-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IKKQ7T2FN0tFETaEQBPdwuiNxT+eZcRlaNLOGaSJk+KHuhdMD3MbYg40zESrVS73 UitKQi2BPCBIG7AdAf6y9Q== /in/edgar/work/20000814/0001031296-00-000042/0001031296-00-000042.txt : 20000921 0001031296-00-000042.hdr.sgml : 20000921 ACCESSION NUMBER: 0001031296-00-000042 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTENERGY CORP CENTRAL INDEX KEY: 0001031296 STANDARD INDUSTRIAL CLASSIFICATION: [4911 ] IRS NUMBER: 341843785 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-21011 FILM NUMBER: 697638 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN ST CITY: AKRON STATE: OH ZIP: 44308-1890 BUSINESS PHONE: 3303845100 MAIL ADDRESS: STREET 1: 76 SOUTH MAIN ST CITY: AKRON STATE: OH ZIP: 44308-1890 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CLEVELAND ELECTRIC ILLUMINATING CO CENTRAL INDEX KEY: 0000020947 STANDARD INDUSTRIAL CLASSIFICATION: [4911 ] IRS NUMBER: 340150020 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02323 FILM NUMBER: 697639 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN STREET STREET 2: C/O FIRSTENERGY CORP CITY: AKRON STATE: OH ZIP: 44308 BUSINESS PHONE: 2166229800 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OHIO EDISON CO CENTRAL INDEX KEY: 0000073960 STANDARD INDUSTRIAL CLASSIFICATION: [4911 ] IRS NUMBER: 340437786 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02578 FILM NUMBER: 697640 BUSINESS ADDRESS: STREET 1: 76 S MAIN ST CITY: AKRON STATE: OH ZIP: 44308 BUSINESS PHONE: 2163845100 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENNSYLVANIA POWER CO CENTRAL INDEX KEY: 0000077278 STANDARD INDUSTRIAL CLASSIFICATION: [4911 ] IRS NUMBER: 250718810 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03491 FILM NUMBER: 697641 BUSINESS ADDRESS: STREET 1: 1 E WASHINGTON ST STREET 2: P O BOX 891 CITY: NEW CASTLE STATE: PA ZIP: 16103-0891 BUSINESS PHONE: 4126525531 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOLEDO EDISON CO CENTRAL INDEX KEY: 0000352049 STANDARD INDUSTRIAL CLASSIFICATION: [4911 ] IRS NUMBER: 344375005 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03583 FILM NUMBER: 697642 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN STREET CITY: AKRON STATE: OH ZIP: 43308 BUSINESS PHONE: 2166229800 10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to _________ Commission Registrant; State of Incorporation; I.R.S. Employer File Number Address; and Telephone Number Identification No. - ----------- ----------------------------------- ------------------ 333-21011 FIRSTENERGY CORP. 34-1843785 (An Ohio Corporation) 76 South Main Street Akron, Ohio 44308 Telephone (800)736-3402 1-2578 OHIO EDISON COMPANY 34-0437786 (An Ohio Corporation) 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-2323 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY 34-0150020 (An Ohio Corporation) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-3583 THE TOLEDO EDISON COMPANY 34-4375005 (An Ohio Corporation) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-3491 PENNSYLVANIA POWER COMPANY 25-0718810 (A Pennsylvania Corporation) 1 East Washington Street P. O. Box 891 New Castle, Pennsylvania 16103 Telephone (412)652-5531 Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: OUTSTANDING CLASS AS OF AUGUST 4, 2000 ----- -------------------- FirstEnergy Corp., $.10 par value 228,615,241 Ohio Edison Company, $9 par value 100 The Cleveland Electric Illuminating Company, no par value 79,590,689 The Toledo Edison Company, $5 par value 39,133,887 Pennsylvania Power Company, $30 par value 6,290,000 FirstEnergy Corp. is the sole holder of Ohio Edison Company, The Cleveland Electric Illuminating Company and The Toledo Edison Company common stock; Ohio Edison Company is the sole holder of Pennsylvania Power Company common stock. This combined Form 10-Q is separately filed by FirstEnergy Corp., Ohio Edison Company, Pennsylvania Power Company, The Cleveland Electric Illuminating Company and The Toledo Edison Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to any other registrant, except that information relating to any of the four FirstEnergy subsidiaries is also attributed to FirstEnergy. This Form 10-Q includes forward looking statements based on information currently available to management. Such statements are subject to certain risks and uncertainties. These statements typically contain, but are not limited to, the terms "anticipate", "potential", "expect", "believe", "estimate" and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy market prices, legislative and regulatory changes (including revised environmental requirements), availability and cost of capital, inability to accomplish or realize anticipated benefits of strategic goals and other similar factors. TABLE OF CONTENTS Pages Part I. Financial Information Notes to Financial Statements 1-5 FirstEnergy Corp. Consolidated Statements of Income 6 Consolidated Balance Sheets 7-8 Consolidated Statements of Cash Flows 9 Report of Independent Public Accountants 10 Management's Discussion and Analysis of Results of Operations and Financial Condition 11-15 Ohio Edison Company Consolidated Statements of Income 16 Consolidated Balance Sheets 17-18 Consolidated Statements of Cash Flows 19 Report of Independent Public Accountants 20 Management's Discussion and Analysis of Results of Operations and Financial Condition 21-23 The Cleveland Electric Illuminating Company Consolidated Statements of Income 24 Consolidated Balance Sheets 25-26 Consolidated Statements of Cash Flows 27 Report of Independent Public Accountants 28 Management's Discussion and Analysis of Results of Operations and Financial Condition 29-31 The Toledo Edison Company Consolidated Statements of Income 32 Consolidated Balance Sheets 33-34 Consolidated Statements of Cash Flows 35 Report of Independent Public Accountants 36 Management's Discussion and Analysis of Results of Operations and Financial Condition 37-38 Pennsylvania Power Company Statements of Income 39 Balance Sheets 40-41 Statements of Cash Flows 42 Report of Independent Public Accountants 43 Management's Discussion and Analysis of Results of Operations and Financial Condition 44-45 Part II. Other Information PART I. FINANCIAL INFORMATION - ------------------------------ FIRSTENERGY CORP. AND SUBSIDIARIES OHIO EDISON COMPANY AND SUBSIDIARIES THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY THE TOLEDO EDISON COMPANY AND SUBSIDIARY PENNSYLVANIA POWER COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) 1 - FINANCIAL STATEMENTS: The principal business of FirstEnergy Corp. (FirstEnergy) is the holding, directly or indirectly, of all of the outstanding common stock of its four principal electric utility operating subsidiaries, Ohio Edison Company (OE), The Cleveland Electric Illuminating Company (CEI), The Toledo Edison Company (TE) and Pennsylvania Power Company (Penn). These utility subsidiaries are referred to throughout as "Companies." Penn is a wholly owned subsidiary of OE. The condensed unaudited financial statements of FirstEnergy and each of the Companies reflect all normal recurring adjustments that, in the opinion of management, are necessary to fairly present results of operations for the interim periods. These statements should be read in connection with the financial statements and notes included in the combined Annual Report on Form 10-K for the year ended December 31, 1999 for FirstEnergy and the Companies. Significant intercompany transactions have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. The reported results of operations are not indicative of results of operations for any future period. Certain prior year amounts have been reclassified to conform with the current year presentation. Penn's results of operations for the 1999 interim periods include Penn and its wholly owned subsidiary, Penn Power Energy, Inc. (PPE). Penn's interest in PPE was transferred to FirstEnergy Services Corp. (FE Services), an affiliate, effective December 31, 1999. The sole assets of the subsidiary trust that is the obligor on the preferred securities included in FirstEnergy's and OE's capitalization are $123,711,350 principal amount of 9% Junior Subordinated Debentures of OE due December 31, 2025. 2 - COMMITMENTS, GUARANTEES AND CONTINGENCIES: CAPITAL EXPENDITURES- FirstEnergy's current forecast reflects expenditures of approximately $3.0 billion (OE-$766 million, CEI-$529 million, TE-$259 million, Penn-$234 million and unregulated subsidiaries-$1.212 billion) for property additions and improvements from 2000-2004, of which approximately $670 million (OE-$213 million, CEI-$109 million, TE-$99 million, Penn-$29 million and unregulated subsidiaries-$220 million) is applicable to 2000. Investments for additional nuclear fuel during the 2000-2004 period are estimated to be approximately $462 million (OE-$113 million, CEI-$157 million, TE-$108 million and Penn-$84 million), of which approximately $152 million (OE-$33 million, CEI-$56 million, TE-$39 million and Penn-$24 million) applies to 2000. STOCK REPURCHASE PROGRAM- On November 17, 1998, the Board of Directors authorized the repurchase of up to 15 million shares of FirstEnergy's common stock over a three-year period beginning in 1999. Repurchases are made on the open market, at prevailing prices, and are funded primarily through the use of operating cash flows. During the second quarter of 2000 and the first six months of 2000, FirstEnergy repurchased and retired 1.7 million shares (average price of $24.29 per share) and 3.2 million shares (average price of $22.71 per share) of its common stock, respectively. In 1999, FirstEnergy also entered into a forward contract with Credit Suisse First Boston Corporation for the purchase of 1.4 million shares of FirstEnergy's common stock at an average price of $24.22 per share to be settled on November 3, 2000. The contract may be settled through gross physical settlement, net share settlement or net cash settlement at FirstEnergy's election. - 1 - ENVIRONMENTAL MATTERS- Various federal, state and local authorities regulate the Companies with regard to air and water quality and other environmental matters. The Companies estimate capital expenditures for environmental compliance of approximately $292 million (OE-$144 million, CEI-$84 million, TE-$33 million and Penn-$31 million), which is included in the construction estimate given under "Capital Expenditures" for 2000 through 2004. The Companies are required to meet federally approved sulfur dioxide (SO2) regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day the unit is in violation. The Environmental Protection Agency (EPA) has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Companies cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. The Companies are in compliance with the current SO2 and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions are being achieved by burning lower- sulfur fuel, generating more electricity from lower-emitting plants, and/or purchasing emission allowances. NOx reductions are being achieved through combustion controls and the generation of more electricity at lower-emitting plants. In September 1998, the EPA finalized regulations requiring additional NOx reductions from the Companies' Ohio and Pennsylvania facilities by May 2003. The EPA's NOx Transport Rule imposes uniform reductions of NOx emissions across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. In March 2000, the U.S. Court of Appeals for the D.C. Circuit upheld EPA's NOx Transport Rule except as applied to the State of Wisconsin and portions of Georgia and Missouri. By October 2000, states are to submit revised State Implementation Plans (SIP) which comply with individual state NOx budgets established by the EPA contemplating an approximate 85% reduction in utility plant NOx emissions from projected 2007 emissions. A proposed Federal Implementation Plan accompanied the NOx Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In another separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NOx emissions which are alleged to contribute to ozone pollution in the eight petitioning states. The EPA position is that the Section 126 petitions will be adequately addressed by the NOx Transport Program, but a December 17, 1999 rulemaking established an alternative program which would require nearly identical 85% NOx reductions at 392 utility plants, including the Companies' Ohio and Pennsylvania plants, by May 2003, in the event implementation of the NOx Transport Rule is delayed. Additional Section 126 petitions were filed by New Jersey, Maryland, Delaware and the District of Columbia in mid-1999 and are still under evaluation by the EPA. The Companies continue to evaluate their compliance plans and other compliance options. In July 1997, EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. In May 1999, the U.S. Court of Appeals for the D.C. Circuit remanded both standards to the EPA, having found constitutional and other defects in the new NAAQS rules. The D.C. Circuit Court, on October 29, 1999, denied an EPA petition for rehearing. The U.S. Supreme Court, on May 22, 2000, agreed to hear appeals of both EPA and industry petitioners regarding the new NAAQS rules and a decision is expected in 2001. The cost of compliance with these regulations, if they are reinstated, may be substantial and will depend on the manner in which they are ultimately implemented, if at all, by the states in which the Companies operate affected facilities. In September 1999, FirstEnergy received, and subsequently in October 1999, OE and Penn received, a citizen suit notification letter from the New York Attorney General's office alleging Clean Air Act violations at the W. H. Sammis Plant. In November 1999, OE and Penn received a citizen