10-Q 1 june.txt FORM 10-Q - JUNE 30, 2001 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 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 (724)652-5531 Indicate by check mark whether each of the registrants (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: OUTSTANDING CLASS AS OF August 7, 2001 ----- --------------------- FirstEnergy Corp., $.10 par value 223,981,580 Ohio Edison Company, no 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 and commodity market prices, legislative and regulatory changes (including revised environmental requirements), the availability and cost of capital, inability to accomplish or realize anticipated benefits of strategic goals (including the merger with GPU, Inc.) and other similar factors. TABLE OF CONTENTS Pages Part I. Financial Information Notes to Financial Statements 1-6 FirstEnergy Corp. Consolidated Statements of Income 7 Consolidated Balance Sheets 8-9 Consolidated Statements of Cash Flows 10 Report of Independent Public Accountants 11 Management's Discussion and Analysis of Results of Operations and Financial Condition 12-16 Ohio Edison Company Consolidated Statements of Income 17 Consolidated Balance Sheets 18-19 Consolidated Statements of Cash Flows 20 Report of Independent Public Accountants 21 Management's Discussion and Analysis of Results of Operations and Financial Condition 22-24 The Cleveland Electric Illuminating Company Consolidated Statements of Income 25 Consolidated Balance Sheets 26-27 Consolidated Statements of Cash Flows 28 Report of Independent Public Accountants 29 Management's Discussion and Analysis of Results of Operations and Financial Condition 30-32 The Toledo Edison Company Consolidated Statements of Income 33 Consolidated Balance Sheets 34-35 Consolidated Statements of Cash Flows 36 Report of Independent Public Accountants 37 Management's Discussion and Analysis of Results of Operations and Financial Condition 38-40 Pennsylvania Power Company Statements of Income 41 Balance Sheets 42-43 Statements of Cash Flows 44 Report of Independent Public Accountants 45 Management's Discussion and Analysis of Results of Operations and Financial Condition 46-48 Part II. Other Information PART I. FINANCIAL INFORMATION ------------------------------ FIRSTENERGY CORP. AND SUBSIDIARIES OHIO EDISON COMPANY AND SUBSIDIARIES THE CLEVELAND ELECTRIC ILLUMINATING COMPANY AND SUBSIDIARY THE TOLEDO EDISON COMPANY AND SUBSIDIARY PENNSYLVANIA POWER COMPANY NOTES TO FINANCIAL STATEMENTS (Unaudited) 1 - FINANCIAL STATEMENTS: The principal business of FirstEnergy Corp. (FirstEnergy) is the holding, directly or indirectly, of all of the outstanding common stock of its five principal electric utility operating subsidiaries, Ohio Edison Company (OE), The Cleveland Electric Illuminating Company (CEI), The Toledo Edison Company (TE), Pennsylvania Power Company (Penn) and American Transmission Systems, Inc. (ATSI). These utility subsidiaries are referred to throughout as "Companies." Penn is a wholly owned subsidiary of OE. FirstEnergy's other principal subsidiaries include FirstEnergy Services Corp. (FES); FirstEnergy Facilities Services Group, LLC (FEFSG); MARBEL Energy Corporation and FirstEnergy Nuclear Operating Company (FENOC). FES provides energy-related products and services and has two subsidiaries, Penn Power Energy, Inc., which provides electric generation services and other energy services to Pennsylvania customers and FirstEnergy Generation Corp. (FGCO), which operates the Companies' nonnuclear generating facilities. FENOC operates the Companies' nuclear generating facilities. The condensed unaudited financial statements of FirstEnergy and each of the Companies reflect all normal recurring adjustments that, in the opinion of management, are necessary to fairly present results of operations for the interim periods. These statements should be read in connection with the financial statements and notes included in the combined Annual Report on Form 10-K for the year ended December 31, 2000 for FirstEnergy and the Companies. Significant intercompany transactions have been eliminated. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make periodic estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. The reported results of operations are not indicative of results of operations for any future period. Certain prior year amounts have been reclassified to conform with the current year presentation. 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 AND CONTINGENCIES: CAPITAL EXPENDITURES- FirstEnergy's current forecast reflects expenditures of approximately $2.55 billion (OE-$360 million, CEI-$455 million, TE-$218 million, Penn-$153 million, ATSI-$112 million, FES-$830 million and other subsidiaries -$422 million) for property additions and improvements from 2001-2005, of which approximately $640 million (OE-$65 million, CEI-$82 million, TE-$51 million, Penn-$27 million, ATSI-$21 million, FES-$321 million and other subsidiaries-$73 million) is applicable to 2001. Investments for additional nuclear fuel during the 2001-2005 period are estimated to be approximately $415 million (OE-$113 million, CEI-$131 million, TE-$91 million and Penn-$80 million), of which approximately $55 million (OE-$16 million, CEI-$11 million, TE-$8 million and Penn-$20 million) applies to 2001. STOCK REPURCHASE PROGRAM- On November 17, 1998, the Board of Directors authorized the repurchase of up to 15 million shares of FirstEnergy's common stock over a three-year period beginning in 1999. Repurchases are made on the open market, at prevailing prices, and are funded primarily through the use of operating cash flows. During the first six months of 2001, FirstEnergy repurchased and retired 550,000 shares of its common stock at an average price of $27.82 per share. ENVIRONMENTAL MATTERS- Various federal, state and local authorities regulate the Companies with regard to air and water quality and other environmental matters. FirstEnergy estimates additional capital expenditures for environmental compliance of approximately $201 million, which is included in the construction forecast provided under "Capital Expenditures" for 2001 through 2005. The Companies are required to meet federally approved sulfur dioxide (SO2) regulations. Violations of such regulations can result in shutdown of the generating unit involved and/or civil or criminal penalties of up to $27,500 for each day the unit is in violation. The Environmental Protection Agency (EPA) has an interim enforcement policy for SO2 regulations in Ohio that allows for compliance based on a 30-day averaging period. The Companies cannot predict what action the EPA may take in the future with respect to the interim enforcement policy. The Companies are in compliance with the current SO2 and nitrogen oxides (NOx) reduction requirements under the Clean Air Act Amendments of 1990. SO2 reductions are being achieved by burning lower-sulfur fuel, generating more electricity from lower-emitting plants, and/or 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 Companies' Ohio and 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 submitted a SIP that requires compliance with the NOx budgets at the Companies' Pennsylvania facilities by May 1, 2003 and Ohio submitted a "draft" SIP that requires compliance with the NOx budgets at the Companies' Ohio facilities by May 31, 2004. 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 Companies' 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. The Companies continue to evaluate their 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 for the D.C. Circuit found constitutional and other defects in the new NAAQS rules. In February 2001, the U.S. Supreme Court upheld the new NAAQS rules regulating ultra-fine particulates but found defects in the new NAAQS rules for ozone and decided that the EPA must revise those rules. The future cost of compliance with these regulations may be substantial and will depend if and how they are ultimately implemented by the states in which the Companies operate 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 OE and Penn in the U.S. District Court for the Southern District of Ohio. The NOV and complaint allege violations of the Clean Air Act based on operation and maintenance of the Sammis Plant dating back to 1984. The complaint requests permanent injunctive relief to require the installation of "best available control technology" and civil penalties of up to $27,500 per day of violation. Although unable to predict the outcome of these proceedings, FirstEnergy believes the Sammis Plant is in full compliance with the Clean Air Act and the NOV and complaint are without merit. Penalties could be imposed if the Sammis Plant continues to operate without correcting the alleged violations and a court determines that the allegations are valid. 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. 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 $3.2 million and $0.2 million, respectively, as of June 30, 2001, based on estimates of the total costs of cleanup, the proportionate responsibility of other PRPs for such costs and the financial ability of other PRPs to pay. CEI and TE believe that waste disposal costs will not have a material adverse effect on their financial condition, cash flows or results of operations. MERGER AGREEMENT- On August 8, 2000, FirstEnergy and GPU, Inc. (GPU), a Pennsylvania corporation, entered into an Agreement and Plan of Merger. Under the merger agreement, FirstEnergy would acquire all of the outstanding shares of GPU's common stock for approximately $4.5 billion in cash and FirstEnergy common stock. Approximately $7.4 billion of debt and preferred stock of GPU's subsidiaries would still be outstanding. The transaction would be accounted for by the purchase method. The combined company's principal electric utility operating companies would include OE, CEI, TE, Penn and ATSI, as well as GPU's electric utility operating companies - Jersey Central Power & Light Company, Metropolitan Edison Company and Pennsylvania Electric Company, which serve customers in New Jersey and Pennsylvania. Under the agreement, GPU shareholders would receive the equivalent of $36.50 for each share of GPU common stock they own, payable in cash or in FirstEnergy common stock, as long as FirstEnergy's common stock price is between $24.2438 and $29.6313. GPU shareholders would be able to elect the form of consideration they wish to receive, subject to proration so that the aggregate consideration to all GPU shareholders will be 50 percent cash and 50 percent FirstEnergy common stock. Each GPU share converted into FirstEnergy common stock would receive not less than 1.2318 and not more than 1.5055 shares of FirstEnergy common stock, depending on the average closing price of FirstEnergy stock during the 20-day trading period ending on the seventh trading date prior to the merger closing. The stock portion of the consideration is expected to be tax-free to GPU shareholders. The merger has been approved by the respective shareholders of FirstEnergy and GPU, and necessary regulatory approvals have been received from the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, the New York State Public Service Commission, the Pennsylvania Public Utility Commission and the Federal Communications Commission. The merger is expected to close promptly after all of the conditions to the consummation of the merger, including the receipt of remaining regulatory approvals, are fulfilled or waived. Approvals from the New Jersey Board of Public Utilities and the Securities and Exchange Commission are expected by the fourth quarter of 2001. 3 - REGULATORY MATTERS: In July 2000, the Public Utilities Commission of Ohio (PUCO) approved FirstEnergy's transition plan as modified by a settlement agreement with major parties to the transition plan, which it filed on behalf of its Ohio electric utility operating companies - OE, CEI and TE - under Ohio's new electric utility restructuring law. Major provisions of the settlement agreement included approval for recovery of transition costs in the amounts filed in the transition plan through no later than 2006 for OE, mid-2007 for TE and 2008 for CEI, except where a longer period of recovery is provided for in the settlement agreement. FirstEnergy also gives preferred access over FirstEnergy's subsidiaries to nonaffiliated marketers, brokers and aggregators to 1,120 megawatts of generation capacity through 2005 at established prices for sales to the Ohio operating companies' retail customers. The base electric rates for distribution service for OE, CEI and TE under their prior respective regulatory plans will be extended from December 31, 2005 through December 31, 2007. The transition rate credits for customers under their prior regulatory plans will also be extended through the Companies' respective transition cost recovery periods. The transition plan itemized, or unbundled, the current price of electricity into its component elements -- including generation, transmission, distribution and transition charges. As required by the PUCO's rules, FirstEnergy's transition plan also included its proposals on corporate separation of its regulated and unregulated operations, operational and technical support changes needed to accommodate customer choice, an education program to inform customers of their options under the law, and how FirstEnergy's transmission system will be operated to ensure access to all users. Customer prices are frozen through a five-year market development period (2001-2005), except for certain limited statutory exceptions including the 5% reduction in the price of generation for residential customers. Ohio's electric utility restructuring law allowed Ohio electric customers to select their generation suppliers beginning January 1, 2001. FirstEnergy's Ohio customers electing alternative suppliers receive an additional incentive applied to the shopping credit of 45% for residential customers, 30% for commercial customers and 15% for industrial customers. The amount of the incentive serves to reduce the amortization of transition costs during the market development period and will be recovered through the extension of the transition cost recovery periods. If the customer shopping goals established in the agreement are not achieved by the end of 2005, the transition cost recovery periods could be shortened for OE, CEI and TE to reduce recovery by as much as $500 million (OE-$250 million, CEI-$170 million and TE-$80 million), but any such adjustment would be computed on a class-by-class and pro-rata basis. 