ML20217K640

1997 Annual Rept First Energy

ML20217K640
Person / Time
Site:	Beaver Valley, Davis Besse, Perry
Issue date:	12/31/1997
From:	Burg H, Holland W CENTERIOR ENERGY
To:
Shared Package
ML20217K629	List: ML20217K640 PY-CEI-NRR-2264, Forwards Listed Info as Evidence of Guarantee of Retrospective Premiums Which May Be Served Against Listed Plants.Util 1997 Annual Rept,Encl
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NUDOCS 9804070278
Download: ML20217K640 (41)

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9. 94,,7 A N N U A L R E P O R T FirstEne Growing markets, opportunities and shareholder value y Oh khb O 0346 PDR

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{Q Q liighlights 1997 1996 MQ 1

Q Operating Perfortnance (Cornbined Olrio Edison and Centerior Energy)

FirstEnergy Corp.

hil hatt-Hour Sales (Millions) 55,810 55,276 FirstEnergy Corp., a diversified energy Customers Served 2,159,636 2,141,829 services holding company headquartemd Number of Employees 10,020 10,477 in Akmn, Ohio > was formed by the 1997 merger of Ohio Edison Company Customers Nr Empkpe 21^ 204 h and Centerior Energy Corporation.

Combining the resouxes of four utility IYnancial Perfornrance*

operating companies-Ohio Edison, Earnings Ibr Common Share and its subsidiary, Nnnsylvania Ibwer, liefore Nonrecurring Charges $2.16 $2.10

' ""*'"#' 8 "'8"" $ $

TheIlluminating Company and Toledo Edison - FirstEnergy comprises the Dividenh Ihr Common Share $1.50 $1.50 nation's 12th largest investor-owned lbok %lueIbr Common Share $18.71 $1735 electric system. The company prves Dividend Ibyout Ratio 2.2 million customers within liefoie Nonmcurring Charges 69 % 71 %

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

central Ohio and western &nnsylvania, Market Price Itr Common Share $29.00 $22.75 generates appmximately $5 billion in annual revenues and owns mca than

• Financial perfonnance includes results for The Illuminating Company and Tokdo Edison from the November 8,1997, acquisition date,

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

ownership in 18 power plants.

FirstEnergy Services Corp. is an umbmila organization offering a wide range of energy-related proaucts and wrvice, to companies nationally. The subsidiary companies ine "de Roth Bros.,Inc.,

g gW g o and RPC Mechanical,Inc. Based in Bi m Youngstown and Cincinnati, Ohig respectively, they are among the nation's g largest providers of engineered heating, ventilation and air-conditioning equipment, and energy management and control systems.

E 94 95 96 97 94 95 96 97 LARNINGS PER SHARE BEFORE RETAIL KILOWATT-HOUR SALES NONRECURRING CHARGES (DOLLARS) (MILUONS) 1

< s assets'by $427 million since 1995. We'll more j than double that figure - to $1 billion - mer

, the next thme years.

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1Tiessa zo mak.that tak s1,le w.need to-ntinue tO S arehOlders coingadvantageofopportunitiestolower ts. e m a,.a , w e.am ,,.so,th.sav1ngs 1997 was a year of dramatic growth. And, we achieved last year:

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 shareholder value.

• $55 million from refinancing and redeeming securities Earnings on common stock, before nonmcur-ring charges, grew to $2.16 per share in 1997

. $39 million through improved from $2.10 in 1996. This includes the effects of per ormance of our fossil-fuel plants charges for accelerated depnxiation and amor- While this is a strong beginning, we must tization of nuclear and mgulatory assets relat- do mom, and we will. We intend to capture ed to the Ohio Edison and Ibnnsylvania nearly $150 million in merger-related savings Ibwer rate plans and the impact of mild in 1998, and significantly incmase annual weather on electricity use for heating and air savings over the next two years. To lap conditioning. After adjusting eamings to focused on achieving this key goal, we've include one-time charges for merger- tied our results to incentive compensation related staffing reductions, which will for executives.

produce annual savings of appmximately Growing New Markets

$90 million, camings were $1.94 per share.

Growing new markets is a key strategy Jncreasing Sharrholder Value br hpming our financial performance.

In addition to our camings results, the We are doing that by continuing to excel at increase in market value of our common our com business, and by expanding our stock is a good example of benefits portfolio of energy-related sersices 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 pertent since Inc., and RPC Mechanical,Inc. Tl ese the merger was announced. Last year alone, companies, with combined 1997 revenues the increase approached 30 percent, which, of approximately $95 million, am among the combined with the reinvestment of annual nation's largest providers of engineertd dividends, produced a total shareholder heating, ventilation and air-conditioning return of nearly 36 pement - topping both equipment, and energy management and Standard & Ibor's 500 Index, and the Edison control systems. We also entered the rapidly Electric Institute Utility Index. growing tekrommunications 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 Internet access, knowledge of four utility operating companies and their collective experience in our core In addition to our traditional wholesale business. This is enabling us to achiew power business, last year we entered the synergies that are increasing productivity, unwgulated wholesale power market with reducing costs and gmwing revenues. the cmation of FirstEnergy Trading & Ibwer Marketing, a licensed marketer that already To impnwe our competitive position, we ve accelerated depreciation and amortization of has conducted $80 million in transactions.

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And, we am retaining and expanding our , the continuing development of wholesale customer base thmugh targeted incentive power market competition and access to pricing contracts and other economic utility transmission systems. To address this development assistance. Major successes in aspect of dengulation, we are exploring a 1997 included our work with Chrysler and number of options, including the creation of local officials to keep that company's Jeep an independent, mgional transmission entity manufacturing facility, along with 5,000 jobs, that could ultimately manage and own the in Toledq Ohia and our partnering with transmission systems of 11 investor-owned British Rtroleum to expand its refinery utility companies in our mgion. his entity in Oregon, Ohio. would be designed to pmvide nondiscrimina-Improving Our Prospects t ry ccess while eliminating duplication of costs, achieving mlated cost savings, and Tnese and other efforts amimproving maintaining the transmission system's long-our pmspects for future success, as is our term mliability and security.

ongoing work to repmsent shamholder mterests regarding deregulation issues. We have developed solid strategies for The mtail 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 Ohin would allow customers to purchase continued support, and the dedication and electricity from any supplier while using innovation f our emphyees, we will compete local utility lines to deliver the power. and wm m the eneq;y marketplace.

Recently, the co-chairs of a joint committee of theOhioGeneral Assemblyissued preliminary findings on dertgula-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.

While their recommendations recagnized the need for utilities to recover transition costs, much still needs to be done. We are work-ing to ensure that investor-om ed j electric companies have a reason-4h 8 /M lland able opportunity to recover costs [j((n mandated by the govemment, Chief becutive Officer and that allenergy suppliers will be treated equally by anylaw that may be enacted.

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3t ivier surg As theissueis unfolding in Ohi4

$>* President and Chief Financial Officer weh gainingvaluableexperience through our participation in

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Ibrmsyhania's customer choice pilot program. We are successfully m competing for customers thmugh our unregulated subsidiary, Ibnn Ibwer Energy. ..

At the federallevel, regulators are focusing on, among other things, 3

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Our pOS1t10n... In the marketplace The creation of FirvGergy, the nation's camings were $1.94 per share. Earnings 12th larges '..vestor-owned electric system, also mflect the effects ofincmased was . agnificant first step in making us a amortization and depmciation of assets, stronger competitor in the energy market- totaling $211 million under rate plans place. Although our holding company is in Ohio and Pennsylvania. Similar -

new, our utility operating companies - accelerated expense mductions in 1996 Ohio Edison and its subsidiary, amounted to $178 million.

Ibnnsylvania Ibwer, 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 befom one percent - the fifth consecutive year of the tum of the century. As a result, ncreased sales. Continued impmvement 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 aggressive and 0.4 percent, mspectively. Residential sales successful enterprise.

wem 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 three conditioning use. Total kilowatt-hour sales -

primary strategies: wem 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 nflect Ohio encq;y-related businesses EdMfnardgrimnceplus resultsfrvin

. Torging strategic alhances with The Illuntinating Corninny and Toledo Edison customers and communities in our frorn Nowrnier 8 - thefirst day of the incrger -

service area and throughout the region to Decernfer 31. Torfinancial reporting

• Improving customer service by purposes, FirstEnergy's results are icing operating mom efficiently and offering mnipamf with Ohio Edison'sfinancial mom mnovative products and services perforinanmfor prioryears.

at corapetitive prices Throughout this report, we offer examples of initiatives that have already occurred or g are *.tnder way to carry out these strategies. E ,

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Errnings and Retail Sales increase g We enter our first full year as FirstEnergy en ouraged by improvements in both earaings and mtail sales in 1997. ,

Our 1997 earnings befom nonrecurring charges were $339.8 million, or $2.16 per share, compamd with Ohio Edison's 1996 earnings of $302.7 million, or $2.10 per share. Adjusted to include the effect of ,

j nonrecurring, meq;er-related staffing 94 95 96 97 l reductions - expected to pmduce savings mg g of about $90 million annually- 1997 emtwume 4

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lxnsCraftem, NASA, Disney Stores, Kmart, GTE, General Motors, LCl International and PPortunities l

ph,,macia & up;ehn,inc.

Ibr years, electric utilities consisted primar- Partnering With AT&T Wireless ily of power plants, wires and meten, and Our skills and knowkdge related to they provided ekctric service to customen, telecommunications, coupled with tiu within a specific service ama. In the com-fad 6 t we own properties that can petitive marketplace of the future, however, acconnodate menudcation towes our customers may be h>cated virtually and other transmitting equipment, made anywhem, and basic electric service is entering telecommunications a logical likely to be only one of their many energy-extension of our traditional business.

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

PCS (Personal Communications Service)

Acquisitions Enhance covering northern Ohio and western Our Capabilitics Pbansylvania. AT&T Wireless offers many services, such as e-mail, voice mail and in December 1997, we completed the acquisition of Roth Bros.,Inc., and RPC Intemet access through digital phones, Mechanical., Inc., which togethet e.v as well as one rate wherever digital service 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 Afarketing Subsidiary Youngstown and Cincinnati, Ohio, FirstEnergy Trading & Ibwer Marketing, respectively, the companies have some a h. censed 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.

process piping and mfrigeration wrvices. .

The companies sell their services and ##"#""# O###I#E"'#"I Spurs Growth pmducM in all 50 states to major customers 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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@ { stmngthens communities through new jobs and additional tax revenues. And d creates a multiplier effect: increased personal income grows mtail sales and non-manufacturing employment, housing construc' ion and demand for community i and leisure services.

