EX-13.4 28 ex13-4.txt ANNUAL REPORT - PP PENNSYLVANIA POWER COMPANY 2000 ANNUAL REPORT TO STOCKHOLDERS Pennsylvania Power Company, an electric utility operating company of FirstEnergy Corp. and a wholly owned subsidiary of Ohio Edison Company, provides electric service to approximately 138,000 customers in western Pennsylvania. The Company furnishes electric service in 139 communities, as well as rural areas, and also sells electric energy at wholesale to three municipalities. Contents Page -------- ---- Selected Financial Data 1 Management's Discussion and Analysis 2-5 Statements of Income 6 Balance Sheets 7 Statements of Capitalization 8 Statements of Common Stockholder's Equity 9 Statements of Preferred Stock 9 Statements of Cash Flows 10 Statements of Taxes 11 Notes to Financial Statements 12-19 Report of Independent Public Accountants 20 PENNSYLVANIA POWER COMPANY SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (Dollars in thousands) Operating Revenues $383,112 $ 329,234 $323,756 $ 323,381 $ 322,625 ======== ========== ======== ========== ========== Operating Income $ 39,979 $ 32,063 $ 58,041 $ 50,736 $ 62,329 ======== ========== ======== ========== ========== Income Before Extraordinary Item $ 22,847 $ 12,648 $ 39,748 $ 31,472 $ 40,587 ======== ========== ======== ========== ========== Net Income $ 22,847 $ 12,648 $ 9,226 $ 31,472 $ 40,587 ======== ========== ======== ========== ========== Earnings on Common Stock $ 19,143 $ 8,278 $ 4,600 $ 26,846 $ 35,961 ======== ========== ======== ========== ========== Total Assets $988,909 $1,015,616 $977,772 $1,034,457 $1,074,578 ======== ========== ======== ========== ========== CAPITALIZATION: Common Stockholder's Equity $213,851 $ 199,608 $275,281 $ 291,977 $ 286,504 Preferred Stock- Not Subject to Mandatory Redemption 39,105 39,105 50,905 50,905 50,905 Subject to Mandatory Redemption 15,000 15,000 15,000 15,000 15,000 Long-Term Debt 270,368 274,821 287,689 289,305 310,996 -------- ---------- -------- ---------- ---------- Total Capitalization $538,324 $ 528,534 $628,875 $ 647,187 $ 663,405 ======== ========== ======== ========== ========== CAPITALIZATION RATIOS: Common Stockholder's Equity 39.7% 37.8% 43.8% 45.1% 43.2% Preferred Stock- Not Subject to Mandatory Redemption 7.3 7.4 8.1 7.9 7.7 Subject to Mandatory Redemption 2.8 2.8 2.4 2.3 2.2 Long-Term Debt 50.2 52.0 45.7 44.7 46.9 ----- ----- ----- ----- ----- Total Capitalization 100.0% 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== ===== TRANSMISSION AND DISTRIBUTION KILOWATT-HOUR DELIVERIES (Millions): Residential 1,387 1,325 1,278 1,238 1,254 Commercial 1,198 1,105 1,069 1,013 996 Industrial 1,665 1,495 1,439 1,659 1,693 Other 6 6 6 6 6 ----- ----- ----- ----- ----- Total Retail 4,256 3,931 3,792 3,916 3,949 Total Wholesale 4,091 1,118 964 901 1,106 ----- ----- ----- ----- ----- Total 8,347 5,049 4,756 4,817 5,055 ===== ===== ===== ===== ===== CUSTOMERS SERVED: Residential 121,066 117,440 124,304 129,316 127,936 Commercial 16,634 16,307 16,924 16,738 16,531 Industrial 177 175 206 241 225 Other 87 87 86 97 99 ------- ------- ------- ------- ------- Total 137,964 134,009 141,520 146,392 144,791 ======= ======= ======= ======= ======= NUMBER OF EMPLOYEES (a) 275 895 888 997 1,015 === === === === ===== (a) Reduction in 2000 reflects transfer of responsibility for generation operations to FirstEnergy Corp.'s competitive services unit.
PENNSYLVANIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION This discussion includes forward-looking statements based on information currently available to management that is subject to certain risks and uncertainties. Such statements typically contain, but are not limited to, the terms anticipate, potential, expect, believe, estimate and similar words. Actual results may differ materially due to the speed and nature of increased competition and deregulation in the electric utility industry, economic or weather conditions affecting future sales and margins, changes in markets for energy services, changing energy and commodity market prices, legislative and regulatory changes (including revised environmental requirements), and the availability and cost of capital. Results of Operations --------------------- Earnings on common stock for 2000 increased to $19.1 million from $8.3 million in 1999. Results for 2000 were favorably affected by higher operating revenues which were partially offset by increased nuclear operating expenses and taxes. In 1999, earnings on common stock increased to $8.3 million from $4.6 million in 1998 primarily due to the absence of an extraordinary charge recognized in 1998, which was substantially offset by higher operating expenses in 1999. Operating revenues increased by $53.9 million in 2000 following a $5.5 million increase in 1999. The sources of increases in operating revenues during 2000 and 1999 are summarized in the following table: Sources of Revenue Changes 2000 1999 ------------------------------------------------------------ Increase (Decrease) (In millions) Generation sales revenue: Change in regulated sales $15.4 $(37.7) Change in unregulated sales (PPE) (13.5) 6.9 ------------------------------------------------------------- Total change in generation sales 1.9 (30.8) Non-generation sales revenue: Change in average unit prices (1.1) 24.6 Increase in distribution sales volume 15.0 5.0 ------------------------------------------------------------- Total change in retail sales 15.8 (1.2) Increase in wholesale sales 42.9 5.6 All other changes (4.8) 1.1 ------------------------------------------------------------- Net Increase in Operating Revenues $53.9 $ 5.5 ============================================================= Electric Sales Service area growth combined with the return of customers previously served by alternative generation suppliers increased our retail sales revenues in 2000. Sales to all retail customer groups were substantially higher in 2000, compared to the preceding year reflecting a stronger economy in our service area. The transfer of ownership in Penn Power Energy, Inc. (PPE) to FirstEnergy Services Corp. (FE Services), an affiliated company, in December 1999, offset a portion of the increased operating revenues in 2000. Substantial growth in wholesale kilowatt-hour sales, primarily to affiliated utilities, contributed significantly to the higher operating revenues in 2000. These sales were possible due to additional available internal generation resulting from increased nuclear capacity received in the December 1999 swap of generating assets with Duquesne Light Company (Duquesne). In 1999, operating revenues benefited primarily from higher kilowatt-hour sales to wholesale customers, compared to the preceding year. As a result of additional available generation, kilowatt-hour sales to the wholesale market were significantly higher. Sales to the retail market were adversely impacted as some customers selected alternative energy suppliers when customer choice became available in 1999. We continued to provide the transmission and distribution of power through our system to those customers. Changes in electric generation sales and kilowatt-hour deliveries in 2000 and 1999, are summarized in the following table: Changes in KWH Sales 2000 1999 ---------------------------------------------------------- Increase (Decrease) Electric Generation Sales: Retail 15.1% (6.8)% Wholesale 266.0% 16.0% --------------------------------------------------------- Total Electric Generation Sales 78.5% (2.0)% --------------------------------------------------------- Kilowatt-hour Deliveries: Residential 4.7% 3.7% Commercial 8.3% 