-----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, VOUioJnjm/cjykfukAP9Y79NZFOXPy+mwzzQSaxdjgipd5/M6LgbPXb7b6ADUuWF DV1fTj1oS3zxfmhgIl2EQQ== 0001031296-99-000022.txt : 19991115 0001031296-99-000022.hdr.sgml : 19991115 ACCESSION NUMBER: 0001031296-99-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRSTENERGY CORP CENTRAL INDEX KEY: 0001031296 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [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: 99747390 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: ELECTRIC SERVICES [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: 99747391 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: ELECTRIC SERVICES [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: 99747392 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: ELECTRIC SERVICES [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: 99747393 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: ELECTRIC SERVICES [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: 99747394 BUSINESS ADDRESS: STREET 1: 76 SOUTH MAIN STREET CITY: AKRON STATE: OH ZIP: 43308 BUSINESS PHONE: 2166229800 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------- ---------- Commission Registrant; State of Incorporation; I.R.S. Employer File Number Address; and Telephone Number Identification No. - ----------- ------------------------------------- ------------------ 333-21011 FIRSTENERGY CORP. 34-1843785 (An Ohio Corporation) 76 South Main Street Akron, Ohio 44308 Telephone (800)736-3402 1-2578 OHIO EDISON COMPANY 34-0437786 (An Ohio Corporation) 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-2323 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY 34-0150020 (An Ohio Corporation) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-3583 THE TOLEDO EDISON COMPANY 34-4375005 (An Ohio Corporation) c/o FirstEnergy Corp. 76 South Main Street Akron, OH 44308 Telephone (800)736-3402 1-3491 PENNSYLVANIA POWER COMPANY 25-0718810 (A Pennsylvania Corporation) 1 East Washington Street P. O. Box 891 New Castle, Pennsylvania 16103 Telephone (412)652-5531 Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: OUTSTANDING CLASS AS OF NOVEMBER 9, 1999 ----- ----------------------- FirstEnergy Corp., $.10 par value 233,023,987 Ohio Edison Company, $9 par value 100 The Cleveland Electric Illuminating Company, no par value 79,590,689 The Toledo Edison Company, $5 par value 39,133,887 Pennsylvania Power Company, $30 par value 6,290,000 FirstEnergy Corp. is the sole holder of Ohio Edison Company, The Cleveland Electric Illuminating Company and The Toledo Edison Company common stock; Ohio Edison Company is the sole holder of Pennsylvania Power Company common stock. This combined Form 10-Q is separately filed by FirstEnergy Corp., Ohio Edison Company, Pennsylvania Power Company, The Cleveland Electric Illuminating Company and The Toledo Edison Company. Information contained herein relating to any individual registrant is filed by such registrant on its own behalf. No registrant makes any representation as to information relating to any other registrant, except that information relating to any of the four FirstEnergy subsidiaries is also attributed to FirstEnergy. This Form 10-Q includes forward looking statements based on information currently available to management. Such statements are subject to certain risks and uncertainties. These statements typically contain, but are not limited to, the terms "anticipate", "potential", "expect", "believe", "estimate" and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy market prices, legislative and regulatory changes (including revised environmental requirements), availability and cost of capital and other similar factors. TABLE OF CONTENTS Pages Part I. Financial Information Notes to Consolidated Financial Statements 1-4 FirstEnergy Corp. Consolidated Statements of Income 5 Consolidated Balance Sheets 6-7 Consolidated Statements of Cash Flows 8 Report of Independent Public Accountants 9 Management's Discussion and Analysis of Results of Operations and Financial Condition 10-14 Ohio Edison Company Consolidated Statements of Income 15 Consolidated Balance Sheets 16-17 Consolidated Statements of Cash Flows 18 Report of Independent Public Accountants 19 Management's Discussion and Analysis of Results of Operations and Financial Condition 20-23 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 37-39 Pennsylvania Power Company Consolidated Statements of Income 40 Consolidated Balance Sheets 41-42 Consolidated Statements of Cash Flows 43 Report of Independent Public Accountants 44 Management's Discussion and Analysis of Results of Operations and Financial Condition 45-47 Part II. Other Information PART I. FINANCIAL INFORMATION FIRSTENERGY CORP. AND SUBSIDIARIES OHIO EDISON COMPANY AND SUBSIDIARIES THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY THE TOLEDO EDISON COMPANY AND SUBSIDIARY PENNSYLVANIA POWER COMPANY AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1 - CONSOLIDATED FINANCIAL STATEMENTS: The principal business of FirstEnergy Corp. (FirstEnergy) is the holding, directly or indirectly, of all of the outstanding common stock of its four principal electric utility operating subsidiaries, Ohio Edison Company (OE), The Cleveland Electric Illuminating Company (CEI), The Toledo Edison Company (TE) and Pennsylvania Power Company (Penn). These utility subsidiaries are referred to throughout as "Companies." Penn is a wholly owned subsidiary of OE. The condensed unaudited consolidated financial statements of FirstEnergy and each of the Companies reflect all normal recurring adjustments that, in the opinion of management, are necessary to fairly present results of operations for the interim periods. These statements should be read in connection with the financial statements and notes included in the combined Annual Report on Form 10-K for the year ended December 31, 1998 for FirstEnergy and the Companies. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results could differ from those estimates. The reported results of operations are not indicative of results of operations for any future period. Certain prior year amounts have been reclassified to conform with the current year presentation. The sole assets of the subsidiary trust that is the obligor on the preferred securities included in FirstEnergy's and OE's capitalization are $123,711,350 principal amount of 9% Junior Subordinated Debentures of OE due December 31, 2025. 2 - COMMITMENTS, GUARANTEES AND CONTINGENCIES: CAPITAL EXPENDITURES- FirstEnergy's current forecast reflects expenditures of approximately $2.2 billion (FirstEnergy-$263 million, OE-$856 million, CEI-$701 million, TE-$257 million and Penn-$167 million) for property additions and improvements from 1999-2003, of which approximately $455 million (FirstEnergy-$117 million, OE-$156 million, CEI-$111 million, TE-$41 million and Penn-$30 million) is applicable to 1999. Investments for additional nuclear fuel during the 1999-2003 period are estimated to be approximately $364 million (OE-$128 million, CEI-$118 million, TE-$92 million and Penn-$26 million), of which approximately $51 million (OE- $23 million, CEI-$14 million, TE-$9 million and Penn-$5 million) applies to 1999. STOCK REPURCHASE PROGRAM- On November 17, 1998, the Board of Directors authorized the repurchase of up to 15 million shares of FirstEnergy's common stock over a three-year period beginning in 1999. Repurchases are made on the open market, at prevailing prices, and will be funded primarily through the use of operating cash flows. During the third quarter of 1999, FirstEnergy repurchased and retired 1.5 million shares of its common stock at an average price of $28.30 per share. During the first nine months of 1999, FirstEnergy repurchased and retired 4.0 million shares at an average price of $28.83 per share. GUARANTEES- The Companies and Duquesne Light Company (Duquesne) have each severally guaranteed certain debt and lease obligations in connection with a coal supply contract for the Bruce Mansfield Plant, which expires December 31, 1999. As of September 30, 1999, the Companies' share of the guarantees was $19.9 million (OE-$11.3 million, CEI-$4.4 million, TE-$2.6 million and Penn-$1.6 million). The price under the coal supply contract, which includes certain minimum payments, has been determined to be sufficient to satisfy the debt and lease obligations. - 1 - ENVIRONMENTAL MATTERS- Various federal, state and local authorities regulate the Companies with regard to air and water quality and other environmental matters. The Companies estimate additional capital expenditures for environmental compliance of approximately $449 million (OE-$213 million, CEI-$145 million, TE-$44 million and Penn-$47 million), which is included in the construction forecast provided under "Capital Expenditures" for 1999 through 2003. The Companies are in compliance with the current sulfur dioxide (SO2) and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions are being achieved by burning lower-sulfur fuel, generating more electricity from lower- emitting plants, and/or purchasing emission allowances. NOx reductions are being achieved through combustion controls and generating more electricity from lower-emitting plants. In September 1998, the Environmental Protection Agency (EPA) finalized regulations requiring additional NOx reductions from the Companies' Ohio and Pennsylvania facilities by May 2003. The EPA`s NOx Transport Rule imposes uniform reductions of NOx emissions across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. In May 1999, the U.S. Court of Appeals for the D.C. Circuit issued a stay which delays implementation of EPA's NOx Transport Rule until the Court has ruled on the merits of various appeals. Under the NOx Transport Rule, each of the twenty-two states are required to submit revised State Implementation Plans (SIP) which comply with individual state NOx budgets established by the EPA contemplating an approximate 85% reduction in utility plant NOx emissions from projected 2007 emissions. A proposed Federal Implementation Plan accompanied the NOx Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In another separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NOx emissions which are alleged to contribute to ozone pollution in the eight petitioning states. The EPA suggests that the Section 126 petitions will be adequately addressed by the NOx Transport Program, but an April 30, 1999 rulemaking established an alternative program which would require nearly identical 85% NOx reductions at the Companies' Ohio and Pennsylvania plants by May 2003 in the event implementation of the NOx Transport Rule is delayed. In June 1999, the EPA stayed the April 30,1999 rulemaking and proposed changes to that rulemaking in response to the D.C. Circuit Court rulings. New Section 126 petitions were filed by New Jersey, Maryland, Delaware and the District of Columbia in mid-1999 and are still under evaluation by the EPA. The Companies continue to evaluate their compliance plans and other compliance options. The Companies are required to meet federally approved SO2 regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day the unit is in violation. The EPA has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Companies cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. In May 1999, the U.S. Court of Appeals for the D.C. Circuit remanded both standards back to the EPA finding constitutional and other defects in the new NAAQS rules. The D.C. Circuit Court, on October 29, 1999, denied an EPA petition for rehearing. The Companies cannot predict the EPA's action in response to the Court's remand order. The cost of compliance with these regulations, if they are reinstated, may be substantial and depends on the manner in which they are ultimately implemented, if at all, by the states in which the Companies operate affected facilities. In September 1999, FirstEnergy received, and subsequently in October 1999, OE and Penn received a citizen suit notification letter from the New York Attorney General's office alleging Clean Air Act violations at the W. H. Sammis Plant. FirstEnergy believes the Sammis Plant is in full compliance with the Clean Air Act, but cannot predict whether New York will nonetheless file a lawsuit. On November 3, 1999, the EPA issued Notices of Violation (NOV) or a Compliance Order to eight utilities covering 32 power plants, including the Sammis Plant. In addition, the U.S. Department of Justice filed seven civil complaints against various investor-owned utilities, which included a complaint against OE and Penn in the U.S. District Court for the Southern District of Ohio. The NOV and complaint allege violations of the Clean Air Act based on operation and maintenance of the Sammis Plant dating back to 1984. The complaint requests permanent injunctive relief to require the installation of "best available control technology" and civil penalties of up to $27,500 per day of violation. FirstEnergy believes the NOV and complaint are without merit. However, FirstEnergy is unable to predict the outcome of this litigation. Criminal penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. It is anticipated at this time that the Sammis Plant will continue to operate while the matter is being decided. CEI and TE have been named as "potentially responsible parties" (PRPs) at waste disposal sites which may require cleanup under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. Allegations of disposal of hazardous substances at historical sites and the liability involved, are often unsubstantiated and subject to dispute. Federal law provides that all PRPs for a particular site be held liable on a joint and several basis. CEI and TE have accrued liabilities of $4.6 million and $1.0 million, respectively, as of September 30, 1999, based on estimates of the costs - 2 - of cleanup and the proportionate responsibility of other PRPs for such costs. CEI and TE believe that waste disposal costs will not have a material adverse effect on their financial condition, cash flows or results of operations. Legislative, administrative and judicial actions will continue to change the way that the Companies must operate in order to comply with environmental laws and regulations. With respect to any such changes and to the environmental matters described above, the Companies expect that while they remain regulated, any resulting additional capital costs which may be required, as well as any required increase in operating costs, would ultimately be recovered from their customers. PENDING EXCHANGE OF ASSETS- On March 26, 1999, FirstEnergy announced that it completed its agreements with Duquesne to exchange certain generating assets. All regulatory approvals were received by October 1999. Duquesne will transfer 1,436 megawatts owned by Duquesne at eight Central Area Power Coordination Group (CAPCO) generating units in exchange for 1,328 megawatts at three non-CAPCO power plants owned by the Companies. The agreements for the exchange of assets, which is structured as a like- kind exchange for tax purposes, will provide the Companies with exclusive ownership and operating control of all CAPCO generating units. The three FirstEnergy plants to be transferred are being sold by Duquesne to a wholly owned subsidiary of Orion Power Holdings, Inc. (Orion). The Companies will continue to operate those plants until the assets are transferred to the new owners. Duquesne will fund decommissioning costs equal to its percentage interest in the three nuclear generating units to be transferred. The asset transfer to Duquesne is expected to occur in December 1999 and the Duquesne asset transfer to the Orion subsidiary could take place by the middle of 2000. Under the agreements, Duquesne will no longer be a participant in the CAPCO arrangements when the assets are exchanged with Duquesne. 