FIRSTENERGY CORP.
SELECTED FINANCIAL DATA
For the Years Ended December 31, 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Revenues $ 5,861,285 $ 2,960,196 $2,521,788 $2,500,770 $2,390,957
--------------------------------------------------------------------
Income Before Extraordinary Item $ 441,396 $ 305,774 $ 302,673 $ 294,747 $ 281,852
--------------------------------------------------------------------
Net Income $ 410,874 $ 305,774 $ 302,673 $ 294,747 $ 281,852
--------------------------------------------------------------------
Earnings per Share of Common Stock:
Before Extraordinary Item $1.95 $1.94 $2.10 $2.05 $1.97
After Extraordinary Item $1.82 $1.94 $2.10 $2.05 $1.97
--------------------------------------------------------------------
Dividends Declared per Share of
Common Stock $1.50 $1.50 $1.50 $1.50 $1.50
--------------------------------------------------------------------
Total Assets $18,063,507 $18,080,795 $9,054,457 $8,892,088 $9,045,255
--------------------------------------------------------------------
Capitalization at December 31:
Common Stockholders' Equity $ 4,449,158 $ 4,159,598 $2,503,359 $2,407,871 $2,317,197
Preferred Stock:
Not Subject to Mandatory Redemption 660,195 660,195 211,870 211,870 328,240
Subject to Mandatory Redemption 294,710 334,864 155,000 160,000 40,000
Long-Term Debt 6,352,359 6,969,835 2,712,760 2,786,256 3,166,593
--------------------------------------------------------------------
Total Capitalization $11,756,422 $12,124,492 $5,582,989 $5,565,997 $5,852,030
====================================================================
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
November 10, 1997 and FirstEnergy Corp. Common Stock beginning November 10, 1997.
1998 1997
- --------------------------------------------------------------------------
First Quarter High-Low 31-5/8 27-7/8 23-7/8 20-7/8
Second Quarter High-Low 31-7/8 28-1/2 22 19-1/4
Third Quarter High-Low 31-5/16 27-1/16 23-5/8 21-3/4
Fourth Quarter High-Low 34-1/16 29-3/16 29 22-13/16
Yearly High-Low 34-1/16 27-1/16 29 19-1/4
<FN>
Prices are based on reports published in The Wall Street Journal for New York
Stock Exchange Composite Transactions.
HOLDERS OF COMMON STOCK
As of December 31, 1998 and January 31, 1999, there were 197,741 and 196,337
holders, respectively, of the 237,069,087 shares of the Company's Common Stock.
Information regarding retained earnings available for payment of cash dividends
is given in Note 3A.
FirstEnergy Corp.
Management's Discussion and Analysis of
Results of Operations and Financial Condition
This discussion includes forward-looking statements based on
information currently available to management that are subject to
certain risks and uncertainties. These statements typically contain,
but are not limited to, the terms anticipate, potential, expect,
believe, estimate and similar words. Actual results may differ
materially due to the speed and nature of increased competition and
deregulation in the electric utility industry, economic or weather
conditions affecting future sales and margins, changes in markets for
energy services, changing energy market prices, legislative and
regulatory changes, and the availability and cost of capital and other
similar factors.
Results of Operations
FirstEnergy Corp. (Company) was formed when the merger of
Ohio Edison Company (OE) and Centerior Energy Corporation (Centerior)
became effective on November 8, 1997. The merger has been accounted for
by using purchase accounting under the guidelines of Accounting
Principles Board Opinion No. 16, "Business Combinations." Under
purchase accounting, the results of operations for the combined entity
are reported from the point of consummation forward. As a result, our
financial statements for 1997 reflect twelve months of operations for
OE and its wholly owned subsidiary, Pennsylvania Power Company (Penn),
but include only seven weeks (November 8, to December 31, 1997) for the
former Centerior companies, which include The Cleveland Electric
Illuminating Company (CEI) and The Toledo Edison Company (TE). Results
for 1998 include operations for the entire year for OE and Penn (OE
companies), CEI and TE. On June 8, 1998, we acquired MARBEL Energy
Corporation (MARBEL), an integrated natural gas company. Also, during
1998, FirstEnergy Facilities Services Group, Inc. (FE Facilities), a
wholly owned subsidiary of the Company, acquired eight companies which
principally provide heating, ventilating and air-conditioning services.
See Note 1 for additional information. All acquisitions in 1998 were
accounted for using purchase accounting and are included in our
consolidated results from their respective acquisition dates.
We continued to take steps in 1998 to better position
FirstEnergy as competition continues to expand in the electric utility
industry. The acquisitions completed in 1998 reflect our strategy to
provide customers an expanded portfolio of energy-related products and
services. We also invested in new information systems with enhanced
functionality which also address Year 2000 application deficiencies.
Cash savings of $173 million were captured in 1998 from initiatives
implemented during the year in connection with our merger. About one-
half of that amount resulted from staffing reductions.
Basic and diluted earnings per share of common stock were
$1.82 for 1998 compared to $1.94 for 1997. Results for 1998 were
adversely affected by a one-time, extraordinary charge of $30.5 million
after taxes, or $.13 per common share, related to Penn's discontinued
application of Statement of Financial Accounting Standards No. 71 (SFAS
71), "Accounting for the Effects of Certain Types of Regulation", to
its generation business, as discussed later in this report.
Additionally, sharp increases in the spot market price for electricity
occasioned by a constrained power supply and heavy customer demand in
the latter part of June 1998, combined with unscheduled generating unit
outages, resulted in spot market purchases of power at prices which
substantially exceeded amounts recovered from retail customers. The
recovery shortfall reduced 1998 net income by approximately $50 million
or $.22 per common share. Finally, unprecedented market prices for
electricity in June 1998 contributed to credit losses totaling $27
million after taxes or $.12 per common share. Four power marketers with
which the Company's FirstEnergy Trading & Power Marketing, Inc. (FETPM)
subsidiary had transactions under contract defaulted as a result of
June's price movements. Earnings for 1997 were also affected by
nonrecurring charges, primarily resulting from merger-related staffing
reductions, which decreased basic and diluted earnings by $.22 per
common share.
Revenue in 1998 increased by $2.9 billion over the previous
year, primarily reflecting a full twelve months of results for the
former Centerior companies in the Electric Utility Operating Companies
(EUOC) business segment compared to seven weeks in 1997. The EUOCs
represent our vertically integrated electric utility operations. As
discussed later, we anticipate future changes to our business segments
to align with our strategy as the electric utility industry
restructures. The sources of the increases in revenue during 1998 and
1997 are summarized in the following table.
1998 1997
- -----------------------------------------------------------------------
(In millions)
Electric sales
OE companies --
Increase in average retail prices $ 27.0 $ 13.3
Change in retail kilowatt-hour sales (0.1) 7.8
Wholesale 13.3 (27.5)
- -----------------------------------------------------------------------
Net OE companies 40.2 (6.4)
Centerior acquisition 2,196.4 350.6
Intercompany sales (31.9) (3.8)
- -----------------------------------------------------------------------
Total electric sales 2,204.7 340.4
Other electric utility revenues 102.3 54.6
- -----------------------------------------------------------------------
Electric utility operating companies 2,307.0 395.0
FETPM 367.6 43.1
Other business acquisitions 226.5 0.3
- -----------------------------------------------------------------------
Net Revenue Increase $2,901.1 $438.4
=======================================================================
Retail kilowatt-hour sales for the OE companies in 1998 were
approximately the same as the previous year at 27.3 billion kilowatt-
hours after setting a new record in 1997. Residential and commercial
kilowatt-hour sales increased 1.7% and 3.5%, respectively, from 1997,
offset by a 3.6% decrease in industrial sales. Residential and
commercial kilowatt-hour sales benefited from continued growth in the
retail customer base, with over 11,000 new retail customers added in
1998 compared to approximately 4,900 new retail customers in 1997. The
closure of an electric arc furnace by a large steel customer in the
latter part of 1997 and a general decline in electricity demand by
steel manufacturers due to intense foreign competition contributed to
the lower industrial sales. Sales to wholesale customers by the OE
companies increased 8.9% contributing to an increase in total kilowatt-
hour sales of 1.4%. In 1997, commercial and industrial kilowatt-hour
sales increased 1.2% and 1.0%, respectively, from 1996, partially
offset by a 0.8% decrease in residential sales resulting in a 0.5%
increase in retail kilowatt-hour sales. A decrease in kilowatt-hour
sales to wholesale customers contributed to a 5.0% decline in total
kilowatt-hour sales in 1997 compared to 1996.
Total expenses increased $2.4 billion in 1998 compared to the
prior year primarily due to the inclusion of a full twelve months of
expenses for the former Centerior companies compared to seven weeks of
expense in the 1997 results. Fuel and purchased power costs were up
$497.5 million in 1998 compared to 1997. Excluding the former Centerior
companies, fuel and purchased power costs for the OE companies
increased $74.4 million. Most of the increase occurred in the second
quarter and resulted from a combination of factors. In late June 1998,
the midwestern and southern regions of the United States experienced
electricity shortages caused mainly by record temperatures and humidity
and unscheduled generating unit outages. During that period, the Beaver
Valley Plant was out of service and the Davis-Besse Plant was removed
from service as a result of damage to transmission facilities caused by
a tornado. Also, Avon Lake Unit 9 experienced an unscheduled outage
during the period due to lightning-related transformer damage. As a
result, the EUOCs purchased significant amounts of power on the spot
market at unusually high prices, causing an increase in purchased power
costs. In 1997, excluding the results for the former Centerior
companies, fuel and purchased power costs were down $19.4 million from
the previous year due to lower total kilowatt-hour sales.
Other expenses for the EUOCs increased in 1998 and 1997 as a
result of the inclusion of the Centerior results. Excluding the former
Centerior companies, 1998 nonnuclear costs decreased $34.8 million from
the previous year due primarily to the absence of expenses related to a
1997 voluntary retirement program and estimated severance costs which
increased other expenses for that year. For the OE companies, nuclear
costs increased $12.2 million in 1998 and $20.0 million in 1997
reflecting higher costs at the Beaver Valley Plant. Expenses for the
facilities services companies in 1998 reflect costs incurred from their
respective acquisition dates. Other expenses for electric trading and
power marketing activities increased in 1998 compared to 1997 due to a
substantial expansion of activity at FETPM.
Depreciation and amortization increased compared to the prior
year in both 1998 and 1997. Excluding the effect of the former
Centerior companies, depreciation and amortization in 1998 decreased
$14.2 million from the prior year due primarily to the net effect of
the OE and Penn rate plans. The Pennsylvania Public Utility
Commission's (PPUC) authorization of Penn's rate restructuring plan in
the second quarter led to discontinued application of certain
regulatory accounting procedures (i.e. SFAS 71) to Penn's generation
business, resulting in a write down of its nuclear generating unit
investment and the recognition of a portion of such investment,
recoverable through future customer rates, as a regulatory asset. Net
of the Centerior contribution to results in 1997, the increase in
depreciation and amortization resulted from accelerations under the
regulatory plans. General taxes increased for the OE companies in 1998
compared to 1997 in part because of gross receipts taxes on increased
electric sales revenue. This followed a decrease in 1997 due to lower
property taxes and an adjustment in the second quarter of that year
which reduced the OE companies' liabilities for gross receipt taxes.
Interest expenses increased due to the inclusion of the
former Centerior companies for both 1998 and 1997. Excluding the impact
of the merger, interest on long-term debt for the OE companies
continued to trend downward due to refinancings and redemptions of
long-term debt. Other interest expense increased as a result of
increased short-term borrowings.
Capital Resources and Liquidity
Savings from improved efficiency helped to fund the strategic
investments we made in 1998 while strengthening our financial position.
We continue to streamline our electric utility operations, as evidenced
by the 50% increase in our customer/employee ratio over the past five
years, from 165 at the end of 1993 to 247 as of December 31, 1998. We
also continued to reduce our capital costs. During 1998, net
redemptions of long-term debt and preferred stock totaled $430 million,
including $176 million of optional redemptions. In addition, we
completed $230 million of refinancings. Combined, these actions will
produce annualized savings of $42 million. The average cost of long-
term debt was reduced to 7.83% in 1998 from 8.02% at the end of 1997.
