FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification No.
- ----------- --------------------------------------- ------------------
333-21011 FIRSTENERGY CORP. 34-1843785
(An Ohio Corporation)
76 South Main Street
Akron, Ohio 44308
Telephone (800)736-3402
1-2578 OHIO EDISON COMPANY 34-0437786
(An Ohio Corporation)
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-2323 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY 34-0150020
(An Ohio Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-3583 THE TOLEDO EDISON COMPANY 34-4375005
(An Ohio Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-3491 PENNSYLVANIA POWER COMPANY 25-0718810
(A Pennsylvania Corporation)
1 East Washington Street
P. O. Box 891
New Castle, Pennsylvania 16103
Telephone (412)652-5531
Indicate by check mark whether each of the registrants (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date:
OUTSTANDING
CLASS AS OF NOVEMBER 3, 2000
----- ----------------------
FirstEnergy Corp., $.10 par value 225,469,780OUTSTANDING
CLASS AS OF MAY 10, 2001
----- ------------------
FirstEnergy Corp., $.10 par value 223,981,580
Ohio Edison Company, no par value 100
The Cleveland Electric Illuminating Company,
no par value 79,590,689
The Toledo Edison Company, $5 par value 39,133,887
Pennsylvania Power Company, $30 par value 6,290,000
FirstEnergy Corp. is the sole holder of Ohio Edison Company, The Cleveland
Electric Illuminating Company and The Toledo Edison Company common stock;
Ohio Edison Company is the sole holder of Pennsylvania Power Company
common stock.
This combined Form 10-Q is separately filed by FirstEnergy
Corp., Ohio Edison Company, Pennsylvania Power Company, The Cleveland
Electric Illuminating Company and The Toledo Edison Company. Information
contained herein relating to any individual registrant is filed by such
registrant on its own behalf. No registrant makes any representation as to
information relating to any other registrant, except that information
relating to any of the four FirstEnergy subsidiaries is also attributed to
FirstEnergy.
This Form 10-Q includes forward lookingforward-looking statements based on
information currently available to management. Such statements 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 and commodity market prices, legislative
and regulatory changes (including revised environmental requirements), the
availability and cost of capital, inability to accomplish or realize
anticipated benefits of strategic goals (including the merger with GPU,
Inc.) and other similar factors.
TABLE OF CONTENTS
Pages
Part I. Financial Information
Notes to Financial Statements 1-5
FirstEnergy Corp.
Consolidated Statements of Income 6
Consolidated Balance Sheets 7-8
Consolidated Statements of Cash Flows 9
Report of Independent Public Accountants 10
Management's Discussion and Analysis of Results
of Operations and Financial Condition 11-1411-15
Ohio Edison Company
Consolidated Statements of Income 1516
Consolidated Balance Sheets 16-1717-18
Consolidated Statements of Cash Flows 1819
Report of Independent Public Accountants 1920
Management's Discussion and Analysis of Results
of Operations and Financial Condition 20-2221-23
The Cleveland Electric Illuminating Company
Consolidated Statements of Income 2324
Consolidated Balance Sheets 24-2525-26
Consolidated Statements of Cash Flows 2627
Report of Independent Public Accountants 2728
Management's Discussion and Analysis of Results
of Operations and Financial Condition 28-2929-30
The Toledo Edison Company
Consolidated Statements of Income 3031
Consolidated Balance Sheets 31-3232-33
Consolidated Statements of Cash Flows 3334
Report of Independent Public Accountants 3435
Management's Discussion and Analysis of Results
of Operations and Financial Condition 35-3636-37
Pennsylvania Power Company
Statements of Income 3738
Balance Sheets 38-3939-40
Statements of Cash Flows 4041
Report of Independent Public Accountants 4142
Management's Discussion and Analysis of Results
of Operations and Financial Condition 42-4343-44
Part II. Other Information
PART I. FINANCIAL INFORMATION
- ------------------------------
FIRSTENERGY CORP. AND SUBSIDIARIES
OHIO EDISON COMPANY AND SUBSIDIARIES
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
PENNSYLVANIA POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1 - FINANCIAL STATEMENTS:
The principal business of FirstEnergy Corp. (FirstEnergy) is the
holding, directly or indirectly, of all of the outstanding common stock of
its five principal electric utility operating subsidiaries, Ohio Edison
Company (OE), The Cleveland Electric Illuminating Company (CEI), The
Toledo Edison Company (TE) and, Pennsylvania Power Company (Penn) and American
Transmission Systems, Inc. (ATSI). These utility subsidiaries are referred
to throughout as "Companies." Penn is a wholly owned subsidiary of OE.
On September 1, 2000, the Companies transferred their
transmission assets to FirstEnergy's wholly owned subsidiary, American
Transmission Systems, Inc. (ATSI)other principal subsidiaries include FirstEnergy Services
Corp. (FE Services); FirstEnergy Facilities Services Group, LLC (FE
Facilities); MARBEL Energy Corporation (MARBEL) and FirstEnergy Nuclear
Operating Company (FENOC). ATSI ownsFE Services provides energy-related products
and operates FirstEnergy's
major high-voltage transmission facilitiesservices and has interconnections withtwo subsidiaries, Penn Power Energy, Inc., which
provides electric generation services and other regional utilities.energy services to
Pennsylvania customers and FirstEnergy Generation Corp., which operates
the nonnuclear generating facilities of the Companies. FENOC operates the
nuclear generating facilities of the Companies.
The condensed unaudited financial statements of FirstEnergy and
each of the Companies reflect all normal recurring adjustments that, in
the opinion of management, are necessary to fairly present results of
operations for the interim periods. These statements should be read in
connection with the financial statements and notes included in the
combined Annual Report on Form 10-K for the year ended December 31, 19992000
for FirstEnergy and the Companies. Significant intercompany transactions
have been eliminated. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make periodic estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from those estimates. The reported results of
operations are not indicative of results of operations for any future
period. Certain prior year amounts have been reclassified to conform with
the current year presentation.
Penn's results of operations for the 1999 interim periods
include Penn and its wholly owned subsidiary, Penn Power Energy, Inc.
(PPE). Penn's interest in PPE was transferred to FirstEnergy Services
Corp. (FE Services), an affiliate, effective December 31, 1999.
The sole assets of the subsidiary trust that is the obligor on
the preferred securities included in FirstEnergy's and OE's capitalization
are $123,711,350 principal amount of 9% Junior Subordinated Debentures of
OE due December 31, 2025.
2 - COMMITMENTS GUARANTEES AND CONTINGENCIES:
CAPITAL EXPENDITURES-
FirstEnergy's current forecast reflects expenditures of
approximately $3.0$2.55 billion (OE-$766360 million, CEI-$529455 million, TE-$259
$218 million, Penn-$234153 million, ATSI-$98112 million, FE Services-$830
million and unregulatedother subsidiaries-
$1.114 billion)$422 million) for property additions and
improvements from 2000-2004,2001-2005, of which approximately $639$679 million (OE-$207
$89 million, CEI-$11499 million, TE-
$96$51 million, Penn-$3228 million, ATSI-$1621
million, FE Services-$314 million and unregulatedother subsidiaries-$17477 million) is
applicable to 2000.2001. Investments for additional nuclear fuel during the
2000-20042001-2005 period are estimated to be approximately $470$376 million (OE-$114
$103 million, CEI-$156117 million, TE-$10781 million and Penn-$9375 million), of
which approximately $136$56 million (OE-$2515 million, CEI-$5312 million, TE-$36
$9 million and Penn-$2220 million) applies to 2000.2001.
STOCK REPURCHASE PROGRAM-
On November 17, 1998, the Board of Directors authorized the
repurchase of up to 15 million shares of FirstEnergy's common stock over a
three-year period beginning in 1999. Repurchases are made on the open
market, at prevailing prices, and are funded primarily through the use of
operating cash flows. During the thirdfirst quarter of 2000 and the first nine
months of 2000,2001, FirstEnergy
repurchased and retired 1.8 million shares
(average price of $25.24 per share) and 5.0 million shares (average price
of $23.62 per share) of its common stock, respectively. In 1999,
FirstEnergy also
- 1 -
entered into a forward contract with Credit Suisse First Boston
Corporation for the purchase of 1.4 million550,000 shares of FirstEnergy'sits common stock at an average
price of $24.22$27.82 per share, which was settled
on November 1, 2000.share.
ENVIRONMENTAL MATTERS-
Various federal, state and local authorities regulate the
Companies with regard to air and water quality and other environmental
matters. The Companies estimateFirstEnergy estimates additional capital expenditures for
environmental compliance of approximately $292$201 million, (OE-$144 million, CEI-$84
million, TE-$33 million and Penn-$31 million), which is included
in the construction estimate givenforecast provided under "Capital Expenditures" for
20002001 through 2004.2005.
The Companies are required to meet federally approved sulfur
dioxide (SO2) regulations. Violations of such regulations can result in
shutdown of the generating unit involved and/or civil or criminal
penalties of up to $27,500 for each day the unit is in violation. The
Environmental Protection Agency (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.
The Companies are in compliance with the current SO2 and
nitrogen oxides (NOx) reduction requirements under the Clean Air Act
Amendments of 1990. SO2 reductions are being achieved by burning lower-
sulfur fuel, generating more electricity from lower-emitting plants,
and/or using emission allowances. NOx reductions are being achieved
through combustion controls and the generation of more electricity at
lower-emitting plants. In September 1998, the EPA finalized regulations
requiring additional NOx reductions from the Companies' Ohio and
Pennsylvania facilities. The EPA's NOx Transport Rule imposes uniform
reductions of NOx emissions (an approximate 85% reduction in utility plant
NOx emissions from projected 2007 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. In March
2000, the U.S. Court of Appeals for the D.C. Circuit upheld EPA's NOx
Transport Rule except as applied to the State of Wisconsin and portions of
Georgia and Missouri. By October 2000, states were to submit revised State
Implementation Plans (SIP) to comply by May 31, 2004 with individual state
NOx budgets established by the EPA. Pennsylvania recently submitted a SIP that
requires compliance with the NOx budgets at the Companies' Pennsylvania
facilities by May 1, 2003 and Ohio indicated in a letter to EPA that it will be submittingsubmitted a "draft" SIP that requires
compliance with the NOx budgets at the Companies' Ohio facilities by
May 31, 2004. 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 position is that the
Section 126 petitions will be adequately addressed by the NOx Transport
Program, but a December 17, 1999 rulemaking established an alternative
program which would require nearly identical 85% NOx reductions at 392
utility plants, including the Companies' Ohio and Pennsylvania plants, by
May 2003, in the event implementation of the NOx Transport Rule is not
implemented by a state. Additional Section 126 petitions were filed by New
Jersey, Maryland, Delaware and the District of Columbia in mid-1999 and
are still under evaluation by the EPA. The Companies continue to evaluate
their compliance plans and other compliance options.
In July 1997, the EPA promulgated changes in the National
Ambient Air Quality Standard (NAAQS) for ozone emissions and proposed a
new NAAQS for previously unregulated ultra-fine particulate matter. In May
1999, the U.S. Court of Appeals for the D.C. Circuit remanded both standards to
the EPA, having found constitutional and other defects in
the new NAAQS rules. The D.C. Circuit Court, on October 29, 1999, denied an EPA
petition for rehearing. On November 7, 2000,In February 2001, the U.S. Supreme Court held
hearings in the appeals of both EPA and industry petitioners regardingupheld the
new NAAQS rules regulating ultra-fine particulates but found defects in
the new NAAQS rules for ozone and a decision is expected in 2001.decided that the EPA must revise those
rules. The future cost of compliance with these regulations if they are reinstated, may be
substantial and will depend on the manner in which they are ultimately
implemented, if at all, by the states in which the Companies operate
affected facilities.
In September 1999, FirstEnergy received, and subsequently in
October 1999, OE and Penn received, a citizen suit notification letter
from the New York Attorney General's office alleging Clean Air Act
violations at the W. H. Sammis Plant. In November 1999, OE and Penn
received a citizen suit notification letter from the Connecticut Attorney
General's office alleging Clean Air Act violations at the Sammis Plant.
In November 1999 and March 2000, the EPA issued Notices of Violation (NOV) or a
Compliance Order to eightnine utilities covering 3644 power plants, including the
W. H. Sammis Plant. In addition, the U.S. Department of Justice filed
seveneight civil complaints against various investor-owned utilities, which
included a complaint against OE and Penn in the U.S. District Court for
the Southern District of Ohio. The NOV and complaint allege violations of
the Clean Air Act based on operation and maintenance of the Sammis Plant
dating back to 1984. The complaint requests permanent injunctive relief to
require the installation of "best available control technology" and civil
penalties of up to $27,500 per day of violation. Although unable to
predict the outcome of these proceedings, FirstEnergy believes the Sammis
Plant is in full compliance with the Clean Air Act and the NOV and
- 2 -
complaint are without merit. Penalties could be imposed if the Sammis
Plant continues to operate without correcting the alleged violations and a
court determines that the allegations are valid. It is anticipated at
this time that theThe Sammis Plant
will continuecontinues to operate while these proceedings are pending.
In December 2000, the EPA announced it would proceed with the
development of regulations regarding hazardous air pollutants from
electric power plants. The EPA identified mercury as the hazardous air
pollutant of greatest concern. The EPA established a schedule to propose
regulations by December 2003 and issue final regulations by December 2004.
The future cost of compliance with these regulations may be substantial.
As a result of the Resource Conservation and Recovery Act of
1976, as amended, and the Toxic Substances Control Act of 1976, federal
and state hazardous waste regulations have been promulgated. Certain
fossil-fuel combustion waste products, such as coal ash, were exempted
from hazardous waste disposal requirements pending the EPA's evaluation of
the need for future regulation. The EPA has issued its final regulatory
determination that regulation of coal ash as a hazardous waste is
unnecessary. On April 25, 2000, the EPA announced that it will develop
national standards regulating disposal of coal ash under its authority to
regulate nonhazardous waste.
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 of disposal of hazardous substances at historical sites
and the liability 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. CEI and TE have accrued liabilities
of $4.2$3.4 million and $0.6$0.2 million, respectively, as of September 30, 2000,March 31, 2001,
based on estimates of the total costs of cleanup, and the proportionate
responsibility of other PRPs for such costs.costs and the financial ability of
other PRPs to pay. 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.
MERGER AGREEMENT-
On August 8, 2000, FirstEnergy and GPU, Inc. (GPU), a
Pennsylvania corporation, entered into an Agreement and Plan of Merger.
Under the merger agreement, FirstEnergy would acquire all of the
outstanding shares of GPU's common stock for approximately $4.5 billion in
cash and FirstEnergy common stock. Approximately $7.4 billion of debt and
preferred stock of GPU's subsidiaries would still be outstanding. The
transaction would be accounted for by the purchase method. The combined
company's principal electric utility operating companies would include OE,
CEI, TE, Penn and Penn,ATSI, as well as GPU's electric utility operating
companies - Jersey Central Power & Light Company, Metropolitan Edison
Company and Pennsylvania Electric Company, which serve customers in New
Jersey and Pennsylvania.
Under the agreement, GPU shareholders would receive the
equivalent of $36.50 for each share of GPU common stock they own, payable
in cash or in FirstEnergy common stock, as long as FirstEnergy's common
stock price is between $24.2438 and $29.6313. Each GPU shareholdershareholders would be
able to elect the form of consideration they wish to receive, subject to
proration so that the aggregate consideration to all GPU shareholders will
be 50 percent cash and 50 percent FirstEnergy common stock. Each GPU share
converted into FirstEnergy common stock would receive not less than 1.2318
and not more than 1.5055 shares of FirstEnergy common stock, depending on
the average closing price of FirstEnergy stock during the 20-
day20-day trading
period ending on the seventh trading date prior to the merger closing. The
stock portion of the consideration is expected to be tax-free to GPU
shareholders.
The merger has been approved by the respective Boards of
Directorsshareholders of
the Company and GPU, and necessary regulatory approvals have been received
from the Federal Energy Regulatory Commission, the Nuclear Regulatory
Commission, the New York State Public Service Commission and the Federal
Communications Commission, and is expected to close promptly after all of
the conditions to the consummation of the merger, including shareholder approval and the receipt of
all necessary regulatory approvals, are fulfilled or waived. Special meetings for FirstEnergyThe Company
and GPU shareholders have been scheduled for November 21, 2000,are working to consider
and vote on adoption ofsecure the merger agreement. The receipt of all remaining necessary
regulatory approvals, including, but not limited to, the Federal Energy
Regulatory Commission, the Nuclear Regulatory Commission, the Federal
Communications Commission, and the Securities and
Exchange Commission, are
expected byin the end of the secondthird quarter of 2001.
3 - REGULATORY ACCOUNTING:
OnMATTERS:
In July 19, 2000, the Public Utilities Commission of Ohio (PUCO)
approved FirstEnergy's transition plan as modified by adopting thea settlement
agreement with major parties to the transition plan, which it had filed in 1999, on
behalf of its Ohio electric utility operating companies - OE, CEI and TE -
under Ohio's new electric utility restructuring law. Major parties to the agreement included the PUCO staff, the Ohio Consumers'
Counsel, the Industrial Energy Users-Ohio, certain power marketers and
others.
Major provisions of
the settlement agreement consisted ofincluded approval of the
transition plan as filed, includingfor recovery of transition
costs in the amounts filed in the transition plan through no later than
2006 for OE, mid-2007 for TE and 2008 for CEI, except where a longer
period of recovery is provided for in the settlement agreement.
