-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KCHqZ3dwA4Wg78SQ5FflFmc5i5AYqXBbnWVN7f6EMJoDSGkh7LDIvUgd+H0VbZLp XeEQ6pLFqGlaHJOsIfgfZw== 0000073960-96-000001.txt : 19960227 0000073960-96-000001.hdr.sgml : 19960227 ACCESSION NUMBER: 0000073960-96-000001 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960208 ITEM INFORMATION: Acquisition or disposition of assets FILED AS OF DATE: 19960223 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO EDISON CO CENTRAL INDEX KEY: 0000073960 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 340437786 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-02578 FILM NUMBER: 96524716 BUSINESS ADDRESS: STREET 1: 76 S MAIN ST CITY: AKRON STATE: OH ZIP: 44308 BUSINESS PHONE: 2163845100 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported) February 8, 1996 OHIO EDISON COMPANY (Exact name of Registrant as specified in its charter) Ohio 1-2578 34-0437786 (State or other jurisdiction of (Commission (I.R.S. Employer incorporation or organization) File Number) Identification No.) 76 South Main Street, Akron, Ohio 44308 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 216-384-5100 Item 5. Other Events Ohio Edison Company reports audited consolidated financial statements for the year ended December 31, 1995 and related matters. Such financial statements and related matters consist of the following: 1) Management's Discussion and Analysis of Results of Operations and Financial Condition 2) Consolidated Statements of Income 3) Consolidated Balance Sheets 4) Consolidated Statements of Capitalization 5) Consolidated Statements of Retained Earnings 6) Consolidated Statements of Capital Stock and Other Paid-In Capital 7) Consolidated Statements of Cash Flows 8) Consolidated Statements of Taxes 9) Notes to Consolidated Financial Statements 10) Report of Independent Public Accountants 11) Consent of Independent Public Accountants Item 7. Exhibits Exhibit Number - ------ 23 Consent of Independent Public Accountants. - 1 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS We continued making significant progress in 1995 as our Company prepares for the rapidly changing environment within the electric utility industry. The most significant event during the year was the approval by the Public Utilities Commission of Ohio (PUCO) of the Company's Rate Reduction and Economic Development Plan (Regulatory Plan). The Regulatory Plan is designed to enhance and accelerate economic development within the Company's service area and to assure our customers of long-term competitive pricing for energy services. The Regulatory Plan, which went into effect November 1, 1995, freezes base electric rates until January 1, 2006, at which time base rates will be reduced by $300,000,000, or approximately 20 percent below current levels, on an annual basis. During the ten-year rate-freeze period, which will remain in effect unless certain significant events occur, transition rate credits will be implemented for customers served under the General Service-Large rates (primarily industrial customers). Also, the monthly customer charge will be reduced for customers served under the General Service-Secondary and Residential rates. Combined, these transition rate credits are expected to reduce operating revenues by approximately $600,000,000 during the ten-year period. A major component of the Regulatory Plan is our commitment to reduce fixed costs during the ten-year period. The PUCO ordered the Company to recognize additional depreciation expense related to our generating assets and additional amortization of regulatory assets during the ten-year Regulatory Plan period of at least $2,000,000,000 more than the amount that would have been recognized if the Regulatory Plan were not in effect. The Regulatory Plan includes a cap (based upon the most recent common equity return authorized for the Company by the PUCO) on the amount the Company may earn applicable to its common stockholders in any calendar year during the Regulatory Plan period. If the cap is exceeded, the excess will be credited to our customers in a future period. The Companies achieved record operating revenues in 1995, a 4.0% increase over the previous record set in 1993. The increased revenues, in combination with our aggressive cost-control efforts, raised earnings on common stock to $2.05 per share in 1995 from $1.97 a year earlier. The 1993 amount of $.39 was adversely affected by nonrecurring charges of $1.43 per share, - 2 - which included a $276,578,000 after-tax write-off of Perry Unit 2, the expected resolution of fuel cost recovery issues in Pennsylvania and certain costs associated with the Performance Initiatives program. The effect of the 1993 write-off was partially offset by a $58,201,000 credit from the cumulative effect of a change in accounting to accrue metered but unbilled revenue (see Note 2). Operation and maintenance expenses were up by 2.5 percent in 1995, mostly due to incremental fuel and purchased power costs incurred to meet the increased demand from our customers. With our revenues increasing at a higher rate than our variable costs, we were able to achieve record operating income for the second consecutive year. A review of the work we do was an integral part of Performance Initiatives which began in 1993 and continues as a part of our Corporate Strategy program. Efficiencies continue to be identified that have resulted in further opportunities for restructuring. In 1995, we reduced our work force by 293 employees following the shutdown of several old generating units and the restructuring of our generation and transmission group. We expect these actions to result in annual savings of approximately $18,000,000. Also, using economic value added-based justification for capital spending contributed to a $67,000,000 reduction in our construction expenditures in 1995 compared to our base year of 1993. For the third straight year, the Companies achieved record retail kilowatt-hour sales. The following table summarizes the sources of changes in operating revenues for 1995 and 1994 as compared to the previous year: 1995 1994 (In millions) Increased retail kilowatt-hour sales $105.1 $ 2.4 Reduced average retail electric price (23.3) (3.1) Sales to utilities 16.6 2.2 Other (0.7) (3.2) ----- ------ Net Increase (Decrease) $ 97.7 $ (1.7) ====== ====== An improving local economy and increased weather-related demand during the second half of 1995 helped us achieve record retail sales of 26.4 billion kilowatt-hours. Our customer base continues to grow with more than 12,300 new retail customers added in 1995, after gaining approximately 13,100 customers the previous year. Residential sales increased 4.2% in 1995 after falling slightly the previous year. Commercial sales rose 3.9% during the year, which follows a 1.4% gain in 1994. A 6.8% increase in industrial sales resulted, in part, from the - 3 - resumption of operations by two major customers that had reduced operations in 1994. Excluding sales to these customers, industrial sales were 3.8% higher than last year's level. We began supplying 300 megawatts of power to another utility in the second quarter of 1995 under a short-term contract that expired at the end of 1995. This contract was the principal cause for an 18.2% increase in sales to other utilities in 1995, which followed an 18.2% decrease the previous year. We have signed short-term contracts with other utilities in 1996 to replace the expired 1995 contract. As a result of all of these factors, total kilowatt-hour sales were up 7.5% compared with sales in 1994, which were down 3.9% from 1993. Because of higher kilowatt-hour sales, we spent 5.6% more on fuel and purchased power in 1995. During the same period, our nuclear expenses fell 4.9% compared to the previous year--nuclear expenses were higher in 1994 mainly due to corrective maintenance work at the Perry Plant. Expenses associated with scheduled maintenance outages at our fossil-fueled generating units contributed to a 4.6% increase in other operating costs during 1995, compared to last year. Other operating costs were down significantly in 1994 from the previous year due to a one-time $39,000,000 charge in 1993 related to Performance Initiatives. That charge consisted of $9,000,000 for obsolete materials and supplies and $30,000,000 estimated for costs of early retirement programs offered to qualifying employees resulting from strategies identified in the Performance Initiatives program. Higher depreciation charges in 1995 resulted mainly from $27,000,000 of additional nuclear depreciation authorized under our Regulatory Plan discussed earlier. A higher level of depreciable utility plant and an increase in the accrual for nuclear decommissioning costs also contributed to the increase. The change between 1995 and 1994 in the amortization of net regulatory assets was due to increased amortization of deferred nuclear costs and the discontinuation of deferral accounting for postretirement benefits, also in accordance with the Regulatory Plan. Penn Power provided an $8,728,000 reserve for deferred postretirement benefit costs in 1994, which was responsible for the majority of the change in net amortization of regulatory assets compared to 1993. Overall, interest costs were lower in 1995 than in 1994. Interest on long-term debt decreased due to