In the first quarter of 1998, we formed an alliance with
British Petroleum (BP) to help ensure the long-term viability of BP's
refinery operation in the TE service area while also generating
additional revenue for our Company. Bay Shore Power Company, a
FirstEnergy subsidiary, will build a new state-of-the-art steam-
generating plant fueled by a waste by-product from a new lower-cost
refinery process at BP's Oregon, Ohio facility. Steam from the plant
will supply both the refinery and a Bay Shore generating unit. To fund
the project, Bay Shore Power issued $147.5 million of solid waste-
disposal revenue bonds during the first quarter of 1998. As of December
31, 1998, approximately $88 million of the funds from the revenue bonds
were invested for financing future construction.
We had about $77.8 million of cash and temporary investments
and $254.5 million of short-term indebtedness on December 31, 1998. Our
unused borrowing capability included $146.5 million under revolving
lines of credit and a $2.0 million bank facility that provide for
borrowings on a short-term basis at the bank's discretion.
Our cash requirements in 1999 for operating expenses,
construction expenditures and scheduled debt maturities are expected to
be met without issuing new securities. During 1998, we reduced our
total debt by approximately $278 million. We have cash requirements of
approximately $2.6 billion for the 1999-2003 period to meet scheduled
maturities of long-term debt and preferred stock. Of that amount,
approximately $712 million applies to 1999. On November 17, 1998, we
announced our intention to repurchase up to 15 million shares of the
Company's common stock over a three-year period beginning in 1999.
Our capital spending for the period 1999-2003 is expected to
be about $2.2 billion (excluding nuclear fuel), of which approximately
$556 million applies to 1999. Investments for additional nuclear fuel
during the 1999-2003 period are estimated to be approximately $399
million, of which about $46 million applies to 1999. During the same
periods, our nuclear fuel investments are expected to be reduced by
approximately $438 million and $93 million, respectively, as the
nuclear fuel is consumed. Also, we have operating lease commitments,
net of trust cash receipts, of approximately $765 million for the 1999-
2003 period, of which approximately $159 million relates to 1999.
Nine acquisitions were completed during 1998, representing
strategic investments designed to expand our portfolio of energy-
related products and services. The acquisition of MARBEL, a fully
integrated natural gas company based in Canton, Ohio, was completed in
June 1998. FE Facilities also acquired eight additional facilities
services companies during the year bringing the total number of
facilities services acquisitions to ten companies by the end of 1998.
For 1998, our facilities services companies provided revenue of $198
million with more than 3,000 employees.
During 1998, we established a national sales group within
FirstEnergy Services Corp. to pursue sales in the unregulated electric
utility market. The national sales group began selling in the
Pennsylvania market following the restructuring which opened the
generation business to increased competition.
FirstEnergy signed an agreement in principle with Duquesne
Light Company (Duquesne) that would result in the transfer of 1,436
megawatts owned by Duquesne at five generating plants in exchange for
1,328 megawatts at three plants owned by our EUOCs (see "Common
Ownership of Generating Facilities" in Note 1). Final agreements
relating to the exchange of assets, which will be structured as a tax-
free transaction to the extent possible, are being negotiated. The
transaction benefits the Company by providing exclusive ownership and
operating control of all generating assets that are now jointly owned
and operated under the Central Area Power Coordination Group agreement.
In a final step to achieve complete ownership and operating
control over our power plants, we signed an agreement to purchase from
GPU, Inc. its 20 percent interest in the Seneca Pumped-Storage
Hydroelectric Plant (87 megawatts). The added capacity will enhance our
ability to meet our customers' demand for electricity during peak
periods.
Interest Rate Risk
Our exposure to fluctuations in market interest rates is
mitigated since a significant portion of our debt has fixed interest
rates, as noted in the table below. We are subject to the inherent
interest rate risks related to refinancing maturing debt by issuing new
debt securities. As discussed in Note 2, our investments in capital
trusts effectively reduce future lease obligations, also reducing
interest rate risk. Changes in the market value of our nuclear
decommissioning trust funds are recognized by making a corresponding
change to the decommissioning liability, as described in Note 1.
The table below presents principal amounts and related
weighted average interest rates by year of maturity for our investment
portfolio, debt obligations and preferred stock with mandatory
redemption provisions.
- ---------------------------------------------------------------------------------------
There- Fair
1999 2000 2001 2002 2003 after Total Value
(Dollars in millions)
- ---------------------------------------------------------------------------------------
Investments other than Cash
and Cash Equivalents
Fixed Income $ 98 $ 91 $ 55 $ 84 $ 97 $1,406 $1,831 $1,942
Average interest rate 6.9% 5.1% 7.7% 7.7% 7.7% 7.7% 7.5%
- ---------------------------------------------------------------------------------------
Liabilities
- ---------------------------------------------------------------------------------------
Long-term Debt
Fixed rate $420 $373 $105 $724 $459 $3,921 $6,002 $6,464
Average interest rate 7.6% 7.0% 8.7% 7.9% 8.0% 7.6% 7.6%
Variable rate $252 $ 4 $ 3 $ 2 $ 1 $ 519 $ 781 $ 783
Average interest rate 6.0% 6.3% 6.3% 6.2% 6.3% 3.8% 4.6%
Short-term Borrowings $254 $ 254 $ 254
Average interest rate 5.7% 5.7%
- ---------------------------------------------------------------------------------------
Preferred Stock $ 40 $ 38 $ 85 $ 20 $ 2 $ 139 $ 324 $ 340
Average dividend rate 8.9% 8.9% 8.9% 8.9% 7.5% 8.8% 8.8%
- ---------------------------------------------------------------------------------------
Market Risk - Commodity Prices
We are exposed to market risk due to fluctuations in
electricity and natural gas prices. To manage the volatility relating
to these exposures, we use a variety of derivative instruments,
including forward contracts, options and futures contracts. These
derivatives are used principally for hedging purposes and to a lesser
extent, for trading purposes. A sensitivity analysis has been prepared
to estimate our exposure to the market risk of our commodity position.
A hypothetical 10 percent adverse shift in quoted market prices in the
near term on both our trading and non-trading instruments would not
have had a material effect on our consolidated financial position,
results of operations or cash flows as of or for the year ended
December 31, 1998.
Outlook
We face many competitive challenges in the years ahead as the
electric utility industry undergoes significant changes, including
changing regulation and the entrance of more energy suppliers into the
marketplace. Retail wheeling, which has begun in our Pennsylvania
service area, allows retail customers to purchase electricity from
other energy producers. Our regulatory plans have provided a solid
foundation to position us to meet the challenges we are facing by
significantly reducing fixed costs and lowering rates to a more
competitive level.
OE's Rate Reduction and Economic Development Plan was
approved by the Public Utilities Commission of Ohio (PUCO) in 1995 and
FirstEnergy's Rate Reduction and Economic Development Plan for CEI and
TE was approved in January 1997. These regulatory plans maintain base
electric rates for OE, CEI and TE through December 31, 2005. The plans
also revised the OE, CEI and TE fuel cost recovery methods. Penn's Rate
Stability and Economic Development Plan, which was approved by the PPUC
in the second quarter of 1996, ended in 1998 with the PPUC's
authorization of Penn's rate restructuring plan.
As part of OE's regulatory plan, transition rate credits were
implemented for customers, which are expected to reduce electric
operating revenues by approximately $600 million during the regulatory
plan period, which is to be followed by a base rate reduction of
approximately $300 million in 2006. The base rate freeze for CEI and TE
is to be followed by a $310 million base rate reduction in 2006;
interim reductions which began in June 1998 of $3 per month will
increase to $5 per month per residential customer by July 1, 2001.
Total savings of $391 million are anticipated over the term of the plan
for CEI's and TE's customers. CEI and TE have also committed $105
million for economic development and energy efficiency programs.
The PUCO has authorized OE to recognize additional capital
recovery related to its generating assets (which is reflected as
additional depreciation expense) and additional amortization of
regulatory assets during the regulatory plan period of at least $2
billion more than the amount that would have been recognized if the
regulatory plan was not in effect. This additional amount is being
recovered through current rates.
In the regulatory plan for CEI and TE, the PUCO authorized
for regulatory accounting purposes, additional capital recovery related
to CEI's and TE's generating assets and additional amortization of
regulatory assets during the regulatory plan period of at least $2
billion more than the amounts that would have been recognized if these
regulatory plans were not in effect. These additional regulatory
charges will be recognized over the rate plan period. The FirstEnergy
regulatory plan does not provide for full recovery of CEI's and TE's
nuclear operations. Accordingly, regulatory assets representing
customer receivables for future income taxes related to nuclear assets
of $794 million were written off prior to consummation of the merger in
1997 since CEI and TE ceased application of SFAS 71 for their nuclear
operations when implementation of the FirstEnergy regulatory plan
became probable. At the consummation of the merger in November 1997,
CEI and TE recognized a fair value purchase accounting adjustment,
which decreased the carrying value of their nuclear assets by
approximately $2.55 billion. The fair value adjustment recognized for
financial reporting purposes will ultimately satisfy the $2 billion
asset reduction commitment contained in the CEI and TE regulatory plan.
Based on the current regulatory environment and our
regulatory plans, we believe we will continue to be able to bill and
collect cost-based rates relating to CEI's and TE's nonnuclear
operations and all of OE's operations. As a result, we will continue
the application of SFAS 71. However, changes in the regulatory
environment appear to be on the horizon for electric utilities in Ohio.
As further discussed below, the Ohio legislature is in the discussion
stages of restructuring the State's electric utility industry. Although
we believe that regulatory changes are possible in 1999, we cannot
currently estimate the ultimate impact.
For Penn, application of SFAS 71 was discontinued for the
generation portion of its business in June 1998 following PPUC approval
of the rate-restructuring plan. Customer choice will be phased in over
two years with 66% of each customer class able to choose alternative
suppliers of generation on January 2, 1999, and all remaining customers
having choice as of January 2, 2000. Under the plan, Penn continues to
deliver power to homes and businesses through its transmission and
distribution system, which remains regulated. However, Penn's rates
have been restructured to establish separate charges for transmission
and distribution; generation, which is subject to competition; and
stranded cost recovery. In the event customers obtain power from an
alternative source, the generation portion of Penn's rates will be
excluded from their bill and the customers will receive a generation
charge from the alternative supplier. The stranded cost recovery
portion of rates provides for recovery of certain amounts not otherwise
considered recoverable in a competitive generation market, including
regulatory assets. Penn is entitled to recover $234 million of stranded
costs through a competitive transition charge that starts in 1999 and
ends in 2005.
We continue to actively pursue the enactment of fair
legislation calling for deregulation of Ohio's investor-owned electric
utility industry. In early 1998, a deregulation proposal was
introduced, leading to the creation of a working group to recommend
legislation. As requested by legislative leadership, investor-owned
utilities introduced a deregulation plan with objectives to (1) treat
all major stakeholders in Ohio's electric system fairly; (2) protect
public schools and local governments from revenue loss; and (3) allow
utilities an opportunity to recover costs of government-mandated
investments. The utilities have submitted proposals which incorporate
these objectives and also recognize the complexity of restructuring the
industry. The overlying objective is to do the job right the first
time. Currently, the working group, comprised of legislative leaders,
representatives of the electric utility companies and other interested
stakeholders are meeting to discuss and mold these proposals. Most
recently, placeholder bills containing statements of principle (that
will be replaced by specific proposals as they are agreed upon) have
been introduced. Legislative leaders have placed a high priority on
enacting a deregulation bill by mid-year.
The Clean Air Act Amendments of 1990, discussed in Note 5,
require additional emission reductions by 2000. We are pursuing cost-
effective compliance strategies for meeting these reduction
requirements.