suit notification letter from the Connecticut Attorney General's office alleging Clean Air Act violations at the Sammis Plant. In November 1999 and March 2000, the EPA issued Notices of Violation (NOV) or a Compliance Order to eight utilities covering 36 power plants, including the Sammis Plant. In addition, the U.S. Department of Justice filed seven civil complaints against various investor-owned utilities, which included a complaint against OE and Penn in the U.S. District Court for the Southern District of Ohio. The NOV and complaint allege violations of the Clean Air Act based on operation and maintenance of the Sammis Plant dating back to 1984. The complaint requests permanent injunctive relief to require the installation of "best available control technology" and civil penalties of up to $27,500 per day of violation. Although unable to predict the outcome of these proceedings, FirstEnergy believes the Sammis Plant is in full compliance with the Clean Air Act and the NOV and complaint are without merit. Penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. It is anticipated at this time that the Sammis Plant will continue to operate until these proceedings are concluded. - 2 - As a result of the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act of 1976, federal and state hazardous waste regulations have been promulgated. Certain fossil-fuel combustion waste products, such as coal ash, were exempted from hazardous waste disposal requirements pending EPA's evaluation of the need for future regulation. EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. On April 25, 2000, EPA announced that it will develop national standards regulating disposal of coal ash under its authority to regulate nonhazardous waste. CEI and TE have been named as "potentially responsible parties" (PRPs) at waste disposal sites which may require cleanup under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. Allegations of disposal of hazardous substances at historical sites and the liability involved, are often unsubstantiated and subject to dispute. Federal law provides that all PRPs for a particular site be held liable on a joint and several basis. CEI and TE have accrued liabilities of $4.4 million and $0.6 million, respectively, as of June 30, 2000, based on estimates of the costs of cleanup and the proportionate responsibility of other PRPs for such costs. CEI and TE believe that waste disposal costs will not have a material adverse effect on their financial condition, cash flows or results of operations. MERGER AGREEMENT - On August 8, 2000, FirstEnergy and GPU, Inc. (GPU), a Pennsylvania corporation, entered into an Agreement and Plan of Merger. Under the merger agreement, FirstEnergy would acquire all of the outstanding shares of GPU's common stock for approximately $4.5 billion in cash and FirstEnergy common stock. FirstEnergy would also assume approximately $7.4 billion of GPU's debt and preferred stock. The transaction would be accounted for by the purchase method. The combined company's principal electric utility operating companies would include OE, CEI, TE and Penn, as well as GPU's electric utility operating companies - Jersey Central Power & Light Company, Metropolitan Edison Company, and Pennsylvania Electric Company, which serve customers in Pennsylvania and New Jersey. Under the agreement, GPU shareholders would receive the equivalent of $36.50 for each share of GPU common stock they own, payable in cash or in FirstEnergy common stock, as long as FirstEnergy's common stock price is between $24.24 and $29.63. Each GPU shareholder would be able to elect the form of consideration they wish to receive, subject to proration so that the aggregate consideration to all GPU shareholders will be 50 percent cash and 50 percent FirstEnergy common stock. Each GPU share converted into FirstEnergy common stock would receive not less than 1.2318 and not more than 1.5055 shares of FirstEnergy common stock, depending on the average closing price of FirstEnergy stock during the 20-day trading period ending on the sixth trading date prior to the merger closing. The stock portion of the consideration is expected to be tax-free to GPU shareholders. The Merger has been approved by the respective Boards of Directors of the Company and GPU and is expected to close promptly after all of the conditions to the consummation of the Merger, including shareholder approval and the receipt of all necessary regulatory approvals, are fulfilled or waived. The receipt of all necessary regulatory approvals, including, the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, the Federal Communications Commission, and the Securities and Exchange Commission, are expected to take approximately one year. 3 - REGULATORY ACCOUNTING: On July 19, 2000, the Public Utilities Commission of Ohio (PUCO) approved FirstEnergy's transition plan by adopting the agreement with major parties to the transition plan it had filed in 1999, on behalf of OE, CEI and TE under Ohio's electric utility restructuring law. Major parties to the agreement included the PUCO staff, the Ohio Consumers' Counsel, the Industrial Energy Users-Ohio, certain power marketers and others. Major provisions of the agreement consisted of approval of the transition plan as filed, including recovery of transition costs through no later than 2006 for OE, mid-2007 for TE and 2008 for CEI, except where a longer period of recovery is provided for in the agreement. The total transition cost amounts to be recovered are as filed in the transition plan. FirstEnergy will also allow preferred access over FirstEnergy's subsidiaries to non-affiliated marketers, brokers and aggregators to 1,120 megawatts of generation capacity through 2005 at established prices for sales to the Ohio operating companies' retail customers. The base electric rates for distribution service for OE, CEI and TE under their prior respective regulatory plans will be extended from December 31, 2005 through December 31, 2007. The transition rate credits for customers under their prior regulatory plans will also be extended through the Companies' respective transition cost recovery periods. - 3 - Beginning January 1, 2001 when Ohio electric customers have the choice to select their generation suppliers under the Ohio restructuring law, the agreement provides to FirstEnergy's Ohio customers electing alternative suppliers, an additional incentive applied to the shopping credit of 45% for residential customers, 30% for commercial customers and 15% for industrial customers as reductions from their bills, when they select alternative energy providers (the credits exceed the price FirstEnergy will be offering to electricity suppliers relating to the 1,120 megawatts described on the previous page). The amount of the incentive will serve to reduce the amortization of transition costs during the market development period (January 1, 2001 through December 31, 2005) and will be recovered over the remaining transition cost recovery periods. If the customer shopping goals established in the agreement are not achieved by the end of 2005, the transition cost recovery periods could be shortened for OE, CEI and TE to reduce recovery by as much as $500 million (OE-$250 million, CEI-$170 million and TE-$80 million), but any such adjustment would be computed on a class-by-class and pro-rata basis. The application of Statement of Financial Accounting Standards (SFAS) No. 71 "Accounting for the Effect of Certain Types of Regulation" (SFAS 71) to OE's generation business and the nonnuclear generation businesses of CEI and TE was discontinued effective with the issuance of the PUCO order. The June 30, 2000 balance sheets reflect the effect of such discontinuance with the reduction of plant investment and the corresponding recognition of regulatory assets recoverable through future regulatory cash flows for generating assets that were impaired in the amount of $1.6 billion ($1.2 billion, $304 million and $53 million for OE, CEI and TE, respectively). The Companies continue to bill and collect cost-based rates for their transmission and distribution services, which remain regulated; accordingly, it is appropriate that the Companies continue the application of SFAS 71 to those respective operations. 4 - NEW ACCOUNTING STANDARD: In June 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 138 (SFAS 138), "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133." SFAS 138 modifies Statement No. 133 (SFAS 133) in several ways. The most significant impact of the amendment for FirstEnergy is expansion of the "normal purchases and normal sales" exception in SFAS 133 to include contracts that implicitly or explicitly permit net settlement. As a consequence, a number of contracts entered into in the normal course of business which were previously required to be accounted for as derivative instruments under SFAS 133 will now be excluded from those provisions, reducing SFAS 133's potential for volatility on earnings and other comprehensive income. The amendment also modifies certain hedging requirements of SFAS 133. FirstEnergy anticipates adopting SFAS 138 on its effective date of January 1, 2001. FirstEnergy is in the process of quantifying the impacts on its financial statements of adopting this new standard. - 4 - 5 - SEGMENT INFORMATION: FirstEnergy's primary segment is its Electric Utility Operating Companies which include four electric utilities that provide electric service in Ohio and Pennsylvania. Its other material business segment consists of the subsidiaries that operate unregulated businesses. Financial data for these business segments are as follows: Segment Financial Information - -----------------------------
Electric Unregulated Reconciling Three Months Ended: Utilities Businesses Eliminations Totals - ------------------ --------- ----------- ------------ ------ (In millions) June 30, 2000 - ------------- External revenues $ 1,342 $ 360 $ -- $ 1,702 Intersegment revenues 29 40 (69) -- Total revenues 1,371 400 (69) 1,702 Depreciation and amortization 220 5 -- 225 Net interest charges 128 17 (11) 134 Income taxes 99 (4) -- 95 Net income/Earnings on common stock 141 (4) (2) 135 Total assets 17,169 2,092 (1,160) 18,101 Property additions 102 22 -- 124 Acquisitions -- -- -- -- June 30, 1999 - ------------- External revenues $ 1,335 $ 184 $ -- $ 1,519 Intersegment revenues 8 45 (53) -- Total revenues 1,343 229 (53) 1,519 Depreciation and amortization 208 9 -- 217 Net interest charges 143 16 (12) 147 Income taxes 101 -- -- 101 Net income/Earnings on common stock 125 3 (3) 125 Total assets 17,393 1,924 (934) 18,383 Property additions 69 24 -- 93 Acquisitions -- -- -- --
Electric Unregulated Reconciling Six Months Ended: Utilities Businesses Eliminations Totals - ------------------ --------- ----------- ------------ ------ (In millions) June 30, 2000 - ------------- External revenues $ 2,617 $ 693 $ -- $ 3,310 Intersegment revenues 57 66 (123) -- Total revenues 2,674 759 (123) 3,310 Depreciation and amortization 417 10 -- 427 Net interest charges 259 35 (25) 269 Income taxes 196 (3) -- 193 Net income/Earnings on common stock 282 (2) (4) 276 Total assets 17,169 2,092 (1,160) 18,101 Property additions 219 57 -- 276 Acquisitions -- -- -- -- June 30, 1999 - ------------- External revenues $ 2,612 $ 329 $ -- $ 2,941 Intersegment revenues 16 68 (84) -- Total revenues 2,628 397 (84) 2,941 Depreciation and amortization 394 14 -- 408 Net interest charges 285 32 (24) 293 Income taxes 197 (3) -- 194 Net income/Earnings on common stock 268 (2) (4) 262 Total assets 17,393 1,924 (934) 18,383 Property additions 121 54 -- 175 Acquisitions -- 9 -- 9
- 5 - FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (In thousands, except per share amounts) REVENUES: Electric sales $1,281,232 $1,288,196 $2,487,707 $2,497,318 Other - electric utilities 67,453 54,125 141,908 128,327 Facilities services 136,604 116,717 254,750 221,323 Trading services 90,141 17,089 137,350 28,566 Other 126,674 42,612 288,319 65,757 ---------- ---------- ---------- ---------- Total revenues 1,702,104 1,518,739 3,310,034 2,941,291 ---------- ---------- ---------- ---------- EXPENSES: Fuel and purchased power 213,364 204,273 392,554 408,630 Other expenses: Electric utilities 420,036 418,956 828,481 789,971 Facilities services 130,745 110,566 245,976 209,959 Trading services 101,676 20,460 149,592 33,264 Other 109,420 34,840 249,585 64,170 Provision for depreciation and amortization 224,794 216,700 426,878 407,913 General taxes 137,977 139,466 279,032 277,560 ---------- ---------- ---------- ---------- Total expenses 1,338,012 1,145,261 2,572,098 2,191,467 ---------- ---------- ---------- ---------- INCOME BEFORE INTEREST AND INCOME TAXES 364,092 373,478 737,936 749,824 ---------- ---------- ---------- ---------- NET INTEREST CHARGES: Interest expense 124,243 131,359 247,086 260,740 Allowance for borrowed funds used during construction and capitalized interest (7,022) (3,376) (13,126) (6,061) Subsidiaries' preferred stock dividends 17,125 19,379 35,413 38,760 ---------- ---------- ---------- ---------- Net interest charges 134,346 147,362 269,373 293,439 ---------- ---------- ---------- ---------- INCOME TAXES 95,142 100,794 193,041 194,342 ---------- ---------- ---------- ---------- NET INCOME $ 134,604 $ 125,322 $ 275,522 $ 262,043 ========== ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 223,542 227,367 224,201 228,254 ======= ======= ======= ======= BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK $ .60 $ .55 $1.23 $1.15 ===== ===== ===== ===== DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $.375 $.375 $ .75 $ .75 ===== ===== ===== ===== The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral part of these statements.
