FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998March 31, 1999
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 34-0150020
ILLUMINATING COMPANY 34-0150020
(An Ohio Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-3583 THE TOLEDO EDISON COMPANY 34-4375005
(An Ohio Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-3491 PENNSYLVANIA POWER COMPANY 25-0718810
(A Pennsylvania Corporation)
1 East Washington Street
P. O. Box 891
New Castle, Pennsylvania 16103
Telephone (412)652-5531
Indicate by check mark whether each of the registrants (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
--- ---____ ____
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date:
OUTSTANDING
CLASS AS OF NOVEMBERMAY 13, 19981999
----- -----------------------------------------
FirstEnergy Corp., $.10 par value 237,069,087234,653,887
Ohio Edison Company, $9 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 market prices, legislative and
regulatory changes (including revised environmental requirements),
availability and cost of capital and other similar factors.
TABLE OF CONTENTS
Pages
Part I. Financial Information
Notes to Consolidated Financial Statements 1-41-3
FirstEnergy Corp.
Consolidated Statements of Income 54
Consolidated Balance Sheets 6-75-6
Consolidated Statements of Cash Flows 87
Report of Independent Public Accountants 98
Management's Discussion and Analysis of Results
of Operations and Financial Condition 10-149-11
Ohio Edison Company
Consolidated Statements of Income 1512
Consolidated Balance Sheets 16-1713-14
Consolidated Statements of Cash Flows 1815
Report of Independent Public Accountants 1916
Management's Discussion and Analysis of Results
of Operations and Financial Condition 20-2317-19
The Cleveland Electric Illuminating Company
Consolidated Statements of Income 2420
Consolidated Balance Sheets 25-2621-22
Consolidated Statements of Cash Flows 2723
Report of Independent Public Accountants 2824
Management's Discussion and Analysis of Results
of Operations and Financial Condition 29-3225-26
The Toledo Edison Company
Consolidated Statements of Income 3327
Consolidated Balance Sheets 34-3528-29
Consolidated Statements of Cash Flows 3630
Report of Independent Public Accountants 3731
Management's Discussion and Analysis of Results
of Operations and Financial Condition 38-4132-33
Pennsylvania Power Company
Consolidated Statements of Income 4234
Consolidated Balance Sheets 43-4435-36
Consolidated Statements of Cash Flows 4537
Report of Independent Public Accountants 4638
Management's Discussion and Analysis of Results
of Operations and Financial Condition 47-4939-40
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 AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1 - CONSOLIDATED FINANCIAL STATEMENTS:
The principal business of FirstEnergy Corp. (FirstEnergy) became a holding company
on November 8, 1997, in connection with the merger of Ohio Edison
Company (OE) and Centerior Energy Corporation (Centerior).
FirstEnergy's principal business is
the holding, directly or indirectly, of all of the outstanding common
stock of its four principal electric utility operating subsidiaries,
OE,Ohio Edison Company (OE), The Cleveland Electric Illuminating Company
(CEI), The Toledo Edison Company (TE) and Pennsylvania Power Company
(Penn). These utility subsidiaries are referred to throughout as
"Companies." Penn is a wholly owned subsidiary of OE.
Prior to the merger in November
1997, CEI and TE were the principal operating subsidiaries of
Centerior. The merger was accounted for using the purchase method
of accounting in accordance with generally accepted accounting
principles, and the applicable effects were reflected on CEI's and
TE's financial statements as of the merger date. Accordingly, the
post-merger financial statements reflect a new basis of
accounting, and pre-merger period and post-merger period financial
results of CEI and TE (separated by a heavy black line) are
presented.
The condensed consolidated 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, 19971998
for FirstEnergy and the Companies. The reported results of operations
are not indicative of results of operations for any future period.
Certain prior year amounts have been reclassified to conform with the
current year presentation.
Penn's consolidated financial statements include Penn and its
wholly owned subsidiary, Penn Power Energy, Inc. The subsidiary was
formed to market energy products and services coincident with the
commencement of electricity generation customer choice and competition
in Pennsylvania in January 1999. All significant intercompany
transactions have been eliminated.
The sole assets of the subsidiary trust that is the obligor on
the preferred securities included in FirstEnergy's and OE's
capitalization are $123,711,350 principal amount of 9% Junior
Subordinated Debentures of OE due December 31, 2025.
2 - COMMITMENTS, GUARANTEES AND CONTINGENCIES:
CAPITAL EXPENDITURES-
FirstEnergy's current forecast reflects expenditures of
approximately $1.2$2.2 billion (OE-(FirstEnergy-$510263 million, OE-$856 million,
CEI-$430701 million, TE-
$200$257 million and Penn-$90167 million) for property
additions and improvements related to its regulated businesses from 1998-2002,1999-2003, of which approximately $282$522
million (OE-(FirstEnergy-$133172 million, OE-$140 million, CEI-$89124 million,
TE-$4348 million and Penn-$1738 million) is applicable to 1998.1999. Investments
for additional nuclear fuel during the 1998-20021999-2003 period are estimated to
be approximately $518$404 million (OE-$169140 million, CEI-$172133 million, TE-$140
$103 million and Penn-$3728 million), of which approximately $85$51 million
(OE-$2421 million, CEI-$3217 million, TE-$2710 million and Penn-$23 million)
applies to 1998.
FirstEnergy also expects to invest approximately $300 million
during 1998-2002 relating to various nonregulated business
ventures.1999.
GUARANTEES-
The Companies and Duquesne Light Company (Duquesne) have each
severally guaranteed certain debt and lease obligations in connection
with a coal supply contract for the Bruce Mansfield Plant. As of September 30, 1998,March
31, 1999, the Companies' share of the guarantees was $43.2$23.5 million (OE-$24.8
$13.6 million, CEI-$9.35.0 million, TE-$5.52.9 million and Penn-$3.62.0
million). The price under the coal supply contract, which includes
certain minimum payments, has
- 1 -
been determined to be sufficient to
satisfy the debt and lease obligations.
ENVIRONMENTAL MATTERS-
Various federal, state and local authorities regulate the
Companies with regard to air and water quality and other environmental
matters. The Companies estimate additional capital expenditures for
environmental compliance of approximately $50$449 million (OE-$25213
million, CEI-$12145 million, TE-$1144 million and Penn-
$2$47 million), which
is included in the construction forecast for
their regulated businesses provided under "Capital
Expenditures" for 19981999 through 2002.2003.
The Companies are in compliance with the current sulfur
dioxide (SO2) and nitrogen oxides (NOx) reduction requirements under
the Clean Air Act Amendments of 1990. SO2 reductions through
the year 1999 will beare being achieved
by burning lower-sulfur fuel, generating more electricity from lower-emittinglower-
emitting plants, and/or purchasing emission allowances. Plans for complying withNOx reductions
required for the year 2000are being achieved through combustion controls and thereafter have not been
finalized.generating more
electricity from lower-emitting plants. In September 1998, the
Environmental Protection Agency (EPA) finalized regulations requiring
additional NOx reductions from the Companies' Ohio and Pennsylvania
facilities by May 2003. The EPA`s NOx Transport Rule imposes uniform
reductions of NOx emissions across a region of twenty-two states and
the District of Columbia, including Ohio and Pennsylvania, based on a
conclusion that such NOx emissions are contributing significantly to
ozone pollution in the eastern United States. By September 1999, each
of the twenty-two states are required to submit revised State
Implementation Plans (SIP) which comply with individual state NOx
budgets established by the EPA. These state NOx budgets contemplate an
85% reduction in utility plant NOx emissions from 1990 emissions. A
proposed Federal Implementation Plan accompanied the NOx Transport Rule
and may be implemented by the EPA in states which fail to revise their
SIP. In another separate but related action, eight states filed
petitions with the EPA under Section 126 of the Clean Air Act seeking
reductions of NOx emissions which are alleged to contribute to ozone
pollution in the eight petitioning states. The EPA suggests that the
Section 126 petitions will be adequately addressed by the NOx Transport
Program, but a September 1998 proposedan April 30, 1999 rulemaking established an alternative
program which would require nearly identical 85% NOx reductions at the
Companies' Ohio and Pennsylvania plants by May 2003 in the event
implementation of the NOx Transport Rule is delayed. The Companies
continue to evaluate their compliance plans and other compliance
options and currently estimate the additional capital expenditures for
NOx reductions may reach $500 million.
The Companies are required to meet federally approved SO2
regulations. Violations of such regulations can result in shutdown of
the generating unit involved and/or civil or criminal penalties of up
to $25,000 for each day the unit is in violation. The EPA has an
interim enforcement policy for SO2 regulations in Ohio that allows for
compliance based on a 30-day averaging period. The Companies cannot
predict what action the EPA may take in the future with respect to the
interim enforcement policy.
In July 1997, the EPA promulgated changes in the National
Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS
for previously unregulated ultra-fine particulate matter. The cost of
compliance with these regulations may be substantial and depends on the
manner in which they are implemented by the states in which the
Companies operate affected facilities. OE,Implementation in Ohio and
Pennsylvania has not yet occurred.
CEI and TE have been named as "potentially responsible
parties" (PRPs) at waste disposal sites which may require cleanup under
the Comprehensive Environmental Response, Compensation and Liability
Act of 1980. Allegations that the
Companies disposedof 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 a liabilityliabilities of $4.8$4.6 million and $1.0 million,
respectively, as of September 30, 1998,March 31, 1999, based on estimates of the costs of
cleanup and the proportionate responsibility of other PRPs for such
costs. OE, CEI and TE believe that waste disposal costs will not have a
material adverse effect on their financial condition, cash flows or
results of operations.
Legislative, administrative and judicial actions will
continue to change the way that the Companies must operate in order to
comply with environmental laws and regulations. With respect to any
such changes and to the environmental matters described above, the
Companies expect that while they remain regulated, any resulting
additional capital costs which may be required, as well as any
- 2 -
required
increase in operating costs, would ultimately be recovered from their
customers.
PENDING EXCHANGE OF ASSETS-
As discussed under "Item 5. Other Events" in the
combined Current Report on Form 8-K dated October 15, 1998,On March 26, 1999, FirstEnergy announced that it has signed an agreement in principlecompleted its
agreements with Duquesne Light Company (Duquesne) that would result in theto exchange certain generating assets. Upon
receipt of regulatory approvals, Duquesne will transfer of 1,436 megawatts
owned by Duquesne at eight Central Area Power Coordination Group (CAPCO)
generating units in exchange for 1,2981,323 megawatts at three non-CAPCO
power plants owned by the Companies. A definitive agreement onThe agreements for the exchange of
assets, which will beis structured as a tax-free transactionlike-kind exchange for tax purposes,
will provide the Companies with exclusive ownership and operating control
of all CAPCO generating units. The three FirstEnergy plants to be
transferred will be included in Duquesne's upcoming auction of its
generating assets. The Companies will operate the plants until
the assets are transferred to the extent possible, is expected by the end of 1998.new owners. Duquesne will fund
decommissioning costs equal to its percentage interest in the three
nuclear generating units to be transferred. The asset transfer is expected tocould
take twelve to eighteen months to close.place later in 1999. Under the agreements, the existing CAPCO
arrangements will terminate upon transfer of the assets.
3 - REGULATORY ACCOUNTING:
In June 1998, the Pennsylvania Public Utility Commission
(PPUC) authorized a rate restructuring plan for Penn, which
essentially resulted in the deregulation of Penn's generation
business. Accordingly, Penn discontinued the application of
Statement of Financial Accounting Standards (SFAS) No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS
71), for its generation business as of June 30, 1998. In
accordance with SFAS 101, "Regulated Enterprises - Accounting for
the Discontinuation of Application of SFAS 71," Penn was required
to remove from its balance sheet all regulatory assets and
liabilities related to its generation business for which SFAS 71
was discontinued and assess all other assets for impairment.
The Securities and Exchange Commission (SEC) recently
issued interpretive guidance regarding asset impairment
measurement when a regulated enterprise such as an electric
utility discontinues SFAS 71 for separable portions of its
operations and assets. That guidance concludes that any
supplemental regulated cash flows such as a competitive transition
charge (CTC) should be excluded from the cash flows of assets in a
portion of the business not subject to regulatory accounting
practices. If such assets are impaired, a regulatory asset should
be established if such costs are recoverable through regulatory
cash flows. Consistent with the SEC guidance, Penn reduced its
nuclear generating unit investments by approximately $305 million,
of which approximately $227 million was recognized as a regulatory
asset to be recovered through a CTC over a seven-year transition
period. The charge of $51.7 million ($30.5 million after income
taxes) for discontinuing the application of SFAS 71 to Penn's
generation business was recorded as an extraordinary item on
FirstEnergy's and OE's respective Consolidated Statements of
Income and Penn's Statements of Income.
Based on the current regulatory environment and the Companies'
respective regulatory plans, the Companies believe they will continue to
be able to bill and collect cost-based rates relating to all of OE's
operations, CEI's and TE's nonnuclear operations, and Penn's
nongeneration operations; accordingly, it is appropriate that the
Companies continue the application of SFASStatement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation," to those respective operations. However, changes in the
regulatory environment are on the horizon in Ohio. The Companies believe
that changes in Ohio regulation are possible in 1999 but cannot assess
what the ultimate impact may be.
4 - PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME:
The following pro forma statements of incomeSEGMENT INFORMATION:
FirstEnergy's primary segment is its Electric Utility Group
which includes four regulated electric utility operating companies that
provide electric service in Ohio and Pennsylvania. Its other material
business segment is the FirstEnergy Trading Services, Inc. subsidiary
(formerly known as FirstEnergy Trading & Power Marketing, Inc.) which
markets and trades electricity in nonregulated markets. Financial data
for FirstEnergy, CEIthese business segments and TE for the three monthsproducts and nine months
ended September 30, 1997, give effect to the OE-Centerior mergerservices are as if it had been consummated on January 1, 1997, with the
purchase accounting adjustments actually recognized in the
business combination.
- 3 -
follows:
Segment Financial Information
- ------------------------------
FE CEI TE
-- --- --FirstEnergy
Electric Trading All Reconciling
Three Months Ended: Utilities Services Other Eliminations Totals
- ------------------ --------- ----------- ----- ------------ ------
(In millions, except per share amounts)millions)
March 31, 1999
- --------------
Three Months Ended September
External revenues $ 1,272 $ 11 $ 134 $ -- $ 1,417
Intersegment revenues 8 -- 23 (31) --
Total revenues 1,280 11 157 (31) 1,417
Depreciation and amortization 186 -- 4 -- 190
Net interest charges 142 -- 16 (12) 146
Income taxes 96 (1) (2) -- 93
Net income/Earnings on common stock 143 (1) (4) (1) 137
Total assets 17,558 86 1,830 (1,286) 18,188
Property additions 52 -- 30 1997
-------------------------------------
Operating Revenues $1,350-- 82
Acquisitions -- -- 9 -- 9
March 31, 1998
- --------------
External revenues $ 499 $241
Operating Expenses1,235 $116 $ 16 $ -- $ 1,367
Intersegment revenues 8 -- 21 (29) --
Total revenues 1,243 116 37 (29) 1,367
Depreciation and Taxes 1,022 365 188
------ ------ ----
Operatingamortization 193 -- 1 -- 194
Net interest charges 141 -- 16 (13) 144
Income 328 134 53
Other Income 21 10taxes 84 -- (1) -- 83
Net income/Earnings on common stock 126 (1) -- (1) 124
Total assets 18,252 38 1,316 (1,373) 18,233
Property additions 58 -- 6 Net Interest Charges 170 68 26
------ ------ ----
Net Income $ 179 $ 76 $ 33
====== ====== ====
Earnings per Share of Common Stock $ .81
======
Nine Months Ended September 30, 1997
------------------------------------
Operating Revenues $3,760 $1,359 $680
Operating Expenses and Taxes 2,942 1,063 552
------ ------ ----
Operating Income 818 296 128
Other Income 47 8 9
Net Interest Charges 478 177 69
------ ------ ----
Net Income $ 387 $ 127 $ 68
====== ====== ====
Earnings per Share of Common Stock $ 1.74
======
Pro forma adjustments reflected above include: (1) adjusting CEI and TE nuclear generating
units to fair value based upon independent appraisals and estimated discounted future cash flows
based on management's current view of cost recovery; (2) the effect of discontinuing SFAS 71 for
CEI's and TE's nuclear operations; (3) amortization of the fair value adjustment for long-term debt;
(4) goodwill recognized representing the excess of CEI's and TE's portion of the purchase price over
the respective company's adjusted net assets; (5) the elimination of merger costs; and (6)
adjustments for estimated tax effects of the above adjustments.-- 64
Acquisitions -- -- -- -- --
- 4 -
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,
------------------- ----------------------March 31,
---------------------------
1999 1998 1997 1998 1997
---------- --------
---------- ----------
(In thousands, except per share amounts)
OPERATING REVENUES $1,416,741 $652,660 $3,893,795 $1,850,684
OPERATING EXPENSES AND TAXES:REVENUES:
Electric sales $1,214,551 $1,180,589
Other - electric utilities 63,669 60,706
Facilities services 104,568 9,529
Electric trading and power marketing 11,477 115,818
Other 23,145 437
---------- ----------
Total revenues 1,417,410 1,367,079
---------- ----------
EXPENSES:
Fuel and purchased power 291,228 111,724 833,412 321,514
Nuclear operating costs 124,508 66,990 365,858 202,833204,357 214,865
Other operating costs 225,809 101,937 664,171 297,006
---------- -------- ---------- ----------
Total operationexpenses:
Electric utilities 365,911 343,676
Facilities services 101,353 9,996
Electric trading and maintenance expenses 641,545 280,651 1,863,441 821,353power marketing 12,804 117,426
Other 29,330 314
Provision for depreciation and amortization 162,478 106,402 496,375 292,975
Amortization of net regulatory assets 28,702 11,288 73,079 26,129189,838 194,127
General taxes 138,471 58,986 409,953 175,959
Income taxes 125,080 54,277 263,863 140,909
---------- --------138,094 136,374
---------- ----------
Total operating expenses and taxes 1,096,276 511,604 3,106,711 1,457,325
---------- -------- ---------- ----------
OPERATING INCOME 320,465 141,056 787,084 393,359
OTHER INCOME (EXPENSE) (5,275) 12,035 9,961 39,605
---------- --------1,041,687 1,016,778
---------- ----------
INCOME BEFORE NET INTEREST CHARGES 315,190 153,091 797,045 432,964
---------- --------AND INCOME TAXES 375,723 350,301
---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 128,479 50,799 390,810 155,137expense 129,381 135,769
Allowance for borrowed funds used during construction
and capitalized interest (2,461) (1,056) (5,129) (1,817)
Other interest expense 6,513 7,669 17,308 23,342(2,685) (1,481)
Subsidiaries' preferred stock dividend requirements 19,568 6,981 47,359 20,943
---------- --------dividends 19,381 9,328
---------- ----------
Net interest charges 152,099 64,393 450,348 197,605
---------- --------146,077 143,616
---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 163,091 88,698 346,697 235,359
EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 3) - - (30,522) -
---------- --------TAXES 92,925 83,033
---------- ----------
NET INCOME $ 163,091136,721 $ 88,698 $ 316,175 $ 235,359
========== ========123,652
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 229,482 144,586 225,292 144,466
========== ========229,140 222,407
========== ==========
BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK:
Income before extraordinary itemSTOCK $ .71.60 $ .61 $ 1.54 $ 1.63
Extraordinary item (Net of income taxes) (Note 3) - - (.14) -
----- ----- ------ ------
Net income $ .71 $ .61 $ 1.40 $ 1.63
===== =====.56
====== ======
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $.375 $.375 $1.125 $1.125
===== =====$ .375 $ .375
====== ======
The preceding Notes to Consolidated Financial Statements as they relate to FirstEnergy Corp. are an
integral part of these statements.
