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 March 31,June 30, 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)(724)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 MAY 10,August 7, 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-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 1-51-6
FirstEnergy Corp.
Consolidated Statements of Income 67
Consolidated Balance Sheets 7-88-9
Consolidated Statements of Cash Flows 910
Report of Independent Public Accountants 1011
Management's Discussion and Analysis of
Results of Operations and Financial Condition 11-1512-16
Ohio Edison Company
Consolidated Statements of Income 1617
Consolidated Balance Sheets 17-1818-19
Consolidated Statements of Cash Flows 1920
Report of Independent Public Accountants 2021
Management's Discussion and Analysis of
Results of Operations and Financial Condition 21-2322-24
The Cleveland Electric Illuminating Company
Consolidated Statements of Income 2425
Consolidated Balance Sheets 25-2626-27
Consolidated Statements of Cash Flows 2728
Report of Independent Public Accountants 2829
Management's Discussion and Analysis of
Results of Operations and Financial Condition 29-3030-32
The Toledo Edison Company
Consolidated Statements of Income 3133
Consolidated Balance Sheets 32-3334-35
Consolidated Statements of Cash Flows 3436
Report of Independent Public Accountants 3537
Management's Discussion and Analysis of Results
of Operations and Financial Condition 36-3738-40
Pennsylvania Power Company
Statements of Income 3841
Balance Sheets 39-4042-43
Statements of Cash Flows 4144
Report of Independent Public Accountants 4245
Management's Discussion and Analysis of Results
of Operations and Financial Condition 43-4446-48
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), 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.
FirstEnergy's other principal subsidiaries include FirstEnergy Services
Corp. (FE Services)(FES); FirstEnergy Facilities Services Group, LLC (FE
Facilities)(FEFSG); MARBEL
Energy Corporation (MARBEL) and FirstEnergy Nuclear Operating Company (FENOC). FE ServicesFES
provides energy-related products and services and has two subsidiaries,
Penn Power Energy, Inc., which provides electric generation services and
other energy services to Pennsylvania customers and FirstEnergy
Generation Corp. (FGCO), which operates the Companies' nonnuclear
generating facilities of the Companies.facilities. FENOC operates the Companies' nuclear generating
facilities of the Companies.facilities.
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, 2000 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.
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 AND CONTINGENCIES:
CAPITAL EXPENDITURES-
FirstEnergy's current forecast reflects expenditures of
approximately $2.55 billion (OE-$360 million, CEI-$455 million,
TE-
$218$218 million, Penn-$153 million, ATSI-$112 million, FE Services-FES-$830 million and
other subsidiaries-$subsidiaries -$422 million) for property additions and improvements
from 2001-2005, of which approximately $679$640 million (OE-
$89$65 million,
CEI-$9982 million, TE-$51 million, Penn-$2827 million, ATSI-$21 million,
FE Services-FES-$314321 million and other subsidiaries-$7773 million) is applicable to 2001.
Investments for additional nuclear fuel during the 2001-2005 period are
estimated to be approximately $376$415 million (OE-
$103$113 million,
CEI-$117131 million, TE-$8191 million and Penn-$7580 million), of which
approximately $56$55 million (OE-$1516 million, CEI-$1211 million, TE-
$9$8 million
and Penn-$20 million) applies to 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 first quartersix months of 2001, FirstEnergy
repurchased and retired 550,000 shares of its common stock at an average
price of $27.82 per share.
ENVIRONMENTAL MATTERS-
Various federal, state and local authorities regulate the
Companies with regard to air and water quality and other environmental
matters. FirstEnergy estimates additional capital expenditures for
environmental compliance of approximately $201 million, which is included
in the construction forecast provided under "Capital Expenditures" for
2001 through 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-
sulfurlower-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 submitted a SIP that requires compliance with the NOx
budgets at the Companies' Pennsylvania facilities by May 1, 2003 and Ohio
submitted a "draft" SIP that requires compliance with the NOx budgets at
the Companies' Ohio facilities by May 31, 2004. A 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 found
constitutional and other defects in the new NAAQS rules. In February
2001, the U.S. Supreme Court upheld the new NAAQS rules regulating
ultra-fine particulates but found defects in the new NAAQS rules for
ozone and decided that the EPA must revise those rules. The future cost
of compliance with these regulations may be substantial and will depend
on the manner in whichif and how they are ultimately implemented if at all, by the states in which the
Companies operate affected facilities.
In 1999 and 2000, the EPA issued Notices of Violation (NOV) or
a Compliance Order to nine utilities covering 44 power plants, including
the W. H. Sammis Plant. In addition, the U.S. Department of Justice filed
eight 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
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. The Sammis Plant
continues 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 $3.4$3.2 million and $0.2 million, respectively, as of March 31,June 30, 2001,
based on estimates of the total costs of cleanup, the proportionate
responsibility of other PRPs for such 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 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. GPU shareholders 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-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 shareholders of
the CompanyFirstEnergy 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, the Pennsylvania
Public Utility Commission and the Federal Communications Commission, andCommission. The
merger is expected to close promptly after all of the conditions to the
consummation of the merger, including the receipt of all necessaryremaining regulatory
approvals, are fulfilled or waived. The CompanyApprovals from the New Jersey Board of
Public Utilities and GPU are working to secure the receipt of all remaining necessary
regulatory approvals, including, but not limited to, the Securities and Exchange Commission inare expected by
the thirdfourth quarter of 2001.
3 - REGULATORY MATTERS:
In July 2000, the Public Utilities Commission of Ohio (PUCO)
approved FirstEnergy's transition plan as modified by a settlement
agreement with major parties to the transition plan, which it filed on
behalf of its Ohio electric utility operating companies - OE, CEI and TE -
under Ohio's new electric utility restructuring law. Major provisions of
the settlement agreement included approval for 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 also
gives 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 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.
The 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 to select their generation suppliers beginning 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.
The amount of the incentive serves to reduce the amortization of transition
costs during the market development period and will be recovered through
the extension 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.
4 - CHANGE INNEW ACCOUNTING FOR DERIVATIVES:STANDARDS:
On January 1, 2001, FirstEnergy adopted Statement of Financial
Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), as amended by SFAS 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities - an
amendment of FASB Statement No. 133." The cumulative effect to January 1,
2001 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 net
income when the underlying hedged commodities are delivered. Of the $34.3The current
net deferred loss of $37.7 million included in Accumulated Other
Comprehensive IncomeLoss as of June 30, 2001, as compared to the March 31, 2001
FirstEnergy expectsbalance of $34.3 million in deferred gains, reflected a $70.3 million
reduction related to current hedging activity and $1.7 million in other
activities during the quarter. Based on the current net gainsdeferred loss of
$37.7 million, net losses of approximately $14.5$33.7 million (after tax) towould
be recognized in net income within the next twelve months. FirstEnergy
entered into interest rate derivative transactions during the first quarterhalf of
2001 to hedge a portion of the expected acquisition-related debt.debt relating to the pending GPU
acquisition. For the quarter and year-to-date periods ended March 31,June 30, 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 theThe Financial Accounting Standards Board (FASB)
responsible for providing guidance on the implementation of SFAS 133, has not reached a
final conclusion regarding the appropriate accounting treatment of certain
types of energy contracts under SFAS 133. The FASB's final decision could
affect those contracts considered eligible for the NPNS exception.
The FASB approved SFAS 141, "Business Combinations" and SFAS
142, "Goodwill and Other Intangible Assets," on June 29, 2001. These new
standards are effective beginning July 1, 2001. SFAS 141 requires all
business combinations initiated after June 30, 2001, to be accounted for
using purchase accounting. The provisions of the new standard relating to
the determination of goodwill and other intangible assets will be applied
to the pending GPU merger, which will be accounted for as a purchase
transaction, and are not expected to materially affect the accounting for
this pending transaction. Under SFAS 142, amortization of existing
goodwill by FirstEnergy will cease on January 1, 2002. Instead, goodwill
will be tested for impairment at least on an annual basis, and no
impairment of goodwill is anticipated as a result of the initial
impairment review process. Currently, FirstEnergy amortizes about $57
million ($.25 per share of common stock) of goodwill annually. There will
be no goodwill amortization in 2001 associated with the pending GPU
merger under the provisions of the new standard.
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
organizational changes to accommodate its retail strategy and the impact of
moving the generation portion of its electricity services from the
regulated segment to the competitive segment as reflected in its approved
Ohio transition plan. These reportable segments are strategic businesses,
which are 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 the retail and wholesale markets, marketing, generation,
trading and sourcing of commodity requirements, as well as other
competitive 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 organizations and operations. Financial data for
these business segments are as follows:
Segment Financial Information
-----------------------------------------------------------
Regulated Competitive Reconciling
Services Services Other Adjustments Consolidated
--------- ----------- ----- ----------- ------------
(In millions)
Three Months Ended:
- -----------------
March 31,------------------
June 30, 2001
---------------------------
External revenues $ 1,3091,260 $ 633499 $ 1 $ 4344 (a) $ 1,9861,804
Internal revenues 334 571 65 (970)324 488 64 (876) (b) --
Total revenues 1,643 1,204 66 (927) 1,9861,584 987 65 (832) 1,804
Depreciation and amortization 215196 4 87 -- 227207
Net interest charges 145 (4)130 13 8 (23)(30) (b) 126121
Income taxes 67 13113 4 3 -- 84120
Income before cumulative effect of
a change in accounting 84 18 7 (3)133 6 4 3 (b) 106146
Net income 84 10 7 (3)133 6 4 3 (b) 98146
Total assets 15,624 1,896 48115,494 2,154 490 -- 18,00118,138
Property additions 53 94 436 84 5 -- 151
March 31,125
June 30, 2000
---------------------------
External revenues $ 1,2721,359 $ 320 $ 16342 $ -- $ 1,6081 (a) $ 1,702
Internal revenues 328 578 24 (930)331 537 106 (974) (b) --
Total revenues 1,600 898 40 (930) 1,6081,690 879 91 (958) 1,702
Depreciation and amortization 198221 4 -- -- 202225
Net interest charges 125 5 4 -- 134
Income taxes 93 3 (1) -- 95
Net income 133 -- 24 (2) -- 135
Total assets 15,227 2,164 710 -- 18,101
Property additions 104 20 -- -- 124
Six Months Ended:
- ----------------
June 30, 2001
-------------
External revenues $ 2,569 $1,132 $ 2 $ 87 (a) $ 3,790
Internal revenues 658 1,059 129 (1,846) (b) --
Total revenues 3,227 2,191 131 (1,759) 3,790
Depreciation and amortization 411 8 15 -- 434
Net interest charges 275 9 16 (53) (b) 247
Income taxes 60 38180 17 7 -- 204
Income before cumulative effect of
a change in accounting 217 24 11 -- 252
Net income 217 16 11 -- 244
Total assets 15,494 2,154 490 -- 18,138
Property additions 89 178 9 -- 276
June 30, 2000
-------------
External revenues $ 2,631 $ 662 $ 1 $ 16 (a) $ 3,310
Internal revenues 659 1,115 130 (1,904) (b) --
Total revenues 3,290 1,777 131 (1,888) 3,310
Depreciation and amortization 419 8 -- -- 98427
Net interest charges 258 5 6 -- 269
Income taxes 153 41 (1) -- 193
Net income 86 55219 59 (2) -- 276
Total assets 15,227 2,164 710 -- 18,101
Property additions 222 54 -- -- 141
Total assets 14,904 2,347 857 -- 18,108
Property additions 118 34 -- -- 152276
Reconciling adjustments to segment operating results from internal management reporting to
consolidated external financial reporting:
(a) Principally fuel marketing revenues which are reflected as reductions to expenses for internal
management reporting purposes.
(b) Elimination of intersegment transactions.
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
-------------------------Six Months Ended
June 30, June 30,
----------------------- ----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
REVENUES:
Electric utilities $1,311,289 $1,280,930$1,260,511 $1,348,685 $2,571,800 $2,629,615
Unregulated businesses 674,452 327,000543,635 353,419 1,218,087 680,419
---------- ---------- ---------- ----------
Total revenues 1,985,741 1,607,9301,804,146 1,702,104 3,789,887 3,310,034
---------- ---------- ---------- ----------
EXPENSES:
Fuel and purchased power 324,579 244,640300,528 306,353 625,107 550,993
Purchased gas 352,817 102,038173,557 87,515 526,374 189,553
Other operating expenses 645,403 544,269643,846 581,373 1,289,249 1,125,642
Provision for depreciation and
amortization 227,214 202,084206,606 224,794 433,820 426,878
General taxes 119,422 141,05592,186 137,977 211,608 279,032
---------- ---------- ---------- ----------
Total expenses 1,669,435 1,234,0861,416,723 1,338,012 3,086,158 2,572,098
---------- ---------- ---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES 316,306 373,844387,423 364,092 703,729 737,936
---------- ---------- ---------- ----------
NET INTEREST CHARGES:
Interest expense 118,219 122,843116,342 124,243 234,561 247,086
Capitalized interest (8,823) (6,104)(12,296) (7,022) (21,119) (13,126)
Subsidiaries' preferred stock dividends 16,934 18,28816,919 17,125 33,853 35,413
---------- ---------- ---------- ----------
Net interest charges 126,330 135,027120,965 134,346 247,295 269,373
---------- ---------- ---------- ----------
INCOME TAXES 83,769 97,899120,439 95,142 204,208 193,041
---------- ------------------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING 106,207 140,918146,019 134,604 252,226 275,522
Cumulative effect of accounting change (net of
income taxes of $5,839,000) (Note 4) -- -- (8,499) --
---------- ---------- ---------- ----------
NET INCOME $ 97,708146,019 $ 140,918134,604 $ 243,727 $ 275,522
========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 218,107 224,859========== ==========
BASIC EARNINGS PER SHARE:
Before cumulative effect of accounting change $ .67 $ .60 $1.16 $1.23
Cumulative effect of accounting change -- -- (.04) --
----- ----- ----- -----
$ .67 $ .60 $1.12 $1.23
===== ===== ===== =====
Weighted average number of basic shares
outstanding 218,372 223,542 218,239 224,201
======= ======= BASIC AND======= =======
DILUTED EARNINGS PER SHARE:
Before cumulative effect of accounting change $.49 $.63$ .67 $ .60 $1.15 $1.23
Cumulative effect of accounting change -- -- (.04) --
---- ----
$.45 $.63
==== ====----- ----- ----- -----
$ .67 $ .60 $1.11 $1.23
===== ===== ===== =====
Weighted average number of diluted shares
outstanding 219,540 223,993 219,235 224,531
======= ======= ======= =======
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $.375 $.375 $ .75 $ .75
===== ===== ===== =====
The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are
an integral part of these statements.