3 - REGULATORY ACCOUNTING: On July 6, 1999, the Governor of the State of Ohio signed legislation which will allow Ohio electric customers to select their generation suppliers beginning January 1, 2001. Among other things, the new law provides for a five percent reduction on the generation portion of residential customers' bills and the opportunity to recover transition costs, including regulatory assets, from January 1, 2001 through December 31, 2005. The period for the recovery of regulatory assets only can be extended up to December 31, 2010. The Public Utilities Commission of Ohio (PUCO) has been authorized to determine the level of transition cost recovery, as well as the recovery period for the regulatory assets portion of those costs, in considering each Ohio electric utility's transition plan application. On October 4, 1999, FirstEnergy, on behalf of OE, CEI and TE, filed with the PUCO its comprehensive transition plan under the new law. The plan itemizes the price of electricity into separate components and details FirstEnergy's strategy to implement corporate separation of its regulated and nonregulated operations. Under the plan, customers who remain with OE, CEI, or TE as their generation provider will continue to receive savings under FirstEnergy's rate plans, expected to total $759 million between 2000 and 2005. In addition, customers will save $358 million through reduced charges for taxes and a five percent reduction in the price of generation for residential customers beginning January 1, 2001. Customer prices are expected to be frozen through a five-year market development period (2001-2005), except for certain limited statutory exceptions including the five percent reduction in the price of generation for residential customers. The plan proposes recovery of generation-related transition costs of approximately $4.5 billion ($3.9 billion, net of deferred income taxes) over the market development period; transition costs related to regulatory assets aggregating approximately $4.3 billion ($3.0 billion, net of deferred income taxes) will be recovered over the period of 2001 through early 2005 for OE; 2001 through mid-2008 for TE; and 2001 through mid-2009 for CEI. The PUCO rejected FirstEnergy's filing on November 4, 1999, because the PUCO has not yet prescribed the transition plan filing rules. FirstEnergy will refile its transition plan once those rules have been established. Despite rejecting FirstEnergy's filing, the PUCO indicated that it will endeavor to issue its order in this case within 275 days of FirstEnergy's initial filing date. The application of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), to OE's generation business and the nonnuclear generation businesses of CEI and TE will be discontinued at that time. If the transition plans ultimately approved by the PUCO for OE, CEI and TE do not provide adequate recovery of their nuclear generating unit investments and regulatory assets, there would be a charge to earnings which could have a material adverse effect on the results of operations and financial condition for FirstEnergy, OE, CEI and TE. The Companies believe they will continue to bill and collect cost-based rates for their transmission and distribution services, which will remain regulated; accordingly, it is appropriate that the Companies continue the application of SFAS 71 to those respective operations after December 31, 2000. 4 - NEW ACCOUNTING STANDARDS: In June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." The statement amended SFAS 133 to make it effective for fiscal years beginning after June 15, - 3 - 2000. This represents a one-year deferral from the original effective date. FirstEnergy expects to adopt SFAS 133 effective January 1, 2001. SFAS 133 requires derivative instruments to be recognized on the balance sheet as assets or liabilities at their fair value. FirstEnergy has not yet quantified the effects of adopting SFAS 133 on its financial statements. However, SFAS 133 could increase volatility in earnings and other comprehensive income. 5 - SEGMENT INFORMATION: FirstEnergy's primary segment is its Electric Utility Group which includes four electric utility operating companies that provide electric service in Ohio and Pennsylvania. Its other material business segment is the FirstEnergy Trading Services, Inc. subsidiary (formerly known as FirstEnergy Trading & Power Marketing, Inc.) which markets and trades electricity in nonregulated markets. Financial data for these business segments and products and services are as follows: Segment Financial Information - -----------------------------
FirstEnergy Electric Trading All Reconciling Three Months Ended: Utilities Services Other Eliminations Totals - ------------------ --------- ----------- ----- ------------ ------ (In millions) September 30, 1999 - ------------------ External revenues $ 1,528 $ 40 $ 164 $ -- $ 1,732 Intersegment revenues 7 22 28 (57) -- Total revenues 1,535 62 192 (57) 1,732 Depreciation and amortization 312 -- 9 -- 321 Net interest charges 136 1 16 (12) 141 Income taxes 114 -- -- -- 114 Net income/Earnings on common stock 186 -- (1) 1 186 Total assets 17,123 72 1,812 (932) 18,075 Property additions 110 -- 5 -- 115 Acquisitions -- -- -- -- -- September 30, 1998 - ------------------ External revenues $ 1,449 $179 $ 94 $ -- $ 1,722 Intersegment revenues 8 23 23 (54) -- Total revenues 1,457 202 117 (54) 1,722 Depreciation and amortization 194 -- 4 -- 198 Net interest charges 148 -- 17 (12) 153 Income taxes 127 (20) 5 -- 112 Net income/Earnings on common stock 191 (29) 4 (3) 163 Total assets 17,619 52 1,692 (952) 18,411 Property additions 67 -- -- -- 67 Acquisitions -- -- 10 -- 10 Nine Months Ended: - ------------------ September 30, 1999 - ------------------ External revenues $ 4,140 $ 69 $ 465 $ -- $ 4,674 Intersegment revenues 23 43 74 (140) -- Total revenues 4,163 112 539 (140) 4,674 Depreciation and amortization 706 -- 20 -- 726 Net interest charges 421 1 49 (36) 435 Income taxes 312 (2) (1) -- 309 Net income/Earnings on common stock 454 (3) -- (3) 448 Total assets 17,123 72 1,812 (932) 18,075 Property additions 231 -- 59 -- 290 Acquisitions -- -- 9 -- 9 September 30, 1998 - ------------------ External revenues $ 4,008 $403 $ 142 $ -- $ 4,553 Intersegment revenues 24 26 65 (115) -- Total revenues 4,032 429 207 (115) 4,553 Depreciation and amortization 579 -- 7 -- 586 Net interest charges 437 1 51 (37) 452 Income taxes 277 (34) 4 -- 247 Net income/Earnings on common stock 372 (50) -- (6) 316 Total assets 17,619 52 1,692 (952) 18,411 Property additions 185 -- 13 -- 198 Acquisitions -- -- 250 -- 250
- 4 - FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (In thousands, except per share amounts) REVENUES: Electric sales $1,467,619 $1,391,134 $3,964,937 $3,834,689 Other - electric utilities 66,099 66,881 194,426 192,986 Facilities services 133,821 72,061 355,144 108,684 Trading services 40,408 178,958 68,974 403,080 Other 24,444 12,953 90,201 13,604 ---------- ---------- ---------- ---------- Total revenues 1,732,391 1,721,987 4,673,682 4,553,043 ---------- ---------- ---------- ---------- EXPENSES: Fuel and purchased power 269,755 291,227 678,385 832,384 Other expenses: Electric utilities 368,066 366,915 1,158,037 1,074,521 Facilities services 119,798 65,642 332,438 102,335 Trading services 40,208 221,446 73,472 481,881 Other 27,393 11,911 91,563 20,646 Provision for depreciation and amortization 321,171 198,329 726,403 586,146 General taxes 144,584 138,471 422,144 409,953 ---------- ---------- ---------- ---------- Total expenses 1,290,975 1,293,941 3,482,442 3,507,866 ---------- ---------- ---------- ---------- INCOME BEFORE INTEREST AND INCOME TAXES 441,416 428,046 1,191,240 1,045,177 ---------- ---------- ---------- ---------- NET INTEREST CHARGES: Interest expense 125,712 136,204 386,452 409,365 Allowance for borrowed funds used during construction and capitalized interest (3,410) (2,461) (9,471) (5,129) Subsidiaries' preferred stock dividends 19,007 19,568 57,767 47,359 ---------- ---------- ---------- ---------- Net interest charges 141,309 153,311 434,748 451,595 ---------- ---------- ---------- ---------- INCOME TAXES 114,284 111,644 308,626 246,885 ---------- ---------- ---------- ---------- INCOME BEFORE EXTRAORDINARY ITEM 185,823 163,091 447,866 346,697 EXTRAORDINARY ITEM (NET OF INCOME TAX BENEFIT OF $21,208,000) -- -- -- (30,522) ---------- ---------- ---------- ---------- NET INCOME $ 185,823 $ 163,091 $ 447,866 $ 316,175 ========== ========== ========== ========== WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 226,432 229,482 227,646 225,292 ======= ======= ======= ======= BASIC AND DILUTED EARNINGS PER SHARE OF COMMON STOCK: Income before extraordinary item $ .82 $ .71 $ 1.97 $ 1.54 Extraordinary item (Net of income taxes) -- -- -- (.14) ----- ----- ------ ------ Net income $ .82 $ .71 $ 1.97 $ 1.40 ===== ===== ====== ====== DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $.375 $.375 $1.125 $1.125 ===== ===== ====== ====== The preceding Notes to Consolidated Financial Statements as they relate to FirstEnergy Corp. are an integral part of these statements.
- 5 - FIRSTENERGY CORP. CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 1999 1998 ------------ ------------ (In thousands) ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 115,604 $ 77,798 Receivables- Customers (less accumulated provisions of $7,783,000 and $6,397,000, respectively, for uncollectible accounts) 328,979 239,183 Other (less accumulated provisions of $46,962,000 and $46,251,000, respectively, for uncollectible accounts) 423,361 322,186 Materials and supplies, at average cost- Owned 116,273 145,926 Under consignment 106,258 110,109 Prepayments and other 163,061 171,931 ----------- ----------- 1,253,536 1,067,133 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT: In service 15,075,021 14,961,664 Less--Accumulated provision for depreciation 6,282,901 6,012,761 ----------- ----------- 8,792,120 8,948,903 Construction work in progress 240,337 293,671 ----------- ----------- 9,032,457 9,242,574 ----------- ----------- INVESTMENTS: Capital trust investments 1,283,575 1,329,010 Nuclear plant decommissioning trusts 406,589 358,371 Letter of credit collateralization 277,763 277,763 Other 666,030 453,860 ----------- ----------- 2,633,957 2,419,004 ----------- ----------- DEFERRED CHARGES: Regulatory assets 2,579,815 2,887,437 Goodwill 2,108,816 2,167,968 Property taxes 270,666 270,666 Other 195,633 199,400 ----------- ----------- 5,154,930 5,525,471 ----------- ----------- $18,074,880 $18,254,182 =========== ===========
- 6 - FIRSTENERGY CORP. CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 1999 1998 ------------ ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CURRENT LIABILITIES: Currently payable long-term debt and preferred stock $ 1,082,371 $ 876,470 Short-term borrowings 287,631 254,470 Accounts payable 232,180 257,524 Accrued taxes 501,713 401,688 Accrued interest 138,266 141,575 Other 252,082 251,262 ----------- ----------- 2,494,243 2,182,989 ----------- ----------- CAPITALIZATION: Common stockholders' equity- Common stock, $.10 par value, authorized 300,000,000 shares - 233,023,987 and 237,069,087 shares outstanding, respectively 23,302 23,707 Other paid-in capital 3,734,814 3,846,513 Accumulated comprehensive income (439) (439) Retained earnings 909,592 718,409 Unallocated employee stock ownership plan common stock - 6,997,705 and 7,406,332 shares, respectively (130,624) (139,032) ----------- ----------- Total common stockholders' equity 4,536,645 4,449,158 Preferred stock of consolidated subsidiaries- Not subject to mandatory redemption 648,395 660,195 Subject to mandatory redemption 154,996 174,710 OE obligated mandatorily redeemable preferred securities of subsidiary trust holding solely OE subordinated debentures 120,000 120,000 Long-term debt 5,817,547 6,352,359 ----------- ----------- 11,277,583 11,756,422 ----------- ----------- DEFERRED CREDITS: Accumulated deferred income taxes 2,235,541 2,282,864 Accumulated deferred investment tax credits 274,377 286,154 Pensions and other postretirement benefits 537,327 525,647 Other 1,255,809 1,220,106 ----------- ----------- 4,303,054 4,314,771 ----------- ----------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ----------- ----------- $18,074,880 $18,254,182 =========== =========== The preceding Notes to Consolidated Financial Statements as they relate to FirstEnergy Corp. are an integral part of these balance sheets.
- 7 - FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 185,823 $ 163,091 $ 447,866 $ 316,175 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 321,171 198,329 726,403 586,146 Nuclear fuel and lease amortization 27,535 21,974 75,484 62,606 Other amortization, net (2,855) (760) (7,109) (10,442) Deferred income taxes, net (30,421) 3,917 (45,166) (20,290) Investment tax credits, net (6,856) (5,841) (13,675) (17,180) Extraordinary item -- -- -- 51,730 Receivables (5,501) (192,236) (165,948) (103,750) Materials and supplies 26,879 21,275 33,607 11,478 Accounts payable (75,808) (97,985) (26,635) (133,134) Other 108,621 153,718 9,172 54,401 --------- --------- ---------- --------- Net cash provided from operating activities 548,588 265,482 1,033,999 797,740 --------- --------- ---------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Common stock -- -- -- 203,855 Long-term debt 84,331 10,151 277,696 272,556 Ohio Schools Council prepayment program -- -- -- 116,598 Short-term borrowings, net 54,353 145,612 29,625 37,169 Redemptions and Repayments- Common stock 41,035 -- 116,610 -- Preferred stock 11,920 6,000 33,409 21,379 Long-term debt 525,532 209,963 618,540 559,874 Common stock dividend payments 85,247 86,040 256,683 253,017 --------- --------- ---------- --------- Net cash used for financing activities 525,050 146,240 717,921 204,092 --------- --------- ---------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 114,873 76,614 298,549 447,838 Cash investments (71) (205) (41,276) 111,405 Other 19,665 (3,873) 20,999 14,971 --------- --------- ---------- --------- Net cash used for investing activities 134,467 72,536 278,272 574,214 --------- --------- ---------- --------- Net increase (decrease) in cash and cash equivalents (110,929) 46,706 37,806 19,434 Cash and cash equivalents at beginning of period 226,533 70,965 77,798 98,237 --------- --------- ---------- --------- Cash and cash equivalents at end of period $ 115,604 $ 117,671 $ 115,604 $ 117,671 ========= ========= ========== ========= The preceding Notes to Consolidated Financial Statements as they relate to FirstEnergy Corp. are an integral part of these statements.
- 8 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To FirstEnergy Corp.: We have reviewed the accompanying consolidated balance sheet of FirstEnergy Corp. (an Ohio corporation) and subsidiaries as of September 30, 1999, and the related consolidated statements of income and cash flows for the three-month and nine-month periods ended September 30, 1999 and 1998. 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 generally accepted auditing standards, 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 generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of FirstEnergy Corp. and subsidiaries as of December 31, 1998 (not presented herein), and, in our report dated February 12, 1999, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1998, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio November 9, 1999 - 9 - FIRSTENERGY CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The Company, as a producer and trader of electricity and natural gas, has certain financial risks inherent in its business activities. With respect to its trading operations, the Company uses principally over-the-counter and commodity exchange contracts for the purchase and sale of electricity and natural gas. These contracts may expose the Company to commodity price fluctuations. Market risk represents the risk of loss that may impact financial position, results of operations or cash flow due to either changes in the commodity market prices for electricity and natural gas or the failure of contract counterparties to perform. Various policies and procedures have been established to manage market risk. However, electricity and natural gas are subject to unpredictable price fluctuations due to changing economic and weather conditions and constraints, which arise from time to time in availability of supply. Results of Operations - --------------------- Basic and diluted earnings per share of common stock increased to $1.97 per share for the nine-month period ended September 30, 1999, from $1.40 per share for the same period last year. For the third quarter of 1999, earnings increased to $.82 per share, from $.71 per share in the third quarter of 1998. Higher earnings resulted from several factors including higher retail revenues, lower purchased power costs, reduced costs from the FirstEnergy Trading Services, Inc. (FETS) business segment and lower interest expenses. These sources of improved earnings were partially offset by increased accelerated depreciation and amortization of nuclear and regulatory assets under OE's rate plan. Also, year-to-date earnings for 1998 included an extraordinary charge of $30.5 million, or $.14 per common share resulting from Penn's discontinued application of SFAS 71 to its generation business. Revenues increased $10.4 million in the third quarter of 1999 and $120.6 million during the nine-month period ended September 30, 1999 as compared to the same periods in 1998. The revenue increases resulted primarily from the contributions from the Electric Utility Operating Companies (EUOC) business segment and newly acquired businesses, offset by reduced revenues from the FETS business segment. The sources of increases in the current quarter and nine-month period revenues, compared to the corresponding periods of 1998, are summarized in the following table.
