SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) February 8, 1996
OHIO EDISON COMPANY
(Exact name of Registrant as specified in its charter)
Ohio 1-2578 34-0437786
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
76 South Main Street, Akron, Ohio 44308
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 216-384-5100
Item 5. Other Events
Ohio Edison Company reports audited consolidated financial
statements for the year ended December 31, 1995 and related
matters. Such financial statements and related matters consist of
the following:
1) Management's Discussion and Analysis of Results of
Operations and Financial Condition
2) Consolidated Statements of Income
3) Consolidated Balance Sheets
4) Consolidated Statements of Capitalization
5) Consolidated Statements of Retained Earnings
6) Consolidated Statements of Capital Stock and Other
Paid-In Capital
7) Consolidated Statements of Cash Flows
8) Consolidated Statements of Taxes
9) Notes to Consolidated Financial Statements
10) Report of Independent Public Accountants
11) Consent of Independent Public Accountants
Item 7. Exhibits
Exhibit
Number
- ------
23 Consent of Independent Public Accountants.
- 1 -
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
We continued making significant progress in 1995 as our
Company prepares for the rapidly changing environment within the
electric utility industry.
The most significant event during the year was the approval
by the Public Utilities Commission of Ohio (PUCO) of the
Company's Rate Reduction and Economic Development Plan
(Regulatory Plan). The Regulatory Plan is designed to enhance and
accelerate economic development within the Company's service area
and to assure our customers of long-term competitive pricing for
energy services.
The Regulatory Plan, which went into effect November 1,
1995, freezes base electric rates until January 1, 2006, at which
time base rates will be reduced by $300,000,000, or approximately
20 percent below current levels, on an annual basis. During the
ten-year rate-freeze period, which will remain in effect unless
certain significant events occur, transition rate credits will be
implemented for customers served under the General Service-Large
rates (primarily industrial customers). Also, the monthly
customer charge will be reduced for customers served under the
General Service-Secondary and Residential rates. Combined, these
transition rate credits are expected to reduce operating revenues
by approximately $600,000,000 during the ten-year period.
A major component of the Regulatory Plan is our commitment
to reduce fixed costs during the ten-year period. The PUCO
ordered the Company to recognize additional depreciation expense
related to our generating assets and additional amortization of
regulatory assets during the ten-year Regulatory Plan period of
at least $2,000,000,000 more than the amount that would have been
recognized if the Regulatory Plan were not in effect. The
Regulatory Plan includes a cap (based upon the most recent common
equity return authorized for the Company by the PUCO) on the
amount the Company may earn applicable to its common stockholders
in any calendar year during the Regulatory Plan period. If the
cap is exceeded, the excess will be credited to our customers in
a future period.
The Companies achieved record operating revenues in 1995, a
4.0% increase over the previous record set in 1993. The increased
revenues, in combination with our aggressive cost-control
efforts, raised earnings on common stock to $2.05 per share in
1995 from $1.97 a year earlier. The 1993 amount of $.39 was
adversely affected by nonrecurring charges of $1.43 per share,
- 2 -
which included a $276,578,000 after-tax write-off of Perry Unit
2, the expected resolution of fuel cost recovery issues in
Pennsylvania and certain costs associated with the Performance
Initiatives program. The effect of the 1993 write-off was
partially offset by a $58,201,000 credit from the cumulative
effect of a change in accounting to accrue metered but unbilled
revenue (see Note 2).
Operation and maintenance expenses were up by 2.5 percent in
1995, mostly due to incremental fuel and purchased power costs
incurred to meet the increased demand from our customers. With
our revenues increasing at a higher rate than our variable costs,
we were able to achieve record operating income for the second
consecutive year. A review of the work we do was an integral part
of Performance Initiatives which began in 1993 and continues as
a part of our Corporate Strategy program. Efficiencies continue
to be identified that have resulted in further opportunities for
restructuring. In 1995, we reduced our work force by 293
employees following the shutdown of several old generating units
and the restructuring of our generation and transmission group.
We expect these actions to result in annual savings of
approximately $18,000,000. Also, using economic value added-based
justification for capital spending contributed to a $67,000,000
reduction in our construction expenditures in 1995 compared to
our base year of 1993.
For the third straight year, the Companies achieved record
retail kilowatt-hour sales. The following table summarizes the
sources of changes in operating revenues for 1995 and 1994 as
compared to the previous year:
1995 1994
(In millions)
Increased retail kilowatt-hour sales $105.1 $ 2.4
Reduced average retail electric price (23.3) (3.1)
Sales to utilities 16.6 2.2
Other (0.7) (3.2)
----- ------
Net Increase (Decrease) $ 97.7 $ (1.7)
====== ======
An improving local economy and increased weather-related
demand during the second half of 1995 helped us achieve record
retail sales of 26.4 billion kilowatt-hours. Our customer base
continues to grow with more than 12,300 new retail customers
added in 1995, after gaining approximately 13,100 customers the
previous year. Residential sales increased 4.2% in 1995 after
falling slightly the previous year. Commercial sales rose 3.9%
during the year, which follows a 1.4% gain in 1994. A 6.8%
increase in industrial sales resulted, in part, from the
- 3 -
resumption of operations by two major customers that had reduced
operations in 1994. Excluding sales to these customers,
industrial sales were 3.8% higher than last year's level. We
began supplying 300 megawatts of power to another utility in the
second quarter of 1995 under a short-term contract that expired
at the end of 1995. This contract was the principal cause for an
18.2% increase in sales to other utilities in 1995, which
followed an 18.2% decrease the previous year. We have signed
short-term contracts with other utilities in 1996 to replace the
expired 1995 contract. As a result of all of these factors, total
kilowatt-hour sales were up 7.5% compared with sales in 1994,
which were down 3.9% from 1993.
Because of higher kilowatt-hour sales, we spent 5.6% more on
fuel and purchased power in 1995. During the same period, our
nuclear expenses fell 4.9% compared to the previous year--nuclear
expenses were higher in 1994 mainly due to corrective maintenance
work at the Perry Plant. Expenses associated with scheduled
maintenance outages at our fossil-fueled generating units
contributed to a 4.6% increase in other operating costs during
1995, compared to last year. Other operating costs were down
significantly in 1994 from the previous year due to a one-time
$39,000,000 charge in 1993 related to Performance Initiatives.
That charge consisted of $9,000,000 for obsolete materials and
supplies and $30,000,000 estimated for costs of early retirement
programs offered to qualifying employees resulting from
strategies identified in the Performance Initiatives program.
Higher depreciation charges in 1995 resulted mainly from
$27,000,000 of additional nuclear depreciation authorized under
our Regulatory Plan discussed earlier. A higher level of
depreciable utility plant and an increase in the accrual for
nuclear decommissioning costs also contributed to the increase.
The change between 1995 and 1994 in the amortization of net
regulatory assets was due to increased amortization of deferred
nuclear costs and the discontinuation of deferral accounting for
postretirement benefits, also in accordance with the Regulatory
Plan. Penn Power provided an $8,728,000 reserve for deferred
postretirement benefit costs in 1994, which was responsible for
the majority of the change in net amortization of regulatory
assets compared to 1993.
Overall, interest costs were lower in 1995 than in 1994.
Interest on long-term debt decreased due to refinancing and
redemption of higher-cost debt. Other interest expense increased
compared to last year due primarily to higher levels of short-
term borrowing. We also discontinued deferring nuclear unit
interest in the second half of 1995, consistent with our
Regulatory Plan. Preferred and preference stock dividend
requirements in 1995 include approximately $2,300,000 for
premiums paid on preferred stock redemptions.
- 4 -
CAPITAL RESOURCES AND LIQUIDITY
We have significantly improved our financial position over
the past five years. Cash generated from operations was 62%
higher in 1995 than it was in 1990 due to higher revenues and
aggressive cost controls. By the end of 1995, we were serving
about 60,000 more customers than we were five years ago, with
approximately 2,000 fewer employees. As a result, our
customer/employee ratio has improved significantly over the past
five years, standing at 228 customers per employee at the end of
1995, compared to 152 at the end of 1990. In addition, capital
expenditures have dropped substantially during that period.
Expenditures in 1995 were approximately 28% lower than they were
in 1990, and annual depreciation charges have exceeded property
additions since the end of 1987. In fact, our projections for the
next five years indicate that annual depreciation charges will
exceed construction program expenditures by at least two to three
times because of our reduced capital requirements, coupled with
the additional depreciation in accordance with the Regulatory
Plan.