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,June 30, December 31,
2001 2000
---------- ----------------------- ------------
(In thousands)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 42,496205,219 $ 49,258
Receivables-
Customers (less accumulated provisions of $29,163,000$18,680,000
and $32,251,000, respectively, for uncollectible accounts) 562,315529,406 541,924
Other (less accumulated provisions of $4,350,000$4,235,000 and
$4,035,000, respectively, for uncollectible accounts) 326,940365,458 376,525
Materials and supplies, at average cost-
Owned 161,811203,935 171,563
Under consignment 128,950124,045 112,155
Prepayments and other 207,374214,727 189,869
----------- -----------
1,429,8861,642,790 1,441,294
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
In service 12,449,81312,712,048 12,417,684
Less--Accumulated provision for depreciation 5,294,6055,409,452 5,263,483
----------- -----------
7,155,2087,302,596 7,154,201
Construction work in progress 443,395302,110 420,875
----------- -----------
7,598,6037,604,706 7,575,076
----------- -----------
INVESTMENTS:
Capital trust investments 1,190,8851,178,743 1,223,794
Nuclear plant decommissioning trusts 617,581634,211 584,288
Letter of credit collateralization 277,763 277,763
Other 683,712687,096 669,057
----------- -----------
2,769,9412,777,813 2,754,902
----------- -----------
DEFERRED CHARGES:
Regulatory assets 3,599,6423,568,007 3,727,662
Goodwill 2,074,7122,062,293 2,088,770
Other 528,495481,917 353,590
----------- -----------
6,202,8496,112,217 6,170,022
----------- -----------
$18,001,279$18,137,526 $17,941,294
=========== ===========
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,June 30, December 31,
2001 2000
--------- ----------------------- -----------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock $ 491,568638,965 $ 536,482
Short-term borrowings 741,879758,246 699,765
Accounts payable 409,001370,982 478,661
Accrued taxes 405,912412,794 409,640
Accrued interest 128,976 116,544
Other 281,885 352,713388,872 469,257
----------- -----------
2,459,2212,569,859 2,593,805
----------- -----------
CAPITALIZATION:
Common stockholders' equity-
Common stock, $.10 par value, authorized 375,000,000
shares - 223,981,580 and 224,531,580 shares
outstanding, respectively 22,398 22,453
Other paid-in capital 3,519,0493,521,782 3,531,821
Accumulated other comprehensive income 39,071(loss) (36,578) 593
Retained earnings 1,225,9451,290,101 1,209,991
Unallocated employee stock ownership plan common stock -
5,741,0745,520,836 and 5,952,032 shares, respectively (106,711)(103,318) (111,732)
----------- -----------
Total common stockholders' equity 4,699,7524,694,385 4,653,126
Preferred stock of consolidated subsidiaries-
Not subject to mandatory redemption 648,395 648,395
Subject to mandatory redemption 40,62840,150 41,105
OE obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely OE subordinated
debentures 120,000 120,000
Long-term debt 5,767,0795,791,593 5,742,048
----------- -----------
11,275,85411,294,523 11,204,674
----------- -----------
DEFERRED CREDITS:
Accumulated deferred income taxes 2,081,6952,000,438 2,094,107
Accumulated deferred investment tax credits 236,642232,278 241,005
Nuclear plant decommissioning costs 632,279648,908 598,985
Other postretirement benefits 564,351578,486 544,541
Other 751,237813,034 664,177
----------- -----------
4,266,2044,273,144 4,142,815
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 2) ----------- -----------
$18,001,279$18,137,526 $17,941,294
=========== ===========
The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral part of
these balance sheets.
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,Six Months Ended
June 30, June 30,
------------------- --------------------
2001 2000 2001 2000
-------- -------- --------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $146,019 $134,604 $ 97,708 $140,918243,727 $275,522
Adjustments to reconcile net income to
net cash from operating activities-
Provision for depreciation and
amortization 227,214 202,084206,606 224,794 433,820 426,878
Nuclear fuel and lease amortization 23,975 29,76124,226 24,943 48,201 54,704
Other amortization, net (3,633) (3,167)(4,039) (3,451) (7,672) (6,618)
Deferred income taxes, net (15,935) (5,373)(19,373) (27,965) (35,308) (33,338)
Investment tax credits, net (4,998) (5,554)(4,988) (6,941) (9,986) (12,495)
Cumulative effect of accounting change -- -- 14,338 --
Receivables 29,194 26,101(5,609) (46,929) 23,585 (20,828)
Materials and supplies (7,043) 6,838(37,219) 12,420 (44,262) 19,258
Accounts payable (69,660) (18,319)(38,019) 15,177 (107,679) (3,142)
Other (69,057) (45,374)(99,111) (40,559) (168,168) (85,933)
-------- -------- --------- --------
Net cash provided from operating
activities 222,103 327,915168,493 286,093 390,596 614,008
-------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 622 17,319254,877 241,099 255,499 258,418
Short-term borrowings net 42,114 --16,367 111,040 58,481 47,048
Redemptions and Repayments-
Common stock -- 40,050 15,308 33,96274,012
Preferred stock 10,716 13,714 10,716 13,714
Long-term debt 21,216 102,055
Short-term borrowings, net -- 63,99274,345 347,469 95,561 449,524
Common stock dividend payments 81,753 84,45581,864 84,063 163,617 168,518
--------- -------- --------- --------
Net cash used for (provided from)
financing activities 75,541 267,145(104,319) 133,157 (28,778) 400,302
-------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 151,176 151,680125,322 124,397 276,498 276,077
Cash investments (29,138) (39,106)(3,463) (1,930) (32,601) (41,036)
Other 31,286 16,938(11,770) (14,045) 19,516 2,893
--------- -------- --------- --------
Net cash used for investing activities 153,324 129,512110,089 108,422 263,413 237,934
--------- -------- --------- --------
Net decreaseincrease (decrease) in cash and cash
equivalents 6,762 68,742162,723 44,514 155,961 (24,228)
Cash and cash equivalents at beginning of
period 42,496 43,046 49,258 111,788
--------- -------- --------- --------
Cash and cash equivalents at end of period $ 42,496205,219 $ 43,04687,560 $ 205,219 $ 87,560
========= ======== ========= ========
The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an
integral part of these statements.
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 March 31,June 30,
2001, and the related consolidated statements of income and cash flows
for the three-month and six-month periods ended March 31,June 30, 2001 and 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, 2000 (not
presented herein), and, in our report dated February 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, 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,
May 14,August 8, 2001.
FIRSTENERGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Net income increased to $146.0 million in the firstsecond quarter of
2001, was $106.2compared to $134.6 million or
$0.49in the same period of 2000. Basic and
diluted earnings per share of common stock (basic and diluted) -were $0.67 in the second
quarter of 2001, compared to $0.60 in the second quarter of 2000. In the
first half of 2001, net income was $252.2 million before the cumulative
effect of an accounting change, (as described below), compared to $140.9$275.5 million or $0.63for the same
period of 2000. Basic earnings per share of common stock were $1.16
($1.15 diluted) in the same periodfirst half of 2001, compared to $1.23 (basic and
diluted) in the first six months of 2000. After the accounting change,
first quarter 2001 net income in the first half of 2001 was $97.7$243.7 million or $0.45basic earnings
per share of common stock.stock of $1.12 ($1.11 diluted). The decrease resulted
in part from changes in depreciationaccounting change
reflected the adoption of SFAS 133, "Accounting for Derivative
Instruments and amortization patterns under
FirstEnergy's transition plan that beganHedging Activities," on January 1, 2001, as compared
to prior regulatory planswhich resulted
in 2000. This transition plan allows Ohio
electric customers to select their generation suppliers and unbundled the
price for electricity into its component elements - including generation,
transmission, distribution and transition charges.an after-tax charge of $8.5 million ($0.04 per share of common stock).
Revenues
Total revenues increased by $377.8$102.0 million in the firstsecond
quarter of 2001, and $479.9 million during the six-month period ended
June 30, 2001, as compared to the same period last year.periods in 2000. FirstEnergy's
competitive services business segment provided the majorityall of the revenue
increase, mostlylargely from greater wholesale electric sales and expanded gas
sales. The sources of changes in revenues during the second quarter and
first quarterhalf of 2001, compared to the corresponding periods of 2000, are
summarized in the following table:
Sources of Revenue Changes
- --------------------------
Increase (Decrease)
Three Six
Months Months
------ ------
(In millions)
Electric Utilities:Utilities (Regulated Services):
Retail electric sales $ 42.3$(105.2) $(62.9)
Other revenues (11.9)17.0 5.1
------- ------
Total Electric Utilities 30.4(88.2) (57.8)
------- ------
Unregulated Businesses:Businesses (Competitive Services):
Retail electric sales 4.1 8.2
Wholesale electric sales 85.8109.5 195.3
Gas sales 225.987.3 313.2
Other businesses 31.6(10.7) 21.0
------- ------
Total Unregulated Businesses 347.4190.2 537.7
------- ------
Net Revenue Increase $377.8$102.0 $479.9
======= ======
Electric Sales
Revenues fromfor the electric utilities increaseddecreased by $30.4$88.2 million
in the second quarter and $57.8 million in the first quartersix months of 2001,
compared to the same periodperiods in 2000, primarily due to lower
kilowatt-hour sales of electric generation as a result of highercustomer choice
in Ohio. Lower unit prices for energy sold and additional kilowatt-hour
sales of electric generation. However,resulting in part from implementation of a 5%
reduction in generation charges for residential customers as part of
Ohio's electric utility restructuring law that beganimplemented in 2001, partially offsetalso
contributed to the increasereduction in electric sales revenues. This lower
residential rate reduced electric sales revenues by approximately
$9$12 million in the second quarter and $21 million in the first quarterhalf of
2001 and is expected to lower revenues for all of 2001 by approximately
$50 million.
HigherLower kilowatt-hour deliveries to franchiseservice area customers increasedin the
second quarter of 2001, compared to the same period of 2000, also
negatively affected revenues for transmission and distribution services.
A 3.6%
increase2.5% decrease in kilowatt-hour deliveries was the result of higherreduced
deliveries to both residential and industrialbusiness (commercial and industrial)
customers in the firstsecond quarter of 2001, compared to the firstsecond quarter
of last year. Weather was a major factor giving risecontributing to the increased residentiallower kilowatt-hour
sales. Although
weather was warmer than normalAverage temperatures were cooler in the firstsecond quarter of 2001
average
temperatures were still significantly colder than the firstsecond quarter of 2000.2000, which reduced residential
air-conditioning loads. Deliveries to commercialbusiness customers decreased
partially as a result of a softening of the economy in the service economyareas.
Kilowatt-hour deliveries increased by 0.6% in the franchise areas. Kilowatt-
hour sales by other suppliers (including unregulated affiliates), which
are included infirst half of
2001 from the kilowatt-hour deliveries, increased to 3.0% of total
energy deliveredsame period last year, benefiting from colder weather in
the first quarter of 2001 from 1.1% inthan the first
quarter of 2000 ascorresponding period last year
(although warmer than normal) which contributed to increased residential
sales. As a result of opening Ohio to competitive generation suppliers in
2001. Other regulated electric revenues decreased2001, kilowatt-hour sales by other suppliers (which are included in the
kilowatt-hour deliveries) increased to 11.8% and 7.2% of total energy
delivered in the second quarter and first quarterhalf of 2001, respectively,
compared to 0.8% and 0.9% in the same periodcorresponding periods of 2000, primarily due
to the absence of income received last year from a settlement with a
supplier.2000.
Retail kilowatt-hour sales for the FirstEnergy competitive
services business segment decreasedincreased by 2%15.2% in the second quarter and
6.8% in the first three monthshalf of 2001, compared to the same period last year partially offset by increased
revenuesperiods of $4.1 million due to higher unit prices.2000.
This reductionincrease 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 expandedexpanding kilowatt-hour sales within Ohio as
a result of retail customers switching to FirstEnergy's unregulated
affiliate - FE
Services,FES, a wholly owned subsidiary, under Ohio's electricity
choice program. The higher kilowatt-hour sales in Ohio were partially
offset by lower sales in markets outside of Ohio as more customers
returned to their local distribution companies.
Total electric generation sales increased by 13.1%7.6% in the second
quarter and 10.3% in the first threehalf of 2001 compared to the same periods
last year. Sales to the wholesale market were the largest single factor
contributing to this increase. Kilowatt-hour sales to wholesale customers
more than doubled in the second quarter and first six months of 2001,
compared to the same period last year. Salesperiods of 2000. Those increases reflect
FirstEnergy's enhanced position to take advantage of opportunities in the
wholesale market more than doubled in the first quarter of 2001, compared
to the first three months of 2000, which contributed the most to this
increase. The additional kilowatt-hour sales to the wholesale market
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,June 30,
2001, over 9001,080 megawatts of the 1,120 megawatts supply commitment had
been secured by alternative suppliers.