- 6 - FIRSTENERGY CORP. CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2000 1999 ------------ ------------ (In thousands) ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 87,560 $ 111,788 Receivables- Customers (less accumulated provisions of $9,682,000 and $6,719,000, respectively, for uncollectible accounts) 369,053 322,687 Other (less accumulated provisions of $8,579,000 and $5,359,000, respectively, for uncollectible accounts) 419,704 445,242 Materials and supplies, at average cost- Owned 113,482 154,834 Under consignment 121,325 99,231 Prepayments and other 228,146 167,894 ----------- ----------- 1,339,270 1,301,676 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT: In service 11,788,170 14,645,131 Less--Accumulated provision for depreciation 4,757,755 5,919,170 ----------- ----------- 7,030,415 8,725,961 Construction work in progress 413,893 367,380 ----------- ----------- 7,444,308 9,093,341 ----------- ----------- INVESTMENTS: Capital trust investments 1,233,368 1,281,834 Nuclear plant decommissioning trusts 574,967 543,694 Letter of credit collateralization 277,763 277,763 Other 623,121 599,443 ----------- ----------- 2,709,219 2,702,734 ----------- ----------- DEFERRED CHARGES: Regulatory assets 4,048,288 2,543,427 Goodwill 2,117,054 2,129,902 Property taxes 267,226 276,997 Other 175,914 175,970 ----------- ----------- 6,608,482 5,126,296 ----------- ----------- $18,101,279 $18,224,047 =========== ===========
- 7 - FIRSTENERGY CORP. CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2000 1999 ------------ ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CURRENT LIABILITIES: Currently payable long-term debt and preferred stock $ 643,682 $ 762,520 Short-term borrowings 464,867 417,819 Accounts payable 357,237 360,379 Accrued taxes 439,983 409,724 Accrued interest 121,781 125,397 Other 276,111 301,572 ----------- ----------- 2,303,661 2,377,411 ----------- ----------- CAPITALIZATION: Common stockholders' equity- Common stock, $.10 par value, authorized 300,000,000 shares - 229,231,141 and 232,454,287 shares outstanding, respectively 22,923 23,245 Other paid-in capital 3,651,147 3,722,375 Accumulated comprehensive income (195) (195) Retained earnings 1,052,245 945,241 Unallocated employee stock ownership plan common stock - 6,296,746 and 6,778,905 shares, respectively (117,715) (126,776) ----------- ----------- Total common stockholders' equity 4,608,405 4,563,890 Preferred stock of consolidated subsidiaries- Not subject to mandatory redemption 648,395 648,395 Subject to mandatory redemption 124,356 136,246 OE obligated mandatorily redeemable preferred securities of subsidiary trust holding solely OE subordinated debentures 120,000 120,000 Long-term debt 5,965,925 6,001,264 ----------- ----------- 11,467,081 11,469,795 ----------- ----------- DEFERRED CREDITS: Accumulated deferred income taxes 2,185,061 2,231,265 Accumulated deferred investment tax credits 257,937 269,083 Other postretirement benefits 519,384 498,184 Nuclear plant decommissioning costs 589,651 562,295 Other 778,504 816,014 ----------- ----------- 4,330,537 4,376,841 ----------- ----------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ----------- ----------- $18,101,279 $18,224,047 =========== =========== The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral part of these balance sheets.
- 8 - FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $134,604 $ 125,322 $275,522 $ 262,043 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 224,794 216,700 426,878 407,913 Nuclear fuel and lease amortization 24,943 21,354 54,704 47,949 Other amortization, net (3,451) (3,789) (6,618) (4,254) Deferred income taxes, net (27,965) (8,310) (33,338) (14,745) Investment tax credits, net (6,941) (3,375) (12,495) (6,819) Receivables (46,929) (142,077) (20,828) (160,447) Materials and supplies 12,420 11,734 19,258 6,728 Accounts payable 15,177 37,015 (3,142) 49,173 Other (40,559) 18,207 (85,933) (102,130) -------- --------- -------- --------- Net cash provided from operating activities 286,093 272,781 614,008 485,411 -------- --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 241,099 181,088 258,418 193,365 Short-term borrowings net 111,040 -- 47,048 -- Redemptions and Repayments- Common stock 40,050 31,076 74,012 75,575 Preferred stock 13,714 21,489 13,714 21,489 Long-term debt 347,469 12,206 449,524 93,008 Short-term borrowings, net -- 35,992 -- 24,728 Common stock dividend payments 84,063 85,299 168,518 171,436 -------- --------- -------- --------- Net cash used for financing activities 133,157 4,974 400,302 192,871 -------- --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 124,397 92,971 276,077 183,676 Cash investments (1,930) 63 (41,036) (41,205) Other (14,045) (6,148) 2,893 1,334 -------- --------- -------- --------- Net cash used for investing activities 108,422 86,886 237,934 143,805 -------- --------- -------- --------- Net increase (decrease) in cash and cash equivalents 44,514 180,921 (24,228) 148,735 Cash and cash equivalents at beginning of period 43,046 45,612 111,788 77,798 -------- --------- -------- --------- Cash and cash equivalents at end of period $ 87,560 $ 226,533 $ 87,560 $ 226,533 ======== ========= ======== ========= The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral part of these statements.
- 9 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To FirstEnergy Corp.: We have reviewed the accompanying consolidated balance sheet of FirstEnergy Corp. (an Ohio corporation) and subsidiaries as of June 30, 2000, and the related consolidated statements of income and cash flows for the three- month and six-month periods ended June 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of FirstEnergy Corp. and subsidiaries as of December 31, 1999 (not presented herein), and, in our report dated February 11, 2000, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio August 11, 2000 - 10 - FIRSTENERGY CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations - --------------------- Revenues increased $183.4 million in the second quarter of 2000 and $368.7 million during the six-month period ended June 30, 2000, as compared to the same periods in 1999, principally as a result of increased sales by our unregulated businesses. The sources of increases in the second quarter and first half of 2000, compared to the corresponding periods of 1999, are summarized in the following table. Sources of Revenue Changes ------------------------- Three Six Months Months ------ ------ (In millions) Electric Utility Operating Companies (EUOC): Electric sales $(6.9) $(9.6) Other electric utility revenues 13.3 13.6 ----- ----- Total EUOC 6.4 4.0 Unregulated Businesses: Retail electric sales 43.3 94.0 FirstEnergy Trading Services, Inc. (FETS) 73.1 108.8 Other businesses 60.6 161.9 ------ ------ Net Revenue Increase $183.4 $368.7 ====== ====== Electric Sales EUOC sales revenues decreased $6.9 million in the second quarter and $9.6 million in the first six months of 2000 from the same periods in 1999. Lower kilowatt-hour prices (representing sales from traditional vertically integrated operations) offset an increase in EUOC electric generation sales in both periods. EUOC other electric revenues increased in both the second quarter and first half of 2000, compared to the same periods in 1999, primarily due to additional FirstEnergy transmission and Penn distribution revenues. Total electric generation sales, including unregulated sales, increased in the second quarter and first six months of 2000, compared to the corresponding periods in 1999. In the first half of 2000, unregulated retail sales were nearly double last year's level. FirstEnergy continued to make progress in expanding its retail electric sales to target unregulated markets in the eastern portion of the U.S. Sales to wholesale customers also contributed to the increase in unregulated sales with a 16.9% increase in the second quarter and a 33.8% increase in the first six months of 2000, compared to the same periods last year. EUOC kilowatt-hour deliveries (to customers in their franchise service areas) increased in both the second quarter and year-to-date periods from the corresponding periods in 1999. Kilowatt-hour deliveries to all customer groups -- residential, commercial and industrial -- grew in the second quarter of 2000, compared to the same quarter in 1999, as a result of continuing economic strength in the service area. Changes in electric generation sales and kilowatt-hour deliveries in the second quarter and first half of 2000 compared to the respective periods of 1999 are summarized in the following table. - 11 - Changes in KWH Sales ------------------- Increase (Decrease) Three Six Months Months ------ ------ Electric Generation Sales: EUOC - Retail 2.5% 1.9% Unregulated 63.1% 94.6% ---- ---- Total Electric Generation Sales 10.0% 11.4% ==== ==== EUOC Distribution Deliveries: Residential 1.6% (1.6)% Commercial 1.0% 1.9% Industrial 3.3% 4.4% ---- ---- Total Distribution Deliveries 2.2% 1.9% ==== ==== Other Sales Retail natural gas sales were the primary contributor to increases in other business revenues in the second quarter and first six months of 2000 from the same periods in 1999. Collectively, three FETS gas acquisitions, occurring late in the first and fourth quarters of 1999 -- Atlas Gas Marketing Inc., Belden Energy Services Company and Volunteer Energy LLC -- significantly expanded FETS revenues in the second quarter and year-to-date periods of 2000 compared to last year. Operating Expenses The $9.1 million increase in fuel and purchased power costs in the second quarter of 2000, compared to the same quarter of 1999, resulted from a $43.0 million increase in purchased power costs partially offset by a $33.9 million decrease in fuel expense. Purchased power costs increased primarily due to replacement power purchased during the Davis-Besse Plant refueling outage, an unplanned 11-day outage at the Perry Plant and fossil plant maintenance outages. Despite a 4.5% increase in generation, fuel expense decreased 19.2%. Factors contributing to the overall reduced fuel expense included: - A higher proportion of nuclear generation (i.e. lower cost fuel) due to improved nuclear availability and increased nuclear ownership from the exchange of generating assets with Duquesne Light Company (Duquesne) in December 1999; - The expiration of an above-market coal contract; and - More extensive use of lower cost western coal. The above factors also contributed to a $16.1 million decrease in fuel and purchased power costs in the first six months of 2000 from the same period of 1999. More internal generation in the first three months of 2000, compared to the same period of 1999, tempered FirstEnergy's need for purchased power in the first half of 2000. Other expenses for the EUOC increased slightly in the second quarter of 2000 from the second quarter of last year, reflecting planned spring maintenance work at fossil units and higher nuclear expenses associated with the Duquesne asset exchange, which were partially offset by gains in 2000 from the sale of emission allowances. Other expenses for the EUOC rose in the first half of 2000, compared to the same period of 1999, as a result of nuclear outage costs and the increased nuclear ownership. Expansion of sales activity by FirstEnergy's unregulated businesses also resulted in corresponding increases in other non-EUOC operating costs of $176.0 million in the second quarter of 2000 and $337.8 million in the first six months of 2000 from the respective periods of 1999. Accelerated cost recovery in connection with OE's rate reduction plan resulted in additional depreciation and amortization in the second quarter and year-to-date periods of 2000, compared to the same periods in 1999. - 12 - Accelerated cost recovery increased $22.5 million in the second quarter and $35.1 million in the first six months of 2000 from the corresponding periods last year. Net Interest Charges Interest charges continued their downward trend, decreasing $13.0 million in the second quarter and $24.1 million in the first six months of 2000 compared to the same periods of 1999, due to debt and preferred stock redemption and refinancing activities. During the first half of 2000, redemption and refinancing activities totaled $130.4 million and $253.8 million, respectively, and will result in annualized savings of $12.1 million, of which $10.8 million relates to activities occurring in the second quarter. Net Income As a result of additional revenues and reduced interest charges that were partially offset by higher other operating expenses, depreciation and amortization, and fuel and purchased power costs, net income increased to $134.6 million in the second quarter of 2000, compared to $125.3 million in the same period of 1999. Basic and diluted earnings per share of common stock were $0.60 in the second quarter of 2000, compared to $0.55 in second quarter of 1999. In the first six months of 2000, net income increased to $275.5 million from $262.0 million in the first half of 1999 as a result of additional revenues, reduced interest charges and lower fuel and purchased power costs, that were partially offset by higher operating expenses and depreciation and amortization. Basic and diluted earnings per share of common stock were $1.23 in the first six months of 2000, compared to $1.15 for the same period in 1999. Pending Merger - -------------- On August 8, 2000, FirstEnergy entered into an agreement to merge with GPU, Inc. (GPU), a Pennsylvania corporation, headquartered in Morristown, New Jersey. Under the merger agreement, FirstEnergy would acquire all of the outstanding shares of GPU's common stock for approximately $4.5 billion in cash and FirstEnergy common stock. FirstEnergy would also assume approximately $7.4 billion of GPU's debt and preferred stock. The transaction would be accounted for by the purchase method. The combined company's principal electric utility operating companies would include OE, CEI, TE and Penn, as well as GPU's electric utility operating companies - Jersey Central Power & Light Company, Metropolitan Edison Company, and Pennsylvania Electric Company, which serve customers in Pennsylvania and New Jersey. The Merger has been approved by the respective Boards of Directors of FirstEnergy and GPU and is expected to close promptly after all of the conditions to the consummation of the Merger, including shareholder approval and the receipt of all necessary regulatory approvals, are fulfilled or waived. The receipt of all necessary regulatory approvals, including, the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, the Federal Communications Commission, and the Securities and Exchange Commission, are expected to take approximately one year. Capital Resources and Liquidity - ------------------------------ FirstEnergy and its subsidiaries have continuing cash needs for planned capital expenditures, maturing debt and preferred stock sinking fund requirements. During the last two quarters of 2000, capital requirements for property additions and capital leases are expected to be about $471 million, including $84 million for nuclear fuel. The Companies have additional cash requirements of approximately $275.1 million to meet sinking fund requirements for preferred stock and maturing long-term debt during the second half of 2000. These cash requirements are expected to be satisfied from internal cash and/or short-term credit arrangements. During the second quarter of 2000, FirstEnergy repurchased 1.7 million shares of its common stock at an average price of $24.29 per share. For the first two quarters of 2000, the Company repurchased 3.2 million shares of common stock at an average price of $22.71 per share. FirstEnergy has an equity forward purchase contract to - 13 - purchase an additional 1.4 million shares in November 2000 at an average price of $24.22 per share (see Note 2, - "Stock Repurchase Program"). As of June 30, 2000, FirstEnergy and its subsidiaries had about $87.6 million of cash and temporary investments and $464.9 million of short-term indebtedness. Available borrowings included $303.0 million from unused revolving lines of credit. On May 31, 2000, FirstEnergy, along with 20 other leading energy companies, formed Pantellos Corporation, which will manage an open, independent Internet e-marketplace for buyers and sellers from the $130 billion North American utility and energy supply market. When Pantellos begins operation next year, FirstEnergy expects to realize savings by using the e-market site and also to benefit from its ownership interest in the new company. Market Risk - Commodity Prices - ----------------------------- FirstEnergy is exposed to market risk due to fluctuations in electricity, coal, natural gas and oil prices. To manage the volatility relating to these exposures, FirstEnergy uses a variety of derivative instruments, including forward contracts, options and futures contracts. These derivatives are used principally for hedging purposes, and to a lesser extent, for trading purposes. Although FirstEnergy believes that the policies and procedures it has adopted are prudent, its financial position, results of operations or cash flow may be adversely affected by unanticipated fluctuations in the commodity prices for electricity, coal, natural gas, oil, or by the failure of contract counterparties to perform. Environmental Matters - --------------------- On May 22, 2000, the U.S. Supreme Court agreed to hear appeals of both EPA and industry petitioners regarding new National Ambient Air Quality Standard (NAAQS) rules (see Note 2, "Environmental Matters"). The appeal stems from the decision of the U.S. Court of Appeals for the D.C. Circuit to remand ozone and ultra-fine particulate matter standards to the EPA, having found constitutional and other defects in the new NAAQS rules. The D.C. Circuit Court subsequently denied an EPA petition for rehearing. A decision is expected from the U.S. Supreme Court in 2001. Regulatory Matters - ------------------ On July 19, 2000, the PUCO approved FirstEnergy's plan for transition to customer choice (see Note 3). As part of its authorization, the PUCO approved an agreement between FirstEnergy and major groups representing most of FirstEnergy's customers regarding the transition to customer choice in the selection of alternative suppliers. Major parties to the plan included the PUCO staff, the Ohio Consumers' Counsel, the Industrial Energy Users-Ohio, certain power marketers and others. Major provisions of the approved transition plan include: - The opportunity to recover transition costs as filed - through 2006 for OE, through mid-2007 for TE, and through 2008 for CEI; - A commitment to sell 1,120 megawatts of FirstEnergy's generating capacity to marketers, brokers and aggregators at set prices for sales to retail customers in its Ohio operating companies' service areas; - A 5% reduction in the generation portion of residential customer bills, saving those customers between 2% to 3% on a typical monthly bill; - Additional incentives applied to shopping credits for residential, commercial and industrial customers of 45%, 30% and 15%, respectively, as reductions from their bills, when they select alternative energy providers (the credits exceed the price FirstEnergy will be offering to electricity suppliers relating to the 1,120 megawatts described above); - 14 - - A continuation of OE's, CEI's and TE's programs that maintain current rates for distribution services through December 31, 2007; and - FirstEnergy assumes the risk of not recovering up to $500 million of transition revenue if the rate of customers switching their service from OE, CEI and TE has not reached an average of 20% over any twelve month period ending between January 1, 2001 and December 31, 2005. The application of SFAS 71 was discontinued for OE's generation business and the nonnuclear generation businesses of CEI and TE effective with the issuance of the PUCO order. The balance sheets as of June 30, 2000 reflect the effect of such discontinuance with $1.6 billion of impaired plant investment recognized as regulatory assets to be recovered as transition costs. The Companies continue to bill and collect cost-based rates for their transmission and distribution services, which remain subject to cost-based regulation; accordingly, it is appropriate that the Companies continue the application of SFAS 71 to those respective operations. - 15 - OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (In thousands) OPERATING REVENUES $667,256 $646,729 $1,311,621 $1,279,847 -------- -------- ---------- ---------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 106,800 109,443 202,378 221,465 Nuclear operating costs 73,042 76,879 184,661 149,315 Other operating costs 98,145 117,773 195,739 218,056 -------- -------- ---------- ---------- Total operation and maintenance expenses 277,987 304,095 582,778 588,836 Provision for depreciation and amortization 136,783 125,151 250,734 228,555 General taxes 58,008 61,562 117,461 123,822 Income taxes 60,362 41,904 106,983 89,667 -------- -------- ---------- ---------- Total operating expenses and taxes 533,140 532,712 1,057,956 1,030,880 -------- -------- ---------- ---------- OPERATING INCOME 134,116 114,017 253,665 248,967 OTHER INCOME 11,481 13,080 23,804 22,398 -------- -------- ---------- ---------- INCOME BEFORE NET INTEREST CHARGES 145,597 127,097 277,469 271,365 -------- -------- ---------- ---------- NET INTEREST CHARGES: Interest on long-term debt 42,056 46,222 84,595 91,305 Allowance for borrowed funds used during construction and capitalized interest (1,508) (885) (4,067) (1,982) Other interest expense 7,589 9,164 15,060 17,783 Subsidiaries' preferred stock dividend requirements 3,626 3,856 7,252 7,713 -------- -------- ---------- ---------- Net interest charges 51,763 58,357 102,840 114,819 -------- -------- ---------- ---------- NET INCOME 93,834 68,740 174,629 156,546 PREFERRED STOCK DIVIDEND REQUIREMENTS 2,808 2,913 5,616 5,826 -------- -------- ---------- ---------- EARNINGS ON COMMON STOCK $ 91,026 $ 65,827 $ 169,013 $ 150,720 ======== ======== ========== ========== The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral part of these statements. - 16 - OHIO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2000 1999 ------------ ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $5,621,302 $8,118,783 Less--Accumulated provision for depreciation 2,557,546 3,713,781 ---------- ---------- 3,063,756 4,405,002 ---------- ---------- Construction work in progress- Electric plant 216,623 205,671 Nuclear fuel 3,008 10,059 ---------- ---------- 219,631 215,730 ---------- ---------- 3,283,387 4,620,732 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: PNBV Capital Trust 461,694 469,124 Nuclear plant decommissioning trusts 253,862 236,903 Letter of credit collateralization 277,763 277,763 Other. 436,900 425,872 ---------- ---------- 1,430,219 1,409,662 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 67,176 87,175 Receivables- Customers (less accumulated provisions of $6,522,000 and $6,452,000, respectively, for uncollectible accounts) 296,639 278,484 Associated companies 251,377 221,653 Other (less accumulated provisions of $1,000,000 for uncollectible accounts at both dates) 27,016 36,281 Notes receivable from associated companies 24,234 -- Materials and supplies, at average cost- Owned 53,299 69,119 Under consignment 61,139 55,278 Prepayments and other 101,253 73,682 ---------- ---------- 882,133 821,672 ---------- ---------- DEFERRED CHARGES: Regulatory assets 2,789,795 1,618,319 Property taxes 99,290 100,906 Unamortized sale and leaseback costs 82,601 85,100 Other 38,170 44,355 ---------- ---------- 3,009,856 1,848,680 ---------- ---------- $8,605,595 $8,700,746 ========== ==========
- 17 - OHIO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2000 1999 ------------ ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholder's equity- Common stock, $9 par value, authorized 175,000,000 shares - 100 shares outstanding $ 1 $ 1 Other paid-in capital 2,098,728 2,098,728 Retained earnings 585,563 525,731 ---------- ---------- Total common stockholder's equity 2,684,292 2,624,460 Preferred stock- Not subject to mandatory redemption 160,965 160,965 Subject to mandatory redemption 5,000 5,000 Preferred stock of consolidated subsidiary- Not subject to mandatory redemption 39,105 39,105 Subject to mandatory redemption 15,000 15,000 OE obligated mandatorily redeemable preferred securities of subsidiary trust holding solely OE subordinated debentures 120,000 120,000 Long-term debt 2,177,472 2,175,812 ---------- ---------- 5,201,834 5,140,342 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 304,208 422,838 Short-term borrowings- Associated companies -- 35,583 Other 308,745 322,713 Accounts payable- Associated companies 128,336 50,883 Other 58,490 63,219 Accrued taxes 226,856 207,362 Accrued interest 34,005 37,572 Other 73,437 94,967 ---------- ---------- 1,134,077 1,235,137 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 1,402,911 1,468,478 Accumulated deferred investment tax credits 135,112 143,336 Nuclear plant decommissioning costs 253,011 239,695 Other postretirement benefits 153,961 148,421 Other 324,689 325,337 ---------- ---------- 2,269,684 2,325,267 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $8,605,595 $8,700,746 ========== ========== The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral part of these balance sheets.
- 18 - OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 93,834 $ 68,740 $174,629 $156,546 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 136,783 125,151 250,734 228,555 Nuclear fuel and lease amortization 12,595 9,483 25,697 20,160 Deferred income taxes, net (21,730) (18,745) (37,688) (30,755) Investment tax credits, net (5,480) (1,907) (9,573) (3,884) Receivables (45,669) 30,463 (38,614) (4,907) Materials and supplies 6,217 (3,507) 9,959 (2,765) Accounts payable 19,364 25,552 72,724 37,970 Other (51,448) (24,362) (13,619) (30,893) -------- -------- -------- -------- Net cash provided from operating activities 144,466 210,868 434,249 370,027 -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 174,934 190,680 192,252 158,515 Short-term borrowings, net 1,388 74,594 -- 89,820 Redemptions and Repayments- Preferred stock -- 6,085 -- 6,085 Long-term debt 245,366 10,558 316,399 19,140 Short-term borrowings, net -- -- 49,551 -- Dividend Payments- Common stock 50,200 251,865 109,200 333,603 Preferred stock 2,789 3,057 5,597 5,826 -------- -------- -------- -------- Net cash used for financing activities 122,033 6,291 288,495 116,319 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 45,064 40,749 133,185 94,787 Loans to associated companies -- -- 24,234 -- Loan payments from associated companies (76,479) -- -- -- Other (4,721) (5,969) 8,334 7,798 -------- -------- -------- -------- Net cash used for (provided from) investing activities (36,136) 34,780 165,753 102,585 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 58,569 169,797 (19,999) 151,123 Cash and cash equivalents at beginning of period 8,607 14,539 87,175 33,213 -------- -------- -------- -------- Cash and cash equivalents at end of period $ 67,176 $184,336 $ 67,176 $184,336 ======== ======== ======== ======== The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral part of these statements.
