EX-13 45 ex13-4pp.txt ANNUAL REPORT - PENN PENNSYLVANIA POWER COMPANY 2001 ANNUAL REPORT TO STOCKHOLDERS Pennsylvania Power Company, an electric utility operating company of FirstEnergy Corp. and a wholly owned subsidiary of Ohio Edison Company, provides electric service to approximately 153,000 customers in western Pennsylvania. Contents Page Selected Financial Data...................................... 1 Management's Discussion and Analysis......................... 2-6 Statements of Income......................................... 7 Balance Sheets............................................... 8 Statements of Capitalization................................. 9 Statements of Common Stockholder's Equity.................... 10 Statements of Preferred Stock................................ 10 Statements of Cash Flows..................................... 11 Statements of Taxes.......................................... 12 Notes to Financial Statements................................ 13-21 Report of Independent Public Accountants..................... 22
PENNSYLVANIA POWER COMPANY SELECTED FINANCIAL DATA 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (Dollars in thousands) Operating Revenues.................... $498,401 $383,112 $ 329,234 $323,756 $ 323,381 ======== ======== ========== ======== ========== Operating Income...................... $ 55,178 $ 39,979 $ 32,063 $ 58,041 $ 50,736 ======== ======== ========== ======== ========== Income Before Extraordinary Item...... $ 41,041 $ 22,847 $ 12,648 $ 39,748 $ 31,472 ======== ======== ========== ======== ========== Net Income............................ $ 41,041 $ 22,847 $ 12,648 $ 9,226 $ 31,472 ======== ======== ========== ======== ========== Earnings on Common Stock.............. $ 37,338 $ 19,143 $ 8,278 $ 4,600 $ 26,846 ======== ======== ========== ======== ========== Total Assets.......................... $960,097 $988,909 $1,015,616 $977,772 $1,034,457 ======== ======== ========== ======== ========== CAPITALIZATION AT DECEMBER 31: Common Stockholder's Equity........... $223,788 $213,851 $ 199,608 $275,281 $ 291,977 Preferred Stock- Not Subject to Mandatory Redemption. 39,105 39,105 39,105 50,905 50,905 Subject to Mandatory Redemption..... 14,250 15,000 15,000 15,000 15,000 Long-Term Debt........................ 262,047 270,368 274,821 287,689 289,305 -------- -------- ---------- -------- ---------- Total Capitalization.................. $539,190 $538,324 $ 528,534 $628,875 $ 647,187 ======== ======== ========== ======== ========== CAPITALIZATION RATIOS: Common Stockholder's Equity........... 41.5% 39.7% 37.8% 43.8% 45.1% Preferred Stock- Not Subject to Mandatory Redemption. 7.3 7.3 7.4 8.1 7.9 Subject to Mandatory Redemption..... 2.6 2.8 2.8 2.4 2.3 Long-Term Debt........................ 48.6 50.2 52.0 45.7 44.7 ----- ----- ----- ----- ----- Total Capitalization.................. 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== DISTRIBUTION KILOWATT-HOUR DELIVERIES (Millions): Residential........................... 1,353 1,387 1,325 1,278 1,238 Commercial............................ 1,121 1,198 1,105 1,069 1,013 Industrial............................ 1,506 1,665 1,495 1,439 1,659 Other................................. 6 6 6 6 6 ----- ----- ----- ----- ----- Total................................. 3,986 4,256 3,931 3,792 3,916 ===== ===== ===== ===== ===== CUSTOMERS SERVED: Residential........................... 134,956 121,066 117,440 124,304 129,316 Commercial............................ 18,153 16,634 16,307 16,924 16,738 Industrial............................ 224 177 175 206 241 Other................................. 87 87 87 86 97 ------- ------- ------- ------- ------- Total................................. 153,420 137,964 134,009 141,520 146,392 ======= ======= ======= ======= ======= NUMBER OF EMPLOYEES (a)............... 256 275 895 888 997 === === === === === (a) Reduction in 2000 reflects transfer of responsibility for generation operations to FirstEnergy Corp.'s competitive services unit.
PENNSYLVANIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This discussion includes forward-looking statements based on information currently available to management that is subject to certain risks and uncertainties. Such statements typically contain, but are not limited to, the terms anticipate, potential, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy and commodity market prices, legislative and regulatory changes (including revised environmental requirements), and the availability and cost of capital. Corporate Separation -------------------- In connection with FirstEnergy's Ohio transition plan, FirstEnergy separated its businesses into three distinct units - a competitive services unit, a regulated services unit and a corporate support services unit. Penn is included in the regulated services unit which continues to deliver power to homes and businesses through its existing distribution system and maintains the "provider of last resort" (PLR) obligation under its rate plan. FirstEnergy's electric utility operating companies (EUOC) have entered into power supply agreements whereby FirstEnergy Solutions Corp. (FES) purchases all of the EUOC nuclear generation, as well as generation from leased fossil generation facilities. FirstEnergy Generation Corp. (FGCO), a wholly owned subsidiary of FES, leases fossil generating units owned by the EUOC. We are a "full requirements" customer of FES to enable us to meet our PLR responsibilities in our service area. The effect on our reported results of operations in 2001 from FirstEnergy's corporate separation plan and our sale of transmission assets to American Transmission Systems, Inc. (ATSI) in September 2000, are summarized in the following table: Corporate Restructuring - 2001 Income Statement Effects -------------------------------------------------------------------------------- Increase (Decrease) Corporate Separation ATSI Total ---------- ---- ----- (In millions) Operating Revenues: Power supply agreement with FES. $151.5 $ -- $151.5 Generating units rent........... 20.2 -- 20.2 Ground lease with ATSI.......... -- 0.6 0.6 ----------------------------------------------------------------------------- Total Operating Revenues Effect. $171.7 $ 0.6 $172.3 ============================================================================= Operating Expenses and Taxes: Fossil fuel costs............... $(32.6)(a) $ -- $ (32.6) Purchased power costs........... 152.7 (b) -- 152.7 Other operating costs........... (21.1)(a) 4.9 (d) (16.2) Provision for depreciation and amortization -- (2.2)(e) (2.2) General taxes................... (2.4)(c) (0.3)(e) (2.7) Income Taxes.................... 31.1 -- 31.1 ----------------------------------------------------------------------------- Total Operating Expenses Effect. $127.7 $ 2.4 $ 130.1 ============================================================================= Other Income...................... $ -- $ 1.7 (f) $ 1.7 ============================================================================= (a) Transfer of fossil operations to FGCO. (b) Purchased power from power supply agreement (PSA). (c) Payroll taxes related to employees transferred to FGCO. (d) Transmission services received from ATSI. (e) Depreciation and property taxes related to transmission assets sold to ATSI. (f) Interest on note receivable from ATSI. Results of Operations --------------------- Earnings on common stock in 2001 increased to $37.3 million from $19.1 million in 2000. Excluding the effects shown in the table above, earnings on common stock decreased to $6.6 million in 2001 from 2000, being adversely affected by reduced operating revenues, which were partially offset by reduced operating expenses and taxes and lower net interest charges. In 2000, earnings on common stock increased to $19.1 million from $8.3 million in 1999. Results for 2000 were favorably affected by higher operating revenues which were partially offset by increased nuclear operating expenses and taxes. Excluding the effects shown in the table above, operating revenues decreased by $57.0 million or 14.9% in 2001 from 2000 following a $53.9 million increase in 2000 from the prior year. The decrease primarily resulted from a $56.7 million reduction in wholesale revenues (a 93.3% decrease in wholesale kilowatt-hour sales) from the prior year due to the substitution of PSA sales for kilowatt-hour sales to other wholesale customers. Distribution deliveries declined 2.3% in 2001 from the prior year reflecting the influence of a declining national economy on our regional business activity that contributed to lower distribution deliveries to commercial and industrial customers. Partially offsetting the impact of a weaker economy was an increase in electric generation revenues reflecting a return of customers previously served by alternative generation suppliers. Retail generation sales increased in all customer categories resulting in an overall 4.8% increase in kilowatt-hour sales from the prior year. Electric generation services provided by other suppliers in our service area decreased to 4.1% from 10.6% in 2000. In 2000, service area growth combined with the return of customers previously served by alternative generation suppliers to increase retail sales revenues. Sales to all retail customer groups were substantially higher in 2000, compared to the preceding year, reflecting a stronger economy in our service area. The transfer of ownership in Penn Power Energy, Inc. (PPE) to FES in December 1999, offset a portion of the increased operating revenues in 2000. Substantial growth in wholesale kilowatt-hour sales, primarily to affiliated utilities, contributed significantly to the higher operating revenues in 2000. These sales were possible due to additional available internal generation resulting from increased nuclear capacity received in a December 1999 exchange of generating assets with Duquesne Light Company. Changes in KWH Sales 2001 2000 ------------------------------------------------------------------- Increase (Decrease) Electric Generation: Retail................................ 