Three Nine Months Months Ended Ended ------ ------ (In millions) Electric sales $ 76.5 $ 130.2 Other electric utility revenues (0.8) 1.4 ------- ------- EUOC 75.7 131.6 FETS (138.6) (334.1) New businesses acquired 58.5 285.4 Unregulated electric sales 14.8 37.7 ------- ------- Net Revenue Increase $ 10.4 $ 120.6 ======= =======
Growth in the Company's consolidated kilowatt-hour sales, consisting of regulated electric sales (EUOC) and unregulated electric sales has been a significant factor in the overall net increase of revenues in the current quarter and the nine months of 1999, compared to the corresponding periods of 1998. Consolidated retail kilowatt-hour sales increased 7.5% in the third quarter of 1999, with sales to residential, commercial and industrial customers increasing 6.2%, 13.6% and 4.2%, respectively. For the first nine months, retail sales increased 6.5%, compared to the same period in 1998, with residential, commercial and industrial customers all contributing to the improved results with sales increases of 6.8%, 12.1% and 2.6%, respectively. Total sales increased 10.7% for the quarter and 6.3% for the nine-month period as compared to the prior year. The increases in EUOC revenues for the third quarter and the nine-month period as compared to the prior year resulted from additional EUOC kilowatt-hour sales, which were partially offset by reduced unit prices. Residential, commercial and industrial customers all contributed to the additional EUOC kilowatt-hour sales with increases of 6.3%, 4.9% and 4.4%, respectively, for the current quarter of 1999 and increases of 6.9%, 4.1% and 2.4%, respectively, for the nine-month period. Growth of the EUOC customer base and increased use of electricity per customer stimulated by a strong consumption-driven - 10 - economy, continued to expand residential and commercial kilowatt-hour sales. Industrial consumption of electricity also benefited from the strong economy. Sales to industrial customers experienced additional volume in the third quarter of 1999, compared to the same period last year, due to a labor strike in 1998 experienced by a major customer in the automotive sector. In total, retail sales increased 5.1% in the third quarter of 1999 and 4.2% for the first nine months of 1999 as compared to the same periods in 1998. Overall, EUOC kilowatt-hour sales increased 8.5% in the third quarter of 1999 and 4.2% for the first nine months of the current year from the corresponding periods of 1998. Contributing to the increases were sales to the wholesale market in the current quarter, which increased 39.9% from the third quarter of 1998. The decreases in FETS revenues for the current year quarter and nine-month period compared to the prior year resulted from a refocus of trading activities in the support of FirstEnergy's retail marketing activities. Acquisition of facilities services companies and sales of electricity to the unregulated market by Penn Power Energy and FirstEnergy Services Corp. contributed to the significant increase in other revenues for both the third quarter and nine-month periods of 1999. The purchase of MARBEL Energy Corporation (MARBEL) also added to the increase in the current nine-month period revenues from the prior year, but was not a contributing factor to the third quarter increase. Total expenses decreased $3.0 million in the third quarter and were $25.4 million lower in the first nine months of 1999 compared to the corresponding periods of 1998. Contributing to this overall reduction in expenses were EUOC purchased power costs which were down $23.0 million in the third quarter of 1999 and $152.1 million lower in the first nine months of 1999. Much of the improvement occurred in the second quarter due to the absence of unusual conditions experienced in 1998, which resulted in an additional $77.4 million of purchased power costs. Those costs were incurred during a period of record heat and humidity in late June 1998, which coincided with a regional power shortage resulting in high prices for purchased power. Unscheduled outages at several of the Companies' power plants at that time required the Companies to purchase significant amounts of power on the spot market. The outage at the Beaver Valley Plant continued as well for most of the third quarter of 1998. Although above normal temperatures were also experienced in 1999, the Companies maintained a stronger capacity position this year compared to 1998. Other expenses for the EUOCs increased only slightly in the third quarter of 1999 from the same period last year, while increasing $83.5 million in the nine-month period from the corresponding period in 1998. Higher nuclear expenses due to refueling outages at Beaver Valley Unit 2 and the Perry Plant; increased customer and sales expenses resulting from marketing programs and information system requirements; and higher distribution expenses, from storm damage, line and meter maintenance all contributed to the year-to-date increase in other EUOC expenses. Reduced FETS activity resulted in significant cost reductions in that business segment for both the third quarter and nine-month period of 1999 when compared to the same periods of 1998. Also, FETS expenses for the nine-month period of 1998 included credit losses resulting from the effects of unprecedented market prices for power in that year. The increase in other expenses was primarily due to the expansion of the facilities services business through additional acquisitions, the purchase of MARBEL and costs attributable to unregulated sales activity. Accelerated cost recovery in connection with the OE rate plan was the primary factor contributing to the increase in depreciation and amortization in the third quarter and year-to-date periods of 1999 from the same periods of 1998. Accelerated depreciation and amortization increased $116 million in the third quarter and $121 million in the first nine months of 1999 from the corresponding periods last year. General taxes increased for both the third quarter and year-to-date periods of 1999 primarily due to increases in the gross receipts tax, Ohio property tax and payroll taxes. Interest expenses decreased in the third quarter and first nine months of 1999 from the same periods of the previous year due to refinancings and redemptions of long-term debt. Subsidiaries' preferred stock dividend requirements increased in the year-to-date period of 1999, as a result of the declaration in the fourth quarter of 1997 of preferred stock dividends payable in 1998 by TE and CEI. Capital Resources and Liquidity - ------------------------------- The Company and its subsidiaries have continuing cash requirements for planned capital expenditures and debt maturities. During the last quarter of 1999, capital requirements for property additions and capital leases are expected to be about $161 million, including $4 million for nuclear fuel. The Companies have additional cash requirements of approximately $86.6 million (excluding an OE revolving credit agreement) to meet sinking fund requirements for - 11 - preferred stock and maturing long-term debt during the fourth quarter of 1999. These cash requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. During the third quarter of 1999, the Company repurchased 1.5 million shares of its common stock at an average price of $28.30 per share - bringing its total repurchases to 4.0 million shares, through September 30, 1999, at an average price of $28.83 per share. As of September 30, 1999, the Company and its subsidiaries had about $115.6 million of cash and temporary investments and $287.6 million of short-term indebtedness. Unused borrowing capability included $96.0 million under revolving lines of credit and $32.0 million of bank facilities that provide for borrowings on a short-term basis at the banks' discretion. On July 26, 1999, CEI completed its purchase of the remaining 20 percent interest in the Seneca pumped storage hydroelectric generation plant from General Public Utilities for $43 million. The purchase makes available 84 megawatts of additional capacity and provides the Company full ownership of the plant. On August 17, 1999, FirstEnergy Services Corporation (FSC), a wholly owned subsidiary, signed a Master Energy Services and Supply Agreement with Republic Technologies International, Inc. (RTI). The agreement could produce more than $1 billion in sales over the five- year contract period. Over the next five years FSC will manage: the supply and delivery of all of RTI's electricity and natural gas needs; RTI's heating, ventilation and air-conditioning requirements; and other energy-related services for RTI. The Company and Range Resources Corporation formed a joint venture, Great Lakes Energy Partners, LLC, on September 30, 1999. This joint venture combined each company's Appalachian oil and natural gas properties and related gas gathering and transportation systems with the objective of lowering operating costs, and increasing natural gas market share in the Appalachian Basin. As exclusive marketing agent for the new joint venture, the Company continues to expand its network of gas assets to supply its retail customer base. On October 5, 1999, FirstEnergy completed the acquisition of Columbus, Ohio-based Volunteer Energy LLC (Volunteer), formerly a retail natural gas subsidiary of The Williams Cos. Volunteer serves about 30,000 business and residential customers in the Midwest and had approximately $150 million of revenues in 1998. On November 5, 1999, FirstEnergy also completed its acquisition of Belden Energy Services Company (Belden), based in North Canton, Ohio. Belden was formerly a retail natural gas subsidiary of Belden & Blake Corporation. The newly acquired company serves about 600 business customers in Ohio and had approximately $44 million of revenues in 1998. The two acquisitions further expand FirstEnergy's retail natural gas business in Ohio and surrounding states, bringing FirstEnergy's total annual retail gas revenues to approximately $500 million. Regulatory Matters - ------------------ In early October, the Company filed its comprehensive transition plan under the new Ohio electricity restructuring law (see Note 3). The law is designed to facilitate the transition of Ohio's electric utility industry from a regulated environment to a competitive market in the generation of electricity. The Company's plan itemizes the price of electricity into separate components -- primarily generation, transmission, distribution and transition charges - and details the Company's strategy to implement corporate separation of its regulated and nonregulated operations. The plan proposes recovery of generation-related transition costs of approximately $8.8 billion ($6.9 billion, net of deferred income taxes). Of that amount, approximately $4.5 billion ($3.9 billion net of deferred income taxes) would be recovered over the five-year market development period (2001-2005). Under the proposed plan, the remainder would be recovered from 2001- 2009 -- 2001 through early 2005 for OE; 2001 through mid-2008 for TE; and 2001 through mid-2009 for CEI. Current rates will be frozen during the market development period, except for certain limited statutory exceptions including a 5% reduction in the generation component of residential customers' rates. On November 4, 1999, the PUCO rejected FirstEnergy's filing because the PUCO has not yet prescribed the transition plan filing rules. The Company will refile its transition plan once those rules have been established. Despite rejecting FirstEnergy's filing, the PUCO indicated that it will endeavor to issue its order in this case within 275 days of the Company's initial filing date. If the transition plans ultimately approved by the PUCO for OE, CEI and TE do not provide adequate recovery of their nuclear generating unit investments and regulatory assets, there would be a charge to earnings which could have a material adverse effect on the results of operations and financial condition for FirstEnergy, OE, CEI and TE. - 12 - All regulatory approvals have been received for the transfer of generating assets between the Company and Duquesne, which is intended to be a tax-free asset exchange. When completed in December 1999, the transaction will provide FirstEnergy with exclusive ownership and operating control of all generating assets that are currently jointly owned and operated under the CAPCO agreement (see Note 2, "Pending Exchange of Assets"). Environmental Matters - --------------------- In September 1999, FirstEnergy received, and subsequently in October 1999, OE and Penn received a citizen suit notification letter from the New York Attorney General's office alleging Clean Air Act violations at the W. H. Sammis Plant. FirstEnergy believes the Sammis Plant is in full compliance with the Clean Air Act, but cannot predict whether New York will nonetheless file a lawsuit. On November 3, 1999, the EPA issued Notices of Violation (NOV) or a Compliance Order to eight utilities covering 32 power plants, including the Sammis Plant. In addition, the U.S. Department of Justice filed seven civil complaints against various investor-owned utilities, which included a complaint against OE and Penn in the U.S. District Court for the Southern District of Ohio. The NOV and complaint allege violations of the Clean Air Act based on operation and maintenance of the Sammis Plant dating back to 1984. The complaint requests permanent injunctive relief to require the installation of "best available control technology" and civil penalties of up to $27,500 per day of violation. FirstEnergy believes the NOV and complaint are without merit. However, FirstEnergy is unable to predict the outcome of this litigation. Criminal penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. It is anticipated at this time that the Sammis Plant will continue to operate while the matter is being decided. Year 2000 Readiness - ------------------- The Year 2000 issue is the result of computer programs being written using two digits rather than four to identify the applicable year. Any of the Company's programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. Because so many of the Company's computer functions are date sensitive, this could cause far-reaching problems, such as system-wide computer failures and miscalculations, if no remedial action is taken. The Company has developed a multi-phase program for Year 2000 compliance that consists of an assessment of its systems and operations that could be affected by the Year 2000 problem; remediation or replacement of noncompliant systems and components; and testing of systems and components following such remediation or replacement. The Company has focused its Year 2000 review on three areas: centralized system applications, noncentralized systems and relationships with third parties (including suppliers as well as end-use customers). The Company's review of system readiness extends to systems involving customer service, safety, shareholder needs and regulatory obligations. The Company is committed to taking appropriate actions to eliminate or lessen negative effects of the Year 2000 issue on its operations. The Company has completed an inventory of all computer systems and hardware including equipment with embedded computer chips, has determined which systems need to be converted or replaced to become Year 2000-ready and has completed the remediation of all mission critical systems and equipment. Based on results of its remediation and testing efforts, the Company filed documents with the North American Electric Reliability Council, Nuclear Regulatory Commission, PUCO and Pennsylvania Public Utility Commission (PPUC) that as of June 30, 1999 its generation, transmission, and distribution systems were ready to serve customers in the year 2000. Most of the Company's Year 2000 issues have been resolved through system replacement. Of the Company's major centralized systems, the general ledger system and inventory management, procurement and accounts payable systems were replaced at the end of 1998. The Company's payroll system was enhanced to be Year 2000 compliant in July 1998. The customer service system was made Year 2000 compliant in June 1999. The Company has contacted all its key suppliers and does not anticipate any service interruptions with them based on the information they have provided. Further, the Company has reviewed its stocking levels of critical supplies and has determined the appropriate stocking levels to maintain approaching the year 2000. The Company has initiated - 13 - actions to ensure that these materials are at the required levels consistent with the assumptions in its contingency plan. The Company has completed the development of formal contingency plans in all mission critical areas to establish procedures to be followed in handling unlikely events which could impact the provision of electric service to its customers. The Company uses both internal and external resources to reprogram and/or replace and test its software for Year 2000 modifications. Of the $87.1 million total project cost, approximately $69.5 million will be capitalized since those costs are attributable to the purchase of new software for total system replacements because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $17.6 million will be expensed as incurred. As of September 30, 1999, the Company had spent $67.7 million for Year 2000 capital projects and had expensed approximately $15.0 million for Year 2000-related maintenance activities. The Company's total Year 2000 project cost, as well as its estimates of the time needed to complete remedial efforts, are based on currently available information and do not include the estimated costs and time associated with the impact of third party Year 2000 issues. The Company believes it is managing the Year 2000 issue in such a way that its customers will not experience any interruption of service. The Company believes the most likely worst-case scenario from the Year 2000 issue will be disruption in power plant monitoring systems, thereby producing inaccurate data and potential failures in electronic switching mechanisms at transmission junctions. This would prolong localized outages, as technicians would have to manually activate switches. Such an event could have a material, but currently undeterminable, effect on its financial results. The costs of the project and the dates on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived from numerous assumptions of future events including the continued availability of certain resources, and other factors. However, there can be no guarantee that this project will be completed as planned and actual results could differ materially from the estimates. - 14 - OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ------------------------- 1999 1998 1999 1998 ---------- --------- ---------- ---------- (In thousands) OPERATING REVENUES $770,518 $696,226 $2,050,365 $1,912,689 -------- -------- ---------- ---------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 143,486 146,194 364,951 413,242 Nuclear operating costs 64,547 69,723 213,862 210,632 Other operating costs 103,398 113,769 321,454 314,033 -------- -------- ---------- ---------- Total operation and maintenance expenses 311,431 329,686 900,267 937,907 Provision for depreciation and amortization 228,775 109,920 457,330 327,146 General taxes 61,890 59,714 185,712 178,208 Income taxes 48,120 56,222 137,787 123,963 -------- -------- ---------- ---------- Total operating expenses and taxes 650,216 555,542 1,681,096 1,567,224 -------- -------- ---------- ---------- OPERATING INCOME 120,302 140,684 369,269 345,465 OTHER INCOME 10,179 12,589 32,577 36,857 -------- -------- ---------- ---------- INCOME BEFORE NET INTEREST CHARGES 130,481 153,273 401,846 382,322 -------- -------- ---------- ---------- NET INTEREST CHARGES: Interest on long-term debt 44,583 47,258 135,888 140,255 Allowance for borrowed funds used during construction and capitalized interest (1,041) (363) (3,023) (1,492) Other interest expense 6,510 7,811 24,293 26,696 Subsidiaries' preferred stock dividend requirements 3,831 3,857 11,544 11,570 -------- -------- ---------- ---------- Net interest charges 53,883 58,563 168,702 177,029 -------- -------- ---------- ---------- INCOME BEFORE EXTRAORDINARY ITEM 76,598 94,710 233,144 205,293 EXTRAORDINARY ITEM (NET OF INCOME TAX BENEFIT OF $21,208,000) -- -- -- (30,522) -------- -------- ---------- ---------- NET INCOME 76,598 94,710 233,144 174,771 PREFERRED STOCK DIVIDEND REQUIREMENTS 2,914 3,020 8,740 9,057 -------- -------- ---------- ---------- EARNINGS ON COMMON STOCK $ 73,684 $ 91,690 $ 224,404 $ 165,714 ======== ======== ========== ========== The preceding Notes to Consolidated Financial Statements as they relate to Ohio Edison Company are an integral part of these statements.
