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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission Registrant; State of Incorporation; I.R.S. Employer
File Number Address; and Telephone Number Identification No.
- ----------- -------------------------------------- ------------------
333-21011 FIRSTENERGY CORP. 34-1843785
(An Ohio Corporation)
76 South Main Street
Akron, Ohio 44308
Telephone (800)736-3402
1-2578 OHIO EDISON COMPANY 34-0437786
(An Ohio Corporation)
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-2323 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY 34-0150020
(An Ohio Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-3583 THE TOLEDO EDISON COMPANY 34-4375005
(An Ohio Corporation)
c/o FirstEnergy Corp.
76 South Main Street
Akron, OH 44308
Telephone (800)736-3402
1-3491 PENNSYLVANIA POWER COMPANY 25-0718810
(A Pennsylvania Corporation)
1 East Washington Street
P. O. Box 891
New Castle, Pennsylvania 16103
Telephone (724)652-5531
Indicate by check mark whether each of the registrants (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date:
OUTSTANDING
CLASS AS OF NOVEMBER 6, 2001
----- ----------------------
FirstEnergy Corp., $.10 par value 223,981,580
Ohio Edison Company, no par value 100
The Cleveland Electric Illuminating Company,
no par value 79,590,689
The Toledo Edison Company, $5 par value 39,133,887
Pennsylvania Power Company, $30 par value 6,290,000
FirstEnergy Corp. is the sole holder of Ohio Edison Company, The Cleveland
Electric Illuminating Company and The Toledo Edison Company common stock;
Ohio Edison Company is the sole holder of Pennsylvania Power Company
common stock.
This combined Form 10-Q is separately filed by FirstEnergy
Corp., Ohio Edison Company, Pennsylvania Power Company, The Cleveland
Electric Illuminating Company and The Toledo Edison Company. Information
contained herein relating to any individual registrant is filed by such
registrant on its own behalf. No registrant makes any representation as to
information relating to any other registrant, except that information
relating to any of the four FirstEnergy subsidiaries is also attributed
to FirstEnergy.
This Form 10-Q includes forward-looking statements based on
information currently available to management. Such statements are subject
to certain risks and uncertainties. These statements typically contain,
but are not limited to, the terms "anticipate", "potential", "expect",
"believe", "estimate" and similar words. Actual results may differ
materially due to the speed and nature of increased competition and
deregulation in the electric utility industry, economic or weather
conditions affecting future sales and margins, changes in markets for
energy services, changing energy and commodity market prices, legislative
and regulatory changes (including revised environmental requirements), the
availability and cost of capital, inability to accomplish or realize
anticipated benefits of strategic goals (including the merger with GPU,
Inc.) and other similar factors.
This Form 10-Q reports FirstEnergy Corp.'s and its subsidiaries'
financial statements and results of operations as of September 30, 2001
and for the three-month and nine-month periods ended September 30, 2001
and 2000. These periods are prior to the November 7, 2001 effective date
of the merger with GPU Inc. and, except for certain information, does not
include financial data for the former electric utility subsidiaries of
GPU, Inc. Those companies - Jersey Central Power & Light Company,
Metropolitan Edison Company and Pennsylvania Electric Company - are each
separately filing a Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001.
TABLE OF CONTENTS
Pages
Part I. Financial Information
Notes to Financial Statements 1-8
FirstEnergy Corp.
Consolidated Statements of Income 9
Consolidated Balance Sheets 10-11
Consolidated Statements of Cash Flows 12
Report of Independent Public Accountants 13
Management's Discussion and Analysis of Results
of Operations and Financial Condition 14-18
Ohio Edison Company
Consolidated Statements of Income 19
Consolidated Balance Sheets 20-21
Consolidated Statements of Cash Flows 22
Report of Independent Public Accountants 23
Management's Discussion and Analysis of Results
of Operations and Financial Condition 24-26
The Cleveland Electric Illuminating Company
Consolidated Statements of Income 27
Consolidated Balance Sheets 28-29
Consolidated Statements of Cash Flows 30
Report of Independent Public Accountants 31
Management's Discussion and Analysis of Results
of Operations and Financial Condition 32-34
The Toledo Edison Company
Consolidated Statements of Income 35
Consolidated Balance Sheets 36-37
Consolidated Statements of Cash Flows 38
Report of Independent Public Accountants 39
Management's Discussion and Analysis of Results
of Operations and Financial Condition 40-42
Pennsylvania Power Company
Statements of Income 43
Balance Sheets 44-45
Statements of Cash Flows 46
Report of Independent Public Accountants 47
Management's Discussion and Analysis of Results
of Operations and Financial Condition 48-50
Part II. Other Information
PART I. FINANCIAL INFORMATION
- ------------------------------
FIRSTENERGY CORP. AND SUBSIDIARIES
OHIO EDISON COMPANY AND SUBSIDIARIES
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY
THE TOLEDO EDISON COMPANY AND SUBSIDIARY
PENNSYLVANIA POWER COMPANY
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1 - FINANCIAL STATEMENTS:
The principal business of FirstEnergy Corp. (FirstEnergy) is the
holding, directly or indirectly, of all of the outstanding common stock of
its five principal electric utility operating subsidiaries (prior to the
November 7, 2001 merger with GPU, Inc. (GPU) discussed in Note 3), Ohio
Edison Company (OE), The Cleveland Electric Illuminating Company (CEI),
The Toledo Edison Company (TE), Pennsylvania Power Company (Penn) and
American Transmission Systems, Inc. (ATSI). These utility subsidiaries are
referred to throughout as "Companies." Penn is a wholly owned subsidiary
of OE. FirstEnergy's other principal subsidiaries include FirstEnergy
Solutions Corp. (FES) (formerly FirstEnergy Services Corp.); FirstEnergy
Facilities Services Group, LLC (FEFSG); MARBEL Energy Corporation,
FirstEnergy Nuclear Operating Company (FENOC) and FirstEnergy Service
Company. FES provides energy-related products and services and has two
subsidiaries, Penn Power Energy, Inc., which provides electric
generation services and other energy services to Pennsylvania customers
and FirstEnergy Generation Corp. (FGCO), which operates the Companies'
nonnuclear generating facilities. FENOC operates the Companies' nuclear
generating facilities.
The condensed unaudited financial statements of FirstEnergy and
each of the Companies reflect all normal recurring adjustments that, in
the opinion of management, are necessary to fairly present results of
operations for the interim periods. These statements should be read in
connection with the financial statements and notes included in the
combined Annual Report on Form 10-K for the year ended December 31, 2000
for FirstEnergy and the Companies. Significant intercompany transactions
have been eliminated. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States requires management to make periodic estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses.
Actual results could differ from those estimates. The reported results of
operations are not indicative of results of operations for any future
period. Certain prior year amounts have been reclassified to conform with
the current year presentation.
The sole assets of the subsidiary trust that is the obligor on
the preferred securities included in FirstEnergy's and OE's capitalization
are $123,711,350 principal amount of 9% Junior Subordinated Debentures of
OE due December 31, 2025.
2 - COMMITMENTS, GUARANTEES AND CONTINGENCIES:
CAPITAL EXPENDITURES-
FirstEnergy's forecast (before factoring in the merger with GPU)
reflects expenditures of approximately $2.55 billion (OE-$360 million,
CEI-$455 million, TE-$218 million, Penn-$153 million, ATSI-$112 million,
FES-$830 million and other subsidiaries - $422 million) for property
additions and improvements from 2001-2005, of which approximately
$633 million (OE-$69 million, CEI-$81 million, TE-$59 million,
Penn-$28 million, ATSI-$18 million, FES-$301 million and other
subsidiaries-$77 million) is applicable to 2001. Investments for
additional nuclear fuel during the 2001-2005 period are estimated to be
approximately $441 million (OE-$119 million, CEI-$140 million,
TE-$98 million and Penn-$84 million), of which approximately $61 million
(OE-$18 million, CEI-$13 million, TE-$9 million and Penn-$21 million)
applies to 2001.
STOCK REPURCHASE PROGRAM-
On November 17, 1998, the Board of Directors authorized the
repurchase of up to 15 million shares of FirstEnergy's common stock over
a three-year period beginning in 1999. Repurchases are made on the open
market, at prevailing prices, and are funded primarily through the use
of operating cash flows. During the first nine months of 2001,
FirstEnergy repurchased and retired 550,000 shares of its common stock
at an average price of $27.82 per share.
1
ENVIRONMENTAL MATTERS-
Various federal, state and local authorities regulate the
Companies with regard to air and water quality and other environmental
matters. FirstEnergy estimates additional capital expenditures (before
factoring in the merger with GPU, Inc.) for environmental compliance of
approximately $201 million, which is included in the construction
forecast provided under "Capital Expenditures" for 2001 through 2005.
The Companies are required to meet federally approved sulfur
dioxide (SO2) regulations. Violations of such regulations can result in
shutdown of the generating unit involved and/or civil or criminal
penalties of up to $27,500 for each day the unit is in violation. The
Environmental Protection Agency (EPA) has an interim enforcement policy
for SO2 regulations in Ohio that allows for compliance based on a 30-day
averaging period. The Companies cannot predict what action the EPA may
take in the future with respect to the interim enforcement policy.
The Companies are in compliance with the current SO2 and
nitrogen oxides (NOx) reduction requirements under the Clean Air Act
Amendments of 1990. SO2 reductions are being achieved by burning
lower-sulfur fuel, generating more electricity from lower-emitting
plants, and/or using emission allowances. NOx reductions are being
achieved through combustion controls and the generation of more
electricity at lower-emitting plants. In September 1998, the EPA
finalized regulations requiring additional NOx reductions from the
Companies' Ohio and Pennsylvania facilities. The EPA's NOx Transport Rule
imposes uniform reductions of NOx emissions (an approximate 85% reduction
in utility plant NOx emissions from projected 2007 emissions) across a
region of twenty-two states and the District of Columbia, including Ohio
and Pennsylvania, based on a conclusion that such NOx emissions are
contributing significantly to ozone pollution in the eastern United
States. In March 2000, the U.S. Court of Appeals for the D.C. Circuit
upheld EPA's NOx Transport Rule except as applied to the State of
Wisconsin and portions of Georgia and Missouri. By October 2000, states
were to submit revised State Implementation Plans (SIP) to comply by
May 31, 2004 with individual state NOx budgets established by the EPA.
Pennsylvania submitted a SIP that requires compliance with the NOx
budgets at the Companies' Pennsylvania facilities by May 1, 2003 and
Ohio submitted a "draft" SIP that requires compliance with the NOx
budgets at the Companies' Ohio facilities by May 31, 2004. A Federal
Implementation Plan accompanied the NOx Transport Rule and may be
implemented by the EPA in states which fail to revise their SIP. In
another separate but related action, eight states filed petitions with
the EPA under Section 126 of the Clean Air Act seeking reductions of NOx
emissions which are alleged to contribute to ozone pollution in the
eight petitioning states. The EPA position is that the Section 126
petitions will be adequately addressed by the NOx Transport Program, but
a December 17, 1999 rulemaking established an alternative program which
would require nearly identical 85% NOx reductions at 392 utility plants,
including the Companies' Ohio and Pennsylvania plants, by May 2003, in
the event the NOx Transport Rule is not implemented by a state. On August
24, 2001, the U.S. Court of Appeals for the D.C. Circuit delayed the
implementation of this Section 126 NOx control program until the EPA
resolves issues involving electric generating units. Additional
Section 126 petitions were filed by New Jersey, Maryland, Delaware and
the District of Columbia in mid-1999 and are still under evaluation by
the EPA. The Companies continue to evaluate their compliance plans and
other compliance options.
In July 1997, the EPA promulgated changes in the National
Ambient Air Quality Standard (NAAQS) for ozone emissions and proposed a
new NAAQS for previously unregulated ultra-fine particulate matter. In
May 1999, the U.S. Court of Appeals for the D.C. Circuit found
constitutional and other defects in the new NAAQS rules. In February
2001, the U.S. Supreme Court upheld the new NAAQS rules regulating
ultra-fine particulates but found defects in the new NAAQS rules for
ozone and decided that the EPA must revise those rules. The future cost
of compliance with these regulations may be substantial and will depend
if and how they are ultimately implemented by the states in which the
Companies operate affected facilities.
In 1999 and 2000, the EPA issued Notices of Violation (NOV) or
a Compliance Order to nine utilities covering 44 power plants, including
the W. H. Sammis Plant. In addition, the U.S. Department of Justice
filed eight civil complaints against various investor-owned utilities,
which included a complaint against OE and Penn in the U.S. District
Court for the Southern District of Ohio. The NOV and complaint allege
violations of the Clean Air Act based on operation and maintenance of
the Sammis Plant dating back to 1984. The complaint requests permanent
injunctive relief to require the installation of "best available control
technology" and civil penalties of up to $27,500 per day of violation.
Although unable to predict the outcome of these proceedings, FirstEnergy
believes the Sammis Plant is in full compliance with the Clean Air Act
and the NOV and complaint are without merit. Penalties could be imposed
if the Sammis Plant continues to operate without correcting the alleged
violations and a court determines that the allegations are valid. The
Sammis Plant continues to operate while these proceedings are pending.
In December 2000, the EPA announced it would proceed with the
development of regulations regarding hazardous air pollutants from
electric power plants. The EPA identified mercury as the hazardous air
pollutant of greatest concern. The EPA established a schedule to propose
regulations by December 2003 and issue final regulations by December
2004. The future cost of compliance with these regulations may be
substantial.
2
As a result of the Resource Conservation and Recovery Act of
1976, as amended, and the Toxic Substances Control Act of 1976, federal
and state hazardous waste regulations have been promulgated. Certain
fossil-fuel combustion waste products, such as coal ash, were exempted
from hazardous waste disposal requirements pending the EPA's evaluation
of the need for future regulation. The EPA has issued its final
regulatory determination that regulation of coal ash as a hazardous
waste is unnecessary. On April 25, 2000, the EPA announced that it will
develop national standards regulating disposal of coal ash under its
authority to regulate nonhazardous waste.
CEI and TE have been named as "potentially responsible
parties" (PRPs) at waste disposal sites which may require cleanup under
the Comprehensive Environmental Response, Compensation and Liability Act
of 1980. Allegations of disposal of hazardous substances at historical
sites and the liability involved, are often unsubstantiated and subject
to dispute. Federal law provides that all PRPs for a particular site be
held liable on a joint and several basis. CEI and TE have accrued
liabilities of $2.9 million and $0.2 million, respectively, as of
September 30, 2001, based on estimates of the total costs of cleanup,
the proportionate responsibility of other PRPs for such costs and the
financial ability of other PRPs to pay. CEI and TE believe that waste
disposal costs will not have a material adverse effect on their
financial condition, cash flows or results of operations.
3 - MERGER WITH GPU:
MERGER -
On November 7, 2001, FirstEnergy merged with GPU, a Pennsylvania
corporation, with FirstEnergy being the surviving company. The application
of FirstEnergy to the Securities and Exchange Commission under the Public
Utility Holding Company Act of 1935 to acquire all of the outstanding
shares of GPU's common stock for approximately $4.5 billion in cash and
FirstEnergy common stock was approved on October 29, 2001. This was the
last regulatory approval needed for the merger. Approximately $7 billion
of debt and preferred securities of GPU's former subsidiaries is still
outstanding. The transaction is being accounted for by the purchase
method. The combined company's principal electric utility operating
companies include OE, CEI, TE, Penn and ATSI, as well as the former GPU
electric utility operating companies - Jersey Central Power & Light
Company, (JCP&L) Metropolitan Edison Company (MetEd) and Pennsylvania
Electric Company (Penelec), which serve customers in New Jersey and
Pennsylvania.
Under the terms of the Merger Agreement, GPU shareholders
could elect to receive, for each share of GPU common stock that they
own, either $36.50 in cash or shares of FirstEnergy common stock. The
number of FirstEnergy shares that a GPU shareholder will receive in
exchange for a GPU share depends upon the average closing price of
FirstEnergy common stock over a pre-determined 20-day trading period,
but is limited to 1.2318 shares if that average price is $29.6313 or
higher. With the November 7, 2001 merger effective date, the 20-day
trading period ended on October 29, 2001, and resulted in an average
closing price of $35.67. Consequently, GPU shareholders electing
FirstEnergy shares will receive 1.2318 shares of FirstEnergy common
stock for each share of GPU common stock that they own. The elections by
GPU shareholders are subject to proration if the total elections
received result in more than one-half of the GPU common stock being
exchanged for either cash or FirstEnergy shares.
