benefits can begin as early as age 55. l De funding policy was to comply with the Employee Retirement Income Security Act of 1974 guidelines. In December 1997, the Centerior Pension Plan was merged into the FirstEnergy j pension plans. In connection with the Ohio Edison-Centerior merger, the Company recorded fair value purchase accounting adjustments to recognize the net gain, prior service cost and net j transition asset (obligation) associated with the pension and postretirement benefit plans (see Note j 2). j The following sets forth the funded status of the former Centerior Pension Plan. The Company's share of the former Centerior Pension Plan's total projected benefit obligation approximates 30% at December 31,1997. At Dawnher 31. 1997 1996 (in millions) Actuanal present value of benefit obligations: Vested benefits $418.9 $325.8 Not.vastui benefits 30.5 15.8 Ace =*~i benefit obliention $449.4 $341.6 Plan assets at fair value 5461.9 542o.8 Actuarial present value of projected benefit oblication 533.4 395.0 Projected benefit obligation in excess of plan assets 71.5 (25.8) Unmcognized net gain (loss) (3.0) 55.0 Unrecognized prior service cost - (14.2) Unrecoenied net transition asset - 32.3 Net cension liability $ 68.5 $ 47.3 He assets of the Centerior Pension Plan consisted primarily of investments in common stocks, bonds, guaranteed investment contracts, cash equivalent securities and real estate. Net pension costs for the three years ended December 31,1997 were computed as follows: Nov. 8 - Jan.1 - Dec. 31.1997 Nov.7.1997 1996 1995 (in millions) Service cost-benefits earned during the period $ 2.3 $ 11.1 $ 12.6 $ 9.8 Interest on projected benefit obligation 6.1 25.4 27.9 25.8 Return on plan assets (7.7) (38.0) (49.7) (52.8) Not deferral (:unortization) - (2.4) 1.8 9.2 Voluntary early retirenust orocram expense 23.0 4.8 - - Net cension cost $ 23.7 $ 0.9 $ (7.4) $ (8.0) Company's share, including pro rata share of the Senice Company's costs $ 5.7 $ 3.5 $ (2.4) $ (2.7) A September 30 measurement date was used for 1996 reporting. The assumed discount rates used in determining the actuarial present value of the projected benefit obligation were 7.25% 18

in 1997,7.75% in 1996 and 8.0% in 1995. The assumed rate of increase in future compensation levels used to measure this obligation was 4.0% in 1997. The rate of annual compensation increase assumption in 1996 was 3.5% for 1997 and 4.0% thereafter. The rate of annual compensation increase assumption in 1995 was 3.5% for 1996 and 1997 and 4.0% thereafter. Expected long-term rates of return on plan assets were assumed to be 10% in 1997 and 11% in 1996 and 1995. At December 31,1997 and 1996, the Company's net pension liability included in Pensions and Other Postretirement Benefits on the Consolidated Balance Sheets was $18.1 million and $61.9 million, respectively. Centerior had sponsored jointly with its former subsidiaries a postretirement benefit plan which provided all employee groups certain health care, death and other postretirement benefits other than pensions. The plan was contributory, with retiree contributions adjusted annually. The plan was not funded.

                            'Ihe accumulated postretirement benefit obligation and accrued postretirement benefit cost for the Centerior postretirement benefit plan are as follows:

At Decmiber 31. 1997 1996 (in millions) Accumulated postretirement benefit obligation allocation: Retirees $209.8 $ 177.1 Fully eligible active plan participants 9.8 3.9 Other active olan participants 46.9 30.9 Accumulated postretirement benefit obligation 266.5 211.9 Unrecognized transition obligation - Unrecognized net rain (120.1) 44.4 Net oostretirement benefit liability $266.5 $ 136.2 Net periodic postretirement benefit costs for the three years ended December 31,1997 were compited as follows: Nov. 8 - Jan.1 - Dec. 31.1997 Nov. 7.1997 1996 1995 (in millions) Service cost-benefits attributed to the period $0.5 $1.8 $ 2.1 $ 1.7 Interest cost on accumulated benefit obligation 2.8 13.5 17.8 17.9 Amortization of transition obligation - 6.4 7.5 7.5 Amortization of rain - (0.9) - (0.6) Net periodic nostretirement benefit cost $3.3 $20.8 $27.4 $26.5 Company's share, mcludmg pro rata share of the Service Company's costs $1.5 $ 8.9 $ 9.0 $ 9.6 The Consolidated Balance Sheet classification of Pensions and Other Postretirement Benefits at December 31,1997 and 1996 includes the Company's share of the accrued postretirement benefit liability of $95.2 million and $40.3 million, respectively. The health care trend rate assumption is approximately 6.0% in the first year gradually decreasing to approximately 4.0% for the year 2008 and later. The discount rates used to compute the accumulated postretirement benefit obligation were 7.25% in 1997,7.75% in 1996 and 8.0% in 1995. An increase in the health care trend rate assumption by one percentage point in all years would increase the accumulated postretirement benefit obligation by approximately $7.7 million 19

