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 JuneSeptember 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to _______to
--------- ----------
Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification No.
- ----------- ----------------------------------------------------------------------- ------------------
333-21011 FIRSTENERGY CORP. 34-1843785
(An Ohio Corporation)
76 South Main Street
Akron, Ohio 44308
Telephone (800)736-3402
1-2578 OHIO EDISON COMPANY 34-0437786
(An Ohio Corporation)
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-2323 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY 34-0150020
(An Ohio Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-3583 THE TOLEDO EDISON COMPANY 34-4375005
(An Ohio Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-3491 PENNSYLVANIA POWER COMPANY 25-0718810
(A Pennsylvania Corporation)
1 East Washington Street
P. O. Box 891
New Castle, Pennsylvania 16103
Telephone (412)652-5531
Indicate by check mark whether each of the registrants (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date:
OUTSTANDING
CLASS AS OF AUGUSTNOVEMBER 9, 1999
----- -------------------------------------------
FirstEnergy Corp., $.10 par value 233,963,887233,023,987
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 1-4
FirstEnergy Corp.
Consolidated Statements of Income 5
Consolidated Balance Sheets 6-7
Consolidated Statements of Cash Flows 8
Report of Independent Public Accountants 9
Management's Discussion and Analysis of Results
of Operations and Financial Condition 10-1310-14
Ohio Edison Company
Consolidated Statements of Income 1415
Consolidated Balance Sheets 15-1616-17
Consolidated Statements of Cash Flows 1718
Report of Independent Public Accountants 1819
Management's Discussion and Analysis of Results of
Operations and Financial Condition 19-2120-23
The Cleveland Electric Illuminating Company
Consolidated Statements of Income 2224
Consolidated Balance Sheets 23-2425-26
Consolidated Statements of Cash Flows 2527
Report of Independent Public Accountants 2628
Management's Discussion and Analysis of Results of
Operations and Financial Condition 27-2929-31
The Toledo Edison Company
Consolidated Statements of Income 3032
Consolidated Balance Sheets 31-3233-34
Consolidated Statements of Cash Flows 3335
Report of Independent Public Accountants 3436
Management's Discussion and Analysis of Results of
Operations and Financial Condition 35-3737-39
Pennsylvania Power Company
Consolidated Statements of Income 3840
Consolidated Balance Sheets 39-4041-42
Consolidated Statements of Cash Flows 4143
Report of Independent Public Accountants 4244
Management's Discussion and Analysis of Results of
Operations and Financial Condition 43-4545-47
Part II. Other Information
PART I. FINANCIAL INFORMATION
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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) is
the holding, directly or indirectly, of all of the outstanding common
stock of its four principal electric utility operating subsidiaries,
Ohio Edison Company (OE), The Cleveland Electric Illuminating Company
(CEI), The Toledo Edison Company (TE) and Pennsylvania Power Company
(Penn). These utility subsidiaries are referred to throughout as
"Companies." Penn is a wholly owned subsidiary of OE.
The condensed unaudited 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, 1998 for FirstEnergy and the Companies. The preparation of
financial statements in conformity with generally accepted accounting
principles requires management to make periodic estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenue and expenses. Actual results could differ from those estimates.
The reported results of operations are not indicative of results of
operations for any future period. Certain prior year amounts have been
reclassified to conform with the current year presentation.
The sole assets of the subsidiary trust that is the obligor on
the preferred securities included in FirstEnergy's and OE's
capitalization are $123,711,350 principal amount of 9% Junior
Subordinated Debentures of OE due December 31, 2025.
2 - COMMITMENTS, GUARANTEES AND CONTINGENCIES:
CAPITAL EXPENDITURES-
FirstEnergy's current forecast reflects expenditures of
approximately $2.2 billion (FirstEnergy-$263 million, OE-$856 million,
CEI-$701 million, TE-$257 million and Penn-$167 million) for property
additions and improvements from 1999-2003, of which approximately $538$455
million (FirstEnergy-$172117 million, OE-$156 million, CEI-$124111 million,
TE-$4841 million and Penn-$3830 million) is applicable to 1999. Investments
for additional nuclear fuel during the 1999-2003 period are estimated to
be approximately $394$364 million (OE-$137128 million, CEI-$129118 million, TE-
$100$92
million and Penn-$2826 million), of which approximately $46$51 million (OE-$19
$23 million, CEI-$1514 million, TE-$89 million and Penn-$45 million) applies
to 1999.
STOCK REPURCHASE PROGRAM-
On November 17, 1998, the Board of Directors authorized the
repurchase of up to 15 million shares of FirstEnergy's common stock over
a three-year period beginning in 1999. Repurchases are made on the open
market, at prevailing prices, and will be funded primarily through the
use of operating cash flows. During the third quarter of 1999,
FirstEnergy repurchased and retired 1.5 million shares of its common
stock at an average price of $28.30 per share. During the first nine
months of 1999, FirstEnergy repurchased and retired 4.0 million shares
at an average price of $28.83 per share.
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.Plant, which
expires December 31, 1999. As of JuneSeptember 30, 1999, the Companies'
share of the guarantees was $23.5$19.9 million (OE-$13.611.3 million, CEI-$5.04.4
million, TE-$2.92.6 million and Penn-$2.01.6 million). The price under the
coal supply contract, which includes certain minimum payments, has been
determined to be sufficient to satisfy the debt and lease obligations.
- 1 -
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 $449 million (OE-$213
million, CEI-$145 million, TE-$44 million and Penn-$47 million), which
is included in the construction forecast provided under "Capital
Expenditures" for 1999 through 2003.
The Companies are in compliance with the current sulfur
dioxide (SO2) and nitrogen oxides (NOx) reduction requirements under
the Clean Air Act Amendments of 1990. SO2 reductions are being achieved
by burning lower-sulfur fuel, generating more electricity from lower-
emitting plants, and/or purchasing emission allowances. NOx reductions
are being achieved through combustion controls and generating more
- 1 -
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. In May 1999, the U.S.
Court of Appeals for the D.C. Circuit issued a stay which delays
implementation of EPA's NOx Transport Rule until the Court has ruled on
the merits of various appeals. Under the NOx Transport Rule, 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 contemplating an approximate 85%
reduction in utility plant NOx emissions from 1990 emissions established by the EPA; the original September 1999
deadline has been extended by the D.C. Circuit Court stay.projected 2007 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 an 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. In June 1999, the
EPA stayed the April 30,1999 rulemaking and proposed changes to that
rulemaking in response to the D.C. Circuit Court rulings. New Section
126 petitions were filed by New Jersey, Maryland, Delaware and the
District of Columbia in mid-1999 and are still under evaluation by the
EPA. The Companies continue to evaluate their compliance plans and
other compliance options and currently estimate the additional capital expenditures for
NOx reductions may reach $500 million.options.
The Companies are required to meet federally approved SO2
regulations. Violations of such regulations can result in shutdown of
the generating unit involved and/or civil or criminal penalties of up
to $25,000$27,500 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. In May 1999,
the U.S. Court of Appeals for the D.C. Circuit remanded both standards
back to the EPA finding constitutional and other defects in the new
NAAQS rules. The EPA is seeking rehearing by the D.C. Circuit Court.Court, on October 29, 1999, denied an EPA
petition for rehearing. The Companies cannot predict either the outcome of the rehearing
request or the time period before the new NAAQS could become
enforceable either through Court action or EPAEPA's action
in response to the Court's remand order. The cost of compliance with
these regulations, if they are reinstated, may be substantial and
depends on the manner in which they are ultimately implemented, if at
all, by the states in which the Companies operate affected facilities.
In September 1999, FirstEnergy received, and subsequently in
October 1999, OE and Penn received a citizen suit notification letter
from the New York Attorney General's office alleging Clean Air Act
violations at the W. H. Sammis Plant. FirstEnergy believes the Sammis
Plant is in full compliance with the Clean Air Act, but cannot predict
whether New York will nonetheless file a lawsuit.
On November 3, 1999, the EPA issued Notices of Violation
(NOV) or a Compliance Order to eight utilities covering 32 power
plants, including the Sammis Plant. In addition, the U.S. Department of
Justice filed seven civil complaints against various investor-owned
utilities, which included a complaint against OE and Penn in the U.S.
District Court for the Southern District of Ohio. The NOV and complaint
allege violations of the Clean Air Act based on operation and
maintenance of the Sammis Plant dating back to 1984. The complaint
requests permanent injunctive relief to require the installation of
"best available control technology" and civil penalties of up to
$27,500 per day of violation. FirstEnergy believes the NOV and
complaint are without merit. However, FirstEnergy is unable to predict
the outcome of this litigation. Criminal penalties could be imposed if
the Sammis Plant continues to operate without correcting the alleged
violations and a court determines that the allegations are valid. It is
anticipated at this time that the Sammis Plant will continue to operate
while the matter is being decided.
CEI and TE have been named as "potentially responsible
parties" (PRPs) at waste disposal sites which may require cleanup under
the Comprehensive Environmental Response, Compensation and Liability
Act of 1980. Allegations of disposal of hazardous substances at
historical sites and the liability involved, are often unsubstantiated
and subject to dispute. Federal law provides that all PRPs for a
particular site be held liable on a joint and several basis. CEI and TE
have accrued liabilities of $4.6 million and $1.0 million,
respectively, as of JuneSeptember 30, 1999, based on estimates of the costs
- 2 -
of cleanup and the proportionate responsibility of other PRPs for such
costs. CEI and TE believe that waste disposal costs will not have a
material adverse effect on their financial condition, cash flows or
results of operations.
Legislative, administrative and judicial actions will
continue to change the way that the Companies must operate in order to
comply with environmental laws and regulations. With respect to any
such changes and to the environmental matters described above, the
Companies expect that while they remain regulated, any resulting
additional capital costs which may be required, as well as any required
increase in operating costs, would ultimately be recovered from their
customers.
PENDING EXCHANGE OF ASSETS-
On March 26, 1999, FirstEnergy announced that it completed its
agreements with Duquesne to exchange certain generating assets. Upon
receipt ofAll
regulatory approvals were received by October 1999. Duquesne will
transfer 1,436 megawatts owned by Duquesne at eight Central Area Power
Coordination Group (CAPCO) generating units in exchange for 1,328
megawatts at three non-CAPCO power plants owned by the Companies. The
agreements for the exchange of assets, which is structured as a like-kindlike-
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 auctionare being sold by
Duquesne to a wholly owned subsidiary of its
generating assets.Orion Power Holdings, Inc.
(Orion). The Companies will continue to operate thethose plants until the
assets are transferred to the new owners. Duquesne will fund
decommissioning costs equal to its percentage interest in the three
nuclear generating units to be transferred. The asset transfer to
Duquesne is expected to occur in December 1999 and the Duquesne asset
transfer to the Orion subsidiary could take place in late 1999 or earlyby the middle of 2000.
Under the agreements, Duquesne will no longer be a participant in the
existing
CAPCO arrangements will terminate upon transfer ofwhen the assets.
- 2 -
assets are exchanged with Duquesne.
3 - REGULATORY ACCOUNTING:
On July 6, 1999, Ohiothe Governor Bob Taftof the State of Ohio signed
legislation which will allow Ohio electric customers to select their
generation suppliers beginning January 1, 2001. Among other things, the
new law provides for a five percent rate reduction on the generation portion
of residential customers' bills and the opportunity to recover
transition costs, including regulatory assets, from January 1, 2001
through December 31, 2005. The period for the recovery of regulatory
assets only can be extended up to December 31, 2010. The Public
Utilities Commission of Ohio (PUCO) has been authorized to determine the
level of transition cost recovery, as well as the recovery period for
the regulatory assets portion of those costs, in considering each Ohio
electric utility's transition plan application.
These applications must beOn October 4, 1999, FirstEnergy, on behalf of OE, CEI and TE,
filed with the PUCO byits comprehensive transition plan under the new law.
The plan itemizes the price of electricity into separate components and
details FirstEnergy's strategy to implement corporate separation of its
regulated and nonregulated operations. Under the plan, customers who
remain with OE, CEI, or TE as their generation provider will continue to
receive savings under FirstEnergy's rate plans, expected to total $759
million between 2000 and 2005. In addition, customers will save $358
million through reduced charges for taxes and a five percent reduction
in the price of generation for residential customers beginning January
3, 2000. Upon conclusion1, 2001. Customer prices are expected to be frozen through a five-year
market development period (2001-2005), except for certain limited
statutory exceptions including the five percent reduction in the price
of generation for residential customers. The plan proposes recovery of
generation-related transition costs of approximately $4.5 billion ($3.9
billion, net of deferred income taxes) over the hearing process,market development
period; transition costs related to regulatory assets aggregating
approximately $4.3 billion ($3.0 billion, net of deferred income taxes)
will be recovered over the period of 2001 through early 2005 for OE;
2001 through mid-2008 for TE; and 2001 through mid-2009 for CEI.
The PUCO rejected FirstEnergy's filing on November 4, 1999,
because the PUCO has not yet prescribed the transition plan filing
rules. FirstEnergy will refile its transition plan once those rules have
been established. Despite rejecting FirstEnergy's filing, the PUCO
indicated that it will endeavor to issue anits order in this case within
275 days of its findings regarding recoverability of
transition costs.FirstEnergy's initial filing date. The application of
Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation" (SFAS 71), to OE's generation
business and the nonnuclear generation businesses of CEI and TE will be
discontinued at that time. If the transition plans ultimately approved
by the PUCO for OE, CEI and TE do not provide adequate recovery of their
nuclear generating unit investments and regulatory assets, there would
be a charge to earnings which could have a material adverse effect on
the results of operations and financial condition for FirstEnergy, OE,
CEI and TE. The Companies believe they will be ablecontinue to bill and collect
cost-based rates for their transmission and distribution services, which
will remain regulated; accordingly, it is appropriate that the Companies
continue the application of SFAS 71 to those respective operations after
December 31, 2000.
4 - NEW ACCOUNTING STANDARDS:
In June 1999, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral
of the Effective Date of FASB Statement No. 133." The statement amended
SFAS 133 to make it effective for fiscal years beginning after June 15,
- 3 -
2000. This represents a one-year deferral from the original effective
date. FirstEnergy expects to adopt SFAS 133 effective January 1, 2001.
SFAS 133 requires derivative instruments to be recognized on the balance
sheet as assets or liabilities at their fair value. FirstEnergy has not
yet quantified the effects of adopting SFAS 133 on its financial
statements. However, SFAS 133 could increase volatility in earnings and
other comprehensive income.