On September 24, 1998, the Federal Environmental Protection
Agency issued a final rule establishing tighter nitrogen oxide emission
requirements for fossil fuel-fired utility boilers in Ohio,
Pennsylvania and twenty other eastern states, including the District of
Columbia (see "Environmental Matters" in Note 5). Controls must be in
place by May 2003, with required reductions achieved during the five-
month summer ozone season (May through September). The new rule is
expected to increase the cost of producing electricity; however, we
believe that we are in a better position than a number of other
utilities to achieve compliance due to our diversified nuclear and
hydroelectric generation capacity.
CEI and TE have been named as "potentially responsible
parties" (PRPs) for three sites listed on the Superfund National
Priorities List and are aware of their potential involvement in the
cleanup of several other sites. Allegations that CEI and TE disposed of
hazardous waste at these sites, and the amount involved are often
unsubstantiated and subject to dispute. Federal law provides that all
PRPs for a particular site be held liable on a joint and several basis.
If CEI and TE were held liable for 100% of the cleanup costs of all the
sites referred to above, the cost could be as high as $313 million.
However, we believe that the actual cleanup costs will be substantially
lower than $313 million, that CEI's and TE's share of any cleanup costs
will be substantially less than 100% and that most of the other PRPs
are financially able to contribute their share. CEI and TE have accrued
a $5.8 million liability as of December 31, 1998, based on estimates of
the costs of cleanup and their proportionate responsibility for such
costs. We believe that the ultimate outcome of these matters will not
have a material adverse effect on our financial condition, cash flows
or results of operations.
In connection with the regulatory plans of our electric
utility operating companies to reduce fixed costs and lower rates, we
continue to take steps to restructure our operations. We announced
plans to transfer our transmission assets into a new subsidiary,
American Transmission Systems, Inc., with the transfer expected to be
finalized in 1999. The new subsidiary represents a first step toward
the goal of establishing or becoming part of a larger independent
transmission company (TransCo). We believe that a TransCo better
addresses the Federal Energy Regulatory Commission's (FERC) stated
transmission objectives of providing non-discriminatory service, while
providing for streamlined and cost-efficient operation. In working
toward the goal of forming a larger regional transmission entity,
FirstEnergy, American Electric Power, Virginia Power and Consumers
Energy announced in November 1998 that they would prepare a FERC filing
during the first quarter of 1999 for such a regional transmission
entity. The entity would be designed to meet the goals of reducing
transmission costs that result when transferring power over several
transmission systems, ensuring transmission reliability and providing
non-discriminatory access to the transmission grid.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 (SFAS 133),
"Accounting for Derivative Instruments and Hedging Activities". The
Statement establishes accounting and reporting standards requiring that
every derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded on the balance sheet as either
an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in the
income statement. SFAS 133 is effective for fiscal years beginning
after June 15, 1999. A company may implement the Statement for any
fiscal quarter beginning after June 16, 1998. We have not yet
quantified the impacts of adopting SFAS 133 on our financial statements
or determined the method of its adoption. We anticipate adopting the
new Statement effective January 1, 2000.
Year 2000 Readiness
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to identify the applicable
year. Any of our programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
Because so many of our computer functions are date sensitive, this
could cause far-reaching problems, such as system-wide computer
failures and miscalculations, if no remedial action is taken.
We have developed a multi-phase program for Year 2000
compliance that consists of an assessment of our systems and operations
that could be affected by the Year 2000 problem; remediation or
replacement of noncompliant systems and components; and testing of
systems and components following such remediation or replacement. We
have focused our Year 2000 review on three areas: centralized system
applications, noncentralized systems and relationships with third
parties (including suppliers as well as end-use customers). Our review
of system readiness extends to systems involving customer service,
safety, shareholder needs and regulatory obligations.
We are committed to taking appropriate actions to eliminate
or lessen negative effects of the Year 2000 issue on our operations. We
have completed an inventory of all computer systems and hardware
including equipment with embedded computer chips and have determined
which systems need to be converted or replaced to become Year 2000-
ready and are in the process of remediating them. Based on our
timetable, we expect to have all identified repairs, replacements and
upgrades completed to achieve Year 2000 readiness by September 1999.
Most of our Year 2000 issues will be resolved through system
replacement. Of our major centralized systems, the general ledger
system and inventory management, procurement and accounts payable
systems were replaced at the end of 1998. Our payroll system was
enhanced to be Year 2000 compliant in July 1998; all employees have
been converted to the new system. The customer service system is due to
be replaced in mid-1999.
We have completed formal communications with most of our key
suppliers to determine the extent to which we are vulnerable to those
third parties' failure to resolve their own Year 2000 problems. For
suppliers having potential compliance problems, we are developing
alternate sources and services in the event such noncompliance occurs.
We are also identifying areas requiring higher inventory levels based
on compliance uncertainties. There can be no guarantee that the failure
of companies to resolve their own Year 2000 issue will not have a
material adverse effect on our business, financial condition and
results of operations.
We are using both internal and external resources to
reprogram and/or replace and test our software for Year 2000
modifications. Of the $92 million total project cost, approximately $74
million will be capitalized since those costs are attributable to the
purchase of new software for total system replacements because the Year
2000 solution comprises only a portion of the benefits resulting from
the system replacements. The remaining $18 million will be expensed as
incurred. As of December 31, 1998, we have spent $54 million for Year
2000 capital projects and had expensed approximately $9 million for
Year 2000-related maintenance activities. Our total Year 2000 project
cost, as well as our estimates of the time needed to complete remedial
efforts, are based on currently available information and do not
include the estimated costs and time associated with the impact of
third party Year 2000 issues.
We believe we are managing the Year 2000 issue in such a way
that our customers will not experience any interruption of service. We
believe the most likely worst-case scenario from the Year 2000 issue
will be disruption in power plant monitoring systems, thereby producing
inaccurate data and potential failures in electronic switching
mechanisms at transmission junctions. This would prolong localized
outages, as technicians would have to manually activate switches. Such
an event could have a material, but currently undeterminable, effect on
our financial results. We are developing contingency plans to address
the effects of any delay in becoming Year 2000 compliant and expect to
have contingency plans completed by June 1999.
The costs of the project and the dates on which we plan to
complete the Year 2000 modifications are based on management's best
estimates, which were derived from numerous assumptions of future
events including the continued availability of certain resources, and
other factors. However, there can be no guarantee that this project
will be completed as planned and actual results could differ materially
from the estimates. Specific factors that might cause material
differences include but are not limited to, the availability and cost
of trained personnel, the ability to locate and correct all relevant
computer code, and similar uncertainties.
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
REVENUES
Electric sales $4,979,718 $2,774,996 $2,434,633
Other - electric utilities 244,129 141,813 87,155
Facilities services 198,336 -- --
Electric trading and power marketing 410,728 43,145 --
Other 28,374 242 --
---------- ---------- ----------
Total revenues 5,861,285 2,960,196 2,521,788
---------- ---------- ----------
EXPENSES
Fuel and purchased power 983,735 486,267 456,629
Other expenses:
Electric utilities 1,478,840 850,217 670,819
Facilities services 184,440 -- --
Electric trading and power marketing 517,001 44,032 --
Other 41,337 -- --
Provision for depreciation and amortization 740,953 475,228 383,441
General taxes 550,908 282,163 241,998
---------- ---------- ----------
Total expenses 4,497,214 2,137,907 1,752,887
---------- ---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES 1,364,071 822,289 768,901
---------- ---------- ----------
NET INTEREST CHARGES:
Interest expense 542,819 284,180 240,146
Allowance for borrowed funds used during construction
and capitalized interest (7,642) (3,469) (3,136)
Subsidiaries' preferred stock dividends 65,799 27,818 27,923
---------- ---------- ---------
Net interest charges 600,976 308,529 264,933
---------- ---------- ----------
INCOME TAXES 321,699 207,986 201,295
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 441,396 305,774 302,673
EXTRAORDINARY ITEM (NET OF INCOME TAX
BENEFIT OF $21,208,000) (Note 1) (30,522) -- --
---------- ---------- ----------
NET INCOME $ 410,874 $ 305,774 $ 302,673
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 226,373 157,464 144,095
========== ========== ==========
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK (Note 3C):
Income before extraordinary item $1.95 $1.94 $2.10
Extraordinary item (Net of income taxes) (Note 1) (.13) -- --
----- ----- -----
Net income $1.82 $1.94 $2.10
===== ===== =====
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.
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
At December 31, 1998 1997
- -----------------------------------------------------------------------------------------
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 77,798 $ 98,237
Receivables--
Customers (less accumulated provisions of
$6,397,000 and $5,618,000,respectively, for
uncollectible accounts) 239,183 284,162
Other (less accumulated provisions of
$46,251,000 and $4,026,000,respectively, for
uncollectible accounts) 322,186 219,106
Materials and supplies, at average cost--
Owned 145,926 154,961
Under consignment 110,109 82,839
Prepayments and other 171,931 163,686
----------- -----------
1,067,133 1,002,991
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
In service 14,961,664 15,104,327
Less--Accumulated provision for depreciation 6,012,761 5,668,997
----------- -----------
8,948,903 9,435,330
Construction work in progress 293,671 200,662
----------- -----------
9,242,574 9,635,992
----------- -----------
INVESTMENTS:
Capital trust investments (Note 2) 1,329,010 1,370,177
Letter of credit collateralization (Note 2) 277,763 277,763
Other 812,231 596,380
----------- -----------
2,419,004 2,244,320
----------- -----------
DEFERRED CHARGES:
Regulatory assets 2,696,762 2,624,144
Goodwill 2,167,968 2,107,795
Other 470,066 465,553
----------- -----------
5,334,796 5,197,492
----------- -----------
$18,063,507 $18,080,795
=========== ===========
LIABILITIES AND CAPITALIZATION
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock $ 876,470 $ 470,436
Short-term borrowings (Note 4) 254,470 302,229
Accounts payable 305,326 312,690
Accrued taxes 401,688 381,937
Accrued interest 141,575 147,694
Other 203,460 193,850
----------- -----------
2,182,989 1,808,836
----------- -----------
CAPITALIZATION (See Consolidated Statements
of Capitalization):
Common stockholders' equity 4,449,158 4,159,598
Preferred stock of consolidated subsidiaries--
Not subject to mandatory redemption 660,195 660,195
Subject to mandatory redemption 174,710 214,864
Ohio Edison obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely Ohio Edison subordinated debentures 120,000 120,000
Long-term debt 6,352,359 6,969,835
----------- -----------
11,756,422 12,124,492
----------- -----------
DEFERRED CREDITS:
Accumulated deferred income taxes 2,282,864 2,304,305
Accumulated deferred investment tax credits 286,154 324,200
Pensions and other postretirement benefits 525,647 492,425
Other 1,029,431 1,026,537
----------- -----------
4,124,096 4,147,467
----------- -----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES
(Notes 2 and 5) ----------- -----------
$18,063,507 $18,080,795
=========== ===========
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these balance sheets.