and the aggregate annual service and interest costs by approximately $0.5 million. A September 30 measurement date was used for 1996 reporting. TRANSACTIONS WITH AFFILIATED COMPANIES-Operating rever.aes, operating expenses and interest charges include amounts for transactions with affiliated companies in the ordinary course of business operations. De Company's transactions with CEI and the other FirstEnergy operating subsidiaries (OE and Penn) from the November 8,1997 merger date are primarily for firm power, interchange power, transmission line rentals and jointly owned power plant operations and construction (see Note 3). Beginning in May 1996, Centerior Funding began serving as the transferor in connection with the accounts receivable securitization for the Company and CEI. De Service Company (formerly a wholly owned subsidiary of Centerior and now a wholly owned subsidiary of FirstEnergy) provides support services at cost to the Company and other affiliated companies. De Service Company billed the Company $13.9 million, $51.5 million,

  $59.8 million and $66.7 million in the November 8-December 31, 1997 period, the January 1-November 7,1997 period,1996 and 1995, respectively, for such services.

SUPPLEMENTAL CASH FLOWS INFORMATION-All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets. The Company reflects temporary cash investments at cost, which approximates their fair market value. Noncash fmancing and investing activities included capital lease transactions amounting to $2 million, $12 million,

  $32 million and $12 million in the November 8-December 31, 1997 period, the January 1-November 7,1997 period,1996 and 1995, respectively.

All borrowings with initial maturities of less than one year are defined as fmancial instruments under generally accepted accounting principles and are reported on the Consolidated Balance Sheets at cost, which approximates their fair market value. De following sets forth the approximate fair value and related carrying amounts of all other long-term debt, preferred stock subject to mandatory redemption and investments other.than cash and cash equivalents as of December 31: 1997 1996 l Carrying Fair Carrying Fair j V '- Vale Vale V '- (in mUnons) leng-term debt $ 1,214 $ 1,218 $ 1,054 $ 1,086 , Preferred stock $ 3 $ 3 $ 5 $ 5 Investments other than cash  ! and cash equivalents: Debt securities

         -(Matunng in more than 10 years)               $ 295         $ 303                $     -          $      -

Equity securities 3 3 - - 3 All other 86 85 52 52

                                                        $ 384         $ 391                $    52          $    52 he carrying value of long-term debt was adjusted to fair value in connection with the merger and reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of 20

each respective year. The yields assumed were based on securities with similar characteristics offered by a corporation with credit ratings similar to 'he Company's ratings. The fair value ofinvestments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. De yields assumed were based on financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents include decommissioning trusts investments. Unrealized gains and losses applicable to the decommissioning trusts have been recognized in the tmst investments with a corresponding change to the decommissioning liability. In 1996, the Company and CEI transferred most of their investment assets in existing trusts into Centerior pooled trust funds for the two companies. The amounts in the table represent the Company's pro rata share of the fair value of such noncash investments. He other debt and equity securities referred to above are in the held-to-maturity category. De Company has no securities held for trading purposes. REGULATORY ASSETS-The Company recognizes, as regulatory assets, costs which the FERC and PUCO have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets related to nonnuclear operations are being recovered from customers under the Company's regulatory plan. Based on the regulatory plan, at this time, the Company believes it will continue to be able to bill and collect cost-based rates (with the exception of the Company's nuclear operations as discussed below); accordingly, it is appropriate that the Company continue the application of SFAS No. 71,

              " Accounting for the Effects of Certain Types of Regulation" (SFAS 71), in the foreseeable future for its nonnuclear operations.