PENDING DIVESTITURES -
On October 18, 2001, FirstEnergy and UtiliCorp United
announced that UtiliCorp made an offer to FirstEnergy to purchase, with
a financial partner, the former wholly-owned subsidiary of GPU, Avon
Energy Partners Holdings, the holding company for Midlands Electricity
plc, for a total purchase price of $2.1 billion, including the
assumption of approximately $1.7 billion of debt. FirstEnergy accepted
the offer upon completion of its merger with GPU. Completion of the sale
is subject to the receipt by all parties of the applicable regulatory
approvals.
In addition, GPU had acquired GasNet Pty Ltd. from the State
of Victoria in Australia in June 1999 as part of the natural gas
industry privatization process in that state. As a result of the
decision by FirstEnergy and GPU to sell GPU GasNet, GasNet Australia
Trust was established to acquire new securities in GPU GasNet and an
associated trust. The Trust filed a prospectus dated October 19, 2001
with the Australian Securities and Investments Commission for the public
offer of 130,000,000 Units of the Trust at AUS$2.00 per Unit. The Trust
will use the expected net proceeds from the offering of approximately
AUS$260 million to acquire the new GPU GasNet securities and will assume
the associated trust's debt (AUS$566.4 million at June 30, 2001). The
net proceeds will then be used by GPU GasNet to cancel and redeem all
securities (currently held by subsidiaries previously wholly-owned by
GPU and now by FirstEnergy) in GPU GasNet and the associated trust. The
prospectus expires on November 28, 2002, and closing is expected to
occur in mid-December.
3
GPU COMMITMENTS AND CONTINGENCIES-
The merger of FirstEnergy and GPU has resulted in
FirstEnergy's assumption of existing commitments and contingencies of
GPU and its former subsidiaries as well as certain guarantees by GPU to
its former subsidiaries.
Environmental Matters:
The former GPU companies have recorded approximately $61
million on their September 30, 2001 balance sheets for environmental
remediation, principally for the former GPU electric utility
subsidiaries and primarily related to potential manufactured gas plant
cleanup costs in New Jersey (see Note 1 of Quarterly Reports on Form 10-
Q for the quarter ended September 30, 2001 separately filed by JCP&L,
MetEd and Penelec).
Investments and Guarantees:
GPU had made significant investments in foreign businesses and
facilities through its subsidiaries, GPU Electric and GPU Power.
Although FirstEnergy will attempt to mitigate its future risks for these
foreign investments, it will face additional risks inherent in operating
in such locations, including foreign currency fluctuations.
GPU Electric's subsidiary, GPU GasNet, is among the multiple
defendants in a lawsuit in Australia seeking damages for losses due to
natural gas supply delivery problems as a result of an explosion and
fire in June 1999 at the Longford gas plant owned and operated by Esso.
These losses occurred before GPU's acquisition of GPU GasNet from the
State of Victoria and the claim of liability is based on the alleged
transfer of liability as part of the purchase acquisition and certain
indemnities provided by GPU GasNet in the Purchase Agreement. GPU GasNet
has filed answers denying liability to the owner and operator of the
plant, the State of Victoria, Australia and Transmission Pipelines
Australia, which could be material. GPU GasNet has notified its
insurance carriers of this action. The insurers notified GPU GasNet that
they have formed the preliminary view that GPU GasNet is not entitled to
coverage under the liability policy. GPU GasNet believes that it is
entitled to coverage, and discussions with the insurers are continuing.
There can be no assurance as to the outcome of this matter.
GPU Electric, through its subsidiary, Midlands, has a 40%
equity interest in a 586 MW power project in Pakistan (the Uch Power
Project), which commenced commercial operations in October 2000. GPU's
investment in this project as of September 30, 2001 was approximately
$38 million, plus a guaranty letter of credit of $3.6 million, and its
share of the projected completion costs represents an additional $4.8
million commitment. Cinergy (the former owner of 50% of Midlands
Electricity plc) agreed to fund up to an aggregate of $20 million of the
required capital contributions, for a period of one year from July 15,
1999, and "cash losses" which could be incurred on the Uch Power
Project, for a period of up to ten years from July 15, 1999. Cinergy has
reimbursed GPU Electric $4.9 million through September 30, 2001, leaving
a remaining commitment for future cash losses of up to $15.1 million.
There can be no assurance as to the outcome of this matter. In addition,
Midlands has a 31% equity interest in a 478 megawatt power project in
Turkey (the Trakya Power Project). Trakya is presently engaged in a
foreign currency conversion issue with TEAS (the state owned electricity
purchaser). A provision against the risk of non-recovery has been
established on Midlands' books, in the amount of $15 million at
September 30, 2001.
The above commitments and contingencies for Midlands and GPU
GasNet would transfer to the purchaser upon completion of the sales
discussed in the Pending Divestitures section.
EI Barranquilla, a wholly owned subsidiary of GPU Power, is an
equity investor in Termobarranquilla S.A., Empresa de Servicios Publicos
(TEBSA), which owns a Colombian independent power generation project. As
of September 30, 2001, GPU Power has an investment of approximately
$102.9 million in TEBSA and is committed, under certain circumstances,
to make additional standby equity contributions of $21.3 million, which
obligation GPU had guaranteed. The total outstanding senior debt of the
TEBSA project is $330 million at September 30, 2001. The lenders include
the Overseas Private Investment Corporation, US Export Import Bank (Ex-
Im Bank) and a commercial bank syndicate. GPU had guaranteed the
obligations of the operators of the TEBSA project, up to a maximum of
$5.8 million (subject to escalation) under the project's operations and
maintenance agreement.
GPU believed that various events of default have occurred
under the loan agreements relating to the TEBSA project. In addition,
questions have been raised as to the accuracy and completeness of
information provided to various parties to the project in connection
with the project's formation. GPU had discussed and FirstEnergy will
continue to discuss these issues and related matters with the project
lenders, CORELCA, (the government owned Colombian electric utility with
an ownership interest in the project) and the Government of Colombia.
In July 2001, the Controller of Colombia was quoted as saying
that he considers many of the power purchase agreements entered into by
CORELCA with various projects, including TEBSA, to be overpriced and
that he considers it necessary, if circumstances permit, to seek to
renegotiate such agreements.
4
Moreover, in September 2001, the DIAN (the Colombian national
tax authority) presented TEBSA with a statement of charges alleging that
certain lease payments made under the Lease Agreements with Los Amigos
Leasing Company (an affiliate of GPU Power) violated Colombian foreign
exchange regulations and were, therefore, subject to substantial
penalties. The DIAN has calculated a statutory penalty amounting to
approximately $200 million and has given TEBSA two months to respond to
the statement of charges. TEBSA is continuing to review the DIAN's
position and has been advised by its Colombian counsel that the DIAN's
position is without substantial legal merit. TEBSA intends to submit a
formal response to this statement of charges by November 19, 2001. There
can be no assurance as to the outcome of these matters.
4 - REGULATORY MATTERS:
In July 2000, the Public Utilities Commission of Ohio (PUCO)
approved FirstEnergy's transition plan as modified by a settlement
agreement with major parties to the transition plan, which it filed on
behalf of its Ohio electric utility operating companies - OE, CEI and TE -
under Ohio's new electric utility restructuring law. Major provisions of
the settlement agreement included approval for recovery of transition
costs in the amounts filed in the transition plan through no later than
2006 for OE, mid-2007 for TE and 2008 for CEI, except where a longer
period of recovery is provided for in the settlement agreement.
FirstEnergy also gives preferred access over FirstEnergy's subsidiaries to
nonaffiliated marketers, brokers and aggregators to 1,120 megawatts of
generation capacity through 2005 at established prices for sales to the
Ohio operating companies' retail customers. The base electric rates for
distribution service for OE, CEI and TE under their prior respective
regulatory plans will be extended from December 31, 2005 through
December 31, 2007. The transition rate credits for customers under their
prior regulatory plans will also be extended through the Companies'
respective transition cost recovery periods.
The transition plan itemized, or unbundled, the current price
of electricity into its component elements -- including generation,
transmission, distribution and transition charges. As required by the
PUCO's rules, FirstEnergy's transition plan also included its proposals
on corporate separation of its regulated and unregulated operations,
operational and technical support changes needed to accommodate customer
choice, an education program to inform customers of their options under
the law, and how FirstEnergy's transmission system will be operated to
ensure access to all users. Customer prices are frozen through a
five-year market development period (2001-2005), except for certain
limited statutory exceptions including a 5% reduction in the price of
generation for residential customers.
Ohio's electric utility restructuring law allowed Ohio electric
customers to select their generation suppliers beginning January 1, 2001.
FirstEnergy's Ohio customers electing alternative suppliers receive an
additional incentive applied to the shopping credit of 45% for residential
customers, 30% for commercial customers and 15% for industrial customers.
The amount of the incentive serves to reduce the amortization of
transition costs during the market development period and will be
recovered through the extension of the transition cost recovery periods.
If the customer shopping goals established in the agreement are not
achieved by the end of 2005, the transition cost recovery periods could be
shortened for OE, CEI and TE to reduce recovery by as much as $500 million
(OE-$250 million, CEI-$170 million and TE-$80 million), but any such
adjustment would be computed on a class-by-class and pro-rata basis.
5 - NEW ACCOUNTING STANDARDS:
On January 1, 2001, FirstEnergy adopted Statement of Financial
Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), as amended by SFAS 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities - an
amendment of FASB Statement No. 133." The cumulative effect to
January 1, 2001 was a charge of $8.5 million (net of $5.8 million of
income taxes) or $.04 per share of common stock. The reported results of
operations for the years ended December 31, 2000 and 1999 would not have
been materially different if this accounting had been in effect during
those years.
FirstEnergy is exposed to financial risks resulting from the
fluctuation of interest rates and commodity prices, including
electricity, natural gas and coal. To manage the volatility relating to
these exposures, FirstEnergy uses a variety of derivative instruments,
including forward contracts, options, futures contracts and swaps. These
derivatives are used principally for hedging purposes and to a lesser
extent for trading purposes. FirstEnergy has a Risk Policy Committee
comprised of executive officers, which exercises an independent risk
oversight function to ensure compliance with corporate risk management
policies and prudent risk management practices.
5
FirstEnergy uses derivatives to hedge the risk of commodity
price and interest rate fluctuations. FirstEnergy's primary ongoing
hedging activity involves cash flow hedges of electricity, natural gas and
coal purchases. The maximum periods over which the variability of
electricity, natural gas and coal cash flows are hedged are two, three and
four years, respectively. Gains and losses from hedges of commodity price
risks are included in net income when the underlying hedged commodities
are delivered. FirstEnergy entered into interest rate derivative
transactions during the first nine months of 2001 to hedge a portion of
the anticipated interest payments on debt related to the GPU acquisition.
Gains and losses from hedges of anticipated interest payments on
acquisition debt will be included in net income over the periods that
hedged interest payments are made - 5, 10 and 30 years. The current net
deferred loss of $122.7 million included in Accumulated Other
Comprehensive Loss (AOCL) as of September 30, 2001, as compared to the
June 30, 2001 balance of $37.7 million in deferred losses, reflected a
$100.9 million reduction related to current hedging activity and a
$15.9 million increase in other activities during the quarter.
Approximately $40.6 million (after tax) of the current deferred net loss
on derivative instruments in AOCL is expected to be reclassified to
earnings during the next twelve months as hedged transactions occur.
However, the fair value of these derivative instruments will fluctuate
from period to period based on various market factors and will generally
be more than offset by the margin on related sales and revenues. For the
quarter and year-to-date periods ended September 30, 2001, there were no
effects to net income as a result of the discontinuance of a cash flow
hedge, and the ineffective portion of derivative commodity contracts was
not material.
FirstEnergy engages in the trading of commodity derivatives and
periodically experiences net open positions. FirstEnergy's risk management
policies limit the exposure to market risk from open positions and require
daily reporting to management of potential financial exposures.
Derivatives classified as "normal-purchase/normal sale" (NPNS)
transactions were documented and excluded from further treatment under
SFAS 133. The Financial Accounting Standards Board (FASB) has not reached
a final conclusion regarding the appropriate accounting treatment of
certain types of energy contracts under SFAS 133. The FASB's final
decision could affect those contracts considered eligible for the NPNS
exception.
The FASB approved SFAS 141, "Business Combinations," and
SFAS 142, "Goodwill and Other Intangible Assets," on June 29, 2001.
These new standards are effective beginning July 1, 2001. SFAS 141
requires all business combinations initiated after June 30, 2001, to be
accounted for using purchase accounting. The provisions of the new
standard relating to the determination of goodwill and other intangible
assets have been applied to the GPU acquisition, is being accounted for
by the purchase method, and will not materially affect the accounting
for this transaction. Under SFAS 142, amortization of existing goodwill
by FirstEnergy will cease on January 1, 2002. Instead, goodwill will be
tested for impairment at least on an annual basis, and no impairment of
goodwill is anticipated as a result of the initial impairment review
process. Currently, FirstEnergy amortizes about $57 million ($.25 per
share of common stock) of goodwill annually. There will be no goodwill
amortization in 2001 associated with the GPU acquisition under the
provisions of the new standard.
In July 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations." SFAS 143 provides the accounting requirements for
retirement obligations associated with tangible long-lived assets.
SFAS 143 is effective for fiscal years beginning after June 15, 2002, with
early adoption encouraged. FirstEnergy is currently assessing the new
standard and has not yet determined the impact on its financial
statements.
In September 2001, the FASB issued SFAS 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." The Statement also supersedes the
accounting and reporting provisions of Accounting Principles Board (APB)
Opinion No. 30, "Reporting the Results of Operations - Reporting the
Effects of Disposal of a Segment of a Business and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions." SFAS 144 is effective
for fiscal years beginning after June 15, 2001, with early adoption
encouraged. FirstEnergy is currently assessing the new standard and has
not yet determined the impact on its financial statements.
6 - SEGMENT INFORMATION:
FirstEnergy operates under the following reportable segments:
regulated services, competitive services and other (primarily corporate
support services). These business units reflect FirstEnergy's
organizational changes to accommodate its retail strategy and the impact
of moving the generation portion of its electricity services from the
regulated segment to the competitive segment as reflected in its approved
Ohio transition plan. These reportable segments are strategic businesses,
which are managed and operated differently based on the degree of
regulation, and the products and services offered.
6
The regulated services segment designs, constructs, operates
and maintains FirstEnergy's regulated transmission and distribution
systems. It also provides generation services to regulated franchise
customers who have not chosen an alternative, competitive generation
supplier. The regulated services segment obtains generation through
power supply agreements with the competitive services segment.
The competitive services segment includes all unregulated energy
and energy-related services including commodity sales (both electricity
and natural gas) in the retail and wholesale markets, marketing,
generation, trading and sourcing of commodity requirements, as well as
other competitive energy-application services. Competitive products are
increasingly marketed to customers as bundled services.
7
2000 financial data are pro forma amounts to represent current
year business segment organizations and operations. Financial data for
these business segments are as follows:
Segment Financial Information
-----------------------------
Regulated Competitive Reconciling
Services Services Other Adjustments Consolidated
--------- ----------- ----- ----------- ------------
(In millions)
Three Months Ended:
- ------------------
September 30, 2001
------------------
External revenues $ 1,404 $ 503 $ 2 $ 43 (a) $ 1,952
Internal revenues 331 510 66 (907)(b) --
Total revenues 1,735 1,013 68 (864) 1,952
Depreciation and amortization 197 7 7 -- 211
Net interest charges 131 8 8 (23)(b) 124
Income taxes 176 9 (4) -- 181
Income before cumulative
effect of a change in
accounting 230 12 (8) -- 234
Net income 230 12 (8) -- 234
Total assets 15,460 2,113 505 -- 18,078
Property additions 180 107 4 -- 291
September 30, 2000
------------------
External revenues $ 1,453 $ 405 $ 9 $ 25 (a) $ 1,892
Internal revenues 346 590 83 (1,019)(b) --
Total revenues 1,799 995 92 (994) 1,892
Depreciation and amortization 278 3 -- -- 281
Net interest charges 123 3 5 -- 131
Income taxes 88 44 (3) -- 129
Net income 138 64 (4) -- 198
Total assets 15,034 2,223 711 -- 17,968
Property additions 69 33 3 -- 105
Nine Months Ended:
- -----------------
September 30, 2001
------------------
External revenues $ 3,973 $1,635 $ 4 $ 130 (a) $ 5,742
Internal revenues 989 1,569 195 (2,753)(b) --
Total revenues 4,962 3,204 199 (2,623) 5,742
Depreciation and amortization 608 15 22 -- 645
Net interest charges 406 17 24 (76)(b) 371
Income taxes 356 26 3 -- 385
Income before cumulative
effect of a change in
accounting 447 36 3 -- 486
Net income 447 28 3 -- 478
Total assets 15,460 2,113 505 -- 18,078
Property additions 269 285 14 -- 568
September 30, 2000
------------------
External revenues $ 4,084 $1,067 $ 10 $ 41 (a) $ 5,202
Internal revenues 1,005 1,705 213 (2,923)(b) --
Total revenues 5,089 2,772 223 (2,882) 5,202
Depreciation and amortization 697 11 -- -- 708
Net interest charges 381 8 12 -- 401
Income taxes 241 85 (4) -- 322
Net income 357 123 (6) -- 474
Total assets 15,034 2,223 711 -- 17,968
Property additions 291 87 3 -- 381
<FN>
Reconciling adjustments to segment operating results from internal management reporting
to consolidated external financial reporting:
(a) Principally fuel marketing revenues which are reflected as reductions to expenses
for internal management reporting purposes.