Changes in electric generation sales and kilowatt-hour
deliveries in the second quarter and first quarterhalf of 2001, compared to the
same periodperiods of 2000, are summarized in the following table:
% Increase
Changes in KWH Sales
--------------------
Increase (Decrease)
-------------------- ----------Three Six
Months Months
------ ------
Electric Generation Sales:
Retail --
Regulated Services 1.5%(13.2)% (5.8)%
Competitive Services (2.0)%15.2% 6.8%
Wholesale 127.7%176.9% 152.6%
----- -----
Total Electric Generation Sales 13.1%
====7.6% 10.3%
===== =====
Distribution Deliveries:
Residential 8.1%(4.2)% 2.5%
Commercial (1.3)(12.6)% (7.0)%
Industrial 3.6%
----5.1% 4.3%
----- -----
Total Retail Distribution Deliveries 3.6%
====(2.5)% 0.6%
===== =====
Other Sales
Residential and small business customers in the service area of
Dominion East Ohio, service areaa nonaffiliated gas utility, began shopping among
alternative gas suppliers last year as part of a customer choice program,
with gas deliveries beginning November 1, 2000. FE ServicesFES took advantage of
this opportunity to expand its customer base. Total gas sales increased
by $225.9$87.3 million in the second quarter and $313.2 million in the first
three monthshalf of 2001, andcompared to the same periods last year. The number of gas
customers served by FE
ServicesFES increased to over 167,000approximately 164,000 by the end of
the firstsecond quarter of 2001 from approximately 30,000 a year earlier.
Additionally, the competitive services business segment's energy-related
services experienced strong growth.growth in the first half of 2001 as compared
to the same period of 2000. Revenues for FE Facilities,FEFSG, a wholly owned subsidiary
providing heating, ventilating, air-conditioning and other energy-related
services, increased by $21.9$28.6 million or 19%11% in the first quartersix months of
2001 compared to the same period last year, reflecting growth in both
construction and service contracts.
Operating Expenses
Fuel and purchased power costs increaseddecreased by $79.9$5.8 million in the
firstsecond quarter of 2001 from the same period last year. Fuel expense
decreasedThe decrease
resulted from a $14.8 million reduction of purchased power costs that
were partially offset by $8.5a $9.0 million as a resultincrease in fuel expenses. A
combination of a 5.8% reductionlower volumes and wholesale unit prices contributed to
reduced purchased power costs, but higher coal prices resulted in
generationincreased fuel expense. In the first six months of 2001, fuel and
purchased power increased $74.1 million, compared to the same period of
2000, almost entirely due to higher purchased power costs. Increased
quantities of purchased power coupled with higher spot prices contributed
to the increase in purchased power costs in the first quarter of 2001.
Lower output (7.4% reductionfrom FirstEnergy's generating plants combined with higher
customer demand resulted in fossil generation and 3.6% reduction in nuclear
generation). The reduction ingreater reliance on purchased power during
the first half of 2001, compared to the same period last year. Reduced
fossil generation resulted from higher planned maintenance activities and
difficulties in the first quarter of 2001, compared to
the first quarter of 2000, as well as difficulties transporting coal to FirstEnergy's generating plants
along the Ohio River during a period of unusually cold winter weather andas
well as supplier constraints.constraints in the first quarter of 2001. The reduction
in nuclear generation in 2001 resulted from a scheduled first quarter
refueling outage at the Perry Plant. Lower generation levels from FirstEnergy's fossilPlant and nuclear
plants combined with higher customer demand to increaseseveral unplanned outages at the
need for
purchased power inPerry Plant during the first quarter of 2001, compared to the same period
of 2000. Those increased requirements and higher spot purchase prices
during this period resulted in an $88.4 million increase in purchased
power costs.second quarter.
Purchased gas costs for FirstEnergy's competitive services
business segment more thanalmost doubled in the second quarter and
nearly tripled in the first quartersix months of 2001, increasing by
$250.8$86.0 million and $336.8 million, respectively, from the same quartercorresponding
periods of 2000. This increaseThese increases resulted from the expansion of FE Services'FES's gas
business described above. Due to the unanticipated sizenumber of customer
enrollments and consumption volume under the gas choice program, FE Services'FES's
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 expectsHowever, the earnings contribution from
the natural gas operations to improve overimproved in the remaindersecond quarter of 2001.2001 from
first quarter results.
Other operating expenses increased by $101.1$62.5 million in the
second quarter and $163.6 million in the first quarterhalf of 2001, compared to
the same periodperiods of 2000. Increased operating costs for the competitive
services business segment accounted for slightly more than halfone-half of the
increase in other operating expenses as a result of increased sales activity. Most of theexpanding operations.
The remaining increase in other operating expenses wereresulted from higher
fossil operating expenses, increased customer service work, and increased
employee benefit costs. Partially offsetting these higher other operating
expenses were lower nuclear expenses resulting from the absence of
refueling outage costs in the second quarter of 2001 (the Davis-Besse
Plant was out of service for refueling in the second quarter of 2000).
A $21.9$16.3 million increase in fossil operating expenses in the
second quarter and a $38.0 million increase in the first quarterhalf of 2001,
from the first quartercorresponding periods of 2000, waswere due principally to planned
maintenance work, which included work to improve the availability of the
fossil units. The increase was primarily related to work at the Mansfield
generating plant in the second quarter of 2001 and at the Bay Shore,
Eastlake and Mansfield generating plants which included work performed as partin the first half of FirstEnergy's
availability improvement program.2001.
Pension costs increased by $20.6$15.8 million in the second quarter
and $36.6 million in the first quarterhalf of 2001 from the same periodcorresponding
periods last year. The increase included $6.1 million
related to last year's early retirement program, with the remaining
increaseincreases were primarily due to pension plan
enhancements, lower expected returns on plan assets (due to significant
market-related reductions in the value of plan assets) and the completion
of the 15-year amortization of OE's transition asset. Health care benefit
costs increased by $4.3$6.9 million in the second quarter and $10.6 million
in the first quarterhalf of 2001, compared to the same periodperiods of 2000,
principally due to the 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 increaseddecreased by
$25.1$18.2 million in the firstsecond quarter of 2001 from the same period last
year. Approximately $18$12.4 million of this increasedecrease resulted from higherlower
transition cost amortization under FirstEnergy's Ohio transition plan
compared to accelerated cost recovery in connection with OE's prior
regulatory plan. FirstEnergy expects total transition plan accelerations duringFor the six-month period ended June 30, 2001, to be
lower thancharges
for depreciation and amortization increased by $6.9 million from the rate plan accelerations recognized in 2000, withsame
period last year due to higher first quarter costs in 2001 resulting from
a different pattern of expense recognition under the transition plan.
Transition cost accelerations (including related income tax amortization)
totaled $79.0$74.4 million in the second quarter and $153.4 million in the
first quarterhalf of 2001, compared to cost accelerations under OE's rate plan
and Penn's restructuring plan of $57.3$86.8 million in the second quarter and
$144.1 million in the first quarterhalf of 2000. DepreciationFirstEnergy expects incremental
transition cost amortization during 2001 to be lower than the rate plan
accelerations recognized in 2000. The changes in depreciation and
amortization for these periods also reflected deferrals for shopping
incentives (see Note 3) partially offset by increases associated with
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.life.
General taxes were $21.6$45.8 million lower in the second quarter
and $67.4 million lower in the first quartersix months of 2001, compared to the
same periodcorresponding periods of 2000, primarily due to reduced property taxes
and other state tax changes in connection with the Ohio electric industry
restructuring. In addition, as a result of successfully resolving certain
pending tax issues, a one-time benefit of $15 million was also recognized
in the second quarter of 2001.
Net Interest Charges
Net interest charges continue to trend lower, decreasing by
$8.7$13.4 million in the second quarter and $22.1 million in the first quarterhalf
of 2001, compared to the same periodperiods in 2000, primarily due to debt and
preferred stock redemption and refinancing activities undertaken after
the end of the firstsecond quarter of 2000. Cumulative Effect of Accounting Change
InDuring the first quarterhalf of 2001,
FirstEnergy recorded an after-tax
chargeredemption and refinancing activities totaled $53.3 million and
$117.4 million, respectively, and will result in annualized savings 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 Hedging Activities," as amended by SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment of FASB Statement 133." SFAS 133 establishes
accounting and reporting standards which require that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recognized on the balance sheet as either an asset or
liability, measured at its fair value, unless specifically excluded from
the statement's scope.$7.7 million.
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 threetwo quarters of 2001, capital
requirements for property additions and capital leases are expected to be
about $590$410 million, including $52$50 million for nuclear fuel. FirstEnergy has
additional cash requirements of approximately $184.4$133.8 million to meet
sinking fund requirements for preferred stock and maturing long-term debt
during the remainder of 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 the issuance of approximately $2.2 billion
of acquisition-related debt during 2001 and issuingthe issuance of between
74 million and 95 million additional shares of common stock.
During the first quarterhalf of 2001, FirstEnergy repurchased 550,000
shares of its common stock at an average price of $27.82 per share. As of
March 31,June 30, 2001, FirstEnergy had repurchased 1313.1 million of the 15 million
shares authorized by the Board of Directors under the three-
yearthree-year program
which began in March 1999.
As of March 31,June 30, 2001, FirstEnergy and its subsidiaries had about
$42.5$205.2 million of cash and temporary investments and $741.9$758.2 million of
short-term indebtedness. Available borrowings included $160$51.5 million from
unused revolving lines of credit. As of March 31,June 30, 2001, the operating
companies in the regulated services business segment (OE, CEI, TE and
Penn) had the capability to issue $2.6 billion of additional 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$2.6 billion of preferred stock
(assuming no additional debt was issued). based on earnings through the
second quarter of 2001. CEI has no restrictions on the issuance of
preferred stock.
Transmission Business
- ---------------------CEI established the Cleveland Electric Financing Trust I, a
Delaware business trust subsidiary, during the second quarter of 2001,
for the purpose of issuing Cumulative Trust Preferred Capital Securities
in the amount of $245 million. The proceeds from the sale will be used by
the financing trust to purchase CEI junior subordinated debentures.
On January 24,June 27, 2001, OE and Penn completed the companies seekingissuance of
pollution control revenue refunding bonds totaling $69.5 million and
$32.9 million, respectively. The proceeds will be used to form the Alliance
Regional Transmission Organization (Alliance RTO), including FirstEnergy's
ATSI subsidiary, received Federal Energy Regulatory Commission (FERC)
approvalcomplete
optional refinancings in all material respects, meeting the four RTO characteristicsAugust and mostSeptember 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 inter-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 May 8, 2001. The
Alliance RTO's goal is to be operational by mid-December 2001.
Pending Business Combination
- ----------------------------
The merger of FirstEnergy and GPU is expected to be completed
by mid-summerthe fourth quarter of 2001. Regulatory approvals for the business
combination have been obtained from the FERC,Federal Energy Regulatory
Commission, the Nuclear Regulatory Commission, the New York Public
Service Commission, the Pennsylvania Public Utility Commission (PPUC),
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(BPU) and the Securities and Exchange
Commission (SEC). ApprovalIn July 2001, several parties appealed the PPUC's
merger approval in the Pennsylvania is expected in May, while approvalCommonwealth Court. The BPU
administrative law judge hearing the merger case in New Jersey has given
parties to the case until August 13, 2001 to report the status of their
settlement discussions.
New Accounting Standard
- -----------------------
The FASB approved SFAS 141, "Business Combinations" and SFAS
142, "Goodwill and Other Intangible Assets," on June 29, 2001. These new
standards are effective beginning July 1, 2001. SFAS 141 requires all
business combinations initiated after June 30, 2001, to be accounted for
using purchase accounting. The provisions of the new standard relating to
the determination of goodwill and other intangible assets will be applied
to the pending GPU merger, which will be accounted for as a purchase
transaction, and are not expected to materially affect the accounting for
this pending transaction. Under SFAS 142, amortization of existing
goodwill by FirstEnergy will cease on January 1, 2002. Instead, goodwill
will be tested for impairment at least on an annual basis, and no
impairment of goodwill is anticipated by early summer. SEC approval is expected within
thirty days afteras a result of the last state regulatory approval.initial
impairment review process. Currently, FirstEnergy amortizes about $57
million ($.25 per share of common stock) of goodwill annually. There will
be no goodwill amortization in 2001 associated with the pending GPU
merger under the provisions of the new standard.
Market Risk - Commodity Prices
- ------------------------------
FirstEnergy is exposed to market risks due to fluctuations in
electricity, 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
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, natural gas, coal, oil, or by the failure of contract
counterparties to perform.
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
--------------------Six Months Ended
June 30, June 30,
------------------- ---------------------
2001 2000 2001 2000
-------- -------- --------- ----------
(In thousands)
OPERATING REVENUES $783,103 $644,365$744,712 $667,256 $1,527,815 $1,311,621
-------- -------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel 14,146 76,06613,408 81,547 27,554 157,613
Purchased power 306,417 19,512237,795 25,253 544,212 44,765
Nuclear operating costs 92,245 111,61976,987 73,042 169,232 184,661
Other operating costs 80,956 97,59479,716 98,145 160,672 195,739
-------- -------- ---------- ----------
Total operation and maintenance expenses 493,764 304,791407,906 277,987 901,670 582,778
Provision for depreciation and amortization 116,956 113,951104,205 136,783 221,161 250,734
General taxes 44,954 59,45326,133 58,008 71,087 117,461
Income taxes 38,601 46,62168,540 60,362 107,141 106,983
-------- -------- ---------- ----------
Total operating expenses and taxes 694,275 524,816606,784 533,140 1,301,059 1,057,956
-------- -------- ---------- ----------
OPERATING INCOME 88,828 119,549137,928 134,116 226,756 253,665
OTHER INCOME 12,365 12,32317,821 11,481 30,186 23,804
-------- -------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 101,193 131,872155,749 145,597 256,942 277,469
-------- -------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 39,387 42,53939,527 42,056 78,914 84,595
Allowance for borrowed funds used during
construction and capitalized interest (2,918) (2,559)1,612 (1,508) (1,306) (4,067)
Other interest expense 6,912 7,4715,806 7,589 12,718 15,060
Subsidiaries' preferred stock dividend
requirements 3,626 3,626 7,252 7,252
-------- -------- ---------- ----------
Net interest charges 47,007 51,07750,571 51,763 97,578 102,840
-------- -------- ---------- ----------
NET INCOME 54,186 80,795105,178 93,834 159,364 174,629
PREFERRED STOCK DIVIDEND REQUIREMENTS 2,702 2,808 5,404 5,616
-------- -------- ---------- ----------
EARNINGS ON COMMON STOCK $102,476 $ 51,48491,026 $ 77,987153,960 $ 169,013
======== ======== ========== ==========
The preceding Notes to Financial Statements as they relate to Ohio Edison
Company are an integral part of these statements.