FirstEnergy will also givegives preferred access over FirstEnergy's subsidiaries to
nonaffiliated marketers, brokers and aggregators to 1,120 megawatts of
generation capacity through 2005 at established prices for sales to the
Ohio operating companies' retail customers. The base electric rates for
distribution service for OE, CEI and TE under their prior respective
regulatory plans will be extended from
- 3 -
December 31, 2005 through
December 31, 2007. The transition rate credits for customers under their
prior regulatory plans will also be extended through the Companies'
respective transition cost recovery periods.
Beginning January 1, 2001, whenThe transition plan itemized, or unbundled, the current price of
electricity into its component elements -- including generation,
transmission, distribution and transition charges. As required by the
PUCO's rules, FirstEnergy's transition plan also included its proposals on
corporate separation of its regulated and unregulated operations,
operational and technical support changes needed to accommodate customer
choice, an education program to inform customers of their options under
the law, and how FirstEnergy's transmission system will be operated to
ensure access to all users. Customer prices are frozen through a five-year
market development period (2001-2005), except for certain limited
statutory exceptions including the 5% reduction in the price of generation
for residential customers.
Ohio's electric utility restructuring law allowed Ohio electric
customers have the
choice to select their generation suppliers under the Ohio restructuring
law, the agreement provides tobeginning January 1, 2001.
FirstEnergy's Ohio customers electing alternative suppliers receive an
additional incentive applied to the shopping credit of 45% for residential
customers, 30% for commercial customers and 15% for industrial customers as reductions from their bills, when they
select alternative energy providers (the credits exceed the price
FirstEnergy will be offering to electricity suppliers relating to the
1,120 megawatts described on the previous page).customers.
The amount of the incentive will serveserves to reduce the amortization of
transition costs during the market development period (January 1, 2001 through December 31, 2005)
and will be
recovered overthrough the remainingextension of the transition cost recovery periods.
If the customer shopping goals established in the agreement are not
achieved by the end of 2005, the transition cost recovery periods could be
shortened for OE, CEI and TE to reduce recovery by as much as $500 million
(OE-$250 million, CEI-$170 million and TE-$80 million), but any such
adjustment would be computed on a class-by-class and pro-rata basis.
The application of4 - CHANGE IN ACCOUNTING FOR DERIVATIVES:
On January 1, 2001, FirstEnergy adopted Statement of Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effect of Certain Types of Regulation"
(SFAS 71) to OE's generation business and the nonnuclear generation
businesses of CEI and TE was discontinued effective with the issuance of
the PUCO order. The effect of such discontinuance was reflected on the
financial statements as of June 30, 2000, with the reduction of plant
investment and the corresponding recognition of regulatory assets
recoverable through future regulatory cash flows for generating assets
that were impaired in the amount of approximately $1.6 billion ($1.2
billion, $304 million and $53 million for OE, CEI and TE, respectively).
The Companies continue to bill and collect cost-based rates for their
transmission and distribution services, which remain regulated;
accordingly, it is appropriate that the Companies continue the application
of SFAS 71 to those respective operations.
4 - RECENTLY ISSUED ACCOUNTING STANDARDS:
FirstEnergy has estimated the impact of SFAS 133, "Accounting for Derivative Instruments
and Hedging Activities," andActivities" (SFAS 133), as amended by SFAS 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities - an
amendment of FASB Statement No. 133." FirstEnergy anticipates adopting
SFAS 133 and SFAS 138 on their effective date ofThe cumulative effect to January 1,
2001. If
applied2001 was a charge of $8.5 million (net of $5.8 million of income taxes) or
$.04 per share of common stock. The reported results of operations for the
years ended December 31, 2000 and 1999 would not have been materially
different if this accounting had been in effect during those years.
FirstEnergy is exposed to financial risks resulting from the
fluctuation of interest rates and commodity prices, including
electricity, natural gas and coal. To manage the volatility relating to
these exposures, FirstEnergy uses a variety of derivative instruments,
including forward contracts, options, futures contracts and swaps. These
derivatives are used principally for hedging purposes and to a lesser
extent for trading purposes. FirstEnergy has a Risk Policy Committee
comprised of executive officers, which exercises an independent risk
oversight function to ensure compliance with corporate risk management
policies and prudent risk management practices.
FirstEnergy uses derivatives to hedge the risk of commodity
price and interest rate fluctuations. FirstEnergy's primary hedging
activity involves cash flow hedges of electricity, natural gas and coal
purchases. The maximum periods over which the variability of electricity,
natural gas and coal cash flows are hedged are two, three and four years,
respectively. Gains and losses from hedges of commodity price risks are
included in existencenet income when the underlying hedged commodities are
delivered. Of the $34.3 million included in Accumulated Other
Comprehensive Income as of September 30, 2000,March 31, 2001, FirstEnergy expects net gains
of approximately $14.5 million (after tax) to be recognized in net income
within the collective impactnext twelve months. FirstEnergy entered into interest rate
derivative transactions during the first quarter of 2001 to hedge a
portion of the expected acquisition-related debt. For the quarter ended
March 31, 2001, there were no effects to net income as a result of the
discontinuance of a cash flow hedge, and the ineffective portion of
derivative commodity contracts was not material.
FirstEnergy engages in the trading of commodity derivatives, and
therefore, periodically experiences net open positions. FirstEnergy's risk
management policies limit the exposure to market risk from open positions
and require daily reporting to management of potential financial
exposures.
Derivatives classified as "normal-purchase/normal sale" (NPNS)
transactions were documented and excluded from further treatment under
SFAS 133. However, the Derivatives Implementation Group, a task force
created to assist the Financial Accounting Standards Board (FASB)
responsible for providing guidance on the implementation of SFAS 133, andhas
not reached a final conclusion regarding the appropriate accounting
treatment of certain types of energy contracts under SFAS 138 is not anticipated to have a
significant effect on FirstEnergy's results of operations or financial
position.
- 4 -133. The FASB's
final decision could affect those contracts considered eligible for the
NPNS exception.
5 - SEGMENT INFORMATION:
FirstEnergy operates under the following reportable segments:
regulated services, competitive services and other (primarily corporate
support services). These business units reflect FirstEnergy's
primaryorganizational changes to accommodate its retail strategy and the impact
of moving the generation portion of its electricity services from the
regulated segment isto the competitive segment as reflected in its Electric Utility Operating
Companiesapproved
Ohio transition plan. These reportable segments are strategic businesses,
which include five electric utilities that provide electric
serviceare managed and operated differently based on the degree of
regulation, and the products and services offered.
The regulated services segment designs, constructs, operates and
maintains FirstEnergy's regulated transmission and distribution systems.
It also provides generation services to regulated franchise customers who
have not chosen an alternative, competitive generation supplier. The
regulated services segment obtains generation through power supply
agreements with the competitive services segment.
The competitive services segment includes all unregulated energy
and energy-related services including commodity sales (both electricity
and natural gas) in Ohiothe retail and Pennsylvania. Itswholesale markets, marketing,
generation, trading and sourcing of commodity requirements, as well as
other materialcompetitive energy-application services. Competitive products are
increasingly marketed to customers as bundled services.
2000 financial data are pro forma amounts to represent current
year business segment consists of the subsidiaries that operate unregulated businesses.organizations and operations. Financial data for
these business segments are as follows:
Segment Financial Information
- -----------------------------
Electric Unregulated------------------------------
Regulated Competitive Reconciling
Three Months Ended: Utilities Businesses Eliminations Totals
- ------------------Services Services Other Adjustments Consolidated
--------- ----------- ----- ----------- ------------ ------
(In millions)
September 30, 2000
- ------------------
External revenues $ 1,457 $ 435 $ -- $ 1,892
Intersegment revenues 35 33 (68) --
Total revenues 1,492 468 (68) 1,892
Depreciation and amortization 275 6 -- 281
Net interest charges 126 18 (13) 131
Income taxes 144 (15) -- 129
Net income/Earnings on common stock 220 (21) (1) 198
Total assets 17,060 2,149 (1,241) 17,968
Property additions 72 33 -- 105
Acquisitions -- -- -- --
September 30, 1999
- ------------------
External revenues $ 1,528 $ 204 $ -- $ 1,732
Intersegment revenues 7 50 (57) --
Total revenues 1,535 254 (57) 1,732
Depreciation and amortization 312 6 -- 318
Net interest charges 136 17 (12) 141
Income taxes 114 -- -- 114
Net income/Earnings on common stock 186 (1) 1 186
Total assets 17,123 1,884 (932) 18,075
Property additions 110 5 -- 115
Acquisitions -- -- -- --
Nine
Three Months Ended:
- -----------------
September 30, 2000
- ------------------March 31, 2001
--------------
External revenues $ 4,075 $1,1271,309 $ 633 $ 1 $ 43 (a) $ 1,986
Internal revenues 334 571 65 (970) (b) --
Total revenues 1,643 1,204 66 (927) 1,986
Depreciation and amortization 215 4 8 -- 227
Net interest charges 145 (4) 8 (23) (b) 126
Income taxes 67 13 4 -- 84
Income before cumulative effect of a
change in accounting 84 18 7 (3) (b) 106
Net income 84 10 7 (3) (b) 98
Total assets 15,624 1,896 481 -- 18,001
Property additions 53 94 4 -- 151
March 31, 2000
--------------
External revenues $ 1,272 $ 320 $ 16 $ -- $ 5,202
Intersegment1,608
Internal revenues 92 100 (192)328 578 24 (930) (b) --
Total revenues 4,167 1,227 (192) 5,2021,600 898 40 (930) 1,608
Depreciation and amortization 692 16198 4 -- 708-- 202
Net interest charges 384 54 (37) 401133 -- 2 -- 135
Income taxes 340 (18)60 38 -- 322-- 98
Net income/Earnings on common stock 502 (24) (4) 474income 86 55 -- -- 141
Total assets 17,060 2,149 (1,241) 17,96814,904 2,347 857 -- 18,108
Property additions 291 90 -- 381
Acquisitions118 34 -- -- -- --
September 30, 1999
- ------------------
External152
Reconciling adjustments to segment operating results from internal
management reporting to consolidated external financial reporting:
(a) Principally fuel marketing revenues $ 4,140 $ 534 $ -- $ 4,674
Intersegment revenues 23 117 (140) --
Total revenues 4,163 651 (140) 4,674
Depreciation and amortization 706 20 -- 726
Net interest charges 421 50 (36) 435
Income taxes 312 (3) -- 309
Net income/Earnings on common stock 454 (3) (3) 448
Total assets 17,123 1,884 (932) 18,075
Property additions 231 59 -- 290
Acquisitions -- 9 -- 9which are reflected as
reductions to expenses for internal management reporting purposes.
(b) Elimination of intersegment transactions.
- 5 -
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,
---------------------- ----------------------March 31,
-------------------------
2001 2000 1999 2000 1999
---------- ----------
---------- ----------
(In thousands, except per share amounts)
REVENUES:
Electric sales $1,401,936 $1,467,619 $3,889,643 $3,968,399
Other - electric utilities 60,771 66,099 202,679 190,964
Facilities services 158,003 133,821 412,753 355,144
Trading services 131,615 40,408 268,965 68,974
Other 139,320 24,444 427,639 90,201
---------- ----------$1,311,289 $1,280,930
Unregulated businesses 674,452 327,000
---------- ----------
Total revenues 1,891,645 1,732,391 5,201,679 4,673,682
---------- ----------1,985,741 1,607,930
---------- ----------
EXPENSES:
Fuel and purchased power 200,801 269,755 593,355 678,385324,579 244,640
Purchased gas 352,817 102,038
Other expenses:
Electric utilities 375,950 368,066 1,204,431 1,158,037
Facilities services 149,679 122,479 395,655 332,438
Trading services 136,248 40,208 285,840 73,472
Other 151,456 27,393 401,041 91,563operating expenses 645,403 544,269
Provision for depreciation and amortization 280,884 318,490 707,762 726,403227,214 202,084
General taxes 138,054 144,584 417,086 422,144
---------- ----------119,422 141,055
---------- ----------
Total expenses 1,433,072 1,290,975 4,005,170 3,482,442
---------- ----------1,669,435 1,234,086
---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES 458,573 441,416 1,196,509 1,191,240
---------- ----------316,306 373,844
---------- ----------
NET INTEREST CHARGES:
Interest expense 123,272 125,712 370,358 386,452
Allowance for borrowed funds used during
construction and capitalized118,219 122,843
Capitalized interest (6,323) (3,410) (19,449) (9,471)(8,823) (6,104)
Subsidiaries' preferred stock dividends 14,237 19,007 49,650 57,767
---------- ----------16,934 18,288
---------- ----------
Net interest charges 131,186 141,309 400,559 434,748
---------- ----------126,330 135,027
---------- ----------
INCOME TAXES 129,200 114,284 322,241 308,62683,769 97,899
---------- -------------------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING 106,207 140,918
Cumulative effect of accounting change (net of income taxes
of $5,839,000) (Note 4) (8,499) --
---------- ----------
NET INCOME $ 198,18797,708 $ 185,823 $ 473,709 $ 447,866
========== ==========140,918
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 221,846 226,432 223,415 227,646
======= =======218,107 224,859
======= =======
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK $ .89 $ .82 $ 2.12 $ 1.97
===== ===== ====== ======SHARE:
Before cumulative effect of accounting change $.49 $.63
Cumulative effect of accounting change (.04) --
---- ----
$.45 $.63
==== ====
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $.375 $.375
$1.125 $1.125
===== ===== ====== ======
The preceding Notes to Financial Statements as they relate to FirstEnergy Corp.
are an integral part of these statements.
- 6 -
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2001 2000
1999
------------- ---------------------- -----------
(In thousands)
ASSETS
------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 67,21342,496 $ 111,78849,258
Receivables-
Customers (less accumulated provisions of $6,864,000$29,163,000
and $6,719,000,$32,251,000, respectively, for uncollectible accounts) 374,113 322,687562,315 541,924
Other (less accumulated provisions of $9,005,000$4,350,000 and
$5,359,000,$4,035,000, respectively, for uncollectible accounts) 438,831 445,242326,940 376,525
Materials and supplies, at average cost-
Owned 136,611 154,834161,811 171,563
Under consignment 108,986 99,231128,950 112,155
Prepayments and other 189,956 167,894
---------- ----------
1,315,710 1,301,676
---------- ----------207,374 189,869
----------- -----------
1,429,886 1,441,294
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
In service 12,004,800 14,645,13112,449,813 12,417,684
Less--Accumulated provision for depreciation 4,840,580 5,919,1705,294,605 5,263,483
----------- -----------
7,164,220 8,725,9617,155,208 7,154,201
Construction work in progress 335,336 367,380443,395 420,875
----------- -----------
7,499,556 9,093,3417,598,603 7,575,076
----------- -----------
INVESTMENTS:
Capital trust investments 1,232,890 1,281,8341,190,885 1,223,794
Nuclear plant decommissioning trusts 600,231 543,694617,581 584,288
Letter of credit collateralization 277,763 277,763
Other 622,404 599,443683,712 669,057
----------- -----------
2,733,288 2,702,7342,769,941 2,754,902
----------- -----------
DEFERRED CHARGES:
Regulatory assets 3,860,941 2,543,4273,599,642 3,727,662
Goodwill 2,102,912 2,129,902
Property taxes 267,226 276,9972,074,712 2,088,770
Other 187,946 175,970528,495 353,590
----------- -----------
6,419,025 5,126,2966,202,849 6,170,022
----------- -----------
$17,967,579 $18,224,047$18,001,279 $17,941,294
=========== ===========
- 7 -
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2001 2000
1999
---------------------- ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock $ 446,797491,568 $ 762,520536,482
Short-term borrowings 663,549 417,819741,879 699,765
Accounts payable 316,308 360,379409,001 478,661
Accrued taxes 520,685 409,724405,912 409,640
Accrued interest 122,335 125,397128,976 116,544
Other 305,534 301,572281,885 352,713
----------- -----------
2,375,208 2,377,4112,459,221 2,593,805
----------- -----------
CAPITALIZATION:
Common stockholders' equity-
Common stock, $.10 par value, authorized 300,000,000375,000,000
shares - 227,446,741223,981,580 and 232,454,287224,531,580 shares outstanding,
respectively 22,745 23,24522,398 22,453
Other paid-in capital 3,607,660 3,722,3753,519,049 3,531,821
Accumulated other comprehensive income (loss) (195) (195)39,071 593
Retained earnings 1,167,041 945,2411,225,945 1,209,991
Unallocated employee stock ownership plan common stock -
6,058,5215,741,074 and 6,778,9055,952,032 shares, respectively (113,487) (126,776)(106,711) (111,732)
----------- -----------
Total common stockholders' equity 4,683,764 4,563,8904,699,752 4,653,126
Preferred stock of consolidated subsidiaries-
Not subject to mandatory redemption 648,395 648,395
Subject to mandatory redemption 114,610 136,24640,628 41,105
OE obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely OE subordinated debentures 120,000 120,000
Long-term debt 5,725,011 6,001,2645,767,079 5,742,048
----------- -----------
11,291,780 11,469,79511,275,854 11,204,674
----------- -----------
DEFERRED CREDITS:
Accumulated deferred income taxes 2,118,258 2,231,2652,081,695 2,094,107
Accumulated deferred investment tax credits 248,027 269,083
Other postretirement benefits 530,221 498,184236,642 241,005
Nuclear plant decommissioning costs 614,922 562,295632,279 598,985
Other 789,163 816,014postretirement benefits 564,351 544,541
Other 751,237 664,177
----------- -----------
4,300,591 4,376,8414,266,204 4,142,815
----------- -----------
COMMITMENTS GUARANTEES AND CONTINGENCIES (Note 2) ----------- -----------
$17,967,579 $18,224,047$18,001,279 $17,941,294
=========== ===========
The preceding Notes to Financial Statements as they relate to FirstEnergy Corp.
are an integral part of these balance sheets.