(b) Elimination of intersegment transactions.
</FN>
8
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands, except per share amounts)
REVENUES:
Electric utilities $1,437,023 $1,462,707 $4,008,823 $4,092,322
Unregulated businesses 514,623 428,938 1,732,710 1,109,357
---------- ---------- ---------- ----------
Total revenues 1,951,646 1,891,645 5,741,533 5,201,679
---------- ---------- ---------- ----------
EXPENSES:
Fuel and purchased power 300,526 297,952 925,633 848,945
Purchased gas 121,564 140,826 647,938 330,379
Other operating expenses 667,003 575,356 1,956,252 1,700,998
Provision for depreciation and amortization 210,764 280,884 644,584 707,762
General taxes 112,292 138,054 323,900 417,086
---------- ---------- ---------- ----------
Total expenses 1,412,149 1,433,072 4,498,307 4,005,170
---------- ---------- ---------- ----------
INCOME BEFORE INTEREST AND INCOME TAXES 539,497 458,573 1,243,226 1,196,509
---------- ---------- ---------- ----------
NET INTEREST CHARGES:
Interest expense 114,468 123,272 349,029 370,358
Capitalized interest (7,016) (6,323) (28,135) (19,449)
Subsidiaries' preferred stock dividends 16,674 14,237 50,527 49,650
---------- ---------- ---------- ----------
Net interest charges 124,126 131,186 371,421 400,559
---------- ---------- ---------- ----------
INCOME TAXES 181,284 129,200 385,492 322,241
---------- ---------- ---------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING 234,087 198,187 486,313 473,709
Cumulative effect of accounting change
(net of income taxes of $5,839,000) (Note 5) -- -- (8,499) --
---------- ---------- ---------- ----------
NET INCOME $ 234,087 $ 198,187 $ 477,814 $ 473,709
========== ========== ========== ==========
BASIC EARNINGS PER SHARE:
Before cumulative effect of accounting
change $1.07 $ .89 $2.23 $2.12
Cumulative effect of accounting change -- -- (.04) --
----- ----- ----- -----
$1.07 $ .89 $2.19 $2.12
===== ===== ===== =====
Weighted average number of basic shares
outstanding 218,594 221,846 218,358 223,415
======= ======= ======= =======
DILUTED EARNINGS PER SHARE:
Before cumulative effect of accounting change $1.06 $ .89 $2.22 $2.12
Cumulative effect of accounting change -- -- (.04) --
----- ----- ----- -----
$1.06 $ .89 $2.18 $2.12
===== ===== ===== =====
Weighted average number of diluted shares
outstanding 220,165 222,406 219,470 223,740
======= ======= ======= =======
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $.375 $.375 $1.125 $1.125
===== ===== ====== ======
<FN>
The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral
part of these statements.
</FN>
9
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
------------- -------------
(In thousands)
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 175,594 $ 49,258
Receivables-
Customers (less accumulated provisions of
$18,174,000 and $32,251,000, respectively,
for uncollectible accounts) 517,800 541,924
Other (less accumulated provisions of $4,793,000
and $4,035,000, respectively, for uncollectible
accounts) 446,573 376,525
Materials and supplies, at average cost-
Owned 208,218 171,563
Under consignment 135,830 112,155
Prepayments and other 147,225 189,869
----------- -----------
1,631,240 1,441,294
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
In service 12,750,716 12,417,684
Less--Accumulated provision for depreciation 5,502,728 5,263,483
----------- -----------
7,247,988 7,154,201
Construction work in progress 410,691 420,875
----------- -----------
7,658,679 7,575,076
----------- -----------
INVESTMENTS:
Capital trust investments 1,178,284 1,223,794
Nuclear plant decommissioning trusts 640,321 584,288
Letter of credit collateralization 277,763 277,763
Other 693,629 669,057
----------- -----------
2,789,997 2,754,902
----------- -----------
DEFERRED CHARGES:
Regulatory assets 3,531,678 3,727,662
Goodwill 2,047,697 2,088,770
Other 418,418 353,590
----------- -----------
5,997,793 6,170,022
----------- -----------
$18,077,709 $17,941,294
=========== ===========
10
FIRSTENERGY CORP.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
------------- -------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CURRENT LIABILITIES:
Currently payable long-term debt and
preferred stock $ 1,039,246 $ 536,482
Short-term borrowings 814,478 699,765
Accounts payable 450,964 478,661
Accrued taxes 527,895 409,640
Other 446,013 469,257
----------- -----------
3,278,596 2,593,805
----------- -----------
CAPITALIZATION:
Common stockholders' equity-
Common stock, $.10 par value, authorized
375,000,000 shares - 223,981,580 and
224,531,580 shares outstanding, respectively 22,398 22,453
Other paid-in capital 3,524,148 3,531,821
Accumulated other comprehensive income
(loss) (Note 5) (122,333) 593
Retained earnings 1,442,247 1,209,991
Unallocated employee stock ownership plan
common stock - 5,298,989 and 5,952,032
shares, respectively (99,508) (111,732)
----------- -----------
Total common stockholders' equity 4,766,952 4,653,126
Preferred stock of consolidated subsidiaries-
Not subject to mandatory redemption 648,395 648,395
Subject to mandatory redemption 38,673 41,105
OE obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
OE subordinated debentures 120,000 120,000
Long-term debt 5,074,751 5,742,048
----------- -----------
10,648,771 11,204,674
----------- -----------
DEFERRED CREDITS:
Accumulated deferred income taxes 1,917,043 2,094,107
Accumulated deferred investment tax credits 227,912 241,005
Nuclear plant decommissioning costs 655,018 598,985
Other postretirement benefits 589,701 544,541
Other 760,668 664,177
----------- -----------
4,150,342 4,142,815
----------- -----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ----------- -----------
$18,077,709 $17,941,294
=========== ===========
<FN>
The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral
part of these balance sheets.
</FN>
11
FIRSTENERGY CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $234,087 $198,187 $477,814 $ 473,709
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and
amortization 210,764 280,884 644,584 707,762
Nuclear fuel and lease amortization 23,247 31,672 71,448 86,376
Other amortization, net (3,111) (2,851) (10,783) (9,469)
Deferred income taxes, net (29,749) (47,856) (65,057) (81,194)
Investment tax credits, net (4,980) (10,569) (14,966) (23,064)
Cumulative effect of accounting change -- -- 14,338 --
Receivables (69,509) (24,187) (45,924) (45,015)
Materials and supplies (16,068) (10,790) (60,330) 8,468
Accounts payable 79,982 (40,929) (27,697) (44,071)
Other 166,060 120,367 (2,108) 34,434
-------- -------- -------- ----------
Net cash provided from operating
activities 590,723 493,928 981,319 1,107,936
-------- -------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 7,128 37,331 262,627 295,749
Short-term borrowings, net 56,232 198,682 114,713 245,730
Redemptions and Repayments-
Common stock -- 44,445 15,308 118,457
Preferred stock 6,000 6,000 16,716 19,714
Long-term debt 198,514 473,730 294,075 923,254
Common stock dividend payments 81,942 83,391 245,559 251,909
-------- -------- -------- ----------
Net cash used for financing
activities 223,096 371,553 194,318 771,855
-------- -------- -------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 291,276 105,369 567,774 381,446
Cash investments 1,799 60 (30,802) (40,976)
Other 104,177 37,293 123,693 40,186
-------- -------- -------- ----------
Net cash used for investing activities 397,252 142,722 660,665 380,656
-------- -------- -------- ----------
Net increase (decrease) in cash and cash
equivalents (29,625) (20,347) 126,336 (44,575)
Cash and cash equivalents at beginning of
period 205,219 87,560 49,258 111,788
-------- -------- -------- ----------
Cash and cash equivalents at end of period $175,594 $ 67,213 $175,594 $ 67,213
======== ======== ======== ==========
<FN>
The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral
part of these statements.
</FN>
12
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, 2001, and the related consolidated statements of income and
cash flows for the three-month and nine-month periods ended September 30,
2001 and 2000. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States, the objective of which is the expression of
an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the
United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the consolidated balance sheet of
FirstEnergy Corp. and subsidiaries as of December 31, 2000 (not presented
herein), and, in our report dated February 16, 2001, we expressed an
unqualified opinion on that statement. In our opinion, the information set
forth in the accompanying consolidated balance sheet as of December 31,
2000, is fairly stated, in all material respects, in relation to the
balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
November 12, 2001.
13
FIRSTENERGY CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
- ---------------------
Net income in the third quarter of 2001 increased by 18% to
$234.1 million, compared to $198.2 million in the same period of 2000.
Basic earnings per share of common stock were $1.07 ($1.06 diluted) in the
third quarter of 2001, compared to $0.89 (basic and diluted) in the third
quarter of 2000. During the first nine months of 2001, net income was
$486.3 million before the cumulative effect of an accounting change,
compared to $473.7 million for the same period of 2000. Basic earnings per
share of common stock were $2.23 ($2.22 diluted) in the first nine months
of 2001, compared to $2.12 (basic and diluted) in the first nine months of
2000. After the accounting change, net income in the first nine months of
2001 was $477.8 million or basic earnings per share of common stock of
$2.19 ($2.18 diluted). The accounting change reflected the adoption of
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities,"
on January 1, 2001, which resulted in an after-tax charge of $8.5 million
($0.04 per share of common stock).
Revenues
Total revenues increased by $60.0 million in the third quarter
of 2001, and by $539.9 million during the nine-month period ended
September 30, 2001, as compared to the same periods in 2000. FirstEnergy's
competitive services business segment provided all of the revenue increase
from higher wholesale electric sales in the third quarter of 2001, and
combined with expanded gas sales, produced substantially all the increased
revenues in the nine-month period. The sources of changes in revenues
during the third quarter and first nine months of 2001, compared to the
corresponding periods of 2000, are summarized in the following table:
Sources of Revenue Changes
- --------------------------
Increase (Decrease)
Three Nine
Months Months
------ ------
(In millions)
Electric Utilities (Regulated Services):
Retail electric sales $ (7.8) $(70.7)
Other revenues (17.9) (12.8)
------ ------
Total Electric Utilities (25.7) (83.5)
------ ------
Unregulated Businesses (Competitive Services):
Retail electric sales (5.0) 3.2
Wholesale electric sales 121.0 316.3
Gas sales (29.5) 283.7
Other businesses (0.8) 20.2
------ ------
Total Unregulated Businesses 85.7 623.4
------ ------
Net Revenue Increase $ 60.0 $539.9
====== ======
Electric Sales
Revenues for the electric utilities decreased by $25.7 million
in the third quarter and by $83.5 million in the first nine months of
2001, compared to the same periods in 2000, primarily due to lower sales
of electric generation as a result of customer choice in Ohio. As a result
of opening Ohio to competitive generation suppliers in 2001, sales of
electric generation by other suppliers increased to 15.1% and 9.9% of
total energy delivered in the third quarter and first nine months of 2001,
respectively, compared to 0.3% and 0.7% in the corresponding periods of
2000. Implementation of a 5% reduction in generation charges for
residential customers, as part of Ohio's electric utility restructuring
implemented in 2001, also contributed to the reduction in electric sales
revenues. This lower residential rate reduced electric sales revenues by
approximately $17.5 million in the third quarter and by $38.8 million in
the first nine months of 2001.
Kilowatt-hour deliveries to franchise customers increased by
2.4% in the third quarter and 1.2% in the first nine months of 2001,
compared to the same periods of 2000, primarily due to warmer than normal
weather in the third quarter of 2001 after unusually mild weather in the
third quarter of 2000. The warmer weather's effect on air-conditioning
load contributed to a 13.3% increase in third quarter kilowatt-hour
deliveries to residential customers compared to the
14
same quarter last year, accounting for most of the 6.2% year-to-date
increase in residential sales compared to the same period last year.
Reduced deliveries to industrial and commercial customers in both the
third quarter and first nine months of 2001 compared to the same periods
of 2000 reflects a softening in the national economy which has affected
our regional economy. Other regulated electric revenues decreased by $17.9
million in the third quarter and by $12.8 million in the first nine months
of 2001, compared to the same periods of 2000, due in large part to
reduced interest income on investments and a decline in third quarter 2001
transmission revenues resulting from reduced customer reservation of
transmission capacity.
Retail kilowatt-hour sales for the FirstEnergy competitive
services business segment increased by 27.1% in the third quarter and
12.3% in the first nine months of 2001, compared to the same periods of
2000. These increases resulted from expanding kilowatt-hour sales within
Ohio as a result of retail customers switching to FirstEnergy's
unregulated affiliate - FES, a wholly owned subsidiary, under Ohio's
electricity choice program. The higher kilowatt-hour sales in Ohio were
partially offset by lower sales in markets outside of Ohio as more
customers returned to their local distribution companies. Expansion of
competitive sales in Ohio as sales to higher-priced eastern markets
declined contributed to an overall decline in third quarter competitive
sales revenue and to a moderate increase in the first nine months of 2001,
compared to the corresponding periods last year, despite the strong
increases in competitive kilowatt-hour sales.
Total electric generation sales increased by 8.1% in the third
quarter and 9.6% in the first nine months of 2001 compared to the same
periods last year. Sales to the wholesale market were the largest single
factor contributing to this increase. Kilowatt-hour sales to wholesale
customers more than doubled in the third quarter and first nine months of
2001, compared to the same periods of 2000. Those increases reflect
FirstEnergy's enhanced position to take advantage of opportunities in the
wholesale market in 2001, as well as nonaffiliated retail energy suppliers
having access to 1,120 megawatts of FirstEnergy's generation capacity made
available under its transition plan. As of September 30, 2001, over 1,060
megawatts of the 1,120 megawatt supply commitment had been secured by
alternative suppliers.
Changes in electric generation sales and kilowatt-hour
deliveries in the third quarter and first nine months of 2001, compared to
the same periods of 2000, are summarized in the following table:
Changes in KWH Sales
- --------------------
Increase (Decrease)
Three Nine
Months Months
------ ------
Electric Generation Sales:
Retail --
Regulated Services (12.8)% (8.2)%
Competitive Services 27.1% 12.3%
Wholesale 156.2% 153.9%
----- -----
Total Electric Generation Sales 8.1% 9.6%
===== =====
Distribution Deliveries:
Residential 13.3% 6.2%
Commercial and Industrial (1.9)% (0.7)%
----- -----
Total Retail Distribution Deliveries 2.4% 1.2%
===== =====
Other Sales
Residential and small business customers in the service area of
Dominion East Ohio, a nonaffiliated gas utility, began shopping among
alternative gas suppliers last year as part of a customer choice program,
with gas deliveries beginning November 1, 2000. FES took advantage of this
opportunity to expand its customer base. The number of retail gas
customers served by FES increased to approximately 155,000 by the end of
the third quarter of 2001 from approximately 28,000 a year earlier. Total
gas sales increased by $283.7 million in the first nine months from the
same period last year. However, gas sales in the third quarter of 2001
were $29.5 million lower than the third quarter last year due to reduced
prices and volumes sold to wholesale customers. The competitive services
business segment's energy-related services contributed favorably to
revenue growth in the first nine months of 2001 as compared to the same
period of 2000. Revenues for FEFSG, a wholly owned subsidiary providing
heating, ventilating, air-conditioning and other energy-related services,
increased by $33.2 million or 8% in the first nine months of 2001 compared
to the same period last year, reflecting growth in both construction and
service contracts. However, in the third quarter slower economic growth in
the U.S. resulted in delays and cancellation of FEFSG construction
projects which reduced revenue growth to 3% compared to the same period
last year.