- 15 - OHIO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 1999 1998 ------------ ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $8,250,044 $8,158,763 Less--Accumulated provision for depreciation 3,776,557 3,610,155 ---------- ---------- 4,473,487 4,548,608 ---------- ---------- Construction work in progress- Electric plant 173,728 174,418 Nuclear fuel 1,154 17,003 ---------- ---------- 174,882 191,421 ---------- ---------- 4,648,369 4,740,029 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: PNBV Capital Trust 470,928 475,087 Nuclear plant decommissioning trusts 144,734 130,572 Letter of credit collateralization 277,763 277,763 Other 424,587 407,839 ---------- ---------- 1,318,012 1,291,261 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 10,955 33,213 Receivables- Customers (less accumulated provisions of $7,783,000 and $6,397,000, respectively, for uncollectible accounts) 289,985 215,257 Associated companies 216,856 229,854 Other 50,882 47,684 Materials and supplies, at average cost- Owned 52,021 76,756 Under consignment 50,042 48,341 Prepayments and other 74,960 78,618 ---------- ---------- 745,701 729,723 ---------- ---------- DEFERRED CHARGES: Regulatory assets 1,643,333 1,913,808 Property taxes 101,360 101,360 Unamortized sale and leaseback costs 86,349 90,098 Other 65,838 57,547 ---------- ---------- 1,896,880 2,162,813 ---------- ---------- $8,608,962 $8,923,826 ========== ==========
- 16 - OHIO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 1999 1998 ------------ ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholder's equity- Common stock, $9 par value, authorized 175,000,000 shares - 100 shares outstanding $ 1 $ 1 Other paid-in capital 2,098,728 2,098,728 Retained earnings 474,249 583,144 ---------- ---------- Total common stockholder's equity 2,572,978 2,681,873 Preferred stock- Not subject to mandatory redemption 160,965 160,965 Subject to mandatory redemption 5,000 10,000 Preferred stock of consolidated subsidiary- Not subject to mandatory redemption 39,105 50,905 Subject to mandatory redemption 15,000 15,000 OE obligated mandatorily redeemable preferred securities of subsidiary trust holding solely OE subordinated debentures 120,000 120,000 Long-term debt 1,974,219 2,215,042 ---------- ---------- 4,887,267 5,253,785 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 589,348 528,792 Short-term borrowings- Associated companies 101,867 88,732 Other 239,382 249,451 Accounts payable- Associated companies 36,593 10,176 Other 53,327 89,483 Accrued taxes 264,222 188,295 Accrued interest 42,970 45,221 Other 120,333 114,162 ---------- ---------- 1,448,042 1,314,312 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 1,502,368 1,601,887 Accumulated deferred investment tax credits 147,163 154,538 Pensions and other postretirement benefits 144,302 136,856 Other 479,820 462,448 ---------- ---------- 2,273,653 2,355,729 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $8,608,962 $8,923,826 ========== ========== The preceding Notes to Consolidated Financial Statements as they relate to Ohio Edison Company are an integral part of these balance sheets.
- 17 - OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 1999 1998 1999 1998 ---------- --------- --------- --------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 76,598 $ 94,710 $233,144 $ 174,771 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 228,775 109,920 457,330 327,146 Nuclear fuel and lease amortization 10,718 8,244 32,131 21,590 Deferred income taxes, net (55,793) (13,903) (86,548) (63,561) Investment tax credits, net (5,320) (3,897) (9,204) (11,345) Extraordinary item -- -- -- 51,730 Receivables (60,020) (166,506) (64,928) (208,382) Materials and supplies 25,799 6,512 23,034 11,092 Accounts payable (47,709) 76,043 (9,739) 185,633 Other 104,710 60,949 72,565 106,535 --------- --------- -------- --------- Net cash provided from operating activities 277,758 172,072 647,785 595,209 --------- --------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 2,936 10,039 161,451 117,499 Short-term borrowings, net -- -- 3,066 3,956 Redemptions and Repayments- Preferred stock 10,920 5,000 17,005 5,000 Long-term debt 329,094 4,522 348,234 286,157 Short-term borrowings, net 86,754 79,581 -- -- Dividend Payments- Common stock -- 44,597 333,603 254,379 Preferred stock 2,611 3,093 8,437 8,952 --------- --------- -------- --------- Net cash used for financing activities 426,443 126,754 542,762 433,033 --------- --------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 45,736 36,793 140,523 125,163 Other (21,040) (1,767) (13,242) (1,645) --------- --------- -------- --------- Net cash used for investing activities 24,696 35,026 127,281 123,518 --------- --------- -------- --------- Net increase (decrease) in cash and cash equivalents (173,381) 10,292 (22,258) 38,658 Cash and cash equivalents at beginning of period 184,336 33,046 33,213 4,680 --------- --------- -------- --------- Cash and cash equivalents at end of period $ 10,955 $ 43,338 $ 10,955 $ 43,338 ========= ========= ======== ========= The preceding Notes to Consolidated Financial Statements as they relate to Ohio Edison Company are an integral part of these statements.
- 18 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Ohio Edison Company: We have reviewed the accompanying consolidated balance sheet of Ohio Edison Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiaries as of September 30, 1999, and the related consolidated statements of income and cash flows for the three- month and nine-month periods ended September 30, 1999 and 1998. 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 generally accepted auditing standards, 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 generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Ohio Edison Company and subsidiaries as of December 31, 1998 (not presented herein), and, in our report dated February 12, 1999, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1998, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio November 9, 1999 - 19 - OHIO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations - --------------------- Earnings on common stock declined to $73.7 million in the third quarter of 1999 from $91.7 million in the third quarter of 1998. Higher operating revenues and lower operation and maintenance expenses were more than offset by increased accelerated depreciation and amortization of nuclear and regulatory assets under the OE rate plan. For the nine-month period ended September 30, 1999, earnings increased to $224.4 million from $165.7 million in the same period of last year. Year-to-date earnings in 1998 included an extraordinary charge of $30.5 million resulting from Penn's discontinued application of SFAS 71 to its generation business. Operating revenues increased $74.3 million in the third quarter and $137.7 million in the first nine months of 1999, compared to the same periods in 1998. Higher third quarter and year-to-date operating revenues resulted primarily from increased kilowatt-hour sales. Residential, commercial and industrial customers all contributed to the increase in retail kilowatt-hour sales during the third quarter of 1999, with increases of 11.9%, 11.7% and 9.9%, respectively. Overall, retail kilowatt-hour sales increased 11.1%. Sales to wholesale customers were 38.4% higher and combined with the additional retail sales to generate a 15.6% increase in total kilowatt-hour sales. Sales to industrial customers experienced additional volume in the current quarter, compared to the same period last year, due to a labor strike in 1998 experienced by a major customer in the automotive sector. For the first nine months of 1999, residential, commercial and industrial sales increased 8.8%, 9.4% and 3.5%, respectively, compared to the same period in 1998. Retail kilowatt-hour sales increased 6.8% and total kilowatt-hour sales increased 8.5%, benefited by a 16.9% increase in sales to wholesale customers. Growth of the OE companies' customer base and increased use of electricity per customer stimulated by a strong consumption-driven economy continued to expand residential and commercial kilowatt-hour sales. Additionally, kilowatt-hour sales by Penn's nonregulated affiliate, Penn Power Energy, Inc., contributed to the increase in the OE companies' commercial sales. Industrial consumption of electricity also benefited from the strong economy. Operation and maintenance expenses decreased $18.3 million in the third quarter and were $37.6 million lower in the first nine months of 1999 compared to the corresponding periods of 1998. Fuel and purchased power costs were lower in both the third quarter and nine- month periods of 1999 than the corresponding periods of 1998, primarily due to lower purchased power costs. Much of the reduction in the current nine-month period was due to the absence of unusual conditions experienced in June of 1998, which increased the prior period's costs. Record heat and humidity in late June 1998 coincided with a regional power shortage resulting in higher prices for purchased power. Unscheduled outages at Beaver Valley Units 1 and 2 reduced the OE companies' production capabilities to the point that they purchased significant amounts of power during that period. In addition, the Beaver Valley Plant remained out of service through most of the third quarter of 1998. Although above normal temperatures were also experienced in 1999, OE maintained a stronger capacity position this year compared to 1998, which reduced the need for purchased power. Nuclear operating costs were lower in the third quarter of 1999, compared to the third quarter of 1998, primarily reflecting reduced costs at the Beaver Valley Plant. However, costs for the first nine months of 1999 remained slightly higher due to expenses associated with the refueling outages at Beaver Valley Unit 2 and the Perry Plant during the first half of 1999. Other operating costs were lower primarily as a result of lower fossil production costs due in part to expenditures incurred last year for outages at the Mansfield and Sammis Plants. However, in the first nine months of 1999 other operating costs increased from the year-to-date period of last year primarily as a result of higher customer and sales expenses including expenditures for energy marketing programs, information systems requirements and other customer-related costs. Depreciation and amortization in the third quarter and year- to-date periods of 1999 increased from the same periods of 1998 primarily due to the effect of the OE rate plan. Total accelerated depreciation and amortization of nuclear and regulatory assets under the OE rate plan and Penn's restructuring plan was $173.5 million in the third quarter of 1999, up from $57.7 million in the third quarter of the previous year. In the first nine months of 1999, total accelerated depreciation and amortization under the regulatory plans was $282.4 million, compared to $161.7 million in the first nine months of 1998. General taxes increased for both the third quarter and year- to-date periods of 1999, compared to 1998, primarily due to increases in the gross receipts tax, Ohio property tax and payroll taxes. A higher tax base and increased rates produced the increase in property taxes. - 20 - Net interest charges decreased in the third quarter and first nine months of 1999 primarily due to refinancings and redemptions of long-term debt. Capital Resources and Liquidity - ------------------------------- The OE companies have continuing cash requirements for planned capital expenditures and debt maturities. During the fourth quarter of 1999, capital requirements for property additions and capital leases are expected to be about $72 million, including $4 million for nuclear fuel. The OE companies have additional cash requirements of approximately $3.5 million (excluding an OE revolving credit agreement) to meet sinking fund requirements for maturing long- term debt during the fourth quarter of 1999. These requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. As of September 30, 1999, the OE companies had approximately $11.0 million of cash and temporary investments and $341.2 million of short-term indebtedness. In addition, the OE companies' unused borrowing capability included $41.0 million under revolving lines of credit and $32.0 million of bank facilities that provide for borrowings on a short-term basis at the banks' discretion. Under their first mortgage indentures, as of September 30, 1999, the OE companies would have been permitted to issue up to $1.1 billion of additional first mortgage bonds on the basis of bondable property additions and retired bonds. Regulatory Matters - ------------------ In early October, FirstEnergy filed a comprehensive transition plan for OE under the new Ohio electricity restructuring law (see Note 3). The law is designed to facilitate the transition of Ohio's electric utility industry from a regulated environment to a competitive market in the generation of electricity. OE's plan itemizes the price of electricity into separate components -- primarily generation, transmission, distribution and transition charges - and details FirstEnergy's strategy to implement corporate separation of OE's regulated and nonregulated operations. The plan proposes recovery of transition costs of approximately $3.3 billion ($2.5 billion, net of deferred income taxes). All of that amount is estimated to be recovered over the five-year market development period (2001-2005). Current rates will be frozen during the market development period except for certain limited statutory exceptions including a 5% reduction in the generation component of residential customers' rates. On November 4, 1999, the PUCO rejected FirstEnergy's filing because the PUCO has not yet prescribed the transition plan filing rules. FirstEnergy will refile its transition plan once those rules have been established. Despite rejecting FirstEnergy's filing, the PUCO indicated that it will endeavor to issue its order in