Over the past five years, we have aggressively taken
advantage of opportunities in the financial markets to reduce our
embedded capital costs. Through refinancing activities, we have
reduced the average cost of outstanding debt from 9.28% at the
end of 1990 to 8.00% at the end of 1995. Also, the cost of
outstanding preferred and preference stock was reduced from 8.59%
at the end of 1990 to 7.59% at the end of 1995. We have improved
our financial position as a result of these actions. For example,
we have enhanced our fixed charge coverage ratios and the
percentage of common equity to total capitalization. Our SEC
ratio of earnings to fixed charges improved to 2.32 at the end of
1995 from 1.97 at the end of 1990. The Company's indenture ratio,
which is used to determine the ability to issue first mortgage
bonds, improved from 4.79 at the end of 1990 to 5.78 at the end
of 1995. Over the same period, the charter ratio, a measure of
our ability to issue preferred stock, improved from 1.87 to 2.31,
and, our common equity percentage of capitalization (excluding
the Employee Stock Ownership Plan Trust adjustment) rose from
approximately 42% at the end of 1990 to about 45% at the end of
1995.
At the end of 1995, we had the capability to issue
$1,466,000,000 principal amount of first mortgage bonds and
$1,673,000,000 of preferred stock (assuming no additional debt
was issued). However, our cash requirements in 1996 for
operations and scheduled debt maturities are expected to be met
without issuing additional securities. During 1995, we reduced
our total debt by approximately $285,000,000. We expect to pay
off over $1,300,000,000 of debt over the next five years with
internal cash, including $264,000,000 in 1996.
- 5 -
We had about $30,000,000 of cash and temporary investments
and $120,000,000 of short-term indebtedness on December 31, 1995.
Through OES Fuel credit facilities, we had the capability to
borrow approximately $128,000,000 as of the end of 1995. We also
had $52,000,000 of unused short-term bank lines of credit, and
$50,000,000 of bank facilities that provide for borrowings on a
short-term basis at the banks' discretion.
Our capital spending for the period 1996-2000 is expected to
be about $650,000,000 (excluding nuclear fuel), of which
approximately $160,000,000 applies to 1996. This spending level
is more than $400,000,000 lower than actual capital outlays over
the past five years.
Investments for additional nuclear fuel during the 1996-2000
period are estimated to be approximately $180,000,000, of which
about $29,000,000 applies to 1996. During the same periods, our
nuclear fuel investments are expected to be reduced by
approximately $191,000,000 and $39,000,000, respectively, as the
nuclear fuel is consumed. Also, we have operating lease
commitments of approximately $594,000,000 for the 1996-2000
period, of which approximately $108,000,000 relates to 1996. We
recover the cost of nuclear fuel consumed and operating leases
through our electric rates.
Reference is made to Note 1 for a discussion of regulatory
assets. In accordance with the Regulatory Plan, the Company's
rates include recovery of all regulatory assets and authorizes
the Company to accelerate amortization of those regulatory assets
over the next ten years.
One of Penn Power's former municipal customers signed a
contract with another energy supplier in November. Penn Power and
the former customer are in dispute over Penn Power's proposed
transmission rate. Both parties have filed proposals with the
Federal Energy Regulatory Commission requesting it to establish
final terms. No ruling has yet been issued. Sales to this
municipality were approximately $1,500,000 in 1995.
OUTLOOK
Many competitive challenges lie ahead as the electric
utility industry becomes less regulated and more energy suppliers
enter the marketplace. Retail wheeling, which would allow retail
customers to purchase electricity from other energy producers,
could be one of those challenges, if legislators choose to move
in that direction. The Company's Regulatory Plan provides the
foundation to position us to meet those challenges by
significantly reducing fixed costs and lowering rates to a more
competitive level. For the Regulatory Plan to succeed, it is
imperative that we build on the success of our Performance
- 6 -
Initiatives and Corporate Strategy programs and continue to find
ways to increase revenues, reduce costs and enhance shareholder
value. In December 1995, we announced that we will offer a
voluntary retirement program to 174 eligible union-represented
employees beginning March 1, 1996. The program is expected to
produce annual savings of up to $7,900,000. Also, in January
1996, employees at the Bruce Mansfield Plant were informed of
future staff reductions that will affect approximately 105
bargaining unit employees and 35 management and
administrative/office employees. The reduction is expected to
occur between February 15, 1996, and April 1, 1996. This work
force reduction is the result of continuing efforts to make the
plant's costs more competitive.
Effective operation of the nuclear facilities we jointly own
will also help us meet these competitive challenges. In 1995, we
increased our annual funding of the decommissioning obligation.
As discussed in Note 1, the Financial Accounting Standards Board
(FASB) is reviewing the accounting for decommissioning costs
regarding the recognition, measurement and classification of
decommissioning costs in the financial statements of electric
utilities. The FASB issued its proposed accounting standard in
February 1996.
The Clean Air Act Amendments of 1990, discussed in Note 7,
require additional emission reductions by 2000. We are pursuing
cost-effective compliance strategies for meeting those
requirements.
Through our Performance Initiatives and Corporate Strategy
programs, we have identified substantial savings that will better
position us to successfully compete in the future. We continue to
identify opportunities for revenue enhancement and cost
reduction. Also, our Regulatory Plan provides more regulatory
assurance that we will collect our fixed costs and minimizes the
risk of not recovering some portion of our assets from our
customers. Our focus is to exceed customers' service expectations
by providing superior value and high-quality products and
services at competitive prices in order to maximize the value of
our shareholders' investment in the Company.
- 7 -
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------
(In thousands, except per share amounts)
OPERATING REVENUES $2,465,846 $2,368,191 $2,369,940
---------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 465,483 440,936 456,494
Nuclear operating costs 289,717 304,716 290,321
Other operating costs 446,967 427,133 474,241
---------- ---------- ----------
Total operation and maintenance expenses 1,202,167 1,172,785 1,221,056
Provision for depreciation 256,085 220,502 217,980
General taxes 243,179 237,020 245,554
Amortization of net regulatory assets 5,825 (884) (6,753)
Income taxes 191,972 181,514 166,773
---------- ---------- ----------
Total operating expenses and taxes 1,899,228 1,810,937 1,844,610
---------- ---------- ----------
OPERATING INCOME 566,618 557,254 525,330
---------- ---------- ----------
OTHER INCOME AND EXPENSE:
Perry Unit 2 termination (Note 3) -- -- (390,835)
Income tax benefit from Perry Unit 2
termination -- -- 142,092
Other 14,424 16,459 19,921
---------- ---------- ----------
Total other income (expense) 14,424 16,459 (228,822)
---------- ---------- ----------
TOTAL INCOME 581,042 573,713 296,508
---------- ---------- ----------
NET INTEREST AND OTHER CHARGES:
Interest on long-term debt 243,570 259,554 262,861
Deferred nuclear unit interest (4,250) (8,511) (8,518)
Allowance for borrowed funds used during
construction and capitalized interest (5,668) (5,156) (4,666)
Other interest expense 22,944 18,931 16,445
Subsidiaries' preferred stock dividend
requirements 7,205 5,364 5,863
---------- ---------- ----------
Net interest and other charges 263,801 270,182 271,985
---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING 317,241 303,531 24,523
Cumulative effect to January 1, 1993, of
a change in accounting for unbilled
revenues (net of income taxes of
$33,632,000) (Note 2) -- -- 58,201
---------- ---------- ----------
NET INCOME 317,241 303,531 82,724
PREFERRED AND PREFERENCE STOCK DIVIDEND
REQUIREMENTS 22,494 21,679 23,707
---------- ---------- ----------
EARNINGS ON COMMON STOCK $ 294,747 $ 281,852 $ 59,017