- 5 -
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
1999 1998
1997
------------------------- ------------
(In thousands)
ASSETS
------
UTILITY PLANT:CURRENT ASSETS:
Cash and cash equivalents $ 45,612 $ 77,798
Receivables-
Customers (less accumulated provisions of $6,547,000 and
$6,397,000, respectively, for uncollectible accounts) 253,302 239,183
Other (less accumulated provisions of $46,532,000 and
$46,251,000, respectively, for uncollectible accounts) 329,430 322,186
Materials and supplies, at average cost-
Owned 141,916 145,926
Under consignment 118,132 110,109
Prepayments and other 196,857 171,931
---------- ----------
1,085,249 1,067,133
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
In service $14,528,550 $15,008,44815,018,231 14,961,664
Less--Accumulated provision for depreciation 5,738,191 5,635,9006,119,331 6,012,761
----------- -----------
8,790,359 9,372,548
----------- -----------8,898,900 8,948,903
Construction work in progress-
Electric plant 254,835 165,837
Nuclear fuel 32,358 34,825progress 320,734 293,671
----------- -----------
287,193 200,6629,219,634 9,242,574
----------- -----------
9,077,552 9,573,210
----------- -----------
OTHER PROPERTY AND
INVESTMENTS:
Capital trust investments 1,331,843 1,370,1771,287,192 1,329,010
Nuclear plant decommissioning trusts 323,252 301,173369,837 358,371
Letter of credit collateralization 277,763 277,763
Other 634,662 357,989481,951 453,860
----------- -----------
2,567,520 2,307,102
----------- -----------
CURRENT ASSETS:
Cash and cash equivalents 117,671 98,237
Receivables-
Customers (less accumulated provisions of
$6,273,000 and $5,618,000, respectively,
for uncollectible accounts) 266,487 284,162
Other (less accumulated provisions of $49,204,000
and $4,026,000,respectively, for
uncollectible accounts) 407,389 219,106
Materials and supplies, at average cost-
Owned 125,840 154,961
Under consignment 104,811 82,839
Prepayments and other 152,705 163,686
----------- -----------
1,174,903 1,002,9912,416,743 2,419,004
----------- -----------
DEFERRED CHARGES:
Regulatory assets 2,736,580 2,624,1442,817,738 2,887,437
Goodwill 2,194,940 2,107,7952,163,946 2,167,968
Property taxes 270,888 270,585271,642 270,666
Other 200,668 194,968213,411 199,400
----------- -----------
5,403,076 5,197,4925,466,737 5,525,471
----------- -----------
$18,223,051 $18,080,795$18,188,363 $18,254,182
=========== ===========
- 6 -
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
1999 1998
1997
------------------------- ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock $ 841,513 $ 876,470
Short-term borrowings 265,734 254,470
Accounts payable 270,993 257,524
Accrued taxes 396,100 401,688
Accrued interest 145,479 141,575
Other 213,998 251,262
----------- -----------
2,133,817 2,182,989
----------- -----------
CAPITALIZATION:
Common stockholders' equity-
Common stock, $.10 par value, authorized 300,000,000
shares - 237,069,087235,531,187 and 230,207,141237,069,087 shares outstanding,
respectively $23,553 23,707 $ 23,021
Other paid-in capital 3,843,946 3,636,9083,803,485 3,846,513
Accumulated comprehensive income (439) (439)
Retained earnings 709,804 646,646768,993 718,409
Unallocated employee stock ownership plan common stock -
7,533,1647,311,471 and 7,829,5387,406,332 shares, respectively (141,413) (146,977)
---------- ----------(135,994) (139,032)
----------- -----------
Total common stockholders' equity 4,436,044 4,159,5984,459,598 4,449,158
Preferred stock of consolidated subsidiaries-
Not subject to mandatory redemption 660,195 660,195
Subject to mandatory redemption 193,460 214,864174,710 174,710
OE obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely OE subordinated debentures 120,000 120,000
Long-term debt 6,606,324 6,969,8356,335,289 6,352,359
----------- -----------
12,016,023 12,124,492
----------- -----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 602,926 470,436
Short-term borrowings 348,450 302,229
Accounts payable 262,197 312,690
Accrued taxes 460,008 381,937
Accrued interest 148,336 147,694
Other 258,186 193,850
----------- -----------
2,080,103 1,808,83611,749,792 11,756,422
----------- -----------
DEFERRED CREDITS:
Accumulated deferred income taxes 2,265,548 2,304,3052,276,861 2,282,864
Accumulated deferred investment tax credits 291,044 324,200282,710 286,154
Pensions and other postretirement benefits 518,588 492,425529,985 525,647
Other 1,051,745 1,026,5371,215,198 1,220,106
----------- -----------
4,126,925 4,147,4674,304,754 4,314,771
----------- -----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ----------- -----------
$18,223,051 $18,080,795$18,188,363 $18,254,182
=========== ===========
The preceding Notes to Consolidated Financial Statements as they relate to FirstEnergy Corp. are an
integral part of these balance sheets.
- 7 -
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,
------------------- ----------------------March 31,
--------------------
1999 1998
1997 1998 1997
---------- -------- ---------- ------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 163,091 $ 88,698 $ 316,175 $ 235,359$136,721 $123,652
Adjustments to reconcile net income to net cash from
operating activities-
Provision for depreciation and amortization 162,478 106,402 496,375 292,975189,838 194,127
Nuclear fuel and lease amortization 21,974 12,040 62,606 40,68226,595 24,313
Other amortization, net 28,214 10,996 62,637 25,225(465) (272)
Deferred income taxes, net 8,395 (14,796) (6,856) (31,492)(6,435) 5,224
Investment tax credits, net (5,841) (4,058) (17,180) (11,222)
Extraordinary item - - 51,730 -(3,444) (5,771)
Receivables (192,236) (3,405) (103,750) 20,559(18,370) 40,065
Materials and supplies 21,275 (135) 11,478 (9,696)(5,006) (9,994)
Accounts payable (97,985) (9,219) (133,134) (3,907)
Accrued liabilities 171,765 25,702 82,871 75,73112,158 (47,906)
Other (15,648) 20,132 (25,212) (28,763)
---------(118,962) (69,926)
-------- --------- --------
Net cash provided from operating activities 265,482 232,357 797,740 605,451
---------212,630 253,512
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Common stock - - 203,855 -
Long-term debt 10,151 9,694 272,556 80,217
Ohio Schools Council Prepayment Program - - 116,598 -12,277 148,119
Short-term borrowings, net 145,612 - 37,169 -11,264 --
Redemptions and Repayments-
PreferredCommon stock 6,000 5,000 21,379 5,00044,499 --
Long-term debt 209,963 121,163 559,874 337,70680,802 159,981
Short-term borrowings, net - 10,303 - 53,806-- 20,844
Common stock dividend payments 86,040 53,109 253,017 163,069
---------86,137 83,391
-------- --------- --------
Net cash used for financing activities 146,240 179,881 204,092 479,364
---------187,897 116,097
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 76,614 52,147 447,838 115,72490,705 64,104
Bay Shore investment -- 145,505
Cash investments (205) - 111,405 -(41,268) (33,961)
Other (3,873) 2,374 14,971 7,172
---------7,482 11,159
-------- --------- -----------------
Net cash used for investing activities 72,536 54,521 574,214 122,896
---------56,919 186,807
-------- --------- -----------------
Net increase (decrease)decrease in cash and cash equivalents 46,706 (2,045) 19,434 3,19132,186 49,392
Cash and cash equivalents at beginning of period 70,965 10,48977,798 98,237
5,253
--------- -------- --------- --------
Cash and cash equivalents at end of period $ 117,67145,612 $ 8,444 $ 117,671 $ 8,444
=========48,845
======== ========= ========
The preceding Notes to Consolidated Financial Statements as they relate to FirstEnergy Corp. are an
integral part of these statements.
- 8 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FirstEnergy Corp.:
We have reviewed the accompanying consolidated balance sheet of
FirstEnergy Corp. (an Ohio corporation) and subsidiaries as of September 30, 1998,March 31,
1999, and the related consolidated statements of income and cash flows
for the three-month and nine-month periods ended September 30, 1998March 31, 1999 and 1997.1998. These
financial statements are the responsibility of the company'sCompany's management.
We conducted our reviewreviews 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 generally accepted auditing
standards, 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 review,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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of FirstEnergy Corp.
and subsidiaries as of December 31, 19971998 (not presented herein), and, in
our report dated February 13, 1998,12, 1999, 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, 1997,1998, is
fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
November 13, 1998
- 9 -
May 14, 1999
FIRSTENERGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The Company, as a producer and trader of electricity and
natural gas, has certain financial risks inherent in its business
activities. With respect to its trading operations, the Company uses
principally over-the-counter and commodity exchange contracts for the
purchase and sale of electricity.electricity and natural gas. These contracts may
expose the Company to commodity price fluctuations. Market risk
represents the risk of loss that may impact financial position, results
of operations or cash flow due to either changes in the commodity market
prices for electricity and natural gas or the failure of contract
counterparties to perform. Various policies and procedures have been
established to manage market risk exposure based on measures of historical market
volatility.risk. However, electricity isand natural gas
are subject to unpredictable price fluctuations due to changing economic
and weather conditions and supply constraints, which arise from time to
time in
availability of supply. Financial results in the third quarter
and year-to-date periods of 1998 were adversely affected by a
combination of these factors as described below.time.
Results of Operations
Basic and diluted earnings per share of common stock
decreasedincreased to $1.40$.60 per share for the nine-month period ended September 30,
1998, compared to $1.63first quarter of 1999 from $.56 per
share for the same period last year. ForResults benefited from higher
retail revenues, lower fuel and purchased power costs, and reduced
interest expense.
Revenues increased $50.3 million in the thirdfirst quarter of
1998, net income increased to $.71 per
share, compared to $.61 per share for the third quarter of 1997.
Financial results reflect several factors including the merger of
OE and Centerior, which was effective November 8, 1997. The
former Centerior companies, which include CEI and TE, have been
included in the third quarter and year-to-date 1998 results. The
1997 third quarter and nine-month results are for OE and Penn
only (OE companies). Also, 1998 nine-month results include an
extraordinary charge of $30.5 million after taxes, or $.14 per
common share, resulting from Penn's discontinued application of
SFAS 71 to its generation business (see Note 3). Sharp increases
in the spot market price for electricity occasioned by
constrained power supply conditions and heavy customer demand in
the latter part of June 1998, combined with unscheduled outages
at certain FirstEnergy generating units, resulted in spot market
purchases of power at prices which substantially exceeded amounts
recovered from retail customers. The recovery shortfall reduced
year-to-date net income by approximately $50 million or $.22 per
common share. Finally, unprecedented market prices for
electricity in June 1998 contributed to credit losses totaling
$28 million after taxes or $.12 per common share. Four power
marketers with which the Company's FirstEnergy Trading and Power
Marketing Corp. subsidiary had transactions under contract
defaulted as a result of June's price movements.
Operating revenues increased $2.043 billion during the
nine-month period ending September 30, 1998,1999, compared to the same period of 1997,1998, as a result of higher
revenue contributions from the Electric Utility Operating Companies
(EUOC) business segment and increased $764 millionthe acquisition of facilities services and
natural gas companies, offset by reduced revenue from the FirstEnergy
Trading Services, Inc. (FETS) business segment. The sources of the
increase in first quarter 1999 revenues are summarized in the third quarter
of 1998 compared to the third quarter of 1997. Excluding the
contribution of the former Centerior companies, operating
revenues were 6.7% higher during the quarter and 3.4% higherfollowing
table.
(In millions)
Electric sales $ 33.9
Other electric utility revenue 3.0
-------
EUOC 36.9
FETS (104.3)
Business acquisitions 117.7
-------
Net Revenue Increase $ 50.3
=======
The increase in the year-to-date period compared to the corresponding periods of
1997. For the OE companies, year-to-date retailEUOC revenue resulted from an increase in
kilowatt-hour sales, increased 1.7%, with a 4.1% increase in residential saleswhich was partially offset by reduced unit prices.
Residential, commercial and a 4.7% increase in commercial sales offset, in part, by a
2.1% decrease in industrial sales. Industrial sales for 1998 were
affected by the August 1997 closure of a major customer's
electric arc furnace in the Penn service area. Excluding sales to
that customer, industrial sales increased 0.1% and retail sales
were 2.6% higher. Sales to wholesale customers increased 7.8%
compared to the first nine months of 1997. This increaseall contributed to the
2.7% increase in total kilowatt-hour sales
during the period.
Retail kilowatt-hour sales in the thirdfirst quarter of 1998
for the OE companies increased 5.4% with residential and
commercial sales being 13.1% and 7.5% higher, respectively.
Residential sales benefited from higher air-conditioning loads
due to hotter weather and commercial sales benefited from
continued growth in the service sector of the area economy during
the period. Industrial sales decreased 2.0% during the third
quarter of 19981999 compared to
the same period of 1997; removing1998, with increases of 11.2%, 7.9% and 1.2%,
respectively. Residential sales in the impactfirst quarter of 1999 benefited
from lower temperatures, compared to the electric arc furnace closure,very mild first quarter of
1998. Adjusting for weather, residential sales were up 5.7%. Continued
service sector growth contributed to the commercial sales increase while
industrial sales were relatively flat. A general decline in electricityaffected by weak demand byfrom the primary metal
manufacturers and the General Motors strike also
dampened industrialsector. Despite a 6.0% increase in retail kilowatt-hour sales in the
thirdfirst quarter of 1998. Sales to
- 10 -
FIRSTENERGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
wholesale customers increased 7.8% in the third quarter compared
to the same period last year, contributing to the increase in
total kilowatt-hour sales of 5.8%.
All operation and maintenance expense categories
increased substantially for the first nine months of 1998,1999, compared to the same period of last year,1998, total
kilowatt-hour sales increased by a more modest 1.6% due principallyto a decrease in
sales to the inclusionwholesale market. The decrease in FETS revenue resulted
from limiting trading activities and focusing on support of
FirstEnergy's retail marketing activities. Acquisition of nine
facilities services companies and MARBEL Energy Corporation (MARBEL) in
the former Centerior companies. Excludingtwelve months ending March 31, 1999, contributed significantly to
the 1998
costs of the former Centerior companies, operation and
maintenanceincreased revenues.
Total expenses increased $116.6$26.4 million forin the first nine
monthsquarter
of 19981999, compared to the same quarter of 1998. More available
generation from EUOC sources in the first quarter of 1999, compared to
the first nine monthsquarter of 1997. Most1998, reduced EUOC purchased power costs. A higher
level of available nuclear capacity in 1999 resulted in lower fuel
costs, despite the increaseadditional generation to support increased kilowatt-
hour sales. Other expenses for the OE companiesEUOCs increased in 1999 due in part
to customer service and sales costs - similar costs in 1998 were
recognized later in that year. Reduced FETS activity resulted from purchased power
expenses which were up $82.1 millionin
significant cost reductions in that business segment. The increases in
facilities services and other costs in the first nine monthsquarter of 19981999 from
the same period in 1997. Mostquarter of the increase occurred
in the second quarter1998 reflect expenses of businesses acquired
subsequent to March 31, 1998. Depreciation and resulted from a combination of
factors. In late June 1998, the midwestern and southern regions
of the United States experienced electricity shortages caused
mainly by record temperatures and humidity and unscheduled
generating unit outages. During that period, the Beaver Valley
Plant was out of service and the Davis-Besse Plant was removed
from service as a result of damage to transmission facilities
caused by a tornado. Also, Avon Lake Unit 9 experienced an
unscheduled outage during the period due to lightning-related
transformer damage. As a result, the Companies purchased
significant amounts of power on the spot market at unusually high
prices (as discussed above), causing an increase in purchased
power costs. Temperatures continued above last year's levels
throughout the third quarter as well and the Beaver Valley Plant
remained out of service for most of that period.
Nuclear operating costs were higheramortization in the
first nine
monthsquarter of 1998 than1999 decreased from the same period last year for the OE
Companies due to higher costs at the Beaver Valley Plant, which
were offset in part by lower costs at the Perry Plant. Reduced
emission allowance sales in the year-to-date 1998 period and
higher third quarter and year-to-date 1998 costs at the Sammis
Plant compared to the corresponding periods of 1997 contributed
to the increase in other operation and maintenance expenses.