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
COMMON STOCKHOLDERS' EQUITY:
Common stock, $.10 par value
authorized 300,000,000 shares-237,069,087 and 230,207,141
shares outstanding, respectively $ 23,707 $ 23,021
Other paid-in capital 3,846,513 3,637,522
Accumulated other comprehensive income (Note 3D) (439) (614)
Retained earnings (Note 3A) 718,409 646,646
Unallocated employee stock ownership plan common stock-
7,406,332 and 7,829,538 shares, respectively (Note 3B) (139,032) (146,977)
---------- ----------
Total common stockholders' equity 4,449,158 4,159,598
---------- ----------
Number of Shares Optional
Outstanding Redemption Price
---------------- ------------------------
1998 1997 Per Share Aggregate
---- ---- --------- ---------
PREFERRED STOCK OF CONSOLIDATED
SUBSIDIARIES (Note 3E)
Ohio Edison Company (OE)
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
--------- --------- ------- ---------- ----------
609,650 609,650 63,893 60,965 60,965
Cumulative, $25 par value-
Authorized 8,000,000 shares
Not Subject to Mandatory Redemption:
7.75% 4,000,000 4,000,000 100,000 100,000
--------- --------- ------- ---------- ----------
Total not subject to
mandatory redemption 4,609,650 4,609,650 $63,893 160,965 160,965
========= ========= ======= ---------- ----------
Cumulative, $100 par value-
Subject to Mandatory Redemption
(Note 3F):
8.45% 150,000 200,000 15,000 20,000
Redemption within one year (5,000) (5,000)
--------- --------- --------- ----------
150,000 200,000 10,000 15,000
========= ========= --------- ----------
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 3F):
7.625% 150,000 150,000 106.86 $ 16,029 15,000 15,000
========= ========= ======== ---------- ----------
OE OBLIGATED MANDATORILY REDEEMABLE
PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY OE SUBORDINATED
DEBENTURES (Note 3G):
Cumulative, $25 par value-
Authorized 4,800,000 shares
Subject to Mandatory Redemption:
9.00% 4,800,000 4,800,000 120,000 120,000
========= ========= ---------- ----------
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont'd)
At December 31, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Number of Shares Optional
Outstanding Redemption Price
---------------- ------------------------
1998 1997 Per Share Aggregate
---- ---- --------- ---------
PREFERRED STOCK OF CONSOLIDATED
SUBSIDIARIES (Cont'd)
Cleveland Electric Illuminating Company
Cumulative, Without Par Value--
Authorized 4,000,000 shares
Not Subject to Mandatory Redemption:
$ 7.40 Series A 500,000 500,000 $ 101.00 $ 50,500 $ 50,000 $ 50,000
$ 7.56 Series B 450,000 450,000 102.26 46,017 45,071 45,071
Adjustable Series L 474,000 474,000 100.00 47,400 46,404 46,404
$ 42.40 Series T 200,000 200,000 500.00 100,000 96,850 96,850
--------- --------- -------- ---------- ----------
Total Not Subject to Mandatory
Redemption 1,624,000 1,624,000 $243,917 238,325 238,325
========= ========= ======== ---------- ----------
Subject to Mandatory Redemption:
$ 7.35 Series C 100,000 110,000 101.00 $ 10,100 10,110 11,110
$ 88.00 Series E 6,000 9,000 1,003.83 6,023 6,000 9,000
$ 91.50 Series Q 32,144 42,858 1,000.00 32,144 32,144 42,858
$ 88.00 Series R 50,000 50,000 -- -- 55,000 55,000
$ 90.00 Series S 74,000 74,000 -- -- 79,920 79,920
--------- --------- -------- ---------- ----------
262,144 285,858 48,267 183,174 197,888
Redemption Within One Year (33,464) (14,714)
--------- --------- -------- ---------- ----------
Total Subject to Mandatory Redemption 262,144 285,858 $ 48,267 149,710 183,174
========= ========= ======== ---------- ----------
Toledo Edison Company
Cumulative, $100 Par Value-
Authorized 3,000,000 shares
Not Subject to Mandatory Redemption:
$ 4.25 160,000 160,000 104.63 $ 16,740 16,000 16,000
$ 4.56 50,000 50,000 101.00 5,050 5,000 5,000
$ 4.25 100,000 100,000 102.00 10,200 10,000 10,000
$ 8.32 100,000 100,000 102.46 10,246 10,000 10,000
$ 7.76 150,000 150,000 102.44 15,366 15,000 15,000
$ 7.80 150,000 150,000 101.65 15,248 15,000 15,000
$ 10.00 190,000 190,000 101.00 19,190 19,000 19,000
--------- --------- -------- ---------- ----------
900,000 900,000 92,040 90,000 90,000
--------- --------- -------- ---------- ----------
Cumulative, $25 Par Value-
Authorized 12,000,000 shares
Not Subject to Mandatory Redemption:
$ 2.21 1,000,000 1,000,000 25.25 25,250 25,000 25,000
$ 2.365 1,400,000 1,400,000 27.75 38,850 35,000 35,000
Adjustable Series A 1,200,000 1,200,000 25.00 30,000 30,000 30,000
Adjustable Series B 1,200,000 1,200,000 25.00 30,000 30,000 30,000
--------- --------- -------- ---------- ----------
4,800,000 4,800,000 124,100 120,000 120,000
--------- --------- -------- ---------- ----------
Total Not Subject to Mandatory
Redemption 5,700,000 5,700,000 $216,140 210,000 210,000
========= ========= ======== ---------- ----------
Cumulative, $100 par value-
Subject to Mandatory Redemption:
$ 9.375 16,900 33,550 100.00 $ 1,690 1,690 3,355
Redemption Within One Year (1,690) (1,665)
--------- --------- -------- ---------- ----------
Total Subject to Mandatory
Redemption 16,900 33,550 $ 1,690 -- 1,690
========= ========= ======== ---------- ----------
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CAPITALIZATION (Cont'd)
LONG-TERM DEBT (Note 3H) (Interest rates reflect weighted average rates) (In thousands)
- ------------------------------------------------------------------------------------------------------------------------------
FIRST MORTGAGE BONDS SECURED NOTES UNSECURED NOTES TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
At December 31, 1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
Ohio Edison Co. -
Due 1998-2003 7.60% $ 659,265 $ 809,265 7.52% $ 144,261 $ 146,201 5.34% $566,500 $531,500
Due 2004-2008 6.88% 80,000 80,000 7.68% 106,995 104,445 -- -- --
Due 2009-2013 -- -- -- -- -- -- -- -- --
Due 2014-2018 -- -- -- 7.12% 113,725 113,725 -- -- --
Due 2019-2023 7.99% 225,960 225,960 7.32% 209,943 209,943 -- -- --
Due 2024-2028 -- -- -- 7.49% 121,522 108,000 -- -- --
Due 2029-2033 -- -- -- 5.75% 121,012 121,012 -- -- --
---------- ---------- ---------- ---------- -------- -------- ----------- -----------
Total-Ohio Edison 965,225 1,115,225 817,458 803,326 566,500 531,500 $ 2,349,183 $ 2,450,051
---------- ---------- ---------- ---------- -------- -------- ----------- -----------
Cleveland Electric
Illuminating Co. -
Due 1998-2003 7.54% 295,000 295,000 7.94% 424,150 490,180 -- -- 6,600
Due 2004-2008 8.72% 425,000 375,000 7.51% 400,150 400,150 -- -- 23,000
Due 2009-2013 -- -- 200,000 7.62% 230,280 237,630 -- -- 17,000
Due 2014-2018 -- -- -- 6.59% 412,630 413,915 -- -- --
Due 2019-2023 9.00% 150,000 150,000 6.58% 291,860 341,860 -- -- --
Due 2024-2028 -- -- -- 7.59% 148,843 142,850 -- -- --
Due 2029-2033 -- -- -- 4.56% 104,895 -- -- -- --
---------- ---------- ---------- ---------- -------- -------- ----------- -----------
Total-Cleveland
Electric 870,000 1,020,000 2,012,808 2,026,585 -- -- 46,600 2,882,808 3,093,185
---------- ---------- ---------- ---------- -------- -------- ----------- -----------
Toledo Edison Co. -
Due 1998-2003 7.47% 120,325 146,725 7.90% 214,500 253,150 8.62% 138,720 139,020
Due 2004-2008 7.88% 145,000 145,000 7.51% 100,000 100,000 10.00% 150 150
Due 2009-2013 -- -- -- 4.98% 31,250 31,250 10.00% 730 730
Due 2014-2018 -- -- -- -- -- -- -- -- --
Due 2019-2023 -- -- -- 7.88% 334,000 334,000 -- -- --
Due 2024-2028 -- -- -- 5.90% 13,851 10,100 -- -- --
Due 2029-2033 -- -- -- -- -- -- -- -- --
---------- ---------- ---------- ---------- -------- -------- ----------- -----------
Total-Toledo Edison 265,325 291,725 693,601 728,500 139,600 139,900 1,098,526 1,160,125
---------- ---------- ---------- ---------- -------- -------- ----------- -----------
Pennsylvania
Power Co. -
Due 1998-2003 7.72% 44,383 44,383 6.08% 23,000 23,850 -- -- --
Due 2004-2008 6.88% 39,370 39,370 -- -- -- -- -- --
Due 2009-2013 9.74% 4,870 4,870 5.40% 1,000 1,000 -- -- --
Due 2014-2018 9.74% 4,870 4,870 6.28% 45,325 45,325 -- -- --
Due 2019-2023 8.37% 34,757 34,757 6.91% 32,382 32,382 -- -- --
Due 2024-2028 -- -- -- 5.63% 47,734 46,000 -- -- --
Due 2029-2033 -- -- -- 5.95% 238 238 -- -- --
---------- ---------- ---------- ---------- -------- -------- ----------- -----------
Total-Penn
Power 128,250 128,250 149,679 148,795 -- -- 277,929 277,045
---------- ---------- ---------- ---------- -------- -------- ----------- -----------
OES Fuel 5.97% 79,524 80,755 79,524 80,755
Bay Shore Power 7.12% 147,500 -- 147,500 --
MARBEL Energy
Corp. 6.40% 12,418 -- 12,418 --
Facilities
Services Group 7.38% 10,237 -- 8.52% 3,917 -- 14,154 --
---------- ---------- ---------- ---------- -------- -------- ----------- -----------
Total 2,228,800 2,555,200 3,923,225 3,787,961 710,017 718,000 6,862,042 7,061,161
========== ========== ========== ========== ======== ======== ----------- -----------
Capital lease obligations 199,491 204,213
----------- -----------
Net unamortized premium on debt 127,142 153,518
----------- -----------
Long-term debt due within one year (836,316) (449,057)
----------- -----------
Total long-term debt 6,352,359 6,969,835
----------- -----------
TOTAL CAPITALIZATION $11,756,422 $12,124,492
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Accumulated
Other Unallocated
Comprehensive Other Comprehensive ESOP
Income- Number Par Paid-In Income- Retained Common
Note 3D of Shares Value Capital Note 3D Earnings Stock
------------- --------- ----------- --------- ------------- -------- -----------
(Dollars in thousands)
Balance, January 1, 1996 152,569,437 $ 1,373,125 $ 726,915 $(608) $ 471,095 $(162,656)
Net income $302,673 302,673
Minimum liability for unfunded
retirement benefits, net of
$27,000 of income taxes (51) (51)
--------
Comprehensive income $302,622
========
Allocation of ESOP Shares 1,346 7,646
Cash dividends on common stock (216,126)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 152,569,437 1,373,125 728,261 (659) 557,642 (155,010)
Net income $305,774 305,774
Minimum liability for unfunded
retirement benefits, net of
$26,000 of income taxes 45 45
--------
Comprehensive income $305,819
========
Centerior acquisition 77,637,704 (1,350,104) 2,907,387
Allocation of ESOP Shares 1,874 8,033
Cash dividends on common stock (216,770)
- ----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 230,207,141 23,021 3,637,522 (614) 646,646 (146,977)
Net income $410,874 410,874
Minimum liability for unfunded
retirement benefits, net of
$53,000 of income taxes 175 175
--------
Comprehensive income $411,049
========
Business acquisitions 6,861,946 686 203,496
Allocation of ESOP Shares 5,495 7,945
Cash dividends on common stock (339,111)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 237,069,087 $ 23,707 $3,846,513 $(439) $ 718,409 $(139,032)
=============================================================================================================================
CONSOLIDATED STATEMENTS OF PREFERRED STOCK
Not Subject to Subject to
Mandatory Redemption Mandatory Redemption
-------------------- --------------------
Par or Par or
Number Stated Number Stated
of Shares Value of Shares Value
--------- ------ --------- ------
(Dollars in thousands)
Balance, January 1, 1996 5,118,699 $211,870 5,200,000 $160,000
----------------------------------------------------------------------------------------
Balance, December 31, 1996 5,118,699 211,870 5,200,000 160,000
Centerior acquisition 7,324,000 448,325 319,408 201,243
Redemptions-
8.45% Series (50,000) (5,000)
------------------------------------------------------------------------------------------
Balance, December 31, 1997 12,442,699 660,195 5,469,408 356,243
Redemptions-
8.45% Series (50,000) (5,000)
$ 7.35 Series C (10,000) (1,000)
$88.00 Series E (3,000) (3,000)
$91.50 Series Q (10,714) (10,714)
$9.375 Series (16,650) (1,665)
------------------------------------------------------------------------------------------
Balance, December 31, 1998 12,442,699 $660,195 5,379,044 $334,864
========================================================================================
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 410,874 $ 305,774 $ 302,673
Adjustments to reconcile net income to net
cash from operating activities:
Provision for depreciation and amortization 740,953 475,228 383,441
Nuclear fuel and lease amortization 94,348 61,960 52,784
Other amortization, net (13,007) (1,187) (1,700)
Deferred income taxes, net (5,851) (29,642) 41,365
Investment tax credits, net (22,070) (16,252) (14,041)
Allowance for equity funds used during construction -- (201) --
Extraordinary item 51,730 -- --
Receivables 35,515 21,846 24,326
Materials and supplies (14,235) (18,909) (736)
Accounts payable (73,205) 57,087 962
Other (49,727) 733 (41,317)
---------- ---------- ---------
Net cash provided from operating activities 1,155,325 856,437 747,757
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Common stock 204,182 1,558,237 --
Long-term debt 499,975 89,773 306,313
Ohio Schools Council prepayment program 116,598 -- --
Short-term borrowings, net -- -- 229,515
Redemptions and Repayments-
Preferred stock 21,379 5,000 1,016
Long-term debt 804,780 335,909 438,916
Short-term borrowings, net 48,354 47,251 --
Common Stock Dividend Payments 339,111 237,848 218,656
---------- ---------- ---------
Net cash provided from (used for) financing
activities (392,869) 1,022,002 (122,760)
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Centerior acquisition -- 1,582,459 --
Property additions 652,852 203,839 148,189
Cash investments 47,804 8,934 487,979
Other 82,239 62,237 13,406
---------- ---------- ---------
Net cash used for investing activities 782,895 1,857,469 649,574
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents (20,439) 20,970 (24,577)
Cash and cash equivalents at beginning of period* 98,237 77,267 29,830
---------- ---------- ---------
Cash and cash equivalents at end of year $ 77,798 $ 98,237 $ 5,253
========== ========== =========
SUPPLEMENTAL CASH FLOWS INFORMATION:
Cash Paid During the Year-
Interest (net of amounts capitalized) $ 536,064 $ 281,670 $ 224,541
Income taxes $ 326,268 $ 265,615 $ 157,477
<FN>
* 1997 beginning balance includes Centerior cash and cash equivalents
as of the November 8, 1997 acquisition date.