refinancing and redemption of higher-cost debt. Other interest expense increased compared to last year due primarily to higher levels of short- term borrowing. We also discontinued deferring nuclear unit interest in the second half of 1995, consistent with our Regulatory Plan. Preferred and preference stock dividend requirements in 1995 include approximately $2,300,000 for premiums paid on preferred stock redemptions. - 4 - CAPITAL RESOURCES AND LIQUIDITY We have significantly improved our financial position over the past five years. Cash generated from operations was 62% higher in 1995 than it was in 1990 due to higher revenues and aggressive cost controls. By the end of 1995, we were serving about 60,000 more customers than we were five years ago, with approximately 2,000 fewer employees. As a result, our customer/employee ratio has improved significantly over the past five years, standing at 228 customers per employee at the end of 1995, compared to 152 at the end of 1990. In addition, capital expenditures have dropped substantially during that period. Expenditures in 1995 were approximately 28% lower than they were in 1990, and annual depreciation charges have exceeded property additions since the end of 1987. In fact, our projections for the next five years indicate that annual depreciation charges will exceed construction program expenditures by at least two to three times because of our reduced capital requirements, coupled with the additional depreciation in accordance with the Regulatory Plan. Over the past five years, we have aggressively taken advantage of opportunities in the financial markets to reduce our embedded capital costs. Through refinancing activities, we have reduced the average cost of outstanding debt from 9.28% at the end of 1990 to 8.00% at the end of 1995. Also, the cost of outstanding preferred and preference stock was reduced from 8.59% at the end of 1990 to 7.59% at the end of 1995. We have improved our financial position as a result of these actions. For example, we have enhanced our fixed charge coverage ratios and the percentage of common equity to total capitalization. Our SEC ratio of earnings to fixed charges improved to 2.32 at the end of 1995 from 1.97 at the end of 1990. The Company's indenture ratio, which is used to determine the ability to issue first mortgage bonds, improved from 4.79 at the end of 1990 to 5.78 at the end of 1995. Over the same period, the charter ratio, a measure of our ability to issue preferred stock, improved from 1.87 to 2.31, and, our common equity percentage of capitalization (excluding the Employee Stock Ownership Plan Trust adjustment) rose from approximately 42% at the end of 1990 to about 45% at the end of 1995. At the end of 1995, we had the capability to issue $1,466,000,000 principal amount of first mortgage bonds and $1,673,000,000 of preferred stock (assuming no additional debt was issued). However, our cash requirements in 1996 for operations and scheduled debt maturities are expected to be met without issuing additional securities. During 1995, we reduced our total debt by approximately $285,000,000. We expect to pay off over $1,300,000,000 of debt over the next five years with internal cash, including $264,000,000 in 1996. - 5 - We had about $30,000,000 of cash and temporary investments and $120,000,000 of short-term indebtedness on December 31, 1995. Through OES Fuel credit facilities, we had the capability to borrow approximately $128,000,000 as of the end of 1995. We also had $52,000,000 of unused short-term bank lines of credit, and $50,000,000 of bank facilities that provide for borrowings on a short-term basis at the banks' discretion. Our capital spending for the period 1996-2000 is expected to be about $650,000,000 (excluding nuclear fuel), of which approximately $160,000,000 applies to 1996. This spending level is more than $400,000,000 lower than actual capital outlays over the past five years. Investments for additional nuclear fuel during the 1996-2000 period are estimated to be approximately $180,000,000, of which about $29,000,000 applies to 1996. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $191,000,000 and $39,000,000, respectively, as the nuclear fuel is consumed. Also, we have operating lease commitments of approximately $594,000,000 for the 1996-2000 period, of which approximately $108,000,000 relates to 1996. We recover the cost of nuclear fuel consumed and operating leases through our electric rates. Reference is made to Note 1 for a discussion of regulatory assets. In accordance with the Regulatory Plan, the Company's rates include recovery of all regulatory assets and authorizes the Company to accelerate amortization of those regulatory assets over the next ten years. One of Penn Power's former municipal customers signed a contract with another energy supplier in November. Penn Power and the former customer are in dispute over Penn Power's proposed transmission rate. Both parties have filed proposals with the Federal Energy Regulatory Commission requesting it to establish final terms. No ruling has yet been issued. Sales to this municipality were approximately $1,500,000 in 1995. OUTLOOK Many competitive challenges lie ahead as the electric utility industry becomes less regulated and more energy suppliers enter the marketplace. Retail wheeling, which would allow retail customers to purchase electricity from other energy producers, could be one of those challenges, if legislators choose to move in that direction. The Company's Regulatory Plan provides the foundation to position us to meet those challenges by significantly reducing fixed costs and lowering rates to a more competitive level. For the Regulatory Plan to succeed, it is imperative that we build on the success of our Performance - 6 - Initiatives and Corporate Strategy programs and continue to find ways to increase revenues, reduce costs and enhance shareholder value. In December 1995, we announced that we will offer a voluntary retirement program to 174 eligible union-represented employees beginning March 1, 1996. The program is expected to produce annual savings of up to $7,900,000. Also, in January 1996, employees at the Bruce Mansfield Plant were informed of future staff reductions that will affect approximately 105 bargaining unit employees and 35 management and administrative/office employees. The reduction is expected to occur between February 15, 1996, and April 1, 1996. This work force reduction is the result of continuing efforts to make the plant's costs more competitive. Effective operation of the nuclear facilities we jointly own will also help us meet these competitive challenges. In 1995, we increased our annual funding of the decommissioning obligation. As discussed in Note 1, the Financial Accounting Standards Board (FASB) is reviewing the accounting for decommissioning costs regarding the recognition, measurement and classification of decommissioning costs in the financial statements of electric utilities. The FASB issued its proposed accounting standard in February 1996. The Clean Air Act Amendments of 1990, discussed in Note 7, require additional emission reductions by 2000. We are pursuing cost-effective compliance strategies for meeting those requirements. Through our Performance Initiatives and Corporate Strategy programs, we have identified substantial savings that will better position us to successfully compete in the future. We continue to identify opportunities for revenue enhancement and cost reduction. Also, our Regulatory Plan provides more regulatory assurance that we will collect our fixed costs and minimizes the risk of not recovering some portion of our assets from our customers. Our focus is to exceed customers' service expectations by providing superior value and high-quality products and services at competitive prices in order to maximize the value of our shareholders' investment in the Company. - 7 - OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------ (In thousands, except per share amounts) OPERATING REVENUES $2,465,846 $2,368,191 $2,369,940 ---------- ---------- ---------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 465,483 440,936 456,494 Nuclear operating costs 289,717 304,716 290,321 Other operating costs 446,967 427,133 474,241 ---------- ---------- ---------- Total operation and maintenance expenses 1,202,167 1,172,785 1,221,056 Provision for depreciation 256,085 220,502 217,980 General taxes 243,179 237,020 245,554 Amortization of net regulatory assets 5,825 (884) (6,753) Income taxes 191,972 181,514 166,773 ---------- ---------- ---------- Total operating expenses and taxes 1,899,228 1,810,937 1,844,610 ---------- ---------- ---------- OPERATING INCOME 566,618 557,254 525,330 ---------- ---------- ---------- OTHER INCOME AND EXPENSE: Perry Unit 2 termination (Note 3) -- -- (390,835) Income tax benefit from Perry Unit 2 termination -- -- 142,092 Other 14,424 16,459 19,921 ---------- ---------- ---------- Total other income (expense) 14,424 16,459 (228,822) ---------- ---------- ---------- TOTAL INCOME 581,042 573,713 296,508 ---------- ---------- ---------- NET INTEREST AND OTHER CHARGES: Interest on long-term debt 243,570 259,554 262,861 Deferred nuclear unit interest (4,250) (8,511) (8,518) Allowance for borrowed funds used during construction and capitalized interest (5,668) (5,156) (4,666) Other interest expense 22,944 18,931 16,445 Subsidiaries' preferred stock dividend requirements 7,205 5,364 5,863 ---------- ---------- ---------- Net interest and other charges 263,801 270,182 271,985 ---------- ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING 317,241 303,531 24,523 Cumulative effect to January 1, 1993, of a change in accounting for unbilled revenues (net of income taxes of $33,632,000) (Note 2) -- -- 58,201 ---------- ---------- ---------- NET INCOME 317,241 303,531 82,724 PREFERRED AND PREFERENCE STOCK DIVIDEND REQUIREMENTS 22,494 21,679 23,707 ---------- ---------- ---------- EARNINGS ON COMMON STOCK $ 294,747 $ 281,852 $ 59,017 ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 143,692 143,237 152,569 ========== ========== ========== EARNINGS PER SHARE OF COMMON STOCK: Before cumulative effect of a change in accounting $2.05 $1.97 $ .01 Cumulative effect to January 1, 1993, of a change in accounting for unbilled revenues (Note 2) -- -- .38 ----- ----- ----- EARNINGS PER SHARE OF COMMON STOCK $2.05 $1.97 $ .39 ===== ===== ===== DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $1.50 $1.50 $1.50 ===== ===== ===== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