- 8 -
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,March 31,
--------------------
-----------------------2001 2000
1999 2000 1999
-------- --------- ---------- ------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $198,187 $ 185,823 $ 473,709 $ 447,86697,708 $140,918
Adjustments to reconcile net income to net cash from operating
activities-
Provision for depreciation and amortization 280,884 318,490 707,762 726,403227,214 202,084
Nuclear fuel and lease amortization 31,672 27,535 86,376 75,48423,975 29,761
Other amortization, net (2,851) (2,855) (9,469) (7,109)(3,633) (3,167)
Deferred income taxes, net (47,856) (30,421) (81,194) (45,166)(15,935) (5,373)
Investment tax credits, net (10,569) (6,856) (23,064) (13,675)(4,998) (5,554)
Cumulative effect of accounting change 14,338 --
Receivables (24,187) (5,501) (45,015) (165,948)29,194 26,101
Materials and supplies (10,790) 26,879 8,468 33,607(7,043) 6,838
Accounts payable (40,929) (75,808) (44,071) (26,635)(69,660) (18,319)
Other 120,367 111,302 34,434 9,172(69,057) (45,374)
-------- --------- ---------- ------------------
Net cash provided from operating activities 493,928 548,588 1,107,936 1,033,999222,103 327,915
-------- --------- ---------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 37,331 84,331 295,749 277,696622 17,319
Short-term borrowings, net 198,682 54,353 245,730 29,62542,114 --
Redemptions and Repayments-
Common stock 44,445 41,035 118,457 116,610
Preferred stock 6,000 11,920 19,714 33,40915,308 33,962
Long-term debt 473,730 525,532 923,254 618,54021,216 102,055
Short-term borrowings, net -- 63,992
Common stock dividend payments 83,391 85,247 251,909 256,68381,753 84,455
-------- --------- ---------- ------------------
Net cash used for financing activities 371,553 525,050 771,855 717,92175,541 267,145
-------- --------- ---------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 105,369 114,873 381,446 298,549151,176 151,680
Cash investments 60 (71) (40,976) (41,276)(29,138) (39,106)
Other 37,293 19,665 40,186 20,99931,286 16,938
-------- --------- ---------- ------------------
Net cash used for investing activities 142,722 134,467 380,656 278,272153,324 129,512
-------- --------- ---------- ------------------
Net increase (decrease)decrease in cash and cash equivalents (20,347) (110,929) (44,575) 37,8066,762 68,742
Cash and cash equivalents at beginning of period 87,560 226,53349,258 111,788
77,798
-------- --------- ---------- ------------------
Cash and cash equivalents at end of period $ 67,21342,496 $ 115,604 $ 67,213 $ 115,60443,046
======== ========= ========== ==================
The preceding Notes to Financial Statements as they relate to FirstEnergy Corp.
are an integral part of these statements.
- 9 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FirstEnergy Corp.:
We have reviewed the accompanying consolidated balance sheet of
FirstEnergy Corp. (an Ohio corporation) and subsidiaries as of September 30, 2000,March 31,
2001, and the related consolidated statements of income and cash flows for
the three-month and nine-month periods ended September 30,
2000March 31, 2001 and 1999.2000. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States, the objective of which is the expression of
an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the
United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the consolidated balance sheet of
FirstEnergy Corp. and subsidiaries as of December 31, 19992000 (not presented
herein), and, in our report dated February 11, 2000,16, 2001, we expressed an
unqualified opinion on that statement. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31,
1999,2000, is fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
November 10, 2000
- 10 -May 14, 2001.
FIRSTENERGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Net income increased to $198.2 million in the thirdfirst quarter of 2000,2001 was $106.2 million, or
$0.49 per share of common stock (basic and diluted) - before the
cumulative effect of an accounting change (as described below), compared
to $185.8$140.9 million, or $0.63 per share of common stock in the same period
in 1999. Basic and
diluted earnings2000. After the accounting change, first quarter 2001 net income was
$97.7 million, or $0.45 per share of common stock were $0.89stock. The decrease resulted
in the third quarter
of 2000,part from changes in depreciation and amortization patterns under
FirstEnergy's transition plan that began on January 1, 2001, as compared
to $0.82prior regulatory plans in 2000. This transition plan allows Ohio
electric customers to select their generation suppliers and unbundled the
third quarter of 1999. In the first nine
months of 2000, net incomeprice for electricity into its component elements - including generation,
transmission, distribution and transition charges.
Revenues
Total revenues increased to $473.7 million from $447.9by $377.8 million in the year-to-date period of 1999. Basic and diluted earnings per share
of common stock were $2.12 in the first nine months of 2000, compared to
$1.97 for the same period in 1999.
As a result of increased sales by our unregulated businesses,
revenues increased $159.3 million in the third quarter
of 2000 and $528.0
million during the nine-month period ended September 30, 2000, as2001, compared to the same periods in 1999.period last year. FirstEnergy's competitive
services business segment provided the majority of the revenue increase,
mostly from expanded gas sales. The sources of changes in revenues during
the increases in the thirdfirst quarter and first nine months of 2000, compared to the corresponding
periods of 1999,2001 are summarized in the following table.
Three Nine
Sources of Revenue Changes Months Months
-------------------------- ------ ------
(In millions)
Electric Utility Operating Companies (EUOC):
Electric sales $(65.7) $(78.8)
Other electric utility revenues (5.3) 11.7
------ ------
Total EUOC (71.0) (67.1)
Unregulated Businesses:
Retail electric sales 33.3 127.3
FirstEnergy Trading Services, Inc. (FETS) 91.2 200.0
Other businesses 105.8 267.8
------ ------
Net Revenue Increases $159.3 $528.0table:
Sources of Revenue Changes
- --------------------------
Increase (Decrease) (In millions)
Electric Utilities:
(Regulated Services)
Retail electric sales $ 42.3
Other revenues (11.9)
------
Total Electric Utilities 30.4
------
Unregulated Businesses:
(Competitive Services)
Retail electric sales 4.1
Wholesale electric sales 85.8
Gas sales 225.9
Other businesses 31.6
------
Total Unregulated Businesses 347.4
------
Net Revenue Increase $377.8
====== ======
Electric Sales
EUOCRevenues from the electric sales revenues decreased $65.7 million in the
third quarter and $78.8utilities increased by $30.4 million
in the first nine monthsquarter of 2001, compared to the same period in 2000, as a
result of higher unit prices for energy sold and additional kilowatt-hour
sales of electric generation. However, implementation of a 5% reduction in
generation charges for residential customers as part of Ohio's electric
utility restructuring law that began in 2001, partially offset the
increase in electric sales revenues. This lower residential rate reduced
electric sales revenues by approximately $9 million in the first quarter
of 2001 and is expected to lower revenues for all of 2001 by approximately
$50 million. Higher kilowatt-hour deliveries to franchise customers
increased revenues for transmission and distribution services. A 3.6%
increase in kilowatt-hour deliveries was the result of higher deliveries
to both residential and industrial customers in the first quarter of 2001,
compared to the first quarter of last year. Weather was a major factor
giving rise to the increased residential kilowatt-hour sales. Although
weather was warmer than normal in the first quarter of 2001, average
temperatures were still significantly colder than the first quarter of
2000. Deliveries to commercial customers decreased partially as a result
of a softening in the service economy in the franchise areas. Kilowatt-
hour sales by other suppliers (including unregulated affiliates), which
are included in the kilowatt-hour deliveries, increased to 3.0% of total
energy delivered in the first quarter of 2001 from 1.1% in the first
quarter of 2000 from the
same periodsas a result of opening Ohio to competitive generation
suppliers in 1999. Lower unit prices (representing sales from
traditional vertically integrated operations) and reduced EUOC electric
generation sales contributed to the decrease in the third quarter. In the
year-to-date period, lower unit prices offset an increase in EUOC electric
generation sales. EUOC other2001. Other regulated electric revenues decreased in the
thirdfirst quarter of 2000, from2001, compared to the same period of 2000, primarily due
to the absence of income received last year duefrom a settlement with a
supplier.
Retail kilowatt-hour sales for the FirstEnergy competitive
services business segment decreased by 2% in part to a
reduction in investment income. Over the first ninethree months of
2000, EUOC
other electric revenues increased,2001, compared to the same period last year primarilypartially offset by increased
revenues of $4.1 million due to additional transmission service revenues.higher unit prices. This reduction
resulted from lower sales in markets outside Ohio as opportunities for
profitable sales became more limited in those markets. The reduction was
partially offset by expanded kilowatt-hour sales within Ohio as a result
of retail customers switching to FirstEnergy's unregulated affiliate - FE
Services, a wholly owned subsidiary, under Ohio's electricity choice
program.
Total electric generation sales (including unregulated sales)
increased by 13.1% in the third quarter and first
ninethree months of 2000, compared to
the corresponding periods in 1999. The strong increase in unregulated
retail sales continued with sales more than doubling in the third quarter
of 2000,2001 compared to the same period in 1999. FirstEnergy made further
progress in expanding its retail electric saleslast year. Sales to target unregulated
marketsthe
wholesale market more than doubled in the eastern seaboard states. Reducedfirst quarter of 2001, compared
to the first three months of 2000, which contributed the most to this
increase. The additional kilowatt-hour sales to wholesale customers dampened the growth in unregulated sales in the third
quarter of 2000 due in part to more available energy in the wholesale market.
EUOC kilowatt-hour deliveries (to customers in their franchise
service areas) decreased inmarket
resulted from FirstEnergy's opportunistic transactions, as well as first-
time, nonaffiliated retail energy suppliers having access to 1,120
megawatts of FirstEnergy's generation capacity being made available under
its transition plan. As of March 31, 2001, over 900 megawatts of the third quarter of 2000 from the third
quarter in 1999. Weather1,120
megawatts supply commitment had a significant impact on residential sales,
which declined 9.4% from the third quarter in 1999. Year-to-date kilowatt-
hour sales to residential customers were also 4.4% lower in 2000, compared
to the same period in 1999, primarily due to the unusually mild third
quarter weather. Sales to commercial and
- 11 -
industrial customers were higher in both the third quarter and first nine
months of 2000, compared to the corresponding periods of 1999, reflecting
modest service area growth.been secured by alternative suppliers.
Changes in electric generation sales and kilowatt-hour
deliveries in the thirdfirst quarter and first nine months of 2000,2001, compared to the respective periodssame period of
1999,2000, are summarized in the following table.
Changes in KWH Sales Three Nine
- --------------------
Increase (Decrease) Months Months
------ ------
Electric Generation Sales:
EUOC - Retail (1.4)% 0.7%
Unregulated 16.2% 59.3%
---- ----
Total Electric Generation Sales 1.2% 7.7%table:
% Increase
Changes in KWH Sales (Decrease)
-------------------- ----------
Electric Generation Sales:
Retail --
Regulated Services 1.5%
Competitive Services (2.0)%
Wholesale 127.7%
-----
Total Electric Generation Sales 13.1%
====
Distribution Deliveries:
Residential 8.1%
Commercial (1.3)%
Industrial 3.6%
----
Total Retail Distribution Deliveries 3.6%
==== ====
EUOC Distribution Deliveries:
Residential (9.4)% (4.4)%
Commercial 0.1% 1.3%
Industrial 1.4% 3.4%
---- ----
Total Distribution Deliveries (2.2)% 0.5%
==== ====
Other Sales
Retail naturalResidential and small business customers in the Dominion East
Ohio service area began shopping among alternative gas suppliers last year
as part of a customer choice program, with gas deliveries beginning
November 1, 2000. FE Services took advantage of this opportunity to expand
its customer base. Total gas sales were the largest source of increases in
other business revenuesincreased by $225.9 million in the
third quarter and first ninethree months of 20002001 and the number of gas customers served by FE
Services increased to over 167,000 by the end of the first quarter of 2001
from approximately 30,000 a year earlier. Additionally, the competitive
services business segment's energy-related services experienced strong
growth. Revenues for FE Facilities, a wholly owned subsidiary, increased
by $21.9 million or 19% in the first quarter of 2001 compared to the same
periodsperiod last year, reflecting growth in 1999. Collectively, three 1999 FETS gas
acquisitions - Atlas Gas Marketing Inc., Belden Energy Services Companyboth construction and Volunteer Energy LLC - significantly expanded FETS revenues in the
third quarter and year-to-date periods of 2000, compared to last year.service
contracts.
Operating Expenses
Fuel and purchased power costs decreased $69.0 million in the
third quarter and $85.0increased by $79.9 million in the
first nine monthsquarter of 2000, compared
to the corresponding periods of 1999. Lower fuel expense continued to be a
major contributor to the reduction in fuel and purchased power costs in
the third quarter, declining $39.6 million2001 from the same period last year. Fuel expense
decreased by $8.5 million as a result of a 5.8% reduction in 1999.
In the nine-month period ended September 30, 2000, fuel expense declined
$93.5 milliongeneration
output (7.4% reduction in fossil generation and 3.6% reduction in nuclear
generation). The reduction in fossil generation resulted from the same year-to-date period in 1999. These reductions
occurred despite a 1.8% increase in internal generationhigher
planned maintenance activities in the thirdfirst quarter and a 6.0% increase in the year-to-date period of 2000,2001, compared to
the corresponding periodsfirst quarter of 1999. Factors contributing2000, as well as difficulties transporting coal to
FirstEnergy's generating plants along the reduced
fuel expense included:
o A higher proportionOhio River during a period of
unusually cold winter weather and supplier constraints. The reduction in
nuclear generation (i.e. lower
cost fuel) dueresulted from a scheduled refueling outage at the Perry
Plant. Lower generation levels from FirstEnergy's fossil and nuclear
plants combined with higher customer demand to improved nuclear availability and
increased nuclear ownership fromincrease the exchange of generating
assets with Duquesne Light Company (Duquesne) in December 1999;
o The expiration of an above-market coal contract; and
o Improved coal-blending strategies, which resultedneed for
purchased power in the use of
additional lower cost coal.
Purchased power costs were $29.4 million lower in the thirdfirst quarter of 2000,2001, compared to the same period
of 1999, as a result of additional
internal generation2000. Those increased requirements and lowerhigher spot purchase prices
during this period resulted in an $88.4 million increase in purchased
power costs.
Purchased gas costs for FirstEnergy's competitive services
business segment more than tripled in the wholesale market. Infirst quarter of 2001,
increasing by $250.8 million from the nine-
month period, purchased power costs were $8.5 million higher than the same
period last year, in part reflecting generating unit outages in the second quarter of 2000.
- 12 -This increase
resulted from the expansion of FE Services' gas business described above.
Due to the unanticipated size of customer enrollments and consumption
under the gas choice program, FE Services' supply costs this winter
exceeded its annual fixed rate contract prices as additional spot
purchases were necessary during a period of rising market prices for
natural gas. FirstEnergy expects the earnings contribution from the
natural gas operations to improve over the remainder of 2001.
Other operating expenses for the EUOC increased by $7.9$101.1 million in the
thirdfirst quarter of 2000 from the same period in 1999. Excluding a $33.1
million credit for gains resulting from the sale of emission allowances,
other expenses for the EUOC increased $41.0 million due to increased
maintenance work at several fossil plants and leased portable diesel
generators as part of our summer supply strategy, and additional nuclear
expenses resulting from the Beaver Valley Unit 2 refueling outage and
increased nuclear ownership. Other expenses for the EUOC also rose in the
first nine months of 2000,2001, compared to the same period of 1999,2000. Increased
operating costs for the competitive services business segment accounted
for slightly more than half of the increase in other operating expenses as
a result of outage-related costsincreased sales activity. Most of the remaining increase in
other operating expenses were from higher fossil operating expenses and
increased nuclear ownership. Expansion
of sales activity by FirstEnergy's unregulated businesses resultedemployee benefit costs.
A $21.9 million increase in corresponding increases in other non-EUOCfossil operating costs of $247.3
millionexpenses in the
thirdfirst quarter of 2001 from the first quarter of 2000 was due principally
to planned maintenance work at the Bay Shore, Eastlake and $585.1Mansfield
generating plants, which included work performed as part of FirstEnergy's
availability improvement program.
Pension costs increased by $20.6 million in the first nine
monthsquarter of
20002001 from the respective periods of 1999.
Depreciation and amortization decreasedsame period last year. The increase included $6.1 million
related to last year's early retirement program, with the remaining
increase primarily due to pension plan enhancements, lower expected
returns on plan assets (due to significant market-related reductions in
the thirdvalue of plan assets) and the completion of the 15-year amortization
of OE's transition asset. Health care benefit costs increased by $4.3
million in the first quarter of 2001, compared to the same period of 1999, primarily2000,
principally due to reducedthe impact of last year's early retirement program,
which added $2.3 million, and an increase in the anticipated health care
cost trend rate assumption for computing post-retirement health care
benefit liabilities.
Charges for depreciation and amortization increased by $25.1
million in the first quarter of 2001 from the same period last year.
Approximately $18 million of this increase resulted from higher transition
cost amortization under FirstEnergy's transition plan compared to
accelerated cost recovery in connection with OE's prior regulatory plan.
FirstEnergy expects total transition plan accelerations during 2001 to be
lower than the rate reductionplan accelerations recognized in 2000, with higher
first quarter costs in 2001 resulting from a different pattern of expense
recognition under the transition plan. TotalTransition cost accelerations
which consist(including related income tax amortization) totaled $79.0 million in the
first quarter of depreciation and amortization of
regulatory assets and regulatory assets related2001, compared to income taxescost accelerations under the
OEOE's rate plan
and Penn's restructuring plan were $147.9 million in the
third quarter of 2000, down from $173.5 million in the third quarter last
year. In the first nine months of 2000, total cost accelerations under the
regulatory plans were $291.9 million, compared to $282.4$57.3 million in the first nine monthsquarter of
1999.2000. Depreciation on recently completed combustion turbines and
additional software amortization due to a change in estimated useful life
also contributed to the increase in depreciation and amortization.