15
Operating Expenses
Fuel and purchased power costs increased slightly by $2.6
million in the third quarter of 2001 from the third quarter last year
reflecting a $28.3 million increase in fuel expense offset by a $25.7
million decrease in purchased power costs. The higher third quarter fuel
expense resulted from an increased mix of more expensive fossil generation
resulting from reduced nuclear availability and a corresponding increase
in coal and gas fired (peaking) generation. Coal prices were also higher
in the third quarter of 2001 than the same period last year. The lower
purchased power costs primarily reflected a reduction in the average cost
for power. Fuel and purchased power costs increased by $76.7 million in
the first nine months of 2001 from the same period last year due to $28.7
million of higher fuel costs and a $48.0 million increase in purchased
power costs. The increase in fuel and purchased power costs for the first
nine months of 2001 resulted principally from the higher fuel expense in
the third quarter and higher purchased power costs in the first quarter of
2001, compared to the same periods last year. Additional requirements for
purchased power coupled with higher prices resulted in the increase in
purchased power costs in the first quarter of 2001.
Purchased gas costs decreased by $19.3 million in the third
quarter of 2001 from the same period last year primarily reflecting
reduced requirements due to the lower sales to wholesale customers
described above. In the first nine months of 2001, purchased gas costs
almost doubled, increasing by $317.6 million from the corresponding period
of 2000 due primarily to the expansion of FES's retail gas business.
Other operating expenses increased by $91.6 million in the third
quarter and by $255.3 million in the first nine months of 2001, compared
to the same periods of 2000. The absence in 2001 of gains from the sale of
emission allowances in 2000 ($37.9 million for the third quarter and $48.5
million for the nine-month period) and higher fossil operating expenses
and employee benefit costs in 2001 contributed $60.0 million to the
increase in other operating expenses in the third quarter and $151.2
million to the increase in the first nine months of 2001 from the
corresponding periods last year. Nuclear operating expenses were $29.5
million higher in the third quarter of 2001 resulting from the timing of
this year's refueling outage, which began earlier in the third quarter of
2001 than last year's refueling outage. Also, in the first nine months of
2001, a $94.3 million increase in operating costs from the competitive
services business segment due to expanded operations contributed to the
increase from the same period last year.
An $8.7 million increase in fossil operating expenses in the
third quarter and a $42.1 million increase in the first nine months of
2001, from the corresponding periods of 2000, were due principally to
planned maintenance work to improve availability of fossil units. The
increase was primarily related to work at the Mansfield generating plant
in the third quarter of 2001 and at the Bay Shore, Eastlake and Mansfield
generating plants in the first nine months of 2001.
Pension costs increased by $7.4 million in the third quarter and
by $44.0 million in the first nine months of 2001 from the corresponding
periods last year. The increases were primarily due to lower returns on
plan assets (due to significant market-related reductions in the value of
plan assets), the completion of the 15-year amortization of OE's
transition asset and changes to plan benefits. Health care benefit costs
also increased by $6.0 million in the third quarter and by $16.6 million
in the first nine months of 2001, compared to the same periods of 2000,
principally due to an increase in the health care cost trend rate
assumption for computing post-retirement health care benefit liabilities.
Charges for depreciation and amortization decreased by $70.1
million in the third quarter and by $63.2 million in the first nine months
of 2001 from the same periods last year. Approximately $61.2 million of
the third quarter decrease and $55.5 million of the nine-month decrease
resulted from lower incremental transition cost amortization under
FirstEnergy's Ohio transition plan compared to accelerated cost recovery
in connection with OE's prior rate plan. Transition cost accelerations
(including related income tax amortization) totaled $80.9 million in the
third quarter and $234.3 million in the first nine months of 2001,
compared to cost accelerations under OE's rate plan and Penn's
restructuring plan of $147.9 million in the third quarter and $291.9
million in the first nine months of 2000. The changes in depreciation and
amortization for these periods also reflected deferrals for shopping
incentives of $18.1 million in the third quarter and of $32.5 million in
first nine months of 2001 (see Note 4), partially offset by increases
associated with depreciation on recently completed combustion turbines.
General taxes were $25.8 million lower in the third quarter and
$93.2 million lower in the first nine months of 2001, compared to the
corresponding periods of 2000, due to reduced property taxes and other
state tax changes in connection with the Ohio electric industry
restructuring. In addition, as a result of successfully resolving certain
pending tax issues, a one-time benefit of $15 million was also recognized
in the first nine months of 2001.
Net Interest Charges
Net interest charges continue to trend lower, decreasing by $7.1
million in the third quarter and by $29.1 million in the first nine months
of 2001, compared to the same periods in 2000, primarily due to prior debt
and preferred stock redemption and refinancing activities. During the
first nine months of 2001, redemption and refinancing activities totaled
$77.8 million and $117.4 million, respectively, and will result in
annualized savings of $9.6 million.
16
GPU Business Combination
- ------------------------
The merger of FirstEnergy and GPU became effective on November
7, 2001 (see Note 3). The application to the Securities and Exchange
Commission (SEC) under the Public Utility Holding Company Act of 1935 was
approved on October 29, 2001. Under the application, FirstEnergy is
acquiring all of the outstanding shares of GPU's common stock for
approximately $4.5 billion in cash and FirstEnergy common stock.
Approximately $7 billion of debt and preferred securities of GPU's former
subsidiaries is still outstanding. The transaction is being accounted for
by the purchase method. The combined company's principal electric utility
operating companies include OE, CEI, TE, Penn and ATSI, as well as the
former GPU electric utility operating companies - Jersey Central Power &
Light Company, Metropolitan Edison Company and Pennsylvania Electric
Company, which serve customers in New Jersey and Pennsylvania.
Capital Resources and Liquidity
- -------------------------------
As part of the recently approved merger with GPU, FirstEnergy is
issuing 74 million additional shares of common stock. Financing for the
merger has been arranged through a $4 billion bridge loan, with $2.2
billion used to pay the cash portion of the merger and $1.8 billion used
primarily to refinance GPU's short-term debt. This bridge loan will be
repaid by the proceeds of an underwritten public offering of $4 billion of
unsecured notes of FirstEnergy which is expected to close on November 15,
2001.
FirstEnergy and its subsidiaries have continuing cash needs for
planned capital expenditures, maturing debt and preferred stock sinking
fund requirements. During the last quarter of 2001, capital requirements
for property additions and capital leases are expected to be about $240
million, including $33 million for nuclear fuel. FirstEnergy has
additional cash requirements of approximately $109.0 million to meet
sinking fund requirements for preferred stock and maturing long-term debt
during the remainder of 2001. These cash requirements are expected to be
satisfied from internal cash and/or short-term credit arrangements. In
addition, the former GPU companies have cash needs for capital
expenditures and maturing debt for the remainder of 2001, after the
November 7th merger effective date, of approximately $80 million and
$40 million, respectively. These cash requirements are expected to be
satisfied from internal cash.
During the first nine months of 2001, FirstEnergy repurchased
550,000 shares of its common stock at an average price of $27.82 per
share. As of September 30, 2001, FirstEnergy had repurchased 13.1 million
of the 15 million shares authorized by the Board of Directors under the
three-year program which began in March 1999.
As of September 30, 2001, FirstEnergy and its subsidiaries had
about $175.6 million of cash and temporary investments and $814.5
million of short-term indebtedness. Available borrowings included $150.0
million from unused revolving lines of credit. As of September 30, 2001,
the operating companies in the regulated services business segment (OE,
CEI, TE and Penn) had the capability to issue $2.3 billion of additional
first mortgage bonds on the basis of property additions and retired
bonds. Based upon applicable earnings coverage tests and their
respective charters, OE, Penn and TE could issue $2.2 billion of
preferred stock (assuming no additional debt was issued) based on
earnings through the third quarter of 2001. CEI has no restrictions on
the issuance of preferred stock.
Following approval of the merger by the New Jersey Board of
Public Utilities (NJBPU) on September 26, 2001, Standard & Poor's and
Moody's Investors Service (Moody's) adjusted FirstEnergy's credit
ratings. Standard & Poor's assigned a BBB corporate credit rating to
FirstEnergy and it operating utilities. It also raised the Senior
Secured rate of FirstEnergy's operating companies to investment grade
levels (from BB+ to BBB). The outlook on all the ratings is stable and
reflects the outlook of the consolidated credit profile of FirstEnergy
and GPU. Moody's assigned an issuer rating of Baa2 to FirstEnergy after
the NJBPU approval. Following approval of the merger by the SEC on
October 29, 2001, Moody's also upgraded CEI's and TE's Senior Secured
rate from Baa3 to Baa2.
Pending Divestitures
- --------------------
As a result of the GPU business combination, FirstEnergy
acquired certain international business operations.
On October 18, 2001, FirstEnergy and UtiliCorp United
announced that UtiliCorp made an offer to FirstEnergy to purchase, with
a financial partner, the former wholly-owned subsidiary of GPU, Avon
Energy Partners Holdings, the holding company for Midlands Electricity
plc, for a total purchase price of $2.1 billion, including the
assumption of approximately $1.7 billion of debt. FirstEnergy accepted
the offer upon completion of its merger with GPU. Completion of the sale
is subject to the receipt by all parties of the applicable regulatory
approvals.
FirstEnergy and GPU also decided to sell another former
subsidiary of GPU, GasNet Pty Ltd. (GasNet), a regulated natural gas
transmission provider in Victoria, Australia. The GasNet Australia Trust
was established to acquire new securities in GasNet and an associated
trust. The Trust filed a prospectus for the public offer of 130,000,000
Units of the Trust at AUS$2.00 per Unit. The Trust will use the expected
net proceeds from the offering of approximately AUS$260 million to
acquire the new GasNet securities and will assume the associated trust's
debt. The net proceeds will
17
then be used by GasNet to cancel and redeem all securities held by
subsidiaries, previously wholly-owned by GPU and now by FirstEnergy, in
GasNet and the associated trust. The prospectus expires on November
28,2002 and closing is expected to occur in mid-December.
New Accounting Standards
- ------------------------
In July 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations." SFAS 143 provides the accounting requirements
for retirement obligations associated with tangible long-lived assets.
SFAS 143 is effective for fiscal years beginning after June 15, 2002,
with early adoption encouraged. FirstEnergy is currently assessing the
new standard and has not yet determined the impact on its financial
statements.
In September 2001, the FASB issued SFAS 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes
SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The Statement also supersedes the
accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS 144 is effective for fiscal
years beginning after June 15, 2001, with early adoption encouraged.
FirstEnergy is currently assessing the new standard and has not yet
determined the impact on its financial statements.
Market Risk - Commodity Prices
- ------------------------------
FirstEnergy is exposed to market risks due to fluctuations in
electricity, natural gas, coal and oil prices. To manage the volatility
relating to these exposures, FirstEnergy uses a variety of derivative
instruments, including forward contracts, options, futures contracts and
swaps. These derivatives are used principally for hedging purposes, and
to a lesser extent, for trading purposes. Although FirstEnergy believes
that the policies and procedures it has adopted are prudent, its
financial position, results of operations or cash flow may be adversely
affected by unanticipated fluctuations in the commodity prices for
electricity, natural gas, coal, oil, or by the failure of contract
counterparties to perform.
18
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
OPERATING REVENUES $815,695 $733,906 $2,343,510 $2,045,527
-------- -------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel 12,484 80,730 40,038 238,343
Purchased power 271,201 22,243 815,413 67,008
Nuclear operating costs 117,918 83,535 287,150 268,196
Other operating costs 80,611 104,971 241,283 300,710
-------- -------- ---------- ----------
Total operation and maintenance expenses 482,214 291,479 1,383,884 874,257
Provision for depreciation and amortization 104,302 193,711 325,463 444,445
General taxes 43,604 56,700 114,691 174,161
Income taxes 63,087 62,749 170,228 169,732
-------- -------- ---------- ----------
Total operating expenses and taxes 693,207 604,639 1,994,266 1,662,595
-------- -------- ---------- ----------
OPERATING INCOME 122,488 129,267 349,244 382,932
OTHER INCOME 18,695 16,423 48,881 40,227
-------- -------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 141,183 145,690 398,125 423,159
-------- -------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 36,978 42,208 115,892 126,803
Allowance for borrowed funds used during
construction and capitalized interest (573) (2,324) (1,879) (6,391)
Other interest expense 4,963 7,911 17,681 22,971
Subsidiaries' preferred stock dividend
requirements 3,626 3,626 10,878 10,878
-------- -------- ---------- ----------
Net interest charges 44,994 51,421 142,572 154,261
-------- -------- ---------- ----------
NET INCOME 96,189 94,269 255,553 268,898
PREFERRED STOCK DIVIDEND REQUIREMENTS 2,702 2,807 8,106 8,423
-------- -------- ---------- ----------
EARNINGS ON COMMON STOCK $ 93,487 $ 91,462 $ 247,447 $ 260,475
======== ======== ========== ==========
<FN>
The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral
part of these statements.
</FN>
19
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
------------- -------------
(In thousands)
ASSETS
------
UTILITY PLANT:
In service $4,981,303 $4,930,844
Less--Accumulated provision for depreciation 2,454,667 2,376,457
---------- ----------
2,526,636 2,554,387
---------- ----------
Construction work in progress-
Electric plant 53,544 219,623
Nuclear fuel 23,619 18,898
---------- ----------
77,163 238,521
---------- ----------
2,603,799 2,792,908
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
PNBV Capital Trust 440,545 452,128
Letter of credit collateralization 277,763 277,763
Nuclear plant decommissioning trusts 282,967 262,042
Long-term notes receivable from associated
companies 505,312 351,545
Other 307,980 305,848
---------- ----------
1,814,567 1,649,326
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 32,253 18,269
Receivables-
Customers (less accumulated provisions of
$4,587,000 and $11,777,000, respectively,
for uncollectible accounts) 342,845 304,719
Associated companies 657,222 476,993
Other (less accumulated provisions of
$1,000,000 for uncollectible accounts at
both dates) 37,146 34,281
Notes receivable from associated companies 230,489 1,032
Materials and supplies, at average cost-
Owned 58,248 80,534
Under consignment 13,899 51,488
Prepayments and other 61,689 76,934
---------- ----------
1,433,791 1,044,250
---------- ----------
DEFERRED CHARGES:
Regulatory assets 2,296,638 2,498,837
Other 172,452 168,830
---------- ----------
2,469,090 2,667,667
---------- ----------
$8,321,247 $8,154,151
========== ==========
20
OHIO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
------------- -------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, without par value, authorized
175,000,000 shares -
100 shares outstanding $2,098,729 $2,098,729
Accumulated other comprehensive income 4,552 --
Retained earnings 568,444 458,263
---------- ----------
Total common stockholder's equity 2,671,725 2,556,992
Preferred stock not subject to mandatory redemption 160,965 160,965
Preferred stock of consolidated subsidiary-
Not subject to mandatory redemption 39,105 39,105
Subject to mandatory redemption 15,000 15,000
OE obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely OE
subordinated debentures 120,000 120,000
Long-term debt 1,848,935 2,000,622
---------- ----------
4,855,730 4,892,684
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred
stock 503,870 311,358
Short-term borrowings-
Associated companies 32,717 19,131
Other 347,614 296,301
Accounts payable-
Associated companies 123,282 123,859
Other 3,337 60,332
Accrued taxes 281,732 232,225
Other 140,006 109,394
---------- ----------
1,432,558 1,152,600
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 1,205,534 1,298,845
Accumulated deferred investment tax credits 101,912 110,064
Nuclear plant decommissioning costs 282,129 261,204
Other postretirement benefits 164,596 160,719
Other 278,788 278,035
---------- ----------
2,032,959 2,108,867
---------- ----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ----------
$8,321,247 $8,154,151
========== ==========
<FN>
The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral
part of these balance sheets.