- 8 - OHIO EDISON COMPANY CONSOLIDATED BALANCE SHEETS
At December 31, 1995 1994 - -------------------------------------------------------------------------------------------------------- (In thousands) ASSETS UTILITY PLANT: In service, at original cost $8,556,722 $8,518,050 Less--Accumulated provision for depreciation 3,051,148 2,910,587 ---------- ---------- 5,505,574 5,607,463 ---------- ---------- Construction work in progress-- Electric plant 150,262 174,970 Nuclear fuel 39,613 52,470 ---------- ---------- 189,875 227,440 ---------- ---------- 5,695,449 5,834,903 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Letter of credit collateralization (Note 4) 277,763 277,763 Other 252,005 197,546 ---------- ---------- 529,768 475,309 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 29,830 23,291 Receivables-- Customers (less accumulated provisions of $2,528,000 and $2,517,000, respectively, for uncollectible accounts) 274,692 254,515 Other 54,988 54,713 Materials and supplies, at average cost-- Owned 68,829 122,337 Under consignment 41,080 -- Prepayments 82,257 71,836 ---------- ---------- 551,676 526,692 ---------- ---------- DEFERRED CHARGES: Regulatory assets 1,786,543 1,898,875 Unamortized sale and leaseback costs 103,091 106,883 Property taxes 104,071 106,458 Other 53,336 44,844 ---------- ---------- 2,047,041 2,157,060 ---------- ---------- $8,823,934 $8,993,964 ========== =========== - 9 - CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Consolidated Statements of Capitalization): Common stockholders' equity $2,407,871 $2,317,197 Preferred stock-- Not subject to mandatory redemption 160,965 277,335 Subject to mandatory redemption 25,000 25,000 Preferred stock of consolidated subsidiary-- Not subject to mandatory redemption 50,905 50,905 Subject to mandatory redemption 15,000 15,000 Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company subordinated debentures 120,000 -- Long-term debt 2,786,256 3,166,593 ---------- ---------- 5,565,997 5,852,030 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt 376,716 227,496 Short-term borrowings (Note 6) 119,965 174,642 Accounts payable 100,536 100,884 Accrued taxes 131,432 140,629 Accrued interest 57,462 65,743 Other 196,482 152,856 ---------- ---------- 982,593 862,250 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 1,772,434 1,799,324 Accumulated deferred investment tax credits 213,876 223,827 Other 289,034 256,533 ---------- ---------- 2,275,344 2,279,684 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Notes 4 and 7) ---------- ---------- $8,823,934 $8,993,964 ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these balance sheets.
- 10 - OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION
At December 31, 1995 1994 - --------------------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) COMMON STOCKHOLDERS' EQUITY: Common stock, $9 par value, authorized 175,000,000 shares- 152,569,437 shares outstanding $1,373,125 $1,373,125 Other paid-in capital 726,307 724,848 Retained earnings (Note 5A) 471,095 389,600 Unallocated employee stock ownership plan common stock- 8,663,575 and 9,076,489 shares, respectively (Note 5B) (162,656) (170,376) ---------- ---------- Total common stockholders' equity 2,407,871 2,317,197 ---------- ---------- Number of Shares Optional Outstanding Redemption Price ------------------ --------------------- 1995 1994 Per Share Aggregate ------ ------ --------- --------- PREFERRED STOCK (Note 5C): Cumulative, $100 par value- Authorized 6,000,000 shares Not Subject to Mandatory Redemption: 3.90% 152,510 152,510 $103.63 $15,804 15,251 15,251 4.40% 176,280 176,280 108.00 19,038 17,628 17,628 4.44% 136,560 136,560 103.50 14,134 13,656 13,656 4.56% 144,300 144,300 103.38 14,917 14,430 14,430 7.24% -- 363,700 -- -- -- 36,370 7.36% -- 350,000 -- -- -- 35,000 8.20% -- 450,000 -- -- -- 45,000 --------- --------- ------- ---------- ---------- 609,650 1,773,350 63,893 60,965 177,335 Cumulative, $25 par value- Authorized 8,000,000 shares Not Subject to Mandatory Redemption: 7.75% 4,000,000 4,000,000 100,000 100,000 --------- --------- ---------- ---------- Total not subject to mandatory redemption 4,609,650 5,773,350 $63,893 160,965 277,335 ========= ========= ======= ---------- ---------- Cumulative, $100 par value- Subject to Mandatory Redemption (Note 5D): 8.45% 250,000 250,000 25,000 25,000 ========= ========= ----------- ---------- - 11 - PREFERRED STOCK OF CONSOLIDATED SUBSIDIARY (Note 5C): Pennsylvania Power Company Cumulative, $100 par value- Authorized 1,200,000 shares Not Subject to Mandatory Redemption: 4.24% 40,000 40,000 $103.13 $ 4,125 4,000 4,000 4.25% 41,049 41,049 105.00 4,310 4,105 4,105 4.64% 60,000 60,000 102.98 6,179 6,000 6,000 7.64% 60,000 60,000 101.42 6,085 6,000 6,000 7.75% 250,000 250,000 -- -- 25,000 25,000 8.00% 58,000 58,000 102.07 5,920 5,800 5,800 --------- --------- ------- ---------- ---------- Total not subject to mandatory redemption 509,049 509,049 $26,619 50,905 50,905 ========= ========= ======= ---------- ---------- Subject to Mandatory Redemption (Note 5D): 7.625% 150,000 150,000 15,000 15,000 ========= ========= ---------- ---------- COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES (Note 5E): Cumulative, $25 par value- Authorized 4,800,000 shares Subject to Mandatory Redemption: 9.00% 4,800,000 -- 120,000 -- ========= ========= ---------- ----------
- 12 - OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CAPITALIZATION (Continued)
At December 31, 1995 1994 1995 1994 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- (In thousands) LONG-TERM DEBT (Note 5F): First mortgage bonds: Ohio Edison Company- Pennsylvania Power Company- 12.740% due 1995 -- 30,000 9.000% due 1996 50,000 50,000 8.500% due 1996 150,000 150,000 9.740% due 1999-2019 20,000 20,000 8.750% due 1998 150,000 150,000 7.500% due 2003 40,000 40,000 6.875% due 1999 150,000 150,000 6.375% due 2004 50,000 50,000 6.375% due 2000 80,000 80,000 6.625% due 2004 20,000 20,000 7.375% due 2002 120,000 120,000 8.500% due 2022 27,250 50,000 7.500% due 2002 34,265 34,265 7.625% due 2023 19,500 40,000 8.250% due 2002 125,000 125,000 ------- ------- 8.625% due 2003 150,000 150,000 6.875% due 2005 80,000 80,000 9.750% due 2019 35,300 35,300 8.750% due 2022 94,210 100,000 7.625% due 2023 75,000 75,000 7.875% due 2023 100,000 100,000 ---------- ---------- Total first mortgage bonds 1,343,775 1,379,565 226,750 270,000 1,570,525 1,649,565 ---------- ---------- ------- ------- ---------- ---------- Secured notes: Ohio Edison Company Pennsylvania Power Company- 8.380% due 1996 16,464 53,718 4.750% due 1998 850 850 7.930% due 2002 69,579 77,997 6.080% due 2000 23,000 23,000 7.680% due 2005 200,000 200,000 5.400% due 2013 1,000 1,000 6.750% due 2015 40,000 -- 8.125% due 2015 -- 14,250 10.500% due 2015 -- 60,000 5.400% due 2017 10,600 10,600 10.625% due 2015 -- 40,000 7.150% due 2017 17,925 17,925 7.450% due 2016 47,725 47,725 5.900% due 2018 16,800 16,800 7.100% due 2018 26,000 26,000 8.100% due 2018 10,300 10,300 7.050% due 2020 60,000 -- 8.100% due 2020 5,200 5,200 7.000% due 2021 69,500 69,500 7.150% due 2021 14,482 14,482 7.150% due 2021 443 443 6.150% due 2023 12,700 12,700 7.625% due 2023 50,000 50,000 6.450% due 2027 14,500 14,500 8.100% due 2023 30,000 30,000 5.450% due 2028 6,950 6,950 7.750% due 2024 108,000 108,000 6.000% due 2028 14,250 -- 5.625% due 2029 50,000 50,000 5.950% due 2029 238 238 5.950% due 2029 56,212 56,212 ------- ------- 5.450% due 2033 14,800 14,800 ---------- ---------- 838,723 884,395 148,795 148,795 987,518 1,033,190 ---------- ---------- ------- ------- OES Fuel- 6.08% weighted average interest rate 97,162 124,984 ---------- ---------- Total secured notes 1,084,680 1,158,174 ---------- ---------- Unsecured notes: Ohio Edison Company- 9.440% due 1995 -- 75,000 7.430% due 1997 100,000 100,000 8.635% due 1997 50,000 50,000 4.900% due 2012 50,000 50,000 4.250% due 2014 50,000 50,000 3.450% due 2015 50,000 50,000 4.400% due 2018 56,000 56,000 4.750% due 2018 57,100 57,100 4.300% due 2032 53,400 53,400 ---------- ---------- Total unsecured notes 466,500 541,500 ---------- ---------- Capital lease obligations (Note 4) 48,221 54,180 ---------- ---------- Net unamortized discount on debt (6,954) (9,330) ---------- ---------- Long-term debt due within one year (376,716) (227,496) ---------- ---------- Total long-term debt 2,786,256 3,166,593 ---------- ---------- TOTAL CAPITALIZATION $5,565,997 $5,852,030 ============================================================================================================================ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