3.4% Industrial 11.3% 3.9% --------------------------------------------------------- Total Kilowatt-hour Deliveries 8.2% 3.7% --------------------------------------------------------- Operating Expenses and Taxes Total operating expenses and taxes increased $46.0 million in 2000 and $31.5 million in 1999. The increase in 2000 resulted primarily from higher nuclear operating costs. Fuel and purchased power costs, other operating costs, depreciation and amortization and general taxes were all lower in 2000, compared to the prior year. In 1999, operating expenses and taxes increased from the preceding year as a result of higher expense levels in all major expense categories except income taxes. Fuel and purchased power costs decreased $19.0 million in 2000, compared to 1999, primarily due to an $18.6 million reduction in purchased power costs and a slight reduction in fuel expense. The decrease in purchased power costs in 2000 resulted from a substantial increase in available internal generation, which reduced the need for external sources of power, as well as the transfer of ownership in PPE to FE Services. Although internal generation increased by 76% compared to 1999, fuel expense was slightly lower. One factor contributing to the improvement was the absence of a nonrecurring charge of $6.8 million from the Duquesne asset swap in 1999. However, fuel expenses in 2000 also benefited from the following factors: o A higher proportion of nuclear generation (which has lower unit fuel costs than fossil fuel) due to increased nuclear ownership from the exchange of generating assets with Duquesne in December 1999; o The expiration of an above-market coal contract at the end of 1999; and o Continued improvement of coal-blending strategies, which resulted in the use of additional lower-cost coal and enhanced the efficiency and cost-competitiveness of our fossil generation. In 1999, fuel and purchased power costs increased $10.3 million from the preceding year due primarily to the one-time costs resulting from the Duquesne asset swap described above. Nuclear operating costs increased $75.8 million in 2000 from the prior year. The increase was due to additional costs associated with refueling outages at both Beaver Valley Plant units and increased ownership of the Beaver Valley Plant for the entire year following the 1999 asset exchange with Duquesne, compared to approximately one month of increased ownership in the prior year. In 1999, nuclear operating costs increased $13.9 million as a result of higher refueling outage-related costs at the Perry Plant and Beaver Valley Unit 2, as well as the one month of increased ownership in the Beaver Valley Plant. Other operating costs decreased $5.7 million in 2000 primarily due to increased gains realized from the sale of emission allowances in 2000. In 1999, other operating costs increased $12.7 million from the prior year principally due to higher customer and sales expenses including expenditures for energy marketing programs, information system requirements and an increase in employee benefit expense, as well as higher distribution costs from storm repair and overhead line maintenance. The $6.2 million reduction in depreciation and amortization in 2000 from 1999 primarily reflects lower accrued decommissioning costs. Depreciation and amortization increased by $2.9 million in 1999, compared to the prior year, due to the amortization of regulatory assets from our rate restructuring plan which exceeded the related reduction in depreciation from our reduced nuclear investment. General taxes decreased $6 million in 2000 from 1999 primarily due to favorable property tax law changes and the phase-out of Pennsylvania's Capital Stock and Franchise Tax. Effects of SFAS 71 Discontinuation ---------------------------------- On June 18, 1998, the Pennsylvania Public Utility Commission authorized our rate restructuring plan that resulted in the discontinuation of Statement of Financial Accounting Standards No. (SFAS) 71, "Accounting for the Effects of Certain Types of Regulation," to our generation business. Under the plan, our rates were restructured to establish separate charges for transmission and distribution services; generation (which is subject to competition); and stranded cost recovery. A total of $215.4 million of impaired nuclear plant investments were recognized as regulatory assets to be recovered through the stranded cost recovery charge. The portion of generating plant investment not recovered through future customer rates resulted in a $30.5 million extraordinary after-tax write-down in 1998. We continue to bill and collect cost-based rates for transmission and distribution services, which remain subject to cost-based regulation; accordingly, it is appropriate that we continue the application of SFAS 71 to those operations. Financial Condition, Capital Resources and Liquidity ---------------------------------------------------- On September 1, 2000, FirstEnergy Corp.'s electric utility operating companies transferred $1.2 billion of their transmission assets to American Transmission Systems, Inc. (ATSI), an affiliated company. ATSI represents a first step toward the goal of establishing a larger independent, regional transmission organization. As part of the transfer, we sold to ATSI $125.6 million of our transmission assets, net of $59.0 million of accumulated depreciation and $2.5 million of investment tax credits for $30.1 million in cash and $34.0 million in long-term notes. We had about $44.7 million of cash and temporary investments and no short-term indebtedness as of December 31, 2000. We also had a $2 million bank facility that provides for borrowings on a short-term basis at the bank's discretion. At the end of 2000, we had the capability to issue $225 million of additional first mortgage bonds on the basis of property additions and retired bonds. Based on our earnings in 2000 under the earnings coverage test contained in our charter, we could issue $55 million of preferred stock (assuming no additional debt was issued). Our cash requirements in 2001 for operating expenses, construction expenditures and scheduled debt maturities are expected to be met without issuing new securities. We have cash requirements of approximately $82 million for the 2001-2005 period to meet scheduled maturities of long-term debt and preferred stock. Of that amount, approximately $1 million relates to 2001. Our capital spending for the period 2001-2005 is expected to be about $153 million (excluding nuclear fuel), of which approximately $28 million applies to 2001. Investments for additional nuclear fuel during the 2001-2005 period are estimated to be approximately $81 million, of which about $22 million relates to 2001. During the same periods, our nuclear fuel investments are expected to be reduced by approximately $91 million and $18 million, respectively, as the nuclear fuel is consumed. Interest Rate Risk ------------------ Our exposure to fluctuations in market interest rates is mitigated since a significant portion of our debt has fixed interest rates, as noted in the table below. We are subject to the inherent interest rate risks related to refinancing maturing debt by issuing new debt securities. Changes in the market value of our nuclear decommissioning trust funds are recognized by making a corresponding change to the decommissioning liability, as described in Note 1. The table below presents principal amounts and related weighted average interest rates by year of maturity for our investment portfolio, debt obligations and preferred stock with mandatory redemption provisions.
