FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to --------- ----------_______
Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification No.
- ----------- ---------------------------------------------------------------------------- ------------------
333-21011 FIRSTENERGY CORP. 34-1843785
(An Ohio Corporation)
76 South Main Street
Akron, Ohio 44308
Telephone (800)736-3402
1-2578 OHIO EDISON COMPANY 34-0437786
(An Ohio Corporation)
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-2323 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY 34-0150020
(An Ohio Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-3583 THE TOLEDO EDISON COMPANY 34-4375005
(An Ohio Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-3491 PENNSYLVANIA POWER COMPANY 25-0718810
(A Pennsylvania Corporation)
1 East Washington Street
P. O. Box 891
New Castle, Pennsylvania 16103
Telephone (412)652-5531
Indicate by check mark whether each of the registrants (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
OUTSTANDING
CLASS AS OF NOVEMBER 9, 1999MAY 5, 2000
----- ----------------------------------------
FirstEnergy Corp., $.10 par value 233,023,987230,504,441
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 10-1410-13
Ohio Edison Company
Consolidated Statements of Income 1514
Consolidated Balance Sheets 16-1715-16
Consolidated Statements of Cash Flows 1817
Report of Independent Public Accountants 1918
Management's Discussion and Analysis of Results
of Operations and Financial Condition 20-2319-20
The Cleveland Electric Illuminating Company
Consolidated Statements of Income 2421
Consolidated Balance Sheets 25-2622-23
Consolidated Statements of Cash Flows 2724
Report of Independent Public Accountants 2825
Management's Discussion and Analysis of Results
of Operations and Financial Condition 29-3126-27
The Toledo Edison Company
Consolidated Statements of Income 3228
Consolidated Balance Sheets 33-3429-30
Consolidated Statements of Cash Flows 3531
Report of Independent Public Accountants 3632
Management's Discussion and Analysis of Results
of Operations and Financial Condition 37-3933-34
Pennsylvania Power Company
Consolidated Statements of Income 40
Consolidated35
Balance Sheets 41-42
Consolidated36-37
Statements of Cash Flows 4338
Report of Independent Public Accountants 4439
Management's Discussion and Analysis of Results
of Operations and Financial Condition 45-4740-41
Part II. Other Information
PART I. FINANCIAL INFORMATION
- ------------------------------
FIRSTENERGY CORP. AND SUBSIDIARIES
OHIO EDISON COMPANY AND SUBSIDIARIES
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
PENNSYLVANIA POWER COMPANY
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1 - CONSOLIDATED FINANCIAL STATEMENTS:
The principal business of FirstEnergy Corp. (FirstEnergy) 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, 19981999 for FirstEnergy and the
Companies. Significant intercompany transactions have been eliminated.
The preparation of financial statements in conformity with
accounting principles generally accepted accounting
principlesin the United States requires
management to make periodic estimates and assumptions that affect the
reported amounts of assets, liabilities, revenuerevenues and expenses. Actual
results could differ from those estimates. The reported results of
operations are not indicative of results of operations for any future
period. Certain prior year amounts have been reclassified to conform with
the current year presentation.
Penn's results of operations for the three months ended March 31,
1999 include Penn and its wholly owned subsidiary, Penn Power Energy, Inc.
(PPE). Penn's interest in PPE was transferred to FirstEnergy Services
Corp., an affiliate, effective December 31, 1999.
The sole assets of the subsidiary trust that is the obligor on the
preferred securities included in FirstEnergy's and OE's capitalization are
$123,711,350 principal amount of 9% Junior Subordinated Debentures of OE due
December 31, 2025.
2 - COMMITMENTS, GUARANTEES AND CONTINGENCIES:
CAPITAL EXPENDITURES-
FirstEnergy's current forecast reflects expenditures of
approximately $2.2$3.0 billion (FirstEnergy-(OE-$263 million, OE-$856766 million, CEI-$701529 million, TE-$257259
million, Penn-$234 million and Penn-unregulated subsidiaries-$167 million)1.212 billion) for
property additions and improvements from 1999-2003,2000-2004, of which approximately
$455$689 million (FirstEnergy-(OE-$117 million, OE-$156215 million, CEI-$11199 million, TE-$4194 million, Penn-$32
million and Penn-unregulated subsidiaries-$30249 million) is applicable to 1999.2000.
Investments for additional nuclear fuel during the 1999-20032000-2004 period are
estimated to be approximately $364$489 million (OE-$128123 million, CEI-$118164
million, TE-$92113 million and Penn-$2689 million), of which approximately $51$149
million (OE-
$23$35 million, CEI-$1454 million, TE-$938 million and Penn-$522
million) applies to 1999.2000.
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 beare funded primarily through the use of
operating cash flows. During the thirdfirst quarter of 1999,2000, FirstEnergy
repurchased and retired 1.52.0 million shares of its common stock at an
average price of $28.30$21.37 per share. During the first nine
months ofIn 1999, FirstEnergy repurchased and retired 4.0also entered into a
forward contract with Credit Suisse First Boston Corporation for the
purchase of 1.4 million shares of FirstEnergy's common stock at an average
price of $28.83$24.22 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, which
expires December 31, 1999. As of September 30, 1999, the Companies'
share of the guarantees was $19.9 million (OE-$11.3 million, CEI-$4.4
million, TE-$2.6 million and Penn-$1.6 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.settled on November 3, 2000. The contract
may be settled through gross physical settlement, net share settlement or
net cash settlement at FirstEnergy's election.
- 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$292 million (OE-$213144 million, CEI-$14584 million,
TE-$4433 million and Penn-$4731 million), which is included in the construction
forecast providedestimate given under "Capital Expenditures" for 19992000 through 2003.2004.
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-sulfurlower-
sulfur fuel, generating more electricity from lower-
emittinglower-emitting plants, and/or
purchasing emission allowances. NOx reductions are being achieved through
combustion controls and generatingthe generation of more electricity from lower-emittingat 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`sEPA'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,March 2000, the U.S. Court of Appeals for the D.C. Circuit issuedupheld EPA's
NOx Transport Rule except as applied to the State of Wisconsin and portions
of Georgia and Missouri. The Court's decision left in place 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-tworequirement for 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 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
suggestsposition is that the Section 126 petitions will be adequately addressed by
the NOx Transport Program, but an April 30,a December 17, 1999 rulemaking established
an alternative program which would require nearly identical 85% NOx
reductions at 392 utility plants, including the Companies' Ohio and
Pennsylvania plants, by May 2003, in the event implementation of the NOx
Transport Rule is 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. NewAdditional 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.
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
$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, findinghaving
found constitutional and other defects in the new NAAQS rules. The D.C.
Circuit Court, on October 29, 1999, denied an EPA petition for rehearing.
The Companies cannot predict the EPA'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 dependswill depend on the manner in which they
are ultimately implemented, if at all, by the states in which the Companies
operate affected facilities.
In September 1999, FirstEnergy received, and subsequently in
October 1999, OE and Penn received, a citizen suit notification letter from
the New York Attorney General's office alleging Clean Air Act violations at
the W. H. Sammis Plant. FirstEnergy believesIn November 1999, OE and Penn received a citizen
suit notification letter from the Sammis
Plant is in full compliance with theConnecticut Attorney General's office
alleging Clean Air Act but cannot predict
whether New York will nonetheless file a lawsuit.
Onviolations at the Sammis Plant. In November 3, 1999 and
March 2000, the EPA issued Notices of Violation (NOV) or a Compliance Order
to eight utilities covering 3236 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. Although unable to predict the outcome of these
proceedings, FirstEnergy believes the Sammis Plant is in full compliance
with the Clean Air Act and the NOV and complaint are without merit.
However, FirstEnergy is unable to predict
the outcome of this litigation. Criminal penaltiesPenalties 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 whileuntil these proceedings are concluded.
- 2 -
As a result of the matterResource Conservation and Recovery Act of
1976, as amended, and the Toxic Substances Control Act of 1976, federal and
state hazardous waste regulations have been promulgated. Certain fossil-
fuel combustion waste products, such as coal ash, were exempted from
hazardous waste disposal requirements pending EPA's evaluation of the need
for future regulation. EPA has issued its final regulatory determination
that regulation of coal ash as a hazardous waste is being decided.unnecessary. On April
25, 2000, EPA announced that it will develop national standards regulating
disposal of coal ash under its authority to regulate nonhazardous waste.
CEI and TE have been named as "potentially responsible parties"
(PRPs) at waste disposal sites which may require cleanup under the
Comprehensive Environmental Response, Compensation and Liability Act of
1980. Allegations of disposal of hazardous substances at historical sites
and the liability involved, are often unsubstantiated and subject to
dispute. Federal law provides that all PRPs for a particular site be held
liable on a joint and several basis. CEI and TE have accrued liabilities of
$4.6$4.8 million and $1.0$0.6 million, respectively, as of September 30, 1999,March 31, 2000, 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. All
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-
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 are being sold by
Duquesne to a wholly owned subsidiary of Orion Power Holdings, Inc.
(Orion). The Companies will continue to operate those 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 by the middle of 2000.
Under the agreements, Duquesne will no longer be a participant in the
CAPCO arrangements when the assets are exchanged with Duquesne.
3 - REGULATORY ACCOUNTING:
On July 6,FirstEnergy has reached an agreement with major parties to the
transition plan it had filed in 1999, the Governoron behalf of the State of Ohio signed
legislation which will allow OhioOE, CEI and TE under
Ohio's electric customersutility restructuring law. Other parties recommending
approval to select their
generation suppliers beginning January 1, 2001. Among other things, the
new law provides for a five percent 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 determineincluded the levelPUCO
staff, the Ohio Consumers' Counsel, the Industrial Energy Users-Ohio, power
marketers and others.
Major provisions of the agreement consist of approval of the
transition plan as filed, including recovery of transition costs through no
later than 2006 for OE, mid-2007 for TE and 2008 for CEI, except where a
longer period of recovery is provided for in the agreement. The total
transition cost recovery,amounts to be recovered are as well asfiled in the recovery periodtransition plan.
FirstEnergy will also allow preferred access to non-affiliated marketers,
brokers and aggregators over FirstEnergy's subsidiaries to 1,120 megawatts
of generation capacity through 2005 at established prices for sales to the
regulatory assets portion of those costs, in considering each Ohio operating companies' retail customers. The base electric utility's transition plan application.
On October 4, 1999, FirstEnergy, on behalf ofrate freeze
for distribution service for OE, CEI and TE filed withunder their current respective
regulatory plans will be extended from December 31, 2005 through December
31, 2007. The transition rate credits for customers under their current
regulatory plans will also be extended through the PUCO its comprehensiveCompanies' respective
transition plancost recovery periods.
Beginning January 1, 2001 when Ohio electric customers have the
choice to select their generation suppliers under the new law.
The plan itemizesOhio restructuring
law, the priceagreement provides to FirstEnergy's Ohio customers electing
alternative suppliers, an additional incentive applied to the shopping
credit 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 generation45% for residential customers, beginning January
1, 2001. Customer prices are expected30% for commercial customers and
15% for industrial customers. The amount of the incentive will serve to
be frozen through a five-yearreduce the amortization of transition costs during the 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 market development
period; transition costs related to regulatory assets aggregating
approximately $4.3 billion ($3.0 billion, net of deferred income taxes)(January 1, 2001 through December 31, 2005) and will be recovered
overthrough the periodextension 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 itscost recovery periods. If the
customer shopping goals established in the agreement are not achieved by the
end of 2005, the transition plan once those rules have
been established. Despite rejecting FirstEnergy's filing, the PUCO
indicated that it will endeavorcost recovery periods could be shortened for OE,
CEI and TE to issue its order in this case within
275 days of FirstEnergy's initial filing date.reduce recovery by as much as $500 million (OE-$250 million,
CEI-$170 million and TE-$80 million), but any such adjustment would be
computed on a class-by-class and pro-rata basis.
The application of Statement of Financial Accounting Standards
(SFAS) No. 71 "Accounting for the EffectsEffect 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.when the PUCO issues its
order. If the transition plans ultimatelystipulated agreement is 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
beanticipate 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.earnings. The Companies believe they will continue 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:STANDARD:
In June 1999,1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 137,SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities - Deferral
of the Effective Date of FASB Statement No. 133.Activities." 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 requiresestablishes accounting and reporting standards
requiring that every derivative instrument (including derivative instruments
toembedded in other contracts) be recognizedrecorded on the balance sheet as assetseither an
asset or liabilitiesliability measured at theirits fair value. SFAS 133 requires that changes
in the derivative's fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement. FirstEnergy has not
yet quantifiedcompleted quantifying the effectsimpacts of adopting SFAS 133 on its financial
statements.statements or determined the method of its adoption. However, SFAS 133 could
- 3 -
increase volatility in earnings and other comprehensive income. FirstEnergy
anticipates adopting the new statement on its amended effective date of
January 1, 2001.