- 13 - OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
For the Years Ended December 31, 1995 1994 1993 - --------------------------------------------------------------------------------------------------- (In thousands) Balance at beginning of year $389,600 $322,821 $490,564 Net income 317,241 303,531 82,724 Tax benefit from ESOP dividends - - 5,256 -------- -------- -------- 706,841 626,352 578,544 - -------------------------------------------------------------------------------------------------- Cash dividends on preferred and preference stock 20,234 21,926 23,275 Cash dividends on common stock 215,512 214,826 228,855 Premium on redemption of preferred stock - - 3,593 -------- -------- -------- 235,746 236,752 255,723 -------- -------- -------- Balance at end of year (Note 5A) $471,095 $389,600 $322,821 - -------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CAPITAL STOCK AND OTHER PAID-IN CAPITAL Preferred and Preference Stock --------------------------------------------- Not Subject to Subject to Common Stock Unallocated Mandatory Redemption Mandatory Redemption --------------------------------- -------------------- -------------------- Other ESOP Par or Par or Number Par Paid-In Common Number Stated Number Stated of Shares Value Capital Stock of Shares Value of Shares Value --------- ----- ------- ----------- --------- ------ --------- ------ (Dollars in thousands) Balance, January 1, 1993 152,569,437 $1,373,125 $731,793 $(187,318) 3,542,399 $354,240 592,016 $ 64,062 Allocation of ESOP Shares 6,799 Sale of 7.75% Class A Preferred Stock (3,361) 4,000,000 100,000 Sale of 7.75% Preferred Stock (345) 250,000 25,000 Redemptions-- $102.50 Series (216) (5,400) (5,400) 8.24% Series (45,000) (4,500) 8.48% Series (6) (80,000) (8,000) 8.64% Series (400,000) (40,000) 9.12% Series (450,000) (45,000) 9.16% Series (80,000) (8,000) 11.00% Series (8,000) (800) 11.50% Series (60,000) (6,000) 13.00% Series (10,000) (1,000) - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1993 152,569,437 1,373,125 727,865 (180,519) 6,782,399 378,240 463,616 46,362 Minimum liability for unfunded retirement benefits (3,053) Allocation of ESOP Shares 36 10,143 Redemptions-- Market Auction Series (500,000) (50,000) 11.00% Series (3,616) (362) 13.00% Series (60,000) (6,000) - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1994 152,569,437 1,373,125 724,848 (170,376) 6,282,399 328,240 400,000 40,000 Minimum liability for unfunded retirement benefits 2,446 Allocation of ESOP Shares 1,274 7,720 Sale of 9% Preferred Stock 4,800,000 120,000 Redemptions-- 7.24% Series (720) (363,700) (36,370) 7.36% Series (609) (350,000) (35,000) 8.20% Series (932) (450,000) (45,000) - ---------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1995 152,569,437 $1,373,125 $726,307 $(162,656) 5,118,699 $211,870 5,200,000 $160,000 ============================================================================================================================ The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
- 14 - OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995 1994 1993 - ------------------------------------------------------------------------------------------------ (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $317,241 $303,531 $ 82,724 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation 256,085 220,502 217,980 Nuclear fuel and lease amortization 70,849 72,141 59,858 Deferred income taxes, net 53,395 21,156 (26,233) Investment tax credits, net (9,951) (8,036) (8,345) Allowance for equity funds used during construction - (5,277) (4,257) Deferred fuel costs, net 3,916 (2,656) (1,078) Perry Unit 2 termination - - 390,835 Cumulative effect of a change in accounting for unbilled revenues - - (58,201) Receivables (20,452) 32,113 (1,962) Materials and supplies 12,428 6,865 41,467 Accounts payable 3,545 (18,261) 9,823 Other 66,158 72,986 20,272 -------- -------- -------- Net cash provided from operating activities 753,214 695,064 722,883 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing-- Preferred stock 120,000 - 121,294 Long-term debt 254,365 434,759 765,358 Short-term borrowings, net - 70,516 - Redemptions and Repayments-- Preferred and preference stock 117,528 56,362 122,502 Long-term debt 499,276 483,347 773,128 Short-term borrowings, net 54,677 - 47,445 Dividend Payments-- Common stock 217,192 216,782 224,943 Preferred and preference stock 20,623 21,483 20,926 -------- -------- -------- Net cash used for financing activities 534,931 272,699 302,292 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 198,103 258,249 256,746 Letter of credit collateralization deposit - 277,763 - Other 13,641 22,752 18,367 -------- -------- -------- Net cash used for investing activities 211,744 558,764 275,113 -------- -------- -------- Net increase (decrease) in cash and cash equivalents 6,539 (136,399) 145,478 Cash and cash equivalents at beginning of year 23,291 159,690 14,212 -------- -------- -------- Cash and cash equivalents at end of year $ 29,830 $ 23,291 $159,690 ======== ======== ======== SUPPLEMENTAL CASH FLOWS INFORMATION: Cash Paid During the Year-- Interest (net of amounts capitalized) $254,789 $267,319 $262,410 Income taxes 178,643 143,202 94,272 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
- 15 - OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF TAXES
For the Years Ended December 31, 1995 1994 1993 (In thousands) GENERAL TAXES: Real and personal property $ 118,707 $ 113,484 $ 124,709 State gross receipts 100,591 100,996 97,348 Social security and unemployment 15,787 14,822 15,626 Other 8,094 7,718 7,871 ---------- ---------- ---------- Total general taxes $ 243,179 $ 237,020 $ 245,554 ========== ========== ========== PROVISION FOR INCOME TAXES: Currently payable- Federal $ 145,511 $ 161,219 $ 61,920 State 10,352 14,547 5,544 ---------- ---------- ---------- 155,863 175,766 67,464 ---------- ---------- ---------- Deferred, net- Federal 50,631 20,796 489 State 2,764 360 6,455 ---------- ---------- ---------- 53,395 21,156 6,944 ---------- ---------- ---------- Investment tax credit amortization (9,951) (8,036) (8,345) ---------- ---------- ---------- Total provision for income taxes $ 199,307 $ 188,886 $ 66,063 ========== ========== ========== INCOME STATEMENT CLASSIFICATION OF PROVISION FOR INCOME TAXES: Operating income $ 191,972 $ 181,514 $ 166,773 Other income 7,335 7,372 (134,342) Cumulative effect of a change in accounting -- -- 33,632 ---------- ---------- ---------- Total provision for income taxes $ 199,307 $ 188,886 $ 66,063 ========== ========== ========== RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES: Book income before provision for income taxes $ 516,548 $ 492,417 $ 148,787 ========== ========== ========== Federal income tax expense at statutory rate $ 180,792 $ 172,346 $ 52,075 Increases (reductions) in taxes resulting from- Amortization of investment tax credits (9,951) (8,036) (8,345) State income taxes net of federal income tax benefit 8,525 9,690 7,799 Amortization of tax regulatory assets 19,690 14,503 15,412 Other, net 251 383 (878) ---------- ---------- ---------- Total provision for income taxes $ 199,307 $ 188,886 $ 66,063 ========== ========== ========== ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31: Property basis differences $1,047,387 $1,024,737 $ 972,501 Allowance for equity funds used during construction 263,465 278,172 282,525 Deferred nuclear expense 271,114 277,951 283,134 Customer receivables for future income taxes 204,978 237,826 244,540 Deferred sale and leaseback costs 82,381 87,068 90,878 Unamortized investment tax credits (77,777) (82,491) (85,459) Other (19,114) (23,939) 10,432 ---------- ---------- ---------- Net deferred income tax liability $1,772,434 $1,799,324 $1,798,551 ========== ========== ========== The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