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 143,692 143,237 152,569
========== ========== ==========
EARNINGS PER SHARE OF COMMON STOCK:
Before cumulative effect of a change
in accounting $2.05 $1.97 $ .01
Cumulative effect to January 1, 1993,
of a change in accounting for unbilled
revenues (Note 2) -- -- .38
----- ----- -----
EARNINGS PER SHARE OF COMMON STOCK $2.05 $1.97 $ .39
===== ===== =====
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $1.50 $1.50 $1.50
===== ===== =====
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
- 8 -
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
At December 31, 1995 1994
- --------------------------------------------------------------------------------------------------------
(In thousands)
ASSETS
UTILITY PLANT:
In service, at original cost $8,556,722 $8,518,050
Less--Accumulated provision for depreciation 3,051,148 2,910,587
---------- ----------
5,505,574 5,607,463
---------- ----------
Construction work in progress--
Electric plant 150,262 174,970
Nuclear fuel 39,613 52,470
---------- ----------
189,875 227,440
---------- ----------
5,695,449 5,834,903
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Letter of credit collateralization (Note 4) 277,763 277,763
Other 252,005 197,546
---------- ----------
529,768 475,309
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 29,830 23,291
Receivables--
Customers (less accumulated provisions of $2,528,000 and $2,517,000,
respectively, for uncollectible accounts) 274,692 254,515
Other 54,988 54,713
Materials and supplies, at average cost--
Owned 68,829 122,337
Under consignment 41,080 --
Prepayments 82,257 71,836
---------- ----------
551,676 526,692
---------- ----------
DEFERRED CHARGES:
Regulatory assets 1,786,543 1,898,875
Unamortized sale and leaseback costs 103,091 106,883
Property taxes 104,071 106,458
Other 53,336 44,844
---------- ----------
2,047,041 2,157,060
---------- ----------
$8,823,934 $8,993,964
========== ===========
- 9 -
CAPITALIZATION AND LIABILITIES
CAPITALIZATION (See Consolidated Statements of Capitalization):
Common stockholders' equity $2,407,871 $2,317,197
Preferred stock--
Not subject to mandatory redemption 160,965 277,335
Subject to mandatory redemption 25,000 25,000
Preferred stock of consolidated subsidiary--
Not subject to mandatory redemption 50,905 50,905
Subject to mandatory redemption 15,000 15,000
Company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely Company subordinated debentures 120,000 --
Long-term debt 2,786,256 3,166,593
---------- ----------
5,565,997 5,852,030
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt 376,716 227,496
Short-term borrowings (Note 6) 119,965 174,642
Accounts payable 100,536 100,884
Accrued taxes 131,432 140,629
Accrued interest 57,462 65,743
Other 196,482 152,856
---------- ----------
982,593 862,250
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 1,772,434 1,799,324
Accumulated deferred investment tax credits 213,876 223,827
Other 289,034 256,533
---------- ----------
2,275,344 2,279,684
---------- ----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES
(Notes 4 and 7) ---------- ----------
$8,823,934 $8,993,964
========== ==========
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
- 10 -
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
COMMON STOCKHOLDERS' EQUITY:
Common stock, $9 par value, authorized 175,000,000 shares-
152,569,437 shares outstanding $1,373,125 $1,373,125
Other paid-in capital 726,307 724,848
Retained earnings (Note 5A) 471,095 389,600
Unallocated employee stock ownership plan common stock-
8,663,575 and 9,076,489 shares, respectively (Note 5B) (162,656) (170,376)
---------- ----------
Total common stockholders' equity 2,407,871 2,317,197
---------- ----------
Number of Shares Optional
Outstanding Redemption Price
------------------ ---------------------
1995 1994 Per Share Aggregate
------ ------ --------- ---------
PREFERRED STOCK (Note 5C):
Cumulative, $100 par value-
Authorized 6,000,000 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
4.56% 144,300 144,300 103.38 14,917 14,430 14,430
7.24% -- 363,700 -- -- -- 36,370
7.36% -- 350,000 -- -- -- 35,000
8.20% -- 450,000 -- -- -- 45,000
--------- --------- ------- ---------- ----------
609,650 1,773,350 63,893 60,965 177,335
Cumulative, $25 par value-
Authorized 8,000,000 shares
Not Subject to Mandatory Redemption:
7.75% 4,000,000 4,000,000 100,000 100,000
--------- --------- ---------- ----------
Total not subject to
mandatory redemption 4,609,650 5,773,350 $63,893 160,965 277,335
========= ========= ======= ---------- ----------
Cumulative, $100 par value-
Subject to Mandatory Redemption (Note 5D):
8.45% 250,000 250,000 25,000 25,000
========= ========= ----------- ----------
- 11 -
PREFERRED STOCK OF CONSOLIDATED
SUBSIDIARY (Note 5C):
Pennsylvania Power Company
Cumulative, $100 par value-
Authorized 1,200,000 shares
Not Subject to Mandatory Redemption:
4.24% 40,000 40,000 $103.13 $ 4,125 4,000 4,000
4.25% 41,049 41,049 105.00 4,310 4,105 4,105
4.64% 60,000 60,000 102.98 6,179 6,000 6,000
7.64% 60,000 60,000 101.42 6,085 6,000 6,000
7.75% 250,000 250,000 -- -- 25,000 25,000
8.00% 58,000 58,000 102.07 5,920 5,800 5,800
--------- --------- ------- ---------- ----------
Total not subject to mandatory
redemption 509,049 509,049 $26,619 50,905 50,905
========= ========= ======= ---------- ----------
Subject to Mandatory Redemption (Note 5D):
7.625% 150,000 150,000 15,000 15,000
========= ========= ---------- ----------
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY
COMPANY SUBORDINATED DEBENTURES (Note 5E):
Cumulative, $25 par value-
Authorized 4,800,000 shares
Subject to Mandatory Redemption:
9.00% 4,800,000 -- 120,000 --
========= ========= ---------- ----------
- 12 -
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION (Continued)
At December 31, 1995 1994 1995 1994 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
(In thousands)
LONG-TERM DEBT (Note 5F):
First mortgage bonds:
Ohio Edison Company- Pennsylvania Power Company-
12.740% due 1995 -- 30,000 9.000% due 1996 50,000 50,000
8.500% due 1996 150,000 150,000 9.740% due 1999-2019 20,000 20,000
8.750% due 1998 150,000 150,000 7.500% due 2003 40,000 40,000
6.875% due 1999 150,000 150,000 6.375% due 2004 50,000 50,000
6.375% due 2000 80,000 80,000 6.625% due 2004 20,000 20,000
7.375% due 2002 120,000 120,000 8.500% due 2022 27,250 50,000
7.500% due 2002 34,265 34,265 7.625% due 2023 19,500 40,000
8.250% due 2002 125,000 125,000 ------- -------
8.625% due 2003 150,000 150,000
6.875% due 2005 80,000 80,000
9.750% due 2019 35,300 35,300
8.750% due 2022 94,210 100,000
7.625% due 2023 75,000 75,000
7.875% due 2023 100,000 100,000
---------- ----------
Total first mortgage bonds 1,343,775 1,379,565 226,750 270,000 1,570,525 1,649,565
---------- ---------- ------- ------- ---------- ----------
Secured notes:
Ohio Edison Company Pennsylvania Power Company-
8.380% due 1996 16,464 53,718 4.750% due 1998 850 850
7.930% due 2002 69,579 77,997 6.080% due 2000 23,000 23,000
7.680% due 2005 200,000 200,000 5.400% due 2013 1,000 1,000
6.750% due 2015 40,000 -- 8.125% due 2015 -- 14,250
10.500% due 2015 -- 60,000 5.400% due 2017 10,600 10,600
10.625% due 2015 -- 40,000 7.150% due 2017 17,925 17,925
7.450% due 2016 47,725 47,725 5.900% due 2018 16,800 16,800
7.100% due 2018 26,000 26,000 8.100% due 2018 10,300 10,300
7.050% due 2020 60,000 -- 8.100% due 2020 5,200 5,200
7.000% due 2021 69,500 69,500 7.150% due 2021 14,482 14,482
7.150% due 2021 443 443 6.150% due 2023 12,700 12,700
7.625% due 2023 50,000 50,000 6.450% due 2027 14,500 14,500
8.100% due 2023 30,000 30,000 5.450% due 2028 6,950 6,950
7.750% due 2024 108,000 108,000 6.000% due 2028 14,250 --
5.625% due 2029 50,000 50,000 5.950% due 2029 238 238
5.950% due 2029 56,212 56,212 ------- -------
5.450% due 2033 14,800 14,800
---------- ----------
838,723 884,395 148,795 148,795 987,518 1,033,190
---------- ---------- ------- -------
OES Fuel-
6.08% weighted average
interest rate 97,162 124,984
---------- ----------
Total secured notes 1,084,680 1,158,174
---------- ----------
Unsecured notes:
Ohio Edison Company-
9.440% due 1995 -- 75,000
7.430% due 1997 100,000 100,000
8.635% due 1997 50,000 50,000
4.900% due 2012 50,000 50,000
4.250% due 2014 50,000 50,000
3.450% due 2015 50,000 50,000
4.400% due 2018 56,000 56,000
4.750% due 2018 57,100 57,100
4.300% due 2032 53,400 53,400
---------- ----------
Total unsecured notes 466,500 541,500
---------- ----------
Capital lease obligations (Note 4) 48,221 54,180
---------- ----------
Net unamortized discount on debt (6,954) (9,330)