5 - SEGMENT INFORMATION:
FirstEnergy's primary segment is its Electric Utility Group
which includes four 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 these
business segments and products and services are as follows:
Segment Financial Information
- -----------------------------
FirstEnergy
Electric Trading All Reconciling
Three Months Ended: Utilities Services Other Eliminations Totals
- ------------------ --------- ----------- ----- ------------ ------
(In millions)
June 30, 1999
- -------------
September 30, 1999
- ------------------
External revenues $ 1,3401,528 $ 1740 $ 167164 $ -- $ 1,5241,732
Intersegment revenues 8 21 24 (53)7 22 28 (57) --
Total revenues 1,348 38 191 (53) 1,5241,535 62 192 (57) 1,732
Depreciation and amortization 208312 -- 79 -- 215321
Net interest charges 143 --136 1 16 (12) 147141
Income taxes 101 (1) 1114 -- 101-- -- 114
Net income/Earnings on common stock 125 (2) 5 (3) 125186 -- (1) 1 186
Total assets 17,393 91 1,833 (934) 18,38317,123 72 1,812 (932) 18,075
Property additions 69110 -- 245 -- 93115
Acquisitions -- -- -- -- --
JuneSeptember 30, 1998
- -------------------------------
External revenues $ 1,3231,449 $179 $ 108 $ 3394 $ -- $ 1,4641,722
Intersegment revenues 8 3 21 (32)23 23 (54) --
Total revenues 1,331 111 54 (32) 1,4641,457 202 117 (54) 1,722
Depreciation and amortization 192194 -- 24 -- 194198
Net interest charges 149148 -- 1817 (12) 155153
Income taxes 66 (14)127 (20) 5 -- -- 52112
Net income/Earnings on common stock 55 (21)191 (29) 4 (3) (2) 29163
Total assets 17,815 62 1,543 (899) 18,52117,619 52 1,692 (952) 18,411
Property additions 6067 -- 7-- -- 67
Acquisitions -- -- 24010 -- 240
- 3 -
FirstEnergy
Electric Trading All Reconciling
Six10
Nine Months Ended:
Utilities Services Other Eliminations Totals
- ------------------
--------- ------------ ----- ------------ ------
(In millions)
JuneSeptember 30, 1999
- -------------
------------------
External revenues $ 2,6124,140 $ 2869 $ 301465 $ -- $ 2,9414,674
Intersegment revenues 16 21 47 (84)23 43 74 (140) --
Total revenues 2,628 49 348 (84) 2,9414,163 112 539 (140) 4,674
Depreciation and amortization 394706 -- 1120 -- 405726
Net interest charges 285 -- 32 (24) 293421 1 49 (36) 435
Income taxes 197312 (2) (1) -- 194309
Net income/Earnings on common stock 268454 (3) 1 (4) 262-- (3) 448
Total assets 17,393 91 1,833 (934) 18,38317,123 72 1,812 (932) 18,075
Property additions 121231 -- 5459 -- 175290
Acquisitions -- -- 9 -- 9
JuneSeptember 30, 1998
- -------------------------------
External revenues $ 2,5594,008 $403 $ 224 $ 48142 $ -- $ 2,8314,553
Intersegment revenues 16 3 42 (61)24 26 65 (115) --
Total revenues 2,575 227 90 (61) 2,8314,032 429 207 (115) 4,553
Depreciation and amortization 385579 -- 37 -- 388586
Net interest charges 289437 1 33 (25) 29851 (37) 452
Income taxes 150 (14) (1)277 (34) 4 -- 135247
Net income/Earnings on common stock 181 (21) (4) (3) 153372 (50) -- (6) 316
Total assets 17,815 62 1,543 (899) 18,52117,619 52 1,692 (952) 18,411
Property additions 118185 -- 13 -- 131198
Acquisitions -- -- 240250 -- 240250
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FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
---------------------- ---------------------------------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
REVENUES:
Electric sales $1,277,424 $1,262,966 $2,497,318 $2,443,555$1,467,619 $1,391,134 $3,964,937 $3,834,689
Other - electric utilities 70,001 65,399 128,327 126,10566,099 66,881 194,426 192,986
Facilities services 116,755 27,094 221,323 36,623133,821 72,061 355,144 108,684
Trading services 17,089 108,304 28,566 224,12240,408 178,958 68,974 403,080
Other 42,612 214 65,757 65124,444 12,953 90,201 13,604
---------- ---------- ---------- ----------
Total revenues 1,523,881 1,463,977 2,941,291 2,831,0561,732,391 1,721,987 4,673,682 4,553,043
---------- ---------- ---------- ----------
EXPENSES:
Fuel and purchased power 204,273 326,292 408,630 541,157269,755 291,227 678,385 832,384
Other expenses:
Electric utilities 424,060 363,930 789,971 707,606368,066 366,915 1,158,037 1,074,521
Facilities services 111,287 26,697 212,640 36,693119,798 65,642 332,438 102,335
Trading services 20,460 143,312 33,264 260,43540,208 221,446 73,472 481,881
Other 34,840 8,118 64,170 8,73527,393 11,911 91,563 20,646
Provision for depreciation and
amortization 215,394 193,690 405,232 387,817321,171 198,329 726,403 586,146
General taxes 139,466 135,108 277,560 271,482144,584 138,471 422,144 409,953
---------- ---------- ---------- ----------
Total expenses 1,149,780 1,197,147 2,191,467 2,213,9251,290,975 1,293,941 3,482,442 3,507,866
---------- ---------- ---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES 374,101 266,830 749,824 617,131441,416 428,046 1,191,240 1,045,177
---------- ---------- ---------- ----------
NET INTEREST CHARGES:
Interest expense 131,359 137,392 260,740 273,161125,712 136,204 386,452 409,365
Allowance for borrowed funds used during
construction and capitalized interest (3,376) (1,187) (6,061) (2,668)(3,410) (2,461) (9,471) (5,129)
Subsidiaries' preferred stock dividends 19,379 18,463 38,760 27,79119,007 19,568 57,767 47,359
---------- ---------- ---------- ----------
Net interest charges 147,362 154,668 293,439 298,284141,309 153,311 434,748 451,595
---------- ---------- ---------- ----------
INCOME TAXES 101,417 52,208 194,342 135,241114,284 111,644 308,626 246,885
---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 125,322 59,954 262,043 183,606185,823 163,091 447,866 346,697
EXTRAORDINARY ITEM (NET OF INCOME TAX
BENEFIT OF $21,208,000) -- (30,522)-- -- (30,522)
---------- ---------- ---------- ----------
NET INCOME $ 125,322185,823 $ 29,432163,091 $ 262,043447,866 $ 153,084316,175
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 227,367 223,987 228,254 223,197226,432 229,482 227,646 225,292
======= ======= ======= =======
BASIC AND DILUTED EARNINGS PER SHARE OF
COMMON STOCK:
Income before extraordinary item $ .55.82 $ .27 $1.15.71 $ .831.97 $ 1.54
Extraordinary item (Net of income taxes) -- (.14)-- -- (.14)
----- ----- ----- ----------- ------
Net income $ .55.82 $ .13 $1.15.71 $ .691.97 $ 1.40
===== ===== ===== =========== ======
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $.375 $.375 $ .75 $ .75$1.125 $1.125
===== ===== ===== =========== ======
The preceding Notes to Consolidated Financial Statements as they relate to FirstEnergy Corp. are an
integral part of these statements.
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FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JuneSeptember 30, December 31,
1999 1998
------------ ------------
(In thousands)
ASSETS
------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 226,533115,604 $ 77,798
Receivables-
Customers (less accumulated provisions of $6,504,000$7,783,000
and $6,397,000, respectively, for uncollectible
accounts) 258,561328,979 239,183
Other (less accumulated provisions of $45,962,000$46,962,000 and
$46,251,000, respectively, for uncollectible accounts) 466,250423,361 322,186
Materials and supplies, at average cost-
Owned 136,379116,273 145,926
Under consignment 113,032106,258 110,109
Prepayments and other 210,675163,061 171,931
----------- -----------
1,411,4301,253,536 1,067,133
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
In service 15,101,66415,075,021 14,961,664
Less--Accumulated provision for depreciation 6,109,3976,282,901 6,012,761
----------- -----------
8,992,2678,792,120 8,948,903
Construction work in progress 231,907240,337 293,671
----------- -----------
9,224,1749,032,457 9,242,574
----------- -----------
INVESTMENTS:
Capital trust investments 1,284,1961,283,575 1,329,010
Nuclear plant decommissioning trusts 396,451406,589 358,371
Letter of credit collateralization 277,763 277,763
Other 459,552666,030 453,860
----------- -----------
2,417,9622,633,957 2,419,004
----------- -----------
DEFERRED CHARGES:
Regulatory assets 2,722,1842,579,815 2,887,437
Goodwill 2,121,1782,108,816 2,167,968
Property taxes 270,666 270,666
Other 215,590195,633 199,400
----------- -----------
5,329,6185,154,930 5,525,471
----------- -----------
$18,383,184$18,074,880 $18,254,182
=========== ===========
- 6 -
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JuneSeptember 30, December 31,
1999 1998
----------------------- ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock $ 1,201,2451,082,371 $ 876,470
Short-term borrowings 228,769287,631 254,470
Accounts payable 304,059232,180 257,524
Accrued taxes 433,012501,713 401,688
Accrued interest 140,103138,266 141,575
Other 203,401252,082 251,262
----------- -----------
2,510,5892,494,243 2,182,989
----------- -----------
CAPITALIZATION:
Common stockholders' equity-
Common stock, $.10 par value, authorized 300,000,000
shares - 234,490,887233,023,987 and 237,069,087 shares
outstanding, respectively 23,44923,302 23,707
Other paid-in capital 3,774,6803,734,814 3,846,513
Accumulated comprehensive income (439) (439)
Retained earnings 809,017909,592 718,409
Unallocated employee stock ownership plan common stock -
7,163,1926,997,705 and 7,406,332 shares, respectively (133,470)(130,624) (139,032)
----------- -----------
Total common stockholders' equity 4,473,2374,536,645 4,449,158
Preferred stock of consolidated subsidiaries-
Not subject to mandatory redemption 648,395 660,195
Subject to mandatory redemption 160,996154,996 174,710
OE obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely OE subordinated
debentures 120,000 120,000
Long-term debt 6,142,8475,817,547 6,352,359
----------- -----------
11,545,47511,277,583 11,756,422
----------- -----------
DEFERRED CREDITS:
Accumulated deferred income taxes 2,259,1002,235,541 2,282,864
Accumulated deferred investment tax credits 279,335274,377 286,154
Pensions and other postretirement benefits 533,236537,327 525,647
Other 1,255,4491,255,809 1,220,106
----------- -----------
4,327,1204,303,054 4,314,771
----------- -----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ----------- -----------
$18,383,184$18,074,880 $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 SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
---------------------- ---------------------------------------------- ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 125,322185,823 $ 29,432163,091 $ 262,043 $153,084447,866 $ 316,175
Adjustments to reconcile net income
to net cash from operating activities-
Provision for depreciation and
amortization 215,394 193,690 405,232 387,817321,171 198,329 726,403 586,146
Nuclear fuel and lease amortization 21,354 16,319 47,949 40,63227,535 21,974 75,484 62,606
Other amortization, net (3,789) (9,410) (4,254) (9,682)(2,855) (760) (7,109) (10,442)
Deferred income taxes, net (8,310) (29,431) (14,745) (24,207)(30,421) 3,917 (45,166) (20,290)
Investment tax credits, net (3,375) (5,568) (6,819) (11,339)(6,856) (5,841) (13,675) (17,180)
Extraordinary item -- 51,730-- -- 51,730
Receivables (142,077) 48,421 (160,447) 88,486(5,501) (192,236) (165,948) (103,750)
Materials and supplies 11,734 197 6,728 (9,797)26,879 21,275 33,607 11,478
Accounts payable 37,015 1,526 49,173 (35,149)(75,808) (97,985) (26,635) (133,134)
Other 19,513 (18,160) (99,449) (99,317)108,621 153,718 9,172 54,401
--------- -------- --------- ---------- ---------
Net cash provided from operating
activities 272,781 278,746 485,411 532,258548,588 265,482 1,033,999 797,740
--------- -------- --------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Common stock -- 203,855-- -- 203,855
Long-term debt 181,088 114,286 193,365 262,40584,331 10,151 277,696 272,556
Ohio Schools Council prepayment program -- 116,598-- -- 116,598
Short-term borrowings, net 54,353 145,612 29,625 37,169
Redemptions and Repayments-
Common stock 31,07641,035 -- 75,575116,610 --
Preferred stock 21,489 15,379 21,489 15,37911,920 6,000 33,409 21,379
Long-term debt 12,206 189,930 93,008 349,911
Short-term borrowings, net 35,992 87,599 24,728 108,443525,532 209,963 618,540 559,874
Common stock dividend payments 85,299 83,586 171,436 166,97785,247 86,040 256,683 253,017
--------- -------- --------- ------------------ ---------
Net cash provided from (used for)used for financing
activities (4,974) 58,245 (192,871) (57,852)525,050 146,240 717,921 204,092
--------- -------- --------- ------------------ ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 92,971 307,120 183,676 371,224114,873 76,614 298,549 447,838
Cash investments 63 66 (41,205) 111,610(71) (205) (41,276) 111,405
Other (6,148) 7,685 1,334 18,84419,665 (3,873) 20,999 14,971
--------- -------- --------- ------------------ ---------
Net cash used for investing
activities 86,886 314,871 143,805 501,678134,467 72,536 278,272 574,214
--------- -------- --------- ------------------ ---------
Net increase (decrease) in cash and
cash equivalents 180,921 22,120 148,735 (27,272)(110,929) 46,706 37,806 19,434
Cash and cash equivalents at beginning
of period 45,612 48,845226,533 70,965 77,798 98,237
--------- -------- --------- ------------------ ---------
Cash and cash equivalents at end of period $ 226,533115,604 $ 70,965117,671 $ 226,533115,604 $ 70,965117,671
========= ======== ========= ================== =========
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
JuneSeptember 30, 1999, and the related consolidated statements of income
and cash flows for the three-month and six-monthnine-month periods ended
JuneSeptember 30, 1999 and 1998. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with 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 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, 1998 (not presented herein), and, in
our report dated February 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, 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
AugustNovember 9, 1999
- 9 -
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 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. However, electricity and
natural gas are subject to unpredictable price fluctuations due to
changing economic and weather conditions and constraints, which arise
from time to time in availability of supply.
Results of Operations
- ---------------------
Basic and diluted earnings per share of common stock
increased to $1.15$1.97 per share for the six-monthnine-month period ended JuneSeptember
30, 1999, from $.69$1.40 per share for the same period last year. For the
secondthird quarter of 1999, earnings increased to $.55$.82 per share, from $.13$.71
per share forin the secondthird quarter of 1998. Higher earnings resulted from
several factors including higher retail revenues, lower purchased power
costs, reduced costs from the FirstEnergy Trading Services, Inc. (FETS)
business segment and lower interest expenses. These sources of improved
earnings were partially offset by increased accelerated depreciation
and amortization of nuclear and regulatory assets under OE's rate plan.
Also, second quarter and year-to-
dateyear-to-date earnings for 1998 included an extraordinary charge
of $30.5 million, or $.14 per common share resulting from Penn's
discontinued application of SFAS 71 to its generation business.
Revenues increased $59.9$10.4 million in the secondthird quarter of 1999
compared to the second quarter of 1998, and $110.2$120.6 million during the six-monthnine-month period ending Juneended September 30,
1999 as compared to the same period
ofperiods in 1998. The revenue increases
resulted primarily from the contributions from the Electric Utility Operating
Companies (EUOC) business segment and newly acquired businesses, offset
by reduced revenues from the FETS business segment. The sources of
increases in secondthe current quarter and year-to-date
1999nine-month period revenues,
compared to the corresponding periods of 1998, are summarized in the
following table.
June 30, 1999
-----------------------
(In millions)
Three SixNine
Months Months
Ended Ended
------ ------
(In millions)
Electric sales $ 14.576.5 $ 53.8130.2
Other electric utility revenues 4.6 2.2
------(0.8) 1.4
------- -------
EUOC 19.1 56.075.7 131.6
FETS (91.2) (195.6)(138.6) (334.1)
New businesses acquired 132.0 249.8
------58.5 285.4
Unregulated electric sales 14.8 37.7
------- -------
Net Revenue Increase $ 59.910.4 $ 110.2
======120.6
======= =======
Growth in the Company's consolidated kilowatt-hour sales,
consisting of regulated electric sales (EUOC) and unregulated electric
sales has been a significant factor in the overall net increase of
revenues in the current quarter and the nine months of 1999, compared
to the corresponding periods of 1998. Consolidated retail kilowatt-hour
sales increased 7.5% in the third quarter of 1999, with sales to
residential, commercial and industrial customers increasing 6.2%, 13.6%
and 4.2%, respectively. For the first nine months, retail sales
increased 6.5%, compared to the same period in 1998, with residential,
commercial and industrial customers all contributing to the improved
results with sales increases of 6.8%, 12.1% and 2.6%, respectively.
Total sales increased 10.7% for the quarter and 6.3% for the nine-month
period as compared to the prior year.
The increases in EUOC revenues for the secondthird quarter and year-to-date periods of 1999the
nine-month period as compared to the same periods of 1998prior year resulted from
increases inadditional EUOC kilowatt-hour sales, which were partially offset by
reduced unit prices. Residential, commercial and industrial customers
all contributed to the increases inadditional EUOC kilowatt-
hourkilowatt-hour sales with
increases of 2.8%6.3%, 3.4%4.9% and 1.8%4.4%, respectively, for the secondcurrent quarter
of 1999 and increases of 7.3%6.9%, 3.6%4.1% and 1.5%2.4%, respectively, for the
year-to-datenine-month period. A net increaseGrowth of more than
10,000 newthe EUOC customer base and increased use
of electricity per customer stimulated by a strong consumption-driven
- 10 -
economy, continued to expand residential customers over the last twelve months ending
June 30, 1999, added to the growth in residential sales. Continued
service sector growth contributed to theand commercial kilowatt-hour
sales
increase.sales. Industrial consumption of electricity also benefited from the
strong economy. Sales to industrial customers showed modest growth with someexperienced additional
strengthvolume in the secondthird quarter of 1999, compared to the same period last
year, due in part to a reboundlabor strike in kilowatt-hour sales to primary metal customers. Overall, EUOC kilowatt-
hour1998 experienced by a major customer in
the automotive sector. In total, retail sales increased 3.3%5.1% in the
secondthird quarter of 1999 and 1.9%4.2% for the first sixnine months of 1999 as
compared to the same periods in 1998. Overall, EUOC kilowatt-hour sales
increased 8.5% in the third quarter of 1999 and 4.2% for the first nine
months of the current year from the corresponding periods of 1998.
Contributing to the increases were sales to the wholesale market in the
current quarter, which increased 39.9% from the third quarter of 1998.
The decreases in FETS revenues for the secondcurrent year quarter
and first half of 1999nine-month period compared to the prior year resulted from limitinga
refocus of trading activities toin the support of FirstEnergy's retail
marketing activities. Acquisition of facilities services companies the purchase
of MARBEL Energy Corporation (MARBEL) and
sales of electricity to the
- 10 -
unregulated market by Penn Power Energy and
FirstEnergy Services Corp. combinedcontributed to cause the significant increase in
other revenues.revenues for both the third quarter and nine-month periods of
1999. The purchase of MARBEL Energy Corporation (MARBEL) also added to
the increase in the current nine-month period revenues from the prior
year, but was not a contributing factor to the third quarter increase.
Total expenses decreased $47.4$3.0 million in the secondthird quarter
and were $25.4 million lower in the first nine months of 1999 compared
to the same quartercorresponding periods of 1998, and were down $22.5
million in the first half of 1999 compared to the first half of the
prior year.1998. Contributing to this overall
reduction in expenses were EUOC purchased power costs which were down
$122.1$23.0 million in the secondthird quarter of 1999 from the same quarter of 1998 and were $129.1$152.1 million lower in
the first halfnine months of 1999, compared to the first half of 1998. Most1999. Much of the improvement occurred in the
second quarter results was due to the absence of unusual conditions experienced in
the second quarter of 1998, which resulted in an additional $77.4 million of unusually high purchased power
costs. Those costs were incurred during a period of record heat and
humidity in late June 1998, which coincided with a regional power
shortage resulting in high prices for purchased power. Unscheduled
outages at several of the Companies' power plants at that time required
the Companies to purchase significant amounts of power on the spot
market. AlthoughThe outage at the secondBeaver Valley Plant continued as well for
most of the third quarter of 1999 also experienced1998. Although above normal temperatures
were also experienced in June,1999, the Companies maintained a stronger
generating
capacity position during the period, due in partthis year compared to a program designed
to increase available internal generation during the summer months. The
program involves moving maintenance away from the summer months,
increasing the reliability of generating units, adding peaking
resources, and in some cases increasing the power output of existing
facilities. The price extremes of the prior year also did not occur in
the first half of 1999.1998.