- 16 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements include Ohio Edison Company (Company) and its wholly owned subsidiaries. Pennsylvania Power Company (Penn Power) is the Company's principal subsidiary. All significant intercompany transactions have been eliminated. The Company and Penn Power (Companies) follow the accounting policies and practices prescribed by the Public Utilities Commission of Ohio (PUCO), the Pennsylvania Public Utility Commission (PPUC) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting period. REVENUES- The Companies' principal business is providing electric service to customers in central and northeastern Ohio and western Pennsylvania. The Companies' retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service through the end of the year (see Note 2). Receivables from customers include sales to residential, commercial and industrial customers located in the Companies' service area and sales to wholesale customers. There was no material concentration of receivables at December 31, 1995 or 1994, with respect to any particular segment of the Companies' customers. REGULATORY PLAN- In the second half of 1995 the PUCO approved the Company's Rate Reduction and Economic Development Plan (Regulatory Plan). As part of the Regulatory Plan, transition rate credits were implemented for customers on November 1, 1995, which are expected to reduce operating revenues by approximately $600,000,000 during the Regulatory Plan period, which expires December 31, 2005. The Regulatory Plan also established a revised fuel recovery rate formula, which eliminated the automatic pass-through of fuel costs to the Company's retail customers. Under the revised formula the fuel recovery rate will be adjusted based upon annual changes in the Gross Domestic Product Implicit Price Deflator. All of the Company's regulatory assets are now being recovered under provisions of the Regulatory Plan. In addition, the PUCO ordered the Company to recognize additional depreciation expense related to its generating assets and additional amortization of regulatory assets during the ten-year Regulatory Plan period of at least $2,000,000,000 more than the amount that would have been recognized if the Regulatory Plan were not in effect. These additional amounts are being recovered through current - 17 - rates. Among other provisions, the Regulatory Plan also limits the Company's annual earnings on common stock; any amounts otherwise earned in excess of the limitation would be credited to the Company's retail customers in a future period. MATERIALS AND SUPPLIES- The Companies recover fuel-related costs not otherwise included in base rates from retail customers through separate energy rates. Penn Power defers the difference between actual fuel-related costs incurred and the amounts currently recovered from customers, with any over or under collection from customers included as an adjustment to a subsequent energy rate. The Company followed this practice until July 1, 1995, at which time current period deferral for over or under collections ceased in accordance with the Regulatory Plan. In 1995, the Company sold substantially all of its materials and supplies, except for those located at generating units not operated by the Company. No gain or loss resulted from this transaction. The buyer now provides all of the Company's materials and supplies under a consignment arrangement. In accordance with Statement of Financial Accounting Standards (SFAS) No. 49, "Accounting for Product Financing Arrangements," the materials and supplies continue to be reflected as assets on the Consolidated Balance Sheet even though the supplier owns the material. UTILITY PLANT AND DEPRECIATION- Utility plant reflects the original cost of construction, including payroll and related costs such as taxes, employee benefits, administrative and general costs and financing costs (allowance for funds used during construction). The Companies provide for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The annual composite rate for electric plant was approximately 3.0% in 1995, 1994 and 1993. In addition to the straight-line depreciation recognized in 1995, the Company also recognized $27,000,000 of additional depreciation in accordance with the Regulatory Plan. Annual depreciation expense includes approximately $7,600,000 for future decommissioning costs applicable to the Companies' ownership and leasehold interests in three nuclear generating units. The Companies' share of the future obligation to decommission these units is approximately $399,000,000 in current dollars and (using a 2.8% escalation rate) approximately $865,000,000 in future dollars. The estimated obligation (based on site-specific studies) and the escalation rate were developed using information obtained from consultants. Payments for decommissioning are expected to begin in 2016, when actual decommissioning work begins. The Companies have recovered approximately $55,000,000 for decommissioning through their electric rates from customers through December 31, 1995; such amounts are reflected in the reserve for - 18 - depreciation on the Consolidated Balance Sheet. If the actual costs of decommissioning the units exceed the funds accumulated from investing amounts recovered from customers, the Companies expect that additional amount will be recoverable from their customers. The Companies have approximately $65,100,000 invested in external decommissioning trust funds as of December 31, 1995. Earnings on these funds are reinvested with a corresponding increase to the depreciation reserve. The Companies have also recognized an estimated liability of approximately $18,000,000 related to decontamination and decommissioning of nuclear enrichment facilities operated by the United States Department of Energy (DOE), as required by the Energy Policy Act of 1992. The Companies recover these costs through their respective energy rates. The Financial Accounting Standards Board (FASB) is reviewing the accounting for nuclear decommissioning costs. If current electric utility industry accounting practices for decommissioning are changed: (1) annual provisions for decommissioning could increase; (2) the full estimated cost for decommissioning could be recorded as a liability rather than as accumulated depreciation; and (3) income from the external decommissioning trusts could be reported as investment income. The FASB issued its proposed accounting standard in February 1996. COMMON OWNERSHIP OF GENERATING FACILITIES- The Companies and other Central Area Power Coordination Group (CAPCO) companies own, as tenants in common, various power generating facilities. Each of the companies is obligated to pay a share of the costs associated with any jointly owned facility in the same proportion as its interest. The Companies' portions of operating expenses associated with jointly owned facilities are included in the corresponding operating expenses on the Consolidated Statements of Income. The amounts reflected on the Consolidated Balance Sheet under utility plant at December 31, 1995, include the following: Companies' Utility Accumulated Construction Ownership/ Plant Provision for Work in Leasehold Generating Units in Service Depreciation Progress Interest - ------------------------------------------------------------------- (In thousands) W.H. Sammis #7 $ 303,700 $ 89,900 $ 1,700 68.80% Bruce Mansfield #1, #2 and #3 777,500 336,500 3,600 50.68% Beaver Valley #1 and #2 1,849,900 606,600 3,600 47.11% Perry #1 1,624,500 356,000 9,600 35.24% - ------------------------------------------------------------------- Total $4,555,600 $1,389,000 $18,500 - ------------------------------------------------------------------- - 19 - NUCLEAR FUEL- Nuclear fuel is recorded at original cost, which includes material, enrichment, fabrication and interest costs incurred prior to reactor load. The Companies amortize the cost of nuclear fuel based on the rate of consumption. The Companies' electric rates include amounts for the future disposal of spent nuclear fuel based upon the formula used to compute payments to the DOE. INCOME TAXES- Details of the total provision for income taxes are shown on the Consolidated Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. The liability method is used to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. RETIREMENT BENEFITS- The Companies' trusteed, noncontributory defined benefit pension plan covers almost all full-time employees. Upon retirement, employees receive a monthly pension based on length of service and compensation. The Companies use the projected unit credit method for funding purposes and were not required to make pension contributions during the three years ended December 31, 1995. The following sets forth the funded status of the plan and amounts recognized on the Consolidated Balance Sheets as of December 31: 1995 1994 - ------------------------------------------------------------------ (In thousands) Actuarial present value of benefit obligations: Vested benefits $546,936 $483,850 Nonnvested benefits 36,548 27,312 - ------------------------------------------------------------------ Accumulated benefit obligation $583,484 $511,162 ================================================================== Plan assets at fair value $857,961 $719,310 Actuarial present value of projected benefit obligation 685,180 593,931 - ------------------------------------------------------------------ Plan assets in excess of projected benefit obligation 172,781 125,379 Unrecognized net loss (gain) (43,564) 8,868 Unrecognized prior service cost 24,704 12,755 Unrecognized net transition asset (41,830) (49,775) - ------------------------------------------------------------------ Net pension asset $112,091 $ 97,227 ================================================================= - 20 - The assets of the plan consist primarily of common stocks, United States government bonds and corporate bonds. Net pension costs for the three years ended December 31, 1995, were computed as follows: 1995 1994 1993 - ------------------------------------------------------------------- (In thousands) Service cost-benefits earned during the period $ 12,794 $ 15,159 $ 13,171 Interest on projected benefit obligation 48,135 45,299 42,723 Return on plan assets (194,465) 8,344 (97,849) Net deferral (amortization) 118,672 (89,324) 14,954 Voluntary early retirement program expense - 37,299 6,014 - ------------------------------------------------------------------ Net pension cost $ (14,864) $ 16,777 $(20,987) ================================================================== The assumed discount rate used in determining the actuarial present value of the projected benefit obligation was 7.5% in 1995 and 1993, and 8.5% in 1994. The assumed rate of increase in future compensation levels used to measure this obligation was 4.5% in each year. Expected long-term rates of return on plan assets were assumed to be 10% in 1995 and 1994 and 11% in 1993. The Companies provide a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Companies pay insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Companies. The Companies recognize the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the plan and amounts recognized on the Consolidated Balance Sheets as of December 31: 1995 1994 - ----------------------------------------------------------------- (In thousands) Accumulated postretirement benefit obligation allocation: Retirees $148,169 $165,386 Fully eligible active plan participants 12,578 12,381 Other active plan participants 77,550 77,599 -------- -------- Accumulated postretirement benefit obligation 238,297 255,366 Plan assets at fair value 1,269 - - ------------------------------------------------------------------ Accumulated postretirement benefit obligation in excess of plan assets 237,028 255,366 Unrecognized transition obligation (152,263) (183,196) Unrecognized net loss (17,038) (23,425) - ------------------------------------------------------------------ Net postretirement benefit liability $ 67,727 $ 48,745 ================================================================== - 21 - Net periodic postretirement benefit costs for the three years ended December 31, 1995, were computed as follows: 1995 1994 1993 - ------------------------------------------------------------------- (In thousands) Service cost-benefits attributed to the period $ 4,499 $ 4,865 $ 3,929 Interest cost on accumulated benefit obligation 21,073 19,332 18,039 Amortization of transition obligation 10,178 10,178 10,178 Amortization of loss 110 787 - Voluntary early retirement program expense - 2,815 1,533 ------- ------- ------- Net periodic postretirement benefit cost $35,860 $37,977 $33,679 ================================================================== The health care trend rate assumption is 6.0% in the first year gradually decreasing to 4.0% for the year 2008 and later. The discount rates used to compute the accumulated postretirement benefit obligation were 7.5% in 1995 and 1993, and 8.5% in 1994. An increase in the health care trend rate assumption by one percentage point in all years would increase the accumulated postretirement benefit obligation by approximately $29,400,000 and the aggregate annual service and interest costs by approximately $3,500,000. The Company deferred postretirement benefits until the Regulatory Plan became effective. The costs are no longer being deferred and are currently being recovered through rates along with the deferred amounts. EARNINGS PER SHARE OF COMMON STOCK- The American Institute of Certified Public Accountants issued its Statement of Position 93-6 (SOP) in late 1993, which changed generally accepted accounting principles relating to employee stock ownership plans (ESOP) for shares purchased after December 31, 1992. The Company's ESOP shares were purchased prior to that date, but the Company elected to adopt the SOP effective January 1, 1994. This change in accounting reduced net income by approximately $8,700,000 in 1994; the net effect to earnings per common share resulting from this change was an increase of six cents after eliminating unallocated ESOP shares from the computation. - 22 - SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Consolidated Balance Sheets. The Companies reflect temporary cash investments at cost, which approximates their market value. Noncash financing and investing activities included capital lease transactions amounting to $1,017,000, $3,613,000 and $1,487,000 for the years 1995, 1994 and 1993, respectively. Commercial paper transactions of OES Fuel (a wholly owned subsidiary of the Company) have initial maturity periods of three months or less, and accordingly are reported net within financing activities under long-term debt and are reflected as long-term debt on the Consolidated Balance Sheets (see Note 5F). All borrowings with initial maturities of less than one year are defined as financial instruments under generally accepted accounting principles and are reported on the Consolidated Balance Sheets at cost, which approximates their fair market value. The following sets forth the approximate fair value and related carrying amounts of all other long-term debt, preferred stock subject to mandatory redemption and investments other than cash and cash equivalents as of December 31: 1995 1994 ------------------ ----------------- Carrying Fair Carrying Fair Value Value Value Value -------- ----- -------- ----- (In Millions) Long-term debt $3,025 $3,152 $3,224 $3,062 Preferred stock $ 160 $ 163 $ 40 $ 38 Investments other than cash and cash equivalents $ 353 $ 394 $ 320 $ 317 The fair values of long-term debt and preferred stock reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by a corporation with credit ratings similar to the Companies' ratings. The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents consist primarily of decommissioning trust investments of approximately $65,100,000 and a letter of credit collateral deposit of $277,763,000. Unrealized gains and losses applicable to the decommissioning trust have been recognized in the trust investment with a corresponding offset to the reserve for depreciation. The collateral deposit is in the held-to- - 23 - maturity category with a maturity date of July 15, 2006. The fair value of the deposit at December 31, 1995, was $318,383,000. The Companies have no securities held for trading purposes. REGULATORY ASSETS- The Companies recognize, as regulatory assets, costs which the FERC, PUCO and PPUC have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets are being recovered from customers under the Company's Regulatory Plan. Penn Power's rates currently exclude approximately $61,000,000 of deferred costs. Based on the Company's Regulatory Plan and Penn Power's expected rate treatment based on PPUC precedent, it is improbable that the Companies will be required to terminate application of SFAS No. 71 "Accounting for the Effects of Certain Types of Regulation" in the foreseeable future. Regulatory assets on the Consolidated Balance Sheets are comprised of the following: 1995 1994 - ------------------------------------------------------------------- (In thousands) Nuclear unit expenses $ 758,434 $ 771,538 Customer receivables for future income taxes 559,660 639,592 Sale and leaseback costs 231,435 242,033 Loss on reacquired debt 96,738 99,384 Employee postretirement benefit costs 32,397 27,055 Uncollectible customer accounts 32,540 44,368 Perry Unit 2 termination 39,639 38,066 DOE decommissioning and decontamination costs 19,310 21,170 Other 16,390 15,669 - ------------------------------------------------------------------- Total $1,786,543 $1,898,875 =================================================================== 2. CHANGE IN ACCOUNTING FOR UNBILLED REVENUES: On January 1, 1993, the Companies changed their accounting policies to recognize revenue relating to metered sales which remain unbilled at the end of the accounting period. This change was made to more closely match the Companies' revenues with the costs of services provided. The cumulative effect to January 1, 1993, was $58,201,000 (net of $33,632,000 of income taxes) or $.38 per share. 3. PERRY UNIT 2 TERMINATION: In December 1993, the Companies announced that they would not participate in further construction of Perry Unit 2 and abandoned Perry Unit 2 as a possible electric generating plant. The Company determined - 24 - that recovery from customers of its Perry Unit 2 investment was improbable, resulting in a $366,377,000 write-off of its investment in 1993. Penn Power expects its Perry Unit 2 investment to be recoverable from its retail customers based on Section 520 of the Pennsylvania Public Utility Code. Due to the anticipated delay in commencement of recovery and taking into account the expected rate treatment, Penn Power recognized an impairment to its Perry Unit 2 investment of $24,458,000 in 1993. As a result, net income for the year ended December 31, 1993, was reduced by $248,743,000 ($1.63 per share of common stock). 