5 - SEGMENT INFORMATION:
FirstEnergy's primary segment is its Electric Utility GroupOperating
Companies which includesinclude four electric utility operating companies that
provide electric service in Ohio and Pennsylvania. Its other material
business segment isconsists of the FirstEnergy Trading Services, Inc. subsidiary (formerly
known as FirstEnergy Trading & Power Marketing, Inc.) which markets and
trades electricity in nonregulated markets.subsidiaries that operate unregulated
businesses. Financial data for these business segments and products and services are as follows:
Segment Financial Information
- -----------------------------
FirstEnergy
Electric Trading AllUnregulated Reconciling
Three Months Ended: Utilities Services OtherBusinesses Eliminations Totals
- ------------------ --------- ----------- ----- ------------ ------
(In millions)
September 30, 1999March 31, 2000
- --------------------------------
External revenues $ 1,5281,275 $ 40 $ 164333 $ -- $ 1,7321,608
Intersegment revenues 7 22 28 (57)26 (54) --
Total revenues 1,535 62 192 (57) 1,7321,303 359 (54) 1,608
Depreciation and amortization 312197 5 -- 9 -- 321202
Net interest charges 136 1 16 (12) 141131 18 (14) 135
Income taxes 11497 1 -- -- -- 11498
Net income/Earnings on common stock 186 -- (1) 1 186141 2 (2) 141
Total assets 17,123 72 1,812 (932) 18,07516,721 2,091 (704) 18,108
Property additions 110117 35 -- 5 -- 115152
Acquisitions -- -- -- --
--
September 30, 1998March 31, 1999
- --------------------------------
External revenues $ 1,449 $1791,278 $ 94145 $ -- $ 1,7221,423
Intersegment revenues 8 23 23 (54)(31) --
Total revenues 1,457 202 117 (54) 1,7221,286 168 (31) 1,423
Depreciation and amortization 194186 5 -- 4 -- 198191
Net interest charges 148 -- 17142 16 (12) 153146
Income taxes 127 (20) 596 (2) -- 11294
Net income/Earnings on common stock 191 (29) 4 (3) 163143 (5) (1) 137
Total assets 17,619 52 1,692 (952) 18,41117,558 1,912 (1,282) 18,188
Property additions 6752 30 -- -- -- 6782
Acquisitions -- 9 -- 10 -- 10
Nine Months Ended:
- ------------------
September 30, 1999
- ------------------
External revenues $ 4,140 $ 69 $ 465 $ -- $ 4,674
Intersegment revenues 23 43 74 (140) --
Total revenues 4,163 112 539 (140) 4,674
Depreciation and amortization 706 -- 20 -- 726
Net interest charges 421 1 49 (36) 435
Income taxes 312 (2) (1) -- 309
Net income/Earnings on common stock 454 (3) -- (3) 448
Total assets 17,123 72 1,812 (932) 18,075
Property additions 231 -- 59 -- 290
Acquisitions -- -- 9 -- 9
September 30, 1998
- ------------------
External revenues $ 4,008 $403 $ 142 $ -- $ 4,553
Intersegment revenues 24 26 65 (115) --
Total revenues 4,032 429 207 (115) 4,553
Depreciation and amortization 579 -- 7 -- 586
Net interest charges 437 1 51 (37) 452
Income taxes 277 (34) 4 -- 247
Net income/Earnings on common stock 372 (50) -- (6) 316
Total assets 17,619 52 1,692 (952) 18,411
Property additions 185 -- 13 -- 198
Acquisitions -- -- 250 -- 250
- 4 -
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,March 31,
------------------------
------------------------2000 1999 1998 1999 1998
---------- ----------
---------- ----------
(In thousands, except per share amounts)
REVENUES:
Electric sales $1,467,619 $1,391,134 $3,964,937 $3,834,689$1,206,475 $1,209,122
Other - electric utilities 66,099 66,881 194,426 192,98674,455 74,202
Facilities services 133,821 72,061 355,144 108,684118,146 104,606
Trading services 40,408 178,958 68,974 403,08047,209 11,477
Other 24,444 12,953 90,201 13,604
---------- ----------161,645 23,145
---------- ----------
Total revenues 1,732,391 1,721,987 4,673,682 4,553,043
---------- ----------1,607,930 1,422,552
---------- ----------
EXPENSES:
Fuel and purchased power 269,755 291,227 678,385 832,384179,190 204,357
Other expenses:
Electric utilities 368,066 366,915 1,158,037 1,074,521408,445 371,015
Facilities services 119,798 65,642 332,438 102,335115,231 99,393
Trading services 40,208 221,446 73,472 481,88147,916 12,804
Other 27,393 11,911 91,563 20,646140,165 29,330
Provision for depreciation and amortization 321,171 198,329 726,403 586,146202,084 191,213
General taxes 144,584 138,471 422,144 409,953
---------- ----------141,055 138,094
---------- ----------
Total expenses 1,290,975 1,293,941 3,482,442 3,507,866
---------- ----------1,234,086 1,046,206
---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES 441,416 428,046 1,191,240 1,045,177
---------- ----------373,844 376,346
---------- ----------
NET INTEREST CHARGES:
Interest expense 125,712 136,204 386,452 409,365122,843 129,381
Allowance for borrowed funds used during construction
and capitalized interest (3,410) (2,461) (9,471) (5,129)(6,104) (2,685)
Subsidiaries' preferred stock dividends 19,007 19,568 57,767 47,359
---------- ----------18,288 19,381
---------- ----------
Net interest charges 141,309 153,311 434,748 451,595
---------- ----------135,027 146,077
---------- ----------
INCOME TAXES 114,284 111,644 308,626 246,885
---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 185,823 163,091 447,866 346,697
EXTRAORDINARY ITEM (NET OF INCOME TAX
BENEFIT OF $21,208,000) -- -- -- (30,522)
---------- ----------97,899 93,548
---------- ----------
NET INCOME $ 185,823140,918 $ 163,091 $ 447,866 $ 316,175
========== ==========136,721
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 226,432 229,482 227,646 225,292
======= =======224,859 229,140
======= =======
BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK:
Income before extraordinary item $ .82 $ .71 $ 1.97 $ 1.54
Extraordinary item (Net of income taxes) -- -- -- (.14)
----- ----- ------ ------
Net income $ .82 $ .71 $ 1.97 $ 1.40
===== ===== ====== ======STOCK $.63 $.60
==== ====
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $.375 $.375
$1.125 $1.125
===== ===== ====== ======
The preceding Notes to Consolidated Financial Statements as they relate to FirstEnergy Corp. are an
integral part of these statements.
- 5 -
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2000 1999
1998
----------------------- ------------
(In thousands)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 115,60443,046 $ 77,798111,788
Receivables-
Customers (less accumulated provisions of $7,783,000$6,778,000
and $6,397,000,$6,719,000, respectively, for uncollectible accounts) 328,979 239,183337,670 322,687
Other (less accumulated provisions of $46,962,000$7,629,000 and
$46,251,000,$5,359,000, respectively, for uncollectible accounts) 423,361 322,186416,110 445,242
Materials and supplies, at average cost-
Owned 116,273 145,926133,782 154,834
Under consignment 106,258 110,109113,445 99,231
Prepayments and other 163,061 171,931214,527 167,894
----------- -----------
1,253,536 1,067,1331,258,580 1,301,676
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
In service 15,075,021 14,961,66414,700,661 14,645,131
Less--Accumulated provision for depreciation 6,282,901 6,012,7616,075,635 5,919,170
----------- -----------
8,792,120 8,948,9038,625,026 8,725,961
Construction work in progress 240,337 293,671492,869 367,380
----------- -----------
9,032,457 9,242,5749,117,895 9,093,341
----------- -----------
INVESTMENTS:
Capital trust investments 1,283,575 1,329,0101,242,189 1,281,834
Nuclear plant decommissioning trusts 406,589 358,371558,266 543,694
Letter of credit collateralization 277,763 277,763
Other 666,030 453,860590,139 599,443
----------- -----------
2,633,957 2,419,0042,668,357 2,702,734
----------- -----------
DEFERRED CHARGES:
Regulatory assets 2,579,815 2,887,4372,499,321 2,543,427
Goodwill 2,108,816 2,167,9682,117,761 2,129,902
Property taxes 270,666 270,666267,226 276,997
Other 195,633 199,400178,708 175,970
----------- -----------
5,154,930 5,525,4715,063,016 5,126,296
----------- -----------
$18,074,880 $18,254,182$18,107,848 $18,224,047
=========== ===========
- 6 -
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2000 1999
1998
------------ ----------------------- -------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock $ 1,082,371657,517 $ 876,470762,520
Short-term borrowings 287,631 254,470353,827 417,819
Accounts payable 232,180 257,524342,060 360,379
Accrued taxes 501,713 401,688416,821 409,724
Accrued interest 138,266 141,575131,159 125,397
Other 252,082 251,262301,503 301,572
----------- -----------
2,494,243 2,182,9892,202,887 2,377,411
----------- -----------
CAPITALIZATION:
Common stockholders' equity-
Common stock, $.10 par value, authorized 300,000,000 shares -
233,023,987230,909,041 and 237,069,087232,454,287 shares outstanding, respectively 23,302 23,70723,091 23,245
Other paid-in capital 3,734,814 3,846,5133,689,672 3,722,375
Accumulated comprehensive income (439) (439)(195) (195)
Retained earnings 909,592 718,4091,001,704 945,241
Unallocated employee stock ownership plan common stock -
6,997,7056,492,051 and 7,406,3326,778,905 shares, respectively (130,624) (139,032)(121,137) (126,776)
----------- -----------
Total common stockholders' equity 4,536,645 4,449,1584,593,135 4,563,890
Preferred stock of consolidated subsidiaries-
Not subject to mandatory redemption 648,395 660,195648,395
Subject to mandatory redemption 154,996 174,710136,246 136,246
OE obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely OE subordinated debentures 120,000 120,000
Long-term debt 5,817,547 6,352,3596,056,213 6,001,264
----------- -----------
11,277,583 11,756,42211,553,989 11,469,795
----------- -----------
DEFERRED CREDITS:
Accumulated deferred income taxes 2,235,541 2,282,8642,212,445 2,231,265
Accumulated deferred investment tax credits 274,377 286,154
Pensions and other264,209 269,083
Other postretirement benefits 537,327 525,647510,950 498,184
Nuclear plant decommissioning costs 577,321 562,295
Other 1,255,809 1,220,106786,047 816,014
----------- -----------
4,303,054 4,314,7714,350,972 4,376,841
----------- -----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ----------- -----------
$18,074,880 $18,254,182$18,107,848 $18,224,047
=========== ===========
The preceding Notes to Consolidated Financial Statements as they relate to FirstEnergy Corp. are an integral
part of these balance sheets.
- 7 -
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,March 31,
------------------------
------------------------2000 1999
1998 1999 1998
---------- ---------- ---------- -------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $140,918 $ 185,823 $ 163,091 $ 447,866 $ 316,175136,721
Adjustments to reconcile net income to net cash from operating activities-
Provision for depreciation and amortization 321,171 198,329 726,403 586,146202,084 191,213
Nuclear fuel and lease amortization 27,535 21,974 75,484 62,60629,761 26,595
Other amortization, net (2,855) (760) (7,109) (10,442)(3,167) (465)
Deferred income taxes, net (30,421) 3,917 (45,166) (20,290)(5,373) (6,435)
Investment tax credits, net (6,856) (5,841) (13,675) (17,180)
Extraordinary item -- -- -- 51,730(5,554) (3,444)
Receivables (5,501) (192,236) (165,948) (103,750)26,101 (18,370)
Materials and supplies 26,879 21,275 33,607 11,4786,838 (5,006)
Accounts payable (75,808) (97,985) (26,635) (133,134)(18,319) 12,158
Other 108,621 153,718 9,172 54,401
--------- --------- ----------(45,374) (120,337)
-------- ---------
Net cash provided from operating activities 548,588 265,482 1,033,999 797,740
--------- --------- ----------327,915 212,630
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Common stock -- -- -- 203,855
Long-term debt 84,331 10,151 277,696 272,556
Ohio Schools Council prepayment program -- -- -- 116,59817,319 12,277
Short-term borrowings, net 54,353 145,612 29,625 37,169-- 11,264
Redemptions and Repayments-
Common stock 41,035 -- 116,610 --
Preferred stock 11,920 6,000 33,409 21,37933,962 44,499
Long-term debt 525,532 209,963 618,540 559,874102,055 80,802
Short-term borrowings, net 63,992 --
Common stock dividend payments 85,247 86,040 256,683 253,017
--------- --------- ----------84,455 86,137
-------- ---------
Net cash used for financing activities 525,050 146,240 717,921 204,092
--------- --------- ----------267,145 187,897
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 114,873 76,614 298,549 447,838151,680 90,705
Cash investments (71) (205) (41,276) 111,405(39,106) (41,268)
Other 19,665 (3,873) 20,999 14,971
--------- --------- ----------16,938 7,482
-------- ---------
Net cash used for investing activities 134,467 72,536 278,272 574,214
--------- --------- ----------129,512 56,919
-------- ---------
Net increase (decrease)decrease in cash and cash equivalents (110,929) 46,706 37,806 19,43468,742 32,186
Cash and cash equivalents at beginning of period 226,533 70,965111,788 77,798
98,237
--------- --------- ------------------ ---------
Cash and cash equivalents at end of period $ 115,60443,046 $ 117,671 $ 115,604 $ 117,671
========= ========= ==========45,612
======== =========
The preceding Notes to Consolidated Financial Statements as they relate to FirstEnergy Corp. are an
integral part of these statements.
- 8 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FirstEnergy Corp.:
We have reviewed the accompanying consolidated balance sheet of FirstEnergy
Corp. (an Ohio corporation) and subsidiaries as of September 30, 1999,March 31, 2000, and the
related consolidated statements of income and cash flows for the three-month
and nine-month periods ended September 30, 1999March 31, 2000 and 1998.1999. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted auditing
standards,in the
United States, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with accounting principles generally accepted accounting principles.in the United
States.
We have previously audited, in accordance with auditing standards generally
accepted auditing standards,in the United States, the consolidated balance sheet of FirstEnergy
Corp. and subsidiaries as of December 31, 19981999 (not presented herein), and,
in our report dated February 12, 1999,11, 2000, 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, 1998,1999, 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, 1999May 12, 2000
- 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
- ---------------------
Revenues increased $185.4 million in the first quarter of 2000,
compared to the same period in 1999, due to increased sales by our
unregulated businesses. The sources of increases in the first quarter of
2000, compared to the first quarter of 1999, are summarized in the following
table.
Sources of Revenue Changes
- --------------------------
(In millions)
Electric Utility Operating Companies (EUOC):
Electric sales $ (2.6)
Other electric utility revenues 0.2
------
Total EUOC (2.4)
Unregulated Businesses:
Retail electric sales 50.8
FirstEnergy Trading Services, Inc. (FETS) 35.7
Other businesses 101.3
------
Net Revenue Increase $185.4
======
Electric Sales
EUOC revenues decreased slightly by $2.4 million in the first
quarter of 2000 from the same period in 1999. Lower kilowatt-hour prices
(representing sales from traditional vertically integrated operations)
offset an increase in EUOC electric generation sales. Kilowatt-hour
electric generation sales by the EUOCs were 1.3% higher in the first
quarter of 2000 than the same period last year.
Total electric generation kilowatt-hour sales increased 12.9%
including unregulated sales that more than doubled from the first quarter
of 1999. FirstEnergy continued to make progress in expanding its retail
electric sales to target markets within the eastern portion of the U.S.,
which are opening up to competition. Sales to wholesale customers also
contributed to the increase in unregulated sales with a 56.8% increase in
the first quarter of 2000 compared to the same period last year, reflecting
additional available generation from the EUOC and continued demand for
electricity in the wholesale market. EUOC distribution deliveries (to
customers in their franchise territory) to commercial and industrial
customers grew in the first quarter of 2000 compared to the same quarter in
1999 due to continuing economic strength in the service area. Mild weather
in the first quarter of 2000 contributed to lower residential deliveries
compared to the same period of 1999. Changes in kilowatt-hour generation
sales and distribution deliveries in the first quarter of 2000 compared to
the first quarter of 1999 are summarized in the following table.
- 10 -
FIRSTENERGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont'd)
Changes in KWH Sales
- ---------------------
% Increase
(Decrease)
----------
Electric Generation Sales:
EUOC - Retail 1.3%
Unregulated 143.0%
------
Total Electric Generation Sales 12.9%
======
EUOC Distribution Deliveries:
Residential (4.2)%
Commercial 2.9%
Industrial 5.6%
------
Total Distribution Deliveries 1.7%
======
Nonelectric Sales
Retail natural gas sales by FirstEnergy Services, Corp., a wholly
owned subsidiary, was the largest factor contributing to the $101.3 million
increase in other business revenues in the first quarter of 2000 from the
same period in 1999. Revenues from new business acquisitions completed
during 1999 by the FirstEnergy Facilities Services Group, Inc. and FETS
provided a smaller contribution to the overall increase recognized in the
first quarter of 2000.
Operating Expenses
The $25.2 million reduction in EUOC fuel and purchased power costs
resulted from a $20.1 million decrease in fuel expense and a $5.1 million
reduction of purchased power costs. Several factors contributed to the lower
fuel expense, which occurred despite a 12.2% increase in generation (fossil
up 4.9%; nuclear up 25.1%). These factors included:
- a higher proportion of nuclear generation (i.e., lower
cost fuel) due to improved nuclear availability and
increased nuclear ownership;
- the expiration of an above-market coal contract; and
- more extensive use of lower cost western coal.