General taxes were $21.6 million lower in the thirdfirst quarter and year-to-date periods of
2000,2001, compared to the same periods last year,period of 2000, primarily due to a favorablereduced
property tax settlement and phase out of
Pennsylvania's franchise tax, partially offset by additional gross
receipts taxes.taxes in connection with the Ohio electric industry
restructuring.
Net Interest Charges
InterestNet interest charges continuedcontinue to trend lower, decreasing by $10.1
million in the third quarter and $34.2$8.7
million in the first nine monthsquarter of 2000,2001, compared to the same periods of 1999,period in 2000,
primarily due to debt and preferred stock redemption and refinancing
activities. Duringactivities undertaken after the end of the first nine monthsquarter of 2000, redemption2000.
Cumulative Effect of Accounting Change
In the first quarter of 2001, FirstEnergy recorded an after-tax
charge of $8.5 million ($0.04 per share of common stock) to reflect the
adoption (as of January 1, 2001) of a new accounting standard required by
the Financial Accounting Standards Board - SFAS 133, "Accounting for
Derivative Instruments and refinancing activities totaled $382.7 millionHedging Activities," as amended by SFAS 138,
"Accounting for Certain Derivative Instruments and $284.7 million, respectively,Certain Hedging
Activities - an amendment of FASB Statement 133." SFAS 133 establishes
accounting and will resultreporting standards which require that every derivative
instrument (including certain derivative instruments embedded in annualized savings of
$30.9 million, of which $18.8 million relates to activities occurring inother
contracts) be recognized on the third quarter.balance sheet as either an asset or
liability, measured at its fair value, unless specifically excluded from
the statement's scope.
Capital Resources and Liquidity
- -------------------------------
FirstEnergy and its subsidiaries have continuing cash needs for
planned capital expenditures, maturing debt and preferred stock sinking
fund requirements. During the last quarterthree quarters of 2000,2001, capital
requirements for property additions and capital leases are expected to be
about $242$590 million, including $29$52 million for nuclear fuel. The Companies haveFirstEnergy
has additional cash requirements of approximately $23.5$184.4 million to meet
sinking fund requirements for preferred stock and maturing long-term debt
during the fourth quarterremainder of 2000.2001. These cash requirements are expected to be
satisfied from internal cash and/or short-term credit arrangements.
However, FirstEnergy's pending merger (see Pending Business Combination)
with GPU, Inc. (GPU) is expected to require approximately $2.2 billion of
acquisition-related debt during 2001 and issuing between 74 million and 95
million additional shares of common stock.
During the thirdfirst quarter of 2000,2001, FirstEnergy repurchased
1.8
million550,000 shares of its common stock at an average price of $25.24$27.82 per
share. ForAs of March 31, 2001, FirstEnergy had repurchased 13 million of the
first nine months of 2000, the Company repurchased 5.015 million shares authorized by the Board of common stock at an average price of $23.62 per share. On
November 1, 2000, FirstEnergy settled an equity forward purchase contract
by purchasing an additional 1.4 million shares at an average price of
$24.22 per share (see Note 2 - "Stock Repurchase Program").Directors under the three-
year program which began in March 1999.
As of September 30, 2000,March 31, 2001, FirstEnergy and its subsidiaries had about
$67.2$42.5 million of cash and temporary investments and $663.5$741.9 million of
short-term indebtedness. Available borrowings included $229.0$160 million from
unused revolving lines of creditcredit. As of March 31, 2001, the operating
companies in the regulated services business segment (OE, CEI, TE and
$32.0 millionPenn) had the capability to issue $2.6 billion of bank facilities
that provideadditional first
mortgage bonds on the basis of property additions and retired bonds. Based
upon applicable earnings coverage tests and their respective charters, OE,
Penn and TE could issue $2.3 billion of preferred stock (assuming no
additional debt was issued). CEI has no restrictions on the issuance of
preferred stock.
Transmission Business
- ---------------------
On January 24, 2001, the companies seeking to form the Alliance
Regional Transmission Organization (Alliance RTO), including FirstEnergy's
ATSI subsidiary, received Federal Energy Regulatory Commission (FERC)
approval in all material respects, meeting the four RTO characteristics
and most of the RTO functions laid out in FERC Order 2000. In February
2001, the Alliance Companies reached a settlement agreement with the
Midwest Independent System Operator, Inc. and certain midwest transmission
owners. This settlement agreement provides for borrowingsinter-RTO coordination,
transmission pricing, and the ability for three Illinois companies to
leave the Midwest ISO and join the Alliance. On March 21, 2001, the
Administrative Law Judge certified the settlement agreement and forwarded
it to the FERC for final approval, which was received on a short-term basis at the banks'
discretion.
On AugustMay 8, 2000,2001. The
Alliance RTO's goal is to be operational by mid-December 2001.
Pending Business Combination
- ----------------------------
The merger of FirstEnergy and GPU Inc. (GPU) entered into
an Agreement and Plan of Merger. Under the merger agreement, FirstEnergy
would acquire all of the outstanding shares of GPU's common stock for
approximately $4.5 billion in cash and FirstEnergy common stock.
FirstEnergy would assume approximately $7.4 billion of GPU's debt and
preferred stock. The transaction would be accounted for by the purchase
method of accounting under the guidelines of Accounting Principles Board
Opinion No. 16, "Business Combinations." Under purchase accounting, the
results of operations for the combined entity would be reported from the
point of consummation forward.
- 13 -
The combined company is expected to becomebe completed by
mid-summer 2001. Regulatory approvals for the sixth-largest investor-
owned electric companybusiness combination have
been obtained from the FERC, the Nuclear Regulatory Commission, the New
York Public Service Commission, Argentina and the Federal Communications
Commission. Information was submitted to the Department of Justice and
Federal Trade Commission as required under the Hart-Scott-Rodino Act and
the required waiting period passed without comment. Remaining approvals
are needed from the New Jersey Board of Public Utilities, the Pennsylvania
Public Utility Commission and the Securities and Exchange Commission
(SEC). Approval in Pennsylvania is expected in May, while approval in New
Jersey is anticipated by early summer. SEC approval is expected within
thirty days after the United States, based on the number of
customers served (see Note 2 - "Merger Agreement").
Moody's Investors Service (Moody's) and Fitch upgraded the
credit ratings of FirstEnergy's EUOC on September 27, 2000 and October 30,
2000, respectively. Moody's senior secured debt ratings of OE and Penn
were raised from Baa2 to Baa1, and CEI and TE's from Ba1 to Baa3. Fitch's
senior secured debt rating of OE was raised from BBB to BBB+ (Penn's
remained at BBB+) and CEI's and TE's from BB+ to BBB-. Ratings of many of
the junior securities of the Companies were upgraded to conform to rating
relationships typical of investment grade issuers. The ratings of the EUOC
remain under review for further possible upgrades by Moody's.last state regulatory approval.
Market Risk - Commodity Prices
- ------------------------------
FirstEnergy is exposed to market riskrisks due to fluctuations in
electricity, coal, natural gas, coal and oil prices. To manage the volatility
relating to these exposures, FirstEnergy uses a variety of derivative
instruments, including forward contracts, options, futures contracts and
futures contracts.swaps. These derivatives are used principally for hedging purposes, and to
a lesser extent, for trading purposes. Although FirstEnergy believes that
the policies and procedures it has adopted are prudent, its financial
position, results of operations or cash flow may be adversely affected by
unanticipated fluctuations in the commodity prices for electricity,
coal,
natural gas, coal, oil, or by the failure of contract counterparties to
perform.
Recently Issued Accounting Standards
- ------------------------------------
FirstEnergy has estimated the impact of SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities," and SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement No. 133." FirstEnergy
anticipates adopting SFAS 133 and SFAS 138 on their effective date of
January 1, 2001. If applied to derivatives in existence as of September
30, 2000, the collective impact of SFAS 133 and SFAS 138 is not
anticipated to have a significant effect on FirstEnergy's results of
operations or financial position.
- 14 -
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,March 31,
--------------------
----------------------2001 2000
1999 2000 1999
-------- -------- ---------- ----------
(In thousands)
OPERATING REVENUES $733,906 $770,518 $2,045,527 $2,050,365$783,103 $644,365
-------- -------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased14,146 76,066
Purchased power 102,973 143,486 305,351 364,951306,417 19,512
Nuclear operating costs 83,535 64,547 268,196 213,86292,245 111,619
Other operating costs 104,971 103,398 300,710 321,45480,956 97,594
-------- -------- ---------- ----------
Total operation and maintenance expenses 291,479 311,431 874,257 900,267493,764 304,791
Provision for depreciation and amortization 193,711 228,775 444,445 457,330116,956 113,951
General taxes 56,700 61,890 174,161 185,71244,954 59,453
Income taxes 62,749 48,120 169,732 137,78738,601 46,621
-------- -------- ---------- ----------
Total operating expenses and taxes 604,639 650,216 1,662,595 1,681,096694,275 524,816
-------- --------
---------- ----------
OPERATING INCOME 129,267 120,302 382,932 369,26988,828 119,549
OTHER INCOME 16,423 10,179 40,227 32,57712,365 12,323
-------- -------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 145,690 130,481 423,159 401,846101,193 131,872
-------- -------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 42,208 44,583 126,803 135,88839,387 42,539
Allowance for borrowed funds used during construction and
capitalized interest (2,324) (1,041) (6,391) (3,023)(2,918) (2,559)
Other interest expense 7,911 6,510 22,971 24,2936,912 7,471
Subsidiaries' preferred stock dividend requirements 3,626 3,831 10,878 11,5443,626
-------- -------- ---------- ----------
Net interest charges 51,421 53,883 154,261 168,70247,007 51,077
-------- --------
---------- ----------
NET INCOME 94,269 76,598 268,898 233,14454,186 80,795
PREFERRED STOCK DIVIDEND REQUIREMENTS 2,807 2,914 8,423 8,7402,702 2,808
-------- -------- ---------- ----------
EARNINGS ON COMMON STOCK $ 91,46251,484 $ 73,684 $ 260,475 $ 224,40477,987
======== ======== ========== ==========
The preceding Notes to Financial Statements as they relate to Ohio Edison
Company are an integral part of these statements.
- 15 -
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2001 2000
1999
----------------------- ------------
(In thousands)
ASSETS
------
ASSETS
------
UTILITY PLANT:
In service $4,960,038 $8,118,783$4,952,557 $4,930,844
Less--Accumulated provision for depreciation 2,249,878 3,713,7812,387,818 2,376,457
---------- ----------
2,710,160 4,405,0022,564,739 2,554,387
---------- ----------
Construction work in progress-
Electric plant 174,570 205,67191,735 219,623
Nuclear fuel 22,346 10,05927 18,898
---------- ----------
196,916 215,73091,762 238,521
---------- ----------
2,907,076 4,620,7322,656,501 2,792,908
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
PNBV Capital Trust 461,156 469,124
Nuclear plant decommissioning trusts 256,861 236,903451,612 452,128
Letter of credit collateralization 277,763 277,763
NotesNuclear plant decommissioning trusts 271,344 262,042
Long-term notes receivable from associated companies 351,808 --470,951 351,545
Other 294,805 425,872296,574 305,848
---------- ----------
1,642,393 1,409,6621,768,244 1,649,326
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 18,582 87,17511,399 18,269
Receivables-
Customers (less accumulated provisions of $6,452,000$11,808,000
and $11,777,000, respectively for uncollectible accounts at both dates) 296,680 278,484accounts) 305,387 304,719
Associated companies 423,672 221,653591,858 478,025
Other (less accumulated provisions of $1,000,000 for
uncollectible accounts at both dates) 37,713 36,28133,650 34,281
Materials and supplies, at average cost-
Owned 67,521 69,11949,147 80,534
Under consignment 52,744 55,27829,729 51,488
Prepayments and other 71,283 73,68289,112 76,934
---------- ----------
968,195 821,6721,110,282 1,044,250
---------- ----------
DEFERRED CHARGES:
Regulatory assets 2,613,969 1,618,319
Property taxes 99,290 100,906
Unamortized sale and leaseback costs 81,352 85,1002,404,894 2,498,837
Other 37,654 44,355182,399 168,830
---------- ----------
2,832,265 1,848,6802,587,293 2,667,667
---------- ----------
$8,349,929 $8,700,746$8,122,320 $8,154,151
========== ==========
- 16 -
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2001 2000
1999
------------------------- ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, without par value, authorized
175,000,000 shares - 100 shares outstanding $2,098,729 $2,098,729
Accumulated other comprehensive income 8,929 --
Retained earnings 621,187 525,731472,451 458,263
---------- ----------
Total common stockholder's equity 2,719,916 2,624,4602,580,109 2,556,992
Preferred stock-
Notstock not subject to mandatory redemption 160,965 160,965
Subject to mandatory redemption -- 5,000
Preferred stock of consolidated subsidiary-
Not subject to mandatory redemption 39,105 39,105
Subject to mandatory redemption 15,000 15,000
OE obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely OE
subordinated debentures 120,000 120,000
Long-term debt 1,952,759 2,175,8122,046,364 2,000,622
---------- ----------
5,007,745 5,140,3424,961,543 4,892,684
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 280,618 422,838260,363 311,358
Short-term borrowings-
Associated companies 4,720 35,58336,315 19,131
Other 311,037 322,713284,732 296,301
Accounts payable-
Associated companies 74,095 50,88388,222 123,859
Other 58,138 63,2197,788 60,332
Accrued taxes 269,443 207,362270,499 232,225
Accrued interest 40,916 37,57239,416 34,106
Other 109,310 94,96785,892 75,288
---------- ----------
1,148,277 1,235,1371,073,227 1,152,600
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 1,338,978 1,468,4781,269,125 1,298,845
Accumulated deferred investment tax credits 115,448 143,336107,346 110,064
Nuclear plant decommissioning costs 256,016 239,695270,506 261,204
Other postretirement benefits 157,350 148,421162,639 160,719
Other 326,115 325,337277,934 278,035
---------- ----------
2,193,907 2,325,2672,087,550 2,108,867
---------- ----------
COMMITMENTS GUARANTEES AND CONTINGENCIES (Note 2) ---------- ----------
$8,349,929 $8,700,746$8,122,320 $8,154,151
========== ==========
The preceding Notes to Financial Statements as they relate to Ohio Edison
Company are an integral part of these balance sheets.
- 17 -
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,March 31,
----------------------
--------------------2001 2000 1999 2000 1999
---------- ----------
---------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 94,26954,186 $ 76,598 $ 268,898 $233,14480,795
Adjustments to reconcile net income to net cash from operating
activities-
Provision for depreciation and amortization 193,711 228,775 444,445 457,330116,956 113,951
Nuclear fuel and lease amortization 15,205 10,718 40,902 32,13111,757 13,102
Deferred income taxes, net (44,589) (55,793) (82,277) (86,548)(20,402) (15,958)
Investment tax credits, net (9,431) (5,320) (19,004) (9,204)(3,353) (4,093)
Receivables (181,935) (60,020) (220,549) (64,928)(57,704) 7,055
Materials and supplies (5,827) 25,799 4,132 23,03453,146 3,742
Accounts payable (54,593) (47,709) 18,131 (9,739)(88,181) 53,360
Other 104,842 104,710 91,223 72,565
--------- ---------45,655 37,829
--------- --------
Net cash provided from operating activities 111,652 277,758 545,901 647,785
--------- ---------112,060 289,783
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 6,864 2,936 199,116 161,451500 17,318
Short-term borrowings, net 7,0125,615 -- -- 3,066
Redemptions and Repayments-
Preferred stock 5,000 10,920 5,000 17,005
Long-term debt 237,993 329,094 554,392 348,2347,150 71,033
Short-term borrowings, net -- 86,754 42,539 --50,939
Dividend Payments-
Common stock 55,700 -- 164,900 333,60337,300 59,000
Preferred stock 2,946 2,611 8,543 8,437
--------- ---------2,698 2,808
--------- --------
Net cash used for financing activities 287,763 426,443 576,258 542,762
--------- ---------41,033 166,462
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 57,121 45,736 190,306 140,52325,398 88,121
Loans to associated companies 182,997 -- 207,231 --175,572 100,713
Sale of assets to associated companies (387,675) -- (387,675)(121,594) --
Other 20,040 (21,040) 28,374 (13,242)
--------- ---------(1,479) 13,055
--------- --------
Net cash used for (provided from)
investing activities (127,517) 24,696 38,236 127,281
--------- ---------77,897 201,889
--------- --------
Net increase (decrease)decrease in cash and cash equivalents (48,594) (173,381) (68,593) (22,258)6,870 78,568
Cash and cash equivalents at beginning of period 67,176 184,33618,269 87,175 33,213
--------- ---------
--------- --------
Cash and cash equivalents at end of period $ 18,58211,399 $ 10,955 $ 18,582 $ 10,955
========= =========8,607
========= ========
The preceding Notes to Financial Statements as they relate to Ohio Edison
Company are an integral part of these statements.
- 18 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ohio Edison Company:
We have reviewed the accompanying consolidated balance sheet of Ohio
Edison Company (an Ohio corporation and wholly owned subsidiary of
FirstEnergy Corp.) and subsidiaries as of September 30, 2000,March 31, 2001, and the related
consolidated statements of income and cash flows for the three-
month and nine-monththree-month
periods ended September 30, 2000March 31, 2001 and 1999.2000. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States, the objective of which is the expression of
an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the
United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the consolidated balance sheet of
Ohio Edison Company and subsidiaries as of December 31, 19992000 (not
presented herein), and, in our report dated February 11, 2000,16, 2001, we
expressed an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1999,2000, is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
November 10, 2000
- 19 -May 14, 2001.