4. LEASES: The Companies lease a portion of their nuclear generating facilities, certain transmission facilities, office space and other property and equipment under cancelable and noncancelable leases. The Company sold portions of its ownership interests in Perry Unit 1 and Beaver Valley Unit 2 and entered into operating leases on the portions sold for basic lease terms of approximately 29 years. During the terms of the leases the Company continues to be responsible, to the extent of its combined ownership and leasehold interest, for costs associated with the units including construction expenditures, operation and maintenance expenses, insurance, nuclear fuel, property taxes and decommissioning. The basic rental payments are adjusted when applicable federal tax law changes. The Company has the right, at the end of the respective basic lease terms, to renew the leases for up to two years. The Company also has the right to purchase the facilities at the expiration of the basic lease term or renewal term (if elected) at a price equal to the fair market value of the facilities. OES Finance, Incorporated (OES Finance), a wholly owned subsidiary of the Company, was established in 1994 for the sole purpose of maintaining deposits pledged as collateral to secure reimbursement obligations relating to certain letters of credit supporting the Company's obligations to lessors under the Beaver Valley Unit 2 sale and leaseback arrangements. The deposits pledged to the financial institution providing those letters of credit are the sole property of OES Finance. In the event of liquidation, OES Finance, as a separate corporate entity, would have to satisfy its obligations to creditors before any of its assets could be made available to the Company as sole owner of OES Finance common stock. Consistent with the regulatory treatment, the rental payments for capital and operating leases are charged to operating expenses on the Consolidated Statements of Income. Such costs for the three years ended December 31, 1995, are summarized as follows: 1995 1994 1993 - ------------------------------------------------------------------- (In thousands) Operating leases Interest element $104,551 $100,980 $ 96,804 Other 13,896 14,530 15,418 Capital leases Interest element 6,983 7,483 7,896 Other 6,636 6,960 6,843 - ------------------------------------------------------------------- Total rental payments $132,066 $129,953 $126,961 =================================================================== - 25 - The future minimum lease payments as of December 31, 1995, are: Capital Operating Leases Leases - ------------------------------------------------------------------- (In thousands) 1996 $ 15,425 $ 108,495 1997 13,916 113,873 1998 12,678 120,779 1999 11,216 125,630 2000 9,888 124,887 Years thereafter 94,228 2,237,913 - ------------------------------------------------------------------- Total minimum lease payments 157,351 $2,831,577 ========== Executory costs 40,527 - ------------------------------------------- Net minimum lease payments 116,824 Interest portion 68,603 - ------------------------------------------- Present value of net minimum lease payments 48,221 Less current portion 5,741 - ------------------------------------------- Noncurrent portion $ 42,480 =========================================== 5. CAPITALIZATION: (A) RETAINED EARNINGS- Under the Company's first mortgage indenture, the Company's consolidated retained earnings unrestricted for payment of cash dividends on the Company's common stock were $404,276,000 at December 31, 1995. (B) EMPLOYEE STOCK OWNERSHIP PLAN- The Companies fund the matching contribution for their 401(k) savings plan through an ESOP Trust. All full-time employees eligible for participation in the 401(k) savings plan are covered by the ESOP. The ESOP borrowed $200,000,000 from the Company and acquired 10,654,114 shares of the Company's common stock on the open market. Dividends on ESOP shares are used to service the debt. Shares are released from the ESOP on a pro- rata basis as debt service payments are made. In 1995, 1994 and 1993, 412,914 shares, 532,250 shares and 369,956 shares, respectively, were - 26 - allocated to employees with the corresponding expense recognized based on the shares allocated method. The fair value of 8,663,575 shares unallocated as of December 31, 1995, was approximately $203,594,000. Total ESOP-related compensation expense was calculated as follows: - ------------------------------------------------------------------- 1995 1994 1993 - ------------------------------------------------------------------- (In thousands) Base compensation $ 8,994 $10,179 $ 6,799 Interest on ESOP debt - - 19,985 Dividends on common stock held by the ESOP and used to service debt (2,503) (1,966) (15,944) Interest earned by the ESOP - - (275) - ----------------------------------------------------------------- Total expense $ 6,491 $ 8,213 $10,565 ================================================================= (C) PREFERRED STOCK- Penn Power's 7.625% and 7.75% series of preferred stock have restrictions which prevent early redemption prior to October 1997 and July 2003, respectively. The Company's 8.45% series of preferred stock has no optional redemption provision, and its 7.75% series is not redeemable before April 1998. All other preferred stock may be redeemed by the Companies in whole, or in part, with 30-60 days' notice. (D) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- The Company's 8.45% series of preferred stock has an annual sinking fund requirement for 50,000 shares beginning on September 16, 1997. Penn Power's 7.625% series has an annual sinking fund requirement for 7,500 shares beginning on October 1, 2002. The Companies' preferred shares are retired at $100 per share plus accrued dividends. Sinking fund requirements for the next five years are $5,000,000 in each year from 1997 through 2000. (E) COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY COMPANY SUBORDINATED DEBENTURES- Ohio Edison Financing Trust, a wholly owned subsidiary of the Company, was established in 1995 and issued $120,000,000 of 9% Cumulative Trust Preferred Capital Securities. The Company purchased all of the Trust's Common Securities and simultaneously issued to the Trust $123,711,350 principal amount of 9% Junior Subordinated Debentures due 2025 in exchange for the proceeds that the Trust received from its sale of Preferred and Common Securities. The sole assets of the Trust are the Subordinated Debentures whose interest and other payment dates coincide - 27 - with the distribution and other payment dates on the Trust Securities. Under certain circumstances the Subordinated Debentures could be distributed to the holders of the outstanding Trust Securities in the event the Trust is liquidated. The Subordinated Debentures may be optionally redeemed beginning December 31, 2000, by the Company at a redemption price of $25 per Subordinated Debenture plus accrued interest, in which event the Trust Securities will be redeemed on a pro-rata basis at $25 per share plus accumulated distributions. The Company's obligations under the Subordinated Debentures along with the related Indenture, amended and restated Trust Agreement, Guarantee Agreement and the Agreement for expenses and liabilities constitute a full and unconditional guarantee by the Company of payments due on the Preferred Securities. (F)LONG-TERM DEBT- The first mortgage indentures and their supplements, which secure all of the Companies' first mortgage bonds, serve as direct first mortgage liens on substantially all property and franchises, other than specifically excepted property, owned by the Companies. Based on the amount of bonds authenticated by the Trustee through December 31, 1995, the Company's annual sinking and improvement fund requirement for all bonds issued under the mortgage amounts to $30,056,000. The Company expects to deposit funds in 1996 that will be withdrawn upon the surrender for cancellation of a like principal amount of bonds, which are specifically authenticated for such purposes against unfunded property additions or against previously retired bonds. This method can result in minor increases in the amount of the annual sinking fund requirement. Sinking fund requirements for first mortgage bonds and maturing long-term debt (excluding capital leases) for the next five years are: - ---------------------------------------------------------------- 1996 $370,975,000 1997 369,261,000 1998 258,683,000 1999 162,036,000 2000 116,473,000 - ---------------------------------------------------------------- Amounts shown above for 1996 include $38,300,000 of first mortgage bonds optionally redeemed in January 1996. The Companies' obligations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds and, in some cases, by subordinate liens on the related pollution control facilities. Certain pollution control revenue bonds are entitled to the benefit of irrevocable bank letters of credit of $338,831,000. To the extent that drawings are made under those letters of credit to pay principal of, or interest on, the pollution control revenue bonds, the - 28 - Company is entitled to a credit against its obligation to repay those bonds. The Company pays annual fees of 0.55% to 0.875% of the amounts of the letters of credit to the issuing banks and is obligated to reimburse the banks for any drawings thereunder. Nuclear fuel purchases are financed through the issuance of OES Fuel commercial paper and loans, both of which are supported by a $225,000,000 long-term bank credit agreement which expires March 31, 1998. Accordingly, the commercial paper and loans are reflected as long-term debt on the Consolidated Balance Sheets. OES Fuel must pay an annual facility fee of 0.1875% on the total line of credit and an annual commitment fee of 0.0625% on any unused amount. 