4.8% 15.1% Wholesale............................. (93.3)%* 266.0% ------------------------------------------------------------------ Total Electric Generation Sales......... (62.6)% 78.5% ================================================================== Distribution Deliveries: Residential........................... 0.3% 4.7% Commercial and industrial............. (3.6)% 10.1% ------------------------------------------------------------------ Total Distribution Deliveries........... (2.3)% 8.3% ================================================================== * Excluding PSA kilowatt-hour sales related to restructuring. Operating Expenses and Taxes Total operating expenses and taxes increased $100.1 million in 2001 and by $46.0 million in 2000 from the respective prior year. Excluding the effects of restructuring, total 2001 operating expenses and taxes were $30.0 million lower than the prior year. The following table presents changes from the prior year by expense category excluding the impact of restructuring. Operating Expenses and Taxes - Changes 2001 2000 --------------------------------------------------------------------- Increase (Decrease) (In millions) Fuel and purchased power...................... $ (12.9) $(19.0) Nuclear operating costs....................... 1.9 75.8 Other operating costs......................... 1.9 (5.7) --------------------------------------------------------------------- Total operation and maintenance expenses.... (9.1) 51.1 Provision for depreciation and amortization... 3.3 (6.2) General taxes................................. (5.2) (6.0) Income taxes.................................. (19.0) 7.1 -------------------------------------------------------------------- Total operating expenses and taxes.......... $ (30.0) $ 46.0 ===================================================================== The following discussion excludes the effects shown in the preceding table related to the impact of restructuring. The decrease in fuel and purchased power costs in 2001, compared to 2000, primarily reflects the transfer of fossil operations to FGCO with our power requirements being provided under the PSA. In 2000, fuel and purchased power costs decreased $19.0 million, compared to 1999, primarily due to an $18.6 million reduction in purchased power costs and a slight reduction in fuel expense. The decrease in purchased power costs in 2000 resulted from a substantial increase in available internal generation, which reduced the need for external sources of power, as well as the transfer of ownership in PPE to FES. Although internal generation increased 76% compared to 1999, fuel expense was slightly lower due to the absence of a $6.8 million nonrecurring charge related to the Duquesne asset exchange in 1999, additional nuclear generation, the expiration of an above-market coal contract and continued improvement in coal blending strategies. Nuclear operating costs increased slightly in 2001 from the previous year. In 2000, nuclear operating costs increased $75.8 million from 1999. The increase was due to additional costs associated with refueling outages at both Beaver Valley Plant units and increased ownership of the Beaver Valley Plant for the entire year following the 1999 asset exchange with Duquesne, compared to approximately one month of increased ownership in the prior year. Other operating costs increased slightly in 2001 from the prior year. In 2000, other operating costs decreased $5.7 million from the prior year primarily due to increased gains realized from the sale of emission allowances, compared to 1999. Depreciation and amortization increased $3.3 million in 2001 from the prior year. The increase resulted in part from the absence in 2001 of an adjustment made in the prior year to decommissioning costs. In 2000, depreciation and amortization decreased $6.2 million from 1999 primarily reflecting lower accrued decommissioning costs. General taxes decreased by $5.2 million in 2001 from 2000 primarily due to a one-time benefit of $3 million resulting from successfully resolving certain pending tax issues and the effect of a reduction to the gross receipts tax rate. In 2000, general taxes decreased by $6.0 million from 1999 primarily due to favorable property tax law changes and the phase-out of Pennsylvania's Capital Stock and Franchise Tax. Net Interest Charges Net interest charges continued to trend lower, decreasing by $2.1 million in 2001 and by $1.4 million in 2000, compared to the prior year. We continue to redeem and refinance our outstanding debt during 2001 -- net redemptions and refinancing activities totaled $1.0 million and $32.9 million, respectively, and will result in annualized savings of $872,000. Capital Resources and Liquidity We had about $54.5 million of cash and temporary investments and no short-term indebtedness as of December 31, 2001. We also had a $2 million bank facility that provides for borrowings on a short-term basis at the bank's discretion. At the end of 2001, we had the capability to issue $293 million of additional first mortgage bonds on the basis of property additions and retired bonds. Based upon applicable earnings in 2001 under the earnings coverage test contained in our charter, we could issue $195 million of preferred stock (assuming no additional debt was issued). Following approval of the merger of FirstEnergy and GPU by the New Jersey Board of Public Utilities on September 26, 2001, Standard & Poor's upgraded our corporate credit rating and senior secured debt rating from BB+ to BBB. Ratings of junior securities were also upgraded to conform to typical rating relationships. Our cash requirements in 2002 for operating expenses, construction expenditures, scheduled debt maturities and preferred stock redemptions are expected to be met without increasing our net debt and preferred stock outstanding. Major contractual obligations for future cash payments are summarized in the following table:
Contractual Obligations ---------------------------------------------------------------------------------------------------------- There- 2002 2003 2004 2005 2006 after Total ---------------------------------------------------------------------------------------------------------- (In millions) Long-term debt................ $1 $41 $35 $1 $1 $173 $252 Mandatory preferred stock..... 1 1 1 1 1 10 15 Unconditional fuel purchases.. 5 18 16 3 -- -- 42 ---------------------------------------------------------------------------------------------------------- Total......................... $7 $60 $52 $5 $2 $183 $309 ==========================================================================================================
Our capital spending for the period 2002-2006 is expected to be about $177 million (excluding nuclear fuel) of which approximately $36 million applies to 2002. Investments for additional nuclear fuel during the 2002-2006 period are estimated to be approximately $94 million, of which about $8 million relates to 2002. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $95 million and $20 million, respectively, as the nuclear fuel is consumed. We had no material off balance sheet obligations as of December 31, 2001. Interest Rate Risk ------------------ Our exposure to fluctuations in market interest rates is reduced since a significant portion of our debt has fixed interest rates, as noted in the table below. We are subject to the inherent risks related to refinancing maturing debt by issuing new debt securities. Changes in the market value of our nuclear decommissioning trust funds are recognized by making corresponding changes to the decommissioning liability, as described in Note 1 - Utility Plant and Depreciation. The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio, debt obligations and preferred stock with mandatory redemption provisions.
