EXHIBIT 13.6
METROPOLITAN EDISON COMPANY
2001 ANNUAL REPORT TO STOCKHOLDERS
Metropolitan Edison Company is a wholly owned electric utility operating
subsidiary of FirstEnergy Corp. It engages in the distribution and sale of
electric energy in an area of approximately 3,300 square miles in eastern
Pennsylvania. It also engages in the sale, purchase and interchange of electric
energy with other electric companies. The area it serves has a population of
approximately 1.3 million.
In August 2000, FirstEnergy entered into an agreement to merge with GPU,
Inc., under which FirstEnergy would acquire all of the outstanding shares of
GPU, Inc.'s common stock for approximately $4.5 billion in cash and FirstEnergy
common stock. The merger became effective on November 7, 2001 and is being
accounted for by the purchase method. Prior to that time, Metropolitan Edison
Company was a wholly owned subsidiary of GPU, Inc.
Contents Page
- -------- ----
Selected Financial Data........................................... 1
Management's Discussion and Analysis.............................. 2-7
Consolidated Statements of Income................................. 8
Consolidated Balance Sheets....................................... 9
Consolidated Statements of Capitalization......................... 10
Consolidated Statements of Common Stockholder's Equity............ 11
Consolidated Statements of Preferred Stock........................ 11
Consolidated Statements of Cash Flows............................. 12
Consolidated Statements of Taxes.................................. 13
Notes to Consolidated Financial Statements........................ 14-21
Reports of Independent Public Accountants......................... 22-23
METROPOLITAN EDISON COMPANY
SELECTED FINANCIAL DATA
Years Ended December 31,
Nov. 7 - Jan. 1 - -----------------------------------------------
Dec. 31, 2001 Nov. 6, 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Operating Revenues.............................. $ 143,760 | $ 824,556 $ 842,333 $ 902,827 $ 919,594 $ 943,109
========== | =========== ========== ========== =========== ==========
|
Operating Income................................ $ 17,367 | $ 102,247 $ 135,211 $ 154,774 $ 124,447 $ 150,151
========== | =========== =========== ========== ========== ==========
|
Income Before Extraordinary Item................ $ 14,617 | $ 62,381 $ 81,895 $ 95,123 $ 57,720 $ 93,517
========== | =========== ========== ========== ========== ==========
|
Net Income...................................... $ 14,617 | $ 62,381 $ 81,895 $ 95,123 $ 50,915 $ 93,517
========== | ============ ========== ========== ========== ==========
|
Earnings on Common Stock........................ $ 14,617 | $ 62,381 $ 81,895 $ 94,515 $ 50,432 $ 93,034
========== | ============ ========== ========== ========== ==========
|
Total Assets.................................... $3,607,187 | $2,708,062 $2,747,059 $3,347,822 $2,419,509
========== | ========== ========== ========== ==========
|
|
Capitalization: |
Common Stockholder's Equity..................... $1,288,953 | $ 537,013 $ 501,417 $ 687,059 $ 717,594
Cumulative Preferred Stock...................... -- | -- -- 12,056 12,056
Company-Obligated Mandatorily Redeemable |
Preferred Securities........................ -- | -- -- 100,000 100,000
Company-Obligated Trust Preferred Securities.... 92,200 | 100,000 100,000 -- --
Long-Term Debt.................................. 583,077 | 496,860 496,883 546,904 576,924
---------- | ---------- ---------- ---------- ----------
Total Capitalization............................ $1,964,230 | $1,133,873 $1,098,300 $1,346,019 $1,406,574
========== | ========== ========== ========== ==========
|
|
Capitalization Ratios: |
Common Stockholder's Equity..................... 65.6%| 47.4% 45.7% 51.1% 51.0%
Cumulative Preferred Stock...................... -- | -- -- 0.9 0.9
Company-Obligated Mandatorily Redeemable |
Preferred Securities......................... -- | -- -- 7.4 7.1
Company-Obligated Trust Preferred Securities.... 4.7 | 8.8 9.1 -- --
Long-Term Debt.................................. 29.7 | 43.8 45.2 40.6 41.0
----- | ----- ----- ----- -----
Total Capitalization............................ 100.0%| 100.0% 100.0% 100.0% 100.0%
===== | ===== ===== ===== =====
|
|
Transmission and Distribution |
Kilowatt-Hour Deliveries (Millions): |
Residential..................................... 793 | 3,712 4,377 4,265 4,040 4,034
Commercial...................................... 652 | 3,203 3,699 3,488 3,321 3,209
Industrial...................................... 662 | 3,506 4,412 4,085 4,174 4,098
Other........................................... 6 | 27 38 107 110 116
----- | ------ ------- ------ ------ ------
Total Retail.................................... 2,113 | 10,448 12,526 11,945 11,645 11,457
Total Wholesale................................. 195 | 1,067 2,120 4,597 1,249 1,024
----- | ------ ------- ------- ------ ------
Total........................................... 2,308 | 11,515 14,646 16,542 12,894 12,481
===== | ====== ======= ====== ====== ======
|
|
Transmission and Distribution Deliveries |
Customers Served: |
Residential..................................... 442,763 | 436,573 430,746 425,431 421,413
Commercial...................................... 57,278 | 56,080 54,969 53,764 52,821
Industrial...................................... 1,961 | 1,967 2,073 2,090 2,107
Other........................................... 819 | 810 1,057 1,063 1,060
------- | ------- ------- ------- -------
Total........................................... 502,821 | 495,430 488,845 482,348 477,401
======= | ======= ======= ======= =======
1
METROPOLITAN EDISON COMPANY
Management's Discussion and Analysis of
Results of Operations and Financial Condition
This discussion includes forward-looking statements based on information
currently available to management that is subject to certain risks and
uncertainties. Such 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, ability to accomplish or realize anticipated
benefits from strategic initiatives and other similar factors.
Results of Operations
- ---------------------
Earnings on common stock decreased 6.0% to $77.0 million in 2001 from
$81.9 million in 2000. Results in 2001 were unfavorably affected by higher other
operating costs and slightly higher net interest charges partially offset by
greater operating revenues. In 2000, earnings on common stock decreased 13.4% to
$81.9 million from $94.5 million in 1999 primarily due to lower operating
revenues and greater purchased power costs, partially offset by lower nuclear
and other operating costs and net interest charges.
Operating revenues increased by $126.0 million in 2001 following a $60.5
million decrease in 2000. The sources of changes in operating revenues during
2001 and 2000, as compared to the prior year, are summarized in the following
table.
Sources of Revenue Changes 2001 2000
---------------------------------------------------------------
Increase (Decrease) (In millions)
Change in kilowatt-hour sales due
to level of retail customers
shopping for generation service.......... $142.6 $ 0.6
Increase in other retail
kilowatt-hour sales...................... 8.2 32.1
Decrease in wholesale sales................ (9.4) (92.9)
All other changes.......................... (15.4) (0.3)
---------------------------------------------------------------
Net Increase (Decrease) in
Operating Revenues....................... $126.0 $(60.5)
===============================================================
Electric Sales
In 2001, a major source of the increase in operating revenues was the
increase in retail generation kilowatt-hour sales due to a large number of
customers returning to us in 2001 as full service customers, after receiving
their power from alternate suppliers in 2000. In 2001, 83.5% of total retail
sales were to full service customers as compared to 57.5% in 2000. Total retail
sales were relatively flat, with increases in residential and commercial sales
being offset by a decrease in industrial sales.
The primary source of the decrease in operating revenues in 2000,
compared to the prior year, was lower sales to the wholesale market, as a result
of us having additional power available in 1999 due to the delay of the
divestiture of our generating assets. Partially offsetting that decrease were
higher residential, commercial and industrial sales, all due to greater usage.
The number of residential and commercial customers also increased in 2000 over
1999. Changes in kilowatt-hour sales by customer class in 2001 and 2000 are
summarized in the following table:
Changes in Kilowatt-hour Sales 2001 2000
-------------------------------------------------
Increase (Decrease)
Residential.................. 2.9% 2.6%
Commercial................... 4.2% 6.0%
Industrial................... (5.5)% 8.0%
--------------------------------------------------
Total Retail................. 0.3% 4.9%
Wholesale.................... (40.5)% (53.9)%
--------------------------------------------------
Total Sales.................. (5.6)% (11.5)%
--------------------------------------------------
2
Operating Expenses and Taxes
Total operating expenses and taxes increased $141.6 million in 2001
after decreasing $40.9 million in 2000, compared to the preceding year. An
increase in purchased power and other operating costs accounted for the majority
of the increase in 2001. Purchased power costs also increased significantly in
2000 compared to 1999, but were partially offset by lower nuclear and other
operating costs.
Purchased power costs increased $91.2 million in 2001 compared to 2000.
The change was due to increased amounts of power purchased through two-party
agreements and the PJM Power Pool to meet higher demand resulting from customers
returning to us in 2001 after receiving their power from alternate suppliers in
2000. The average price of power under the two-party agreements was also higher
in 2001 than it was in 2000. Offsetting these increases was the effect of the
Pennsylvania Public Utility Commission's (PPUC) June 2001 order that allowed us
to defer, for future recovery from customers, energy costs in excess of our
fixed generation tariff rates, retroactive to January 1, 2001, in connection
with our provider of last resort (PLR) obligation.
In 2000, fuel and purchased power costs increased $246.1 million over
1999. Much of the increase was due to the need to purchase substantially all of
our energy requirements following the sales of generating assets in 1999, and
the absence of deferred accounting treatment for these costs. An offsetting
decrease in fuel costs also resulted from the sales of generating assets. The
sale of Unit 1 of the Three Mile Island Nuclear Plant, completed in December
1999, eliminated essentially all of our nuclear operating costs in 2000.