this case within 275 days of FirstEnergy's initial filing date. If the transition plan ultimately approved by the PUCO for OE does not provide adequate recovery of OE's nuclear generating unit investments and regulatory assets, there would be a charge to earnings which could have a material adverse effect on OE's results of operations and financial condition. All regulatory approvals have been received for the transfer of generating assets between FirstEnergy and Duquesne, which is intended to be a tax-free asset exchange. When completed in December 1999, the transaction will provide FirstEnergy with exclusive ownership and operating control of all generating assets that are currently jointly owned and operated under the CAPCO agreement (see Note 2, "Pending Exchange of Assets"). Environmental Matters - --------------------- In September 1999, FirstEnergy received, and subsequently in October 1999, the OE companies received a citizen suit notification letter from the New York Attorney General's office alleging Clean Air Act violations at the W. H. Sammis Plant. FirstEnergy believes the Sammis Plant is in full compliance with the Clean Air Act, but cannot predict whether New York will nonetheless file a lawsuit. On November 3, 1999, the EPA issued Notices of Violation (NOV) or a Compliance Order to eight utilities covering 32 power plants, including the Sammis Plant. In addition, the U.S. Department of Justice filed seven civil complaints against various investor-owned utilities, which included a complaint against the OE companies in the U.S. District Court for the Southern District of Ohio. The NOV and complaint allege violations of the Clean Air Act based on operation and maintenance of the Sammis Plant dating back to 1984. The complaint requests permanent injunctive relief to require the installation of "best available control technology" and civil penalties of up to $27,500 per day of violation. FirstEnergy believes the NOV and complaint are without merit. However, FirstEnergy is unable to predict the outcome of this litigation. Criminal penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged - 21 - violations and a court determines that the allegations are valid. It is anticipated at this time that the Sammis Plant will continue to operate while the matter is being decided. Year 2000 Readiness - ------------------- The Year 2000 issue is the result of computer programs being written using two digits rather than four to identify the applicable year. Any of the OE companies' programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. Because so many of the OE companies' computer functions are date sensitive, this could cause far-reaching problems, such as system-wide computer failures and miscalculations, if no remedial action is taken. The OE companies have developed a multi-phase program for Year 2000 compliance that consists of an assessment of their systems and operations that could be affected by the Year 2000 problem; remediation or replacement of noncompliant systems and components; and testing of systems and components following such remediation or replacement. The OE companies have focused their Year 2000 review on three areas: centralized system applications, noncentralized systems and relationships with third parties (including suppliers as well as end-use customers). The OE companies' review of system readiness extends to systems involving customer service, safety, shareholder needs and regulatory obligations. The OE companies are committed to taking appropriate actions to eliminate or lessen negative effects of the Year 2000 issue on their operations. The OE companies have completed an inventory of all computer systems and hardware including equipment with embedded computer chips, have determined which systems need to be converted or replaced to become Year 2000-ready and have completed the remediation of all mission critical systems and equipment. Based on results of their remediation and testing efforts, the OE companies filed documents with the North American Electric Reliability Council, Nuclear Regulatory Commission, PUCO and PPUC that as of June 30, 1999 their generation, transmission, and distribution systems were ready to serve customers in the year 2000. Most of the OE companies' Year 2000 issues have been resolved through system replacement. Of the OE companies' major centralized systems, the general ledger system and inventory management, procurement and accounts payable systems were replaced at the end of 1998. The OE companies' payroll system was enhanced to be Year 2000 compliant in July 1998. The customer service system was made Year 2000 compliant in June 1999. The OE companies have contacted all their key suppliers and do not anticipate any service interruptions with them based on the information the suppliers have provided. Further, the OE companies have reviewed their stocking levels of critical supplies and have determined the appropriate stocking levels to maintain approaching the year 2000. The OE companies have initiated actions to ensure that these materials are at the required levels consistent with the assumptions in their contingency plans. The OE companies have completed the development of formal contingency plans in all mission critical areas to establish procedures to be followed in handling unlikely events which could impact the provision of electric service to their customers. The OE companies use both internal and external resources to reprogram and/or replace and test their software for Year 2000 modifications. Of the $42.6 million total project cost, approximately $33.6 million will be capitalized since those costs are attributable to the purchase of new software for total system replacements because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $9.0 million will be expensed as incurred. As of September 30, 1999, the OE companies have spent $32.6 million for Year 2000 capital projects and have expensed approximately $7.6 million for Year 2000-related maintenance activities. The OE companies' total Year 2000 project costs, as well as their estimates of the time needed to complete remedial efforts, are based on currently available information and do not include the estimated costs and time associated with the impact of third party Year 2000 issues. The OE companies believe they are managing the Year 2000 issue in such a way that their customers will not experience any interruption of service. The OE companies believe the most likely worst-case scenario from the Year 2000 issue will be disruption in power plant monitoring systems, thereby producing inaccurate data and potential failures in electronic switching mechanisms at transmission junctions. This would prolong localized outages, as technicians would - 22 - have to manually activate switches. Such an event could have a material, but currently undeterminable, effect on their financial results. The costs of the project and the dates on which the OE companies plan to complete the Year 2000 modifications are based on management's best estimates, which were derived from numerous assumptions of future events including the continued availability of certain resources, and other factors. However, there can be no guarantee that this project will be completed as planned and actual results could differ materially from the estimates. - 23 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ------------------------- 1999 1998 1999 1998 ---------- --------- ---------- ---------- (In thousands) OPERATING REVENUES $534,503 $514,555 $1,435,297 $1,404,158 -------- -------- ---------- ---------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 118,816 127,347 310,400 358,704 Nuclear operating costs 22,978 24,470 92,799 71,367 Other operating costs 88,528 77,633 265,805 233,742 -------- -------- ---------- ---------- Total operation and maintenance expenses 230,322 229,450 669,004 663,813 Provision for depreciation and amortization 58,156 59,048 174,154 175,696 General taxes 56,855 55,356 165,497 163,730 Income taxes 50,273 45,598 99,591 88,314 -------- -------- ---------- ---------- Total operating expenses and taxes 395,606 389,452 1,108,246 1,091,553 -------- -------- ---------- ---------- OPERATING INCOME 138,897 125,103 327,051 312,605 OTHER INCOME 1,272 6,227 6,489 10,326 -------- -------- ---------- ---------- INCOME BEFORE NET INTEREST CHARGES 140,169 131,330 333,540 322,931 -------- -------- ---------- ---------- NET INTEREST CHARGES: Interest on long-term debt 52,581 57,072 160,146 177,883 Allowance for borrowed funds used during construction (425) (664) (1,158) (1,620) Other interest expense (credit) 48 (95) (948) (2,821) -------- -------- ---------- ---------- Net interest charges 52,204 56,313 158,040 173,442 -------- -------- ---------- ---------- NET INCOME 87,965 75,017 175,500 149,489 PREFERRED STOCK DIVIDEND REQUIREMENTS 8,230 8,547 25,312 17,053 -------- -------- ---------- ---------- EARNINGS ON COMMON STOCK $ 79,735 $ 66,470 $ 150,188 $ 132,436 ======== ======== ========== ========== The preceding Notes to Consolidated 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)
September 30, December 31, 1999 1998 ------------ ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $4,702,049 $4,648,725 Less--Accumulated provision for depreciation 1,711,141 1,631,974 ---------- ---------- 2,990,908 3,016,751 ---------- ---------- Construction work in progress- Electric plant 36,197 42,428 Nuclear fuel 416 14,864 ---------- ---------- 36,613 57,292 ---------- ---------- 3,027,521 3,074,043 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust 517,256 543,161 Nuclear plant decommissioning trusts 143,396 125,050 Other 26,899 21,059 ---------- ---------- 687,551 689,270 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 29,403 19,526 Receivables- Customers 19,070 16,588 Associated companies 16,640 15,636 Other 200,985 142,834 Notes receivable from associated companies -- 53,509 Materials and supplies, at average cost- Owned 35,558 38,213 Under consignment 36,044 43,620 Prepayments and other 51,385 58,342 ---------- ---------- 389,085 388,268 ---------- ---------- DEFERRED CHARGES: Regulatory assets 541,450 555,925 Goodwill 1,442,721 1,471,563 Property taxes 126,464 126,464 Other 12,935 12,650 ---------- ---------- 2,123,570 2,166,602 ---------- ---------- $6,227,727 $6,318,183 ========== ==========
- 25 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 1999 1998 ------------ ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholder's equity- Common stock, without par value, authorized 105,000,000 shares - 79,590,689 shares outstanding $ 931,962 $ 931,962 Retained earnings 71,996 76,276 ---------- ---------- Total common stockholder's equity 1,003,958 1,008,238 Preferred stock- Not subject to mandatory redemption 238,325 238,325 Subject to mandatory redemption 134,996 149,710 Long-term debt 2,684,211 2,888,202 ---------- ---------- 4,061,490 4,284,475 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 331,039 208,050 Accounts payable- Associated companies 64,216 47,680 Other 44,674 67,929 Notes payable to associated companies 42,237 80,618 Accrued taxes 232,643 192,359 Accrued interest 65,486 66,685 Other 37,974 58,585 ---------- ---------- 818,269 721,906 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 556,093 524,285 Accumulated deferred investment tax credits 87,986 90,946 Pensions and other postretirement benefits 214,704 217,719 Other 489,185 478,852 ---------- ---------- 1,347,968 1,311,802 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $6,227,727 $6,318,183 ========== ========== The preceding Notes to Consolidated 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 Nine Months Ended September 30, September 30, ---------------------- ---------------------- 1999 1998 1999 1998 ---------- --------- --------- --------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 87,965 $ 75,017 $175,500 $ 149,489 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 58,156 59,048 174,154 175,696 Nuclear fuel and lease amortization 8,830 8,154 24,801 24,510 Other amortization (2,855) (593) (7,109) (10,010) Deferred income taxes, net 17,472 1,750 26,348 27,582 Investment tax credits, net (986) (1,296) (2,960) (3,889) Receivables 44,144 (44,448) (61,637) (132,016) Materials and supplies 1,139 13,684 10,231 2,962 Accounts payable (34,572) (58,965) (6,719) (31,461) Accrued taxes 46,014 76,357 40,284 44,024 Other 13,023 (5,332) (26,355) (36,757) -------- --------- -------- -------- Net cash provided from operating activities 238,330 123,376 346,538 210,130 -------- --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 26,459 -- 26,459 5,822 Ohio Schools Council prepayment program -- -- -- 116,598 Short-term borrowings, net -- 30,528 -- 4,036 Redemptions and Repayments- Preferred stock 1,000 1,000 14,714 14,714 Long-term debt 89,424 172,192 113,438 198,773 Short-term borrowings, net 13,653 -- 38,381 -- Dividend Payments- Common stock 68,000 28,653 150,974 54,122 Preferred stock 8,230 8,559 25,312 26,300 -------- --------- -------- -------- Net cash used for financing activities 153,848 179,876 316,360 167,453 -------- --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 55,881 16,327 86,180 43,741 Loans to associated companies -- -- -- 26,628 Loan payments from associated companies -- (110,272) (53,509) -- Capital trust investments (7) 35 (25,905) (31,923) Other 3,079 24,183 13,535 10,230 -------- --------- -------- -------- Net cash used for (provided from) investing activities 58,953 (69,727) 20,301 48,676 -------- --------- -------- -------- Net increase (decrease) in cash and cash equivalents 25,529 13,227 9,877 (5,999) Cash and cash equivalents at beginning of period 3,874 14,549 19,526 33,775 -------- --------- -------- --------- Cash and cash equivalents at end of period $ 29,403 $ 27,776 $ 29,403 $ 27,776 ======== ========= ======== ========= The preceding Notes to Consolidated Financial Statements as they relate to The Cleveland Electric Illuminating Company are an integral part of these statements.