In 1997, our economic development incentive rate and other community support programs helped encourage business expansions, and the attraction of 85

• 87 new companies, mpresenting an investment poams) of more than $2 billion in new facilities, 6

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a and cwated more than 3,000 jobs. Just as Energy for Education helps us l Notable among them: achieve long-term sak s goals while providing assistance to education,

. ITV Corporation's $66-million tube the Ohio Edison Iblymer Growth Fund l

plant expansion in Marion, Ohio,

. shows our commitment to kical economies will employ 144 people and produce more than 146,000 tons of the new and to a developing industry. The fund ffers emerging p lymer c mpanies gr nts l lightweight steels required by i .. of up to 10 percent of their annual ekttnci-i automotive companies. LTV facilities in ty payments for aergy-eff. .iciency and Youngstown, Cleveland and Elyria are pmductivity projects that ultimately also serwd by FirstEnergy companies.

produce more sales opportunit.ies. We also

. Alpha Tube Corp., one of the top five pnwide consulting .;ervices and financing mechanical-tube producers in North for approved ek ctrical-equipment projects.

America,is building a 330,00Huan' 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 ernploy 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- 1 and construction industries. term contract.

. International Paper is building an Innovative Partnership Helps

$80-million manufacturing and British Petroleurn conversion facility - the lan;est single . .

A creatw.e partnership with British businessinvestmentin Ashtabula Petroleum (BP) helped keep its refinery County's history.

open in Oregon, Olu.a The alliance resulted in a $235-million expacsion project that Strategic Partnerships win save BP as much es s400,000, day in and Alhances raw material costs. To help the project succeed, we will build and operate a state-The marketplace of tomorrow will bring of.the-art tviler at our nearby Bay Shore new challenges and opportunities, Ptnver Plant that will be primarily fueled requiring a new way oflooking at the by petroleum coke, a by-pmduct of the world. This means stmngthening old refinery. The wfinery, generating nearly relationships and fog;ing 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 .

energy-related products and services.

I'nParng Relatm.ns Wh Mmlesale ,

Custorners and Corninunrts,es Partnerships Prornote Growth Signaling the beginning of a new, coopera-More than 90 schools have enrolk'd in tive relationship, FirstEnergy reached an our new Energy for Education Pmgram. agreement with the City of Cleveland to The program reduces base ek ctricity prices enhance service and economic opportuni-

, by 10 perrent for participating public and ties in the city. A similar agreement was I private, primary and secondary schools reached with American MunicipalIbwer-that sign long-term supply contracts. We're Ohio (AMP-Ohio), an organization that encouraging participating schools to apply purchases ekttricity on behalf of its the savings to pmgrams that develop the member municipal electric systems skills and work ethic students will need to thmughout 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 Tokdo we provided and the Alksheny Ibwer companies-a $3-million loan, energy-consulting Monongahela Ibwer, Ibtomac Edison and assistance and an economic development West Penn Ibwer. The companies sen*e incentive rate to help ensum the continued 26 million people in a 108,500-square-operation of Chrysler's Jeep plant in Toleda mile service area, including lower Chrysler will spend $1.2 billion, including Michigan, northem and central Ohio, building a $600-million assembly plant, western Pennsylvania, most of West that will keep 5,000 manufacturing jobs Virginia, and parts of Maryland, in our ama. Virginia and North Carolina.

Exploring Regional Transntission Options Reducing Costs We am also forming mlationships with other utilities to help resolve common We are w rking hard to improve perform-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 enemy costs. As a result of the to utility transmission systems.

rate plans for our utility operating compa-FirstEnergy's utility operating companies. nies, we're cuttirig 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 transmission 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 .

and shareholders; avoiding duplication of Cutting the Cost of Producing Po ur costs and achieving transmission cost sav-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 stmamlining the omaruzation, upgrading equipment, and improving the heat-rate

@ performance of our generating units.

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r Savings included $100,000 in annual g waste disposal costs acitieved by g;

q upgrading envimnmental equipment at our Niles Plant. We achieved similar savings by using fly ashin a mine g mclamation pmject and by selling fly

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 20 percent in mductions by 2000. Ibr j g g g , instance, we're saving $700,000 a year by custouens scavco closing the Westwood fly ash repository 10

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1 i 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 pmssurized water reactors.

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southeastern Ohict Other savings have last year also marked Davis-Besse's come from closing older generating unks, 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 ek ctricity, and Ibrry has generated and the Ibrry Nucicar Ibwer Plant, our more than 73 million.

cost-reduction efforts produced more These plants also help us meet air <1uality 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-fimd 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 Dcht Through replacement power. The 1,250-megawatt Refinancings 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 Resourre Afanagement Through expenses at Davis-Besse, we maintained Sharcholder Valuc-Added the plant's safety standards and its position 3f,yyy,,,ygyg, 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 n souwes.

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

investment in a project or activity versus g

the cost of capital and other msources.

Strict accountability and a better under-R standing of customers, markets and the true costs of doing business will enable us to maximize our financial performance.

Consolidating hierger-Related Operations Cuts Costs Consolidating the dispatch function for generation and transmission at Ohio Edison's System Control Center will l 94 95 9e 97 increase operating flexibility, improve OHIO EDIS ENTERIOR BlNED rs MUONS) about $10 million annually. Likewise, 12

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l consolidationof theinformation We have achieved our safdy results by l 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 l companies would have spent separately. responsibility throughout the organization f r s fe w rk practices, and rewarding Savings Thrmigh 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 medical and insurance costs.

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

of the OccupationalSafdy and Health k" 10 Administration Recordable incident Rate. N Oh:o 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 wcorded significant safety milestones for working without a lost-time accident: 23 million hours worked in our Eastern Region; 2 million at the 94 95 9e 97 Y R EN MA PRICE Burger Plant; 1 million at the Niles Plant; and 1 million at Ibnn Rnver. cou.AR$

Positioned wm b mg _ th__ _

h{ hg hfgg,,, men;er provided to improve our competi-tive edge by pursuing new ventures, Creating FirstEnergy was an important forging new alliances and operating rnore step toward meeting the challenges new efficiently. FirstEnen;y is entering 1998 competition brings. As this report shows, better positioned for success.

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Menspament Rapart R* pert cf Ind:pendsnt Public Acccunt' sets

• The consolidated financial statements were prepared To ths Clockhsidsrs end Ceard cf Directcrs cf by the management of FirstEnergy Corp., who 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 con',olidated statements of capitalization of accounting principles and are consistent with other financial FirstEnerg; Corp. (an Ohio corporation) and subsidiaries as information appearing elsewhere in this report. Arthur of Deccmber 31,1997 and 1996, and the telated 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, who are responsible These 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 managerial 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 w hose 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 gblic accountants and the estimates made by management, as well as evaluating the internal 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 reponing 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.

h ara LL ARTIIUR ANDERSEN LLP II. Peter Burg Cleveland, Ohio President february 13,1998 -

Chief Financial Officer 1-larvey L. Wagner g Controller Chief Accounting Officer 16

Eiciscts'd Fin ncI:1 D:ta FinsTENERGY CORP, tin thousands. except per share anwunts) 1997 1996 1995 1994 1993 Operating Resenues S 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 Sh>ckholders' Equity $ 4,159,598 $2,503,359 $2,407,871 $2,317,197 $2,243,292 Preferred Stock:

Not Subject to Mandatory Redemption 660,195 211,870 211,870 328,240 328,240 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 Price 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 Nosember 10,1997 and FirstEnergy Corp. Common Stock beginning November 10,1997.

1997 1996 First Quarter liigh-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 7hird Quarter Ifigh-Low 23-5/8 21 3/4 22-1/4 19-1/4 Nurth Quarter liigh-l.m 29 22 13/16 23-1/4 19-3/8 Yearly fligh-Low 29 19-1/4 24-7/8 19-1/4 Prices are bawd on reports published in The Ndl Sirrcr,hmrnal for New York Stock Exchange Composite Transactions.

Classification of Holders of Common Stock as of December 31,1997 -

~ ~

lloiders of Record Shares Held y

Number  % Number  %

Individuals 179,862 82.41 61,232,003 26.60 Fiduciaries 36,439 16.69 12,348,785 5.36 . o 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 ea*nings available for payment of cash di4 idends is given in Note 4A.

(

17

M:ncosmsnt's Discuscian end Annlysis of share. Excluding these charges,1997 earnings per, share were Rssults cf Opsr:tizns cnd Financi:1 Ccnditisn $2.16, compared to $2.10 in 1996. The 1997 re'sults reflect' 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-Penn's Rate Stability and Economic Development Plan; ties. These 6tatements typically contain, but are not limited

'#"""" I"' '"#I".ded approximately $1-78 million of to, the terms " anticipate," " potential," "e.xpectl* "believe,"

accelerated depreciation and amortization. The 1996 results

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

materially due to the speed and nature of increased competi.

tion and deregulation in the electric utility industry, eco. Operating revenues were up $351.7 million in 1997, nomic or weather conditions affecting future sales and mar. compared to 1996. Excluding the seven weeks of former gins, changes in markets for energy services, changing Centerior results, we achieved record operating revenues for energy market prices, legislative and regulatory changes the third consecutive year with an increase of $3.8 million (including revised environmental requirements), availability over 1996. The OE companies also achieved record retail and cost of capital and other similar factors. sales for the fifth consecutive year. "Ihe following table sunun zes tk soumes of changes in opuadng rmnues Racults of Operations for the OE companies for 1997 and 1996 as compared to the FirstEnergy Corp. was formed 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 October 29,1997, and the Securities and Change in average retail prices 13.3 (46.1) l Exchange Commission followed with their approval on Sales to utilities (25.8) (4.5)

November 5,1997. The merger of the companies has been Other 8.5 (3.6) accounted for by using pumhase accounting under the Net increase $ 3.8 $ 3.9 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 l

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 pmgress 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 in the electric utility industry. The most significant event a result of the above factors, total kilowatt-hour sales for during the year was the consummation of our merger. We the OE companies dropped 5.0%. compared with sales in expect the merger to produce a minimum of $1 billion in 1996, which were up 3.0% from 1995.