Other expenses for the EUOCs increased $60.1only slightly in the
third quarter of 1999 from the same period last year, while increasing
$83.5 million in the second quarter of 1999 compared to the samenine-month period the prior year and
$82.4 million in the six-month period ended June 30, 1999 compared tofrom the corresponding period ofin
1998. A portion of the second quarter and
year-to-date increases resulted from the program (mentioned above)Higher nuclear expenses due to
increase internal generation during the summer months. As part of that
program, the outage at Bruce Mansfield Unit 1 was moved from Fall 1999
to a period extending from late March to May 31, 1999, in order to
enhance readiness for the peak summer months. Nuclear expenses also
contributed significantly to the increases in other expenses primarily
as a result of refueling outages at Beaver Valley
Unit 2 and the Perry Plant. Additionally, higherPlant; increased customer and sales expenses
resulting from marketing programs and information system requirements;
and higher distribution expenses, from storm damage, line and meter
maintenance all contributed to the increases ofyear-to-date increase in other EUOC
other expenses in both periods of 1999.expenses.
Reduced FETS activity resulted in a significant cost reductionreductions
in that business segment for both the secondthird quarter and year-to-date periodsnine-month
period of 1999 when compared to the same periods of 1998. Also, FETS
expenses for the second quarternine-month period of 1998 included credit losses
resulting from the effects of unprecedented market prices for purchased power in
that year. ExpansionThe increase in other expenses was primarily due to the
expansion of the facilities services business through additional
acquisitions, the purchase of MARBEL and costs attributable to
unregulated sales activity all combinedactivity.
Accelerated cost recovery in connection with the OE rate plan
was the primary factor contributing to the increase other expenses.
Depreciationin depreciation and
amortization in the secondthird quarter and year-to-date periods of 1999 increased from
the same periods of 19981998. Accelerated depreciation and amortization
increased $116 million in the third quarter and $121 million in the
first nine months of 1999 from the corresponding periods last year.
General taxes increased for both the third quarter and year-to-date
periods of 1999 primarily as a
result of accelerated expensesdue to increases in connection with the OE rate plan.gross receipts tax,
Ohio property tax and payroll taxes.
Interest expenses decreased in the secondthird quarter and first
halfnine months of 1999 from the same periods of the previous year due to
refinancings and redemptions of long-term debt. Subsidiaries' preferred
stock dividend requirements increased in the year-to-date period of
1999, compared to the year-to-date periodas a result of 1998, due to the declaration in the fourth quarter of 1997 of
preferred stock dividends payable in 1998 by TE and CEI.
Capital Resources and Liquidity
- -------------------------------------------------------------
The Company and its subsidiaries have continuing cash
requirements for planned capital expenditures and debt maturities.
During the last two quartersquarter of 1999, capital requirements for property
additions and capital leases are expected to be about $379$161 million,
including $11$4 million for nuclear fuel. The Companies have additional
cash requirements of approximately $426.1$86.6 million (excluding thean OE
revolving credit agreement) to meet sinking fund requirements for
- 11 -
preferred stock and maturing long-term debt during the remainderfourth quarter
of 1999. These cash requirements are expected to be satisfied with
internal cash and/or short-term credit arrangements.
During the secondthird quarter of 1999, the Company repurchased over 11.5
million shares of its common stock at an average price of approximately $29.41$28.30 per
share. In the year-to-date period ending
Juneshare - bringing its total repurchases to 4.0 million shares, through
September 30, 1999, the Company repurchased 2.6 million shares at an average price of approximately $29.13$28.83 per share.
As of JuneSeptember 30, 1999, the Company and its subsidiaries
had about $226.5$115.6 million of cash and temporary investments and $228.8$287.6
million of short-term indebtedness. Unused borrowing capability
included $145.0$96.0 million under revolving lines of credit and $32.0
million of bank facilities that provide for borrowings on a short-term
basis at the banks' discretion.
- 11 -
On June 24,July 26, 1999, CEI completed its purchase of the remaining
20 percent interest in the Seneca pumped storage hydroelectric
generation plant from General Public Utilities for $43 million. The
purchase makes available 84 megawatts of additional capacity and
provides the Company signed a letter of intent to
form a joint venture with Range Resources Corp., a Texas-based,
independent energy company. Under the agreement, the Company would
merge the exploration, production and certain other assets of its
MARBEL Energy Corporation subsidiary into a single limited liability
company with the Appalachian Basin assets of Range Resources. The joint
venture would produce oil and gas on 980,000 acres in the Appalachian
Basin, which includes parts of Ohio, Pennsylvania, West Virginia,
Kentucky and Tennessee. The objectivefull ownership of the joint venture is to cut
costs, enhance productivity and increase the competitive position of
the joint venture partners in the Appalachian Basin.plant.
On August 17, 1999, FirstEnergy Telecom Corp.Services Corporation (FSC), a
wholly owned subsidiary, joinedsigned a Master Energy Services and Supply
Agreement with Allegheny Communications Connect,Republic Technologies International, Inc., AEP Communications LLC,
and GPU Telecom Services, Inc., to initiate the interconnection of
their respective fiber optic networks. (RTI). The
agreement was announcedcould produce more than $1 billion in sales over the five-
year contract period. Over the next five years FSC will manage: the
supply and delivery of all of RTI's electricity and natural gas needs;
RTI's heating, ventilation and air-conditioning requirements; and other
energy-related services for RTI.
The Company and Range Resources Corporation formed a joint
venture, Great Lakes Energy Partners, LLC, on June 23,September 30, 1999. OnceThis
joint venture combined each company's Appalachian oil and natural gas
properties and related gas gathering and transportation systems with
the linkages are complete,objective of lowering operating costs, and increasing natural gas
market share in the network alliance
will haveAppalachian Basin. As exclusive marketing agent for
the opportunity to make sales in new regional markets.
In order to assure adequate future generating capacity during
peak periodsjoint venture, the Company currently planscontinues to install eight combustion
turbines at several locations totaling 815 megawattsexpand its network of
capacity, with
390 megawatts installedgas assets to supply its retail customer base.
On October 5, 1999, FirstEnergy completed the acquisition of
Columbus, Ohio-based Volunteer Energy LLC (Volunteer), formerly a
retail natural gas subsidiary of The Williams Cos. Volunteer serves
about 30,000 business and availableresidential customers in 2000the Midwest and the balance availablehad
approximately $150 million of revenues in 1998. On November 5, 1999,
FirstEnergy also completed its acquisition of Belden Energy Services
Company (Belden), based in North Canton, Ohio. Belden was formerly a
retail natural gas subsidiary of Belden & Blake Corporation. The newly
acquired company serves about 600 business customers in Ohio and had
approximately $44 million of revenues in 1998. The two acquisitions
further expand FirstEnergy's retail natural gas business in Ohio and
surrounding states, bringing FirstEnergy's total annual retail gas
revenues to meet demand in 2001.approximately $500 million.
Regulatory Matters
- ------------------
On July 6, 1999, Ohio Governor Bob Taft signed into law
legislation providing residents of Ohio with a choice of generation
suppliers. Among other provisions,In early October, the Company filed its comprehensive
transition plan under the new Ohio electricity restructuring law provides customer choice
starting January 1, 2001, freezes current rates for(see
Note 3). The law is designed to facilitate the transition of Ohio's
electric utility industry from a five year market-regulated environment to a competitive
market in the generation of electricity. The Company's plan itemizes
the price of electricity into separate components -- primarily
generation, transmission, distribution and transition charges - and
details the Company's strategy to implement corporate separation of its
regulated and nonregulated operations. The plan proposes recovery of
generation-related transition costs of approximately $8.8 billion ($6.9
billion, net of deferred income taxes). Of that amount, approximately
$4.5 billion ($3.9 billion net of deferred income taxes) would be
recovered over the five-year market development period (2001-2005).
Under the proposed plan, the remainder would be recovered from 2001-
2009 -- 2001 through early 2005 for OE; 2001 through mid-2008 for TE;
and includes2001 through mid-2009 for CEI. Current rates will be frozen during
the market development period, except for certain limited statutory
exceptions including a five-percent price cut5% reduction in the generation component of
residential customer bills. Undercustomers' rates. On November 4, 1999, the new law
OE, CEI and TE will continue to deliver power to homes and businesses
through their distribution systems, which will remain regulated. WhilePUCO rejected
FirstEnergy's filing because the new law provides guidance forPUCO has not yet prescribed the
transition to retail competition
in Ohio, significant authority hasplan filing rules. The Company will refile its transition
plan once those rules have been vested inestablished. Despite rejecting
FirstEnergy's filing, the PUCO indicated that it will endeavor to determineissue
its order in this case within 275 days of the ultimate recovery of transition costs (see Note 3). The PUCO will
hold hearings as early asCompany's initial filing
date. If the first quarter of next year to decide the
amount of transition costs each utility can recover over a period of up
to ten years. The Company intends to file transition plans ultimately approved by the PUCO for OE,
CEI and TE do not provide adequate recovery of their nuclear generating
unit investments and regulatory assets, there would be a charge to
earnings which could have a material adverse effect on the results of
operations and financial condition for FirstEnergy, OE, CEI and TE.
- 12 -
All regulatory approvals have been received for the transfer
of generating assets between the Company and Duquesne, which is
intended to be a tax-free asset exchange. When completed in
December 1999, the transaction will provide FirstEnergy with exclusive
ownership and operating control of all generating assets that are
currently jointly owned and operated under the CAPCO agreement (see
Note 2, "Pending Exchange of Assets").
Environmental Matters
- ---------------------
In September 1999, FirstEnergy received, and subsequently in
October 1999, OE and Penn received a citizen suit notification letter
from the New York Attorney General's office alleging Clean Air Act
violations at the W. H. Sammis Plant. FirstEnergy believes the Sammis
Plant is in full compliance with the Clean Air Act, but cannot predict
whether New York will nonetheless file a lawsuit.
On November 3, 1999, the EPA issued Notices of Violation
(NOV) or a Compliance Order to eight utilities covering 32 power
plants, including the Sammis Plant. In addition, the U.S. Department of
Justice filed seven civil complaints against various investor-owned
utilities, which included a complaint against OE and Penn in the fourth quarterU.S.
District Court for the Southern District of 1999.Ohio. The applicationNOV and complaint
allege violations of SFAS 71the Clean Air Act based on operation and
maintenance of the Sammis Plant dating back to OE's generation business1984. The complaint
requests permanent injunctive relief to require the installation of
"best available control technology" and civil penalties of up to
$27,500 per day of violation. FirstEnergy believes the nonnuclear generation businessesNOV and
complaint are without merit. However, FirstEnergy is unable to predict
the outcome of CEIthis litigation. Criminal penalties could be imposed if
the Sammis Plant continues to operate without correcting the alleged
violations and TE will be discontinued whena court determines that the PUCO issues an order of its
hearing findings. Consequently, the Companyallegations are valid. It is
not able to determine,anticipated at this time that the financial impact resulting from the eventual
discontinuation of regulatory accounting under SFAS 71 for those
businesses. The Company believes itSammis Plant will be able to continue to bill
and collect cost-based rates relating to its transmission and
distribution operations.
On June 3, 1999,operate
while the Alliance Regional Transmission
Organization submitted to the Federal Energy Regulatory Commission
(FERC) a proposal to form an independent, regional transmission
organization (RTO). If approved, the RTO would become one of the
largest independent RTOs in the world. The companies in the Alliance
filing are American Electric Power, Consumers Energy, Detroit Edison,
FirstEnergy and Virginia Electric and Power. The RTO would be
controlled by a board of directors independent of member companies, and
would not be affiliated with any transmission owner. The Company
believes that the proposed RTO meets the FERC's stated transmission
objectives of providing non-discriminatory service, while providing for
streamlined and cost efficient operation.
In May 1999, a federal appeals court delayed enforcement of
EPA's September 1998 final regulations requiring reductions in nitrogen
oxide emissions for Ohio, Pennsylvania and twenty other eastern states.
The federal appeals court remanded the regulations back to the EPA so
that the agency could address, if possible, constitutional and other
defects in the rules. The EPA has sought a rehearing. The Company
cannot predict either the outcome of these actions or the time period
before final rules could become enforceable.matter is being decided.
Year 2000 Readiness
- -------------------
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to identify the applicable
year. Any of the Company'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 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.
- 12 -
The Company has developed a multi-phase program for Year 2000
compliance that consists of an assessment of its systems and operations
that could be affected by the Year 2000 problem; remediation or
replacement of noncompliant systems and components; and testing of
systems and components following such remediation or replacement. 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 is committed to taking appropriate actions to
eliminate or lessen negative effects of the Year 2000 issue on its
operations. The Company has completed an inventory of all computer
systems and hardware including equipment with embedded computer chips,
has determined which systems need to be converted or replaced to become
Year 2000-ready and has completed the remediation of all mission
critical systems and equipment. Based on results of its remediation and
testing efforts, the Company filed documents with the North American
Electric Reliability Council, Nuclear Regulatory Commission, PUCO and
Pennsylvania Public Utility Commission (PPUC) that as of June 30, 1999
its generation, transmission, and distribution systems were ready to
serve customers in the year 2000.
Most of the Company's Year 2000 issues have been resolved
through system replacement. Of the Company's major centralized systems,
the general ledger system and inventory management, procurement and
accounts payable systems were replaced at the end of 1998. The
Company's payroll system was enhanced to be Year 2000 compliant in July
1998. The customer service system was made Year 2000 compliant in June
1999.
The Company has completed formal communications with most ofcontacted all its key suppliers to determineand does not
anticipate any service interruptions with them based on 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,information
they have provided. Further, the Company is
developing alternate sourceshas reviewed its stocking
levels of critical supplies and services inhas determined the event such
noncompliance occurs.appropriate stocking
levels to maintain approaching the year 2000. The Company is also identifying areas requiring
higher inventoryhas initiated
- 13 -
actions to ensure that these materials are at the required levels
based on compliance uncertainties. There can be
no guarantee thatconsistent with the failure of companies to resolve their own Year
2000 issues will not have a material adverse effect on the Company's
business, financial condition and results of operations, although it
does not consider this likely to occur.assumptions in its contingency plan.
The Company has completed the development of formal
contingency plans in all mission critical areas to establish procedures
to be followed in handling unlikely events which could impact the
provision of electric service to its customers.
The Company is usinguses both internal and external resources to
reprogram and/or replace and test its software for Year 2000
modifications. Of the $90$87.1 million total project cost, approximately
$70$69.5 million will be capitalized since those costs are attributable to
the purchase of new software for total system replacements because the
Year 2000 solution comprises only a portion of the benefits resulting
from the system replacements. The remaining $20$17.6 million will be
expensed as incurred. As of JuneSeptember 30, 1999, the Company had spent
$66$67.7 million for Year 2000 capital projects and had expensed
approximately $14$15.0 million for Year 2000-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 likely worst-case scenario from
the Year 2000 issue will be disruption in power plant monitoring
systems, thereby producing inaccurate data and potential failures in
electronic switching mechanisms at transmission junctions. This would
prolong localized outages, as technicians would have to manually
activate switches. Such an event could have a material, but currently
undeterminable, effect on its financial results.
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.
- 1314 -
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
---------------------- --------------------------------------------- -------------------------
1999 1998 1999 1998
---------- ------------------- ---------- ----------
(In thousands)
OPERATING REVENUES $646,729 $618,598 $1,279,847 $1,216,463$770,518 $696,226 $2,050,365 $1,912,689
-------- -------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 109,443 153,133 221,465 267,048143,486 146,194 364,951 413,242
Nuclear operating costs 76,879 69,043 149,315 140,90964,547 69,723 213,862 210,632
Other operating costs 117,773 108,091 218,056 200,264103,398 113,769 321,454 314,033
-------- -------- ---------- ----------
Total operation and maintenance
expenses 304,095 330,267 588,836 608,221311,431 329,686 900,267 937,907
Provision for depreciation and
amortization 125,151 106,030 228,555 217,226228,775 109,920 457,330 327,146
General taxes 61,562 58,969 123,822 118,49461,890 59,714 185,712 178,208
Income taxes 41,904 29,684 89,667 67,74148,120 56,222 137,787 123,963
-------- -------- ---------- ----------
Total operating expenses and taxes 532,712 524,950 1,030,880 1,011,682650,216 555,542 1,681,096 1,567,224
-------- -------- ---------- ----------
OPERATING INCOME 114,017 93,648 248,967 204,781120,302 140,684 369,269 345,465
OTHER INCOME 13,080 11,766 22,398 24,26810,179 12,589 32,577 36,857
-------- -------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 127,097 105,414 271,365 229,049130,481 153,273 401,846 382,322
-------- -------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 46,222 46,329 91,305 92,99744,583 47,258 135,888 140,255
Allowance for borrowed funds used during
construction and capitalized interest (885) (469) (1,982) (1,129)(1,041) (363) (3,023) (1,492)
Other interest expense 9,164 9,391 17,783 18,8856,510 7,811 24,293 26,696
Subsidiaries' preferred stock dividend
requirements 3,856 3,856 7,713 7,7133,831 3,857 11,544 11,570
-------- -------- ---------- ----------
Net interest charges 58,357 59,107 114,819 118,46653,883 58,563 168,702 177,029
-------- -------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 68,740 46,307 156,546 110,58376,598 94,710 233,144 205,293
EXTRAORDINARY ITEM (NET OF INCOME TAX
BENEFIT OF $21,208,000) -- (30,522)-- -- (30,522)
-------- -------- ---------- ----------
NET INCOME 68,740 15,785 156,546 80,06176,598 94,710 233,144 174,771
PREFERRED STOCK DIVIDEND REQUIREMENTS 2,913 3,018 5,826 6,0372,914 3,020 8,740 9,057
-------- -------- ---------- ----------
EARNINGS ON COMMON STOCK $ 65,82773,684 $ 12,76791,690 $ 150,720224,404 $ 74,024165,714
======== ======== ========== ==========
The preceding Notes to Consolidated Financial Statements as they relate to Ohio Edison Company are an
integral part of these statements.