Other operating costs increased $47.8 million in 2001 as compared to the
prior year. The majority of the increase was due to the absence in 2001 of a
pension curtailment gain associated with employees who were terminated at the
time of the sale of our generating assets. This gain was realized in 2000 as a
result of the PPUC's Phase II Order. Other operating costs also increased due to
costs related to Voluntary Enhanced Retirement Programs offered to certain
bargaining unit employees. In 2000, other operating costs decreased $183.3
million from 1999. The reason for the decline was a reduction in expenses
associated with the operation of generating stations due to the sale of
essentially all of our remaining generating assets in 1999. Operating costs were
also reduced by the pension curtailment gain discussed above. The sale of
generating assets in 1999 was also the cause for a decrease in depreciation
expense of $20.3 million in 2000 from the previous year.
Other Income
Other income increased by $11.9 million in 2001 compared to the
previous year. The increase was due to higher competitive transition charge
interest income and the absence in 2001 of the write-down of regulatory assets
for Unit 2 of the Three Mile Island Nuclear Plant (TMI-2) decommissioning,
representing the net realized gain previously recorded on the accident-related
portion of the TMI-2 decommissioning trust. Offsetting these increases was a
charge for a sustainable energy fund in accordance with the Stipulation of
Settlement related to the merger of FirstEnergy and GPU, Inc.
Net Interest Charges
Net interest charges increased by $1.2 million in 2001 after decreasing
$6.1 million in 2000 compared to the prior year. In 2001, the increase was due
to the September issuance of $100 million of senior notes. In 2000, lower
interest charges were due to the redemption of $50 million of first mortgage
bonds (FMB) in 2000, and the redemption of $100 million of company obligated
mandatorily redeemable preferred securities in 1999. Partially offsetting these
reductions were increased preferred dividends associated with the issuance of
$100 million of company obligated preferred securities in 1999.
Capital Resources and Liquidity
- -------------------------------
We had approximately $25.3 million of cash and temporary investments and
$72 million of short-term indebtedness on December 31, 2001. We may borrow from
our affiliates on a short-term basis. We will not issue FMBs other than as
collateral for senior notes, since our senior note indentures prohibit (subject
to certain exceptions) us from issuing any debt which is senior to the senior
notes. As of December 31, 2001, we had the capability to issue $88 million of
additional senior notes based upon FMB collateral. We have no restrictions on
the issuance of preferred stock.
At the end of 2001, our common equity as a percentage of capitalization
stood at 66% compared to 47% at the end of 2000. This increase resulted from the
allocation of the purchase price in the merger between FirstEnergy and GPU.
Following approval of the merger of FirstEnergy and GPU by the New
Jersey Board of Public Utilities on September 26, 2001, Standard and Poor's
adjusted our corporate credit rating from A/A-1 to BBB/A-2, and our senior
3
secured debt rating from A+ to BBB+. The lower credit ratings reflect Standard &
Poor's consolidated rating methodology, which resulted in essentially the same
corporate credit rating for all of FirstEnergy's electric utility operating
companies. The credit rating outlook of Standard & Poor's is stable. On February
22, 2002, Moody's announced a change in its outlook for our credit ratings from
stable to negative based upon a decision by the Commonwealth Court of
Pennsylvania to reverse the PPUC's decision to grant us rate relief (see
Regulatory Matters).
Our cash requirements in 2002 for operating expenses, construction
expenditures, scheduled debt maturities and preferred stock redemptions are
expected to be met without increasing our net debt and preferred stock
outstanding. Major contractual obligations for future cash payments are
summarized in the following table:
Contractual Obligations 2002 2003 2004 2005 2006 Thereafter Total
- -----------------------------------------------------------------------------
(In millions)
Long-term debt.......... $ 30 $ 90 $ 40 $ 51 $151 $ 235 $ 597
Mandatory preferred
stock................. 100 100
Operating leases ....... 1 1 -- -- -- 15 17
Unconditional power
purchases............. 365 227 157 160 165 1,410 2,484
- ------------------------------------------------------------------------------
$396 $318 $197 $211 $316 $1,760 $3,198
==============================================================================
Our capital spending for the period 2002-2006 is expected to be about
$323 million, of which approximately $66 million applies to 2002.
Market Risk Information
- -----------------------
We use various market risk sensitive instruments, including derivative
contracts, primarily to manage the risk of price. Our Risk Policy Committee,
comprised of FirstEnergy executive officers, exercises an independent risk
oversight function to ensure compliance with corporate risk management policies
and prudent risk management practices.
Commodity Price Risk
We are exposed to market risk primarily due to fluctuations in
electricity and natural gas prices. To manage the volatility relating to these
exposures, we use a variety of derivative instruments, including options and
futures contracts. These derivatives are used principally for hedging purposes.
The change in the fair value of commodity derivative contracts related to energy
production during 2001 is summarized in the table below:
Increase (Decrease)in the Fair Value of Commodity Derivative Contracts
Nov. 7 - Dec. 31 Jan. 1 - Nov. 6
2001 2001
-------------------------------------------------------------------
(In millions)
Outstanding as of beginning of
period with SFAS 133
cumulative adjustment............. $6.6 $26.0
Contract value when entered......... 0.3 5.2
Decrease in value of existing
contracts......................... (4.5) (2.9)
Change in techniques/assumptions.... -- (21.3)
Settled contracts................... (0.1) (0.4)
-------------------------------------------------------------------
Outstanding as of end of period..... $2.3 $6.6
===================================================================
While the valuation of derivative contracts is always based on active
market prices when they are available, longer-term contracts can require the use
of model-based estimates of prices in later years due to the absence of
published market prices. Currently, substantially all of our derivatives are
valued based on active market prices.
We perform sensitivity analyses to estimate our exposure to the market
risk of our commodity position. A hypothetical 10% adverse shift in quoted
market prices in the near term on our derivative instruments would not have had
a material effect on our consolidated financial position or cash flows as of
December 31, 2001.
Interest Rate Risk
Our exposure to fluctuations in market interest rates is reduced since a
significant portion of our debt has fixed interest rates, as noted in the table
below. We are subject to the inherent interest rate risks related to refinancing
maturing debt by issuing new debt securities. Changes in the market value of our
nuclear decommissioning trust funds are recognized by making corresponding
changes to the decommissioning liability, as described in Note 1 to the
consolidated financial statements.
4
Comparison of Carrying Value to Fair Value
- --------------------------------------------------------------------------------
There- Fair
2002 2003 2004 2005 2006 after Total Value
- --------------------------------------------------------------------------------
(Dollars in millions)
Investments other
than Cash and Cash
Equivalents:
Fixed Income........... -- -- -- -- -- $ 68 $ 68 $ 67
Average interest
rate............... 4.7% 4.7%
- --------------------------------------------------------------------------------
________________________________________________________________________________
Liabilities
- -------------------------------------------------------------------------------
Long-term Debt:
Fixed rate.............$30 $90 $40 $51 $151 $235 $597 $601
Average interest
rate...............8.1% 7.7% 6.3% 7.0% 5.9% 7.6% 7.1%
Variable rate..........
Average interest
rate...............
Short-term Borrowings..$72 -- -- -- -- -- $ 72 $ 72
Average interest
rate...............4.9% 4.9%
- --------------------------------------------------------------------------------
Preferred Stock........ -- -- -- -- -- $100 $100 $ 93
Average dividend
rate............... 7.4% 7.4%
- --------------------------------------------------------------------------------
Outlook
- -------
Our industry continues to transition to a more competitive environment.
As of January 1, 1999, our customers could select alternative energy
suppliers. We continue to deliver power to homes and businesses through our
existing distribution system, which remains regulated. The PPUC authorized our
rate restructuring plan, establishing separate charges for transmission,
distribution, generation and stranded cost recovery, which is recovered through
a competitive transition charge (CTC). Customers electing to obtain power from
an alternative supplier have their bills reduced based on the regulated
generation component, and the customers receive a generation charge from the
alternative supplier. We have a continuing responsibility to provide power to
those customers not choosing to receive power from an alternative energy
supplier, subject to certain limits, which is referred to as our PLR obligation.
Regulatory Matters
In June 2001, we entered into a settlement agreement with major parties
in the combined merger and rate proceedings that, in addition to resolving
certain issues concerning the PPUC's approval of our merger with FirstEnergy,
also addressed our request for PLR relief. We are permitted to defer, for future
recovery, the difference between our actual energy costs and those reflected in
our capped generation rates. Those costs will continue to be deferred through
December 31, 2005. If energy costs incurred during that period are below our
capped generation rates, the difference would be used to reduce our recoverable
deferred costs. Our PLR obligation was extended through December 31, 2010. Our
CTC revenues will be applied first to PLR costs, then to stranded costs other
than for non-utility generation (NUG) and finally to NUG stranded costs through
December 31, 2010. We would be permitted to recover any remaining stranded costs
through a continuation of the CTC after December 31, 2010; however, such
recovery would extend to no later than December 31, 2015. Any amounts not
expected to be recovered by December 31, 2015 would be written off at the time
such nonrecovery becomes probable. Several parties had appealed this PPUC
decision to the Commonwealth Court of Pennsylvania. On February 21, 2002, the
Court affirmed the PPUC decision regarding approval of the merger, remanding the
decision to the PPUC only with respect to the issue of merger savings. The Court
reversed the PPUC's decision regarding our PLR obligation, and denied our
related requests for rate relief. We are considering our response to the Court's
decision, which could include asking the Pennsylvania Supreme Court to review
the decision. We are unable to predict the outcome of these matters.