savings during the first ten years 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 of lower 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 down to determine best practices and opportunities for increasing compared to 1995. Higher nuclear expenses in 1997 reflect efficiency and reducing costs. On January 29,1998, our increased operating costs at the Beaver Valley Plant and the workforce was reduced by 310 employees to eliminate dupli- seven weeks of former Centerior results. Excluding the cative activities resulting from the merger. Total merger. Centerior costs,1997 nuclear expenses increased $20 releed staffing reductions to date are 1,336, including 582 million compared to 1996. Nuclear operating costs were employees who recently accepted voluntary retirement lower in 1996, compared to 1995, due primarily to lower pmgrams and 444 employees who left the Companies in refueling outage cost levels. Other operating costs in 1997 1997 and were not replaced. These reductions are expected wem $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.

l For the OE companies, the increase in other operating costs Earnings per share of $1.94 for 1997 were adversely I feflects a f urth quarter charge of approximately affected by net nonrecurring charges, primarily related to the

$41.5 million for the voluntary retirement program stafling reductions discussed above, amounting to $.22 per 18

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

cbst increasswere partially offset by gains on the sale of fixed charge coverage ratios continue to improve. The inden-emissiim 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, reflects lower first mongage bonds, improved from 4.34 at the end of 1992 3

maintenance costs at our fossil-fuel generating units. to 6.21 at the end of 1997. Over the same period, the charter 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 improved from 1.89 to 2.35.

regulatory plans discussed above. The changes between 1997 At the end of 1997. FirstEnergy's common equity as a 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 amortization and $7.7 million of goodwill amortization. addition of $4.4 billion of debt, $633.2 million of preferred General taxes were up $40.2 million in 1997, compared to stock and $1.6 billion of equity to our capital structure 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 decrease 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. -

quaner 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 former ments of approximately $2.4 billion for the 1998-2002 Centerior's seven-week results contributed $5.6 million of period to meet scheduled maturities of long-term debt and the increase. For the OE companies, the increases in other prefened stock. Of that amount, approximately $288 million income in 1997 and 1996 were principally due to higher applies to 1998. .

investment income-primarily through our PNBV Capital We had about $98.2 million of cash and temporary Trust investment, which was effective in the third quarter investments and $302.2 million of shon-term indebtedness of 1996. Excluding the seven-week resuhs for the former on December 31,1997. As of December 31,1997, we had Centerior, oserall interest 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 refinancings and redemption credit and $26 million of bank facilities that provide for of higher-cost debt totaling approximately $282 million that bonowings on a shon-term basis at the banks' discretion.

had been outstanding as of Decemter 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 bonowing. 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 OP's regulatory plan. pl ns include investing approximately $300 million during the five-year period ($65 million in 1998) in nonregulated Ccpital Resources and Liquidity business ventures. 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 companics, cash gener- rn tely $518 million, of which about $85 million applies to ated from operations was nearly 25% higher in 1997 than 1998. During the same periods, our nuclear fuel investments it was in 1992 due to higher revenues and aggressive cost are exp cted to be reduced by approximately $380 milhon controls. At the same time, return on common equity and $112 million, respectively, as the nuclear fuel is con-improved from 10.8% in 1992 to 12.1% in 1997, excluding sumed. Also, we have operating lease commitments (net of the net nonrecurring charges discussed above. By the end of related trust mcome) of approximately $1.0 billion for the 1997, the OE companies we e sening about 57,000 more 1998-2002 period, of which approximately $189 million customers than they were five years ago, with approximately relates to 1998. We rec ver the cost of nuclear fuel consumed 2,00() fewer employees. As a result, our customer / employee and operating leases thmugh our electric rates.

ratio has increased by 56% over the past five years, stimding Interest Rate Risk at 264 customers per employee at the end of 1997, compared , . , ,

with if 9 at the end of 1992. In addition, capital expenditures Our exposure to 11uctuations m market mcerest rates is for the OE companies have dropped substantially during that mitigated by the fact that a significant ponion 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 mherent interest rate nsks exceeded propeny 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-tmsts effectively reduce future lease obligations, also sively taken advantage of opponunities in the hnau '

reducing interest rate risk. As discussed in Note 1, changes markets to reduce our average capital costs. Thoup refi-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 8.534 at the end of 1992 to 7.77% at the end of 1997, sioning liability.

I

! 19 l

The table below presents principal amounts and related weighted average interest rates by year of maturity for our invest-ment ponfolio, debt obligations and preferred stock with mandatory redemption provisions:

1998 1999 2000 2001 2002 Thereafter Total Fair Value (Dollars in Millions)

Investments other than Cash .

and Cash Equivalents Fixed Income 5 39 $ 45 $ 56 5 55 S 83 $1,443 $1,721 $1,796 Average interest rate 7.3% 7.4% 7.5% 7.7% 7.7% 6.2% 6.4%

Liabilities Long-tenn 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 Average dividend rate 7.4% 8.9% 8.9% 8.9% 8.9% 8.8% 8.7%

Outlook 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 egula-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 curmnt 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 significantly 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 CEI'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 4PUCO)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 As part of OE's regulatory plan, transition rate credits discussion stages of restructuring the electric utility industry were implemented for customers, which are expected to within the State. We do not expect any changes in regulation reduce operating revenues by approximately $600 million to be effective within the next two years and we cannot during the regulatory plan period which is to be followed by assess what the ultimate impact may be.

a base rate reduction of approximately $300 million in 2006. The PUCO has authorized CEI and TE to recognize The base rate frecte 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 increase to $5 regulatory plan period of at least $2 billion more than the per month 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 plan for CEl's and TE's customers. CEI and TE have also additional charges will be reflected over the rate plan period.

committed $105 million for economic development and The FirstEnergy regulatory plan does not provide for full energy efficiency programs, recovery of CEI's and TE's nuclear operations. Accordingly, .

regulatory assets representing customer receivables for All of the Companies' mgulatory assets are being recov-future income taxes related to nuclear assets of $794 million emd under pmvisions of the regulatory plans. In addition. the were written on 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

tory plan became pmbable. At the consummation of the costs will be substantially lower than $313 million, that CEl's merger in' November 1997, CEI and TE recognized a fair and TE's share of any clear.up costs will be substantially less value purchase accounting adjustment which decreased the than 1(X)% and that most of the other PRPs are financially , , ,

carrying value of their nuclear assets 'y approximately able to contribute their share. CEI and TE have accrued a $5.9

$2.55 billion. The fair value adjustment recogni7ed 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 proportionate responsibility

$2 billian asset reduction commitment contained in the for such cost. We believe that the uhimate outcome of these CEl and TE regulatory plan over the regulatory plan period. matters will not have a material adverse effect on our financial On September 30,1997. Penn filed c restructuring condition, 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 ahernative electricity suppliers; customer choice '

is to be phased in over three years beginning in 1999 The Year 2(XX) Issue is the result of computer programs 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 remains 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 20(X). This could resuh in system fail-and energy.related services in its own territory and ures or miscalculations.

throughout Pennsylvania as an alternative supplier through We currently believe that with modifications te existing its nonregulated subsidiary, Penn Power Energy. Through software and conversions to new software, the Year 2')00 the restructuring plan, Penn is seeking recovery of $293 issue will pose no significant operational problems for our million of stranded costs through a competitive transition computer systems as so modified and converted. If these charge starting in 1999 and ending in 2005, which is consis- modifications and conversions are not made, or are not com-tent with Penn's Rate Stability and Economic Development pleted on a timely basis, the Year 20001ssue could have a Plan currently in effect. The PPUC plans to hold public material impact on our operations.

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

We have imtiated 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 panies' failure to resolve their own Deregulation released their draft report of a plan which Year 2000 problems. Our total Year 2000 project cost and pmposes to give customers a choice from whom they buy estimates to complete are based on currently available infor-

electricity beginning January 1,2(XX). 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 Assembly 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 intmduced and if it will be passed into law. We continue

%.e are utih. .zmg both internal and extemal resources to to study the potential etTects t:.at such legislation would have on our financial position and results of operations. repr gram and/or replace and test the software for Year 2000 modifications. Most of our Year 2(XX) problems will be The Financial Accounting Standards Board (FASB) resolved through system replacements. The different phases of issued a proposed accounting standard for nuclear decommis- our Year 2000 project will 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 increase:(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 decommissioning tmsts could be reponed system replacements (i.e., the Year 2(XX) solution comprises as investment 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, require additional emission reductions by 2000. We and expensed approximately $1 million related to the assess-are pursuing cost-efTective compliance strategies for meeting ment of, and preliminary effons in connection with, our Year the reduction requirements that begin in 2000. 2(XX) project and the development of a remediation plan.

CEI and TE have been named as "potentially responsible The costs of the project and the date on which we plan to panics"(PRPs) for three sites listed on the Superfund complete the Year 2000 modifications 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 availability of certain resources, and other factors.

and the amount involved me often unsubstantiated and flowever, there can be no guarantee that this project will be subject to dispute. Fede al law pmvides that all PRPs for a completed as planned and actual results could differ materially particular site be ' aid hable on a joint and several basis. If from the estimates. Specific factors that might cause material CEI and TE were 1.ud liable for 100% of the cleanup costs of difTerences 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, the ability to locate and correct all

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

21

Ccnsclidsted Stctsmsnts Of Incems FIRSTENERGY-

• CORP.

tin 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 ANDTAXES: .

Fuel and purchased 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 Total 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 9

income 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 OTIIER INCOME 58,343 37,537 14,424 INCOME BEFORE NET INTEREST CilARGES 614,303 567,606 581,042 NET INTEREST CHARGES:

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

(4,250)

Allowance for lx rrowed funds used during construction and capitali7ed interest (3,469) (3,136) (5,668)

' Other 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 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 157,464 144,095 143,692 EARNINGS PER SilARE OF COMMON STUCK (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 Stateinents are an integral part of these statements.

(.

22

Cpnselidstad Calenco chooto FIRsTENERGY CORP.

tin thousand.0 At December 31, 1997 1996 ASSETS UTILITY PLANT:

In ser ice . $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 Nuclear fuel 34,825 5,786

~

200,662 99,199 9,573,210 5,506,970 OTIIER PROPERTY AND INVESTMENTS:

Capital trust investments (Note 3) 1,370,177 487,979 Letter of credit collateralization (Note 3) 277,763 277,763 Other 659,162 323,316 2,307 102 1,089,058 CURRENT ASSETS: ,

Cash and cash equivalents 98,237 5,253 Receivables-Customers (less accumulated provisions of $5,618,000 and $2,306,(XX), '

respectively, for uncollectible accounts) 284,162 247,027 ._

Other 219,106 58,327 Materials and supplies, at average cost-Owned 154,961 66,177 Under consignment 82,839 44,468 Prepayments and other 163,686 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 Propeny taxes 270,585 100,802 Other 99,872 57,517 5,197,492 1,961,496

_ _ 7,

$18,080,795 $ 9.054,457 CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Consolidated Statements of Capitalization):

Common stockholders' equity $ 4,159,598 $ 2,503,359 Preferred 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 LIABILITIES:

Currently payable long-term debt and preferred stock 470,436 333,667 Shon-term borrowings (Note 5) 302,229 349,480 Accounts payable 312,690 93,509 Accrued taxes 381,937 142,909 Accrued interest 147,694 52,855 Other 193,850 131,275 1,808,836 1,103,695 DEFERRED CREDITS:

Accumulated deferred income taxes 2,304,305 1,777,086 Accumulated deferred investment tax credits 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 COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 3 and 6 ) $18,080,795 $ 9.054,457 The accompanying Nues to Consolidated Financial Statements are an integral pan of these balance sheets.