- 19 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Ohio Edison Company: We have reviewed the accompanying consolidated balance sheet of Ohio Edison Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiaries as of June 30, 2000, and the related consolidated statements of income and cash flows for the three-month and six-month periods ended June 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Ohio Edison Company and subsidiaries as of December 31, 1999 (not presented herein), and, in our report dated February 11, 2000, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio August 11, 2000 - 20 - OHIO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations - --------------------- Operating revenues increased $20.5 million in the second quarter and $31.8 million during the six-month period ended June 30, 2000, compared to the same periods in 1999. Higher second quarter and year-to- date operating revenues resulted from increased kilowatt-hour sales, which were partially offset by lower unit prices. Residential and industrial customers combined to increase total retail kilowatt-hour sales in the second quarter of 2000, while sales to commercial customers decreased, compared to the same period last year. Industrial customers were the only customer group contributing to the increase in total retail kilowatt-hour sales in the first half of 2000 compared to the first half of 1999. Industrial kilowatt-hour sales in both periods benefited from a rebound in demand for domestic steel, as the area economy continued to support expanding industrial sales. Additional available internal generation and continuing demand for wholesale power combined to increase kilowatt-hour sales significantly to the wholesale market in both the second quarter and first six months of 2000, compared to the previous year. Retail and wholesale demand combined to increase total kilowatt-hour sales by 15.4% in the second quarter and 11.1% in the first half of 2000 from the corresponding periods in 1999. Changes in kilowatt-hour sales by customer class for the second quarter and first six months of 2000, compared to 1999, are summarized in the following table: Changes in KWH Sales -------------------- Increase (Decrease) Three Six Months Months ------ ------ Residential 1.6% (0.4)% Commercial (2.6)% (2.1)% Industrial 3.1% 5.0% ---- ---- Total Retail 1.0% 1.2% Wholesale 83.1% 58.7% ---- ---- Total Sales 15.4% 11.1% ==== ==== Operating Expenses and Taxes Total operating expenses and taxes were nearly unchanged in the second quarter and increased $27.1 million in the first half of 2000 from the corresponding periods in 1999. Lower operation and maintenance expenses and general taxes were substantially offset by higher depreciation and amortization and income taxes in the second quarter of 2000, compared to the second quarter of 1999. In the first six months of 2000, the increase in operating expenses and taxes from the same period in 1999 resulted from higher nuclear expense, depreciation and amortization and income taxes, offset by reductions in fuel and purchased power costs, other operating expenses and general taxes. Lower fuel and purchased power costs in both the second quarter and first half of 2000, compared to the same periods of 1999, occurred due to reduced fuel expense -- down $7.5 million and $23.3 million, respectively. Two factors contributed to the lower fuel expense, which occurred despite a 19.6% second quarter increase in generation and a 13.6% increase in generation over the first half of 2000, compared to the prior year. These factors included a higher proportion of nuclear generation (i.e., lower cost fuel) due to increased nuclear generation ownership and improved nuclear availability, and the expiration of an above-market coal contract. The increased nuclear generation ownership resulted from the exchange of generating assets with Duquesne in December 1999. Nuclear operating costs decreased slightly in the second quarter despite the increased nuclear generation ownership due to less nuclear refueling outage work being done at OE nuclear units in the second quarter of 2000, compared to the second quarter of last year. However, in the first six months of 2000, nuclear operating expenses - 21 - increased $35.3 million from the same period in 1999 primarily due to the refueling outage related costs at Beaver Valley Unit 1 and increased ownership of the Beaver Valley Plant following the asset exchange. Other operating costs decreased by $19.6 million in the second quarter and $22.3 million in the first half of 2000 from the corresponding periods last year. Approximately one-half of the reductions resulted from gains on the sales of emission allowances. In addition, the transfer of ownership in PPE from Penn, a wholly owned subsidiary, to FE Services, an affiliated company, and reduced customer program expenses contributed to the lower other operating costs in the second quarter and first half of 2000. Accelerated cost recovery in connection with OE's rate plan resulted in an $11.6 million increase in depreciation and amortization in the second quarter and a $22.2 million increase in the first six months of 2000 from the corresponding periods of the previous year. Accelerated recovery of nuclear and regulatory assets under the OE rate plan and Penn's restructuring plan totaled $86.8 million in the second quarter and $144.0 million in the first half of 2000, compared to $64.3 million and $108.9 million in the corresponding periods of last year. General taxes decreased in both the second quarter and year-to-date periods of 2000, compared to 1999, primarily due to a tax settlement and reduced gross receipts taxes. Net Interest Charges Net interest charges declined in the second quarter and first six months of 2000 compared to the same periods last year due to debt redemption and refinancing activities. Interest on short-term debt also declined in both periods as a result of reduced borrowings. During the first half of 2000, redemption and refinancing activities totaled $86.1 million and $186.5 million, respectively, and will result in annualized savings of $6.6 million, of which $6.4 million relates to activities occurring in the second quarter. Capital Resources and Liquidity - ------------------------------- OE and Penn (OE companies) have continuing cash requirements for planned capital expenditures, maturing debt and preferred stock sinking fund requirements. During the last two quarters of 2000, capital requirements for property additions and leases are expected to be about $165 million, including $31 million for nuclear fuel. The OE companies will need additional cash of approximately $34.9 million (excluding an OE revolving credit agreement) to meet sinking fund payments for preferred stock and maturing long-term debt during the remainder of 2000. These cash requirements are expected to be satisfied from internal cash and/or short- term credit arrangements. As of June 30, 2000, the OE companies had about $91.4 million of cash and temporary investments and $308.7 million of short-term indebtedness. In addition, the OE companies' available borrowing capability included $103.0 million from unused revolving lines of credit and up to $2.0 million from a bank facility on a short-term basis at the bank's discretion. As of June 30, 2000, OE had the capability to issue up to $1.2 billion of additional first mortgage bonds on the basis of property additions and retired bonds. Environmental Matters - --------------------- On May 22, 2000, the U.S. Supreme Court agreed to hear appeals of both EPA and industry petitioners regarding new NAAQS rules (see Note 2, "Environmental Matters"). The appeal stems from the decision of the U.S. Court of Appeals for the D.C. Circuit to remand ozone and ultra-fine particulate matter standards to the EPA, having found constitutional and other defects in the new NAAQS rules. The D.C. Circuit Court subsequently denied an EPA petition for rehearing. A decision is expected from the U.S. Supreme Court in 2001. Regulatory Matters - ------------------ On July 19, 2000, the PUCO approved FirstEnergy's plan for transition to customer choice (see Note 3) on OE's behalf as well as for its other Ohio electric utility operating companies - CEI and TE. As part of its authorization, the PUCO approved the settlement agreement between FirstEnergy and major groups representing most of the parties in FirstEnergy's transition cost proceeding before the PUCO. Major parties to the approved settlement included the PUCO staff, the Ohio Consumers' Counsel, the Industrial Energy Users-Ohio, certain power marketers and others. - 22 - Major provisions of the approved transition plan include: - The opportunity to recover transition costs as filed through 2006 for OE; - A commitment to sell 1,120 megawatts of FirstEnergy's generating capacity to marketers, brokers and aggregators at set prices for sales to retail customers in its Ohio operating companies' service areas; - A 5% reduction in the generation portion of residential customer bills, saving those customers between 2% to 3% on a typical monthly bill; - Additional incentives applied to shopping credits for residential, commercial and industrial customers of 45%, 30% and 15%, respectively, as reductions from their bills, when they select alternative energy providers (the credits exceed the price FirstEnergy will be offering to electricity suppliers relating to the 1,120 megawatts described above); - Maintaining current rates for OE's customers for distribution services through December 31, 2007; and - OE assumes the risk of not recovering up to $250 million of transition revenue if the rate of customers switching their service from OE has not reached an average of 20% over any twelve month period ending between January 1, 2001 and December 31, 2005. The application of SFAS 71 was discontinued for OE's generation business effective with the issuance of the PUCO order. The balance sheet as of June 30, 2000, reflects the effect of such discontinuance with $1.2 billion of impaired plant investment recognized as regulatory assets to be recovered as transition costs. OE continues to bill and collect cost-based rates for its transmission and distribution services, which remain subject to cost-based regulation; accordingly, it is appropriate that OE continues the application of SFAS 71 to its transmission and distribution operations. - 23 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (In thousands) OPERATING REVENUES $470,635 $476,851 $894,292 $900,794 -------- -------- -------- -------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 107,682 100,554 196,660 191,584 Nuclear operating costs 49,007 40,305 78,438 69,821 Other operating costs 92,803 92,360 175,020 177,277 -------- -------- -------- -------- Total operation and maintenance expenses 249,492 233,219 450,118 438,682 Provision for depreciation and amortization 57,511 58,311 115,525 115,998 General taxes 54,020 54,629 110,924 108,642 Income taxes 22,670 29,163 44,000 49,318 -------- -------- -------- -------- Total operating expenses and taxes 383,693 375,322 720,567 712,640 -------- -------- -------- -------- OPERATING INCOME 86,942 101,529 173,725 188,154 OTHER INCOME 2,857 3,864 6,285 5,217 -------- -------- -------- -------- INCOME BEFORE NET INTEREST CHARGES 89,799 105,393 180,010 193,371 -------- -------- -------- -------- NET INTEREST CHARGES: Interest on long-term debt 51,659 53,812 102,843 107,565 Allowance for borrowed funds used during construction (560) (517) (1,072) (733) Other interest expense (credit) (554) (517) 275 (996) -------- -------- --------- -------- Net interest charges 50,545 52,778 102,046 105,836 -------- -------- --------- -------- NET INCOME 39,254 52,615 77,964 87,535 PREFERRED STOCK DIVIDEND REQUIREMENTS 6,615 8,541 14,405 17,082 -------- -------- -------- -------- EARNINGS ON COMMON STOCK $ 32,639 $ 44,074 $ 63,559 $ 70,453 ======== ======== ======== ======== The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating Company are an integral part of these statements.
- 24 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2000 1999 ------------ ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $4,147,571 $4,479,098 Less--Accumulated provision for depreciation 1,498,947 1,498,798 ---------- ---------- 2,648,624 2,980,300 ---------- ---------- Construction work in progress- Electric plant 55,807 55,002 Nuclear fuel 1,932 408 ---------- ---------- 57,739 55,410 ---------- ---------- 2,706,363 3,035,710 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust 491,838 517,256 Nuclear plant decommissioning trusts 191,279 183,291 Other 19,878 20,708 ---------- ---------- 702,995 721,255 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 178 376 Receivables- Customers (less accumulated provision of $2,500,000 for uncollectible accounts at June 30, 2000) 15,149 17,010 Associated companies 11,594 18,318 Other (less accumulated provisions of $1,000,000 for uncollectible accounts at both dates) 137,252 171,274 Notes receivable from associated companies 27,700 -- Materials and supplies, at average cost- Owned 29,212 39,294 Under consignment 36,909 23,721 Prepayments and other 77,798 56,447 ---------- ---------- 335,792 326,440 ---------- ---------- DEFERRED CHARGES: Regulatory assets 831,361 539,824 Goodwill 1,427,984 1,440,283 Property taxes 124,488 132,643 Other 9,623 12,606 ---------- ---------- 2,393,456 2,125,356 ---------- ---------- $6,138,606 $6,208,761 ========== ==========
- 25 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2000 1999 ------------ ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholder's equity- Common stock, without par value, authorized 105,000,000 shares - 79,590,689 shares outstanding $ 931,962 $ 931,962 Retained earnings 68,213 34,654 ---------- ---------- Total common stockholder's equity 1,000,175 966,616 Preferred stock- Not subject to mandatory redemption 238,325 238,325 Subject to mandatory redemption 104,356 116,246 Long-term debt 2,669,003 2,682,795 ---------- ---------- 4,011,859 4,003,982 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 250,026 240,684 Accounts payable- Associated companies 95,535 85,950 Other 48,920 50,570 Notes payable to associated companies 13,812 103,471 Accrued taxes 210,745 177,006 Accrued interest 60,772 60,740 Other 62,761 83,292 ---------- ---------- 742,571 801,713 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 571,080 567,478 Accumulated deferred investment tax credits 85,035 86,999 Nuclear plant decommissioning costs 200,472 192,484 Pensions and other postretirement benefits 218,378 220,731 Other 309,211 335,374 ---------- ---------- 1,384,176 1,403,066 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $6,138,606 $6,208,761 ========== ========== The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating Company are an integral part of these balance sheets.
- 26 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 39,254 $ 52,615 $ 77,964 $ 87,535 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 57,511 58,311 115,525 115,998 Nuclear fuel and lease amortization 7,590 6,665 17,616 15,971 Other amortization (3,451) (3,789) (6,618) (4,254) Deferred income taxes, net (6,697) 5,136 (2,612) 8,876 Investment tax credits, net (982) (987) (1,964) (1,974) Receivables (500) (90,588) 42,607 (105,781) Materials and supplies 507 11,005 (3,106) 9,092 Accounts payable 55,016 16,220 7,935 33,467 Other 16,493 19,411 (25,286) (50,722) -------- -------- -------- -------- Net cash provided from operating activities 164,741 73,999 222,061 108,208 -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemptions and Repayments- Preferred stock 13,714 13,714 13,714 13,714 Long-term debt 8,603 6,346 18,740 24,014 Short-term borrowings, net 97,652 12,883 89,659 24,728 Dividend Payments- Common stock 20,000 75,811 30,000 82,974 Preferred stock 7,789 8,541 15,579 17,082 -------- -------- -------- -------- Net cash used for financing activities 147,758 117,295 167,692 162,512 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 30,025 20,204 44,475 30,299 Loans to associated companies -- -- 27,700 -- Loan payments from associated companies (5,120) (59,077) -- (53,509) Capital trust investments (1,294) -- (25,418) (25,898) Other (894) 6,135 7,810 10,456 -------- -------- -------- -------- Net cash used for (provided from) investing activities 22,717 (32,738) 54,567 (38,652) -------- -------- -------- -------- Net decrease in cash and cash equivalents 5,734 10,558 198 15,652 Cash and cash equivalents at beginning of period 5,912 14,432 376 19,526 -------- -------- -------- -------- Cash and cash equivalents at end of period $ 178 $ 3,874 $ 178 $ 3,874 ======== ======== ======== ======== The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating Company are an integral part of these statements.