- 1415 -
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JuneSeptember 30, December 31,
1999 1998
------------ ------------
(In thousands)
ASSETS
------
ASSETS
------
UTILITY PLANT:
In service $8,209,980$8,250,044 $8,158,763
Less--Accumulated provision for depreciation 3,674,9313,776,557 3,610,155
---------- ----------
4,535,0494,473,487 4,548,608
---------- ----------
Construction work in progress-
Electric plant 175,967173,728 174,418
Nuclear fuel 1,1371,154 17,003
---------- ----------
177,104174,882 191,421
---------- ----------
4,712,1534,648,369 4,740,029
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
PNBV Capital Trust 471,478470,928 475,087
Nuclear plant decommissioning trusts 141,692144,734 130,572
Letter of credit collateralization 277,763 277,763
Other 428,389424,587 407,839
---------- ----------
1,319,3221,318,012 1,291,261
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 184,33610,955 33,213
Receivables-
Customers (less accumulated provisions of $6,504,000$7,783,000
and $6,397,000, respectively, for uncollectible accounts) 236,152289,985 215,257
Associated companies 214,553216,856 229,854
Other 46,99750,882 47,684
Materials and supplies, at average cost-
Owned 69,58152,021 76,756
Under consignment 58,28150,042 48,341
Prepayments and other 102,94874,960 78,618
---------- ----------
912,848745,701 729,723
---------- ----------
DEFERRED CHARGES:
Regulatory assets 1,774,1921,643,333 1,913,808
Property taxes 101,360 101,360
Unamortized sale and leaseback costs 87,59986,349 90,098
Other 59,48665,838 57,547
---------- ----------
2,022,6371,896,880 2,162,813
---------- ----------
$8,966,960$8,608,962 $8,923,826
========== ==========
- 1516 -
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JuneSeptember 30, December 31,
1999 1998
--------- ----------------------- ------------
(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 2,098,728 2,098,728
Retained earnings 400,440474,249 583,144
---------- ----------
Total common stockholder's equity 2,499,1692,572,978 2,681,873
Preferred stock-
Not subject to mandatory redemption 160,965 160,965
Subject to mandatory redemption 10,0005,000 10,000
Preferred stock of consolidated subsidiary-
Not subject to mandatory redemption 39,105 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 2,061,5971,974,219 2,215,042
---------- ----------
4,905,8364,887,267 5,253,785
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 829,750589,348 528,792
Short-term borrowings-
Associated companies 209,231101,867 88,732
Other 218,772239,382 249,451
Accounts payable-
Associated companies 55,26836,593 10,176
Other 82,36153,327 89,483
Accrued taxes 230,142264,222 188,295
Accrued interest 44,81642,970 45,221
Other 66,477120,333 114,162
---------- ----------
1,736,8171,448,042 1,314,312
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 1,554,8941,502,368 1,601,887
Accumulated deferred investment tax credits 150,654147,163 154,538
Pensions and other postretirement benefits 140,996144,302 136,856
Other 477,763479,820 462,448
---------- ----------
2,324,3072,273,653 2,355,729
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$8,966,960$8,608,962 $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.
- 1617 -
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
-------------------- ----------------------------------------- ----------------------
1999 1998 1999 1998
---------- --------- --------- -------- -----------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 68,74076,598 $ 15,785 $156,54694,710 $233,144 $ 80,061174,771
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and amortization 125,151 106,030 228,555 217,226228,775 109,920 457,330 327,146
Nuclear fuel and lease amortization 9,483 6,563 20,160 13,34610,718 8,244 32,131 21,590
Deferred income taxes, net (18,745) (36,679) (30,755) (49,658)(55,793) (13,903) (86,548) (63,561)
Investment tax credits, net (1,907) (3,622) (3,884) (7,448)(5,320) (3,897) (9,204) (11,345)
Extraordinary item -- 51,730-- -- 51,730
Receivables 30,463 (73,744) (4,907) (41,876)(60,020) (166,506) (64,928) (208,382)
Materials and supplies (3,507) 4,755 (2,765) 4,58025,799 6,512 23,034 11,092
Accounts payable 25,552 92,415 37,970 109,590(47,709) 76,043 (9,739) 185,633
Other (24,362) (4,046) (30,893) 45,586104,710 60,949 72,565 106,535
--------- --------- -------- -------- -------- -----------------
Net cash provided from operating
activities 210,868 159,187 370,027 423,137277,758 172,072 647,785 595,209
--------- --------- -------- -------- -------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 190,680 104,822 158,515 107,4602,936 10,039 161,451 117,499
Short-term borrowings, net 74,594 -- 89,820 83,537-- 3,066 3,956
Redemptions and Repayments-
Preferred stock 6,085 -- 6,085 --10,920 5,000 17,005 5,000
Long-term debt 10,558 141,774 19,140 281,635329,094 4,522 348,234 286,157
Short-term borrowings, net -- 15,61986,754 79,581 -- --
Dividend Payments-
Common stock 251,865 39,884-- 44,597 333,603 209,782254,379
Preferred stock 3,057 2,834 5,826 5,8592,611 3,093 8,437 8,952
--------- --------- -------- -------- -------- -----------------
Net cash used for financing activities 6,291 95,289 116,319 306,279426,443 126,754 542,762 433,033
--------- --------- -------- -------- -------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 40,749 47,354 94,787 88,37045,736 36,793 140,523 125,163
Other (5,969) (4,847) 7,798 122(21,040) (1,767) (13,242) (1,645)
--------- --------- -------- -------- -------- -----------------
Net cash used for investing activities 34,780 42,507 102,585 88,49224,696 35,026 127,281 123,518
--------- --------- -------- -------- -------- -----------------
Net increase (decrease) in cash and cash
equivalents 169,797 21,391 151,123 28,366(173,381) 10,292 (22,258) 38,658
Cash and cash equivalents at beginning of
period 14,539 11,655184,336 33,046 33,213 4,680
--------- --------- -------- -------- -------- -----------------
Cash and cash equivalents at end of period $184,336 $ 33,046 $184,33610,955 $ 33,04643,338 $ 10,955 $ 43,338
========= ========= ======== ======== ======== =================
The preceding Notes to Consolidated Financial Statements as they relate to Ohio Edison Company are an
integral part of these statements.
- 1718 -
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 JuneSeptember 30, 1999, and the
related consolidated statements of income and cash flows for the three-
month and six-monthnine-month periods ended JuneSeptember 30, 1999 and 1998. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with 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 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, 1998 (not presented herein),
and, in our report dated February 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, 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
AugustNovember 9, 1999
- 1819 -
OHIO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Earnings on common stock declined to $73.7 million in the
third quarter of 1999 from $91.7 million in the third quarter of 1998.
Higher operating revenues and lower operation and maintenance expenses
were more than offset by increased accelerated depreciation and
amortization of nuclear and regulatory assets under the OE rate plan.
For the nine-month period ended September 30, 1999, earnings increased
to $224.4 million from $165.7 million in the same period of last year.
Year-to-date earnings in 1998 included an extraordinary charge of $30.5
million resulting from Penn's discontinued application of SFAS 71 to its
generation business.
Operating revenues increased $28.1$74.3 million in the secondthird
quarter of 1999, compared to the second quarter of 1998, and increased
$63.4$137.7 million in the first halfnine months of 1999, compared
to the same period of
the prior year.periods in 1998. Higher secondthird quarter and year-to-date
operating revenues resulted primarily from increased kilowatt-hour
sales. Residential, commercial and industrial customers all contributed
to the increase in retail kilowatt-hour sales induring the secondthird quarter
of 1999, compared to the same period of 1998, with increases of 2.7%11.9%, 6.8%11.7% and 2.7%9.9%, respectively.
Overall, retail kilowatt-hour sales increased 3.9%11.1%. Sales to wholesale
customers were 38.4% higher and combined with the additional retail
sales to generate a 15.6% increase in total kilowatt-hour sales. Sales
to industrial customers experienced additional volume in the current
quarter, compared to the same period last year, due to a labor strike
in 1998 experienced by a major customer in the automotive sector. For
the first nine months of 1999, residential, commercial and industrial
sales increased 8.8%, 9.4% and 3.5%, respectively, compared to the same
period in 1998. Retail kilowatt-hour sales increased 6.8% and total
kilowatt-hour sales increased 3.5%8.5%, benefited by a 16.9% increase in
sales to wholesale customers. Growth of the OE companies' customer base
and increased use of electricity per customer stimulated by a strong
consumption-driven economy continued to expand residential and
commercial kilowatt-hour sales. Additionally, kilowatt-hour sales by
Penn's nonregulated affiliate, Penn Power Energy, Inc., contributed to
the increase in the OE companies' commercial sales. Industrial
consumption of electricity also benefited from the 1998 secondstrong economy.
Operation and maintenance expenses decreased $18.3 million in
the third quarter results. Residential, commercial and industrial customers also
combined to increase retail kilowatt-hour saleswere $37.6 million lower in the first sixnine months
of 1999 compared to the same periodcorresponding periods of 1998, with increases of 7.1%,
8.1% and 0.3%, respectively. Retail kilowatt-hour sales increased 4.6%
and total kilowatt-hour sales increased 4.7% from the first half of
1998. Growth in the customer base and increased kilowatt-hour sales per
customer contributed to the residential sales increase for both the
second quarter and first half of 1999, compared to the corresponding
prior year periods. Service sector growth and an expansion of sales by
Penn's nonregulated affiliate were factors increasing commercial
kilowatt-hour sales. A rebound of sales to primary metal customers
contributed to renewed growth of kilowatt-hour sales to industrial
customers.
Operation and maintenance expenses decreased $26.2 million in
the second quarter of 1999 from the same period of 1998, and were $19.4
million lower in the first half of 1999, compared to the first six
months of 1999. Fuel and
purchased power costs were lower in both the secondthird quarter and year-to-datenine-
month periods of 1999 than the corresponding periods of 1998, primarily
due to lower purchased power costs. MostMuch of the reduction in 1999the
current nine-month period was due to the absence of unusual conditions
experienced in the second quarterJune of 1998, which increased the prior period's costs.
Record heat and humidity in late June 1998 coincided with a regional
power shortage resulting in highhigher prices for purchased power.
Unscheduled outages at Beaver Valley Units 1 and 2 which
continued throughreduced the second quarterOE
companies' production capabilities to the point that they purchased
significant amounts of 1998, required that OE and Penn
(OE companies) purchase significant quantities of power on the spot
market during that period. AlthoughIn addition, the
secondBeaver Valley Plant remained out of service through most of the third
quarter of 1999 also
experienced1998. Although above normal temperatures were also
experienced in June, spot market prices were
less extreme and the1999, OE companies maintained a stronger capacity position duringthis
year compared to 1998, which reduced the period. Therefore,need for purchased power.
Nuclear operating costs were lower in the OE companies were ablethird quarter of
1999, compared to reduce their dependence on purchased power in 1999.
Expensesthe third quarter of 1998, primarily reflecting
reduced costs at the Beaver Valley Plant. However, costs for the first
nine months of 1999 remained slightly higher due to expenses associated
with the 1999 refueling outages at Beaver Valley Unit 2 and the Perry Plant
increased nuclear expenses induring the
second quarter and first half of 1999, compared to the corresponding
periods of 1998.1999. Other operating costs increasedwere lower
primarily as a result of lower fossil production costs due in part to
expenditures incurred last year for outages at the Mansfield and Sammis
Plants. However, in the second quarter
and year-to-date periodsfirst nine months of 1999 other operating costs
increased from the same periodsyear-to-date period of last year primarily due toas a
result of higher customer and sales expenses. Factors
contributing to the increase includedexpenses including expenditures for
energy marketing program
expenditures,programs, information systems requirements and similar costs in 1998 being recognized later that
year.other
customer-related costs.
Depreciation and amortization in the secondthird quarter and first
halfyear-
to-date periods of 1999 increased from the same periodperiods of 1998
primarily due to the effect of the OE rate plan. Total accelerated
depreciation and amortization of nuclear and regulatory assets under
the OE rate plan and Penn's restructuring plan was $64.3$173.5 million in
the secondthird quarter of 1999, up from $49.0$57.7 million in the secondthird quarter
of the previous year. In the first sixnine months of 1999, total
accelerated depreciation and amortization under the OE rate planregulatory plans
was $108.9$282.4 million, compared to $104.0$161.7 million in the first halfnine months
of 1998. SecondGeneral taxes increased for both the third quarter and year-to-date results foryear-
to-date periods of 1999, compared to 1998, include an
extraordinary chargeprimarily due to increases
in the gross receipts tax, Ohio property tax and payroll taxes. A
higher tax base and increased rates produced the increase in property
taxes.
- 20 -
Net interest charges decreased in the third quarter and first
nine months of $30.5 million resulting from Penn's
discontinued application1999 primarily due to refinancings and redemptions of
SFAS 71 to its generation business.long-term debt.
Capital Resources and Liquidity
- -------------------------------
The OE companies have continuing cash requirements for
planned capital expenditures and debt maturities. During the last halffourth
quarter of 1999, capital requirements for property additions and
capital leases are expected to be about $120$72 million, with no additional expendituresincluding $4
million for nuclear fuel. The OE companies have additional cash
requirements of approximately $161.4$3.5 million (excluding thean OE revolving
credit agreement) to meet sinking fund requirements for preferred stock and
maturing long-termlong-
term debt during the remainderfourth quarter of 1999. These cash requirements are
expected to be satisfied with internal cash and/or short-term credit
arrangements.
OE also completed optional refinancings
of $50 million principal amount of pollution control notes in July 1999
and intends to complete an additional optional refinancing of $108
million of pollution control notes during the balance of 1999. In
addition, Penn completed a $5.8 million optional redemption of 8.00%
preferred stock in July 1999.
- 19 -
As of JuneSeptember 30, 1999, the OE companies had approximately
$184.3$11.0 million of cash and temporary investments and $428.0$341.2 million of
short-term indebtedness. In addition, the OE companies' unused
borrowing capability included $45.0$41.0 million under revolving lines of
credit and $32.0 million of bank facilities that provide for borrowings
on a short-term basis at the banks' discretion. Under their first
mortgage indentures, as of JuneSeptember 30, 1999, the OE companies would
have been permitted to issue up to $1.3$1.1 billion of additional first
mortgage bonds on the basis of bondable property additions and retired
bonds.
Regulatory Matters
- ------------------
On July 6, 1999, Ohio Governor Bob Taft signed into law
legislation providing residents of Ohio withIn early October, FirstEnergy filed a choice of generation
suppliers. Among other provisions,comprehensive
transition plan for OE under the new Ohio electricity restructuring law
provides customer choice
starting January 1, 2001, freezes current rates for(see Note 3). The law is designed to facilitate the transition of
Ohio's electric utility industry from a five year market-regulated environment to a
competitive market in the generation of electricity. OE's plan itemizes
the price of electricity into separate components -- primarily
generation, transmission, distribution and transition charges - and
details FirstEnergy's strategy to implement corporate separation of
OE's regulated and nonregulated operations. The plan proposes recovery
of transition costs of approximately $3.3 billion ($2.5 billion, net of
deferred income taxes). All of that amount is estimated to be recovered
over the five-year market development period and includes(2001-2005). Current rates
will be frozen during the market development period except for certain
limited statutory exceptions including a five-percent price cut5% reduction in the generation
component of residential customer bills. Undercustomers' rates. On November 4, 1999, the
new lawPUCO rejected FirstEnergy's filing because the PUCO has not yet
prescribed the transition plan filing rules. FirstEnergy will refile its
transition plan once those rules have been established. Despite
rejecting FirstEnergy's filing, the PUCO indicated that it will endeavor
to issue its order in this case within 275 days of FirstEnergy's initial
filing date. If the transition plan ultimately approved by the PUCO for
OE does not provide adequate recovery of OE's nuclear generating unit
investments and regulatory assets, there would be a charge to earnings
which could have a material adverse effect on OE's results of operations
and financial condition.
All regulatory approvals have been received for the transfer
of generating assets between FirstEnergy and Duquesne, which is
intended to be a tax-free asset exchange. When completed in December
1999, the transaction will provide FirstEnergy with exclusive ownership
and operating control of all generating assets that are currently
jointly owned and operated under the CAPCO agreement (see Note 2,
"Pending Exchange of Assets").
Environmental Matters
- ---------------------
In September 1999, FirstEnergy received, and subsequently in
October 1999, the OE companies received a citizen suit notification
letter from the New York Attorney General's office alleging Clean Air
Act violations at the W. H. Sammis Plant. FirstEnergy believes the
Sammis Plant is in full compliance with the Clean Air Act, but cannot
predict whether New York will nonetheless file a lawsuit.