Inclusion of the former Centerior companies also
increased other operating expenses. Excluding those companies'
1998 costs, the provision for depreciation and amortization
decreased $13.4 million in the third quarter of 1998 from the
same period in 1997primarily
due primarily to the net effect of the OE and Penn rate plans. The rate restructuring plan authorizedplans, which were
partially offset by the
PPUC for Penn in the second quarter caused the reduction inadditional depreciation expense in the third quarter due to the reduction of
nuclear generating unit investment resultingand amortization from
the
discontinued application of SFAS 71. Penn's rate restructuring
plan also resulted in a reclassification of accelerated Perry
Plant depreciation in the third quarter to amortization of net
regulatory assets, further reducing reported depreciation
expense. The reclassification of depreciation resulted in a
corresponding increase in the amortization of net regulatory
assets in bothcompanies acquired since the first nine months of 1998 and in the third
quarter of 1998 compared to the same periods of 1997. Also
contributing to the increase in year-to-date 1998 amortization
was the absence in 1998 of certain regulatory credits which were
fully amortized by the end of the second quarter of 1997.
Other income (expense) for the year-to-date period
ending September 30, 1998 reflects the $28 million after-tax
reserve for credit losses discussed above. Also included in the
third quarter of 1998 were after tax losses of $26 million
resulting from purchases of energy to replace scheduled third
quarter deliveries from a power marketer which defaulted on its
power contracts to FirstEnergy Trading1998.
Capital Resources and Power Marketing Corp.
due to the unprecedented June 1998 price fluctuations.
Interest expenses increased due to the inclusion of the
former Centerior companies for both the nine-month period ended
September 30, 1998 and the third quarter of 1998, from the
corresponding periods in 1997. Excluding the impact of the
merger, interest on long-term debt for the OE companies decreased
due to redemptions of long-term debt totaling $273.8 million
since October 1997. Other interest expense increased as a result
of increased short-term borrowing levels in 1998.
- 11 -
FIRSTENERGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
from General Public Utilities 87 megawatts of capacity at the
Seneca Pumped-Storage Hydroelectric Plant. The added
hydroelectric plant capacity will enhance the Company's ability
to meet demand during peak periods.
Regulatory Matters
On September 16, 1998, the Company, together with
representatives of the three other Ohio investor-owned utilities,
presented proposed legislation for restructuring the electric
utility industry in Ohio to a private working group formed by the
leadership of the Ohio General Assembly. The working group, which
includes numerous interested parties, will consider the utility
proposal -- a proposal that represents a balanced approach for
bringing choice to Ohio's electric consumers -- as well as other
restructuring proposals. Passage of a restructuring bill appears
unlikely in 1998.
On September 24, 1998, the Federal Environmental
Protection Agency issued a final rule establishing tighter
nitrogen oxide emission ceilings for Ohio, Pennsylvania and 20
other Eastern states and the District of Columbia (see
"Environmental Matters" in Note 2). Controls must be in place by
May 2003, with required reductions achieved during the five-month
summer ozone season (May through September). The new rule is
expected to increase the cost of producing electricity; however,
the Company believes that it is in a better position than a
number of other utilities in achieving compliance due to its
nuclear and hydroelectric generation capability.
In connection with the regulatory plans for its utility
operating companies to reduce fixed costs and lower rates, the
Company continued to take steps to restructure its operations for
improved efficiency and effectiveness in the changing electric
utility industry.Liquidity
The Company announced plans to transferand its transmission assets into a new subsidiary, American Transmission
Systems, Inc. (ATS), withsubsidiaries have continuing cash
requirements for planned capital expenditures and debt maturities.
During the transferlast three quarters of 1999, capital requirements for
property additions and capital leases are expected to be finalized
by earlyabout $456
million, including $9 million for nuclear fuel. The Companies have
additional cash requirements of approximately $653.1 million to meet
sinking fund requirements for preferred stock and maturing long-term
debt during the remainder of 1999. The new subsidiary represents a first step toward
the Company's goal of establishing These cash requirements are expected
to be satisfied with internal cash and/or becoming part of a larger
independent transmission company (TransCo). FirstEnergy believes
that a TransCo better addresses the Federal Energy Regulatory
Commission's (FERC) stated transmission objectives of providing
non-discriminatory service, while providing for streamlined and
cost-efficient operation. In working toward the goal of forming a
larger regional transmission entity, the Company, American
Electric Power and Virginia Power announced on November 6, 1998,
that they would prepare a FERC filing duringshort-term credit
arrangements.
During the first quarter of 1999, the Company initiated its
previously announced common stock repurchase program by buying almost
1.5 million shares at an average price of slightly less than $29 per
share.
As of March 31, 1999, the Company and its subsidiaries had
about $45.6 million of cash and temporary investments and $265.7
million of short-term indebtedness. Unused borrowing capability
included $174.0 million under revolving lines of credit and a $2.0
million bank facility that provides for suchborrowings on a regional transmission entity.short-term
basis at the bank's discretion.
On January 19, 1999, the Company completed the purchase of
Webb Technologies, Inc., an HVAC contractor headquartered in Norfolk,
Virginia. The entity would be
designednew acquisition adds approximately $14 million in annual
revenue and 90 employees to meetFirstEnergy Facilities Services Group,
Inc., a wholly owned subsidiary of the goalsCompany. On March 31, 1999, the
Company also completed its purchase of reducing transmission costsAtlas Gas Marketing Inc. of
Pittsburgh, Pennsylvania, which will become part of FETS. The Company
has entered into an agreement with Atlas Gas Marketing's former parent,
Atlas America, to buy and market their natural gas production.
The Company completed its agreements with Duquesne on March
25, 1999, to exchange certain generating assets. Upon receipt of
regulatory approvals, Duquesne will transfer 1,436 megawatts (MW) that
result when transferring power over several transmission systems,
ensuring transmission reliability and providing non-
discriminatory accessit owns at eight generating units to the transmission grid.
ImpactCompany in exchange for 1,323
MW at three power plants owned by the Company's EUOCs.
Following an appeal by Penn of the 1998 restructuring order
from the Pennsylvania Public Utility Commission (PPUC) to the
Commonwealth Court, a settlement was reached in April 1999 with parties
to Penn's original restructuring proceeding. Among the provisions of the
settlement was a one year extension of the period for which all
customers may select among alternative generation suppliers.
In the continuing move toward enactment of legislation
deregulating Ohio's investor-owned electric utility industry,
substitute bills (HB 5 & SB 3) were introduced at a joint meeting of
the House Public Utilities and the Senate Ways and Means committees on
March 26, 1999. The bills, sponsored by House Republican Priscilla Mead
and Senate Republican Bruce Johnson, will be considered by the two
committees individually. Hearings in the Senate and House began on
April 13 and 14, 1999, respectively. As many as two hearings a week
will be held with the objective of delivering legislation to the
Governor by the beginning of June. The Company is unable to predict the
ultimate outcome of this process or the level of recovery of regulatory
assets and nuclear generating unit investment for OE, CEI and TE.
Unfavorable resolution could result in a charge to earnings which could
have a material adverse effect on the Company's results of operations
and financial condition.
Year 2000 IssueReadiness
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to identify the applicable
year. Any of the Company's programs that have date-
sensitivedate-sensitive software
may recognize a date using "00" as the year 1900 rather than the year
2000. Because so many of the Company's computer functions are date
sensitive, this could cause far-reaching problems, such as system-wide
computer failures and miscalculations, if no remedial action is taken.
The Company has developed a multi-phase program for Year 2000
compliance that consists of: (i)of an assessment of the
corporateits systems and operations of the Company
that could be affected by the Year 2000 problem; (ii) remediation or
replacement of noncompliant systems and components; and (iii) testing of
systems and components following such remediation or replacement. The
Company has focused its Year 2000 review on three areas: centralized
system applications, noncentralized systems and relationships with
third parties (including suppliers as well as end-use customers). The
Company's review of system readiness extends to systems involving
customer service, safety, shareholder needs and regulatory obligations.
The Company currently believes that with modificationsis committed to existing software and conversionstaking appropriate actions to
new software,eliminate or lessen negative effects of the Year 2000 issue will pose no significant operational problems foron its
operations. The Company has completed an inventory of all computer
systems.systems and hardware including equipment with embedded computer chips
and has determined which systems need to be converted or replaced to
become Year 2000-ready and is in the process of remediating them. Based
on its timetable, the Company expects to have all identified repairs,
replacements and upgrades completed by June 30, 1999 to enable it to be
ready to serve its customers into the Year 2000.
Most of the Company's Year 2000 problemsissues will be resolved
through system replacement. Of the Company's major - 13 -
FIRSTENERGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
centralized systems,
the general ledger system and inventory management, procurement and procurement
accounts payable system will besystems were replaced byat the end of 1998. The
Company's payroll system was enhanced to be Year 2000 compliant in July
1998; all employees will behave been converted to the new system by January 1999.system. The customer
service system is due to be replaced in mid-1999.
The Company has categorized its noncentralized systems
into sixteen separate areas, and has already determined that five
of such areas pose no material Year 2000 problem. The Company has
identified certain Year 2000 issues in nine areas and is in the
process of remediating them. The Company has plans to complete
the assessment of the final two areas by the end of 1998. The
Company plans to complete the entire Year 2000 project by
September 1999. If the already identified modifications and
conversions are not made or are not completed on a timely basis,
or if the Company identifies material additional modifications
which are not completed on a timely basis, the Year 2000 issue
would have a material adverse impact on operations.
The Company has initiated formal communications with manymost of
its majorkey suppliers to determine the extent to which it is vulnerable to
those third parties' failure to resolve their own Year 2000 problems.
For suppliers having potential compliance problems, the Company is
developing alternate sources and is stillservices in the assessment phase as to
whether and to what extentevent such
third parties have a Year 2000
issue.noncompliance occurs. The Company is also identifying areas requiring
higher inventory levels based on compliance uncertainties. There can be
no guarantee that the failure of other
companies to resolve their own Year
2000 issueissues will not have a material adverse effect on the Company's
business, financial condition and results of operations.operations, although it
does not consider this likely to occur.
The Company is utilizingusing both internal and external resources to
reprogram and/or replace and test the Company'sits software for Year 2000
modifications. Of the $111$93 million total project cost, approximately $90$70
million will be capitalized since those costs are attributable to the
purchase of new software for total system replacements (i.e.,because the Year
2000 solution comprises only a portion of the benefits resulting from
the system replacements).replacements. The remaining $21$23 million will be expensed as
incurred. As of September 30, 1998,March 31, 1999, the Company had expended a
total of $43spent $60 million for
Year 2000 capital projects and had expensed approximately $6$13 million
for Year 2000 related2000-related maintenance activities. The Company's total Year
2000 project cost, as well as its estimates of the time needed to
complete remedial efforts, are based on currently available information
and do not include the estimated costs and time associated with the
impact of third party Year 2000 issues.
The Company believes it is managing the Year 2000 issue in
such a way that its customers will not experience any interruption of
service. The Company believes the most reasonably likely worst
caseworst-case scenario from
the Year 2000 issue towill be disruption in power plant monitoring
systems, thereby producing inaccurate data and potential failures in
electronic switching mechanisms at transmission junctions. This would
prolong localized outages, as technicians would have to manually
activate switches. Such an event could have a material, but presentlycurrently
undeterminable, effect on the Company'sits financial results. The Company has not yet
developed ais
developing contingency planplans to address the effects of any delay in
becoming Year 2000 compliant but currentlyand expects to have a
contingency planplans
completed by the spring ofJune 30, 1999.
The costs of the project and the dates on which the Company
plans to complete the Year 2000 modifications are based on management's
best estimates, which were derived from numerous assumptions of future
events including the continued availability of certain resources, and
other factors. However, there can be no guarantee that this project will
be completed as planned and actual results could differ materially from
the estimates. Specific factors that might cause material differences
include but are not limited to, the availability and cost of trained
personnel, the ability to locate and correct all relevant computer code,
and similar uncertainties.
- 14 -
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,
------------------- ----------------------March 31,
------------------------
1999 1998
1997 1998 1997
---------- -------- ---------- -------------------
(In thousands)
OPERATING REVENUES $696,226 $652,660 $1,912,689 $1,850,684$633,118 $597,865
-------- -------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 146,194 111,724 413,242 321,514112,022 113,915
Nuclear operating costs 69,336 66,990 210,324 202,83372,436 71,866
Other operating costs 114,156 101,937 314,341 297,006100,283 92,173
-------- -------- ---------- ----------
Total operation and maintenance expenses 329,686 280,651 937,907 821,353284,741 277,954
Provision for depreciation 93,005 106,402 289,524 292,975
Amortization of net regulatory assets 17,849 11,288 40,424 26,129and amortization 103,404 111,196
General taxes 59,714 58,986 178,208 175,95962,260 59,525
Income taxes 55,288 54,277 121,161 140,90947,763 38,057
-------- -------- ---------- ----------
Total operating expenses and taxes 555,542 511,604 1,567,224 1,457,325498,168 486,732
-------- --------
---------- ----------
OPERATING INCOME 140,684 141,056 345,465 393,359134,950 111,133
OTHER INCOME 12,589 12,035 36,857 39,6059,318 12,502
-------- -------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 153,273 153,091 382,322 432,964144,268 123,635
-------- -------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 47,258 50,799 140,255 155,13745,083 46,668
Allowance for borrowed funds used during construction
and capitalized interest (363) (1,056) (1,492) (1,817)(1,097) (660)
Other interest expense 7,811 7,669 26,696 23,3428,619 9,494
Subsidiaries' preferred stock dividend requirements 3,857 3,857
11,570 11,570
-------- -------- ---------- ----------
Net interest charges 58,563 61,269 177,029 188,23256,462 59,359
-------- --------
---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 94,710 91,822 205,293 244,732
EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 3) - - (30,522) -
-------- -------- ---------- ----------
NET INCOME 94,710 91,822 174,771 244,73287,806 64,276
PREFERRED STOCK DIVIDEND REQUIREMENTS 3,020 3,124 9,057 9,3732,913 3,019
-------- -------- ---------- ----------
EARNINGS ON COMMON STOCK $ 91,69084,893 $ 88,698 $ 165,714 $ 235,35961,257
======== ======== ========== ==========
The preceding Notes to Consolidated Financial Statements as they relate to Ohio Edison Company are an
integral part of these statements.
- 15 -
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
1999 1998
1997
------------- ------------------------- ------------
(In thousands)
ASSETS
------
UTILITY PLANT:
In service at original cost $8,159,009 $8,666,272$8,190,241 $8,158,763
Less--Accumulated provision for depreciation 3,542,085 3,546,5943,670,416 3,610,155
---------- ----------
4,616,924 5,119,6784,519,825 4,548,608
---------- ----------
Construction work in progress-
Electric plant 125,512 99,158174,742 174,418
Nuclear fuel 14,129 21,36038,028 17,003
---------- ----------
139,641 120,518212,770 191,421
---------- ----------
4,756,565 5,240,1964,732,595 4,740,029
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
PNBV Capital Trust 477,986 482,220474,537 475,087
Nuclear plant decommissioning trusts 114,496 109,883136,641 130,572
Letter of credit collateralization 277,763 277,763
Other 314,740 419,525430,152 407,839
---------- ----------
1,184,985 1,289,3911,319,093 1,291,261
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 43,338 4,68014,539 33,213
Receivables-
Customers (less accumulated provisions of $6,273,000$6,547,000
and $5,618,000,$6,397,000, respectively, for uncollectible
accounts) 240,035 235,332216,211 215,257
Associated companies 407,922 25,348255,064 229,854
Other 54,347 87,56656,890 47,684
Materials and supplies, at average cost-
Owned 67,245 75,58069,619 76,756
Under consignment 45,133 47,89054,736 48,341
Prepayments and other 74,995 78,34895,772 78,618
---------- ----------
933,015 554,744762,831 729,723
---------- ----------
DEFERRED CHARGES:
Regulatory assets 1,753,528 1,601,7091,856,615 1,913,808
Property taxes 101,119 100,043101,360 101,360
Unamortized sale and leaseback costs 91,348 95,09688,848 90,098
Other 55,646 96,27659,137 57,547
---------- ----------
2,001,641 1,893,1242,105,960 2,162,813
---------- ----------
$8,876,206 $8,977,455$8,920,479 $8,923,826
========== ==========
- 16 -
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
1999 1998
1997
------------------------ ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, $9 par value, authorized 175,000,000
shares - 100 shares outstanding $ 1 $ 1
Other paid-in capital 2,098,114 2,102,6442,098,728 2,098,728
Retained earnings 533,398 621,674586,443 583,144
---------- ----------
Total common stockholder's equity 2,631,513 2,724,3192,685,172 2,681,873
Preferred stock-
Not subject to mandatory redemption 160,965 160,965
Subject to mandatory redemption 10,000 15,00010,000
Preferred stock of consolidated subsidiary-
Not subject to mandatory redemption 50,905 50,905
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 2,405,875 2,569,8022,220,693 2,215,042
---------- ----------
5,394,258 5,655,9915,262,735 5,253,785
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 276,337 278,492482,879 528,792
Short-term borrowings-
Associated companies 45,385 -94,403 88,732
Other 260,800 302,229259,006 249,451
Accounts payable-
Associated companies 212,470 1,75134,645 10,176
Other 84,139 114,08577,432 89,483
Accrued taxes 206,478 157,095210,747 188,295
Accrued interest 46,573 53,16542,833 45,221
Other 158,088 115,256106,303 114,162
---------- ----------
1,290,270 1,022,0731,308,248 1,314,312
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 1,602,443 1,698,3541,583,614 1,601,887
Accumulated deferred investment tax credits 157,483 184,804
Postretirement152,561 154,538
Pensions and other postretirement benefits 173,136 158,038139,759 136,856
Other 258,616 258,195473,562 462,448
---------- ----------
2,191,678 2,299,3912,349,496 2,355,729
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$8,876,206 $8,977,455$8,920,479 $8,923,826
========== ==========
The preceding Notes to Consolidated Financial Statements as they relate to Ohio Edison Company are an
integral part of these balance sheets.