The Company discontinued the application of SFAS 71 for its nuclear operations in October 1997 when implementation of the regulatory plan became probable, ne regulatory plan does not provide for full recovery of the Ccmpany's nuclear operations. In accordance with SFAS No.101, " Regulated Enterprises -- Accounting for the Discontinuation of Application of SFAS 71," the Company was required to remove from its balance sheet all regulatory assets and liabilities related to the portion of its business for which SFAS 71 was discontinued and to assess all other assets for impairment. Regulatory assets attributable to nuclear operations of $295.2 million ($191.9 million after taxes) were written off as an extraordinary item in October 1997. The regulatory assets attributable to nuclear operations written off represent the net amounts due from customers for future federal income taxes when the taxes become payable, which, under the regulatory plan, are no longer recoverable from customers. The remainder of the Company's business continues to comply with the provisions of SFAS 71. All remaining regulatory assets of the Company will continue to be recovered through rates set for the nonnuclear portion of its business. For financial reporting purposes, the net book value of the nuclear generating units was not impaired as a result of the regulatory plan. 21

Net regulatory assets on the Consolidated Balance Sheets are comprised of the following: At r-- - 31. 1997 1996 (in mulions) Nuclear unit expenses $207.4 $214.8 Customer receivables for future income taxes  %.5 391.4 Rate stabilization program deferrals 172.0 179.8 Sale and leaseback costs * (76.9) 91.7 Loss on reacquired debt 21.1 24.2 Other 22.6 25.7 Total $442.7 $927.6

• Includes the gain from the Bruce Mansfield Plant sale which was reclassified as a regulatory liability in connectaon with the purchase accounting adjustments, consistent with the mtemalong treatment.

2. OHIO EDISON-CENTERIOR MERGER:

FirstEnergy was formed on November 8,1997 by the merger of OE and Centerior. FirstEnergy holds directly all of the issued and outstanding common shares of OE and all of the issued and outstanding common shares of Centerior's former direct subsidiaries, which include, among others, the Company and CEI. As a result of the merger, the former common shareholders of OE and Centerior now own all of the outstanding shares of FirstEnergy Common Stock. All other classes of capital stock of OE and its subsidiaries and of the subsidiaries of Centerior are unaffected by the Merger and remain outstanding. The merger was accounted for as a purchase of Centerior's net assets with 77,637,704 shares of FirstEnergy Common Stock through the conversion of each outstanding Centerior Common Stock share into 0.525 of a share of FirstEnergy Common Stock (fractional shares were paid in cash). Based on an imputed value of $20.125 per share, the purchase price was approximately $1.582 billion which also included approximately $20 million of merger related costs. Goodwill of approximately $2.1 billion was recognized by FirstEnergy (to be amortized on a straight-line basis over forty years), which represented the excess of the purchase price over l Centerior's net assets after fair value adjustments. Such amount may be adjusted if additional l information produces changed assumptions over the twelve months following the merger as FirstEnergy continues to integrate operations and evaluate options with respect to its generation portfolio. The Company's merger purchase accounting adjustments, which were recognized in its accounting records, primarily consist of (1) revaluation of the Company's nuclear generating units to fair value ($561 million), based upon the results of independent appraisals and estimated i discounted future cash flows expected to be generated by its nuclear generating units (the estimated , cash flows are based upon management's current view of the likely cost recovery associated with the nuclear units); (2) adjusting by $55 million its long-term debt to estimated fair value; (3) adjusting its obligations related to retirement benefits (pension liability - $53 million and postretirement obligtlion - $51 million); (4) recognizing the Company's estimated severance and other compensation liabilities ($24 million); (5) adjustment of the (Beaver Valley Unit 2) deferred rent liability by $57 million to reflect remaining payments on a straight-line basis; and (6) adjusting , the Company's coramon equity by $108 million. The nuclear assets revaluation does not include decommissioning r,ince that obligation is expected to be recovered with the cash flows provided by the regulated portion of the business. Other assets and liabilities were not adjusted since they remain subject ta rate regulation on a historical cost basis. See Note 8. 22