---------- ----------
Long-term debt due within one year (376,716) (227,496)
---------- ----------
Total long-term debt 2,786,256 3,166,593
---------- ----------
TOTAL CAPITALIZATION $5,565,997 $5,852,030
============================================================================================================================
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
- 13 -
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the Years Ended December 31, 1995 1994 1993
- ---------------------------------------------------------------------------------------------------
(In thousands)
Balance at beginning of year $389,600 $322,821 $490,564
Net income 317,241 303,531 82,724
Tax benefit from ESOP dividends - - 5,256
-------- -------- --------
706,841 626,352 578,544
- --------------------------------------------------------------------------------------------------
Cash dividends on preferred and
preference stock 20,234 21,926 23,275
Cash dividends on common stock 215,512 214,826 228,855
Premium on redemption of preferred stock - - 3,593
-------- -------- --------
235,746 236,752 255,723
-------- -------- --------
Balance at end of year (Note 5A) $471,095 $389,600 $322,821
- --------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CAPITAL STOCK AND OTHER PAID-IN CAPITAL
Preferred and Preference Stock
---------------------------------------------
Not Subject to Subject to
Common Stock Unallocated Mandatory Redemption Mandatory Redemption
--------------------------------- -------------------- --------------------
Other ESOP Par or Par or
Number Par Paid-In Common Number Stated Number Stated
of Shares Value Capital Stock of Shares Value of Shares Value
--------- ----- ------- ----------- --------- ------ --------- ------
(Dollars in thousands)
Balance, January 1, 1993 152,569,437 $1,373,125 $731,793 $(187,318) 3,542,399 $354,240 592,016 $ 64,062
Allocation of ESOP Shares 6,799
Sale of 7.75% Class A
Preferred Stock (3,361) 4,000,000 100,000
Sale of 7.75% Preferred
Stock (345) 250,000 25,000
Redemptions--
$102.50 Series (216) (5,400) (5,400)
8.24% Series (45,000) (4,500)
8.48% Series (6) (80,000) (8,000)
8.64% Series (400,000) (40,000)
9.12% Series (450,000) (45,000)
9.16% Series (80,000) (8,000)
11.00% Series (8,000) (800)
11.50% Series (60,000) (6,000)
13.00% Series (10,000) (1,000)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 152,569,437 1,373,125 727,865 (180,519) 6,782,399 378,240 463,616 46,362
Minimum liability for
unfunded retirement
benefits (3,053)
Allocation of ESOP Shares 36 10,143
Redemptions--
Market Auction Series (500,000) (50,000)
11.00% Series (3,616) (362)
13.00% Series (60,000) (6,000)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 152,569,437 1,373,125 724,848 (170,376) 6,282,399 328,240 400,000 40,000
Minimum liability for
unfunded retirement
benefits 2,446
Allocation of 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
============================================================================================================================
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
- 14 -
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995 1994 1993
- ------------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $317,241 $303,531 $ 82,724
Adjustments to reconcile net income to net
cash from operating activities:
Provision for depreciation 256,085 220,502 217,980
Nuclear fuel and lease amortization 70,849 72,141 59,858
Deferred income taxes, net 53,395 21,156 (26,233)
Investment tax credits, net (9,951) (8,036) (8,345)
Allowance for equity funds used
during construction - (5,277) (4,257)
Deferred fuel costs, net 3,916 (2,656) (1,078)
Perry Unit 2 termination - - 390,835
Cumulative effect of a change in
accounting for unbilled revenues - - (58,201)
Receivables (20,452) 32,113 (1,962)
Materials and supplies 12,428 6,865 41,467
Accounts payable 3,545 (18,261) 9,823
Other 66,158 72,986 20,272
-------- -------- --------
Net cash provided from operating activities 753,214 695,064 722,883
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing--
Preferred stock 120,000 - 121,294
Long-term debt 254,365 434,759 765,358
Short-term borrowings, net - 70,516 -
Redemptions and Repayments--
Preferred and preference stock 117,528 56,362 122,502
Long-term debt 499,276 483,347 773,128
Short-term borrowings, net 54,677 - 47,445
Dividend Payments--
Common stock 217,192 216,782 224,943
Preferred and preference stock 20,623 21,483 20,926
-------- -------- --------
Net cash used for financing activities 534,931 272,699 302,292
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 198,103 258,249 256,746
Letter of credit collateralization deposit - 277,763 -
Other 13,641 22,752 18,367
-------- -------- --------
Net cash used for investing activities 211,744 558,764 275,113
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 6,539 (136,399) 145,478
Cash and cash equivalents at beginning of year 23,291 159,690 14,212
-------- -------- --------
Cash and cash equivalents at end of year $ 29,830 $ 23,291 $159,690
======== ======== ========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash Paid During the Year--
Interest (net of amounts capitalized) $254,789 $267,319 $262,410
Income taxes 178,643 143,202 94,272
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
- 15 -
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF TAXES
For the Years Ended December 31, 1995 1994 1993
(In thousands)
GENERAL TAXES:
Real and personal property $ 118,707 $ 113,484 $ 124,709
State gross receipts 100,591 100,996 97,348
Social security and unemployment 15,787 14,822 15,626
Other 8,094 7,718 7,871
---------- ---------- ----------
Total general taxes $ 243,179 $ 237,020 $ 245,554
========== ========== ==========
PROVISION FOR INCOME TAXES:
Currently payable-
Federal $ 145,511 $ 161,219 $ 61,920
State 10,352 14,547 5,544
---------- ---------- ----------
155,863 175,766 67,464
---------- ---------- ----------
Deferred, net-
Federal 50,631 20,796 489
State 2,764 360 6,455
---------- ---------- ----------
53,395 21,156 6,944
---------- ---------- ----------
Investment tax credit amortization (9,951) (8,036) (8,345)
---------- ---------- ----------
Total provision for income taxes $ 199,307 $ 188,886 $ 66,063
========== ========== ==========
INCOME STATEMENT CLASSIFICATION
OF PROVISION FOR INCOME TAXES:
Operating income $ 191,972 $ 181,514 $ 166,773
Other income 7,335 7,372 (134,342)
Cumulative effect of a change in accounting -- -- 33,632
---------- ---------- ----------
Total provision for income taxes $ 199,307 $ 188,886 $ 66,063
========== ========== ==========
RECONCILIATION OF FEDERAL INCOME TAX EXPENSE
AT STATUTORY RATE TO TOTAL PROVISION FOR
INCOME TAXES:
Book income before provision for income taxes $ 516,548 $ 492,417 $ 148,787
========== ========== ==========
Federal income tax expense at statutory rate $ 180,792 $ 172,346 $ 52,075
Increases (reductions) in taxes resulting from-
Amortization of investment tax credits (9,951) (8,036) (8,345)
State income taxes net of federal income tax
benefit 8,525 9,690 7,799
Amortization of tax regulatory assets 19,690 14,503 15,412
Other, net 251 383 (878)
---------- ---------- ----------
Total provision for income taxes $ 199,307 $ 188,886 $ 66,063
========== ========== ==========
ACCUMULATED DEFERRED INCOME TAXES AT
DECEMBER 31:
Property basis differences $1,047,387 $1,024,737 $ 972,501
Allowance for equity funds used during
construction 263,465 278,172 282,525
Deferred nuclear expense 271,114 277,951 283,134
Customer receivables for future income taxes 204,978 237,826 244,540
Deferred sale and leaseback costs 82,381 87,068 90,878
Unamortized investment tax credits (77,777) (82,491) (85,459)
Other (19,114) (23,939) 10,432
---------- ---------- ----------
Net deferred income tax liability $1,772,434 $1,799,324 $1,798,551
========== ========== ==========
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral part of
these statements.
- 16 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements include Ohio Edison
Company (Company) and its wholly owned subsidiaries. Pennsylvania Power
Company (Penn Power) is the Company's principal subsidiary. All
significant intercompany transactions have been eliminated. The Company
and Penn Power (Companies) follow the accounting policies and practices
prescribed by the Public Utilities Commission of Ohio (PUCO), the
Pennsylvania Public Utility Commission (PPUC) and the Federal Energy
Regulatory Commission (FERC). The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses during the reporting
period.