23

Censelidstad Ctstsnznts Of Capitalizatien FinsTENF5d CORl!

Un thousands, except ptr share amYunts)

At December 31, 1997 1996 COMMON S1DCKHOLDERS' EQUITY: '

Common stock,5.10 par value, and $9 par value, respectively - . ,

auttioriicd 3(X)000.(XX) shares-230.207,141 and 152,569.437 shares outstanding. respectively $ 23,021 $1,373,125 Other paid-in capital 3,636,908 727,602 Retained earnings (Note 4A) 646,646 557,642 Unallocated employee stock ownership plan common stock-7,829,538 and H.259,053 shares, respectively (Note 4B) (146,977) (155.010)

Total common stockholders' equity 4,159,598 2.503.359 Number of Sharen Optional Outstanding Redemption Price .

1997 1996 Per Share Aggregate PREH:RRED STOCK OF CONSOLIDATED SUBSIDI ARIES (Note 4D)

Ohio Edison Company (OE)

Cumulative. 51(X) par value-Authorized 6,(XX),(XX) shares Not Subject to Mandatory Redemption:

3.90% 152.510 152.510 $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 13.656 4.56W 144,300 144,300 103.38 14,917 14,430 14.430 609.650 609.650 63.893 60,965 60,965 Cumulative, $25 par value-Authori/cd H.000.(X10 shares Not Subject to Mandatory Redemption:

7.759 0 00,000 1 000,000 100,000 100.000 Total not subject to mandatory redemption 4.609.650 4,609.650 $63.893 160,965 160,965 Cumulative. $100 par vane-Subject to Mandatory Redemption (Note 4E):

8.45 % 200,000 250,000 20,000 25,000 Redemption within one year (5,000) (5.000) 200.000 250.000 15,000 20.000 IYnnsylvania Ibwer Company Cumulative. 51(X) par value-Authori7ed 1,200.(XX) shares Not Subject to Mandatory Redemption:

4.24 % 40.000 40.000 $103.13 $ 4,125 4,000 4.000 4.25 % 41,049 41,049 105.00 4,310 4,105 4.105 4.64% 60,000 60,000 102.98 6,179 6,000 6.000 7.64 % 60,000 60.000 101.42 6,085 6,000 6,000 7.75 % 250,000 250.000 - - 25,000 25,000 H.(X)% 58.000 58.000 102.07 5.920 5,800 5.800 Total not subject to mandatory 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 OE OHLIGATED MANDA1 DRILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDI ARY TRUST 1101 DING SOLI 1Y OE SUBORDINATED DEBENTURES (Note 4F):

Cumulative,525 par value- ,

Authorized 4,800.000 shares Subject to Mandatory Redemption:

9.004 4.800.000 4.800.000 120,000 120.000 l

24

Cohsclid$ tad Statsmants Of Cepitalizctisn (Cent.) FIRsTENERGY CORit (In shousands, e.tcrPIIwr share anwunts)

• At December 31, 1997 1996 Number of Shares Optional

, Outstanding Redemption Price 1997 1996 Itr Share Aggregate PREITRRED S'IDCK OF CONSOLIDATED SUBSIDI ARIES (Cont.)

Cleveland Electric illuminating Company Cumulative, Without hr Value-Authorized 4,(XX),000 shares Not Subject to Mandatory Redemption:

5 7,40 Series A 500,000 $ 101.00 $ 50,500 50,000 5 7.56 Series B 450,000 102.26 46,017 45,071 I Adjustable Series L 474,000 100.00 47,400 46,404 542.40 Series T 200,000 500.00 100,000 96,850 Total not subject to mandatory redemption 1,624,000 $243.917 238,325 Subject to Mandatory Redemption:

5 7.35 Series C 110,000 101.00 $ 11,110 11,110 588.00 Series E 9,000 1,007.65 9,069 9,000 591.50 Sciies Q 42,858 1,000.00 42,858 42,858 588.00 Series R 50,000 - - 55,000 5903) Series S 74,000 - -

79,920 285,858 63,037 197,888 Redemption Within One Year _ _ _ _

(14,714)

Total subject to mandatory redemption 285.858 $ 63.037 183,174 Toledo ik!ison Company Cumulative,5100 hr Value-Authorized 3,000,000 shares Not Subject to Mandatory Redemption:

5 4.25 160,000 104.63 $ 16,740 16,000 5 4.56 50,000 101.00 5,050 5,000 5 4.25 100,000 102.00 10,200 10,000

$ 8.32 100,000 102.46 10,246 10,000 5 7.76 150,000 102A4 15,366 15,000 5 7.80 150,000 101.65 15,248 15,000 Sion) 190,000 101.00 19,190 19,000 900,000 92,040 90,000 Cumulative,525 par Value-Authorized 12,000,000 shares '

Not Subject to Mandatory Redemption:

5 2.21 1,000,000 25.25 25,250 25,000 5 2.365 1,400,000 27.75 38,850 35,000 Adjustable Series A 1,200.000 25.00 30,000 30,000 Adjustable Series 1,200,000 25.00 30,000 30,000 4,800,000 124,100 120,000 Total not subject to mandatory redemption 5,700.000 $216,140 210,000 Cumulative 5100 par value-Subject to Mandatory Redemprion:

5 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 h -

Ccncelidstsd Ctatsmsnts Of Capitalizatien (Cent.) FinsTEN'EI[GY COKE ,

I LONG-TERM DEfff (Note 4G)(Interest rates reflect weiphred average rates) (in thousands)

ITRST MORlGAGE BONDS SECURl'D N0ll.S UNSffCRED NOITS 1UIAL At December 31 1997 1996 1997 1996 1997 1996 1997 1996 Ohio Ediwn Ca-Due 1997-2002 7.63 % $ 659.265 5 659.265 7.45% $ 92,442 $102263 5 51 % $531,500 $691.500 Due 2003-2007 802% 230.000 230,000 7.68 % 158204 158204 - - -

Due 2008 2012 Due 2013-2017 - - -

7.13% 87,725 87,725 - - -

Due 2018-2022 8.75% 50,960 50,960 7.04 % 155,943 155,943 - - -

Due 2023-2027 7.77 % 175.000 175,000 7.77% 188,000 188,000 - - -

Due 2028-2032 - - -

5.80 % 106212 106212 - -

Due 20312037 - - -

5.45 % 14.800 14.800 1,115,225 1.115.225 803.326 813,147 531,5'10 691,500 $2,450,051 $2.619,872 Total-Ohio Edwm Cleveland Electnc illuminating Ca -

Due 1997-2002 7.63 % 195.000 8.01 % 475.150 6.?4% 5,050 Due 200L2007 8 93 % 475,000 7.52 % 415.150 6.46 % 22.550 Duc 2008 2012 8.38 % 200.000 7.36 % 158.960 6.10% 19.000 Due 20112017 - -

7.51 % 419.820 Due 2018-2022 - -

5.25% 310.855 bue 2023-2027 9.00 % 150.000 7.68 % 246.650 Due 2028-2032 Due 20312037 Total Cleveland Electric 1,020,000 2,026.585 46,600 3.093,185 Toledo Edison Co -

Due 19972002 7.31 % 111,000 8.13% 190.750 8.65 % 137,490 Due 20012007 7 90% 180.725 7.63% 162.400 6.14 % 1.650 Due 20i&2012 - - 3.80 % 31.250 10.00 % 760 Due 2013-2017 Due 2018-2022 8.00 %

227200

('

i Due 2023 2027 - - 7.50% 116.900 - -

'g '

I - - - - -

Due 203-2032 -

Due 203F2037 TotalToledo Edsm 291,725 728.500 139.900 1,160,125 \

itunghania Ptmer Ca -

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

Due 2003-2007 719% 79.370 101,870 - - - - -- -

Due 2008 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*4 29.231 29.231 6.71 % 36.482 46.782 Due 2023-2027 7.63 % 6.500 6.500 5.65 % 37,500 27200 - - -

Due 203-2032 - - -

5.82 % 21,438 21,438 - - -

Due 203k2037 - - - -

- i 150,750 148,795 - - 277,045 299,545 Toul-Penn ther 128250 148.795 OES I;uel 6.19% 80,755 84,000 80,755 84.000 lixal 2.555200 1.265.975 3.787.961 1,045,942 718.000 691.500 7,061.161 3,003.417 CapitalicacMigasms 204213 43.775 Net unamurtued premium idacount)on dets 153 518 (5,755) long term deta due aein one year (449.057) (328.667)

Total kmg-term dits 6.969.835 2.712,760

$12,124,492 $5,582.989 IUIAL CAPITAllZATION 26

Ccnsell'ditsd Ctstemsnts Of Roteinsd Earnings FIRSTENERGY CORP.

(in alwusands)

Ibr the Years Ended December 31, 1997 1996 1995 Balance 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) '

216,770 216,126 213,252 Balance at end of year (Note 4A) $646,646 $ 557,642 $ 471,095 s

Consclidated Statements Of Capital Stock and Other Paid-in Capital Preferred Stock 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 d Shares %lue d Shares Wlue Q? fDollars in themsands)

Balance, January 1,1995 152,5 %,437 $1,373,125 $724,848 $(170,376) 6,282,399 $328.240 400,000 $ 40,000 Minimum liabihty for unfunded retirement benefits 2,446 Allocation d ESOP Shares 1,274 7,720 Sale of 9% Preferred Stock 4,800,000 120,000 Redemptions-7.24% Series (720) (363,700) (36,370) -

7.36% 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 Mmimum liabihty for unfunded retirement benefits (51)

Allocation d ESOP Shares 1,346 7.646 Balance, December 31,1996 152,569,437 1,373,125 727,602 (155,010) 5,118,699 5,200,000 160,000 211.870 Cente ior acquisition 77,637,704 (1,350,104) 2.907,387 7,324,000 448.325 319,408 201.243 Minimam habihty for unfunded retirement benefits 45 Allocation d ESOP Shares 1,874 8,033 Redemptions-8.45% Series (5,000)

(50.000)

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

27 ..