- 27 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Cleveland Electric Illuminating Company: We have reviewed the accompanying consolidated balance sheet of The Cleveland Electric Illuminating Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiary as of September 30, 1999, and the related consolidated statements of income and cash flows for the three-month and nine-month periods ended September 30, 1999 and 1998. 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 generally accepted auditing standards, 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 generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of The Cleveland Electric Illuminating Company and subsidiary as of December 31, 1998 (not presented herein), and, in our report dated February 12, 1999, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1998, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio November 9, 1999 - 28 - THE CLEVELAND ELECTRIC ILLUMINATING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations - --------------------- Operating revenues increased $19.9 million in the third quarter of 1999, and were $31.1 million higher in the first nine months of 1999, compared to the same periods in 1998. Higher third quarter and year-to-date operating revenues were the result of increased kilowatt- hour sales, which were partially offset by reduced unit prices. Total kilowatt-hour sales increased 7.0% in the current quarter, compared to the same period of 1998. While retail sales increased only 0.5% in the third quarter of 1999, kilowatt-hour sales to wholesale customers increased 86.1% as a result of available power from CEI generating units and strong weather-induced demand in the wholesale market. Retail kilowatt-hour sales to residential and commercial customers increased 2.1% and 0.9%, respectively, whereas, sales to industrial customers decreased 1.1%. In the first nine months of 1999, total kilowatt-hour sales increased 5.5%, compared to the same period of 1998, benefiting from a 47.0% rise in sales to wholesale customers and a 2.6% increase in kilowatt-hour sales to retail customers. Residential and commercial customers contributed to the higher retail sales, with increases of 6.6% and 2.6%, respectively. Kilowatt-hour sales to industrial customers were essentially unchanged during the nine-month period. Operation and maintenance expenses increased only slightly in the current quarter and were $5.2 million higher in the first nine months of 1999 compared to the same periods of 1998. Fuel and purchased power costs were lower in both the third quarter and year-to-date periods of 1999. An increased mix of nuclear generation in the third quarter of 1999 reduced fuel costs and was the primary cause of lower fuel and purchased power costs in that period. However, in this year's nine-month period, lower purchased power costs was the largest factor. Most of the year-to-date reduction in purchased power costs was due to the absence of unusual conditions experienced in June 1998, which increased the cost during last year's nine-month period. Record heat and humidity in late June 1998 coincided with a regional power shortage resulting in high prices for purchased power. Unscheduled outages at Beaver Valley Unit 2, the Davis-Besse Plant and Avon Lake Unit 9 required CEI to purchase significant quantities of power on the spot market during that period. In addition, Beaver Valley Unit 2 remained out of service through most of the third quarter of 1998. Although above normal temperatures were also experienced in 1999, CEI maintained a stronger capacity position this year compared to the prior year. Therefore, CEI was not only able to reduce its dependence on purchased power this year, but also took advantage of the strong demand for power through sales to the wholesale market. More than offsetting the current year-to-date reduction in fuel and purchased power costs were increases in nuclear operating costs and other operating costs. Expenses associated with the refueling outages at Beaver Valley Unit 2 and the Perry Plant increased nuclear operating costs in the first nine months of 1999. The increases in other operating costs in the third quarter and nine-month period of 1999 resulted from higher customer and sales expenses including expenditures for energy marketing programs, information system requirements and other customer-related costs. Lower other income in the third quarter and year-to-date periods of 1999, compared to the corresponding periods if 1998 was due primarily to a reduction in interest income. Net interest charges decreased in the third quarter and first nine months of 1999 primarily due to refinancings and redemptions of long-term debt. Preferred stock dividend requirements increased in the nine-month period ended September 30, 1999, compared to the first nine months of 1998, due to the declaration in the fourth quarter of 1997 of preferred stock dividends payable in 1998 by CEI. Capital Resources and Liquidity - ------------------------------ CEI has continuing cash requirements for planned capital expenditures and debt maturities. During the fourth quarter of 1999, capital requirements for property additions and capital leases are expected to be about $27 million, with no additional expenditures for nuclear fuel. CEI has additional cash requirements of approximately $82.8 million to meet sinking fund requirements for preferred stock and maturing long-term debt during the fourth quarter of 1999. These requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. As of September 30, 1999, CEI had approximately $29.4 million of cash and temporary investments and $42.2 million of short-term indebtedness to affiliated companies. Together with TE, CEI had unused borrowing capability of $55 million under a FirstEnergy revolving line of credit at the end of the third quarter of 1999. Under its first - 29 - mortgage indenture, as of September 30, 1999, CEI would have been permitted to issue up to $509 million of additional first mortgage bonds on the basis of bondable property additions and retired bonds. On July 26, 1999, CEI completed its purchase of the remaining 20 percent interest in the Seneca pumped storage hydroelectric generation plant from General Public Utilities for $43 million. This purchase makes available 84 megawatts of additional capacity and provides the Company full ownership of the plant. Regulatory Matters - ------------------ In early October, FirstEnergy filed a comprehensive transition plan for CEI under the new Ohio electricity restructuring law (see Note 3). The law is designed to facilitate the transition of Ohio's electric utility industry from a regulated environment to a competitive market in the generation of electricity. CEI's plan itemizes the price of electricity into separate components -- primarily generation, transmission, distribution and transition charges - and details FirstEnergy's strategy to implement corporate separation of CEI's regulated and nonregulated operations. The plan proposes recovery of generation-related transition costs of approximately $3.8 billion ($3.0 billion, net of deferred income taxes). Of that amount, approximately $1.9 billion ($1.6 billion, net of deferred income taxes) would be recovered over the five-year market development period (2001- 2005). Under the proposed plan, the remainder is estimated to be recovered from 2001 through mid-2009. Current rates will be frozen during the market development period, except for certain limited statutory exceptions including a 5% reduction in the generation component of residential customers' rates. On November 4, 1999, the PUCO rejected FirstEnergy's filing because the PUCO has not yet prescribed the transition plan filing rules. FirstEnergy will refile its transition plan once those rules have been established. Despite rejecting FirstEnergy's filing, the PUCO indicated that it will endeavor to issue its order in this case within 275 days of FirstEnergy's initial filing date. If the transition plan ultimately approved by the PUCO for CEI does not provide adequate recovery of CEI's nuclear generating unit investments and regulatory assets, there would be a charge to earnings which could have a material adverse effect on CEI's results of operations and financial condition. All regulatory approvals have been received for the transfer of generating assets between FirstEnergy and Duquesne, which is intended to be a tax-free asset exchange. When completed in December 1999, the transaction will provide FirstEnergy with exclusive ownership and operating control of all generating assets that are currently jointly owned and operated under the CAPCO agreement (see Note 2, "Pending Exchange of Assets"). Year 2000 Readiness - ------------------- The Year 2000 issue is the result of computer programs being written using two digits rather than four to identify the applicable year. Any of CEI's programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. Because so many of CEI's computer functions are date sensitive, this could cause far-reaching problems, such as system-wide computer failures and miscalculations, if no remedial action is taken. CEI has developed a multi-phase program for Year 2000 compliance that consists of an assessment of its systems and operations that could be affected by the Year 2000 problem; remediation or replacement of noncompliant systems and components; and testing of systems and components following such remediation or replacement. CEI has focused its Year 2000 review on three areas: centralized system applications, noncentralized systems and relationships with third parties (including suppliers as well as end-use customers). CEI's review of system readiness extends to systems involving customer service, safety, shareholder needs and regulatory obligations. CEI is committed to taking appropriate actions to eliminate or lessen negative effects of the Year 2000 issue on its operations. CEI has completed an inventory of all computer systems and hardware including equipment with embedded computer chips, has determined which systems need to be converted or replaced to become Year 2000-ready and has completed the remediation of all mission critical systems and equipment. Based on results of its remediation and testing efforts, CEI filed documents with the North American Electric Reliability Council, Nuclear Regulatory Commission and PUCO that as of June 30, 1999 its generation, transmission, and distribution systems were ready to serve customers in the year 2000. Most of CEI's Year 2000 issues have been resolved through system replacement. Of CEI's major centralized systems, the general ledger system and inventory management, procurement and accounts - 30 - payable systems were replaced at the end of 1998. CEI's payroll system was enhanced to be Year 2000 compliant in July 1998. The customer service system was made Year 2000 compliant in June 1999. CEI has contacted all its key suppliers and does not anticipate any service interruptions with them based on the information they have provided. Further, CEI has reviewed its stocking levels of critical supplies and has determined the appropriate stocking levels to maintain approaching the year 2000. CEI has initiated actions to ensure that these materials are at the required levels consistent with the assumptions in its contingency plan. CEI has completed the development of formal contingency plans in all mission critical areas to establish procedures to be followed in handling unlikely events which could impact the provision of electric service to its customers. CEI uses both internal and external resources to reprogram and/or replace and test its software for Year 2000 modifications. Of the $29.1 million total project cost, approximately $23.4 million will be capitalized since those costs are attributable to the purchase of new software for total system replacements because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $5.7 million will be expensed as incurred. As of September 30, 1999, CEI had spent $22.9 million for Year 2000 capital projects and had expensed approximately $4.9 million for Year 2000-related maintenance activities. CEI's total Year 2000 project cost, as well as its estimates of the time needed to complete remedial efforts, are based on currently available information and do not include the estimated costs and time associated with the impact of third party Year 2000 issues. CEI believes it is managing the Year 2000 issue in such a way that its customers will not experience any interruption of service. CEI believes the most likely worst-case scenario from the Year 2000 issue will be disruption in power plant monitoring systems, thereby producing inaccurate data and potential failures in electronic switching mechanisms at transmission junctions. This would prolong localized outages, as technicians would have to manually activate switches. Such an event could have a material, but currently undeterminable, effect on its financial results. The costs of the project and the dates on which CEI plans to complete the Year 2000 modifications are based on management's best estimates, which were derived from numerous assumptions of future events including the continued availability of certain resources, and other factors. However, there can be no guarantee that this project will be completed as planned and actual results could differ materially from the estimates. - 31 - THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 1999 1998 1999 1998 ---------- --------- ---------- --------- (In thousands) OPERATING REVENUES $233,697 $253,282 $693,143 $714,116 -------- -------- -------- -------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 51,793 56,708 130,639 164,049 Nuclear operating costs 35,082 40,576 126,208 115,801 Other operating costs 41,974 39,785 119,284 106,626 -------- -------- -------- -------- Total operation and maintenance expenses 128,849 137,069 376,131 386,476 Provision for depreciation and amortization 26,112 26,691 78,008 80,047 General taxes 22,532 21,435 66,364 63,393 Income taxes 13,490 16,884 41,699 43,187 -------- -------- -------- -------- Total operating expenses and taxes 190,983 202,079 562,202 573,103 -------- -------- -------- -------- OPERATING INCOME 42,714 51,203 130,941 141,013 OTHER INCOME 2,840 2,674 9,007 9,573 -------- -------- -------- -------- INCOME BEFORE NET INTEREST CHARGES 45,554 53,877 139,948 150,586 -------- -------- -------- -------- NET INTEREST CHARGES: Interest on long-term debt 20,412 21,524 62,570 66,780 Allowance for borrowed funds used during construction (254) (344) (860) (927) Other interest expense (credit) (889) 10 (3,403) (1,089) -------- -------- -------- -------- Net interest charges 19,269 21,190 58,307 64,764 -------- -------- -------- -------- NET INCOME 26,285 32,687 81,641 85,822 PREFERRED STOCK DIVIDEND REQUIREMENTS 4,034 4,145 12,173 9,680 -------- -------- -------- -------- EARNINGS ON COMMON STOCK $ 22,251 $ 28,542 $ 69,468 $ 76,142 ======== ======== ======== ======== The preceding Notes to Consolidated 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)
September 30, December 31, 1999 1998 ------------ ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $1,777,714 $1,757,364 Less--Accumulated provision for depreciation 661,991 626,942 ---------- ---------- 1,115,723 1,130,422 ---------- ---------- Construction work in progress- Electric plant 28,448 26,603 Nuclear fuel 394 11,191 ---------- ---------- 28,842 37,794 ---------- ---------- 1,144,565 1,168,216 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust 295,391 310,762 Nuclear plant decommissioning trusts 118,459 102,749 Other 5,352 3,656 ---------- ---------- 419,202 417,167 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 57,418 4,140 Receivables- Customers 8,948 7,338 Associated companies 20,037 30,006 Other 4,731 31,688 Notes receivable from associated companies 42,237 101,236 Materials and supplies, at average cost- Owned 22,471 25,745 Under consignment 20,172 18,148 Prepayments and other 23,921 25,647 ---------- ---------- 199,935 243,948 ---------- ---------- DEFERRED CHARGES: Regulatory assets 395,032 417,704 Goodwill 465,085 474,593 Property taxes 42,842 42,842 Other 6,898 4,295 ---------- ---------- 909,857 939,434 ---------- ---------- $2,673,559 $2,768,765 ========== ==========
- 33 - THE TOLEDO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 1999 1998 ------------ ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholder's equity- Common stock, $5 par value, authorized 60,000,000 shares - 39,133,887 shares outstanding $ 195,670 $ 195,670 Other paid-in capital 328,559 328,559 Retained earnings 39,236 51,463 ---------- ---------- Total common stockholder's equity 563,465 575,692 Preferred stock not subject to mandatory redemption 210,000 210,000 Long-term debt 987,767 1,083,666 ---------- ---------- 1,761,232 1,869,358 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 156,660 130,426 Accounts payable- Associated companies 32,865 34,260 Other 27,493 38,832 Notes payable to associated companies 151 -- Accrued taxes 44,182 62,288 Accrued interest 23,828 24,965 Other 30,317 35,082 ---------- ---------- 315,496 325,853 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 166,563 151,321 Accumulated deferred investment tax credits 39,228 40,670 Pensions and other postretirement benefits 120,521 122,314 Other 270,519 259,249 ---------- ---------- 596,831 573,554 ---------- ---------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) ---------- ---------- $2,673,559 $2,768,765 ========== ========== The preceding Notes to Consolidated 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 Nine Months Ended September 30, September 30, ----------------------- --------------------- 1999 1998 1999 1998 ---------- --------- --------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 26,285 $32,687 $ 81,641 $ 85,822 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 26,112 26,691 78,008 80,047 Nuclear fuel and lease amortization 6,734 5,576 18,552 16,506 Deferred income taxes, net 8,127 1,021 18,432 16,173 Investment tax credits, net (481) (648) (1,442) (1,946) Receivables (7,202) 1,473 35,316 4,699 Materials and supplies 163 1,578 1,250 (1,929) Accounts payable (2,964) (9,566) (12,734) (9,680) Accrued taxes 2,738 7,083 (18,106) 13,556 Other 22,414 26,241 (12,597) (6,449) -------- ------- -------- -------- Net cash provided from operating activities 81,926 92,136 188,320 196,799 -------- ------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 54,929 -- 89,779 3,657 Short-term borrowings, net 151 -- 151 -- Redemptions and Repayments- Preferred stock -- -- 1,690 1,665 Long-term debt 106,802 33,273 162,427 74,968 Dividend Payments- Common stock 20,000 15,654 80,351 36,786 Preferred stock 4,034 4,074 12,173 12,309 -------- ------- -------- -------- Net cash used for financing activities 75,756 53,001 166,711 122,071 -------- ------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 8,734 14,518 27,656 29,165 Loans to associated companies -- -- -- 38,793 Loan payments from associated companies (58,136) (5,855) (58,999) -- Capital trust investments (64) (240) (15,371) (2,177) Other 2,935 13,923 15,045 9,761 -------- ------- -------- ------- Net cash used for (provided from) investing activities (46,531) 22,346 (31,669) 75,542 -------- ------- -------- ------- Net increase (decrease) in cash and cash equivalents 52,701 16,789 53,278 (814) Cash and cash equivalents at beginning of period 4,717 4,567 4,140 22,170 -------- ------- -------- -------- Cash and cash equivalents at end of period $ 57,418 $21,356 $ 57,418 $ 21,356 ======== ======= ======== ======== The preceding Notes to Consolidated Financial Statements as they relate to The Toledo Edison Company are an integral part of these statements.