Comparison of Carrying Value to Fair Value ----------------------------------------------------------------------------------------------------------------------- There- Fair 2001 2002 2003 2004 2005 after Total Value ----------------------------------------------------------------------------------------------------------------------- (Dollars in millions) Investments other than Cash and Cash Equivalents: Fixed Income $1 $1 $111 $113 $113 Average interest rate 7.8% 7.8% 5.9% 6.0% ---------------------------------------------------------------------------------------------------------------------- Liabilities ---------------------------------------------------------------------------------------------------------------------- Long-term Debt: Fixed rate $1 $1 $41 $35 $1 $158 $237 $247 Average interest rate 9.7% 9.7% 7.6% 6.6% 9.7% 7.1% 7.1% Variable rate $ 16 $ 16 $ 16 Average interest rate 5.3% 5.3% ---------------------------------------------------------------------------------------------------------------------- Preferred Stock $1 $ 1 $ 1 $1 $ 11 $ 15 $ 15 Average dividend rate 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% ----------------------------------------------------------------------------------------------------------------------
Outlook ------- Since FirstEnergy's regionally-focused retail sales strategy envisions the continued operation of both regulated and competitive operations, FirstEnergy manages its businesses through a competitive services unit, a utility services unit and a corporate support services unit - we are included in the utility services unit. FE Services provides competitive retail energy services while we continue to provide regulated distribution services. In February 2001, the Pennsylvania Public Utility Commission approved our lease agreement with FirstEnergy Generation Corp. (FE Generation), an associated company, to lease and operate our fossil plants. Together with FirstEnergy's Ohio utilities, we expect that the transfer of our fossil generating assets to FE Generation will be completed by the end of 2005. We are in compliance with current sulfur dioxide and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. In 1998 the EPA finalized regulations requiring additional NOx reductions in the future from our Ohio and Pennsylvania facilities (see Note 5). We continue to evaluate our compliance plans and other compliance options. In July 1997, the EPA changed the National Ambient Air Quality Standard (NAAQS) for ozone emissions and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. In May 1999, the U.S. Court of Appeals found constitutional and other defects in the new NAAQS rules. In February 2001, the U.S. Supreme Court upheld the new NAAQS rules regulating ultra-fine particulates but found defects in the new NAAQS rules for ozone and decided that the EPA must revise those rules. The future cost of compliance with these regulations may be substantial and will depend on the manner in which they are ultimately implemented, if at all, by the states in which we operate affected facilities. In 1999, we received notification of pending legal actions based on alleged violations of the Clean Air Act at our W. H. Sammis Plant involving the states of New York and Connecticut as well as the U.S. Department of Justice. The civil complaint filed by the U.S. Department of Justice requests installation of "best available control technology" as well as civil penalties of up to $27,500 per day of violation. We believe the Sammis Plant is in full compliance with the Clean Air Act and the legal actions are without merit. However, we are unable to predict the outcome of this litigation. Penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. The Sammis Plant continues to operate while the matter is being decided. Under federal environmental law and related federal and state waste regulations, certain fossil-fuel combustion waste products, such as coal ash, were exempted from hazardous waste disposal requirements pending the EPA's evaluation of the need for future regulation. The EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. On April 25, 2000, the EPA announced that it will develop national standards regulating disposal of coal ash as a nonhazardous waste. In December 2000, the EPA announced it would proceed with the development of regulations regarding hazardous air pollutants from electric power plants. The EPA identified mercury as the hazardous air pollutant of greatest concern. The EPA established a schedule to propose regulations by December 2003 and issue final regulations by December 2004. The future cost of compliance with these regulations may be substantial. On August 8, 2000, FirstEnergy Corp. entered into an agreement to merge with GPU, Inc, a Pennsylvania corporation, headquartered in Morristown, New Jersey. The target date for completing the merger is by the end of the second quarter of 2001. Our parent company, Ohio Edison Company, will continue to be a wholly owned subsidiary of FirstEnergy Corp. PENNSYLVANIA POWER COMPANY STATEMENTS OF INCOME
For the Years Ended December 31, 2000 1999 1998 ----------------------------------------------------------------------------------------------------- (In thousands) OPERATING REVENUES $383,112 $329,234 $323,756 -------- -------- -------- OPERATING EXPENSES AND TAXES: Fuel and purchased power 68,099 87,128 76,801 Nuclear operating costs 112,731 36,915 22,968 Other operating costs 59,389 65,079 52,348 -------- -------- --------- Total operation and maintenance expenses 240,219 189,122 152,117 Provision for depreciation and amortization 55,964 62,182 59,264 General taxes 22,076 28,110 22,540 Income taxes 24,874 17,757 31,794 -------- -------- --------- Total operating expenses and taxes 343,133 297,171 265,715 -------- -------- --------- OPERATING INCOME 39,979 32,063 58,041 OTHER INCOME 2,300 1,438 2,485 -------- -------- --------- INCOME BEFORE NET INTEREST CHARGES 42,279 33,501 60,526 -------- -------- --------- NET INTEREST CHARGES: Interest on long-term debt 18,651 19,268 19,255 Interest on nuclear fuel obligations 364 90 28 Allowance for borrowed funds used during construction (1,005) (464) (294) Other interest expense 1,422 1,959 1,789 -------- -------- --------- Net interest charges 19,432 20,853 20,778 -------- -------- --------- INCOME BEFORE EXTRAORDINARY ITEM 22,847 12,648 39,748 EXTRAORDINARY ITEM (NET OF INCOME TAXES) (Note 1) -- -- (30,522) -------- -------- --------- NET INCOME 22,847 12,648 9,226 PREFERRED STOCK DIVIDEND REQUIREMENTS 3,704 4,370 4,626 -------- -------- -------- EARNINGS ON COMMON STOCK $ 19,143 $ 8,278 $ 4,600 ======== ======== ======== The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY BALANCE SHEETS
As of December 31, 2000 1999 ----------------------------------------------------------------------------------------- (In thousands) ASSETS UTILITY PLANT: In service $ 636,418 $ 646,186 Less-Accumulated provision for depreciation 275,699 237,893 ---------- ---------- 360,719 408,293 ---------- ---------- Construction work in progress- Electric plant 20,800 18,558 Nuclear fuel 2,810 6,540 ---------- ---------- 23,610 25,098 ---------- ---------- 384,329 433,391 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Nuclear plant decommissioning trusts (Note 1) 117,453 104,775 Long-term notes receivable from associated companies 33,581 -- Other 21,279 19,784 ---------- ---------- 172,313 124,559 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 3,475 5,670 Notes receivable from associated companies (Note 4) 41,264 15,423 Receivables- Customers (less accumulated provisions of $628,000 and $3,537,000, respectively, for uncollectible accounts) 40,980 34,568 Associated companies 40,685 38,565 Other 8,848 8,896 Materials and supplies, at average cost 29,595 32,483 Prepayments 2,044 2,208 ---------- ---------- 166,891 137,813 ---------- ---------- DEFERRED CHARGES: Regulatory assets 260,221 314,593 Other 5,155 5,260 ---------- ---------- 265,376 319,853 ---------- ---------- $ 988,909 $1,015,616 ========== ========== CAPITALIZATION AND LIABILITIES CAPITALIZATION (See Statements of Capitalization): Common stockholder's equity $ 213,851 $ 199,608 Preferred stock- Not subject to mandatory redemption 39,105 39,105 Subject to mandatory redemption 15,000 15,000 Long-term debt- Associated companies 18,135 18,007 Other 252,233 256,814 ---------- ---------- 538,324 528,534 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt- Associated companies 16,620 13,504 Other 1,036 29,521 Accounts payable- Associated companies 42,293 26,220 Other 21,165 28,903 Accrued taxes 19,250 21,863 Accrued interest 5,972 6,592 Other 16,228 16,506 ---------- ---------- 122,564 143,109 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 160,632 182,702 Accumulated deferred investment tax credits 4,407 7,266 Nuclear plant decommissioning costs 117,915 107,816 Other 45,067 46,189 ---------- ---------- 328,021 343,973 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Notes 2 and 5) ---------- ---------- $ 988,909 $1,015,616 ========== ========== The accompanying Notes to Financial Statements are an integral part of these balance sheets.