Censelidstad Ctetsmsnts Of Cash Flows FIRsTENEidN CORIP Un thousands)

For the Years Ended December 31, 1997 1996 1995 CASil FLOWS IROM OPERATING ACTIVITIES: ,.

Net income $ 305,774 $ 302,673 < $2943747 '/

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

Provision for depreciation and amortiution 431,431 355,780 256.085 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 o 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)

CASH FLOWS IHOM INVESTING ACTIVITIES:

Centerior acquisition 1,582,459 - -

Property additions 203,839 148,189 198,103 Capital trust investments 8,934 487,979 -

Other 62,237 13,406 13,64.

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 l

1

$ 29,830 Cash and cash equivalents at end of year $ 98,237 $ 5,253 SUPPLEMENTAL CASil FLOWS INFORM ATION:

Cash Paid During the Year.

Interest (net of umounts capitalized) $ 281,670 $ 224,541 $ 254,789 income taxes $ 265,615 $ 157,477 $ 78,643 1

• 1997 beginninF alance b includes Centerior cash and cash equivalents as of the November 8,1997 acquisition date.

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

28

cenacifditsd Ctstsmsnts Of Ycxos FIRSTENERGY CORI!

(hs thousamis)

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

Real and personal property 5 137,816 $ 115,443 $ 118,707 State gross receipts 11P.390 104,158 100,591 Social security and unemp!oyment id,551 14,602 15,787 Other 9,406 7,795 8,094 Tbtal general taxes S 282,163 $ 241,998 $ 243,179 PROVISION IOR INCOME TAXES:

Currently payable- ,

Federal $ 235,728 $ 164,132 $ 145,511 .

State 18,152 9,839 10,352 '

253,880 173,971 155,863 Deferred, net-Federal (23,716) 37,277 50,631 -

State (5,926) 4,088 2,764 s

(29,642) 41,365 53,395 Investment tax credit amortization (16,252) (14,041) (9,951)

Total provision for income taxes S 207,986 $ 201,295 $ 199,307 INCOME STATEMFNr CLASSIFICATION OF PROVISION FOR INCOME TAXES:

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

• Other income 24,188 11,878 7,335 Total provision for income taxes S 297,986 $ 201,295 $ 199,307 RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE 10 'lUTAL PROVISION FOR INCOME TAXES:

Ik>ok income before provision for income taxes $ 513,760 $ 503,968 $ 494,054 Federal income tax expense at statutory rate $ 179,816 $ 176,389 $ 172,919 increases (reducti ons)in taxes resulting from-Amortization of investment tax credits (16,252) (14,041) (9,951)

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 Other, net 6,073 2,949 8,124 Total provision fbr income taxes $ 207,986 $ 201,295 $ 199,307 ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31:

Property basis differences $2,091,207 $1,319,878 $1,310,852 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)

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

Other (22,626) (2.396) (19,114)

Net deferred income tax liability $2,304,305 $1,777,086 $1,772,434 The accompanying Notes to Consolidated Fmancial Statements are an integral part <! these statements.

29

Netos to Censclici:;tsd Fin:ncini Statsmants -

1. CUMMARY OF S12NIFICANT 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 financial statements include ' * " ' base rates of its fuel rate. As part of OE's FirstEnergy Corp. (Company) and its principal el actric and FirstEnergy,s regulatory plans, transition rate credits utility operating subsidiaries, Ohio Edison Company (OE), were imp lemented for customers, which are expected to The Cleveland Electric illuminating Company (CEIi, reduce operating revenues for OE by approximately $600 4 Pennsylvania Power Company (Penn) and The Tolet o milli n and CEI and TE by approximately $391 milhon q Edison Company (TE). The Company and its utility sub-during the regulatory plan period.

sidiaries are referred to throughout as " Companies."The Company's 1997 results of operations incluae ua. mults of All of the Companies' regulatory assets are being recov-CEI and TE for the period November 8,1997 throup cred under provisions of the regulatory plans. In addition, December 31,1997. All significant intercompany transac. the PUCO has authorized OE to recognize additional capital tions have been climinated. The Companies follow the recovery related to its generating assets (which is reflected accounting policies and practices prescribed by the Public as additional depreciation expense) and additional amortiza-Utilities Commission 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 accounting principles requires management to make periodic in effect. These additional amounts are being recovered 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 reclassined to conform with the asset amortization amounted to $427 million. CEI and TE current year presentation. recognized a fair value purchase accounting adjustment of

$2.55 billion in connection with the hrstEnergy merger; that Revenues - The Companies' principal business is fair value adjustment recognized for fm' ancial reporting pur-providing electric service to customers in central and u mate sa Jy mn asse Wuctbn p ses $

northern Ohio and western Pennsylvania. The Companies, c mmitment contained in the CEI and TE regulatory plan.

retail customers are metered on a cycle basis. Revenue is I regulat ry purposes, CEI and TE will recognize the $2 recognized for unbilled electric service through the end bilh.on of accelerated amortization over the rate plan period.

g Receivables from customers include sales to residential, y nt and WMahn - My commercial and industrial customers located in the E "",t reDects f on,ginal cost oNonstmedon (except for CEI s and TE s nuclear generatmg tmits which were Companies' service area and sales to wholesale customers. adlusted to fair value), meluding payroll and related costs There was no material concentration of receivables at

• • "'"*E'" # " E " "'

December 31,1997 or 1996, with respect to any particular c sts and fmancing costs (allowance for funds used during segment of the Companies' customers.

construction).

CEI and TE sell substantially all of their retail customer . .

The Coutpanies provide for depreciation on a straight-accounts receivable to Centerier Funding Corp. under an

""# "

• at various rates over the estimated lives of asset-backed securitization agreement which expires in .

pr perty included m plant in service. The annual composite 2001. Centerior Funding completed a public sale of $150 ra e f r OE's and Penn's electric plant was approximately million of receivables-backed investor 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% in 1997. In addition to Regulatory Plans - OE's Rate Reduction and the straight-line depreciation recognized in 1997,1996 and Economic Development Plan was approved by the PUCO 1995. OE and Penn recognized 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 Development 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 thmugh December 31, .

2005, and Penn through June 20,2006. At the end of the Anmaal depreciation expense includes approximately m mn for uture decommissioning costs applicable to regulatory plan periods, OE base rates will be reduced by the Compames ownership and leasehold interests in four

$300 million (approximately 20 percent below current levels) and CEI and TE base rates will be reduced by a com- ""'. "'. E#"*'"* "E "" .ts. The Compames share of the future gau nt decommisson these units is approximately bined $310 million (approximately 15 percent below current $1.2 billion in current dollars and (using a 3.5% escalation levels). The plans also revised the Companies' fuel cost I

rate) approximately $2.9 bilhon m future dollars. The esti-recovery methods. The Companies formerly recovered fuel-related costs not otherwise included in base rates from retail customers through separate energy iates. In accordance with 30

mated obi,igation and the escalation rate were developed Nuclear Fuel - OE s and Penn's nuclear fuel is bhed~on site specific studies. Payments for decommis- recorded at original cost, which includes material, enrichment, sioniflg are expected to begin in 2016, when actual decom- fabrication and interest costs incurred prior to reactor load.

missioning work begins. He Companies have recovered CEI and TE severally lease their respective ponions of approximately $252 million for decommissioning through nuclear fuel and pay for the fuel as it is consumed (see Note their electric rates fmm customers through December 31, 3). The Companies amonize the cost of nuclear fuel based on 1997. If the actual costs of decommissioning the units the rate of consumption. The Companies' elecuic 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 income Yaxes - Details of the total provision for external decommissioning trust funds as of December 31, income taxes are shown on the Consolidated Statements of 1997, Earnings on these iunds are reinvested with a corre-Taxes. Defened income taxes sesult from timine differences sponding inctease to the decommissioning 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 approximately $34.9 million related to decontamination and defened when utilized, are being amortized over the recovery decommissioning of nuclear enrichment facilities operated period of the related propeny. The liability method is used by the United States Department of Energy (DOS), as to account for deferred income taxes. Deferred income tax required by the Energy Policy Act of 1992.

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 m: clear 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 aveilable 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-Common Ownership of Generating tion. The Companies use the projected unit en dit method for Fccilities - 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 proportion as its interest. The Companies' portions of oper-ating expenses associated with jointly owned facilities are 1997 1996 included in the corresponding operating expenses on the pn mNions)

Consolidated Statements i ' Income. The amounts reflected Actuarial present VM of benefit obligations: -

on the Consolidated Balame Sheet under utility plant at Vested benefits $1,096.3 $562.0 December 31,1997, include the following: Nonvested benefits 60.4 38.9 Companies. Accumulated benefit obligation $1,156.7 $600.9 Utihty Accumulated Construction OwnersNp/

Plant Prowsion for Plan assets at fair value $1,542.5 $M6.3 Work m Leasehold Generatm0 Umts m Serwce Depreciation Progress interest Actuarial present value of projected benefit obligation 1,?27.5 688.5

~

pn m/ mons) Plan assets in excess of projected benefit obligation 215.0 257.8

$ 305.5 Unrecognized net gain (136.5)

W.H. Sammis #7 $ 100.8 $ .8 68.80 % (106.2)

Bruce Mansfield #1, Unrecognized prior service cost 21.0 20.1

1. 2 and #3 886 6 408.1 Untt: cognized net transition asset (25 9) (33 9) 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 %

Davis Besse 400.9 - -

100 00%

Perry 2.674.6 720.3 3.1 86.26 %

Eastlake #L 159.9 94.6 -

68.80 %

Seneca 64.9 24.3 -

80.00 %

Total $6.792.3 $2,004.4 $9.9 The Seneca Unit is jointly owned by CEI and a non-CAPCO company.

l 31

The assets of the plans consist primarily of common 'Ite following sets forth the funded status o'f'the pldns

• 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 computed as follows: 1997 1996 1997 1996 1995 (in millions)

Accumulated postretirament benefit

(/n millions) obligation allocation:

Service cost-benefits eamed

$ 14.2 $ 12.8 Retirees $384.8 $155.5 during the period $ 15.2 Fully eligible active plan participants 25.5 10.1 Interest on projected benefit 49.3 48.1 Other active plan participants 123.8 75.5 obligation 55.9 Return on plan assets (194.0) (141.6) (194.5) Accumu!ated postretirement benefit cbligation 534.1 241.1

. Net deferral 87.5 52.7 118.7 Plan assets at fair value 2.8 2.0 Voluntary early retirement g

program expense 54.5 12.5 -

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

(12.8) -

Net pension cost $ 19.1 $ (25.7) $ (14.9) (Jmecognized 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 postretimment 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,,j,,,,

1996 and 1995. Expected long-term rates of retu'n on plan service cost-benefits attributed assets were assumed to be 10% in 1997,1996 and 1995. to the period 54.6 $ 4.3 $ 4.5 late est st on ac mutated The Companies provide a minimum amount of non , ,n 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 -

" are also available to retired employees, their dependents and, Loss on plan curtailment -

13.1 -

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 Companies. 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 increase the accumulated postretirement benefit obligation Standards (SFAS) No. 88 " Employers' Accounting for by approximately $42.3 million and the aggregate annual Settlements and Curtailments 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 Supplemental Cash Flows Information -

All temporary cash investments purchased with an initial shown below included curtai' ment 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 employee termi-nations reflected in OE's and Penn's 1996 voluntary early reflect temporary cash mvestments at cost, w hich approxi-mates their market udue. Noncash financing and investing retirement program represented a plan curtailment that sig-activitiec 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 relatM uccrual 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-mported 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 Sheets (see Note 4G).

the terminations was shown as a plan c.srtailment loss.