3. LEASES:

The~ Company leases certain generating facilities, nuclear fuel, certain transmission facilities, office space and other property and equipment under cancelable and noncancellable leases. The Company and CEI sold their ownership interests in Bruce Mansfield Units 1,2 and 3 and the Company sold a portion of its ownership interest in Beaver Valley Unit 2. In connection with these sales, which were completed in 1987, the Company and CEI entered into operating leases for lease terms of approximately 30 years as co-lessees. During the terms of the leases, the Company and CEI continue to be responsible, to the extent of their combined ownership and leasehold interest, for costs associated with the units including construction expenditures, operation and maintenance expenses, insurance, nuclear fuel, property taxes and decommissioning. The Company and CEI have the right, at the end of the respective basic lease terms, to renew the leases. He Company and CEI also have the right to purchase the facilities at the expiration of the basi: lease term or renewal term (if elected) at a price equal to the fair market value of the facilities. As co-lessee with CEl, the Company is also obligated for CEI's lease payments. If CEI is unable to make its payments under the Bruce Mansfield Plant lease, the Company would be obligated to make such payments. No such payments have been made on behalf of CEI. (CEI's minimum lease payments as of December 31,1997 were $793 million.) ne Company is selling 150 megawatts of its Beaver Valley Unit 2 leased capacity entitlement to CEI. Operating revenues for this transaction were $16.8 million, $87.4 million,

 $99.4 million and $97.6 million in the November 8-December 31, 1997 period, the January 1-November 7,1997 period,1996 and 1995, respectively. His sale is expected to continue through the end of the lease period. De future minimum lease payments through 2017 associated with Beaver Valley Unit 2 are approximately $1.2 billion.

Nuclear fuel is currently financed for the Company and CEI through leases with a special-purpose corporation. As of December 31,1997, $157 million of nuclear fuel ($64 million for the Company) was financed under a lease financing arrangement totaling $190 million ($90 million of intermediate-term notes and $100 million from bank credit arrangements). The notes mature from 1998 through 2000 and the bank credit arrangements expire in October 1998. Lease rates are based on intennediate-term note rates, bank rates and commercial paper rates. Consistent with the regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Consolidated Statements of Income. Such costs for the three years ended December 31,1997 are summarized as follows: Nov. 8 - Jan.1 - Dec. 31.1997 Nov.7.1997 1996 1995 (in millions) Operating leases Interest element $28.0 $ 57.4 $ 82.5 $ 85.0 Other 13.5 23.1 42.6 17.8 Capital leases Interest element 1.0 6.0 7.5 8.2 Other 5.3 30.4 38.6 43.6 Total rentals $47.8 $116.9 $171.2 $154.6 23

The future minimum lease payments as of December 31,1997 are: Capital Operating Capkal Trust Leases I *- Income Net (in millions) 1998 $ 32.1 $ 103.9 $ 22.5 $ 81.4 1999 22.5 106.5 21.8 84.7 2000 12.8 104.8 20.5 84.2 2001 6.1 108.0 19.4 88.6 2002 3.0 111.1 18.0 93.1 Years thereafter 2.7 1.430,1 130.3 1.299.8 Total minimum lease payments 79.2 $1.964.4 g $1.731.8 Interest nortion 14.4 Present value of net minimum lease payments 64.8 Iess current oortion 29.4 Noncurrent nortion $ 35.4 The Company and CEI refmanced high-cost fixed obligations related to their 1987 sale and leaseback transaction for the Bruce Mansfield Plant through a lower cost transaction in June and July 1997. In a June 1997 offering (Offering), the two companies pledged $720 million aggregate principal amount ($145 million for the Company and $575 million for CEI) of first mortgage bonds due in 2000, 2004 and 2007 to a trust as security for the issuance of a like principal amount of secured notes due in 2000, 2004 and 2007. The obligations of the two companies under these secured notes are joint and several. Using available cash, short-term borrowings and the net proceeds from the Offering the two companies invested $906.5 million ($337.1 million for the Company and $569.4 million for CEI) in a business trust, in June 1997. The trust used these funds in July 1997 to purchase lease notes and redeem all $873.2 million

  . aggregate principal amount of 10-1/4% and 11-1/8% secured lease obligation bonds (SLOBS) due 2003 and 2016. The SLOBS were issued by a special-purpose funding corporation in 1988 on behalf of lessors in the two companies' 1987 sale and leaseback transaction. As noted in the table above, the trust income, which is included in Other Income in the Consolidated Statements of Income, effectively reduces lease costs related to that transaction.

4. CAPITALIZATION:

(A) RETAINED EARNINGS-The Company has a provision in its mortgage applicable to approximately $62 million of outstanding first mortgage bonds that requires common stock dividends to be paid out of its total balance of retained earnings. The merger purchase accounting adjustments included rer.etting the retained earnings balance to zero at the November 8,1997 merger date. (B) PREFERRED AND PREFERENCE STOCK-Preferred stock may be redeemed by the Company in whole, or in part, with 30-90 days' notice.