- 35 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Toledo Edison Company: We have reviewed the accompanying consolidated balance sheet of The Toledo Edison Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiary as of September 30, 1999, and the related consolidated statements of income and cash flows for the three- month and nine-month periods ended September 30, 1999 and 1998. 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 generally accepted auditing standards, 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 generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of The Toledo Edison Company and subsidiary as of December 31, 1998 (not presented herein), and, in our report dated February 12, 1999, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1998, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio November 9, 1999 - 36 - THE TOLEDO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations - --------------------- Operating revenues decreased $19.6 million in the third quarter of 1999, and were $21.0 million lower in the first nine months of 1999, compared to the same periods in 1998. Increases in kilowatt-hour sales were more than offset by reduced unit prices. Total kilowatt-hour sales increased 5.8% in the current quarter, compared to the same period of 1998. While retail sales decreased 1.7% in the third quarter of 1999, kilowatt-hour sales to wholesale customers increased 47.9% as a result of available power from TE generating units and strong weather-induced demand in the wholesale market. Retail kilowatt-hour sales to residential and commercial customers declined in the third quarter by 8.2% and 6.9%, respectively. However, sales to industrial customers increased 3.7%. In the first nine months of 1999, total kilowatt-hour sales increased 7.0%, compared to the same period of 1998, benefiting from a 45.7% increase in sales to wholesale customers. Retail kilowatt- hour sales increased 1.1%; sales to industrial customers increased 4.1%. However, residential and commercial customers decreased 0.8% and 3.2%, respectively. Operation and maintenance expenses decreased $8.2 million in the third quarter of 1999 and were $10.3 million lower in the first nine months of 1999, compared to the same periods of 1998. In addition, fuel and purchased power costs were lower in the third quarter and in the first nine months of 1999. Most of the year-to-date reduction in purchased power costs was due to the absence of unusual conditions experienced in June 1998, which increased the prior year's costs. Record heat and humidity in late June 1998 coincided with a regional power shortage resulting in higher prices for purchased power. During this period, unscheduled outages at Beaver Valley Unit 2 and the Davis- Besse Plant required TE to purchase significant quantities of power on the spot market during that period. In addition, Beaver Valley Unit 2 remained out of service through most of the third quarter of 1998. Although above normal temperatures were also experienced in 1999, TE maintained a stronger capacity position this year compared to the prior year. Therefore, TE was not only able to reduce its dependence on purchased power in the current year, but also took advantage of the strong demand for power through sales to the wholesale market. Nuclear operating costs were lower in the third quarter of 1999, compared to the prior year quarter primarily due to reduced costs at the Beaver Valley Plant. However, costs for the first nine months of 1999 remained higher than the prior period due to expenses associated with the refueling outages at Beaver Valley Unit 2 and the Perry Plant. The increases in other operating costs in this year's quarter and nine- month period were primarily due to higher customer and sales expenses including energy marketing programs, information system requirements and other customer-related costs. Net interest charges decreased in the third quarter and the first nine months of 1999 principally as a result of redemptions of long-term debt. Capital Resources and Liquidity - ------------------------------ TE has continuing cash requirements for planned capital expenditures and debt maturities. During the fourth quarter of 1999, capital requirements for property additions and capital leases are expected to be about $11 million, with no additional expenditures for nuclear fuel. TE has additional cash requirements of approximately $400,000 for maturing long-term debt during the fourth quarter of 1999. These requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. As of September 30, 1999, TE had approximately $99.7 million of cash and temporary investments and $151,000 of short-term indebtedness to associated companies. Together with CEI, TE had unused borrowing capability of $55 million under a FirstEnergy revolving line of credit at the end of the third quarter of 1999. Under its first mortgage indenture, as of September 30, 1999, TE would have been permitted to issue approximately $264 million of additional first mortgage bonds on the basis of bondable property additions and retired bonds. Regulatory Matters - ------------------ FirstEnergy filed a comprehensive transition plan for TE on October 4, 1999, under the new Ohio electricity restructuring law (see Note 3). The law is designed to facilitate the transition of Ohio's electric utility industry from a regulated environment to a competitive market in the generation of electricity. TE's plan itemizes the price of electricity into separate components -- primarily generation, transmission, distribution and transition charges - and details - 37 - FirstEnergy's strategy to implement corporate separation of TE's regulated and nonregulated operations. The plan proposes recovery of generation-related transition costs of approximately $1.7 billion ($1.4 billion, net of deferred income taxes). Of that amount, approximately $880 million ($770 million, net of deferred income taxes) would be recovered over the five-year market development period (2001-2005) and the remainder is estimated to be recovered from 2001 through mid-2008. These transition costs will be recovered as a component of frozen rates scheduled to be in effect pursuant to TE's rate plan as of January 1, 2001. Those rates will be adjusted to reflect a 5% reduction in the generation component of residential customers' rates. On November 4, 1999, the PUCO rejected FirstEnergy's filing because the PUCO has not yet prescribed the transition plan filing rules. FirstEnergy will refile its transition plan once those rules have been established. Despite rejecting FirstEnergy's filing, the PUCO indicated that it will endeavor to issue its order in this case within 275 days of FirstEnergy's initial filing date. If the transition plan ultimately approved by the PUCO for TE does not provide adequate recovery of TE's nuclear generating unit investments and regulatory assets, there would be a charge to earnings which could have a material adverse effect on TE's results of operations and financial condition. Year 2000 Readiness - ------------------- The Year 2000 issue is the result of computer programs being written using two digits rather than four to identify the applicable year. Any of TE's programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. Because so many of TE's computer functions are date sensitive, this could cause far-reaching problems, such as system-wide computer failures and miscalculations, if no remedial action is taken. TE has developed a multi-phase program for Year 2000 compliance that consists of an assessment of its systems and operations that could be affected by the Year 2000 problem; remediation or replacement of noncompliant systems and components; and testing of systems and components following such remediation or replacement. TE has focused its Year 2000 review on three areas: centralized system applications, noncentralized systems and relationships with third parties (including suppliers as well as end-use customers). TE's review of system readiness extends to systems involving customer service, safety, shareholder needs and regulatory obligations. TE is committed to taking appropriate actions to eliminate or lessen negative effects of the Year 2000 issue on its operations. TE has completed an inventory of all computer systems and hardware including equipment with embedded computer chips, has determined which systems need to be converted or replaced to become Year 2000-ready and has completed the remediation of all mission critical systems and equipment. Based on results of its remediation and testing efforts, TE filed documents with the North American Electric Reliability Council, Nuclear Regulatory Commission and PUCO that as of June 30, 1999 its generation, transmission, and distribution systems were ready to serve customers in the year 2000. Most of TE's Year 2000 issues have been resolved through system replacement. Of TE's major centralized systems, the general ledger system and inventory management, procurement and accounts payable systems were replaced at the end of 1998. TE's payroll system was enhanced to be Year 2000 compliant in July 1998. The customer service system was made Year 2000 compliant in June 1999. TE has contacted all its key suppliers and does not anticipate any service interruptions with them based on the information they have provided. Further, TE has reviewed its stocking levels of critical supplies and has determined the appropriate stocking levels to maintain approaching the year 2000. TE has initiated actions to ensure that these materials are at the required levels consistent with the assumptions in its contingency plan. TE has completed the development of formal contingency plans in all mission critical areas to establish procedures to be followed in handling unlikely events which could impact the provision of electric service to its customers. TE uses both internal and external resources to reprogram and/or replace and test its software for Year 2000 modifications. Of the $15.4 million total project cost, approximately $12.5 million will be capitalized since those costs are attributable to the purchase of new software for total system replacements because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $2.9 million will be expensed as incurred. As of September 30, 1999, TE had spent $12.2 million for Year 2000 capital projects and had expensed approximately $2.5 million for Year 2000-related maintenance activities. TE's total Year 2000 project cost, as well as its estimates of the time needed to complete remedial - 38 - efforts, are based on currently available information and do not include the estimated costs and time associated with the impact of third party Year 2000 issues. TE believes it is managing the Year 2000 issue in such a way that its customers will not experience any interruption of service. TE believes the most likely worst-case scenario from the Year 2000 issue will be disruption in power plant monitoring systems, thereby producing inaccurate data and potential failures in electronic switching mechanisms at transmission junctions. This would prolong localized outages, as technicians would have to manually activate switches. Such an event could have a material, but currently undeterminable, effect on its financial results. The costs of the project and the dates on which TE plans to complete the Year 2000 modifications are based on management's best estimates, which were derived from numerous assumptions of future events including the continued availability of certain resources, and other factors. However, there can be no guarantee that this project will be completed as planned and actual results could differ materially from the estimates. - 39 - PENNSYLVANIA POWER COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 1999 1998 1999 1998 ---------- --------- --------- --------- (In thousands) OPERATING REVENUES $82,354 $87,885 $245,843 $246,732 ------- ------- -------- -------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 25,978 21,948 61,244 62,835 Nuclear operating costs 5,165 6,700 20,168 20,568 Other operating costs 14,281 14,972 45,526 40,673 ------- ------- -------- -------- Total operation and maintenance expenses 45,424 43,620 126,938 124,076 Provision for depreciation and amortization 15,790 13,125 46,505 46,133 General taxes 7,151 5,335 19,395 16,608 Income taxes 4,824 9,375 19,788 20,847 ------- ------- -------- -------- Total operating expenses and taxes 73,189 71,455 212,626 207,664 ------- ------- -------- -------- OPERATING INCOME 9,165 16,430 33,217 39,068 OTHER INCOME 194 569 1,441 1,942 ------- ------- -------- -------- INCOME BEFORE NET INTEREST CHARGES 9,359 16,999 34,658 41,010 ------- ------- -------- -------- NET INTEREST CHARGES: Interest expense 4,972 5,234 16,090 15,951 Allowance for borrowed funds used during construction (91) (52) (323) (196) ------- ------- -------- -------- Net interest charges 4,881 5,182 15,767 15,755 ------- ------- -------- -------- INCOME BEFORE EXTRAORDINARY ITEM 4,478 11,817 18,891 25,255 EXTRAORDINARY ITEM (NET OF INCOME TAX BENEFIT OF $21,208,000) -- -- -- (30,522) ------- ------- -------- -------- NET INCOME (LOSS) 4,478 11,817 18,891 (5,267) PREFERRED STOCK DIVIDEND REQUIREMENTS 1,131 1,157 3,444 3,470 ------- ------- -------- -------- EARNINGS (LOSS) ON COMMON STOCK $ 3,347 $10,660 $ 15,447 $ (8,737) ======= ======= ======== ======== The preceding Notes to Consolidated Financial Statements as they relate to Pennsylvania Power Company are an integral part of these statements.
- 40 - PENNSYLVANIA POWER COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 1999 1998 ------------ ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $702,725 $686,771 Less--Accumulated provision for depreciation 303,005 291,188 -------- -------- 399,720 395,583 -------- -------- Construction work in progress- Electric plant 13,143 17,187 Nuclear fuel 385 508 -------- -------- 13,528 17,695 -------- -------- 413,248 413,278 -------- -------- OTHER PROPERTY AND INVESTMENTS 34,849 29,177 -------- -------- CURRENT ASSETS: Cash and cash equivalents 260 7,485 Notes receivable from parent company 16,090 50,000 Receivables- Customers (less accumulated provisions of $3,753,000 and $3,599,000, respectively, for uncollectible accounts) 33,399 34,737 Associated companies 24,375 34,430 Other 11,546 12,472 Materials and supplies, at average cost 12,790 15,515 Prepayments 5,904 2,657 -------- -------- 104,364 157,296 -------- -------- DEFERRED CHARGES: Regulatory assets 329,626 371,027 Other 6,633 6,994 -------- -------- 336,259 378,021 -------- -------- $888,720 $977,772 ======== ========
- 41- PENNSYLVANIA POWER COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30, December 31, 1999 1998 ------------ ------------ (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholder's equity- Common stock, $30 par value, authorized 6,500,000 shares - 6,290,000 shares outstanding $188,700 $188,700 Other paid-in capital (310) (310) Retained earnings 22,084 86,891 -------- -------- Total common stockholder's equity 210,474 275,281 Preferred stock- Not subject to mandatory redemption 39,105 50,905 Subject to mandatory redemption 15,000 15,000 Long-term debt- Associated companies 6,392 6,617 Other 257,849 281,072 -------- -------- 528,820 628,875 -------- -------- CURRENT LIABILITIES: Currently payable long-term debt- Associated companies 4,709 5,557 Other 23,879 984 Accounts payable- Associated companies 20,692 9,676 Other 16,597 23,156 Accrued taxes 11,817 12,849 Accrued interest 3,886 6,519 Other 11,443 17,046 -------- -------- 93,023 75,787 -------- -------- DEFERRED CREDITS: Accumulated deferred income taxes 201,419 212,427 Accumulated deferred investment tax credits 7,379 7,787 Other 58,079 52,896 -------- -------- 266,877 273,110 -------- -------- COMMITMENTS, GUARANTEES AND CONTINGENCIES (Note 2) -------- -------- $888,720 $977,772 ======== ======== The preceding Notes to Consolidated Financial Statements as they relate to Pennsylvania Power Company are an integral part of these balance sheets.
- 42 - PENNSYLVANIA POWER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 1999 1998 1999 1998 ---------- --------- --------- --------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 4,478 $ 11,817 $ 18,891 $ (5,267) Adjustments to reconcile net income (loss) to net cash from operating activities- Provision for depreciation and amortization 15,790 13,125 46,505 46,133 Nuclear fuel and lease amortization 1,919 1,460 5,153 3,252 Deferred income taxes, net (143) 931 (1,016) (26,058) Investment tax credits, net (1,942) (573) (2,237) (1,717) Extraordinary item -- -- -- 51,730 Receivables 1,481 881 12,319 1,827 Materials and supplies 5,067 (839) 2,725 (1,012) Accounts payable (6,759) (12,493) 4,457 (7,487) Other (5,280) (1,533) (12,481) (7,937) -------- -------- -------- -------- Net cash provided from operating activities 14,611 12,776 74,316 53,464 -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt -- -- -- 1,621 Redemptions and Repayments- Preferred stock 5,920 -- 12,005 -- Long-term debt 1,843 1,443 4,988 3,994 Dividend Payments- Common stock 15,000 5,347 80,362 16,040 Preferred stock 1,393 1,232 3,130 3,470 -------- -------- -------- -------- Net cash used for financing activities 24,156 8,022 100,485 21,883 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 8,160 4,541 16,489 11,560 Loan to parent -- 4,400 -- 16,900 Loan payment from parent (12,597) -- (33,910) -- Other (3,391) (2,194) (1,523) (313) -------- -------- -------- -------- Net cash used for (provided from) investing activities (7,828) 6,747 (18,944) 28,147 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents (1,717) (1,993) (7,225) 3,434 Cash and cash equivalents at beginning of period 1,977 6,087 7,485 660 -------- -------- -------- -------- Cash and cash equivalents at end of period $ 260 $ 4,094 $ 260 $ 4,094 ======== ======== ======== ======== The preceding Notes to Consolidated Financial Statements as they relate to Pennsylvania Power Company are an integral part of these statements.