32

• Al'1 borroVings with initial maturities of less than one expected to discontinue its application of Si AS 71 for its year ar'e denned as financial instruments under generally generation operations, possibly as early as 1998. The impact accepted accounting principles and are reported on the of Penn discontinuing SFAS 71 is not expected to be mate-Consolidated Balance Sheets at cost, w hich 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 Lion in accordance with their 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 71 for their Carrying Fair Carrying Fair nuclear operations and decreased their regulatory assets of Valae Value Value Value customer receivables for future income taxes related to the

~~ ~

nuclear assets by $794 million.

(in millions)

Long-term debt $6.980 $7.334 $2.919 $2.961 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 1993 ^

Debt securities (In millions)

- Maturity (5-10 years) $ 487 $ 512 $ 364 $ 364 Nuclear umt expenses $1.224.2 $ 733.4

- Matunty (more than Customer receivai29s for future income taxes 724.2 523.0 10 years) 1,134 1,149 387 390 Rate stabilaation program deferrals 460.2 -

Equity securities 24 24 14 14 Sale and leaseback costs (141.1) 220.8 All other 336 337 104 102 Loss on reacquired debt 191.1 95.8 j ,

$1.981 $2.022 $ 869 $ 870 Employee postretirement benefit cests 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 35.7 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 deemed appropriate at the j 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 outsunding equivalents represent cost (which approximates fair value) or common shares of OE and all of the issued and outstanding the present value of the cash inflows based on the yield to common shares of Centerior's former direct subsidiaries, 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 applicable to the decommissioning trust have been recog- of OE and its subsidiaries and of the subsidiaries of Centerior nized in the tmst 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 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 conversion of each outstanding Regulatory Assets - The Companies recognize, as C:nteri r Common Stock share into 0.525 of a share of regulatory assets, costs w hich the FERC, PUCO and PPUC firstEnergy Common Stock (fractional shares were paid in 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 .

at this tima, the Companies believe they will continue to be able to bih and collect cost-based rates (with the exception of CErs and TE's nuclear operations as discussed below);

,s accordingly, it is appropriate that the Companies continue ',

the application of SFAS No. 71 " Accounting for the Effects of Certain Types of Regulation"(SIMS 71). Ilowever, based ' '

on the regulatory environment in IYnnsylvania, IYnn is -

33 w

represented the excess of the imrchase price over Centerior's under the Beaver Valley Unit 2 sale and leaseback trrange-net cssets efter fair v:lue adjustments. Such amount may be ments. The deposits pledged to the financial ini,tituIion~ pro'

= adjusted if additional information produces changed assump- ' viding those letters of credit are the sole property of OBS l tions over the twelve months following the merger as the Finance. In the event of liquidation, OES Fmance, as a sepa-l Company continues to integrate operations and evaluate rate corporate entity, would have to satisfy its obligations to l

options with respect to its generation portfolio, creditors before any of its assets could be made available to The merger purchase accounting adjustments, which . OE as sole owner of OES Fmance commorr stock.

• l were recorded in the records of Centerior's direct sub ^ Nuclear fuel is currently financed for CEI and TE sidiaries, primari'y consist of: (1) revaluation of CErs and through leases with a special-purpose corporation. As of

, TE's nuclear generating units to fair value ($1.60 billion). December 31,1997, $157 million of nuclear fuel was I

tused upon the results of an independent appraisal and esti- financed under a lease financing arrangement totaling $190 m:ted discounted future cash flows expected to be generated . million ($90 million of intermediate-term notes aV. $100 by their nuclear generating units (the estimated cash flows million from bank credit arrangements). The notes mature ere based upon management's current view of the likely cost from 1998 through 2000 and the bank credit arrangements

. recovery associated with the nuclear units);(2) adjusting _ expire in October 1998. Lease rates are based on interme-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 sentals for

. tional obligations related to retirement benefits; (4) recog- capital nad operating leases are charged to operating nizing estimated severance and other compensation liabili- expenses on the Consolidated Statements ofincome. Such

^ 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 remaining payments marized as follows:

i. , on a straight-line basis. Tne nuclear assets revaluation does

' not include decommissioning since that obligation is expected to be recovered with the cash flows pmvided 1997 19 % 1995

' by the regulated portion of the business. Other assets and lia- (in mimons) bilities were not adjusted bince they remain subject to rate Operating leases Interest element $149.9 $107.6 $104.6 regulation on a historical cost basis.

. Other 45.2 18.3 13.9 Capitalleases

3. LEASES: , intemst & ment 61 6.5 74 Other 6.0 . 6.3 - 6.6

~

The Companies lease certain generating facilities, Total rentals $207.2 $138.7 $132.1 nucle:r fuel, certain transmission facilities, office space and other property'and equipment under cancelable and non-c:.ncelete leases. - h future minimum lease payments as of December 31, 1997, are:

OE sold portions of its ownership mterests m Perry Unit Operating Leases 1 and Beaver Valley Unit 2 and entered into operating leases Caprtal - Lease Capital Trusts on the portions sold for basic lease terms of approximately eases Payn e s inconw M

. 29 ye:rs. CEI and TE also sold portions of their ownership

' interests in Beaver Valley Unit 1 and Bruce Mansfield Units 1998 $ 93.0 $ 290.1 $ 0 189.1 1,2, and 3 and entered into sinular operating leases for lease 1999 67.6 301.6 98.0 203.6 l- terms of approximately 30 years. During the terms of their 2000 42.0 296 4 94 5 201.9 l respective leases OE, CEI and TE continue to be respon- 2001 24.3 307.3 90.6 216.7 j sible, to the extent of their individual combined ownership 2002 16.3 315.3 85.4 229.9 cnd leasehold interests, for costs associated with the units Years thereafter 93.6 4,263.3 607.4 3,655.9

. 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 1 respective basic lease terms, to renew their xspective 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 3 a price equal to the fair market value of the facilities. The Less current portion - 74.6 b . sic rental payments are adjusted when applicable federal , Noncurrent portion $129.6 t:.x 1:w changes.

OES Finance, incorporated (OES Finance), a wholly owned subsidiary of OE, maintains deposits pledged as coll:teral to secure reimbursement obligations relating to certain letters of credit supporting OE's obligations to lessors i

34 l'

r l OE inyested in the PNBV Capit.1 Trust in the third (Z) Preferred Stock - Penn's 7.75% series of pre-l quA . 4 M6. Tue Trust was established to purchase e por- ferred stock has a restriction which prevents e:rly redemp-l tion al .e ie:se 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 1 and Beaver Valley Unit 2 sale and lease- has no optional redemption provision, and its 7.75% series is l _ back trr.nsactions. CEI and TE established the Shippingport not redeemable before April 1998. CEl's $42.40 and $88.00 l Capit:1 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 transactions. 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.

other income in the Consolidated Statements of income, effectively reduces lease costs related to those transactions.

(E) Preferred Stock Subject To Mandatory Redoenption - Annual sinking fund provisions for the Companies' preferred stock are as follows:

C. CAPITALIZATIONt Redemption Price Per (A) Retained Earnings - There are no restrictions Senes Shares share Date Beginning on ret:ined earnings for payment of cash dividends on the OE BAS % 50.000 $100 (i)

Company's common stock- CEI $ 7.35 C 10,000 100 (i) 1,000 (Z) Eenployee Stock Ownership Plon -The 88.00 E 3.000 (i) 1 Companies fund the matching contribution for their 401(k) h59 9 November 1 1 9 sivings plan through an ESOP Trust. All full-time 88.00 R 50.000 1.000 December 1 2001 employees eligible for participation in the 401(k) savings TE $9.375 16,650 100 (i) pl:n 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 Annual sinking fund requirements for the next five years are converted into the Company's common stock in connection

$21 milhon m 1998, $40 milhon m 1999, $38 milhon m with the merger. Dividends on ESOP shares are used to 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 million was included in the net assets acquired 1996 and 1995,429,515 shares,404,522 shares and 412,914 fr m 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 for CEI and TE preferred dividends are included 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- period November 8,1997 through December 31,1997.

mately $227.1 million. Total ESOP-related compensation (F) Ohio Edison Obligated Mandatority expense was calculated as follows: Redeemable Preferred Securities of 1997 19 % 1995 Subsidiary Tlrust Holding Solely Ohio Edison gg Subordinated Debentures - Ohio Edison Financing ,

Base compnsation $ 9.9 89.0 $ 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 tree ESOP and OE purchased all of the Trust's Common Securities and used to service debt (3A) (2 9) (2.5) simultaneously issued to the Trust $123.7 million principal Net expense $ 6.5 $ 6.1 $ 6.5 amount of 9% Junior Subordinated Debentures due 2025 in exchange for the proceeds that the Trust received from its sale of Preferred and Common Securities. The sole assets of (2) Equity Compensation Plan - Under an Equity Compensation Plan adopted by Centerior in 1994, a

st Payment are se dates Wmag*ebenmms comc wW mtuest we, the distribution and restricted common stock and common stock options were ther payment dates on the Trust Secunt es. Under certain aranted