                  'Ihe preferred dividend rates on the Company's Series A and Series B fluctuate based on prevailing interest rates and market conditions. 7he dividend rates for these issues averaged 7.03% and 7.71 %, respectively, in 1997.

Preference stock authorized for the Company is 5,000,000 shares with a $25 par value. No preference shares are currently outstanding. 24

i i A liability of $5 million was included in the Company's net assets as of the merger date for preferred dividends declared attributable to the post-merger period. Accordingly, no accrual for preferred stock dividend requirements is included on the Company's November 8,1997 to 1 December 31,1997 Consolidated Statement of Income. k (C) PREFERRED STOCK SUBJECI' TO MANDATORY REDEMPTION- l l Annual sinking fund requirements for the next five years are $1.7 million in each year 1998 and 1999. I (D) LONG-TERM DEST-ne first mortgage indenture and its supplements, which secure all of the Company's first mortgage bonds, serve as direct first mortgage liens on substantially all property and franchises, other than specifically excepted property, owned by the Company. Sinking fund requirements for first mortgage bonds and maturing long-term debt (excluding capital leases) for the next five years are: Un n= mans) 1998 $ 39.0 1999 103.8 2000 75.9 2001 29.5 2002 191.0 De Company's obligations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds. One pollution control revenue bond issue is entitled to the benefit of an irrevocable bank letter of credit of $31.3 million. To the extent that drawings are made under this letter of credit to pay principal of, or interest on, the pollution control revenue bonds, the Company is entitled to a credit against its obligation to repay those bor,ds. De j Company pays an annual fee of 1.875% of the amount of the letter of credit to the issuing bank and is obligated to reimburse the bank for any drawings thereunder, ne Company and CEI have letters of credit of approximately $225 million in connection with the sale and leaseback of Beaver Valley Unit 2 that expire in June 1999. The letters of credit are secured by first mortgage bonds of the Company and CEI in the proponion of 60% and 40%, respectively (see Note 3).

5. SHORT-TERM BORROWINGS:

FirstEnergy has a $125 million revolving credit facility that expires in May 1998. FirstEnergy and the Service Company may borrow under the facility, with all borrowings jointly and severally guaranteed by the Company and CEl. FirstEnergy plans to transfer any of its borrowed funds to the Company and CEl. The credit agreement is secured with first mortgage bonds of the Company and CEI in the proponion of 60% and 40%, respectively. The credit agreement also provides the participating banks with a subordinate mortgage security interest in the properties of the Company and CEl. The banks' fee is 0.625% per annum payable quarterly in 25

addition to interest on any borrowings. Dere were no borrowings under the facility at December 31,1997. Also, the Company may borrow from its affiliates on a short-term basis.

6. COMMITMENTS, GUARANTEES AND CONTINGENCIES:

CAPITAL EXPENDITURES-The Company's current forecast reflects expenditures of approximately $200 million for property additions and improvements from 1998-2002, of which approximately $50 million is applicable to 1998. Investments for additional nuclear fuel during the 1998-2002 period are estimated to be approximately $140 million, of which approximately $27 million applies to 1998. During the same periods, the Company's nuclear fuel investments are expected to be reduced by approximately $85 million and $30 million, respectively, as the nuclear fuel is consumed. NUCLEAR INSURANCE-De Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $8.92 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on its present ownership and leasehold interests in Beaver Valley Unit 2, the Davis-Besse Nuclear Power Station (Davis-Besse) and the Perry Nuclear Power Plant (Perry), the Company's maximum potential assessment under the industry retrospective rating plan (assuming the other CAPCO . companies were to contribute their proportionate share of any assessments under the retrospective rating plan) would be $70 million per incident but not more than $8.8 million in any one year for each incident. De Company is also insured as to its respective interests in Beaver Valley Unit 2, Davis-Besse and Perry under policies issued to the operating company for each plant. Under these policies, up to $2.75 billion is provided for property damage and decontamination and decommissioning costs. De Company has also obtained approximately $260 million of insurance coverage for replacement power costs for its respective interests in Beaver Valley Unit 2, Davis-Besse and Perry. Under these policies, the Company can be assessed a maximum of approximately

    $11 million for incidents at any covered nuclear facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses.