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF TAXES
For the Years Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------------------------------
(In thousands)
GENERAL TAXES:
Real and personal property $ 292,503 $ 137,816 $ 115,443
State gross receipts 217,633 118,390 104,158
Social security and unemployment 27,363 16,551 14,602
Other 13,409 9,406 7,795
---------- ---------- ----------
Total general taxes $ 550,908 $ 282,163 $ 241,998
========== ========== ==========
PROVISION FOR INCOME TAXES:
Currently payable-
Federal $ 313,960 $ 235,728 $ 164,132
State 14,452 18,152 9,839
---------- ---------- ----------
328,412 253,880 173,971
---------- ---------- ----------
Deferred, net-
Federal 3,356 (23,716) 37,277
State (9,207) (5,926) 4,088
---------- ---------- ----------
(5,851) (29,642) 41,365
---------- ---------- ----------
Investment tax credit amortization (22,070) (16,252) (14,041)
---------- ---------- ----------
Total provision for income taxes $ 300,491 $ 207,986 $ 201,295
========== ========== ==========
RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT
STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES:
Book income before provision for income taxes $ 711,365 $ 513,760 $ 503,968
========== ========== ==========
Federal income tax expense at statutory rate $ 248,978 $ 179,816 $ 176,389
Increases (reductions) in taxes resulting from-
Amortization of investment tax credits (22,070) (16,252) (14,041)
State income taxes net of federal income tax benefit 3,409 7,947 9,053
Amortization of tax regulatory assets 40,365 30,402 26,945
Amortization of goodwill 17,868 2,685 --
Preferred stock dividends 19,250 5,956 5,993
Other, net (7,309) (2,568) (3,044)
---------- ---------- ----------
Total provision for income taxes $ 300,491 $ 207,986 $ 201,295
========== ========== ==========
ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31:
Property basis differences $1,938,735 $2,091,207 $1,319,878
Deferred nuclear expense 436,601 454,902 262,123
Customer receivables for future income taxes 159,526 262,428 191,537
Competitive transition charge 135,730 -- --
Deferred sale and leaseback costs (61,506) (121,974) 78,607
Unamortized investment tax credits (102,085) (116,593) (72,663)
Unused alternative minimum tax credits (190,781) (243,039) --
Other (33,356) (22,626) (2,396)
---------- ---------- ----------
Net deferred income tax liability $2,282,864 $2,304,305 $1,777,086
========== ========== ==========
<FN>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements include FirstEnergy
Corp. (Company) and its principal electric utility operating
subsidiaries, Ohio Edison Company (OE), The Cleveland Electric
Illuminating Company (CEI), Pennsylvania Power Company (Penn) and The
Toledo Edison Company (TE). The Company and its utility subsidiaries
are referred to throughout as "Companies." The Company's 1997 results
of operations include the results of CEI and TE for the period November
8, 1997 through December 31, 1997. The consolidated financial
statements also include the Company's other principal subsidiaries:
FirstEnergy Facilities Services Group, Inc. (FE Facilities);
FirstEnergy Trading & Power Marketing, Inc. (FETPM); and MARBEL Energy
Corporation. FE Facilities is the parent company of several heating,
ventilating, air conditioning and energy management companies. FETPM
markets and trades electricity in nonregulated markets. MARBEL is a
fully integrated natural gas company. Significant intercompany
transactions have been eliminated. The 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 periodic estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses. Certain prior year amounts have been
reclassified to conform with the current year presentation.
REVENUES-
The Companies' principal business is providing electric
service to customers in central and northern Ohio and western
Pennsylvania. The Companies' retail customers are metered on a cycle
basis. Revenue is recognized for unbilled electric service through the
end of the year.
Receivables from customers include sales to residential,
commercial and industrial customers located in the Companies' service
area and sales to wholesale customers. There was no material
concentration of receivables at December 31, 1998 or 1997, with respect
to any particular segment of the Companies' customers.
CEI and TE sell substantially all of their retail customer
accounts receivable to Centerior Funding Corp. under an asset-backed
securitization agreement which expires in 2001. Centerior Funding
completed a public sale of $150 million of receivables-backed investor
certificates in a transaction that qualified for sale accounting
treatment.
REGULATORY PLANS-
The PUCO approved OE's Rate Reduction and Economic
Development Plan in 1995 and FirstEnergy's Rate Reduction and Economic
Development Plan for CEI and TE in January 1997. These regulatory plans
initially maintain current base electric rates for OE, CEI and TE
through December 31, 2005. At the end of the regulatory plan periods,
OE base rates will be reduced by $300 million (approximately 20 percent
below current levels) and CEI and TE base rates will be reduced by a
combined $310 million (approximately 15 percent below current levels).
The plans also revised the Companies' fuel cost recovery methods. The
Companies formerly recovered fuel-related costs not otherwise included
in base rates from retail customers through separate energy rates. In
accordance with the respective regulatory plans, OE's, CEI's and TE's
fuel rates will be frozen through the regulatory plan period, subject
to limited periodic adjustments. As part of OE's and FirstEnergy's
regulatory plans, transition rate credits were implemented for
customers, which are expected to reduce operating revenues for OE by
approximately $600 million and CEI and TE by approximately $391 million
during the regulatory plan period.
In June 1998, the PPUC authorized a rate restructuring plan
for Penn, which superseded the regulatory plan which had been in place
for Penn since 1996 and essentially resulted in the deregulation of
Penn's generation business as of June 30, 1998. Penn was required to
remove from its balance sheet all regulatory assets and liabilities
related to its generation business and assess all other assets for
impairment. The Securities and Exchange Commission (SEC) issued
interpretive guidance regarding asset impairment measurement which
concluded that any supplemental regulated cash flows such as a
competitive transition charge (CTC) should be excluded from the cash
flows of assets in a portion of the business not subject to regulatory
accounting practices. If those assets are impaired, a regulatory asset
should be established if the costs are recoverable through regulatory
cash flows. Consistent with the SEC guidance, Penn reduced its nuclear
generating unit investments by approximately $305 million, of which
approximately $227 million was recognized as a regulatory asset to be
recovered through a CTC over a seven-year transition period; the
remaining net amount of $78 million was written off. The charge of $51.7
million ($30.5 million after income taxes) for discontinuing the
application of Statement of Financial Accounting Standards (SFAS) No.
71, "Accounting for the Effects of Certain Types of Regulation" (SFAS
71), to Penn's generation business was recorded as an extraordinary item
on the Consolidated Statement of Income.
All of the Companies' regulatory assets are being recovered
under provisions of the regulatory plans. In addition, the PUCO has
authorized OE to recognize additional capital recovery related to its
generating assets (which is reflected as additional depreciation
expense) and additional amortization of regulatory assets during the
regulatory plan period of at least $2 billion, and the PPUC had
authorized Penn to accelerate at least $358 million, more than the
amounts that would have been recognized if the regulatory plans were
not in effect. These additional amounts are being recovered through
current rates. As of December 31, 1998, OE's and Penn's cumulative
additional capital recovery and regulatory asset amortization amounted
to $696 million (including Penn's impairment discussed above). CEI and
TE recognized a fair value purchase accounting adjustment of $2.55
billion in connection with the FirstEnergy merger; that fair value
adjustment recognized for financial reporting purposes will ultimately
satisfy the $2 billion asset reduction commitment contained in the CEI
and TE regulatory plan. For regulatory purposes, CEI and TE will
recognize the accelerated amortization over the rate plan period.
Application of SFAS 71 was discontinued in 1997 with respect
to CEI's and TE's nuclear operations (see "Regulatory Assets" below)
and in 1998 with respect to Penn's generation operations (as described
above). The following summarizes net assets included in property, plant
and equipment relating to operations for which the application of SFAS
71 was discontinued, compared with the respective company's total
assets at December 31, 1998.
SFAS 71
Discontinued
Net Assets Total Assets
------------ ------------
(In millions)
CEI $1,064 $6,318
TE 579 2,739
Penn 146 978
PROPERTY, PLANT AND EQUIPMENT-
Property, plant and equipment reflects original cost (except
for CEI's, TE's and Penn's nuclear generating units which were adjusted
to fair value), including payroll and related costs such as taxes,
employee benefits, administrative and general costs, and interest
costs.
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 OE's and Penn's
electric plant was approximately 3.0% in 1998, 1997 and 1996. CEI's and
TE's composite rates were both approximately 3.4% in 1998. In addition
to the straight-line depreciation recognized in 1998, 1997 and 1996, OE
and Penn recognized additional capital recovery of $141 million
(excluding Penn's impairment), $172 million and $144 million,
respectively, as additional depreciation expense in accordance with
their regulatory plans. Such additional charges in the accumulated
provision for depreciation were $422 million and $343 million as of
December 31, 1998 and 1997, respectively.
Annual depreciation expense includes approximately $30.9
million for future decommissioning costs applicable to the Companies'
ownership and leasehold interests in four nuclear generating units. The
Companies' share of the future obligation to decommission these units
is approximately $1.3 billion in current dollars and (using a 4.0%
escalation rate) approximately $3.4 billion in future dollars. The
estimated obligation and the escalation rate were developed based on
site specific studies. Payments for decommissioning are expected to
begin in 2016, when actual decommissioning work begins. The Companies
have recovered approximately $284 million for decommissioning through
their electric rates from customers through December 31, 1998. If the
actual costs of decommissioning the units exceed the funds accumulated
from investing amounts recovered from customers, the Companies expect
that additional amount to be recoverable from their customers. The
Companies have approximately $358.4 million invested in external
decommissioning trust funds as of December 31, 1998. Earnings on these
funds are reinvested with a corresponding increase to the
decommissioning liability. The Companies have also recognized an
estimated liability of approximately $32.5 million related to
decontamination and decommissioning of nuclear enrichment facilities
operated by the United States Department of Energy (DOE), as required
by the Energy Policy Act of 1992.