- 17 -
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,
--------------------- ---------------------March 31,
---------------------------
1999 1998 1997 1998 1997
--------- ----------
---------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 94,71087,806 $ 91,822 $ 174,771 $244,73264,276
Adjustments to reconcile net income to net cash from
operating activities-
Provision for depreciation 93,005 106,402 289,524 292,975and amortization 103,404 111,196
Nuclear fuel and lease amortization 8,244 12,040 21,590 40,682
Other amortization, net 17,954 10,996 39,992 25,22510,677 6,783
Deferred income taxes, net (14,837) (14,796) (66,363) (31,492)(12,010) (12,979)
Investment tax credits, net (3,897) (4,058) (11,345) (11,222)
Extraordinary item - - 51,730 -(1,977) (3,826)
Receivables (166,506) (3,405) (208,382) 20,559(35,370) 31,868
Materials and supplies 6,512 (135) 11,092 (9,696)742 (175)
Accounts payable 76,043 (9,219) 185,633 (3,907)12,418 17,175
Other 60,844 46,527 106,967 47,565
---------(6,531) 49,632
-------- ---------- --------
Net cash provided from operating activities 172,072 236,174 595,209 615,421
---------159,159 263,950
-------- ---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 10,039 9,694 117,499 80,2179,935 2,638
Short-term borrowings, net - - 3,956 -15,226 99,156
Redemptions and Repayments-
Preferred stock 5,000 5,000 5,000 5,000
Long-term debt 4,522 121,163 286,157 337,706
Short-term borrowings, net 79,581 10,303 - 53,80650,682 139,861
Dividend Payments-
Common stock 44,597 53,109 254,379 163,06981,738 169,898
Preferred stock 3,093 3,817 8,952 9,970
---------2,769 3,025
-------- ---------- --------
Net cash used for financing activities 126,754 183,698 433,033 489,334
---------110,028 210,990
-------- ---------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 36,793 52,147 125,163 115,72454,038 41,016
Other (1,767) 2,374 (1,645) 7,172
---------13,767 4,969
-------- --------- --------
Net cash used for investing activities 35,026 54,521 123,518 122,896
---------67,805 45,985
-------- --------- --------
Net increase (decrease) in cash and cash equivalents 10,292 (2,045) 38,658 3,191(18,674) 6,975
Cash and cash equivalents at beginning of period 33,046 10,48933,213 4,680
5,253
--------- -------- --------- --------
Cash and cash equivalents at end of period $ 43,33814,539 $ 8,444 $ 43,338 $ 8,444
=========11,655
======== ========= ========
The preceding Notes to Consolidated Financial Statements as they relate to Ohio Edison Company are an
integral part of these statements.
- 18 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ohio Edison Company:
We have reviewed the accompanying consolidated balance sheet of Ohio
Edison Company (an Ohio corporation and wholly owned subsidiary of
FirstEnergy Corp.) and subsidiaries as of September
30, 1998,March 31, 1999, and the
related consolidated statements of income and cash flows for the three-month and nine-monththree-
month periods ended September 30, 1998March 31, 1999 and 1997.1998. These financial statements
are the responsibility of the company'sCompany's management.
We conducted our reviewreviews 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 generally accepted auditing
standards, 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 review,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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Ohio Edison
Company and subsidiaries as of December 31, 19971998 (not presented herein),
and, in our report dated February 13, 1998,12, 1999, 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, 1997,1998, is
fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
November 13, 1998
- 19 -
May 14, 1999
OHIO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Earnings were adversely affectedOperating revenues increased $35.3 million in the nine-month
period ended September 30,first
quarter of 1999 from the first quarter of 1998 due to an increase in
retail kilowatt-hour sales. Residential and commercial customers
contributed to the higher kilowatt-hour sales with increases of 10.8%
and 9.5%, respectively. Industrial sales decreased 2.2% between the two
periods. Residential sales in the first quarter of 1999 benefited from
lower temperatures, compared to mild weather conditions in the first
quarter of 1998. Continued service sector growth contributed to the
commercial sales increase while industrial sales were affected by
weaker demand from the primary metal sector. Overall, retail kilowatt-
hour sales increased by 5.3% in the first quarter of 1999, compared to
the same period of 1997 by an extraordinary item resulting from deregulation of
Penn's generation business and the corresponding discontinuation
of SFAS 71 with respect to that business. This action was taken
following the June 18, 1998 authorization by the PPUC of a
restructuring plan for Penn (see below and Note 3). Excluding the
extraordinary item, earnings on common stock were $196.2 million
in the first nine months of 1998 compared to $235.4 million in
the same period last year; for the third quarter of 1998,
earnings on common stock were $91.7 million compared to $88.7
million in the third quarter of 1997. Earnings were also
adversely affected in the nine-month period by increased
purchased power costs in 1998 occasioned by unprecedented market
prices for electricity and unscheduled generating unit outages.
This increase in purchased power costs more than offset an
increase in operating revenues.
Operating revenues increased $62.0 million during the
first nine months of 1998, compared to the same period of 1997,
and increased $43.6 million in the third quarter of 1998 compared
to the third quarter of 1997. Year-to-date retailwhile total kilowatt-hour sales increased 1.7%, with a
4.1%more substantial 6.1% due to a 10.3% increase in residential sales
and a 4.7% increase in commercial sales offset, in part, by a
2.1% decrease in industrial sales. Industrial sales for 1998 were
affected by the August 1997 closure of a major customer's
electric arc furnace in the Penn service area. Excludingkilowatt-hour sales to
that customer, industrial sales increased 0.1% and retail sales
were 2.6% higher. Sales tothe wholesale customers increased 7.8%
compared to the first nine months of 1997. This increase
contributed to the 2.7% increase in total kilowatt-hour sales
during the period.
Retail kilowatt-hour sales in the third quarter of 1998
increased 5.4% with residential and commercial sales being 13.1%
and 7.5% higher, respectively. Residential sales benefited from
higher air-conditioning loads due to hotter weather and
commercial sales benefited from continued growth in the service
sector of the area economy during the period. Industrial sales
decreased 2.0% during the third quarter of 1998 compared to the
same period of 1997; removing the impact of the electric arc
furnace closure, industrial sales were relatively flat. A general
decline in energy use by primary metal manufacturers and the
General Motors strike also dampened industrial sales in the third
quarter of 1998. Sales to wholesale customers increased 7.8% in
the third quarter compared to the same period last year,
contributing to the increase in total kilowatt-hour sales of
5.8%.market.
Operation and maintenance expenses increased $116.6$6.8 million
forin the first nine monthsquarter of 19981999 compared to the first nine months of 1997. Most ofquarter the previous
year. The increase resulted from purchased
power expenses which were up $82.1 million in the first nine
months of 1998 from the same period in 1997. Most of the increase
occurred in the second quarter and resulted from a combination of
factors. In late June 1998, the midwestern and southern regions
of the United States experienced electricity shortages caused
mainly by record temperatures and humidity and unscheduled
generating unit outages. Due in part to unscheduled outages at
the Beaver Valley Plant, the OE companies' production
capabilities were reduced to the point that they purchased
significant amounts of power during this period. Temperatures
continued above last year's levels in the third quarter of 1998
as well and the Beaver Valley Plant remained out of service for
most of that period. As a result, OE purchased significant
amounts of power at unusually high spot market prices, causing
the increase in purchased power costs.
Nuclearhigher other operating costs, were higher in the first nine
months of 1998 than the same period last year due to higher costs
at the Beaver Valley Plant which
were offset in part by lower costs at the Perry Plant. Reduced emission allowance salesfuel and purchased power expenses. More
available internal generation in the year-to-date 1998 period and higher thirdfirst quarter and year-to-
- 20 -
OHIO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
date 1998of 1999 lowered
purchased power expenses. Other operating costs at the Sammis Plant compared to the corresponding
periods of 1997 contributed to the increase in other operation
and maintenance expenses.
The provision for depreciation and amortization
decreased $13.4 millionincreased in the thirdfirst
quarter of 19981999 from the same period the prior year due to an increase
in 1997customer service and sales costs. Factors contributing to the
increase included expenditures for energy efficiency programs,
marketing program expenditures, unregulated business management costs,
and similar costs in 1998 being recognized later in that year.
Depreciation and amortization in the first quarter of 1999
decreased from the same period of 1998 primarily due primarily to the net effect
of the OE and Penn rate plans. TheTotal accelerated depreciation and
amortization of nuclear and regulatory assets under the OE rate restructuring plan
authorized by the
PPUC for Pennwas $43.0 million in the secondfirst quarter causedof 1999, down from $49.6 million
the reduction in
depreciation expense in the third quarterprevious year. Increased gross receipts taxes due to higher retail
operating revenues, and increased property taxes were the reduction of
nuclear generating unit investment resulting from the
discontinued application of SFAS 71. Penn's rate restructuring
plan also resulted in a reclassification of accelerated Perry
Plant depreciation in the third quarter to amortization of net
regulatory assets, further reducing reported depreciation
expense. The reclassification of depreciation resulted in a
corresponding increase in the amortization of net regulatory
assets in both the first nine months of 1998 and in the third
quarter of 1998 compared to the same periods of 1997. Alsoprimary
factors contributing to the increase in year-to-date 1998 amortization
wasgeneral taxes in the absencefirst
quarter of 1999, compared to the same period in 1998 of certain regulatory credits which were
fully amortized by the end of the second quarter 1997.
Interest on long-term debt decreased due toprior year.
Net redemptions of long-term debt totaling $273.8 million since October 1997.
Otherreduced interest expense increased as a resultin
the first quarter of increased short-
term borrowing levels in1999, compared to same period of 1998.
Capital Resources and Liquidity
The OE companiesand Penn (OE companies) have continuing cash requirements
for planned capital expenditures and debt maturities. During the fourth quarterlast
three quarters of 1998,1999, capital requirements for property additions and
capital leases are expected to be about $57$148 million, including $13$3
million for nuclear fuel. The OE companies have additional cash
requirements of approximately $2.7$369.2 million to meet sinking fund
requirements for preferred stock and maturing long-term debt during the
remainder of 1998.1999. These cash requirements are expected to be satisfied
with internal cash and/or short-term credit arrangements.
As of September 30, 1998,March 31, 1999, the OE companies had about $43.3$14.5
million of cash and temporary investments and $306.2$353.4 million of short-termshort-
term indebtedness. In addition, the OE companies' unused borrowing
capability included $100$74.0 million under revolving lines of credit and $22a
$2.0 million of bank facilitiesfacility that provideprovided for borrowings on a short-term
basis at the banks'bank's discretion. Under its first mortgage indenture, as
of March 31, 1999, OE would have been permitted to issue up to $1.2
billion of additional first mortgage bonds on the basis of bondable
property additions and retired bonds.
FirstEnergy signed an agreement in principlecompleted its agreements with Duquesne Light Companyon March
25, 1999, to exchange certain generating assets. Upon receipt of
regulatory approvals, Duquesne will transfer 886 MW that would result in the transfer of 1,436
megawatts owned by Duquesneit owns at
five generating plantsunits to the OE companies in exchange for 1,298 megawatts at three plants owned by FirstEnergy's
electric utility operating companies (see "Pending Exchange of
Assets" in Note 2), including the OE
companies. A final agreement
oncompanies' 584 MW at the exchangeNiles and New Castle Plants.
Following an appeal by Penn of assets, which will be structured as a tax-free
transactionthe 1998 restructuring order
from the PPUC to the extent possible, is expectedCommonwealth Court, a settlement was reached in
April 1999 with parties to be reached byPenn's original restructuring proceeding.
Among the endprovisions of the year. The transaction benefits the Companies by
providing them with exclusive ownership and operating control of
all the generating assets that are now jointly owned and operated
under the Central Area Power Coordination Group agreement.
Regulatory Matters
On September 16, 1998, FirstEnergy, together with
representativessettlement was a one year extension of the
three other Ohioperiod for which all customers may select alternative generation
suppliers.
In the continuing move toward enactment of legislation
deregulating Ohio's investor-owned utilities,
presented proposed legislation for restructuring the electric utility industry,
in Ohio tosubstitute bills (HB 5 & SB 3) were introduced at a private working group formedjoint meeting of
the House Public Utilities and the Senate Ways and Means committees on
March 26, 1999. The bills, sponsored by House Republican Priscilla Mead
and Senate Republican Bruce Johnson, will be considered by the leadershiptwo
committees individually. Hearings in the Senate and House began on
April 13 and 14, 1999, respectively. As many as two hearings a week
will be held with the objective of delivering legislation to the
Ohio General Assembly. The working group, which
includes numerous interested parties, will considerGovernor by the utility
proposal -- a proposal that represents a balanced approach for
bringing choicebeginning of June. OE is unable to Ohio's electric consumers -- as well as other
restructuring proposals. Passagepredict the ultimate
outcome of a restructuring bill appears
unlikely in 1998.
- 21 -
OHIO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
On September 24, 1998,this process or the Federal Environmental
Protection Agency issued a final rule establishing tighter
nitrogen oxide emission ceilings for Ohio, Pennsylvanialevel of recovery of regulatory assets
and 20
other Eastern states and the District of Columbia (see
"Environmental Matters" in Note 2). Controls must be in place by
May 2003, with required reductions achieved during the five-month
summer ozone season (May through September). The new rule is
expected to increase the cost of producing electricity; however,
the OE companies believe that they arenuclear generating unit investment. Unfavorable resolution could
result in a better position thancharge to earnings which could have a numbermaterial adverse
effect on OE's results of other utilities in achieving compliance due to their
nuclear generation capability.
In connection with the regulatory plans for its utility
operating companies to reduce fixed costsoperations and lower rates,
FirstEnergy continued to take steps to restructure its operations
for improved efficiency and effectiveness in the changing
electric utility industry. FirstEnergy announced plans to
transfer its transmission assets (including the OE companies'
assets) into a new subsidiary, American Transmission Systems,
Inc. (ATS), with the transfer expected to be finalized by early
1999. The new subsidiary represents a first step toward
FirstEnergy's goal of establishing or becoming part of a larger
independent transmission company (TransCo). FirstEnergy believes
that a TransCo better addresses the Federal Energy Regulatory
Commission's (FERC) stated transmission objectives of providing
non-discriminatory service, while providing for streamlined and
cost-efficient operation. In working toward the goal of forming a
larger regional transmission entity, FirstEnergy, American
Electric Power and Virginia Power announced on November 6, 1998,
that they would prepare a FERC filing during the first quarter of
1999 for such a regional transmission entity. The entity would be
designed to meet the goals of reducing transmission costs that
result when transferring power over several transmission systems,
ensuring transmission reliability and providing non-
discriminatory access to the transmission grid.
Impact of thefinancial condition.
Year 2000 IssueReadiness
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to identify the applicable
year. Any of the OE companies' programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather than
the year 2000. Because so many of the OE companies' computer functions
are date sensitive, this could cause far-reaching problems, such as
system-wide computer failures and miscalculations, if no remedial
action is taken.
The OE companies have developed a multi-phase program for
Year 2000 compliance that consists of: (i)of an assessment of the
corporatetheir systems
and operations of the OE companies that could be affected by the Year 2000 problem;
(ii) remediation or replacement of non-compliantnoncompliant systems and components; and (iii)
testing of systems and components following such remediation or
replacement. The OE companies have focused their Year 2000 review on
three areas: centralized system applications, non-centralizednoncentralized systems
and relationships with third parties (including suppliers as well as
end-use customers). The OE companies' review of system readiness
extends to systems involving customer service, safety, shareholder
needs and regulatory obligations.
The OE companies currently believe that with
modificationsare committed to existing software and conversionstaking appropriate actions
to new
software,eliminate or lessen negative effects of the Year 2000 issue will pose no significant
operational problems foron their
operations. The OE companies have completed an inventory of all
computer systems.systems and hardware including equipment with embedded
computer chips and has determined which systems need to be converted or
replaced to become Year 2000-ready and is in the process of remediating
them. Based on their timetable, the OE companies expect to have all
identified repairs, replacements and upgrades completed by June 30,
1999 to enable them to be ready to serve their customers into the Year
2000.
Most of the OE companies' Year 2000 problemsissues will be resolved
through system replacement. Of the OE companies' major centralized
systems, the general ledger system and inventory management,
procurement and procurement accounts payable system will besystems were replaced byat the end of
1998. The OE companies' payroll system was enhanced to be Year 2000
compliant in July 1998.1998; all employees have been converted to the new
system. The customer service system is due to be replaced in mid-1999.
The OE companies have categorized their non-centralized
systems into sixteen separate areas, and have already determined
that five of such areas pose no material Year 2000 problem. The
OE companies have identified certain Year 2000 issues in nine of
such areas and are in the process of remediating them. The OE
companies have plans to complete the assessment of the final two
areas by the end of 1998. The OE companies plan to complete the
entire Year 2000 project by September 1999. If the already
identified modifications and conversions are not made or are not
completed on a timely basis, or if the OE companies identify
- 22 -
OHIO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
material additional modifications which are not completed on a
timely basis, the Year 2000 issue would have a material adverse
impact on operations.
The OE companies have initiated formal communications with
manymost of their majorkey suppliers to determine the extent to which they are
vulnerable to those third parties' failure to resolve their own Year
2000 problems. For suppliers having potential compliance problems, the
OE companies are developing alternate sources and are stillservices in the assessment phase as to whether and to what extentevent
such third
parties have a Year 2000 issue.noncompliance occurs. The OE companies are also identifying areas
requiring higher inventory levels based on compliance uncertainties.
There can be no guarantee that the failure of other companies to resolve
their own Year 2000 issueissues will not have a material adverse effect on
the OE companies' business, financial condition and results of
operations.operations, although it does not consider this likely to occur.