REVENUES-
The Companies' principal business is providing electric service
to customers in central and northeastern Ohio and western Pennsylvania.
The Companies' retail customers are metered on a cycle basis. Revenue is
recognized for unbilled electric service through the end of the year (see
Note 2).
Receivables from customers include sales to residential,
commercial and industrial customers located in the Companies' service area
and sales to wholesale customers. There was no material concentration of
receivables at December 31, 1995 or 1994, with respect to any particular
segment of the Companies' customers.
REGULATORY PLAN-
In the second half of 1995 the PUCO approved the Company's Rate
Reduction and Economic Development Plan (Regulatory Plan). As part of the
Regulatory Plan, transition rate credits were implemented for customers on
November 1, 1995, which are expected to reduce operating revenues by
approximately $600,000,000 during the Regulatory Plan period, which
expires December 31, 2005. The Regulatory Plan also established a revised
fuel recovery rate formula, which eliminated the automatic pass-through of
fuel costs to the Company's retail customers. Under the revised formula
the fuel recovery rate will be adjusted based upon annual changes in the
Gross Domestic Product Implicit Price Deflator.
All of the Company's regulatory assets are now being recovered
under provisions of the Regulatory Plan. In addition, the PUCO ordered the
Company to recognize additional depreciation expense related to its
generating assets and additional amortization of regulatory assets during
the ten-year Regulatory Plan period of at least $2,000,000,000 more than
the amount that would have been recognized if the Regulatory Plan were not
in effect. These additional amounts are being recovered through current
- 17 -
rates. Among other provisions, the Regulatory Plan also limits the
Company's annual earnings on common stock; any amounts otherwise earned in
excess of the limitation would be credited to the Company's retail
customers in a future period.
MATERIALS AND SUPPLIES-
The Companies recover fuel-related costs not otherwise included
in base rates from retail customers through separate energy rates. Penn
Power defers the difference between actual fuel-related costs incurred and
the amounts currently recovered from customers, with any over or under
collection from customers included as an adjustment to a subsequent energy
rate. The Company followed this practice until July 1, 1995, at which time
current period deferral for over or under collections ceased in accordance
with the Regulatory Plan.
In 1995, the Company sold substantially all of its materials and
supplies, except for those located at generating units not operated by the
Company. No gain or loss resulted from this transaction. The buyer now
provides all of the Company's materials and supplies under a consignment
arrangement. In accordance with Statement of Financial Accounting
Standards (SFAS) No. 49, "Accounting for Product Financing Arrangements,"
the materials and supplies continue to be reflected as assets on the
Consolidated Balance Sheet even though the supplier owns the material.
UTILITY PLANT AND DEPRECIATION-
Utility plant reflects the original cost of construction,
including payroll and related costs such as taxes, employee benefits,
administrative and general costs and financing costs (allowance for funds
used during construction).
The Companies provide for depreciation on a straight-line basis
at various rates over the estimated lives of property included in plant in
service. The annual composite rate for electric plant was approximately
3.0% in 1995, 1994 and 1993. In addition to the straight-line depreciation
recognized in 1995, the Company also recognized $27,000,000 of additional
depreciation in accordance with the Regulatory Plan.
Annual depreciation expense includes approximately $7,600,000
for future decommissioning costs applicable to the Companies' ownership
and leasehold interests in three nuclear generating units. The Companies'
share of the future obligation to decommission these units is
approximately $399,000,000 in current dollars and (using a 2.8% escalation
rate) approximately $865,000,000 in future dollars. The estimated
obligation (based on site-specific studies) and the escalation rate were
developed using information obtained from consultants. Payments for
decommissioning are expected to begin in 2016, when actual decommissioning
work begins. The Companies have recovered approximately $55,000,000 for
decommissioning through their electric rates from customers through
December 31, 1995; such amounts are reflected in the reserve for
- 18 -
depreciation on the Consolidated Balance Sheet. If the actual costs of
decommissioning the units exceed the funds accumulated from investing
amounts recovered from customers, the Companies expect that additional
amount will be recoverable from their customers. The Companies have
approximately $65,100,000 invested in external decommissioning trust funds
as of December 31, 1995. Earnings on these funds are reinvested with a
corresponding increase to the depreciation reserve. The Companies have
also recognized an estimated liability of approximately $18,000,000
related to decontamination and decommissioning of nuclear enrichment
facilities operated by the United States Department of Energy (DOE), as
required by the Energy Policy Act of 1992. The Companies recover these
costs through their respective energy rates.
The Financial Accounting Standards Board (FASB) is reviewing the
accounting for nuclear decommissioning costs. If current electric utility
industry accounting practices for decommissioning are changed: (1) annual
provisions for decommissioning could increase; (2) the full estimated cost
for decommissioning could be recorded as a liability rather than as
accumulated depreciation; and (3) income from the external decommissioning
trusts could be reported as investment income. The FASB issued its
proposed accounting standard in February 1996.
COMMON OWNERSHIP OF GENERATING FACILITIES-
The Companies and other Central Area Power Coordination Group
(CAPCO) companies own, as tenants in common, various power generating
facilities. Each of the companies is obligated to pay a share of the costs
associated with any jointly owned facility in the same proportion as its
interest. The Companies' portions of operating expenses associated with
jointly owned facilities are included in the corresponding operating
expenses on the Consolidated Statements of Income. The amounts reflected
on the Consolidated Balance Sheet under utility plant at December 31,
1995, include the following:
Companies'
Utility Accumulated Construction Ownership/
Plant Provision for Work in Leasehold
Generating Units in Service Depreciation Progress Interest
- -------------------------------------------------------------------
(In thousands)
W.H. Sammis #7 $ 303,700 $ 89,900 $ 1,700 68.80%
Bruce Mansfield
#1, #2 and #3 777,500 336,500 3,600 50.68%
Beaver Valley
#1 and #2 1,849,900 606,600 3,600 47.11%
Perry #1 1,624,500 356,000 9,600 35.24%
- -------------------------------------------------------------------
Total $4,555,600 $1,389,000 $18,500
- -------------------------------------------------------------------
- 19 -
NUCLEAR FUEL-
Nuclear fuel is recorded at original cost, which includes
material, enrichment, fabrication and interest costs incurred prior to
reactor load. The Companies amortize the cost of nuclear fuel based on the
rate of consumption. The Companies' electric rates include amounts for the
future disposal of spent nuclear fuel based upon the formula used to
compute payments to the DOE.
INCOME TAXES-
Details of the total provision for income taxes are shown on the
Consolidated Statements of Taxes. Deferred income taxes result from timing
differences in the recognition of revenues and expenses for tax and
accounting purposes. Investment tax credits, which were deferred when
utilized, are being amortized over the recovery period of the related
property. The liability method is used to account for deferred income
taxes. Deferred income tax liabilities related to tax and accounting basis
differences are recognized at the statutory income tax rates in effect
when the liabilities are expected to be paid.
RETIREMENT BENEFITS-
The Companies' trusteed, noncontributory defined benefit pension
plan covers almost all full-time employees. Upon retirement, employees
receive a monthly pension based on length of service and compensation. The
Companies use the projected unit credit method for funding purposes and
were not required to make pension contributions during the three years
ended December 31, 1995.
The following sets forth the funded status of the plan and amounts
recognized on the Consolidated Balance Sheets as of December 31:
1995 1994
- ------------------------------------------------------------------
(In thousands)
Actuarial present value of benefit obligations:
Vested benefits $546,936 $483,850
Nonnvested benefits 36,548 27,312
- ------------------------------------------------------------------
Accumulated benefit obligation $583,484 $511,162
==================================================================
Plan assets at fair value $857,961 $719,310
Actuarial present value of projected benefit
obligation 685,180 593,931
- ------------------------------------------------------------------
Plan assets in excess of projected benefit
obligation 172,781 125,379
Unrecognized net loss (gain) (43,564) 8,868
Unrecognized prior service cost 24,704 12,755
Unrecognized net transition asset (41,830) (49,775)
- ------------------------------------------------------------------
Net pension asset $112,091 $ 97,227
=================================================================
- 20 -
The assets of the plan consist primarily of common stocks,
United States government bonds and corporate bonds. Net pension costs for
the three years ended December 31, 1995, were computed as follows:
1995 1994 1993
- -------------------------------------------------------------------
(In thousands)
Service cost-benefits earned
during the period $ 12,794 $ 15,159 $ 13,171
Interest on projected benefit
obligation 48,135 45,299 42,723
Return on plan assets (194,465) 8,344 (97,849)
Net deferral (amortization) 118,672 (89,324) 14,954
Voluntary early retirement
program expense - 37,299 6,014
- ------------------------------------------------------------------
Net pension cost $ (14,864) $ 16,777 $(20,987)
==================================================================
The assumed discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.5% in 1995 and
1993, and 8.5% in 1994. The assumed rate of increase in future
compensation levels used to measure this obligation was 4.5% in each year.