On November 3, 1999, the EPA issued Notices of Violation
(NOV) or a Compliance Order to eight utilities covering 32 power
plants, including the Sammis Plant. In addition, the U.S. Department of
Justice filed seven civil complaints against various investor-owned
utilities, which included a complaint against the OE companies in the
U.S. District Court for the Southern District of Ohio. The NOV and
complaint allege violations of the Clean Air Act based on operation and
maintenance of the Sammis Plant dating back to 1984. The complaint
requests permanent injunctive relief to require the installation of
"best available control technology" and civil penalties of up to
$27,500 per day of violation. FirstEnergy believes the NOV and
complaint are without merit. However, FirstEnergy is unable to predict
the outcome of this litigation. Criminal penalties could be imposed if
the Sammis Plant continues to operate without correcting the alleged
- 21 -
violations and a court determines that the allegations are valid. It is
anticipated at this time that the Sammis Plant will continue to deliver power to homes and businesses through its
distribution system, which will remain regulated. Whileoperate
while the new law
provides guidance for the transition to retail competition in Ohio,
significant authority has been vested in the PUCO to determine the
ultimate recovery of transition costs (see Note 3). The PUCO will hold
hearings as early as the first quarter of next year to decide the
amount of transition costs each utility can recover over a period of up
to ten years. FirstEnergy intends to file a transition plan for OE in
the fourth quarter of 1999. The application of SFAS 71 to OE's
generation business will be discontinued when the PUCO issues an order
of its hearing findings. Consequently, OEmatter is not able to determine, at
this time, the financial impact resulting from the eventual
discontinuation of regulatory accounting under SFAS 71 for its
generation business. OE believes it will be able to continue to bill
and collect cost-based rates on its transmission and distribution
operations.
In May 1999, a federal appeals court delayed enforcement of
EPA's September 1998 final regulations requiring reductions in nitrogen
oxide emissions for Ohio, Pennsylvania and twenty other eastern states.
The federal appeals court remanded the regulations back to the EPA so
the agency could address, if possible, constitutional and other defects
in the rules (see "Environmental Matters" in Note 2). The EPA has
sought a rehearing. OE cannot predict either the outcome of these
actions or the time period before final rules could become enforceable.being decided.
Year 2000 Readiness
- -------------------
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to identify the applicable
year. Any of 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 an assessment of their systems
and operations that could be affected by the Year 2000 problem;
remediation or replacement of noncompliant systems and components; and
testing of systems and components following such remediation or
replacement. The OE companies have focused their 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 OE companies' review of system readiness
extends to systems involving customer service, safety, shareholder
needs and regulatory obligations.
The OE companies are committed to taking appropriate actions
to eliminate or lessen negative effects of the Year 2000 issue on their
operations. The OE companies have completed an inventory of all
computer systems and hardware including equipment with embedded
computer chips, have determined which systems need to be converted or
replaced to become Year 2000-ready and have completed the remediation
of all mission critical systems and equipment. Based on the results of
their remediation and testing efforts, the OE companies filed (through
FirstEnergy)documents
with the North American Electric Reliability Council, Nuclear
Regulatory Commission, PUCO and Pennsylvania Public Utility
Commission (PPUC)PPUC that as of June 30, 1999 their
generation, transmission, and distribution systems were ready to serve
customers in the year 2000.
Most of the OE companies' Year 2000 issues have been resolved
through system replacement. Of the OE companies' major centralized
systems, the general ledger system and inventory management,
- 20 -
procurement and accounts payable systems were replaced at the end of
1998. The OE companies' payroll system was enhanced to be Year 2000
compliant in July 1998. The customer service system was made Year 2000
compliant in June 1999.
The OE companies have completed formal communications with
most ofcontacted all their key suppliers to determineand
do not anticipate any service interruptions with them based on the
extent to which they are
vulnerable to those third parties' failure to resolve their own Year
2000 problems. Forinformation the suppliers having potential compliance problems,have provided. Further, the OE companies are developing alternate sourceshave
reviewed their stocking levels of critical supplies and services inhave determined
the event
such noncompliance occurs.appropriate stocking levels to maintain approaching the year 2000.
The OE companies have initiated actions to ensure that these materials
are also identifying areas
requiring higher inventoryat the required levels based on compliance uncertainties.
There can be no guarantee thatconsistent with the failure of companies to resolveassumptions in their
own Year 2000 issues will not have a material adverse effect on
the OE companies' business, financial condition and results of
operations, although it does not consider this likely to occur.contingency plans.
The OE companies have completed the development of formal
contingency plans in all mission critical areas to establish procedures
to be followed in handling unlikely events which could impact the
provision of electric service to their customers.
The OE companies are usinguse both internal and external resources to
reprogram and/or replace and test their software for Year 2000
modifications. Of the $44$42.6 million total project cost, approximately
$34$33.6 million will be capitalized since those costs are attributable to
the purchase of new software for total system replacements because the
Year 2000 solution comprises only a portion of the benefits resulting
from the system replacements. The remaining $10$9.0 million will be
expensed as incurred. As of JuneSeptember 30, 1999, the OE companies have
spent $32$32.6 million for Year 2000 capital projects and hadhave expensed
approximately $7$7.6 million for Year 2000-related maintenance activities.
The OE companies' total Year 2000 project cost,costs, 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 likely
worst-case scenario from the Year 2000 issue will be disruption in
power plant monitoring systems, thereby producing inaccurate data and
potential failures in electronic switching mechanisms at transmission
junctions. This would prolong localized outages, as technicians would
- 22 -
have to manually activate switches. Such an event could have a
material, but currently undeterminable, effect on their financial
results.
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.
- 2123 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
------------------- ------------------------------------------- -------------------------
1999 1998 1999 1998
-------- ------------------ --------- ------------------ ----------
(In thousands)
OPERATING REVENUES $481,955 $474,576 $900,794 $889,603$534,503 $514,555 $1,435,297 $1,404,158
-------- -------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 100,554 139,642 191,584 231,357118,816 127,347 310,400 358,704
Nuclear operating costs 40,305 20,658 69,821 46,89722,978 24,470 92,799 71,367
Other operating costs 92,360 83,415 177,277 156,10988,528 77,633 265,805 233,742
-------- -------- -------- ------------------ ----------
Total operation and maintenance
expenses 233,219 243,715 438,682 434,363230,322 229,450 669,004 663,813
Provision for depreciation and
amortization 58,311 59,419 115,998 116,64858,156 59,048 174,154 175,696
General taxes 54,629 53,863 108,642 108,37456,855 55,356 165,497 163,730
Income taxes 29,163 20,773 49,318 42,71650,273 45,598 99,591 88,314
-------- -------- -------- ------------------ ----------
Total operating expenses and taxes 375,322 377,770 712,640 702,101395,606 389,452 1,108,246 1,091,553
-------- -------- ---------- ----------
OPERATING INCOME 138,897 125,103 327,051 312,605
OTHER INCOME 1,272 6,227 6,489 10,326
-------- -------- OPERATING INCOME 106,633 96,806 188,154 187,502
-------- -------- -------- --------
OTHER INCOME (EXPENSE) (1,240) (3,494) 5,217 4,099
-------- -------- -------- ------------------ ----------
INCOME BEFORE NET INTEREST CHARGES 105,393 93,312 193,371 191,601140,169 131,330 333,540 322,931
-------- -------- -------- ------------------ ----------
NET INTEREST CHARGES:
Interest on long-term debt 53,812 60,751 107,565 120,81152,581 57,072 160,146 177,883
Allowance for borrowed funds used
during construction (517) (404) (733) (956)(425) (664) (1,158) (1,620)
Other interest expense (credit) (517) (1,882) (996) (2,726)48 (95) (948) (2,821)
-------- -------- -------- ------------------ ----------
Net interest charges 52,778 58,465 105,836 117,12952,204 56,313 158,040 173,442
-------- -------- -------- ------------------ ----------
NET INCOME 52,615 34,847 87,535 74,47287,965 75,017 175,500 149,489
PREFERRED STOCK DIVIDEND REQUIREMENTS 8,541 7,438 17,082 8,5068,230 8,547 25,312 17,053
-------- -------- -------- ------------------ ----------
EARNINGS ON COMMON STOCK $ 44,07479,735 $ 27,40966,470 $ 70,453150,188 $ 65,966132,436
======== ======== ======== ================== ==========
The preceding Notes to Consolidated Financial Statements as they relate to The Cleveland Electric
Illuminating Company are an integral part of these statements.
- 2224 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JuneSeptember 30, December 31,
1999 1998
------------ ------------
(In thousands)
ASSETS
------
ASSETS
------
UTILITY PLANT:
In service $4,657,245$4,702,049 $4,648,725
Less--Accumulated provision for depreciation 1,667,5721,711,141 1,631,974
---------- ----------
2,989,6732,990,908 3,016,751
---------- ----------
Construction work in progress-
Electric plant 28,00336,197 42,428
Nuclear fuel 408416 14,864
---------- ----------
28,41136,613 57,292
---------- ----------
3,018,0843,027,521 3,074,043
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 517,263517,256 543,161
Nuclear plant decommissioning trusts 139,521143,396 125,050
Other 31,37726,899 21,059
---------- ----------
688,161687,551 689,270
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 3,87429,403 19,526
Receivables-
Customers 17,47819,070 16,588
Associated companies 15,61316,640 15,636
Other 247,748200,985 142,834
Notes receivable from associated companies -- 53,509
Materials and supplies, at average cost-
Owned 36,80635,558 38,213
Under consignment 35,93536,044 43,620
Prepayments and other 69,28851,385 58,342
---------- ----------
426,742389,085 388,268
---------- ----------
DEFERRED CHARGES:
Regulatory assets 541,912541,450 555,925
Goodwill 1,452,3591,442,721 1,471,563
Property taxes 126,464 126,464
Other 14,04612,935 12,650
---------- ----------
2,134,7812,123,570 2,166,602
---------- ----------
$6,267,768$6,227,727 $6,318,183
========== ==========
- 2325 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JuneSeptember 30, December 31,
1999 1998
------------ ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, without par value, authorized
105,000,000 shares - 79,590,689 shares outstanding $ 931,962 $ 931,962
Retained earnings 59,68871,996 76,276
---------- ----------
Total common stockholder's equity 991,6501,003,958 1,008,238
Preferred stock-
Not subject to mandatory redemption 238,325 238,325
Subject to mandatory redemption 135,996134,996 149,710
Long-term debt 2,869,8592,684,211 2,888,202
---------- ----------
4,235,8304,061,490 4,284,475
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 209,861331,039 208,050
Accounts payable-
Associated companies 58,38264,216 47,680
Other 85,08044,674 67,929
Notes payable to associated companies 55,89042,237 80,618
Accrued taxes 186,629232,643 192,359
Accrued interest 65,57365,486 66,685
Other 47,54437,974 58,585
---------- ----------
708,959818,269 721,906
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 532,747556,093 524,285
Accumulated deferred investment tax credits 88,97287,986 90,946
Pensions and other postretirement benefits 215,767214,704 217,719
Other 485,493489,185 478,852
---------- ----------
1,322,9791,347,968 1,311,802
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$6,267,768$6,227,727 $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.
- 2426 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ------------------- --------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 52,61587,965 $ 34,84775,017 $175,500 $ 87,535 $ 74,472149,489
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and
amortization 58,311 59,419 115,998 116,64858,156 59,048 174,154 175,696
Nuclear fuel and lease amortization 6,665 6,127 15,971 16,3568,830 8,154 24,801 24,510
Other amortization (3,789) (9,417) (4,254) (9,417)(2,855) (593) (7,109) (10,010)
Deferred income taxes, net 5,136 14,096 8,876 25,83217,472 1,750 26,348 27,582
Investment tax credits, net (987) (1,297) (1,974) (2,593)(986) (1,296) (2,960) (3,889)
Receivables (90,588) (77,237) (105,781) (87,568)44,144 (44,448) (61,637) (132,016)
Materials and supplies 11,005 (6,374) 9,092 (10,722)1,139 13,684 10,231 2,962
Accounts payable 16,220 53,237 27,853 27,504(34,572) (58,965) (6,719) (31,461)
Accrued taxes 46,014 76,357 40,284 44,024
Other 19,411 (32,607) (45,108) (63,758)13,023 (5,332) (26,355) (36,757)
-------- --------- -------- --------- --------
Net cash provided from operating
activities 73,999 40,794 108,208 86,754238,330 123,376 346,538 210,130
-------- --------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 26,459 -- 5,822 --26,459 5,822
Ohio Schools Council prepayment program -- 116,598-- -- 116,598
Short-term borrowings, net -- 30,528 -- 4,036
Redemptions and Repayments-
Preferred stock 13,714 13,714 13,714 13,7141,000 1,000 14,714 14,714
Long-term debt 6,346 15,029 24,014 26,58189,424 172,192 113,438 198,773
Short-term borrowings, net 12,883 45,290 24,728 26,49213,653 -- 38,381 --
Dividend Payments-
Common stock 75,811 25,469 82,974 25,46968,000 28,653 150,974 54,122
Preferred stock 8,541 8,870 17,082 17,741
---------8,230 8,559 25,312 26,300
-------- --------- -------- --------
Net cash provided from (used for)used for financing activities (117,295) 14,048 (162,512) 12,423153,848 179,876 316,360 167,453
-------- --------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 20,204 12,080 30,299 27,41455,881 16,327 86,180 43,741
Loans to associated companies -- 59,900 -- 136,900-- 26,628
Loan payments from associated companies (59,077) -- (110,272) (53,509) --
Capital trust investments -- -- (25,898) (31,958)(7) 35 (25,905) (31,923)
Other 6,135 (18,137) 10,456 (13,953)3,079 24,183 13,535 10,230
-------- --------- -------- --------- --------
Net cash used for (provided from)
investing activities (32,738) 53,843 (38,652) 118,40358,953 (69,727) 20,301 48,676
-------- --------- -------- --------- --------
Net increase (decrease) in cash and cash
equivalents (10,558) 999 (15,652) (19,226)25,529 13,227 9,877 (5,999)
Cash and cash equivalents at beginning of period 14,432 13,5503,874 14,549 19,526 33,775
-------- --------- -------- --------- --------
Cash and cash equivalents at end of period $ 3,87429,403 $ 14,54927,776 $ 3,87429,403 $ 14,54927,776
======== ========= ======== ========= ========
The preceding Notes to Consolidated Financial Statements as they relate to The Cleveland Electric
Illuminating Company are an integral part of these statements.
- 2527 -
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 JuneSeptember
30, 1999, and the related consolidated statements of income and cash
flows for the three-month and six-monthnine-month periods ended JuneSeptember 30,
1999 and 1998. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with 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 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, 1998
(not presented herein), and, in our report dated February 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, 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
AugustNovember 9, 1999
- 2628 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Operating revenues increased $7.4$19.9 million in the secondthird
quarter of 1999, compared to the second quarter of 1998 and were $11.2$31.1 million higher in the first halfnine months
of 1999, compared to the same periodperiods in 1998. Higher third quarter and
year-to-date operating revenues were the prior year. Increases in kilowatt-hourresult of increased kilowatt-
hour sales, which were substantiallypartially offset by reduced unit prices. Residential,Total
kilowatt-hour sales increased 7.0% in the current quarter, compared to
the same period of 1998. While retail sales increased only 0.5% in the
third quarter of 1999, kilowatt-hour sales to wholesale customers
increased 86.1% as a result of available power from CEI generating
units and strong weather-induced demand in the wholesale market. Retail
kilowatt-hour sales to residential and commercial customers increased
2.1% and 0.9%, respectively, whereas, sales to industrial customers
all contributed todecreased 1.1%. In the increase in retailfirst nine months of 1999, total kilowatt-hour
sales in the second quarter of 1999,increased 5.5%, compared to the same period of 1998, benefiting
from a 47.0% rise in sales to wholesale customers and a 2.6% increase
in kilowatt-hour sales to retail customers. Residential and commercial
customers contributed to the higher retail sales, with increases of
3.9%, 5.2%6.6% and 1.5%2.6%, respectively. Overall, retail
kilowatt-hourKilowatt-hour sales increased 3.3% and total kilowatt-hour sales
increased 10.0% from the 1998 second quarter results. Residential,
commercial andto industrial
customers also combined to increase retail
kilowatt-hour saleswere essentially unchanged during the nine-month period.
Operation and maintenance expenses increased only slightly in
the current quarter and were $5.2 million higher in the first sixnine
months of 1999 compared to the same period of 1998, with increases of 9.2%, 3.6% and 0.6%,
respectively. Retail kilowatt-hour sales increased 3.7% and total
kilowatt-hour sales increased 4.7% from the first half of 1998. Lower
temperatures in the first quarter of 1999, compared to the milder
weather in the same period of 1998, contributed to stronger residential
growth in the first quarter of 1999, which is reflected in year-to-date
increases in residential kilowatt-hour sales. Service sector growth
supported continuing increases in sales to commercial customers. Total
kilowatt-hour sales benefited from strong weather-induced demand in the
wholesale market during June and available capacity at CEI. Sales to
wholesale customers increased 131.3% in the second quarter of 1999, and
were 20.6% higher in the first half than the corresponding periods of
1998.