PENNSYLVANIA POWER COMPANY STATEMENTS OF CAPITALIZATION
As of December 31, 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) COMMON STOCKHOLDER'S EQUITY: Common stock, $30 par value, 6,500,000 shares authorized, 6,290,000 shares outstanding $188,700 $188,700 Other paid-in capital (310) (310) Retained earnings (Note 3A) 25,461 11,218 -------- -------- Total common stockholder's equity 213,851 199,608 -------- -------- Number of Shares Optional Outstanding Redemption Price ---------------- ------------------- 2000 1999 Per Share Aggregate ---- ---- --------- --------- PREFERRED STOCK (Note 3B): Cumulative, $100 par value- Authorized 1,200,000 shares Not Subject to Mandatory Redemption: 4.24% 40,000 40,000 $103.13 $ 4,125 4,000 4,000 4.25% 41,049 41,049 105.00 4,310 4,105 4,105 4.64% 60,000 60,000 102.98 6,179 6,000 6,000 7.75% 250,000 250,000 -- -- 25,000 25,000 ------- ------- ------- -------- -------- Total not subject to mandatory redemption 391,049 391,049 $14,614 39,105 39,105 ======= ======= ======= -------- -------- Subject to Mandatory Redemption (Note 3C): 7.625% 150,000 150,000 105.34 $15,801 15,000 15,000 ======= ======= ======= -------- -------- LONG-TERM DEBT (Note 3D): First mortgage bonds- 9.740% due 2001-2019 18,539 19,513 7.500% due 2003 40,000 40,000 6.375% due 2004 20,500 20,500 6.625% due 2004 14,000 14,000 8.500% due 2022 27,250 27,250 7.625% due 2023 6,500 6,500 -------- -------- Total first mortgage bonds 126,789 127,763 -------- -------- Secured notes- 6.080% due 2000 -- 23,000 8.100% due 2000 -- 5,200 5.400% due 2013 1,000 1,000 5.400% due 2017 10,600 10,600 7.150% due 2017 17,925 17,925 5.900% due 2018 16,800 16,800 7.150% due 2021 14,482 14,482 6.150% due 2023 12,700 12,700 * 5.050% due 2027 10,300 10,300 6.450% due 2027 14,500 14,500 5.375% due 2028 1,734 1,734 5.450% due 2028 6,950 6,950 6.000% due 2028 14,250 14,250 5.950% due 2029 238 238 -------- -------- Total secured notes 121,479 149,679 -------- -------- Unsecured notes- * 5.900% due 2033 5,200 5,200 -------- -------- Other obligations- Nuclear fuel 34,756 31,511 Capital leases (Note 2) 170 4,160 -------- -------- Total other obligations 34,926 35,671 -------- -------- Net unamortized discount on debt (370) (467) -------- -------- Long-term debt due within one year (17,656) (43,025) -------- -------- Total long-term debt 270,368 274,821 -------- -------- TOTAL CAPITALIZATION $538,324 $528,534 ======== ======== *Denotes variable rate issue with December 31, 2000 interest rate shown. The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY STATEMENTS OF COMMON STOCKHOLDER'S EQUITY
Accumulated Other Other Comprehensive Comprehensive Number Par Paid-In Income Retained Income of Shares Value Capital (Loss) Earnings ------------- --------- ------- ------- ------------ -------- (Dollars in thousands) Balance, January 1, 1998 6,290,000 $188,700 $(310) $(90) $103,677 Net income $ 9,226 9,226 Transfer of minimum liability for unfunded retirement benefits to FirstEnergy 90 90 ------- Comprehensive income $ 9,316 ======= Cash dividends on common stock (21,386) Cash dividends on preferred stock (4,626) -------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 6,290,000 188,700 (310) -- 86,891 Net income $12,648 12,648 ======= Transfer of Penn Power Energy to FirstEnergy Services Corp. 3,302 Cash dividends on common stock (87,362) Cash dividends on preferred stock (4,056) Premium on redemption of preferred stock (205) -------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 6,290,000 188,700 (310) -- 11,218 Net income $22,847 22,847 ======= Cash dividends on common stock (4,900) Cash dividends on preferred stock (3,704) -------------------------------------------------------------------------------------------------------------------- Balance, December 31, 2000 6,290,000 $188,700 $(310) $ -- $ 25,461 ======================================================================================================================
STATEMENTS OF PREFERRED STOCK
Not Subject to Subject to Mandatory Redemption Mandatory Redemption -------------------- ---------------------- Number Par Number Par of Shares Value of Shares Value --------- ----- --------- ----- (Dollars in thousands) Balance, January 1, 1998 509,049 $50,905 150,000 $15,000 ------------------------------------------------------------------------------------------------------ Balance, December 31, 1998 509,049 50,905 150,000 15,000 ------------------------------------------------------------------------------------------------------ Redemptions- 7.64% Series (60,000) (6,000) 8.00% Series (58,000) (5,800) ------------------------------------------------------------------------------------------------------ Balance, December 31, 1999 391,049 39,105 150,000 15,000 ------------------------------------------------------------------------------------------------------ Balance, December 31, 2000 391,049 $39,105 150,000 $15,000 ====================================================================================================== The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2000 1999 1998 ----------------------------------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 22,847 $ 12,648 $ 9,226 Adjustments to reconcile net income to net cash from operating activities: Provision for depreciation and amortization 55,964 62,182 59,264 Nuclear fuel and lease amortization 18,248 8,423 5,418 Other amortization, net -- -- (330) Deferred income taxes, net (8,620) (16,207) (20,007) Investment tax credits, net (3,051) (3,111) (2,289) Extraordinary item -- -- 51,730 Receivables (8,484) (390) (20,680) Materials and supplies 2,888 389 (542) Accounts payable 8,335 22,291 3,293 Other (9,651) 15,899 3,148 -------- -------- -------- Net cash provided from operating activities 78,476 102,124 88,231 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt -- 5,200 1,563 Redemptions and Repayments- Preferred stock -- 12,005 -- Long-term debt 47,796 8,675 6,088 Dividend Payments- Common stock 4,900 87,362 21,386 Preferred stock 3,704 4,055 4,626 -------- -------- ------- Net cash used for financing activities 56,400 106,897 30,537 -------- -------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 29,856 21,964 16,495 Loans to associated companies 59,421 -- 32,500 Loan payment from parent -- (34,577) -- Sale of assets to associated companies (67,472) -- -- Other 2,466 9,655 1,874 -------- -------- ------- Net cash used for (provided from) investing activities 24,271 (2,958) 50,869 -------- -------- ------- Net increase (decrease) in cash and cash equivalents (2,195) (1,815) 6,825 Cash and cash equivalents at beginning of year 5,670 7,485 660 -------- -------- ------- Cash and cash equivalents at end of year $ 3,475 $ 5,670 $ 7,485 ======== ======== ======= SUPPLEMENTAL CASH FLOWS INFORMATION: Cash paid during the year- Interest (net of amounts capitalized) $ 18,804 $ 19,436 $19,057 ======== ======== ======= Income taxes $ 39,704 $ 33,786 $32,290 ======== ======== ======= The accompanying Notes to Financial Statements are an integral part of these statements.
PENNSYLVANIA POWER COMPANY STATEMENTS OF TAXES
For the Years Ended December 31, 2000 1999 1998 ------------------------------------------------------------------------------------------------------ (In thousands) GENERAL TAXES: State gross receipts $ 14,264 $ 13,466 $ 10,830 Real and personal property 4,012 8,626 6,893 State capital stock 1,598 3,067 2,774 Social security and unemployment 2,137 2,875 1,894 Other 65 76 149 -------- -------- -------- Total general taxes $ 22,076 $ 28,110 $ 22,540 ======== ======== ======== PROVISION FOR INCOME TAXES: Currently payable- Federal $ 26,712 $ 29,522 $ 25,938 State 11,080 8,630 7,654 -------- -------- -------- 37,792 38,152 33,592 -------- -------- -------- Deferred, net- Federal (4,273) (12,714) (15,454) State (4,347) (3,493) (4,553) -------- -------- -------- (8,620) (16,207) (20,007) -------- -------- -------- Investment tax credit amortization (3,051) (3,111) (2,289) -------- -------- -------- Total provision for income taxes $ 26,121 $ 18,834 $ 11,296 ======== ======== ======== INCOME STATEMENT CLASSIFICATION OF PROVISION FOR INCOME TAXES: Operating expenses $ 24,874 $ 17,757 $ 31,794 Other income 1,247 1,077 710 Extraordinary item -- -- (21,208) -------- -------- -------- Total provision for income taxes $ 26,121 $ 18,834 $ 11,296 ======== ======== ======== RECONCILIATION OF FEDERAL INCOME TAX EXPENSE AT STATUTORY RATE TO TOTAL PROVISION FOR INCOME TAXES: Book income before provision for income taxes $ 48,968 $ 31,482 $ 20,522 ======== ======== ======== Federal income tax expense at statutory rate $ 17,139 $ 11,019 $ 7,183 Increases (reductions) in taxes resulting from: State income taxes, net of federal income tax benefit 4,376 3,339 2,016 Amortization of investment tax credits (3,051) (3,111) (2,289) Amortization of tax regulatory assets 6,899 7,059 4,745 Other, net 758 528 (359) -------- -------- -------- Total provision for income taxes $ 26,121 $ 18,834 $ 11,296 ======== ======== ======== ACCUMULATED DEFERRED INCOME TAXES AT DECEMBER 31: Competitive transition charge $ 95,497 $115,277 $135,730 Property basis differences 64,348 73,694 69,867 Allowance for equity funds used during construction 4,163 5,688 7,219 Customer receivables for future income taxes 7,016 8,354 9,690 Unamortized investment tax credits (1,823) (2,987) (3,193) Deferred gain for asset sale to affiliated company 8,925 -- -- Other (17,494) (17,324) (6,886) -------- -------- -------- Net deferred income tax liability $160,632 $182,702 $212,427 ======== ======== ======== The accompanying Notes to Financial Statements are an integral part of these statements.
NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The Company, a wholly owned subsidiary of Ohio Edison Company (Edison), follows the accounting policies and practices prescribed by the Pennsylvania Public Utility Commission (PPUC) and the Federal Energy Regulatory Commission (FERC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Results of operations for 1999 include Penn and its wholly owned subsidiary, Penn Power Energy, Inc. (PPE). The subsidiary was formed to market energy products and services coincident with the commencement of electricity generation customer choice and competition in Pennsylvania in January 1999. All significant intercompany transactions have been eliminated. The Company transferred its 100% ownership in PPE to FirstEnergy Services Corp., an affiliate, effective December 31, 1999. On September 1, 2000, the Company sold its transmission assets to an affiliate, American Transmission Systems, Inc. (ATSI). As a result, ATSI owns and operates the Company's and its affiliates' major high-voltage transmission facilities and has interconnections with other regional utilities. REVENUES- The Company's principal business is providing electric service to customers in western Pennsylvania. The Company's retail customers are metered on a cycle basis. Revenue is recognized for unbilled electric service through the end of the year. Receivables from customers include sales to residential, commercial and industrial customers located in the Company's service area and sales to wholesale customers. There was no material concentration of receivables at December 31, 2000 or 1999, with respect to any particular segment of the Company's customers. REGULATORY PLAN- In December 1996, Pennsylvania enacted "The Electricity Generation Customer Choice and Competition Act," which permitted customers, including the Company's customers, to choose their electric generation supplier, while transmission and distribution services would continue to be supplied by their current providers. The phase in of customer choice was completed on January 1, 2001. The Company continues to deliver power to homes and businesses through its distribution system, which remains regulated by the PPUC. The Company's rates have been restructured to establish separate charges for transmission and distribution; generation, which is subject to competition; and stranded cost recovery. In the event customers obtain power from an alternative source, the generation portion of the Company's rates is excluded from their bill and the customers receive a generation charge from the alternative supplier. The stranded cost recovery portion of rates provides for recovery of certain amounts not otherwise considered recoverable in a competitive generation market, including regulatory assets. In June 1998, the PPUC authorized the Company's rate restructuring plan, which essentially resulted in the deregulation of the Company's generation business as of June 30, 1998. The Company was required to remove from its balance sheet all regulatory assets and liabilities related to its generation business and assess all other assets for impairment. The Securities and Exchange Commission (SEC) issued interpretive guidance regarding asset impairment measurement which concluded that any supplemental regulated cash flows such as a competitive transition charge (CTC) should be excluded from the cash flows of assets in a portion of the business not subject to regulatory accounting practices. If those assets are impaired, a regulatory asset should be established if the costs are recoverable through regulatory cash flows. Consistent with the SEC guidance, the Company reduced its nuclear generating unit investments by approximately $305 million, of which approximately $227 million was recognized as a regulatory asset to be recovered through the CTC over a seven-year transition period; the remaining net amount of $78 million was written off. The charge of $51.7 million ($30.5 million after income taxes) for discontinuing the application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71), to the Company's generation business was recorded as a 1998 extraordinary item on the Statement of Income. The Company is entitled to recover $236 million of stranded costs through the CTC that began in 1999 and ends in 2006. The Company's net assets included in utility plant relating to the operations for which the application of SFAS 71 was discontinued were $92 million as of December 31, 2000. All of the Company's regulatory assets continue to be recovered under provisions of the rate restructuring plan. UTILITY PLANT AND DEPRECIATION- Utility plant reflects the original cost of construction (except for nuclear generating units which were adjusted to fair value as discussed above), including payroll and related costs such as taxes, employee benefits, administrative and general costs, and interest costs. The Company provides for depreciation on a straight-line basis at various rates over the estimated lives of property included in plant in service. The annual composite rate for electric plant was approximately 2.6% in 2000, 2.5% in 1999 and 3.0% in 1998. In addition to the straight-line depreciation recognized in 2000, 1999 and 1998, the Company also recognized additional cumulative capital recovery of $143 million, as of December 31, 2000, as additional depreciation expense in accordance with its former regulatory plan. Annual depreciation expense includes approximately $1.6 million for future decommissioning costs applicable to the Company's ownership interest in three nuclear generating units. The Company's future decommissioning costs reflect the 1999 increase in its ownership interests related to the exchange of certain generating assets with Duquesne Light Company (Duquesne). The Company's share of the future obligation to decommission these units is approximately $315 million in current dollars and (using a 4.0% escalation rate) approximately $695 million in future dollars. The estimated obligation and the escalation rate were developed based on site specific studies. Payments for decommissioning are expected to begin in 2016, when actual decommissioning work begins. The Company has recovered approximately $14 million for decommissioning through its electric rates from customers through December 31, 2000. The Company has also recognized an estimated liability of approximately $7.5 million related to decontamination and decommissioning of nuclear enrichment facilities operated by the United States Department of Energy, as required by the Energy Policy Act of 1992. The Financial Accounting Standards Board (FASB) issued a proposed accounting standard for nuclear decommissioning costs in 1996. If the standard is adopted as proposed: (1) annual provisions for decommissioning could change; (2) the net present value of estimated decommissioning costs could be recorded as a liability; and (3) income from the external decommissioning trusts could be reported as investment income. The FASB subsequently expanded the scope of the proposed standard to include other closure and removal obligations related to long-lived assets. A final pronouncement is expected in the second quarter of 2001 and is anticipated to be implemented on January 1, 2002. COMMON OWNERSHIP OF GENERATING FACILITIES- The Company, together with Edison and affiliated companies, The Cleveland Electric Illuminating Company (CEI) and The Toledo Edison Company (TE), own, as tenants in common, various power generating facilities. Each of the companies is obligated to pay a share of the costs associated with any jointly owned facility in the same proportion as its interest. The Company's portion of operating expenses associated with jointly owned facilities is included in the corresponding operating expenses on the Statements of Income. The amounts reflected on the Balance Sheet under utility plant at December 31, 2000 include the following: Utility Accumulated Construction Company's Plant in Provision for Work in Ownership Generating Units Service Depreciation Progress Interest -------------------------------------------------------------------------- (In millions) W. H. Sammis #7 $ 67.0 $ 24.6 $ 0.1 20.80% Bruce Mansfield #1, #2 and #3 182.3 110.4 -- 16.38% Beaver Valley #1 and #2 36.3 9.9 7.9 39.37% Perry #1 1.8 0.7 1.6 5.24% ------------------------------------------------------------------------- Total $287.4 $145.6 $9.6 ========================================================================= NUCLEAR FUEL- OES Fuel, Incorporated (OES Fuel), a wholly owned subsidiary of Edison, is the sole lessor for the Company's nuclear fuel requirements. Minimum lease payments during the next five years are estimated to be as follows: (In millions) ------------------------- 2001 $18.9 2002 12.8 2003 4.7 2004 1.7 2005 0.2 ------------------------ The Company amortizes the