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,June 30, December 31,
2001 2000
---------- -----------------------
(In thousands)
ASSETS
------
ASSETS
------
UTILITY PLANT:
In service $4,952,557$4,975,966 $4,930,844
Less--Accumulated provision for depreciation 2,387,8182,424,036 2,376,457
---------- ----------
2,564,7392,551,930 2,554,387
---------- ----------
Construction work in progress-
Electric plant 91,73543,594 219,623
Nuclear fuel 2725 18,898
---------- ----------
91,76243,619 238,521
---------- ----------
2,656,5012,595,549 2,792,908
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
PNBV Capital Trust 451,612441,061 452,128
Letter of credit collateralization 277,763 277,763
Nuclear plant decommissioning trusts 271,344280,815 262,042
Long-term notes receivable from associated companies 470,951505,595 351,545
Other 296,574301,065 305,848
---------- ----------
1,768,2441,806,299 1,649,326
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 11,399113,374 18,269
Receivables-
Customers (less accumulated provisions of $11,808,000$3,971,000
and $11,777,000, respectively, for uncollectible
accounts) 305,387311,393 304,719
Associated companies 591,858 478,025669,431 476,993
Other (less accumulated provisions of $1,000,000
for uncollectible accounts at both dates) 33,65029,964 34,281
Notes receivable from associated companies 158,304 1,032
Materials and supplies, at average cost-
Owned 49,14763,678 80,534
Under consignment 29,72914,284 51,488
Prepayments and other 89,11289,714 76,934
---------- ----------
1,110,2821,450,142 1,044,250
---------- ----------
DEFERRED CHARGES:
Regulatory assets 2,404,8942,354,816 2,498,837
Other 182,399176,807 168,830
---------- ----------
2,587,2932,531,623 2,667,667
---------- ----------
$8,122,320$8,383,613 $8,154,151
========== ==========
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,June 30, December 31,
2001 2000
------------ ---------------------- -----------
(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 8,9297,158 --
Retained earnings 472,451574,923 458,263
---------- ----------
Total common stockholder's equity 2,580,1092,680,810 2,556,992
Preferred stock not subject to mandatory redemption 160,965 160,965
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 2,046,3642,083,465 2,000,622
---------- ----------
4,961,5435,099,345 4,892,684
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 260,363447,061 311,358
Short-term borrowings-
Associated companies 36,3155,874 19,131
Other 284,732294,111 296,301
Accounts payable-
Associated companies 88,222116,310 123,859
Other 7,78815,197 60,332
Accrued taxes 270,499250,436 232,225
Accrued interest 39,416 34,106
Other 85,892 75,28898,760 109,394
---------- ----------
1,073,2271,227,749 1,152,600
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 1,269,1251,229,883 1,298,845
Accumulated deferred investment tax credits 107,346104,629 110,064
Nuclear plant decommissioning costs 270,506279,977 261,204
Other postretirement benefits 162,639163,907 160,719
Other 277,934278,123 278,035
---------- ----------
2,087,5502,056,519 2,108,867
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 2) ---------- ----------
$8,122,320$8,383,613 $8,154,151
========== ==========
The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral part
of these balance sheets.
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,Six Months Ended
June 30, June 30,
---------------------- --------------------
2001 2000 ---------- ----------2001 2000
--------- -------- --------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 54,186105,178 $ 80,79593,834 $ 159,364 $174,629
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and amortization 116,956 113,951104,205 136,783 221,161 250,734
Nuclear fuel and lease amortization 11,757 13,10211,920 12,595 23,677 25,697
Deferred income taxes, net (20,402) (15,958)(22,160) (21,730) (42,562) (37,688)
Investment tax credits, net (3,353) (4,093)(3,341) (5,480) (6,694) (9,573)
Receivables (57,704) 7,055(137,091) (45,669) (194,795) (38,614)
Materials and supplies 53,146 3,742914 6,217 54,060 9,959
Accounts payable (88,181) 53,36035,497 19,364 (52,684) 72,724
Other 45,655 37,829(74,071) (51,448) (28,416) (13,619)
--------- -------- --------- --------
Net cash provided from operating
activities 112,060 289,78321,051 144,466 133,111 434,249
--------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 500 17,318249,042 174,934 249,542 192,252
Short-term borrowings, net 5,615-- 1,388 -- --
Redemptions and Repayments-
Long-term debt 7,150 71,03330,560 245,366 37,710 316,399
Short-term borrowings, net 21,062 -- 50,93915,447 49,551
Dividend Payments-
Common stock -- 50,200 37,300 59,000109,200
Preferred stock 2,698 2,8082,706 2,789 5,404 5,597
--------- -------- --------- --------
Net cash used for (provided from) financing
activities 41,033 166,462(194,714) 122,033 (153,681) 288,495
--------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 25,398 88,12115,608 45,064 41,006 133,185
Loans to associated companies 175,572 100,713136,257 -- 311,829 24,234
Loan payments from associated companies (506) (76,479) (506) --
Sale of assets to associated companies (121,594)(33,002) -- (154,596) --
Other (1,479) 13,055(4,567) (4,721) (6,046) 8,334
--------- -------- --------- --------
Net cash used for (provided from)
investing activities 77,897 201,889113,790 (36,136) 191,687 165,753
--------- -------- --------- --------
Net decreaseincrease (decrease) in cash and cash
equivalents 6,870 78,568101,975 58,569 95,105 (19,999)
Cash and cash equivalents at beginning of period 11,399 8,607 18,269 87,175
--------- -------- --------- --------
Cash and cash equivalents at end of period $ 11,399113,374 $ 8,60767,176 $ 113,374 $ 67,176
========= ======== ========= ========
The preceding Notes to Financial Statements as they relate to Ohio Edison
Company are an integral part of these statements.
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 March 31,June 30, 2001, and the related
consolidated statements of income and cash flows for the three-month and
six-month periods ended March 31,June 30, 2001 and 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, 2000 (not
presented herein), and, in our report dated February 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, 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,
May 14,August 8, 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 Companiesand Penn (OE and Penn)Companies) 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 EUOCelectric
utility operating companies (EUOC) entered into power supply agreements
whereby FE ServicesFES purchases all of the electric utility operating companies (EUOC)EUOC nuclear generation, as well as
generation from leased fossil generating facilities. FirstEnergy
Generation Corp. (FE Generation),FGCO, a wholly owned
subsidiary of FE
Services,FES, leases fossil generating units owned by the EUOC. The
EUOC are "full requirements" customers of FE ServicesFES 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.megawatts
(531 megawatts committed as of June 30, 2001).
The effect on the OE Companies' reported results of operations
during the second quarter and first quarterhalf 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:tables:
Three Months Ended June 30, 2001
--------------------------------
Income Statement Effects Corporate
- ------------------------
Increase (Decrease) Separation ATSI Total
---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement with FE ServicesFES $ 89.887.7 $ -- $ 89.887.7
Generating units rent 44.5 -- 44.5
Ground lease rent 44.9with ATSI -- 44.93.0 3.0
------ ----- ------
Total Operating Revenues Effect $134.7$132.2 $ -- $134.73.0 $135.2
====== ===== ======
Operating Expenses:Expenses and Taxes:
Fossil fuel costs $(63.9) $(66.5)(a) $ -- $(63.9)$(66.5)
Purchased power costs 297.5235.5 (b) -- 297.5235.5
Other operating costs (40.5) (22.1)(a) 20.119.9 (d) (20.4)(2.2)
Provision for depreciation and
amortization -- (4.3)(e) (4.3)
General taxes (1.2)(c) (3.6)(4.0)(e) (4.8)(5.2)
------ ----- ------
Total Operating Expenses Effect $191.9 $12.2 $204.1$145.7 $11.6 $157.3
====== ===== ======
Other Income $ -- $ 4.0 (f) $ 4.0
====== ===== ======
Six Months Ended June 30, 2001
--------------------------------
Income Statement Effects Corporate
- ------------------------
Increase (Decrease) Separation ATSI Total
---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement with FES $ 177.5 $ -- $ 177.5
Generating units rent 89.4 -- 89.4
Ground lease with ATSI -- 6.0 6.0
------- ----- -------
Total Operating Revenues Effect $ 266.9 $ 6.0 $ 272.9
======= ===== =======
Operating Expenses and Taxes:
Fossil fuel costs $(130.4)(a) $ -- $(130.4)
Purchased power costs 533.0 (b) -- 533.0
Other operating costs (62.6)(a) 40.0 (d) (22.6)
Provision for depreciation and
amortization -- (8.6)(e) (8.6)
General taxes (2.4)(c) (7.6)(e) (10.0)
------- ----- -------
Total Operating Expenses Effect $ 337.6 $23.8 $ 361.4
======= ===== =======
Other Income $ -- $ 8.0 (f) $ 8.0
======= ===== =======
(a) Transfer of fossil operations to FE Generation.FGCO.
(b) Purchased power for PLR.from power supply agreement (PSA).
(c) Payroll taxes related to employees transferred to FE Generation.FGCO.
(d) Transmission services received from ATSI.
(e) Depreciation and property taxes onrelated to transmission assets sold
to ATSI.
(f) Interest on note receivable from ATSI.
Results of Operations
- ---------------------
OperatingExcluding the effects shown in the tables above, operating
revenues increaseddecreased by $138.7$57.7 million or 21.5%8.7% in the second quarter and
$56.7 million or 4.3% in the first quarterhalf of 2001, compared to the same
period in 2000, with nearly
allperiods of that increase resulting from the implementation of FirstEnergy's
corporate separation as shown on the table above.2000. The OE Companies' electric sales to retail customers
also increaseddecreased by $10.5$43.8 million offsetting reduced wholesale sales of $13.3in the second quarter and $33.2 million in the
first quarterhalf of 2001, compared withto the first quartersame periods of 2000.2000 due to lower
kilowatt-hour sales of electric generation reflecting in part the effects
of customer choice in Ohio. As part of Ohio's electric utility
restructuring law, the implementation of a 5% reduction in generation
charges for Ohio's residential customers partially offsetalso contributed to the increase inlower electric
sales revenues in 2001.revenues. The lower residential rate reduced electric sales
revenues by approximately $4.9$6.4 million in the second quarter and
$11.4 million in the first quarterhalf of 2001 and is expected to lower revenues
for all of 2001 by more than $29 million. Higher revenuesRevenues from distribution services also contributed
favorablykilowatt-hour
sales to wholesale customers (excluding the PSA sales to FES) declined
$14.9 million in the second quarter and $24.6 million in the first half
of 2001 from the same periods last year.
Lower kilowatt-hour deliveries to customers in the second
quarter of 2001, compared to the increasesame period of 2000, resulted in
operating revenues. Residentialdecreased revenues for transmission and distribution services. A 3.6%
decrease in kilowatt-hour deliveries in the second quarter of 2001 from
the corresponding period last year was the result of reduced deliveries
to all customer groups -- residential, commercial and industrial. Weather
was cooler in the second quarter of 2001 than the same period last year,
reducing residential air-conditioning loads. Deliveries to business
(commercial and industrial) customers were lower in the second quarter of
2001, compared to the same period last year, reflecting a softening in
the service area economy. A 0.3% decrease in total kilowatt-hour
deliveries in the first quarter of 2001 were 8.6% higher than the first
quarter of 2000, partially 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 were approximately unchanged in the first quarterhalf of 2001 from the same period last year. Total kilowatt-hour deliveries, which
represents all kilowatt-hours delivered to customers in the OE Companies'
franchise areas, increasedyear was
moderated by 2.9%colder weather in the first quarter of 2001 than the
corresponding period last year (although warmer than normal) which
contributed to a 3.7% increase in residential deliveries. However,
business deliveries were lower in the first half of 2001 from the same
period last year. Additional revenues from OE's market support
generation to alternative energy suppliers also contributed to higher
revenues, as well as several existing committed wholesale contracts.year reflecting the softening in the service area economy.
Operating Expenses and Taxes
Total operating expenses and taxes increased by $169.5$73.6 million
in the second quarter and $243.1 million in the first six months of 2001,
compared to the same periods of 2000, due to the implementation of the
effects as shown in the preceding tables. Excluding these effects on
operating expenses, fuel expense declined $1.7 million in the second
quarter of 2001 and was relatively unchanged for the first half of 2001,
from the same periods last year. Lower nuclear fuel expense resulted, in
part, from reduced nuclear generation in the second quarter of 2001.
Purchased power costs decreased by $23.0 million in the second quarter
and $33.6 million in the first six months of 2001, compared to the
corresponding periods of last year, reflecting all of the OE Companies'
power requirements now being provided under the PSA.
Nuclear operating costs increased by $3.9 million in the second
quarter of 2001, compared to the samesecond quarter of 2000,
principally due to2000. No refueling
outages occurred in either period although 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 higherPerry Plant experienced
several unplanned outages in the firstsecond quarter of 2001. For the first
half of 2001, from the same period last year due to additional nuclear generation.
Nuclear operating costs decreased by $19.4$15.4 million infrom the
first quarterhalf of 2001, compared to the first quarter of 2000, due primarily to lower
refueling outage costs.2000. 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 costsexpenses decreased by $16.6$16.2 million in the second quarter
and $12.5 million in the first quarterhalf of 2001 from the corresponding
periodperiods in 2000 as2000. The decreases resulted principally from a result of corporate
separation; these reductions were partially offset by increased pensionreduction in
low-income payment plan customer costs resultingand lower distribution expenses
from last year's early retirement program.storm-related damage.
Excluding the effect from corporate separation,effects shown in the preceding tables, charges
for depreciation and amortization increased $7.3decreased $28.3 million in the second
quarter and $21.0 million in the first quarterhalf of 2001 from the same periodperiods
last year. HigherLower transition cost amortization under FirstEnergy'sOE's transition plan
compared to the accelerated cost recovery in connection with OE's prior
regulatory plan accountedwas the principal factor accounting for this increase.decrease.