The OE companies are utilizingusing both internal and external
resources to reprogram and/or replace and test the OE
companies'their software for Year
2000 modifications. Of the $53$46 million total project cost, approximately
$43$34 million will be capitalized since those costs are attributable to
the purchase of new software for total system replacements (i.e.,because the
Year 2000 solution comprises only a portion of the benefits resulting
from the system replacements).replacements. The remaining $10$12 million will be expensed
as incurred. As of September 30, 1998,March 31, 1999, the OE companies have expended a total of $20had spent $29
million for Year 2000 capital projects and havehad expensed approximately $3$7
million for Year 2000
related2000-related maintenance activities. The OE companies'
total Year 2000 project cost, as well as their estimates of the time
needed to complete remedial efforts, are based on currently available
information and do not include the estimated costs and time associated
with the impact of third party Year 2000 issues.
The OE companies believe they are managing the Year 2000
issue in such a way that their customers will not experience any
interruption of service. The OE companies believe the most reasonably likely
worst caseworst-case scenario from the Year 2000 issue towill be disruption in
power plant monitoring systems, thereby producing inaccurate data and
potential failures in electronic switching mechanisms at transmission
junctions. This would prolong localized outages, as technicians would
have to manually activate switches. Such an event could have a
material, but presentlycurrently undeterminable, effect on the OE companies'their financial
results. The OE companies have not
yet developed aare developing contingency planplans to address
the effects of any delay in becoming Year 2000 compliant but currentlyand expect to
have a contingency planplans completed by the spring ofJune 30, 1999.
The costs of the project and the dates on which the OE
companies plan to complete the Year 2000 modifications are based on
management's best estimates, which were derived from numerous
assumptions of future events including the continued availability of
certain resources, and other factors. However, there can be no guarantee
that this project will be completed as planned and actual results could
differ materially from the estimates. Specific factors that might cause
material differences include but are not limited to, the availability
and cost of trained personnel, the ability to locate and correct all
relevant computer code, and similar uncertainties.
- 23 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
September 30, 1998 September 30, 1997
----------------------- ---------------------
Three Nine Three Nine
Months Months Months Months Ended
Ended Ended Ended
---------- ----------- --------- ----------March 31,
-----------------------
1999 1998
-------- --------
(In thousands)
OPERATING REVENUES $512,616 $1,392,868 | $499,468 $1,359,341$418,839 $415,027
-------- ---------- | -------- ----------
OPERATING EXPENSES AND TAXES:
|
Fuel and purchased power 127,342 358,704 | 111,095 329,34791,030 91,715
Nuclear operating costs 19,836 55,335 | 23,617 65,02929,516 26,239
Other operating costs 82,272 249,774 | 77,407 251,00284,917 72,694
-------- ---------- | -------- ----------
Total operation and maintenance expenses 229,450 663,813 | 212,119 645,378205,463 190,648
Provision for depreciation and amortization 50,002 148,557 | 55,611 166,134
Amortization of net regulatory assets 6,567 19,701 | 6,567 19,70157,687 57,229
General taxes 55,356 163,730 | 56,864 170,82454,013 54,511
Income taxes 48,077 95,752 | 36,836 68,39020,155 21,943
-------- ---------- | -------- ----------
Total operating expenses and taxes 389,452 1,091,553 | 367,997 1,070,427337,318 324,331
-------- ---------- | -------- ----------
OPERATING INCOME 123,164 301,315 | 131,471 288,914
|81,521 90,696
OTHER INCOME (EXPENSE) 8,166 21,616 | 7,544 (1,341)6,457 7,593
-------- ---------- | -------- ----------
INCOME BEFORE NET INTEREST CHARGES 131,330 322,931 | 139,015 287,57387,978 98,289
-------- ---------- | -------- ----------
NET INTEREST CHARGES: |
Interest on long-term debt 57,072 177,883 | 66,901 174,45153,753 60,060
Allowance for borrowed funds used during |
construction (664) (1,620)| (729) (1,440)(216) (552)
Other interest expense (credit) (95) (2,821)| 5,101 12,620(479) (844)
-------- ---------- | -------- ----------
Net interest charges 56,313 173,442 | 71,273 185,63153,058 58,664
-------- ---------- | -------- ----------
NET INCOME 75,017 149,489 | 67,742 101,942
|34,920 39,625
PREFERRED STOCK DIVIDEND REQUIREMENTS 8,547 17,053 | 8,876 27,2878,541 1,068
-------- ---------- | -------- ----------
EARNINGS ON COMMON STOCK $ 66,47026,379 $ 132,436 | $ 58,866 $ 74,65538,557
======== ========== | ======== ==========
The preceding Notes to Consolidated Financial Statements as they relate to The Cleveland Electric
Illuminating Company are an integral part of these statements.
- 24 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
1999 1998
1997
------------------------ ------------
(In thousands)
ASSETS
------
ASSETS
------
UTILITY PLANT:
In service $4,626,360 $4,578,649$4,661,434 $4,648,725
Less--Accumulated provision for depreciation 1,589,311 1,470,0841,674,965 1,631,974
---------- ----------
3,037,049 3,108,5652,986,469 3,016,751
---------- ----------
Construction work in progress-
Electric plant 45,947 41,26138,357 42,428
Nuclear fuel 10,115 6,83327,672 14,864
---------- ----------
56,062 48,09466,029 57,292
---------- ----------
3,093,111 3,156,6593,052,498 3,074,043
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 517,263 543,161 575,084
Nuclear plant decommissioning trusts 114,265 105,334
Other. 18,223 21,482127,818 125,050
Other 22,664 21,059
---------- ----------
675,649 701,900667,745 689,270
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 27,776 33,77514,432 19,526
Receivables-
Customers 17,427 29,75923,182 16,588
Associated companies 9,945 8,69551,174 15,636
Other 241,175 98,077115,895 142,834
Notes receivable from associated companies 26,628 -59,077 53,509
Materials and supplies, at average cost-
Owned 29,483 47,48940,215 38,213
Under consignment 40,455 25,41143,531 43,620
Prepayments and other 52,068 57,76363,174 58,342
---------- ----------
444,957 300,969410,680 388,268
---------- ----------
DEFERRED CHARGES:
Regulatory assets 559,453 579,711548,778 555,925
Goodwill 1,511,635 1,552,4831,461,999 1,471,563
Property taxes 126,414 125,204126,464 126,464
Other 15,627 23,35815,783 12,650
---------- ----------
2,213,129 2,280,7562,153,024 2,166,602
---------- ----------
$6,426,846 $6,440,284$6,283,947 $6,318,183
========== ==========
- 25 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
1999 1998
1997
------------------------ ------------
(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 $ 931,312931,962 $ 931,614931,962
Retained earnings 101,251 19,29091,882 76,276
---------- ----------
Total common stockholder's equity 1,032,563 950,9041,023,844 1,008,238
Preferred stock-
Not subject to mandatory redemption 238,325 238,325
Subject to mandatory redemption 168,460 183,174149,710 149,710
Long-term debt 2,956,689 3,189,5902,880,207 2,888,202
---------- ----------
4,396,037 4,561,9934,292,086 4,284,475
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 181,476 121,965208,127 208,050
Accounts payable-
Associated companies 51,831 56,10979,037 47,680
Other 58,332 90,73748,205 67,929
Notes payable to associated companies 60,838 56,80268,773 80,618
Accrued taxes 238,418 194,394176,223 192,359
Accrued interest 70,078 67,89670,180 66,685
Other 43,068 52,29732,920 62,325
---------- ----------
704,041 640,200683,465 725,646
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 533,755 496,437527,881 524,285
Accumulated deferred investment tax credits 92,242 96,13189,959 90,946
Pensions and other postretirement benefits 204,152 198,642216,801 217,719
Other 496,619 446,881473,755 475,112
---------- ----------
1,326,768 1,238,0911,308,396 1,308,062
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$6,426,846 $6,440,284$6,283,947 $6,318,183
========== ==========
The preceding Notes to Consolidated Financial Statements as they relate to The Cleveland Electric
Illuminating Company are an integral part of these balance sheets.
- 26 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
September 30, 1998 September 30, 1997
---------------------- ---------------------
Three Nine Three Nine
Months Months Months Months Ended
Ended Ended Ended
---------- ---------- ----------March 31,
-----------------------
1999 1998
--------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 75,01734,920 $ 149,489 | $ 67,742 $101,94239,625
Adjustments to reconcile net income to net
|
cash from operating activities- |
Provision for depreciation and amortization 50,002 148,557 | 55,611 166,13457,687 57,229
Nuclear fuel and lease amortization 8,154 24,510 | 12,924 38,1109,306 10,229
Other amortization 5,974 9,691 | 6,567 19,701(465) --
Deferred income taxes, net 4,229 35,020 | 12,057 34,2543,740 11,736
Investment tax credits, net (987) (1,296)
(3,889)| (2,001) (6,003)
Allowance for equity funds used during |
construction - - | (465) (1,190)
Receivables (44,448) (132,016)| (8,096) 6,869(15,193) (10,331)
Materials and supplies 13,684 2,962 | 2,465 (1,675)(1,913) (4,348)
Accounts payable (69,068) (36,683)| (15,214) (26,535)
Accrued taxes 76,357 44,024 | 8,379 (14,060)11,633 (25,733)
Other 4,771 (31,535)| 42,415 27,285
--------- ---------- |(64,519) (31,151)
-------- --------
Net cash provided from operating activities 123,376 210,130 | 182,384 344,832
--------- ---------- |34,209 45,960
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
|
New Financing- |
Equity contributions from parent - - | 4,500 4,500
Long-term debt - 5,822 | 168,118 743,065
Short-term borrowings, net 30,528 4,036 | - -
Ohio Schools Council Prepayment Program - 116,598 | - --- 18,798
Redemptions and Repayments-
|
Preferred stock 1,000 14,714 | 1,000 29,714
Long-term debt 172,192 198,773 | 192,475 218,63617,668 11,552
Short-term borrowings, net - - | 37,651 8,61811,845 --
Dividend Payments-
|
Common stock 28,653 54,122 | 29,606 88,8167,163 --
Preferred stock 8,559 26,300 | 8,889 27,631
--------- --------- |8,541 8,871
-------- --------
Net cash provided from (used for)used for financing |
activities (179,876) (167,453)| (97,003) 374,150
--------- --------- |45,217 1,625
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
|
Property additions 16,327 43,741 | 31,733 86,70510,095 15,334
Loans to associated companies - 26,628 | - -
Loan payments from associated companies (110,272) - | - -5,568 77,000
Capital trust investments 35 (31,923)| (10,576) 558,813(25,898) (31,958)
Other 24,183 10,230 | (673) 16,714
--------- --------- | --------- ---------4,321 4,184
-------- --------
Net cash used for (provided from) |
investing activities (69,727) 48,676 | 20,484 662,232
--------- --------- | --------- ---------(5,914) 64,560
-------- --------
Net increase (decrease) in cash and cash equivalents 13,227 (5,999)| 64,897 56,750(5,094) (20,225)
Cash and cash equivalents at beginning of period 14,54919,526 33,775
| 22,126 30,273
--------- --------- | --------- ----------------- --------
Cash and cash equivalents at end of period $ 27,77614,432 $ 27,776 | $ 87,023 $ 87,023
========= ========= | ========= =========13,550
======== ========
The preceding Notes to Consolidated Financial Statements as they relate to The Cleveland Electric
Illuminating Company are an integral part of these statements.
- 27 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Cleveland Electric Illuminating Company:
We have reviewed the accompanying consolidated balance sheet of The
Cleveland Electric Illuminating Company (an Ohio corporation and wholly
owned subsidiary of FirstEnergy Corp.) and subsidiary as of September 30, 1998,March 31,
1999, and the related consolidated statements of income and cash flows
for the three-month and nine-month
periods ended September 30, 1998March 31, 1999 and 1997.1998. These
financial statements are the responsibility of the company'sCompany's management.
We conducted our reviewreviews 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 generally accepted auditing
standards, 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 review,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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of The Cleveland
Electric Illuminating Company and subsidiary as of December 31, 19971998
(not presented herein), and, in our report dated February 13, 1998,12, 1999, 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, 1997,1998, is fairly stated, in all material respects, in
relation to the balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
November 13, 1998
- 28 -
May 14, 1999
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Financial results reflect the application of purchase
accounting to the merger of CEI's former parent company,
Centerior, with OE to form FirstEnergy on November 8, 1997. The
application of this accounting resultedOperating revenues increased $3.8 million in fair value adjustments
which were "pushed down" or reflected on the separate financial
statements of Centerior's direct subsidiaries as of the merger
date, including CEI's financial statements. Accordingly, the
post-merger financial statements for the first
nine months and
thirdquarter of 1999 from the first quarter of 1998 and the December 31, 1997 Consolidated
Balance Sheet reflect a new basis of accounting. Material effects
of this new basis of accounting are identified below.
Earnings on common stock increaseddue to $132.4 million
for the nine-month period ended September 30, 1998, from $74.7
million in the same period last year. For the third quarter of
1998, earnings increased to $66.5 million, compared to $58.9
million in the third quarter of 1997. The increases reflect
increased operating revenues, benefits provided by the Bruce
Mansfield Plant lease refinancing and net reductions in the
provision for depreciation and amortization resulting from the
fair value adjustment of nuclear plant in connection with the
merger. The above factors were offset in part by an increase in
purchased power costs.
Operating revenuesretail kilowatt-hour sales. Residential and commercial customers
contributed to the higher kilowatt-hour sales with increases of 13.8%
and 1.9%, respectively. Industrial sales experienced a small, 0.4%
decline. Residential sales in the first quarter of 1999 benefited from
lower temperatures, compared to milder weather conditions in the first
quarter of 1998. Overall, retail kilowatt-hour sales increased $33.5 million duringby 4.1%
in the nine-month period ended September 30, 1998,first quarter of 1999, compared to the same period of 1997 and increased $13.1 million1998.
However, sales to the wholesale market in the thirdfirst quarter of 19981999
were down approximately 60% from the corresponding 1997 period. Operating revenues in
the year-to-datefirst quarter of 1998, period included $9.2 million received as a
termination charge for a canceled power supply contract. Year-to-
date retail kilowatt-hour sales increased 1.9% from the same
period of 1997, with residential, commercial and industrial
customers all contributing to the increase with increases of
2.4%, 1.9% and 1.6%, respectively. Sales to wholesale customers
decreased 50.6% compared to the first nine months of 1997 due in part
to unplanned generating unit outagesthe expiration of several wholesale contracts, which reduced available
energy for salecontributed to
other utilities. This resulted in a 4.9%
decrease in total kilowatt-hour sales during the nine-month
period compared to 1997.
Retail kilowatt-hour sales in the third quarter of 1998
increased 4.5% from the third quarter of 1997. Residential sales
benefited from higher air-conditioning loads due to hotter
weather in 1998, increasing 15.0%. The large increase in
residential sales was offset in part by a 1.0% decline in
commercial sales reflecting a softening in the service sector.
However, sales to industrial customers increased 3.0%. Sales to
wholesale customers decreased 48.1% in the third quarter of 1998
compared to the same period in 1997. Overall, reduced off-system
sales more than offset the increase in retail sales leading to a0.5% decline in total kilowatt-hour sales of 3.0% for the third
quarter of 1998 compared to the third quarter of 1997.
Fuelsales.
Operation and purchased powermaintenance expenses increased in both the
first nine months of 1998 and the third quarter of 1998 compared
to the same periods of 1997. The increases resulted from higher
purchased power costs, which were due to a combination of
factors. In late June 1998, the midwestern and southern regions
of the United States experienced electricity shortages caused
mainly by record temperatures and humidity and unscheduled
generating unit outages. During this period, Beaver Valley Unit 2
was out of service and the Davis-Besse Plant was removed from
service as a result of damage to transmission facilities caused
by a tornado. Also, Avon Lake Unit 9 experienced an unscheduled
outage during the period due to lightning-related transformer
damage. Temperatures continued above last year's levels
throughout the third quarter of 1998 as well and Beaver Valley
Unit 2 remained out of service for most of that period. As a
result, CEI purchased significant amounts of power on the spot
market at unusually high prices, causing the increase in
purchased power costs. On a net basis, nuclear operating costs
were lower for the year-to-date and third quarter periods of 1998
compared to 1997, offsetting part of the increase in fuel and
purchased power expense discussed above.
- 29 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
Lower depreciable asset balances resulting from the
purchase accounting adjustment reduced the provision for
depreciation$14.8 million in
the first nine months of 1998 compared to the
same period last year and for the third quarter of 1998 compared
to the third quarter of 1997. These reductions were partially
offset by the amortization of goodwill recognized with the
application of purchase accounting.
Interest income from investments related to the
refinancing of the Mansfield Plant lease increased other income
in the first nine months of 19981999, compared to the same period of 1997. Interest expense decreased $15 million1998.
Increased operating costs at the Beaver Valley Plant and costs related
to the Davis-Besse Plant outage scheduled for April 1999 contributed to
the increase in nuclear operating costs in the thirdfirst quarter of 1999,
compared to the first quarter of 1998. Other operating costs increased
primarily as a result of higher fossil generating unit operating costs,
and customer and sales expenses. A turbine-generator outage at the
Eastlake Plant, which began in the first quarter of 1999, was a major
factor contributing to the $5 million increase in fossil unit costs.
Customer and sales expenses reflect increased expenditures for energy
efficiency programs and similar costs in 1998 being recognized later in
that year.
Other income decreased in the first quarter of 1999, compared
to the first quarter of 1998, due in part to reduced interest income.
Long-term debt refinancings of $229 million and net redemptions of $217
million during the twelve months ended March 31, 1999, produced the
$6.3 million reduction in long-term debt interest expense in 1999.
Preferred stock dividend requirements increased in the first quarter of
1999, compared to the same periodfirst quarter of 1998, due to the declaration in
the fourth quarter of 1997 due to refinancings
and redemptions completedof preferred dividends payable in the last twelve months and the
amortization of premiums associated with the revaluation of long-
term debt in connection with the merger.1998 by
CEI.
Capital Resources and Liquidity
CEI has continuing cash requirements for planned capital
expenditures and debt maturities. During the fourth
quarterlast three quarters of
1998,1999, capital requirements for property additions and capital leases
are expected to be about $45$115 million, including $4 million for nuclear
fuel. CEI has additional cash requirements of approximately $51.5$178
million to meet sinking fund requirements for preferred stock and
maturing long-term debt during the remainder of 1998.1999. These cash
requirements are expected to be satisfied with internal cash and/or
short-term credit arrangements.