4 - NEW ACCOUNTING STANDARDS: On January 1, 2001, FirstEnergy adopted Statement of Financial Accounting Standards (SFAS) 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133." The cumulative effect to January 1, 2001 was a charge of $8.5 million (net of $5.8 million of income taxes) or $.04 per share of common stock. The reported results of operations for the years ended December 31, 2000 and 1999 would not have been materially different if this accounting had been in effect during those years. FirstEnergy is exposed to financial risks resulting from the fluctuation of interest rates and commodity prices, including electricity, natural gas and coal. To manage the volatility relating to these exposures, FirstEnergy uses a variety of derivative instruments, including forward contracts, options, futures contracts and swaps. These derivatives are used principally for hedging purposes and to a lesser extent for trading purposes. FirstEnergy has a Risk Policy Committee comprised of executive officers, which exercises an independent risk oversight function to ensure compliance with corporate risk management policies and prudent risk management practices. FirstEnergy uses derivatives to hedge the risk of commodity price and interest rate fluctuations. FirstEnergy's primary hedging activity involves cash flow hedges of electricity, natural gas and coal purchases. The maximum periods over which the variability of electricity, natural gas and coal cash flows are hedged are two, three and four years, respectively. Gains and losses from hedges of commodity price risks are included in net income when the underlying hedged commodities are delivered. The current net deferred loss of $37.7 million included in Accumulated Other Comprehensive Loss as of June 30, 2001, as compared to the March 31, 2001 balance of $34.3 million in deferred gains, reflected a $70.3 million reduction related to current hedging activity and $1.7 million in other activities during the quarter. Based on the current net deferred loss of $37.7 million, net losses of approximately $33.7 million (after tax) would be recognized in net income within the next twelve months. FirstEnergy entered into interest rate derivative transactions during the first half of 2001 to hedge a portion of the expected debt relating to the pending GPU acquisition. For the quarter and year-to-date periods ended June 30, 2001, there were no effects to net income as a result of the discontinuance of a cash flow hedge, and the ineffective portion of derivative commodity contracts was not material. FirstEnergy engages in the trading of commodity derivatives, and therefore, periodically experiences net open positions. FirstEnergy's risk management policies limit the exposure to market risk from open positions and require daily reporting to management of potential financial exposures. Derivatives classified as "normal-purchase/normal sale" (NPNS) transactions were documented and excluded from further treatment under SFAS 133. The Financial Accounting Standards Board (FASB) has not reached a final conclusion regarding the appropriate accounting treatment of certain types of energy contracts under SFAS 133. The FASB's final decision could affect those contracts considered eligible for the NPNS exception. The FASB approved SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets," on June 29, 2001. These new standards are effective beginning July 1, 2001. SFAS 141 requires all business combinations initiated after June 30, 2001, to be accounted for using purchase accounting. The provisions of the new standard relating to the determination of goodwill and other intangible assets will be applied to the pending GPU merger, which will be accounted for as a purchase transaction, and are not expected to materially affect the accounting for this pending transaction. Under SFAS 142, amortization of existing goodwill by FirstEnergy will cease on January 1, 2002. Instead, goodwill will be tested for impairment at least on an annual basis, and no impairment of goodwill is anticipated as a result of the initial impairment review process. Currently, FirstEnergy amortizes about $57 million ($.25 per share of common stock) of goodwill annually. There will be no goodwill amortization in 2001 associated with the pending GPU merger under the provisions of the new standard. 5 - SEGMENT INFORMATION: FirstEnergy operates under the following reportable segments: regulated services, competitive services and other (primarily corporate support services). These business units reflect FirstEnergy's organizational changes to accommodate its retail strategy and the impact of moving the generation portion of its electricity services from the regulated segment to the competitive segment as reflected in its approved Ohio transition plan. These reportable segments are strategic businesses, which are managed and operated differently based on the degree of regulation, and the products and services offered. The regulated services segment designs, constructs, operates and maintains FirstEnergy's regulated transmission and distribution systems. It also provides generation services to regulated franchise customers who have not chosen an alternative, competitive generation supplier. The regulated services segment obtains generation through power supply agreements with the competitive services segment. The competitive services segment includes all unregulated energy and energy-related services including commodity sales (both electricity and natural gas) in the retail and wholesale markets, marketing, generation, trading and sourcing of commodity requirements, as well as other competitive energy-application services. Competitive products are increasingly marketed to customers as bundled services. 2000 financial data are pro forma amounts to represent current year business segment organizations and operations. Financial data for these business segments are as follows: Segment Financial Information -----------------------------
Regulated Competitive Reconciling Services Services Other Adjustments Consolidated --------- ----------- ----- ----------- ------------ (In millions) Three Months Ended: ------------------ June 30, 2001 ------------- External revenues $ 1,260 $ 499 $ 1 $ 44 (a) $ 1,804 Internal revenues 324 488 64 (876) (b) -- Total revenues 1,584 987 65 (832) 1,804 Depreciation and amortization 196 4 7 -- 207 Net interest charges 130 13 8 (30) (b) 121 Income taxes 113 4 3 -- 120 Income before cumulative effect of a change in accounting 133 6 4 3 (b) 146 Net income 133 6 4 3 (b) 146 Total assets 15,494 2,154 490 -- 18,138 Property additions 36 84 5 -- 125 June 30, 2000 ------------- External revenues $ 1,359 $ 342 $ -- $ 1 (a) $ 1,702 Internal revenues 331 537 106 (974) (b) -- Total revenues 1,690 879 91 (958) 1,702 Depreciation and amortization 221 4 -- -- 225 Net interest charges 125 5 4 -- 134 Income taxes 93 3 (1) -- 95 Net income 133 4 (2) -- 135 Total assets 15,227 2,164 710 -- 18,101 Property additions 104 20 -- -- 124 Six Months Ended: ---------------- June 30, 2001 ------------- External revenues $ 2,569 $1,132 $ 2 $ 87 (a) $ 3,790 Internal revenues 658 1,059 129 (1,846) (b) -- Total revenues 3,227 2,191 131 (1,759) 3,790 Depreciation and amortization 411 8 15 -- 434 Net interest charges 275 9 16 (53) (b) 247 Income taxes 180 17 7 -- 204 Income before cumulative effect of a change in accounting 217 24 11 -- 252 Net income 217 16 11 -- 244 Total assets 15,494 2,154 490 -- 18,138 Property additions 89 178 9 -- 276 June 30, 2000 ------------- External revenues $ 2,631 $ 662 $ 1 $ 16 (a) $ 3,310 Internal revenues 659 1,115 130 (1,904) (b) -- Total revenues 3,290 1,777 131 (1,888) 3,310 Depreciation and amortization 419 8 -- -- 427 Net interest charges 258 5 6 -- 269 Income taxes 153 41 (1) -- 193 Net income 219 59 (2) -- 276 Total assets 15,227 2,164 710 -- 18,101 Property additions 222 54 -- -- 276 Reconciling adjustments to segment operating results from internal management reporting to consolidated external financial reporting: (a) Principally fuel marketing revenues which are reflected as reductions to expenses for internal management reporting purposes. (b) Elimination of intersegment transactions.
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (In thousands, except per share amounts) REVENUES: Electric utilities $1,260,511 $1,348,685 $2,571,800 $2,629,615 Unregulated businesses 543,635 353,419 1,218,087 680,419 ---------- ---------- ---------- ---------- Total revenues 1,804,146 1,702,104 3,789,887 3,310,034 ---------- ---------- ---------- ---------- EXPENSES: Fuel and purchased power 300,528 306,353 625,107 550,993 Purchased gas 173,557 87,515 526,374 189,553 Other operating expenses 643,846 581,373 1,289,249 1,125,642 Provision for depreciation and amortization 206,606 224,794 433,820 426,878 General taxes 92,186 137,977 211,608 279,032 ---------- ---------- ---------- ---------- Total expenses 1,416,723 1,338,012 3,086,158 2,572,098 ---------- ---------- ---------- ---------- INCOME BEFORE INTEREST AND INCOME TAXES 387,423 364,092 703,729 737,936 ---------- ---------- ---------- ---------- NET INTEREST CHARGES: Interest expense 116,342 124,243 234,561 247,086 Capitalized interest (12,296) (7,022) (21,119) (13,126) Subsidiaries' preferred stock dividends 16,919 17,125 33,853 35,413 ---------- ---------- ---------- ---------- Net interest charges 120,965 134,346 247,295 269,373 ---------- ---------- ---------- ---------- INCOME TAXES 120,439 95,142 204,208 193,041 ---------- ---------- ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING 146,019 134,604 252,226 275,522 Cumulative effect of accounting change (net of income taxes of $5,839,000) (Note 4) -- -- (8,499) -- ---------- ---------- ---------- ---------- NET INCOME $ 146,019 $ 134,604 $ 243,727 $ 275,522 ========== ========== ========== ========== BASIC EARNINGS PER SHARE: Before cumulative effect of accounting change $ .67 $ .60 $1.16 $1.23 Cumulative effect of accounting change -- -- (.04) -- ----- ----- ----- ----- $ .67 $ .60 $1.12 $1.23 ===== ===== ===== ===== Weighted average number of basic shares outstanding 218,372 223,542 218,239 224,201 ======= ======= ======= ======= DILUTED EARNINGS PER SHARE: Before cumulative effect of accounting change $ .67 $ .60 $1.15 $1.23 Cumulative effect of accounting change -- -- (.04) -- ----- ----- ----- ----- $ .67 $ .60 $1.11 $1.23 ===== ===== ===== ===== Weighted average number of diluted shares outstanding 219,540 223,993 219,235 224,531 ======= ======= ======= ======= DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $.375 $.375 $ .75 $ .75 ===== ===== ===== ===== The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral part of these statements.
FIRSTENERGY CORP. CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2001 2000 ------------ ------------ (In thousands) ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 205,219 $ 49,258 Receivables- Customers (less accumulated provisions of $18,680,000 and $32,251,000, respectively, for uncollectible accounts) 529,406 541,924 Other (less accumulated provisions of $4,235,000 and $4,035,000, respectively, for uncollectible accounts) 365,458 376,525 Materials and supplies, at average cost- Owned 203,935 171,563 Under consignment 124,045 112,155 Prepayments and other 214,727 189,869 ----------- ----------- 1,642,790 1,441,294 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT: In service 12,712,048 12,417,684 Less--Accumulated provision for depreciation 5,409,452 5,263,483 ----------- ----------- 7,302,596 7,154,201 Construction work in progress 302,110 420,875 ----------- ----------- 7,604,706 7,575,076 ----------- ----------- INVESTMENTS: Capital trust investments 1,178,743 1,223,794 Nuclear plant decommissioning trusts 634,211 584,288 Letter of credit collateralization 277,763 277,763 Other 687,096 669,057 ----------- ----------- 2,777,813 2,754,902 ----------- ----------- DEFERRED CHARGES: Regulatory assets 3,568,007 3,727,662 Goodwill 2,062,293 2,088,770 Other 481,917 353,590 ----------- ----------- 6,112,217 6,170,022 ----------- ----------- $18,137,526 $17,941,294 =========== ===========
FIRSTENERGY CORP. CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2001 2000 ----------- ----------- (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CURRENT LIABILITIES: Currently payable long-term debt and preferred stock $ 638,965 $ 536,482 Short-term borrowings 758,246 699,765 Accounts payable 370,982 478,661 Accrued taxes 412,794 409,640 Other 388,872 469,257 ----------- ----------- 2,569,859 2,593,805 ----------- ----------- CAPITALIZATION: Common stockholders' equity- Common stock, $.10 par value, authorized 375,000,000 shares - 223,981,580 and 224,531,580 shares outstanding, respectively 22,398 22,453 Other paid-in capital 3,521,782 3,531,821 Accumulated other comprehensive income (loss) (36,578) 593 Retained earnings 1,290,101 1,209,991 Unallocated employee stock ownership plan common stock - 5,520,836 and 5,952,032 shares, respectively (103,318) (111,732) ----------- ----------- Total common stockholders' equity 4,694,385 4,653,126 Preferred stock of consolidated subsidiaries- Not subject to mandatory redemption 648,395 648,395 Subject to mandatory redemption 40,150 41,105 OE obligated mandatorily redeemable preferred securities of subsidiary trust holding solely OE subordinated debentures 120,000 120,000 Long-term debt 5,791,593 5,742,048 ----------- ----------- 11,294,523 11,204,674 ----------- ----------- DEFERRED CREDITS: Accumulated deferred income taxes 2,000,438 2,094,107 Accumulated deferred investment tax credits 232,278 241,005 Nuclear plant decommissioning costs 648,908 598,985 Other postretirement benefits 578,486 544,541 Other 813,034 664,177 ----------- ----------- 4,273,144 4,142,815 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note 2) ----------- ----------- $18,137,526 $17,941,294 =========== =========== The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral part of these balance sheets.