Comparison of Carrying Value to Fair Value -------------------------------------------------------------------------------------------------------------------- There- Fair 2002 2003 2004 2005 2006 after Total Value -------------------------------------------------------------------------------------------------------------------- (Dollars in millions) Investments other than Cash and Cash Equivalents: Fixed Income................. $ 1 $6 $1 $104 $112 $115 Average interest rate..... 7.8% 7.8% 7.8% 5.9% 6.0% -------------------------------------------------------------------------------------------------------------------- Liabilities -------------------------------------------------------------------------------------------------------------------- Long-term Debt: Fixed rate................... $1 $41 $35 $1 $1 $125 $204 $214 Average interest rate .... 9.7% 7.6% 6.6% 9.7% 9.7% 7.0% 7.1% Variable rate................ $ 48 $ 48 $ 48 Average interest rate..... 2.1% 2.1% Preferred Stock.............. $1 $ 1 $ 1 $1 $1 $ 10 $ 15 $ 15 Average dividend rate..... 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% -------------------------------------------------------------------------------------------------------------------
Outlook ------- In 2001, a number of our customers previously electing to be served by alternative energy providers returned to our system for their energy needs. We have a continuing responsibility to provide power to those customers not choosing to receive power from an alternative energy supplier subject to certain limits. Adopting new approaches to regulation and experiencing new forms of competition have created new uncertainties. We continue to deliver power to homes and businesses through our existing distribution system, which remains regulated. Environmental Matters We are in compliance with the current sulfur dioxide (SO2) and nitrogen oxide (NOx) reduction requirements under the Clean Air Act Amendments of 1990. In 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions in the future from our Ohio and Pennsylvania facilities. Various regulatory and judicial actions have since sought to further define NOx reduction requirements (see Note 5 - Environmental Matters). We continue to evaluate our compliance plans and other compliance options. Violations of federally approved SO2 regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day a unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. We cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In 1999 and 2000, the EPA issued Notices of Violation (NOV) or a Compliance Order to nine utilities covering 44 power plants, including the W.H. Sammis Plant. In addition, the U.S. Department of Justice filed eight civil complaints against various investor-owned utilities, which included a complaint against us in the U.S. District Court for the Southern District of Ohio. The NOV and complaint allege violations of the Clean Air Act (CAA) based on operation and maintenance of the Sammis Plant dating back to 1984. The complaint against us requests the installation of "best available control technology" as well as civil penalties of up to $27,500 per day. Although unable to predict the outcome of these proceedings, we believe the Sammis Plant is in full compliance with the CAA and that the NOV and complaint are without merit. Penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. The Sammis Plant continues to operate while these proceedings are pending. In December 2000, the EPA announced it would proceed with the development of regulations regarding hazardous air pollutants from electric power plants. The EPA identified mercury as the hazardous air pollutant of greatest concern. The EPA established a schedule to propose regulations by December 2003 and issue final regulations by December 2004. The future cost of compliance with these regulations may be substantial. As a result of the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act of 1976, federal and state hazardous waste regulations have been promulgated. Certain fossil-fuel combustion waste products, such as coal ash, were exempted from hazardous waste disposal requirements pending the EPA's evaluation of the need for future regulation. The EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. In April 2000, the EPA announced that it will develop national standards regulating disposal of coal ash under its authority to regulate nonhazardous waste. Legal Matters- Various lawsuits, claims and proceedings related to our normal business operations are pending against FirstEnergy and its subsidiaries. The most significant applicable to us are described above. Significant Accounting Policies ------------------------------- We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States. Application of these principles often require a high degree of judgment, estimates and assumptions that affect our financial results. All of our assets are subject to their own specific risks and uncertainties and are continually reviewed for impairment. Assets related to the application of the policies discussed below are similarly reviewed with their risks and uncertainties reflecting these specific factors. Our more significant accounting policies are described below. Regulatory Accounting We are subject to regulation that sets the prices (rates) we are permitted to charge our customers based on our costs that the regulatory agencies determine we are permitted to recover. At times, regulators permit the future recovery through rates of costs that would be currently charged to expense by an unregulated company. This rate-making process results in the recording of regulatory assets based on anticipated future cash inflows. As a result of the changing regulatory framework in Pennsylvania, significant amounts of regulatory assets have been recorded -- $209 million as of December 31, 2001. We continually review these assets to assess their ultimate recoverability within the approved regulatory guidelines. Impairment risk associated with these assets relates to potentially adverse legislative, judicial or regulatory actions in the future. Revenue Recognition We follow the accrual method of accounting for revenues, recognizing revenue for kilowatt-hours that have been delivered but have not yet been billed through the end of the year. The determination of unbilled revenues requires management to make various estimates including: o Net energy generated or purchased for retail load o Losses of energy over distribution lines o Allocations to distribution companies within the FirstEnergy system o Mix of kilowatt-hour usage by residential, commercial and industrial customers o Kilowatt-hour usage of customers receiving electricity from alternative suppliers Recently Issued Accounting Standards ------------------------------------ In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. (SFAS) 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting standards for retirement obligations associated with tangible long-lived assets, with adoption required by January 1, 2003. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases resulting in a period expense. Upon retirement, a gain or loss will be recorded if the cost to settle the retirement obligation differs from the carrying amount. We are currently assessing the new standard and have not yet determined the impact on our financial statements. In September 2001, the FASB issued SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supersedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Statement also supersedes the accounting and reporting provisions of Accounting Principles Board Opinion (APB) No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Our adoption of this Statement, effective January 1, 2002, will result in our accounting for any future impairments or disposals of long-lived assets under the provisions of SFAS 144, but will not change the accounting principles used in previous asset impairments or disposals. Application of SFAS 144 is not anticipated to have a major impact on our accounting for impairments or disposal transactions compared to the prior application of SFAS 121 or APB 30.
PENNSYLVANIA POWER COMPANY STATEMENTS OF INCOME For the Years Ended December 31, 2001 2000 1999 ---------------------------------------------------------------------------------------------- (In thousands) OPERATING REVENUES........................................... $498,401 $383,112 $329,234 -------- -------- -------- OPERATING EXPENSES AND TAXES: Fuel and purchased power................................... 175,257 68,099 87,128 Nuclear operating costs.................................... 114,623 112,731 36,915 Other operating costs...................................... 45,133 59,389 65,079 -------- -------- -------- Total operation and maintenance expenses................. 335,013 240,219 189,122 Provision for depreciation and amortization................ 57,087 55,964 62,182 General taxes.............................................. 14,214 22,076 28,110 Income taxes............................................... 36,909 24,874 17,757 -------- -------- -------- Total operating expenses and taxes....................... 443,223 343,133 297,171 -------- -------- -------- OPERATING INCOME............................................. 55,178 39,979 32,063 OTHER INCOME................................................. 3,185 2,300 1,438 -------- -------- -------- INCOME BEFORE NET INTEREST CHARGES........................... 58,363 42,279 33,501 -------- -------- -------- NET INTEREST CHARGES: Interest on long-term debt................................. 16,971 18,651 19,268 Interest on nuclear fuel obligations....................... 141 364 90 Allowance for borrowed funds used during construction...... (850) (1,005) (464) Other interest expense..................................... 1,060 1,422 1,959 -------- -------- -------- Net interest charges..................................... 17,322 19,432 20,853 -------- -------- -------- NET INCOME................................................... 41,041 22,847 12,648 PREFERRED STOCK DIVIDEND REQUIREMENTS........................ 3,703 3,704 4,370 -------- -------- -------- EARNINGS ON COMMON STOCK..................................... $ 37,338 $ 19,143 $ 8,278 ======== ======== ======== The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY BALANCE SHEETS As of December 31, 2001 2000 --------------------------------------------------------------------------------------------- (In thousands) ASSETS UTILITY PLANT: In service......................................................... $664,432 $636,418 Less-Accumulated provision for depreciation........................ 290,216 275,699 -------- -------- 374,216 360,719 -------- -------- Construction work in progress- Electric plant................................................... 24,141 20,800 Nuclear fuel..................................................... 2,921 2,810 -------- -------- 27,062 23,610 -------- -------- 401,278 384,329 -------- -------- OTHER PROPERTY AND INVESTMENTS: Nuclear plant decommissioning trusts (Note 1)...................... 116,634 117,453 Long-term notes receivable from associated companies............... 39,290 33,581 Other.............................................................. 21,597 21,279 -------- -------- 177,521 172,313 -------- -------- CURRENT ASSETS: Cash and cash equivalents.......................................... 67 3,475 Notes receivable from associated companies (Note 4)................ 54,411 41,264 Receivables- Customers (less accumulated provisions of $619,000 and $628,000, respectively, for uncollectible accounts)...................... 40,890 40,980 Associated companies............................................. 36,491 40,685 Other............................................................ 4,787 8,848 Materials and supplies, at average cost............................ 25,598 29,595 Prepayments........................................................ 5,682 2,044 -------- -------- 167,926 166,891 -------- -------- DEFERRED CHARGES: Regulatory assets.................................................. 208,838 260,221 Other.............................................................. 4,534 5,155 -------- -------- 213,372 265,376 -------- -------- $960,097 $988,909 ======== ======== CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Statements of Capitalization): Common stockholder's equity........................................ $223,788 $213,851 Preferred stock- Not subject to mandatory redemption.............................. 39,105 39,105 Subject to mandatory redemption.................................. 14,250 15,000 Long-term debt- Associated companies............................................. 21,064 18,135 Other............................................................ 240,983 252,233 -------- -------- 539,190 538,324 -------- -------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock- Associated companies............................................. 18,090 16,620 Other............................................................ 12,075 1,036 Accounts payable- Associated companies............................................. 50,604 42,293 Other............................................................ 1,441 21,165 Accrued taxes...................................................... 18,853 19,250 Accrued interest................................................... 5,264 5,972 Other.............................................................. 9,675 16,228 -------- -------- 116,002 122,564 -------- -------- DEFERRED CREDITS: Accumulated deferred income taxes.................................. 136,808 160,632 Accumulated deferred investment tax credits........................ 4,108 4,407 Nuclear plant decommissioning costs................................ 117,096 117,915 Other.............................................................. 46,893 45,067 -------- -------- 304,905 328,021 -------- -------- COMMITMENTS AND CONTINGENCIES (Notes 2 and 5)...................... -------- -------- $960,097 $988,909 ======== ======== The accompanying Notes to Financial Statements are an integral part of these balance sheets.