As of September 30, 1998,March 31, 1999, CEI had approximately $54.4$73.5 million of
cash and temporary investments and $60.8$68.8 million of short-term
indebtedness to an associated company. Upon completioncompanies. Together with TE, CEI had unused
borrowing capability of $100 million under a FirstEnergy revolving line
of credit at the end of the merger, applicationfirst quarter of purchase accounting reduced
bondable property such that1999. Under its first
mortgage indenture, as of March 31, 1999, CEI is not currently ablewould have been permitted
to issue at least $190 million of additional first mortgage bonds except againston
the basis of bondable property additions and retired bonds.
FirstEnergy signed an agreement in principlecompleted its agreements with Duquesne Light Companyon March
25, 1999, to exchange certain generating assets. Upon receipt of
regulatory approvals, Duquesne will transfer 550 MW that would result in the transfer of 1,436
megawatts owned by Duquesneit owns at
fivefour generating plantsunits to CEI in exchange for 1,298 megawatts at three plants owned by FirstEnergy's
electric utility operating companies (see "Pending ExchangeCEI's 739 MW Avon Lake
Plant.
In the continuing move toward enactment of Assets" in Note 2), including CEI. A final agreement on the
exchange of assets, which will be structured as a tax-free
transaction to the extent possible, is expected to be reached by
the end of the year. The transaction benefits the Companies by
providing them with exclusive ownership and operating control of
all the generating assets that are now jointly owned and operated
under the Central Area Power Coordination Group agreement.
Regulatory Matters
On September 16, 1998, FirstEnergy, together with
representatives of the three other Ohiolegislation
deregulating Ohio's investor-owned utilities,
presented proposed legislation for restructuring the electric utility industry,
in Ohio tosubstitute bills (HB 5 & SB 3) were introduced at a private working group formedjoint meeting of
the House Public Utilities and the Senate Ways and Means committees on
March 26, 1999. The bills, sponsored by House Republican Priscilla Mead
and Senate Republican Bruce Johnson, will be considered by the leadershiptwo
committees individually. Hearings in the Senate and House began on
April 13 and 14, 1999, respectively. As many as two hearings a week
will be held with the objective of delivering legislation to the
Ohio General Assembly. The working group, which
includes numerous interested parties, will considerGovernor by the utility
proposal -- a proposal that represents a balanced approach for
bringing choicebeginning of June. CEI is unable to Ohio's electric consumers -- as well as other
restructuring proposals. Passagepredict the
ultimate outcome of a restructuring bill appears
unlikely in 1998.
On September 24, 1998,this process or the Federal Environmental
Protection Agency issued a final rule establishing tighter
nitrogen oxide emission ceilings for Ohio, Pennsylvanialevel of recovery of regulatory
assets and 20
other Eastern states and the District of Columbia (see
"Environmental Matters" in Note 2). Controls must be in place by
May 2003, with required reductions achieved during the five-month
summer ozone season (May through September). The new rule is
expected to increase the cost of producing electricity; however,
CEI believes that it isnuclear generating unit investment. Unfavorable resolution
could result in a better position thancharge to earnings which could have a numbermaterial
adverse effect on CEI's results of other utilities in achieving compliance due to its nuclearoperations and hydroelectric generation capability.
- 30 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS (Cont.)
In connection with the regulatory plans for its utility
operating companies to reduce fixed costs and lower rates,
FirstEnergy continued to take steps to restructure its operations
for improved efficiency and effectiveness in the changing
electric utility industry. FirstEnergy announced plans to
transfer its transmission assets (including CEI's assets) into a
new subsidiary, American Transmission Systems, Inc. (ATS), with
the transfer expected to be finalized by early 1999. The new
subsidiary represents a first step toward FirstEnergy's goal of
establishing or becoming part of a larger independent
transmission company (TransCo). FirstEnergy believes that a
TransCo better addresses the Federal Energy Regulatory
Commission's (FERC) stated transmission objectives of providing
non-discriminatory service, while providing for streamlined and
cost-efficient operation. In working toward the goal of forming a
larger regional transmission entity, FirstEnergy, American
Electric Power and Virginia Power announced on November 6, 1998,
that they would prepare a FERC filing during the first quarter of
1999 for such a regional transmission entity. The entity would be
designed to meet the goals of reducing transmission costs that
result when transferring power over several transmission systems,
ensuring transmission reliability and providing non-
discriminatory access to the transmission grid.
Impact of thefinancial condition.
Year 2000 IssueReadiness
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to identify the applicable
year. Any of CEI's programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
Because so many of CEI's computer functions are date sensitive, this
could cause far-reaching problems, such as system-wide computer
failures and miscalculations, if no remedial action is taken.
CEI has developed a multi-phase program for Year 2000
compliance that consists of: (i)of an assessment of the corporateits systems and operations of CEI
that could be affected by the Year 2000 problem; (ii) remediation or
replacement of noncompliant systems and components; and (iii) testing of
systems and components following such remediation or replacement. CEI
has focused its Year 2000 review on three areas: centralized system
applications, noncentralized systems and relationships with third
parties (including suppliers as well as end-use customers). CEI's
review of system readiness extends to systems involving customer
service, safety, shareholder needs and regulatory obligations.
CEI currently believes that, with modificationsis committed to existing software and conversionstaking appropriate actions to new software,eliminate
or lessen negative effects of the Year 2000 issue will pose no significant operational problems foron its operations.
CEI has completed an inventory of all computer systems.systems and hardware
including equipment with embedded computer chips and has determined
which systems need to be converted or replaced to become Year 2000-
ready and is in the process of remediating them. Based on its
timetable, CEI expects to have all identified repairs, replacements and
upgrades completed by June 30, 1999 to enable it to be ready to serve
its customers into the Year 2000.
Most of CEI's Year 2000 problemsissues will be resolved through
system replacement. Of CEI's major centralized systems, the general
ledger system and inventory management, procurement and
procurement accounts
payable system will besystems were replaced byat the end of 1998. CEI's payroll system
was enhanced to be Year 2000 compliant in July 1998; all employees will behave
been converted to the new system by January 1999.system. The customer service system is due to
be replaced in mid-1999.
CEI has categorized its noncentralized systems into
sixteen separate areas, and has already determined that five of
such areas pose no material Year 2000 problem. CEI has identified
certain Year 2000 issues in nine of such areas and is in the
process of remediating them. CEI has plans to complete the
assessment of the final two areas by the end of 1998. CEI plans
to complete the entire Year 2000 project by September 1999. If
the already identified modifications and conversions are not made
or are not completed on a timely basis, or if CEI identifies
material additional modifications which are not completed on a
timely basis, the Year 2000 issue would have a material adverse
impact on operations.
CEI has initiated formal communications with manymost of its majorkey
suppliers to determine the extent to which it is vulnerable to those
third parties' failure to resolve their own Year 2000 problems. For
suppliers having potential compliance problems, CEI is developing
alternate sources and is stillservices in the assessment phase as to
whether and to what extentevent such third parties have a Year 2000
issue.noncompliance occurs.
CEI is also identifying areas requiring higher inventory levels based
on compliance uncertainties. There can be no guarantee that the failure
of other
companies to resolve their own Year 2000 issueissues will not have a
material adverse effect on CEI's business, financial condition and
results of operations.
- 31 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS (Cont.)operations, although it does not consider this likely to
occur.
CEI is utilizingusing both internal and external resources to reprogram
and/or replace and test CEI'sits software for Year 2000 modifications. Of the
$38$31 million total project cost, approximately $31$23 million will be
capitalized since those costs are attributable to the purchase of new
software for total system replacements (i.e.,because the Year 2000 solution
comprises only a portion of the benefits resulting from the system
replacements).replacements. The remaining $7$8 million will be expensed as incurred. As
of September 30,1998,March 31, 1999, CEI has expended a total of $15had spent $20 million for Year 2000 capital
projects and had expensed approximately $2$4 million for Year 2000 related2000-related
maintenance activities. CEI's total Year 2000 project cost, as well as
its estimates of the time needed to complete remedial efforts, are based
on currently available information and do not include the estimated
costs and time associated with the impact of third party Year 2000
issues.
CEI believes it is managing the Year 2000 issue in such a way
that its customers will not experience any interruption of service. CEI
believes the most reasonably likely worst caseworst-case scenario from the Year 2000 issue
towill be disruption in power plant monitoring systems, thereby producing
inaccurate data and potential failures in electronic switching
mechanisms at transmission junctions. This would prolong localized
outages, as technicians would have to manually activate switches. Such
an event could have a material, but presentlycurrently undeterminable, effect on
CEI'sits financial results. CEI has not yet developed ais developing contingency planplans to address
the effects of any delay in becoming Year 2000 compliant but currently expectsand expect to
have a contingency planplans completed by the spring ofJune 30, 1999.
The costs of the project and the dates on which CEI plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived from numerous assumptions of future events
including the continued availability of certain resources, and other
factors. However, there can be no guarantee that this project will be
completed as planned and actual results could differ materially from the
estimates. Specific factors that might cause material differences
include but are not limited to, the availability and cost of trained
personnel, the ability to locate and correct all relevant computer code,
and similar uncertainties.
- 32 -
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
September 30, 1998 September 30, 1997
---------------------- ---------------------
Three Nine Three Nine
Months Months Months Months Ended
Ended Ended Ended
---------- ----------- --------- ----------March 31,
---------------------
1999 1998
-------- --------
(In thousands)
OPERATING REVENUES $253,282 $714,116 | $241,282 $680,486
-------- -------- |$224,262 $221,103
-------- --------
OPERATING EXPENSES AND TAXES:
|
Fuel and purchased power 56,708 164,049 | 47,976 140,79236,402 34,841
Nuclear operating costs 37,681 106,912 | 38,027 113,85441,894 37,795
Other operating costs 42,680 115,515 | 40,214 123,042
-------- -------- |33,514 32,973
-------- --------
Total operation and maintenance expenses 137,069 386,476 | 126,217 377,688111,810 105,609
Provision for depreciation and amortization 19,472 58,295 | 24,542 74,032
Amortization of net regulatory assets 4,286 12,954 | 4,291 12,87325,743 25,482
General taxes 21,435 63,393 | 22,729 68,12421,098 21,030
Income taxes 19,817 51,985 | 14,132 29,964
-------- -------- |16,907 17,016
-------- --------
Total operating expenses and taxes 202,079 573,103 | 191,911 562,681
-------- -------- |175,558 169,137
-------- --------
OPERATING INCOME 51,203 141,013 | 49,371 117,805
|48,704 51,966
OTHER INCOME 2,674 9,573 | 5,058 5,091
-------- -------- |2,922 3,842
-------- --------
INCOME BEFORE NET INTEREST CHARGES 53,877 150,586 | 54,429 122,896
-------- -------- |51,626 55,808
-------- --------
NET INTEREST CHARGES:
|
Interest on long-term debt 21,524 66,780 | 23,388 64,97021,041 22,886
Allowance for borrowed funds used during |
construction (344) (927) | (124) (239)(202) (269)
Other interest expense (credit) 10 (1,089) | 3,946 8,990
-------- -------- |(1,361) (814)
-------- --------
Net interest charges 21,190 64,764 | 27,210 73,721
-------- -------- |19,478 21,803
-------- --------
NET INCOME 32,687 85,822 | 27,219 49,175
|32,148 34,005
PREFERRED STOCK DIVIDEND REQUIREMENTS 4,145 9,680 | 4,185 12,590
-------- -------- |4,070 1,385
-------- --------
EARNINGS ON COMMON STOCK $ 28,54228,078 $ 76,142 | $ 23,034 $ 36,585
======== ======== |32,620
======== ========
The preceding Consolidated Notes to Financial Statements as they relate to The Toledo Edison Company
are an integral part of these statements.
- 33 -
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
1999 1998
1997
----------------------- ------------
(In thousands)
ASSETS
------
ASSETS
------
UTILITY PLANT:
In service $1,741,913 $1,763,495$1,772,925 $1,757,364
Less--Accumulated provision for depreciation 606,442 619,222649,625 626,942
---------- ----------
1,135,471 1,144,2731,123,300 1,130,422
---------- ----------
Construction work in progress-
Electric plant 23,885 19,90122,491 26,603
Nuclear fuel 8,114 6,63219,444 11,191
---------- ----------
31,999 26,53341,935 37,794
---------- ----------
1,167,470 1,170,8061,165,235 1,168,216
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 310,696 312,873295,392 310,762
Nuclear plant decommissioning trusts 94,491 85,956105,378 102,749
Other 3,719 3,1646,226 3,656
---------- ----------
408,906 401,993406,996 417,167
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 21,356 22,170173 4,140
Receivables-
Customers 29,837 36,710
Associated companies 21,663 15,19932,387 30,006
Other 10,501 21,66422,225 2,316
Notes receivable from associated companies 79,595 40,802104,098 101,236
Materials and supplies, at average cost-
Owned 24,136 31,89226,409 25,745
Under consignment 19,223 9,53819,864 18,148
Prepayments and other 22,211 26,43728,522 25,647
---------- ----------
198,685 167,702263,515 243,948
---------- ----------
DEFERRED CHARGES:
Regulatory assets 423,599 442,724412,345 417,704
Goodwill 500,532 514,462471,424 474,593
Property taxes 43,355 45,33843,818 42,842
Other 5,127 15,1274,295
---------- ----------
972,613 1,017,651932,714 939,434
---------- ----------
$2,747,674 $2,758,152$2,768,460 $2,768,765
========== ==========
- 34 -
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
1999 1998
1997
------------- -------------------------
(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 328,193 328,364328,559 328,559
Retained earnings 48,470 7,61678,184 51,463
---------- ----------
Total common stockholder's equity 572,333 531,650602,413 575,692
Preferred stock-
Notstock subject to mandatory redemption 210,000 210,000
Subject to mandatory redemption - 1,690
Long-term debt 1,086,227 1,210,1901,063,644 1,083,666
---------- ----------
1,868,560 1,953,5301,876,057 1,869,358
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 142,492 69,979144,537 130,426
Accounts payable-
Associated companies 24,676 21,17339,936 34,260
Other 56,389 60,75627,491 38,832
Accrued taxes 47,997 34,44149,091 62,288
Accrued interest 24,806 26,63324,700 24,965
Other 35,138 22,60340,508 37,617
---------- ----------
331,498 235,585326,263 328,388
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 125,061 104,543155,686 151,321
Accumulated deferred investment tax credits 41,319 43,26540,189 40,670
Pensions and other postretirement benefits 116,584 113,254121,752 122,314
Other 264,652 307,975248,513 256,714
---------- ----------
547,616 569,037566,140 571,019
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$2,747,674 $2,758,152$2,768,460 $2,768,765
========== ==========
The preceding Notes to Consolidated Financial Statements as they relate to The Toledo Edison Company
are an integral part of these balance sheets.
- 35 -
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
September 30, 1998 September 30, 1997
---------------------- --------------------
Three Nine Three Nine
Months Months Months Months Ended
Ended Ended Ended
---------- ----------March 31,
-----------------------
1999 1998
--------- -----------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 32,68732,148 $ 85,822 | $ 27,219 $ 49,17534,005
Adjustments to reconcile net income to net
|
cash from operating activities- |
Provision for depreciation and amortization 19,472 58,295 | 24,542 74,03225,743 25,482
Nuclear fuel and lease amortization 5,576 16,506 | 9,264 26,898
Amortization of net regulatory assets 4,286 12,954 | 4,291 12,8736,612 7,301
Deferred income taxes, net 3,954 24,971 | (3,336) (6,462)3,682 6,521
Investment tax credits, net (648) (1,946) | (1,080) (3,240)
Allowance for equity funds used during |
construction - - | (291) (677)(481) (649)
Receivables 1,473 4,699 | (203) 1,569(15,417) 18,201
Materials and supplies (2,380) (2,980)
Accounts payable (3,216) (864) | 2,774 852
Accrued taxes 7,083 13,556 | 2,503 10,977(5,665) (12,772)
Other 19,891 (15,265) | 17,370 20,951
-------- -------- |(32,923) 2,869
-------- --------
Net cash provided from operating activities 92,136 196,799 | 102,950 201,742
-------- -------- |11,319 77,978
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
|
New Financing- |
Long-term debt - 3,657 | 6,973 151,945
Short-term borrowings, net - - | - 24,500
Redemptions and Repayments-
|Long-term debt 12,434 8,568
Dividend Payments-
Preferred stock - 1,665 | - 1,665
Long-term debt 33,273 74,968 | 49,692 75,952
Short-term borrowings, net - - | 60,500 -
Dividend Payments- |
Common stock 15,654 36,786 | - -
Preferred stock 4,074 12,309 | 4,192 12,589
-------- -------- |4,070 4,127
-------- --------
Net cash provided from (used for) |used for financing activities (53,001) (122,071) | (107,411) 86,239
-------- -------- |16,504 12,695
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
|
Property additions 14,518 29,165 | 8,761 33,8808,931 7,749
Loans to associated companies - 38,793 | - -
Loan payments from associated companies (5,855) - | (27,651) (38,817)2,862 77,798
Capital trust investments (240) (2,177) | (17,115) 319,984(15,370) (2,003)
Other 13,923 9,761 | 5,902 6,244
-------- -------- |2,359 3,536
-------- --------
Net cash used for (provided from) |
investing activities 22,346 75,542 | (30,103) 321,291
-------- -------- |(1,218) 87,080
-------- --------
Net increase (decrease) in cash and cash |
equivalents 16,789 (814) | 25,642 (33,310)(3,967) (21,797)
Cash and cash equivalents at beginning of period 4,5674,140 22,170 | 22,502 81,454
-------- -------- |
-------- --------
Cash and cash equivalents at end of period $ 21,356173 $ 21,356 | $ 48,144 $ 48,144
======== ======== |373
======== ========
The preceding Notes to Consolidated Financial Statements as they relate to The Toledo Edison Company
are an integral part of these statements.