The Financial Accounting Standards Board (FASB) issued a
proposed accounting standard for nuclear decommissioning costs in 1996.
If the standard is adopted as proposed: (1) annual provisions for
decommissioning could increase; (2) the net present value of estimated
decommissioning costs could be recorded as a liability; and (3) income
from the external decommissioning trusts could be reported as
investment income. The FASB subsequently expanded the scope of the
proposed standard to include other closure and removal obligations
related to long-lived assets. A revised proposal may be issued by the
FASB in 1999.
COMMON OWNERSHIP OF GENERATING FACILITIES-
The Companies and Duquesne Light Company (Duquesne)
constitute the Central Area Power Coordination Group (CAPCO). The CAPCO
companies own and/or lease, as tenants in common, various power
generating facilities. Each of the companies is obligated to pay a
share of the costs associated with any jointly owned facility in the
same proportion as its interest. The Companies' portions of operating
expenses 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
property, plant and equipment at December 31, 1998, include the
following:
Companies'
Accumulated Construction Ownership/
Provision for Work in Leasehold
Generating Units In Service Depreciation Progress Interest
- -------------------------------------------------------------------------------------------
(In millions)
W.H. Sammis #7 $ 303.3 $ 101.3 $ 2.0 68.80%
Bruce Mansfield #1,
#2 and #3 895.1 433.9 11.2 83.01%
Beaver Valley
#1 and #2 2,052.3 619.6 11.8 69.46%
Davis-Besse 404.4 4.8 10.3 100.00%
Perry 2,174.7 790.2 19.1 86.26%
Eastlake # 5 160.5 116.8 0.7 68.80%
Seneca 64.3 25.4 0.1 80.00%
- -------------------------------------------------------------------------------------------
Total $6,054.6 $2,092.0 $ 55.2
===========================================================================================
The Seneca Unit is currently jointly owned by CEI and a non-CAPCO
company. The Company has agreed to purchase the remaining 20% share in 1999.
On October 15, 1998, the Company announced that it signed an
agreement in principle with Duquesne that would result in the transfer of
1,436 megawatts owned by Duquesne at eight CAPCO generating units in exchange
for 1,328 megawatts at three non-CAPCO power plants owned by the Companies. A
definitive agreement on the exchange of assets, which will be structured as a
tax-free transaction to the extent possible, will provide the Companies with
exclusive ownership and operating control of all CAPCO generating units.
Duquesne will fund decommissioning costs equal to its percentage interest in
the three nuclear generating units to be transferred. The asset transfer is
expected to take twelve to eighteen months to close.
NUCLEAR FUEL-
OE's and Penn's nuclear fuel is recorded at original cost, which
includes material, enrichment, fabrication and interest costs incurred prior
to reactor load. CEI and TE severally lease their respective portions of
nuclear fuel and pay for the fuel as it is consumed (see Note 2). 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. Alternative minimum tax credits of
$191 million, which may be carried forward indefinitely, are available to
reduce future federal income taxes.
RETIREMENT BENEFITS-
The Companies' trusteed, noncontributory defined benefit pension
plans cover almost all full-time employees. Upon retirement, employees
receive a monthly pension based on length of service and compensation. In
1998, the Centerior Energy Corporation (Centerior) pension plan was merged
into the FirstEnergy pension plans. The Companies use the projected unit
credit method for funding purposes and were not required to make pension
contributions during the three years ended December 31, 1998. The assets of
the pension plans consist primarily of common stocks, United States
government bonds and corporate bonds.
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 plans and amounts
recognized on the Consolidated Balance Sheets as of December 31:
Other
Pension Benefits Postretirement Benefits
---------------- ------------------------
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------
(In millions)
Change in benefit obligation:
Benefit obligation as of January 1 $1,327.5 $ 688.5 $ 534.1 $ 241.1
Service Cost 25.0 15.2 7.5 4.6
Interest cost 92.5 55.9 37.6 20.4
Plan amendments 44.3 3.0 40.1 --
Early retirement program expense -- 54.5 -- 1.9
Actuarial loss 101.6 63.3 10.7 17.0
Centerior acquisition -- 508.9 -- 265.9
Benefits paid (90.8) (61.8) (28.7) (16.8)
- -------------------------------------------------------------------------------------------
Benefit obligation as of December 31 1,500.1 1,327.5 601.3 534.1
- -------------------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets as of
January 1 1,542.5 946.3 2.8 2.0
Actual return on plan assets 231.3 194.0 0.7 0.5
Company contribution -- -- 0.4 0.3
Centerior acquisition -- 464.0 -- --
Benefits paid (90.8) (61.8) -- --
- --------------------------------------------------------------------------------------------
Fair value of plan assets as of
December 31 1,683.0 1,542.5 3.9 2.8
- --------------------------------------------------------------------------------------------
Funded status of plan 182.9 215.0 (597.4) (531.3)
Unrecognized actuarial loss (gain) (110.8) (136.5) 30.6 24.0
Unrecognized prior service cost 63.0 21.0 27.4 (13.8)
Unrecognized net transition obligation
(asset) (18.0) (25.9) 129.3 138.9
- --------------------------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 117.1 $ 73.6 $(410.1) $(382.2)
=============================================================================================
Assumptions used as of December 31:
Discount rate 7.00% 7.25% 7.00% 7.25%
Expected long-term return on plan assets 10.25% 10.00% 10.25% 10.00%
Rate of compensation increase 4.00% 4.00% 4.00% 4.00%
Net pension and other postretirement benefit costs for the
three years ended December 31, 1998 were computed as follows:
Other
Pension Benefits Postretirement Benefits
---------------------- -----------------------
1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------
(In millions)
Service cost $ 25.0 $ 15.2 $ 14.2 $ 7.5 $ 4.6 $ 4.3
Interest cost 92.5 55.9 49.3 37.6 20.4 17.4
Expected return on plan assets (152.7) (99.7) (83.2) (0.3) (0.2) (0.1)
Amortization of transition
obligation (asset) (8.0) (8.0) (8.0) 9.2 8.2 10.1
Amortization of prior service cost 2.3 2.1 2.3 (0.8) 0.3 (1.2)
Recognized net actuarial loss (gain) (2.6) (0.9) -- -- -- 0.1
Voluntary early retirement program expense -- 54.5 12.5 -- 1.9 0.5
Plan curtailment loss (gain) -- -- (12.8) -- -- 13.1
- -------------------------------------------------------------------------------------------------
Net benefit cost $ (43.5) $ 19.1 $ (25.7) $53.2 $35.2 $44.2
==================================================================================================
In accordance with SFAS 88, "Employers' Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," the 1996 net pension costs and postretirement
benefit costs shown above included curtailment effects (significant
changes in projected plan assumptions) relating to the pension and
postretirement benefit plans. The employee terminations reflected in
OE's and Penn's 1996 voluntary early retirement program represented a
plan curtailment that significantly reduced the expected future
employee service years and the related accrual of defined pension and
postretirement benefits. In the pension plan, the reduction in the
benefit obligation increased the net pension asset and was shown as a
plan curtailment gain. In the postretirement benefit plan, the
unrecognized prior service cost associated with service years no longer
expected to be rendered as a result of the terminations was shown as a
plan curtailment loss.
The health care trend rate assumption is 5.5% in the first
year gradually decreasing to 4.0% for the year 2008 and later. Assumed
health care cost trend rates have a significant effect on the amounts
reported for the health care plan. An increase in the health care trend
rate assumption by one percentage point would increase the total
service and interest cost components by $4.0 million and the
postretirement benefit obligation by $68.1 million. A decrease in the
same assumption by one percentage point would decrease the total
service and interest cost components by $3.2 million and the
postretirement benefit obligation by $55.2 million.
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 $61.8 million, $3.0 million and $2.0 million for the years
1998, 1997 and 1996, respectively. Commercial paper transactions of OES
Fuel, Incorporated (OES Fuel) (a wholly owned subsidiary of OE) that
have initial maturity periods of three months or less are reported net
within financing activities under long-term debt and are reflected as
long-term debt on the Consolidated Balance Sheets (see Note 3H).
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:
1998 1997
- -------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------
(In millions)
Long-term debt $6,783 $7,247 $6,980 $7,334
Preferred stock $ 335 $ 340 $ 356 $ 362
Investments other than cash
and cash equivalents:
Debt securities
- Maturity (5-10 years) $ 481 $ 520 $ 487 $ 512
- Maturity (more than 10 years) 1,109 1,139 1,134 1,149
Equity securities 17 17 24 24
All other 520 533 336 337
- ---------------------------------------------------------------------
$2,127 $2,209 $1,981 $2,022
======================================================================
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 include decommissioning trust investments. Unrealized gains
and losses applicable to the decommissioning trust have been recognized
in the trust investment with a corresponding change to the
decommissioning liability. The debt and equity securities referred to
above are in the held-to-maturity category. The Companies have no
securities held for trading purposes.
Effective December 31, 1998, the Company began accounting for
its commodity price derivatives, entered into specifically for trading
purposes, on a marked-to-market basis in accordance with Emerging
Issues Task Force Issue 98-10, "Accounting for Energy Trading and Risk
Management Activities," with gains and losses recognized currently in
the Consolidated Statements of Income. The contracts that were marked
to market are included in the 1998 Consolidated Balance Sheets as
Deferred Charges and Deferred Credits at their fair values. The impact
on the consolidated financial statements was immaterial.
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 Companies' respective regulatory
plans. Based on those regulatory plans, at this time, the Companies
believe they will continue to be able to bill and collect cost-based
rates relating to all of OE's operations, CEI's and TE's nonnuclear
operations, and Penn's nongeneration operations; accordingly, it is
appropriate that the Companies continue the application of SFAS 71 to
those respective operations. OE and Penn recognized additional cost
recovery of $50 million, $39 million and $34 million in 1998, 1997 and
1996, respectively, as additional regulatory asset amortization in
accordance with their regulatory plans. FirstEnergy's regulatory plan
does not provide for full recovery of CEI's and TE's nuclear
operations. As a result, in October 1997 CEI and TE discontinued
application of SFAS 71 for their nuclear operations and decreased their
regulatory assets of customer receivables for future income taxes
related to the nuclear assets by $794 million.
Net regulatory assets on the Consolidated Balance Sheets are
comprised of the following:
1998 1997
- ----------------------------------------------------------------------
(In millions)
Nuclear unit expenses $1,164.8 $1,224.2
Customer receivables for future income
taxes 444.0 558.7
Rate stabilization program deferrals 440.1 460.2
Sale and leaseback costs 28.1 24.4
Competitive transition charge 331.0 --
Loss on reacquired debt 183.5 191.1
Employee postretirement benefit costs 28.9 25.9
Uncollectible customer accounts 6.8 18.9
Perry Unit 2 termination -- 36.7
DOE decommissioning and decontamination
costs 32.9 39.3
Other 36.7 44.7
- -----------------------------------------------------------------------
Total $2,696.8 $2,624.1
=======================================================================
2. LEASES:
The Companies lease certain generating facilities, nuclear
fuel, certain transmission facilities, office space and other property
and equipment under cancelable and noncancelable leases.
OE 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. CEI and
TE also sold portions of their ownership interests in Beaver Valley
Unit 2 and Bruce Mansfield Units 1, 2 and 3 and entered into similar
operating leases for lease terms of approximately 30 years. During the
terms of their respective leases, OE, CEI and TE continue to be
responsible, to the extent of their individual combined ownership and
leasehold interests, for costs associated with the units including
construction expenditures, operation and maintenance expenses,
insurance, nuclear fuel, property taxes and decommissioning. They have
the right, at the end of the respective basic lease terms, to renew
their respective leases. They also have the right to purchase the
facilities at the expiration of the basic lease term or renewal term
(if elected) at a price equal to the fair market value of the
facilities. The basic rental payments are adjusted when applicable
federal tax law changes.