PENNSYLVANIA POWER COMPANY STATEMENTS OF CAPITALIZATION As of December 31, 2001 2000 ----------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) COMMON STOCKHOLDER'S EQUITY: Common stock, $30 par value, 6,500,000 shares authorized, 6,290,000 shares outstanding .................................................................. $188,700 $188,700 Other paid-in capital................................................................. (310) (310) Retained earnings (Note 3A)........................................................... 35,398 25,461 -------- -------- Total common stockholder's equity................................................. 223,788 213,851 -------- -------- Number of Shares Optional Outstanding Redemption Price ------------------ -------------------- 2001 2000 Per Share Aggregate ---- ---- --------- --------- PREFERRED STOCK (Note 3C): Cumulative, $100 par value- Authorized 1,200,000 shares Not Subject to Mandatory Redemption: 4.24%................................... 40,000 40,000 $103.13 $ 4,125 4,000 4,000 4.25%................................... 41,049 41,049 105.00 4,310 4,105 4,105 4.64%................................... 60,000 60,000 102.98 6,179 6,000 6,000 7.75%................................... 250,000 250,000 -- -- 25,000 25,000 ------- ------- ------- -------- -------- Total not subject to mandatory redemption.......................... 391,049 391,049 $14,614 39,105 39,105 ======= ======= ======= -------- -------- Subject to Mandatory Redemption (Note 3D): 7.625%.................................. 150,000 150,000 104.58 $15,687 15,000 15,000 Redemption Within One Year................ (750) -- ------- ------- ------- -------- -------- Total subject to mandatory redemption. 150,000 150,000 $15,687 14,250 15,000 ======= ======= ======= -------- -------- LONG-TERM DEBT (Note 3E): First mortgage bonds- 9.740% due 2002-2019................................................................ 17,565 18,539 7.500% due 2003..................................................................... 40,000 40,000 6.375% due 2004..................................................................... 20,500 20,500 6.625% due 2004..................................................................... 14,000 14,000 8.500% due 2022..................................................................... 27,250 27,250 7.625% due 2023..................................................................... 6,500 6,500 -------- -------- Total first mortgage bonds........................................................ 125,815 126,789 -------- -------- Secured notes- 5.400% due 2013..................................................................... 1,000 1,000 5.400% due 2017..................................................................... 10,600 10,600 * 1.550% due 2017..................................................................... 17,925 -- 7.150% due 2017..................................................................... -- 17,925 5.900% due 2018..................................................................... 16,800 16,800 * 1.550% due 2021..................................................................... 14,482 -- 7.150% due 2021..................................................................... -- 14,482 6.150% due 2023..................................................................... 12,700 12,700 * 1.750% due 2027..................................................................... 10,300 10,300 6.450% due 2027..................................................................... 14,500 14,500 5.375% due 2028..................................................................... 1,734 1,734 5.450% due 2028..................................................................... 6,950 6,950 6.000% due 2028..................................................................... 14,250 14,250 5.950% due 2029..................................................................... 238 238 -------- -------- Total secured notes............................................................... 121,479 121,479 -------- -------- Unsecured notes- * 5.900% due 2033..................................................................... 5,200 5,200 -------- -------- Other obligations- Nuclear fuel........................................................................ 39,154 34,756 Capital leases (Note 2)............................................................. 95 170 -------- -------- Total other obligations........................................................... 39,249 34,926 -------- -------- Net unamortized discount on debt...................................................... (281) (370) -------- -------- Long-term debt due within one year.................................................... (29,415) (17,656) -------- -------- Total long-term debt.............................................................. 262,047 270,368 -------- -------- TOTAL CAPITALIZATION.................................................................... $539,190 $538,324 ======== ======== * Denotes variable rate issue with December 31, 2001 interest rate shown. The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY STATEMENTS OF COMMON STOCKHOLDER'S EQUITY Other Comprehensive Number Par Paid-In Retained Income of Shares Value Capital Earnings ------------- --------- ----- -------- -------- (Dollars in thousands) Balance, January 1, 1999............... 6,290,000 $188,700 $(310) $ 86,891 Net income........................... $12,648 12,648 ======= Transfer of Penn Power Energy to a FirstEnergy affiliate......... 3,302 Cash dividends on common stock....... (87,362) Cash dividends on preferred stock.... (4,056) Premium on redemption of preferred stock.............................. (205) ----------------------------------------------------------------------------------------------------- Balance, December 31, 1999............. 6,290,000 188,700 (310) 11,218 Net income........................... $22,847 22,847 ======= Cash dividends on common stock....... (4,900) Cash dividends on preferred stock.... (3,704) ----------------------------------------------------------------------------------------------------- Balance, December 31, 2000............. 6,290,000 188,700 (310) 25,461 Net income........................... $41,041 41,041 ======= Cash dividends on common stock....... (27,400) Cash dividends on preferred stock.... (3,704) ----------------------------------------------------------------------------------------------------- Balance, December 31, 2001............. 6,290,000 $188,700 $(310) $ 35,398 =====================================================================================================
STATEMENTS OF PREFERRED STOCK Not Subject to Subject to Mandatory Redemption Mandatory Redemption -------------------- -------------------- Number Par Number Par of Shares Value of Shares Value --------- ----- --------- ----- (Dollars in thousands) Balance, January 1, 1999.... 509,049 $50,905 150,000 $15,000 ----------------------------------------------------------------------------- Redemptions- 7.64% Series............. (60,000) (6,000) 8.00% Series............. (58,000) (5,800) ----------------------------------------------------------------------------- Balance, December 31, 1999.. 391,049 39,105 150,000 15,000 ----------------------------------------------------------------------------- Balance, December 31, 2000.. 391,049 39,105 150,000 15,000 ----------------------------------------------------------------------------- Balance, December 31, 2001.. 391,049 $39,105 150,000 $15,000 ============================================================================= The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001 2000 1999 ---------------------------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................... $ 41,041 $ 22,847 $ 12,648 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation and amortization............ 57,087 55,964 62,182 Nuclear fuel and lease amortization.................... 17,323 18,248 8,423 Deferred income taxes, net............................. (11,055) (8,620) (16,207) Investment tax credits, net............................ (2,775) (3,051) (3,111) Receivables............................................ 8,345 (8,484) (390) Materials and supplies................................. 3,997 2,888 389 Accounts payable....................................... (11,413) 8,335 22,291 Other.................................................. (9,265) (9,651) 15,899 -------- -------- -------- Net cash provided from operating activities.......... 93,285 78,476 102,124 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt......................................... 31,626 -- 5,200 Redemptions and Repayments- Preferred stock........................................ -- -- 12,005 Long-term debt......................................... 51,351 47,796 8,675 Dividend Payments- Common stock........................................... 27,400 4,900 87,362 Preferred stock........................................ 3,704 3,704 4,055 -------- -------- -------- Net cash used for financing activities............... 50,829 56,400 106,897 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions....................................... 40,529 29,856 21,964 Loans to associated companies............................ 19,175 59,421 -- Loan payment from parent................................. -- -- (34,577) Sale of assets to associated companies................... (6,053) (67,472) -- Other.................................................... (7,787) 2,466 9,655 -------- -------- -------- Net cash used for (provided from) investing activities........................................... 45,864 24,271 (2,958) -------- -------- -------- Net decrease in cash and cash equivalents................ 