The increased nuclear ownership resulted from the exchange of generating
assets with Duquesne Light Company in December 1999. Because more internal
generation was available in the first quarter of 2000 compared to the same
quarter in 1999, FirstEnergy also reduced its need for purchased power.
Other expenses for the EUOC rose in the first quarter of 2000
compared to the same period in 1999 primarily due to outage related costs at
Beaver Valley Unit 1 and increased ownership of nuclear plants resulting
from the Duquesne asset swap. Expansion of unregulated sales activity also
resulted in a corresponding increase of $161.8 million in other operating
costs for FirstEnergy Facilities Services Group, LLC and FETS, as well as
FirstEnergy Services Corp., which is reflected in "Other" expenses.
Accelerated cost recovery in connection with OE's rate reduction
plan was the primary factor contributing $12.6 million to the increase in
depreciation and amortization in the first quarter of 2000, compared to the
prior year. General taxes increased in the first quarter of 2000 from the
first quarter in 1999, principally due to higher payroll taxes as a result
of the nuclear refueling outage at Beaver Valley Unit 1 and an increase in
the Ohio unemployment tax rate.
- 11 -
FIRSTENERGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont'd)
Interest Charges
Interest charges continued their downward trend, decreasing by
$6.5 million in the first three months of 2000, compared to the same period
in 1999, because of debt redemptions and refinancing activities. During the
first quarter of 2000, FirstEnergy redeemed an additional $17.1 million of
debt which will result in annualized savings of $1.3 million.
Net Income
As a result of additional unregulated sales, lower fuel and
purchased power costs and reduced interest charges that were partially
offset by higher other operating expenses and depreciation and amortization,
net income increased in the first quarter of 2000 to $140.9 million,
compared to $136.7 million in the same period in 1999. Basic and diluted
earnings per share of common stock increased to $1.97 per share for the nine-month period ended September
30, 1999, from $1.40 per share for the same period last year. For the
third quarter of 1999, earnings increased to $.82 per share, from $.71
per share in the third 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, year-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 $10.4 million in the third quarter of 1999
and $120.6 million during the nine-month period ended September 30,
1999 as compared to the same periods 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 the current quarter and nine-month period revenues,
compared to the corresponding periods of 1998, are summarized in the
following table.
Three Nine
Months Months
Ended Ended
------ ------
(In millions)
Electric sales $ 76.5 $ 130.2
Other electric utility revenues (0.8) 1.4
------- -------
EUOC 75.7 131.6
FETS (138.6) (334.1)
New businesses acquired 58.5 285.4
Unregulated electric sales 14.8 37.7
------- -------
Net Revenue Increase $ 10.4 $ 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 third quarter and the
nine-month period as compared to the prior year resulted from
additional EUOC kilowatt-hour sales, which were partially offset by
reduced unit prices. Residential, commercial and industrial customers
all contributed to the additional EUOC kilowatt-hour sales with
increases of 6.3%, 4.9% and 4.4%, respectively, for the current quarter
of 1999 and increases of 6.9%, 4.1% and 2.4%, respectively, for the
nine-month period. Growth of the EUOC customer base and increased use
of electricity per customer stimulated by a strong consumption-driven
- 10 -
economy, continued to expand residential and commercial kilowatt-hour
sales. Industrial consumption of electricity also benefited from the
strong economy. Sales to industrial customers experienced additional
volume in the third quarter of 1999, compared to the same period last
year, due to a labor strike in 1998 experienced by a major customer in
the automotive sector. In total, retail sales increased 5.1% in the
third quarter of 1999 and 4.2% for the first nine 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 current year quarter
and nine-month period compared to the prior year resulted from a
refocus of trading activities in the support of FirstEnergy's retail
marketing activities. Acquisition of facilities services companies and
sales of electricity to the unregulated market by Penn Power Energy and
FirstEnergy Services Corp. contributed to the significant increase in
other 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 $3.0 million in the third quarter
and were $25.4 million lower$0.63 in the first nine monthsquarter of 19992000,
compared to the corresponding periods of 1998. Contributing to this overall
reduction$0.60 in expenses were EUOC purchased power costs which were down
$23.0 million in the third quarter of 1999 and $152.1 million lower in
the first nine months of 1999. Much of the improvement occurred in the
second quarter due to the absence of unusual conditions experienced in
1998, which resulted in an additional $77.4 million of 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. The outage at the Beaver Valley Plant continued as well for
most of the third quarter of 1998. Although above normal temperatures
were also experienced in 1999, the Companies maintained a stronger
capacity position this year compared to 1998.
Other expenses for the EUOCs increased only slightly in the
third quarter of 1999 from the same period last year, while increasing
$83.5 million in the nine-month period from the corresponding period in
1998. Higher nuclear expenses due to refueling outages at Beaver Valley
Unit 2 and the Perry Plant; 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 year-to-date increase in other EUOC
expenses.
Reduced FETS activity resulted in significant cost reductions
in that business segment for both the third quarter and nine-month
period of 1999 when compared to the same periods of 1998. Also, FETS
expenses for the nine-month period of 1998 included credit losses
resulting from the effects of unprecedented market prices for power in
that year. The 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.
Accelerated cost recovery in connection with the OE rate plan
was the primary factor contributing to the increase in depreciation and
amortization in the third quarter and year-to-date periods of 1999 from
the same periods of 1998. 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 due to increases in the gross receipts tax,
Ohio property tax and payroll taxes.
Interest expenses decreased in the third quarter and first
nine 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, as a result of the declaration in the fourth quarter of 1997 of
preferred stock dividends payable in 1998 by TE and CEI.
Capital Resources and Liquidity
- -------------------------------
The CompanyFirstEnergy and its subsidiaries have continuing cash requirements
for planned capital expenditures and debt and preferred stock maturities.
During the last quarterthree quarters of 1999,2000, capital requirements for property
additions and capital leases are expected to be about $161$639 million,
including $4$89 million for nuclear fuel. The Companies have additional cash
requirements of approximately $86.6$388.9 million (excluding an OE
revolving credit agreement) to meet sinking fund
requirements for
- 11 -
preferred stock and maturing long-term debt during the
fourth quarterremainder of 1999.2000. These cash requirements are expected to be satisfied with
internal cash and/or short-term credit arrangements.
During the thirdfirst quarter of 1999, the Company2000, FirstEnergy repurchased 1.52.0
million shares of its common stock at an average price of $28.30$21.37 per share - bringing its total repurchasesshare.
The Company has an equity forward purchase contract, which will enable it to
4.0purchase an additional 1.4 million shares through
September 30, 1999,in November 2000 at an average
price of $28.83$24.22 per share.
As of September 30, 1999, the CompanyMarch 31, 2000, FirstEnergy and its subsidiaries had about
$115.6$43.0 million of cash and temporary investments and $287.6$353.8 million of short-termshort-
term indebtedness. Unused borrowing capabilityAvailable borrowings included $96.0$196.0 million underfrom unused
revolving lines of credit and $32.0
million of bank facilities that provide for borrowings on a short-term
basis at the banks' discretion.
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. The
purchase makes available 84 megawatts of additional capacity and
provides the Company full ownership of the plant.
On August 17, 1999,credit.
FirstEnergy Services Corporation (FSC)Telecom Corp., a wholly owned subsidiary signedof
FirstEnergy, joined with five other companies to create America's Fiber
Network, LLC (AFN) a Master Energy Serviceshigh-speed fiber optics company with a 7,000-mile
network in the eastern United States. AFN connects major markets in the
eastern United States to secondary markets with a growing need for broadband
access. FirstEnergy's ownership interest is expected to be approximately
6.5%.
FirstEnergy joined with 14 other utilities in signing an agreement
to form an Internet marketplace for utility supplies and Supply
Agreement with Republic Technologies International, Inc. (RTI).services, which
will be available for use by companies in the energy industry. The agreement could produce more than $1 billionbusiness-
to-business exchange is expected to generate benefits for utilities by
streamlining the purchasing process, reducing the purchase cycle and
increasing access between buyers and sellers. The group expects to establish
an independent company by June 2000 to operate the exchange, which will be
initially owned by the founding companies.
Market Risk - Commodity Prices
- ------------------------------
FirstEnergy is exposed to market risk due to fluctuations 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, andcoal, natural gas needs;
RTI's heating, ventilation and air-conditioning requirements;oil prices. To manage the volatility
relating to these exposures, FirstEnergy uses a variety of derivative
instruments, including forward contracts, options and other
energy-related servicesfutures contracts.
These derivatives are used principally for RTI.
The Companyhedging purposes, and Range Resources Corporation formedto a
joint
venture, Great Lakes Energy Partners, LLC, on September 30, 1999. This
joint venture combined each company's Appalachian oillesser extent, for trading purposes. Although FirstEnergy believes that the
policies and procedures it has adopted are prudent, financial position,
results of operations or cash flow may be adversely impacted by
unanticipated fluctuations in the commodity prices for electricity, coal,
natural gas, properties and related gas gathering and transportation systems withoil, or by the objectivefailure of lowering operating costs, and increasing natural gas
market share in the Appalachian Basin. As exclusive marketing agent for
the new joint venture, the Company continuescontract counterparties to expand its network of
gas 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 residential customers in the Midwest and had
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 approximately $500 million.perform.
- 12 -
FIRSTENERGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont'd)
Regulatory Matters
- ------------------
In early October,FirstEnergy has reached an agreement with major parties to the Company filed its comprehensive
transition plan it filed in 1999, on behalf of OE, CEI and TE under the new Ohio electricity restructuring law (see
Note 3). The law is designed to facilitate the transition of Ohio's
electric utility industryrestructuring law. Other parties recommending approval to
the PUCO included the PUCO staff, the Ohio Consumers' Counsel, the
Industrial Energy Users-Ohio, power marketers and others. If the PUCO adopts
the agreement, OE, CEI and TE will have the opportunity to recover their
transition costs and would anticipate no charges to earnings resulting from
implementation of the transition plan.
Major provisions of the agreement consist of approval of the
transition plan as filed, including recovery of transition costs through no
later than 2006 for OE, mid-2007 for TE and 2008 for CEI, except where a
regulated environment to a competitive
marketlonger period of recovery is provided for in the agreement. FirstEnergy will
also allow preferred access to non-affiliated marketers, brokers and
aggregators over FirstEnergy's subsidiaries to 1,120 megawatts of generation
capacity through 2005 at established prices for sales in the Ohio operating
companies' franchise areas. The base electric rate freeze for distribution
service for OE, CEI and TE under their current respective regulatory plans
will be extended from December 31, 2005 through December 31, 2007. The
transition rate credits for customers under their current regulatory plans
will also be extended through the Ohio EUOCs' respective transition cost
recovery periods.
Beginning January 1, 2001, when Ohio electric customers have the
choice to select their generation suppliers under the Ohio restructuring
law, the stipulated agreement provides that OE, CEI and TE customers who
select alternative suppliers will have a shopping credit subtracted from
their bills (equal to their energy usage times the forecast energy prices in
the transition plan filing plus an additional incentive applied to the
shopping credit of electricity.45% for residential customers, 30% for commercial
customers, and 15% for industrial customers). The Company's plan itemizesamount of the priceincentive
will serve to reduce the amortization 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 2001 through mid-2009 for CEI. Current rates will be frozen during the market
development period exceptand will be recovered by OE, CEI and TE through the
extension of their transition cost recovery periods. The agreement
establishes shopping goals of 20% for certain limited statutory
exceptions including a 5% reduction ineach customer class. If these goals
are not reached, the generation componentsize of residential customers' rates. On November 4, 1999, the PUCO rejected
FirstEnergy's filing becauseincentive may be increased. If the PUCO hascustomer
shopping goals are still not yet prescribedreached by the end of 2005, the transition plan filing rules. The Company 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 the Company's initial filing
date. If the transition plans ultimately approved by the PUCOcost
recovery periods could be shortened for OE, CEI and TE do not provide adequateto reduce recovery of their nuclear generating
unit investmentsby
as much as $500 million (OE-$250 million, CEI-$170 million and regulatory assets, thereTE-$80
million), but any such adjustment would be computed on a chargeclass-by-class and
pro-rata basis.
The application of Statement of Financial Accounting Standards No.
71 (SFAS 71), "Accounting for the Effect of Certain Types of Regulation" to
earningsOE's generation business and the nonnuclear generation businesses of CEI and
TE will be discontinued when the PUCO issues its order. The Ohio EUOC will
continue to bill and collect cost-based rates for their transmission and
distribution services, which could have a material adverse effect on the results of
operations and financial condition for FirstEnergy,will remain regulated; accordingly, it is
appropriate that OE, CEI and TE.TE continue the application of SFAS 71 to those
respective operations after December 31, 2000.
- 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 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.
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.
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 contacted all its key suppliers and does not
anticipate any service interruptions with them based on the information
they have provided. Further, the Company has reviewed its stocking
levels of critical supplies and has determined the appropriate stocking
levels to maintain approaching the year 2000. The Company has initiated
- 13 -
actions to ensure that these materials are at the required levels
consistent with the 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 uses both internal and external resources to
reprogram and/or replace and test its software for Year 2000
modifications. Of the $87.1 million total project cost, approximately
$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 $17.6 million will be
expensed as incurred. As of September 30, 1999, the Company had spent
$67.7 million for Year 2000 capital projects and had expensed
approximately $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.
- 14 -
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,March 31,
-----------------------
-------------------------2000 1999
1998 1999 1998
---------- --------- ---------- ------------------ --------
(In thousands)
OPERATING REVENUES $770,518 $696,226 $2,050,365 $1,912,689$644,365 $633,118
-------- -------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 143,486 146,194 364,951 413,24295,578 112,022
Nuclear operating costs 64,547 69,723 213,862 210,632111,619 72,436
Other operating costs 103,398 113,769 321,454 314,03397,594 100,283
-------- -------- ---------- ----------
Total operation and maintenance expenses 311,431 329,686 900,267 937,907304,791 284,741
Provision for depreciation and amortization 228,775 109,920 457,330 327,146113,951 103,404
General taxes 61,890 59,714 185,712 178,20859,453 62,260
Income taxes 48,120 56,222 137,787 123,96346,621 47,763
-------- -------- ---------- ----------
Total operating expenses and taxes 650,216 555,542 1,681,096 1,567,224524,816 498,168
-------- --------
---------- ----------
OPERATING INCOME 120,302 140,684 369,269 345,465119,549 134,950
OTHER INCOME 10,179 12,589 32,577 36,85712,323 9,318
-------- -------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 130,481 153,273 401,846 382,322131,872 144,268
-------- -------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 44,583 47,258 135,888 140,25542,539 45,083
Allowance for borrowed funds used during construction
and capitalized interest (1,041) (363) (3,023) (1,492)(2,559) (1,097)
Other interest expense 6,510 7,811 24,293 26,6967,471 8,619
Subsidiaries' preferred stock dividend requirements 3,8313,626 3,857
11,544 11,570
-------- -------- ---------- ----------
Net interest charges 53,883 58,563 168,702 177,02951,077 56,462
-------- --------
---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 76,598 94,710 233,144 205,293
EXTRAORDINARY ITEM (NET OF INCOME TAX
BENEFIT OF $21,208,000) -- -- -- (30,522)
-------- -------- ---------- ----------
NET INCOME 76,598 94,710 233,144 174,77180,795 87,806
PREFERRED STOCK DIVIDEND REQUIREMENTS 2,914 3,020 8,740 9,0572,808 2,913
-------- -------- ---------- ----------
EARNINGS ON COMMON STOCK $ 73,68477,987 $ 91,690 $ 224,404 $ 165,71484,893
======== ======== ========== ==========
The preceding Notes to Consolidated Financial Statements as they relate to Ohio Edison Company are an integral part of
these statements.