</FN>
21
OHIO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 96,189 $ 94,269 $ 255,553 $ 268,898
Adjustments to reconcile net income to
net cash from operating activities-
Provision for depreciation and
amortization 104,302 193,711 325,463 444,445
Nuclear fuel and lease amortization 10,125 15,205 33,802 40,902
Deferred income taxes, net (9,182) (44,589) (51,744) (82,277)
Investment tax credits, net (3,331) (9,431) (10,025) (19,004)
Receivables (26,425) (181,935) (221,220) (220,549)
Materials and supplies 5,815 (5,827) 59,875 4,132
Accounts payable (4,888) (54,593) (57,572) 18,131
Other 80,023 104,842 51,607 91,223
-------- --------- --------- ---------
Net cash provided from operating
activities 252,628 111,652 385,739 545,901
-------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 6,619 6,864 256,161 199,116
Short-term borrowings, net 80,346 7,012 64,899 --
Redemptions and Repayments-
Preferred stock 5,000 5,000 5,000 5,000
Long-term debt 178,039 237,993 215,749 554,392
Short-term borrowings, net -- -- -- 42,539
Dividend Payments-
Common stock 100,000 55,700 137,300 164,900
Preferred stock 2,668 2,946 8,072 8,543
-------- --------- --------- ---------
Net cash used for financing activities 198,742 287,763 45,061 576,258
-------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 49,908 57,121 90,914 190,306
Loans to associated companies 71,900 182,997 383,729 207,231
Loan payments from associated companies -- -- (506) --
Sale of assets to associated companies -- (387,675) (154,596) (387,675)
Other 13,199 20,040 7,153 28,374
-------- --------- --------- ---------
Net cash used for (provided from)
investing activities 135,007 (127,517) 326,694 38,236
-------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (81,121) (48,594) 13,984 (68,593)
Cash and cash equivalents at beginning of
period 113,374 67,176 18,269 87,175
-------- --------- --------- ---------
Cash and cash equivalents at end of period $ 32,253 $ 18,582 $ 32,253 $ 18,582
======== ========= ========= =========
<FN>
The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral
part of these statements.
</FN>
22
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, 2001, and the
related consolidated statements of income and cash flows for the
three-month and nine-month periods ended September 30, 2001 and 2000.
These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States, the objective of which is the expression of
an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the
United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the consolidated balance sheet of
Ohio Edison Company and subsidiaries as of December 31, 2000 (not
presented herein), and, in our report dated February 16, 2001, we
expressed an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 2000, is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
November 12, 2001.
23
OHIO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Corporate Separation
- --------------------
Beginning in 2001, Ohio electric customers can select their
generation suppliers as a result of legislation which restructured the
electric utility industry. That legislation also required unbundling the
price for electricity into its component elements -- including
generation, transmission, distribution and transition charges. Also,
Ohio utilities that offer both competitive and regulated retail electric
services were required to implement a corporate separation plan approved
by the PUCO -- one which provides a clear separation between regulated
and competitive operations. In connection with FirstEnergy's transition
plan, FirstEnergy separated its businesses into three distinct units --
a competitive services unit, a utility services unit and a corporate
support services unit. OE and Penn (OE Companies) are included in the
utility services unit which continues to deliver power to homes and
businesses through their existing distribution systems and maintains the
"provider of last resort" (PLR) obligation under their respective rate
plans.
As a result of the transition plan, FirstEnergy's electric
utility operating companies (EUOC) entered into power supply agreements
whereby FES purchases all of the EUOC nuclear generation, as well as
generation from leased fossil generating facilities. FGCO, a wholly
owned subsidiary of FES, leases fossil generating units owned by the
EUOC. The EUOC are "full requirements" customers of FES to enable them
to meet their PLR responsibilities in their respective service areas. OE
continues to provide power directly to wholesale customers under
previously negotiated contracts as well as to alternative energy
suppliers as part of OE's market support generation of 560 megawatts
(526 megawatts committed as of September 30, 2001).
The effect on the OE Companies' reported results of operations
during the third quarter and first nine months of 2001 from
FirstEnergy's corporate separation plan and the OE Companies' sale of
transmission assets to ATSI in September 2000, are summarized in the
following tables:
Three Months Ended September 30, 2001
-------------------------------------
Income Statement Effects Corporate
- ------------------------ Separation ATSI Total
Increase (Decrease) ---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement with
FES $ 82.7 $ -- $ 82.7
Generating units rent 44.7 -- 44.7
Ground lease with ATSI -- 0.7 0.7
------ ----- ------
Total Operating Revenues
Effect $127.4 $ 0.7 $128.1
====== ===== ======
Operating Expenses and Taxes:
Fossil fuel costs $(63.8)(a) $ -- $(63.8)
Purchased power costs 266.3 (b) -- 266.3
Other operating costs (51.9)(a) 9.6 (d) (42.3)
Provision for depreciation
and amortization -- (2.4)(e) (2.4)
General taxes (1.2)(c) (3.8)(e) (5.0)
------ ----- ------
Total Operating Expenses
Effect $149.4 $ 3.4 $152.8
====== ===== ======
Other Income $ -- $ 2.7 (f) $ 4.0
====== ===== ======
24
Nine Months Ended September 30, 2001
-------------------------------------
Income Statement Effects Corporate
- ------------------------ Separation ATSI Total
Increase (Decrease) ---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement with
FES $ 260.2 $ -- $ 260.2
Generating units rent 134.1 -- 134.1
Ground lease with ATSI -- 6.7 6.7
------- ------ -------
Total Operating Revenues
Effect $ 394.3 $ 6.7 $ 401.0
======= ====== =======
Operating Expenses and Taxes:
Fossil fuel costs $(194.2)(a) $ -- $(194.2)
Purchased power costs 799.3 (b) -- 799.3
Other operating costs (114.5)(a) 49.6 (d) (64.9)
Provision for depreciation
and amortization -- (11.0)(e) (11.0)
General taxes (3.6)(c) (11.4)(e) (15.0)
------- ------ -------
Total Operating Expenses
Effect $ 487.0 $ 27.2 $ 514.2
======= ====== =======
Other Income $ -- $ 10.7 (f) $ 10.7
======= ====== =======
<FN>
(a) Transfer of fossil operations to FGCO.
(b) Purchased power from power supply agreement (PSA).
(c) Payroll taxes related to employees transferred to FGCO.
(d) Transmission services received from ATSI.
(e) Depreciation and property taxes related to transmission assets sold
to ATSI.
(f) Interest on note receivable from ATSI.
</FN>
Results of Operations
- ---------------------
Excluding the effects shown in the tables above, operating
revenues decreased by $46.3 million or 6.3% in the third quarter and by
$103.0 million or 5.0% in the first nine months of 2001, compared to the
same periods of 2000. The OE Companies' electric sales to retail
customers decreased by $16.1 million in the third quarter and by $49.4
million in the first nine months of 2001, compared to the same periods
of 2000 primarily due to lower sales of electric generation reflecting
the effects of customer choice in Ohio. Sales of electric generation
provided by other suppliers in the OE Companies' service area increased
to 16.4% and 11.3% of total energy delivered in the third quarter and
first nine months of 2001, respectively, compared to 0.7% and 1.5% in
the corresponding periods of 2000. As part of Ohio's electric utility
restructuring law, the implementation of a 5% reduction in generation
charges for residential customers also contributed to the lower electric
sales revenues. The lower residential rate reduced electric sales
revenues by approximately $8.7 million in the third quarter and by $20.0
million in the first nine months of 2001. Electric sale revenues in the
third quarter and year-to-date periods were also reduced, compared to
the corresponding periods of 2000, by the absence of revenues associated
with the low-income payment plan now administered by the Ohio Department
of Development. Revenues from kilowatt-hour sales to wholesale customers
(excluding the PSA sales to FES) declined by $17.3 million in the third
quarter and by $41.9 million in the first nine months of 2001 from the
same periods last year. Transmission revenues also declined in the third
quarter and first nine months of 2001, compared to the same periods of
2000 but were offset in part by additional ATSI ground lease revenues.
Kilowatt-hour deliveries to franchise customers increased by
3.0% in the third quarter of 2001 and by 0.9% in the first nine months
of 2001 compared to the same periods of 2000 primarily due to warmer
than normal weather in the third quarter of 2001 after an unusually mild
period of weather in the third quarter of 2000. The warmer weather's
effect on air-conditioning load contributed to a 12.3% increase in third
quarter kilowatt-hour deliveries to residential customers compared to
the same quarter last year, accounting for most of the 6.6% year-to-date
increase in residential sales compared to the same period last year.
Reduced deliveries to industrial and commercial customers in both the
third quarter and first nine months of 2001, compared to the same
periods of 2000, reflects a softening in the national economy which has
affected the OE Companies' service area economy.
Operating Expenses and Taxes
Total operating expenses and taxes increased by $88.6 million
in the third quarter and by $331.7 million in the first nine months of
2001, compared to the same periods of 2000, due to the effects shown in
the preceding tables. Excluding these effects on operating expenses,
fuel expense declined by $4.4 million in the third quarter and by $4.1
million in the first nine months of 2001, from the same periods last
year. The decrease in fuel expense resulted from reduced nuclear
generation in the third quarter of 2001 resulting from the timing of
this year's refueling outage, which began earlier in the third quarter
of 2001 than last year's refueling outage, and included a larger
ownership share of
25
capacity, as well as several unplanned outages at the Perry Plant.
Purchased power costs decreased by $17.3 million in the third quarter
and by $50.9 million in the first nine months of 2001, compared to the
same periods last year, reflecting principally all of the OE Companies'
power requirements now being provided under the PSA (in the preceding
tables) rather than from alternative sources.
Nuclear operating costs increased by $34.4 million in the
third quarter and by $19.0 million in the first nine months of 2001,
compared to the corresponding periods of 2000. The increased costs
resulted from the OE Companies' larger ownership share of refueling
outage costs at Beaver Valley Unit 1 (100% owned) in the third quarter
of 2001 compared to Beaver Valley Unit 2 (55.62% owned) in the same
period of 2000. Also, the 2001 refueling outage began earlier than last
year resulting in 21 additional days falling within the third quarter.
Other operating expenses increased by $17.9 million in the third quarter
and by $5.5 million in the first nine months of 2001, compared to the
same periods of 2000. These increases resulted principally from the
absence in 2001 of gains from the sale of emission allowances recognized
in 2000, partially offset by reductions in low-income payment plan
customer costs and lower storm damage costs.
Excluding the effects shown in the preceding tables, charges
for depreciation and amortization decreased by $87.0 million in the
third quarter and by $108.0 million in the first nine months of 2001
from the same periods last year. Lower incremental transition cost
amortization under OE's transition plan compared to the accelerated cost
recovery in connection with OE's prior regulatory plan and new deferrals
for shopping incentives were the principal factors accounting for this
decrease.
General taxes decreased by $13.1 million in the third quarter
and by $59.5 million in the first nine months of 2001, compared to the
same periods of 2000, primarily due to reduced property taxes and other
state tax changes in connection with the Ohio electric industry
restructuring. Also contributing to these reductions were the effects
shown in the preceding tables and a one-time benefit of $15 million in
the second quarter of 2001 as a result of successfully resolving certain
pending tax issues.
Net Interest Charges
Net interest charges continued to trend lower, decreasing by
$6.4 million in the third quarter and by $11.7 million in the first nine
months of 2001, compared to the same periods in 2000, primarily due to
prior debt redemption and refinancing activities. During the first nine
months of 2001, debt redemption and refinancing activities totaled $15.0
million and $102.4 million, respectively, and will result in annualized
savings of $3.7 million. As a result of initiating transfers of
generation assets and related construction projects, including the West
Lorain turbines, to FGCO under corporate separation, capitalized
interest was reduced by approximately $2.3 million, with offsetting
increases to other income from the interest income on the related notes
receivable.
Capital Resources and Liquidity
- ------------------------------
The OE Companies have continuing cash requirements for
planned capital expenditures and maturing debt. During the last quarter
of 2001, capital requirements for property additions and capital leases
are expected to be about $46 million, including $14 million for nuclear
fuel. The OE Companies also have sinking fund requirements for preferred
stock and maturing long-term debt of $5.3 million during the remainder
of 2001. These requirements are expected to be satisfied from internal
cash and/or short-term credit arrangements.
As of September 30, 2001, the OE Companies had about $262.7
million of cash and temporary investments and $380.3 million of short-
term indebtedness. Their available borrowing capability included $150.0
million from unused revolving lines of credit and up to $2 million from
bank facilities on a short-term basis at the banks' discretion. As of
September 30, 2001, the OE Companies had the capability to issue up to
$1.3 billion of additional first mortgage bonds on the basis of property
additions and retired bonds. Under the earnings coverage tests contained
in the OE Companies' charters, $2.0 billion of preferred stock (assuming
no additional debt was issued) could be issued based on earnings through
the third quarter of 2001.
Following approval of the merger of FirstEnergy and GPU by the
NJBPU on September 26, 2001, Standard & Poor's upgraded the OE
Companies' corporate credit ratings from BB+ to BBB, OE's senior secured
debt rating from BBB- to BBB and Penn's senior secured debt rating from
BB+ to BBB. Ratings of junior securities were also upgraded to conform
to typical rating relationships. The improved credit ratings should
lower the cost of future borrowings.
26
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
OPERATING REVENUES $603,332 $525,423 $1,618,515 $1,419,715
-------- -------- ---------- ----------
OPERATING EXPENSES AND TAXES:
Fuel 19,685 47,616 54,438 134,510
Purchased power 135,156 61,554 543,251 171,320
Nuclear operating costs 27,236 31,578 105,865 110,016
Other operating costs 72,923 96,889 223,622 271,909
-------- -------- ---------- ----------
Total operation and maintenance expenses 255,000 237,637 927,176 687,755
Provision for depreciation and amortization 51,705 53,566 161,433 169,091
General taxes 37,261 56,584 109,211 167,508
Income taxes 86,087 48,254 115,381 92,254
-------- -------- ---------- ----------
Total operating expenses and taxes 430,053 396,041 1,313,201 1,116,608
-------- -------- ---------- ----------
OPERATING INCOME 173,279 129,382 305,314 303,107
OTHER INCOME 3,991 3,849 9,549 10,134
-------- -------- ---------- ----------
INCOME BEFORE NET INTEREST CHARGES 177,270 133,231 314,863 313,241
-------- -------- ---------- ----------
NET INTEREST CHARGES:
Interest on long-term debt 47,717 48,248 144,319 151,091
Allowance for borrowed funds used
during construction (594) (404) (1,667) (1,476)
Other interest expense (credit) 1,257 1,385 (818) 1,660
-------- -------- ---------- ----------
Net interest charges 48,380 49,229 141,834 151,275
-------- -------- ---------- ----------
NET INCOME 128,890 84,002 173,029 161,966
PREFERRED STOCK DIVIDEND REQUIREMENTS 6,316 3,733 19,438 18,138
-------- -------- ---------- ----------
EARNINGS ON COMMON STOCK $122,574 $ 80,269 $ 153,591 $ 143,828
======== ======== ========== ==========
<FN>
The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating
Company are an integral part of these statements.
</FN>
27
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
------------- -------------
(In thousands)
ASSETS
------
UTILITY PLANT:
In service $4,054,835 $4,036,590
Less--Accumulated provision for depreciation 1,690,596 1,624,672
---------- ----------
2,364,239 2,411,918
---------- ----------
Construction work in progress-
Electric plant 62,124 66,904
Nuclear fuel 42 24,145
---------- ----------
62,166 91,049
---------- ----------
2,426,405 2,502,967
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 475,551 491,830
Nuclear plant decommissioning trusts 206,234 189,804
Long-term notes receivable from associated companies 103,531 92,722
Other 24,589 36,084
---------- ----------
809,905 810,440
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 7,743 2,855
Receivables-
Customers 17,016 14,748
Associated companies 122,955 81,090
Other (less accumulated provisions of $1,000,000
for uncollectible accounts at both dates) 189,298 127,639
Notes receivable from associated companies 504 384
Materials and supplies, at average cost-
Owned 22,295 26,039
Under consignment 27,517 38,673
Prepayments and other 43,799 59,377
---------- ----------
431,127 350,805
---------- ----------
DEFERRED CHARGES:
Regulatory assets 842,784 816,143
Goodwill 1,380,197 1,408,869
Other 73,397 75,407
---------- ----------
2,296,378 2,300,419
---------- ----------
$5,963,815 $5,964,631
========== ==========
28
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
------------- -------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, without par value, authorized
105,000,000 shares -
79,590,689 shares outstanding $ 931,962 $ 931,962
Retained earnings 113,665 132,877
---------- ----------
Total common stockholder's equity 1,045,627 1,064,839
Preferred stock-
Not subject to mandatory redemption 238,325 238,325
Subject to mandatory redemption 23,673 26,105
Long-term debt 2,341,858 2,634,692
---------- ----------
3,649,483 3,963,961
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt and preferred
stock 324,626 165,696
Accounts payable-
Associated companies 48,998 102,915
Other 13,003 54,422
Notes payable to associated companies 254,452 28,586
Accrued taxes 227,231 178,707
Accrued interest 62,128 56,142
Other 51,501 82,195
---------- ----------
981,939 668,663
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 589,399 591,748
Accumulated deferred investment tax credits 77,049 79,957
Nuclear plant decommissioning costs 215,428 198,997
Pensions and other postretirement benefits 230,529 227,528
Other 219,988 233,777
---------- ----------
1,332,393 1,332,007
---------- ----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ----------
$5,963,815 $5,964,631
========== ==========
<FN>
The preceding Notes to Financial Statements as they relate to The Cleveland Electric
Illuminating Company are an integral part of these balance sheets.