Supply Plan
As part of our Restructuring Order, we are obligated to supply
electricity to customers who do not choose an alternate supplier. The total
forecasted peak of this obligation in 2002 is 2,500 megawatts (MW). Our current
supply portfolio contains approximately 300 MW of long-term purchases from NUGs,
and the remaining obligation is expected to be met through a mix of multi-year
forward purchases, short-term forward (less than one year) purchases and spot
market purchases.
Environmental Matters
Various environmental liabilities have been recognized on the
Consolidated Balance Sheet as of December 31, 2001, based on estimates of the
total costs of cleanup, our proportionate responsibility for such costs and the
financial ability of other nonaffiliated entities to pay. We have been named as
a "potentially responsible party" (PRP) 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
5
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. We have total
accrued liabilities aggregating approximately $0.1 million as of December 31,
2001. We do not believe environmental remediation costs will have a material
adverse effect on our financial condition, cash flows or results of operations.
Legal Matters
Various lawsuits, claims and proceedings related to our normal business
operations are pending against us, the most significant of which is described
below.
We have a 50% ownership interest in TMI-2, which was damaged during a
1979 accident. As a result of the accident, claims for alleged personal injury
were filed against us, Jersey Central Power & Light Company, Pennsylvania
Electric Company and GPU in the U.S. District Court for the Middle District of
Pennsylvania. In 1996, the District Court granted a motion for summary judgment
filed by the defendants and dismissed the ten initial "test cases" which had
been selected for a test case trial, as well as all of the remaining 2,100
pending claims. In November 1999, the U.S. Court of Appeals for the Third
Circuit affirmed the District Court's dismissal of the ten test cases, but set
aside the dismissal of the additional pending claims, remanding them to the
District Court for further proceedings. Following the resolution of judicial
proceedings dealing with admissible evidence, we have again requested summary
judgment of the remaining 2,100 claims in the District Court. On January 15,
2002, the District Court granted our motion. On February 14, 2002, the
plaintiffs filed a notice of appeal of this decision (see Note 6 - Other Legal
Proceedings). Although unable to predict the outcome of this litigation, we
believe that any liability to which we might be subject by reason of the TMI-2
accident will not exceed our financial protection under the Price-Anderson Act.
Significant Accounting Policies
- -------------------------------
We prepare our consolidated financial statements in accordance with
accounting principles generally accepted in the United States. Application of
these principles often requires a high degree of judgment, estimates and
assumptions that affect our financial results. All of our assets are subject to
their own specific risks and uncertainties and are continually reviewed for
impairment. Assets related to the application of the policies discussed below
are similarly reviewed with their risks and uncertainties reflecting these
specific factors. Our more significant accounting policies are described below:
Purchase Accounting
On November 7, 2001, the merger between FirstEnergy and GPU became
effective, and we became a wholly owned subsidiary of FirstEnergy. The merger
was accounted for by the purchase method of accounting, which requires judgment
regarding the allocation of the purchase price based on the fair values of the
assets acquired (including intangible assets) and the liabilities assumed. The
fair values of the acquired assets and assumed liabilities were based primarily
on estimates. The adjustments reflected in our records, which are subject to
adjustment in 2002 when finalized, primarily consist of: (1) revaluation of
certain property, plant and equipment; (2) adjusting preferred stock subject to
mandatory redemption and long-term debt to estimated fair value; (3) recognizing
additional obligations related to retirement benefits; and (4) recognizing
estimated severance and other compensation liabilities. The excess of the
purchase price over the estimated fair values of the assets acquired and
liabilities assumed was recognized as goodwill, which will be reviewed for
impairment at least annually. As of December 31, 2001, we had recorded goodwill
of approximately $784.4 million related to the merger.
Regulatory Accounting
We are subject to regulation that sets the prices (rates) we are
permitted to charge our customers based on costs that the regulatory agencies
determine we are permitted to recover. At times, regulators permit the future
recovery through rates of costs that would be currently charged to expense by an
unregulated company. This rate-making process results in the recording of
regulatory assets based on anticipated future cash inflows. As a result of the
changing regulatory framework in Pennsylvania, a significant amount of
regulatory assets have been recorded. As of December 31, 2001, we had regulatory
assets of $1.3 billion. We continually review these assets to assess their
ultimate recoverability within the approved regulatory guidelines. Impairment
risk associated with these assets relates to potentially adverse legislation,
judicial or regulatory actions in the future.
Derivative Accounting
Determination of appropriate accounting for derivative transactions
requires the involvement of management representing operations, finance and risk
assessment. In order to determine the appropriate accounting for derivative
transactions, the provisions of the contract need to be carefully assessed in
accordance with the authoritative accounting literature and management's
intended use of the derivative. New authoritative guidance continues to shape
the application of derivative accounting. Management's expectations and
intentions are key factors in determining the
6
appropriate accounting for a derivative transaction and, as a result, such
expectations and intentions must be documented. Derivative contracts that are
determined to fall within the scope of Statement of Financial Accounting
Standards (SFAS) No. 133, as amended, must be recorded at their fair value.
Active market prices are not always available to determine the fair value of the
later years of a contract, requiring that various assumptions and estimates be
used in their valuation. We continually monitor our derivative contracts to
determine if our activities, expectations, intentions, assumptions and estimates
remain valid. As part of our normal operations we enter into commodities
contracts, which increase the impact of derivative accounting judgments.
Revenue Recognition
We follow the accrual method of accounting for revenues, recognizing
revenue for kilowatt-hours that have been delivered but not yet billed through
the end of the year. The determination of unbilled revenues requires management
to make various estimates including:
- Net energy purchased or generated for retail load
- Losses of energy over distribution lines
- Mix of kilowatt-hour usage by residential, commercial and industrial
customers
- Kilowatt-hour usage of customers receiving electricity from
alternative suppliers
Recently Issued Accounting Standards
- ------------------------------------
The Financial Accounting Standards Board (FASB) approved SFAS 141,
"Business Combinations," and SFAS 142, "Goodwill and Other Intangible Assets,"
on June 29, 2001. SFAS 141 requires that all business combinations initiated
after June 30, 2001 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 our 2001 merger, which was accounted for
as a purchase transaction. Under SFAS 142, amortization of existing goodwill
will cease 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 a preliminary analysis. We did not have any goodwill prior to our 2001
merger, and we did not amortize goodwill associated with the merger under the
provisions of the new standard.
In July 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations." The new statement provides accounting standards for retirement
obligations associated with tangible long-lived assets, with adoption required
by January 1, 2003. SFAS 143 requires that the fair value of a liability for an
asset retirement obligation be recorded in the period in which it is incurred.
The associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. Over time the capitalized costs are depreciated
and the present value of the asset retirement liability increases, resulting in
a period expense. Upon retirement, a gain or loss will be recorded if the cost
to settle the retirement obligation differs from the carrying amount. We are
currently assessing the new standard and have not yet determined the impact on
our 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 30. Our adoption of this Statement, effective January 1, 2002,
will result in our accounting for any future impairments or disposals of
long-lived assets under the provisions of SFAS 144, but will not change the
accounting principles used in previous asset impairments or disposals.
Application of SFAS 144 is not anticipated to have a major impact on accounting
for impairments or disposal transactions compared to the prior application of
SFAS 121 or APB 30.