3,408 2,195 1,815 Cash and cash equivalents at beginning of year........... 3,475 5,670 7,485 -------- -------- -------- Cash and cash equivalents at end of year................. $ 67 $ 3,475 $ 5,670 ======== ======== ======== SUPPLEMENTAL CASH FLOWS INFORMATION: Cash paid during the year- Interest (net of amounts capitalized).................. $ 19,286 $ 18,804 $ 19,436 ======== ======== ======== Income taxes........................................... $ 53,527 $ 39,704 $ 33,786 ======== ======== ======== The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY STATEMENTS OF TAXES For the Years Ended December 31, 2001 2000 1999 ---------------------------------------------------------------------------------------------- (In thousands) GENERAL TAXES: State gross receipts.................................... $ 12,776 $ 14,264 $ 13,466 Real and personal property.............................. 59 4,012 8,626 State capital stock..................................... 1,081 1,598 3,067 Social security and unemployment........................ 201 2,137 2,875 Other................................................... 97 65 76 -------- -------- -------- Total general taxes................................. $ 14,214 $ 22,076 $ 28,110 ======== ======== ======== PROVISION FOR INCOME TAXES: Currently payable- Federal............................................... $ 40,948 $ 26,712 $ 29,522 State................................................. 12,803 11,080 8,630 -------- -------- -------- 53,751 37,792 38,152 -------- -------- -------- Deferred, net- Federal............................................... (8,304) (4,273) (12,714) State................................................. (2,751) (4,347) (3,493) -------- -------- -------- (11,055) (8,620) (16,207) -------- -------- -------- Investment tax credit amortization...................... (2,775) (3,051) (3,111) -------- -------- -------- Total provision for income taxes.................... $ 39,921 $ 26,121 $ 18,834 ======== ======== ======== INCOME STATEMENT CLASSIFICATION OF PROVISION FOR INCOME TAXES: Operating expenses...................................... $ 36,909 $ 24,874 $ 17,757 Other income............................................ 3,012 1,247 1,077 -------- -------- -------- Total provision for income taxes.................... $ 39,921 $ 26,121 $ 18,834 ======== ======== ======== RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES: Book income before provision for income taxes........... $ 80,962 $ 48,968 $ 31,482 ======== ======== ======== Federal income tax expense at statutory rate............ $ 28,337 $ 17,139 $ 11,019 Increases (reductions) in taxes resulting from: State income taxes, net of federal income tax benefit. 6,534 4,376 3,339 Amortization of investment tax credits................ (2,775) (3,051) (3,111) Amortization of tax regulatory assets................. 6,315 6,899 7,059 Other, net............................................ 1,510 758 528 -------- -------- -------- Total provision for income taxes.................... $ 39,921 $ 26,121 $ 18,834 ======== ======== ======== ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31: Competitive transition charge........................... $ 75,686 $ 95,497 $115,277 Property basis differences.............................. 65,534 64,348 73,694 Allowance for equity funds used during construction..... 2,608 4,163 5,688 Customer receivables for future income taxes............ 5,640 7,016 8,354 Unamortized investment tax credits...................... (1,702) (1,823) (2,987) Deferred gain for asset sale to affiliated company...... 9,943 8,925 -- Other................................................... (20,901) (17,494) (17,324) -------- -------- -------- Net deferred income tax liability................... $136,808 $160,632 $182,702 ======== ======== ======== The accompanying Notes to Financial Statements are an integral part of these statements.
NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Pennsylvania Power Company (Company), a wholly owned subsidiary of Ohio Edison Company (OE), follows the accounting policies and practices prescribed by the Pennsylvania Public Utility Commission (PPUC) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities. Actual results could differ from these estimates. Results of operations for 1999 include the Company and its former wholly owned subsidiary, Penn Power Energy, Inc. (PPE). The subsidiary was formed to market energy products and services coincident with the commencement of electricity generation customer choice and competition in Pennsylvania in January 1999. All significant intercompany transactions have been eliminated. The Company transferred its 100% ownership in PPE to a subsidiary of FirstEnergy Corp., OE's parent company, effective December 31, 1999. REVENUES- The Company's principal business is providing electric service to customers in western Pennsylvania. The Company's retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service through the end of the year. Receivables from customers include sales to residential, commercial and industrial customers located in the Company's service area and sales to wholesale customers. There was no material concentration of receivables at December 31, 2001 or 2000, with respect to any particular segment of the Company's customers. REGULATORY PLAN- Pennsylvania enacted "The Electricity Generation Customer Choice and Competition Act" in 1996, which permitted customers, including the Company's customers, to choose their electric generation supplier, while transmission and distribution services would continue to be supplied by their current providers. The phase in of customer choice was completed on January 1, 2001. The Company continues to deliver power to homes and businesses through its distribution system, which remains regulated by the PPUC. The Company's rates have been restructured to establish separate charges for transmission and distribution; generation, which is subject to competition; and stranded cost recovery. In the event customers obtain power from an alternative source, the generation portion of the Company's rates is excluded from their bill and the customers receive a generation charge from the alternative supplier. The stranded cost recovery portion of rates provides for recovery of certain amounts not otherwise considered recoverable in a competitive generation market, including regulatory assets. In 1998, the PPUC authorized the Company's rate restructuring plan, which essentially resulted in the deregulation of the Company's generation business. The Company was required to remove from its balance sheet all regulatory assets and liabilities related to its generation business and assess all other assets for impairment. The Securities and Exchange Commission (SEC) issued interpretive guidance regarding asset impairment measurement which concluded that any supplemental regulated cash flows such as a competitive transition charge (CTC) should be excluded from the cash flows of assets in a portion of the business not subject to regulatory accounting practices. If those assets are impaired, a regulatory asset should be established if the costs are recoverable through regulatory cash flows. Consistent with the SEC guidance, the Company reduced its nuclear generating unit investments by approximately $305 million, of which approximately $227 million was recognized as a regulatory asset to be recovered through the CTC over a seven-year transition period; the remaining net amount of $78 million was written off. The Company is entitled to recover $236 million of stranded costs through the CTC that began in 1999 and ends in 2006. The Company's net assets included in utility plant relating to the operations for which the application of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71) was discontinued were $88 million as of December 31, 2001. All of the Company's regulatory assets are expected to continue to be recovered under provisions of the rate restructuring plan. UTILITY PLANT AND DEPRECIATION- Utility plant reflects the original cost of construction (except for nuclear generating units which were adjusted to fair value as discussed above), including payroll and related costs such as taxes, employee benefits, administrative and general costs, and interest costs. The Company provides for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The annual composite rate for electric plant was approximately 2.9% in 2001, 2.6% in 2000 and 2.5% in 1999. Annual depreciation expense includes approximately $1.6 million for future decommissioning costs applicable to the Company's ownership interest in three nuclear generating units. The Company's share of the future obligation to decommission these units is approximately $340 million in current dollars and (using a 4.0% escalation rate) approximately $695 million in future dollars. The estimated obligation and the escalation rate were developed based on site specific studies. Payments for decommissioning are expected to begin in 2016, when actual decommissioning work begins. The Company has recovered approximately $16 million for decommissioning through its electric rates from customers through December 31, 2001. The Company has also recognized an estimated liability of approximately $7.0 million related to decontamination and decommissioning of nuclear enrichment facilities operated by the United States Department of Energy, as required by the Energy Policy Act of 1992. In July 2001, the Financial Accounting Standards Board issued SFAS 143, "Accounting for Asset Retirement Obligations." The new statement provides accounting treatment for retirement obligations associated with tangible long-lived assets with adoption required as of January 1, 