OES Finance, Incorporated (OES Finance), a wholly owned
subsidiary of OE, maintains deposits pledged as collateral to secure
reimbursement obligations relating to certain letters of credit
supporting OE's obligations to lessors 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 OE as sole owner of
OES Finance common stock.
Nuclear fuel is currently financed for CEI and TE through
leases with a special-purpose corporation. As of December 31, 1998, $156
million of nuclear fuel was financed under a lease financing arrangement
totaling $175 million ($60 million of intermediate-term notes and $115
million from bank credit arrangements). The notes mature from 1999
through 2000 and the bank credit arrangements expire in September 2000.
Lease rates are based on intermediate-term note rates, bank rates and
commercial paper rates.
Consistent with the regulatory treatment, the rentals for
capital and operating leases are charged to operating expenses on the
Consolidated Statements of Income. Such costs for the three years ended
December 31, 1998, are summarized as follows:
1998 1997 1996
- -------------------------------------------------------------
(In millions)
Operating leases
Interest element $201.2 $149.9 $107.6
Other 147.8 45.2 18.3
Capital leases
Interest element 17.6 6.1 6.5
Other 66.3 6.0 6.3
- --------------------------------------------------------------
Total rentals $432.9 $207.2 $138.7
==============================================================
The future minimum lease payments as of December 31, 1998, are:
Operating Leases
-----------------------------
Capital Lease Capital
Leases Payments Trusts Net
- -----------------------------------------------------------------------
(In millions)
1999 $ 76.6 $ 301.6 $ 143.1 $ 158.5
2000 55.3 296.4 150.5 145.9
2001 37.3 307.3 146.0 161.3
2002 22.8 318.3 169.5 148.8
2003 13.9 326.6 176.5 150.1
Years thereafter 81.6 3,936.8 1,475.1 2,461.7
- ------------------------------------------------------------------------
Total minimum lease payments 287.5 $5,487.0 $2,260.7 $3,226.3
======= ======== ========
Executory costs 29.5
- --------------------------------------
Net minimum lease payments 258.0
Interest portion 76.9
- --------------------------------------
Present value of net minimum
lease payments 181.1
Less current portion 58.6
- --------------------------------------
Noncurrent portion $122.5
======================================
OE invested in the PNBV Capital Trust , which was established
to purchase a portion of the lease obligation bonds issued on behalf of
lessors in OE's Perry Unit 1 and Beaver Valley Unit 2 sale and
leaseback transactions. CEI and TE established the Shippingport Capital
Trust in the fourth quarter of 1997 to purchase the lease obligation
bonds issued on behalf of lessors in their Bruce Mansfield Units 1, 2
and 3 sale and leaseback transactions. The PNBV and Shippingport
capital trust arrangements effectively reduce lease costs related to
those transactions.
3. CAPITALIZATION:
(A) RETAINED EARNINGS-
There are no restrictions on retained earnings for payment of
cash dividends on the Company's common stock.
(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 million from OE and acquired 10,654,114 shares of
OE's common stock through market purchases; the shares were converted
into the Company's common stock in connection with the merger. 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 1998,
1997 and 1996, 423,206 shares, 429,515 shares and 404,522 shares,
respectively, were allocated to employees with the corresponding expense
recognized based on the shares allocated method. The fair value of
7,406,332 shares unallocated as of December 31, 1998, was approximately
$241.2 million. Total ESOP-related compensation expense was calculated
as follows:
- -----------------------------------------------------------------
1998 1997 1996
- -----------------------------------------------------------------
(In millions)
Base compensation $13.5 $ 9.9 $ 9.0
Dividends on common stock held
by the ESOP and used to
service debt (3.9) (3.4) (2.9)
- -----------------------------------------------------------------
Net expense $ 9.6 $ 6.5 $ 6.1
=================================================================
(C) STOCK COMPENSATION PLANS-
Under a Centerior Equity Compensation Plan (Centerior Plan)
adopted in 1994, restricted stock and common stock options were granted
to management employees. Upon consummation of the merger, outstanding
options became exercisable for the Company's common stock with option
prices and the number of shares adjusted to reflect the merger
conversion ratio. A total of 329,493 options for the Company's common
stock were exercised in 1998 and 222,023 options were exercised in
1997. Unexercised options totaling 117,004 shares were outstanding as
of December 31, 1998 and at year end 1997, unexercised options totaled
517,388 shares. The plan ends when all outstanding options are
exercised or when all options lapse by February 25, 2007. There will be
no additional grants under the Centerior Plan.
On April 30, 1998, the Company adopted the Executive and
Director Incentive Compensation Plan (FE Plan). The FE Plan permits
awards to be made to key employees in the form of restricted stock,
stock options, stock appreciation rights, performance shares or cash. A
total of 189,491 options for the Company's common stock and 20,000
shares of restricted stock were granted during 1998. Options granted in
1998 are exercisable in four years and expire after 10 years.
Restrictions on restricted stock lapse in 25% annual increments
beginning in the fourth year. During 1998, options on 7,535 shares were
forfeited under the FE Plan leaving 181,956 options outstanding as of
December 31, 1998. No shares of restricted stock were forfeited.
Computing compensation costs for options consistent with SFAS 123,
"Accounting for Stock-Based Compensation," would not have materially
affected net income in 1998 and basic and diluted earnings per share
are the same.
(D) COMPREHENSIVE INCOME-
In 1998, the Company adopted SFAS 130, "Reporting
Comprehensive Income", and applied the standard to all periods
presented in the Consolidated Statements of Common Stockholders'
Equity. Comprehensive income includes net income as reported on the
Consolidated Statements of Income and all other changes in common
stockholders' equity except those resulting from transactions with
common stockholders.
(E) PREFERRED AND PREFERENCE STOCK-
Penn's 7.75% series of preferred stock has a restriction
which prevents early redemption prior to July 2003. OE's 8.45% series
of preferred stock has no optional redemption provision. CEI's $88.00
series of preferred stock is not redeemable before December 2001 and
its $90.00 series has no optional redemption provision. All other
preferred stock may be redeemed by the Companies in whole, or in part,
with 30-90 days' notice.
Preference stock authorized for the Companies are 8 million
shares without par value for OE; 3 million shares without par value for
CEI; and 5 million shares, $25 par value for TE. No preference shares
are currently outstanding.
(F) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION-
Annual sinking fund provisions for the Companies' preferred stock are
as follows:
Redemption
Price Per
Series Shares Share Date Beginning
- -------------------------------------------------------------------------------------------
OE 8.45% 50,000 $ 100 (i)
CEI $ 7.35 C 10,000 100 (i)
88.00 E 3,000 1,000 (i)
91.50 Q 10,714 1,000 (i)
90.00 S 18,750 1,000 November 1 1999
88.00 R 50,000 1,000 December 1 2001
TE $9.375 16,900 100 (i)
Penn 7.625% 7,500 100 October 1 2002
- -------------------------------------------------------------------------------------------
<FN>
(i) Sinking fund provisions are in effect.
Annual sinking fund requirements for the next five years are
$40 million in 1999, $38 million in 2000, $85 million in 2001, $19
million in 2002 and $2 million in 2003. A liability of $19 million was
included in the net assets acquired from CEI and TE for preferred
dividends declared attributable to the post-merger period. Accordingly,
no accruals for CEI and TE preferred dividends are included in the
Company's Consolidated Statement of Income for the period November 8,
1997 through December 31, 1997.
(G) OHIO EDISON OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY OHIO EDISON
SUBORDINATED DEBENTURES-
Ohio Edison Financing Trust, a wholly owned subsidiary of OE,
has issued $120 million of 9% Cumulative Trust Preferred Capital
Securities. OE purchased all of the Trust's Common Securities and
simultaneously issued to the Trust $123.7 million 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 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 by OE beginning December 31, 2000, at a redemption price of
$25 per Subordinated Debenture plus accrued interest, in which event
the Trust Securities will be redeemed on a pro-rata basis at $25 per
share plus accumulated distributions. OE'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 OE of payments due on the Preferred Securities.
(H) 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 Trustees
through December 31, 1998, OE's and TE's annual sinking and improvement
fund requirements for all bonds issued under the mortgage amounts to
$30 million. OE and TE expect to deposit funds in 1999 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:
(In millions)
- ------------------------------------------
1999 $777.7
2000 587.2
2001 187.8
2002 726.4
2003 459.5
- ------------------------------------------
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 $419.0
million. To the extent that drawings are made under those letters of
credit to pay principal of, or interest on, the pollution control
revenue bonds, OE, CEI and/or TE are entitled to a credit against their
obligation to repay those bonds. The Companies pay annual fees of 0.43%
to 1.875% of the amounts of the letters of credit to the issuing banks
and are obligated to reimburse the banks for any drawings thereunder.
OE had unsecured borrowings of $250 million at December 31,
1998, supported by a $250 million long-term revolving credit facility
agreement which expires December 30, 1999. OE must pay an annual
facility fee of 0.20% on the total credit facility amount. In addition,
the credit agreement provides that OE maintain unused first mortgage
bond capability for the full credit agreement amount under OE's
indenture as potential security for the unsecured borrowings.
CEI and TE have letters of credit of approximately $225
million in connection with the sale and leaseback of Beaver Valley Unit
2 that expire in June 1999. The letters of credit are secured by first
mortgage bonds of CEI and TE in the proportion of 40% and 60%,
respectively (see Note 2).
OE's and Penn's nuclear fuel purchases are financed through
the issuance of OES Fuel commercial paper and loans, both of which are
supported by a $180.5 million long-term bank credit agreement which
expires March 31, 2001. Accordingly, the commercial paper and loans are
reflected as long-term debt on the Consolidated Balance Sheets. OES
Fuel must pay an annual facility fee of 0.20% on the total line of
credit and an annual commitment fee of 0.0625% on any unused amount.
4. SHORT-TERM BORROWINGS AND BANK LINES OF CREDIT:
Short-term borrowings outstanding at December 31, 1998,
consisted of $134.5 million of bank borrowings and $120.0 million of
OES Capital, Incorporated (OES Capital) commercial paper. OES Capital
is a wholly owned subsidiary of OE whose borrowings are secured by
customer accounts receivable. OES Capital can borrow up to $120 million
under a receivables financing agreement at rates based on certain bank
commercial paper and is required to pay an annual fee of 0.26% on the
amount of the entire finance limit. The receivables financing agreement
expires in 1999.
The Companies have various credit facilities with domestic
banks that provide for borrowings of up to $175 million under various
interest rate options. OE's short-term borrowings may be made under its
line of credit on its unsecured notes. To assure the availability of
these lines, the Companies are required to pay annual commitment fees
that vary from 0.20% to 0.50%. These lines expire at various times
during 1999. The weighted average interest rates on short-term
borrowings outstanding at December 31, 1998 and 1997, were 5.67% and
6.02%, respectively.
5. COMMITMENTS, GUARANTEES AND CONTINGENCIES:
CAPITAL EXPENDITURES-
The Companies' current forecasts reflect expenditures of
approximately $2.2 billion for property additions and improvements from
1999-2003, of which approximately $556 million is applicable to 1999.
Investments for additional nuclear fuel during the 1999-2003 period are
estimated to be approximately $399 million, of which approximately $46
million applies to 1999. During the same periods, the Companies'
nuclear fuel investments are expected to be reduced by approximately
$438 million and $93 million, 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 $9.7 billion. The
amount is covered by a combination of private insurance and an industry
retrospective rating plan. Based on their present ownership and
leasehold interests in the Beaver Valley Station, Davis-Besse Plant and
the Perry Plant, the Companies' maximum potential assessment under the
industry retrospective rating plan (assuming the other co-owner
contributes its proportionate share of any assessments under the
retrospective rating plan) would be $286.3 million per incident but not
more than $32.5 million in any one year for each incident.