- 1514 -
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2000 1999
1998
------------------------- ------------
(In thousands)
ASSETS
------
UTILITY PLANT:
In service $8,250,044 $8,158,763$8,143,590 $8,118,783
Less--Accumulated provision for depreciation 3,776,557 3,610,1553,807,543 3,713,781
---------- ----------
4,473,487 4,548,6084,336,047 4,405,002
---------- ----------
Construction work in progress-
Electric plant 173,728 174,418241,967 205,671
Nuclear fuel 1,154 17,00333,116 10,059
---------- ----------
174,882 191,421275,083 215,730
---------- ----------
4,648,369 4,740,0294,611,130 4,620,732
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
PNBV Capital Trust 470,928 475,087468,585 469,124
Nuclear plant decommissioning trusts 144,734 130,572242,204 236,903
Letter of credit collateralization 277,763 277,763
Other 424,587 407,839439,430 425,872
---------- ----------
1,318,012 1,291,2611,427,982 1,409,662
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 10,955 33,2138,607 87,175
Receivables-
Customers (less accumulated provisions of $7,783,000$6,455,000
and $6,397,000,$6,452,000, respectively, for uncollectible accounts) 289,985 215,257266,058 278,484
Associated companies 216,856 229,854218,608 221,653
Other 50,882 47,684(less accumulated provisions of $1,000,000 for
uncollectible accounts at both dates) 44,698 36,281
Notes receivable from associated companies 100,713 --
Materials and supplies, at average cost-
Owned 52,021 76,75661,725 69,119
Under consignment 50,042 48,34158,930 55,278
Prepayments and other 74,960 78,61897,296 73,682
---------- ----------
745,701 729,723856,635 821,672
---------- ----------
DEFERRED CHARGES:
Regulatory assets 1,643,333 1,913,8081,586,561 1,618,319
Property taxes 101,360 101,36099,290 100,906
Unamortized sale and leaseback costs 86,349 90,09883,850 85,100
Other 65,838 57,54743,795 44,355
---------- ----------
1,896,880 2,162,8131,813,496 1,848,680
---------- ----------
$8,608,962 $8,923,826$8,709,243 $8,700,746
========== ==========
- 1615 -
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2000 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 474,249 583,144544,718 525,731
---------- ----------
Total common stockholder's equity 2,572,978 2,681,8732,643,447 2,624,460
Preferred stock-
Not subject to mandatory redemption 160,965 160,965
Subject to mandatory redemption 5,000 10,0005,000
Preferred stock of consolidated subsidiary-
Not subject to mandatory redemption 39,105 50,90539,105
Subject to mandatory redemption 15,000 15,000
OE obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely OE
subordinated debentures 120,000 120,000
Long-term debt 1,974,219 2,215,0422,207,858 2,175,812
---------- ----------
4,887,267 5,253,7855,191,375 5,140,342
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 589,348 528,792341,163 422,838
Short-term borrowings-
Associated companies 101,867 88,732-- 35,583
Other 239,382 249,451307,357 322,713
Accounts payable-
Associated companies 36,593 10,17694,988 50,883
Other 53,327 89,48372,474 63,219
Accrued taxes 264,222 188,295245,860 207,362
Accrued interest 42,970 45,22142,334 37,572
Other 120,333 114,162110,957 94,967
---------- ----------
1,448,042 1,314,3121,215,133 1,235,137
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 1,502,368 1,601,8871,440,177 1,468,478
Accumulated deferred investment tax credits 147,163 154,538
Pensions and other139,923 143,336
Nuclear plant decommissioning costs 245,449 239,695
Other postretirement benefits 144,302 136,856151,860 148,421
Other 479,820 462,448325,326 325,337
---------- ----------
2,273,653 2,355,7292,302,735 2,325,267
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$8,608,962 $8,923,826$8,709,243 $8,700,746
========== ==========
The preceding Notes to Consolidated Financial Statements as they relate to Ohio Edison Company are
an integral part of these balance sheets.
- 1716 -
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,
---------------------- ----------------------March 31,
-----------------------
2000 1999
1998 1999 1998
---------- --------- --------- ----------------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 76,59880,795 $ 94,710 $233,144 $ 174,77187,806
Adjustments to reconcile net income to net cash from
operating activities-
Provision for depreciation and amortization 228,775 109,920 457,330 327,146113,951 103,404
Nuclear fuel and lease amortization 10,718 8,244 32,131 21,59013,102 10,677
Deferred income taxes, net (55,793) (13,903) (86,548) (63,561)(15,958) (12,010)
Investment tax credits, net (5,320) (3,897) (9,204) (11,345)
Extraordinary item -- -- -- 51,730(4,093) (1,977)
Receivables (60,020) (166,506) (64,928) (208,382)7,055 (35,370)
Materials and supplies 25,799 6,512 23,034 11,0923,742 742
Accounts payable (47,709) 76,043 (9,739) 185,63353,360 12,418
Other 104,710 60,949 72,565 106,535
--------- ---------37,829 (6,531)
-------- -----------------
Net cash provided from operating activities 277,758 172,072 647,785 595,209
--------- ---------289,783 159,159
-------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 2,936 10,039 161,451 117,49917,318 9,935
Short-term borrowings, net -- -- 3,066 3,95615,226
Redemptions and Repayments-
Preferred stock 10,920 5,000 17,005 5,000
Long-term debt 329,094 4,522 348,234 286,15771,033 50,682
Short-term borrowings, net 86,754 79,581 --50,939 --
Dividend Payments-
Common stock -- 44,597 333,603 254,37959,000 81,738
Preferred stock 2,611 3,093 8,437 8,952
--------- ---------2,808 2,769
-------- -----------------
Net cash used for financing activities 426,443 126,754 542,762 433,033
--------- ---------166,462 110,028
-------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 45,736 36,793 140,523 125,16388,121 54,038
Loans to associated companies 100,713 --
Other (21,040) (1,767) (13,242) (1,645)
--------- ---------13,055 13,767
-------- -----------------
Net cash used for investing activities 24,696 35,026 127,281 123,518
--------- ---------201,889 67,805
-------- -----------------
Net increase (decrease)decrease in cash and cash equivalents (173,381) 10,292 (22,258) 38,65878,568 18,674
Cash and cash equivalents at beginning of period 184,336 33,04687,175 33,213
4,680
--------- --------- -------- -----------------
Cash and cash equivalents at end of period $ 10,9558,607 $ 43,338 $ 10,955 $ 43,338
========= =========14,539
======== =================
The preceding Notes to Consolidated Financial Statements as they relate to Ohio Edison Company are an integral
part of these statements.
- 1817 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Ohio Edison Company:
We have reviewed the accompanying consolidated balance sheet of Ohio Edison
Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy
Corp.) and subsidiaries as of September 30, 1999,March 31, 2000, and the related consolidated
statements of income and cash flows for the three-
month and nine-monththree-month periods ended September 30, 1999March
31, 2000 and 1998.1999. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted auditing
standards,in the
United States, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with accounting principles generally accepted accounting principles.in the United
States.
We have previously audited, in accordance with auditing standards generally
accepted auditing standards,in the United States, the consolidated balance sheet of Ohio Edison
Company and subsidiaries as of December 31, 19981999 (not presented herein),
and, in our report dated February 12, 1999,11, 2000, 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, 1998,1999, 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, 1999May 12, 2000
- 1918 -
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 $74.3 million in the third
quarter and $137.7$11.2 million in the first nine months of 1999, compared
to the same periods in 1998. Higher third 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 during the third quarter of
1999, with increases of 11.9%, 11.7% and 9.9%, respectively.
Overall, retail kilowatt-hour sales increased 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,2000, compared to the same period last year,of 1999. Higher operating revenues
resulted from increased kilowatt-hour sales, which were partially offset by
lower unit prices. Total retail kilowatt-hour sales to industrial customers
were higher as the steel industry experienced a rebound in demand for
domestic steel and the economy remained strong. However, sales to
residential and commercial customers declined in the first quarter of 2000,
compared to the first quarter of 1999. These sales were lower, partially as
a result of reduced kilowatt-hour sales by Penn, a wholly owned subsidiary,
as a portion of Penn's customers elected to receive energy from alternative
suppliers. Mild weather in the first quarter of 2000 also adversely affected
residential sales. However, sales to wholesale customers benefited from
additional available internal generation and continued demand in the
wholesale market. Higher sales to retail and wholesale customers combined to
increase total kilowatt-hour sales by 6.8% in the first quarter of 2000,
compared to the same period of 1999. Changes in kilowatt-hour sales by
customer class between the first quarter of 2000 and the same period in 1999
are summarized in the following table.
Changes in KWH Sales
- --------------------
% Increase
(Decrease)
----------
Residential (2.0)%
Commercial (1.5)%
Industrial 7.0%
------
Total Retail 1.4%
------
Wholesale 33.6%
-----
Total Sales 6.8%
=====
Operating Expenses and Taxes
Total operating expenses and taxes increased $26.6 million in the
first quarter of 2000 from the first quarter of 1999. The increase resulted
from higher nuclear operating costs and depreciation and amortization which
were partially offset by lower fuel and purchased power costs, other
operating costs and general taxes. The $16.4 million reduction in fuel and
purchased power costs resulted from a $15.8 million decrease in fuel expense
and a $0.6 million reduction of purchased power costs. Two primary factors
contributed to the lower fuel expense, which occurred despite a 7.9%
increase in generation (nuclear up 33.2%; fossil unchanged). These factors
included a higher proportion of nuclear generation (i.e., lower cost fuel)
due to a labor strikeincreased nuclear generation ownership, and the expiration of an
above-market coal contract. The increased nuclear generation ownership
resulted from the Duquesne asset swap, which was completed in 1998 experienced by a major customerDecember 1999.
Nuclear operating costs also increased in the automotive sector. For
the first nine monthsquarter of 1999, residential, commercial and industrial
sales increased 8.8%, 9.4% and 3.5%, respectively,2000 compared
to the same period in 1998. Retail kilowatt-hour sales increased 6.8% and total
kilowatt-hour sales increased 8.5%, benefited by1999 primarily as a 16.9% increase in
sales to wholesale customers. Growthresult 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 strong economy.
Operation and maintenance expenses decreased $18.3 million in
the third quarter and were $37.6 million lower in the first nine months
of 1999 compared to the corresponding periods of 1998. Fuel and
purchased powerrefueling outage related
costs were lower in both the third quarter and nine-
month periods of 1999 than the corresponding periods of 1998, primarily
due to lower purchased power costs. Much of the reduction in the
current nine-month period was due to the absence of unusual conditions
experienced in June 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 higher prices for purchased power.
Unscheduled outages at Beaver Valley UnitsUnit 1 and 2 reduced the OE
companies' production capabilities to the point that they purchased
significant amountsincreased ownership of power during that period. In addition, the Beaver Valley
Plant remained out of service through most offollowing the third
quarter of 1998. Although above normal temperatures were also
experienced in 1999, OE maintained a stronger capacity position this
year compared to 1998, which reduced the need for purchased power.
Nuclearasset swap. Other operating costs were lower in the
thirdfirst quarter of 2000, compared to the first quarter of 1999, compared to the 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 associateda larger nuclear insurance refund in 2000, as well as the transfer of
ownership in PPE from Penn, a wholly owned subsidiary, to FirstEnergy
Services Corp., an affiliated company. The transfer moved Penn's unregulated
electric generation sales to an affiliated entity dedicated to unregulated
sales activity with the refueling outages at Beaver Valley Unit 2 and the Perry Plant
during the first halfan effective date of December 31, 1999.
Other operating costs were lower
primarily asAccelerated cost recovery in connection with OE's rate plan
resulted in a result of lower fossil production costs due$10.5 million increase in part to
expenditures incurred last year for outages at the Mansfield and Sammis
Plants. However, in the first nine months of 1999 other operating costs
increased from the year-to-date period of last year primarily as a
result of higher customer and sales expenses including expenditures for
energy marketing programs, information systems requirements and other
customer-related costs.
Depreciationdepreciation and amortization in
the thirdfirst quarter and year-
to-date periods of 1999 increased from2000, compared to the same periods of 1998
primarily due to the effect of the OE rate plan.period in 1999. Total
accelerated depreciation and amortization of nuclear and regulatory assets
under the OE rate plan and Penn's restructuring plan was $173.5 million in
the third quarter of 1999, up from $57.7 million in the third quarter
of the previous year. In the first nine months of 1999, total
accelerated depreciation and amortization under the regulatory plans
was $282.4 million, compared to $161.7$57.3 million in
the first nine monthsquarter of 1998.2000, up from $44.7 million in the first quarter of
1999. General taxes increased for both the third quarter and year-
to-date periods of 1999, compared to 1998,were lower primarily due to increasesa tax settlement and
reduced gross receipts taxes, which were partially offset by higher payroll
taxes from the nuclear refueling outage at Beaver Valley Unit 1 and an
increase in the gross receiptsOhio unemployment tax Ohio property tax and payroll taxes. A
higher tax base and increased rates produced the increase in property
taxes.rate.
- 2019 -
OHIO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont'd)
Net Interest Charges
Net interest charges decreaseddeclined in the thirdfirst quarter and first
nine months of 2000,
compared to the same period in 1999, primarily due to refinancings and
redemptions of long-termlong term debt. Interest on short term debt also declined as
a result of reduced borrowing.
Capital Resources and Liquidity
- -------------------------------
The------------------------------
OE companiesand Penn (OE companies) have continuing cash requirements for
planned capital expenditures and debt and preferred stock maturities. During
the fourth
quarterlast three quarters of 1999,2000, capital requirements for property additions
and capital leases are expected to be about $72$215 million, including $4$34 million for
nuclear fuel. The OE companies havewill need additional cash requirements of approximately
$3.5$118.4 million (excluding an OE revolving credit agreement) to meet sinking
fund requirementspayments for preferred stock and maturing long-
termlong-term debt during the
fourth quarterremainder of 1999.2000. These cash requirements are expected to be satisfied with
internal cash and/or short-term credit arrangements.
As of September 30, 1999,March 31, 2000, the OE companies had approximately
$11.0about $109.3 million of
cash and temporary investments and $341.2$307.4 million of short-term
indebtedness. In addition, the OE companies' unusedavailable borrowing capability
included $41.0$86.0 million underfrom unused revolving lines of credit and $32.0a $2.0
million of bank facilitiesfacility that provideprovides for borrowingsborrowing on a short-term basis at
the banks'bank's discretion. Under their first
mortgage indentures, asAs of September 30, 1999,March 31, 2000, OE had the OE companies would
have been permittedcapability to issue
up to $1.1$1.2 billion of additional first mortgage bonds on the basis of
bondable property additions and retired bonds.