Expected long-term rates of return on plan assets were assumed to be 10%
in 1995 and 1994 and 11% in 1993.
The Companies provide a minimum amount of noncontributory life
insurance to retired employees in addition to optional contributory
insurance. Health care benefits, which include certain employee
deductibles and copayments, are also available to retired employees, their
dependents and, under certain circumstances, their survivors. The
Companies pay insurance premiums to cover a portion of these benefits in
excess of set limits; all amounts up to the limits are paid by the
Companies. The Companies recognize the expected cost of providing other
postretirement benefits to employees and their beneficiaries and covered
dependents from the time employees are hired until they become eligible to
receive those benefits. The following sets forth the funded status of the
plan and amounts recognized on the Consolidated Balance Sheets as of
December 31:
1995 1994
- -----------------------------------------------------------------
(In thousands)
Accumulated postretirement benefit
obligation allocation:
Retirees $148,169 $165,386
Fully eligible active plan participants 12,578 12,381
Other active plan participants 77,550 77,599
-------- --------
Accumulated postretirement benefit
obligation 238,297 255,366
Plan assets at fair value 1,269 -
- ------------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets 237,028 255,366
Unrecognized transition obligation (152,263) (183,196)
Unrecognized net loss (17,038) (23,425)
- ------------------------------------------------------------------
Net postretirement benefit liability $ 67,727 $ 48,745
==================================================================
- 21 -
Net periodic postretirement benefit costs for the three years
ended December 31, 1995, were computed as follows:
1995 1994 1993
- -------------------------------------------------------------------
(In thousands)
Service cost-benefits attributed
to the period $ 4,499 $ 4,865 $ 3,929
Interest cost on accumulated
benefit obligation 21,073 19,332 18,039
Amortization of transition
obligation 10,178 10,178 10,178
Amortization of loss 110 787 -
Voluntary early retirement program
expense - 2,815 1,533
------- ------- -------
Net periodic postretirement
benefit cost $35,860 $37,977 $33,679
==================================================================
The health care trend rate assumption is 6.0% in the first year
gradually decreasing to 4.0% for the year 2008 and later. The discount
rates used to compute the accumulated postretirement benefit obligation
were 7.5% in 1995 and 1993, and 8.5% in 1994. An increase in the health
care trend rate assumption by one percentage point in all years would
increase the accumulated postretirement benefit obligation by
approximately $29,400,000 and the aggregate annual service and interest
costs by approximately $3,500,000.
The Company deferred postretirement benefits until the
Regulatory Plan became effective. The costs are no longer being deferred
and are currently being recovered through rates along with the deferred
amounts.
EARNINGS PER SHARE OF COMMON STOCK-
The American Institute of Certified Public Accountants issued
its Statement of Position 93-6 (SOP) in late 1993, which changed generally
accepted accounting principles relating to employee stock ownership plans
(ESOP) for shares purchased after December 31, 1992. The Company's ESOP
shares were purchased prior to that date, but the Company elected to adopt
the SOP effective January 1, 1994. This change in accounting reduced net
income by approximately $8,700,000 in 1994; the net effect to earnings per
common share resulting from this change was an increase of six cents after
eliminating unallocated ESOP shares from the computation.
- 22 -
SUPPLEMENTAL CASH FLOWS INFORMATION-
All temporary cash investments purchased with an initial
maturity of three months or less are reported as cash equivalents on the
Consolidated Balance Sheets. The Companies reflect temporary cash
investments at cost, which approximates their market value. Noncash
financing and investing activities included capital lease transactions
amounting to $1,017,000, $3,613,000 and $1,487,000 for the years 1995,
1994 and 1993, respectively. Commercial paper transactions of OES Fuel (a
wholly owned subsidiary of the Company) have initial maturity periods of
three months or less, and accordingly are reported net within financing
activities under long-term debt and are reflected as long-term debt on the
Consolidated Balance Sheets (see Note 5F).
All borrowings with initial maturities of less than one year are
defined as financial instruments under generally accepted accounting
principles and are reported on the Consolidated Balance Sheets at cost,
which approximates their fair market value. The following sets forth the
approximate fair value and related carrying amounts of all other long-term
debt, preferred stock subject to mandatory redemption and investments
other than cash and cash equivalents as of December 31:
1995 1994
------------------ -----------------
Carrying Fair Carrying Fair
Value Value Value Value
-------- ----- -------- -----
(In Millions)
Long-term debt $3,025 $3,152 $3,224 $3,062
Preferred stock $ 160 $ 163 $ 40 $ 38
Investments other than
cash and cash equivalents $ 353 $ 394 $ 320 $ 317
The fair values of long-term debt and preferred stock reflect
the present value of the cash outflows relating to those securities based
on the current call price, the yield to maturity or the yield to call, as
deemed appropriate at the end of each respective year. The yields assumed
were based on securities with similar characteristics offered by a
corporation with credit ratings similar to the Companies' ratings.
The fair value of investments other than cash and cash
equivalents represent cost (which approximates fair value) or the present
value of the cash inflows based on the yield to maturity. The yields
assumed were based on financial instruments with similar characteristics
and terms. Investments other than cash and cash equivalents consist
primarily of decommissioning trust investments of approximately
$65,100,000 and a letter of credit collateral deposit of $277,763,000.
Unrealized gains and losses applicable to the decommissioning trust have
been recognized in the trust investment with a corresponding offset to the
reserve for depreciation. The collateral deposit is in the held-to-
- 23 -
maturity category with a maturity date of July 15, 2006. The fair value of
the deposit at December 31, 1995, was $318,383,000. The Companies have no
securities held for trading purposes.
REGULATORY ASSETS-
The Companies recognize, as regulatory assets, costs which the
FERC, PUCO and PPUC have authorized for recovery from customers in future
periods. Without such authorization, the costs would have been charged to
income as incurred. All regulatory assets are being recovered from
customers under the Company's Regulatory Plan. Penn Power's rates
currently exclude approximately $61,000,000 of deferred costs. Based on
the Company's Regulatory Plan and Penn Power's expected rate treatment
based on PPUC precedent, it is improbable that the Companies will be
required to terminate application of SFAS No. 71 "Accounting for the
Effects of Certain Types of Regulation" in the foreseeable future.
Regulatory assets on the Consolidated Balance Sheets are
comprised of the following:
1995 1994
- -------------------------------------------------------------------
(In thousands)
Nuclear unit expenses $ 758,434 $ 771,538
Customer receivables for future
income taxes 559,660 639,592
Sale and leaseback costs 231,435 242,033
Loss on reacquired debt 96,738 99,384
Employee postretirement benefit costs 32,397 27,055
Uncollectible customer accounts 32,540 44,368
Perry Unit 2 termination 39,639 38,066
DOE decommissioning and
decontamination costs 19,310 21,170
Other 16,390 15,669
- -------------------------------------------------------------------
Total $1,786,543 $1,898,875
===================================================================
2. CHANGE IN ACCOUNTING FOR UNBILLED REVENUES:
On January 1, 1993, the Companies changed their accounting
policies to recognize revenue relating to metered sales which remain
unbilled at the end of the accounting period. This change was made to more
closely match the Companies' revenues with the costs of services provided.
The cumulative effect to January 1, 1993, was $58,201,000 (net of
$33,632,000 of income taxes) or $.38 per share.
3. PERRY UNIT 2 TERMINATION:
In December 1993, the Companies announced that they would not
participate in further construction of Perry Unit 2 and abandoned Perry
Unit 2 as a possible electric generating plant. The Company determined
- 24 -
that recovery from customers of its Perry Unit 2 investment was
improbable, resulting in a $366,377,000 write-off of its investment in
1993. Penn Power expects its Perry Unit 2 investment to be recoverable
from its retail customers based on Section 520 of the Pennsylvania Public
Utility Code. Due to the anticipated delay in commencement of recovery and
taking into account the expected rate treatment, Penn Power recognized an
impairment to its Perry Unit 2 investment of $24,458,000 in 1993. As a
result, net income for the year ended December 31, 1993, was reduced by
$248,743,000 ($1.63 per share of common stock).