7
METROPOLITAN EDISON COMPANY
CONSOLIDATED STATEMENTS OF INCOME
Nov 7 - Jan. 1 - For the Years Ended Dec. 31,
Dec. 31, 2001 Nov. 6, 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------
(In thousands)
OPERATING REVENUES........................................ $ 143,760 | $824,556 $842,333 $902,827
--------- | -------- -------- --------
|
OPERATING EXPENSES AND TAXES: |
Fuel and purchased power............................... 83,275 | 478,954 471,070 224,931
Nuclear operating costs................................ -- | -- -- 61,170
Other operating costs.................................. 16,122 | 123,094 91,456 274,743
--------- | -------- -------- --------
Total operation and maintenance expenses............. 99,397 | 602,048 562,526 560,844
Provision for depreciation and amortization............ 8,903 | 51,867 68,695 88,989
General taxes.......................................... 6,509 | 39,845 42,623 39,283
Income taxes........................................... 11,584 | 28,549 33,278 58,937
--------- | -------- -------- --------
Total operating expenses and taxes................... 126,393 | 722,309 707,122 748,053
--------- | -------- -------- --------
|
OPERATING INCOME.......................................... 17,367 | 102,247 135,211 154,774
|
OTHER INCOME.............................................. 5,465 | 7,807 1,387 1,143
--------- | -------- -------- --------
|
INCOME BEFORE NET INTEREST CHARGES........................ 22,832 | 110,054 136,598 155,917
--------- | -------- -------- --------
|
NET INTEREST CHARGES: |
Subsidiaries' preferred stock dividend requirements.... 1,102 | 6,248 6,656 13,319
Interest on long-term debt............................. 5,615 | 33,101 37,886 45,996
Allowance for borrowed funds used during |
construction......................................... 30 | (574) (477) (1,048)
Deferred interest income............................... (276) | (321) -- --
Other interest expense................................. 1,744 | 9,219 10,638 2,527
--------- | -------- -------- --------
Net interest charges................................... 8,215 | 47,673 54,703 60,794
--------- | -------- -------- --------
|
NET INCOME................................................ 14,617 | 62,381 81,895 95,123
|
PREFERRED STOCK DIVIDEND |
REQUIREMENTS........................................... -- | -- -- 66
|
LOSS ON PREFERRED STOCK |
REACQUISITION.......................................... -- | -- -- 542
---------- | -------- -------- --------
|
EARNINGS ON COMMON STOCK.................................. $ 14,617 | $ 62,381 $ 81,895 $ 94,515
========= | ======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
8
METROPOLITAN EDISON COMPANY
CONSOLIDATED BALANCE SHEETS
As of December 31, 2001 2000
- ------------------------------------------------------------------------------------------------------------------
(In thousands)
ASSETS
UTILITY PLANT:
In service..................................................................... $1,609,974 | $1,561,848
Less-Accumulated provision for depreciation.................................... 530,006 | 489,607
---------- | ----------
1,079,968 | 1,072,241
--------- | ----------
Construction work in progress- |
Electric plant............................................................... 14,291 | 22,437
----------- | ----------
1,094,259 | 1,094,678
--------- | ----------
OTHER PROPERTY AND INVESTMENTS: |
Nuclear plant decommissioning trusts........................................... 157,699 | 154,068
Long-term notes receivable from associated companies........................... 12,418 | 12,418
Other.......................................................................... 13,391 | 4,472
---------- | ----------
183,508 | 170,958
---------- | ----------
CURRENT ASSETS: |
Cash and cash equivalents...................................................... 25,274 | 3,439
Receivables- |
Customers (less accumulated provisions of $12,271,000 and $13,004,000 |
respectively, for uncollectible accounts)................................. 112,257 | 108,806
Associated companies......................................................... 8,718 | 37,314
Other........................................................................ 16,675 | 28,525
Prepayments and other.......................................................... 12,239 | 7,555
---------- | ----------
175,163 | 185,639
---------- | ----------
DEFERRED CHARGES: |
Regulatory assets.............................................................. 1,320,412 | 1,224,370
Goodwill....................................................................... 784,443 | --
Other.......................................................................... 49,402 | 32,417
---------- | ----------
2,154,257 | 1,256,787
---------- | ----------
$3,607,187 | $2,708,062
========== | ==========
CAPITALIZATION AND LIABILITIES |
|
CAPITALIZATION (See Consolidated Statements of Capitalization): |
Common stockholder's equity.................................................... $1,288,953 | $ 537,013
Company - obligated trust preferred securities................................. 92,200 | 100,000
Long-term debt................................................................. 583,077 | 496,860
---------- | ----------
1,964,230 | 1,133,873
---------- | ----------
CURRENT LIABILITIES: |
Currently payable long-term debt and preferred stock........................... 30,029 | 27
Short-term borrowings (Note 5)- |
Associated companies......................................................... 72,011 | --
Other........................................................................ -- | 46,600
Accounts payable- |
Associated companies......................................................... 67,351 | 69,462
Other........................................................................ 36,750 | 36,011
Accrued taxes................................................................. 7,037 | 20,768
Accrued interest............................................................... 17,468 | 14,375
Other.......................................................................... 13,652 | 14,687
---------- | ----------
244,298 | 201,930
---------- | ----------
DEFERRED CREDITS: |
Accumulated deferred income taxes.............................................. 300,438 | 279,009
Accumulated deferred investment tax credits.................................... 13,310 | 14,159
Power purchase contract loss liability......................................... 730,662 | 727,503
Nuclear fuel disposal costs.................................................... 36,906 | 35,456
Nuclear plant decommissioning costs............................................ 268,967 | 262,505
Other.......................................................................... 48,376 | 53,627
---------- | ----------
1,398,659 | 1,372,259
---------- | ----------
COMMITMENTS AND CONTINGENCIES |
(Notes 3 and 6)................................................................ |
---------- | ----------
$3,607,187 | $2,708,062
========== | ==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these balance sheets.
9
METROPOLITAN EDISON COMPANY
CONSOLIDATED STATEMENTS OF CAPITALIZATION
As of December 31, 2001 2000
- ----------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
COMMON STOCKHOLDER'S EQUITY:
Common stock, without par value, authorized 900,000 shares
859,500 shares outstanding........................................................ $1,274,325 |$ 66,273
Other paid-in capital.............................................................. -- | 400,200
Accumulated other comprehensive income (Note 4E).................................... 11 | 64
Retained earnings (Note 4A)......................................................... 14,617 | 70,476
---------- |----------
Total common stockholder's equity................................................. 1,288,953 | 537,013
---------- |----------
|
COMPANY OBLIGATED TRUST |
PREFERRED SECURITIES |
OF SUBSIDIARY TRUST |
(NOTE 4C): |
7.35% due 2039...................................................................... 92,200 | 100,000
|
LONG-TERM DEBT (Note 4D): |
First mortgage bonds: |
8.05% due 2002.................................................................... 30,000 | 30,000
6.60% due 2003.................................................................... 20,000 | 20,000
7.22% due 2003.................................................................... 40,000 | 40,000
9.10% due 2003.................................................................... 30,000 | 30,000
6.34% due 2004.................................................................... 40,000 | 40,000
6.77% due 2005.................................................................... 30,000 | 30,000
7.35% due 2005.................................................................... 20,000 | 20,000
6.36% due 2006.................................................................... 17,000 | 17,000
6.40% due 2006.................................................................... 33,000 | 33,000
6.00% due 2008.................................................................... 8,700 | 8,700
6.10% due 2021.................................................................... 28,500 | 28,500
8.60% due 2022.................................................................... 30,000 | 30,000
8.80% due 2022.................................................................... 30,000 | 30,000
6.97% due 2023.................................................................... 30,000 | 30,000
7.65% due 2023.................................................................... 30,000 | 30,000
8.15% due 2023.................................................................... 60,000 | 60,000
5.95% due 2027.................................................................... 13,690 | 13,690
---------- |----------
Total first mortgage bonds...................................................... 490,890 | 490,890
---------- |----------
|
Secured note: |
5.72% due 2006.................................................................... 100,000 | --
|
Unsecured note: |
7.69% due 2039.................................................................... 5,997 | 6,024
|
Net unamortized premium(discount) on debt........................................... 16,219 | (27)
---------- |----------
Long-term debt due within one year.................................................. (30,029)| (27)
---------- |----------
Total long-term debt ........................................................... 583,077 | 496,860
---------- |----------
TOTAL CAPITALIZATION................................................................... $1,964,230 |$1,133,873
========== |==========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
10
METROPOLITAN EDISON COMPANY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
Common Stock Accumulated
-------------------- Other Other
Comprehensive Number Carrying Paid-In Comprehensive Retained
Income of Shares Value Capital Income (Loss) Earnings
------------- --------- -------- ------- ------------- ---------
(Dollars in thousands)
Balance, January 1, 1999................................ 859,500 $ 66,273 $ 370,200 $16,520 $234,066
Net income........................................... $ 95,123 95,123
Net unrealized gains(loss) on investments............ 4,315 4,315
Minimum pension liability............................ 528 528
--------
Comprehensive Income................................. 99,966
--------
Cash dividends on preferred stock.................... (66)
Cash dividends on common stock....................... (315,000)
Contributions from parent company.................... 30,000
Loss on preferred stock reacquisition................ (542)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999.............................. 859,500 66,273 400,200 21,363 13,581
Net income........................................... 81,895 81,895
Net unrealized gain (loss) on investments............ (21,295) (21,295)
Minimum pension liability............................ (4) (4)
--------
Comprehensive Income................................. 60,596
--------
Cash dividends on common stock....................... (25,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000.............................. 859,500 66,273 400,200 64 70,476
Net income........................................... 62,381 62,381
Net unrealized gain (loss) on investments............ 5 5
Net unrealized gain (loss) on derivative instruments. (174) (174)
--------
Comprehensive Income................................. 62,212
--------
Cash dividends on common stock....................... (65,000)
---------------------------------------------------------------------------------------------------------------------------------
Balance, November 6, 2001............................... 859,500 66,273 400,200 (105) 67,857
Purchase accounting fair value adjustment............ 1,208,052 (400,200) 105 (67,857)
____________________________________________________________________________________________________________________________________
Balance, November 7, 2001............................... 859,500 1,274,325 -- -- --
Net income........................................... 14,617 14,617
Net unrealized gain (loss) on investments............ 22 22
Net unrealized gain (loss) on derivative instruments. (11) (11)
--------
Comprehensive Income................................. $ 14,628
--------
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001.............................. 859,500 $1,274,325 $ -- $ 11 $14,617
====================================================================================================================================