- 27 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Cleveland Electric Illuminating Company: We have reviewed the accompanying consolidated balance sheet of The Cleveland Electric Illuminating Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiary as of June 30, 2000, and the related consolidated statements of income and cash flows for the three-month and six-month periods ended June 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of The Cleveland Electric Illuminating Company and subsidiary as of December 31, 1999 (not presented herein), and, in our report dated February 11, 2000, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio August 11, 2000 - 28 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations - --------------------- Operating revenues decreased $6.2 million in the second quarter and $6.5 million during the six-month period ended June 30, 2000, compared to the same periods in 1999. Other electric revenues were down in the second quarter of 2000 due to steam sales and joint ownership billings to Duquesne no longer being made due to the asset exchange. However, electric sales revenue increased in the second quarter and year-to-date periods of 2000 from the prior year due to higher kilowatt-hour sales, which were substantially offset by lower unit prices. Total kilowatt-hour sales increased 5.3% in the second quarter of 2000 and 10.7% in the year-to-date period, compared to the same periods last year as a result of higher sales to wholesale customers. Although available internal generation was lower in the second quarter of 2000 than the same period in 1999, sales to wholesale customers increased due to continued demand for power in the wholesale market. For the year-to-date period of 2000, sales to wholesale customers increased substantially, compared to the first six months of 1999, due to additional internal generation and strong wholesale demand. Total retail sales decreased 0.6% in the second quarter of 2000 and increased slightly in the year-to-date period of 2000, compared to the same periods last year. Kilowatt-hour sales to commercial and industrial customers decreased in the second quarter, which more than offset an increase in residential sales. In the first six months of 2000, sales to commercial and industrial customers were higher, compared to the corresponding periods of 1999, but were substantially offset by lower kilowatt-hour sales to residential customers. Changes in kilowatt-hour sales by customer class for the second quarter and first six months of 2000, compared to 1999, are summarized in the following table: Changes in KWH Sales -------------------- Increase (Decrease) Three Six Months Months ------ ------ Residential 1.1% (4.0)% Commercial (1.0)% 1.2% Industrial (1.2)% 2.0% ---- ----- Total Retail (0.6)% 0.2% Wholesale 52.8% 148.5% ---- ----- Total Sales 5.3% 10.7% ==== ===== Operating Expenses and Taxes Total operating expenses and taxes increased $8.4 million in the second quarter and $7.9 million in the year-to-date period from the corresponding periods in 1999. The increases resulted primarily from higher fuel and purchased power costs and nuclear operating costs. Fuel and purchased power costs increased $7.1 million in the second quarter and $5.1 million in the first six months of 2000, compared to the same periods last year. Refueling and maintenance outages in the second quarter of 2000 reduced available internal generation and contributed to a $27.1 million increase in purchased power costs, compared to the second quarter of 1999. Partially offsetting the higher purchased power costs was a $20.0 million reduction in fuel expense which resulted from less internal generation, as well as the following factors: - A higher proportion of nuclear generation (i.e., lower cost fuel); - The expiration of an above-market coal contract; and - More extensive use of lower cost western coal. - 29 - In the year-to-date period of 2000, purchased power costs increased $28.9 million, compared to the same period of 1999, with an offsetting $23.8 million reduction in fuel expense, which occurred despite a 4.1% increase in generation. Fuel expense benefited from the same fuel supply factors discussed above. Nuclear operating costs increased in the second quarter and first six months of 2000 from the corresponding periods in 1999 due to a refueling outage at the Davis-Besse Plant. Other operating costs were lower in the first six months of 2000, compared to the first half of 1999, partially due to a larger nuclear insurance refund. Higher general taxes in the first six months of 2000, compared to the same period last year, resulted from additional payroll taxes related to nuclear outage work. Net Interest Charges and Preferred Stock Dividend Requirements Net interest charges declined in the second quarter and first six months of 2000 from the same periods last year due to debt redemption and refinancing activities. During the second quarter of 2000, CEI redeemed $13.7 million of preferred stock, which will result in annualized savings of $1.3 million. Capital Resources and Liquidity - ------------------------------- CEI has continuing cash needs for planned capital expenditures, maturing debt and preferred stock sinking fund requirements. During the last two quarters of 2000, capital requirements for property additions and capital leases are expected to be about $98 million, including $34 million for nuclear fuel. CEI will need additional cash of approximately $194.8 million to meet sinking fund payments for preferred stock and maturing long-term debt during the remainder of 2000. These cash requirements are expected to be satisfied from internal cash and/or short-term credit arrangements. As of June 30, 2000, CEI had approximately $27.9 million of cash and temporary investments and $13.8 million of short-term indebtedness to associated companies. Under its first mortgage indenture, as of June 30, 2000, CEI had the capability to issue up to $628 million of additional first mortgage bonds on the basis of property additions and retired bonds. Environmental Matters - --------------------- On May 22, 2000, the U.S. Supreme Court agreed to hear appeals of both EPA and industry petitioners regarding new NAAQS rules (see Note 2, "Environmental Matters"). The appeal stems from the decision of the U.S. Court of Appeals for the D.C. Circuit to remand ozone and ultra-fine particulate matter standards to the EPA, having found constitutional and other defects in the new NAAQS rules. The D.C. Circuit Court subsequently denied an EPA petition for rehearing. A decision is expected from the U.S. Supreme Court in 2001. Regulatory Matters - ------------------ On July 19, 2000, the PUCO approved FirstEnergy's plan for transition to customer choice (see Note 3) on CEI's behalf, as well as for its other Ohio electric utility operating companies - OE and TE. As part of its authorization, the PUCO approved the settlement agreement between FirstEnergy and major groups representing most of the parties in FirstEnergy's transition cost proceeding before the PUCO. Major parties to the approved settlement included the PUCO staff, the Ohio Consumers' Counsel, the Industrial Energy Users-Ohio, certain power marketers and others. Major provisions of the approved transition plan include: - The opportunity to recover transition costs as filed through 2008 for CEI; - A commitment to sell 1,120 megawatts of FirstEnergy's generating capacity to marketers, brokers and aggregators at set prices for sales to retail customers in its Ohio operating companies' service areas; - A 5% reduction in the generation portion of residential customer bills, saving those customers between 2% to 3% on a typical monthly bill; - 30 - - Additional incentives applied to shopping credits for residential, commercial and industrial customers of 45%, 30% and 15%, respectively, as reductions from their bills, when they select alternative energy providers (the credits exceed the price FirstEnergy will be offering to electricity suppliers relating to the 1,120 megawatts described on the previous page); - Maintaining current rates for CEI's customers for distribution services through December 31, 2007; and - CEI assumes the risk of not recovering up to $170 million of transition revenue if the rate of customers switching their service from CEI has not reached an average of 20% over any twelve month period ending between January 1, 2001 and December 31, 2005. The application of SFAS 71 was discontinued for the nonnuclear generation business of CEI effective with the issuance of the PUCO order. The balance sheet as of June 30, 2000, reflects the effect of such discontinuance with $304 million of impaired plant investment recognized as regulatory assets to be recovered as transition costs. CEI continues to bill and collect cost-based rates for its transmission and distribution services, which remain subject to cost-based regulation; accordingly, it is appropriate that CEI continues the application of SFAS 71 to its transmission and distribution operations. - 31 - THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (In thousands) OPERATING REVENUES $235,379 $235,184 $452,770 $459,446 -------- -------- -------- -------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 49,665 42,444 82,798 78,846 Nuclear operating costs 52,721 49,232 90,918 91,126 Other operating costs 40,816 43,796 78,029 77,310 -------- -------- -------- -------- Total operation and maintenance expenses 143,202 135,472 251,745 247,282 Provision for depreciation and amortization 26,382 26,153 52,562 51,896 General taxes 21,576 22,734 45,000 43,832 Income taxes 10,652 11,302 25,970 28,209 -------- -------- -------- -------- Total operating expenses and taxes 201,812 195,661 375,277 371,219 -------- -------- -------- -------- OPERATING INCOME 33,567 39,523 77,493 88,227 OTHER INCOME 2,196 3,245 4,885 6,167 -------- -------- -------- -------- INCOME BEFORE NET INTEREST CHARGES 35,763 42,768 82,378 94,394 -------- -------- -------- -------- NET INTEREST CHARGES: Interest on long-term debt 18,628 21,117 37,769 42,158 Allowance for borrowed funds used during construction (2,931) (404) (4,145) (606) Other interest expense (credit) (464) (1,153) (1,296) (2,514) -------- -------- -------- -------- Net interest charges 15,233 19,560 32,328 39,038 -------- -------- -------- -------- NET INCOME 20,530 23,208 50,050 55,356 PREFERRED STOCK DIVIDEND REQUIREMENTS 4,075 4,069 8,139 8,139 -------- -------- -------- -------- EARNINGS ON COMMON STOCK $ 16,455 $ 19,139 $ 41,911 $ 47,217 ======== ======== ======== ======== The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an integral part of these statements.
- 32 - THE TOLEDO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2000 1999 ------------ ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $1,721,900 $1,776,534 Less--Accumulated provision for depreciation 661,968 670,866 ---------- ---------- 1,059,932 1,105,668 ---------- ---------- Construction work in progress- Electric plant 133,734 95,854 Nuclear fuel 1,230 386 ---------- ---------- 134,964 96,240 ---------- ---------- 1,194,896 1,201,908 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust 279,836 295,454 Nuclear plant decommissioning trusts 129,826 123,500 Other. 3,854 4,678 ---------- ---------- 413,516 423,632 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 301 312 Receivables- Customers (less accumulated provision of $300,000 for uncollectible accounts at June 30, 2000) 8,271 12,965 Associated companies 12,473 40,998 Other 6,681 9,827 Notes receivable from associated companies 13,812 7,863 Materials and supplies, at average cost- Owned 17,032 23,243 Under consignment 23,277 20,232 Prepayments and other 32,460 25,931 ---------- ---------- 114,307 141,371 ---------- ---------- DEFERRED CHARGES: Regulatory assets 427,132 385,284 Goodwill 464,380 465,169 Property taxes 43,448 43,448 Other 5,459 6,116 ---------- ---------- 940,419 900,017 ---------- ---------- $2,663,138 $2,666,928 ========== ==========
- 33 - THE TOLEDO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2000 1999 ------------ ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholder's equity- Common stock, $5 par value, authorized 60,000,000 shares - 39,133,887 shares outstanding $ 195,670 $ 195,670 Other paid-in capital 328,559 328,559 Retained earnings 35,071 27,475 ---------- ---------- Total common stockholder's equity 559,300 551,704 Preferred stock not subject to mandatory redemption 210,000 210,000 Long-term debt 960,274 981,029 ---------- ---------- 1,729,574 1,742,733 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt 86,473 95,765 Accounts payable- Associated companies 49,654 20,537 Other 26,793 27,100 Notes payable to associated companies 51,934 33,876 Accrued taxes 49,836 57,742 Accrued interest 21,218 21,961 Other 31,922 60,414 ---------- ---------- 317,830 317,395 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 187,000 172,236 Accumulated deferred investment tax credits 37,790 38,748 Nuclear plant decommissioning costs 136,168 130,116 Pensions and other postretirement benefits 121,107 122,986 Other 133,669 142,714 ---------- ---------- 615,734 606,800 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $2,663,138 $2,666,928 ========== ========== The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an integral part of these balance sheets.