4. LEASES:
The Companies lease a portion of their nuclear generating
facilities, certain transmission facilities, office space and other
property and equipment under cancelable and noncancelable leases.
The Company sold portions of its ownership interests in Perry
Unit 1 and Beaver Valley Unit 2 and entered into operating leases on the
portions sold for basic lease terms of approximately 29 years. During the
terms of the leases the Company continues to be responsible, to the extent
of its combined ownership and leasehold interest, for costs associated
with the units including construction expenditures, operation and
maintenance expenses, insurance, nuclear fuel, property taxes and
decommissioning. The basic rental payments are adjusted when applicable
federal tax law changes. The Company has the right, at the end of the
respective basic lease terms, to renew the leases for up to two years. The
Company also has the right to purchase the facilities at the expiration of
the basic lease term or renewal term (if elected) at a price equal to the
fair market value of the facilities.
OES Finance, Incorporated (OES Finance), a wholly owned
subsidiary of the Company, was established in 1994 for the sole purpose of
maintaining deposits pledged as collateral to secure reimbursement
obligations relating to certain letters of credit supporting the Company's
obligations to lessors under the Beaver Valley Unit 2 sale and leaseback
arrangements. The deposits pledged to the financial institution providing
those letters of credit are the sole property of OES Finance. In the event
of liquidation, OES Finance, as a separate corporate entity, would have to
satisfy its obligations to creditors before any of its assets could be
made available to the Company as sole owner of OES Finance common stock.
Consistent with the regulatory treatment, the rental payments
for capital and operating leases are charged to operating expenses on the
Consolidated Statements of Income. Such costs for the three years ended
December 31, 1995, are summarized as follows:
1995 1994 1993
- -------------------------------------------------------------------
(In thousands)
Operating leases
Interest element $104,551 $100,980 $ 96,804
Other 13,896 14,530 15,418
Capital leases
Interest element 6,983 7,483 7,896
Other 6,636 6,960 6,843
- -------------------------------------------------------------------
Total rental payments $132,066 $129,953 $126,961
===================================================================
- 25 -
The future minimum lease payments as of December 31, 1995, are:
Capital Operating
Leases Leases
- -------------------------------------------------------------------
(In thousands)
1996 $ 15,425 $ 108,495
1997 13,916 113,873
1998 12,678 120,779
1999 11,216 125,630
2000 9,888 124,887
Years thereafter 94,228 2,237,913
- -------------------------------------------------------------------
Total minimum lease payments 157,351 $2,831,577
==========
Executory costs 40,527
- -------------------------------------------
Net minimum lease payments 116,824
Interest portion 68,603
- -------------------------------------------
Present value of net minimum
lease payments 48,221
Less current portion 5,741
- -------------------------------------------
Noncurrent portion $ 42,480
===========================================
5. CAPITALIZATION:
(A) RETAINED EARNINGS-
Under the Company's first mortgage indenture, the Company's
consolidated retained earnings unrestricted for payment of cash dividends
on the Company's common stock were $404,276,000 at December 31, 1995.
(B) EMPLOYEE STOCK OWNERSHIP PLAN-
The Companies fund the matching contribution for their 401(k)
savings plan through an ESOP Trust. All full-time employees eligible for
participation in the 401(k) savings plan are covered by the ESOP. The ESOP
borrowed $200,000,000 from the Company and acquired 10,654,114 shares of
the Company's common stock on the open market. Dividends on ESOP shares
are used to service the debt. Shares are released from the ESOP on a pro-
rata basis as debt service payments are made. In 1995, 1994 and 1993,
412,914 shares, 532,250 shares and 369,956 shares, respectively, were
- 26 -
allocated to employees with the corresponding expense recognized based on
the shares allocated method. The fair value of 8,663,575 shares
unallocated as of December 31, 1995, was approximately $203,594,000. Total
ESOP-related compensation expense was calculated as follows:
- -------------------------------------------------------------------
1995 1994 1993
- -------------------------------------------------------------------
(In thousands)
Base compensation $ 8,994 $10,179 $ 6,799
Interest on ESOP debt - - 19,985
Dividends on common stock
held by the ESOP and
used to service debt (2,503) (1,966) (15,944)
Interest earned by the ESOP - - (275)
- -----------------------------------------------------------------
Total expense $ 6,491 $ 8,213 $10,565
=================================================================
(C) PREFERRED STOCK-
Penn Power's 7.625% and 7.75% series of preferred stock have
restrictions which prevent early redemption prior to October 1997 and July
2003, respectively. The Company's 8.45% series of preferred stock has no
optional redemption provision, and its 7.75% series is not redeemable
before April 1998. All other preferred stock may be redeemed by the
Companies in whole, or in part, with 30-60 days' notice.
(D) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION-
The Company's 8.45% series of preferred stock has an annual
sinking fund requirement for 50,000 shares beginning on September 16,
1997. Penn Power's 7.625% series has an annual sinking fund requirement
for 7,500 shares beginning on October 1, 2002.
The Companies' preferred shares are retired at $100 per share
plus accrued dividends. Sinking fund requirements for the next five years
are $5,000,000 in each year from 1997 through 2000.
(E) COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES-
Ohio Edison Financing Trust, a wholly owned subsidiary of the
Company, was established in 1995 and issued $120,000,000 of 9% Cumulative
Trust Preferred Capital Securities. The Company purchased all of the
Trust's Common Securities and simultaneously issued to the Trust
$123,711,350 principal 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 the Trust are the
Subordinated Debentures whose interest and other payment dates coincide
- 27 -
with the distribution and other payment dates on the Trust Securities.
Under certain circumstances the Subordinated Debentures could be
distributed to the holders of the outstanding Trust Securities in the
event the Trust is liquidated. The Subordinated Debentures may be
optionally redeemed beginning December 31, 2000, by the Company at a
redemption price of $25 per Subordinated Debenture plus accrued interest,
in which event the Trust Securities will be redeemed on a pro-rata basis
at $25 per share plus accumulated distributions. The Company's obligations
under the Subordinated Debentures along with the related Indenture,
amended and restated Trust Agreement, Guarantee Agreement and the
Agreement for expenses and liabilities constitute a full and unconditional
guarantee by the Company of payments due on the Preferred Securities.
(F)LONG-TERM DEBT-
The first mortgage indentures and their supplements, which
secure all of the Companies' first mortgage bonds, serve as direct first
mortgage liens on substantially all property and franchises, other than
specifically excepted property, owned by the Companies.
Based on the amount of bonds authenticated by the Trustee
through December 31, 1995, the Company's annual sinking and improvement
fund requirement for all bonds issued under the mortgage amounts to
$30,056,000. The Company expects to deposit funds in 1996 that will be
withdrawn upon the surrender for cancellation of a like principal amount
of bonds, which are specifically authenticated for such purposes against
unfunded property additions or against previously retired bonds. This
method can result in minor increases in the amount of the annual sinking
fund requirement.
Sinking fund requirements for first mortgage bonds and maturing
long-term debt (excluding capital leases) for the next five years are:
- ----------------------------------------------------------------
1996 $370,975,000
1997 369,261,000
1998 258,683,000
1999 162,036,000
2000 116,473,000
- ----------------------------------------------------------------
Amounts shown above for 1996 include $38,300,000 of first
mortgage bonds optionally redeemed in January 1996.
The Companies' obligations to repay certain pollution control
revenue bonds are secured by several series of first mortgage bonds and,
in some cases, by subordinate liens on the related pollution control
facilities. Certain pollution control revenue bonds are entitled to the
benefit of irrevocable bank letters of credit of $338,831,000. To the
extent that drawings are made under those letters of credit to pay
principal of, or interest on, the pollution control revenue bonds, the
- 28 -
Company is entitled to a credit against its obligation to repay those
bonds. The Company pays annual fees of 0.55% to 0.875% of the amounts of
the letters of credit to the issuing banks and is obligated to reimburse
the banks for any drawings thereunder.
Nuclear fuel purchases are financed through the issuance of OES
Fuel commercial paper and loans, both of which are supported by a
$225,000,000 long-term bank credit agreement which expires March 31, 1998.