The OE Companies expect totalincremental transition plan
accelerationscost amortization during
2001 to be lower than the rate plan accelerations recognized in 2000, with higher first quarter costs in 2001 resulting from
a different pattern of expense recognition under the transition plan.2000.
General taxes were $14.5$31.9 million lower in the second quarter
and $46.4 million lower in the first quarterhalf of 2001, compared to the same
periodperiods of 2000, primarily due to reduced property taxes and other state
tax changes in connection with the Ohio electric industry restructuring.
Also contributing to these reductions were the effects shown in the
preceding tables and a one-time benefit of $15 million in the second
quarter of 2001 as a result of successfully resolving certain pending tax
issues.
Net Interest Charges
Net interest charges continuecontinued to trend lower, decreasing
$4.1$1.2 million in the second quarter and $5.3 million in the first quarterhalf of
2001, compared to the same periodperiods in 2000, primarily due to debt
redemption and refinancing activities inundertaken after the end of the
second quarter of 2000. Financing activity was minimal inDuring the first quarterhalf of 2001, debt redemption
and refinancing activities totaled $6.6 million and $102.4 million,
respectively, and will result in annualized savings of $3.0 million. As a
result of initiating transfers of generation assets and related
construction projects to FGCO under corporate separation, capitalized
interest was reduced by approximately $2.3 million, with only
$3.3 million of debt redeemed.offsetting
increases to other income from the interest income on the related notes
receivable.
Capital Resources and Liquidity
- -------------------------------
The OE Companies have continuing cash requirements for planned
capital expenditures and maturing debt. During the last threetwo quarters of
2001, capital requirements for property additions and capital leases are
expected to be about $131$85 million, including $34$35 million for nuclear fuel.
The OE companies will need additional cash of approximately $18.0 million
to meetCompanies also have sinking fund paymentsrequirements for preferred stock
and maturing long-term debt of $14.1 million during the remainder of
2001. These cash requirements are expected to be satisfied from internal cash
and/or short-term credit arrangements.
As of March 31,June 30, 2001, the OE companiesCompanies had about $11.4$113.4 million
of cash and temporary investments and $321.0$300.0 million of short-term
indebtedness. In addition, the OE companies'Their available borrowing capability included $160$51.5 million
from unused revolving lines of credit and up to $2 million from short-term bank
facilities on a short-term basis at the banks' discretion. As of March 31,June 30,
2001, the OE Companies had the capability to issue up to $1.3$1.1 billion of
additional first mortgage bonds on the basis of property additions and
retired bonds. Under the earnings coverage tests contained in the OE
Companies' charters, $1.8$2.1 billion of preferred stock (assuming no
additional debt was issued) could be issued based on earnings through the
firstsecond quarter of 2001.
On June 27, 2001, OE and Penn completed the issuance of
pollution control revenue refunding bonds totaling $69.5 million and
$32.9 million, respectively. The proceeds will be used to complete
optional refinancing in August and September of 2001.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
-----------------------Six Months Ended
June 30, June 30,
-------------------- ---------------------
2001 2000 -------- --------2001 2000
(In thousands)
OPERATING REVENUES $516,417 $423,657$498,766 $470,635 $1,015,183 $894,292
-------- -------- ---------- --------
OPERATING EXPENSES AND TAXES:
Fuel 17,865 47,16016,888 39,734 34,753 86,894
Purchased power 214,505 41,818193,590 67,948 408,095 109,766
Nuclear operating costs 49,950 29,43128,679 49,007 78,629 78,438
Other operating costs 78,303 82,21772,396 92,803 150,699 175,020
-------- -------- ---------- --------
Total operation and maintenance expenses 360,623 200,626311,553 249,492 672,176 450,118
Provision for depreciation and amortization 56,764 58,01452,964 57,511 109,728 115,525
General taxes 37,870 56,90434,080 54,020 71,950 110,924
Income taxes 7,715 21,33021,579 22,670 29,294 44,000
-------- -------- ---------- --------
Total operating expenses and taxes 462,972 336,874420,176 383,693 883,148 720,567
-------- -------- ---------- --------
OPERATING INCOME 53,445 86,78378,590 86,942 132,035 173,725
OTHER INCOME 4,420 3,4281,138 2,857 5,558 6,285
-------- -------- ---------- --------
INCOME BEFORE NET INTEREST CHARGES 57,865 90,21179,728 89,799 137,593 180,010
-------- -------- ---------- --------
NET INTEREST CHARGES:
Interest on long-term debt 48,285 51,18448,317 51,659 96,602 102,843
Allowance for borrowed funds used during
construction (857) (512)(216) (560) (1,073) (1,072)
Other interest expense (credit) (1,196) 829(879) (554) (2,075) 275
-------- -------- ---------- --------
Net interest charges 46,232 51,50147,222 50,545 93,454 102,046
-------- -------- ---------- --------
NET INCOME 11,633 38,71032,506 39,254 44,139 77,964
PREFERRED STOCK DIVIDEND REQUIREMENTS 6,561 7,7906,615 13,122 14,405
-------- -------- ---------- --------
EARNINGS ON COMMON STOCK $ 5,07225,945 $ 30,92032,639 $ 31,017 $ 63,559
======== ======== ========== ========
The preceding Notes to Financial Statements as they relate to The Cleveland
Electric Illuminating Company are an integral part of these statements.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,June 30, December 31,
2001 2000
------------ ----------------------- -----------
(In thousands)
ASSETS
------
ASSETS
------
UTILITY PLANT:
In service $4,031,157$4,047,943 $4,036,590
Less--Accumulated provision for depreciation 1,620,2321,654,685 1,624,672
---------- ----------
2,410,9252,393,258 2,411,918
---------- ----------
Construction work in progress-
Electric plant 65,41949,338 66,904
Nuclear fuel --42 24,145
---------- ----------
65,41949,380 91,049
---------- ----------
2,476,3442,442,638 2,502,967
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 476,622475,551 491,830
Nuclear plant decommissioning trusts 203,113205,824 189,804
Long-term notes receivable from associated companies 92,621103,636 92,722
Other 33,86936,794 36,084
---------- ----------
806,225821,805 810,440
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 214238 2,855
Receivables-
Customers 13,67620,917 14,748
Associated companies 41,56261,375 81,090
Other (less accumulated provisions of $1,000,000 for
uncollectible accounts at both dates) 92,620126,125 127,639
Notes receivable from associated companies 486399 384
Materials and supplies, at average cost-
Owned 23,56723,471 26,039
Under consignment 25,82225,684 38,673
Prepayments and other 63,19666,918 59,377
---------- ----------
261,143325,127 350,805
---------- ----------
DEFERRED CHARGES:
Regulatory assets 808,804824,477 816,143
Goodwill 1,399,3111,389,754 1,408,869
Other 74,25973,509 75,407
---------- ----------
2,282,3742,287,740 2,300,419
---------- ----------
$5,826,086$5,877,310 $5,964,631
========== ==========
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,June 30, 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 116,15061,192 132,877
---------- ----------
Total common stockholder's equity 1,048,112993,154 1,064,839
Preferred stock-
Not subject to mandatory redemption 238,325 238,325
Subject to mandatory redemption 25,62825,150 26,105
Long-term debt 2,621,4542,615,427 2,634,692
---------- ----------
3,933,5193,872,056 3,963,961
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 170,149142,007 165,696
Accounts payable-
Associated companies 90,08277,808 102,915
Other 12,20533,348 54,422
Notes payable to associated companies 60,849157,172 28,586
Accrued taxes 130,238152,003 178,707
Accrued interest 62,20856,490 56,142
Other 35,78550,156 82,195
---------- ----------
561,516668,984 668,663
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 591,435595,679 591,748
Accumulated deferred investment tax credits 78,98878,018 79,957
Nuclear plant decommissioning costs 212,306215,017 198,997
Pensions and other postretirement benefits 230,243230,491 227,528
Other 218,079217,065 233,777
---------- ----------
1,331,0511,336,270 1,332,007
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 2) ---------- ----------
$5,826,086$5,877,310 $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.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
-----------------------Six Months Ended
June 30, June 30,
------------------- -------------------
2001 2000 --------- ---------2001 2000
-------- -------- -------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,63332,506 $ 38,71039,254 $ 44,139 $ 77,964
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and amortization 56,764 58,01452,964 57,511 109,728 115,525
Nuclear fuel and lease amortization 7,044 10,0267,070 7,590 14,114 17,616
Other amortization (3,633) (3,167)(4,039) (3,451) (7,672) (6,618)
Deferred income taxes, net 53 4,0854,607 (6,697) 4,660 (2,612)
Investment tax credits, net (969)(970) (982) (1,939) (1,964)
Receivables 75,619 43,107(60,559) (500) 15,060 42,607
Materials and supplies 15,323 (3,613)234 507 15,557 (3,106)
Accounts payable (55,050) (47,081)8,869 55,016 (46,181) 7,935
Accrued taxes (48,469) 12,78421,765 20,955 (26,704) 33,739
Other (53,583) (54,563)(13,482) (4,462) (67,065) (59,025)
-------- -------- -------- --------
Net cash provided from operating activities 4,732 57,32048,965 164,741 53,697 222,061
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Short-term borrowings, net 32,263 7,99396,323 -- 128,586 --
Redemptions and Repayments-
Preferred stock 10,716 13,714 10,716 13,714
Long-term debt 8,640 10,13721,264 8,603 29,904 18,740
Short-term borrowings, net -- 97,652 -- 89,659
Dividend Payments-
Common stock 21,800 10,00084,000 20,000 105,800 30,000
Preferred stock 7,037 7,7907,040 7,789 14,077 15,579
-------- -------- -------- --------
Net cash used for financing activities 5,214 19,93426,697 147,758 31,911 167,692
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 10,217 14,4505,363 30,025 15,580 44,475
Loans to associated companies 11,117 -- 32,82011,117 27,700
Loan payments from associated companies (188) (5,120) (188) --
Capital trust investments (15,208) (24,124)(1,071) (1,294) (16,279) (25,418)
Sale of assets to associated companies (11,117) -- (11,117) --
Other 7,150 8,70418,140 (894) 25,290 7,810
-------- -------- -------- --------
Net cash used for investing activities 2,159 31,85022,244 22,717 24,403 54,567
-------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (2,641) 5,53624 (5,734) (2,617) (198)
Cash and cash equivalents at beginning of period 214 5,912 2,855 376
-------- -------- -------- --------
Cash and cash equivalents at end of period $ 214238 $ 5,912178 $ 238 $ 178
======== ======== ======== ========
The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating
Company are an integral part of these statements.
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 March 31,June 30,
2001, and the related consolidated statements of income and cash flows
for the three-month and six-month periods ended March 31,June 30, 2001 and 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, 2000 (not presented herein), and, in our report dated
February 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, 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,
May 14,August 8, 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)PLR obligation under the transitionits rate plan.
As a result of the transition plan, FirstEnergy'sthe EUOC entered into power
supply agreements whereby FE ServicesFES purchases all of the EUOC nuclear
generation, as well as generation from leased fossil generating
facilities. FirstEnergy Generation Corp. (FE Generation),FGCO, a wholly owned subsidiary of FE Services,FES, leases fossil
generating units owned by the EUOC. The EUOC are "full requirements"
customers of FE ServicesFES 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.megawatts (398 megawatts committed as of June 30, 2001).
The effect on CEI's reported results of operations during the
second quarter and first quarterhalf 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:tables:
Three Months Ended June 30, 2001
--------------------------------
Income Statement Effects Corporate
- ------------------------
Increase (Decrease) Separation ATSI Total
---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement with FE
ServicesFES $ 77.576.3 $ -- $ 77.576.3
Generating units rent 14.6 -- 14.6
Ground lease rent 15.0with ATSI -- 15.01.8 1.8
------ ----------- ------
Total Operating Revenues Effect $ 92.590.9 $ --1.8 $ 92.592.7
====== =========== ======
Operating Expenses:Expenses and Taxes:
Fossil fuel costs $(23.4)$(20.5)(a) $ -- $(23.4)$(20.5)
Purchased power costs 189.5169.1 (b) -- 189.5169.1
Other operating costs (17.1)(23.4)(a) 11.010.2 (d) (6.1)(13.2)
Provision for depreciation and
amortization -- (2.0)(1.9)(e) (2.0)(1.9)
General taxes (0.8)(c) (2.2)(2.4)(e) (3.0)(3.2)
------ ------------ ------
Total Operating Expenses Effect $148.2$124.4 $ 6.8 $155.05.9 $130.3
====== ============ ======
Other Income $ -- $ 1.8 (f)1.8(f) $ 1.8
====== ============ ======
Six Months Ended June 30, 2001
--------------------------------
Income Statement Effects Corporate
- ------------------------
Increase (Decrease) Separation ATSI Total
---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement with FES $153.8 $ -- $153.8
Generating units rent 29.6 -- 29.6
Ground lease with ATSI -- 3.6 3.6
------ ----- ------
Total Operating Revenues Effect $183.4 $ 3.6 $187.0
====== ===== ======
Operating Expenses and Taxes:
Fossil fuel costs $(43.9)(a) $ -- $(43.9)
Purchased power costs 358.6 (b) -- 358.6
Other operating costs (40.5)(a) 21.2 (d) (19.3)
Provision for depreciation and
amortization -- (3.9)(e) (3.9)
General taxes (1.6)(c) (4.6)(e) (6.2)
------ ----- ------
Total Operating Expenses Effect $272.6 $12.7 $285.3
====== ===== ======
Other Income $ -- $ 3.6 (f) $ 3.6
====== ===== ======
(a) Transfer of fossil operations to FE Generation.FGCO.
(b) Purchased power for PLR.from power supply agreement (PSA).
(c) Payroll taxes related to employees transferred to FE Generation.FGCO.