CONSOLIDATED STATEMENTS OF PREFERRED STOCK
Not Subject to Subject to
Mandatory Redemption Mandatory Redemption
-------------------- --------------------
Number Carrying Number Carrying
of Shares Value of Shares Value
--------- ----- --------- -----
(Dollars in thousands)
Balance, January 1, 1999............ 119,475 $12,056 4,000,000 $100,000
Redemptions-
3.90% Series .................. (64,384) (6,527)
4.35% Series.................... (22,517) (2,256)
3.85% Series.................... (9,252) (929)
3.80% Series.................... (7,982) (807)
4.45% Series.................... (15,340) (1,537)
9.00% Series.................... (4,000,000) (100,000)
Issuance-
7.35% Series.................... 4,000,000 100,000
-----------------------------------------------------------------------------------------
Balance, December 31, 1999.......... -- -- 4,000,000 100,000
=========================================================================================
Balance, December 31, 2000.......... -- -- 4,000,000 100,000
=========================================================================================
Purchase accounting fair
value adjustment............. (7,800)
-----------------------------------------------------------------------------------------
Balance, December 31, 2001.......... -- $ -- 4,000,000 $ 92,200
=========================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
11
METROPOLITAN EDISON COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nov. 7 - Jan. 1 - For the Years Ended Dec. 31,
Dec. 31, 2001 Nov. 6, 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------------
- - (In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income........................................................... $14,617 || $ 62,381 $ 81,895 $ 95,123
Adjustments to reconcile net income to net |
cash from operating activities: |
Provision for depreciation and amortization..................... 8,903 | 51,867 68,695 88,989
Nuclear fuel and lease amortization............................. -- | -- -- 12,041
Other amortization.............................................. 154 | 1,147 5,684 2,586
Impact of PPUC rate order, net.................................. -- | -- (44,580) --
Deferred costs, net............................................. 1,045 | (91,182) (7,941) (8,291)
Deferred income taxes, net...................................... 906 | 53,464 22,483 (66,995)
Investment tax credits, net..................................... (128)| (721) (851) (12,146)
Receivables..................................................... 10,213 | 33,714 33,348 (93,309)
Materials and supplies.......................................... -- | -- -- 36,944
Accounts payable................................................ (4,339)| (60,868) (48,395) (23,039)
Other........................................................... 8,286 | (59,313) (25,896) (137,153)
------- | -------- -------- --------
Net cash provided from (used for) operating activities........ 39,657 | (9,511) 84,442 (105,250)
------- | -------- -------- --------
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
New Financing- |
Long-term debt.................................................. -- | 99,500 -- --
Short-term borrowings, net...................................... -- | 51,400 46,600 --
Company-obligated trust preferred securities.................... -- | -- -- 96,535
Contributions from parent....................................... -- | -- -- 30,000
Redemptions and Repayments- |
Preferred stock................................................. -- | -- -- 12,598
Long-term debt.................................................. -- | -- 50,000 30,024
Short-term borrowings, net...................................... 25,989 | -- -- 79,540
Capital lease principal payments................................ -- | -- -- 15,786
Company-obligated mandatorily redeemable |
preferred securities........................................ -- | -- -- 100,000
Dividend Payments- |
Common stock.................................................... -- | 65,000 25,000 315,000
Preferred stock................................................. -- | -- -- 66
------- | -------- -------- --------
Net cash used for (provided from) financing activities........ 25,989 | (85,900) 28,400 426,479
------- | --------- --------- ---------
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
Property additions................................................... 7,787 | 47,660 58,481 66,388
Contributions to decommissioning trusts.............................. -- | 7,113 8,700 33,556
Sale of investments.................................................. -- | -- (3,519) (641,273)
Other................................................................ 453 | 5,209 -- 45
------- | -------- -------- --------
Net cash used for (provided from) investing activities........ 8,240 | 59,982 63,662 (541,284)
------- | -------- -------- --------
Net increase (decrease) in cash and cash equivalents................. 5,428 | 16,407 (7,620) 9,555
Cash and cash equivalents at beginning of period..................... 19,846 | 3,439 11,059 1,504
------- | -------- -------- --------
Cash and cash equivalents at end of period........................... $25,274 | $ 19,846 $ 3,439 $ 11,059
======= | ======== ======== ========
|
SUPPLEMENTAL CASH FLOWS INFORMATION: |
Cash Paid During the Year- |
Interest (net of amounts capitalized)........................... $ - | $ 41,473 $ 47,451 $ 55,011
======= | ======== ======== ========
Income taxes (refund).......................................... $(2,990)| $ 7,486 $ 45,534 $120,277
======= | ========= ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
12
METROPOLITAN EDISON COMPANY
CONSOLIDATED STATEMENTS OF TAXES
Nov. 7 - Jan. 1 - For the Years Ended Dec.31,
Dec. 31, 2001 Nov. 6, 2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
(In thousands)
GENERAL TAXES:
Real and personal property......................................... $ 5 | $ 1,236 $ 1,826 $ 3,979
State gross receipts............................................... 5,730 | 31,353 35,288 26,757
Social security and unemployment................................... (1) | 14 -- 171
Other.............................................................. 775 | 7,242 5,509 8,376
--------- | -------- --------- --------
Total general taxes......................................... $ 6,509 | $ 39,845 $ 42,623 $ 39,283
========= | ======== ======== ========
|
PROVISION FOR INCOME TAXES: |
Currently payable- |
Federal......................................................... $ 7,693 | $(11,534) $ 17,080 $107,335
State........................................................... 2,433 | (1,760) 5,377 33,202
--------- | -------- --------- --------
10,126 | (13,294) 22,457 140,537
--------- | -------- --------- --------
Deferred, net- |
Federal......................................................... 934 | 41,297 19,476 (46,758)
State........................................................... (28) | 12,167 3,007 (20,237)
--------- | -------- --------- --------
906 | 53,464 22,483 (66,995)
--------- | -------- --------- --------
Investment tax credit amortization................................. (128) | (721) (851) (12,146)
--------- | -------- --------- --------
Total provision for income taxes............................ $ 10,904 | $ 39,449 $ 44,089 $ 61,396
========= | ======== ========= ========
|
INCOME STATEMENT CLASSIFICATION |
OF PROVISION FOR INCOME TAXES: |
Operating income................................................... $ 11,584 | $ 28,549 $ 33,278 $ 58,937
Other income....................................................... (680) | 10,900 10,811 2,459
---------- | -------- --------- --------
Total provision for income taxes............................ $ 10,904 | $ 39,449 $ 44,089 $ 61,396
========= | ======== ========= ========
|
RECONCILIATION OF FEDERAL INCOME TAX |
EXPENSE AT STATUTORY RATE TO TOTAL |
PROVISION FOR INCOME TAXES: |
Book income before provision for income taxes...................... $ 25,521 | $101,831 $ 125,983 $156,520
========= | ======== ========= ========
Federal income tax expense at statutory rate....................... $ 8,932 | $ 35,641 $ 44,094 $ 54,782
Increases (reductions) in taxes resulting from- |
Amortization of investment tax credits.......................... (128) | (721) (851) (12,145)
Depreciation.................................................... 304 | 926 300 7,152
State income tax, net of federal tax............................ 938 | 7,388 7,379 10,257
Allocated share of consolidated tax savings..................... -- | (3,151) -- (1,100)
Other, net...................................................... 858 | (634) (6,833) 2,450
--------- | -------- --------- --------
Total provision for income taxes............................ $ 10,904 | $ 39,449 $ 44,089 $ 61,396
========= | ======== ========= ========
|
ACCUMULATED DEFERRED INCOME TAXES AT |
DECEMBER 31: |
Property basis differences......................................... $ 211,394 | $ 203,352 $210,673
Nuclear decommissioning............................................ (5,623) | (9,797) (1,501)
Deferred sale and leaseback costs.................................. (12,077) | (11,298) (13,491)
Non-utility generation costs....................................... 36,099 | 12,238 8,787
Purchase accounting basis difference............................... (37,143) | -- --
Regulatory transition charge....................................... 85,414 | 69,828 20,946
Customer receivables for future income taxes....................... 49,755 | 51,247 48,815
Other.............................................................. (27,381) | (36,561) (21,565)
--------- | --------- --------
Net deferred income tax liability........................... $ 300,438 | $ 279,009 $252,664
========= | ========= ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements include Metropolitan Edison
Company (Company) and its wholly owned subsidiaries. All significant
intercompany transactions have been eliminated. The Company is a wholly owned
subsidiary of FirstEnergy Corp. FirstEnergy also holds directly all of the
issued and outstanding common shares of Ohio Edison Company (OE), The Cleveland
Electric Illuminating Company (CEI), The Toledo Edison Company (TE), American
Transmission Systems, Inc. (ATSI), Jersey Central Power & Light Company (JCP&L)
and Pennsylvania Electric Company (Penelec). The Company, JCP&L and Penelec were
formerly wholly owned subsidiaries of GPU, Inc., which merged with FirstEnergy
on November 7, 2001. Pre-merger period and post-merger period financial results
are separated by a heavy black line.
The Company follows the accounting policies and practices prescribed by
the Pennsylvania Public Utility Commission (PPUC) and the Federal Energy
Regulatory Commission (FERC). The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
(GAAP) requires management to make periodic estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses and
disclosure of contingent assets and liabilities. Actual results could differ
from these estimates. Certain prior year amounts have been reclassified to
conform with the current year presentation.
REVENUES-
The Company's principal business is providing electric service to
customers in Pennsylvania. The Company's retail customers are metered on a cycle
basis. Revenue is recognized for unbilled electric service through the end of
the year.
Receivables from customers include sales to residential, commercial and
industrial customers and sales to wholesale customers. There was no material
concentration of receivables as of December 31, 2001 or 2000, with respect to
any particular segment of the Company's customers.
REGULATORY PLAN-
Pennsylvania enacted its electric utility competition law in 1996 with the
phase-in of customer choice for generation suppliers completed as of January 1,
2001. The PPUC authorized a rate restructuring plan for the Company in 1998
which essentially resulted in the deregulation of the Company's generation
business. The Company has a continuing responsibility to provide power to those
customers not choosing to receive power from an alternative energy supplier,
subject to certain limits, which is referred to as the Company's provider of
last resort (PLR) obligation.
In 2000, the PPUC disallowed a portion of the requested additional
stranded costs above those amounts granted in the Company's 1998 rate
restructuring plan order. The PPUC required the Company to seek an IRS ruling
regarding the return of certain unamortized investment tax credits and excess
deferred income tax benefits to ratepayers. If the IRS ruling ultimately
supports returning these tax benefits to ratepayers, the Company would then
reduce stranded costs by $12 million plus interest and record a corresponding
charge to income.
As a result of its generating asset divestitures, the Company obtains
its supply of electricity to meet its PLR obligation almost entirely from
contracted and open market purchases. During 2000, the Company's purchased power
costs substantially exceeded the amounts it could recover under its capped
generation rates, which are in effect for varying periods, pursuant to its 1998
rate restructuring plan. In November 2000, the Company filed a petition with the
PPUC seeking permission to defer for future recovery its energy costs in excess
of amounts reflected in its capped generation rates. In January 2001, the PPUC
consolidated this petition with the FirstEnergy and GPU merger proceeding (see
Note 2 - Merger) for consideration and resolution in accordance with the merger
procedural schedule.