cost of nuclear fuel based on the rate of consumption. INCOME TAXES- Details of the total provision for income taxes are shown on the Statements of Taxes. Deferred income taxes result from timing differences in the recognition of revenues and expenses for tax and accounting purposes. Investment tax credits, which were deferred when utilized, are being amortized over the recovery period of the related property. The liability method is used to account for deferred income taxes. Deferred income tax liabilities related to tax and accounting basis differences are recognized at the statutory income tax rates in effect when the liabilities are expected to be paid. The Company is included in Edison's parent's, FirstEnergy Corp. (FirstEnergy) consolidated federal income tax return. The consolidated tax liability is allocated on a "stand-alone" company basis, with the Company recognizing any tax losses or credits it contributed to the consolidated return. RETIREMENT BENEFITS- FirstEnergy's trusteed, noncontributory defined benefit pension plan covers almost all of the Company's full-time employees. Upon retirement, employees receive a monthly pension based on length of service and compensation. The Company uses the projected unit credit method for funding purposes and was not required to make pension contributions during the three years ended December 31, 2000. The assets of the FirstEnergy pension plan consist primarily of common stocks, United States government bonds and corporate bonds. The Company provides a minimum amount of noncontributory life insurance to retired employees in addition to optional contributory insurance. Health care benefits, which include certain employee deductibles and copayments, are also available to retired employees, their dependents and, under certain circumstances, their survivors. The Company pays insurance premiums to cover a portion of these benefits in excess of set limits; all amounts up to the limits are paid by the Company. The Company recognizes the expected cost of providing other postretirement benefits to employees and their beneficiaries and covered dependents from the time employees are hired until they become eligible to receive those benefits. The following sets forth the funded status of the plans and amounts recognized on FirstEnergy's Consolidated Balance Sheets as of December 31:
Other Pension Benefits Postretirement Benefits -------------------- ---------------------- 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------- (In millions) Change in benefit obligation: Benefit obligation as of January 1 $1,394.1 $1,500.1 $ 608.4 $ 601.3 Service cost 27.4 28.3 11.3 9.3 Interest cost 104.8 102.0 45.7 40.7 Plan amendments 41.3 -- -- -- Actuarial loss (gain) 17.3 (155.6) 121.7 (17.6) Net increase from asset swap -- 14.8 -- 12.5 Voluntary early retirement program expense 23.4 -- -- -- Benefits paid (102.2) (95.5) (35.1) (37.8) --------------------------------------------------------------------------------------------------------- Benefit obligation as of December 31 1,506.1 1,394.1 752.0 608.4 --------------------------------------------------------------------------------------------------------- Change in plan assets: Fair value of plan assets as of January 1 1,807.5 1,683.0 4.9 3.9 Actual return on plan assets 0.7 220.0 (0.2) 0.6 Company contribution -- -- 18.3 0.4 Benefits paid (102.2) (95.5) -- -- ---------------------------------------------------------------------------------------------------------- Fair value of plan assets as of December 31 1,706.0 1,807.5 23.0 4.9 ---------------------------------------------------------------------------------------------------------- Funded status of plan 199.9 413.4 (729.0) (603.5) Unrecognized actuarial loss (gain) (90.9) (303.5) 147.3 24.9 Unrecognized prior service cost 93.1 57.3 20.9 24.1 Unrecognized net transition obligation (asset) (2.1) (10.1) 110.9 120.1 ---------------------------------------------------------------------------------------------------------- Prepaid (accrued) benefit cost $ 200.0 $ 157.1 $(449.9) $(434.4) =========================================================================================================== Company's share of prepaid (accrued) benefit cost $ 21.1 $ 13.8 $ (35.1) $ (31.7) =========================================================================================================== Assumptions used as of December 31: Discount rate 7.75% 7.75% 7.75% 7.75% Expected long-term return on plan assets 10.25% 10.25% 10.25% 10.25% Rate of compensation increase 4.00% 4.00% 4.00% 4.00%
FirstEnergy's net pension and other postretirement benefit costs for the three years ended December 31, 2000 were computed as follows:
Other Pension Benefits Postretirement Benefits ------------------------ ------------------------ 2000 1999 1998 2000 1999 1998 ------------------------------------------------------------------------------------------------------------ (In millions) Service cost $ 27.4 $ 28.3 $ 25.0 $11.3 $ 9.3 $ 7.5 Interest cost 104.8 102.0 92.5 45.7 40.7 37.6 Expected return on plan assets (181.0) (168.1) (152.7) (0.5) (0.4) (0.3) Amortization of transition obligation (asset) (7.9) (7.9) (8.0) 9.2 9.2 9.2 Amortization of prior service cost 5.7 5.7 2.3 3.2 3.3 (0.8) Recognized net actuarial loss (gain) (9.1) -- (2.6) -- -- -- Voluntary early retirement program expense 17.2 -- -- -- -- -- ------------------------------------------------------------------------------------------------------------ Net benefit cost $ (42.9) $(40.0) $(43.5) $68.9 $62.1 $53.2 ============================================================================================================== Company's share of total plan costs $ (3.6) $ (4.8) $ (6.1) $ 7.5 $ 7.5 $ 5.4 -------------------------------------------------------------------------------------------------------------
The FirstEnergy plan's health care trend rate assumption is 7.2% in 2001, 7.0% in 2002 and 6.5% in 2003, trending to 5.0%-5.5% in later years. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. An increase in the health care trend rate assumption by one percentage point would increase the total service and interest cost components by $7.5 million and the postretirement benefit obligation by $94.4 million. A decrease in the same assumption by one percentage point would decrease the total service and interest cost components by $8.5 million and the postretirement benefit obligation by $111.0 million. TRANSACTIONS WITH AFFILIATED COMPANIES- Operating revenues and operating expenses include transactions with Edison, CEI, TE and ATSI. Operating revenue transactions with affiliates were primarily for electric sales of $57.6 million, $12.6 million and $9.8 million in 2000, 1999 and 1998, respectively; Bruce Mansfield Plant administrative and general charges of $2.9 million, $5.3 million and $6.3 million in 2000, 1999 and 1998, respectively; and ground lease revenues of $0.7 million to ATSI which began in 2000. Operating expense transactions with affiliates were primarily for nuclear fuel leased from OES Fuel of $20.3 million, $8.8 million and $5.9 million in 2000, 1999 and 1998, respectively; purchased power of $7.1 million, $12.9 million and $20.9 million in 2000, 1999 and 1998, respectively; transmission facilities rentals (including ATSI rents which began in 2000) of $5.7 million, $1.3 million and $1.3 million in 2000, 1999 and 1998, respectively; and nuclear operations administrative and general charges of $15.0 million, $2.1 million and $1.5 million in 2000, 1999 and 1998, respectively. The increase in 2000 nuclear administrative and general charges reflects the Company's increased nuclear assets ownership due to the Duquesne asset swap described in "Utility Plant and Depreciation." FirstEnergy provides support services at cost to the Company and other affiliated companies, for which the Company was billed $27.4 million, $28.3 million and $9.5 million in 2000, 1999 and 1998, respectively. SUPPLEMENTAL CASH FLOWS INFORMATION- All temporary cash investments purchased with an initial maturity of three months or less are reported as cash equivalents on the Balance Sheets. As of December 31, 1999, cash and cash equivalents included $5 million used for the redemption of long-term debt in the first quarter of 2000. The Company reflects temporary cash investments at cost, which approximates their market value. Noncash financing and investing activities included capital lease transactions amounting to $21.2 million, $27.1 million and $0.8 million for the years 2000, 1999 and 1998, respectively. All borrowings with initial maturities of less than one year are defined as financial instruments under GAAP and are reported on the Balance Sheets at cost, which approximates their fair market value. The following sets forth the approximate fair value and related carrying amounts of all other long-term