- 34 - THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ---------------------- 2000 1999 2000 1999 ---------- ---------- ---------- --------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 20,530 $ 23,208 $ 50,050 $ 55,356 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 26,382 26,153 52,562 51,896 Nuclear fuel and lease amortization 4,758 5,206 11,391 11,818 Deferred income taxes, net 1,412 6,623 8,020 10,305 Investment tax credits, net (479) (480) (958) (961) Receivables 11,530 57,935 36,365 42,518 Materials and supplies 2,833 3,467 3,166 1,087 Accounts payable 42,039 (4,105) 28,810 (5,213) Other (25,189) (22,932) (58,247) (60,412) -------- -------- -------- -------- Net cash provided from operating activities 83,816 95,075 131,159 106,394 -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 66,166 34,850 66,166 34,850 Short-term borrowings, net 1,224 -- 18,058 -- Redemptions and Repayments- Preferred stock -- 1,690 -- 1,690 Long-term debt 90,433 43,191 111,317 55,625 Dividend Payments- Common stock 16,300 60,351 34,300 60,351 Preferred stock 4,075 4,069 8,139 8,139 -------- -------- -------- -------- Net cash used for financing activities 43,418 74,451 69,532 90,955 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 28,068 9,991 65,777 18,922 Loans to associated companies 11,115 -- 5,949 -- Loan payments from associated companies -- (3,725) -- (863) Capital trust investments (636) 63 (15,618) (15,307) Other 1,851 9,751 5,530 12,110 -------- -------- -------- -------- Net cash used for investing activities 40,398 16,080 61,638 14,862 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents -- 4,544 (11) 577 Cash and cash equivalents at beginning of period 301 173 312 4,140 -------- -------- -------- -------- Cash and cash equivalents at end of period $ 301 $ 4,717 $ 301 $ 4,717 ======== ======== ======== ======== The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an integral part of these statements.
- 35 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Toledo Edison Company: We have reviewed the accompanying consolidated balance sheet of The Toledo Edison Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiary as of June 30, 2000, and the related consolidated statements of income and cash flows for the three-month and six-month periods ended June 30, 2000 and 1999. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of The Toledo Edison Company and subsidiary as of December 31, 1999 (not presented herein), and, in our report dated February 11, 2000, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1999, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio August 11, 2000 - 36 - THE TOLEDO EDISON COMPANY MANAGEMENT's DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations - --------------------- Operating revenues increased slightly in the second quarter and decreased $6.7 million during the six-month period ended June 30, 2000, compared to the same periods in 1999. Lower electric sales revenue led to the decrease in first-half operating revenues and resulted from lower unit prices, which were partially offset by additional kilowatt-hour sales. The reduced unit prices reflected in part a changing mix of sales, which included an increased proportion of lower-margin sales to wholesale customers. Sales to wholesale customers increased in the second quarter and first half of 2000, compared to the same periods last year due to continued demand in the wholesale market. Retail kilowatt-hour sales also increased in the second quarter and year-to-date periods of 2000, compared to the previous year. In the second quarter of 2000, sales to all customer groups - -- residential, commercial and industrial -- increased from the same period last year, with sales to industrial customers providing the greatest contribution. Changes in kilowatt-hour sales by customer class for the second quarter and first six months of 2000, compared to the same periods of last year, are summarized in the following table: Changes in KWH Sales -------------------- Increase (Decrease) Three Six Months Months ------ ------ Residential 1.2% (4.5)% Commercial 1.1% 0.6% Industrial 7.7% 2.3% ---- ---- Total Retail 4.7% 0.3% Wholesale 37.8% 57.6% ---- ---- Total Sales 10.7% 9.8% ==== ==== Operating Expenses and Taxes Total operating expenses and taxes increased $6.2 million in the second quarter and $4.1 million in the first half of 2000 from the corresponding periods in 1999, primarily due to higher fuel and purchased power costs. Fuel and purchased power costs increased $7.2 million in the second quarter and $4.0 million in the first six months of 2000 from the same periods last year. Refueling and maintenance outages in the second quarter of 2000 reduced available internal generation and contributed to a $13.6 million increase in purchased power costs from the same period in 1999. A $6.4 million reduction in fuel expense partially offset the increase in purchased power costs. The reduction in internal generation and the expiration of an above-market coal contract contributed to the lower fuel expense. In the first six months of 2000, purchased power costs increased $10.9 million, compared to the same period in 1999, with an offsetting $6.9 million reduction in fuel expense, which occurred despite a small increase in internal generation. Lower coal prices, due in part to the expiration of the above-market coal contract, contributed to the year- to-date reduction in fuel expense from the prior year. Nuclear operating costs increased in the second quarter due to a refueling outage at the Davis-Besse Plant. The reduction in other operating costs in the second quarter of 2000, compared to the second quarter of 1999, resulted in part from reduced employee benefit costs. Net Interest Charges Net interest charges declined in the second quarter and first six months of 2000 from the same periods last year due to debt redemption and refinancing activity. During the first half of 2000, redemption and refinancing activities totaled $30.6 million and $67.3 million, respectively, and will result in annualized savings of $4.2 million, of which $3.2 million relates to activities occurring in the second quarter. - 37 - Capital Resources and Liquidity - ------------------------------- TE has continuing cash needs for planned capital expenditures and maturing debt. During the last two quarters of 2000, capital requirements for property additions and capital leases are expected to be about $53 million, including $19 million for nuclear fuel. TE will need additional cash of approximately $45.4 million for maturing long-term debt during the remainder of 2000. These cash requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. As of June 30, 2000, TE had approximately $14.1 million of cash and temporary investments and $51.9 million of short-term indebtedness to associated companies. Under its first mortgage indenture, as of June 30, 2000, TE had the capability to issue up to $467 million of additional first mortgage bonds on the basis of property additions and retired bonds. Environmental Matters - --------------------- On May 22, 2000, the U.S. Supreme Court agreed to hear appeals of both EPA and industry petitioners regarding new NAAQS rules (see Note 2, "Environmental Matters"). The appeal stems from the decision of the U.S. Court of Appeals for the D.C. Circuit to remand ozone and ultra-fine particulate matter standards to the EPA, having found constitutional and other defects in the new NAAQS rules. The D.C. Circuit Court subsequently denied an EPA petition for rehearing. A decision is expected from the U.S. Supreme Court in 2001. Regulatory Matters - ------------------ On July 19, 2000, the PUCO approved FirstEnergy's plan for transition to customer choice (see Note 3) on TE's behalf as well as for its other Ohio electric utility operating companies - OE and CEI. As part of its authorization, the PUCO approved the settlement agreement between FirstEnergy and major groups representing most of the parties in FirstEnergy's transition cost proceeding before the PUCO. Major parties to the approved settlement included the PUCO staff, the Ohio Consumers' Counsel, the Industrial Energy Users-Ohio, certain power marketers and others. Major provisions of the approved transition plan include: - The opportunity to recover transition costs as filed through mid-2007 for TE; - A commitment to sell 1,120 megawatts of FirstEnergy's generating capacity to marketers, brokers and aggregators at set prices for sales to retail customers in its Ohio operating companies' service areas; - A 5% reduction in the generation portion of residential customer bills, saving those customers between 2% to 3% on a typical monthly bill; - Additional incentives applied to shopping credits for residential, commercial and industrial customers of 45%, 30% and 15%, respectively, as reductions from their bills, when they select alternative energy providers (the credits exceed the price FirstEnergy will be offering to electricity suppliers relating to the 1,120 megawatts described above); - Maintaining current rates for TE's customers for distribution services through December 31, 2007; and - TE assumes the risk of not recovering up to $80 million of transition revenue if the rate of customers switching their service from TE has not reached an average of 20% over any twelve month period ending between January 1, 2001 and December 31, 2005. The application of SFAS 71 was discontinued for TE's nonnuclear generation business effective with the issuance of the PUCO order. The balance sheet as of June 30, 2000, reflects the effect of such discontinuance with $53 million of impaired plant investment recognized as regulatory assets to be recovered as transition costs. TE continues to bill and collect cost-based rates for its transmission and distribution services, which remain subject to cost-based regulation; accordingly, it is appropriate that TE continues the application of SFAS 71 to its transmission and distribution operations. - 38 - PENNSYLVANIA POWER COMPANY STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ---------------------- 2000 1999 2000 1999 ---------- ---------- ---------- --------- (In thousands) OPERATING REVENUES $93,565 $82,117 $177,516 $163,489 ------- ------- -------- -------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 17,645 18,354 31,035 35,266 Nuclear operating costs 21,453 8,290 66,960 15,003 Other operating costs 16,044 16,517 29,579 31,245 ------- ------- -------- -------- Total operation and maintenance expenses 55,142 43,161 127,574 81,514 Provision for depreciation and amortization 11,898 16,278 27,629 30,715 General taxes 6,277 6,340 13,335 12,244 Income taxes 7,628 6,578 2,725 14,964 ------- ------- -------- -------- Total operating expenses and taxes 80,945 72,357 171,263 139,437 ------- ------- -------- -------- OPERATING INCOME 12,620 9,760 6,253 24,052 OTHER INCOME 431 250 844 1,247 ------- ------- -------- -------- INCOME BEFORE NET INTEREST CHARGES 13,051 10,010 7,097 25,299 ------- ------- -------- -------- NET INTEREST CHARGES: Interest expense 5,120 6,022 10,527 11,118 Allowance for borrowed funds used during construction 303 (86) (672) (232) ------- ------- -------- -------- Net interest charges 5,423 5,936 9,855 10,886 ------- ------- -------- -------- NET INCOME (LOSS) 7,628 4,074 (2,758) 14,413 PREFERRED STOCK DIVIDEND REQUIREMENTS 926 1,156 1,852 2,313 ------- ------- -------- -------- EARNINGS (LOSS) ATTRIBUTABLE TO COMMON STOCK $ 6,702 $ 2,918 $ (4,610) $ 12,100 ======= ======= ======== ======== The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company are an integral part of these statements.
- 39 - PENNSYLVANIA POWER COMPANY BALANCE SHEETS (Unaudited)
June 30, December 31, 2000 1999 ------------ ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $ 678,875 $ 646,186 Less--Accumulated provision for depreciation 244,272 237,893 ---------- ---------- 434,603 408,293 ---------- ---------- Construction work in progress- Electric plant 19,938 18,558 Nuclear fuel 672 6,540 ---------- ---------- 20,610 25,098 ---------- ---------- 455,213 433,391 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Nuclear plant decommissioning trusts 114,329 104,775 Other 21,221 19,784 ---------- ---------- 135,550 124,559 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 1,842 5,670 Notes receivable from parent company 28,585 15,423 Receivables- Customers (less accumulated provisions of $3,596,000 and $3,537,000, respectively, for uncollectible accounts) 36,450 34,568 Associated companies 33,017 38,565 Other 6,862 8,896 Materials and supplies, at average cost 26,774 32,483 Prepayments 11,806 2,208 ---------- ---------- 145,336 137,813 ---------- ---------- DEFERRED CHARGES: Regulatory assets 287,469 314,593 Other 5,092 5,260 ---------- ---------- 292,561 319,853 ---------- ---------- $1,028,660 $1,015,616 ========== ==========
- 40 - PENNSYLVANIA POWER COMPANY BALANCE SHEETS (Unaudited)
June 30, December 31, 2000 1999 ------------ ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholder's equity- Common stock, $30 par value, authorized 6,500,000 shares - 6,290,000 shares outstanding $ 188,700 $ 188,700 Other paid-in capital (310) (310) Retained earnings 6,607 11,218 ---------- ---------- Total common stockholder's equity 194,997 199,608 Preferred stock- Not subject to mandatory redemption 39,105 39,105 Subject to mandatory redemption 15,000 15,000 Long-term debt- Associated companies 20,406 18,007 Other 256,285 256,814 ---------- ---------- 525,793 528,534 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt- Associated companies 18,477 13,504 Other 24,245 29,521 Accounts payable- Associated companies 50,975 26,220 Other 17,928 28,903 Accrued taxes 28,029 21,863 Accrued interest 6,401 6,592 Other 16,897 16,506 ---------- ---------- 162,952 143,109 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 170,183 182,702 Accumulated deferred investment tax credits 7,044 7,266 Nuclear plant decommissioning costs 114,777 107,816 Other 47,911 46,189 ---------- ---------- 339,915 343,973 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $1,028,660 $1,015,616 ========== ========== The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company are an integral part of these balance sheets.