FIRSTENERGY CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------- -------------------- 2001 2000 2001 2000 -------- -------- --------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $146,019 $134,604 $ 243,727 $275,522 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 206,606 224,794 433,820 426,878 Nuclear fuel and lease amortization 24,226 24,943 48,201 54,704 Other amortization, net (4,039) (3,451) (7,672) (6,618) Deferred income taxes, net (19,373) (27,965) (35,308) (33,338) Investment tax credits, net (4,988) (6,941) (9,986) (12,495) Cumulative effect of accounting change -- -- 14,338 -- Receivables (5,609) (46,929) 23,585 (20,828) Materials and supplies (37,219) 12,420 (44,262) 19,258 Accounts payable (38,019) 15,177 (107,679) (3,142) Other (99,111) (40,559) (168,168) (85,933) -------- -------- --------- -------- Net cash provided from operating activities 168,493 286,093 390,596 614,008 -------- -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 254,877 241,099 255,499 258,418 Short-term borrowings net 16,367 111,040 58,481 47,048 Redemptions and Repayments- Common stock -- 40,050 15,308 74,012 Preferred stock 10,716 13,714 10,716 13,714 Long-term debt 74,345 347,469 95,561 449,524 Common stock dividend payments 81,864 84,063 163,617 168,518 --------- -------- --------- -------- Net cash used for (provided from) financing activities (104,319) 133,157 (28,778) 400,302 -------- -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 125,322 124,397 276,498 276,077 Cash investments (3,463) (1,930) (32,601) (41,036) Other (11,770) (14,045) 19,516 2,893 --------- -------- --------- -------- Net cash used for investing activities 110,089 108,422 263,413 237,934 --------- -------- --------- -------- Net increase (decrease) in cash and cash equivalents 162,723 44,514 155,961 (24,228) Cash and cash equivalents at beginning of period 42,496 43,046 49,258 111,788 --------- -------- --------- -------- Cash and cash equivalents at end of period $ 205,219 $ 87,560 $ 205,219 $ 87,560 ========= ======== ========= ======== The preceding Notes to Financial Statements as they relate to FirstEnergy Corp. are an integral part of these statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To FirstEnergy Corp.: We have reviewed the accompanying consolidated balance sheet of FirstEnergy Corp. (an Ohio corporation) and subsidiaries as of June 30, 2001, and the related consolidated statements of income and cash flows for the three-month and six-month periods ended June 30, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of FirstEnergy Corp. and subsidiaries as of December 31, 2000 (not presented herein), and, in our report dated February 16, 2001, 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, 2000, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio, August 8, 2001. FIRSTENERGY CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Results of Operations --------------------- Net income increased to $146.0 million in the second quarter of 2001, compared to $134.6 million in the same period of 2000. Basic and diluted earnings per share of common stock were $0.67 in the second quarter of 2001, compared to $0.60 in the second quarter of 2000. In the first half of 2001, net income was $252.2 million before the cumulative effect of an accounting change, compared to $275.5 million for the same period of 2000. Basic earnings per share of common stock were $1.16 ($1.15 diluted) in the first half of 2001, compared to $1.23 (basic and diluted) in the first six months of 2000. After the accounting change, net income in the first half of 2001 was $243.7 million or basic earnings per share of common stock of $1.12 ($1.11 diluted). The accounting change reflected the adoption of SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," on January 1, 2001, which resulted in an after-tax charge of $8.5 million ($0.04 per share of common stock). Revenues Total revenues increased by $102.0 million in the second quarter of 2001, and $479.9 million during the six-month period ended June 30, 2001, as compared to the same periods in 2000. FirstEnergy's competitive services business segment provided all of the revenue increase, largely from greater wholesale electric sales and expanded gas sales. The sources of changes in revenues during the second quarter and first half of 2001, compared to the corresponding periods of 2000, are summarized in the following table: Sources of Revenue Changes -------------------------- Increase (Decrease) Three Six Months Months ------ ------ (In millions) Electric Utilities (Regulated Services): Retail electric sales $(105.2) $(62.9) Other revenues 17.0 5.1 ------- ------ Total Electric Utilities (88.2) (57.8) ------- ------ Unregulated Businesses (Competitive Services): Retail electric sales 4.1 8.2 Wholesale electric sales 109.5 195.3 Gas sales 87.3 313.2 Other businesses (10.7) 21.0 ------- ------ Total Unregulated Businesses 190.2 537.7 ------- ------ Net Revenue Increase $102.0 $479.9 ======= ====== Electric Sales Revenues for the electric utilities decreased by $88.2 million in the second quarter and $57.8 million in the first six months of 2001, compared to the same periods in 2000, primarily due to lower kilowatt-hour sales of electric generation as a result of customer choice in Ohio. Lower unit prices resulting in part from implementation of a 5% reduction in generation charges for residential customers as part of Ohio's electric utility restructuring implemented in 2001, also contributed to the reduction in electric sales revenues. This lower residential rate reduced electric sales revenues by approximately $12 million in the second quarter and $21 million in the first half of 2001 and is expected to lower revenues for all of 2001 by approximately $50 million. Lower kilowatt-hour deliveries to service area customers in the second quarter of 2001, compared to the same period of 2000, also negatively affected revenues for transmission and distribution services. A 2.5% decrease in kilowatt-hour deliveries was the result of reduced deliveries to residential and business (commercial and industrial) customers in the second quarter of 2001, compared to the second quarter of last year. Weather was a factor contributing to lower kilowatt-hour sales. Average temperatures were cooler in the second quarter of 2001 than the second quarter of 2000, which reduced residential air-conditioning loads. Deliveries to business customers decreased partially as a result of a softening of the economy in the service areas. Kilowatt-hour deliveries increased by 0.6% in the first half of 2001 from the same period last year, benefiting from colder weather in the first quarter of 2001 than the corresponding period last year (although warmer than normal) which contributed to increased residential sales. As a result of opening Ohio to competitive generation suppliers in 2001, kilowatt-hour sales by other suppliers (which are included in the kilowatt-hour deliveries) increased to 11.8% and 7.2% of total energy delivered in the second quarter and first half of 2001, respectively, compared to 0.8% and 0.9% in the corresponding periods of 2000. Retail kilowatt-hour sales for the FirstEnergy competitive services business segment increased by 15.2% in the second quarter and 6.8% in the first half of 2001, compared to the same periods of 2000. This increase resulted from expanding kilowatt-hour sales within Ohio as a result of retail customers switching to FirstEnergy's unregulated affiliate - FES, a wholly owned subsidiary, under Ohio's electricity choice program. The higher kilowatt-hour sales in Ohio were partially offset by lower sales in markets outside of Ohio as more customers returned to their local distribution companies. Total electric generation sales increased by 7.6% in the second quarter and 10.3% in the first half of 2001 compared to the same periods last year. Sales to the wholesale market were the largest single factor contributing to this increase. Kilowatt-hour sales to wholesale customers more than doubled in the second quarter and first six months of 2001, compared to the same periods of 2000. Those increases reflect FirstEnergy's enhanced position to take advantage of opportunities in the wholesale market in 2001, as well as nonaffiliated retail energy suppliers having access to 1,120 megawatts of FirstEnergy's generation capacity being made available under its transition plan. As of June 30, 2001, over 1,080 megawatts of the 1,120 megawatts supply commitment had been secured by alternative suppliers. Changes in electric generation sales and kilowatt-hour deliveries in the second quarter and first half of 2001, compared to the same periods of 2000, are summarized in the following table: Changes in KWH Sales -------------------- Increase (Decrease) Three Six Months Months ------ ------ Electric Generation Sales: Retail -- Regulated Services (13.2)% (5.8)% Competitive Services 15.2% 6.8% Wholesale 176.9% 152.6% ----- ----- Total Electric Generation Sales 7.6% 10.3% ===== ===== Distribution Deliveries: Residential (4.2)% 2.5% Commercial (12.6)% (7.0)% Industrial 5.1% 4.3% ----- ----- Total Retail Distribution Deliveries (2.5)% 0.6% ===== ===== Other Sales Residential and small business customers in the service area of Dominion East Ohio, a nonaffiliated gas utility, began shopping among alternative gas suppliers last year as part of a customer choice program, with gas deliveries beginning November 1, 2000. FES took advantage of this opportunity to expand its customer base. Total gas sales increased by $87.3 million in the second quarter and $313.2 million in the first half of 2001, compared to the same periods last year. The number of gas customers served by FES increased to approximately 164,000 by the end of the second quarter of 2001 from approximately 30,000 a year earlier. Additionally, the competitive services business segment's energy-related services experienced strong growth in the first half of 2001 as compared to the same period of 2000. Revenues for FEFSG, a wholly owned subsidiary providing heating, ventilating, air-conditioning and other energy-related services, increased by $28.6 million or 11% in the first six months of 2001 compared to the same period last year, reflecting growth in both construction and service contracts. Operating Expenses Fuel and purchased power costs decreased by $5.8 million in the second quarter of 2001 from the same period last year. The decrease resulted from a $14.8 million reduction of purchased power costs that were partially offset by a $9.0 million increase in fuel expenses. A combination of lower volumes and wholesale unit prices contributed to reduced purchased power costs, but higher coal prices resulted in increased fuel expense. In the first six months of 2001, fuel and purchased power increased $74.1 million, compared to the same period of 2000, almost entirely due to higher purchased power costs. Increased quantities of purchased power coupled with higher spot prices contributed to the increase in purchased power costs in the first quarter of 2001. Lower output from FirstEnergy's generating plants combined with higher customer demand resulted in greater reliance on purchased power during the first half of 2001, compared to the same period last year. Reduced fossil generation resulted from higher planned maintenance activities and difficulties in transporting coal to FirstEnergy's generating plants along the Ohio River during a period of unusually cold winter weather as well as supplier constraints in the first quarter of 2001. The reduction in nuclear generation in 2001 resulted from a scheduled first quarter refueling outage at the Perry Plant and several unplanned outages at the Perry Plant during the second quarter. Purchased gas costs almost doubled in the second quarter and nearly tripled in the first six months of 2001, increasing by $86.0 million and $336.8 million, respectively, from the corresponding periods of 2000. These increases resulted from the expansion of FES's gas business described above. Due to the unanticipated number of customer enrollments and consumption volume under the gas