Accordingly, the commercial paper and loans are reflected as long-term
debt on the Consolidated Balance Sheets. OES Fuel must pay an annual
facility fee of 0.1875% on the total line of credit and an annual
commitment fee of 0.0625% on any unused amount.
6. SHORT-TERM BORROWINGS AND BANK LINES OF CREDIT:
Short-term borrowings outstanding at December 31, 1995,
represent debt of OES Capital, Incorporated (OES Capital), a wholly owned
subsidiary of the Company. Those borrowings are secured by customer
accounts receivable. OES Capital can borrow up to $120,000,000 under a
receivables financing agreement at rates based on certain bank commercial
paper. OES Capital is required to pay an annual fee of 0.41% on the amount
of the entire finance limit. The receivables financing agreement expires
April 23, 1996. The Company plans to negotiate an extension to this
agreement.
The Companies have lines of credit with domestic banks that
provide for borrowings of up to $52,000,000 under various interest rate
options. Short-term borrowings may be made under these lines of credit on
the Companies' unsecured notes. To assure the availability of these lines,
the Companies are required to pay annual commitment fees that vary from
0.22% to 0.50%. These lines expire at various times during 1996. The
weighted average interest rates on short-term borrowings outstanding at
December 31, 1995 and 1994, were 5.67% and 5.76%, respectively.
7. COMMITMENTS, GUARANTEES AND CONTINGENCIES:
CONSTRUCTION PROGRAM-
The Companies' current forecasts reflect expenditures of
approximately $650,000,000 for property additions and improvements from
1996-2000, of which approximately $160,000,000 is applicable to 1996.
Investments for additional nuclear fuel during the 1996-2000 period are
estimated to be approximately $180,000,000, of which approximately
$29,000,000 applies to 1996. During the same periods, the Companies'
nuclear fuel investments are expected to be reduced by approximately
$191,000,000 and $39,000,000, respectively, as the nuclear fuel is
consumed.
NUCLEAR INSURANCE-
The Price-Anderson Act limits the public liability relative to
a single incident at a nuclear power plant to $8,920,000,000. The amount
- 29 -
is covered by a combination of private insurance and an industry
retrospective rating plan. Based on their present ownership and leasehold
interests in the Beaver Valley Station and the Perry Plant, the Companies'
maximum potential assessment under the industry retrospective rating plan
(assuming the other CAPCO companies were to contribute their proportionate
share of any assessments under the retrospective rating plan) would be
$102,800,000 per incident but not more than $13,000,000 in any one year
for each incident.
The Companies are also insured as to their respective interests
in the Beaver Valley Station and the Perry Plant under policies issued to
the operating company for each plant. Under these policies, up to
$2,750,000,000 is provided for property damage and decontamination and
decommissioning costs. The Companies have also obtained approximately
$414,000,000 of insurance coverage for replacement power costs for their
respective interests in Perry and Beaver Valley. Under these policies, the
Companies can be assessed a maximum of approximately $17,400,000 for
incidents at any covered nuclear facility occurring during a policy year
which are in excess of accumulated funds available to the insurer for
paying losses.
The Companies intend to maintain insurance against nuclear risks
as described above as long as it is available. To the extent that
replacement power, property damage, decontamination, decommissioning,
repair and replacement costs and other such costs arising from a nuclear
incident at any of the Companies' plants exceed the policy limits of the
insurance in effect with respect to that plant, to the extent a nuclear
incident is determined not to be covered by the Companies' insurance
policies, or to the extent such insurance becomes unavailable in the
future, the Companies would remain at risk for such costs.
GUARANTEES-
The Companies, together with the other CAPCO companies, have
each severally guaranteed certain debt and lease obligations in connection
with a coal supply contract for the Bruce Mansfield Plant. As of December
31, 1995, the Companies' shares of the guarantees (which approximate fair
market value) were $72,851,000. The price under the coal supply contract,
which includes certain minimum payments, has been determined to be
sufficient to satisfy the debt and lease obligations. The Companies' total
payments under the coal supply contract were $120,015,000, $99,774,000 and
$114,572,000 during 1995, 1994 and 1993, respectively. Under the coal
supply contract, the Companies' minimum payments in each year during the
period 1996 through 1999 are approximately $35,000,000.
ENVIRONMENTAL MATTERS-
Various federal, state and local authorities regulate the
Companies with regard to air and water quality and other environmental
matters. The Companies have estimated additional capital expenditures for
environmental compliance of approximately $17,000,000, which is included
in the construction forecast provided under "Construction Program" for
1996 through 2000.
- 30 -
The Companies are in compliance with the sulfur dioxide (SO2)
and nitrogen oxides (NOx) reduction requirements for 1995 under the Clean
Air Act Amendments of 1990. SO2 reductions for the years 1995 through 1999
are being achieved by burning lower-sulfur fuel, generating more
electricity from lower-emitting plants, and/or purchasing emission
allowances. Plans for complying with reductions required for the year 2000
and thereafter have not been finalized. The Environmental Protection
Agency (EPA) is conducting additional studies which could indicate the
need for additional NOx reductions from the Companies' Pennsylvania
facilities by the year 2003. The cost of such reductions, if required, may
be substantial. The Companies continue to evaluate their compliance plans
and other compliance options.
The Companies are required to meet federally approved SO2
regulations. Violations of such regulations can result in shutdown of the
generating unit involved and/or civil or criminal penalties of up to
$25,000 for each day the unit is in violation. The EPA has an interim
enforcement policy for SO2 regulations in Ohio that allows for compliance
based on a 30-day averaging period. The EPA has proposed regulations that
could change the interim enforcement policy, including the method of
determining compliance with emission limits. The Companies cannot predict
what action the EPA may take in the future with respect to proposed
regulations or the interim enforcement policy.
Legislative, administrative and judicial actions will continue
to change the way that the Companies must operate in order to comply with
environmental laws and regulations. With respect to any such changes and
to the environmental matters described above, the Companies expect that
any resulting additional capital costs which may be required, as well as
any required increase in operating costs, would ultimately be recovered
from their customers.
- 31 -
8. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED):
The following summarizes certain consolidated operating results
by quarter for 1995 and 1994.
March 31, June 30, September 30, December 31,
Three Months Ended 1995 1995 1995 1995
- -------------------------------------------------------------------
(In thousands, except per share amounts)
Operating Revenues $587,734 $593,838 $667,013 $617,261
Operating Expenses
and Taxes 453,921 454,424 508,024 482,859
- -------------------------------------------------------------------
Operating Income 133,813 139,414 158,989 134,402
Other Income 2,997 3,829 1,190 6,408
Net Interest and
Other Charges 65,214 66,192 67,127 65,268
- -------------------------------------------------------------------
Net Income $ 71,596 $ 77,051 $ 93,052 $ 75,542
- -------------------------------------------------------------------
Earnings on Common
Stock $ 66,237 $ 71,514 $ 87,703 $ 69,293
- -------------------------------------------------------------------
Earnings per Share
of Common Stock $.46 $.50 $.61 $.48
- -------------------------------------------------------------------
March 31, June 30, September 30, December 31,
Three Months Ended 1994 1994 1994 1994
- -------------------------------------------------------------------
(In thousands, except per share amounts)
Operating Revenues $601,248 $585,428 $614,390 $567,125
Operating Expenses
and Taxes 468,850 447,353 462,573 432,161
- -------------------------------------------------------------------
Operating Income 132,398 138,075 151,817 134,964
Other Income 2,255 3,534 5,032 5,638
Net Interest and
Other Charges 66,723 67,569 68,624 67,266
- -------------------------------------------------------------------
Net Income $ 67,930 $ 74,040 $ 88,225 $ 73,336
- -------------------------------------------------------------------
Earnings on Common
Stock $ 62,329 $ 68,681 $ 82,869 $ 67,973
- -------------------------------------------------------------------
Earnings per Share
of Common Stock $.44 $.48 $.58 $.47
- -------------------------------------------------------------------
- 32 -
Report of Independent Public Accountants
To the Stockholders and Board of Directors of Ohio Edison Company:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of Ohio Edison Company (an Ohio
corporation) and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, retained earnings, capital stock and other
paid-in capital, cash flows and taxes for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ohio Edison Company and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for unbilled
revenues.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
February 8, 1996
- 33 -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OHIO EDISON COMPANY
/s/ Harvey L. Wagner
----------------------------
Harvey L. Wagner
Comptroller
Dated: February 23, 1996
- 34 -