Regulatory Matters
- ------------------
In early October, FirstEnergy filed a comprehensivehas reached an agreement with major parties to the
transition plan it filed in 1999, on OE's behalf, as well as for its other
Ohio electric utility operating companies - CEI and TE - under Ohio's
electric utility restructuring law. Other parties recommending approval to
the PUCO included the PUCO staff, the Ohio Consumers' Counsel, the
Industrial Energy Users-Ohio, power marketers and others. If the PUCO adopts
the agreement, OE will have the opportunity to recover its transition costs
and would anticipate no charge to earnings resulting from implementation of
the transition plan.
Major provisions of the agreement consist of approval of the
transition plan as filed, including recovery of transition costs through no
later than 2006 for OE, except where a longer period of recovery is provided
for in the agreement. FirstEnergy will also allow preferred access to non-
affiliated marketers, brokers and aggregators over FirstEnergy's
subsidiaries to 1,120 megawatts of generation capacity through 2005 at
established prices for sales in the Ohio operating companies' franchise
areas. The base electric rate freeze for distribution service for OE under
the newcurrent regulatory plan will be extended from December 31, 2005 through
December 31, 2007. The transition rate credits for customers under OE's
current regulatory plan will also be extended through its transition cost
recovery period.
Beginning January 1, 2001, when Ohio electricityelectric customers have the
choice to select their generation suppliers under the Ohio restructuring
law, (see Note 3)the stipulated agreement provides that OE customers who select
alternative suppliers will have a shopping credit subtracted from their
bills (equal to their energy usage times the forecast energy prices in the
transition plan filing plus an additional incentive applied to the shopping
credit of 45% for residential customers, 30% for commercial customers, and
15% for industrial customers). The law is designedamount of the incentive will serve to
facilitate the transition of
Ohio's electric utility industry from a 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 recoveryreduce amortization 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 (2001-2005). Current rates
will be frozen during the market development period
exceptand will be recovered by OE through the extension of its transition cost
recovery period. The agreement establishes shopping goals of 20% for certain
limited statutory exceptions includingeach
customer class. If these goals are not reached, the size of the incentive
may be increased. If the customer shopping goals are still not reached by
the end of 2005, the transition cost recovery period could be shortened for
OE to reduce recovery by as much as $250 million, but any such adjustment
would be computed on a 5% reduction in theclass-by-class and pro-rata basis.
The application of SFAS 71 to OE's generation component of residential customers' rates. On November 4, 1999,business will be
discontinued when the PUCO rejected FirstEnergy's filing because the PUCO has not yet
prescribed the transition plan filing rules. FirstEnergy will refileissues 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 fororder. 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 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 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 failuresbill and
miscalculations, if no remedial
action is taken.
The OE companies have developed a multi-phase programcollect cost-based rates 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 results of
their remediation and testing efforts, the OE companies filed documents
with the North American Electric Reliability Council, Nuclear
Regulatory Commission, PUCO and PPUC that as of June 30, 1999 their
generation,its transmission and distribution systems were readyservices,
which will remain regulated; accordingly, it is appropriate that OE continue
the application of SFAS 71 to serve
customers in the yearits transmission and distribution operations
after December 31, 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,
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 contacted all their key suppliers and
do not anticipate any service interruptions with them based on the
information the suppliers have provided. Further, the OE companies have
reviewed their stocking levels of critical supplies and have determined
the appropriate stocking levels to maintain approaching the year 2000.
The OE companies have initiated actions to ensure that these materials
are at the required levels consistent with the assumptions in their
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 use both internal and external resources to
reprogram and/or replace and test their software for Year 2000
modifications. Of the $42.6 million total project cost, approximately
$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 $9.0 million will be
expensed as incurred. As of September 30, 1999, the OE companies have
spent $32.6 million for Year 2000 capital projects and have expensed
approximately $7.6 million for Year 2000-related maintenance activities.
The OE companies' total Year 2000 project 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.
- 2320 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,
----------------------- -------------------------March 31,
--------------------
2000 1999
1998 1999 1998
---------- --------- ---------- ------------------ --------
(In thousands)
OPERATING REVENUES $534,503 $514,555 $1,435,297 $1,404,158$423,657 $423,943
-------- -------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 118,816 127,347 310,400 358,70488,978 91,030
Nuclear operating costs 22,978 24,470 92,799 71,36729,431 29,516
Other operating costs 88,528 77,633 265,805 233,74282,217 84,917
-------- -------- ---------- ----------
Total operation and maintenance expenses 230,322 229,450 669,004 663,813200,626 205,463
Provision for depreciation and amortization 58,156 59,048 174,154 175,69658,014 57,687
General taxes 56,855 55,356 165,497 163,73056,904 54,013
Income taxes 50,273 45,598 99,591 88,31421,330 20,155
-------- -------- ---------- ----------
Total operating expenses and taxes 395,606 389,452 1,108,246 1,091,553336,874 337,318
-------- --------
---------- ----------
OPERATING INCOME 138,897 125,103 327,051 312,60586,783 86,625
OTHER INCOME 1,272 6,227 6,489 10,3263,428 1,353
-------- -------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 140,169 131,330 333,540 322,93190,211 87,978
-------- -------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 52,581 57,072 160,146 177,88351,184 53,753
Allowance for borrowed funds used during construction (425) (664) (1,158) (1,620)(512) (216)
Other interest expense (credit) 48 (95) (948) (2,821)829 (479)
-------- -------- ---------- ----------
Net interest charges 52,204 56,313 158,040 173,44251,501 53,058
-------- --------
---------- ----------
NET INCOME 87,965 75,017 175,500 149,48938,710 34,920
PREFERRED STOCK DIVIDEND REQUIREMENTS 8,230 8,547 25,312 17,0537,790 8,541
-------- -------- ---------- ----------
EARNINGS ON COMMON STOCK $ 79,73530,920 $ 66,470 $ 150,188 $ 132,43626,379
======== ======== ========== ==========
The preceding Notes to Consolidated Financial Statements as they relate to The Cleveland Electric Illuminating
Company are an integral part of these statements.
- 2421 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2000 1999
1998
------------------------- ------------
(In thousands)
ASSETS
------
UTILITY PLANT:
In service $4,702,049 $4,648,725$4,486,664 $4,479,098
Less--Accumulated provision for depreciation 1,711,141 1,631,9741,540,138 1,498,798
---------- ----------
2,990,908 3,016,7512,946,526 2,980,300
---------- ----------
Construction work in progress-
Electric plant 36,197 42,42859,215 55,002
Nuclear fuel 416 14,86419,448 408
---------- ----------
36,613 57,29278,663 55,410
---------- ----------
3,027,521 3,074,0433,025,189 3,035,710
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 493,132 517,256 543,161
Nuclear plant decommissioning trusts 143,396 125,050188,780 183,291
Other 26,899 21,05917,905 20,708
---------- ----------
687,551 689,270699,817 721,255
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 29,403 19,5265,912 376
Receivables-
Customers 19,070 16,58816,572 17,010
Associated companies 16,640 15,63621,877 18,318
Other 200,985 142,834(less accumulated provisions of $1,000,000
for uncollectible accounts at both dates) 125,046 171,274
Notes receivable from associated companies 32,820 -- 53,509
Materials and supplies, at average cost-
Owned 35,558 38,21333,955 39,294
Under consignment 36,044 43,62032,673 23,721
Prepayments and other 51,385 58,34271,847 56,447
---------- ----------
389,085 388,268340,702 326,440
---------- ----------
DEFERRED CHARGES:
Regulatory assets 541,450 555,925533,214 539,824
Goodwill 1,442,721 1,471,5631,430,771 1,440,283
Property taxes 126,464 126,464124,488 132,643
Other 12,935 12,65010,692 12,606
---------- ----------
2,123,570 2,166,6022,099,165 2,125,356
---------- ----------
$6,227,727 $6,318,183$6,164,873 $6,208,761
========== ==========
- 2522 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2000 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 71,996 76,27655,574 34,654
---------- ----------
Total common stockholder's equity 1,003,958 1,008,238987,536 966,616
Preferred stock-
Not subject to mandatory redemption 238,325 238,325
Subject to mandatory redemption 134,996 149,710116,246 116,246
Long-term debt 2,684,211 2,888,2022,694,621 2,682,795
---------- ----------
4,061,490 4,284,4754,036,728 4,003,982
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 331,039 208,050235,357 240,684
Accounts payable-
Associated companies 64,216 47,68052,804 85,950
Other 44,674 67,92936,635 50,570
Notes payable to associated companies 42,237 80,618111,464 103,471
Accrued taxes 232,643 192,359189,790 177,006
Accrued interest 65,486 66,68563,764 60,740
Other 37,974 58,58548,423 83,292
---------- ----------
818,269 721,906738,237 801,713
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 556,093 524,285571,292 567,478
Accumulated deferred investment tax credits 87,986 90,94686,017 86,999
Nuclear plant decommissioning costs 197,973 192,484
Pensions and other postretirement benefits 214,704 217,719220,002 220,731
Other 489,185 478,852314,624 335,374
---------- ----------
1,347,968 1,311,8021,389,908 1,403,066
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$6,227,727 $6,318,183$6,164,873 $6,208,761
========== ==========
The preceding Notes to ConsolidatedFinancial Statements as they relate to The Cleveland Electric
Illuminating Company are an integral part of these balance sheets.
- 23 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
-----------------------
2000 1999
--------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 38,710 $ 34,920
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and amortization 58,014 57,687
Nuclear fuel and lease amortization 10,026 9,306
Other amortization (3,167) (465)
Deferred income taxes, net 4,085 3,740
Investment tax credits, net (982) (987)
Receivables 43,107 (15,193)
Materials and supplies (3,613) (1,913)
Accounts payable (47,081) 17,247
Other (41,779) (70,133)
-------- --------
Net cash provided from operating activities 57,320 34,209
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Short-term borrowings, net 7,993 --
Redemptions and Repayments-
Long-term debt 10,137 17,668
Short-term borrowings, net -- 11,845
Dividend Payments-
Common stock 10,000 7,163
Preferred stock 7,790 8,541
-------- --------
Net cash used for financing activities 19,934 45,217
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 14,450 10,095
Loans to associated companies 32,820 5,568
Capital trust investments (24,124) (25,898)
Other 8,704 4,321
-------- --------
Net cash used for (provided from) investing activities 31,850 (5,914)
-------- --------
Net increase (decrease) in cash and cash equivalents 5,536 (5,094)
Cash and cash equivalents at beginning of period 376 19,526
-------- --------
Cash and cash equivalents at end of period $ 5,912 $ 14,432
======== ========
The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating
Company are an integral part of these balance sheets.statements.
- 2624 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- --------- --------- ---------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 87,965 $ 75,017 $175,500 $ 149,489
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and
amortization 58,156 59,048 174,154 175,696
Nuclear fuel and lease amortization 8,830 8,154 24,801 24,510
Other amortization (2,855) (593) (7,109) (10,010)
Deferred income taxes, net 17,472 1,750 26,348 27,582
Investment tax credits, net (986) (1,296) (2,960) (3,889)
Receivables 44,144 (44,448) (61,637) (132,016)
Materials and supplies 1,139 13,684 10,231 2,962
Accounts payable (34,572) (58,965) (6,719) (31,461)
Accrued taxes 46,014 76,357 40,284 44,024
Other 13,023 (5,332) (26,355) (36,757)
-------- --------- -------- --------
Net cash provided from operating
activities 238,330 123,376 346,538 210,130
-------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 26,459 -- 26,459 5,822
Ohio Schools Council prepayment program -- -- -- 116,598
Short-term borrowings, net -- 30,528 -- 4,036
Redemptions and Repayments-
Preferred stock 1,000 1,000 14,714 14,714
Long-term debt 89,424 172,192 113,438 198,773
Short-term borrowings, net 13,653 -- 38,381 --
Dividend Payments-
Common stock 68,000 28,653 150,974 54,122
Preferred stock 8,230 8,559 25,312 26,300
-------- --------- -------- --------
Net cash used for financing activities 153,848 179,876 316,360 167,453
-------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 55,881 16,327 86,180 43,741
Loans to associated companies -- -- -- 26,628
Loan payments from associated companies -- (110,272) (53,509) --
Capital trust investments (7) 35 (25,905) (31,923)
Other 3,079 24,183 13,535 10,230
-------- --------- -------- --------
Net cash used for (provided from)
investing activities 58,953 (69,727) 20,301 48,676
-------- --------- -------- --------
Net increase (decrease) in cash and cash
equivalents 25,529 13,227 9,877 (5,999)
Cash and cash equivalents at beginning of period 3,874 14,549 19,526 33,775
-------- --------- -------- ---------
Cash and cash equivalents at end of period $ 29,403 $ 27,776 $ 29,403 $ 27,776
======== ========= ======== =========
The preceding Notes to Consolidated Financial Statements as they relate to The Cleveland Electric
Illuminating Company are an integral part of these statements.
- 27 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Cleveland Electric Illuminating Company:
We have reviewed the accompanying consolidated balance sheet of The
Cleveland Electric Illuminating Company (an Ohio corporation and wholly
owned subsidiary of FirstEnergy Corp.) and subsidiary as of September
30, 1999,March 31, 2000,
and the related consolidated statements of income and cash flows for the
three-month and nine-month periods ended September 30,
1999March 31, 2000 and 1998.1999. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted auditing
standards,in the
United States, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with accounting principles generally accepted accounting principles.in the United
States.
We have previously audited, in accordance with auditing standards generally
accepted auditing standards,in the United States, the consolidated balance sheet of The
Cleveland Electric Illuminating Company and subsidiary as of December 31,
19981999 (not presented herein), and, in our report dated February 12, 1999,11, 2000, 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, 1998,1999, 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, 1999May 12, 2000
- 2825 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Operating revenues increased $19.9 million in the third
quarter of 1999, and were $31.1 million higher in the first nine monthsquarter of 1999, compared to the same periods in 1998. Higher third quarter and
year-to-date operating revenues2000 were the result of increased kilowatt-
hour sales, which were partially offset by reduced unit prices. Total
kilowatt-hour sales increased 7.0% in the current quarter, compared tonearly
unchanged from the same period of 1998. While retail sales increased only 0.5%in 1999. Underlying this small change in
operating revenue was a change in the thirdmix of kilowatt-hour sales. Total
retail kilowatt-hour sales were slightly higher as sales to industrial and
commercial customers continued to benefit from the strong economy. Mild
weather contributed to lower residential sales during the first quarter of
1999, kilowatt-hour2000. However, sales to wholesale customers increased 86.1% as a result ofwere significantly higher due to
an increase in available power from CEI generating
unitsinternal generation and strong weather-inducedthe continued 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
decreased 1.1%. In theAs a consequence, while first nine months of 1999, totalquarter kilowatt-hour sales
increased 5.5%, compared tosubstantially, these sales were offset by lower unit prices
reflecting the lower margins available in the wholesale market, resulting in
very little change in total operating revenues. Changes in kilowatt-hour
sales by customer class between the first quarter of 2000 and the same
period of 1998, benefiting
from a 47.0% rise in sales to wholesale customers1999 are summarized in the following table.