OHIO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Corporate Separation
- --------------------
Beginning in 2001, Ohio electric customers can select their
generation suppliers as a result of legislation which restructured the
electric utility industry. That legislation also required unbundling the
price for electricity into its component elements -- including generation,
transmission, distribution and transition charges. Also, Ohio utilities
that offer both competitive and regulated retail electric services were
required to implement a corporate separation plan approved by the PUCO --
one which provides a clear separation between regulated and competitive
operations. In connection with FirstEnergy's transition plan, FirstEnergy
separated its businesses into three distinct units -- a competitive
services unit, a utility services unit and a corporate support services
unit. The OE Companies (OE and Penn) are included in the utility services
unit which continues to deliver power to homes and businesses through
their existing distribution systems and maintains the "provider of last
resort" (PLR) obligation under their respective rate plans.
As a result of the transition plan, FirstEnergy's EUOC entered
into power supply agreements whereby FE Services purchases all of the
electric utility operating companies (EUOC) nuclear generation, as well as
generation from leased fossil generating facilities. FirstEnergy
Generation Corp. (FE Generation), a wholly owned subsidiary of FE
Services, leases fossil generating units owned by the EUOC. The EUOC are
"full requirements" customers of FE Services to enable them to meet their
PLR responsibilities in their respective service areas. OE continues to
provide power directly to wholesale customers under previously negotiated
contracts as well as to alternative energy suppliers as part of OE's
market support generation program of 560 megawatts.
The effect on the OE Companies' reported results of operations
during the first quarter of 2001 from FirstEnergy's corporate separation
plan and the OE Companies' sale of transmission assets to ATSI in
September 2000, are summarized in the following table:
Income Statement Effects Corporate
------------------------
Increase (Decrease) Separation ATSI Total
---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement with FE Services $ 89.8 $ -- $ 89.8
Generating units lease rent 44.9 -- 44.9
------ ----- ------
Total Operating Revenues Effect $134.7 $ -- $134.7
====== ===== ======
Operating Expenses:
Fossil fuel costs $(63.9) (a) $ -- $(63.9)
Purchased power costs 297.5 (b) -- 297.5
Other operating costs (40.5) (a) 20.1 (d) (20.4)
Provision for depreciation and
amortization -- (4.3)(e) (4.3)
General taxes (1.2) (c) (3.6)(e) (4.8)
------ ----- ------
Total Operating Expenses Effect $191.9 $12.2 $204.1
====== ===== ======
Other Income $ -- $ 4.0 (f) $ 4.0
====== ===== ======
(a) Transfer of fossil operations to FE Generation.
(b) Purchased power for PLR.
(c) Payroll taxes related to employees transferred to FE Generation.
(d) Transmission services received from ATSI.
(e) Depreciation and property taxes on transmission assets sold to ATSI.
(f) Interest on note receivable from ATSI.
Results of Operations
- ---------------------
Operating revenues decreased $36.6increased by $138.7 million or 21.5% in the
thirdfirst quarter and $4.8 million during the nine-month period ended September 30, 2000,of 2001, compared to the same periodsperiod in 1999. Lower third2000, with nearly
all of that increase resulting from the implementation of FirstEnergy's
corporate separation as shown on the table above. The OE Companies'
electric sales to retail customers also increased by $10.5 million,
offsetting reduced wholesale sales of $13.3 million in the first quarter
and year-to-date
operating revenues resulted from lowerof 2001, compared with the first quarter of 2000. As part of Ohio's
electric utility restructuring law, the implementation of a 5% reduction
in generation charges for Ohio's residential customers, partially offset
the increase in electric sales revenues in 2001. The lower residential
rate reduced electric sales revenues by approximately $4.9 million in the
first quarter of 2001 and is expected to lower revenues for all of 2001 by
more than $29 million.
Higher revenues from distribution services also contributed
favorably to the increase in operating revenues. Residential kilowatt-hour
deliveries in the first quarter of 2001 were 8.6% higher than the first
quarter of 2000, partially due to reduced unit prices, which were partially offset by additional
transmission service revenues. As a result of higher sales to wholesale
customers, total kilowatt-hour sales increased 0.5%weather. Although weather was warmer
than normal in the thirdfirst quarter of 2001, average temperatures were still
significantly colder than the first quarter of 2000. Commercial and
7.1%industrial deliveries were approximately unchanged in the year-to-date periodfirst quarter of
2000, compared to2001 from the same periodsperiod last year. Total kilowatt-hour deliveries, which
represents all kilowatt-hours delivered to customers in the OE Companies'
franchise areas, increased by 2.9% in the first quarter of 2001 from the
same period last year. Additional available internalrevenues from OE's market support
generation and continuing demand
forto alternative energy suppliers also contributed to higher
revenues, as well as several existing committed wholesale power combined to increase sales to the wholesale market in
both the third quarter and first nine months of 2000, compared to the
previous year. Total retail kilowatt-hour sales decreased 7.5% in the
third quarter and 2.0% in the first nine months of 2000, compared to the
same periods in 1999, with reduced kilowatt-hour sales primarily in the
residential and commercial sectors. The decrease in residential sales was
principally due to milder weather during the quarter, resulting in a much
lower air-conditioning load. Kilowatt-hour sales to industrial customers
were lower in the third quarter of 2000, but remain higher for the year-
to-date period of 2000, compared to the same periods in 1999. Industrial
kilowatt-hour sales for the first nine months of 2000 benefited from a
rebound in demand for domestic steel.
Changes in kilowatt-hour sales by customer class for the third
quarter and first nine months of 2000, compared to the corresponding
periods of 1999, are summarized in the following table.
Changes in KWH Sales Three Nine
- --------------------
Increase (Decrease) Months Months
------ ------
Residential (13.1)% (5.1)%
Commercial (7.7)% (4.2)%
Industrial (2.3)% 2.4%
---- ----
Total Retail (7.5)% (2.0)%
Wholesale 32.1% 47.8%
---- ----
Total Sales 0.5% 7.1%
==== ====
contracts.
Operating Expenses and Taxes
Total operating expenses and taxes decreased $45.6 million and
$18.5increased by $169.5 million
in the thirdfirst quarter and first nine months of 2000,
respectively, from the same periods of 1999. Lower fuel and purchased
power costs in both the third quarter and first nine months of 2000,2001, compared to the same periodsquarter of 2000,
principally due to the implementation of FirstEnergy's corporate
separation plan as shown on the preceding table. Excluding the effect of
corporate separation, purchased power costs decreased by $10.6 million.
Nuclear fuel costs were $2.0 million higher in 1999, occurredthe first quarter of 2001
from the same period last year due to additional nuclear generation.
Nuclear operating costs decreased by $19.4 million in the first quarter of
2001, compared to the first quarter of 2000, due primarily to lower
refueling outage costs. The reduced costs resulted from the OE Companies'
smaller ownership share (35.24%) of a scheduled Perry Plant refueling
outage in the first quarter of 2001 versus their 100% ownership share in
the Beaver Valley Unit 1 refueling outage in the same period last year.
Other operating costs decreased by $16.6 million in the first quarter of
2001 from the corresponding period in 2000 as a result of reduced fuel expense - down $21.9corporate
separation; these reductions were partially offset by increased pension
costs resulting from last year's early retirement program.
Excluding the effect from corporate separation, charges for
depreciation and amortization increased $7.3 million and $45.2 million, respectively.
Several factors contributed to the lower fuel expense, which occurred
despite an 8.2% third quarter increase in generation and an 11.7% increase
in generation during the first nine months of 2000, compared to the prior
year. These factors included:
o A higher proportion of nuclear generation (i.e. lower cost
fuel) due to improved nuclear availability and increased
nuclear ownership from the exchange of assets with Duquesne
in December 1999;
o The expiration of an above-market coal contract; and
o Improved coal-blending strategies, which resulted in the
use of additional lower cost fuel.
- 20 -
Nuclear operating costs were higher in both the third quarter
and year-to-date periods of 2000, compared to the same periods last year,
due to nuclear refueling outages at the Beaver Valley Plant and increased
ownership of that plant following the asset exchange. In the first nine
months of 2000, other operating costs decreased, compared to the year-to-
date period in 1999, due to $21.4 million in gains realized on the sale of
emission allowances.
Depreciation and amortization decreased in the third quarter
of 2000, compared to2001 from the same period of 1999, primarily duelast year. Higher transition cost
amortization under FirstEnergy's transition plan compared to reducedthe
accelerated cost recovery in connection with OE's prior regulatory plan
accounted for this increase. The OE Companies expect total transition plan
accelerations during 2001 to be lower than the rate reduction plan.
Total costplan accelerations
which consistrecognized in 2000, with higher first quarter costs in 2001 resulting from
a different pattern of depreciation and amortization
of regulatory assets and regulatory assets related to income taxesexpense recognition under the OE rate plan and Penn's restructuring plantransition plan.
General taxes were $147.9$14.5 million in the
third quarter of 2000, down from $173.5 million in the third quarter last
year. In the first nine months of 2000, total cost accelerations under the
regulatory plans were $291.9 million, compared to $282.4 millionlower in the first nine monthsquarter of
1999. General taxes decreased in both the third
quarter and year-to-date periods of 2000,2001, compared to 1999,the same period of 2000, primarily due to a favorablereduced
property tax settlement and phase out of Pennsylvania's
franchise tax.
Other Income
Other income increased $6.2 milliontaxes in connection with the third quarter and
$7.7 million for the first nine months of 2000, compared to the
corresponding periods in 1999 - principally due to interest earned on
short-term loans to affiliated companies.Ohio electric industry
restructuring.
Net Interest Charges
Net interest charges declinedcontinue to trend lower, decreasing $4.1
million in the thirdfirst quarter and first
nine months of 2000 from2001, compared to the same periods last yearperiod in 2000,
primarily due to debt and
preferred stock redemption and refinancing activities. Duringactivities in 2000.
Financing activity was minimal in the first nine monthsquarter of 2000, redemptions and refinancings totaled $117.3 million
and $186.5 million, respectively, and will result in annualized savings of
$7.72001, with only
$3.3 million of which $2.1 million relates to redemptions occurring in
the third quarter.
Financial Condition,debt redeemed.
Capital Resources and Liquidity
- ----------------------------------------------------
On September 1, 2000, FirstEnergy's EUOC transferred $1.2
billion of their transmission assets to ATSI. As part of the transfer,-------------------------------
The OE and Penn (OE companies) sold to ATSI $719.4 million of their transmission
assets, net of $339.4 million of accumulated depreciation and $10.9
million of investment tax credits, and approximately $7.7 million of
construction work in progress for $169.6 million of cash and $207.2
million of long-term notes.
OE companiesCompanies have continuing cash requirements for planned
capital expenditures and maturing debt. During the fourth quarterlast three quarters of
2000,2001, capital requirements for property additions and capital leases are
expected to be about $79$131 million, including $3$34 million for nuclear fuel.
The OE companies will need additional cash of approximately $4.4$18.0 million
(excluding an OE revolving credit agreement)to meet sinking fund payments for preferred stock and maturing long-term
debt during the remainder of 2000.2001. These cash requirements are expected to
be satisfied from internal cash and/or short-term credit arrangements.
As of September 30, 2000,March 31, 2001, the OE companies had about $19.7$11.4 million
of cash and temporary investments and $315.8$321.0 million of short-term
indebtedness. In addition, the OE companies' available borrowing
capability included $229.0$160 million from unused revolving lines of credit and
up to $32.0$2 million from short-term bank facilities on a short-term basis at the banks' discretion.
As of September 30, 2000,March 31, 2001, the OE Companies had the capability to issue up to
$1.3 billion of additional first mortgage bonds on the basis of property
additions and retired bonds. On October 27, 2000, OE paid a
special dividend of $200 million to FirstEnergy to meet its funding
requirements.
Moody's Investors Service (Moody's) upgradedUnder the earnings coverage tests contained
in the OE companies'
credit ratingsCompanies' charters, $1.8 billion of preferred stock (assuming
no additional debt was issued) could be issued based on September 27, 2000 and Fitch upgraded OE's credit
ratings on October 30, 2000. The improved credit ratings should lowerearnings through
the costfirst quarter of future borrowings. The OE companies' credit ratings remain under
review for further possible upgrades by Moody's. The following table
summarizes the changes in credit ratings:
- 21 -
Credit Ratings Before and After Upgrade
- ---------------------------------------
Before Upgrade After Upgrade
------------------ ---------------------
Moody's Moody's
Investors Investors
Service Fitch Service Fitch
--------- ----- --------- ------
OE
First mortgage bonds Baa2 BBB Baa1 BBB+
Preferred Stock ba1 BB+ baa2 BBB-
Penn
First mortgage bonds Baa2 BBB+ Baa1 Unchanged
Preferred Stock ba1 BBB baa2 Unchanged
- 22 -2001.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,
-------------------March 31,
-----------------------
2001 2000 1999 2000 1999
-------- -------- ---------- ----------
(In thousands)
OPERATING REVENUES $525,423 $534,503 $1,419,715 $1,435,297$516,417 $423,657
-------- -------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased17,865 47,160
Purchased power 109,170 118,816 305,830 310,400214,505 41,818
Nuclear operating costs 31,578 22,978 110,016 92,79949,950 29,431
Other operating costs 96,889 88,528 271,909 265,80578,303 82,217
-------- -------- ---------- ----------
Total operation and maintenance expenses 237,637 230,322 687,755 669,004360,623 200,626
Provision for depreciation and amortization 53,566 58,156 169,091 174,15456,764 58,014
General taxes 56,584 56,855 167,508 165,49737,870 56,904
Income taxes 48,254 50,273 92,254 99,5917,715 21,330
-------- -------- ---------- ----------
Total operating expenses and taxes 396,041 395,606 1,116,608 1,108,246462,972 336,874
-------- --------
---------- ----------
OPERATING INCOME 129,382 138,897 303,107 327,05153,445 86,783
OTHER INCOME 3,849 1,272 10,134 6,4894,420 3,428
-------- -------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 133,231 140,169 313,241 333,54057,865 90,211
-------- -------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 48,248 52,581 151,091 160,14648,285 51,184
Allowance for borrowed funds used during construction (404) (425) (1,476) (1,158)(857) (512)
Other interest expense (credit) 1,385 48 1,660 (948)(1,196) 829
-------- -------- ---------- ----------
Net interest charges 49,229 52,204 151,275 158,04046,232 51,501
-------- --------
---------- ----------
NET INCOME 84,002 87,965 161,966 175,50011,633 38,710
PREFERRED STOCK DIVIDEND REQUIREMENTS 3,733 8,230 18,138 25,3126,561 7,790
-------- -------- ---------- ----------
EARNINGS ON COMMON STOCK $ 80,2695,072 $ 79,735 $ 143,828 $ 150,18830,920
======== ======== ========== ==========
The preceding Notes to Financial Statements as they relate to The Cleveland
Electric Illuminating Company are an integral part of these statements.
- 23 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
--------------- --------------2001 2000
1999
--------------- -------------------------- ------------
(In thousands)
ASSETS
------
UTILITY PLANT:
In service $3,843,090 $4,479,098$4,031,157 $4,036,590
Less--Accumulated provision for depreciation 1,379,095 1,498,7981,620,232 1,624,672
---------- ----------
2,463,995 2,980,3002,410,925 2,411,918
---------- ----------
Construction work in progress-
Electric plant 51,183 55,00265,419 66,904
Nuclear fuel 14,331 408-- 24,145
---------- ----------
65,514 55,41065,419 91,049
---------- ----------
2,529,509 3,035,7102,476,344 2,502,967
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 491,838 517,256476,622 491,830
Nuclear plant decommissioning trusts 204,215 183,291
Notes203,113 189,804
Long-term notes receivable from associated companies 92,820 --92,621 92,722
Other 17,339 20,70833,869 36,084
---------- ----------
806,212 721,255806,225 810,440
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 161 376214 2,855
Receivables-
Customers 21,776 17,01013,676 14,748
Associated companies 40,931 18,31841,562 81,090
Other (less accumulated provisions of $1,000,000 for
uncollectible accounts at both dates) 120,654 171,27492,620 127,639
Notes receivable from associated companies 486 384
Materials and supplies, at average cost-
Owned 26,897 39,29423,567 26,039
Under consignment 33,007 23,72125,822 38,673
Prepayments and other 64,114 56,44763,196 59,377
---------- ----------
307,540 326,440261,143 350,805
---------- ----------
DEFERRED CHARGES:
Regulatory assets 825,357 539,824808,804 816,143
Goodwill 1,418,426 1,440,283
Property taxes 124,488 132,6431,399,311 1,408,869
Other 9,808 12,60674,259 75,407
---------- ----------
2,378,079 2,125,3562,282,374 2,300,419
---------- ----------
$6,021,340 $6,208,761$5,826,086 $5,964,631
========== ==========
- 24 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2001 2000
------------ ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, without par value, authorized 105,000,000
shares - 79,590,689 shares outstanding $ 931,962 $ 931,962
Retained earnings 128,586 34,654116,150 132,877
---------- ----------
Total common stockholder's equity 1,060,548 966,6161,048,112 1,064,839
Preferred stock-
Not subject to mandatory redemption 238,325 238,325
Subject to mandatory redemption 99,610 116,24625,628 26,105
Long-term debt 2,658,090 2,682,7952,621,454 2,634,692
---------- ----------
4,056,573 4,003,9823,933,519 3,963,961
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 86,737 240,684170,149 165,696
Accounts payable-
Associated companies 64,639 85,95090,082 102,915
Other 31,876 50,57012,205 54,422
Notes payable to associated companies 2,751 103,47160,849 28,586
Accrued taxes 249,104 177,006130,238 178,707
Accrued interest 60,801 60,74062,208 56,142
Other 70,572 83,29235,785 82,195
---------- ----------
566,480 801,713561,516 668,663
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 564,740 567,478591,435 591,748
Accumulated deferred investment tax credits 80,977 86,99978,988 79,957
Nuclear plant decommissioning costs 213,409 192,484212,306 198,997
Pensions and other postretirement benefits 229,256 220,731230,243 227,528
Other 309,905 335,374218,079 233,777
---------- ----------
1,398,287 1,403,0661,331,051 1,332,007
---------- ----------
COMMITMENTS GUARANTEES AND CONTINGENCIES (Note 2) ---------- ----------
$6,021,340 $6,208,761$5,826,086 $5,964,631
========== ==========
The preceding Notes to Financial Statements as they relate to The Cleveland
Electric Illuminating Company are an integral part of these balance sheets.