debt, preferred stock subject to mandatory redemption and investments other than cash and cash equivalents as of December 31: 2000 1999 ----------------------------------------------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------------------------------------------------------------ (In millions) Long-term debt $253 $263 $283 $279 Preferred stock 15 15 15 14 Investments other than cash and cash equivalents 155 153 108 116 ------------------------------------------------------------------ The fair values of long-term debt and preferred stock reflect the present value of the cash outflows relating to those securities based on the current call price, the yield to maturity or the yield to call, as deemed appropriate at the end of each respective year. The yields assumed were based on securities with similar characteristics offered by a corporation with credit ratings similar to the Company's ratings. The fair value of investments other than cash and cash equivalents represent cost (which approximates fair value) or the present value of the cash inflows based on the yield to maturity. The yields assumed were based on financial instruments with similar characteristics and terms. Investments other than cash and cash equivalents consist primarily of decommissioning trust investments. Unrealized gains and losses applicable to the decommissioning trusts have been recognized in the trust investment with a corresponding change to the decommissioning liability. The Company has no securities held for trading purposes. REGULATORY ASSETS- The Company recognizes, as regulatory assets, costs which the FERC and PPUC have authorized for recovery from customers in future periods. Without such authorization, the costs would have been charged to income as incurred. All regulatory assets are being recovered from customers under the Company's rate restructuring plan. Based on the rate restructuring plan, the Company continues to bill and collect cost-based rates relating to the Company's nongeneration operations and continues the application of SFAS 71 to these operations. Regulatory assets on the Balance Sheets are comprised of the following: 2000 1999 -------------------------------------------------------------------- (In millions) Competitive transition charge $230.9 $280.4 Customer receivables for future income taxes 17.0 20.3 Loss on reacquired debt 6.4 7.1 Employee postretirement benefit costs 4.5 5.4 Other 1.4 1.4 -------------------------------------------------------------------- Total $260.2 $314.6 ==================================================================== 2. LEASES The Company leases office space and other property and equipment under cancelable and noncancelable leases. Consistent with the regulatory treatment, the rentals for capital and operating leases are charged to operating expenses on the Statements of Income. Such costs for the three years ended December 31, 2000, are summarized as follows: 2000 1999 1998 ------------------------------------------------------------------ (In millions) Operating leases Interest element $0.4 $0.6 $0.5 Other 0.3 1.6 1.3 Capital leases Interest element 0.3 0.6 0.6 Other 0.8 0.5 0.7 ------------------------------------------------------------------ Total rental payments $1.8 $3.3 $3.1 ================================================================== The future minimum lease payments as of December 31, 2000, are: Capital Operating Leases Leases ------------------------------------------------------------------ (In millions) 2001 $0.1 $0.1 2002 0.2 0.1 2003 0.1 0.1 2004 -- 0.1 2005 -- 0.1 Years thereafter -- 0.8 -------------------------------------------------------------- Total minimum lease payments 0.4 $1.3 Executory costs 0.2 ==== ------------------------------------------- Net minimum lease payments 0.2 Interest portion -- ------------------------------------------- Present value of net minimum lease payments 0.2 Less current portion 0.1 ------------------------------------------- Noncurrent portion $0.1 =========================================== 3. CAPITALIZATION (A) RETAINED EARNINGS- Under the Company's Charter, the Company's retained earnings unrestricted for payment of cash dividends on the Company's common stock were $18.3 million as of December 31, 2000. (B) PREFERRED STOCK- The Company's 7.75% series of preferred stock has a restriction which prevents early redemption prior to July 2003. All other preferred stock may be redeemed by the Company in whole, or in part, with 30-60 days' notice. (C) PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION- The Company's 7.625% series has an annual sinking fund requirement for 7,500 shares beginning on October 1, 2002. (D) LONG-TERM DEBT- The first mortgage indenture and its supplements, which secure all of the Company's first mortgage bonds, serve as a direct first mortgage lien on substantially all property and franchises, other than specifically excepted property, owned by the Company. Based on the amount of bonds authenticated by the Trustee through December 31, 2000, the Company's annual sinking and improvement fund requirements for all bonds issued under the mortgage amounts to $1.0 million. The Company expects to deposit funds in 2001 that will be withdrawn upon the surrender for cancellation of a like principal amount of bonds, which are specifically authenticated for such purposes against unfunded property additions or against previously retired bonds. This method can result in minor increases in the amount of the annual sinking fund requirement. Sinking fund requirements for first mortgage bonds and maturing long-term debt (excluding capital leases) during the next five years are $1.0 million in 2001, $1.0 million in 2002, $41.0 million in 2003, $40.7 million in 2004 and $1.0 million in 2005. The Company's obligations to repay certain pollution control revenue bonds are secured by a series of first mortgage bonds. The $10.3 million pollution control revenue bond is entitled to the benefit of irrevocable bank letters of credit of $10.4 million. To the extent that drawings are made under the letters of credit to pay principal of, or interest on, the pollution control revenue bond, the Company is entitled to a credit against its obligation to repay this bond. The Company pays an annual fee of 1.25% of the amount of the letters of credit to the issuing bank and is obligated to reimburse the bank for any drawings thereunder. 4. SHORT-TERM BORROWINGS: The Company has a credit agreement with Edison whereby either company can borrow funds from the other by issuing unsecured notes at the prevailing prime or similar interest rate. Under the terms of this agreement, the maximum borrowing is limited only by the availability of funds; however, the Company's borrowing under this agreement is currently limited by the PPUC to a total of $50 million. Either company can terminate the agreement with six months' notice. 5. COMMITMENTS AND CONTINGENCIES: CAPITAL EXPENDITURES- The Company's current forecast reflects expenditures of approximately $153 million for property additions and improvements from 2001-2005, of which approximately $28 million is applicable to 2001. Investments for additional nuclear fuel during the 2001-2005 period are estimated to be approximately $81 million, of which approximately $22 million applies to 2001. During the same periods, the Company's nuclear fuel investments are expected to be reduced by approximately $91 million and $18 million, respectively, as the nuclear fuel is consumed. NUCLEAR INSURANCE- The Price-Anderson Act limits the public liability relative to a single incident at a nuclear power plant to $9.5 billion. The amount is covered by a combination of private insurance and an industry retrospective rating plan. Based on its ownership interests in the Beaver Valley Station and the Perry Plant, the Company's maximum potential assessment under the industry retrospective rating plan (assuming the other affiliate co-owners contribute their proportionate shares of any assessments under the retrospective rating plan) would be $74 million per incident but not more than $8.4 million in any one year for each incident. The Company is also insured as to its interest in Beaver Valley and Perry under policies issued to the operating company for each plant. Under these policies, up to $2.75 billion is provided for property damage and decontamination and decommissioning costs. The Company has also obtained approximately $148 million of insurance coverage for replacement power costs for its interests in Beaver Valley and Perry. Under these policies, the Company can be assessed a maximum of approximately $7.4 million for incidents at any covered nuclear facility occurring during a policy year which are in excess of accumulated funds available to the insurer for paying losses. The Company intends to maintain insurance against