Changes in KWH Sales
- --------------------
% Increase
(Decrease)
----------
Residential (8.1)%
Commercial 3.5%
Industrial 5.6%
------
Total Retail 0.9%
------
Wholesale 570.5%
------
Total Sales 16.5%
======
Operating Expenses and a 2.6% increase
in kilowatt-hour sales to retail customers. ResidentialTaxes
Total operating expenses and commercial
customers contributed to the higher retail sales, with increases of
6.6% and 2.6%, respectively. Kilowatt-hour sales to industrial
customers were essentially unchanged during the nine-month period.
Operation and maintenance expenses increased onlytaxes decreased slightly in the currentfirst
quarter and were $5.2 million higher inof 2000, compared the first nine
months of 1999 compared to the same periods of 1998. Fuel and purchased
power costs were lower in both the third quarter and year-to-date
periods of 1999. An increased mix of nuclear generation in the third
quarter of 1999 reduced fuel costs and was the primary cause of lowerLower fuel and
purchased power costs in that period. However, in this year's
nine-month period, lower purchased powerand other operating 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 June 1998, which
increased the 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 CEI to purchase significant quantities of power on the spot
market during that period. In addition, Beaver Valley Unit 2 remained
out of service through most of the third quarter of 1998. Although
above normal temperatures were also experienced in 1999, CEI maintained
a stronger capacity position this year compared to the prior year.
Therefore, CEI was not only able to reduce its dependence on purchased
power this year, but also took advantage of the strong demand for power
through sales to the wholesale market.
More than offsetting the current year-to-datesubstantially offset by
additional taxes. The $2.1 million reduction in fuel and purchased power
resulted from a $3.8 million decrease in fuel expense and a $1.7 million
increase in purchased power costs. Several factors contributed to the lower
fuel expense, which occurred despite a 21.1% increase in generation (fossil
up 14.4%; nuclear up 29.1%). These factors included:
- a higher proportion of nuclear generation (i.e., lower
cost fuel) due to increased nuclear generation
ownership;
- the expiration of an above-market coal contract; and
- more extensive use of lower cost western coal.
The increased nuclear generation ownership resulted from the Duquesne asset
swap, which was completed in December 1999. Other operating costs were increases in nuclear operating
costs and other operating costs. Expenses associated with the refueling
outages at Beaver Valley Unit 2 and the Perry Plant increased nuclear
operating costsalso
lower in the first nine monthsquarter of 1999. The increases in
other operating costs in the third quarter and nine-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 1999,2000, compared to the corresponding periods if 1998 wasfirst quarter of last
year partially due
primarily to a reduction in interest income.larger nuclear insurance refund.
- 26 -
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont'd)
Net Interest Charges
Net interest charges decreased in the thirdfirst quarter and first
nine months of 1999 primarily2000 from
the same period a year ago due to refinancings and redemptions of long-term
debt. Preferred stock dividend requirements increasedThe reduction was partially offset by an increase in the
nine-month period ended September 30, 1999, compared to the first nine
months of 1998, due to the declaration in the fourth quarter of 1997 of
preferred stock dividends payable in 1998 by CEI.interest expense
on additional short-term borrowings.
Capital Resources and Liquidity
- ------------------------------
CEI has continuing cash requirements for planned capital
expenditures and debt and preferred stock maturities. During the fourth quarterlast three
quarters of 1999,2000, capital requirements for property additions and capital
leases are expected to be about $27$116 million, with no additional expendituresincluding $35 million for
nuclear fuel. CEI haswill need additional cash requirements of approximately $82.8$208.5 million
to meet sinking fund requirementspayments for preferred stock and maturing long-term
debt during the fourth quarterremainder of 1999.2000. These cash requirements are expected to
be satisfied with internal cash and/or short-term credit arrangements.
As of September 30, 1999,March 31, 2000, CEI had approximately $29.4$38.7 million of cash
and temporary investments and $42.2$111.5 million of short-term indebtedness to
affiliatedassociated companies. Together with TE, CEI had unused
borrowing capability of $55 million under a FirstEnergy revolving line
of credit at the end of the third quarter of 1999. Under its first
- 29 -
mortgage indenture, as of September 30, 1999,March 31,
2000, CEI would have been
permittedhad the capability to issue up to $509$615 million of additional first
mortgage bonds on the basis of bondable property additions and retired bonds.
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
- ------------------
In early October, FirstEnergy filed a comprehensivehas reached an agreement with major parties to the
transition plan it had filed in 1999, on CEI's behalf, as well as for its
other Ohio electric utility operating companies - OE and TE - under Ohio's
electric utility restructuring law. Other parties recommending approval to
the PUCO included the PUCO staff, the Ohio Consumers' Counsel, the
Industrial Energy Users-Ohio, power marketers and others. If the PUCO adopts
the agreement, CEI will have the opportunity to recover its transition costs
and would anticipate no charge to earnings resulting from implementation of
the transition plan.
Major provisions of the agreement consist of approval of the
transition plan as filed, including recovery of transition costs through no
later than 2008 for CEI, except where a longer period of recovery is
provided for in the agreement. FirstEnergy will also allow preferred access
to non-affiliated marketers, brokers and aggregators over FirstEnergy's
subsidiaries to 1,120 megawatts of generation capacity through 2005 at
established prices for sales in the Ohio operating companies' franchise
areas. The base electric rate freeze for distribution service for CEI under
the newcurrent regulatory plan will be extended from December 31, 2005 through
December 31, 2007. The transition rate credits for customers under CEI's
current regulatory plan will also be extended through its transition cost
recovery period.
Beginning January 1, 2001, when Ohio electricityelectric customers have the
choice to select their generation suppliers under the Ohio restructuring
law, (see Note 3)the stipulated agreement provides that CEI customers who select
alternative suppliers will have a shopping credit subtracted from their
bills (equal to their energy usage times the forecast energy prices in the
transition plan filing plus an additional incentive applied to the shopping
credit of 45% for residential customers, 30% for commercial customers, and
15% for industrial customers). The law is designedamount of the incentive will serve to
facilitate thereduce amortization of transition of
Ohio's electric utility industry from a 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 (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
exceptand will be recovered by CEI through the extension of its transition cost
recovery period. The agreement establishes shopping goals of 20% for certain limited
statutory exceptions includingeach
customer class. If these goals are not reached, the size of the incentive
may be increased. If the customer shopping goals are still not reached by
the end of 2005, the transition cost recovery period could be shortened for
CEI to reduce recovery by as much as $170 million, but any such adjustment
would be computed on a 5% reduction inclass-by-class and pro-rata basis.
The application of SFAS 71 to the nonnuclear generation componentbusinesses
of residential customers' rates. On November 4, 1999,CEI will be discontinued when the PUCO rejected FirstEnergy's filing because the PUCO has not yet
prescribed the transition plan filing rules. FirstEnergyissues its order. CEI will
refilecontinue to bill and collect cost-based rates for 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 does not provide adequate recovery of CEI's nuclear generating unit
investments and regulatory assets, there would be a charge to earnings
which could have a material adverse effect on CEI'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").
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 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 inservices, which will remain regulated; accordingly, it is
appropriate that CEI continue the year 2000.
Mostapplication 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. The customer
service system was made Year 2000 compliant in June 1999.
CEI has contacted all its key suppliers and does not
anticipate any service interruptions with them based on the 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 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
serviceSFAS 71 to its customers.
CEI uses both internaltransmission
and external resources to reprogram
and/or replace and test its software for Year 2000 modifications. Of the
$29.1 million total project cost, approximately $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 $5.7 million will be expensed as incurred.
As of September 30, 1999, CEI had spent $22.9 million for Year 2000
capital projects and had expensed approximately $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.distribution operations after December 31, 2000.
- 3127 -
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,
----------------------- -----------------------March 31,
----------------------
2000 1999
1998 1999 1998
---------- --------- ---------- ----------------- --------
(In thousands)
OPERATING REVENUES $233,697 $253,282 $693,143 $714,116
-------- --------$217,391 $224,262
-------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 51,793 56,708 130,639 164,04933,133 36,402
Nuclear operating costs 35,082 40,576 126,208 115,80138,197 41,894
Other operating costs 41,974 39,785 119,284 106,626
-------- --------37,213 33,514
-------- --------
Total operation and maintenance expenses 128,849 137,069 376,131 386,476108,543 111,810
Provision for depreciation and amortization 26,112 26,691 78,008 80,04726,180 25,743
General taxes 22,532 21,435 66,364 63,39323,424 21,098
Income taxes 13,490 16,884 41,699 43,187
-------- --------15,318 16,907
-------- --------
Total operating expenses and taxes 190,983 202,079 562,202 573,103
-------- --------173,465 175,558
-------- --------
OPERATING INCOME 42,714 51,203 130,941 141,01343,926 48,704
OTHER INCOME 2,840 2,674 9,007 9,573
-------- --------2,689 2,922
-------- --------
INCOME BEFORE NET INTEREST CHARGES 45,554 53,877 139,948 150,586
-------- --------46,615 51,626
-------- --------
NET INTEREST CHARGES:
Interest on long-term debt 20,412 21,524 62,570 66,78019,141 21,041
Allowance for borrowed funds used during construction (254) (344) (860) (927)(1,214) (202)
Other interest expense (credit) (889) 10 (3,403) (1,089)
-------- --------(832) (1,361)
-------- --------
Net interest charges 19,269 21,190 58,307 64,764
-------- --------17,095 19,478
-------- --------
NET INCOME 26,285 32,687 81,641 85,82229,520 32,148
PREFERRED STOCK DIVIDEND REQUIREMENTS 4,034 4,145 12,173 9,680
-------- --------4,064 4,070
-------- --------
EARNINGS ON COMMON STOCK $ 22,25125,456 $ 28,542 $ 69,468 $ 76,142
======== ========28,078
======== ========
The preceding Notes to Consolidated Financial Statements as they relate to The Toledo Edison Company are an integral
part of these statements.
- 3228 -
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2000 1999 1998
------------ ------------
(In thousands)
ASSETS
------
UTILITY PLANT:
In service $1,777,714 $1,757,364$1,787,508 $1,776,534
Less--Accumulated provision for depreciation 661,991 626,942689,583 670,866
---------- ----------
1,115,723 1,130,4221,097,925 1,105,668
---------- ----------
Construction work in progress-
Electric plant 28,448 26,603120,755 95,854
Nuclear fuel 394 11,19118,368 386
---------- ----------
28,842 37,794139,123 96,240
---------- ----------
1,144,565 1,168,2161,237,048 1,201,908
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 295,391 310,762280,472 295,454
Nuclear plant decommissioning trusts 118,459 102,749127,282 123,500
Other 5,352 3,6564,570 4,678
---------- ----------
419,202 417,167412,324 423,632
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 57,418 4,140301 312
Receivables-
Customers 8,948 7,3388,187 12,965
Associated companies 20,037 30,00626,554 40,998
Other 4,731 31,6884,214 9,827
Notes receivable from associated companies 42,237 101,2362,697 7,863
Materials and supplies, at average cost-
Owned 22,471 25,74521,300 23,243
Under consignment 20,172 18,14821,842 20,232
Prepayments and other 23,921 25,64729,781 25,931
---------- ----------
199,935 243,948114,876 141,371
---------- ----------
DEFERRED CHARGES:
Regulatory assets 395,032 417,704379,546 385,284
Goodwill 465,085 474,593462,097 465,169
Property taxes 42,842 42,84243,448 43,448
Other 6,898 4,2954,900 6,116
---------- ----------
909,857 939,434889,991 900,017
---------- ----------
$2,673,559 $2,768,765$2,654,239 $2,666,928
========== ==========
- 3329 -
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2000 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 39,236 51,46334,921 27,475
---------- ----------
Total common stockholder's equity 563,465 575,692559,150 551,704
Preferred stock not subject to mandatory redemption 210,000 210,000
Long-term debt 987,767 1,083,666994,446 981,029
---------- ----------
1,761,232 1,869,3581,763,596 1,742,733
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred stock 156,660 130,42678,014 95,765
Accounts payable-
Associated companies 32,865 34,26010,696 20,537
Other 27,493 38,83223,712 27,100
Notes payable to associated companies 151 --50,710 33,876
Accrued taxes 44,182 62,28842,267 57,742
Accrued interest 23,828 24,96521,730 21,961
Other 30,317 35,08259,098 60,414
---------- ----------
315,496 325,853286,227 317,395
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 166,563 151,321179,527 172,236
Accumulated deferred investment tax credits 39,228 40,67038,269 38,748
Nuclear plant decommissioning costs 133,899 130,116
Pensions and other postretirement benefits 120,521 122,314122,442 122,986
Other 270,519 259,249130,279 142,714
---------- ----------
596,831 573,554604,416 606,800
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) ---------- ----------
$2,673,559 $2,768,765$2,654,239 $2,666,928
========== ==========
The preceding Notes to ConsolidatedFinancial Statements as they relate to The Toledo Edison Company
are an integral part of these balance sheets.
- 30 -
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
----------------------
2000 1999
--------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 29,520 $ 32,148
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and amortization 26,180 25,743
Nuclear fuel and lease amortization 6,633 6,612
Deferred income taxes, net 6,608 3,682
Investment tax credits, net (479) (481)
Receivables 24,835 (15,417)
Materials and supplies 333 (2,380)
Accounts payable (13,229) (1,108)
Other (33,058) (37,480)
-------- --------
Net cash provided from operating activities 47,343 11,319
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Short-term borrowings, net 16,834 --
Redemptions and Repayments-
Long-term debt 20,884 12,434
Dividend Payments-
Common stock 18,000 --
Preferred stock 4,064 4,070
-------- --------
Net cash used for financing activities 26,114 16,504
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 37,709 8,931
Loans to associated companies -- 2,862
Loan payments from associated companies (5,166) --
Capital investments (14,982) (15,370)
Other 3,679 2,359
-------- --------
Net cash used for (provided from) investing activities 21,240 (1,218)
-------- --------
Net decrease in cash and cash equivalents 11 3,967
Cash and cash equivalents at beginning of period 312 4,140
-------- --------
Cash and cash equivalents at end of period $ 301 $ 173
======== ========
The preceding Notes to Financial Statements as they relate to The Toledo Edison Company
are an integral part of these balance sheets.statements.