Operation and maintenance expenses decreased $10.5 million in
the second quarter of 1999 from the same period of 1998, and were $4.3
million higher in the first half of 1999, compared to the first six
months of 1998. Fuel and purchased
power costs were lower in both the secondthird quarter and year-to-date
periods of 1999. An increased mix of nuclear generation in the third
quarter of 1999 thanreduced fuel costs and was the corresponding
periodsprimary cause of 1998, primarily due tolower
fuel and purchased power costs in that period. However, in this year's
nine-month period, lower purchased power costs.costs was the largest factor.
Most of the year-to-date reduction in purchased power costs was due to
the absence of unusual conditions experienced in the second quarter ofJune 1998, which
increased the prior period's
costs.cost during last year's nine-month period. Record heat
and humidity in late June 1998 coincided with a regional power shortage
resulting in high prices for purchased power. Unscheduled outages at
Beaver Valley Unit 2, the Davis-Besse Plant and Avon Lake Unit 9
required that CEI to purchase significant quantities of power on the spot
market during that period. AlthoughIn addition, Beaver Valley Unit 2 remained
out of service through most of the secondthird quarter of 1999 also experienced1998. Although
above normal temperatures were also experienced in June,1999, CEI maintained
a stronger capacity position duringthis year compared to the period.prior year.
Therefore, CEI was not only able to reduce its dependence on purchased
power in
1999this year, but also took advantage of the strong demand for power
through sales to the wholesale market (discussed above). Offsettingmarket.
More than offsetting the second
quartercurrent year-to-date reduction in
fuel and purchased power costs were expensesincreases in nuclear operating
costs and other operating costs. Expenses associated with the refueling
outages at Beaver Valley Unit 2 and the Perry Plant which increased nuclear
expensesoperating costs in the secondfirst nine months of 1999. The increases in
other operating costs in the third quarter and first halfnine-month period of
1999 resulted from higher customer and sales expenses including
expenditures for energy marketing programs, information system
requirements and other customer-related costs.
Lower other income in the third quarter and year-to-date
periods of 1999, compared to the corresponding periods of 1998. Other operating
costs increased in the second quarter and year-to-date periods of 1999
from the corresponding periods of last yearif 1998 was due
primarily to higher
customer and sales expenses.
Long-term debt refinancings of $264 million and net
redemptions of $211 million during the twelve months ended June 30,
1999, contributed to thea reduction in long-term debt interest expenseincome.
Net interest charges decreased in the secondthird quarter and first
halfnine months of 1999 comparedprimarily due to the
corresponding periodsrefinancings and redemptions of
the prior year.long-term debt. Preferred stock dividend requirements increased in the
six-monthnine-month period ending Juneended September 30, 1999, compared to the first halfnine
months of 1998, due to the declaration in the fourth quarter of 1997 of
preferred stock dividends payable in 1998 by CEI.
Capital Resources and Liquidity
- -------------------------------------------------------------
CEI has continuing cash requirements for planned capital
expenditures and debt maturities. During the last halffourth quarter of 1999,
capital requirements for property additions and capital leases are
expected to be about $103$27 million, including $8 millionwith no additional expenditures for
nuclear fuel. CEI has additional cash requirements of approximately
$164.3$82.8 million to meet sinking fund requirements for preferred stock and
maturing long-term debt during the remainderfourth quarter of 1999. These cash
requirements are expected to be satisfied with internal cash and/or
short-term credit arrangements.
As of June 30,1999,September 30, 1999, CEI had approximately $3.9$29.4 million
of cash and temporary investments and $55.9$42.2 million of short-term
indebtedness to affiliated companies. Together with TE, CEI had unused
borrowing capability of $100$55 million under a FirstEnergy revolving line
of credit at the end of the secondthird quarter of 1999. Under its first
- 29 -
mortgage indenture, as of JuneSeptember 30, 1999, CEI would have been
permitted to issue up to $552$509 million of additional first mortgage
bonds on the basis of bondable property additions and retired bonds.
- 27 -
On July 26, 1999, CEI completed its purchase of the remaining
20 percent interest in the Seneca pumped storage hydroelectric
generation plant from General Public Utilities for $43 million. This
purchase makes available 84 megawatts of additional capacity and
provides the Company full ownership of the plant.
Regulatory Matters
- ------------------
On July 6, 1999, Ohio Governor Bob Taft signed into law
legislation providing residents of Ohio withIn early October, FirstEnergy filed a choice of generation
suppliers. Among other provisions,comprehensive
transition plan for CEI under the new Ohio electricity restructuring
law provides customer choice
starting January 1, 2001, freezes current rates for(see Note 3). The law is designed to facilitate the transition of
Ohio's electric utility industry from a five year market-regulated environment to a
competitive market in the generation of electricity. CEI's plan
itemizes the price of electricity into separate components -- primarily
generation, transmission, distribution and transition charges - and
details FirstEnergy's strategy to implement corporate separation of
CEI's regulated and nonregulated operations. The plan proposes recovery
of generation-related transition costs of approximately $3.8 billion
($3.0 billion, net of deferred income taxes). Of that amount,
approximately $1.9 billion ($1.6 billion, net of deferred income taxes)
would be recovered over the five-year market development period and includes(2001-
2005). Under the proposed plan, the remainder is estimated to be
recovered from 2001 through mid-2009. Current rates will be frozen
during the market development period, except for certain limited
statutory exceptions including a five-percent price cut5% reduction in the generation
component of residential customer bills. Undercustomers' rates. On November 4, 1999, the
new lawPUCO rejected FirstEnergy's filing because the PUCO has not yet
prescribed the transition plan filing rules. FirstEnergy will refile its
transition plan once those rules have been established. Despite
rejecting FirstEnergy's filing, the PUCO indicated that it will endeavor
to issue its order in this case within 275 days of FirstEnergy's initial
filing date. If the transition plan ultimately approved by the PUCO for
CEI will continuedoes not provide adequate recovery of CEI's nuclear generating unit
investments and regulatory assets, there would be a charge to deliver power to homesearnings
which could have a material adverse effect on CEI's results of
operations and businesses through its
distribution system, which will remain regulated. While the new law
provides guidancefinancial condition.
All regulatory approvals have been received for the transitiontransfer
of generating assets between FirstEnergy and Duquesne, which is
intended to retail competitionbe a tax-free asset exchange. When completed in Ohio,
significant authority has been vested inDecember
1999, the PUCO to determinetransaction will provide FirstEnergy with exclusive ownership
and operating control of all generating assets that are currently
jointly owned and operated under the ultimate recovery of transition costsCAPCO agreement (see Note 3). The PUCO will hold
hearings as early as the first quarter2,
"Pending Exchange of next year to decide the
amount of transition costs each utility can recover over a period of up
to ten years. FirstEnergy intends to file a transition plan for CEI in
the fourth quarter of 1999. The application of SFAS 71 to CEI's
nonnuclear generation business will be discontinued when the PUCO
issues an order of its hearing findings. Consequently, CEI is not able
to determine, at this time, the financial impact resulting from the
eventual discontinuation of regulatory accounting under SFAS 71 for its
nonnuclear generation business. CEI believes it will be able to
continue to bill and collect cost-based rates on its transmission and
distribution operations.
In May 1999, a federal appeals court delayed enforcement of
EPA's September 1998 final regulations requiring reductions in nitrogen
oxide emissions for Ohio, Pennsylvania and twenty other eastern states.
The federal appeals court remanded the regulations back to the EPA so
the agency could address, if possible, constitutional and other defects
in the rules (see "Environmental Matters" in Note 2)Assets"). The EPA has
sought a rehearing. CEI cannot predict either the outcome of these
actions or the time period before final rules could become enforceable.
Year 2000 Readiness
- -------------------
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to identify the applicable
year. Any of 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 an assessment of its systems and operations
that could be affected by the Year 2000 problem; remediation or
replacement of noncompliant systems and components; and testing of
systems and components following such remediation or replacement. 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 is committed to taking appropriate actions to eliminate
or lessen negative effects of the Year 2000 issue on its operations.
CEI has completed an inventory of all computer systems and hardware
including equipment with embedded computer chips, has determined which
systems need to be converted or replaced to become Year 2000-ready and
has completed the remediation of all mission critical systems and
equipment. Based on results of its remediation and testing efforts, CEI
filed documents (through FirstEnergy) with the North American Electric Reliability Council,
Nuclear Regulatory Commission and PUCO that as of June 30, 1999 its
generation, transmission, and distribution systems were ready to serve
customers in the year 2000.
Most of CEI's Year 2000 issues have been resolved through
system replacement. Of CEI's major centralized systems, the general
ledger system and inventory management, procurement and accounts
- 30 -
payable systems were replaced at the end of 1998. CEI's payroll system
was enhanced to be Year 2000 compliant in July 1998; all employees have
been converted to the new system.1998. The customer
service system was made Year 2000 compliant in June 1999.
CEI has completed formal communications with most ofcontacted all its key 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 services in the event such noncompliance occurs.
CEI is also identifying areas requiring higher inventory levelsdoes not
anticipate any service interruptions with them based on compliance uncertainties. There can be no guaranteethe information
they have provided. Further, CEI has reviewed its stocking levels of
critical supplies and has determined the appropriate stocking levels to
maintain approaching the year 2000. CEI has initiated actions to ensure
that these materials are at the failure
of companies to resolve their own Year 2000 issues will not have a
material adverse effect on CEI's business, financial condition and
results of operations, although it does not consider this likely to
occur.
- 28 -
required levels consistent with the
assumptions in its contingency plan.
CEI has completed the development of formal contingency plans
in all mission critical areas to establish procedures to be followed in
handling unlikely events which could impact the provision of electric
service to its customers.
CEI is usinguses both internal and external resources to reprogram
and/or replace and test its software for Year 2000 modifications. Of the
$30$29.1 million total project cost, approximately $23$23.4 million will be
capitalized since those costs are attributable to the purchase of new
software for total system replacements because the Year 2000 solution
comprises only a portion of the benefits resulting from the system
replacements. The remaining $7$5.7 million will be expensed as incurred.
As of JuneSeptember 30, 1999, CEI had spent $22$22.9 million for Year 2000
capital projects and had expensed approximately $5$4.9 million for Year
2000-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 likely worst-case scenario from the Year 2000 issue
will be disruption in power plant monitoring systems, thereby producing
inaccurate data and potential failures in electronic switching
mechanisms at transmission junctions. This would prolong localized
outages, as technicians would have to manually activate switches. Such
an event could have a material, but currently undeterminable, effect on
its financial results.
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.
- 2931 -
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
---------------------- --------------------------------------------- -----------------------
1999 1998 1999 1998
---------- --------- ---------- ---------- -------------------
(In thousands)
OPERATING REVENUES $235,184 $239,731 $459,446 $460,834$233,697 $253,282 $693,143 $714,116
-------- -------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 42,444 72,500 78,846 107,34151,793 56,708 130,639 164,049
Nuclear operating costs 49,232 37,430 91,126 75,22535,082 40,576 126,208 115,801
Other operating costs 43,796 33,868 77,310 66,84141,974 39,785 119,284 106,626
-------- -------- -------- --------
Total operation and maintenance
expenses 135,472 143,798 247,282 249,407128,849 137,069 376,131 386,476
Provision for depreciation and
amortization 26,153 27,874 51,896 53,35626,112 26,691 78,008 80,047
General taxes 22,734 20,928 43,832 41,95822,532 21,435 66,364 63,393
Income taxes 11,302 9,287 28,209 26,30313,490 16,884 41,699 43,187
-------- -------- -------- --------
Total operating expenses and taxes 195,661 201,887 371,219 371,024190,983 202,079 562,202 573,103
-------- -------- -------- --------
OPERATING INCOME 39,523 37,844 88,227 89,81042,714 51,203 130,941 141,013
OTHER INCOME 3,245 3,057 6,167 6,8992,840 2,674 9,007 9,573
-------- -------- -------- --------
INCOME BEFORE NET INTEREST CHARGES 42,768 40,901 94,394 96,70945,554 53,877 139,948 150,586
-------- -------- -------- --------
NET INTEREST CHARGES:
Interest on long-term debt 21,117 22,370 42,158 45,25620,412 21,524 62,570 66,780
Allowance for borrowed funds used
during construction (404) (314) (606) (583)(254) (344) (860) (927)
Other interest expense (credit) (1,153) (285) (2,514) (1,099)(889) 10 (3,403) (1,089)
-------- -------- -------- --------
Net interest charges 19,560 21,771 39,038 43,57419,269 21,190 58,307 64,764
-------- -------- -------- --------
NET INCOME 23,208 19,130 55,356 53,13526,285 32,687 81,641 85,822
PREFERRED STOCK DIVIDEND REQUIREMENTS 4,069 4,150 8,139 5,5354,034 4,145 12,173 9,680
-------- -------- -------- --------
EARNINGS ON COMMON STOCK $ 19,13922,251 $ 14,98028,542 $ 47,21769,468 $ 47,60076,142
======== ======== ======== ========
The preceding Notes to Consolidated Financial Statements as they relate to The Toledo Edison Company
are an integral part of these statements.
- 3032 -
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JuneSeptember 30, December 31,
1999 1998
------------ ------------
(In thousands)
ASSETS
------
ASSETS
------
UTILITY PLANT:
In service $1,768,439$1,777,714 $1,757,364
Less--Accumulated provision for depreciation 638,340661,991 626,942
---------- ----------
1,130,0991,115,723 1,130,422
---------- ----------
Construction work in progress-
Electric plant 26,00628,448 26,603
Nuclear fuel 386394 11,191
---------- ----------
26,39228,842 37,794
---------- ----------
1,156,4911,144,565 1,168,216
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 295,455295,391 310,762
Nuclear plant decommissioning trusts 115,238118,459 102,749
Other. 6,390Other 5,352 3,656
---------- ----------
417,083419,202 417,167
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 4,71757,418 4,140
Receivables-
Customers 2,9788,948 7,338
Associated companies 14,01020,037 30,006
Other 9,5264,731 31,688
Notes receivable from associated companies 100,37342,237 101,236
Materials and supplies, at average cost-
Owned 23,99022,471 25,745
Under consignment 18,81620,172 18,148
Prepayments and other 31,49023,921 25,647
---------- ----------
205,900199,935 243,948
---------- ----------
DEFERRED CHARGES:
Regulatory assets 406,080395,032 417,704
Goodwill 468,255465,085 474,593
Property taxes 42,842 42,842
Other 7,4466,898 4,295
---------- ----------
924,623909,857 939,434
---------- ----------
$2,704,097$2,673,559 $2,768,765
========== ==========
- 3133 -
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JuneSeptember 30, December 31,
1999 1998
------------ ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, $5 par value, authorized 60,000,000
shares - 39,133,887 shares outstanding $ 195,670 $ 195,670
Other paid-in capital 328,559 328,559
Retained earnings 36,98439,236 51,463
---------- ----------
Total common stockholder's equity 561,213563,465 575,692
Preferred stock not subject to mandatory redemption 210,000 210,000
Long-term debt 1,040,289987,767 1,083,666
---------- ----------
1,811,5021,761,232 1,869,358
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 156,382156,660 130,426
Accounts payable-
Associated companies 31,91932,865 34,260
Other 31,40327,493 38,832
Notes payable to associated companies 151 --
Accrued taxes 41,44444,182 62,288
Accrued interest 24,60823,828 24,965
Other 23,97130,317 35,082
---------- ----------
309,727315,496 325,853
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 162,992166,563 151,321
Accumulated deferred investment tax credits 39,70939,228 40,670
Pensions and other postretirement benefits 121,131120,521 122,314
Other 259,036270,519 259,249
---------- ----------
582,868596,831 573,554
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$2,704,097$2,673,559 $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.
- 3234 -
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
---------------------- --------------------------------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ------------------- --------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,20826,285 $32,687 $ 19,13081,641 $ 55,356 $ 53,13585,822
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and
amortization 26,153 27,874 51,896 53,35626,112 26,691 78,008 80,047
Nuclear fuel and lease amortization 5,206 3,629 11,818 10,9306,734 5,576 18,552 16,506
Deferred income taxes, net 6,623 8,631 10,305 15,1528,127 1,021 18,432 16,173
Investment tax credits, net (480) (649) (961) (1,298)(481) (648) (1,442) (1,946)
Receivables 57,935 (14,975) 42,518 3,226(7,202) 1,473 35,316 4,699
Materials and supplies 3,467 (527) 1,087 (3,507)163 1,578 1,250 (1,929)
Accounts payable (4,105) 12,658 (9,770) (114)(2,964) (9,566) (12,734) (9,680)
Accrued taxes 2,738 7,083 (18,106) 13,556
Other (22,932) (29,086) (55,855) (26,217)22,414 26,241 (12,597) (6,449)
-------- --------------- -------- --------
Net cash provided from operating
activities 95,075 26,685 106,394 104,66381,926 92,136 188,320 196,799
-------- --------------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 34,85054,929 -- 89,779 3,657
34,850 3,657Short-term borrowings, net 151 -- 151 --
Redemptions and Repayments-
Preferred stock 1,690 1,665-- -- 1,690 1,665
Long-term debt 43,191 33,127 55,625 41,695106,802 33,273 162,427 74,968
Dividend Payments-
Common stock 60,351 21,132 60,351 21,13220,000 15,654 80,351 36,786
Preferred stock 4,069 4,108 8,139 8,2354,034 4,074 12,173 12,309
-------- --------------- -------- --------
Net cash used for financing activities 74,451 56,375 90,955 69,07075,756 53,001 166,711 122,071
-------- --------------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 9,991 6,898 18,922 14,6478,734 14,518 27,656 29,165
Loans to associated companies -- -- -- 44,64838,793
Loan payments from associated companies (3,725) (33,150) (863)(58,136) (5,855) (58,999) --
Capital trust investments 63 66 (15,307) (1,937)(64) (240) (15,371) (2,177)
Other 9,751 (7,698) 12,110 (4,162)2,935 13,923 15,045 9,761
-------- ------- -------- -------- ---------------
Net cash used for (provided from)
investing activities 16,080 (33,884) 14,862 53,196(46,531) 22,346 (31,669) 75,542
-------- ------- -------- -------- ---------------
Net increase (decrease) in cash and cash
equivalents 4,544 4,194 577 (17,603)52,701 16,789 53,278 (814)
Cash and cash equivalents at beginning of period 173 3734,717 4,567 4,140 22,170
-------- --------------- -------- --------
Cash and cash equivalents at end of period $ 4,71757,418 $21,356 $ 4,56757,418 $ 4,717 $ 4,56721,356
======== =============== ======== ========
The preceding Notes to Consolidated Financial Statements as they relate to The Toledo Edison Company
are an integral part of these statements.