- 41 - PENNSYLVANIA POWER COMPANY STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ---------------------- 2000 1999 2000 1999 ---------- ---------- ---------- --------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 7,628 $ 4,074 $ (2,758) $ 14,413 Adjustments to reconcile net income (loss) to net cash from operating activities- Provision for depreciation and amortization 11,898 16,278 27,629 30,715 Nuclear fuel and lease amortization 4,697 1,411 7,867 3,234 Deferred income taxes, net (2,087) 1,150 (5,709) (873) Investment tax credits, net (781) (112) (1,572) (295) Receivables 6,226 14,623 5,700 10,838 Materials and supplies 1,941 (1,610) 5,709 (2,342) Accounts payable (4,313) 5,031 13,780 11,216 Other 14,801 5,250 (4,555) (7,201) ------- ------- -------- -------- Net cash provided from operating activities 40,010 46,095 46,091 59,705 ------- ------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Redemptions and Repayments- Preferred stock -- 6,085 -- 6,085 Long-term debt 5,408 1,400 13,773 3,145 Dividend Payments- Common stock -- 33,597 -- 65,362 Preferred stock 926 671 1,852 1,737 ------- ------- -------- -------- Net cash used for financing activities 6,334 41,753 15,625 76,329 ------- ------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 4,750 3,696 17,941 8,329 Loans to parent 26,028 -- 26,028 -- Loan payment from parent -- (1,071) (12,866) (21,313) Other 1,380 605 3,191 1,868 ------- ------- -------- -------- Net cash used for (provided from) investing activities 32,158 3,230 34,294 (11,116) ------- ------- -------- -------- Net increase (decrease) in cash and cash equivalents 1,518 1,112 (3,828) (5,508) Cash and cash equivalents at beginning of period 324 865 5,670 7,485 ------- ------- -------- -------- Cash and cash equivalents at end of period $ 1,842 $ 1,977 $ 1,842 $ 1,977 ======= ======= ======== ======== The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company are an integral part of these statements.
- 42 - PENNSYLVANIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations - --------------------- Operating revenues increased by $11.4 million in the second quarter and $14.0 million during the six-month period ended June 30, 2000, compared to the same periods in 1999. This increase was primarily the result of a change in the mix of kilowatt-hour sales. Retail generation sales increased due in part to higher demand from the steel industry, which strongly rebounded from the depressed production levels experienced last year as a direct result of imports of foreign steel products. Retail electric generation sales in the second quarter of 2000 also benefited from growth in kilowatt-hour sales to commercial customers. Total electric generation sales increased significantly in the second quarter and first half of 2000 from the previous year due to significant growth in sales to wholesale markets. While electric generation sales increased substantially, these sales were partially offset by lower unit prices reflecting the lower margins available in the wholesale market, resulting in more modest increases in operating revenues. Total kilowatt-hour deliveries (to customers in the Penn franchise territory) also significantly increased in the second quarter and first half of 2000, compared to the same periods in 1999, on the strength of commercial and industrial sales. Residential kilowatt-hour deliveries decreased in both periods. Changes in electric generation sales and kilowatt-hour deliveries in the second quarter and first six months of 2000, compared to 1999, are summarized in the following table: Changes in KWH Sales -------------------- Increase (Decrease) Three Six Months Months ------ ------ Electric Generation Sales: Retail 16.2% 9.2% Wholesale 421.9% 300.7% ----- ----- Total Electric Generation Sales 95.5% 65.0% ===== ===== Distribution Deliveries: Residential (0.4)% (0.8)% Commercial 9.0% 4.7% Industrial 17.5% 22.8% ----- ----- Total Distribution Deliveries 9.4% 9.2% ===== ===== Operating Expenses and Taxes Total operating expenses and taxes increased $8.6 million in the second quarter and $31.8 million in the first half of 2000 from the corresponding periods in 1999. The increase resulted primarily from higher nuclear operating costs, which were partially offset by reductions in fuel and purchased power, other operating costs and depreciation and amortization. Lower fuel and purchased power costs resulted from additional internal generation, which reduced the need for more expensive external sources of power. Nuclear operating costs were much higher in both the second quarter and first six months of 2000, compared to the same periods last year, due to refueling outage costs at Beaver Valley Unit 1 and Penn's increased ownership of Beaver Valley Units 1 and 2 as a result of the asset exchange with Duquesne. Other operating costs decreased in the second quarter and first half of 2000, compared to the corresponding periods in 1999, primarily due to the transfer of ownership in PPE to FE Services, an affiliated company. The transfer moved Penn's unregulated electric generation business to an affiliated entity dedicated to unregulated sales activity, effective December 31, 1999. Lower depreciation and amortization in the second quarter and first six months of 2000, compared to the same periods in the previous year reflects a reduction in accrued decommissioning costs. General taxes increased in the first half of 2000 in part due to an increase in the gross receipts tax resulting from higher taxable receipts. - 44 - Net Interest Charges Net interest charges declined in the second quarter and first six months of 2000 compared to the same periods last year due to debt redemption and refinancing activities. Capital Resources and Liquidity - ------------------------------- Penn has continuing cash requirements for planned capital expenditures and maturing debt. During the last two quarters of 2000, capital requirements for property additions and capital leases are expected to be about $21 million, including $9 million for nuclear fuel. Penn will need additional cash of approximately $23.5 million for maturing long-term debt during the remainder of 2000. These cash requirements are expected to be satisfied by internal cash. As of June 30, 2000, Penn had approximately $30.4 million of cash and temporary investments and no short-term indebtedness. Also, Penn had $2 million available from an unused bank facility as of June 30, 2000, which may be borrowed for up to several days at the bank's discretion. Under its first mortgage indenture, as of June 30, 2000, Penn had the capability to issue up to $202 million of additional first mortgage bonds on the basis of property additions and retired bonds. Environmental Matters - --------------------- On May 22, 2000, the U.S. Supreme Court agreed to hear appeals of both EPA and industry petitioners regarding new NAAQS rules (see Note 2, "Environmental Matters"). The appeal stems from the decision of the U.S. Court of Appeals for the D.C. Circuit to remand ozone and ultra-fine particulate matter standards to the EPA, having found constitutional and other defects in the new NAAQS rules. The D.C. Circuit Court subsequently denied an EPA petition for rehearing. A decision is expected from the U.S. Supreme Court in 2001. - 45 - PART II. OTHER INFORMATION - --------------------------- Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits Exhibit Number ------- FirstEnergy, OE, CEI and Penn ----------------------------- 15 Letter from independent public accountants. TE -- None Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S- K, neither FirstEnergy, OE, CEI, TE nor Penn has filed as an exhibit to this Form 10-Q any instrument with respect to long-term debt if the respective total amount of securities authorized thereunder does not exceed 10% of their respective total assets of FirstEnergy and its subsidiaries on a consolidated basis, or respectively, OE, CEI, TE or Penn, but hereby agrees to furnish to the Commission on request any such documents. (b) Reports on Form 8-K FirstEnergy, OE, CEI, TE and Penn --------------------------------- One report on Form 8-K was filed since March 31, 2000. A report dated August 10, 2000 reported that FirstEnergy Corp. and GPU, Inc. have entered into a merger agreement. - 46 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. August 14, 2000 FIRSTENERGY CORP. ----------------- Registrant OHIO EDISON COMPANY ------------------- Registrant THE CLEVELAND ELECTRIC ILLUMINATING COMPANY ---------------------- Registrant THE TOLEDO EDISON COMPANY ------------------------- Registrant PENNSYLVANIA POWER COMPANY -------------------------- Registrant /s/ Harvey L. Wagner ------------------------------- Harvey L. Wagner Controller Principal Accounting Officer - 47 - EX-15 2 0002.txt EXHIBIT 15 August 11, 2000 FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Gentlemen: We are aware that FirstEnergy Corp. has incorporated by reference in its Registration Statements No. 333-40065, No. 333-48587, No. 333-48651, No. 333-58279, No. 333-65409 and No. 333-75985 its Form 10-Q for the quarter ended June 30, 2000, which includes our report dated August 11, 2000 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP EX-27 3 0003.txt
UT This schedule contains summary financial information extracted from the related Form 10-Q financial statements for FirstEnergy Corp. and is qualified in its entirety by reference to such financial statements. (Amounts in 1,000's, except earnings per share.) 0001031296 FIRSTENERGY CORP. 1,000 U.S. DOLLARS 6-MOS DEC-31-2000 JUN-30-2000 1 PER-BOOK 7,444,308 2,709,219 1,339,270 6,608,482 0 18,101,279 22,923 3,533,237 1,052,245 4,608,405 244,356 648,395 5,965,925 304,897 0 159,970 555,385 35,466 0 52,831 5,525,649 18,101,279 3,310,034 193,041 2,572,098 2,765,139 544,895 0 544,895 269,373 275,522 0 0 168,518 464,264 614,008 1.23 1.23
EX-15 4 0004.txt EXHIBIT 15 August 11, 2000 Ohio Edison Company 76 South Main Street Akron, OH 44308 Gentlemen: We are aware that Ohio Edison Company has incorporated by reference in its Registration Statements No. 33-49135, No. 33- 49259, No. 33-49413, No. 33-51139, No. 333-01489 and No. 333- 05277 its Form 10-Q for the quarter ended June 30, 2000, which includes our report dated August 11, 2000 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP EX-27 5 0005.txt
UT This schedule contains summary financial information extracted from the related Form 10-Q financial statements for Ohio Edison Company and is qualified in its entirety by reference to such financial statements. (Amounts in 1,000's.) Income tax expense includes $8,256,000 related to other income. 0000073960 OHIO EDISON COMPANY 1,000 U.S. DOLLARS 6-MOS DEC-31-2000 JUN-30-2000 1 PER-BOOK 3,283,387 1,430,219 882,133 3,009,856 0 8,605,595 1 2,098,728 585,563 2,684,292 140,000 200,070 2,177,472 148,775 0 159,970 295,950 5,000 0 3,258 2,790,808 8,605,595 1,311,621 115,239 950,973 1,057,956 253,665 23,804 277,469 102,840 174,629 5,616 169,013 109,200 175,461 434,249 0 0
EX-15 6 0006.txt EXHIBIT 15 August 11, 2000 The Cleveland Electric Illuminating Company 76 South Main Street Akron, OH 44308 Gentlemen: We are aware that The Cleveland Electric Illuminating Company has incorporated by reference in its Registration Statements No. 33- 55513, No. 333-47651 and No. 333-72891 its Form 10-Q for the quarter ended June 30, 2000, which includes our report dated August 11, 2000 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP EX-27 7 0007.txt
UT This schedule contains summary financial information extracted from the related Form 10-Q financial statements for The Cleveland Electric Illuminating Company and is qualified in its entirety by reference to such financial statements. (Amounts in 1,000's). Income tax expense includes $7,033,000 related to other income. 0000020947 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY 1,000 U.S. DOLLARS 6-MOS DEC-31-2000 JUN-30-2000 1 PER-BOOK 2,706,363 702,995 335,792 2,393,456 0 6,138,606 931,962 0 68,213 1,000,175 104,356 238,325 2,669,003 13,812 0 0 190,030 30,466 0 29,530 1,862,909 6,138,606 894,292 51,033 676,567 720,567 173,725 6,285 180,010 102,046 77,964 14,405 63,559 30,000 204,929 222,061 0 0
EX-27 8 0008.txt
UT This schedule contains summary financial information extracted from the related Form 10-Q financial statements for The Toledo Edison Company and is qualified in its entirety by reference to such financial statements. (Amounts in 1,000's.) Income tax expense includes $2,221,000 related to other income. 0000352049 THE TOLEDO EDISON COMPANY 1,000 U.S. DOLLARS 6-MOS DEC-31-2000 JUN-30-2000 1 PER-BOOK 1,194,896 413,516 114,307 940,419 0 2,663,138 195,670 328,559 35,071 559,300 0 210,000 960,274 51,934 0 0 66,430 0 0 20,043 795,157 2,663,138 452,770 28,191 349,307 375,277 77,493 4,885 82,378 32,328 50,050 8,139 41,911 34,300 72,970 131,159 0 0
EX-15 9 0009.txt EXHIBIT 15 August 11, 2000 Pennsylvania Power Company 1 E. Washington Street P. O. Box 891 New Castle, PA 16103 Gentlemen: We are aware that Pennsylvania Power Company has incorporated by reference in its Registration Statements No. 33-62450 and No. 33- 65156 its Form 10-Q for the quarter ended June 30, 2000, which includes our report dated August 11, 2000 covering the unaudited interim financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, that report is not considered a part of the registration statements prepared or certified by our firm or a report prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, ARTHUR ANDERSEN LLP EX-27 10 0010.txt
UT This schedule contains summary financial information extracted from the related Form 10-Q financial statements for Pennsylvania Power Company and is qualified in its entirety by reference to such financial statements. (Amounts in 1,000's.) Income tax expense includes $399,000 related to other income. 0000077278 PENNSYLVANIA POWER COMPANY 1,000 U.S. DOLLARS 6-MOS DEC-31-2000 JUN-30-2000 1 PER-BOOK 455,213 135,550 145,336 292,561 0 1,028,660 188,700 (310) 6,607 194,997 15,000 39,105 276,691 0 0 0 23,974 0 0 18,748 460,145 1,028,660 177,516 3,124 168,538 171,263 6,253 844 7,097 9,855 (2,758) 1,852 (4,610) 0 19,141 46,091 0 0
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