- 25 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,
-------------------- -------------------March 31,
-----------------------
2001 2000
1999 2000 1999
-------- -------- -------- ----------------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 84,00211,633 $ 87,965 $161,966 $175,50038,710
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and amortization 53,566 58,156 169,091 174,15456,764 58,014
Nuclear fuel and lease amortization 10,038 8,830 27,654 24,8017,044 10,026
Other amortization (2,851) (2,855) (9,469) (7,109)(3,633) (3,167)
Deferred income taxes, net (6,069) 17,472 (8,681) 26,34853 4,085
Investment tax credits, net (633) (986) (2,597) (2,960)(969) (982)
Receivables (1,903) 44,144 40,704 (61,637)75,619 43,107
Materials and supplies 6,217 1,139 3,111 10,23115,323 (3,613)
Accounts payable (47,940) (34,572) (40,005) (1,105)(55,050) (47,081)
Accrued taxes (48,469) 12,784
Other 66,338 59,037 41,052 8,315
--------- --------(53,583) (54,563)
-------- --------
Net cash provided from operating activities 160,765 238,330 382,826 346,538
--------- --------4,732 57,320
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt -- 26,459 -- 26,459Short-term borrowings, net 32,263 7,993
Redemptions and Repayments-
Preferred stock 1,000 1,000 14,714 14,714
Long-term debt 184,427 89,424 203,167 113,438
Short-term borrowings, net 11,061 13,653 100,720 38,3818,640 10,137
Dividend Payments-
Common stock 20,000 68,000 50,000 150,97421,800 10,000
Preferred stock 7,479 8,230 23,058 25,312
--------- --------7,037 7,790
-------- --------
Net cash used for financing activities 223,967 153,848 391,659 316,360
--------- --------5,214 19,934
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 17,638 55,881 62,113 86,18010,217 14,450
Loans to associated companies 82,583 -- 110,283 --
Loan payments from associated companies -- -- -- (53,509)32,820
Capital trust investments -- (7) (25,418) (25,905)
Sale of assets to associated companies (172,931) -- (172,931) --(15,208) (24,124)
Other 9,525 3,079 17,335 13,535
--------- --------7,150 8,704
-------- --------
Net cash used for (provided from)
investing activities (63,185) 58,953 (8,618) 20,301
--------- --------2,159 31,850
-------- --------
Net increase (decrease) in cash and cash equivalents (17) 25,529 (215) 9,877(2,641) 5,536
Cash and cash equivalents at beginning of period 178 3,8742,855 376 19,526
--------- --------
-------- --------
Cash and cash equivalents at end of period $ 161214 $ 29,403 $ 161 $ 29,403
========= ========5,912
======== ========
The preceding Notes to Financial Statements as they relate to The Cleveland
Electric Illuminating Company are an integral part of these statements.
- 26 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Cleveland Electric Illuminating Company:
We have reviewed the accompanying consolidated balance sheet of The
Cleveland Electric Illuminating Company (an Ohio corporation and wholly
owned subsidiary of FirstEnergy Corp.) and subsidiary as of September 30,
2000,March 31,
2001, and the related consolidated statements of income and cash flows for
the three-month and nine-month periods ended September 30, 2000March 31, 2001 and 1999.2000. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States, the objective of which is the expression of
an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the
United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the consolidated balance sheet of
The Cleveland Electric Illuminating Company and subsidiary as of
December 31, 19992000 (not presented herein), and, in our report dated
February 11, 2000,16, 2001, we expressed an unqualified opinion on that statement.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 1999,2000, is fairly stated, in all material
respects, in relation to the balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
November 10, 2000
- 27 -May 14, 2001.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Corporate Separation
- --------------------
Beginning in 2001, Ohio electric customers can select their
generation suppliers as a result of legislation which restructured the
electric utility industry. That legislation also required unbundling the
price for electricity into its component elements -- including generation,
transmission, distribution and transition charges. Also, Ohio utilities
that offer both competitive and regulated retail electric services were
required to implement a corporate separation plan approved by the PUCO --
one which provides a clear separation between regulated and competitive
operations. In connection with FirstEnergy's transition plan, FirstEnergy
separated its businesses into three distinct units -- a competitive
services unit, a utility services unit and a corporate support services
unit. CEI is included in the utility services unit which continues to
deliver power to homes and businesses through its existing distribution
system and maintains the "provider of last resort" (PLR) obligation under
the transition plan.
As a result of the transition plan, FirstEnergy's EUOC entered
into power supply agreements whereby FE Services purchases all of the EUOC
nuclear generation, as well as generation from leased fossil generating
facilities. FirstEnergy Generation Corp. (FE Generation), a wholly owned
subsidiary of FE Services, leases fossil generating units owned by the
EUOC. The EUOC are "full requirements" customers of FE Services to enable
them to meet their PLR responsibilities in their respective service areas.
CEI continues to provide power directly to wholesale customers under
negotiated contracts as well as to alternative energy suppliers as part of
CEI's market support generation program of 400 megawatts.
The effect on CEI's reported results of operations during the
first quarter of 2001 from FirstEnergy's corporate separation plan and
CEI's sale of transmission assets to ATSI in September 2000, are
summarized in the following table:
Income Statement Effects Corporate
- ------------------------
Increase (Decrease) Separation ATSI Total
---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement with FE
Services $ 77.5 $ -- $ 77.5
Generating units lease rent 15.0 -- 15.0
------ ------ ------
Total Operating Revenues Effect $ 92.5 $ -- $ 92.5
====== ====== ======
Operating Expenses:
Fossil fuel costs $(23.4)(a) $ -- $(23.4)
Purchased power costs 189.5 (b) -- 189.5
Other operating costs (17.1)(a) 11.0 (d) (6.1)
Provision for depreciation and
amortization -- (2.0)(e) (2.0)
General taxes (0.8)(c) (2.2)(e) (3.0)
------ ------- ------
Total Operating Expenses Effect $148.2 $ 6.8 $155.0
====== ======= ======
Other Income $ -- $ 1.8 (f) $ 1.8
====== ======= ======
(a) Transfer of fossil operations to FE Generation.
(b) Purchased power for PLR.
(c) Payroll taxes related to employees transferred to FE Generation.
(d) Transmission services received from ATSI.
(e) Depreciation and property taxes on transmission assets sold to ATSI.
(f) Interest on note receivable from ATSI.
Results of Operations
- ---------------------
Operating revenues decreased $9.1increased by $92.8 million or 21.9% in the
third quarter
and $15.6 million during the nine-month period ended September 30, 2000,
compared to the same periods in 1999. Lower third quarter operating
revenues resulted primarily from lower unit prices which were partially
offset by increased kilowatt-hour sales. Other electric revenues were down
during the first nine months of 2000 due to the elimination of steam sales
and joint ownership billings to Duquesne as a result of the fourth quarter
1999 asset exchange. Total kilowatt-hour sales increased 3.3% in the third quarter of 2000 and 8.1% in the year-to-date period, compared to the same
periods last year, as a result of higher sales to wholesale customers. For
the first nine months of 2000, sales to wholesale customers increased
substantially,2001, compared to the same period in 1999, reflecting additional
available internal generation earlier2000, with nearly
all of that increase resulting from the implementation of FirstEnergy's
corporate separation as shown on the table above. CEI's electric sales to
retail customers also increased by $20.4 million, offsetting reduced
wholesale sales of $17.7 million in the year and strong demandfirst quarter of 2001 compared
with the first quarter of 2000. As part of Ohio's electric utility
restructuring law, the implementation of a 5% reduction in generation
charges for Ohio's residential customers, that began in 2001, partially
offset the increase in electric sales revenues by approximately $2.8
million in the wholesale market. Total retail sales decreasedfirst quarter of 2001 and is expected to lower revenues for
all of 2001 by more than $16 million.
Higher revenues from distribution services also contributed
favorably to the increase in operating revenues. Residential kilowatt-hour
deliveries in the thirdfirst quarter and
year-to-date periodsof 2001 were 6.7% higher than the first
quarter of 2000 primarily due to weather. Although weather was warmer than
normal in the first quarter of 2001, average temperatures were still
significantly colder than the first quarter of 2000. Commercial and
industrial deliveries also increased by 0.9% and 0.2%, respectively,1.9% in the first quarter of 2001
from the corresponding periods of 1999. Kilowatt-hour salessame period last year. Total kilowatt-hour deliveries, which
represents all kilowatt-hours delivered to commercial and
industrial customers in CEI's franchise
area, increased by 3.1% in the thirdfirst quarter and nine-month periods
of 20002001 from the corresponding periodssame period
last year, but were more than
offset by lower residential sales dueyear. Additional revenues from CEI's market support generation to
alternative energy suppliers also contributed to the unusually mild weather during
the third quarter.
Changes in kilowatt-hour sales by customer class for the third
quarter and first nine months of 2000, compared to the corresponding
periods of 1999, are summarized in the following table:
Changes in KWH Sales Three Nine
--------------------
Increase (Decrease) Months Months
------ ------
Residential (10.6)% (6.4)%
Commercial 3.7% 2.1%
Industrial 1.9% 2.0%
----- ----
Total Retail (0.9)% (0.2)%
Wholesale 31.2% 88.7%
----- ----
Total Sales 3.3% 8.1%
===== ====
higher revenues.
Operating Expenses and Taxes
Total operating expenses and taxes increased $0.4by $126.1 million
in the thirdfirst quarter and $8.4 million in the year-to-date period of 2000,2001, compared to the same periodsquarter of 1999. The increases resulted primarily
from higher nuclear and other operating costs, partially offset by lower
fuel and2000,
principally due to the implementation of FirstEnergy's corporate
separation plan as shown on the preceding table. Excluding the effect of
corporate separation, purchased power costs and depreciation and amortization. Lowerdecreased by $16.8 million.
Nuclear fuel expense more than offset additional purchased power costs were $4.0 million lower in the thirdfirst quarter and first nine months of 2000, compared to2001
from the same periodsperiod last year. In the third quarter of 2000, fuel expense decreased by $11.7
million while purchased power costs were $2.1 million higher. In the first
nine months of 2000, fuel expense was $35.5 million lower while purchased
power costs increased by $30.9 million. As a result of the refueling and
maintenance outages from the spring, most of the year-to-date increase in
purchased power occurred during the second quarter of 2000, whichyear due to reduced
internal generation in that period. Although slightly lower internal
generation contributed to the third quarter of 2000 reduction of fuel
expense, the year-to-date period reduction in fuel expense was achieved
despite an increase in internal generation from the prior year. Factors
contributing to the lower fuel expense included:
o A higher proportion of nuclear generation (i.e. lower cost fuel);
oresulting
from a scheduled refueling outage at the Perry Plant. The expiration of an above-market coal contract; and
o Improved coal-blending strategies, which resultedrefueling outage
increased nuclear operating costs by $20.5 million in 2001 -- there were
no refueling outages in the use of
additional lower cost fuel.
- 28 -
Nuclear operating costs were higher in both the third quarter
and year-to-date periods of 2000, compared to the same periods in 1999,
due to nuclear refueling outages at Beaver Valley Unit 2 in September 2000
and the Davis-Besse Plant in the secondfirst quarter of 2000.
Excluding credits
from gains resulting from the sale of emission allowances, other operating
costs increased by $15.5General taxes were $19.0 million in the third quarter and $13.3 million
during the first nine months of 2000, compared to the corresponding
periods in 1999. Factors contributing to the increases included additional
maintenance work at the Eastlake Plant, costs related to newly leased
peaking facilities and voluntary early retirement costs. Approval of CEI's
transition plan by the PUCO resulted in a net reduction of depreciation
and amortization in the third quarter and year-to-date periods of 2000,
compared to the same periods last year. As part of the transition plan,
generating plant assets were reviewed for possible impairment. As a
result, $304 million of impaired nuclear plant investments were recognized
in June 2000 as regulatory assets which will begin to be recovered as
transition costs in January 2001. This reduction in plant investment
resulted in a corresponding reduction of depreciation that began in July
2000. Higher general taxeslower in the first nine monthsquarter of
2000,2001, compared to the same period last year, resulted from additional payrollof 2000, primarily due to reduced
property taxes related
to nuclear outage work.in connection with the Ohio electric industry
restructuring.
Net Interest Charges
Net interest charges declined $5.3 million in the thirdfirst quarter
and first
nine months of 2000 from2001 compared to the same periods last year duequarter of 2000. Lower interest expense on
long-term debt contributed $2.9 million to the reduction as a result of
debt redemption and refinancing activities. Duringactivities in 2000. Lower borrowings from
affiliates in the first nine monthsquarter of 2001, compared to the same quarter of
2000, redemptions totaled $189.7 million and will result in annualized savings
of $13.9 million, of which $12.7 million relates to redemptions occurring
in the third quarter.
Financial Condition,reduced other interest expense by $2.0 million.
Capital Resources and Liquidity
- ----------------------------------------------------
On September 1, 2000, FirstEnergy's EUOC transferred $1.2
billion of their transmission assets to ATSI. As part of the transfer, CEI
sold to ATSI $327.7 million of its transmission assets, net of $155.2
million of accumulated depreciation and $3.4 million of investment tax
credits, and approximately $400,000 of construction work in progress for
$76.3 million of cash and a $93.2 million long-term note.-------------------------------
CEI has continuing cash needs for planned capital expenditures
and maturing debt and preferred stock sinking fund requirements.debt. During the fourth quarterlast three quarters of 2000,2001, capital
requirements for property additions and capital leases are expected to be
about $59$89 million, including $18$10 million for nuclear fuel. CEI will need
additional cash of approximately $18.8$137 million to meet sinking fund
payments for preferred stock and maturing long-term debt during the
remainder of 2000.2001. These cash requirements are expected to be satisfied
with internal cash and/or short-term credit arrangements.
As of September 30, 2000,March 31, 2001, CEI had approximately $17.6 million$700,000 of cash and
temporary investments and $2.8$60.8 million of short-term indebtedness to
associated companies. Under its first mortgage indenture, as of September 30, 2000,March 31,
2001, CEI had the capability to issue up to $803$830 million of additional
first mortgage bonds on the basis of property additions and retired bonds.
Moody's Investors Service (Moody's) and Fitch upgraded CEI's
credit ratingsCEI has no restrictions on September 27, 2000 and October 30, 2000, respectively.
The improved credit ratings should lower the costissuance of future borrowings.
CEI's credit ratings remain under review for further possible upgrades by
Moody's. The following table summarizes the changes in credit ratings:
Credit Ratings Before and After Upgrade
- ---------------------------------------
Before Upgrade After Upgrade
----------------- --------------------
Moody's Moody's
Investors Investors
Service Fitch Service Fitch
------- ----- ------- -----
First mortgage bonds Ba1 BB+ Baa3 BBB-
Preferred Stock b1 B baa1 BB
- 29 -preferred stock.
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,
-------------------- -------------------March 31,
---------------------
2001 2000 1999 2000 1999
-------- --------
-------- --------
(In thousands)
OPERATING REVENUES $260,803 $233,697 $713,573 $693,143
-------- --------$271,635 $217,391
-------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased12,753 26,215
Purchased power 35,229 51,793 118,027 130,63988,352 6,918
Nuclear operating costs 39,596 35,082 130,514 126,20847,648 38,197
Other operating costs 33,009 41,974 111,038 119,284
-------- --------38,626 37,213
-------- --------
Total operation and maintenance expenses 107,834 128,849 359,579 376,131187,379 108,543
Provision for depreciation and amortization 26,501 26,112 79,063 78,00832,775 26,180
General taxes 23,187 22,532 68,187 66,36416,061 23,424
Income taxes 31,082 13,490 57,052 41,699
-------- --------7,086 15,318
-------- --------
Total operating expenses and taxes 188,604 190,983 563,881 562,202
-------- --------243,301 173,465
-------- --------
OPERATING INCOME 72,199 42,714 149,692 130,94128,334 43,926
OTHER INCOME 2,005 2,840 6,890 9,007
-------- --------3,788 2,689
-------- --------
INCOME BEFORE NET INTEREST CHARGES 74,204 45,554 156,582 139,948
-------- --------32,122 46,615
-------- --------
NET INTEREST CHARGES:
Interest on long-term debt 17,681 20,412 55,450 62,57017,244 19,141
Allowance for borrowed funds used during construction (1,319) (254) (5,464) (860)(349) (1,214)
Other interest expense (credit) 196 (889) (1,100) (3,403)
-------- --------(978) (832)
-------- --------
Net interest charges 16,558 19,269 48,886 58,307
-------- --------15,917 17,095
-------- --------
NET INCOME 57,646 26,285 107,696 81,64116,205 29,520
PREFERRED STOCK DIVIDEND REQUIREMENTS 4,072 4,034 12,211 12,173
-------- --------4,045 4,064
-------- --------
EARNINGS ON COMMON STOCK $ 53,57412,160 $ 22,251 $ 95,485 $ 69,468
======== ========25,456
======== ========
The preceding Notes to Financial Statements as they relate to The Toledo
Edison Company are an integral part of these statements.