nuclear risks as described above as long as it is available. To the extent that replacement power, property damage, decontamination, decommissioning, repair and replacement costs and other such costs arising from a nuclear incident at any of the Company's plants exceed the policy limits of the insurance in effect with respect to that plant, to the extent a nuclear incident is determined not to be covered by the Company's insurance policies, or to the extent such insurance becomes unavailable in the future, the Company would remain at risk for such costs. ENVIRONMENTAL MATTERS- Various federal, state and local authorities regulate the Company with regard to air and water quality and other environmental matters. Generation operations and any related additional capital expenditures for environmental compliance are the responsibility of FirstEnergy's competitive services business unit. The Company is required to meet federally approved sulfur dioxide (SO2) regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day the unit is in violation. The Environmental Protection Agency (EPA) has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Company cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. The Company is in compliance with the current SO2 and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions are being achieved by burning lower-sulfur fuel, generating more electricity from lower-emitting plants, and/or using emission allowances. NOx reductions are being achieved through combustion controls and the generation of more electricity at lower-emitting plants. In September 1998, the EPA finalized regulations requiring additional NOx reductions from the Company's Pennsylvania facilities. The EPA's NOx Transport Rule imposes uniform reductions of NOx emissions (an approximate 85% reduction in utility plant NOx emissions from projected 2007 emissions) across a region of twenty-two states and the District of Columbia, including Ohio and Pennsylvania, based on a conclusion that such NOx emissions are contributing significantly to ozone pollution in the eastern United States. In March 2000, the U.S. Court of Appeals for the D.C. Circuit upheld EPA's NOx Transport Rule except as applied to the State of Wisconsin and portions of Georgia and Missouri. By October 2000, states were to submit revised State Implementation Plans (SIP) to comply by May 31, 2004 with individual state NOx budgets established by the EPA. Pennsylvania recently submitted a SIP that requires compliance with the NOx budgets at the Company's Pennsylvania facilities by May 1, 2003. A Federal Implementation Plan accompanied the NOx Transport Rule and may be implemented by the EPA in states which fail to revise their SIP. In another separate but related action, eight states filed petitions with the EPA under Section 126 of the Clean Air Act seeking reductions of NOx emissions which are alleged to contribute to ozone pollution in the eight petitioning states. The EPA position is that the Section 126 petitions will be adequately addressed by the NOx Transport Program, but a December 17, 1999 rulemaking established an alternative program which would require nearly identical 85% NOx reductions at 392 utility plants, including the Company's Ohio and Pennsylvania plants, by May 2003, in the event implementation of the NOx Transport Rule is not implemented by a state. Additional Section 126 petitions were filed by New Jersey, Maryland, Delaware and the District of Columbia in mid-1999 and are still under evaluation by the EPA. FirstEnergy continues to evaluate its compliance plans and other compliance options. In July 1997, the EPA promulgated changes in the National Ambient Air Quality Standard (NAAQS) for ozone emissions and proposed a new NAAQS for previously unregulated ultra-fine particulate matter. In May 1999, the U.S. Court of Appeals found constitutional and other defects in the new NAAQS rules. In February 2001, the U.S. Supreme Court upheld the new NAAQS rules regulating ultra-fine particulates but found defects in the new NAAQS rules for ozone and decided that the EPA must revise those rules. The future cost of compliance with these regulations may be substantial and will depend on the manner in which they are ultimately implemented, if at all, by the states in which the Company operates affected facilities. In 1999 and 2000, the EPA issued Notices of Violation (NOV) or a Compliance Order to nine utilities covering 44 power plants, including the W. H. Sammis Plant. In addition, the U.S. Department of Justice filed eight civil complaints against various investor-owned utilities, which included a complaint against the Company and Edison in the U.S. District Court for the Southern District of Ohio. The NOV and complaint allege violations of the Clean Air Act based on operation and maintenance of the Sammis Plant dating back to 1984. The complaint requests permanent injunctive relief to require the installation of "best available control technology" and civil penalties of up to $27,500 per day of violation. Although unable to predict the outcome of these proceedings, the Company and Edison believe the Sammis Plant is in full compliance with the Clean Air Act and the NOV and complaint are without merit. Penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. The Sammis Plant continues to operate while these proceedings are pending. In December 2000, the EPA announced it would proceed with the development of regulations regarding hazardous air pollutants from electric power plants. The EPA identified mercury as the hazardous air pollutant of greatest concern. The EPA established a schedule to propose regulations by December 2003 and issue final regulations by December 2004. The future cost of compliance with these regulations may be substantial. As a result of the Resource Conservation and Recovery Act of 1976, as amended, and the Toxic Substances Control Act of 1976, federal and state hazardous waste regulations have been promulgated. Certain fossil-fuel combustion waste products, such as coal ash, were exempted from hazardous waste disposal requirements pending the EPA's evaluation of the need for future regulation. The EPA has issued its final regulatory determination that regulation of coal ash as a hazardous waste is unnecessary. On April 25, 2000, the EPA announced that it will develop national standards regulating disposal of coal ash under its authority to regulate nonhazardous waste. 6. SUMMARY OF QUARTERLY FINANCIAL DATA (UNAUDITED): The following summarizes certain operating results by quarter for 2000 and 1999.
March 31, June 30, September 30, December 31, Three Months Ended 2000 2000 2000 2000 ----------------------------------------------------------------------------------- (In millions) Operating Revenues $ 83.9 $93.6 $102.8 $102.8 Operating Expenses and Taxes 90.3 81.0 83.0 88.9 ----------------------------------------------------------------------------------- Operating Income (Loss) (6.4) 12.6 19.8 13.9 Other Income 0.4 0.4 0.4 1.1 Net Interest Charges 4.4 5.4 5.0 4.6 ----------------------------------------------------------------------------------- Net Income (Loss) $(10.4) $ 7.6 $ 15.2 $ 10.4 =================================================================================== Earnings (Loss) on Common Stock $(11.3) $ 6.7 $ 14.3 $ 9.5 ===================================================================================
March 31, June 30, September 30, December 31, Three Months Ended 1999 1999 1999 1999 ----------------------------------------------------------------------------------- (In millions) Operating Revenues $81.4 $82.1 $82.4 $83.4 Operating Expenses and Taxes 67.1 72.4 73.2 84.5 ---------------------------------------------------------------------------------- Operating Income (Loss) 14.3 9.7 9.2 (1.1) Other Income 1.0 0.3 0.2 -- Net Interest Charges 5.0 5.9 4.9 5.1 ---------------------------------------------------------------------------------- Net Income (Loss) $10.3 $ 4.1 $ 4.5 $(6.2) ================================================================================== Earnings (Loss) on Common Stock $ 9.2 $ 2.9 $ 3.3 $(7.2) ==================================================================================
Report of Independent Public Accountants To the Stockholders and Board of Directors of Pennsylvania Power Company: We have audited the accompanying balance sheets and statements of capitalization of Pennsylvania Power Company (a Pennsylvania corporation and wholly owned subsidiary of Ohio Edison Company) as of December 31, 2000 and 1999, and the related statements of income, common stockholder's equity, preferred stock, cash flows and taxes for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pennsylvania Power Company as of December 31, 2000 and 1999, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Cleveland, Ohio, February 16, 2001. 21 1