• to management emploges. Upon consummation of circumstances the Subordinated Debentures could be distrib-the merger, outstanding optiory became exercisable for uted to the holders of the outstanding Trust Securities in the

! FirstEnergy common stock with option prices and the

. vent the Trust is liquidated. The Subordinated Debentures number of shares adjusted to reflect the merger conversion may be optionally redeemed by OE beginning December 31, ratio. A total of 222,023 options for FirstEnergy common 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 Securities will be redeemed on a pro-rata basis at $25 per 517,388 shares were outstanding as of December 31,1997, share plus accumulated distributions. OE's obligations Computing compensation costs for the options consistent 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 'fiina'nced ' '

Indetaure, amended and restated Trust Agreement, through the issuance of OES Fuel commercial paper a'nd Guarantee Agreement and the Agreement for expenses and loans, both of which are supported by a $225 million long- ,

l 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 C) Long-Term Debt - The first mortgage long-term debt on the Consolidated Balance SheetseOES 1

indentures and their supplements, which secure all of the Fuel must pay an annual facility fee of 0.1875% on the total Companid first mortgage bonds, serve as direct first line of credit and an annual commitment fee of 0.0625% on mortgage liens on substantially all property and franchises, any umixd amount.

other than specifically excepted property, owned by the Companies. 5. SHORT. TERM BORROMNGS AND BANK Hased on the amount of bonds authenticated by the LINES OF CREDIT:

Trustee through December 31,1997 OE's annual sinking Short-term borrowings outstanding at December 31, and improvement fund requirement for all bonds issued -

1997, consisted of $182.2 million of Innk borrowings and under the mortgage amounts to $30 nulhon. OE expects t

$120.0 million of OES Capital, Incorporated commercial deposit funds in 1998 that will be withdrawn upon the sur-paper. OES Capital is a wholly owned subsidiary of OE rendu for cancellation of a like principal amount of bonds' wings 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  ; g;  ; g retired bonds. Th,s i 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 U" f#8"U million under various interest rate options, including a $125 1998 $374 4 million revolving credit facility which expires in May 1998.

OE's and Penn's short-term borrowings may be made under 2001 101 6 these lines of credit on their unsecured notes. To assure the 2002 744.7 availability of these lines, the Companies are required to pay annual comm mem fees that vary fmm R22% to 0.625%.

The Companies' obligations to repay certain pollution These lines expire at various times during 1998. The

ontrol revenue bonds are secured by several series of first weighted awrage interest rates on short-term borrowings 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.

tro! revenue bonds are entitled to the benefit of irrevocable bank tetters 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 cipal of, or interest on, the pollution control revenue bonds, CONTINGENCIES:

OE, CEI and/or TE are entitled to a credit against their obligation to repay those bonds. The Companies pay annual Capital Expenditures - The Compam.es' current fmecasts reflect expenditures of approximately $1.2 billion fees of 0.43% to 1.875% of the amounts of the letters of credit to the issuing banks and are obligated to reimburse for property additions and improvements related to their regu-the banks for any drawings thereunder. lated businesses from 1998-2602, of which approximately

$320 million is applicable to 1998. Imestments for addinonal 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 imestments 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 imest approximately $300 million during 1998-f amount under OE's indenture as potential security for the 2002 ($65 million in 1998) relating to various nonregulated unsecured borrowings. business ventures.

)

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08Isolear insuranee - The Price-Anderson Act Environenental Matters - V:rious federal, state end

' limits the public liability relative to a single incident at a local 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 additional capital expenditures for environmental spective rating plan. Based on their present ownership and compliance of appmximately $50'million, which is included in le:sehold interests in the Beaver Valley Station, Davis-Besse the construction forecast for their regulated businesses pro-Pl nt and the Itrry Plant, the Companies' maximum poten- vided under " Capital Expenditures" for 1998 through 2(K)2.

tial assessment under the industry retrospective rating plan The Companies are in compliance with the current sulfur (assuming the other co-owner comributes its proportionate dioxide (SO2) and nitrogen oxides (NOx) reduction require-share of any assessments under the ntrospective 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

. The Companies are also insured as to their respective lower-emitting plants, and/or purchasing emission inten $ts in the Beaver Valley Station, Davis-Besse Plant and allowances. Plans for complying with reductions required for j the Ittry Plant under policies issued to the operating com. the year 2000 and thereafter have not been finalized. The pany for each plant. Under these pclicies, up to $2.75 billion Environmental Protection Agency (EPA)is conducting addi-ht 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'Itansylvania facilities approximately $809 million ofinsurance coverage for by the year 2003. In addition, the EPA is also considening replacement power costs for their respective interests in the need for additional NOx reductions from the Companies' ltrry, 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 emissior.s 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 fo: paying losses. NOx etnissions are contributing significantly to orone pollu-tion in the eastern United States. In a separate but related The Companies intend to mamtam msurance agamst

'l action, eight states filed petitions with the EPA under nuclear nsks as desenhed 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 tammation, decommissioning, repair and replacement costs in the eight petitioning states. A December 1997 EPA and other such costs ansmg fmm a nuclear mcident at any Memorandum of Agreement proposes to finalize the NOx of the Compames' plants exceed the policy limits of the Transport Rule by September 30,1998, and estaolishes a insurance ig effect with respect to that plant, to the extent a schedule for EPA action on the Section 126 petitions. The nuclear incident is determmed not to be covered by the cost of NOx reductions, if required, may be substantial. The Compam,es insurance poh,cies, or to the extent such insur-Companies continue to evaluate their compliance plans and ance becomes unavailable m 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 SO2 regulations. Violations of such regulations can result in severally guaranteed cenain debt and lease obligations in shutdown of the generating unit im'olved 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 i 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 SO2 regulations in Ohio that allows for compliance based on value) were $66.1 million. 'Ihe 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 CEI and TE have been named as potentially responsible supply contract were $135.3 million, $113.8 million and parties"(PRPs) for three sites listed on the Federal

$120.0 million during 1997,1996 and 1995, respectively.

Superfund National Pnonties List and several other sites.

The Companies' minimum annual payments are approxi-cral envimnmenW regdatums pmvide that PRPs for spe-mately $58 million under the contract, which expires December 31,1999' etfic sites w uld be held liable on a joint and several basis.

CEI and TE have accrued a liability of $5.9 million based on estimates of their share of potential cleanup costs.

37

Legistitive, administrative and judici:1 cctions will con- C. PRO FORMA COMBINED CONDENSED " * )

tinue to change the way th:t the Comp:.nics must operate in FIR 2TENEREY CONSOLIDATE 3 INCOME' order to comply with environmental laws and regulations. STATEMENTS (UNAUDITED):

With respect to any such changes and to the environmental The pro fonna staternents of income of FirstEnergy matters described above, the Companies expect that any give efftct to the Merger as if it had been consummated on resulting additional capital costs which may be required, as January 1,1996, with the purchase accounting adjustments well es any required increase in operating costs, would ulti-actually recognized in the business combination.

mitely be recovered from their customers.

Year Ended December 31, 1997 1996

7.

SUMMARY

OF QUARTERLY FINANCIAL DATA (in milhons, except per share amounts)

Operatmg revenues $4.975 $5.006 (UNAUDITED): 3,%6 Operating expenses 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. June 30. september 30. oecember 31 Net income $ 427 $ 468 Three Marths Ended 1997 1997 1997 1997 Earnings per share of common stock $ 1.92 $ 2.11 pn moons. except per share amounts)

Operating Rever.ues $604 8 $593.3 $652.7 $970.8 adj.usting CEI and TE nuclear generating units to fair value Operating Expenses and Taxes 478.5 467.3 511.6 808.2 Operatmg income 126.3 126 0 141.1 162.6

• "E""# " "EE " "'" "" # ** "" #

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 repn senting the excess of the purchase price over Centerior's adjusted net Net income $ 72.9 $ 73.8 $ 88.7 $ 70.4 Earnmos per Share of asuts; W eHmbadon of revenue and expene tramagons between OE, and Centerior; (4) amortization of the fair value Common Stock $.51 $.51 $.61 $.36 adjustment of long-term debt; and (5) adjustments for March 31. June 30 Septemhet 30. Det.emtier 31, estimated 18% effects of the above adjustments.

Three Months Ended 1996 1996 1996 1996 (in moons, except per share amounts)

Operating Revenues $611.6 $599.3 $646.9 $611.9 Operating Expenses and Taxes 481.1 471.7 500.0 486.8 Operating income 130.5 127.6 146.9 125.1 Otter 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 Earnugs per Share of Common Stock $ 49 $.51 $ 62 $.48 Results for CEI and TE are included from the Novem-her 8,1997 acquisition date through December 31,1997.

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lonsolidInted Financial And Pro Forma Combined Operating Statistica Fins 1 ENERGY CORP.

1997 1996 1995 1994 1993 1992 1987

ENERAL HNANCIAL INFORMATION Dollars in thousands)

>perating Revenues 8 2,821,435 5 2.469,785 $ 2,465,846 $ 2,368,191 $ 2,369,940 $ 2,332,378 $ 1,785296 speraung income $ 555,960 $ 530,069 $ 566.618 $ 557254 $ 525.330 $ 522.115 $ 397.468 set income $ 305,774 $ 302,673 $ 294,747 $ 281,852 $ 59.017 $ 253.060 $ 364.657 K Ratio of Earnings to Fixed Charges 2.18 2.38 2.32 224 1.12 2.01 2.30 set Utility PL nt 8 9,573.210 $ 5.506.970 $ 5.763.603 $ 5.886,194 $ 5,924.250 $ 5,979.538 $ 6,353,508 "apit-i Expenditures - 8 188,145 $ 145,005 $ 196.041 $ 258.642 $ 263,179 $ 252,592 $ 705.242 otal Capitalization $12,124,492 $ 5.582,989 $ 5.565,997 $ 5,852,030 $ 5,656.295 $ 5,943,913 $ 6.533,774

'apitalization Katios:

Common 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 62 Subject to Mandatory Redemption 2.7 2.8 2.9 0.7 Di 1.0 22 long-Term Debt 57.5 48.6 50.0 54.1 53.7 52.5 51.0 Total Capit?.lization 100.8% 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %

werage 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 %

"0MMON STOCK DATA

arnings per Share * $2.16 $2.10 $2.05 $197 $1.82 $1.70 $2.62 Letum on Average Common Equity

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

)ividends Paid per Share $1.50 $1.50 $1.50 $1.50 ' $1.50 $1.50 $1.96

)ividend Puyout Ratio

• 69% 71 % 73 % 76 % 82% 88% 75 %

Sividend held 5.2% 6.6% 6.4% 8.1% 6.6% 6.5% 97%

' rice / Earnings Ratio

• 13.4 10.8 11.5 9.4 12.5 13.6 7.7 kmL Value per Share $18.71 $17.35 $1673 $16.15 514.70 $ 15.78 $17.40 iarket Price per Share $29.00 $22.75 $23.50 $18.50 $22.75 $23.125 $20.13 Latio of Market Price to Book Value 155 % 131 % 140% 115 % 155 % 147% 116 %

Before net nonrecurring charges in 1997 and 1993.