In June 2001, the Company entered into a Settlement Stipulation with all
of the major parties in the combined merger and rate relief proceedings, that,
in addition to resolving certain issues concerning the PPUC's approval of the
merger, also addressed the Company's request for PLR relief. On June 20, 2001,
the PPUC entered orders approving the Settlement Stipulation, which approved the
merger and provided PLR relief. The Company is permitted to defer for future
recovery the difference between its actual energy costs and those reflected in
its capped generation rates, retroactive to January 1, 2001. Deferral accounting
will continue for such cost differences through December 31, 2005 and, should
energy costs incurred by the Company during that period be below its capped
generation rates, the difference would be used to reduce its recoverable
deferred costs. The Company's PLR obligation has been extended through December
31, 2010. The Company's competitive transition charge (CTC) revenues will be
applied first to PLR costs, then to stranded costs other than for non-utility
generation (NUG) and finally to NUG stranded costs through December 31, 2010.
The Company would be permitted to recover any remaining stranded costs through a
continuation of the CTC after December 31, 2010; however, such recovery would
extend to no later than December 31, 2015. Any amounts not expected to be
recovered by December 31, 2015 would be written off at the time such nonrecovery
becomes probable.
14
Several parties had filed Petitions for Review with the Commonwealth
Court of Pennsylvania regarding the PPUC's orders. On February 21, 2002, the
Court affirmed the PPUC decision regarding approval of the merger, remanding the
decision to the PPUC only with respect to the issue of merger savings. The Court
reversed the PPUC's decision regarding the Company's PLR obligation, and denied
the Company's related requests for rate relief. The Company is considering its
response to the Court's decision, which could include asking the Pennsylvania
Supreme Court to review the decision. The Company is unable to predict the
outcome of these matters.
The application of Statement of Financial Accounting Standards (SFAS)
No. 71, "Accounting for the Effects of Certain Types of Regulation," was
discontinued in 1998 with respect to the Company's generation operations. The
Company subsequently divested substantially all of its generating assets. The
Securities and Exchange Commission issued interpretive guidance regarding asset
impairment measurement, concluding that any supplemental regulated cash flows
such as a CTC should be excluded from the cash flows of assets in a portion of
the business not subject to regulatory accounting practices. If those assets are
impaired, a regulatory asset should be established if the costs are recoverable
through regulatory cash flows. Net assets included in utility plant relating to
the operations for which the application of SFAS 71 was discontinued were $18
million as of December 31, 2001. All of the Company's regulatory assets are
expected to continue to be recovered under provisions of the Company's
regulatory orders.
PROPERTY, PLANT AND EQUIPMENT-
As a result of the merger, certain of the Company's property, plant
and equipment have been adjusted to reflect fair value. The majority of the
Company's property, plant and equipment is reflected at original cost since such
assets remain subject to rate regulation on a historical cost basis.
The Company provides for depreciation on a straight-line basis at
various rates over the estimated lives of property included in plant in service.
The annualized composite rate was approximately 3.0% in 2001, 2.9% in 2000 and
3.0% in 1999.
Annual depreciation expense in 2001 included approximately $11.1 million
for future decommissioning costs applicable to the Company's ownership in Unit 2
of the Three Mile Island Nuclear Plant (TMI-2), a demonstration nuclear reactor
owned by a wholly owned subsidiary of the Company (in conjunction with JCP&L and
Penelec) and decommissioning liabilities for its previously divested nuclear
generating units. The Company's share of the future obligation to decommission
these units is approximately $254.5 million in current dollars and (using a 4.0%
escalation rate) approximately $421.9 million in future dollars. The estimated
obligation and the escalation rate were developed based on site specific
studies. Decommissioning of the demonstration nuclear reactor is expected to be
completed in 2003; payments for decommissioning of TMI-2 are expected to begin
in 2014, when actual decommissioning work is expected to begin. The Company has
recovered approximately $54 million for decommissioning through its electric
rates from customers through December 31, 2001. The Company has also recognized
an estimated liability of approximately $4.6 million related to decontamination
and decommissioning of nuclear enrichment facilities operated by the United
States Department of Energy, as required by the Energy Policy Act of 1992.
In July 2001, the Financial Accounting Standards Board (FASB) issued
SFAS 143, "Accounting for Asset Retirement Obligations." The new statement
provides accounting treatment for retirement obligations associated with
tangible long-lived assets with adoption required as of January 1, 2003. SFAS
143 requires that the fair value of a liability for an asset retirement
obligation be recorded in the period in which it is incurred. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. Over time the capitalized costs are depreciated and the
present value of the asset retirement liability increases, resulting in a period
expense. Upon retirement, a gain or loss will be recorded if the costs to settle
the retirement obligation differs from the carrying amount. Under the new
standard, additional assets and liabilities relating principally to nuclear
decommissioning obligations will be recorded, the pattern of expense recognition
will change and income from the external decommissioning trusts will be recorded
as investment income. The Company is currently assessing the new standard and
has not yet quantified the impact on its financial statements.
INCOME TAXES-
Details of the total provision for income taxes are shown on the
Consolidated Statements of Taxes. Deferred income taxes result from timing
differences in the recognition of revenues and expenses for tax and accounting
purposes. Investment tax credits, which were deferred when utilized, are being
amortized over the recovery period of the related property. The liability method
is used to account for deferred income taxes. Deferred income tax liabilities
related to tax and accounting basis differences are recognized at the statutory
income tax rates in effect when the liabilities are expected to be paid. Results
for the period January 1, 2001 through November 6, 2001 are included in the
final consolidated federal income tax return of GPU, and results for the period
November 7, 2001 through December 31, 2001 are included in FirstEnergy's 2001
consolidated federal income tax return. In both cases, the consolidated tax
liability is allocated on a "stand-alone" company basis, with the Company
recognizing the tax benefit for any tax losses or credits it contributed to the
consolidated return.
15
RETIREMENT BENEFITS-
Effective December 31, 2001, the Company's defined benefit pension
plan was merged into FirstEnergy's defined benefit pension plan. FirstEnergy's
trusteed, noncontributory defined benefit pension plan covers almost all of the
Company's full-time employees. Upon retirement, employees receive a monthly
pension based on length of service and compensation. On December 31, 2001, the
GPU pension plans were merged with the FirstEnergy plan. FirstEnergy uses the
projected unit credit method for funding purposes. The assets of the pension
plan consist primarily of common stocks, United States government bonds and
corporate bonds. The FirstEnergy and GPU postretirement benefit plans are
currently separately maintained; the information shown below is aggregated as of
December 31, 2001. Costs for the year 2001 include the former GPU companies'
pension and other postretirement benefit costs for the period November 7, 2001
through December 31, 2001.
The Company provides a minimum amount of noncontributory life insurance
to retired employees in addition to optional contributory insurance. Health care
benefits, which include certain employee deductibles and copayments, are also
available to retired employees, their dependents and, under certain
circumstances, their survivors. The Company pays insurance premiums to cover a
portion of these benefits in excess of set limits; all amounts up to the limits
are paid by the Company. The Company recognizes the expected cost of providing
other postretirement benefits to employees and their beneficiaries and covered
dependents from the time employees are hired until they become eligible to
receive those benefits.
The following sets forth the funded status of the plans and amounts
recognized on FirstEnergy's Consolidated Balance Sheet as of December 31, 2001:
Other
Pension Benefits Postretirement Benefits
---------------- -----------------------
(In millions)
Change in benefit obligation:
Benefit obligation as of
January 1......................... $1,506.1 $ 752.0
Service cost........................ 34.9 18.3
Interest cost....................... 133.3 64.4
Plan amendments..................... 3.6 --
Actuarial loss...................... 123.1 73.3
Voluntary early retirement program.. -- 2.3
GPU acquisition..................... 1,878.3 716.9
Benefits paid....................... (131.4) (45.6)
---------------------------------------------------------------------------
Benefit obligation as of December 31 3,547.9 1,581.6
---------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets
as of January 1................... 1,706.0 23.0
Actual return on plan assets........ 8.1 12.7
Company contribution................ -- 43.3
GPU acquisition..................... 1,901.0 462.0
Benefits paid....................... (131.4) (6.0)
---------------------------------------------------------------------------
Fair value of plan assets as of
December 31....................... 3,483.7 535.0
---------------------------------------------------------------------------
Funded status of plan............... (64.2) (1,046.6)
Unrecognized actuarial loss (gain).. 222.8 212.8
Unrecognized prior service cost..... 87.9 17.7
Unrecognized net transition
obligation (asset)................ -- 101.6
---------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 246.5 $ (714.5)
===========================================================================
Assumptions used as of
December 31, 2001:
Discount rate....................... 7.25% 7.25%
Expected long-term return on
plan assets....................... 10.25% 10.25%
Rate of compensation increase....... 4.00% 4.00%
FirstEnergy's net pension and other postretirement benefit costs for the
year ended December 31, 2001 were computed as follows:
Other
Pension Benefits Postretirement Benefits
---------------- -----------------------
(In millions)
Service cost........................ $ 34.9 $18.3
Interest cost....................... 133.3 64.4
Expected return on plan assets...... (204.8) (9.9)
Amortization of transition
obligation (asset)................ (2.1) 9.2
Amortization of prior service cost.. 8.8 3.2
Recognized net actuarial
loss (gain)....................... -- 4.9
Voluntary early retirement program.. 6.1 2.3
---------------------------------------------------------------------------
Net benefit cost.................... $ (23.8) $92.4
===========================================================================
The composite health care trend rate assumption is approximately 10% in
2002, 9% in 2003 and 8% in 2004, trending to 4%-6% in later years. Assumed
health care cost trend rates have a significant effect on the amounts reported
16
for the health care plan. An increase in the health care trend rate assumption
by one percentage point would increase FirstEnergy's total service and interest
cost components by $14.6 million and the postretirement benefit obligation by
$151.2 million. A decrease in the same assumption by one percentage point would
decrease the total service and interest cost components by $12.7 million and the
postretirement benefit obligation by $131.3 million.