(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
- ---------------------
OperatingExcluding the effects shown in the tables above, operating
revenues increaseddecreased by $92.8$64.6 million or 21.9%13.7% in the second quarter and
$66.1 million or 7.4% in the first quarterhalf of 2001, compared to the same
period in 2000, with nearly
allperiods of that increase resulting from the implementation of FirstEnergy's
corporate separation as shown on the table above.2000. CEI's electric sales to retail customers also increaseddecreased by
$20.4$49.7 million offsetting reduced
wholesale sales of $17.7in the second quarter and $29.2 million in the first quarterhalf
of 2001, compared with the first quartersame periods of 2000.2000, primarily due to lower
kilowatt-hour sales of electric generation reflecting in part the effects
of customer choice in Ohio. 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
offsetalso contributed to the increase inlower electric
sales revenues. This decreased electric sales revenues by approximately
$2.8$3.9 million in the second quarter and $6.7 million in the first quarterhalf of
2001 and is expected to lower revenues for all of 2001 by more than
$16 million. Higher revenuesRevenues from distribution services also contributed
favorablykilowatt-hour sales to wholesale customers
(excluding the PSA sales to FES) declined $15.1 million in the second
quarter and $32.4 million in the first half of 2001 from the same periods
last year.
Lower kilowatt-hour deliveries to customers in the second
quarter of 2001, compared to the same period of 2000, resulted in
decreased revenues for transmission and distribution services. A 1.7%
decrease in kilowatt-hour deliveries in the second quarter of 2001
resulted from reduced residential deliveries partially offset by a slight
increase in operating revenues. Residentialbusiness (commercial and industrial) deliveries from the
second quarter of last year. Weather was cooler in the second quarter of
2001 than the same period last year reducing residential air-conditioning
loads. The nearly flat business deliveries in the second quarter of 2001,
compared to the same period last year, reflected the slowing service area
economy. A 0.7% increase in total kilowatt-hour deliveries in the first
quarter of 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 1.9% in the first quarterhalf of 2001 from the same period last year. Totalyear resulted from a net increase
in sales to business customers that was partially offset by reduced sales
to residential customers. The lower residential kilowatt-hour deliveries, which
represents all kilowatt-hours deliveredsales were
partially due to customers in CEI's franchise
area, increased by 3.1%reduced air-conditioning loads in the firstsecond quarter,
of 2001 fromwhich was significant enough to affect the same periodsix-month comparison to last
year. Additional revenues from CEI's market support generation to
alternative energy suppliers also contributed to the higher revenues.
Operating Expenses and Taxes
Total operating expenses and taxes increased by $126.1$36.5 million
in the second quarter and $162.6 million in the first quartersix months of 2001,
compared to the same quarterperiods of 2000,
principally due to the implementation of FirstEnergy's corporate
separation planthe
effects as shown onin the preceding table.tables. Excluding these effects on
operating expenses, fuel expense declined $2.3 million in the effect of
corporate separation, purchased power costs decreased by $16.8 million.
Nuclear fuel costs were $4.0second
quarter and $8.2 million lower in the first quarterhalf of 2001 from the same periods
last year. The lower fuel expense resulted from reduced generation in the
first six months of 2001, compared to the same period last year due to reducedof 2000. Reduced
fossil generation resulted from planned maintenance activities at the
Mansfield Plant, and lower nuclear generation resulting from a scheduled refueling
outage and several unplanned outages at the Perry Plant. Purchased power
costs decreased by $43.4 million in the second quarter and $60.3 million
in the first six months of 2001, compared to the corresponding periods of
last year, reflecting all of CEI's power requirements now being provided
under the PSA. The timing of nuclear refueling outage
increasedoutages resulted in a
$20.3 million decrease in nuclear operating costs by $20.5 million in 2001 -- there were
no refueling outages in the first quarter of 2000.
General taxes were $19.0 million lower in the firstsecond quarter
of 2001, compared to the same period of last year. Refueling outage costs
were comparable for the six month periods with the Perry Plant's (44.85%
owned) outage occurring in the first quarter of 2001 and the Davis Besse
Plant's (51.38% owned) outage occurring in the second quarter of 2000.
Other operating costs decreased $7.2 million in the second quarter and
$5.0 million in the first half of 2001, compared to the same periods of
2000. The decreases resulted principally from a reduction in low-income
payment plan customer costs and lower distribution expenses from
storm-related damage.
Excluding the effects shown in the preceding tables, charges
for depreciation and amortization decreased $2.6 million in the second
quarter and $1.9 million in the first half of 2001 from the same periods
last year due to deferrals for shopping incentives offsetting incremental
transition cost amortization under CEI's transition plan (see Note 3).
General taxes were $19.9 million lower in the second quarter
and $39.0 million lower in the first half of 2001, compared to the same
periods of 2000, primarily due to reduced property taxes in connectionand other state
tax changes associated with the Ohio electric industry restructuring.
Net Interest Charges
Net interest charges declined $5.3continued to trend lower, decreasing
$3.3 million in the second quarter and $8.6 million in the first quarterhalf of
2001, compared to the same quarter of 2000. Lower interest expense on
long-term debt contributed $2.9 millionperiods in 2000, primarily due to the reduction as a result of debt
redemption and refinancing activities inundertaken after the end of the
second quarter of 2000. Lower borrowings from
affiliates inDuring the first quarterhalf of 2001, compared to the same quarterdebt redemptions
totaled $15 million and will result in annualized savings of
2000, reduced other interest expense by $2.0$1.4 million.
Capital Resources and Liquidity
- -------------------------------
CEI has continuing cash needs for planned capital expenditures
and maturing debt. During the last threetwo quarters of 2001, capital
requirements for property additions and capital leases are expected to be
about $89$56 million, including $10$8 million for nuclear fuel. CEI will need
additional cash of approximately $137 million to meetalso has
sinking fund paymentsrequirements for preferred stock and maturing long-term debt
of $111.3 million during the remainder of 2001. These cash requirements are
expected to be satisfied with internal cash and/or short-term credit
arrangements.
As of March 31,June 30, 2001, CEI had approximately $700,000$637,000 of cash and
temporary investments and $60.8$157.2 million of short-term indebtedness to
associated companies. Under its first mortgage indenture, as of March 31,June 30,
2001, CEI had the capability to issue up to $830$854 million of additional
first mortgage bonds on the basis of property additions and retired
bonds. CEI has no restrictions on the issuance of preferred stock.
CEI established the Cleveland Electric Financing Trust I, a
Delaware business trust subsidiary, during the second quarter of 2001,
for the purpose of issuing Cumulative Trust Preferred Capital Securities
in the amount of $245 million. The proceeds from the sale will be used by
the financing trust to purchase CEI junior subordinated debentures.
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
---------------------Six Months Ended
June 30, June 30,
------------------ ------------------
2001 2000 2001 2000
-------- -------- -------- --------
(In thousands)
OPERATING REVENUES $271,635 $217,391$263,003 $235,379 $534,638 $452,770
-------- -------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel 12,753 26,21512,015 21,523 24,768 47,738
Purchased power 88,352 6,91886,713 28,142 175,065 35,060
Nuclear operating costs 47,648 38,19737,111 52,721 84,759 90,918
Other operating costs 38,626 37,21337,287 40,816 75,913 78,029
-------- -------- -------- --------
Total operation and maintenance expenses 187,379 108,543173,126 143,202 360,505 251,745
Provision for depreciation and amortization 32,775 26,18029,240 26,382 62,015 52,562
General taxes 16,061 23,42413,879 21,576 29,940 45,000
Income taxes 7,086 15,31813,403 10,652 20,489 25,970
-------- -------- -------- --------
Total operating expenses and taxes 243,301 173,465229,648 201,812 472,949 375,277
-------- -------- -------- --------
OPERATING INCOME 28,334 43,92633,355 33,567 61,689 77,493
OTHER INCOME 3,788 2,6892,178 2,196 5,966 4,885
-------- -------- -------- --------
INCOME BEFORE NET INTEREST CHARGES 32,122 46,61535,533 35,763 67,655 82,378
-------- -------- -------- --------
NET INTEREST CHARGES:
Interest on long-term debt 17,244 19,14116,616 18,628 33,860 37,769
Allowance for borrowed funds used during
construction (349) (1,214)(2,914) (2,931) (3,263) (4,145)
Other interest expense (credit) (978) (832)(1,133) (464) (2,111) (1,296)
-------- -------- -------- --------
Net interest charges 15,917 17,09512,569 15,233 28,486 32,328
-------- -------- -------- --------
NET INCOME 16,205 29,52022,964 20,530 39,169 50,050
PREFERRED STOCK DIVIDEND REQUIREMENTS 4,045 4,0644,030 4,075 8,075 8,139
-------- -------- -------- --------
EARNINGS ON COMMON STOCK $ 12,16018,934 $ 25,45616,455 $ 31,094 $ 41,911
======== ======== ======== ========
The preceding Notes to Financial Statements as they relate to The Toledo
Edison Company are an integral part of these statements.
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,June 30, December 31,
2001 2000
---------- ------------
(In thousands)
ASSETS
------
UTILITY PLANT:
In service $1,564,004$1,568,085 $1,637,616
Less--Accumulated provision for depreciation 597,659613,192 597,397
---------- ----------
966,345954,893 1,040,219
---------- ----------
Construction work in progress-
Electric plant 27,87828,227 73,565
Nuclear fuel --40 10,720
---------- ----------
27,87828,267 84,285
---------- ----------
994,223983,160 1,124,504
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 262,651262,131 279,836
Nuclear plant decommissioning trusts 143,124147,572 132,442
Long-term notes receivable from associated companies 156,931162,436 39,084
Other 4,193Other. 3,916 4,601
---------- ----------
566,899576,055 455,963
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 707349 1,385
Receivables-
Customers 5,7599,219 6,618
Associated companies 40,99844,092 62,271
Other 6,08713,150 1,572
Notes receivable from associated companies 29,1127,599 32,617
Materials and supplies, at average cost-
Owned 8,64113,145 17,388
Under consignment 19,31815,525 21,994
Prepayments and other 28,94230,423 27,151
---------- ----------
139,564133,502 170,996
---------- ----------
DEFERRED CHARGES:
Regulatory assets 385,944388,714 412,682
Goodwill 455,056451,949 458,164
Other 28,94828,566 29,958
---------- ----------
869,948869,229 900,804
---------- ----------
$2,570,634$2,561,946 $2,652,267
========== ==========
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,June 30, December 31,
2001 2000
---------- ----------- ------------
(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 78,81897,754 81,358
---------- ----------
Total common stockholder's equity 603,047621,983 605,587
Preferred stock not subject to mandatory redemption 210,000 210,000
Long-term debt 936,192920,509 944,193
---------- ----------
1,749,2391,752,492 1,759,780
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt 58,04646,694 56,230
Accounts payable-
Associated companies 53,56741,851 36,564
Other 9,97615,292 25,070
Notes payable to associated companies --7,491 41,936
Accrued taxes 49,87257,832 57,519
Accrued interest 18,62319,778 19,946
Other 30,89927,009 49,908
---------- ----------
220,983---------
215,947 287,173
---------- -------------------
DEFERRED CREDITS:
Accumulated deferred income taxes 200,125202,137 196,944
Accumulated deferred investment tax credits 34,68834,201 35,174
Nuclear plant decommissioning costs 149,467153,914 138,784
Pensions and other postretirement benefits 120,175120,187 119,327
Other 95,95783,068 115,085
---------- ----------
600,412593,507 605,314
---------- ----------
COMMITMENTS AND CONTINGENCIES (Note 2) ---------- ----------
$2,570,634$2,561,946 $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.
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
------------------------Six Months Ended
June 30, June 30,
-------------------- ------------------
2001 2000 ---------- ---------2001 2000
-------- -------- -------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,20522,964 $ 29,52020,530 $ 39,169 $ 50,050
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and
amortization 32,775 26,18029,240 26,382 62,015 52,562
Nuclear fuel and lease amortization 5,174 6,6335,236 4,758 10,410 11,391
Deferred income taxes, net 2,158 6,608994 1,412 3,152 8,020
Investment tax credits, net (486)(487) (479) (973) (958)
Receivables 17,617 24,835(13,617) 11,530 4,000 36,365
Materials and supplies 11,423 333(711) 2,833 10,712 3,166
Accounts payable 1,909 (13,229)(6,400) 42,039 (4,491) 28,810
Other (29,804) (33,058)
---------(18,750) (25,189) (48,554) (58,247)
-------- -------- -------- --------
Net cash provided from operating
activities 56,971 47,343
---------18,469 83,816 75,440 131,159
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt -- 66,166 -- 66,166
Short-term borrowings, net 7,491 1,224 -- 16,83418,058
Redemptions and Repayments-
Long-term debt 5,863 20,88425,949 90,433 31,812 111,317
Short-term borrowings, net 41,936-- -- 34,445 --
Dividend Payments-
Common stock -- 16,300 14,700 18,00034,300
Preferred stock 4,045 4,064
---------4,028 4,075 8,073 8,139
-------- -------- -------- --------
Net cash used for financing activities 66,544 26,114
---------22,486 43,418 89,030 69,532
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 12,028 37,7098,481 28,068 20,509 65,777
Loans to associated companies 117,890 --5,548 11,115 123,438 5,949
Loan payments from associated companies (3,548) (5,166)(21,556) -- (25,104) --
Capital trust investments (17,185) (14,982)(520) (636) (17,705) (15,618)
Sale of assets to associated companies (117,890)(5,548) -- (123,438) --
Other (190) 3,679
---------9,936 1,851 9,746 5,530
-------- -------- -------- --------
Net cash used for (provided from)
investing activities (8,895) 21,240
---------( 3,659) 40,398 (12,554) 61,638
-------- -------- -------- --------
Net decrease in cash and cash equivalents 678358 -- 1,036 11
Cash and cash equivalents at beginning
of period 707 301 1,385 312
----------------- -------- -------- --------
Cash and cash equivalents at end of period $ 707349 $ 301 =========$ 349 $ 301
======== ======== ======== ========
The preceding Notes to Financial Statements as they relate to The Toledo
Edison Company are an integral part of these statements.
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 March 31,June 30, 2001, and the related
consolidated statements of income and cash flows for the three-month and
six-month periods ended March 31,June 30, 2001 and 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, 2000 (not
presented herein), and, in our report dated February 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, 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,
May 14,August 8, 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)PLR obligation under the transitionits rate plan.