- 3335 -
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 JuneSeptember 30, 1999, and the
related consolidated statements of income and cash flows for the three-
month and six-monthnine-month periods ended JuneSeptember 30, 1999 and 1998. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with 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 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, 1998 (not presented herein),
and, in our report dated February 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, 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
AugustNovember 9, 1999
- 3436 -
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Operating revenues decreased $4.5$19.6 million in the secondthird quarter
of 1999, compared to the second quarter of 1998, and were $1.4$21.0 million lower in the first halfnine months of 1999,
compared to the same period of
the prior year.periods in 1998. Increases in kilowatt-hour sales
were substantiallymore than offset by reduced unit prices. A reduction in other revenue contributed
to the decrease in operating revenues. Total kilowatt-hour sales
increased 6.4%5.8% in the secondcurrent quarter, of 1999, compared to the same period of
1998. While retail sales decreased 1.6%1.7% in the secondthird quarter of 1999,
kilowatt-hour sales to wholesale customers increased 69.2%47.9% as a result
of available power atfrom TE generating units and strong weather-induced
demand in the wholesale market during June.market. Retail kilowatt-hour sales to
residential commercial and industrialcommercial customers declined in the secondthird quarter by
1.7%, 1.3%8.2% and 1.6%6.9%, respectively. However, sales to industrial customers
increased 3.7%. In the first halfnine months of 1999, total kilowatt-hour
sales increased 7.7%7.0%, compared to the same period of 1998, benefiting
from a 44.2%45.7% increase in sales to wholesale customers. Retail kilowatt-hourkilowatt-
hour sales increased 2.6% from the year-ago
period, with1.1%; sales to residential and industrial customers up 3.2%increased
4.1%. However, residential and
4.3% respectively. Sales to commercial customers decreased 1.4%.0.8% and
3.2%, respectively.
Operation and maintenance expenses decreased $8.3$8.2 million in
the secondthird quarter of 1999 from the same period of 1998, and were $2.1$10.3 million lower in the first
halfnine months of 1999, compared to the first six
monthssame periods of 1998. FuelIn addition,
fuel and purchased power costs were lower in the secondthird quarter and year-to-date periodsin
the first nine months of 1999 than the corresponding periods
of 1998, due to lower purchased power costs.1999. Most of the year-to-date reduction in
1999purchased power costs was due to the absence of unusual conditions
experienced in the
second quarter ofJune 1998, which increased the prior period'syear's costs.
Record heat and humidity in late June 1998 coincided with a regional
power shortage resulting in highhigher prices for purchased power. During
this period, unscheduled outages at Beaver Valley Unit 2 and the Davis-
Besse Plant required that TE to purchase significant quantities of power on
the spot market during that period. AlthoughIn addition, Beaver Valley Unit 2
remained out of service through most of the secondthird quarter of 1999 also experienced1998.
Although above normal temperatures were also experienced in June, spot market
prices were less extreme, and1999, TE
maintained a stronger generating
capacity position duringthis year compared to the period.prior
year. Therefore, TE was not only able to reduce its dependence on
purchased power in 1999the current year, but also took advantage of the
strong demand for power through sales to the wholesale market (discussed above). Offsetting a portion of the reduction in
purchased powermarket.
Nuclear operating costs were increaseslower in nuclear operatingthe third quarter of
1999, compared to the prior year quarter primarily due to reduced costs
at the Beaver Valley Plant. However, costs for the first nine months of
1999 remained higher than the prior period due to expenses associated
with the refueling outages at Beaver Valley Unit 2 and the Perry plant resulting from refueling
outages at those locations. OtherPlant.
The increases in other operating costs increased in the
secondthis year's quarter and year-to-date periods of 1999 from the corresponding
periods of last yearnine-
month period were primarily due in part to higher customer and sales expenses.
Interest expenses
including energy marketing programs, information system requirements
and other customer-related costs.
Net interest charges decreased in the secondthird quarter and the
first halfnine months of 1999 from the same periodsprincipally as a result of the previous year primarily due
to redemptions of
long-term debt.
Capital Resources and Liquidity
- -------------------------------------------------------------
TE has continuing cash requirements for planned capital
expenditures and debt maturities. During the last halffourth quarter of 1999,
capital requirements for property additions and capital leases are
expected to be about $32$11 million, including $3 millionwith no additional expenditures for
nuclear fuel. TE has additional cash requirements of approximately
$100.4 million to meet
requirements$400,000 for maturing long-term debt during the remainderfourth quarter of 1999.
These cash requirements are expected to be satisfied with internal cash
and/or short-term credit arrangements.
As of JuneSeptember 30, 1999, TE had approximately $105.1$99.7 million
of cash and temporary investments and no$151,000 of short-term
indebtedness.indebtedness to associated companies. Together with CEI, TE had unused
borrowing capability of $100$55 million under a FirstEnergy revolving line
of credit at the end of the secondthird quarter of 1999. Under its first
mortgage indenture, as of JuneSeptember 30, 1999, TE would have been
permitted to issue approximately $234$264 million of additional first
mortgage bonds on the basis of bondable property additions and retired
bonds.
Regulatory Matters
- ------------------
On July 6,FirstEnergy filed a comprehensive transition plan for TE on
October 4, 1999, Ohio Governor Bob Taft signed into law
legislation providing residents of Ohio with a choice of generation
suppliers. Among other provisions,under the new Ohio electricity restructuring law provides customer choice
starting(see
Note 3). The law is designed to facilitate the transition of Ohio's
electric utility industry from a regulated environment to a competitive
market in the generation of electricity. TE's plan itemizes the price
of electricity into separate components -- primarily generation,
transmission, distribution and transition charges - and details
- 37 -
FirstEnergy's strategy to implement corporate separation of TE's
regulated and nonregulated operations. The plan proposes recovery of
generation-related transition costs of approximately $1.7 billion ($1.4
billion, net of deferred income taxes). Of that amount, approximately
$880 million ($770 million, net of deferred income taxes) would be
recovered over the five-year market development period (2001-2005) and
the remainder is estimated to be recovered from 2001 through mid-2008.
These transition costs will be recovered as a component of frozen rates
scheduled to be in effect pursuant to TE's rate plan as of January 1,
2001, freezes current2001. Those rates forwill be adjusted to reflect a five year market-
development period and includes a five-percent price cut5% reduction in the
generation component of residential customer bills. Undercustomers' rates. On November 4,
1999, the new law
TE will continue to deliver power to homes and businesses through its
distribution system, which will remain regulated. WhilePUCO rejected FirstEnergy's filing because the new law
provides guidance forPUCO has not
yet prescribed the transition to retail competition in Ohio,
significant authority hasplan filing rules. FirstEnergy will refile
its transition plan once those rules have been vested inestablished. Despite
rejecting FirstEnergy's filing, the PUCO indicated that it will endeavor
to determineissue its order in this case within 275 days of FirstEnergy's initial
filing date. If the - 35 -
ultimatetransition plan ultimately approved by the PUCO for
TE does not provide adequate recovery of transition costs (see Note 3). The PUCO will hold
hearings as early as the first quarterTE's nuclear generating unit
investments and regulatory assets, there would be a charge to earnings
which could have a material adverse effect on TE's results of next year to decide the
amount of transition costs each utility can recover over a period of up
to ten years. FirstEnergy intends to file a transition plan for TE in
the fourth quarter of 1999. The application of SFAS 71 to TE's
nonnuclear generation business will be discontinued when the PUCO
issues an order of its hearing findings. Consequently, TE is not able
to determine, at this time, theoperations
and financial impact resulting from the
eventual discontinuation of regulatory accounting under SFAS 71 for its
nonnuclear generation business. TE believes it will be able to continue
to bill and collect cost-based rates on its transmission and
distribution operations.
In May 1999, a federal appeals court delayed enforcement of
the EPA's September 1998 final regulations requiring reductions in
nitrogen oxide emissions for Ohio, Pennsylvania and twenty other
eastern states. The federal appeals court remanded the regulations back
to the EPA so the agency could address, if possible, constitutional and
other defects in the rules (see "Environmental Matters" in Note 2). The
EPA has sought a rehearing. TE cannot predict either the outcome of
these actions or the time period before final rules could become
enforceable.condition.
Year 2000 Readiness
- -------------------
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to identify the applicable
year. Any of 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 an assessment of its systems and operations
that could be affected by the Year 2000 problem; remediation or
replacement of noncompliant systems and components; and testing of
systems and components following such remediation or replacement. 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 is committed to taking appropriate actions to eliminate or
lessen negative effects of the Year 2000 issue on its operations. TE
has completed an inventory of all computer systems and hardware
including equipment with embedded computer chips, has determined which
systems need to be converted or replaced to become Year 2000-ready and
has completed the remediation of all mission critical systems and
equipment. Based on results of its remediation and testing efforts, TE
filed documents (through FirstEnergy) with the North American Electric Reliability Council,
Nuclear Regulatory Commission and PUCO that as of June 30, 1999 its
generation, transmission, and distribution systems were ready to serve
customers in the year 2000.
Most of TE's Year 2000 issues have been resolved through
system replacement. Of TE's major centralized systems, the general
ledger system and inventory management, procurement and accounts
payable systems were replaced at the end of 1998. TE's payroll system
was enhanced to be Year 2000 compliant in July 1998; all employees have
been converted to the new system.1998. The customer
service system was made Year 2000 compliant in June 1999.
TE has completed formal communications with most ofcontacted all its key 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 services in the event such noncompliance occurs.
TE is also identifying areas requiring higher inventory levelsdoes not
anticipate any service interruptions with them based on compliance uncertainties. There can be no guaranteethe information
they have provided. Further, TE has reviewed its stocking levels of
critical supplies and has determined the appropriate stocking levels to
maintain approaching the year 2000. TE has initiated actions to ensure
that these materials are at the failure of
companies to resolve their own Year 2000 issues will not have a
material adverse effect on TE's business, financial condition and
results of operations, although it does not consider this likely to
occur.required levels consistent with the
assumptions in its contingency plan.
TE has completed the development of formal contingency plans
in all mission critical areas to establish procedures to be followed in
handling unlikely events which could impact the provision of electric
service to its customers.
TE is usinguses both internal and external resources to reprogram
and/or replace and test its software for Year 2000 modifications. Of the
$16$15.4 million total project cost, approximately $13$12.5 million will be
capitalized since those costs are attributable to the purchase of new
software for total system replacements because the Year 2000 solution
comprises only a portion of the benefits resulting from the system
replacements. The remaining $3$2.9 million will be expensed as incurred.
As of JuneSeptember 30, 1999, TE had spent $12$12.2 million for Year 2000
capital projects and had expensed approximately $2$2.5 million for Year
2000-related maintenance activities. TE's total Year 2000 project cost,
as well as - 36 -
its estimates of the time needed to complete remedial
- 38 -
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 likely worst-case scenario from the Year 2000 issue
will be disruption in power plant monitoring systems, thereby producing
inaccurate data and potential failures in electronic switching
mechanisms at transmission junctions. This would prolong localized
outages, as technicians would have to manually activate switches. Such
an event could have a material, but currently undeterminable, effect on
its financial results.
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.
- 3739 -
PENNSYLVANIA POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ------------------- --------- ---------
(In thousands)
OPERATING REVENUES $82,117 $ 80,271 $163,489 $158,847$82,354 $87,885 $245,843 $246,732
------- --------------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 18,354 23,089 35,266 40,88725,978 21,948 61,244 62,835
Nuclear operating costs 8,290 6,762 15,003 13,8685,165 6,700 20,168 20,568
Other operating costs 16,517 13,511 31,245 25,70114,281 14,972 45,526 40,673
------- --------------- -------- --------
Total operation and maintenance expenses 43,161 43,362 81,514 80,45645,424 43,620 126,938 124,076
Provision for depreciation and amortization 16,278 16,510 30,715 33,00815,790 13,125 46,505 46,133
General taxes 6,340 5,494 12,244 11,2737,151 5,335 19,395 16,608
Income taxes 6,578 4,906 14,964 11,4724,824 9,375 19,788 20,847
------- --------------- -------- --------
Total operating expenses and taxes 72,357 70,272 139,437 136,20973,189 71,455 212,626 207,664
------- --------------- -------- --------
OPERATING INCOME 9,760 9,999 24,052 22,6389,165 16,430 33,217 39,068
OTHER INCOME 250 634 1,247 1,373194 569 1,441 1,942
------- --------------- -------- --------
INCOME BEFORE NET INTEREST CHARGES 10,010 10,633 25,299 24,0119,359 16,999 34,658 41,010
------- --------------- -------- --------
NET INTEREST CHARGES:
Interest expense 6,022 5,223 11,118 10,7174,972 5,234 16,090 15,951
Allowance for borrowed funds used during
construction (86) (62) (232) (144)(91) (52) (323) (196)
------- --------------- -------- --------
Net interest charges 5,936 5,161 10,886 10,5734,881 5,182 15,767 15,755
------- --------------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 4,074 5,472 14,413 13,4384,478 11,817 18,891 25,255
EXTRAORDINARY ITEM (NET OF INCOME TAX
BENEFIT OF $21,208,000) -- (30,522)-- -- (30,522)
------- --------------- -------- --------
NET INCOME (LOSS) 4,074 (25,050) 14,413 (17,084)4,478 11,817 18,891 (5,267)
PREFERRED STOCK DIVIDEND REQUIREMENTS 1,156 1,156 2,313 2,3131,131 1,157 3,444 3,470
------- --------------- -------- --------
EARNINGS (LOSS) ON COMMON STOCK $ 2,918 $(26,206)3,347 $10,660 $ 12,100 $(19,397)15,447 $ (8,737)
======= =============== ======== ========
The preceding Notes to Consolidated Financial Statements as they relate to Pennsylvania Power Company
are an integral part of these statements.
- 3840 -
PENNSYLVANIA POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JuneSeptember 30, December 31,
1999 1998
------------ ------------
(In thousands)
ASSETS
------
UTILITY PLANT:
In service $696,055$702,725 $686,771
Less--Accumulated provision for depreciation 297,319303,005 291,188
-------- --------
398,736399,720 395,583
-------- --------
Construction work in progress-
Electric plant 14,84913,143 17,187
Nuclear fuel 379385 508
-------- --------
15,22813,528 17,695
-------- --------
413,964413,248 413,278
-------- --------
OTHER PROPERTY AND INVESTMENTS 34,20534,849 29,177
-------- --------
CURRENT ASSETS:
Cash and cash equivalents 1,977260 7,485
Notes receivable from parent company 28,68716,090 50,000
Receivables-
Customers (less accumulated provisions of
$3,766,000$3,753,000 and $3,599,000, respectively, for
uncollectible accounts) 37,31133,399 34,737
Associated companies 15,66624,375 34,430
Other 17,82411,546 12,472
Materials and supplies, at average cost 17,85712,790 15,515
Prepayments 9,6005,904 2,657
-------- --------
128,922104,364 157,296
-------- --------
DEFERRED CHARGES:
Regulatory assets 343,739329,626 371,027
Other 6,4786,633 6,994
-------- --------
350,217336,259 378,021
-------- --------
$927,308$888,720 $977,772
======== ========
- 39 -
41-
PENNSYLVANIA POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
JuneSeptember 30, December 31,
1999 1998
------------ ------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, $30 par value, authorized 6,500,000
shares - 6,290,000 shares outstanding $188,700 $188,700
Other paid-in capital (310) (310)
Retained earnings 34,11822,084 86,891
-------- --------
Total common stockholder's equity 222,508210,474 275,281
Preferred stock-
Not subject to mandatory redemption 39,105 50,905
Subject to mandatory redemption 15,000 15,000
Long-term debt-
Associated companies 7,4056,392 6,617
Other 280,919257,849 281,072
-------- --------
564,937528,820 628,875
-------- --------
CURRENT LIABILITIES:
Currently payable long-term debt and
preferred stock-debt-
Associated companies 5,4034,709 5,557
Other 6,73123,879 984
Accounts payable-
Associated companies 21,53320,692 9,676
Other 22,51516,597 23,156
Accrued taxes 18,76511,817 12,849
Accrued interest 6,5463,886 6,519
Other 10,79711,443 17,046
-------- --------
92,29093,023 75,787
-------- --------
DEFERRED CREDITS:
Accumulated deferred income taxes 206,258201,419 212,427
Accumulated deferred investment tax credits 7,4927,379 7,787
Other 56,33158,079 52,896
-------- --------
270,081266,877 273,110
-------- --------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) -------- --------
$927,308$888,720 $977,772
======== ========
The preceding Notes to Consolidated Financial Statements as they relate to Pennsylvania Power Company
are an integral part of these balance sheets.