6. SHORT-TERM BORROWINGS AND BANK LINES OF CREDIT: Short-term borrowings outstanding at December 31, 1995, represent debt of OES Capital, Incorporated (OES Capital), a wholly owned subsidiary of the Company. Those borrowings are secured by customer accounts receivable. OES Capital can borrow up to $120,000,000 under a receivables financing agreement at rates based on certain bank commercial paper. OES Capital is required to pay an annual fee of 0.41% on the amount of the entire finance limit. The receivables financing agreement expires April 23, 1996. The Company plans to negotiate an extension to this agreement. The Companies have lines of credit with domestic banks that provide for borrowings of up to $52,000,000 under various interest rate options. Short-term borrowings may be made under these lines of credit on the Companies' unsecured notes. To assure the availability of these lines, the Companies are required to pay annual commitment fees that vary from 0.22% to 0.50%. These lines expire at various times during 1996. The weighted average interest rates on short-term borrowings outstanding at December 31, 1995 and 1994, were 5.67% and 5.76%, respectively. 7. COMMITMENTS, GUARANTEES AND CONTINGENCIES: CONSTRUCTION PROGRAM- The Companies' current forecasts reflect expenditures of approximately $650,000,000 for property additions and improvements from 1996-2000, of which approximately $160,000,000 is applicable to 1996. Investments for additional nuclear fuel during the 1996-2000 period are estimated to be approximately $180,000,000, of which approximately $29,000,000 applies to 1996. During the same periods, the Companies' nuclear fuel investments are expected to be reduced by approximately $191,000,000 and $39,000,000, respectively, as the nuclear fuel is consumed. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $8,920,000,000. The amount - 29 - is covered by a combination of private insurance and an industry retrospective rating plan. Based on their present ownership and leasehold interests in the Beaver Valley Station and the Perry Plant, the Companies' maximum potential assessment under the industry retrospective rating plan (assuming the other CAPCO companies were to contribute their proportionate share of any assessments under the retrospective rating plan) would be $102,800,000 per incident but not more than $13,000,000 in any one year for each incident. The Companies are also insured as to their respective interests in the Beaver Valley Station and the Perry Plant under policies issued to the operating company for each plant. Under these policies, up to $2,750,000,000 is provided for property damage and decontamination and decommissioning costs. The Companies have also obtained approximately $414,000,000 of insurance coverage for replacement power costs for their respective interests in Perry and Beaver Valley. Under these policies, the Companies can be assessed a maximum of approximately $17,400,000 for incidents at any covered nuclear facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses. The Companies intend to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at any of the Companies' plants exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Companies' insurance policies, or to the extent such insurance becomes unavailable in the future, the Companies would remain at risk for such costs. GUARANTEES- The Companies, together with the other CAPCO companies, have each severally guaranteed certain debt and lease obligations in connection with a coal supply contract for the Bruce Mansfield Plant. As of December 31, 1995, the Companies' shares of the guarantees (which approximate fair market value) were $72,851,000. The price under the coal supply contract, which includes certain minimum payments, has been determined to be sufficient to satisfy the debt and lease obligations. The Companies' total payments under the coal supply contract were $120,015,000, $99,774,000 and $114,572,000 during 1995, 1994 and 1993, respectively. Under the coal supply contract, the Companies' minimum payments in each year during the period 1996 through 1999 are approximately $35,000,000. ENVIRONMENTAL MATTERS- Various federal, state and local authorities regulate the Companies with regard to air and water quality and other environmental matters. The Companies have estimated additional capital expenditures for environmental compliance of approximately $17,000,000, which is included in the construction forecast provided under "Construction Program" for 1996 through 2000. - 30 - The Companies are in compliance with the sulfur dioxide (SO2) and nitrogen oxides (NOx) reduction requirements for 1995 under the Clean Air Act Amendments of 1990. SO2 reductions for the years 1995 through 1999 are being achieved by burning lower-sulfur fuel, generating more electricity from lower-emitting plants, and/or purchasing emission allowances. Plans for complying with reductions required for the year 2000 and thereafter have not been finalized. The Environmental Protection Agency (EPA) is conducting additional studies which could indicate the need for additional NOx reductions from the Companies' Pennsylvania facilities by the year 2003. The cost of such reductions, if required, may be substantial. The Companies continue to evaluate their compliance plans and other compliance options. The Companies are required to meet federally approved SO2 regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $25,000 for each day the unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The EPA has proposed regulations that could change the interim enforcement policy, including the method of determining compliance with emission limits. The Companies cannot predict what action the EPA may take in the future with respect to proposed regulations or the interim enforcement policy. Legislative, administrative and judicial actions will continue to change the way that the Companies must operate in order to comply with environmental laws and regulations. With respect to any such changes and to the environmental matters described above, the Companies expect that any resulting additional capital costs which may be required, as well as any required increase in operating costs, would ultimately be recovered from their customers. - 31 - 8. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain consolidated operating results by quarter for 1995 and 1994. March 31, June 30, September 30, December 31, Three Months Ended 1995 1995 1995 1995 - ------------------------------------------------------------------- (In thousands, except per share amounts) Operating Revenues $587,734 $593,838 $667,013 $617,261 Operating Expenses and Taxes 453,921 454,424 508,024 482,859 - ------------------------------------------------------------------- Operating Income 133,813 139,414 158,989 134,402 Other Income 2,997 3,829 1,190 6,408 Net Interest and Other Charges 65,214 66,192 67,127 65,268 - ------------------------------------------------------------------- Net Income $ 71,596 $ 77,051 $ 93,052 $ 75,542 - ------------------------------------------------------------------- Earnings on Common Stock $ 66,237 $ 71,514 $ 87,703 $ 69,293 - ------------------------------------------------------------------- Earnings per Share of Common Stock $.46 $.50 $.61 $.48 - ------------------------------------------------------------------- March 31, June 30, September 30, December 31, Three Months Ended 1994 1994 1994 1994 - ------------------------------------------------------------------- (In thousands, except per share amounts) Operating Revenues $601,248 $585,428 $614,390 $567,125 Operating Expenses and Taxes 468,850 447,353 462,573 432,161 - ------------------------------------------------------------------- Operating Income 132,398 138,075 151,817 134,964 Other Income 2,255 3,534 5,032 5,638 Net Interest and Other Charges 66,723 67,569 68,624 67,266 - ------------------------------------------------------------------- Net Income $ 67,930 $ 74,040 $ 88,225 $ 73,336 - ------------------------------------------------------------------- Earnings on Common Stock $ 62,329 $ 68,681 $ 82,869 $ 67,973 - ------------------------------------------------------------------- Earnings per Share of Common Stock $.44 $.48 $.58 $.47 - ------------------------------------------------------------------- - 32 - Report of Independent Public Accountants To the Stockholders and Board of Directors of Ohio Edison Company: We have audited the accompanying consolidated balance sheets and consolidated statements of capitalization of Ohio Edison Company (an Ohio corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, retained earnings, capital stock and other paid-in capital, cash flows and taxes for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ohio Edison Company and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for unbilled revenues. ARTHUR ANDERSEN LLP Cleveland, Ohio February 8, 1996 - 33 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OHIO EDISON COMPANY /s/ Harvey L. Wagner ---------------------------- Harvey L. Wagner Comptroller Dated: February 23, 1996 - 34 - EX-23 2 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 8-K, into the Company's previously filed Registration Statements, File No. 33-49135, No. 33-49259, No. 33-49413 and No. 33-51139. ARTHUR ANDERSEN LLP Cleveland, Ohio February 23, 1996 -----END PRIVACY-ENHANCED MESSAGE-----