2003. SFAS 143 requires the fair value of a liability for an asset retirement obligation be recorded in the period in which it is incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. Over time the capitalized costs are depreciated and the present value of the asset retirement liability increases, resulting in a period expense. Upon retirement, a gain or loss will be recorded if the costs to settle the retirement obligation differs from the carrying amount. Under the new standard, additional assets and liabilities relating principally to nuclear decommissioning obligations will be recorded, the pattern of expense recognition will change and income from the external decommissioning trust will be recorded as investment income. The Company is currently assessing the new standard and has not yet quantified the impact on its financial statements. COMMON OWNERSHIP OF GENERATING FACILITIES- The Company, together with OE and other affiliated companies, The Cleveland Electric Illuminating Company (CEI) and The Toledo Edison Company (TE), own, as tenants in common, various power generating facilities. Each of the companies is obligated to pay a share of the costs associated with any jointly owned facility in the same proportion as its interest. The Company's portion of operating expenses associated with jointly owned facilities is included in the corresponding operating expenses on the Statements of Income. The amounts reflected on the Balance Sheet under utility plant at December 31, 2001 include the following: Utility Accumulated Construction Company's Plant in Provision for Work in Ownership Generating Units Service Depreciation Progress Interest ------------------------------------------------------------------------------- (In millions) W. H. Sammis #7............ $ 67.7 $ 25.7 $ -- 20.80% Bruce Mansfield #1, #2 and #3............ 186.0 112.8 2.5 16.38% Beaver Valley #1 and #2.... 44.6 11.5 -- 39.37% Perry #1................... 3.6 0.9 0.5 5.24% ------------------------------------------------------------------------------ Total.................. $301.9 $150.9 $ 3.0 =============================================================================== NUCLEAR FUEL- OES Fuel, Incorporated, a wholly owned subsidiary of OE, is the sole lessor for the Company's nuclear fuel requirements. OE anticipates replacing that lease arrangement with direct ownership and nuclear fuel financing by the Company and OE. The Company amortizes the cost of nuclear fuel based on the rate of consumption. INCOME TAXES- Details of the total provision for income taxes are shown on the Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. The liability method is used to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. The Company is included in FirstEnergy's consolidated federal income tax return. The consolidated tax liability is allocated on a "stand-alone" company basis, with the Company recognizing any tax losses or credits it contributed to the consolidated return. RETIREMENT BENEFITS- FirstEnergy's trusteed, noncontributory defined benefit pension plan covers almost all of the Company's full-time employees. Upon retirement, employees receive a monthly pension based on length of service and compensation. On December 31, 2001, the FirstEnergy pension plan was merged with the pension plans of GPU, Inc., which merged with FirstEnergy on November 7, 2001. The Company uses the projected unit credit method for funding purposes and was not required to make pension contributions during the three years ended December 31, 2001. The assets of the FirstEnergy pension plan consist primarily of common stocks, United States government bonds and corporate bonds. The FirstEnergy and GPU postretirement benefit plans are currently separately maintained; the information shown below is aggregated as of December 31, 2001. The Company provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Company pays insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Company. The Company recognizes the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the plans and amounts recognized on FirstEnergy's Consolidated Balance Sheets as of December 31:
Other Pension Benefits Postretirement Benefits ----------------- ----------------------- 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1...... $1,506.1 $1,394.1 $ 752.0 $ 608.4 Service cost............................ 34.9 27.4 18.3 11.3 Interest cost........................... 133.3 104.8 64.4 45.7 Plan amendments......................... 3.6 41.3 -- -- Actuarial loss.......................... 123.1 17.3 73.3 121.7 Voluntary early retirement program...... -- 23.4 2.3 -- GPU acquisition......................... 1,878.3 -- 716.9 -- Benefits paid........................... (131.4) (102.2) (45.6) (35.1) --------------------------------------------------------------------------------------------- Benefit obligation as of December 31.... 3,547.9 1,506.1 1,581.6 752.0 --------------------------------------------------------------------------------------------- Change in fair value of plan assets: Fair value of plan assets as of January 1 1,706.0 1,807.5 23.0 4.9 Actual return on plan assets............ 8.1 0.7 12.7 (0.2) Company contribution.................... -- -- 43.3 18.3 GPU acquisition......................... 1,901.0 -- 462.0 -- Benefits paid........................... (131.4) (102.2) (6.0) -- --------------------------------------------------------------------------------------------- Fair value of plan assets as of December 31 3,483.7 1,706.0 535.0 23.0 --------------------------------------------------------------------------------------------- Funded status of plan................... (64.2) 199.9 (1,046.6) (729.0) Unrecognized actuarial loss (gain)...... 222.8 (90.9) 212.8 147.3 Unrecognized prior service cost......... 87.9 93.1 17.7 20.9 Unrecognized net transition obligation (asset) -- (2.1) 101.6 110.9 --------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost.......... $ 246.5 $ 200.0 $ (714.5) $(449.9) ============================================================================================= Company's share of prepaid (accrued) benefit cost.......................... $ 18.1 $ 17.4 $ (37.4) $ (35.1) ============================================================================================== Assumptions used as of December 31: Discount rate........................... 7.25% 7.75% 7.25% 7.75% Expected long-term return on plan assets 10.25% 10.25% 10.25% 10.25% Rate of compensation increase........... 4.00% 4.00% 4.00% 4.00%
FirstEnergy's net pension and other postretirement benefit costs for the three years ended December 31, 2001 were computed as follows:
Other Pension Benefits Postretirement Benefits ------------------------ ------------------------- 2001 2000 1999 2001 2000 1999 ---------------------------------------------------------------------------------------------------- (In millions) Service cost............................ $ 34.9 $ 27.4 $ 28.3 $18.3 $11.3 $ 9.3 Interest cost........................... 133.3 104.8 102.0 64.4 45.7 40.7 Expected return on plan assets.......... (204.8) (181.0) (168.1) (9.9) (0.5) (0.4) Amortization of transition obligation (asset) (2.1) (7.9) (7.9) 9.2 9.2 9.2 Amortization of prior service cost...... 8.8 5.7 5.7 3.2 3.2 3.3 Recognized net actuarial loss (gain).... -- (9.1) -- 4.9 -- -- Voluntary early retirement program...... 6.1 17.2 -- 2.3 -- -- ------------------------------------------------------------------------------------------------------ Net benefit cost........................ $(23.8) $ (42.9) $ (40.0) $92.4 $68.9 $62.1 ====================================================================================================== Company's share of net benefit cost..... $ (0.7) $ (3.6) $ (4.8) $ 4.0 $ 7.5 $ 7.5 ------------------------------------------------------------------------------------------------------
The composite health care trend rate assumption is approximately 10% in 2002, 9% in 2003 and 8% in 2004, trending to 4%-6% in later years. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. An increase in the health care trend rate assumption by one percentage point would increase the total service and interest cost components by $14.6 million and the postretirement benefit obligation by $151.2 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $12.7 million and the postretirement benefit obligation by $131.3 million. TRANSACTIONS WITH AFFILIATED COMPANIES- Operating revenues, operating expenses and other income include transactions with affiliated companies, primarily OE, CEI, TE, American Transmission Systems, Inc. (ATSI), FirstEnergy Solutions Corp. (FES) and FirstEnergy. The Ohio transition plan resulted in the corporate separation of FirstEnergy's regulated and unregulated operations in 2001. Unregulated operations under FES now operate the generation businesses of the Company, OE, CEI and TE. As a result, the Company entered into power supply agreements (PSA) whereby FES purchases all of the Company's nuclear generation and the Company purchases its power from FES to meet its "provider of last resort" obligations. The 2001 reduction in revenues for Bruce Mansfield administrative and general charges and costs for FirstEnergy support services reflects the transfer of fossil generation operations to FES. The primary affiliated companies transactions, including the effects of the PSA beginning in 2001, the sale and leaseback of the Company's transmission assets to ATSI in September 2000 and FirstEnergy's providing support services at cost, are as follows: 2001 2000 1999 ----------------------------------------------------------------------------- (In millions) Operating Revenues: PSA revenues with FES............... $151.5 $ -- $ -- Generating units rent with FES...... 20.2 -- -- Electric sales to affiliated utilities -- 57.6 12.6 Bruce Mansfield administrative and general charges.................. -- 2.9 5.3 Ground lease with ATSI.............. 1.3 0.7 -- Operating Expenses: Nuclear fuel leased from OES Fuel... 18.7 20.3 8.8 Purchased power from affiliated utilities -- 7.1 12.9 Purchased power under PSA........... 152.7 -- -- Transmission facilities rentals (including ATSI rents)........... 