choice program, FES's supply costs this winter exceeded its annual fixed rate contract prices as additional spot purchases were necessary during a period of rising market prices for natural gas. However, the earnings contribution from the natural gas operations improved in the second quarter of 2001 from first quarter results. Other operating expenses increased by $62.5 million in the second quarter and $163.6 million in the first half of 2001, compared to the same periods of 2000. Increased operating costs for the competitive services business segment accounted for more than one-half of the increase in other operating expenses as a result of expanding operations. The remaining increase in other operating expenses resulted from higher fossil operating expenses, increased customer service work, and increased employee benefit costs. Partially offsetting these higher other operating expenses were lower nuclear expenses resulting from the absence of refueling outage costs in the second quarter of 2001 (the Davis-Besse Plant was out of service for refueling in the second quarter of 2000). A $16.3 million increase in fossil operating expenses in the second quarter and a $38.0 million increase in the first half of 2001, from the corresponding periods of 2000, were due principally to planned maintenance work, which included work to improve the availability of the fossil units. The increase was primarily related to work at the Mansfield generating plant in the second quarter of 2001 and at the Bay Shore, Eastlake and Mansfield generating plants in the first half of 2001. Pension costs increased by $15.8 million in the second quarter and $36.6 million in the first half of 2001 from the corresponding periods last year. The increases were primarily due to pension plan enhancements, lower expected returns on plan assets (due to significant market-related reductions in the value of plan assets) and the completion of the 15-year amortization of OE's transition asset. Health care benefit costs increased by $6.9 million in the second quarter and $10.6 million in the first half of 2001, compared to the same periods of 2000, principally due to an increase in the anticipated health care cost trend rate assumption for computing post-retirement health care benefit liabilities. Charges for depreciation and amortization decreased by $18.2 million in the second quarter of 2001 from the same period last year. Approximately $12.4 million of this decrease resulted from lower transition cost amortization under FirstEnergy's Ohio transition plan compared to accelerated cost recovery in connection with OE's prior regulatory plan. For the six-month period ended June 30, 2001, charges for depreciation and amortization increased by $6.9 million from the same period last year due to higher first quarter costs in 2001 resulting from a different pattern of expense recognition under the transition plan. Transition cost accelerations (including related income tax amortization) totaled $74.4 million in the second quarter and $153.4 million in the first half of 2001, compared to cost accelerations under OE's rate plan and Penn's restructuring plan of $86.8 million in the second quarter and $144.1 million in the first half of 2000. FirstEnergy expects incremental transition cost amortization during 2001 to be lower than the rate plan accelerations recognized in 2000. The changes in depreciation and amortization for these periods also reflected deferrals for shopping incentives (see Note 3) partially offset by increases associated with depreciation on recently completed combustion turbines and additional software amortization due to a change in estimated useful life. General taxes were $45.8 million lower in the second quarter and $67.4 million lower in the first six months of 2001, compared to the corresponding periods of 2000, primarily due to reduced property taxes and other state tax changes in connection with the Ohio electric industry restructuring. In addition, as a result of successfully resolving certain pending tax issues, a one-time benefit of $15 million was also recognized in the second quarter of 2001. Net Interest Charges Net interest charges continue to trend lower, decreasing by $13.4 million in the second quarter and $22.1 million in the first half of 2001, compared to the same periods in 2000, primarily due to debt and preferred stock redemption and refinancing activities undertaken after the end of the second quarter of 2000. During the first half of 2001, redemption and refinancing activities totaled $53.3 million and $117.4 million, respectively, and will result in annualized savings of $7.7 million. Capital Resources and Liquidity ------------------------------ FirstEnergy and its subsidiaries have continuing cash needs for planned capital expenditures, maturing debt and preferred stock sinking fund requirements. During the last two quarters of 2001, capital requirements for property additions and capital leases are expected to be about $410 million, including $50 million for nuclear fuel. FirstEnergy has additional cash requirements of approximately $133.8 million to meet sinking fund requirements for preferred stock and maturing long-term debt during the remainder of 2001. These requirements are expected to be satisfied from internal cash and/or short-term credit arrangements. However, FirstEnergy's pending merger (see Pending Business Combination) with GPU is expected to require the issuance of approximately $2.2 billion of acquisition-related debt during 2001 and the issuance of between 74 million and 95 million additional shares of common stock. During the first half of 2001, FirstEnergy repurchased 550,000 shares of its common stock at an average price of $27.82 per share. As of June 30, 2001, FirstEnergy had repurchased 13.1 million of the 15 million shares authorized by the Board of Directors under the three-year program which began in March 1999. As of June 30, 2001, FirstEnergy and its subsidiaries had about $205.2 million of cash and temporary investments and $758.2 million of short-term indebtedness. Available borrowings included $51.5 million from unused revolving lines of credit. As of June 30, 2001, the operating companies in the regulated services business segment (OE, CEI, TE and Penn) had the capability to issue $2.6 billion of additional first mortgage bonds on the basis of property additions and retired bonds. Based upon applicable earnings coverage tests and their respective charters, OE, Penn and TE could issue $2.6 billion of preferred stock (assuming no additional debt was issued) based on earnings through the second quarter of 2001. CEI has no restrictions on the issuance of preferred stock. CEI established the Cleveland Electric Financing Trust I, a Delaware business trust subsidiary, during the second quarter of 2001, for the purpose of issuing Cumulative Trust Preferred Capital Securities in the amount of $245 million. The proceeds from the sale will be used by the financing trust to purchase CEI junior subordinated debentures. On June 27, 2001, OE and Penn completed the issuance of pollution control revenue refunding bonds totaling $69.5 million and $32.9 million, respectively. The proceeds will be used to complete optional refinancings in August and September of 2001. Pending Business Combination ---------------------------- The merger of FirstEnergy and GPU is expected to be completed by the fourth quarter of 2001. Regulatory approvals for the business combination have been obtained from the Federal Energy Regulatory Commission, the Nuclear Regulatory Commission, the New York Public Service Commission, the Pennsylvania Public Utility Commission (PPUC), Argentina and the Federal Communications Commission. Information was submitted to the Department of Justice and Federal Trade Commission as required under the Hart-Scott-Rodino Act and the required waiting period passed without comment. Remaining approvals are needed from the New Jersey Board of Public Utilities (BPU) and the Securities and Exchange Commission (SEC). In July 2001, several parties appealed the PPUC's merger approval in the Pennsylvania Commonwealth Court. The BPU administrative law judge hearing the merger case in New Jersey has given parties to the case until August 13, 2001 to report the status of their settlement discussions. New Accounting Standard ----------------------- The FASB approved SFAS 141, "Business Combinations" and SFAS 142, "Goodwill and Other Intangible Assets," on June 29, 2001. These new standards are effective beginning July 1, 2001. SFAS 141 requires all business combinations initiated after June 30, 2001, to be accounted for using purchase accounting. The provisions of the new standard relating to the determination of goodwill and other intangible assets will be applied to the pending GPU merger, which will be accounted for as a purchase transaction, and are not expected to materially affect the accounting for this pending transaction. Under SFAS 142, amortization of existing goodwill by FirstEnergy will cease on January 1, 2002. Instead, goodwill will be tested for impairment at least on an annual basis, and no impairment of goodwill is anticipated as a result of the initial impairment review process. Currently, FirstEnergy amortizes about $57 million ($.25 per share of common stock) of goodwill annually. There will be no goodwill amortization in 2001 associated with the pending GPU merger under the provisions of the new standard. Market Risk - Commodity Prices ------------------------------ FirstEnergy is exposed to market risks due to fluctuations in electricity, natural gas, coal and oil prices. To manage the volatility relating to these exposures, FirstEnergy uses a variety of derivative instruments, including forward contracts, options, futures contracts and swaps. These derivatives are used principally for hedging purposes, and to a lesser extent, for trading purposes. Although FirstEnergy believes that the policies and procedures it has adopted are prudent, its financial position, results of operations or cash flow may be adversely affected by unanticipated fluctuations in the commodity prices for electricity, natural gas, coal, oil, or by the failure of contract counterparties to perform. OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------- --------------------- 2001 2000 2001 2000 -------- -------- --------- ---------- (In thousands) OPERATING REVENUES $744,712 $667,256 $1,527,815 $1,311,621 -------- -------- ---------- ---------- OPERATING EXPENSES AND TAXES: Fuel 13,408 81,547 27,554 157,613 Purchased power 237,795 25,253 544,212 44,765 Nuclear operating costs 76,987 73,042 169,232 184,661 Other operating costs 79,716 98,145 160,672 195,739 -------- -------- ---------- ---------- Total operation and maintenance expenses 407,906 277,987 901,670 582,778 Provision for depreciation and amortization 104,205 136,783 221,161 250,734 General taxes 26,133 58,008 71,087 117,461 Income taxes 68,540 60,362 107,141 106,983 -------- -------- ---------- ---------- Total operating expenses and taxes 606,784 533,140 1,301,059 1,057,956 -------- -------- ---------- ---------- OPERATING INCOME 137,928 134,116 226,756 253,665 OTHER INCOME 17,821 11,481 30,186 23,804 -------- -------- ---------- ---------- INCOME BEFORE NET INTEREST CHARGES 155,749 145,597 256,942 277,469 -------- -------- ---------- ---------- NET INTEREST CHARGES: Interest on long-term debt 39,527 42,056 78,914 84,595 Allowance for borrowed funds used during construction and capitalized interest 1,612 (1,508) (1,306) (4,067) Other interest expense 5,806 7,589 12,718 15,060 Subsidiaries' preferred stock dividend requirements 3,626 3,626 7,252 7,252 -------- -------- ---------- ---------- Net interest charges 50,571 51,763 97,578 102,840 -------- -------- ---------- ---------- NET INCOME 105,178 93,834 159,364 174,629 PREFERRED STOCK DIVIDEND REQUIREMENTS 2,702 2,808 5,404 5,616 -------- -------- ---------- ---------- EARNINGS ON COMMON STOCK $102,476 $ 91,026 $ 153,960 $ 169,013 ======== ======== ========== ========== The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral part of these statements.