- 36 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Toledo Edison Company:
We have reviewed the accompanying consolidated balance sheet of The
Toledo Edison Company (an Ohio corporation and wholly owned subsidiary
of FirstEnergy Corp.) and subsidiary as of September
30, 1998,March 31, 1999, and the
related consolidated statements of income and cash flows for the three-month and nine-monththree-
month periods ended September 30, 1998March 31, 1999 and 1997.1998. These financial statements
are the responsibility of the company'sCompany's management.
We conducted our reviewreviews 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 generally accepted auditing
standards, 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 review,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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of The Toledo Edison
Company and subsidiary as of December 31, 19971998 (not presented herein),
and, in our report dated February 13, 1998,12, 1999, 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, 1997,1998, is
fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
November 13, 1998
- 37 -
May 14, 1999
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Financial results reflect the application of purchase
accounting to the merger of TE's former parent company,
Centerior, with OE to form FirstEnergy on November 8, 1997. The
application of this accounting resultedOperating revenues increased $3.2 million in fair value adjustments
which were "pushed down" or reflected on the separate financial
statements of Centerior's direct subsidiaries as of the merger
date, including TE's financial statements. Accordingly, the post-
merger financial statements for the first
nine months and thirdquarter of 1999 from the first quarter of 1998 and the December 31, 1997 Consolidated Balance
Sheet reflect a new basis of accounting. Material effects of this
new basis of accounting are identified below.
Earnings on common stock increaseddue to $76.1 million for
the nine-month period ended September 30, 1998, from $36.6
million in the same period last year. For the third quarter of
1998, earnings increased to $28.5 million, compared to $23.0
million in the third quarter of 1997. The increases reflect
increased operating revenues, benefits provided by the Bruce
Mansfield Plant lease refinancing and net reductions in the
provision for depreciation and amortization resulting from the
fair value adjustment of nuclear plant in connection with the
merger. The above factors were offset in part by an increase in
purchased power costs.
Operating revenues increased $33.6 million during the
nine-month period ended September 30, 1998 compared to the same
period of 1997 and increased $12.0 million in the third quarter
of 1998 from the corresponding period of 1997. Year-to-date
retail kilowatt-hour sales increased 8.0% from the same period
last year, with residential, commercialsales. Residential and industrial customers
all contributingcontributed to the increasehigher kilowatt-hour sales with increases of 5.3%, 5.1%7.5%
and 10.5%, respectively. ExpandedCommercial sales declined 1.4% in 1999.
Residential sales in the first quarter of 1999 benefited from lower
temperatures, compared to milder weather conditions in the first
quarter of 1998. Strong automotive demand and expanded production at
the North Star BHP Steel (North Star) facility was the primary factor incontributed to the increase in
industrial salessales.
Operation and maintenance expenses increased $6.2 million in
the first nine months of 1998
from last year's level. Excluding North Star, industrial sales
increased 0.2%. Sales to wholesale customers decreased 39.4%
compared to the first nine months of 1997 due in part to
unplanned generating unit outages which reduced available energy
for sale to other utilities. This resulted in a 2.1% decrease in
total kilowatt-hour sales during the nine-month period compared
to 1997.
Retail kilowatt-hour sales in the third quarter of 1998
increased 5.7% from the third quarter of 1997 with increased
demand from all customer groups. Residential sales benefited from
higher air-conditioning loads due to hotter weather, increasing
12.4% in the third quarter of 1998,1999, compared to the same period of 1997. Continued growth1998.
Increased operating costs at the Beaver Valley Plant and costs related
to the Dave-Besse Plant outage scheduled for April 1999 contributed to
the increase in nuclear operating costs in the service sector of the area
economy during the period contributed to a 2.2% increase in
commercial sales in the thirdfirst quarter of 19981999,
compared to the thirdfirst quarter of 1997. Expanded production at North Star remained
a major contributor to industrial sales1998.
Other income decreased in the period with sales
up 4.5% in the thirdfirst quarter of 19981999, from the
same period last
year. Excluding sales to North Star, industrial sales decreased
4.7% in the third quarter of 1998 from the third quarter of 1997.
A general decline in energy use by primary metal manufacturers
and the General Motors strike dampened industrial sales in the
third quarter of 1998. Sales to wholesale customers decreased
15.3% in the third quarter of 1998 compared to the same period of
1997. Reduced off-system sales offset, in part, the increase in
retail sales resulting in a net increase in total sales of 1.8%
for the third quarter of 1998 compared to the third quarter of
1997.
Fuel and purchased power expenses increased in both the
first nine months of 1998 and the third quarter of 1998 compared
to the same periods of 1997. The increases resulted from higher
purchased power costs, which resulted from a combination of
factors. In late June 1998, the midwestern and southern regions
of the United States experienced electricity shortages caused
mainly by record temperatures and humidity and unscheduled
generating unit outages. During this period, Beaver Valley Unit 2
was out of service and the Davis-Besse Plant was removed from
serviceprior year, primarily as a result of damagelower interest
income. Net debt redemptions of $65 million during the twelve months
ended March 31, 1999, produced the reduction in long-term debt interest
expense in 1999. Preferred stock dividend requirements increased in the
first quarter of 1999, compared to transmission facilities caused
- 38 -
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
by a tornado. Temperatures continued above last year's levels
throughout the thirdfirst quarter of 1998, as well and Beaver Valley
Unit 2 remained out of service for most of that period. As a
result, TE purchased significant amounts of power on the spot
market at unusually high prices, causing the increase in
purchased power costs.
Reduced nuclear operating costs and other operating
costs combined to substantially offset the year-to-date 1998
increase in fuel and purchased power expense compareddue to
the same
period last year. On a net basis nuclear operating costs were
down at the three nuclear plants. Other operating costs were
lower for the first nine months of 1998 compared to the same
period last year due to lower costs at the Bay Shore and
Mansfield plants. Lower rent expense resulting from the
refinancing of the Mansfield Plant lease and reduced employee
levels contributed to these reduced costs.
Lower depreciable asset balances resulting from the
purchase accounting adjustment reduced the provision for
depreciationdeclaration in the first nine months of 1998 compared to the
same period last year and for the thirdfourth quarter of 1997 of preferred dividends
payable in 1998 compared
to the third quarter of 1997. These reductions were partially
offset by the amortization of goodwill recognized with the
application of purchase accounting.
Interest income from investments related to the
refinancing of the Mansfield Plant lease increased other income
in the first nine months of 1998 compared to same period of 1997.
Total interest charges decreased due in part to the amortization
of net premiums associated with the revaluation of long-term debt
in connection with the merger.TE.
Capital Resources and Liquidity
TE has continuing cash requirements for planned capital
expenditures and debt maturities. During the fourth quarterlast three quarters of
1998,1999, capital requirements for property additions and capital leases
are expected to be about $13$42 million, including $2 million for nuclear
fuel. TE has additional cash requirements of approximately $12.4$105.9
million to meet sinking fund requirements for preferred stock and
maturing long-term debt during the remainder of 1998.1999. These cash
requirements are expected to be satisfied with internal cash and/or
short-term credit arrangements.
As of September 30, 1998,March 31, 1999, TE had approximately $101.0$104.3 million of
cash and temporary investments and no short-term indebtedness. Upon completionTogether
with CEI, TE had unused borrowing capability of $100 million under a
FirstEnergy revolving line of credit at the end of the merger, applicationfirst quarter of
purchase accounting reduced bondable property such that1999. Under its first mortgage indenture, as of March 31, 1999, TE
is not
currently ablewould have been permitted to issue approximately $194 million of
additional first mortgage bonds except
againston the basis of bondable property
additions and retired bonds.
Regulatory Matters
On September 16, 1998, FirstEnergy, together with
representativesIn the continuing move toward enactment of the three other Ohiolegislation
deregulating Ohio's investor-owned utilities,
presented proposed legislation for restructuring the electric utility industry,
in Ohio tosubstitute bills (HB 5 & SB 3) were introduced at a private working group formedjoint meeting of
the House Public Utilities and the Senate Ways and Means committees on
March 26, 1999. The bills, sponsored by House Republican Priscilla Mead
and Senate Republican Bruce Johnson, will be considered by the leadershiptwo
committees individually. Hearings in the Senate and House began on
April 13 and 14, 1999, respectively. As many as two hearings a week
will be held with the objective of delivering legislation to the
Ohio General Assembly. The working group, which
includes numerous interested parties, will considerGovernor by the utility
proposal -- a proposal that represents a balanced approach for
bringing choicebeginning of June. TE is unable to Ohio's electric consumers -- as well as other
restructuring proposals. Passagepredict the ultimate
outcome of a restructuring bill appears
unlikely in 1998.
On September 24, 1998,this process or the Federal Environmental
Protection Agency issued a final rule establishing tighter
nitrogen oxide emission ceilings for Ohio, Pennsylvanialevel of recovery of regulatory assets
and 20
other Eastern states and the District of Columbia (see
"Environmental Matters" in Note 2). Controls must be in place by
May 2003, with required reductions achieved during the five-month
summer ozone season (May through September). The new rule is
expected to increase the cost of producing electricity; however,
- 39 -
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
TE believes that it isnuclear generating unit investment. Unfavorable resolution could
result in a better position thancharge to earnings which could have a numbermaterial adverse
effect on TE's results of other utilities in achieving compliance due to its nuclear
generation capability.
In connection with the regulatory plans for its utility
operating companies to reduce fixed costsoperations and lower rates,
FirstEnergy continued to take steps to restructure its operations
for improved efficiency and effectiveness in the changing
electric utility industry. FirstEnergy announced plans to
transfer its transmission assets (including TE's assets) into a
new subsidiary, American Transmission Systems, Inc. (ATS), with
the transfer expected to be finalized by early 1999. The new
subsidiary represents a first step toward FirstEnergy's goal of
establishing or becoming part of a larger independent
transmission company (TransCo). FirstEnergy believes that a
TransCo better addresses the Federal Energy Regulatory
Commission's (FERC) stated transmission objectives of providing
non-discriminatory service, while providing for streamlined and
cost-efficient operation. In working toward the goal of forming a
larger regional transmission entity, FirstEnergy, American
Electric Power and Virginia Power announced on November 6, 1998,
that they would prepare a FERC filing during the first quarter of
1999 for such a regional transmission entity. The entity would be
designed to meet the goals of reducing transmission costs that
result when transferring power over several transmission systems,
ensuring transmission reliability and providing non-
discriminatory access to the transmission grid.
Impact of thefinancial condition.
Year 2000 IssueReadiness
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to identify the applicable
year. Any of TE's programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000.
Because so many of TE's computer functions are date sensitive, this
could cause far-reaching problems, such as system-wide computer
failures and miscalculations, if no remedial action is taken.
TE has developed a multi-phase program for Year 2000
compliance that consists of: (i)of an assessment of the corporateits systems and operations of TE
that could be affected by the Year 2000 problem; (ii) remediation or
replacement of noncompliant systems and components; and (iii) testing of
systems and components following such remediation or replacement. TE
has focused its Year 2000 review on three areas: centralized system
applications, noncentralized systems and relationships with third
parties (including suppliers as well as end-use customers). TE's review
of system readiness extends to systems involving customer service,
safety, shareholder needs and regulatory obligations.
TE currently believes that, with modificationsis committed to existing software and conversionstaking appropriate actions to new software,eliminate or
lessen negative effects of the Year 2000 issue will pose no significant operational problems foron its operations. TE
has completed an inventory of all computer systems.systems and hardware
including equipment with embedded computer chips and has determined
which systems need to be converted or replaced to become Year 2000-
ready and is in the process of remediating them. Based on its
timetable, TE expects to have all identified repairs, replacements and
upgrades completed by June 30, 1999 to enable it to be ready to serve
its customers into the Year 2000.
Most of TE's Year 2000 problemsissues will be resolved through system
replacement. Of TE's major centralized systems, the general ledger
system and inventory management, procurement and
procurement accounts payable
system will besystems were replaced byat the end of 1998. TE's payroll system was
enhanced to be Year 2000 compliant in July 1998; all employees will behave
been converted to the new system by January 1999.system. The customer service system is due to
be replaced in mid-1999.
TE has categorized its noncentralized systems into
sixteen separate areas, and has already determined that five of
such areas pose no material Year 2000 problem. TE has identified
certain Year 2000 issues in nine of such areas and is in the
process of remediating them. TE has plans to complete the
assessment of the final two areas by the end of 1998. TE plans to
complete the entire Year 2000 project by September 1999. If the
already identified modifications and conversions are not made or
are not completed on a timely basis, or if TE identifies material
additional modifications which are not completed on a timely
basis, the Year 2000 issue would have a material adverse impact
on operations.
TE has initiated formal communications with manymost of its majorkey
suppliers to determine the extent to which it is vulnerable to those
third parties' failure to resolve their own Year 2000 problems. For
suppliers having potential compliance problems, TE is developing
alternate sources and is stillservices in the assessment phase as to whether and
to what extentevent such third parties have a Year 2000 issue.noncompliance occurs.
TE is also identifying areas requiring higher inventory levels based on
compliance uncertainties. There
- 40 -
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.) can be no guarantee that the failure of
other companies to resolve their own Year 2000 issueissues will not have a
material adverse effect on TE's business, financial condition and
results of operations.operations, although it does not consider this likely to
occur.
TE is utilizingusing both internal and external resources to reprogram
and/or replace and test TE'sits software for Year 2000 modifications. Of the
$16 million total project cost, approximately $13$12 million will be
capitalized since those costs are attributable to the purchase of new
software for total system replacements (i.e.,because the Year 2000 solution
comprises only a portion of the benefits resulting from the system
replacements).replacements. The remaining $3$4 million will be expensed as incurred. As
of September 30, 1998,March 31, 1999, TE has expended a total of $7had spent $11 million for Year 2000 capital
projects and had expensed approximately $1$2 million for Year 2000 related2000-related
maintenance activities. TE's total Year 2000 project cost, as well as
its estimates of the time needed to complete remedial efforts, are based
on currently available information and do not include the estimated
costs and time associated with the impact of third party Year 2000
issues.
TE believes it is managing the Year 2000 issue in such a way
that its customers will not experience any interruption of service. TE
believes the most reasonably likely worst caseworst-case scenario from the Year 2000 issue
towill be disruption in power plant monitoring systems, thereby producing
inaccurate data and potential failures in electronic switching
mechanisms at transmission junctions. This would prolong localized
outages, as technicians would have to manually activate switches. Such
an event could have a material, but presentlycurrently undeterminable, effect on
TE'sits financial results. TE has not yet developed ais developing contingency planplans to address
the effects of any delay in becoming Year 2000 compliant but currently expectsand expect to
have a contingency planplans completed by the
spring ofJune 30, 1999.
The costs of the project and the dates on which TE plans to
complete the Year 2000 modifications are based on management's best
estimates, which were derived from numerous assumptions of future events
including the continued availability of certain resources, and other
factors. However, there can be no guarantee that this project will be
completed as planned and actual results could differ materially from the
estimates. Specific factors that might cause material differences
include but are not limited to, the availability and cost of trained
personnel, the ability to locate and correct all relevant computer code,
and similar uncertainties.
- 41 -
PENNSYLVANIA POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,
-------------------- ---------------------March 31,
----------------------
1999 1998
1997 1998 1997
---------- -------- ---------- -----------------
(In thousands)
OPERATING REVENUES $87,885 $85,239 $246,732 $243,436$81,372 $78,576
------- ------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 21,948 17,299 62,835 48,41116,912 17,798
Nuclear operating costs 6,720 6,407 20,516 19,5416,713 7,106
Other operating costs 14,952 13,870 40,725 45,12214,728 12,190
------- ------- -------- --------
Total operation and maintenance expenses 43,620 37,576 124,076 113,07438,353 37,094
Provision for depreciation 4,719 15,621 34,037 42,903
Amortization of net regulatory assets 8,406 1,845 12,096 5,535and amortization 14,437 16,498
General taxes 5,335 5,913 16,608 17,6205,904 5,779
Income taxes 9,375 8,649 20,847 22,0328,386 6,566
------- ------- -------- --------
Total operating expenses and taxes 71,455 69,604 207,664 201,16467,080 65,937
------- -------
-------- --------
OPERATING INCOME 16,430 15,635 39,068 42,27214,292 12,639
OTHER INCOME 569 795 1,942 1,789997 739
------- ------- -------- --------
INCOME BEFORE NET INTEREST CHARGES 16,999 16,430 41,010 44,06115,289 13,378
------- ------- -------- --------
NET INTEREST CHARGES:
Interest expense 5,234 5,669 15,951 17,0665,096 5,494
Allowance for borrowed funds used during construction (52) (133) (196) (269)(146) (82)
------- ------- -------- -------
Net interest charges 5,182 5,536 15,755 16,7974,950 5,412
------- -------
-------- -------
INCOME BEFORE EXTRAORDINARY ITEM 11,817 10,894 25,255 27,264
EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 3) - - (30,522) -
------- ------- -------- --------
NET INCOME (LOSS) 11,817 10,894 (5,267) 27,26410,339 7,966
PREFERRED STOCK DIVIDEND REQUIREMENTS 1,157 1,157
3,470 3,470
------- -------
-------- --------
EARNINGS (LOSS) ON COMMON STOCK $10,660 $ 9,7379,182 $ (8,737) $ 23,7946,809
======= ======= ======== ========
The preceding Notes to Consolidated Financial Statements as they relate to Pennsylvania Power Company
are an integral part of these statements.