- 3431 -
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ---------------------
1999 1998 1999 1998
---------- --------- --------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 26,285 $32,687 $ 81,641 $ 85,822
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and
amortization 26,112 26,691 78,008 80,047
Nuclear fuel and lease amortization 6,734 5,576 18,552 16,506
Deferred income taxes, net 8,127 1,021 18,432 16,173
Investment tax credits, net (481) (648) (1,442) (1,946)
Receivables (7,202) 1,473 35,316 4,699
Materials and supplies 163 1,578 1,250 (1,929)
Accounts payable (2,964) (9,566) (12,734) (9,680)
Accrued taxes 2,738 7,083 (18,106) 13,556
Other 22,414 26,241 (12,597) (6,449)
-------- ------- -------- --------
Net cash provided from operating
activities 81,926 92,136 188,320 196,799
-------- ------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 54,929 -- 89,779 3,657
Short-term borrowings, net 151 -- 151 --
Redemptions and Repayments-
Preferred stock -- -- 1,690 1,665
Long-term debt 106,802 33,273 162,427 74,968
Dividend Payments-
Common stock 20,000 15,654 80,351 36,786
Preferred stock 4,034 4,074 12,173 12,309
-------- ------- -------- --------
Net cash used for financing activities 75,756 53,001 166,711 122,071
-------- ------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 8,734 14,518 27,656 29,165
Loans to associated companies -- -- -- 38,793
Loan payments from associated companies (58,136) (5,855) (58,999) --
Capital trust investments (64) (240) (15,371) (2,177)
Other 2,935 13,923 15,045 9,761
-------- ------- -------- -------
Net cash used for (provided from)
investing activities (46,531) 22,346 (31,669) 75,542
-------- ------- -------- -------
Net increase (decrease) in cash and cash
equivalents 52,701 16,789 53,278 (814)
Cash and cash equivalents at beginning of period 4,717 4,567 4,140 22,170
-------- ------- -------- --------
Cash and cash equivalents at end of period $ 57,418 $21,356 $ 57,418 $ 21,356
======== ======= ======== ========
The preceding Notes to Consolidated Financial Statements as they relate to The Toledo Edison Company
are an integral part of these statements.
- 35 -
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Toledo Edison Company:
We have reviewed the accompanying consolidated balance sheet of The Toledo
Edison Company (an Ohio corporation and wholly owned subsidiary of
FirstEnergy Corp.) and subsidiary as of September 30, 1999,March 31, 2000, and the related
consolidated statements of income and cash flows for the three-
month and nine-monththree-month periods
ended September 30, 1999March 31, 2000 and 1998.1999. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted auditing
standards,in the
United States, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with accounting principles generally accepted accounting principles.in the United
States.
We have previously audited, in accordance with auditing standards generally
accepted auditing standards,in the United States, the consolidated balance sheet of The Toledo
Edison Company and subsidiary as of December 31, 19981999 (not presented
herein), and, in our report dated February 12, 1999,11, 2000, 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,
1998,1999, 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, 1999May 12, 2000
- 3632 -
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Operating revenues decreased $19.6by $6.9 million in the thirdfirst quarter
of 1999, and were $21.0 million lower in the first nine months of 1999,
compared to the same periods in 1998. Increases in kilowatt-hour sales
were more than offset by reduced unit prices. Total kilowatt-hour sales
increased 5.8% in the current quarter,2000, compared to the same period of
1998. While retail sales decreased 1.7%in 1999. Underlying this decrease in
operating revenues was a change in the thirdmix of kilowatt-hour sales. Sales to
commercial customers in the first quarter of 1999,
kilowatt-hour2000 were relatively unchanged
from the same period in 1999. However, sales to residential and industrial
customers were both lower in 2000. Mild weather principally contributed to
lower residential sales in the first quarter of 2000. However, sales to
wholesale customers increased 47.9% as a result
ofsignificantly due to additional available
power from TE generating units and strong weather-inducedinternal generation coupled with continued demand in the wholesale market.
Retail kilowatt-hour sales to
residential and commercial customers declined in the third quarter by
8.2% and 6.9%, respectively. However, sales to industrial customers
increased 3.7%. In the first nine months of 1999, total kilowatt-hour
sales increased 7.0%, compared to the same period of 1998, benefiting
from a 45.7%The increase in sales to the wholesale customers. Retail kilowatt-
hourmarket more than offset the decline
in retail kilowatt-hour sales resulting in an increase of 8.9% in total
sales. However, while first quarter kilowatt-hour sales increased
1.1%;substantially, these sale were offset by lower unit prices reflecting the
lower margins available in the wholesale market, resulting in the net
decrease in operating revenues. Changes in kilowatt-hour sales to industrial customers increased
4.1%. However, residentialby customer
class between the first quarter of 2000 and commercial customersthe same period in 1999 are
summarized in the following table.
Changes in KWH Sales
- --------------------
% Increase
(Decrease)
----------
Residential (8.9)%
Commercial --
Industrial (2.9)%
------
Total Retail (3.8)%
------
Wholesale 80.6%
-----
Total Sales 8.9%
=====
Operating Expenses and Taxes
Total operating expenses and taxes decreased 0.8% and
3.2%, respectively.
Operation and maintenance expenses decreased $8.2$2.1 million in the
thirdfirst quarter of 1999 and were $10.3 million lower in2000 from the first nine monthsquarter of 1999, compared to the same periods of 1998. In addition,1999. The decrease resulted
from lower fuel and purchased power and nuclear operating costs, which were
partially offset by higher other operating costs and general taxes. The
$3.3 million reduction in fuel and purchased power costs were lowerwas comprised
of a $0.5 million decrease in the third quarterfuel expense and in
the first nine monthsa $2.8 million reduction
of 1999. Most of the year-to-date reduction in purchased power costs was duecosts. The expiration of an above-market coal contract
contributed to the absence of unusual conditions
experiencedlower fuel expense which occurred despite an 11.3%
increase in June 1998, which increased the prior year's costs.
Record heat and humidity in late June 1998 coincided with a regional
power shortage resulting in higher prices for purchased power. During
this period, unscheduled outages at Beaver Valley Unit 2 and the Davis-
Besse Plant required TE to purchase significant quantities of power on
the spot market during that period. In addition, Beaver Valley Unit 2
remained out of service through most of the third quarter of 1998.
Although above normal temperatures were also experienced in 1999, TE
maintained a stronger capacity position this year compared to the prior
year. Therefore, TE was not only able to reduce its dependence on
purchased power in the current year, but also took advantage of the
strong demand for power through sales to the wholesale market.generation (fossil up 13.0%; nuclear up 10.1%). Nuclear
operating costs were lower in the third quarterfirst three months of 1999,2000, compared
to the prior year quarter primarilysame period in 1999, due to reducedlower 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 atPerry Plant and Beaver Valley Unit 2, which had refueling outages that
began in the first quarter of 1999. Higher costs at the Bay Shore Plant
and additional distribution expenses for forestry work combined to increase
other expenses in the Perry Plant.
The increases in other operating costs in this year'sfirst quarter and nine-
month period were primarily dueof 2000, compared to higher customer and sales expenses
including energy marketing programs, information system requirements
and other customer-related costs.the first quarter
of 1999.
Net Interest Charges
Net interest charges decreased in the thirdfirst quarter of 2000 from
the same period a year ago due to redemptions and refinancings of long-term
debt. Interest on additional short-term borrowings partially offset the
first nine monthsreduction of 1999 principally as a result of redemptions ofinterest on long-term debt.
Capital Resources and Liquidity
- ------------------------------
TE has continuing cash requirements for planned capital
expenditures and debt maturities. During the fourth quarterlast three quarters of 1999,2000,
capital requirements for property additions and capital leases are expected
to be about $11$75 million, with no additional expendituresincluding $20 million for nuclear fuel. TE haswill
need additional cash requirements of approximately $400,000$61.9 million for maturing long-term
debt
- 33 -
THE TOLEDO EDISON COMOPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITIONS (Cont'd)
during the fourth quarterremainder of 1999.2000. These cash requirements are expected to
be satisfied with internal cash and/or short-term credit arrangements.
As of September 30, 1999,March 31, 2000, TE had approximately $99.7$3.0 million of cash
and temporary investments and $151,000$50.7 million of short-term indebtedness to
associated companies. Together with CEI, TE had unused
borrowing capability of $55 million under a FirstEnergy revolving line
of credit at the end of the third quarter of 1999. Under its first mortgage indenture, as of September 30, 1999,March 31,
2000, TE would have been
permittedhad the capability to issue approximately $264up to $373 million of additional first
mortgage bonds on the basis of bondable property additions and retired bonds.
Regulatory Matters
- ------------------
FirstEnergy filed a comprehensivehas reached an agreement with major parties to the
transition plan it filed in 1999, on TE's behalf, as well as for TE on
October 4, 1999,its other
Ohio electric utility operating companies - OE and CEI - under the new Ohio electricity restructuring law (see
Note 3). The law is designed to facilitate the transition of Ohio's
electric utility industryrestructuring law. Other parties recommending approval to
the PUCO included the PUCO staff, the Ohio Consumers' Counsel, the
Industrial Energy Users-Ohio, power marketers and others. If the PUCO adopts
the agreement TE will have the opportunity to recover its transition costs
and would anticipate no charges to earnings resulting from implementation of
the transition plan.
Major provisions of the agreement consist of approval of the
transition plan as filed, including recovery of transition costs through no
later than mid-2007 for TE, except where a regulated environment to a competitive
marketlonger period of recovery is
provided for in the agreement. FirstEnergy will also allow preferred access
to non-affiliated marketers, brokers and aggregators over FirstEnergy's
subsidiaries to 1,120 megawatts of generation of electricity. TE'scapacity through 2005 at
established prices for sales in the Ohio operating companies' franchise
areas. The base electric rate freeze for distribution service for TE under
its current regulatory 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 toextended from December 31, 2005 through
December 31, 2007. The transition rate credits for customers under TE's
current regulatory plan will also be in effect pursuant to TE's rate plan as ofextended through its transition cost
recovery period.
Beginning January 1, 2001. Those rates2001, when Ohio electric customers have the
choice to select their generation suppliers under the Ohio restructuring
law, the stipulated agreement provides that TE customers who select
alternative suppliers will be adjustedhave a shopping credit subtracted from their
bills (equal to reflect a 5% reductiontheir energy usage times the forecast energy prices in the
generation component of residential customers' rates. On November 4,
1999, the PUCO rejected FirstEnergy's filing because the PUCO has not
yet prescribed the
transition plan filing rules. FirstEnergyplus an additional incentive applied to the shopping
credit of 45% for residential customers, 30% for commercial customers, and
15% for industrial customers). The amount of the incentive will refileserve to
reduce amortization of transition costs during the market development period
and will be recovered by TE through the extension of its transition plan once those rules have been established. Despite
rejecting FirstEnergy's filing,cost
recovery period. The agreement establishes shopping goals of 20% for each
customer class. If these goals are not reached, the size of the incentive
may be increased. If the customer shopping goals are still not reached by
the end of 2005, the transition cost recovery period could be shortened for
TE to reduce recovery by as much as $80 million, but any such adjustment
would be computed on a class-by-class and pro-rata basis.
The application of SFAS 71 to the nonnuclear generation businesses
of TE will be discontinued when the PUCO indicated that itissues its order. TE will endeavorcontinue
to issuebill and collect cost-based rates for its order in this case within 275 days of FirstEnergy's initial
filing date. If the transition plan ultimately approved by the PUCO for
TE does not provide adequate recovery of TE'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 operations
and financial 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 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 inservices, which will remain regulated; accordingly, it is appropriate that
TE continue the year 2000.
Mostapplication 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. The customer
service system was made Year 2000 compliant in June 1999.
TE has contacted all its key suppliers and does not
anticipate any service interruptions with them based on the 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 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
serviceSFAS 71 to its customers.
TE uses both internaltransmission and external resources to reprogram
and/or replace and test its software for Year 2000 modifications. Of the
$15.4 million total project cost, approximately $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 $2.9 million will be expensed as incurred.
As of September 30, 1999, TE had spent $12.2 million for Year 2000
capital projects and had expensed approximately $2.5 million for Year
2000-related maintenance activities. TE's total Year 2000 project cost,
as well as its estimates of the time needed to complete remedialdistribution
operations after December 31, 2000.
- 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.
- 3934 -
PENNSYLVANIA POWER COMPANY
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,March 31,
----------------------
----------------------2000 1999
1998 1999 1998
---------- --------- --------- ----------------- --------
(In thousands)
OPERATING REVENUES $82,354 $87,885 $245,843 $246,732$ 83,951 $81,372
-------- ------- ------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel and purchased power 25,978 21,948 61,244 62,83513,390 16,912
Nuclear operating costs 5,165 6,700 20,168 20,56845,507 6,713
Other operating costs 14,281 14,972 45,526 40,67313,535 14,728
-------- ------- ------- -------- --------
Total operation and maintenance expenses 45,424 43,620 126,938 124,07672,432 38,353
Provision for depreciation and amortization 15,790 13,125 46,505 46,13315,731 14,437
General taxes 7,151 5,335 19,395 16,6087,058 5,904
Income taxes 4,824 9,375 19,788 20,847(credit) (4,903) 8,386
-------- ------- ------- -------- --------
Total operating expenses and taxes 73,189 71,455 212,626 207,66490,318 67,080
-------- ------- ------- -------- --------
OPERATING INCOME 9,165 16,430 33,217 39,068(LOSS) (6,367) 14,292
OTHER INCOME 194 569 1,441 1,942413 997
-------- -------
------- -------- --------
INCOME (LOSS) BEFORE NET INTEREST CHARGES 9,359 16,999 34,658 41,010(5,954) 15,289
-------- ------- ------- -------- --------
NET INTEREST CHARGES:
Interest expense 4,972 5,234 16,090 15,9515,407 5,096
Allowance for borrowed funds used during construction (91) (52) (323) (196)(975) (146)
-------- ------- ------- -------- --------
Net interest charges 4,881 5,182 15,767 15,7554,432 4,950
-------- ------- ------- -------- --------
INCOME BEFORE EXTRAORDINARY ITEM 4,478 11,817 18,891 25,255
EXTRAORDINARY ITEM (NET OF INCOME TAX
BENEFIT OF $21,208,000) -- -- -- (30,522)
------- ------- -------- --------
NET INCOME (LOSS) 4,478 11,817 18,891 (5,267)(10,386) 10,339
PREFERRED STOCK DIVIDEND REQUIREMENTS 1,131926 1,157
3,444 3,470-------- ------- ------- -------- --------
EARNINGS (LOSS) ONATTRIBUTABLE TO COMMON STOCK $(11,312) $ 3,347 $10,660 $ 15,447 $ (8,737)9,182
======== ======= ======= ======== ========
The preceding Notes to Consolidated Financial Statements as they relate to Pennsylvania Power Company are an
integral part of these statements.