OHIO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2001 2000 ---------- ----------- (In thousands) ASSETS ------ UTILITY PLANT: In service $4,975,966 $4,930,844 Less--Accumulated provision for depreciation 2,424,036 2,376,457 ---------- ---------- 2,551,930 2,554,387 ---------- ---------- Construction work in progress- Electric plant 43,594 219,623 Nuclear fuel 25 18,898 ---------- ---------- 43,619 238,521 ---------- ---------- 2,595,549 2,792,908 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: PNBV Capital Trust 441,061 452,128 Letter of credit collateralization 277,763 277,763 Nuclear plant decommissioning trusts 280,815 262,042 Long-term notes receivable from associated companies 505,595 351,545 Other 301,065 305,848 ---------- ---------- 1,806,299 1,649,326 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 113,374 18,269 Receivables- Customers (less accumulated provisions of $3,971,000 and $11,777,000, respectively, for uncollectible accounts) 311,393 304,719 Associated companies 669,431 476,993 Other (less accumulated provisions of $1,000,000 for uncollectible accounts at both dates) 29,964 34,281 Notes receivable from associated companies 158,304 1,032 Materials and supplies, at average cost- Owned 63,678 80,534 Under consignment 14,284 51,488 Prepayments and other 89,714 76,934 ---------- ---------- 1,450,142 1,044,250 ---------- ---------- DEFERRED CHARGES: Regulatory assets 2,354,816 2,498,837 Other 176,807 168,830 ---------- ---------- 2,531,623 2,667,667 ---------- ---------- $8,383,613 $8,154,151 ========== ==========
OHIO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2001 2000 ---------- ----------- (In thousands) CAPITALIZATION AND LIABILITIES ------------------------------ CAPITALIZATION: Common stockholder's equity- Common stock, without par value, authorized 175,000,000 shares - 100 shares outstanding $2,098,729 $2,098,729 Accumulated other comprehensive income 7,158 -- Retained earnings 574,923 458,263 ---------- ---------- Total common stockholder's equity 2,680,810 2,556,992 Preferred stock not subject to mandatory redemption 160,965 160,965 Preferred stock of consolidated subsidiary- Not subject to mandatory redemption 39,105 39,105 Subject to mandatory redemption 15,000 15,000 OE obligated mandatorily redeemable preferred securities of subsidiary trust holding solely OE subordinated debentures 120,000 120,000 Long-term debt 2,083,465 2,000,622 ---------- ---------- 5,099,345 4,892,684 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 447,061 311,358 Short-term borrowings- Associated companies 5,874 19,131 Other 294,111 296,301 Accounts payable- Associated companies 116,310 123,859 Other 15,197 60,332 Accrued taxes 250,436 232,225 Other 98,760 109,394 ---------- ---------- 1,227,749 1,152,600 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 1,229,883 1,298,845 Accumulated deferred investment tax credits 104,629 110,064 Nuclear plant decommissioning costs 279,977 261,204 Other postretirement benefits 163,907 160,719 Other 278,123 278,035 ---------- ---------- 2,056,519 2,108,867 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Note 2) ---------- ---------- $8,383,613 $8,154,151 ========== ========== The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral part of these balance sheets.
OHIO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ---------------------- -------------------- 2001 2000 2001 2000 --------- -------- --------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 105,178 $ 93,834 $ 159,364 $174,629 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 104,205 136,783 221,161 250,734 Nuclear fuel and lease amortization 11,920 12,595 23,677 25,697 Deferred income taxes, net (22,160) (21,730) (42,562) (37,688) Investment tax credits, net (3,341) (5,480) (6,694) (9,573) Receivables (137,091) (45,669) (194,795) (38,614) Materials and supplies 914 6,217 54,060 9,959 Accounts payable 35,497 19,364 (52,684) 72,724 Other (74,071) (51,448) (28,416) (13,619) --------- -------- --------- -------- Net cash provided from operating activities 21,051 144,466 133,111 434,249 --------- -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 249,042 174,934 249,542 192,252 Short-term borrowings, net -- 1,388 -- -- Redemptions and Repayments- Long-term debt 30,560 245,366 37,710 316,399 Short-term borrowings, net 21,062 -- 15,447 49,551 Dividend Payments- Common stock -- 50,200 37,300 109,200 Preferred stock 2,706 2,789 5,404 5,597 --------- -------- --------- -------- Net cash used for (provided from) financing activities (194,714) 122,033 (153,681) 288,495 --------- -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 15,608 45,064 41,006 133,185 Loans to associated companies 136,257 -- 311,829 24,234 Loan payments from associated companies (506) (76,479) (506) -- Sale of assets to associated companies (33,002) -- (154,596) -- Other (4,567) (4,721) (6,046) 8,334 --------- -------- --------- -------- Net cash used for (provided from) investing activities 113,790 (36,136) 191,687 165,753 --------- -------- --------- -------- Net increase (decrease) in cash and cash equivalents 101,975 58,569 95,105 (19,999) Cash and cash equivalents at beginning of period 11,399 8,607 18,269 87,175 --------- -------- --------- -------- Cash and cash equivalents at end of period $ 113,374 $ 67,176 $ 113,374 $ 67,176 ========= ======== ========= ======== The preceding Notes to Financial Statements as they relate to Ohio Edison Company are an integral part of these statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Ohio Edison Company: We have reviewed the accompanying consolidated balance sheet of Ohio Edison Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiaries as of June 30, 2001, and the related consolidated statements of income and cash flows for the three-month and six-month periods ended June 30, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of Ohio Edison Company and subsidiaries as of December 31, 2000 (not presented herein), and, in our report dated February 16, 2001, 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, 2000, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio, August 8, 2001. OHIO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Corporate Separation -------------------- Beginning in 2001, Ohio electric customers can select their generation suppliers as a result of legislation which restructured the electric utility industry. That legislation also required unbundling the price for electricity into its component elements -- including generation, transmission, distribution and transition charges. Also, Ohio utilities that offer both competitive and regulated retail electric services were required to implement a corporate separation plan approved by the PUCO -- one which provides a clear separation between regulated and competitive operations. In connection with FirstEnergy's transition plan, FirstEnergy separated its businesses into three distinct units -- a competitive services unit, a utility services unit and a corporate support services unit. OE and Penn (OE Companies) are included in the utility services unit which continues to deliver power to homes and businesses through their existing distribution systems and maintains the "provider of last resort" (PLR) obligation under their respective rate plans. As a result of the transition plan, FirstEnergy's electric utility operating companies (EUOC) entered into power supply agreements whereby FES purchases all of the EUOC nuclear generation, as well as generation from leased fossil generating facilities. FGCO, a wholly owned subsidiary of FES, leases fossil generating units owned by the EUOC. The EUOC are "full requirements" customers of FES to enable them to meet their PLR responsibilities in their respective service areas. OE continues to provide power directly to wholesale customers under previously negotiated contracts as well as to alternative energy suppliers as part of OE's market support generation of 560 megawatts (531 megawatts committed as of June 30, 2001). The effect on the OE Companies' reported results of operations during the second quarter and first half of 2001 from FirstEnergy's corporate separation plan and the OE Companies' sale of transmission assets to ATSI in September 2000, are summarized in the following tables: Three Months Ended June 30, 2001 -------------------------------- Income Statement Effects Corporate ------------------------ Increase (Decrease) Separation ATSI Total ---------- ---- ----- (in millions) Operating Revenues: Power supply agreement with FES $ 87.7 $ -- $ 87.7 Generating units rent 44.5 -- 44.5 Ground lease with ATSI -- 3.0 3.0 ------ ----- ------ Total Operating Revenues Effect $132.2 $ 3.0 $135.2 ====== ===== ====== Operating Expenses and Taxes: Fossil fuel costs $(66.5)(a) $ -- $(66.5) Purchased power costs 235.5 (b) -- 235.5 Other operating costs (22.1)(a) 19.9 (d) (2.2) Provision for depreciation and amortization -- (4.3)(e) (4.3) General taxes (1.2)(c) (4.0)(e) (5.2) ------ ----- ------ Total Operating Expenses Effect $145.7 $11.6 $157.3 ====== ===== ====== Other Income $ -- $ 4.0 (f) $ 4.0 ====== ===== ====== Six Months Ended June 30, 2001 -------------------------------- Income Statement Effects Corporate ------------------------ Increase (Decrease) Separation ATSI Total ---------- ---- ----- (in millions) Operating Revenues: Power supply agreement with FES $ 177.5 $ -- $ 177.5 Generating units rent 89.4 -- 89.4 Ground lease with ATSI -- 6.0 6.0 ------- ----- ------- Total Operating Revenues Effect $ 266.9 $ 6.0 $ 272.9 ======= ===== ======= Operating Expenses and Taxes: Fossil fuel costs $(130.4)(a) $ -- $(130.4) Purchased power costs 533.0 (b) -- 533.0 Other operating costs (62.6)(a) 40.0 (d) (22.6) Provision for depreciation and amortization -- (8.6)(e) (8.6) General taxes (2.4)(c) (7.6)(e) (10.0) ------- ----- ------- Total Operating Expenses Effect $ 337.6 $23.8 $ 361.4 ======= ===== ======= Other Income $ -- $ 8.0 (f) $ 8.0 ======= ===== ======= (a) Transfer of fossil operations to FGCO. (b) Purchased power from power supply agreement (PSA). (c) Payroll taxes related to employees transferred to FGCO. (d) Transmission services received from ATSI. (e) Depreciation and property taxes related to transmission assets sold to ATSI. (f) Interest on note receivable from ATSI. Results of Operations --------------------- Excluding the effects shown in the tables above, operating revenues decreased by $57.7 million or 8.7% in the second quarter and $56.7 million or 4.3% in the first half of 2001, compared to the same periods of 2000. The OE Companies' electric sales to retail customers decreased by $43.8 million in the second quarter and $33.2 million in the first half of 2001, compared to the same periods of 2000 due to lower kilowatt-hour sales of electric generation reflecting in part the effects of customer choice in Ohio. As part of Ohio's electric utility restructuring law, the implementation of a 5% reduction in generation charges for residential customers also contributed to the lower electric sales revenues. The lower residential rate reduced electric sales revenues by approximately $6.4 million in the second quarter and $11.4 million in the first half of 2001 and is expected to lower revenues for all of 2001 by more than $29 million. Revenues from kilowatt-hour sales to wholesale customers (excluding the PSA sales to FES) declined $14.9 million in the second quarter and $24.6 million in the first half of 2001 from the same periods last year. Lower kilowatt-hour deliveries to customers in the second quarter of 2001, compared to the same period of 2000, resulted in decreased revenues for transmission and distribution services. A 3.6% decrease in kilowatt-hour deliveries in the second quarter of 2001 from the corresponding period last year was the result of reduced deliveries to all customer groups -- residential, commercial and industrial. Weather was cooler in the second quarter of 2001 than the same period last year, reducing residential air-conditioning loads. Deliveries to business (commercial and industrial) customers were lower in the second quarter of 2001, compared to the same period last year, reflecting a softening in the service area economy. A 0.3% decrease in total kilowatt-hour deliveries in the first half of 2001 from the same period last year was moderated by colder weather in the first quarter of 2001 than the corresponding period last year (although warmer than normal) which contributed to a 3.7% increase in residential deliveries. However, business deliveries were lower in the first half of 2001 from the same period last year reflecting the softening in the service area economy. Operating Expenses and Taxes Total operating expenses and taxes increased by $73.6 million in the second quarter and $243.1 million in the first six months of 2001, compared to the same periods of 2000, due to the implementation of the effects as shown in the preceding tables. Excluding these effects on operating expenses, fuel expense declined $1.7 million in the second quarter of 2001 and was relatively unchanged for the first half of 2001, from the same periods last year. Lower nuclear fuel expense resulted, in part, from reduced nuclear generation in the second quarter of 2001. Purchased power costs decreased by $23.0 million in the second quarter and $33.6 million in the first six months of 2001, compared to the corresponding periods of last year, reflecting all of the OE Companies' power requirements now being provided under the PSA. Nuclear operating costs increased by $3.9 million in the second quarter of 2001, compared to the second quarter of 2000. No refueling outages occurred in either period although the Perry Plant experienced several unplanned outages in the second quarter of 2001. For the first half of 2001, nuclear operating costs decreased by $15.4 million from the first half of 2000. The reduced costs resulted from the OE Companies' smaller ownership share (35.24%) of a scheduled Perry Plant refueling outage in the first quarter of 2001 versus their 100% ownership share in the Beaver Valley Unit 1 refueling outage in the same period last year. Other operating expenses decreased by $16.2 million in the second quarter and $12.5 million in the first half of 2001 from the corresponding periods in 2000. The decreases resulted principally from a reduction in low-income payment plan customer costs and lower distribution expenses from storm-related damage. Excluding the effects shown in the preceding tables, charges for depreciation and amortization decreased $28.3 million in the second quarter and $21.0 million in the first half of 2001 from the same periods last year. Lower transition cost amortization under OE's transition plan compared to the accelerated cost recovery in connection with OE's prior regulatory plan was the principal factor accounting for this decrease. The OE Companies expect incremental transition cost amortization during 2001 to be lower than the rate plan accelerations recognized in 2000. General taxes were $31.9 million lower in the second quarter and $46.4 million lower in the first half of 2001, compared to the same periods of 2000, primarily due to reduced property taxes and other state tax changes in connection with the Ohio electric industry restructuring. Also contributing to these reductions were the effects shown in the preceding tables and a one-time benefit of $15 million in the second quarter of 2001 as a result of successfully resolving certain pending tax issues. Net Interest Charges Net interest charges continued to trend lower, decreasing $1.2 million in the second quarter and $5.3 million in the first half of 2001, compared to the same periods in 2000, primarily due to debt redemption and refinancing activities undertaken after the end of the second quarter of 2000. During the first half of 2001, debt redemption and refinancing activities totaled $6.6 million and $102.4 million, respectively, and will result in annualized savings of $3.0 million. As a result of initiating transfers of generation assets and related construction projects to FGCO under corporate separation, capitalized interest was reduced by approximately $2.3 million, with offsetting increases to other income from the interest income on the related notes receivable. Capital Resources and Liquidity ------------------------------- The OE Companies have continuing cash requirements for planned capital expenditures and maturing debt. During the last two quarters of 2001, capital requirements for property additions and capital leases are expected to be about $85 million, including $35 million for nuclear fuel. The OE Companies also have sinking fund requirements for preferred stock and maturing long-term debt of $14.1 million during the remainder of 2001. These requirements are expected to be satisfied from internal cash and/or short-term credit arrangements. As of June 30, 2001, the OE Companies had about $113.4 million of cash and temporary investments and $300.0 million of short-term indebtedness. Their available borrowing capability included $51.5 million from unused revolving lines of credit and up to $2 million from bank facilities on a short-term basis at the banks' discretion. As of June 30, 2001, the OE Companies had the capability to issue up to $1.1 billion of additional first mortgage bonds on the basis of property additions and retired bonds. Under the earnings coverage tests contained in the OE Companies' charters, $2.1 billion of preferred stock (assuming no additional debt was issued) could be issued based on earnings through the second quarter of 2001. On June 27, 2001, OE and Penn completed the issuance of pollution control revenue refunding bonds totaling $69.5 million and $32.9 million, respectively. The proceeds will be used to complete optional refinancing in August and September of 2001. THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------- --------------------- 2001 2000 2001 2000 (In thousands) OPERATING REVENUES $498,766 $470,635 $1,015,183 $894,292 -------- -------- ---------- -------- OPERATING EXPENSES AND TAXES: Fuel 16,888 39,734 34,753 86,894 Purchased power 193,590 67,948 408,095 109,766 Nuclear operating costs 28,679 49,007 78,629 78,438 Other operating costs 72,396 92,803 150,699 175,020 -------- -------- ---------- -------- Total operation and maintenance expenses 311,553 249,492 672,176 450,118 Provision for depreciation and amortization 52,964 57,511 109,728 115,525 General taxes 34,080 54,020 71,950 110,924 Income taxes 21,579 22,670 29,294 44,000 -------- -------- ---------- -------- Total operating expenses and taxes 420,176 383,693 883,148 720,567 -------- -------- ---------- -------- OPERATING INCOME 78,590 86,942 132,035 173,725 OTHER INCOME 1,138 2,857 5,558 6,285 -------- -------- ---------- -------- INCOME BEFORE NET INTEREST CHARGES 79,728 89,799 137,593 180,010 -------- -------- ---------- -------- NET INTEREST CHARGES: Interest on long-term debt 48,317 51,659 96,602 102,843 Allowance for borrowed funds used during construction (216) (560) (1,073) (1,072) Other interest expense (credit) (879) (554) (2,075) 275 -------- -------- ---------- -------- Net interest charges 47,222 50,545 93,454 102,046 -------- -------- ---------- -------- NET INCOME 32,506 39,254 44,139 77,964 PREFERRED STOCK DIVIDEND REQUIREMENTS 6,561 6,615 13,122 14,405 -------- -------- ---------- -------- EARNINGS ON COMMON STOCK $ 25,945 $ 32,639 $ 31,017 $ 63,559 ======== ======== ========== ======== The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating Company are an integral part of these statements.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2001 2000 ----------- ----------- (In thousands) ASSETS ------ UTILITY PLANT: In service $4,047,943 $4,036,590 Less--Accumulated provision for depreciation 1,654,685 1,624,672 ---------- ---------- 2,393,258 2,411,918 ---------- ---------- Construction work in progress- Electric plant 49,338 66,904 Nuclear fuel 42 24,145 ---------- ---------- 49,380 91,049 ---------- ---------- 2,442,638 2,502,967 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust 475,551 491,830 Nuclear plant decommissioning trusts 205,824 189,804 Long-term notes receivable from associated companies 103,636 92,722 Other 36,794 36,084 ---------- ---------- 821,805 810,440 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 238 2,855 Receivables- Customers 20,917 14,748 Associated companies 61,375 81,090 Other (less accumulated provisions of $1,000,000 for uncollectible accounts at both dates) 126,125 127,639 Notes receivable from associated companies 399 384 Materials and supplies, at average cost- Owned 23,471 26,039 Under consignment 25,684 38,673 Prepayments and other 66,918 59,377 ---------- ---------- 325,127 350,805 ---------- ---------- DEFERRED CHARGES: Regulatory assets 824,477 816,143 Goodwill 1,389,754 1,408,869 Other 73,509 75,407 ---------- ---------- 2,287,740 2,300,419 ---------- ---------- $5,877,310 $5,964,631 ========== ==========
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2001 2000 --------- ----------- (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 61,192 132,877 ---------- ---------- Total common stockholder's equity 993,154 1,064,839 Preferred stock- Not subject to mandatory redemption 238,325 238,325 Subject to mandatory redemption 25,150 26,105 Long-term debt 2,615,427 2,634,692 ---------- ---------- 3,872,056 3,963,961 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt and preferred stock 142,007 165,696 Accounts payable- Associated companies 77,808 102,915 Other 33,348 54,422 Notes payable to associated companies 157,172 28,586 Accrued taxes 152,003 178,707 Accrued interest 56,490 56,142 Other 50,156 82,195 ---------- ---------- 668,984 668,663 ---------- ---------- DEFERRED CREDITS: Accumulated deferred income taxes 595,679 591,748 Accumulated deferred investment tax credits 78,018 79,957 Nuclear plant decommissioning costs 215,017 198,997 Pensions and other postretirement benefits 230,491 227,528 Other 217,065 233,777 ---------- ---------- 1,336,270 1,332,007 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Note 2) ---------- ---------- $5,877,310 $5,964,631 ========== ========== The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating Company are an integral part of these balance sheets.