- 30 -
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2001 2000
1999
----------------------- ------------
(In thousands)
ASSETS
------
UTILITY PLANT:
In service $1,657,956 $1,776,534$1,564,004 $1,637,616
Less--Accumulated provision for depreciation 604,823 670,866597,659 597,397
---------- ----------
1,053,133 1,105,668966,345 1,040,219
---------- ----------
Construction work in progress-
Electric plant 61,831 95,85427,878 73,565
Nuclear fuel 9,123 386-- 10,720
---------- ----------
70,954 96,24027,878 84,285
---------- ----------
1,124,087 1,201,908994,223 1,124,504
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 279,896 295,454262,651 279,836
Nuclear plant decommissioning trusts 139,155 123,500
Notes143,124 132,442
Long-term notes receivable from associated companies 39,125 --156,931 39,084
Other 3,820 4,6784,193 4,601
---------- ----------
461,996 423,632566,899 455,963
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 31,272 312707 1,385
Receivables-
Customers (less accumulated provision of $300,000 for
uncollectible accounts at September 30, 2000) 9,078 12,9655,759 6,618
Associated companies 19,348 48,86140,998 62,271
Other 9,861 9,8276,087 1,572
Notes receivable from associated companies 29,112 32,617
Materials and supplies, at average cost-
Owned 16,256 23,2438,641 17,388
Under consignment 23,235 20,23219,318 21,994
Prepayments and other 31,281 25,93128,942 27,151
---------- ----------
140,331 141,371139,564 170,996
---------- ----------
DEFERRED CHARGES:
Regulatory assets 421,615 385,284385,944 412,682
Goodwill 461,272 465,169
Property taxes 43,448 43,448455,056 458,164
Other 5,965 6,11628,948 29,958
---------- ----------
932,300 900,017869,948 900,804
---------- ----------
$2,658,714 $2,666,928$2,570,634 $2,652,267
========== ==========
- 31 -
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2001 2000
1999
------------------------ ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, $5 par value, authorized 60,000,000 shares -
39,133,887 shares outstanding $ 195,670 $ 195,670
Other paid-in capital 328,559 328,559
Retained earnings 78,547 27,47578,818 81,358
---------- ----------
Total common stockholder's equity 602,776 551,704603,047 605,587
Preferred stock not subject to mandatory redemption 210,000 210,000
Long-term debt 956,540 981,029936,192 944,193
---------- ----------
1,769,316 1,742,7331,749,239 1,759,780
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt 76,478 95,76558,046 56,230
Accounts payable-
Associated companies 17,593 20,53753,567 36,564
Other 17,715 27,1009,976 25,070
Notes payable to associated companies 12,335 33,876-- 41,936
Accrued taxes 66,700 57,74249,872 57,519
Accrued interest 18,859 21,96118,623 19,946
Other 48,229 60,41430,899 49,908
---------- ----------
257,909 317,395220,983 287,173
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 188,933 172,236200,125 196,944
Accumulated deferred investment tax credits 35,602 38,74834,688 35,174
Nuclear plant decommissioning costs 145,497 130,116149,467 138,784
Pensions and other postretirement benefits 119,777 122,986120,175 119,327
Other 141,680 142,71495,957 115,085
---------- ----------
631,489 606,800600,412 605,314
---------- ----------
COMMITMENTS GUARANTEES AND CONTINGENCIES (Note 2) ---------- ----------
$2,658,714 $2,666,928$2,570,634 $2,652,267
========== ==========
The preceding Notes to Financial Statements as they relate to The Toledo Edison
Company are an integral part of these balance sheets.
- 32 -
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,
-------------------- -------------------March 31,
------------------------
2001 2000
1999 2000 1999---------- --------- -------- -------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 57,64616,205 $ 26,285 $107,696 $ 81,64129,520
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and amortization 26,501 26,112 79,063 78,00832,775 26,180
Nuclear fuel and lease amortization 6,429 6,734 17,820 18,5525,174 6,633
Deferred income taxes, net 1,251 8,127 9,271 18,4322,158 6,608
Investment tax credits, net (442) (481) (1,400) (1,442)(486) (479)
Receivables (7,939) (7,202) 28,426 35,31617,617 24,835
Materials and supplies 818 163 3,984 1,25011,423 333
Accounts payable (41,139) (2,964) (12,329) (8,177)1,909 (13,229)
Other 33,832 25,152 (24,415) (35,260)
-------- -------- --------(29,804) (33,058)
--------- --------
Net cash provided from operating activities 76,957 81,926 208,116 188,320
-------- -------- --------56,971 47,343
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 30,467 54,929 96,633 89,779
Short-term borrowings, net -- 151 -- 15116,834
Redemptions and Repayments-
Preferred stock -- -- -- 1,690
Long-term debt 51,310 106,802 162,627 162,4275,863 20,884
Short-term borrowings, net 39,599 -- 21,54141,936 --
Dividend Payments-
Common stock 10,100 20,000 44,400 80,35114,700 18,000
Preferred stock 4,072 4,034 12,211 12,173
-------- -------- --------4,045 4,064
--------- --------
Net cash used for financing activities 74,614 75,756 144,146 166,711
-------- -------- --------66,544 26,114
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 6,659 8,734 72,436 27,65612,028 37,709
Loans to associated companies 28,236 -- 34,185117,890 --
Loan payments from associated companies -- (58,136) -- (58,999)(3,548) (5,166)
Capital trust investments 60 (64) (15,558) (15,371)(17,185) (14,982)
Sale of assets to associated companies (73,195) -- (73,195)(117,890) --
Other 9,612 2,935 15,142 15,045
-------- -------- --------(190) 3,679
--------- --------
Net cash used for (provided from) investing activities (28,628) (46,531) 33,010 (31,669)
-------- -------- --------(8,895) 21,240
--------- --------
Net increasedecrease in cash and cash equivalents 30,971 52,701 30,960 53,278678 11
Cash and cash equivalents at beginning of period 301 4,7171,385 312
4,140
-------- -------- ----------------- --------
Cash and cash equivalents at end of period $ 31,272707 $ 57,418 $ 31,272 $ 57,418
======== ======== ========301
========= ========
The preceding Notes to Financial Statements as they relate to The Toledo
Edison Company are an integral part of these statements.
- 33 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Toledo Edison Company:
We have reviewed the accompanying consolidated balance sheet of The Toledo
Edison Company (an Ohio corporation and wholly owned subsidiary of
FirstEnergy Corp.) and subsidiary as of September 30, 2000,March 31, 2001, and the related
consolidated statements of income and cash flows for the three-
month and nine-monththree-month
periods ended September 30, 2000March 31, 2001 and 1999.2000. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States, the objective of which is the expression of
an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the
United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the consolidated balance sheet of
The Toledo Edison Company and subsidiary as of December 31, 19992000 (not
presented herein), and, in our report dated February 11, 2000,16, 2001, we
expressed an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 1999,2000, is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
November 10, 2000
- 34 -May 14, 2001.
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Corporate Separation
- --------------------
Beginning in 2001, Ohio electric customers can select their
generation suppliers as a result of legislation which restructured the
electric utility industry. That legislation also required unbundling the
price for electricity into its component elements -- including generation,
transmission, distribution and transition charges. Also, Ohio utilities
that offer both competitive and regulated retail electric services were
required to implement a corporate separation plan approved by the PUCO --
one which provides a clear separation between regulated and competitive
operations. In connection with FirstEnergy's transition plan, FirstEnergy
separated its businesses into three distinct units -- a competitive
services unit, a utility services unit and a corporate support services
unit. TE is included in the utility services unit which continues to
deliver power to homes and businesses through its existing distribution
system and maintains the "provider of last resort" (PLR) obligation under
the transition plan.
As a result of the transition plan, FirstEnergy's EUOC entered
into power supply agreements whereby FE Services purchases all of the EUOC
nuclear generation, as well as generation from leased fossil generating
facilities. FirstEnergy Generation Corp. (FE Generation), a wholly owned
subsidiary of FE Services, leases fossil generating units owned by the
EUOC. The EUOC are "full requirements" customers of FE Services to enable
them to meet their PLR responsibilities in their respective service areas.
TE continues to provide power directly to wholesale customers under
previously negotiated contracts as well as to alternative energy suppliers
as part of TE's market support generation program of 160 megawatts.
The effect on the TE's reported results of operations during the
first quarter of 2001 from FirstEnergy's corporate separation plan and
TE's sale of transmission assets to ATSI in September 2000, are summarized
in the following table:
Income Statement Effects Corporate
- ------------------------
Increase (Decrease) Separation ATSI Total
---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement with FE Services $ 43.0 $ -- $ 43.0
Generating units lease rent 3.6 -- 3.6
------ ------ ------
Total Operating Revenues Effect $ 46.6 $ -- $ 46.6
====== ====== ======
Operating Expenses:
Fossil fuel costs $(10.5) (a) $ -- $(10.5)
Purchased power costs 83.9 (b) -- 83.9
Other operating costs (3.0) (a) 5.8 (d) 2.8
Provision for depreciation and
amortization -- (0.9)(e) (0.9)
General taxes (0.5) (c) (0.8)(e) (1.3)
------ ------ ------
Total Operating Expenses Effect $ 69.9 $ 4.1 $ 74.0
====== ====== ======
Other Income $ -- $ 0.8 (f) $ 0.8
====== ====== ======
(a) Transfer of fossil operations to FE Generation.
(b) Purchased power for PLR.
(c) Payroll taxes related to employees transferred to FE Generation.
(d) Transmission services received from ATSI.
(e) Depreciation and property taxes on transmission assets sold to ATSI.
(f) Interest on note receivable from ATSI.
Results of Operations
- ---------------------
Operating revenues increased $27.1by $54.2 million or 25.0% in the
thirdfirst quarter and $20.4 million during the nine-month period ended September 30, 2000,of 2001, compared to the same periodsperiod in 1999. Higher third-quarter and year-to-
date operating revenues resulted principally2000, with nearly
all of that increase resulting from anthe implementation of FirstEnergy's
corporate separation as shown on the table above. TE's electric sales to
retail customers also increased by $12.1 million, offsetting reduced
wholesale sales of $7.3 million in the first quarter of 2001, compared
with the first quarter of 2000. As part of Ohio's electric utility
restructuring law, the implementation of a 5% reduction in generation
charges for Ohio's residential customers, that began in 2001, partially
offset the increase in thirdelectric sales revenues by approximately $1.4
million in the first quarter 2000 kilowatt-hour sales, which were partially offsetof 2001 and is expected to lower revenues for
all of 2001 by lower
unit prices. Transmission servicemore than $8 million.
Higher revenues from distribution services also contributed
favorably to the increase in operating revenues. Sales to wholesale customers were 16.1%
and 41.0% higherResidential kilowatt-hour
deliveries in the thirdfirst quarter andof 2001 were 9.7% higher than the first
nine monthsquarter of 2000 respectively, compared to the corresponding periods in 1999,partially due to continued demandweather. Although weather was warmer than
normal in the wholesale market.first quarter of 2001, average temperatures were still
significantly colder than the first quarter of 2000. Commercial and
industrial deliveries also increased by 6.0% in the first quarter of 2001
from the same period last year reflecting service area economic strength.
Total kilowatt-hour salesdeliveries, which represent all kilowatt-hours
delivered to customers in TE's franchise area, increased 11.1%by 7.0% in the
thirdfirst quarter and 10.2% in the year-to-date periods
of 2000, compared to2001 from the same periodsperiod last year. Additional revenues
from TE's market support generation to alternative energy suppliers also
contributed to higher revenues, as well as several existing committed
wholesale contracts.
Operating Expenses and Taxes
Total operating expenses and taxes decreasedincreased by $2.4$69.8 million in
the thirdfirst quarter and increased by $1.7 million during the first nine
months of 2000,2001, compared to the same periods last year. Operation and
maintenance expenses decreased substantially in both periods resulting
from lower fuel andquarter of 2000,
principally due to implementation of FirstEnergy's corporate separation
plan as shown on the preceding table. Excluding the effect of corporate
separation, purchased power costs and otherdecreased by $2.5 million. Nuclear fuel
costs were $2.0 million lower in the first quarter of 2001 from the same
period last year due to reduced nuclear generation resulting from a
scheduled refueling outage at the Perry Plant. The refueling outage
increased nuclear operating costs whichby $9.5 million in 2001 -- there were partially offsetno
refueling outages in the first quarter of 2000.
Excluding the effect from corporate separation, charges for
depreciation and amortization increased by higher nuclear expenses. A reduction$7.5 million in internal
generationthe first
quarter of 2001 from the same period last year, due to refueling and maintenance outages and the expiration of
an above-market coal contract contributed tohigher transition
cost amortization under FirstEnergy's transition plan.
General taxes were $7.4 million lower fuel expense in the thirdfirst quarter and year-to-date periods of
2000 - down $5.9 million and
$12.8 million, respectively,2001, compared to the same periods last year.
Purchased power costs were also $10.7 million lower in the third quarterperiod of 2000, due in part to lower unit costs. Nuclear operating costs
increased in the third quarter and the first nine months of 2000, compared
to the same periods in 1999,primarily due to nuclear refueling outages at Beaver
Valley Unit 2reduced
property taxes in September 2000 andconnection with the Davis-Besse Plant in the second
quarter of 2000. Excluding credits from gains resulting from the sale of
emission allowances, other operating costs were $5.6 million higher in the
third quarter and $6.4 million higher during the first nine months of
2000, compared to the corresponding periods in 1999. Factors contributing
to the increases in other operating costs included maintenance work at the
Bay Shore Plant (including repowering of Unit 1) and additional tree
trimming expenses.Ohio electric industry
restructuring.
Net Interest Charges
Net interest charges declinedcontinue to trend lower, decreasing by $1.2
million in the thirdfirst quarter and first
nine months of 2000 from2001, compared to the same periods last yearperiod in 2000,
due to debt redemption and refinancing activities. During the first nine months of 2000,
redemption and refinancing activities totaled $75.6 million and $98.2
million, respectively, and will result in annualized savings of $8.3
million, of which $4.1 million relates to activities occurring in the
third quarter.
Financial Condition,2000.
Capital Resources and Liquidity
- ----------------------------------------------------
On September 1, 2000, FirstEnergy's EUOC transferred $1.2
billion of their transmission assets to ATSI. As part of the transfer, TE
sold to ATSI $149.2 million of its transmission assets, net of $77.0
million of accumulated depreciation and $1.7 million of investment tax
credits, and approximately $1.0 million of construction work in progress
for $32.2 million of cash and a $39.3 million long-term note.
TE has continuing cash needs for planned capital expenditures
and maturing debt. During the fourth quarterlast three quarters of 2000,2001, capital
requirements for property additions and capital leases are expected to be
about $24$52 million, including $8 million for nuclear fuel. TE will need
additional cash of approximately $0.4$29.4 million for maturing long-term debt
during the remainder of 2000.2001. These cash requirements are expected to be
satisfied with internal cash and/or short-term credit arrangements.
As of September 30, 2000,March 31, 2001, TE had approximately $34.2$29.8 million of cash
and temporary investments and $12.3 million ofno short-term indebtedness to associated companies.indebtedness. Under its first
mortgage indenture, as of September 30, 2000,March 31, 2001, TE had the capability to issue
up to $501$523 million of additional first mortgage bonds on the basis of
property additions and retired bonds.
- 35 -
Moody's Investors Service (Moody's) and Fitch upgraded TE's
credit ratingsUnder the earnings coverage test
contained in the TE charter, $524 million of preferred stock (assuming no
additional debt was issued) could be issued based on September 27, 2000 and October 30, 2000, respectively.
The improved credit ratings should lowerearnings through the
costfirst quarter of future borrowings.
TE's credit ratings remain under review for further possible upgrades by
Moody's. The following table summarizes the changes in credit ratings:
Credit Ratings Before and After Upgrade
- ---------------------------------------
Before Upgrade After Upgrade
------------------- ------------------
Moody's Moody's
Investors Investors
Service Fitch Service Fitch
------- ----- ------- -----
First mortgage bonds Ba1 BB+ Baa3 BBB-
Subordinated debt Ba3 B+ Ba1 BB
Preferred Stock b1 B ba1 BB
- 36 -2001.
PENNSYLVANIA POWER COMPANY
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,
-------------------- -------------------March 31,
----------------------
2001 2000 1999 2000 1999
-------- -------
-------- --------
(In thousands)
OPERATING REVENUES $102,761 $82,354 $280,277 $245,843
-------- -------$128,397 $ 83,951
-------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased6,641 10,222
Purchased power 17,721 25,978 48,756 61,24445,768 3,168
Nuclear operating costs 21,914 5,165 88,874 20,16820,265 45,507
Other operating costs 9,554 14,281 39,133 45,526
-------- -------10,296 13,535
-------- --------
Total operation and maintenance expenses 49,189 45,424 176,763 126,93882,970 72,432
Provision for depreciation and amortization 14,367 15,790 41,996 46,50514,263 15,731
General taxes 6,511 7,151 19,846 19,3954,480 7,058
Income taxes 12,898 4,824 15,623 19,788
-------- -------(credit) 10,675 (4,903)
-------- --------
Total operating expenses and taxes 82,965 73,189 254,228 212,626
-------- -------112,388 90,318
-------- --------
OPERATING INCOME 19,796 9,165 26,049 33,217(LOSS) 16,009 (6,367)
OTHER INCOME 421 194 1,265 1,441
-------- -------875 413
-------- --------
INCOME (LOSS) BEFORE NET INTEREST CHARGES 20,217 9,359 27,314 34,658
-------- -------16,884 (5,954)
-------- --------
NET INTEREST CHARGES:
Interest expense 5,146 4,972 15,673 16,0904,728 5,407
Allowance for borrowed funds used during construction (121) (91) (793) (323)
-------- -------(232) (975)
-------- --------
Net interest charges 5,025 4,881 14,880 15,767
-------- -------4,496 4,432
-------- --------
NET INCOME 15,192 4,478 12,434 18,891(LOSS) 12,388 (10,386)
PREFERRED STOCK DIVIDEND REQUIREMENTS 926 1,131 2,778 3,444
------- -------926
-------- --------
EARNINGS ON(LOSS) ATTRIBUTABLE TO COMMON STOCK $14,266 $ 3,347 $ 9,656 $ 15,447
======= =======11,462 $(11,312)
======== ========
The preceding Notes to Financial Statements as they relate to
Pennsylvania Power Company are an integral part of these
statements.