- 42 -
PENNSYLVANIA POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
1999 1998
1997
------------------------ ------------
(In thousands)
ASSETS
------
UTILITY PLANT:
In service at original cost $689,654 $1,237,562$687,987 $686,771
Less--Accumulated provision for depreciation 285,242 508,981296,809 291,188
-------- ----------
404,412 728,581
--------
----------391,178 395,583
-------- --------
Construction work in progress-
Electric plant 10,977 7,42720,601 17,187
Nuclear fuel 118 6,7883,582 508
-------- ----------
11,095 14,215
--------
----------
415,507 742,79624,183 17,695
-------- ------------------
415,361 413,278
-------- --------
OTHER PROPERTY AND INVESTMENTS 32,259 26,15732,644 29,177
-------- ------------------
CURRENT ASSETS:
Cash and cash equivalents 4,094 660865 7,485
Notes receivable from parent company 34,400 17,50029,758 50,000
Receivables-
Customers (less accumulated provisions of
$3,596,000$3,898,000 and $3,609,000,$3,599,000, respectively,
for uncollectible accounts) 34,949 33,93432,004 34,737
Associated companies 15,674 15,76428,686 34,430
Other 8,509 11,26124,734 12,472
Materials and supplies, at average cost 15,985 14,97316,247 15,515
Prepayments 5,511 1,70712,455 2,657
-------- ----------
119,122 95,799
--------
----------144,749 157,296
-------- --------
DEFERRED CHARGES:
Regulatory assets 381,758 162,966357,932 371,027
Other 6,155 6,7396,721 6,994
-------- ----------
387,913 169,705
--------
----------
$954,801 $1,034,457364,653 378,021
-------- --------
$957,407 $977,772
======== ==================
- 43 -
PENNSYLVANIA POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
1999 1998
1997
------------------------- ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, $30 par value, authorized 6,500,000 shares -
6,290,000 shares outstanding $188,700 $ 188,700$188,700
Other paid-in capital (400) (400)(310) (310)
Retained earnings 78,900 103,67764,398 86,891
-------- ------------------
Total common stockholder's equity 267,200 291,977252,788 275,281
Preferred stock-
Not subject to mandatory redemption 50,905 50,905
Subject to mandatory redemption 15,000 15,000
Long-term debt-
Associated companies 7,785 9,2318,797 6,617
Other 281,636 280,074281,007 281,072
-------- ----------
622,526 647,187
--------
----------608,497 628,875
-------- --------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 5,960 6,9584,855 5,557
Other 512 1,443968 984
Accounts payable-
Associated companies 7,768 6,78811,686 9,676
Other 14,284 22,75127,331 23,156
Accrued taxes 12,155 12,33218,797 12,849
Accrued interest 3,982 6,5883,775 6,519
Other 16,450 14,7469,664 17,046
-------- ----------
61,111 71,606
--------
----------77,076 75,787
-------- --------
DEFERRED CREDITS:
Accumulated deferred income taxes 208,209 239,952209,612 212,427
Accumulated deferred investment tax credits 8,359 26,0527,605 7,787
Other 54,596 49,66054,617 52,896
-------- ----------
271,164 315,664
--------
----------271,834 273,110
-------- --------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) -------- ----------
$954,801 $1,034,457--------
$957,407 $977,772
======== ==================
The preceding Notes to Consolidated Financial Statements as they relate to Pennsylvania Power Company
are an integral part of these balance sheets.
- 44 -
PENNSYLVANIA POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,
--------------------- ---------------------March 31,
----------------------
1999 1998
1997 1998 1997
---------- --------- --------- ------------------ --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 11,817 $10,89410,339 $ (5,267) $27,2647,966
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation 4,719 15,621 34,037 42,903and amortization 14,437 16,498
Nuclear fuel and lease amortization 1,460 1,658 3,252 6,467
Other amortization, net 8,511 1,553 11,664 4,6311,823 940
Deferred income taxes, net 931 (1,857) (26,058) (8,464)(2,023) (2,812)
Investment tax credits, net (573) (629) (1,717) (1,748)
Extraordinary item - - 51,730 -(183) (572)
Receivables 881 (122) 1,827 11,365(3,785) 962
Materials and supplies (839) 328 (1,012) (600)(732) (376)
Accounts payable (12,493) (5,025) (7,487) (9,177)6,185 1,164
Other (1,638) 2,013 (7,505) (3,051)
--------(12,451) (9,874)
------- -------- -------
Net cash provided from operating activities 12,776 24,434 53,464 69,590
--------13,610 13,896
------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt - 10,007 1,621 10,007
Redemptions and Repayments-
Long-term debt 1,443 12,103 3,994 26,4151,745 1,760
Dividend Payments-
Common stock 5,347 5,347 16,040 16,04031,765 5,346
Preferred stock 1,232 1,232 3,470 3,470
--------1,066 1,157
------- -------- -------
Net cash used for financing activities 8,022 8,675 21,883 35,918
--------34,576 8,263
------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 4,541 3,529 11,560 10,0594,633 3,284
Loan topayment from parent 4,400 11,500 16,900 22,000(20,242) (1,000)
Other (2,194) 1,211 (313) 2,988
--------1,263 812
------- -------- -------------
Net cash used for (provided from) investing activities 6,747 16,240 28,147 35,047
--------(14,346) 3,096
------- -------- -------------
Net increase (decrease) in cash and cash equivalents (1,993) (481) 3,434 (1,375)(6,620) 2,537
Cash and cash equivalents at beginning of period 6,087 4937,485 660
1,387
-------- ------- -------- -------
Cash and cash equivalents at end of period $ 4,094865 $ 12 $ 4,094 $ 12
========3,197
======= ======== =======
The preceding Notes to Consolidated 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 a wholly owned
subsidiary of Ohio Edison Company) as of September 30, 1998, and
the related statements of income and cash flows for the three-
month and nine-month periods ended September 30, 1998 and 1997.
These financial statements are the responsibility of the company's
management.
We conducted our review 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 generally accepted auditing standards, 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 review, 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 generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of Pennsylvania Power
Company as of December 31, 1997 (not presented herein), and, in
our report dated February 13, 1998, we expressed an unqualified
opinion on that statement. In our opinion, the information set
forth in the accompanying balance sheet as of December 31, 1997,
is fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio
November 13, 1998
- 46 -
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Earnings were adversely affected in the nine-month
period ended September 30, 1998 compared to the same period of
1997, by an extraordinary item resulting from the deregulation of
Penn's generation business and the corresponding discontinuation
of SFAS 71 with respect to that business. This action was taken
following the June 18, 1998, authorization by the PPUC of a
restructuring plan for Penn (see below and Note 3). Excluding the
extraordinary item, earnings on common stock were $21.8 million
in the first nine months of 1998 compared to $23.8 million in the
same period last year; for the third quarter of 1998, earnings on
common stock were $10.7 million compared to $9.7 million in the
third quarter of 1997.
Retail kilowatt-hour sales decreased 1.7% in the first
nine months of 1998 and increased 0.4% in the third quarter of
1998 from the same periods in 1997. Year-to-date results reflect
a decline in industrial sales which was more than offset in the
third quarter by growth in the residential and commercial
sectors. Closure of an electric arc facility at Caparo Steel
Company in August 1997, caused the reduced industrial sales.
Excluding sales to Caparo, sales to industrial customers in the
first nine months of 1998 increased 2.7% and sales in the third
quarter of 1998 were up 0.9% from the corresponding periods last
year. A general decline in electricity demand by primary metal
manufacturers also dampened industrial sales in the third quarter
of 1998. Residential sales increased 5.1% during the first nine
months of 1998 compared to the first nine months of 1997 and 8.5%
in the third quarter of 1998 from the same period last year.
Residential sales benefited from higher air-conditioning loads
due to hotter weather. Commercial sales also increased in both
the nine month and third quarter periods of 1998 from the
corresponding periods last year, by 7.8% and 10.7%, respectively,
reflecting continued growth in the service sector economy. Sales
to wholesale customers increased 9.9% in the first nine months of
1998 compared to the first nine months of 1997 and were up 34.1%
in the third quarter of 1998 compared to the same period last
year due to increased generation availability.
Fuel and purchased power expenses increased in both the
first nine months of 1998 and in the third quarter of 1998
compared to the same periods of 1997. Most of the increase in
purchased power costs occurred in the second quarter of 1998,
resulting from a combination of factors. In late June 1998, the
midwestern and southern regions of the United States experienced
electricity shortages caused mainly by record temperatures and
humidity and unscheduled generating unit outages. Due in part to
an unscheduled outage at Beaver Valley Unit 1, Penn's production
capability was reduced to the point that Penn purchased
significant amounts of power during this period. Temperatures
continued above last year's levels in the third quarter of 1998
as well and Beaver Valley Unit 1 remained out of service for
approximately half of that period. As a result, Penn purchased
significant amounts of power at unusually high spot market
prices, causing the increase in purchased power costs.
Other operating costs decreased in the first nine
months of 1998 compared to the same period of 1997 due to a $3
million charge for uncollectible accounts in the second quarter
of 1997. The provision for depreciation and amortization
decreased $10.9 million in the third quarter of 1998 from the
same period of 1997 primarily due to the effects of Penn's rate
restructuring plan authorized by the PPUC in the second quarter.
The rate restructuring plan resulted in a reduction in nuclear
generating unit investment due to the discontinued application of
SFAS 71 with a corresponding reduction in reported depreciation
expense. Penn's rate restructuring plan also resulted in a
reclassification of accelerated Perry 1 depreciation in the third
quarter of 1998 to amortization of net regulatory assets, further
reducing depreciation. The reclassification of depreciation
resulted in an increase in the amortization of net regulatory
assets in the third quarter of 1998 compared to the third quarter
of 1997.
- 47 -
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
Capital Resources and Liquidity
Penn has continuing cash requirements for planned
capital expenditures. During the fourth quarter of 1998, capital
requirements for property additions and capital leases are
expected to be about $8 million, including $2 million for nuclear
fuel. These requirements are expected to be satisfied with
internal cash.
As of September 30, 1998, Penn had approximately $38.5
million of cash and temporary investments and no short-term
indebtedness. Penn had $2 million of unused bank facilities as of
September 30, 1998, which may be borrowed for up to several days
at the banks' discretion.
In connection with the regulatory plans for its utility
operating companies to reduce fixed costs and lower rates,
FirstEnergy continued to take steps to restructure its operations
for improved efficiency and effectiveness in the changing
electric utility industry. FirstEnergy announced plans to
transfer its transmission assets (including Penn's assets) into a
new subsidiary, American Transmission Systems, Inc. (ATS), with
the transfer expected to be finalized by early 1999. The new
subsidiary represents a first step toward FirstEnergy's goal of
establishing or becoming part of a larger independent
transmission company (TransCo). FirstEnergy believes that a
TransCo better addresses the Federal Energy Regulatory
Commission's (FERC) stated transmission objectives of providing
non-discriminatory service, while providing for streamlined and
cost-efficient operation. In working toward the goal of forming a
larger regional transmission entity, FirstEnergy, American
Electric Power and Virginia Power announced on November 6, 1998,
that they would prepare a FERC filing during the first quarter of
1999 for such a regional transmission entity. The entity would be
designed to meet the goals of reducing transmission costs that
result when transferring power over several transmission systems,
ensuring transmission reliability and providing non-
discriminatory access to the transmission grid.
FirstEnergy signed an agreement in principle with
Duquesne Light Company that would result in the transfer of 1,436
megawatts owned by Duquesne at five generating plants in exchange
for 1,298 megawatts at three plants owned by FirstEnergy's
utility operating companies (see "Pending Exchange of Assets" in
Note 2) including Penn. A final agreement on the exchange of
assets, which will be structured as a tax-free transaction to the
extent possible, is expected to be reached by the end of the
year. The transaction benefits the Companies by providing them
with exclusive ownership and operating control of all the
generating assets that are now jointly owned and operated under
the Central Area Power Coordination Group agreement. Certain
details of the arrangement such as the specific allocation of
generation assets among the Companies remains to be determined.
On September 24, 1998, the Federal Environmental
Protection Agency issued a final rule establishing tighter
nitrogen oxide emission ceilings for Pennsylvania, Ohio and 20
other Eastern states and the District of Columbia (see
"Environmental Matters" in Note 2). Controls must be in place by
May 2003, with required reductions achieved during the five-month
summer ozone season (May through September). The new rule is
expected to increase the cost of producing electricity; however,
Penn believes that it is in a better position than a number of
other utilities in achieving compliance due to its nuclear
generation capability.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs
being written using two digits rather than four to identify the
applicable year. Any of Penn's programs that have date-sensitive
software may recognize a date using "00" as the year 1900 rather
than the year 2000.
- 48 -
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont.)
Penn has developed a multi-phase program for Year 2000
compliance that consists of: (i) assessment of the corporate
systems and operations of Penn that could be affected by the Year
2000 problem; (ii) remediation or replacement of noncompliant
systems and components; and (iii) testing of systems and
components following such remediation or replacement. Penn has
focused its Year 2000 review on three areas: centralized system
applications, noncentralized systems and relationships with third
parties (including suppliers as well as end-use customers).
Penn currently believes that, with modifications to
existing software and conversions to new software, the Year 2000
issue will pose no significant operational problems for its
computer systems. Most of Penn's Year 2000 problems will be
resolved through system replacement. Of Penn's major centralized
systems, the general ledger system and inventory management and
procurement accounts payable system will be replaced by the end
of 1998. Penn's payroll system was enhanced to be Year 2000
compliant in July 1998. The customer service system is due to be
replaced in mid-1999.
Penn has categorized its noncentralized systems into
sixteen separate areas, and has already determined that five of
such areas pose no material Year 2000 problem. Penn has
identified certain Year 2000 issues in nine areas and is in the
process of remediating them. Penn has plans to complete the
assessment of the final two areas by the end of 1998. Penn plans
to complete the entire Year 2000 project by September 1999. If
the already identified modifications and conversions are not made
or are not completed on a timely basis, or if Penn identifies
material additional modifications which are not completed on a
timely basis, the Year 2000 issue would have a material adverse
impact on operations.
Penn has initiated formal communications with many of
its major suppliers to determine the extent to which it is
vulnerable to those third parties' failure to resolve their own
Year 2000 problems and is still in the assessment phase as to
whether and to what extent such third parties have a Year 2000
issue. There can be no guarantee that the failure of other
companies to resolve their own Year 2000 issue will not have a
material adverse effect on Penn's business, financial condition
and results of operations.
Penn is utilizing both internal and external resources
to reprogram and/or replace and test Penn's software for Year
2000 modifications. Of the $7 million total project cost,
approximately $6 million will be capitalized since those costs
are attributable to the purchase of new software for total system
replacements (i.e., the Year 2000 solution comprises only a
portion of the benefits resulting from the system replacements).
The remaining $1 million will be expensed as incurred. As of
September 30, 1998, Penn had expended a total of $3 million for
Year 2000 capital projects and had expensed approximately
$400,000 for Year 2000 related maintenance activities. Penn's
total Year 2000 project cost, as well as its estimates of the
time needed to complete remedial efforts, are based on currently
available information and do not include the estimated costs and
time associated with the impact of third party Year 2000 issues.
Penn believes the most reasonably likely worst case
scenario from the Year 2000 issue to be disruption in power plant
monitoring systems, thereby producing inaccurate data and
potential failures in electronic switching mechanisms at
transmission junctions. This would prolong localized outages, as
technicians would have to manually activate switches. Such an
event could have a material, but presently undeterminable, effect
on Penn's financial results. Penn has not yet developed a
contingency plan to address the effects of any delay in becoming
Year 2000 compliant but currently expects to have a contingency
plan by the spring of 1999.
The costs of the project and the dates on which Penn
plans to complete the Year 2000 modifications are based on
management's best estimates, which were derived from numerous
assumptions of future events including the continued availability
of certain resources, and other factors. However, there can be no
guarantee that this project will be completed as planned and
actual results could differ materially from the estimates.
Specific factors that might cause material differences include,
but are not limited to, the availability and cost of trained
personnel, the ability to locate and correct all relevant
computer code, and similar uncertainties.
- 49 -
PART II. OTHER INFORMATION
- ---------------------------
Item 5. Other Information
-----------------
FirstEnergy's Code of Regulations requires a shareholder
to give appropriate notice to the Company before any
business requested to be brought before an annual meeting
of the Company's shareholders by that shareholder can be
considered at the meeting. Appropriate notice in this
case is notice to the Company's Corporate Secretary
received at least 60 days prior to the meeting. Business
that a shareholder requests be brought before the 1999
Annual Meeting as to which appropriate notice is given to
the Company on or before February 3, 1999, will be
referred to in the Company's proxy materials for that
meeting, but such business as to which the Company
receives notice after that date will not. In either case,
the rules contained in Regulation 14a-4(c) under the
Securities Exchange Act of 1934 relating to the
conferring of discretionary voting authority in a proxy
will apply.
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, FirstEnergy, or, respectively, any of
the Companies, has not filed as an exhibit to this Form
10-Q any instrument with respect to long-term debt if
the respective total amount of securities authorized
thereunder does not exceed 10% of the total assets of
FirstEnergy and its subsidiaries on a consolidated
basis, or respectively, any of the Companies, but hereby
agrees to furnish to the Commission on request any such
documents.
(b) Reports on Form 8-K
FirstEnergy, OE, CEI, TE, Penn - Two combined
------------------------------
reports on Form 8-K were filed since June 30, 1998.
A report dated July 6, 1998 reported events
affecting second quarter 1998 results of operations
for FirstEnergy and its four operating subsidiaries
including power supply transactions, power marketing
and trading transactions, and Penn's rate
restructuring plan. A report dated October 15, 1998
reported that FirstEnergy will transfer its
transmission assets into a new subsidiary and has
signed an agreement in principle with Duquesne
Light Company (Duquesne) that would result in an
exchange of certain generating assets between
FirstEnergy's operating subsidiaries and Duquesne.
- 50 -
SIGNATURE
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
November 13, 1998
FIRSTENERGY CORP.
-----------------
Registrant
OHIO EDISON COMPANY
-------------------
Registrant
THE CLEVELAND ELECTRIC
----------------------
ILLUMINATING COMPANY
--------------------
Registrant
THE TOLEDO EDISON COMPANY
-------------------------
Registrant
/s/ Harvey L. Wagner
---------------------------------
Harvey L. Wagner
Controller
Principal Accounting Officer
PENNSYLVANIA POWER COMPANY
--------------------------
Registrant
/s/ Harvey L. Wagner
---------------------------------
Harvey L. Wagner
Comptroller
Principal Accounting Officer
- 51 -