- 4042 -
PENNSYLVANIA POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended SixNine Months Ended
JuneSeptember 30, JuneSeptember 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ------------------- --------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,074 $(25,050)4,478 $ 14,413 $(17,084)11,817 $ 18,891 $ (5,267)
Adjustments to reconcile net income (loss) to
net cash from operating activities-
Provision for depreciation and amortization 16,278 16,510 30,715 33,00815,790 13,125 46,505 46,133
Nuclear fuel and lease amortization 1,411 852 3,234 1,7921,919 1,460 5,153 3,252
Deferred income taxes, net 1,150 (24,177) (873) (26,989)(143) 931 (1,016) (26,058)
Investment tax credits, net (112) (572) (295) (1,144)(1,942) (573) (2,237) (1,717)
Extraordinary item -- 51,730-- -- 51,730
Receivables 14,623 (16) 10,838 9461,481 881 12,319 1,827
Materials and supplies (1,610) 203 (2,342) (173)5,067 (839) 2,725 (1,012)
Accounts payable 5,031 3,842 11,216 5,006(6,759) (12,493) 4,457 (7,487)
Other 5,250 3,470 (7,201) (6,404)
-------(5,280) (1,533) (12,481) (7,937)
-------- -------- -------- --------
Net cash provided from operating
activities 46,095 26,792 59,705 40,688
-------14,611 12,776 74,316 53,464
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt -- 1,621-- -- 1,621
Redemptions and Repayments-
Preferred stock 6,0855,920 -- 6,08512,005 --
Long-term debt 1,400 791 3,145 2,5511,843 1,443 4,988 3,994
Dividend Payments-
Common stock 33,59715,000 5,347 65,362 10,69380,362 16,040
Preferred stock 671 1,081 1,737 2,238
-------1,393 1,232 3,130 3,470
-------- -------- -------- --------
Net cash used for financing activities 41,753 5,598 76,329 13,861
-------24,156 8,022 100,485 21,883
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 3,696 3,735 8,329 7,0198,160 4,541 16,489 11,560
Loan to parent -- 13,5004,400 -- 12,50016,900
Loan payment from parent (1,071)(12,597) -- (21,313)(33,910) --
Other 605 1,069 1,868 1,881
-------(3,391) (2,194) (1,523) (313)
-------- -------- -------- --------
Net cash used for (provided from)
investing activities 3,230 18,304 (11,116) 21,400
-------(7,828) 6,747 (18,944) 28,147
-------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents 1,112 2,890 (5,508) 5,427(1,717) (1,993) (7,225) 3,434
Cash and cash equivalents at beginning of period 865 3,1971,977 6,087 7,485 660
--------------- -------- -------- --------
Cash and cash equivalents at end of period $ 1,977260 $ 6,0874,094 $ 1,977260 $ 6,087
=======4,094
======== ======== ======== ========
The preceding Notes to Consolidated Financial Statements as they relate to Pennsylvania Power Company
are an integral part of these statements.
- 4143 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennsylvania Power Company:
We have reviewed the accompanying consolidated balance sheet of
Pennsylvania Power Company (a Pennsylvania corporation and wholly owned
subsidiary of Ohio Edison Company) and subsidiary as of September 30,
1999, and the related consolidated statements of income and cash flows
for the three-month and nine-month periods ended September 30, 1999 and
1998. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with 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 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 balance sheet of Pennsylvania Power Company as
of December 31, 1998 (not presented herein), and, in our report dated
February 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, 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 9, 1999
- 44 -
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Earnings were adversely affected in the second quarter and
year-to-date periods of 1998 by an extraordinary item resulting from the
deregulation of Penn's generation business and the corresponding
discontinuation of SFAS 71 with respect to its generation business. This
action was taken following the June 18, 1998, authorization by the
Pennsylvania Public Utility Commission (PPUC) of the restructuring plan
for Penn. Earnings on common stock declined to $3.3 million in the secondthird
quarter of 1999 were
$2.9from $10.7 million compared to $4.3 million, excluding the extraordinary item in the secondthird quarter of 1998; for1998. Reduced
fossil generating capacity resulted in lower wholesale revenues and
increased purchased power costs in the third quarter of 1999, from the
prior year's third quarter levels, contributing to the lower earnings.
In the first halfnine months of 1999, earnings on common stock were $12.1increased to
$15.4 million compared to $11.1from a loss on common stock of $8.7 million for the same
period last year. The nine-month period ended September 30, 1998,
included an extraordinary charge of 1998.$30.5 million resulting from Penn's
discontinued application of SFAS 71 to its generation business.
Operating revenues increased $1.8declined approximately $5.5 million in the
secondthird quarter and $0.9 million for the first nine months of 1999,
compared to the secondcorresponding periods of 1998. The lower third quarter of 1998, and $4.6
million in the first half of 1999, compared to the same period of the
prior year. The increases in
operating revenues resulted primarily from additionala decline in kilowatt-hours
sales. Total kilowatt-hour sales which were partially offset by reduced
unit prices. Residential, commercial and industrial customers all
contributed to higher retail kilowatt-hour salesdecreased 3.8% in the secondthird quarter of
1999, compared to the same period of 1998, with increases of 4.1%,
23.4% and 7.3%, respectively. Overall, retail1998. This resulted from reduced
kilowatt-hour sales
increased 10.9% and total kilowatt-hour sales increased a more moderate
5.6% due to reduced sales to wholesale customers, duringwhich declined 33.1% in the
period. In
the first halfthird quarter of 1999 residential and commercial customers contributed
to the increase in retail kilowatt-hour sales, increasing 10.1% and
23.5%, respectively, from the prior year, whilethird quarter of 1998. The decrease
resulted from a reduction in fossil generation available for the
wholesale market during that period. However, sales to industrialretail customers
decreased 1.5%. Overall, retail sales increased 9.2% and
total sales increased 6.2%. Growth in sales per customer was the
primary factor supporting increased residential sales in the secondthird quarter and first half of 1999, compared to the corresponding prior
year periods. Continued service sector growth contributedthird
quarter of 1998. Kilowatt-hour sales to the
commercial and industrial
customers increased 4.6% and 16.4%, respectively, whereas, sales increase while industrial sales benefitedto
residential customers decreased 3.1% in the secondthird quarter of 1999 from a
rebound in sales to the primary metal sector.
Retail kilowatt-hour sales also increased due to nonregulated sales by
Penn Power Energy, Inc. (PPE), a wholly owned subsidiary. Most of the
new PPE sales were to commercial customers resulting in the unusually
large percentageyear ago. Lower unit prices offset an increase in kilowatt-hour sales
during the first nine months of 1999, compared to those customers.
Operation and maintenance expenses decreased $0.2 millionthe year-to-date
period of 1998. Total kilowatt-hour sales increased 2.6% in the second quarter of 1999 from the samecurrent
nine-month period, of 1998,with retail sales 8.2% higher and sales to wholesale
customers 18.5% lower. Additionally, kilowatt-hour sales to retail
customers were $1.1
million higher in the first halfnine months of 1999, compared to the
first half of
1998. The relatively small changes in these expenses resulted from
larger increases and offsetting decreases as discussed below. Fuel and
purchased power costs were lower in both the second quarter and
year-to-date periods of 1999 than the corresponding periodsnine months of 1998, duewith increased sales to an increased mixresidential,
commercial and industrial customers of nuclear production, which reduced the cost of
fuel,5.6%, 16.7% and lower purchased power costs. Most of the reduction in purchased
power costs in 1999 was due4.1%,
respectively. Contributing to the absence of unusual conditions experiencedhigher sales to commercial customers
were increased sales by Penn's nonregulated affiliate, Penn Power
Energy, Inc.
Operation and maintenance expenses increased $1.8 million and
$2.9 million in the second quarter of 1998, which increased the prior period's costs.
Record heat and humidity in late June 1998 coincided with a regional power
shortage resulting in high prices for purchased power. Due in part to an
unscheduled outage at Beaver Valley Unit 1, which continued through the
second quarter of 1998, Penn purchased significant quantities of power
on the spot market during that period. Although the second quarter of
1999 also experienced above normal temperatures in June, spot market
prices were less extreme and Penn maintained a stronger capacity
position during the period. Therefore, Penn was able to reduce its
dependence on purchased power in 1999.
Expenses associated with the 1999 refueling outage at the
Perry Plant increased nuclear expenses in the secondthird quarter and first halfnine months of 1999,
respectively, compared to the corresponding periods of 1998. Fuel and
purchased power costs were higher in the third quarter of 1999 due to
an increase in purchased power costs. The increase resulted from an
outage at the New Castle Plant and reduced available internally
generated power. However, Beaver Valley Unit 1, which remained out of
service for most of the first three quarters of 1998, was available for
service for nearly all of the first nine months of 1999. As a result,
in the 1999 year-to-date period, the increased mix of nuclear
generation lowered fuel costs. Nuclear operating costs were lower in
the third quarter of 1999, compared to the third quarter of 1998,
reflecting lower costs at Beaver Valley Unit 1. Other operating costs
were higher in the first nine months of 1999, compared to the same
period in 1998, primarily due to higher customer and sales expenses,
including expenditures for energy marketing programs and information
system requirements, and increased employee benefit costs.
The provision for depreciation and amortization increased in
the secondthird quarter of 1999, compared to the third quarter of 1998, as a
result of increases in the amortization of regulatory assets related to
the Penn rate restructuring plan that began in 1999. For the first nine
months of 1999, the increase in amortization expense was substantially
offset by lower depreciation expense related to the reduction in the
nuclear plant investments at the end of June 1998. This reduction was
the result of an extraordinary charge discussed above. General taxes
increased for both the third quarter and year-to-datenine-month periods of 1999,
fromcompared to the same periods of last yearin 1998, primarily due to increased energy marketing program expenditures.increases in the
gross receipts tax, Ohio property tax and payroll taxes.
Capital Resources and Liquidity
- -------------------------------------------------------------
Penn has continuing cash requirements for planned capital
expenditures. During the second halffourth quarter of 1999, capital requirements
for property additions and capital leases are expected to be about $30$18
million, with no additional expendituresincluding $1 million for nuclear fuel. Penn has additional
cash requirements of approximately $0.5 million$487,000 to meet requirements for
maturing long-term debt during the remainderfourth quarter of 1999. These
requirements are expected to be satisfied with internal cash.
As of JuneSeptember 30, 1999, Penn had approximately $30.7$16.4
million of cash and temporary investments and no short-term
indebtedness. In addition, Penn hadhas $2 million ofavailable from an unused
bank facility, as of June 30, 1999, which may be borrowed for up to several days at the
bank's discretion. Under its first mortgage indenture, as of JuneSeptember
30, 1999, Penn would have been - 43 -
permitted to issue at least $233$120 million
of additional first mortgage bonds on the basis of bondable property
additions and retired bonds.
- 45 -
Regulatory Matters
- ------------------
All regulatory approvals have been received for the transfer
of generating assets between FirstEnergy and Duquesne, which is
intended to be a tax-free asset exchange. When completed in December
1999, the transaction will provide FirstEnergy with exclusive ownership
and operating control of all generating assets that are currently
jointly owned and operated under the CAPCO agreement (see Note 2,
"Pending Exchange of Assets").
Environmental Matters
- ---------------------
In MaySeptember 1999, FirstEnergy received, and subsequently in
October 1999, Penn received a federal appeals court delayed enforcementcitizen suit notification letter from the
New York Attorney General's office alleging Clean Air Act violations at
the W. H. Sammis Plant. FirstEnergy believes the Sammis Plant is in
full compliance with the Clean Air Act, but cannot predict whether New
York will nonetheless file a lawsuit.
On November 3, 1999, the EPA issued Notices of EPA's September 1998 final regulations requiring reductionsViolation
(NOV) or a Compliance Order to eight utilities covering 32 power
plants, including the Sammis Plant. In addition, the U.S. Department of
Justice filed seven civil complaints against various investor-owned
utilities, which included a complaint against Penn in nitrogen
oxide emissionsthe U.S. District
Court for Pennsylvania, Ohiothe Southern District of Ohio. The NOV and twenty other eastern states.
The federal appeals court remandedcomplaint allege
violations of the regulationsClean Air Act based on operation and maintenance of
the Sammis Plant dating back to 1984. The complaint requests permanent
injunctive relief to require the EPA soinstallation of "best available
control technology" and civil penalties of up to $27,500 per day of
violation. FirstEnergy believes the agency could address, if possible, constitutionalNOV and other defects
in the rules (see "Environmental Matters" in Note 2). The EPA has
sought a rehearing. Penn cannotcomplaint are without
merit. However, FirstEnergy is unable to predict either the outcome of these
actions orthis
litigation. Criminal penalties could be imposed if the Sammis Plant
continues to operate without correcting the alleged violations and a
court determines that the allegations are valid. It is anticipated at
this time period before final rules could become enforceable.that the Sammis Plant will continue to operate while the
matter is being decided.
Year 2000 Readiness
- -------------------
The Year 2000 issue is the result of computer programs being
written using two digits rather than four to identify the applicable
year. Any of Penn'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 Penn'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.
Penn has developed a multi-phase program for Year 2000
compliance that consists of an assessment of its systems and operations
that could be affected by the Year 2000 problem; remediation or
replacement of noncompliant systems and components; and testing of
systems and components following such remediation or replacement. 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's
review of system readiness extends to systems involving customer
service, safety, shareholder needs and regulatory obligations.
Penn is committed to taking appropriate actions to eliminate
or lessen negative effects of the Year 2000 issue on its operations.
Penn has completed an inventory of all computer systems and hardware
including equipment with embedded computer chips, and has determined which
systems need to be converted or replaced to become Year 2000-
ready2000-ready and
has completed the remediation of all mission critical systems and
equipment. Based on results of ourits remediation and testing efforts,
Penn filed documents (through FirstEnergy) with the North American Electric Reliability
Council, Nuclear Regulatory Commission and PPUC that as of June 30,
1999 its generation, transmission, and distribution systems were ready
to serve customers in the year 2000.
Most of Penn's Year 2000 issues have been resolved through
system replacement. Of Penn's major centralized systems, the general
ledger system and inventory management, procurement and accounts
payable systems were replaced at the end of 1998. Penn's payroll system
was enhanced to be Year 2000 compliant in July 1998. The customer
service system was made Year 2000 compliant in June 1999.
Penn has completed formal communications with most ofcontacted all its key 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, Penn is developing
alternate sources and services in the event such noncompliance occurs.
Penn is also identifying areas requiring higher inventory levelsdoes not
anticipate any service interruptions with them based on compliance uncertainties. There can be no guaranteethe information
they have provided. Further, Penn has reviewed its stocking levels of
critical supplies and has determined the appropriate stocking levels to
maintain approaching the year 2000. Penn has initiated actions to
ensure that these materials are at the failure
of companies to resolve their own Year 2000 issues will not have a
material adverse effect on Penn's business, financial condition and
results of operations, although it does not consider this likely to
occur.required levels consistent with
the assumptions in its contingency plan.
Penn has completed the development of formal contingency
plans in all mission critical areas to establish procedures to be
followed in handling unlikely events which could impact the provision
of electric service to its customers.
- 46 -
Penn is usinguses both internal and external resources to reprogram
and/or replace and test its software for Year 2000 modifications. Of the
$4.9$4.8 million total project cost, approximately $3.5 million will be
capitalized since those costs are attributable to the purchase of new
software for total system replacements because the Year 2000 solution
comprises only a portion of the benefits resulting from the system
replacements. The remaining $1.4$1.3 million will be expensed as incurred.
As of JuneSeptember 30, 1999, Penn had spent $3.2$3.4 million for Year 2000
capital projects and had expensed approximately $.9$1.0 million 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.
- 44 -
Penn believes it is managing the Year 2000 issue in such a
way that its customers will not experience any interruption of service.
Penn believes the most likely worst-case scenario from the Year 2000
issue will be disruption in power plant monitoring systems, thereby
producing inaccurate data and potential failures in electronic
switching mechanisms at transmission junctions. This would prolong
localized outages, as technicians would have to manually activate
switches. Such an event could have a material, but currently
undeterminable, effect on its financial results.
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.
- 4547 -
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
-----------------
On November 3, 1999, the EPA issued Notices of Violation (NOV) or
a Compliance Order to eight utilities covering 32 power plants,
including the Sammis Plant. In addition, the U.S. Department of
Justice filed seven civil complaints against various investor-
owned utilities, which included a complaint against OE and Penn
in the U.S. District Court for the Southern District of Ohio. The
NOV and complaint allege violations of the Clean Air Act based on
operation and maintenance of the Sammis Plant dating back to
1984. The complaint requests permanent injunctive relief to
require the installation of "best available control technology"
and civil penalties of up to $27,500 per day of violation.
FirstEnergy believes the NOV and complaint are without merit.
However, FirstEnergy is unable to predict the outcome of this
litigation. Criminal penalties could be imposed if the Sammis
Plant continues to operate without correcting the alleged
violations and a court determines that the allegations are valid.
It is anticipated at this time that the Sammis Plant will
continue to operate while the matter is being decided.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number
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FirstEnergy, OE, CEI and Penn
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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 and TE - One combined report on Form 8-K
----------------------------
was filed since March 31, 1999. A report dated June 24, 1999
reported the Ohio legislature's passage of an electric utility
industry restructuring bill.
Penn
-------------------------------------
None
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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.
August 13,November 12, 1999
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
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