THE CLEVELAND ELECTRIC ILLUMINATING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 32,506 $ 39,254 $ 44,139 $ 77,964 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 52,964 57,511 109,728 115,525 Nuclear fuel and lease amortization 7,070 7,590 14,114 17,616 Other amortization (4,039) (3,451) (7,672) (6,618) Deferred income taxes, net 4,607 (6,697) 4,660 (2,612) Investment tax credits, net (970) (982) (1,939) (1,964) Receivables (60,559) (500) 15,060 42,607 Materials and supplies 234 507 15,557 (3,106) Accounts payable 8,869 55,016 (46,181) 7,935 Accrued taxes 21,765 20,955 (26,704) 33,739 Other (13,482) (4,462) (67,065) (59,025) -------- -------- -------- -------- Net cash provided from operating activities 48,965 164,741 53,697 222,061 -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Short-term borrowings, net 96,323 -- 128,586 -- Redemptions and Repayments- Preferred stock 10,716 13,714 10,716 13,714 Long-term debt 21,264 8,603 29,904 18,740 Short-term borrowings, net -- 97,652 -- 89,659 Dividend Payments- Common stock 84,000 20,000 105,800 30,000 Preferred stock 7,040 7,789 14,077 15,579 -------- -------- -------- -------- Net cash used for financing activities 26,697 147,758 31,911 167,692 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 5,363 30,025 15,580 44,475 Loans to associated companies 11,117 -- 11,117 27,700 Loan payments from associated companies (188) (5,120) (188) -- Capital trust investments (1,071) (1,294) (16,279) (25,418) Sale of assets to associated companies (11,117) -- (11,117) -- Other 18,140 (894) 25,290 7,810 -------- -------- -------- -------- Net cash used for investing activities 22,244 22,717 24,403 54,567 -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 24 (5,734) (2,617) (198) Cash and cash equivalents at beginning of period 214 5,912 2,855 376 -------- -------- -------- -------- Cash and cash equivalents at end of period $ 238 $ 178 $ 238 $ 178 ======== ======== ======== ======== The preceding Notes to Financial Statements as they relate to The Cleveland Electric Illuminating Company are an integral part of these statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Cleveland Electric Illuminating Company: We have reviewed the accompanying consolidated balance sheet of The Cleveland Electric Illuminating Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiary as of June 30, 2001, and the related consolidated statements of income and cash flows for the three-month and six-month periods ended June 30, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of The Cleveland Electric Illuminating Company and subsidiary as of December 31, 2000 (not presented herein), and, in our report dated February 16, 2001, 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, 2000, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio, August 8, 2001. THE CLEVELAND ELECTRIC ILLUMINATING COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Corporate Separation -------------------- Beginning in 2001, Ohio electric customers can select their generation suppliers as a result of legislation which restructured the electric utility industry. That legislation also required unbundling the price for electricity into its component elements -- including generation, transmission, distribution and transition charges. Also, Ohio utilities that offer both competitive and regulated retail electric services were required to implement a corporate separation plan approved by the PUCO -- one which provides a clear separation between regulated and competitive operations. In connection with FirstEnergy's transition plan, FirstEnergy separated its businesses into three distinct units -- a competitive services unit, a utility services unit and a corporate support services unit. CEI is included in the utility services unit which continues to deliver power to homes and businesses through its existing distribution system and maintains the PLR obligation under its rate plan. As a result of the transition plan, the EUOC entered into power supply agreements whereby FES purchases all of the EUOC nuclear generation, as well as generation from leased fossil generating facilities. FGCO, a wholly owned subsidiary of FES, leases fossil generating units owned by the EUOC. The EUOC are "full requirements" customers of FES to enable them to meet their PLR responsibilities in their respective service areas. CEI continues to provide power directly to wholesale customers under negotiated contracts as well as to alternative energy suppliers as part of CEI's market support generation of 400 megawatts (398 megawatts committed as of June 30, 2001). The effect on CEI's reported results of operations during the second quarter and first half of 2001 from FirstEnergy's corporate separation plan and CEI's sale of transmission assets to ATSI in September 2000, are summarized in the following tables: Three Months Ended June 30, 2001 -------------------------------- Income Statement Effects Corporate ------------------------ Increase (Decrease) Separation ATSI Total ---------- ---- ----- (in millions) Operating Revenues: Power supply agreement with FES $ 76.3 $ -- $ 76.3 Generating units rent 14.6 -- 14.6 Ground lease with ATSI -- 1.8 1.8 ------ ----- ------ Total Operating Revenues Effect $ 90.9 $ 1.8 $ 92.7 ====== ===== ====== Operating Expenses and Taxes: Fossil fuel costs $(20.5)(a) $ -- $(20.5) Purchased power costs 169.1 (b) -- 169.1 Other operating costs (23.4)(a) 10.2 (d) (13.2) Provision for depreciation and amortization -- (1.9)(e) (1.9) General taxes (0.8)(c) (2.4)(e) (3.2) ------ ----- ------ Total Operating Expenses Effect $124.4 $ 5.9 $130.3 ====== ===== ====== Other Income $ -- $ 1.8(f) $ 1.8 ====== ===== ====== Six Months Ended June 30, 2001 -------------------------------- Income Statement Effects Corporate ------------------------ Increase (Decrease) Separation ATSI Total ---------- ---- ----- (in millions) Operating Revenues: Power supply agreement with FES $153.8 $ -- $153.8 Generating units rent 29.6 -- 29.6 Ground lease with ATSI -- 3.6 3.6 ------ ----- ------ Total Operating Revenues Effect $183.4 $ 3.6 $187.0 ====== ===== ====== Operating Expenses and Taxes: Fossil fuel costs $(43.9)(a) $ -- $(43.9) Purchased power costs 358.6 (b) -- 358.6 Other operating costs (40.5)(a) 21.2 (d) (19.3) Provision for depreciation and amortization -- (3.9)(e) (3.9) General taxes (1.6)(c) (4.6)(e) (6.2) ------ ----- ------ Total Operating Expenses Effect $272.6 $12.7 $285.3 ====== ===== ====== Other Income $ -- $ 3.6 (f) $ 3.6 ====== ===== ====== (a) Transfer of fossil operations to FGCO. (b) Purchased power from power supply agreement (PSA). (c) Payroll taxes related to employees transferred to FGCO. (d) Transmission services received from ATSI. (e) Depreciation and property taxes on transmission assets sold to ATSI. (f) Interest on note receivable from ATSI. Results of Operations --------------------- Excluding the effects shown in the tables above, operating revenues decreased by $64.6 million or 13.7% in the second quarter and $66.1 million or 7.4% in the first half of 2001, compared to the same periods of 2000. CEI's electric sales to retail customers decreased by $49.7 million in the second quarter and $29.2 million in the first half of 2001, compared with the same periods of 2000, primarily due to lower kilowatt-hour sales of electric generation reflecting in part the effects of customer choice in Ohio. As part of Ohio's electric utility restructuring law, the implementation of a 5% reduction in generation charges for residential customers also contributed to the lower electric sales revenues. This decreased electric sales revenues by approximately $3.9 million in the second quarter and $6.7 million in the first half of 2001 and is expected to lower revenues for all of 2001 by more than $16 million. Revenues from kilowatt-hour sales to wholesale customers (excluding the PSA sales to FES) declined $15.1 million in the second quarter and $32.4 million in the first half of 2001 from the same periods last year. Lower kilowatt-hour deliveries to customers in the second quarter of 2001, compared to the same period of 2000, resulted in decreased revenues for transmission and distribution services. A 1.7% decrease in kilowatt-hour deliveries in the second quarter of 2001 resulted from reduced residential deliveries partially offset by a slight increase in business (commercial and industrial) deliveries from the second quarter of last year. Weather was cooler in the second quarter of 2001 than the same period last year reducing residential air-conditioning loads. The nearly flat business deliveries in the second quarter of 2001, compared to the same period last year, reflected the slowing service area economy. A 0.7% increase in total kilowatt-hour deliveries in the first half of 2001 from the same period last year resulted from a net increase in sales to business customers that was partially offset by reduced sales to residential customers. The lower residential kilowatt-hour sales were partially due to reduced air-conditioning loads in the second quarter, which was significant enough to affect the six-month comparison to last year. Operating Expenses and Taxes Total operating expenses and taxes increased by $36.5 million in the second quarter and $162.6 million in the first six months of 2001, compared to the same periods of 2000, due to the implementation of the effects as shown in the preceding tables. Excluding these effects on operating expenses, fuel expense declined $2.3 million in the second quarter and $8.2 million in the first half of 2001 from the same periods last year. The lower fuel expense resulted from reduced generation in the first six months of 2001, compared to the same period of 2000. Reduced fossil generation resulted from planned maintenance activities at the Mansfield Plant, and lower nuclear generation resulting from a refueling outage and several unplanned outages at the Perry Plant. Purchased power costs decreased by $43.4 million in the second quarter and $60.3 million in the first six months of 2001, compared to the corresponding periods of last year, reflecting all of CEI's power requirements now being provided under the PSA. The timing of nuclear refueling outages resulted in a $20.3 million decrease in nuclear operating costs in the second quarter of 2001, compared to the same period of last year. Refueling outage costs were comparable for the six month periods with the Perry Plant's (44.85% owned) outage occurring in the first quarter of 2001 and the Davis Besse Plant's (51.38% owned) outage occurring in the second quarter of 2000. Other operating costs decreased $7.2 million in the second quarter and $5.0 million in the first half of 2001, compared to the same periods of 2000. The decreases resulted principally from a reduction in low-income payment plan customer costs and lower distribution expenses from storm-related damage. Excluding the effects shown in the preceding tables, charges for depreciation and amortization decreased $2.6 million in the second quarter and $1.9 million in the first half of 2001 from the same periods last year due to deferrals for shopping incentives offsetting incremental transition cost amortization under CEI's transition plan (see Note 3). General taxes were $19.9 million lower in the second quarter and $39.0 million lower in the first half of 2001, compared to the same periods of 2000, primarily due to reduced property taxes and other state tax changes associated with the Ohio electric industry restructuring. Net Interest Charges Net interest charges continued to trend lower, decreasing $3.3 million in the second quarter and $8.6 million in the first half of 2001, compared to the same periods in 2000, primarily due to debt redemption and refinancing activities undertaken after the end of the second quarter of 2000. During the first half of 2001, debt redemptions totaled $15 million and will result in annualized savings of $1.4 million. Capital Resources and Liquidity ------------------------------- CEI has continuing cash needs for planned capital expenditures and maturing debt. During the last two quarters of 2001, capital requirements for property additions and capital leases are expected to be about $56 million, including $8 million for nuclear fuel. CEI also has sinking fund requirements for preferred stock and maturing long-term debt of $111.3 million during the remainder of 2001. These requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. As of June 30, 2001, CEI had approximately $637,000 of cash and temporary investments and $157.2 million of short-term indebtedness to associated companies. Under its first mortgage indenture, as of June 30, 2001, CEI had the capability to issue up to $854 million of additional first mortgage bonds on the basis of property additions and retired bonds. CEI has no restrictions on the issuance of preferred stock. CEI established the Cleveland Electric Financing Trust I, a Delaware business trust subsidiary, during the second quarter of 2001, for the purpose of issuing Cumulative Trust Preferred Capital Securities in the amount of $245 million. The proceeds from the sale will be used by the financing trust to purchase CEI junior subordinated debentures. THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- (In thousands) OPERATING REVENUES $263,003 $235,379 $534,638 $452,770 -------- -------- -------- -------- OPERATING EXPENSES AND TAXES: Fuel 12,015 21,523 24,768 47,738 Purchased power 86,713 28,142 175,065 35,060 Nuclear operating costs 37,111 52,721 84,759 90,918 Other operating costs 37,287 40,816 75,913 78,029 -------- -------- -------- -------- Total operation and maintenance expenses 173,126 143,202 360,505 251,745 Provision for depreciation and amortization 29,240 26,382 62,015 52,562 General taxes 13,879 21,576 29,940 45,000 Income taxes 13,403 10,652 20,489 25,970 -------- -------- -------- -------- Total operating expenses and taxes 229,648 201,812 472,949 375,277 -------- -------- -------- -------- OPERATING INCOME 33,355 33,567 61,689 77,493 OTHER INCOME 2,178 2,196 5,966 4,885 -------- -------- -------- -------- INCOME BEFORE NET INTEREST CHARGES 35,533 35,763 67,655 82,378 -------- -------- -------- -------- NET INTEREST CHARGES: Interest on long-term debt 16,616 18,628 33,860 37,769 Allowance for borrowed funds used during construction (2,914) (2,931) (3,263) (4,145) Other interest expense (credit) (1,133) (464) (2,111) (1,296) -------- -------- -------- -------- Net interest charges 12,569 15,233 28,486 32,328 -------- -------- -------- -------- NET INCOME 22,964 20,530 39,169 50,050 PREFERRED STOCK DIVIDEND REQUIREMENTS 4,030 4,075 8,075 8,139 -------- -------- -------- -------- EARNINGS ON COMMON STOCK $ 18,934 $ 16,455 $ 31,094 $ 41,911 ======== ======== ======== ======== The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an integral part of these statements.
THE TOLEDO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2001 2000 ---------- ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $1,568,085 $1,637,616 Less--Accumulated provision for depreciation 613,192 597,397 ---------- ---------- 954,893 1,040,219 ---------- ---------- Construction work in progress- Electric plant 28,227 73,565 Nuclear fuel 40 10,720 ---------- ---------- 28,267 84,285 ---------- ---------- 983,160 1,124,504 ---------- ---------- OTHER PROPERTY AND INVESTMENTS: Shippingport Capital Trust 262,131 279,836 Nuclear plant decommissioning trusts 147,572 132,442 Long-term notes receivable from associated companies 162,436 39,084 Other. 3,916 4,601 ---------- ---------- 576,055 455,963 ---------- ---------- CURRENT ASSETS: Cash and cash equivalents 349 1,385 Receivables- Customers 9,219 6,618 Associated companies 44,092 62,271 Other 13,150 1,572 Notes receivable from associated companies 7,599 32,617 Materials and supplies, at average cost- Owned 13,145 17,388 Under consignment 15,525 21,994 Prepayments and other 30,423 27,151 ---------- ---------- 133,502 170,996 ---------- ---------- DEFERRED CHARGES: Regulatory assets 388,714 412,682 Goodwill 451,949 458,164 Other 28,566 29,958 ---------- ---------- 869,229 900,804 ---------- ---------- $2,561,946 $2,652,267 ========== ==========
THE TOLEDO EDISON COMPANY CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30, December 31, 2001 2000 ---------- ----------- (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 97,754 81,358 ---------- ---------- Total common stockholder's equity 621,983 605,587 Preferred stock not subject to mandatory redemption 210,000 210,000 Long-term debt 920,509 944,193 ---------- ---------- 1,752,492 1,759,780 ---------- ---------- CURRENT LIABILITIES: Currently payable long-term debt 46,694 56,230 Accounts payable- Associated companies 41,851 36,564 Other 15,292 25,070 Notes payable to associated companies 7,491 41,936 Accrued taxes 57,832 57,519 Accrued interest 19,778 19,946 Other 27,009 49,908 ---------- --------- 215,947 287,173 ---------- --------- DEFERRED CREDITS: Accumulated deferred income taxes 202,137 196,944 Accumulated deferred investment tax credits 34,201 35,174 Nuclear plant decommissioning costs 153,914 138,784 Pensions and other postretirement benefits 120,187 119,327 Other 83,068 115,085 ---------- ---------- 593,507 605,314 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Note 2) ---------- ---------- $2,561,946 $2,652,267 ========== ========== The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an integral part of these balance sheets.