- 37 -
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2001 2000
1999
----------------------- ------------
(In thousands)
ASSETS
------
UTILITY PLANT:
In service $561,832 $ 646,186$641,075 $636,418
Less--Accumulated provision for depreciation 200,413 237,893280,174 275,699
-------- ----------
361,419 408,293
--------
----------360,901 360,719
-------- --------
Construction work in progress-
Electric plant 17,361 18,55820,840 20,800
Nuclear fuel 4,991 6,54017 2,810
-------- ----------
22,352 25,098
--------
----------
383,771 433,39120,857 23,610
-------- ------------------
381,758 384,329
-------- --------
OTHER PROPERTY AND INVESTMENTS:
Nuclear plant decommissioning trusts 115,716 104,775
Notes118,951 117,453
Long-term notes receivable from associated companies 33,662 --33,575 33,581
Other 23,075 19,78421,215 21,279
-------- ----------
172,453 124,559
--------
----------173,741 172,313
-------- --------
CURRENT ASSETS:
Cash and cash equivalents 366 5,6702,444 3,475
Receivables-
Customers (less accumulated provisions of $3,593,000$688,000 and
$3,537,000,$628,000, respectively, for uncollectible accounts) 35,044 34,56842,772 40,980
Associated companies 90,879 53,98833,882 40,685
Other 8,515 8,8964,794 8,848
Notes receivable from associated companies 27,630 41,264
Materials and supplies, at average cost 23,094 32,48321,631 29,595
Prepayments 5,712 2,2089,747 2,044
-------- ----------
163,610 137,813
--------
----------142,900 166,891
-------- --------
DEFERRED CHARGES:
Regulatory assets 273,774 314,593246,755 260,221
Other 5,625 5,2604,674 5,155
-------- ----------
279,399 319,853
--------
----------
$999,233 $1,015,616251,429 265,376
-------- --------
$949,828 $988,909
======== ==================
- 38 -
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2001 2000
1999
------------------------ ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, $30 par value, authorized 6,500,000
shares - 6,290,000 shares outstanding $188,700 $ 188,700$188,700
Other paid-in capital (310) (310)
Retained earnings 20,874 11,21830,623 25,461
-------- ------------------
Total common stockholder's equity 209,264 199,608219,013 213,851
Preferred stock-
Not subject to mandatory redemption 39,105 39,105
Subject to mandatory redemption 15,000 15,000
Long-term debt-
Associated companies 20,806 18,00715,001 18,135
Other 252,714 256,814252,227 252,233
-------- ----------
536,889 528,534
--------
----------540,346 538,324
-------- --------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 16,978 13,50415,140 16,620
Other 1,062 29,5211,033 1,036
Accounts payable-
Associated companies 34,774 26,22029,646 42,293
Other 19,539 28,903458 21,165
Accrued taxes 36,253 21,86326,124 19,250
Accrued interest 3,778 6,5923,818 5,972
Other 17,913 16,5068,747 16,228
-------- ----------
130,297 143,109
--------
----------84,966 122,564
-------- --------
DEFERRED CREDITS:
Accumulated deferred income taxes 162,530 182,702154,896 160,632
Accumulated deferred investment tax credits 4,482 7,2664,332 4,407
Nuclear plant decommissioning costs 116,171 107,816119,412 117,915
Other 48,864 46,18945,876 45,067
-------- -----------
332,047 343,973
--------
-----------324,516 328,021
-------- --------
COMMITMENTS GUARANTEES AND CONTINGENCIES (Note 2) -------- ----------
$999,233 $1,015,616--------
$949,828 $988,909
======== ==================
The preceding Notes to Financial Statements as they relate to Pennsylvania
Power Company are an integral part of these balance sheets.
- 39 -
PENNSYLVANIA POWER COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,
-------------------- --------------------March 31,
----------------------
2001 2000
1999 2000 1999
---------- -------- --------- -----------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 15,192 $ 4,478 $ 12,434 $ 18,89112,388 $(10,386)
Adjustments to reconcile net income (loss) to net
cash from operating activities-
Provision for depreciation and amortization 14,367 15,790 41,996 46,50514,263 15,731
Nuclear fuel and lease amortization 5,276 1,919 13,143 5,1534,882 3,170
Deferred income taxes, net (4,311) (143) (10,020) (1,016)(2,481) (3,622)
Investment tax credits, net (757) (1,942) (2,329) (2,237)(711) (791)
Receivables (10,492) 1,481 (4,792) 12,3199,065 (526)
Materials and supplies 3,680 5,067 9,389 2,7257,964 3,768
Accounts payable (14,590) (6,759) (810) 4,457(33,354) 18,093
Other 9,037 (5,280) 4,482 (12,481)
-------- -------(8,870) (19,356)
-------- --------
Net cash provided from operating activities 17,402 14,611 63,493 74,316
-------- -------3,146 6,081
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemptions and Repayments-
Preferred stock -- 5,920 -- 12,005
Long-term debt 28,227 1,843 42,000 4,9884,918 8,365
Dividend Payments-
Common stock 6,300 -- 15,000 -- 80,362
Preferred stock 926 1,393 2,778 3,130
-------- -------926
-------- --------
Net cash used for financing activities 29,153 24,156 44,778 100,485
-------- -------12,144 9,291
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 4,314 8,160 22,255 16,489
Loans to associated companies 52,694 -- 78,722 --5,358 13,191
Loan payment from parent -- (12,597)(13,640) (12,866)
(33,910)
Sale of assets to associated companies (66,529) -- (66,529) --
Other (754) (3,391) 2,437 (1,523)
-------- -------315 1,811
-------- --------
Net cash used for (provided from) investing activities (10,275) (7,828) 24,019 (18,944)
-------- -------(7,967) 2,136
-------- --------
Net increase (decrease)decrease in cash and cash equivalents (1,476) (1,717) (5,304) (7,225)1,031 5,346
Cash and cash equivalents at beginning of period 1,842 1,9773,475 5,670 7,485
-------- --------
-------- --------
Cash and cash equivalents at end of period $ 3662,444 $ 260 $ 366 $ 260
======== ========324
======== ========
The preceding Notes to Financial Statements as they relate to Pennsylvania
Power Company are an integral part of these statements.
- 40 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennsylvania Power Company:
We have reviewed the accompanying balance sheet of Pennsylvania Power
Company (a Pennsylvania corporation and wholly owned subsidiary of Ohio
Edison Company) as of September 30, 2000,March 31, 2001, and the related statements of income
and cash flows for the three-month and nine-month periods ended September 30, 2000March 31, 2001 and 1999.2000.
These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States, the objective of which is the expression of
an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the
United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the balance sheet of Pennsylvania
Power Company as of December 31, 19992000 (not presented herein), and, in our
report dated February 11, 2000,16, 2001, we expressed an unqualified opinion on
that statement. In our opinion, the information set forth in the
accompanying balance sheet as of December 31, 1999,2000, is fairly stated, in
all material respects, in relation to the balance sheet from which it has
been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
November 10, 2000
- 41 -May 14, 2001.
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Corporate Separation
- --------------------
Beginning in 2001, FirstEnergy was required to implement a
corporate separation plan which provides a clear separation between
regulated and competitive operations. In connection with FirstEnergy's
transition plan, FirstEnergy separated its businesses into three distinct
units -- a competitive services unit, a utility services unit and a
corporate support services unit. Penn is included in the utility services
unit which continues to deliver power to homes and businesses through its
existing distribution system and maintains the "provider of last
resort"(PLR) obligation under its rate restructuring plan.
As a result of the transition plan, FirstEnergy's EUOC entered
into power supply agreements whereby FE Services purchases all of the EUOC
nuclear generation, as well as generation from leased fossil generating
facilities. FirstEnergy Generation Corp. (FE Generation), a wholly owned
subsidiary of FE Services, leases fossil generating units owned by the
EUOC. The EUOC are "full requirements" customers of FE Services to enable
them to meet their PLR responsibilities in their respective service areas.
The effect on Penn's reported results of operations during the
first quarter of 2001 from FirstEnergy's corporate separation plan and
Penn's sale of transmission assets to ATSI in September 2000, are
summarized in the following table:
Income Statement Effects Corporate
- ------------------------
Increase (Decrease) Separation ATSI Total
---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement with FE Services $ 41.6 $ -- $ 41.6
Generating units lease rent 5.1 -- 5.1
------ ------ ------
Total Operating Revenues Effect $ 46.7 $ -- $ 46.7
====== ====== ======
Operating Expenses:
Fossil fuel costs $ (6.2)(a) $ -- $ (6.2)
Purchased power costs 45.9 (b) -- 45.9
Other operating costs (6.2)(a) 3.2 (d) (3.0)
Provision for depreciation and
amortization -- (0.8)(e) (0.8)
General taxes (0.6)(c) (0.1)(e) (0.7)
------ ----- ------
Total Operating Expenses Effect $ 32.9 $ 2.3 $ 35.2
====== ===== ======
Other Income $ -- $ 0.7 (f) $ 0.7
====== ===== ======
(a) Transfer of fossil operations to FE Generation.
(b) Purchased power for PLR.
(c) Payroll taxes related to employees transferred to FE Generation.
(d) Transmission services received from ATSI.
(e) Depreciation and property taxes on transmission assets sold to ATSI.
(f) Interest on note receivable from ATSI.
Results of Operations
- ---------------------
Operating revenues increased $20.4by $44.4 million or 52.9% in the
thirdfirst quarter and $34.4 million during the nine-month period ended September 30, 2000,of 2001, compared to the same periodsperiod in 1999. Retail generation2000, with nearly
all of that increase resulting from the implementation of FirstEnergy's
corporate separation as shown on the table above. Penn's electric sales to
the
commercial and industrial sectorsretail customers also increased stronglyby $3.6 million, partially offsetting
reduced wholesale sales of $7.4 million in the thirdfirst quarter of 2000 due to2001,
compared with the first quarter of 2000. The return of former Penn customers
previously served by alternative generation suppliers and a rebound in demand for domestic steel. Substantial growth
in kilowatt-hour salescontributed to the wholesale market also contributed to much
higher total
electric generation sales in the third quarter and first nine
months of 2000, comparedgrowth.
Higher revenues from distribution services also contributed
favorably to the previous year. Sales to the wholesale
market continued to benefit from available internal generation. Overall,
operating revenues benefited from the strong growth in kilowatt-hour sales
which was partially offset by lower unit prices reflecting the lower
margins available in the wholesale market. The transfer of ownership in
PPE to FE Services, an affiliated company, in December 1999, also offset a
portion of the increase in operating revenues. Changes in electric generation sales andResidential kilowatt-hour
deliveries in the thirdfirst quarter andof 2001 were 9.7% higher than the first
nine monthsquarter of 2000 comparedpartially due to the corresponding periods of 1999, are summarizedweather. Although weather was warmer than
normal in the following table:
Changes in KWH Sales Three Nine
- --------------------
Increase (Decrease) Months Months
------ ------
Electric Generation Sales:
Retail 24.2% 14.0%
Wholesale 450.6% 354.3%
----- -----
Total Electric Generation Sales 116.6% 82.0%
===== =====
Kilowatt-hour Deliveries:
Residential 3.8% 0.7%
Commercial 13.8% 7.7%
Industrial 4.3% 16.1%
----- -----
Total Kilowatt-hour Deliveries 6.7% 8.4%
===== =====
first quarter of 2001, average temperatures were still
significantly colder than the first quarter of 2000. Commercial and
industrial deliveries also increased by 6.7% in the first quarter of 2001
from the same period last year reflecting service area economic strength.
Operating Expenses and Taxes
Total operating expenses and taxes increased $9.8 million in the
third quarter and $41.6by $22.1 million in
the first nine monthsquarter of 2000,2001, compared to the same periodsquarter of 1999. The increases resulted primarily from higher
nuclear operating costs, which were partially offset by reductions in fuel
and2000,
principally due to the implementation of FirstEnergy's corporate
separation plan as shown on the preceding table. Excluding the effect of
corporate separation, purchased power costs other operating costs and depreciation and
amortization. Lowerdecreased by $3.3 million.
Nuclear fuel and purchased power costs resulted from
additional internal generation, which reduced the demand for more
expensive external sources of power, and the transfer of ownership in PPE
to FE Services. Nuclear operating costs were much higher in both the third
quarter and year-to-date period of 2000, compared to the corresponding
periods last year, due to nuclear refueling outages at the Beaver Valley
Plant and increased ownership of that plant following the December 1999
asset exchange with Duquesne. Excluding credits from gains on the sale of
emission allowances, other operating costs were $1.6$2.6 million higher in the thirdfirst quarter and approximately the same in the nine-month period of 2000,
compared to the same periods in 1999. The third quarter increase in other
operating costs resulted2001
from additional maintenance work at the Mansfield
Plant and increased ownership of the Mansfield Plant following the asset
exchange. Lower depreciation and amortization in the third quarter and
year-to-date period of 2000, compared to the corresponding periods in the
previous year, reflects a reduction in accrued decommissioning costs.
- 42 -
Net Interest Charges
Net interest charges declined in the first nine months of 2000
compared to the same period last year due to debt redemption and
refinancing activities. Duringadditional nuclear generation in
2001. Nuclear operating costs were $25.2 million lower in the first
nine monthsquarter 2001, compared to the first quarter of 2000, redemptions
totaled $23.0 million and will result in annualized savingsdue to Penn's smaller
ownership share (5.24%) of $1.4
million, substantially all of which relates to redemptions occurringa scheduled Perry Plant refueling outage in the
third quarter.
Financial Condition,first quarter 2001 versus its 65% ownership share in the Beaver Valley
Unit 1 refueling outage in the same period last year.
General taxes were $2.6 million lower in the first quarter of
2001, compared to the same period of 2000, partially due to reduced
property taxes in connection with the Ohio electric industry
restructuring.
Capital Resources and Liquidity
- ----------------------------------------------------
On September 1, 2000, FirstEnergy's EUOC transferred $1.2
billion of their transmission assets to ATSI. As part of the transfer,
Penn sold to ATSI $125.4 million of its transmission assets, net of $59.0
million of accumulated depreciation and $2.5 million of investment tax
credits, and approximately $130,000 of construction work in progress for
$30.1 million of cash and a $34.0 million long-term note.-------------------------------
Penn has continuing cash requirements for planned capital
expenditures and maturing debt. During the fourth quarterlast three quarters of 2000,2001,
capital requirements for property additions and capital leases are
expected to be about $13$40 million, including $3$20 million for nuclear fuel.
Penn will need additional cash of approximately $487,000$974,000 for maturing
long-term debt during the remainder of 2000.2001. These cash requirements are
expected to be satisfied with internal cash.
As of September 30, 2000,March 31, 2001, Penn had approximately $48.0$30.1 million of
cash and temporary investments and no short-term indebtedness. Also, Penn
had $2.0 million available from an unused bank facility as of September 30, 2000,March 31,
2001, which may be borrowed for up to several days at the bank's
discretion. Under its first mortgage indenture, as of September 30,
2000,March 31, 2001, Penn
had the capability to issue up to $226 million of additional first
mortgage bonds on the basis of property additions and retired bonds. On September 27, 2000, Moody's Investors Service (Moody's)
upgraded Penn's credit ratings. Fitch affirmed Penn's existing credit
ratings on October 30, 2000. Moody's senior secured debt ratingsUnder
the earnings coverage test contained in the Penn charter, $190 million of Penn
were raised from Baa2 to Baa1 and
preferred stock ratings were upgraded
from ba1 to baa2. The improved credit ratings from Moody's should lower(assuming no additional debt was issued) could be issued
based on earnings through the costfirst quarter of future borrowings. The credit ratings of Penn remain under
review for further possible upgrades by Moody's.
- 43 -2001.
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number
-------
FirstEnergy, OE, CEI and Penn
-----------------------------
15 Letter from independent public accountants.
TE
--
None
Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation
S-K, neither FirstEnergy, OE, CEI, TE nor Penn has filed as an
exhibit to this Form 10-Q any instrument with respect to long-termlong-
term debt if the respective total amount of securities authorized
thereunder does not exceed 10% of their respective total assets
of FirstEnergy and its subsidiaries on a consolidated basis, or
respectively, OE, CEI, TE or Penn, but hereby agrees to furnish
to the Commission on request any such documents.
(b) Reports on Form 8-K
FirstEnergy, OE, CEI, TE and Penn
---------------------------------
None
- 44 -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, each Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
November 14, 2000May 15, 2001
FIRSTENERGY CORP.
-----------------
Registrant
OHIO EDISON COMPANY
-------------------
Registrant
THE CLEVELAND ELECTRIC
----------------------
ILLUMINATING COMPANY
--------------------
Registrant
THE TOLEDO EDISON COMPANY
-------------------------
Registrant
PENNSYLVANIA POWER COMPANY
--------------------------
Registrant
/s/ Harvey L. Wagner
-----------------------------------------------------------------------
Harvey L. Wagner
Controller
Principal Accounting Officer
- 45 -