De Company intends to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at any of the Company's plants exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Company's insurance policies, or to the extent such insurance becomes unavailable in the future, the Company would remain at risk for such costs. GUARAN'ITE-The Company, together with the other CAPCO companies, has severally guaranteed certain debt N icase obligations in connection with a coal supply contract for the Bruce Mansfield Plant. As o; December 31,1997, the Company's share of the guarantee (which approximates fair market value) was $8.3 million. De price under the coal supply contract, which includes certain minimum payments, has been determined to be sufficient to satisfy the debt and lease obligations. 26

The Company's total payments under the coal supply contract were $29.9 million, $31.4 million and $24.5 million during 1997,1996 and 1995, respectively. The Company's minimum annual payments are approximately $9 million under the contract, which expires December 31,1999. ENVIRONMENTAL MA'ITERS-Various federal, state and local authorities regulate the Company with regard to air and water quality and other environmental matters. The Company has estimated additional capital expenditures for environmental compliance of approximately $11 million, which is included in the construction forecast provided under " Capital Expenditures" for 1998 through 2002. The Company is in compliance with the current sulfur dioxide (SO)2 and nitrogen oxides (NO) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions through the year 1999 will be achieved by burning lower-sulfur fuel, generating more electricity from lower-emitting plants, and/or purchasing emission allowances. Plans for complying with reductions required for the year 2000 and thereafter have not been finalized. The Environmental Protection Agency (EPA) is conducting additional studies which could indicate the need for additional NO, reductions from the Bruce Mansfield Plant by the year 2003. In addition, the EPA is also considering the need for additional NO, reductions from the Company's Ohio facilities. On November 7,1997, the EPA proposed uniform reductions of NO, emissions across a region of twenty-two states, including Ohio and the District of Columbia (NO, Transport Rule) after determining that such NO, emissions are contributing significantly to ozone pollution in the eastern United States. In a separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NO, emissions which are alleged to contribute to ozone pollution in the eight petitioning states. A December 1997 EPA Memorandum of Agreement proposes to finalize the NO, Transport Rule by September 30,1998 and establishes a schedule for EPA action on the Section 126 petitions. The cost of NO, reductions, if required, may be substantial. The Company continues to evaluate its compliance plans and other compliance options. The Company is required to meet federally approved SO2 regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $25,000 for each day the unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Company cannot predict what action the EPA may take in the future with respect to proposed regulatic is or the interim enforcement policy. The Company is aware of its potential involvement in the cleanup of several hazardous waste disposal sites. 'Ihe Company has accrued a liability totaling $1.1 million at December 31, 1997 based on estimates of the costs of cleanup and its proportionate responsibility for such costs. The Company believes that the ultimate outcome of these matters will not have a material adverse effect on its financial condition, cash flows or results of operations. Legislative, administrative and judicial actions will continue to change the way that the Company must operate in order to comply with environmental laws and regulations. With respect  : . to any such changes and to the environmental matters described above, the Company expects that any resulting additional capital costs which may be required, as well as any required increase in operating costs, would ultimately be recovered from its customers. 27

7.

SUMMARY

OF QUARTERLY FINANCIAL DATA (UNAUDITED); The following summarizes certain consolidated operating results by quarter for 1997 l and 1996. Three Ma=*he Ended Mar. 31, June 30, Sept.30, Oct.1 - Nov. 8 - 1997 1997 1997 Nov.7.1997 Dec. 31.1997 (in millions) Operating Revenues $217.1 $222.1 $241.3 $ 92.2 $122.7 Oper= tina Exp and Taxes 184.7 186.1 191.9 86.7 103.6 Operating Income 32.4 36.0 49.4 5.5 19.1 Other Income (IAss) (.4) .4 5.0 (2.9) 2.1 Net Interest Charees 23.2 23.3 27.2 10.0 13.6 Income (lass) Before Extraordmary item 8.8 13.1 27.2 (7.4) 7.6 Extraordinary Item (Not of locome Taxes) (Note 1) - - - (191.9) - Net Income (loss) $ 8.8 $ 13.1 $ 27.2 $(199.3) $ 7.6 Earnines (Ioss) on Comman Stock 5 4.6 5 8.9 5 23.0 5(206.2) 5 7.6 March 31, June 30, September 30, December 31 Three Mantha Fadad ISM 1996 1996 1996 (in millions) Operating Revenues $210.8 $210.9 $252.2 $223.3 Operatine Exoenses and Taxes 177.9 180.3 200.5 181.7 Operating income 32.9 30.6 51.7 41.6 Other Income (Loss) (5.5) .7 .3 - Net Interest Cherres 24.1 23.7 24.0 23.2 Net income $ 3.3 $ 7.6 $ 28.0 $'8.4