The Companies are also insured as to their respective
interests in the Beaver Valley Station, Davis-Besse Plant and the Perry
Plant under policies issued to the operating company for each plant.
Under these policies, up to $2.75 billion is provided for property
damage and decontamination and decommissioning costs. The Companies
have also obtained approximately $1.22 billion of insurance coverage
for replacement power costs for their respective interests in Perry,
Davis-Besse and Beaver Valley. Under these policies, the Companies can
be assessed a maximum of approximately $39.9 million for incidents at
any covered nuclear facility occurring during a policy year which are
in excess of accumulated funds available to the insurer for paying
losses.
The Companies intend to maintain insurance against nuclear
risks as described above as long as it is available. To the extent that
replacement power, property damage, 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 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, 1998, the Companies' shares
of the guarantees (which approximate fair market value) were $43.2
million. 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 $220.1 million, $135.3 million and
$113.8 million during 1998, 1997 and 1996, respectively. The Companies'
minimum payment for 1999 is approximately $58 million. The contract
expires December 31, 1999.
ENVIRONMENTAL MATTERS-
Various federal, state and local authorities regulate the
Companies with regard to air and water quality and other environmental
matters. The Companies estimate additional capital expenditures for
environmental compliance of approximately $400 million, which is
included in the construction forecast provided under "Capital
Expenditures" for 1999 through 2003.
The Companies are in compliance with the current sulfur
dioxide (SO2) and nitrogen oxides (NOx) reduction requirements under
the Clean Air Act Amendments of 1990. SO2 reductions in 1999 will be
achieved by burning lower-sulfur fuel, generating more electricity from
lower-emitting plants, and/or purchasing emission allowances. Plans for
complying with reductions required for the year 2000 and thereafter
have not been finalized. In September 1998, the Environmental
Protection Agency (EPA) finalized regulations requiring additional NOx
reductions from the Companies' Ohio and Pennsylvania facilities by May
2003. The EPA`s NOx Transport Rule imposes uniform reductions of NOx
emissions across a region of twenty-two states and the District of
Columbia, including Ohio and Pennsylvania, based on a conclusion that
such NOx emissions are contributing significantly to ozone pollution in
the eastern United States. By September 1999, each of the twenty-two
states are required to submit revised State Implementation Plans (SIP)
which comply with individual state NOx budgets established by the EPA.
These state NOx budgets contemplate an 85% reduction in utility plant
NOx emissions from 1990 emissions. A proposed Federal Implementation
Plan accompanied the NOx Transport Rule and may be implemented by the
EPA in states which fail to revise their SIP. In another separate but
related action, eight states filed petitions with the EPA under Section
126 of the Clean Air Act seeking reductions of NOx emissions which are
alleged to contribute to ozone pollution in the eight petitioning
states. The EPA suggests that the Section 126 petitions will be
adequately addressed by the NOx Transport Program, but a September 1998
proposed rulemaking established an alternative program which would
require nearly identical 85% NOx reductions at the Companies' Ohio and
Pennsylvania plants by May 2003 in the event implementation of the NOx
Transport Rule is delayed. The Companies continue to evaluate their
compliance plans and other compliance options and currently estimate
the additional capital expenditures for NOx reductions may reach $500
million.
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 Companies cannot
predict what action the EPA may take in the future with respect to the
interim enforcement policy.
In July 1997, the EPA promulgated changes in the National
Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS
for previously unregulated ultra-fine particulate matter. The cost of
compliance with these regulations may be substantial and depends on the
manner in which they are implemented by the states in which the
Companies operate affected facilities.
CEI and TE have been named as "potentially responsible
parties" (PRPs) at waste disposal sites which may require cleanup under
the Comprehensive Environmental Response, Compensation and Liability
Act of 1980. Allegations that CEI and TE disposed of hazardous
substances at historical sites and the liability involved, are often
unsubstantiated and subject to disputes. Federal law provides that all
PRPs for a particular site be held liable on a joint and several basis.
CEI and TE have accrued a liability of $5.8 million as of December 31,
1998, based on estimates of the costs of cleanup and the proportionate
responsibility of other PRPs for such costs. CEI and TE believe that
waste disposal costs will not have a material adverse effect on their
financial condition, cash flows or results of operations.
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 while they remain regulated, 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.
6. SEGMENT INFORMATION:
The Company adopted SFAS 131, "Disclosure About Segments of
an Enterprise and Related Information," in 1998. The Company's primary
segment is its Electric Utility Group which includes four regulated
electric utility operating companies that provide electric service in
Ohio and Pennsylvania. Its other material business segment is FETPM
which markets and trades electricity in nonregulated markets. Financial
data for these business segments and products and services are as
follows:
Segment Financial Information
- -----------------------------
FE Trading
Electric & Power All Reconciling
Utilities Marketing Other Eliminations Totals
--------- ---------- ----- ------------ ------
(In millions)
1998
----
External revenues $ 5,201 $410 $ 250 $ -- $ 5,861
Intersegment revenues 32 27 96 (155) --
Total revenues 5,233 437 346 (155) 5,861
Depreciation and amortization 730 -- 11 -- 741
Net interest charges 590 2 69 (60) 601
Income taxes 337 (35) (2) -- 300
Extraordinary Item:
Pennsylvania restructuring (31) -- -- -- (31)
Net income/Earnings on common
stock 478 (52) 1 (16) 411
Total assets 18,188 54 1,742 (1,920) 18,064
Property additions 304 -- 64 -- 368
Acquisitions -- -- 285 -- 285
1997
----
External revenues $ 2,843 $ 43 $ 74 $ -- $ 2,960
Intersegment revenues 33 -- 106 (139) --
Total revenues 2,876 43 180 (139) 2,960
Depreciation and amortization 470 -- 5 -- 475
Net interest charges 300 -- 60 (51) 309
Income taxes 205 -- 3 -- 208
Net income/Earnings on common
stock 335 (1) 4 (32) 306
Total assets 18,520 32 1,209 (1,680) 18,081
Property additions 166 -- 38 -- 204
Acquisitions -- -- 1,582 -- 1,582
1996
----
External revenues $ 2,499 $ -- $ 23 $ -- $ 2,522
Intersegment revenues 33 -- 109 (142) --
Total revenues 2,532 -- 132 (142) 2,522
Depreciation and amortization 378 -- 5 -- 383
Net interest charges 256 -- 57 (48) 265
Income taxes 195 -- 6 -- 201
Net income/Earnings on common
stock 337 -- 7 (41) 303
Total assets 9,406 -- 1,013 (1,365) 9,054
Property additions 124 -- 24 -- 148
Products and Services
- ---------------------
Oil & Gas Energy Related
Electricity Sales and Sales and
Year Sales Production Services Other
---- ----------- ---------- -------------- -----
(In millions)
1998 $4,980 $26 $853 $ 2
1997 2,775 -- 185 --
1996 2,435 -- 87 --
7. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED):
The following summarizes certain consolidated operating results
by quarter for 1998 and 1997.
March 31, June 30, September 30, December 31,
Three Months Ended 1998 1998 1998 1998
- --------------------------------------------------------------------------------------------
(In millions, except per share amounts)
Revenues $1,344.2 $1,410.6 $1,633.6 $1,472.9
Expenses 988.3 1,140.9 1,203.3 1,164.7
- ---------------------------------------------------------------------------------------------
Income Before Interest and Income Taxes 355.9 269.7 430.3 308.2
Net Interest Charges 143.6 154.6 152.1 150.7
Income Taxes 88.6 55.1 115.2 62.8
- ---------------------------------------------------------------------------------------------
Income Before Extraordinary Item 123.7 60.0 163.0 94.7
Extraordinary Item (Net of Income
Taxes)(Note 1) -- (30.5) -- --
- ---------------------------------------------------------------------------------------------
Net Income $ 123.7 $ 29.5 $ 163.0 $ 94.7
=============================================================================================
Earnings per Share of Common Stock
Before Extraordinary Item $ .56 $ .27 $ .71 $ .41
Extraordinary Item (Net of Income
Taxes)(Note 1) -- (.14) -- --
- ---------------------------------------------------------------------------------------------
Earnings per Share of Common Stock $ .56 $ .13 $ .71 $ .41
=============================================================================================
March 31, June 30, September 30, December 31,
Three Months Ended 1997 1997 1997 1997
- --------------------------------------------------------------------------------------------
(In millions, except per share amounts)
Revenues $626.2 $614.4 $671.2 $1,048.4
Expenses 436.9 425.4 459.5 816.1
- --------------------------------------------------------------------------------------------
Income Before Interest and Income Taxes 189.3 189.0 211.7 232.3
Net Interest Charges 67.0 66.2 64.4 110.9
Income Taxes 49.4 49.0 58.6 51.0
- ---------------------------------------------------------------------------------------------
Net Income $ 72.9 $ 73.8 $ 88.7 $ 70.4
=============================================================================================
Earnings per Share of Common Stock $ .51 $ .51 $ .61 $ .36
=============================================================================================
<FN>
Results for CEI and TE are included from the November 8, 1997 acquisition date through
December 31, 1998.
8. PRO FORMA COMBINED CONDENSED FIRSTENERGY STATEMENTS OF INCOME
(UNAUDITED):
The Company was formed on November 8, 1997 by the merger of
OE and Centerior. The merger was accounted for as a purchase of
Centerior's net assets with 77,637,704 shares of FirstEnergy Common
Stock through the conversion of each outstanding Centerior Common Stock
share into 0.525 of a share of FirstEnergy Common Stock (fractional
shares were paid in cash). Based on an imputed value of $20.125 per
share, the purchase price was approximately $1.582 billion, which also
included approximately $20 million of merger related costs. Goodwill of
approximately $2.0 billion was recognized (to be amortized on a
straight-line basis over forty years), which represented the excess of
the purchase price over Centerior's net assets after fair value
adjustments.
Accumulated amortization of goodwill was approximately $59
million as of December 31, 1998. The merger purchase accounting
adjustments, which were recorded in the records of Centerior's direct
subsidiaries, included recognizing estimated severance and other
compensation liabilities ($80 million). The amount charged against the
liability in 1998 relating to the costs of involuntary employee
separation was $41 million. In addition, the liability was reduced to
approximately $9 million as of December 31, 1998 to represent potential
costs associated with the separation of 493 CEI employees. The
liability adjustment was offset by a corresponding reduction to
goodwill recognized in connection with the Centerior acquisition.
The following pro forma statements of income of FirstEnergy
give effect to the OE/Centerior merger as if it had been consummated on
January 1, 1996, with the purchase accounting adjustments actually
recognized in the business combination.
Year Ended December 31,
-----------------------
1997 1996
- ------------------------------------------------------------------
(In millions, except per share amounts)
Revenues $5,206 $5,089
Expenses 3,800 3,671
- ------------------------------------------------------------------
Income Before Interest and Income Taxes 1,406 1,418
Net Interest Charges 643 634
Income Taxes 336 316
- ------------------------------------------------------------------
Net Income $ 427 $ 468
==================================================================
Earnings per Share of Common Stock $ 1.92 $ 2.11
===================================================================
Pro forma adjustments reflected above include: (1) adjusting
CEI and TE nuclear generating units to fair value based upon
independent appraisals and estimated discounted future cash flows based
on management's estimate of cost recovery; (2) goodwill recognized
representing the excess of the purchase price over Centerior's adjusted
net assets; (3) elimination of revenue and expense transactions between
OE and Centerior; (4) amortization of the fair value adjustment for
long-term debt; and (5) adjustments for estimated tax effects of the
above adjustments.
Report of Independent Public Accountants
To the Stockholders and Board of Directors of FirstEnergy Corp.:
We have audited the accompanying consolidated balance sheets and
consolidated statements of capitalization of FirstEnergy Corp. (an Ohio
corporation) and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, common stockholders' equity,
preferred stock, cash flows and taxes for each of the three years in
the period ended December 31, 1998. These 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 FirstEnergy
Corp. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three
years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
February 12, 1999
1