</FN>
29
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 128,890 $ 84,002 $ 173,029 $ 161,966
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and
amortization 51,705 53,566 161,433 169,091
Nuclear fuel and lease amortization 7,627 10,038 21,741 27,654
Other amortization (3,111) (2,851) (10,783) (9,469)
Deferred income taxes, net (5,910) (6,069) (1,250) (8,681)
Investment tax credits, net (969) (633) (2,908) (2,597)
Receivables (120,852) (1,903) (105,792) 40,704
Materials and supplies (657) 6,217 14,900 3,111
Accounts payable (49,155) (47,940) (95,336) (40,005)
Other 100,047 66,338 6,278 41,052
--------- --------- --------- ---------
Net cash provided from operating
activities 107,615 160,765 161,312 382,826
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Short-term borrowings, net 97,280 -- 225,866 --
Redemptions and Repayments-
Preferred stock 1,000 1,000 11,716 14,714
Long-term debt 17,735 184,427 47,639 203,167
Short-term borrowings, net -- 11,061 -- 100,720
Dividend Payments-
Common stock 70,100 20,000 175,900 50,000
Preferred stock 6,793 7,479 20,870 23,058
--------- --------- --------- ---------
Net cash used for (provided from)
financing activities (1,652) 223,967 30,259 391,659
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 93,062 17,638 108,642 62,113
Loans to associated companies -- 82,583 11,117 110,283
Loan payments from associated companies -- -- (188) --
Capital trust investments -- -- (16,279) (25,418)
Sale of assets to associated companies -- (172,931) (11,117) (172,931)
Other 8,700 9,525 33,990 17,335
--------- --------- --------- ---------
Net cash used for (provided from)
investing activities 101,762 (63,185) 126,165 (8,618)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 7,505 (17) 4,888 (215)
Cash and cash equivalents at beginning
of period 238 178 2,855 376
--------- --------- --------- ---------
Cash and cash equivalents at end of period $ 7,743 $ 161 $ 7,743 $ 161
========= ========= ========= =========
<FN>
The preceding Notes to Financial Statements as they relate to The Cleveland Electric
Illuminating Company are an integral part of these statements.
</FN>
30
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,
2001, and the related consolidated statements of income and cash flows for
the three-month and nine-month periods ended September 30, 2001 and 2000.
These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States, the objective of which is the expression of
an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the
United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the consolidated balance sheet of
The Cleveland Electric Illuminating Company and subsidiary as of
December 31, 2000 (not presented herein), and, in our report dated
February 16, 2001, we expressed an unqualified opinion on that statement.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of December 31, 2000, is fairly stated, in all material
respects, in relation to the balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
November 12, 2001.
31
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Corporate Separation
- --------------------
Beginning in 2001, Ohio electric customers can select their
generation suppliers as a result of legislation which restructured the
electric utility industry. That legislation also required unbundling the
price for electricity into its component elements - including generation,
transmission, distribution and transition charges. Also, Ohio utilities
that offer both competitive and regulated retail electric services were
required to implement a corporate separation plan approved by the PUCO --
one which provides a clear separation between regulated and competitive
operations. In connection with FirstEnergy's transition plan, FirstEnergy
separated its businesses into three distinct units -- a competitive
services unit, a utility services unit and a corporate support services
unit. CEI is included in the utility services unit which continues to
deliver power to homes and businesses through its existing distribution
system and maintains the PLR obligation under its rate plan.
As a result of the transition plan, the EUOC entered into power
supply agreements whereby FES purchases all of the EUOC nuclear
generation, as well as generation from leased fossil generating
facilities. FGCO, a wholly owned subsidiary of FES, leases fossil
generating units owned by the EUOC. The EUOC are "full requirements"
customers of FES to enable them to meet their PLR responsibilities in
their respective service areas. CEI continues to provide power directly to
wholesale customers under negotiated contracts as well as to alternative
energy suppliers as part of CEI's market support generation of 400
megawatts (383 megawatts committed as of September 30, 2001).
The effect on CEI's reported results of operations during the
third quarter and first nine months of 2001 from FirstEnergy's corporate
separation plan and CEI's sale of transmission assets to ATSI in September
2000, are summarized in the following tables:
Three Months Ended September 30, 2001
-------------------------------------
Income Statement Effects Corporate
- ------------------------ Separation ATSI Total
Increase (Decrease) ---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement
with FES $ 88.1 $ -- $ 88.1
Generating units rent 14.8 -- 14.8
Ground lease with ATSI -- 0.7 0.7
------ ----- ------
Total Operating Revenues
Effect $102.9 $ 0.7 $103.6
====== ===== ======
Operating Expenses and Taxes:
Fossil fuel costs $(24.4)(a) $ -- $(24.4)
Purchased power costs 111.3 (b) -- 111.3
Other operating costs (29.8)(a) 2.5 (d) (27.3)
Provision for depreciation
and amortization -- (1.3)(e) (1.3)
General taxes (0.8)(c) (2.4)(e) (3.2)
------ ----- ------
Total Operating Expenses
Effect $ 56.3 $(1.2) $ 55.1
====== ===== ======
Other Income $ -- $ 1.5 (f) $ 1.5
====== ===== ======
32
Nine Months Ended September 30, 2001
-------------------------------------
Income Statement Effects Corporate
- ------------------------ Separation ATSI Total
Increase (Decrease) ---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement
with FES $241.9 $ -- $241.9
Generating units rent 44.4 -- 44.4
Ground lease with ATSI -- 4.3 4.3
------ ----- ------
Total Operating Revenues
Effect $286.3 $ 4.3 $290.6
====== ===== ======
Operating Expenses and Taxes:
Fossil fuel costs $(68.3)(a) $ -- $(68.3)
Purchased power costs 469.9 (b) -- 469.9
Other operating costs (70.3)(a) 23.7 (d) (46.6)
Provision for depreciation
and amortization -- (5.2)(e) (5.2)
General taxes (2.4)(c) (7.0)(e) (9.4)
------ ----- ------
Total Operating Expenses
Effect $328.9 $11.5 $340.4
====== ===== ======
Other Income $ -- $ 5.1 (f) $ 5.1
====== ===== ======
<FN>
(a) Transfer of fossil operations to FGCO.
(b) Purchased power from power supply agreement (PSA).
(c) Payroll taxes related to employees transferred to FGCO.
(d) Transmission services received from ATSI.
(e) Depreciation and property taxes on transmission assets sold to
ATSI.
(f) Interest on note receivable from ATSI.
</FN>
Results of Operations
- ---------------------
Excluding the effect shown in the tables above, operating
revenues decreased by $25.7 million or 4.9% in the third quarter and by
$91.8 million or 6.5% in the first nine months of 2001, compared to the
same periods of 2000. CEI's electric sales to retail customers decreased
by $1.0 million in the third quarter and by $30.2 million in the first
nine months of 2001, compared with the same periods of 2000, primarily due
to lower sales of electric generation reflecting the effects of customer
choice in Ohio. Sales of electric generation provided by other suppliers
in CEI's service area increased to 17.4% and 10.8% of total energy
delivered in the third quarter and first nine months of 2001,
respectively, with no energy delivered by alternative suppliers in the
comparable periods of 2000. As part of Ohio's electric utility
restructuring law, the implementation of a 5% reduction in generation
charges for residential customers also contributed to the lower electric
sales revenues. The lower residential rate reduced electric sales revenues
by approximately $6.0 million in the third quarter and by $12.7 million in
the first nine months of 2001. Electric sale revenues in the third quarter
and year-to-date periods were also reduced, compared to the corresponding
periods of 2000, by the absence of revenues associated with a low-income
payment plan now administered by the Ohio Department of Development.
Revenues from kilowatt-hour sales to wholesale customers (excluding the
PSA sales to FES) declined by $20.9 million in the third quarter and by
$53.3 million in the first nine months of 2001 from the same periods last
year. Transmission revenues also declined in the third quarter and first
nine months of 2001, compared to the same periods of 2000, but were offset
in part by additional ATSI ground lease revenues.
Kilowatt-hour deliveries to franchise customers increased by
0.5% in the third quarter of 2001 and by 0.6% in the first nine months of
2001 compared to the same periods of 2000 due to warmer than normal
weather in the third quarter of 2001 after an unusually mild period of
weather in the third quarter of 2000. The warmer weather's effect on air-
conditioning load contributed to a 14.8% increase in third quarter
kilowatt-hour deliveries to residential customers compared to the same
quarter last year. The higher third quarter kilowatt-hour deliveries in
2001 accounted for all of the 4.4% year-to-date increase in residential
sales compared to the same period last year. The increase in deliveries to
residential customers in the third quarter of 2001 was substantially
offset by a net decrease of 4.3% in sales to commercial and industrial
customers that reflects a softening in the national economy which has
affected CEI's service area economy. The decline in third quarter
kilowatt-hour sales to commercial and industrial customers resulted in a
year-to-date decline of 0.6% from the same period last year.
Operating Expenses and Taxes
Total operating expenses and taxes increased by $34.0 million in
the third quarter and by $196.6 million in the first nine months of 2001,
compared to the same periods of 2000, due to the effects shown in the
preceding tables. Excluding these effects on operating expenses, fuel
expense declined by $3.5 million in the third quarter and by $11.8 million
in the first nine months of 2001 from the same periods last year. The
lower fuel expense resulted from reduced
33
fossil and nuclear generation. Planned maintenance activities at the
Mansfield Plant contributed to the reduced fossil generation while lower
nuclear generation resulted from scheduled nuclear refueling outages and
several unplanned outages at the Perry Plant. Purchased power costs
decreased by $37.7 million in the third quarter and by $98.0 million in
the first nine months of 2001, compared to the same periods last year,
reflecting principally all of CEI's power requirements now being provided
under the PSA (in the preceding tables) rather than from alternative
sources.
There were no planned nuclear refueling outages in the third
quarter of 2001, resulting in a $4.3 million decrease in nuclear operating
costs in the third quarter of 2001 from last year's third quarter. The
third quarter of 2000 included the first eight days of a refueling outage
at Beaver Valley Unit 2 (24.47% owned) which added outage-related costs to
that period. In the first nine months of 2001 nuclear operating costs were
$4.2 million lower than the same period last year due to the lower nuclear
operating costs in the third quarter of 2001. Other operating costs
increased by $3.3 million in the third quarter, compared to the same
period of 2000. This increase resulted principally from the absence in
2001 of gains from the sale of emission allowances recognized in 2000,
partially offset by reductions in low-income payment plan customer costs
and decreased storm damage costs.
Excluding the effects shown in the preceding tables, charges for
depreciation and amortization were nearly unchanged in the third quarter
and $2.5 million lower in the first nine months of 2001 from the same
periods last year; new deferrals for shopping incentives offset
incremental transition cost amortization under CEI's transition plan (see
Note 4).
General taxes decreased by $19.3 million in the third quarter
and by $58.3 million in the first nine months of 2001, compared to the
same periods of 2000, primarily due to reduced property taxes and other
state tax changes associated with the Ohio electric industry
restructuring.
Other Income
Excluding the effects shown in the preceding tables, other
income decreased by $5.7 million in the first nine months of 2001 from the
same period last year due to a reduction in interest income on investments
and the absence in 2001 of supplier settlement income received in 2000.
Net Interest Charges
Net interest charges continued to trend lower, decreasing by
$849,000 in the third quarter and by $9.4 million in the first nine months
of 2001, compared to the same periods in 2000, primarily due to prior debt
redemptions. During the first nine months of 2001, debt redemptions
totaled $41.7 million and will result in annualized savings of $3.6
million.
Capital Resources and Liquidity
- -------------------------------
CEI has continuing cash needs for planned capital expenditures
and maturing debt. During the last quarter of 2001, capital requirements
for property additions and capital leases are expected to be about $38
million, including $10 million for nuclear fuel. CEI also has sinking fund
requirements for preferred stock and maturing long-term debt of $95.3
million during the remainder of 2001. These requirements are expected to
be satisfied with internal cash and/or short-term credit arrangements.
As of September 30, 2001, CEI had approximately $8.2 million of
cash and temporary investments and $254.5 million of short-term
indebtedness to associated companies. Under its first mortgage indenture,
as of September 30, 2001, CEI had the capability to issue up to $568
million of additional first mortgage bonds on the basis of property
additions and retired bonds. CEI has no restrictions on the issuance of
preferred stock.
Following approval of the merger of FirstEnergy and GPU by the
NJBPU on September 26, 2001, Standard & Poor's upgraded CEI's credit
ratings. Following a period of review and after the SEC's approval of the
merger on October 29, 2001, Moody's also upgraded CEI's credit ratings.
The improved credit ratings should lower the cost of future borrowings.
The following table summarizes the changes:
Credit Ratings Before and After Upgrade
---------------------------------------
Before Upgrade After Upgrade
-------------- -------------
Moody's Moody's
Standard Investors Standard Investors
& Poors Service & Poors Service
-------- --------- -------- ---------
Corporate/Issuer BB+ Ba1 BBB Baa3
Senior Secured Debt BB+ Baa3 BBB Baa2
Preferred Stock B+ Ba3 BB+ Ba2
34
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
OPERATING REVENUES $306,512 $260,803 $841,150 $713,573
-------- -------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel 13,671 23,910 38,439 71,648
Purchased power 137,679 11,319 312,744 46,379
Nuclear operating costs 36,254 39,596 121,013 130,514
Other operating costs 38,259 33,009 114,172 111,038
-------- -------- -------- --------
Total operation and maintenance expenses 225,863 107,834 586,368 359,579
Provision for depreciation and amortization 30,818 26,501 92,833 79,063
General taxes 13,256 23,187 43,196 68,187
Income taxes 8,951 31,082 29,440 57,052
-------- -------- -------- --------
Total operating expenses and taxes 278,888 188,604 751,837 563,881
-------- -------- -------- --------
OPERATING INCOME 27,624 72,199 89,313 149,692
OTHER INCOME 3,896 2,005 9,862 6,890
-------- -------- -------- --------
INCOME BEFORE NET INTEREST CHARGES 31,520 74,204 99,175 156,582
-------- -------- -------- --------
NET INTEREST CHARGES:
Interest on long-term debt 16,494 17,681 50,354 55,450
Allowance for borrowed funds used
during construction (285) (1,319) (3,548) (5,464)
Other interest expense (credit) (1,117) 196 (3,228) (1,100)
-------- -------- -------- --------
Net interest charges 15,092 16,558 43,578 48,886
-------- -------- -------- --------
NET INCOME 16,428 57,646 55,597 107,696
PREFERRED STOCK DIVIDEND REQUIREMENTS 4,030 4,072 12,105 12,211
-------- -------- -------- --------
EARNINGS ON COMMON STOCK $ 12,398 $ 53,574 $ 43,492 $ 95,485
======== ======== ======== ========
<FN>
The preceding Notes to Financial Statements as they relate to The Toledo Edison Company
are an integral part of these statements.