As a result of the transition plan, FirstEnergy'sthe EUOC entered into power
supply agreements whereby FE ServicesFES purchases all of the EUOC nuclear
generation, as well as generation from leased fossil generating
facilities. FirstEnergy Generation Corp. (FE Generation),FGCO, a wholly owned subsidiary of FE Services,FES, leases fossil
generating units owned by the EUOC. The EUOC are "full requirements"
customers of FE ServicesFES 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.megawatts (151 megawatts committed as of June 30, 2001).
The effect on the TE's reported results of operations during the
second quarter and first quarterhalf 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:tables:
Three Months Ended June 30, 2001
--------------------------------
Income Statement Effects Corporate
- ------------------------
Increase (Decrease) Separation ATSI Total
---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement with FE Services $ 43.0FES $41.6 $ -- $ 43.0$41.6
Generating units rent 3.4 -- 3.4
Ground lease rent 3.6with ATSI -- 3.6
------ ------ ------0.4 0.4
----- ----- -----
Total Operating Revenues Effect $45.0 $ 46.6 $ -- $ 46.6
====== ====== ======0.4 $45.4
===== ===== =====
Operating Expenses:Expenses and Taxes:
Fossil fuel costs $(10.5) $(9.0)(a) $ -- $(10.5)$(9.0)
Purchased power costs 83.982.8 (b) -- 83.982.8
Other operating costs (3.0) (6.2)(a) 5.85.9 (d) 2.8(0.3)
Provision for depreciation and
amortization -- (0.9)(e) (0.9)
General taxes (0.5)(c) (0.8)(0.9)(e) (1.3)(1.4)
----- ----- -----
Total Operating Expenses Effect $67.1 $ 4.1 $71.2
===== ===== =====
Other Income $ -- $ 0.7 (f) $ 0.7
===== ===== =====
Six Months Ended June 30, 2001
--------------------------------
Income Statement Effects Corporate
- ------------------------
Increase (Decrease) Separation ATSI Total
---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement with FES $ 84.6 $ -- $ 84.6
Generating units rent 7.0 -- 7.0
Ground lease with ATSI -- 0.9 0.9
------ ----- ------
Total Operating Revenues Effect $ 91.6 $ 0.9 $ 92.5
====== ===== ======
Operating Expenses and Taxes:
Fossil fuel costs $(19.5)(a) $ -- $(19.5)
Purchased power costs 166.7 (b) -- 166.7
Other operating costs (9.2)(a) 11.7(d) 2.5
Provision for depreciation and
amortization -- (1.8)(e) (1.8)
General taxes (1.0)(c) (1.7)(e) (2.7)
------ ----- ------
Total Operating Expenses Effect $137.0 $ 69.9 $ 4.1 $ 74.08.2 $145.2
====== =========== ======
Other Income $ -- $ 0.81.5 (f) $ 0.81.5
====== =========== ======
(a) Transfer of fossil operations to FE Generation.FGCO.
(b) Purchased power for PLR.from power supply agreement (PSA).
(c) Payroll taxes related to employees transferred to FE Generation.FGCO.
(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
- ---------------------
OperatingExcluding the effects shown in the tables above, operating
revenues increaseddecreased by $54.2$17.8 million or 25.0%7.5% in the second quarter and
$10.6 million or 2.3% in the first quarterhalf of 2001, compared to the same
period in 2000, with nearly
allperiods of that increase resulting from the implementation of FirstEnergy's
corporate separation as shown on the table above.2000. TE's electric sales to retail customers also increaseddecreased by
$12.1 million, offsetting reduced
wholesale sales of $7.3$11.1 million in the second quarter and were nearly flat in the first quartersix
months of 2001, compared withto the first quartersame periods of 2000.2000, primarily due to
lower kilowatt-hour sales of electric generation reflecting in part the
effects of customer choice in Ohio. 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
offsetalso contributed to the increase inlower electric
sales revenues. This decreased electric sales revenues by approximately
$1.4$1.9 million in the second quarter and $3.3 million in the first quarterhalf of
2001 and is expected to lower revenues for all of 2001 by more than
$8 million. Higher revenuesRevenues from distribution services also contributed
favorablykilowatt-hour sales to wholesale customers
(excluding the PSA sales to FES) declined $4.9 million in the second
quarter and $10.3 million in the first half of 2001 from the same periods
last year.
A 0.3% decrease in kilowatt-hour deliveries in the second
quarter of 2001 from the corresponding period last year resulted from
reduced business (commercial and industrial) deliveries, reflecting a
softening of the service area economy partially offset by a slight
increase in operating revenues. Residentialresidential deliveries. A 3.3% increase in total
kilowatt-hour deliveries in the first quarter of 2001 were 9.7% higher than the first
quarter of 2000 partially 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 6.0% in the first quarterhalf of 2001 from the same period
last year reflecting service area economic strength.
Total kilowatt-hour deliveries, which represent all kilowatt-hours
deliveredresulted from an increase in sales to customers in TE's franchise area, increased by 7.0% in the
first quarter of 2001 from the same period 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.both residential and
business customers.
Operating Expenses and Taxes
Total operating expenses and taxes increased by $69.8$27.8 million
in the second quarter and $97.7 million in the first quartersix months of 2001,
compared to the same quarterperiods of 2000, principally due to the implementation of FirstEnergy's corporate separation
planthe
effects as shown onin the preceding table.tables. Excluding these effects on
operating expenses, fuel expense declined $0.5 million in the effect of corporate
separation, purchased power costs decreased by $2.5 million. Nuclear fuel
costs were $2.0second
quarter and $3.5 million lower in the first quarterhalf of 2001 from the same periodperiods
last year due toyear. The lower fuel expense resulted from reduced nuclear generation resulting from a
scheduled refueling outage at the
Perry Plant. The refueling outage
increased nuclear operating costs by $9.5 million in 2001 -- there were no
refueling outages inMansfield Plant during the first quarter of 2000.
Excluding the effect from corporate separation, charges for
depreciation and amortization increased by $7.5 million in the first
quarter of 2001 from the same period last year, due to higher transition
cost amortization under FirstEnergy's transition plan.
General taxes were $7.4 million lower in the first quartersix months of 2001, compared to the same
period of 2000, due to planned maintenance activities. Purchased power
costs decreased by $24.2 million in the second quarter and $26.7 million
in the first six months of 2001, compared to the corresponding periods of
last year, reflecting all of TE's power requirements now being provided
under the PSA. The timing of nuclear refueling outages and ownership
percentages resulted in nuclear operating costs decreasing $15.6 million
in the second quarter of 2001, compared to the corresponding period last
year. Nuclear operating costs decreased $6.2 million in the first six
months of 2001, as compared to the same period last year, with the Perry
Plant's (19.91% owned) outage occurring in the first quarter of 2001 and
the Davis Besse Plant's (48.62% owned) outage occurring in the second
quarter of 2000. Other operating costs decreased $3.2 million in the
second quarter and $4.6 million in the first half of 2001, compared to
the same periods of 2000. The decreases resulted principally from a
reduction in low-income payment plan customer costs and lower
distribution expenses from storm-related damage.
Excluding the effects shown in the preceding tables, charges
for depreciation and amortization increased $3.8 million in the second
quarter and $11.3 million in the first half of 2001 from the same periods
last year due to incremental transition cost amortization under TE's
transition plan partially offset by deferrals for shopping incentives
(see Note 3).
General taxes were $7.7 million lower in the second quarter and
$15.1 million lower in the first half of 2001, compared to the same
periods of 2000, primarily due to reduced property taxes in connectionand other state
tax changes associated with the Ohio electric industry restructuring.
Net Interest Charges
Net interest charges continuecontinued to trend lower, decreasing
by $1.2$2.7 million in the second quarter and $3.8 million in the first quarterhalf of
2001, compared to the same periodperiods in 2000, primarily due to debt
redemption and refinancing activities undertaken after the end of the
second quarter of 2000. During the first half of 2001, debt redemptions
totaled $21 million and will result in 2000.annualized savings of
$2.0 million.
Capital Resources and Liquidity
- -------------------------------
TE has continuing cash needs for planned capital expenditures
and maturing debt. During the last threetwo quarters of 2001, capital
requirements for property additions and capital leases are expected to be
about $52$37 million, including $8$7 million for nuclear fuel. TE will need
additional cash of approximately $29.4 million foralso has
maturing long-term debt of $8.4 million during the remainder of 2001.
These cash requirements are expected to be satisfied with internal cash and/or
short-term credit arrangements.
As of March 31,June 30, 2001, TE had approximately $29.8$7.9 million of cash
and temporary investments and no$7.5 million of short-term indebtedness.indebtedness to
associated companies. Under its first mortgage indenture, as of March 31,June 30,
2001, TE had the capability to issue up to $523$578 million of additional
first mortgage bonds on the basis of property additions and retired
bonds. Under the earnings coverage test contained in the TE charter,
$524$521 million of preferred stock (assuming no additional debt was issued)
could be issued based on earnings through the firstsecond quarter of 2001.
PENNSYLVANIA POWER COMPANY
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31,
----------------------Six Months Ended
June 30, June 30,
2001 2000 -------- --------2001 2000
------------------ ------------------
(In thousands)
OPERATING REVENUES $128,397 $ 83,951$124,701 $93,565 $253,098 $177,516
-------- ------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel 6,641 10,2225,887 15,151 12,528 25,373
Purchased power 45,768 3,16833,791 2,494 79,559 5,662
Nuclear operating costs 20,265 45,50719,252 21,453 39,517 66,960
Other operating costs 10,296 13,53511,897 16,044 22,193 29,579
-------- ------- -------- --------
Total operation and maintenance expenses 82,970 72,43270,827 55,142 153,797 127,574
Provision for depreciation and amortization 14,263 15,73114,267 11,898 28,530 27,629
General taxes 4,480 7,0581,261 6,277 5,741 13,335
Income taxes (credit) 10,675 (4,903)15,482 7,628 26,157 2,725
-------- ------- -------- --------
Total operating expenses and taxes 112,388 90,318101,837 80,945 214,225 171,263
-------- ------- -------- --------
OPERATING INCOME (LOSS) 16,009 (6,367)22,864 12,620 38,873 6,253
OTHER INCOME 875 413747 431 1,622 844
------- ------- -------- --------
INCOME (LOSS) BEFORE NET INTEREST CHARGES 16,884 (5,954)23,611 13,051 40,495 7,097
------- ------- -------- --------
NET INTEREST CHARGES:
Interest expense 4,728 5,4074,674 5,120 9,402 10,527
Allowance for borrowed funds used during
construction (232) (975)(108) 303 (340) (672)
------- ------- -------- --------
Net interest charges 4,496 4,4324,566 5,423 9,062 9,855
------- ------- -------- --------
NET INCOME (LOSS) 12,388 (10,386)19,045 7,628 31,433 (2,758)
PREFERRED STOCK DIVIDEND REQUIREMENTS 926 926 1,852 1,852
------- ------- -------- --------
EARNINGS (LOSS) ATTRIBUTABLE TO COMMON STOCK $18,119 $ 11,462 $(11,312)6,702 $ 29,581 $ (4,610)
======= ======= ======== ========
The preceding Notes to Financial Statements as they relate to Pennsylvania
Power Company are an integral part of these statements.
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
March 31,June 30, December 31,
2001 2000
------------------ ------------
(In thousands)
ASSETS
------
ASSETS
------
UTILITY PLANT:
In service $641,075$651,652 $636,418
Less--Accumulated provision for depreciation 280,174290,251 275,699
-------- --------
360,901361,401 360,719
-------- --------
Construction work in progress-
Electric plant 20,84012,155 20,800
Nuclear fuel 1716 2,810
-------- --------
20,85712,171 23,610
-------- --------
381,758373,572 384,329
-------- --------
OTHER PROPERTY AND INVESTMENTS:
Nuclear plant decommissioning trusts 118,951120,298 117,453
Long-term notes receivable from associated companies 33,57539,465 33,581
Other 21,21521,118 21,279
-------- --------
173,741180,881 172,313
-------- --------
CURRENT ASSETS:
Cash and cash equivalents 2,44434,145 3,475
Receivables-
Customers (less accumulated provisions of $688,000$684,000
and $628,000, respectively, for uncollectible accounts) 42,77244,403 40,980
Associated companies 33,88238,333 40,685
Other 4,7946,463 8,848
Notes receivable from associated companies 27,63052,411 41,264
Materials and supplies, at average cost 21,63123,287 29,595
Prepayments 9,7475,653 2,044
-------- --------
142,900204,695 166,891
-------- --------
DEFERRED CHARGES:
Regulatory assets 246,755233,369 260,221
Other 4,6744,549 5,155
-------- --------
251,429237,918 265,376
-------- --------
$949,828$997,066 $988,909
======== ========
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
March 31,June 30, December 31,
2001 2000
------------------- ------------
(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
Other paid-in capital (310) (310)
Retained earnings 30,62348,742 25,461
-------- --------
Total common stockholder's equity 219,013237,132 213,851
Preferred stock-
Not subject to mandatory redemption 39,105 39,105
Subject to mandatory redemption 15,000 15,000
Long-term debt-
Associated companies 15,00113,225 18,135
Other 252,227252,176 252,233
-------- --------
540,346556,638 538,324
-------- --------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 15,14012,580 16,620
Other 1,03333,436 1,036
Accounts payable-
Associated companies 29,64635,841 42,293
Other 4581,610 21,165
Accrued taxes 26,12422,619 19,250
Accrued interest 3,818 5,972
Other 8,747 16,22814,884 22,200
-------- --------
84,966120,970 122,564
-------- --------
DEFERRED CREDITS:
Accumulated deferred income taxes 154,896148,128 160,632
Accumulated deferred investment tax credits 4,3324,257 4,407
Nuclear plant decommissioning costs 119,412120,759 117,915
Other 45,87646,314 45,067
-------- --------
324,516319,458 328,021
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 2) -------- --------
$949,828$997,066 $988,909
======== ========
The preceding Notes to Financial Statements as they relate to Pennsylvania
Power Company are an integral part of these balance sheets.