- 4035 -
PENNSYLVANIA POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2000 1999
1998
------------------------- ------------
(In thousands)
ASSETS
------
ASSETS
------
UTILITY PLANT:
In service $702,725 $686,771$ 652,584 $ 646,186
Less--Accumulated provision for depreciation 303,005 291,188
-------- --------
399,720 395,583
-------- --------243,417 237,893
---------- ----------
409,167 408,293
---------- ----------
Construction work in progress-
Electric plant 13,143 17,18725,085 18,558
Nuclear fuel 385 508
-------- --------
13,528 17,695
-------- --------
413,248 413,278
-------- --------21,285 6,540
---------- ----------
46,370 25,098
---------- ----------
455,537 433,391
---------- ----------
OTHER PROPERTY AND INVESTMENTS 34,849 29,177
-------- --------INVESTMENTS:
Nuclear plant decommissioning trusts 111,366 104,775
Other 21,407 19,784
---------- ----------
132,773 124,559
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 260 7,485324 5,670
Notes receivable from parent company 16,090 50,0002,557 15,423
Receivables-
Customers (less accumulated provisions of $3,753,000$3,601,000
and $3,599,000,$3,537,000, respectively, for uncollectible accounts) 33,399 34,73732,601 34,568
Associated companies 24,375 34,43037,135 38,565
Other 11,546 12,47212,819 8,896
Materials and supplies, at average cost 12,790 15,51528,715 32,483
Prepayments 5,904 2,657
-------- --------
104,364 157,296
-------- --------14,865 2,208
---------- ----------
129,016 137,813
---------- ----------
DEFERRED CHARGES:
Regulatory assets 329,626 371,027301,273 314,593
Other 6,633 6,994
-------- --------
336,259 378,021
-------- --------
$888,720 $977,772
======== ========5,014 5,260
---------- ----------
306,287 319,853
---------- ----------
$1,023,613 $1,015,616
========== ==========
- 41-36 -
PENNSYLVANIA POWER COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,March 31, December 31,
2000 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 $188,700$ 188,700 $ 188,700
Other paid-in capital (310) (310)
Retained earnings 22,084 86,891
-------- --------(accumulated deficit) (94) 11,218
---------- ----------
Total common stockholder's equity 210,474 275,281188,296 199,608
Preferred stock-
Not subject to mandatory redemption 39,105 50,90539,105
Subject to mandatory redemption 15,000 15,000
Long-term debt-
Associated companies 6,392 6,61729,222 18,007
Other 257,849 281,072
-------- --------
528,820 628,875
-------- --------256,823 256,814
---------- ----------
528,446 528,534
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 4,709 5,55713,966 13,504
Other 23,879 98424,283 29,521
Accounts payable-
Associated companies 20,692 9,67652,667 26,220
Other 16,597 23,15620,549 28,903
Accrued taxes 11,817 12,84920,397 21,863
Accrued interest 3,886 6,5196,592
Other 11,443 17,046
-------- --------
93,023 75,787
-------- --------14,672 16,506
---------- ----------
150,420 143,109
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 201,419 212,427175,654 182,702
Accumulated deferred investment tax credits 7,379 7,7877,155 7,266
Nuclear plant decommissioning costs 114,860 107,816
Other 58,079 52,896
-------- --------
266,877 273,110
-------- --------47,078 46,189
---------- ----------
344,747 343,973
---------- ----------
COMMITMENTS, GUARANTEES AND
CONTINGENCIES (Note 2) -------- --------
$888,720 $977,772
======== ========---------- ----------
$1,023,613 $1,015,616
========== ==========
The preceding Notes to Consolidated Financial Statements as they relate to Pennsylvania Power Company are an
integral part of these balance sheets.
- 4237 -
PENNSYLVANIA POWER COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
Nine Months Ended
September 30, September 30,March 31,
----------------------
----------------------2000 1999
1998 1999 1998
---------- --------- --------- ----------------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,478 $ 11,817 $ 18,891 $ (5,267)$(10,386) $10,339
Adjustments to reconcile net income (loss) to net
cash from operating activities-
Provision for depreciation and amortization 15,790 13,125 46,505 46,13315,731 14,437
Nuclear fuel and lease amortization 1,919 1,460 5,153 3,2523,170 1,823
Deferred income taxes, net (143) 931 (1,016) (26,058)(3,622) (2,023)
Investment tax credits, net (1,942) (573) (2,237) (1,717)
Extraordinary item -- -- -- 51,730(791) (183)
Receivables 1,481 881 12,319 1,827(526) (3,785)
Materials and supplies 5,067 (839) 2,725 (1,012)3,768 (732)
Accounts payable (6,759) (12,493) 4,457 (7,487)18,093 6,185
Other (5,280) (1,533) (12,481) (7,937)
-------- --------(19,356) (12,451)
-------- --------
Net cash provided from operating activities 14,611 12,776 74,316 53,464
-------- --------6,081 13,610
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt -- -- -- 1,621
Redemptions and Repayments-
Preferred stock 5,920 -- 12,005 --
Long-term debt 1,843 1,443 4,988 3,9948,365 1,745
Dividend Payments-
Common stock 15,000 5,347 80,362 16,040-- 31,765
Preferred stock 1,393 1,232 3,130 3,470
-------- --------926 1,066
-------- --------
Net cash used for financing activities 24,156 8,022 100,485 21,883
-------- --------9,291 34,576
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 8,160 4,541 16,489 11,560
Loan to parent -- 4,400 -- 16,90013,191 4,633
Loan payment from parent (12,597) -- (33,910) --(12,866) (20,242)
Other (3,391) (2,194) (1,523) (313)
-------- --------1,811 1,263
-------- --------
Net cash used for (provided from) investing activities (7,828) 6,747 (18,944) 28,147
-------- --------2,136 (14,346)
-------- --------
Net increase (decrease)decrease in cash and cash equivalents (1,717) (1,993) (7,225) 3,4345,346 6,620
Cash and cash equivalents at beginning of period 1,977 6,0875,670 7,485 660
-------- --------
-------- --------
Cash and cash equivalents at end of period $ 260324 $ 4,094 $ 260 $ 4,094
======== ========865
======== ========
The preceding Notes to Consolidated Financial Statements as they relate to Pennsylvania Power Company
are an integral part of these statements.
- 4338 -
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,March 31, 2000, and the related consolidated statements of income
and cash flows for the three-month and nine-month periods ended September 30, 1999March 31, 2000 and 1998.1999.
These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted auditing
standards,in the
United States, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with accounting principles generally accepted accounting principles.in the United
States.
We have previously audited, in accordance with auditing standards generally
accepted auditing standards,in the United States, the balance sheet of Pennsylvania Power
Company as of December 31, 19981999 (not presented herein), and, in our report
dated February 12, 1999,11, 2000, 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, 1998,1999, 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, 1999May 12, 2000
- 4439 -
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Earnings on common stock declined to $3.3Operating revenues increased by $2.6 million in the thirdfirst quarter
of 1999 from $10.7 million in the third quarter of 1998. 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, contributing2000, compared to the lower earnings.
In the first nine months of 1999, earnings on common stock increased to
$15.4 million from a loss on common stock of $8.7 million for the same period in 1999. Underlying this increase was a
change in the mix of kilowatt-hour sales. Retail generation sales increased
due to higher demand from the steel industry, which strongly rebounded from
the depressed production levels experienced last year as a direct result of
foreign imports of steel products. Total electric kilowatt-hour sales of
generation increased significantly by 37.7% as sales to wholesale customers
almost tripled from the first quarter of last year. The nine-month period ended September 30, 1998,
included an extraordinary chargemajor increase in
sales to wholesale customers occurred because of $30.5 million resulting from Penn's
discontinued applicationadditional generation
capacity received as part of SFAS 71 to its generation business.
Operating revenues declined approximately $5.5 millionthe Duquesne asset swap and continued demand in
the thirdwholesale market. While first quarter and $0.9 million forgeneration sales increased
substantially, these sales were offset by lower unit prices reflecting the
lower margins available in the wholesale market, resulting in the modest
increase in operating revenues. Total distribution deliveries (to customers
in the Penn franchise territory) significantly increased on the strength of
industrial sales. The rebound in the steel sector was a major contributing
factor to the increase in kilowatt-hour sales. Mild weather in the first
nine months of 1999,
compared to the corresponding periods of 1998. The lower third quarter
operating revenues resulted primarily from a decline in kilowatt-hours
sales. Total kilowatt-hour sales decreased 3.8% in the third quarter of 1999,2000 contributed to lower residential deliveries compared to the
same period of 1998. This resulted from reduced1999. Changes in kilowatt-hour generation sales to wholesale customers, which declined 33.1%and
distribution deliveries in the thirdfirst quarter of 2000 compared to the first
quarter of 1999 are summarized in the following table.
Changes in KWH Sales
- --------------------
% Increase
(Decrease)
----------
Electric Generation Sales:
Retail 3.0%
Wholesale 187.6%
------
Total Electric Generation Sales 37.7%
======
Distribution Deliveries:
Residential (1.1)%
Commercial 0.7%
Industrial 29.2%
------
Total Distribution Deliveries 9.0%
======
Operating Expenses and Taxes
Total operating expenses and taxes increased $23.2 million in the
first quarter of 2000 from the third quartersame period of 1998.1999. The decreaseincrease resulted
from higher nuclear operating costs, depreciation and amortization and
general taxes which were partially offset by lower fuel and purchased
power costs and other operating costs. The $3.5 million reduction in
fuel and purchased power costs resulted from a $2.9 million decrease in
fuel expense and a $0.6 million reduction in fossil generation available for the
wholesale market during that period. However, sales to retail customers
increased 6.2% in the third quarter of 1999, comparedpurchased power costs. Two
primary factors contributed to the third
quarter of 1998. Kilowatt-hour sales to commercial and industrial
customers increased 4.6% and 16.4%, respectively, whereas, sales to
residential customers decreased 3.1% in the third quarter of 1999 fromlower fuel expense, which occurred
despite a year ago. Lower unit prices offset an37.6% net increase in kilowatt-hour sales
duringgeneration (nuclear up 150.8%; fossil
down 13.6%). These factors included a higher proportion of nuclear
generation (i.e., lower cost fuel) due to increased nuclear
generation ownership and the first nine monthsexpiration of 1999, compared toan above-market coal
contract. The increased nuclear generation ownership resulted
from the year-to-date
period of 1998. Total kilowatt-hour sales increased 2.6%Duquesne asset swap, which was completed in the current
nine-month period, with retail sales 8.2% higher and sales to wholesale
customers 18.5% lower. Additionally, kilowatt-hour sales to retail
customersDecember
1999. Nuclear operating costs were much higher in the first
nine monthsquarter of 1999,2000 compared to the first nine monthssame period in 1999 as a result of
1998, with increased sales to residential,
commercial and industrial customers of 5.6%, 16.7% and 4.1%,
respectively. Contributing to the higher 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 third quarter and first nine months of 1999,
respectively, compared to the corresponding periods of 1998. Fuel and
purchased powerrefueling outage 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 outcombined with Penn's
increased ownership of service for mostthat unit and Beaver Valley Unit 2 as a result 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. Nuclearasset swap. Other operating costs were lower in the thirdfirst quarter of
2000, compared to the first 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 andthe transfer
of ownership in PPE to FirstEnergy Services Corp., an affiliated company.
The transfer moved Penn's unregulated electric generation sales expenses,
including expenditures for energy marketing programs and information
system requirements, and increased employee benefit costs.to an
affiliated entity dedicated to unregulated sales activity, effective
December 31, 1999.
- 40 -
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION (Cont'd)
The provision for depreciation and amortization increased in the
thirdfirst quarter of 1999,2000 compared to the third quartersame period of 1998,1999, 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 bothin the thirdfirst
quarter and nine-month periods of 1999,
compared to the same periods2000 in 1998, primarilypart due to increasesan increase in the gross receipts tax Ohio property tax and payroll taxes.resulting
from higher taxable receipts.
Capital Resources and Liquidity
- -------------------------------------------------------------
Penn has continuing cash requirements for planned capital
expenditures.expenditures and debt maturities. During the fourth quarterlast three quarters of 1999,2000,
capital requirements for property additions and capital leases are expected
to be about $18$28 million, including $1$7 million for nuclear fuel. Penn haswill
need additional cash requirements of approximately $487,000 to meet requirements$24.0 million for maturing long-term
debt during the fourth quarterremainder of 1999.2000. These cash requirements are expected to
be satisfied withby internal cash.
As of September 30, 1999,March 31, 2000, Penn had approximately $16.4$2.9 million of cash
and temporary investments and no short-term indebtedness. In addition,Also, Penn hashad $2
million available from an unused bank facility as of March 31, 2000, which
may be borrowed for up to several days at the bank's discretion. Under its
first mortgage indenture, as of September
30, 1999,March 31, 2000, Penn would have been permittedhad the capability to
issue at least $120up to $181 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 September 1999, FirstEnergy received, and subsequently in
October 1999, 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 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.
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, 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,
Penn filed documents 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 contacted all its key suppliers and does not
anticipate any service interruptions with them based on the 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 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 uses both internal and external resources to reprogram
and/or replace and test its software for Year 2000 modifications. Of the
$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 $1.3 million will be expensed as incurred.
As of September 30, 1999, Penn had spent $3.4 million for Year 2000
capital projects and had expensed approximately $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.
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.
- 4741 -
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
-----------------
On November 3, 1999,4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The annual meeting of FirstEnergy shareholders was held on
April 27, 2000.
(b) At this meeting, the EPA issued Noticesfollowing persons were elected to
FirstEnergy's Board of Violation (NOV) orDirectors:
Number of Votes
---------------------------
For Withheld
----------- ---------
Dr. Carol A. Cartwright 183,742,058 7,079,706
William F. Conway 183,640,479 7,181,285
Paul J. Powers 183,813,374 7,008,390
George M. Smart 183,996,088 6,825,676
(c) At this meeting, the appointment of Arthur Andersen LLP,
independent public accountants, as auditors for the year 2000
was ratified (ratification required a Compliance Ordermajority of
votes cast):
Number of Votes
-------------------------------------
For Against Abstentions
----------- --------- -----------
185,796,848 2,633,622 2,391,294
(d) At this meeting, a shareholder proposal designed 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 Pennresult in
the U.S. District Court for the Southern District of Ohio. The
NOV and complaint allege violationselection of the Clean Air Act based on
operation and maintenanceentire Board of Directors each year was
rejected (passage required 80% of the Sammis Plant dating back231,595,941
common shares outstanding):
Number of Votes
---------------------------------------------------
Broker
For Against Abstentions Non-Votes
---------- ---------- ----------- ----------
78,762,982 84,035,742 7,021,915 21,001,125
(e) At this meeting, a shareholder proposal to 1984. The complaint requests permanent injunctive reliefreinstate simple-
majority vote on all issues that are submitted to requireshareholder
vote was rejected (passage required 80% of the
installation231,595,941 common shares outstanding):
Number 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.Votes
---------------------------------------------------
Broker
For Against Abstentions Non-Votes
---------- ---------- ----------- ----------
79,078,310 83,613,566 7,128,773 21,001,115
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number
-------
FirstEnergy, OE, CEI and Penn
-----------------------------
15 Letter from independent public accountants.
- 42 -
PART II. OTHER INFORMATION (Cont'd)
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K (Cont'd)
--------------------------------
TE
--
None
Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K,
neither FirstEnergy, or, respectively, any of the Companies,OE, CEI, TE nor Penn 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 thetheir respective
total assets of FirstEnergy and its subsidiaries on a consolidated
basis, or respectively, any of the Companies,OE, CEI, TE or Penn, but hereby agrees
to furnish to the Commission on request any such documents.
(b) Reports on Form 8-K
FirstEnergy, OE, CEI and TE and- One combined report on Form 8-K was
---------------------------
filed since December 31, 1999. A report dated April 18, 2000
reported that FirstEnergy Corp. had reached a stipulated agreement
with major parties to the transition filing it made in December
1999 under Ohio's electric utility industry restructuring law.
Penn
-------------------------------------
None
- 4843 -
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
theeach Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NovemberMay 12, 19992000
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
ComptrollerController
Principal Accounting Officer
- 4944 -