Pre-Merger
As of December 31, 2000, the Company had on its balance sheet accrued
benefit costs of $0.9 million and $0.4 million, respectively, related to pension
and other postretirement benefit obligations. In addition, for the year ended
December 31, 2000, the Company recognized in income net benefit costs/(credits)
of $0.1 million and $0.2 million, respectively, for pension and other
postretirement benefits, and for the year ended December 31, 1999, the Company
recognized net benefit costs/(credits) of $0.2 million and $0.3 million,
respectively.
TRANSACTIONS WITH AFFILIATED COMPANIES-
During the three years ended December 31, 2001, GPU Service, Inc., an
affiliated company, provided legal, accounting, financial and other services to
the Company. In addition, prior to the sales of the Company's generating assets
in 1999, affiliated companies GPU Nuclear, Inc. and GPU Generation, Inc.
conducted generation operations for the company. The total cost of services
rendered by affiliates was $141 million, $99 million and $350 million for the
years 2001, 2000 and 1999, respectively. Of these amounts, $95 million, $77
million and $264 million were charged to income for the years 2001, 2000 and
1999, respectively.
SUPPLEMENTAL CASH FLOWS INFORMATION-
All temporary cash investments purchased with an initial maturity of
three months or less are reported as cash equivalents on the Consolidated
Balance Sheets at cost, which approximates their fair market value.
All borrowings with initial maturities of less than one year are defined
as financial instruments under GAAP and are reported on the Consolidated Balance
Sheets at cost, which approximates their fair market value. The following sets
forth the approximate fair value and related carrying amounts of all other
long-term debt, preferred stock subject to mandatory redemption and investments
other than cash and cash equivalents as of December 31:
2001 2000
---------------------------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------------------------------------------------------------------
(In millions)
Long-term debt................. $597 $601 $497 $504
Preferred stock................ $100 $ 93 $100 $ 97
Investments other than cash
and cash equivalents........ $159 $160 $156 $156
---------------------------------------------------------------------
$848 $854 $753 $757
=====================================================================
The fair values of long-term debt and preferred stock reflect the
present value of the cash outflows relating to those securities based on the
current call price, the yield to maturity or the yield to call, as deemed
appropriate at the end of each respective year. The yields assumed were based on
securities with similar characteristics offered by corporations with credit
ratings similar to the Company's ratings. Long-term debt and preferred stock
subject to mandatory redemption were recognized at fair value in connection with
the merger.
The fair value of investments other than cash and cash equivalents
represent cost (which approximates fair value) or the present value of the cash
inflows based on the yield to maturity. The yields assumed were based on
financial instruments with similar characteristics and terms. Investments other
than cash and cash equivalents include decommissioning trust investments.
Unrealized gains and losses applicable to the decommissioning trusts have been
recognized in the trust investment with a corresponding change to the
decommissioning liability. The Company has no securities held for trading
purposes.
On January 1, 2001, the Company adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities --
an amendment of FASB Statement No. 133." The adoption resulted in the
recognition of derivative assets on the Consolidated Balance Sheet at January 1,
2001 in the amount of $13.0 million, with a substantially offsetting amount
recorded in Regulatory Assets of $12.2 million. As of January 1, 2001, a
cumulative effect of accounting change was recognized as an expense in Other
Income (Deductions), Net on the Consolidated Statement of Income in the amount
of $0.1 million.
17
The Company is exposed to financial risks resulting from the fluctuation
of commodity prices, including electricity and natural gas. To manage the
volatility relating to these exposures, the Company uses a variety of derivative
instruments, including options and futures contracts. These derivatives are used
principally for hedging 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.
The Company uses derivatives to hedge the risk of price fluctuations.
The Company's primary ongoing hedging activity involves cash flow hedges of
electricity and natural gas purchases. The majority of the Company's forward
commodity contracts are considered "normal purchases and sales," as defined by
SFAS 133, and are therefore excluded from the scope of SFAS 138. The options and
futures contracts determined to be within the scope of SFAS 133 are accounted
for as cash flow hedges and expire on various dates through 2002. Gains and
losses from hedges of commodity price risks are included in net income when the
underlying hedged commodities are delivered. There is currently a net deferred
loss of $0.01 million included in Accumulated Other Comprehensive Loss as of
December 31, 2001 related to derivative hedging activity, which will be
reclassified to earnings during the next twelve months as hedged transactions
occur.
REGULATORY ASSETS-
The Company recognizes, as regulatory assets, costs which the FERC and
PPUC have authorized for recovery from customers in future periods. Without such
authorization, the costs would have been charged to income as incurred. All
regulatory assets are expected to continue to be recovered from customers under
the Company's regulatory plan. The Company continues to bill and collect
cost-based rates for its transmission and distribution services, which remain
regulated; accordingly, it is appropriate that the Company continues the
application of SFAS 71 to those operations.
Net regulatory assets on the Consolidated Balance Sheets are comprised
of the following:
2001 2000
----------------------------------------------------------------------
(In millions)
Regulatory transition charge................... $1,115.9 $1,053.1
Customer receivables for future income taxes... 110.9 114.5
Nuclear decommissioning costs.................. 34.7 27.6
Provider of last resort deferrals.............. 32.7 --
Employee postretirement benefit costs.......... 21.4 23.4
Loss on reacquired debt........................ 4.8 5.3
Other.......................................... -- 0.5
----------------------------------------------------------------------
Total...................................... $1,320.4 $1,224.4
======================================================================
2. MERGER:
On November 7, 2001, the merger of FirstEnergy and GPU became effective
pursuant to the Agreement and Plan of Merger, dated August 8, 2000. As a result
of the merger, GPU's former wholly owned subsidiaries, including the Company,
became wholly owned subsidiaries of FirstEnergy.
The merger was accounted for by the purchase method of accounting. The
assets acquired and liabilities assumed were recorded at estimated fair values
as determined by FirstEnergy's management based on information currently
available and on current assumptions as to future operations. Merger purchase
accounting adjustments recorded in the records of the Company primarily consist
of: (1) revaluation of certain property, plant and equipment; (2) adjusting
preferred stock subject to mandatory redemption and long-term debt to estimated
fair value; (3) recognizing additional obligations related to retirement
benefits; and (4) recognizing estimated severance and other compensation
liabilities. Other assets and liabilities were not adjusted since they remain
subject to rate regulation on a historical cost basis. The excess of the
purchase price over the estimated fair values of the assets acquired and
liabilities assumed was recognized as goodwill, which will not be amortized but
will be reviewed for impairment at least annually. As of December 31, 2001, the
Company had recorded goodwill of approximately $784.4 million related to the
merger.
3. LEASES:
Consistent with regulatory treatment, the rentals for capital and
operating leases are charged to operating expenses on the Consolidated
Statements of Income. Prior to the sale of its nuclear generating facility in
December 1999, the Company's capital lease obligations related primarily to
nuclear fuel lease agreements with nonaffiliated fuel trusts for the plant. The
Company's most significant operating lease relates to the sale and leaseback of
a portion of its ownership interest in the Merrill Creek Reservoir project. The
interest element related to this lease was $1.9 million for the years 2001 and
2000.
18
As of December 31, 2001, the future minimum lease payments on the
Company's Merrill Creek operating lease, net of reimbursements from sublessees,
are: $0.4 million in 2002, $1.3 million in 2003, zero in 2004, $0.2 million in
2005 and in 2006, and $15.0 million for the years thereafter. The Company's
Merrill Creek lease payments were offset against the actual net divestiture
proceeds received from the 1999 sales of its generating assets.
4. CAPITALIZATION:
(A) RETAINED EARNINGS-
The merger purchase accounting adjustments included resetting the
retained earnings balance to zero at the November 7, 2001 merger date.
In general, the Company's first mortgage bond (FMB) indentures restrict
the payment of dividends or distributions on or with respect to the Company's
common stock to amounts credited to earned surplus since approximately the date
of its indenture. At such date, the Company had a balance of $3.4 million in its
earned surplus account, which would not be available for dividends or other
distributions. As of December 31, 2001, the Company had retained earnings
available to pay common stock dividends of $11.2 million, net of amounts
restricted under the Company's FMB indentures.
(B) PREFERRED AND PREFERENCE STOCK-
The Company's preferred stock authorization consists of 10 million
shares without par value. No preferred shares are currently outstanding.
(C) COMPANY-OBLIGATED MANDATORILY REDEEMABLE TRUST PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY PARTNERSHIP PREFERRED SECURITIES-
The Company has formed a statutory business trust, Met-Ed Capital Trust,
which is owned through a wholly-owned limited partnership of the Company, Met-Ed
Capital II, L.P., of which a wholly-owned subsidiary of the Company is the sole
general partner. In this transaction, Met-Ed Capital Trust invested the gross
proceeds from the sale of $100.0 million of its 7.35% trust preferred securities
in the preferred securities of Met-Ed Capital II, L.P., which in turn invested
those proceeds in $103.1 million of 7.35% subordinated debentures of the
Company. The sole assets of Met-Ed Capital Trust are the preferred securities of
Met-Ed Capital II, L.P., whose sole assets are the Company's subordinated
debentures with the same rate and maturity date as the preferred securities. The
Company has effectively provided a full and unconditional guarantee of its
obligations under its trust's preferred securities. The trust preferred
securities, which mature in 2039 and have a liquidation value of $25.00 per
security, are redeemable at the option of the Company beginning in May 2004 at
100% of their principal amount. The interest on the subordinated debentures (and
therefore the distributions on the preferred securities) may be deferred for up
to 60 months, but the Company may not pay dividends on, or redeem or acquire,
any of its cumulative preferred or common stock until deferred payments on its
subordinated debentures are paid in full.