THE TOLEDO EDISON COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------- ------------------ 2001 2000 2001 2000 -------- -------- -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 22,964 $ 20,530 $ 39,169 $ 50,050 Adjustments to reconcile net income to net cash from operating activities- Provision for depreciation and amortization 29,240 26,382 62,015 52,562 Nuclear fuel and lease amortization 5,236 4,758 10,410 11,391 Deferred income taxes, net 994 1,412 3,152 8,020 Investment tax credits, net (487) (479) (973) (958) Receivables (13,617) 11,530 4,000 36,365 Materials and supplies (711) 2,833 10,712 3,166 Accounts payable (6,400) 42,039 (4,491) 28,810 Other (18,750) (25,189) (48,554) (58,247) -------- -------- -------- -------- Net cash provided from operating activities 18,469 83,816 75,440 131,159 -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt -- 66,166 -- 66,166 Short-term borrowings, net 7,491 1,224 -- 18,058 Redemptions and Repayments- Long-term debt 25,949 90,433 31,812 111,317 Short-term borrowings, net -- -- 34,445 -- Dividend Payments- Common stock -- 16,300 14,700 34,300 Preferred stock 4,028 4,075 8,073 8,139 -------- -------- -------- -------- Net cash used for financing activities 22,486 43,418 89,030 69,532 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 8,481 28,068 20,509 65,777 Loans to associated companies 5,548 11,115 123,438 5,949 Loan payments from associated companies (21,556) -- (25,104) -- Capital trust investments (520) (636) (17,705) (15,618) Sale of assets to associated companies (5,548) -- (123,438) -- Other 9,936 1,851 9,746 5,530 -------- -------- -------- -------- Net cash used for (provided from) investing activities ( 3,659) 40,398 (12,554) 61,638 -------- -------- -------- -------- Net decrease in cash and cash equivalents 358 -- 1,036 11 Cash and cash equivalents at beginning of period 707 301 1,385 312 -------- -------- -------- -------- Cash and cash equivalents at end of period $ 349 $ 301 $ 349 $ 301 ======== ======== ======== ======== The preceding Notes to Financial Statements as they relate to The Toledo Edison Company are an integral part of these statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Toledo Edison Company: We have reviewed the accompanying consolidated balance sheet of The Toledo Edison Company (an Ohio corporation and wholly owned subsidiary of FirstEnergy Corp.) and subsidiary as of June 30, 2001, and the related consolidated statements of income and cash flows for the three-month and six-month periods ended June 30, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of The Toledo Edison Company and subsidiary as of December 31, 2000 (not presented herein), and, in our report dated February 16, 2001, 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, 2000, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio, August 8, 2001. THE TOLEDO EDISON COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Corporate Separation -------------------- Beginning in 2001, Ohio electric customers can select their generation suppliers as a result of legislation which restructured the electric utility industry. That legislation also required unbundling the price for electricity into its component elements -- including generation, transmission, distribution and transition charges. Also, Ohio utilities that offer both competitive and regulated retail electric services were required to implement a corporate separation plan approved by the PUCO -- one which provides a clear separation between regulated and competitive operations. In connection with FirstEnergy's transition plan, FirstEnergy separated its businesses into three distinct units -- a competitive services unit, a utility services unit and a corporate support services unit. TE is included in the utility services unit which continues to deliver power to homes and businesses through its existing distribution system and maintains the PLR obligation under its rate plan. As a result of the transition plan, the EUOC entered into power supply agreements whereby FES purchases all of the EUOC nuclear generation, as well as generation from leased fossil generating facilities. FGCO, a wholly owned subsidiary of FES, leases fossil generating units owned by the EUOC. The EUOC are "full requirements" customers of FES to enable them to meet their PLR responsibilities in their respective service areas. TE continues to provide power directly to wholesale customers under previously negotiated contracts as well as to alternative energy suppliers as part of TE's market support generation of 160 megawatts (151 megawatts committed as of June 30, 2001). The effect on TE's reported results of operations during the second quarter and first half of 2001 from FirstEnergy's corporate separation plan and TE's sale of transmission assets to ATSI in September 2000, are summarized in the following tables: Three Months Ended June 30, 2001 -------------------------------- Income Statement Effects Corporate ------------------------ Increase (Decrease) Separation ATSI Total ---------- ---- ----- (in millions) Operating Revenues: Power supply agreement with FES $41.6 $ -- $41.6 Generating units rent 3.4 -- 3.4 Ground lease with ATSI -- 0.4 0.4 ----- ----- ----- Total Operating Revenues Effect $45.0 $ 0.4 $45.4 ===== ===== ===== Operating Expenses and Taxes: Fossil fuel costs $(9.0)(a) $ -- $(9.0) Purchased power costs 82.8 (b) -- 82.8 Other operating costs (6.2)(a) 5.9 (d) (0.3) Provision for depreciation and amortization -- (0.9)(e) (0.9) General taxes (0.5)(c) (0.9)(e) (1.4) ----- ----- ----- Total Operating Expenses Effect $67.1 $ 4.1 $71.2 ===== ===== ===== Other Income $ -- $ 0.7 (f) $ 0.7 ===== ===== ===== Six Months Ended June 30, 2001 -------------------------------- Income Statement Effects Corporate ------------------------ Increase (Decrease) Separation ATSI Total ---------- ---- ----- (in millions) Operating Revenues: Power supply agreement with FES $ 84.6 $ -- $ 84.6 Generating units rent 7.0 -- 7.0 Ground lease with ATSI -- 0.9 0.9 ------ ----- ------ Total Operating Revenues Effect $ 91.6 $ 0.9 $ 92.5 ====== ===== ====== Operating Expenses and Taxes: Fossil fuel costs $(19.5)(a) $ -- $(19.5) Purchased power costs 166.7 (b) -- 166.7 Other operating costs (9.2)(a) 11.7(d) 2.5 Provision for depreciation and amortization -- (1.8)(e) (1.8) General taxes (1.0)(c) (1.7)(e) (2.7) ------ ----- ------ Total Operating Expenses Effect $137.0 $ 8.2 $145.2 ====== ===== ====== Other Income $ -- $ 1.5 (f) $ 1.5 ====== ===== ====== (a) Transfer of fossil operations to FGCO. (b) Purchased power from power supply agreement (PSA). (c) Payroll taxes related to employees transferred to FGCO. (d) Transmission services received from ATSI. (e) Depreciation and property taxes on transmission assets sold to ATSI. (f) Interest on note receivable from ATSI. Results of Operations --------------------- Excluding the effects shown in the tables above, operating revenues decreased by $17.8 million or 7.5% in the second quarter and $10.6 million or 2.3% in the first half of 2001, compared to the same periods of 2000. TE's electric sales to retail customers decreased by $11.1 million in the second quarter and were nearly flat in the first six months of 2001, compared to the same periods of 2000, primarily due to lower kilowatt-hour sales of electric generation reflecting in part the effects of customer choice in Ohio. As part of Ohio's electric utility restructuring law, the implementation of a 5% reduction in generation charges for residential customers also contributed to the lower electric sales revenues. This decreased electric sales revenues by approximately $1.9 million in the second quarter and $3.3 million in the first half of 2001 and is expected to lower revenues for all of 2001 by more than $8 million. Revenues from kilowatt-hour sales to wholesale customers (excluding the PSA sales to FES) declined $4.9 million in the second quarter and $10.3 million in the first half of 2001 from the same periods last year. A 0.3% decrease in kilowatt-hour deliveries in the second quarter of 2001 from the corresponding period last year resulted from reduced business (commercial and industrial) deliveries, reflecting a softening of the service area economy partially offset by a slight increase in residential deliveries. A 3.3% increase in total kilowatt-hour deliveries in the first half of 2001 from the same period last year resulted from an increase in sales to both residential and business customers. Operating Expenses and Taxes Total operating expenses and taxes increased by $27.8 million in the second quarter and $97.7 million in the first six months of 2001, compared to the same periods of 2000, due to the implementation of the effects as shown in the preceding tables. Excluding these effects on operating expenses, fuel expense declined $0.5 million in the second quarter and $3.5 million in the first half of 2001 from the same periods last year. The lower fuel expense resulted from reduced generation at the Mansfield Plant during the first six months of 2001, compared to the same period of 2000, due to planned maintenance activities. Purchased power costs decreased by $24.2 million in the second quarter and $26.7 million in the first six months of 2001, compared to the corresponding periods of last year, reflecting all of TE's power requirements now being provided under the PSA. The timing of nuclear refueling outages and ownership percentages resulted in nuclear operating costs decreasing $15.6 million in the second quarter of 2001, compared to the corresponding period last year. Nuclear operating costs decreased $6.2 million in the first six months of 2001, as compared to the same period last year, with the Perry Plant's (19.91% owned) outage occurring in the first quarter of 2001 and the Davis Besse Plant's (48.62% owned) outage occurring in the second quarter of 2000. Other operating costs decreased $3.2 million in the second quarter and $4.6 million in the first half of 2001, compared to the same periods of 2000. The decreases resulted principally from a reduction in low-income payment plan customer costs and lower distribution expenses from storm-related damage. Excluding the effects shown in the preceding tables, charges for depreciation and amortization increased $3.8 million in the second quarter and $11.3 million in the first half of 2001 from the same periods last year due to incremental transition cost amortization under TE's transition plan partially offset by deferrals for shopping incentives (see Note 3). General taxes were $7.7 million lower in the second quarter and $15.1 million lower in the first half of 2001, compared to the same periods of 2000, primarily due to reduced property taxes and other state tax changes associated with the Ohio electric industry restructuring. Net Interest Charges Net interest charges continued to trend lower, decreasing $2.7 million in the second quarter and $3.8 million in the first half of 2001, compared to the same periods in 2000, primarily due to debt redemption and refinancing activities undertaken after the end of the second quarter of 2000. During the first half of 2001, debt redemptions totaled $21 million and will result in annualized savings of $2.0 million. Capital Resources and Liquidity ------------------------------- TE has continuing cash needs for planned capital expenditures and maturing debt. During the last two quarters of 2001, capital requirements for property additions and capital leases are expected to be about $37 million, including $7 million for nuclear fuel. TE also has maturing long-term debt of $8.4 million during the remainder of 2001. These requirements are expected to be satisfied with internal cash and/or short-term credit arrangements. As of June 30, 2001, TE had approximately $7.9 million of cash and temporary investments and $7.5 million of short-term indebtedness to associated companies. Under its first mortgage indenture, as of June 30, 2001, TE had the capability to issue up to $578 million of additional first mortgage bonds on the basis of property additions and retired bonds. Under the earnings coverage test contained in the TE charter, $521 million of preferred stock (assuming no additional debt was issued) could be issued based on earnings through the second quarter of 2001. PENNSYLVANIA POWER COMPANY STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ------------------ ------------------ (In thousands) OPERATING REVENUES $124,701 $93,565 $253,098 $177,516 -------- ------- -------- -------- OPERATING EXPENSES AND TAXES: Fuel 5,887 15,151 12,528 25,373 Purchased power 33,791 2,494 79,559 5,662 Nuclear operating costs 19,252 21,453 39,517 66,960 Other operating costs 11,897 16,044 22,193 29,579 -------- ------- -------- -------- Total operation and maintenance expenses 70,827 55,142 153,797 127,574 Provision for depreciation and amortization 14,267 11,898 28,530 27,629 General taxes 1,261 6,277 5,741 13,335 Income taxes 15,482 7,628 26,157 2,725 -------- ------- -------- -------- Total operating expenses and taxes 101,837 80,945 214,225 171,263 -------- ------- -------- -------- OPERATING INCOME 22,864 12,620 38,873 6,253 OTHER INCOME 747 431 1,622 844 ------- ------- -------- -------- INCOME BEFORE NET INTEREST CHARGES 23,611 13,051 40,495 7,097 ------- ------- -------- -------- NET INTEREST CHARGES: Interest expense 4,674 5,120 9,402 10,527 Allowance for borrowed funds used during construction (108) 303 (340) (672) ------- ------- -------- -------- Net interest charges 4,566 5,423 9,062 9,855 ------- ------- -------- -------- NET INCOME (LOSS) 19,045 7,628 31,433 (2,758) PREFERRED STOCK DIVIDEND REQUIREMENTS 926 926 1,852 1,852 ------- ------- -------- -------- EARNINGS (LOSS) ATTRIBUTABLE TO COMMON STOCK $18,119 $ 6,702 $ 29,581 $ (4,610) ======= ======= ======== ======== The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company are an integral part of these statements.
PENNSYLVANIA POWER COMPANY BALANCE SHEETS (Unaudited)
June 30, December 31, 2001 2000 -------- ------------ (In thousands) ASSETS ------ UTILITY PLANT: In service $651,652 $636,418 Less--Accumulated provision for depreciation 290,251 275,699 -------- -------- 361,401 360,719 -------- -------- Construction work in progress- Electric plant 12,155 20,800 Nuclear fuel 16 2,810 -------- -------- 12,171 23,610 -------- -------- 373,572 384,329 -------- -------- OTHER PROPERTY AND INVESTMENTS: Nuclear plant decommissioning trusts 120,298 117,453 Long-term notes receivable from associated companies 39,465 33,581 Other 21,118 21,279 -------- -------- 180,881 172,313 -------- -------- CURRENT ASSETS: Cash and cash equivalents 34,145 3,475 Receivables- Customers (less accumulated provisions of $684,000 and $628,000, respectively, for uncollectible accounts) 44,403 40,980 Associated companies 38,333 40,685 Other 6,463 8,848 Notes receivable from associated companies 52,411 41,264 Materials and supplies, at average cost 23,287 29,595 Prepayments 5,653 2,044 -------- -------- 204,695 166,891 -------- -------- DEFERRED CHARGES: Regulatory assets 233,369 260,221 Other 4,549 5,155 -------- -------- 237,918 265,376 -------- -------- $997,066 $988,909 ======== ========
PENNSYLVANIA POWER COMPANY BALANCE SHEETS (Unaudited)
June 30, December 31, 2001 2000 -------- ------------ (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 48,742 25,461 -------- -------- Total common stockholder's equity 237,132 213,851 Preferred stock- Not subject to mandatory redemption 39,105 39,105 Subject to mandatory redemption 15,000 15,000 Long-term debt- Associated companies 13,225 18,135 Other 252,176 252,233 -------- -------- 556,638 538,324 -------- -------- CURRENT LIABILITIES: Currently payable long-term debt- Associated companies 12,580 16,620 Other 33,436 1,036 Accounts payable- Associated companies 35,841 42,293 Other 1,610 21,165 Accrued taxes 22,619 19,250 Other 14,884 22,200 -------- -------- 120,970 122,564 -------- -------- DEFERRED CREDITS: Accumulated deferred income taxes 148,128 160,632 Accumulated deferred investment tax credits 4,257 4,407 Nuclear plant decommissioning costs 120,759 117,915 Other 46,314 45,067 -------- -------- 319,458 328,021 -------- -------- COMMITMENTS AND CONTINGENCIES (Note 2) -------- -------- $997,066 $988,909 ======== ======== The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company are an integral part of these balance sheets.