PENNSYLVANIA POWER COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
----------------------Six Months Ended
June 30, June 30,
-------------------- ------------------
2001 2000 --------- ---------2001 2000
------- -------- -------- -------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 12,388 $(10,386)19,045 $ 7,628 $ 31,433 $ (2,758)
Adjustments to reconcile net income (loss)
to net cash from operating activities-
Provision for depreciation and amortization 14,263 15,73114,267 11,898 28,530 27,629
Nuclear fuel and lease amortization 4,882 3,1704,359 4,697 9,241 7,867
Deferred income taxes, net (2,481) (3,622)(3,555) (2,087) (6,036) (5,709)
Investment tax credits, net (711) (791)(699) (781) (1,410) (1,572)
Receivables 9,065 (526)(7,751) 6,226 1,314 5,700
Materials and supplies 7,964 3,768(1,656) 1,941 6,308 5,709
Accounts payable (33,354) 18,0937,347 (4,313) (26,007) 13,780
Other (8,870) (19,356)3,623 14,801 (5,247) (4,555)
-------- ------- -------- --------
Net cash provided from operating
activities 3,146 6,08134,980 40,010 38,126 46,091
-------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 32,603 -- 32,603 --
Redemptions and Repayments-
Long-term debt 4,918 8,3654,804 5,408 9,722 13,773
Dividend Payments-
Common stock -- -- 6,300 --
Preferred stock 926 926 1,852 1,852
-------- ------- -------- --------
Net cash used for (provided from)
financing activities 12,144 9,291(26,873) 6,334 (14,729) 15,625
-------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 5,358 13,1918,552 4,750 13,910 17,941
Loans to associated companies 30,828 26,028 30,828 26,028
Loan payment from parent -- -- (13,640) (12,866)
Sale of assets to associated companies (6,053) -- (6,053) --
Other 315 1,811(3,175) 1,380 (2,860) 3,191
-------- ------- -------- --------
Net cash used for (provided from) investing activities (7,967) 2,13630,152 32,158 22,185 34,294
-------- ------- -------- --------
Net decreaseincrease (decrease) in cash and cash
equivalents 1,031 5,34631,701 1,518 30,670 (3,828)
Cash and cash equivalents at beginning of period 2,444 324 3,475 5,670
-------- ------- -------- --------
Cash and cash equivalents at end of period $ 2,44434,145 $ 3241,842 $ 34,145 $ 1,842
======== ======= ======== ========
The preceding Notes to Financial Statements as they relate to Pennsylvania
Power Company are an integral part of these statements.
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 March 31,June 30, 2001, and the related statements of income
and cash flows for the three-month and six-month periods ended March 31,June 30,
2001 and 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, 2000 (not presented
herein), and, in our report dated February 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, 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,
May 14,August 8, 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 Ohio 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)PLR obligation under its
rate restructuring plan.
As a result of the transition plan, FirstEnergy'sThe EUOC have entered into power supply agreements whereby FE ServicesFES
purchases all of the EUOC nuclear generation, as well as generation from
leased fossil generating facilities. FirstEnergy Generation Corp. (FE Generation),FGCO, a wholly owned subsidiary of
FE Services,FES, leases fossil generating units owned by the EUOC. The EUOC are "full
requirements" customers of FE ServicesFES to enable them to meet their PLR
responsibilities in their respective service areas.
The effect on Penn's reported results of operations during the
second quarter and first quarterhalf 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:tables:
Three Months Ended June 30, 2001
--------------------------------
Income Statement Effects Corporate
- ------------------------
Increase (Decrease) Separation ATSI Total
---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement with FE ServicesFES $38.2 $ 41.6-- $38.2
Generating units rent 5.0 -- 5.0
Ground lease with ATSI -- 0.3 0.3
----- ----- -----
Total Operating Revenues Effect $43.2 $ 0.3 $43.5
===== ===== =====
Operating Expenses and Taxes:
Fossil fuel costs $(8.8)(a) $ -- $(8.8)
Purchased power costs 35.7 (b) -- 35.7
Other operating costs (6.0)(a) 3.3 (d) (2.7)
Provision for depreciation and
amortization -- (0.7)(e) (0.7)
General taxes (0.6)(c) -- (0.6)
----- ----- -----
Total Operating Expenses Effect $20.3 $ 2.6 $22.9
===== ===== =====
Other Income $ -- $ 41.60.6 (f) $ 0.6
===== ===== =====
Six Months Ended June 30, 2001
--------------------------------
Income Statement Effects Corporate
- ------------------------
Increase (Decrease) Separation ATSI Total
---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement with FES $ 79.8 $ -- $ 79.8
Generating units rent 10.1 -- 10.1
Ground lease rent 5.1with ATSI -- 5.10.7 0.7
------ ----------- ------
Total Operating Revenues Effect $ 46.789.9 $ --0.7 $ 46.790.6
====== =========== ======
Operating Expenses:Expenses and Taxes:
Fossil fuel costs $ (6.2)$(15.0)(a) $ -- $ (6.2)$(15.0)
Purchased power costs 45.981.6 (b) -- 45.981.6
Other operating costs (6.2)(12.2)(a) 3.26.5 (d) (3.0)(5.7)
Provision for depreciation and
amortization -- (0.8)(1.5)(e) (0.8)(1.5)
General taxes (0.6)(1.2)(c) (0.1)(e) (0.7)(1.3)
------ ----- ------
Total Operating Expenses Effect $ 32.953.2 $ 2.34.9 $ 35.258.1
====== ===== ======
Other Income $ -- $ 0.7 (f)1.3(f) $ 0.71.3
====== ===== ======
(a) Transfer of fossil operations to FE Generation.FGCO.
(b) Purchased power for PLR.from power supply agreement (PSA).
(c) Payroll taxes related to employees transferred to FE Generation.FGCO.
(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
- ---------------------
OperatingExcluding the effects shown in the tables above, operating
revenues increaseddecreased by $44.4$12.4 million or 52.9%13.2% in the second quarter and
$15.0 million or 8.5% in the first quarterhalf of 2001, compared to the same
periodperiods of 2000. Revenues from kilowatt-hour sales to wholesale customers
(excluding the PSA sales to FES) declined $13.7 million in 2000, with nearly
allthe second
quarter and $20.9 million in the first half of that increase resulting2001 from the implementation of FirstEnergy's
corporate separation as shown on the table above.same periods
last year. Penn's electric sales to retail customers also increased by
$3.6$1.5 million partially offsetting
reduced wholesale sales of $7.4in the second quarter and $5.1 million in the first quarterhalf of
2001, compared withto the first quartersame periods of 2000. The2000 due to the return of customers
previously served by alternative generation suppliers, contributed to thewhich resulted in
increased electric generation sales growth.
Higher revenues from distribution services also contributed
favorably torevenues.
Despite the increase in operating revenues. Residentialgeneration kilowatt-hour sales,
kilowatt-hours delivered through Penn's distribution system were 2.7%
lower in the second quarter of 2001, compared to the same period of 2000,
as a result of reduced deliveries to all customer groups -- residential,
commercial and industrial. Weather was cooler in the second quarter of
2001 than the same period last year, reducing residential
air-conditioning loads. Deliveries to business (commercial and
industrial) customers were lower in the second quarter of 2001, compared
to the same period last year, reflecting a softening of the service area
economy. A 2.6% increase in total kilowatt-hour deliveries in the first
quarter of 2001 were 9.7% higher than the first
quarter of 2000 partially 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 6.7% in the first quarterhalf of 2001 from the same period last year reflecting service area economic strength.resulted from an increase in
sales to both residential and business customers.
Operating Expenses and Taxes
Total operating expenses and taxes increased by $22.1$20.9 million
in the second quarter and $43.0 million in the first six months of 2001,
compared to the same periods of 2000, due to the implementation of the
effects as shown in the preceding tables. Excluding these effects on
operating expenses, fuel expense was unchanged in the second quarter and
increased $2.2 million in the first half of 2001 from the same periods
last year due to additional nuclear generation in the first quarter of
2001. Purchased power costs decreased by $4.4 million in the second
quarter and $7.7 million in the first six months of 2001, compared to the
corresponding periods of last year, reflecting all of Penn's power
requirements now being provided under the PSA.
Nuclear operating costs decreased by $2.2 million in the second
quarter of 2001 compared to the same quarter last year. No refueling
outages occurred in either period although the Perry Plant experienced
several unplanned outages in the second quarter of 2000,
principally due to2001. For the implementationfirst
half of FirstEnergy's corporate
separation plan as shown on the preceding table. Excluding the effect of
corporate separation, purchased power2001, nuclear operating costs decreased by $3.3 million.
Nuclear fuel costs were $2.6$27.4 million higher infrom the
first quarterhalf of 20012000. The reduced costs resulted from the same period last year due to additional nuclear generation in
2001. Nuclear operating costs were $25.2 million lower in the first
quarter 2001, compared to the first quarter of 2000, due to Penn's smaller
ownership share (5.24%) of a scheduled Perry Plant refueling outage in
the first quarter of 2001 versus its 65% ownership share in the Beaver
Valley Unit 1 refueling outage in the same period last year. Other
operating expenses decreased by $1.4 million in the second quarter and
$1.7 million in the first half of 2001 from the corresponding periods in
2000. The decreases resulted principally from lower distribution expenses
from storm-related damage.
Excluding the effects shown in the preceding tables, charges
for depreciation and amortization increased $3.1 million in the second
quarter and $2.4 million in the first half of 2001 from the same periods
last year. The increase primarily resulted from the absence this year of
an adjustment made to decommissioning costs in the second quarter of
2000.
General taxes were $2.6$5.0 million lower in the second quarter and
$7.6 million lower in the first quarterhalf of 2001, compared to the same
periodperiods of 2000, partiallyprimarily due to reduced property taxes in connectionassociated with
the Ohio electric industry restructuring.restructuring and a one-time benefit of
$3 million in the second quarter of 2001 as a result of successfully
resolving certain pending tax issues.
Net Interest Charges
Net interest charges continued to trend lower, decreasing
$857,000 in the second quarter and $793,000 in the first half of 2001,
compared to the same periods in 2000, primarily due to debt redemption
and refinancing activities undertaken after the end of the second quarter
of 2000. During the first half of 2001, debt refinancing totaled
$32.9 million and will result in annualized savings of $777,000.
Capital Resources and Liquidity
- -------------------------------
Penn has continuing cash requirements for planned capital
expenditures and maturing debt. During the last threetwo quarters of 2001,
capital requirements for property additions and capital leases are
expected to be about $40$37 million, including $20 million for nuclear fuel.
Penn will need additional cash of approximately $974,000 foralso has maturing long-term debt of $487,000 during the remainder of
2001. These cash requirements are expected to be satisfied withfrom internal
cash.cash and/or short-term credit arrangements.
As of March 31,June 30, 2001, Penn had approximately $30.1about $86.6 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 March 31,June 30, 2001,
which may be borrowed for up to several days at the bank's discretion.
Under its first mortgage indenture, as of March 31,June 30, 2001, Penn had the
capability to issue up to $226$187 million of additional first mortgage bonds
on the basis of property additions and retired bonds. Under the earnings
coverage test contained in the PennPenn's charter, $190$294 million of preferred
stock (assuming no additional debt was issued) could be issued based on
earnings through the firstsecond quarter of 2001.
On June 27, 2001, Penn completed the issuance of pollution
control revenue refunding bonds totaling $32.9 million. The proceeds will
be used to complete optional refinancing in September of 2001.
Pending Business Combination
- ----------------------------
On June 14, 2001, the PPUC approved a settlement agreement,
which is predicated upon the consummation of the FirstEnergy and GPU
merger, that includes a provision extending Penn's current distribution
rates to December 31, 2007. In July 2001, several parties appealed the
PPUC's decision to the Pennsylvania Commonwealth Court.
PART II. OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The annual meeting of FirstEnergy shareholders was held on
May 15, 2001.
(b) At this meeting, the following persons were elected to
FirstEnergy's Board of Directors:
Number of Votes
--------------------------
For Withheld
----------- ---------
Robert B. Heisler, Jr. 194,165,180 5,303,288
Robert L. Loughhead 193,760,753 5,707,715
Robert C. Savage 194,133,442 5,335,026
(c) At this meeting, the appointment of Arthur Andersen LLP,
independent public accountants, as auditors for the year
2001 was ratified (ratification required a majority of
votes cast):
Number of Votes
--------------------------------------
For Against Abstentions
----------- --------- -----------
192,802,744 4,261,589 2,404,135
(d) At this meeting, amendments to the Executive and Director
Incentive Compensation Plan were approved (passage required
a majority of votes cast).
Number of Votes
---------------------------------------
For Against Abstentions
----------- ---------- -----------
175,833,127 18,848,530 4,786,811
(e) At this meeting, a shareholder proposal designed to result
in the election of the entire Board of Directors each year
was rejected (passage required 80% of the 223,981,580
common shares outstanding):
Number of Votes
----------------------------------------------------
Broker
For Against Abstentions Non-Votes
---------- ---------- ----------- ----------
89,338,665 79,482,529 10,940,118 19,707,156
(f) At this meeting, a shareholder proposal to reinstate
simple-majority vote on all issues that are submitted to
shareholder vote was rejected (passage required 80% of the
223,981,580 common shares outstanding):
Number of Votes
----------------------------------------------------
Broker
For Against Abstentions Non-Votes
---------- ---------- ----------- ----------
96,982,388 75,484,976 7,293,948 19,707,156
(g) At this meeting, a shareholder proposal to establish a
performance-based senior executive compensation system that
focuses the five most highly paid members of management on
advancing the long-term success of the Company and to
specify certain disclosures related to such a system in the
annual report to shareholders was rejected (passage
required a majority of the votes cast):
Number of Votes
----------------------------------------------------
Broker
For Against Abstentions Non-Votes
---------- ----------- ----------- ----------
31,698,702 138,164,771 9,897,839 19,707,156
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
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.
May 15,August 10, 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