(D) LONG-TERM DEBT-
The first mortgage indentures and their supplements, which secure all of
the Company's FMBs, serve as direct first mortgage liens on substantially all
property and franchises, other than specifically excepted property, owned by the
Company.
Based on the amount of bonds authenticated by the Trustee through
December 31, 2001, the Company's annual sinking and improvement fund
requirements for all bonds issued under the mortgage amount to $6.7 million. The
Company expects to fulfill its sinking and improvement fund obligation by
providing bondable property additions to the Trustee.
Sinking fund requirements for FMBs and maturing long-term debt
(excluding capital leases) for the next five years are:
(In millions)
----------------------
2002........ $ 30.1
2003........ 90.5
2004........ 40.5
2005........ 50.5
2006........ 150.5
----------------------
The Company's obligations to repay certain pollution control revenue
bonds are secured by several series of FMBs. Certain pollution control revenue
bonds are entitled to the benefit of noncancelable municipal bond insurance
policies of $42.2 million to pay principal of, or interest on, the pollution
control revenue bonds.
19
(E) COMPREHENSIVE INCOME-
Comprehensive income includes net income as reported on the Consolidated
Statements of Income and all other changes in common stockholder's equity except
those resulting from transactions with the Company's parent. As of December 31,
2001, accumulated other comprehensive income consisted of an unrealized gain on
investment of securities available for sale of $0.02 million and unrealized
losses on derivative instrument hedges of $0.01 million.
5. SHORT-TERM BORROWINGS:
The Company may borrow from its affiliates on a short-term basis. As of
December 31, 2001, the Company had total short-term borrowings of $72 million
from its affiliates with a weighted average interest rate of approximately 4.9%.
6. COMMITMENTS, GUARANTEES AND CONTINGENCIES:
CAPITAL EXPENDITURES-
The Company's current forecast reflects expenditures of approximately
$323 million for property additions and improvements from 2002-2006, of which
approximately $66 million is applicable to 2002.
NUCLEAR INSURANCE-
The Price-Anderson Act limits the public liability relative to a single
incident at a nuclear power plant to $9.5 billion. The amount is covered by a
combination of private insurance and an industry retrospective rating plan.
Based on its present ownership interest in TMI-2, the Company is exempt from any
potential assessment under the industry retrospective rating plan.
The Company is also insured as to its interest in TMI-2 under a policy
issued to the operating company for the plant. Under this policy, $150 million
is provided for property damage and decontamination and decommissioning costs.
Under this policy, the Company can be assessed a maximum of approximately $0.4
million for incidents at any covered nuclear facility occurring during a policy
year which are in excess of accumulated funds available to the insurer for
paying losses.
The Company intends to maintain insurance against nuclear risks as
described above as long as it is available. To the extent that property damage,
decontamination, decommissioning, repair and replacement costs and other such
costs arising from a nuclear incident at TMI-2 exceed the policy limits of the
insurance in effect with respect to that plant, to the extent a nuclear incident
is determined not to be covered by the Company's insurance policies, or to the
extent such insurance becomes unavailable in the future, the Company would
remain at risk for such costs.
ENVIRONMENTAL MATTERS-
Various environmental liabilities have been recognized on the
Consolidated Balance Sheet as of December 31, 2001, based on estimates of the
total costs of cleanup, the Company's proportionate responsibility for such
costs and the financial ability of other nonaffiliated entities to pay. The
Company has been named as a "potentially responsible party" (PRP) 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. The Company has
total accrued liabilities aggregating approximately $0.1 million as of December
31, 2001. The Company does not believe environmental remediation costs will have
a material adverse effect on its financial condition, cash flows or results of
operations.
OTHER LEGAL PROCEEDINGS-
Various lawsuits, claims and proceedings related to the Company's normal
business operations are pending against the Company, the most significant of
which is described below.
TMI-2, which was damaged during a 1979 accident, is jointly owned by the
Company, JCP&L and Penelec, with the Company having a 50% ownership percentage.
Claims for alleged personal injury against the Company, JCP&L, Penelec and GPU
(the defendants) were filed in the U.S. District Court for the Middle District
of Pennsylvania. In 1996, the District Court granted a motion for summary
judgment filed by the defendants and dismissed the ten initial "test cases"
which had been selected for a test case trial, as well as all of the remaining
2,100 pending claims. In November
20
1999, the U.S. Court of Appeals for the Third Circuit affirmed the District
Court's dismissal of the ten "test cases," but set aside the dismissal of the
additional pending claims, remanding them to the District Court for further
proceedings. In September 2000, the defendants filed for a summary judgment in
the District Court. Meanwhile, the plaintiffs appealed to the Third Circuit for
a review of the District Court's decision placing limitations on the remaining
plaintiffs' suit. In April 2001, the Third Circuit affirmed the District Court's
decision. In July 2001, the defendants renewed their motion for a summary
judgment on the remaining 2,100 claims in the District Court. On January 15,
2002, the District Court granted the defendants' amended motion for summary
judgment. On February 14, 2002, plaintiffs filed a notice of appeal to the
United States Court of Appeals for the Third Circuit. In addition to the
approximately 2,100 claims for which summary judgment has been granted, there is
other pending litigation arising out of the TMI-2 accident. This litigation
consists of the following: eight personal injury cases that were not
consolidated with the above-referenced approximately 2,100 claims; two class
actions brought on behalf of plaintiffs alleging additional injuries diagnosed
after the filing of the complaints in the above-referenced case; a case alleging
exposure during the post-accident cleanup of the TMI-2 plant; and claims by
individual businesses for economic loss resulting from the TMI-2 accident.
Although unable to predict the outcome of this litigation, the Company believes
that any liability to which it might be subject by reason of the TMI-2 accident
will not exceed its financial protection under the Price-Anderson Act.
7. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED):
The following summarizes certain consolidated operating results by
quarter for 2001 and 2000.
Three Months Ended
-----------------------------
March 31, June 30, Sept. 30, Oct.1-Nov. 6 Nov. 7-Dec. 31
2001 2001 2001 2001 2001
- -------------------------------------------------------------------------------------------
(In millions)
Operating Revenues............ $221.0 $222.6 $283.5 $97.5 | $143.7
Operating Expenses and Taxes.. 196.6 197.9 248.3 79.5 | 126.4
- ----------------------------------------------------------------------------|--------------
Operating Income.............. 24.4 24.7 35.2 18.0 | 17.3
Other Income (Expense)........ 4.7 5.3 2.6 (4.8) | 5.5
Net Interest Charges.......... 13.1 14.1 13.3 7.2 | 8.2
- ----------------------------------------------------------------- ----------|--------------
Net Income.................... $ 16.0 $ 15.9 $ 24.5 $ 6.0 | $ 14.6
===========================================================================================
Three Months Ended
-----------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
2000 2000 2000 2000
- -------------------------------------------------------------------------
(In millions)
Operating Revenues............ $203.0 $197.8 $227.5 $214.0
Operating Expenses and Taxes.. 164.2 180.2 215.7 147.0
- -------------------------------------------------------------------------
Operating Income.............. 38.8 17.6 11.8 67.0
Other Income (Expense)........ 1.8 4.8 (2.1) (3.1)
Net Interest Charges.......... 14.1 13.7 13.5 13.4
- -------------------------------------------------------------------------
Net Income (Loss)............. $ 26.5 $ 8.7 $ (3.8) $ 50.5
=========================================================================
21
Report of Independent Public Accountants
To the Stockholders and Board of Directors of
Metropolitan Edison Company:
We have audited the accompanying consolidated balance sheet and consolidated
statement of capitalization of Metropolitan Edison Company (a Pennsylvania
corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiaries
as of December 31, 2001 (post-merger), and the related consolidated statements
of income, common stockholder's equity, preferred stock, cash flows and taxes
for the period from January 1, 2001 to November 6, 2001 (pre-merger) and the
period from November 7, 2001 to December 31, 2001 (post-merger). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Metropolitan Edison Company and
subsidiaries as of December 31, 2000 and for each of the two years in the period
ended December 31, 2000 (pre-merger), were audited by other auditors whose
report dated January 31, 2001, expressed an unqualified opinion on those
statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 2001 financial statements referred to above present fairly,
in all material respects, the financial position of Metropolitan Edison Company
and subsidiaries as of December 31, 2001 (post-merger), and the results of their
operations and their cash flows for the period from January 1, 2001 to November
6, 2001 (pre-merger) and the period from November 7, 2001 to December 31, 2001
(post-merger), in conformity with accounting principles generally accepted in
the United States.
Arthur Andersen LLP
Cleveland, Ohio,
March 18, 2002.
22
Report of Independent Accountants
To the Board of Directors and Stockholder of
Metropolitan Edison Company:
In our opinion, the consolidated balance sheet as of December 31, 2000 and the
related consolidated statements of income, and cash flows for each of the two
years in the period ended December 31, 2000 (appearing on the accompanying index
of the Metropolitan Edison Company 2001 Annual Report to Stockholders
incorporated by reference in this Form 10-K) present fairly, in all material
respects, the financial position, results of operations and cash flows of
Metropolitan Edison Company and Subsidiary Companies at December 31, 2000 and
for each of the two years in the period ended December 31, 2000, in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
January 31, 2001
23