9.9 5.7 1.3 Nuclear operations administrative and generation charges............. 18.6 15.0 2.1 FirstEnergy support services........ 10.1 27.4 28.3 Other Income: Interest income from ATSI........... 2.6 0.9 -- Interest income from FES............ 0.5 -- -- ----------------------------------------------------------------------------- SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Balance Sheets at cost, which approximates their fair market value. Noncash financing and investing activities included capital lease transactions amounting to $21.6 million, $21.2 million and $27.1 million for the years 2001, 2000 and 1999, respectively. All borrowings with initial maturities of less than one year are defined as financial instruments under GAAP and are reported on the Balance Sheets at cost, which approximates their fair market value. The following sets forth the approximate fair value and related carrying amounts of all other long-term debt, preferred stock subject to mandatory redemption and investments other than cash and cash equivalents as of December 31: 2001 2000 ------------------------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------------------------------------------------------------------------- (In millions) Long-term debt................... $252 $262 $253 $263 Preferred stock.................. 15 15 15 15 Investments other than cash and cash equivalents................ 160 162 155 153 ------------------------------------------------------------------------------ The fair values of long-term debt and preferred stock reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by corporations with credit ratings similar to the Company's ratings. The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents consist primarily of decommissioning trust investments. Unrealized gains and losses applicable to the decommissioning trusts have been recognized in the trust investment with a corresponding change to the decommissioning liability. The Company has no securities held for trading purposes. REGULATORY ASSETS- The Company recognizes, as regulatory assets, costs which the FERC and PPUC have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets are being recovered from customers under the Company's rate restructuring plan. Based on the rate restructuring plan, the Company continues to bill and collect cost-based rates relating to the Company's nongeneration operations and continues the application of SFAS 71 to these operations. Net regulatory assets on the Balance Sheets are comprised of the following: 2001 2000 ------------------------------------------------------------------------------ (In millions) Competitive transition charge.................. $182.7 $230.9 Customer receivables for future income taxes... 13.6 17.0 Loss on reacquired debt........................ 6.9 6.4 Employee postretirement benefit costs.......... 3.6 4.5 Other.......................................... 2.0 1.4 ----------------------------------------------------------------------------- Total..................................... $208.8 $260.2 ============================================================================== 2. LEASES The Company leases office space and other property and equipment under cancelable and noncancelable leases. Consistent with the regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Statements of Income. Such costs for the three years ended December 31, 2001, are summarized as follows: 2001 2000 1999 ----------------------------------------------------------------------------- (In millions) Operating leases Interest element................... $ -- $0.3 $0.6 Other.............................. 0.1 0.8 1.6 Capital leases Interest element................... -- 0.4 0.6 Other.............................. 0.1 0.3 0.5 ----------------------------------------------------------------------------- Total rentals......................... $ 0.2 $1.8 $3.3 ============================================================================ The future minimum lease payments as of December 31, 2001, are: Capital Operating Leases Leases -------------------------------------------------------------------------------- (In millions) 2002............................... $0.1 $0.1 2003............................... 0.1 0.1 2004............................... -- 0.1 2005............................... -- 0.1 2006............................... -- 0.1 Years thereafter................... -- 0.8 ---------------------------------------------------------------- Total minimum lease payments....... 0.2 $1.3 ==== Executory costs.................... 0.1 ------------------------------------------- Net minimum lease payments......... 0.1 Interest portion................... -- ------------------------------------------- Present value of net minimum lease payments................... 0.1 Less current portion............... 0.1 ------------------------------------------- Noncurrent portion................. $-- ========================================== 3. CAPITALIZATION (A) RETAINED EARNINGS- Under the Company's Charter, the Company's retained earnings unrestricted for payment of cash dividends on the Company's common stock were $26.1 million as of December 31, 2001. (B) STOCK COMPENSATION PLANS- Employees of the Company participate in the FirstEnergy Executive and Director Incentive Compensation Plan (FE Plan) administered by FirstEnergy. Under the FE Plan, total awards cannot exceed 15 million shares of common stock or their equivalent. Only stock options and restricted stock have been granted, with vesting periods ranging from six months to seven years. Under the Executive Deferred Compensation Plan, covered employees can direct a portion of their Annual Incentive Award and/or Long Term Incentive Award into an unfunded FirstEnergy Stock Account to receive vested stock units. An additional 20% premium is received in the form of stock units based on the amount allocated to the FirstEnergy Stock Account. Dividends are calculated quarterly on stock units outstanding and are paid in the form of additional stock units. Upon withdrawal, stock units are converted to FirstEnergy shares. Payout occurs three years from the date of deferral. The Company continues to apply APB 25, "Accounting for Stock Issued to Employees." As required by SFAS 123, "Accounting for Stock-Based Compensation," the Company has determined pro forma earnings as though the Company had accounted for employee stock options under the fair value method. The weighted average assumptions used in valuing the options and their resulting fair values are as follows: 2001 2000 1999 --------------------------------------------------------------------------- Valuation assumptions: Expected option term (years) 8.3 7.6 6.4 Expected volatility......... 23.45% 21.77% 20.03% Expected dividend yield..... 5.00% 6.68% 5.97% Risk-free interest rate..... 4.67% 5.28% 5.97% Fair value per option......... $4.97 $2.86 $3.42 -------------------------------------------------------------------------- The following table summarizes the pro forma effect of applying fair value accounting to the Company's stock options. 2001 2000 1999 --------------------------------------------------------------------------- Earnings on Common Stock (000) As Reported................. $37,338 $19,143 $8,278 Pro Forma................... $37,191 $18,970 $8,228 --------------------------------------------------------------------------- (C) PREFERRED STOCK- The Company's 7.75% series of preferred stock has a restriction which prevents early redemption prior to July 2003. All other preferred stock may be redeemed by the Company in whole, or in part, with 30-60 days' notice. (D) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- The Company's 7.625% series has an annual sinking fund requirement for 7,500 shares beginning on October 1, 2002. (E) LONG-TERM DEBT- The first mortgage indenture and its supplements, which secure all of the Company's first mortgage bonds, serve as a direct first mortgage lien on substantially all property and franchises, other than specifically excepted property, owned by the Company. Based on the amount of bonds authenticated by the Trustee through December 31, 2001, the Company's annual sinking and improvement fund requirements for all bonds issued under the mortgage amounts to $1.0 million. The Company expects to deposit funds in 2002 that will be withdrawn upon the surrender for cancellation of a like principal amount of bonds, which are specifically authenticated for such purposes against unfunded property additions or against previously retired bonds. This method can result in minor increases in the amount of the annual sinking fund requirement. Sinking fund requirements for first mortgage bonds and maturing long-term debt (excluding capital leases) during the next five years are $11.3 million in 2002, $41.0 million in 2003, $40.7 million in 2004 and $1.0 million in each year 2005 and 2006. The Company's obligations to repay certain pollution control revenue bonds are secured by several series of first mortgage bonds. Certain pollution control revenue bonds are entitled to the benefit of irrevocable bank letters of credit of $10.4 million and noncancelable municipal bond insurance policies of $32.9 million to pay principal of, or interest on, the pollution control revenue bonds. To the extent that drawings are made under the letters of credit, the Company is entitled to a credit against its obligation to repay the related bond. The Company pays an annual fee of 1.25% of the amount of the letters of credit to the issuing bank and is obligated to reimburse the bank for any drawings thereunder. 