</FN>
35
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
------------- -------------
(In thousands)
ASSETS
------
UTILITY PLANT:
In service $1,568,676 $1,637,616
Less--Accumulated provision for depreciation 629,257 597,397
---------- ----------
939,419 1,040,219
---------- ----------
Construction work in progress-
Electric plant 35,031 73,565
Nuclear fuel 40 10,720
---------- ----------
35,071 84,285
---------- ----------
974,490 1,124,504
---------- ----------
OTHER PROPERTY AND INVESTMENTS:
Shippingport Capital Trust 262,188 279,836
Nuclear plant decommissioning trusts 151,120 132,442
Long-term notes receivable from associated
companies 162,391 39,084
Other 4,064 4,601
---------- ----------
579,763 455,963
---------- ----------
CURRENT ASSETS:
Cash and cash equivalents 2,657 1,385
Receivables-
Customers 5,808 6,618
Associated companies 44,376 62,271
Other 12,871 1,572
Notes receivable from associated companies 37,661 32,617
Materials and supplies, at average cost-
Owned 13,115 17,388
Under consignment 16,244 21,994
Prepayments and other 19,617 27,151
---------- ----------
152,349 170,996
---------- ----------
DEFERRED CHARGES:
Regulatory assets 392,256 412,682
Goodwill 448,840 458,164
Other 27,789 29,958
---------- ----------
868,885 900,804
---------- ----------
$2,575,487 $2,652,267
========== ==========
36
THE TOLEDO EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
------------- -------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, $5 par value, authorized
60,000,000 shares - 39,133,887 shares
outstanding $ 195,670 $ 195,670
Other paid-in capital 328,559 328,559
Retained earnings 110,152 81,358
---------- ----------
Total common stockholder's equity 634,381 605,587
Preferred stock not subject to mandatory
redemption 210,000 210,000
Long-term debt 715,000 944,193
---------- ----------
1,559,381 1,759,780
---------- ----------
CURRENT LIABILITIES:
Currently payable long-term debt 204,385 56,230
Accounts payable-
Associated companies 77,196 36,564
Other 9,021 25,070
Notes payable to associated companies -- 41,936
Accrued taxes 62,028 57,519
Accrued interest 17,820 19,946
Other 42,283 49,908
---------- ----------
412,733 287,173
---------- ----------
DEFERRED CREDITS:
Accumulated deferred income taxes 198,195 196,944
Accumulated deferred investment tax credits 33,711 35,174
Nuclear plant decommissioning costs 157,461 138,784
Pensions and other postretirement benefits 120,170 119,327
Other 93,836 115,085
---------- ----------
603,373 605,314
---------- ----------
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ----------
$2,575,487 $2,652,267
========== ==========
<FN>
The preceding Notes to Financial Statements as they relate to The Toledo Edison Company
are an integral part of these balance sheets.
</FN>
37
THE TOLEDO EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 16,428 $ 57,646 $ 55,597 $107,696
Adjustments to reconcile net income to net
cash from operating activities-
Provision for depreciation and
amortization 30,818 26,501 92,833 79,063
Nuclear fuel and lease amortization 5,495 6,429 15,905 17,820
Deferred income taxes, net (4,966) 1,251 (1,814) 9,271
Investment tax credits, net (490) (442) (1,463) (1,400)
Receivables 3,406 (7,939) 7,406 28,426
Materials and supplies (689) 818 10,023 3,984
Accounts payable 29,074 (41,139) 24,583 (12,329)
Other 28,391 33,832 (20,163) (24,415)
-------- -------- --------- --------
Net cash provided from operating
activities 107,467 76,957 182,907 208,116
-------- -------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt -- 30,467 -- 96,633
Redemptions and Repayments-
Long-term debt 1,961 51,310 33,773 162,627
Short-term borrowings, net 7,491 39,599 41,936 21,541
Dividend Payments-
Common stock -- 10,100 14,700 44,400
Preferred stock 4,030 4,072 12,103 12,211
-------- -------- --------- --------
Net cash used for financing activities 13,482 74,614 102,512 144,146
-------- -------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 54,670 6,659 75,179 72,436
Loans to associated companies 30,017 28,236 128,351 34,185
Capital trust investments 57 60 (17,648) (15,558)
Sale of assets to associated companies -- (73,195) (123,438) (73,195)
Other 6,933 9,612 16,679 15,142
-------- -------- --------- --------
Net cash used for (provided from)
investing activities 91,677 (28,628) 79,123 33,010
-------- -------- --------- --------
Net increase in cash and cash equivalents 2,308 30,971 1,272 30,960
Cash and cash equivalents at beginning of
period 349 301 1,385 312
-------- -------- --------- --------
Cash and cash equivalents at end of period $ 2,657 $ 31,272 $ 2,657 $ 31,272
======== ======== ========= ========
<FN>
The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an integral
part of these statements.
</FN>
38
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, 2001, and the
related consolidated statements of income and cash flows for the
three-month and nine-month periods ended September 30, 2001 and 2000.
These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States, the objective of which is the expression of
an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the
United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the consolidated balance sheet of
The Toledo Edison Company and subsidiary as of December 31, 2000 (not
presented herein), and, in our report dated February 16, 2001, we
expressed an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying consolidated balance sheet as of
December 31, 2000, is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
November 12, 2001.
39
THE TOLEDO EDISON COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Corporate Separation
- --------------------
Beginning in 2001, Ohio electric customers can select their
generation suppliers as a result of legislation which restructured the
electric utility industry. That legislation also required unbundling the
price for electricity into its component elements -- including
generation, transmission, distribution and transition charges. Also,
Ohio utilities that offer both competitive and regulated retail electric
services were required to implement a corporate separation plan approved
by the PUCO -- one which provides a clear separation between regulated
and competitive operations. In connection with FirstEnergy's transition
plan, FirstEnergy separated its businesses into three distinct units --
a competitive services unit, a utility services unit and a corporate
support services unit. TE is included in the utility services unit which
continues to deliver power to homes and businesses through its existing
distribution system and maintains the PLR obligation under its rate
plan.
As a result of the transition plan, the EUOC entered into
power supply agreements whereby FES purchases all of the EUOC nuclear
generation, as well as generation from leased fossil generating
facilities. FGCO, a wholly owned subsidiary of FES, leases fossil
generating units owned by the EUOC. The EUOC are "full requirements"
customers of FES to enable them to meet their PLR responsibilities in
their respective service areas. TE continues to provide power directly
to wholesale customers under previously negotiated contracts as well as
to alternative energy suppliers as part of TE's market support
generation of 160 megawatts (152 megawatts committed as of September 30,
2001).
The effect on TE's reported results of operations during the
third quarter and first nine months of 2001 from FirstEnergy's corporate
separation plan and TE's sale of transmission assets to ATSI in
September 2000, are summarized in the following tables:
Three Months Ended September 30, 2001
-------------------------------------
Income Statement Effects Corporate
- ------------------------ Separation ATSI Total
Increase (Decrease) ---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement
with FES $ 47.3 $ -- $ 47.3
Generating units rent 3.5 -- 3.5
Ground lease with ATSI -- (0.2) (0.2)
------ ----- ------
Total Operating Revenues
Effect $ 50.8 $(0.2) $ 50.6
====== ===== ======
Operating Expenses and Taxes:
Fossil fuel costs $ (9.1)(a) $ -- $ (9.1)
Purchased power costs 133.5 (b) -- 133.5
Other operating costs (12.4)(a) 1.4 (d) (11.0)
Provision for depreciation
and amortization -- (0.6)(e) (0.6)
General taxes (0.5)(c) (0.8)(e) (1.3)
------ ----- ------
Total Operating Expenses
Effect $111.5 $ -- $111.5
====== ===== ======
Other Income $ -- $ 0.8 (f) $ 0.8
====== ===== ======
40
Nine Months Ended September 30, 2001
-------------------------------------
Income Statement Effects Corporate
- ------------------------ Separation ATSI Total
Increase (Decrease) ---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement with
FES $131.9 $ -- $131.9
Generating units rent 10.5 -- 10.5
Ground lease with ATSI -- 0.7 0.7
------ ----- ------
Total Operating Revenues
Effect $142.4 $ 0.7 $143.1
====== ===== ======
Operating Expenses and Taxes:
Fossil fuel costs $(28.6)(a) $ -- $(28.6)
Purchased power costs 300.2 (b) -- 300.2
Other operating costs (21.6)(a) 13.1 (d) (8.5)
Provision for depreciation
and amortization -- (2.4)(e) (2.4)
General taxes (1.5)(c) (2.5)(e) (4.0)
------ ----- ------
Total Operating Expenses
Effect $248.5 $ 8.2 $256.7
====== ===== ======
Other Income $ -- $ 2.3 (f) $ 2.3
====== ===== ======
<FN>
(a) Transfer of fossil operations to FGCO.
(b) Purchased power from power supply agreement (PSA).
(c) Payroll taxes related to employees transferred to FGCO.
(d) Transmission services received from ATSI.
(e) Depreciation and property taxes on transmission assets sold to ATSI.
(f) Interest on note receivable from ATSI.
</FN>
Results of Operations
- ---------------------
Excluding the effects shown in the tables above, operating
revenues decreased by $4.9 million or 1.9% in the third quarter and $15.5
million or 2.2% in the first nine months of 2001, compared to the same
periods of 2000. Revenues from kilowatt-hour sales to wholesale customers
(excluding the PSA sales to FES) declined $7.6 million in the third
quarter and $17.9 million in the first nine months of 2001 from the same
periods last year. Transmission revenues also declined in the third
quarter and first nine months of 2001, compared to the same periods of
2000, but were offset in part by additional ATSI ground lease revenues.
TE's electric sales to retail customers increased by $10.1
million in the third quarter and by $11.1 million over the first nine
months of 2001, compared to the same periods of 2000, benefiting from
additional kilowatt-hour deliveries. The increase in retail electric sales
occurred despite lower sales of electric generation reflecting the effects
of customer choice in Ohio. Sales of electric generation provided by other
suppliers in TE's service area increased to 7.6% and 4.9% of total energy
delivered in the third quarter and first nine months of 2001,
respectively, with no energy delivered by alternative suppliers in the
comparable periods of 2000. As part of Ohio's electric utility
restructuring law, the implementation of a 5% reduction in generation
charges for residential customers also moderated the increase in electric
sales revenues. This decreased electric retail sales by approximately $2.8
million in the third quarter and $6.1 million in the first nine months of
2001. The higher electric retail sales were also moderated by the absence
of revenues associated with a low-income payment plan now administered by
the Ohio Department of Development.
Kilowatt-hour deliveries to franchise customers increased by
4.8% in the third quarter of 2001 and by 3.8% in the first nine months of
2001 compared to the same periods of 2000. Warmer than normal weather in
the third quarter of 2001 after a mild period of weather in the third
quarter of 2000 contributed to a 14.3% increase in residential kilowatt-
hour deliveries in the third quarter of 2001 from the same period last
year. The higher third quarter kilowatt-hour deliveries in 2001
contributed significantly to the 8.5% year-to-date increase in residential
sales compared to the same period last year. Kilowatt-hour deliveries to
commercial and industrial customers in TE's service area were also higher
in the third quarter of 2001, increasing 1.8% from the same period last
year, versus the 2.4% increase in the first nine months of 2001 from the
corresponding period the previous year.
Operating Expenses and Taxes
Total operating expenses and taxes increased by $90.3 million in
the third quarter and $188.0 million in the first nine months of 2001,
compared to the same periods of 2000, due to the effects shown in the
preceding tables. Excluding these effects on operating expenses, fuel
expense declined by $1.1 million in the third quarter and by $4.6 million
in the first nine months of 2001 from the same periods last year. The
lower fuel expense primarily resulted from reduced fossil generation.
Planned maintenance activities at the Mansfield Plant contributed to the
reduced fossil
41
generation. Purchased power costs decreased by $7.1 million in the third
quarter and by $33.8 million in the first nine months of 2001, compared to
the corresponding periods of last year, reflecting principally all of TE's
power requirements now being provided under the PSA (in the preceding
tables) rather than from alternative sources. The timing of nuclear
refueling outages and differing ownership percentages resulted in nuclear
operating costs decreasing by $3.3 million in the third quarter and by
$9.5 million in the first nine months of 2001, as compared to the same
periods last year. TE's only nuclear refueling outage in 2001 occurred at
the Perry Plant (19.91% owned) in the first quarter of 2001 while two
refueling outages occurred in 2000 -- at the Davis Besse Plant (48.62%
owned) in the second quarter and at Beaver Valley Unit 2 (19.91% owned)
beginning in the third quarter. Other operating costs increased by $16.3
million in the third quarter and by $11.6 million in the first nine months
of 2001, compared to the same periods of 2000. These increases resulted
principally from the absence in 2001 of gains from the sale of emission
allowances recognized in 2000, partially offset by reductions in low-
income payment plan customer costs and decreased storm damage costs.
Excluding the effects shown in the preceding tables, charges for
depreciation and amortization increased $4.9 million in the third quarter
and $16.2 million in the first nine months of 2001 from the same periods
last year due to incremental transition cost amortization under TE's
transition plan, partially offset by new deferrals for shopping incentives
(see Note 4).
General taxes decreased by $9.9 million in the third quarter and
by $25.0 million in the first nine months of 2001, compared to the same
periods of 2000, primarily due to reduced property taxes and other state
tax changes associated with the Ohio electric industry restructuring.
Net Interest Charges
Net interest charges continued to trend lower, decreasing by
$1.5 million in the third quarter and by $5.3 million in the first nine
months of 2001, compared to the same periods in 2000, due to prior debt
redemption and refinancing activities, as well as reduced notes payable to
associated companies. During the first nine months of 2001, debt
redemptions totaled $21.0 million and will result in annualized savings of
$2.0 million.
Capital Resources and Liquidity
- -------------------------------
TE has continuing cash needs for planned capital expenditures
and maturing debt. During the last quarter of 2001, capital requirements
for property additions and capital leases are expected to be about $37
million, including $8 million for nuclear fuel. TE also has maturing long-
term debt of $8.4 million during the remainder of 2001. These cash
requirements are expected to be satisfied with internal cash and/or short-
term credit arrangements.
As of September 30, 2001, TE had approximately $40.3 million of
cash and temporary investments and no short-term indebtedness. Under its
first mortgage indenture, as of September 30, 2001, TE had the capability
to issue up to $394 million of additional first mortgage bonds on the
basis of property additions and retired bonds. Under the earnings coverage
test contained in the TE charter, $228 million of preferred stock
(assuming no additional debt was issued) could be issued based on earnings
through the third quarter of 2001.
Following approval of the merger of FirstEnergy and GPU by the
NJBPU on September 26, 2001, Standard & Poor's upgraded TE's credit
ratings. Following a period of review and after the SEC's approval of the
merger on October 29, 2001, Moody's Investors Service also upgraded TE's
credit ratings. The improved credit ratings should lower the cost of
future borrowings. The following table summarizes the changes:
Credit Ratings Before and After Upgrade
---------------------------------------
Before Upgrade After Upgrade
-------------- -------------
Moody's Moody's
Standard Investors Standard Investors
& Poors Service & Poors Service
-------- --------- -------- ---------
Corporate/Issuer BB+ Ba1 BBB Baa3
Senior Secured Debt BB+ Baa3 BBB Baa2
Preferred Stock B+ Ba3 BB+ Ba2
42
PENNSYLVANIA POWER COMPANY
STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
OPERATING REVENUES $121,349 $102,761 $374,447 $280,277
-------- -------- -------- --------
OPERATING EXPENSES AND TAXES:
Fuel 5,065 15,650 17,593 41,023
Purchased power 34,389 2,071 113,948 7,733
Nuclear operating costs 47,316 21,914 86,833 88,874
Other operating costs 11,909 9,554 34,102 39,133
-------- -------- -------- --------
Total operation and maintenance expenses 98,679 49,189 252,476 176,763
Provision for depreciation and amortization 14,307 14,367 42,837 41,996
General taxes 4,542 6,511 10,283 19,846
Income taxes 1,218 12,898 27,375 15,623
-------- -------- -------- --------
Total operating expenses and taxes 118,746 82,965 332,971 254,228
-------- -------- -------- --------
OPERATING INCOME 2,603 19,796 41,476 26,049
OTHER INCOME 959 421 2,581 1,265
-------- -------- -------- --------
INCOME BEFORE NET INTEREST CHARGES 3,562 20,217 44,057 27,314
-------- -------- -------- --------
NET INTEREST CHARGES:
Interest expense 4,527 5,146 13,929 15,673
Allowance for borrowed funds used
during construction (237) (121) (577) (793)
-------- -------- -------- --------
Net interest charges 4,290 5,025 13,352 14,880
-------- -------- -------- --------
NET INCOME (LOSS) (728) 15,192 30,705 12,434
PREFERRED STOCK DIVIDEND REQUIREMENTS 926 926 2,778 2,778
-------- -------- -------- --------
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ (1,654) $ 14,266 $ 27,927 $ 9,656
======== ======== ======== ========
<FN>
The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company
are an integral part of these statements.