PENNSYLVANIA POWER COMPANY STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, -------------------- ------------------ 2001 2000 2001 2000 ------- -------- -------- ------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 19,045 $ 7,628 $ 31,433 $ (2,758) Adjustments to reconcile net income (loss) to net cash from operating activities- Provision for depreciation and amortization 14,267 11,898 28,530 27,629 Nuclear fuel and lease amortization 4,359 4,697 9,241 7,867 Deferred income taxes, net (3,555) (2,087) (6,036) (5,709) Investment tax credits, net (699) (781) (1,410) (1,572) Receivables (7,751) 6,226 1,314 5,700 Materials and supplies (1,656) 1,941 6,308 5,709 Accounts payable 7,347 (4,313) (26,007) 13,780 Other 3,623 14,801 (5,247) (4,555) -------- ------- -------- -------- Net cash provided from operating activities 34,980 40,010 38,126 46,091 -------- ------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: New Financing- Long-term debt 32,603 -- 32,603 -- Redemptions and Repayments- Long-term debt 4,804 5,408 9,722 13,773 Dividend Payments- Common stock -- -- 6,300 -- Preferred stock 926 926 1,852 1,852 -------- ------- -------- -------- Net cash used for (provided from) financing activities (26,873) 6,334 (14,729) 15,625 -------- ------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Property additions 8,552 4,750 13,910 17,941 Loans to associated companies 30,828 26,028 30,828 26,028 Loan payment from parent -- -- (13,640) (12,866) Sale of assets to associated companies (6,053) -- (6,053) -- Other (3,175) 1,380 (2,860) 3,191 -------- ------- -------- -------- Net cash used for investing activities 30,152 32,158 22,185 34,294 -------- ------- -------- -------- Net increase (decrease) in cash and cash equivalents 31,701 1,518 30,670 (3,828) Cash and cash equivalents at beginning of period 2,444 324 3,475 5,670 -------- ------- -------- -------- Cash and cash equivalents at end of period $ 34,145 $ 1,842 $ 34,145 $ 1,842 ======== ======= ======== ======== The preceding Notes to Financial Statements as they relate to Pennsylvania Power Company are an integral part of these statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Pennsylvania Power Company: We have reviewed the accompanying balance sheet of Pennsylvania Power Company (a Pennsylvania corporation and wholly owned subsidiary of Ohio Edison Company) as of June 30, 2001, and the related statements of income and cash flows for the three-month and six-month periods ended June 30, 2001 and 2000. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States. We have previously audited, in accordance with auditing standards generally accepted in the United States, the balance sheet of Pennsylvania Power Company as of December 31, 2000 (not presented herein), and, in our report dated February 16, 2001, we expressed an unqualified opinion on that statement. In our opinion, the information set forth in the accompanying balance sheet as of December 31, 2000, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. ARTHUR ANDERSEN LLP Cleveland, Ohio, August 8, 2001. PENNSYLVANIA POWER COMPANY MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Corporate Separation -------------------- In connection with FirstEnergy's Ohio transition plan, FirstEnergy separated its businesses into three distinct units -- a competitive services unit, a utility services unit and a corporate support services unit. Penn is included in the utility services unit which continues to deliver power to homes and businesses through its existing distribution system and maintains the PLR obligation under its rate plan. The EUOC have entered into power supply agreements whereby FES purchases all of the EUOC nuclear generation, as well as generation from leased fossil generating facilities. FGCO, a wholly owned subsidiary of FES, leases fossil generating units owned by the EUOC. The EUOC are "full requirements" customers of FES to enable them to meet their PLR responsibilities in their respective service areas. The effect on Penn's reported results of operations during the second quarter and first half of 2001 from FirstEnergy's corporate separation plan and Penn's sale of transmission assets to ATSI in September 2000, are summarized in the following tables: Three Months Ended June 30, 2001 -------------------------------- Income Statement Effects Corporate ------------------------ Increase (Decrease) Separation ATSI Total ---------- ---- ----- (in millions) Operating Revenues: Power supply agreement with FES $38.2 $ -- $38.2 Generating units rent 5.0 -- 5.0 Ground lease with ATSI -- 0.3 0.3 ----- ----- ----- Total Operating Revenues Effect $43.2 $ 0.3 $43.5 ===== ===== ===== Operating Expenses and Taxes: Fossil fuel costs $(8.8)(a) $ -- $(8.8) Purchased power costs 35.7 (b) -- 35.7 Other operating costs (6.0)(a) 3.3 (d) (2.7) Provision for depreciation and amortization -- (0.7)(e) (0.7) General taxes (0.6)(c) -- (0.6) ----- ----- ----- Total Operating Expenses Effect $20.3 $ 2.6 $22.9 ===== ===== ===== Other Income $ -- $ 0.6 (f) $ 0.6 ===== ===== ===== Six Months Ended June 30, 2001 -------------------------------- Income Statement Effects Corporate ------------------------ Increase (Decrease) Separation ATSI Total ---------- ---- ----- (in millions) Operating Revenues: Power supply agreement with FES $ 79.8 $ -- $ 79.8 Generating units rent 10.1 -- 10.1 Ground lease with ATSI -- 0.7 0.7 ------ ----- ------ Total Operating Revenues Effect $ 89.9 $ 0.7 $ 90.6 ====== ===== ====== Operating Expenses and Taxes: Fossil fuel costs $(15.0)(a) $ -- $(15.0) Purchased power costs 81.6 (b) -- 81.6 Other operating costs (12.2)(a) 6.5 (d) (5.7) Provision for depreciation and amortization -- (1.5)(e) (1.5) General taxes (1.2)(c) (0.1)(e) (1.3) ------ ----- ------ Total Operating Expenses Effect $ 53.2 $ 4.9 $ 58.1 ====== ===== ====== Other Income $ -- $ 1.3(f) $ 1.3 ====== ===== ====== (a) Transfer of fossil operations to FGCO. (b) Purchased power from power supply agreement (PSA). (c) Payroll taxes related to employees transferred to FGCO. (d) Transmission services received from ATSI. (e) Depreciation and property taxes on transmission assets sold to ATSI. (f) Interest on note receivable from ATSI. Results of Operations --------------------- Excluding the effects shown in the tables above, operating revenues decreased by $12.4 million or 13.2% in the second quarter and $15.0 million or 8.5% in the first half of 2001, compared to the same periods of 2000. Revenues from kilowatt-hour sales to wholesale customers (excluding the PSA sales to FES) declined $13.7 million in the second quarter and $20.9 million in the first half of 2001 from the same periods last year. Penn's electric sales to retail customers increased by $1.5 million in the second quarter and $5.1 million in the first half of 2001, compared to the same periods of 2000 due to the return of customers previously served by alternative generation suppliers, which resulted in increased electric generation revenues. Despite the increase in generation kilowatt-hour sales, kilowatt-hours delivered through Penn's distribution system were 2.7% lower in the second quarter of 2001, compared to the same period of 2000, as a result of reduced deliveries to all customer groups -- residential, commercial and industrial. Weather was cooler in the second quarter of 2001 than the same period last year, reducing residential air-conditioning loads. Deliveries to business (commercial and industrial) customers were lower in the second quarter of 2001, compared to the same period last year, reflecting a softening of the service area economy. A 2.6% increase in total kilowatt-hour deliveries in the first half of 2001 from the same period last year resulted from an increase in sales to both residential and business customers. Operating Expenses and Taxes Total operating expenses and taxes increased by $20.9 million in the second quarter and $43.0 million in the first six months of 2001, compared to the same periods of 2000, due to the implementation of the effects as shown in the preceding tables. Excluding these effects on operating expenses, fuel expense was unchanged in the second quarter and increased $2.2 million in the first half of 2001 from the same periods last year due to additional nuclear generation in the first quarter of 2001. Purchased power costs decreased by $4.4 million in the second quarter and $7.7 million in the first six months of 2001, compared to the corresponding periods of last year, reflecting all of Penn's power requirements now being provided under the PSA. Nuclear operating costs decreased by $2.2 million in the second quarter of 2001 compared to the same quarter last year. No refueling outages occurred in either period although the Perry Plant experienced several unplanned outages in the second quarter of 2001. For the first half of 2001, nuclear operating costs decreased by $27.4 million from the first half of 2000. The reduced costs resulted from Penn's smaller ownership share (5.24%) of a scheduled Perry Plant refueling outage in the first quarter of 2001 versus its 65% ownership share in the Beaver Valley Unit 1 refueling outage in the same period last year. Other operating expenses decreased by $1.4 million in the second quarter and $1.7 million in the first half of 2001 from the corresponding periods in 2000. The decreases resulted principally from lower distribution expenses from storm-related damage. Excluding the effects shown in the preceding tables, charges for depreciation and amortization increased $3.1 million in the second quarter and $2.4 million in the first half of 2001 from the same periods last year. The increase primarily resulted from the absence this year of an adjustment made to decommissioning costs in the second quarter of 2000. General taxes were $5.0 million lower in the second quarter and $7.6 million lower in the first half of 2001, compared to the same periods of 2000, primarily due to reduced property taxes associated with the Ohio electric industry restructuring and a one-time benefit of $3 million in the second quarter of 2001 as a result of successfully resolving certain pending tax issues. Net Interest Charges Net interest charges continued to trend lower, decreasing $857,000 in the second quarter and $793,000 in the first half of 2001, compared to the same periods in 2000, primarily due to debt redemption and refinancing activities undertaken after the end of the second quarter of 2000. During the first half of 2001, debt refinancing totaled $32.9 million and will result in annualized savings of $777,000. Capital Resources and Liquidity ------------------------------- Penn has continuing cash requirements for planned capital expenditures and maturing debt. During the last two quarters of 2001, capital requirements for property additions and capital leases are expected to be about $37 million, including $20 million for nuclear fuel. Penn also has maturing long-term debt of $487,000 during the remainder of 2001. These cash requirements are expected to be satisfied from internal cash and/or short-term credit arrangements. As of June 30, 2001, Penn had about $86.6 million of cash and temporary investments and no short-term indebtedness. Also, Penn had $2.0 million available from an unused bank facility as of June 30, 2001, which may be borrowed for up to several days at the bank's discretion. Under its first mortgage indenture, as of June 30, 2001, Penn had the capability to issue up to $187 million of additional first mortgage bonds on the basis of property additions and retired bonds. Under the earnings coverage test contained in Penn's charter, $294 million of preferred stock (assuming no additional debt was issued) could be issued based on earnings through the second quarter of 2001. On June 27, 2001, Penn completed the issuance of pollution control revenue refunding bonds totaling $32.9 million. The proceeds will be used to complete optional refinancing in September of 2001. Pending Business Combination ---------------------------- On June 14, 2001, the PPUC approved a settlement agreement, which is predicated upon the consummation of the FirstEnergy and GPU merger, that includes a provision extending Penn's current distribution rates to December 31, 2007. In July 2001, several parties appealed the PPUC's decision to the Pennsylvania Commonwealth Court. PART II. OTHER INFORMATION --------------------------- Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- (a) The annual meeting of FirstEnergy shareholders was held on May 15, 2001. (b) At this meeting, the following persons were elected to FirstEnergy's Board of Directors: Number of Votes -------------------------- For Withheld ----------- --------- Robert B. Heisler, Jr. 194,165,180 5,303,288 Robert L. Loughhead 193,760,753 5,707,715 Robert C. Savage 194,133,442 5,335,026 (c) At this meeting, the appointment of Arthur Andersen LLP, independent public accountants, as auditors for the year 2001 was ratified (ratification required a majority of votes cast): Number of Votes -------------------------------------- For Against Abstentions ----------- --------- ----------- 192,802,744 4,261,589 2,404,135 (d) At this meeting, amendments to the Executive and Director Incentive Compensation Plan were approved (passage required a majority of votes cast). Number of Votes --------------------------------------- For Against Abstentions ----------- ---------- ----------- 175,833,127 18,848,530 4,786,811 (e) At this meeting, a shareholder proposal designed to result in the election of the entire Board of Directors each year was rejected (passage required 80% of the 223,981,580 common shares outstanding): Number of Votes ---------------------------------------------------- Broker For Against Abstentions Non-Votes ---------- ---------- ----------- ---------- 89,338,665 79,482,529 10,940,118 19,707,156 (f) At this meeting, a shareholder proposal to reinstate simple-majority vote on all issues that are submitted to shareholder vote was rejected (passage required 80% of the 223,981,580 common shares outstanding): Number of Votes ---------------------------------------------------- Broker For Against Abstentions Non-Votes ---------- ---------- ----------- ---------- 96,982,388 75,484,976 7,293,948 19,707,156 (g) At this meeting, a shareholder proposal to establish a performance-based senior executive compensation system that focuses the five most highly paid members of management on advancing the long-term success of the Company and to specify certain disclosures related to such a system in the annual report to shareholders was rejected (passage required a majority of the votes cast): Number of Votes ---------------------------------------------------- Broker For Against Abstentions Non-Votes ---------- ----------- ----------- ---------- 31,698,702 138,164,771 9,897,839 19,707,156 Item 6. Exhibits and Reports on Form 8-K --------------------------------- (a) Exhibits Exhibit Number ------- FirstEnergy, OE, CEI and Penn ----------------------------- 15 Letter from independent public accountants. TE -- None Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, neither FirstEnergy, OE, CEI, TE nor Penn has filed as an exhibit to this Form 10-Q any instrument with respect to long-term debt if the respective total amount of securities authorized thereunder does not exceed 10% of their respective total assets of FirstEnergy and its subsidiaries on a consolidated basis, or respectively, OE, CEI, TE or Penn, but hereby agrees to furnish to the Commission on request any such documents. (b) Reports on Form 8-K FirstEnergy, OE, CEI, TE and Penn --------------------------------- None SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. August 10, 2001 FIRSTENERGY CORP. ----------------- Registrant OHIO EDISON COMPANY ------------------- Registrant THE CLEVELAND ELECTRIC ---------------------- ILLUMINATING COMPANY -------------------- Registrant THE TOLEDO EDISON COMPANY ------------------------- Registrant PENNSYLVANIA POWER COMPANY -------------------------- Registrant /s/ Harvey L. Wagner ---------------------------------- Harvey L. Wagner Controller Principal Accounting Officer