'R0 TORMA COMBINED OH10 EDISON LND CENTER 10R STATISTICS

ilow-tt-Hour Sales (Millions)

Residential 15.556 15,807 15.773 15.181 15211 14.351 13.958 Commercial 15,000 14,944 14.845 14,366 14.093 13,565 12,132 Industrial 24,047 23,367 22,681 21,910 21,561 21,301 21,052 Other 1,207 1,158 1.196 1,218 1,166 1,150 2259 Total Retail 55,810 55,276 54,495 52,675 52.031 50,373 49,401 10.d Wholesale 7,998 9.670 9.295 7,039 7,967 8.463 5.579 Total Sales 63,808 64.946 63,790 59,714 59,998 58,836 54.980

'ustomers Served:

Residential 1,929,371 1,912.850 1,907,850 1,893.827 1,882,094 1,870.026 1.805,831 Commercial 213,348 212.092 210,745 207,362 203,892 202.605 189.470 Industri:1 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 To',al 2,159,636 2,141,829 2,135,227 2,117,567 2,103,083 2,089,990 2,010.874 Jumber of Employees 10,020 1 % 477 11,633 11,933 12.726 14.639 16.157 39

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Investor Services, Transfer Ageni and Registrar instruction requesting that the Company hold the shares and stating whether future dividends for the shares

~ FirstEnergy Securities Transfer Company, a subsidiary e ng f ma am mimested or paid in cash. Ihe of Fin,tEnergy, acts as the transfer agent and registrar for a ca e wl n en om ,and mgistend mail all stock issues of FirstEnergy and its suosidiaries,

• • "# ** ***'# E* "

Shareholders wanting to transfer stock, or who need

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assistance or information, can submit their skick or write hi Investor Senices, FirstEnergy Corp.,76 South Main Stnet, Duplicate Mailings of the Annual Report Akmn, Ohio 44308-1890. Shamholders can also call the if you hald stock in more than one registration 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 wport by writing to I##E Imtstor Services requesting N = dp mailing an Stack Listings and Trading annual mport to a partiwlar account. Be sure to pmvide the exact wgistration of the account for which you want Newspapers generaHy wport FirstEnergy common stock g;  ;

under the abbreviation ISFENCY, although this can vary depending upon the newspaper. The common stock of Combining Stock Accounts FirstEnergy and prefened stocks of its subsidiaries are if you have more than one stock account and want to listed on st ick exchanges as folkiws:

combine them, please write or call Investor Services and Company Stock Exchange Symbol specify the account that you would like to retain as well FirstEnemy New York FE

• • "N## " ' #8 ***C"""

TheIlluminating Company New York CVX form 10-K Annual Report Ohio Ed.ison New York OFC form 10-K, the Annual Report to the Securities and Ibnnsylvania nwer Philadelphia PPC Exchange Commission, will be sent without charge upon Toledo Edison New York, TED written mquest to Nancy C. Ashcom, Corporate Secniary, American, Fine y Corp.,76 South Main Street, Akron, Ohio 44308-1890.

Dividends institutionalinvestor and -

Proposed dates for the payment of FirstEnergy conunon Security Analyst inquirics stock dividends in 1998 are as folkms:

Institutional investors and security analysts should dimet Ex-Dividend Date Record Date Payment Date inquiries to: Ronald E. Seeholzer, Manager, Im estor Relations,330-384 5500.

February 4 February 6 March 1 May 5 May 7 June 1 AnnualMeeting of Shareholders August 5 August 7 September 1 We invite shareholden to attend the 1998 Annual Meeting November 4 November 6 Decernber 1 of Shareholders on Thursday, April 30, at 10 a.m., at the Direct Dividend Deposit John S Knight Center in Akmn, Ohia Registered holders

"""""" "I""#" ## " ""

Shareholdens can have their dividends ek'ctmnically businas by mmpleting and mtuming the pnwy card that deposited into their bank account. To receive an authoriza-is maikd prior to the meeting. Shareholders whose shares tion form, contact Investor Services.

are held in the name of a bmker can attend the meeting if Stock Investment Plan thq present a letter from the bmker indicating ownenhip o inEnemy mmm n stock on the mcord date of The Company's Stock Investment Plan enables mgistered March 6,1998.

shamholders, as well as others, to purchase or sell shams of FintEnergy common stock. Individuals who are not regis- Board ofDirectors tered shareholders can enroll with an initial cash invest i We are saddened to report the passing of Ikiard Member ment of $250. Participants may invest all or some of their Donald C Blasius,68. Mr. Blasius, wtired President of dhidends or make optional cash payments of up to White Consolidated lndustries, Inc., Cleveland, Ohin was

$100,000 annually. To mceiw an enmilment form, contact ek'cted to the ikiard of Ohio Edison in 1981. Mr. Blasius was a trusted counselor,and his knowk dge and good Safelterping ofShams judgment will be missed by the Ikerd.

f The Company will hold shares of common stock in safe- Charles W. Rainger,64, wtind President of Sandusky kwping at a shareholder's request. To take advantage of this International Inc., Sandusky, Ohin who joined the ikiard l

wrvice, shareholders should forward the common stock of Ohio Edison in 1987, eksted to mtim. The Board

- certificate (s) to the Company along with a signed letter of appmciates his yean of dedication and sen ice. f 40 Pnnted on Recycled Paper

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1 Board ofDirectors Russell W. Maier,61 George M. Smart,52 Nancy C Ashcom nnan and Gamnan of Mah Npmate by H Peter Du 51 Chief Executive Officer of President of Phoenix Packaging President and Chief Financial Theodore E Struck 11 Republic Engmected Steels, Corporation, North Canton, Officer of BrstEnefgy Cup ***" "

Inc., Massillon, Ohia Member, Ohin Member, Audit and Compensation and Nuclear Finance mmmittws. Dimetor Harvey L Wagner 0

mmm n m > of Ohio Edison Company since Centroller Company since 1989 and a Edison Company since 1993 1988 and Dmdor of FirstEnergy Dindor of FirstEnergy Corp Heather E. Glisson since the merger.

an n m of n eg Corp smw the merger.

Assistant Contmller E* "#T" Jesse T. Williams, Sr,58 Cartn,47 Randy Scma

. Glenn H. Meadows,68 Vice President of Human PartmT, Carts & Associates, As nt hsum and Clewland, Ohia Member, Mind, foidy President Resourtes Iblicy, Emphryment and Chief Executive Officer of Practices and Systems of The

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Audit and hnance commitka McNeilCorporation, Akmn, GoodyearTire & Rubber Dimetor of Ohb Edison Ohia Chairman, Audit Company, Akmn,Ohia Company since 1994 and Director of FirstEnergy Corp Conunittee; Member, Membes Audit and W W""

Compensation and Nuclear Nominating committees. Fred J. Lange sina tk maga commith Director of Ohio Dindor of Ohio Edison President, FirstEnergy Ventuns Dc Ccrol A.Cartwright,56 Edison Company since 1981 Company since 1992 and Ibident, Kent State and Director of Fin,tEnergy John P. Stetz Dincor of FirstEne:gy Corp Univen,ity, Kent, Ohia Smim Vice President-Corp sinw the merger. since the merger.

FirstEnergy NuclearServices Chairman, Nominating Paul J. Ibwers,63 Committee. Dindor of Ohio Lew W Myers Edium Company since 1992

1. )fE i Oa first nergy Officers Vice Pnsident and Dincor of FirstEnergy C "'

CommercialIntertech Corp, Willard R. Holland Corp since the merge

%ungstown, Ohia Chairman, Chairman and John K. Wood WillP.m E Conway,67 Rnance Committee; Member Chief Executive Officer Vice President Ibident of Wdliam E Conway Compensation Committee. Nuclear-Davis-Iksse

& Associates,Inc.,Scottsdale, I "

Director of Ohio Edison g n d Arizona. Chairman, Nuclear Company since 1992 and Chief Financial Officer 1 Committee. Dimetor of the Director of I'ustEnergy Corp Regional Officers former Centerior Energy since the merger. AnthonyJ. Alexander M. Cavdier Corporation since 1994 and I ecutiveVicePresidentand Charles W. Rainger,64 RegionalPresident-Eastern Dirteorof FirstEnergyCorp General Counsel Ret red, formerly Pmsident of since the merger.

Sandusky Ink rnationalInc., Earl T. Carey

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Willird R. Holland,61 Sandusky, Ohia Member, Vice President 'N ""' #"'~' " ""

Chairman of the ik ard Nominating and Nuclear R. Joseph Hrach Mary Beth Canoll and Chief Ewcutive Officer commitka Director of Ohio Vi I ident,,IYnnsyhania Ibwer ids of FirstEnergy Corp and Ediam Company since 1987 Charles E. Jones I Ibnnsyhania Ibwer and Director of FirstEnergy Douglas S. Elliott Regional President-Northern Company. Director of Ohio Corp since the merger. Vice President Edison since 1991 nnd Director '" @*"

Robert C Savage,60 Arthur R. Garfield of FirstEnergy Corp since ""# " " ~ " '"

Ibident and Chief Executive Vice Ibident the merger.

Officer of Savage & Associates, **** "'I Robert L 1.oughhead,68 inc.,Toks Ohia Member, John A Gill "# "

Viw Prbident Retired, formerly Chainnan of Finance and Nominating John E. Paganic the Board, Pmsident and Chief commitku Director of the Richard H. Marsh nM Vice Pmsident-Executiw Officer of Weirton former Centerior Energy Vice President Western Steel Corporation, Weirton, Corporation since 1990 and Gu L Pipitone * **

West Virginia. Chairman, Director of FirstEnergy Corp

. Compensation Committee; Vict(President Regional Vice President- l since the merger.

Member, Audit Committee. Stanley E Srwed Northern Dimetor of Ohio Edimn Viw Pnsident i Company since 1980 and Dindor of FirstEnergy Corp since the merger.

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