</FN>
43
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
------------- -------------
(In thousands)
ASSETS
------
UTILITY PLANT:
In service $654,554 $636,418
Less--Accumulated provision for depreciation 296,967 275,699
-------- --------
357,587 360,719
-------- --------
Construction work in progress-
Electric plant 16,743 20,800
Nuclear fuel 15,352 2,810
-------- --------
32,095 23,610
-------- --------
389,682 384,329
-------- --------
OTHER PROPERTY AND INVESTMENTS:
Nuclear plant decommissioning trusts 121,697 117,453
Long-term notes receivable from associated companies 39,378 33,581
Other 21,346 21,279
-------- --------
182,421 172,313
-------- --------
CURRENT ASSETS:
Cash and cash equivalents 2,494 3,475
Receivables-
Customers (less accumulated provisions of
$638,000 and $628,000, respectively, for
uncollectible accounts) 41,911 40,980
Associated companies 24,852 40,685
Other 5,967 8,848
Notes receivable from associated companies 58,874 41,264
Materials and supplies, at average cost 23,446 29,595
Prepayments 6,745 2,044
-------- --------
164,289 166,891
-------- --------
DEFERRED CHARGES:
Regulatory assets 221,200 260,221
Other 4,696 5,155
-------- --------
225,896 265,376
-------- --------
$962,288 $988,909
======== ========
44
PENNSYLVANIA POWER COMPANY
BALANCE SHEETS
(Unaudited)
September 30, December 31,
2001 2000
------------- -------------
(In thousands)
CAPITALIZATION AND LIABILITIES
------------------------------
CAPITALIZATION:
Common stockholder's equity-
Common stock, $30 par value, authorized
6,500,000 shares - 6,290,000 shares
outstanding $188,700 $188,700
Other paid-in capital (310) (310)
Retained earnings 25,988 25,461
-------- --------
Total common stockholder's equity 214,378 213,851
Preferred stock-
Not subject to mandatory redemption 39,105 39,105
Subject to mandatory redemption 15,000 15,000
Long-term debt-
Associated companies 25,669 18,135
Other 251,778 252,233
-------- --------
545,930 538,324
-------- --------
CURRENT LIABILITIES:
Currently payable long-term debt-
Associated companies 11,760 16,620
Other 1,025 1,036
Accounts payable-
Associated companies 45,037 42,293
Other 671 21,165
Accrued taxes 29,377 19,250
Other 12,826 22,200
-------- --------
100,696 122,564
-------- --------
DEFERRED CREDITS:
Accumulated deferred income taxes 142,456 160,632
Accumulated deferred investment tax credits 4,182 4,407
Nuclear plant decommissioning costs 122,159 117,915
Other 46,865 45,067
-------- --------
315,662 328,021
-------- --------
COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) -------- --------
$962,288 $988,909
======== ========
<FN>
The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company
are an integral part of these balance sheets.
</FN>
45
PENNSYLVANIA POWER COMPANY
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (728) $ 15,192 $ 30,705 $ 12,434
Adjustments to reconcile net income (loss)
to net cash from operating activities-
Provision for depreciation and
amortization 14,307 14,367 42,837 41,996
Nuclear fuel and lease amortization 3,733 5,276 12,974 13,143
Deferred income taxes, net (2,501) (4,311) (8,537) (10,020)
Investment tax credits, net (688) (757) (2,098) (2,329)
Receivables 16,469 (10,492) 17,783 (4,792)
Materials and supplies (159) 3,680 6,149 9,389
Accounts payable 8,257 (14,590) (17,750) (810)
Other 4,020 9,037 (1,227) 4,482
------- -------- -------- --------
Net cash provided from operating
activities 42,710 17,402 80,836 63,493
------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
New Financing-
Long-term debt 239 -- 32,842 --
Redemptions and Repayments-
Long-term debt 37,970 28,227 47,692 42,000
Dividend Payments-
Common stock 21,100 -- 27,400 --
Preferred stock 926 926 2,778 2,778
------- -------- -------- --------
Net cash used for financing
activities 59,757 29,153 45,028 44,778
------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions 7,910 4,314 21,820 22,255
Loans to associated companies 10,245 52,694 41,073 78,722
Loan payment from parent (3,870) -- (17,510) (12,866)
Sale of assets to associated companies -- (66,529) (6,053) (66,529)
Other 319 (754) (2,541) 2,437
------- -------- -------- --------
Net cash used for (provided from)
investing activities 14,604 (10,275) 36,789 24,019
------- -------- -------- --------
Net decrease in cash and cash equivalents 31,651 1,476 981 5,304
Cash and cash equivalents at beginning
of period 34,145 1,842 3,475 5,670
------- -------- -------- --------
Cash and cash equivalents at end of period $ 2,494 $ 366 $ 2,494 $ 366
======= ======== ======== ========
<FN>
The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company are an integral
part of these statements.
</FN>
46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pennsylvania Power Company:
We have reviewed the accompanying balance sheet of Pennsylvania Power
Company (a Pennsylvania corporation and wholly owned subsidiary of Ohio
Edison Company) as of September 30, 2001, and the related statements of
income and cash flows for the three-month and nine-month periods ended
September 30, 2001 and 2000. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with auditing standards generally
accepted in the United States, the objective of which is the expression of
an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to
be in conformity with accounting principles generally accepted in the
United States.
We have previously audited, in accordance with auditing standards
generally accepted in the United States, the balance sheet of Pennsylvania
Power Company as of December 31, 2000 (not presented herein), and, in our
report dated February 16, 2001, we expressed an unqualified opinion on
that statement. In our opinion, the information set forth in the
accompanying balance sheet as of December 31, 2000, is fairly stated, in
all material respects, in relation to the balance sheet from which it has
been derived.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
November 12, 2001.
47
PENNSYLVANIA POWER COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Corporate Separation
- --------------------
In connection with FirstEnergy's Ohio transition plan,
FirstEnergy separated its businesses into three distinct units -- a
competitive services unit, a utility services unit and a corporate support
services unit. Penn is included in the utility services unit which
continues to deliver power to homes and businesses through its existing
distribution system and maintains the PLR obligation under its rate plan.
The EUOC have entered into power supply agreements whereby FES
purchases all of the EUOC nuclear generation, as well as generation from
leased fossil generating facilities. FGCO, a wholly owned subsidiary of
FES, leases fossil generating units owned by the EUOC. The EUOC are "full
requirements" customers of FES to enable them to meet their PLR
responsibilities in their respective service areas.
The effect on Penn's reported results of operations during the
third quarter and first nine months of 2001 from FirstEnergy's corporate
separation plan and Penn's sale of transmission assets to ATSI in
September 2000, are summarized in the following tables:
Three Months Ended September 30, 2001
-------------------------------------
Income Statement Effects Corporate
- ------------------------ Separation ATSI Total
Increase (Decrease) ---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement
with FES $32.5 $ -- $32.5
Generating units rent 5.1 -- 5.1
Ground lease with ATSI -- 0.1 0.1
----- ----- -----
Total Operating Revenues
Effect $37.6 $ 0.1 $37.7
===== ===== =====
Operating Expenses and Taxes:
Fossil fuel costs $(8.5)(a) $ -- $(8.5)
Purchased power costs 33.2 (b) -- 33.2
Other operating costs (5.0)(a) 1.7 (d) (3.3)
Provision for depreciation
and amortization -- (0.5)(e) (0.5)
General taxes (0.6)(c) (0.1)(e) (0.7)
----- ----- -----
Total Operating Expenses
Effect $19.1 $ 1.1 $20.2
===== ===== =====
Other Income $ -- $ 0.5 (f) $ 0.5
===== ===== =====
48
Nine Months Ended September 30, 2001
-------------------------------------
Income Statement Effects Corporate
- ------------------------ Separation ATSI Total
Increase (Decrease) ---------- ---- -----
(in millions)
Operating Revenues:
Power supply agreement
with FES $112.3 $ -- $112.3
Generating units rent 15.2 -- 15.2
Ground lease with ATSI -- 0.8 0.8
------ ----- ------
Total Operating Revenues
Effect $127.5 $ 0.8 $128.3
====== ===== ======
Operating Expenses and Taxes:
Fossil fuel costs $(23.5)(a) $ -- $(23.5)
Purchased power costs 114.8 (b) -- 114.8
Other operating costs (17.2)(a) 8.2 (d) (9.0)
Provision for depreciation
and amortization -- (2.0)(e) (2.0)
General taxes (1.8)(c) (0.2)(e) (2.0)
------ ----- ------
Total Operating Expenses
Effect $ 72.3 $ 6.0 $ 78.3
====== ===== ======
Other Income $ -- $ 1.8 (f) $ 1.8
====== ===== ======
<FN>
(a) Transfer of fossil operations to FGCO.
(b) Purchased power from the PSA.
(c) Payroll taxes related to employees transferred to FGCO.
(d) Transmission services received from ATSI.
(e) Depreciation and property taxes on transmission assets sold to ATSI.
(f) Interest on note receivable from ATSI.
</FN>
Results of Operations
- ---------------------
Excluding the effects shown in the tables above, operating
revenues decreased by $19.1 million or 18.6% in the third quarter and by
$34.1 million or 12.2% in the first nine months of 2001, compared to the
same periods of 2000. Revenues from kilowatt-hour sales to wholesale
customers (excluding the PSA sales to FES) declined by $17.2 million in
the third quarter and by $38.1 million in the first nine months of 2001
from the same periods last year. Penn's electric sales to retail customers
increased by $0.9 million in the third quarter and by $6.0 million in the
first nine months of 2001, compared to the same periods of 2000 due to the
return of customers previously served by alternative generation suppliers,
which resulted in increased electric generation revenues.
Kilowatt-hours delivered to franchise customers through Penn's
distribution system were 2.0% lower in the third quarter of 2001, compared
to the same period of 2000, resulting from a 5.7% decrease in deliveries
to commercial and industrial customers that reflects a softening in the
national economy which has affected Penn's service area economy. Kilowatt-
hour deliveries to residential customers increased 6.0% due to more normal
weather in the third quarter of 2001 after an unusually mild period of
weather in the third quarter of 2000. The higher third quarter kilowatt-
hour deliveries to residential customers in 2001 contributed to the 5.1%
year-to-date increase in residential sales compared to the same period
last year. The decline in third quarter kilowatt-hour sales to commercial
and industrial customers accounted for all of the 0.8% decline in
kilowatt-hour sales to those business customers in the first nine months
of 2001 from the same period last year.
Operating Expenses and Taxes
Total operating expenses and taxes increased by $35.8 million in
the third quarter and by $78.7 million in the first nine months of 2001,
compared to the same periods of 2000, due in part to the effects shown in
the preceding tables. Excluding these effects on operating expenses, fuel
expense decreased $2.1 million in the third quarter and remained
relatively unchanged for the first nine months of 2001, compared to the
same periods last year. The lower third quarter fuel expense resulted from
the timing of this year's nuclear refueling outage and a larger ownership
share of capacity in the outage. Purchased power costs were unchanged in
the third quarter and decreased by $8.6 million in the first nine months
of 2001, compared to the same periods of last year, reflecting principally
all of Penn's power requirements now being provided under the PSA (in the
preceding tables) rather than alternative sources.
Nuclear operating costs increased by $25.4 million in the third
quarter of 2001 compared to the same quarter last year. The increased
costs primarily resulted from Penn's larger ownership share (65.00%) of a
scheduled Beaver Valley Unit 1 refueling outage in the third quarter of
2001 compared to its 13.74% ownership share in the Beaver Valley Unit 2
refueling outage in the same period last year. Also, the 2001 refueling
outage began earlier than last year's resulting in 21 additional outage
days falling within the third quarter. Over the first nine months of 2001
nuclear operating
49
costs decreased by $2.0 million compared to the same period last year.
Other operating expenses increased by $5.7 million in the third quarter
and by $4.0 million in the first nine months of 2001 from the
corresponding periods in 2000 due to the absence in 2001 of gains from the
sale of emission allowances recognized in 2000 which were partially offset
by lower storm damage costs.
Excluding the effects shown in the preceding tables, charges for
depreciation and amortization increased by $2.8 million in the first nine
months of 2001 from the same period last year. The increase primarily
resulted from the absence this year of an adjustment made to
decommissioning costs in the second quarter of 2000.
General taxes decreased by $2.0 million in the third quarter and
by $9.6 million in the first nine months of 2001, compared to the same
periods of 2000, primarily due to reduced property taxes associated with
the Ohio electric industry restructuring and a one-time benefit of $3
million in the second quarter of 2001 resulting from successfully
resolving certain pending tax issues.
Net Interest Charges
Net interest charges continued to trend lower, decreasing by
$735,000 in the third quarter and by $1.5 million in the first nine months
of 2001, compared to the same periods in 2000, due to prior debt
redemption and refinancing activities. During the first nine months of
2001, debt refinancing totaled $32.9 million and will result in annualized
savings of $777,000.
Capital Resources and Liquidity
- -------------------------------
Penn has continuing cash requirements for planned capital
expenditures and maturing debt. During the last quarter of 2001, capital
requirements for property additions and capital leases are expected to be
about $16 million, including $6 million for nuclear fuel. Penn also has
maturing long-term debt of $487,000 during the remainder of 2001. These
cash requirements are expected to be satisfied from internal cash and/or
short-term credit arrangements.
As of September 30, 2001, Penn had about $61.4 million of cash
and temporary investments and no short-term indebtedness. Also, Penn had
$2.0 million available from an unused bank facility as of September 30,
2001, which may be borrowed for up to several days at the bank's
discretion. Under its first mortgage indenture, as of September 30, 2001,
Penn had the capability to issue up to $291 million of additional first
mortgage bonds on the basis of property additions and retired bonds. Under
the earnings coverage test contained in Penn's charter, $189 million of
preferred stock (assuming no additional debt was issued) could be issued
based on earnings through the third quarter of 2001.
Following approval of the merger of FirstEnergy and GPU by the
NJBPU on September 26, 2001, Standard & Poor's upgraded Penn's corporate
credit rating and senior secured debt rating from BB+ to BBB. Ratings of
junior securities were also upgraded to conform to typical rating
relationships. The improved credit ratings should lower the cost of future
borrowings.
GPU Business Combination Settlement Agreement
- ---------------------------------------------
Upon consummation of the FirstEnergy and GPU merger, the PPUC-
approved settlement agreement became effective, including a provision
extending Penn's current distribution rates to December 31, 2007. In July
2001, several parties appealed the PPUC's decision to the Pennsylvania
Commonwealth Court which heard argument on the appeal on November 7, 2001.
50
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
(a) Exhibits
Exhibit
Number
-------
FirstEnergy, OE, CEI and Penn
-----------------------------
15 Letter from independent public accountants.
TE
--
None
Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation
S-K, neither FirstEnergy, OE, CEI, TE nor Penn has filed as an
exhibit to this Form 10-Q any instrument with respect to
long-term debt if the respective total amount of securities
authorized thereunder does not exceed 10% of their respective
total assets of FirstEnergy and its subsidiaries on a
consolidated basis, or respectively, OE, CEI, TE or Penn, but
hereby agrees to furnish to the Commission on request any such
documents.
(b) Reports on Form 8-K
FirstEnergy
-----------
Three reports on Form 8-K were filed since June 30, 2001. A
report dated October 18, 2001 reported that UtiliCorp United had
made an offer to FirstEnergy Corp. to purchase a GPU, Inc.
foreign subsidiary pending completion of FirstEnergy's merger
with GPU. A report dated October 30, 2001 reported that the
Securities and Exchange Commission approved the merger of
FirstEnergy and GPU. A report dated November 7, 2001 reported
that the merger of FirstEnergy and GPU was effective November 7,
2001.
OE, CEI, TE and Penn
--------------------
None
51
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, each Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
November 13, 2001
FIRSTENERGY CORP.
-----------------
Registrant
OHIO EDISON COMPANY
-------------------
Registrant
THE CLEVELAND ELECTRIC
----------------------
ILLUMINATING COMPANY
--------------------
Registrant
THE TOLEDO EDISON COMPANY
-------------------------
Registrant
PENNSYLVANIA POWER COMPANY
--------------------------
Registrant
/s/ Harvey L. Wagner
----------------------------------
Harvey L. Wagner
Vice President and Controller
Principal Accounting Officer
52