4. SHORT-TERM BORROWINGS: The Company has a credit agreement with OE whereby either company can borrow funds from the other by issuing unsecured notes at the prevailing prime or similar interest rate. Under the terms of this agreement, the maximum borrowing is limited only by the availability of funds; however, the Company's borrowings under this agreement are currently limited by the PPUC to a total of $50 million. Either company can terminate the agreement with six months' notice. 5. COMMITMENTS AND CONTINGENCIES: CAPITAL EXPENDITURES- The Company's current forecast reflects expenditures of approximately $177 million for property additions and improvements from 2002-2006, of which approximately $36 million is applicable to 2002. Investments for additional nuclear fuel during the 2002-2006 period are estimated to be approximately $94 million, of which approximately $8 million applies to 2002. During the same periods, the Company's nuclear fuel investments are expected to be reduced by approximately $95 million and $20 million, respectively, as the nuclear fuel is consumed. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $9.5 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on its ownership interests in the Beaver Valley Station and the Perry Plant, the Company's maximum potential assessment under the industry retrospective rating plan (assuming the other affiliate co-owners contribute their proportionate shares of any assessments under the retrospective rating plan) would be $74.0 million per incident but not more than $8.4 million in any one year for each incident. The Company is also insured as to its interest in Beaver Valley and Perry under policies issued to the operating company for each plant. Under these policies, up to $2.75 billion is provided for property damage and decontamination and decommissioning costs. The Company has also obtained approximately $222.1 million of insurance coverage for replacement power costs for its interests in Beaver Valley and Perry. Under these policies, the Company can be assessed a maximum of approximately $13.9 million for incidents at any covered nuclear facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses. The Company intends to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at any of the Company's plants exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Company's insurance policies, or to the extent such insurance becomes unavailable in the future, the Company would remain at risk for such costs. ENVIRONMENTAL MATTERS- Various federal, state and local authorities regulate the Company with regard to air and water quality and other environmental matters. Generation operations and any related additional capital expenditures for environmental compliance are the responsibility of FirstEnergy's competitive services business unit. The Company is 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 Company cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. The Company is in compliance with the current SO2 and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions are being achieved by burning lower-sulfur fuel, generating more electricity from lower-emitting plants, and/or using emission allowances. NOx reductions are being achieved through combustion controls and the generation of more electricity at lower-emitting plants. In September 1998, the EPA finalized regulations requiring additional NOx reductions from the Company's Pennsylvania facilities. The EPA's NOx Transport Rule imposes uniform reductions of NOx emissions (an approximate 85% reduction in utility plant NOx emissions from projected 2007 emissions) across a region of nineteen 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. State Implementation Plans (SIP) must comply by May 31, 2004 with individual state NOx budgets established by the EPA. Pennsylvania submitted a SIP that requires compliance with the NOx budgets at the Company's Pennsylvania facilities by May 1, 2003. FirstEnergy continues to evaluate its compliance plans and other compliance options. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone emissions and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. In May 1999, the U.S. Court of Appeals found constitutional and other defects in the new NAAQS rules. In February 2001, the U.S. Supreme Court upheld the new NAAQS rules regulating ultra-fine particulates but found defects in the new NAAQS rules for ozone and decided that the EPA must revise those rules. The future cost of compliance with these regulations may be substantial and will depend if and how they are ultimately implemented by the states in which the Company operates affected facilities. In 1999 and 2000, the EPA issued Notices of Violation (NOV) or a Compliance Order to nine utilities covering 44 power plants, including the W. H. Sammis Plant. In addition, the U.S. Department of Justice filed eight civil complaints against various investor-owned utilities, which included a complaint against the Company and OE 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, the Company and OE believe the Sammis Plant is in full compliance with the Clean Air Act and the NOV and complaint are without merit. Penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. The Sammis Plant continues to operate while these proceedings are pending. In December 2000, the EPA announced it would proceed with the development of regulations regarding hazardous air pollutants from electric power plants. The EPA identified mercury as the hazardous air pollutant of greatest concern. The EPA established a schedule to propose regulations by December 2003 and issue final regulations by December 2004. The future cost of compliance with these regulations may be substantial. As a result of the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act of 1976, federal and state hazardous waste regulations have been promulgated. Certain fossil-fuel combustion waste products, such as coal ash, were exempted from hazardous waste disposal requirements pending the EPA's evaluation of the need for future regulation. The EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. In April 2000, the EPA announced that it will develop national standards regulating disposal of coal ash under its authority to regulate nonhazardous waste. LEGAL MATTERS- Various lawsuits, claims and proceedings related to the Company's normal business operations are pending against FirstEnergy and its subsidiaries. The most significant applicable to the Company are described above.
6. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain operating results by quarter for 2001 and 2000. March 31, June 30, September 30, December 31, Three Months Ended 2001 2001 2001 2001 --------------------------------------------------------------------------------------------------------------- (In millions) Operating Revenues........................ $128.4 $124.7 $121.3 $124.0 Operating Expenses and Taxes.............. 112.4 101.8 118.7 110.3 --------------------------------------------------------------------------------------------------------------- Operating Income.......................... 16.0 22.9 2.6 13.7 Other Income.............................. 0.9 0.7 1.0 0.6 Net Interest Charges...................... 4.5 4.6 4.3 4.0 --------------------------------------------------------------------------------------------------------------- Net Income (Loss)......................... $ 12.4 $ 19.0 $ (0.7) $ 10.3 =============================================================================================================== Earnings (Loss) on Common Stock........... $ 11.5 $ 18.1 $ (1.7) $ 9.4 ===============================================================================================================
March 31, June 30, September 30, December 31, Three Months Ended 2000 2000 2000 2000 --------------------------------------------------------------------------------------------------------------- (In millions) Operating Revenues........................ $ 83.9 $93.6 $102.8 $102.8 Operating Expenses and Taxes.............. 90.3 81.0 83.0 88.9 --------------------------------------------------------------------------------------------------------------- Operating Income (Loss)................... (6.4) 12.6 19.8 13.9 Other Income.............................. 0.4 0.4 0.4 1.1 Net Interest Charges...................... 4.4 5.4 5.0 4.6 --------------------------------------------------------------------------------------------------------------- Net Income (Loss)......................... $(10.4) $ 7.6 $ 15.2 $ 10.4 =============================================================================================================== Earnings (Loss) on Common Stock........... $(11.3) $ 6.7 $ 14.3 $ 9.5 ===============================================================================================================
Report of Independent Public Accountants To the Stockholders and Board of Directors of Pennsylvania Power Company: We have audited the accompanying balance sheets and statements of capitalization of Pennsylvania Power Company (a Pennsylvania corporation and wholly owned subsidiary of Ohio Edison Company) as of December 31, 2001 and 2000, and the related statements of income, common stockholder's equity, preferred stock, cash flows and taxes for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pennsylvania Power Company as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Cleveland, Ohio, March 18, 2002.