       .Earnines (I naa) on Comman Stock
                    -                                                 ,$1                 5 f.9)                          5 3.4               5 23.7             5   4.2

8. PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME (UNAUDITED):

                      'Ihe following pro forma statements of income for the Company give effect to the OE-Centerior merger as if it had been consummated on January 1,1996, with the purchase accounting                                                                             3 adjustments actually recognized in the business combination.                                                                                                               {

Year Ended December 31. 1997 1996 (In millions) Operating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $895 $897 Operating Expenses and Taxes ........................... .2H .221 Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153 169 Other Income (Loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 (3) Net Interest Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _S_t 89 i Net Income.. . . . ... .. $ 72 $ 77 Pro forma adjustments reflected above include: (1) adjusting the Company's nuclear j generating units to fair value based upon independent appraisals and estimated discounted future { cash flows based on management's current view of cost recovery; (2) the effect of discontinuing SFAS 71 for the Company's nuclear operations; (3) amortization of the fair value adjustment for long-term debt; (4) goodwill recognized representing the excess of the Company's portion of the purchase price over the Company's adjusted net assets; (4) the elimination of merger costs; and (5) { adjustments for estimated tax effects of the above adjustments. See Note 2. j 28

9. PENDING MERGER OF THE COMPANY INTO CEI: I

! I 1 l In March 1994, Centerior announced a plan to merge the Company into CEI. All l necessary regulatory approvals have been obtained, except the approval of the Nuclear Regulatory Commission (NRC). His application was withdrawn at the NRC's request pending the decision whether to complete this merger. No final decision regarding the proposed merger has been reached. In June 1995, the Company's preferred stockholders approved the merger and CEI's preferred stockholders approved the authorization of additional shares of preferred stock. If and l when the merger becomes effective, the Company's preferred stockholders will exchange their shares for preferred stock shares of CEI having substantially the same terms. Debt holders of the merging companies will become debt holders of CEl. For the merging companies, the combined pro forma operating revenues were $2.527 i l billion, $2.554 billion and $2.516 billion and the combined pro forma net income wu $220 million (excluding the extraordinary item discussed in Note 1 and a similar item for CEI), $718 million and l

     $281 million for the years 1997,1996 and 1995, respectively. De pro forma data is based on accounting for the merger of the Company and CEI on a method similar to a pooling of interests and for 1997 a-d 1996 includes pro forma adjustments to reflect the effect of the OE and Centerior merger (see Note 8). De pro forma data is not necessarily indicative of the results of operations which would have been reported had the merger been in effect during those years or which may be                          .

reponed in the future. De pro forma data should be read in conjunction with the audited financial )' statements of both the Company and CEl. I i l 29

Repod of Independent Public Accountants To the Stockholders and Board of Directors of he Toledo Edison Comp:my: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of De Toledo Edison Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiary as of December 31,1997 (post-merger) tmd 1996 (pre-merger), and the related consolidated statements of income, retained earnings, capital stock and other paid-in capital, cash flows and taxes for the years ended December 31,1996 and 1995 and the period from January 1,1997 to November 7,1997 (pre-merger), and the period from November 8,1997 to December 31,1997 (post-merger). Rese fmancial 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. hose standards require that we plan and perform the audit to obtain reasonable assurance about whether the fmancial statements are free of material misstatement. An audit inclodes examining, on a test basis, evidence supporting the =mo.mts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall fmancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the fmancial statements referred to above present fairly, in all material respects, the financial position of ne Toledo Edison Company and subsidiary as of December 31,1997 (post-merger) and th 5 (pre-rnerger), and the results of their operations and their cash flows for the years ended December 31,1906 and 1995 and the period from January 1,1997 to November 7, 1997 (pre-merger), and the period from November 8,1997 to December 31,1997 (post-merger), in conformity with generally accepted accounting principles. N Y ARTHUR ANDERSEN LLP Cleveland, Ohio February 13,1998 30

c/o FirstEnergy Corp. 76 South Main Street Akron, Ohio 44308 (800)736-3402 1997 Annual Report ,g.. l j k. _ _ _ . _}}