- 43 - REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Pennsylvania Power Company: We have reviewed the accompanying consolidated balance sheet of Pennsylvania Power Company (a Pennsylvania corporation and wholly owned subsidiary of Ohio Edison Company) and subsidiary as of September 30, 1999, and the related consolidated statements of income and cash flows for the three-month and nine-month periods ended September 30, 1999 and 1998. 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 generally accepted auditing standards, 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 generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the balance sheet of Pennsylvania Power Company as of December 31, 1998 (not presented herein), and, in our report dated February 12, 1999, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 1998, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio November 9, 1999 - 44 - PENNSYLVANIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations - --------------------- Earnings on common stock declined to $3.3 million in the third quarter of 1999 from $10.7 million in the third quarter of 1998. Reduced fossil generating capacity resulted in lower wholesale revenues and increased purchased power costs in the third quarter of 1999, from the prior year's third quarter levels, contributing to the lower earnings. In the first nine months of 1999, earnings on common stock increased to $15.4 million from a loss on common stock of $8.7 million for the same period last year. The nine-month period ended September 30, 1998, included an extraordinary charge of $30.5 million resulting from Penn's discontinued application of SFAS 71 to its generation business. Operating revenues declined approximately $5.5 million in the third quarter and $0.9 million for the first nine months of 1999, compared to the corresponding periods of 1998. The lower third quarter operating revenues resulted primarily from a decline in kilowatt-hours sales. Total kilowatt-hour sales decreased 3.8% in the third quarter of 1999, compared to the same period of 1998. This resulted from reduced kilowatt-hour sales to wholesale customers, which declined 33.1% in the third quarter of 1999 from the third quarter of 1998. The decrease resulted from a reduction in fossil generation available for the wholesale market during that period. However, sales to retail customers increased 6.2% in the third quarter of 1999, compared to the third quarter of 1998. Kilowatt-hour sales to commercial and industrial customers increased 4.6% and 16.4%, respectively, whereas, sales to residential customers decreased 3.1% in the third quarter of 1999 from a year ago. Lower unit prices offset an increase in kilowatt-hour sales during the first nine months of 1999, compared to the year-to-date period of 1998. Total kilowatt-hour sales increased 2.6% in the current nine-month period, with retail sales 8.2% higher and sales to wholesale customers 18.5% lower. Additionally, kilowatt-hour sales to retail customers were higher in the first nine months of 1999, compared to the first nine months of 1998, with increased sales to residential, commercial and industrial customers of 5.6%, 16.7% and 4.1%, respectively. Contributing to the higher sales to commercial customers were increased sales by Penn's nonregulated affiliate, Penn Power Energy, Inc. Operation and maintenance expenses increased $1.8 million and $2.9 million in the third quarter and first nine months of 1999, respectively, compared to the corresponding periods of 1998. Fuel and purchased power costs were higher in the third quarter of 1999 due to an increase in purchased power costs. The increase resulted from an outage at the New Castle Plant and reduced available internally generated power. However, Beaver Valley Unit 1, which remained out of service for most of the first three quarters of 1998, was available for service for nearly all of the first nine months of 1999. As a result, in the 1999 year-to-date period, the increased mix of nuclear generation lowered fuel costs. Nuclear operating costs were lower in the third quarter of 1999, compared to the third quarter of 1998, reflecting lower costs at Beaver Valley Unit 1. Other operating costs were higher in the first nine months of 1999, compared to the same period in 1998, primarily due to higher customer and sales expenses, including expenditures for energy marketing programs and information system requirements, and increased employee benefit costs. The provision for depreciation and amortization increased in the third quarter of 1999, compared to the third quarter of 1998, as a result of increases in the amortization of regulatory assets related to the Penn rate restructuring plan that began in 1999. For the first nine months of 1999, the increase in amortization expense was substantially offset by lower depreciation expense related to the reduction in the nuclear plant investments at the end of June 1998. This reduction was the result of an extraordinary charge discussed above. General taxes increased for both the third quarter and nine-month periods of 1999, compared to the same periods in 1998, primarily due to increases in the gross receipts tax, Ohio property tax and payroll taxes. Capital Resources and Liquidity - ------------------------------ Penn has continuing cash requirements for planned capital expenditures. During the fourth quarter of 1999, capital requirements for property additions and capital leases are expected to be about $18 million, including $1 million for nuclear fuel. Penn has additional cash requirements of approximately $487,000 to meet requirements for maturing long-term debt during the fourth quarter of 1999. These requirements are expected to be satisfied with internal cash. As of September 30, 1999, Penn had approximately $16.4 million of cash and temporary investments and no short-term indebtedness. In addition, Penn has $2 million available from an unused bank facility, which may be borrowed for up to several days at the bank's discretion. Under its first mortgage indenture, as of September 30, 1999, Penn would have been permitted to issue at least $120 million of additional first mortgage bonds on the basis of bondable property additions and retired bonds. - 45 - Regulatory Matters - ------------------ All regulatory approvals have been received for the transfer of generating assets between FirstEnergy and Duquesne, which is intended to be a tax-free asset exchange. When completed in December 1999, the transaction will provide FirstEnergy with exclusive ownership and operating control of all generating assets that are currently jointly owned and operated under the CAPCO agreement (see Note 2, "Pending Exchange of Assets"). Environmental Matters - --------------------- In September 1999, FirstEnergy received, and subsequently in October 1999, Penn received a citizen suit notification letter from the New York Attorney General's office alleging Clean Air Act violations at the W. H. Sammis Plant. FirstEnergy believes the Sammis Plant is in full compliance with the Clean Air Act, but cannot predict whether New York will nonetheless file a lawsuit. On November 3, 1999, the EPA issued Notices of Violation (NOV) or a Compliance Order to eight utilities covering 32 power plants, including the Sammis Plant. In addition, the U.S. Department of Justice filed seven civil complaints against various investor-owned utilities, which included a complaint against Penn in the U.S. District Court for the Southern District of Ohio. The NOV and complaint allege violations of the Clean Air Act based on operation and maintenance of the Sammis Plant dating back to 1984. The complaint requests permanent injunctive relief to require the installation of "best available control technology" and civil penalties of up to $27,500 per day of violation. FirstEnergy believes the NOV and complaint are without merit. However, FirstEnergy is unable to predict the outcome of this litigation. Criminal penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. It is anticipated at this time that the Sammis Plant will continue to operate while the matter is being decided. Year 2000 Readiness - ------------------- The Year 2000 issue is the result of computer programs being written using two digits rather than four to identify the applicable year. Any of Penn's programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. Because so many of Penn's computer functions are date sensitive, this could cause far-reaching problems, such as system-wide computer failures and miscalculations, if no remedial action is taken. Penn has developed a multi-phase program for Year 2000 compliance that consists of an assessment of its systems and operations that could be affected by the Year 2000 problem; remediation or replacement of noncompliant systems and components; and testing of systems and components following such remediation or replacement. Penn has focused its Year 2000 review on three areas: centralized system applications, noncentralized systems and relationships with third parties (including suppliers as well as end-use customers). Penn's review of system readiness extends to systems involving customer service, safety, shareholder needs and regulatory obligations. Penn is committed to taking appropriate actions to eliminate or lessen negative effects of the Year 2000 issue on its operations. Penn has completed an inventory of all computer systems and hardware including equipment with embedded computer chips, has determined which systems need to be converted or replaced to become Year 2000-ready and has completed the remediation of all mission critical systems and equipment. Based on results of its remediation and testing efforts, Penn filed documents with the North American Electric Reliability Council, Nuclear Regulatory Commission and PPUC that as of June 30, 1999 its generation, transmission, and distribution systems were ready to serve customers in the year 2000. Most of Penn's Year 2000 issues have been resolved through system replacement. Of Penn's major centralized systems, the general ledger system and inventory management, procurement and accounts payable systems were replaced at the end of 1998. Penn's payroll system was enhanced to be Year 2000 compliant in July 1998. The customer service system was made Year 2000 compliant in June 1999. Penn has contacted all its key suppliers and does not anticipate any service interruptions with them based on the information they have provided. Further, Penn has reviewed its stocking levels of critical supplies and has determined the appropriate stocking levels to maintain approaching the year 2000. Penn has initiated actions to ensure that these materials are at the required levels consistent with the assumptions in its contingency plan. Penn has completed the development of formal contingency plans in all mission critical areas to establish procedures to be followed in handling unlikely events which could impact the provision of electric service to its customers. - 46 - Penn uses both internal and external resources to reprogram and/or replace and test its software for Year 2000 modifications. Of the $4.8 million total project cost, approximately $3.5 million will be capitalized since those costs are attributable to the purchase of new software for total system replacements because the Year 2000 solution comprises only a portion of the benefits resulting from the system replacements. The remaining $1.3 million will be expensed as incurred. As of September 30, 1999, Penn had spent $3.4 million for Year 2000 capital projects and had expensed approximately $1.0 million for Year 2000-related maintenance activities. Penn's total Year 2000 project cost, as well as its estimates of the time needed to complete remedial efforts, are based on currently available information and do not include the estimated costs and time associated with the impact of third party Year 2000 issues. Penn believes it is managing the Year 2000 issue in such a way that its customers will not experience any interruption of service. Penn believes the most likely worst-case scenario from the Year 2000 issue will be disruption in power plant monitoring systems, thereby producing inaccurate data and potential failures in electronic switching mechanisms at transmission junctions. This would prolong localized outages, as technicians would have to manually activate switches. Such an event could have a material, but currently undeterminable, effect on its financial results. The costs of the project and the dates on which Penn plans to complete the Year 2000 modifications are based on management's best estimates, which were derived from numerous assumptions of future events including the continued availability of certain resources, and other factors. However, there can be no guarantee that this project will be completed as planned and actual results could differ materially from the estimates. - 47 - PART II. OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings ----------------- On November 3, 1999, the EPA issued Notices of Violation (NOV) or a Compliance Order to eight utilities covering 32 power plants, including the Sammis Plant. In addition, the U.S. Department of Justice filed seven civil complaints against various investor- owned utilities, which included a complaint against OE and Penn in the U.S. District Court for the Southern District of Ohio. The NOV and complaint allege violations of the Clean Air Act based on operation and maintenance of the Sammis Plant dating back to 1984. The complaint requests permanent injunctive relief to require the installation of "best available control technology" and civil penalties of up to $27,500 per day of violation. FirstEnergy believes the NOV and complaint are without merit. However, FirstEnergy is unable to predict the outcome of this litigation. Criminal penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. It is anticipated at this time that the Sammis Plant will continue to operate while the matter is being decided. 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, FirstEnergy, or, respectively, any of the Companies, has not filed as an exhibit to this Form 10-Q any instrument with respect to long-term debt if the respective total amount of securities authorized thereunder does not exceed 10% of the total assets of FirstEnergy and its subsidiaries on a consolidated basis, or respectively, any of the Companies, 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 --------------------------------- None - 48 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. November 12, 1999 FIRSTENERGY CORP. ----------------- Registrant OHIO EDISON COMPANY ------------------- Registrant THE CLEVELAND ELECTRIC ---------------------- ILLUMINATING COMPANY -------------------- Registrant THE TOLEDO EDISON COMPANY ------------------------- Registrant /s/ Harvey L. Wagner ----------------------------- Harvey L. Wagner Controller Principal Accounting Officer PENNSYLVANIA POWER COMPANY -------------------------- Registrant /s/ Harvey L. Wagner ----------------------------- Harvey L. Wagner Comptroller Principal Accounting Officer - 49 - EX-15 2 EXHIBIT 15 November 9, 1999 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 September 30, 1999, which includes our report dated November 9, 1999 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
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 9-MOS DEC-31-1999 SEP-30-1999 1 PER-BOOK 9,032,457 2,633,957 1,253,536 5,154,930 0 18,074,880 23,302 3,603,751 909,592 4,536,645 274,996 648,395 5,817,547 167,649 0 119,982 985,072 38,464 0 58,835 5,427,295 18,074,880 4,673,682 308,626 3,482,442 3,791,068 882,614 0 882,614 434,748 447,866 0 0 256,683 481,727 1,033,999 1.97 1.97
EX-15 4 EXHIBIT 15 November 9, 1999 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 September 30, 1999, which includes our report dated November 9, 1999 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
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 $15,320,000 related to other income. 0000073960 OHIO EDISON COMPANY 1,000 U.S. DOLLARS 9-MOS DEC-31-1999 SEP-30-1999 1 PER-BOOK 4,648,369 1,318,012 745,701 1,896,880 0 8,608,962 1 2,098,728 474,249 2,572,978 140,000 200,070 1,974,219 221,267 0 119,982 580,888 5,000 0 3,460 2,791,098 8,608,962 2,050,365 153,107 1,543,309 1,681,096 369,269 32,577 401,846 168,702 233,144 8,740 224,404 333,603 178,642 647,785 0 0
EX-15 6 EXHIBIT 15 November 9, 1999 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 September 30, 1999, which includes our report dated November 9, 1999 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
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 $9,944,000 related to other income. 0000020947 THE CLEVELAND ELECTRIC ILLUMINATING COMPANY 1,000 U.S. DOLLARS 9-MOS DEC-31-1999 SEP-30-1999 1 PER-BOOK 3,027,521 687,551 389,085 2,123,570 0 6,227,727 931,962 0 71,996 1,003,958 134,996 238,325 2,684,211 42,237 0 0 266,730 33,464 0 30,845 1,792,961 6,227,727 1,435,297 109,535 1,008,655 1,108,246 327,051 6,489 333,540 158,040 175,500 25,312 150,188 150,974 210,819 346,538 0 0
EX-27 8
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 $4,759,000 related to other income. 0000352049 THE TOLEDO EDISON COMPANY 1,000 U.S. DOLLARS 9-MOS DEC-31-1999 SEP-30-1999 1 PER-BOOK 1,144,565 419,202 199,935 909,857 0 2,673,559 195,670 328,559 39,236 563,465 0 210,000 987,767 151 0 0 132,130 0 0 24,530 755,516 2,673,559 693,143 46,458 520,503 562,202 130,941 9,007 139,948 58,307 81,641 12,173 69,468 80,351 80,283 188,320 0 0
EX-15 9 EXHIBIT 15 November 9, 1999 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 September 30, 1999, which includes our report dated November 9, 1999 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
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 $416,000 related to other income. 0000077278 PENNSYLVANIA POWER COMPANY 1,000 U.S. DOLLARS 9-MOS DEC-31-1999 SEP-30-1999 1 PER-BOOK 413,248 34,849 104,364 336,259 0 888,720 188,700 (310) 22,084 210,474 15,000 39,105 264,241 0 0 0 23,487 0 0 5,101 331,312 888,720 245,843 20,204 192,838 212,626 33,217 1,441 34,658 15,767 18,891 3,444 15,447 80,362 19,203 74,316 0 0
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